ANSYS - Q1 2018

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to ANTA's 1st Quarter 2018 Earnings Conference Call. With us today are RJ Ajay Gopal, chief executive officer, Maria Shields, chief financial officer, and Annette Aribas, Senior Director, Global Investor Relations. At this time, I would like to turn the call over to Ms. Aribas for some opening remarks.

Speaker 1

Thank you, Brandon. Good morning, everyone. Our earnings release and the related prepared remarks document have been posted on the homepage of our Investor Relations website this morning. They contain all of the key financial information and supporting data relative to our first quarter financial results and business update as well as our Q2 and fiscal year 2018 outlook and the key underlying our future results are discussed at length in our public filings with the SEC, all of which are available via our website. Additionally, the company's reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future.

These statements are based upon our view of the business as of today and ANSYS undertakes no obligation to update any such information unless we do so in a public forum. The course of this call and in the prepared remarks, we'll be making reference to non GAAP financial measures. And unless otherwise stated, for purposes of comparability, will be presenting results in accordance with ASC 605. A discussion of various items that are excluded and a full reconciliation of GAAP to comparable non GAAP financial measures are included in this morning's earnings release materials and related Form 8 K. I would now like to turn the call over to our CEO, Ajay Capal for his opening remarks.

Ajay?

Speaker 2

Thank you, Annette, and good morning, everyone. Building on the strong momentum from a great performance last year. 2018 is off to an excellent start with a record Q1 that exceeded the high end of our guidance across all of the key metrics I'm especially pleased with our ACV growth of 10% in constant currency and with our record 605 deferred revenue and backlog of 842,000,000 is a 29% year over year increase. These metrics are leading indicators of the ongoing strength of our business. I'm also delighted that we are both increasing and tightening the range of our guidance for both Our Q1 outperformance and the strength of the sales pipeline of our organic business in and of themselves with warrants an increase in both revenue and EPS guidance.

In addition, our new guidance also factors in increased revenue from of 10% in constant currency at the midpoint. Maria will walk you through all the details. Last year, we described our vision of pervasive simulation, where simulation becomes critical to the entire product lifecycle. We discussed key emerging global customer initiatives, including autonomous vehicles and additive manufacturing. We outlined how we are transforming sales operations to support multiple go to market motions to reach our tens of thousands of customers around the world from direct high touch with large enterprise accounts, to territory sales, to inside sales, to broader channel relationships.

And we talked about how we intend to use M and A to further our vision of pervasive simulation. We are executing as promised and our strategy is working. Let me start with sales. We are continuing to demonstrate our leadership by broadening and deepening our customer relationships, resulting in record size deals. In the first quarter, we had 30 customers with orders of over $1,000,000, of which one was over $5,000,002 were over $10,000,000.

These customers tend to buy multiple products from the ANSYS portfolio. In fact, over 3 quarters of these deals included 3 or more of our product lines. This class of customers was a key contributor to our 10% ACV growth in the quarter. I'm also delighted to announce that in Q1, we broke our previous large deal record with a 3 year $50,000,000 agreement with a long standing customer. While I'm not at liberty to mention the customer or the industry, this is yet another indication that our strategy around pervasive simulation is resonating with our customers.

Overall, I'm very pleased with our performance in our various regions. The differences in performance across countries are attributable to the timing of deals and the licensing mix and were as expected coming into the quarter. Details are in the prepared remarks. But let me take a moment to talk about the progress that we have made in Europe. If you recall, in response to sub power performance in the region, we began 2017 with several important changes in Europe.

We saw weakness in Europe in the first half of twenty seventeen, And as we had predicted, we did see improved performance in the second half of twenty seventeen. I'm delighted that this improvement continued in Q1 of this year with 9% year over year revenue growth, including over 15% year over year revenue growth in Germany, both in constant currency. Let me now shift to technology. In Q1, we released ANSYS 19, which included advances across our entire suite of products. Anasys' 19 has become the most downloaded relief from the history of the company and reflects our commitment to extending the accuracy and the completeness of our multi physics solutions.

The strength of our core flagship products continues to drive the growth of our business. However, instead of focusing on our flagship solutions in this call, I'd like to discuss how we are extending our core as we make simulation pervasive across the product lifecycle. Yesterday, we completed our acquisition of Optus, the leading provider of physics based simulation software for light, human visual human visions and visualization, thus adding a new physics to the ANSYS multi physics portfolio. Office brings both world class technology and a world class team to ANSYS. They have a strong presence in a few key countries, and have strength in the automotive and high-tech verticals with an impressive list of customers, including industry leaders such as Audi, BMW, Ferrari, Ford, Honda, Sony, Phillips, and Nikon.

ANSYS has a long history of quickly and successfully integrating technology companies like Optus and scaling them in a financially disciplined manner. This is a hallmark of the ANSYS business model. Our global sales teams and our worldwide channel partners are experts in selling physics based simulation solutions to customers across geographies and across industries. The Optus products will seamlessly and cost effectively slot into our existing go to market motion. Not only increasing the sales of the Optus products in an efficient manner, but also increasing our cross portfolio solution sales.

Any discussion of Optus naturally leads to autonomous vehicles. As you can imagine, both safety and reliability are vital to delivering transformational technology to the market. The ANSYS portfolio delivers accurate, high fidelity, physics based engineering simulation, enabling customers to ensure our performance and reliability while reducing time to market. Our solutions also include the ability to assess functional safety, from software to components to systems to the target environment, such as an autonomous vehicle driving in traffic. Sensors are the eyes and the ears of an autonomous vehicle.

Offices, lidar, camera and ultrasound capabilities coupled with our existing radar solutions give ANSYS the most comprehensive sensor solution of the market. Bringing together best of breed products that cover visible and infrared light, electromagnetic, electromagnetic, and radar, and acoustics. In other words, ANSYS customers can use our solutions to design and validate all of the sensors that are critical to autonomous vehicles. In addition, offices photo realistic and virtual reality based closed loop platform provides accurate simulation of 100 of 1000 of road, weather and traffic scenarios. Together with our safety capabilities, ANSYS now has a comprehensive solution for validating the safety and reliability of autonomous vehicles with simulation, a task that would otherwise require billions of miles of road tests.

A major European automotive manufacturer, who is an existing customer on both ANSYS and Optus believe that the acquisition will streamline their simulation and testing efforts. Optus VR based platform combined with ANSYS's industry leading simulation will help them reduce the number of physical prototypes and nicest and create accurate simulations of complicated roads in a virtual environment. Another key adjacency is additive manufacturing, particularly metal printing, which is transforming the way in which products are manufactured. Last quarter, we announced the acquisition of 3 d SIM, a technology tuck in to help accelerate our additive products. Integrating 3 d SIMs technology into our with our existing software, we launched a new product in Q1, ANSYS Additive Print, which is a standalone, easy to learn and very powerful solution.

This product enables machine operators in additive manufacturing designers to reduce failed bills and trial and error in metal additive manufacturing. And next week, as part of ANSYS 19.1, we will be releasing ANSYS Additives Suite, which we believe will emerge as the new industry standard simulation solution for additive manufacturing. ANSYS Suite contains all of ANSYS' additive manufacturing technologies, including advanced topology optimization, latticing, additive manufactured material microstructure analysis and print process simulation, all integrated into our flagship workbench environment. In Q1, Relativity Space a space 2.0 company expanded their use of ANSYS adding our additive solutions to their existing ANSYS simulation capabilities. Relativity began a journey to develop what could be the world's largest metal 3 d printer to print rockets and leveraging the full portfolio of ANSYS flagship tools, they successfully built the printer, printed an engine, and fired that engine.

ANSYS' streamlined additive manufacturing solutions enable relativity to iterate designs 10 times faster and with 100 times fewer parts. Also in Q1, we formally launched ANSYS Discovery Live to reach Product Designers, a new audience of users. While we do not expect revenue from this new product to be significant this year, interest has been very strong from both new and long time ANSYS customers and we're seeing some early important wins. For example, Mercury Marine, a world leader in manufacturing marine engines and related equipment, is adopting the Discovery Product family to accelerate early design exploration and product optimization. Discovery is helping Mercury to validate new designs in has helped to reduce a 3 to 4 day simulation effort down to a few hours, streamlining new product launches and deliveries.

As I think about the rest of I am delighted by our excellent quarter, and I'm very excited and proud of the progress that we have made over the past year. Our pervasive simulation strategy is resonating with customers. Our go to market changes have been successfully rolled out. And we are extending and expanding our core through acquisitions and organic developments. I'm more confident than ever in our markets, in our products, in our team and in our ability to execute.

I will now turn the call over to Maria to discuss our financial results in a little bit more detail. Maria?

Speaker 3

Thank you, Audrey. Good morning, everyone. Ajay shared a few of our key financial highlights, but let me take a few minutes to add some additional perspective on our first quarter performance and key financial metrics. I'll also provide some additional color around our outlook and assumptions for Q2 and 2018, which we have updated to include both our increased outlook for the ANSYS standalone business, for both revenue and EPS, as well as the impact of the recently closed Office acquisition. As previously communicated, During this 1st year of adoption of revenue recognition under ASC 606, we will be providing financial results and outlook under both ASC 605 and 606.

We have a fairly even split of analyst models published under both standard and we believe this will provide investors and analysts with an additional level of comparison to historical financial results in its 1st year of transition. I want to highlight that any comments that under ASC 605. And I'll also be providing commentary relative to key financial metrics under both 605 and 606. And consistent with our standard practice, my comments will be in terms of non GAAP unless I state otherwise. The record Q1 results reflect solid execution across our business in what we see as a solid customer demand environment, and yielded revenue, operating margin and EPS, all above the high end of our guidance under both 605 and 606.

Our strong start in 2018 is very encouraging when considering in which we reported and revenue growth of 7%, both in constant currency. All currency rates were within the ranges that we provided for the quarter. Revenue under ASC 605 and 606 totaled $285,200,000 283 $300,000, respectively, and includes positive currency impacts of $14,300,000 $16,000,000. The increase in software license sales combined with strong maintenance renewals contributed to building our deferred revenue and backlog under 605 to a total of $842,000,000, representing a record high and a 29% increase over last year's first quarter balance. Deferred revenue backlog under ASC 606 totaled 595,000,000 Recurring revenue for the quarter under 605 grew 7 percent in constant currency to a total of $223,000,000 or 78 percent of total revenue.

Under 606, recurring revenue totaled $213,000,000 or 75 percent of total revenue. Under either accounting method, our strong recurring base of revenue gives us good insight and predictability into our future performance. During the quarter, we continued to manage our business with fiscal discipline, which yielded a strong first quarter gross margin of 90%, and an operating margin of 45 percent. Margins were positively impacted by revenue results finishing above the high end of our revenue guidance as well as a slightly lower pace of hiring than we have planned for the quarter. We reported 1st quarter EPS of $1.22 under 605, and $1.20 under 606.

With respect to taxes, our effective tax rate in Q1 was 20%. Below the 22% to 23.5 in income attributed to foreign subsidiaries as a result of the non recognition of a meaningful portion of deferred revenue under ASC 606. Going forward, we expect our effective tax rate to be in the range of 22% to 23.5%. Subject to further interpretation and clarification of the many nuances of U. S.

Tax reform. We will refine our estimates and provide updates as we continue with our transition work. Our cash flow from operations totaled 132,400,000 And we ended the quarter with a total of $890,000,000 in cash and short term investments. In line with our capital allocation priorities, We repurchased 750,000 shares during the quarter at a total cost of 118,000,000, and we have 4,800,000 shares available for repurchase under the current authorized guidance for Q2 and also increasing both our revenue and EPS outlook for the full year. This increase reflects the strong performance in the first quarter, combined with our confidence and continued positive business momentum for the remainder of the year.

Additionally, we are also updating This includes an incremental $25,000,000 to $26,000,000 in revenue for 2018, as well as the impact of the capital utilized in the acquisition, and incremental integration investments that will be necessary throughout the remainder of this year. We expect the Office acquisition be a the range of $294,000,000 to $304,000,000 and non GAAP EPS in the range of $1.13 to $1.19. Non GAAP revenue under ASC 606 is in the range of $272,000,000 to 292,000,000 and non GAAP EPS in the range of $0.94 to $1.09. And for the full year, we are increasing both the revenue and EPS outlook to non GAAP revenue under ASC 605 in the range of $1,228,000,000 to 1,258,000,000 or constant currency growth of 10% at the midpoint and EPS in the range of $4.85 to $5.04. Non GAAP revenue under ASC 606 is in the range of $1,197,000,000 to 1,262,000,000 and non GAAP EPS in the range of $4.60 to $5.08.

Our ACD outlook for 2018 is also increasing to reflect the contribution from the Optus acquisition $2,000,000 to $1,302,000,000. This represents constant currency ACV growth of 9% to 13% over 18 to a range of $435,000,000 to $475,000,000. I'd like to be clear that our outlook for operating cash flow in 2018 includes our current estimated adverse impact of approximately $12,000,000 to $15,000,000 related to the acceleration of income tax payments under ASC 606 that is associated with deferred revenue and backlog credited to retained earnings that will never be recognized as revenue in our financial statements. Now for modeling purposes, we're expecting 2nd quarter operating margins of 43% to 44% under ASC 605, and 39% to 41% under ASC 606. And for the full year, we're expecting operating margins under 60542 percent to 44 percent under 606.

This guidance reflects near term impact revenue, albeit at lower margins, and our expectations are to continue to scale the business, drive increased revenue growth and profitability, as we've demonstrated with our many technology acquisitions over nearly 2 decades. The Office business aligns with our strategy, and our 2020 revenue growth and margin targets. This, coupled with the positive returns from our 2017 incremental investments, that are reflected in our early 2018 results, give us confidence that we can continue to drive sustained incremental growth over the long run. Further details around specific currency rates and other assumptions, including the impact of the contribution from the Office Act position that have been factored into our outlook for Q2 and twenty eighteen are contained in the prepared remarks document. In summary, we delivered a record first quarter with strength across all of the key financial metrics that we focus on in managing the business.

ACV, top line growth, operating margins, EPS, operating cash flows and deferred revenue and backlog. We also continued to deploy capital pursuing strategic M and A and additional share repurchases. Another quarter of solid performance combined with the exciting opportunity to unite the incredible technology, talent and customer relationships of Optus. With our global distribution platform and business model give us confidence that our continued focus on execution and investing in the business combined with the strength of our recurring business, our broad product portfolio, strong customer relationships and growing sales pipeline, provide a strong foundation to continue to deliver on our 2018 goals, as well as our longer term 2020 financial targets. And now, operator, we'll open the

Speaker 0

questions.

Speaker 2

Session.

Speaker 0

Our first question comes from Jade Bleeschhouwer with Griffin Securities. Please go ahead.

Speaker 4

Thank you. Good morning. Ajay, let me start with you. With respect to record order that you achieved in the quarter. And I understand you're constrained in being able to talk about it, but to the extent you do more of these, as you did just two quarters ago in the third quarter.

Could you talk about the services commitments or obligations that you have to support those kinds of large commitments or deployments, meaning in other words, how are you doing, for instance, in, your additions to AEs and other similar kinds of infrastructure that you need to support those kinds of large customers. And then secondly, with respect to Optus, you said at the Analyst Meeting that you would be devoting about a 5th of your R and D to what you called next generation, and that included, digital expiration, meaning Discovery Live and now Optus for Autonomous, and 3 d SIM for additive. Have you now, do you think, filled in the pieces that you referred to as your 4 priorities within next generation R and D, or is there there more to do in that respect? Thanks.

Speaker 2

Sure. Jay, thanks for the question. So firstly, to your point about the large customer order that we closed in Q1. We're having a lot of success by go into existing customers and broadening and deepening the footprints of our portfolio. In many cases, this is using our technology across different projects in different areas or just frankly getting more people to take advantage of the technology.

So it fundamentally doesn't change the business model. It doesn't increase the level of services. It doesn't change the way we interact with those customers. So we are continuing in a manner that's consistent with the way that we've historically been engaging with these customers just so that we're selling, we're able to sell more. Obviously, there is a investment in these accounts.

And that's the point about the field engineering or the presales activity that we talked about last year. And as we mentioned during our investor day, we have we're looking at enterprise accounts a little bit differently from regulatory accounts. And within the enterprise accounts, we're allocating additional resources for presales and that's what's driving some of these cross portfolio success. So the investments that we're making we have made and that we identified are paying off, but the business model is very consistent with what we've historically had. So that's the first piece of it.

The second one was the second part of your question was, you know, in terms of our R and D priorities, have these essentially have we made progress across these adjacencies? Absolutely. You know, we talked I talked in the call about the We've talked about 3 d SIM. I talked about autonomous. We've continued to make progress with these with these acquisitions across all of them, and equally in the digital twin space.

And I didn't talk about that on the call, but we've certainly made progress along across those. So those reflect the adjacencies to our core business. We're continuing to invest in them. We see those as growth opportunities and we feel confident that our approach is the right approach for us in the market down.

Speaker 0

Our next question comes from Rich Valera with Needham And Company. Please go ahead.

Speaker 5

Thank you. Good morning. Ajay, question on the EMEA region. So great performance there certainly on a relative basis in quarter, that region that's been sort of a long time laggard. Can you give a sense of how much that recovery has to do with a broader macro recovery in Europe and how much from the initiatives that you guys undertook last year?

And kind of where do you think you are in terms of those initiatives to sort of revamp that region and get it up to par with your other regions sort of structurally?

Speaker 2

Sure. Look, we had, we had, we made significant changes last year both in terms of leadership in the way that we were structuring the European region. And obviously, those changes take to settle down, which is essentially what you saw last year. And we're seeing significantly better performance and engagement. And we see this We see this systemically as we start to look at things like pipeline, but we also see this when we look at large customer engagements, when we look at customer deal reviews, when I sit down with the team, when I sit down with Rick and his leaders, you can see that level of engagement increasing within Europe.

Obviously, last year was a little bit weaker relative to from a performance perspective. So we're seeing a year over year benefit from the fact that we had some, I would say, pent up demand that we were not in the position to or effectively capturing last year. So, I'm very excited about the performance. It's really hard for me to say this percentage comes from economic improvements. This percentage comes from our improved execution.

All I can say is our execution is definitely getting better. The teams are executing well. The customers are excited about our solution. And frankly, we have in my opinion, the best solutions in the market. As far as where we are, I mean, this is a journey, as you know, transforming any region is takes time, but we're well along the way.

And what I'd what I'd mentioned earlier, last year that we should expect to see improvement in recovery at the latter part of 2017 into 2018 and beyond. And we're on the track that we expect to pass a little bit ahead.

Speaker 5

That's great. Thanks for that color. I appreciate it.

Speaker 0

Our next question comes from Sterling Auty with JP Morgan. Please go ahead. Yes, thanks. Hi guys. I want to follow-up on one

Speaker 6

of the questions that J. S. Around the large deals. And appreciate the color that you gave. But I guess more specifically, when you look at the June quarter guidance, what's included in that guidance as well as the full year guidance in terms of these deals that are in excess of $10,000,000?

Speaker 3

So what I'd say Sterling is is the guidance, in line with with what I talked about on on last quarters call is largely, the pipeline and the renewals of larger deals for 20 18 is skewed towards the back half of 2018. So I would say right now based on everything that we have, Q3 2 is not being driven by any significant deals and certainly nothing like the deal that we talked about for Q1. So we have a strong pipeline. We've got a lot of work to do, but Q2 is not being driven by large deals.

Speaker 6

Got it. And then you mentioned hiring a little bit slower than anticipated in the quarter. Which areas did not come up to plan in terms of the hiring? And have you been able to catch up with that hiring so far in the June quarter?

Speaker 3

Yeah. So so Sterling, what I'd say is, you know, when on the last call, what we talked about, one of the areas of of disproportionate incremental investments, to Ajay's earlier comment in 2018 is around AEs in our field engineering team. To support not only larger accounts, but the whole change in our go to market. So not like many other companies right now. It's a very challenging talent environment.

So we had an aggressive plan to hire. We were a little bit behind in that plan in Q1, but we certainly are not slowing down any of our recruiting activity. And we will continue to march towards our hiring plan for 2018 because it's important to set the stage for 2019 and beyond.

Speaker 0

Our next question comes from Rob Oliver with Baird.

Speaker 5

A couple of the questions earlier. Going back to the Analyst Day, when you guys outlined, some of the incremental investments that you guys were looked to make. It seems like some of those are starting to pay off, Ajay. I know you mentioned some of the progress that Rick's making with his go to market team. I just was curious if you could just give us a little more color around where you feel like you're getting early, the seeds you're planting are starting to blossom here early and where you still have work to do to kind of get to that level of satisfaction relative to what you guys stated at the Analyst Day.

And then I have a quick follow-up.

Speaker 2

Sure. In terms of early traction, as I said, it's still early days for some of these adjacencies. If you look at Discovery Live as an example, We've had a lot of customer interest and we've had downloads, we've had customer engagement, And we've had some we've had some important customers who have purchased the product, and I mentioned one of them on the call. But that being said, that's coming off a $0 base. And when you're a $1,000,000,000 plus company, it isn't that material as you start think about an individual product line that's brand new.

So we're very excited about it, but it's still relatively early in the process. If you look at Additive, I mentioned again, a customer who's been using our technologies, to support additive, but we're releasing right now in this quarter a next generation of our additive solutions We think that's going to be a very strong solution. We're very excited about it. We're engaged in active conversations, and frankly, evaluations with a number of both existing customers as well as as well as new opportunities. But again, it's still relatively new.

In with autonomous and the automotive space, There I would say our conversations are pretty exciting. We get every time we talk to customers about, about the holistic offering that we can bring to market, we get a lot of positive we get a lot of positive feedback from from our customers, and we are engaged actually with some important customers in solutions around autonomous. In particular in the automotive space, although the technology appears usable, not just in automotive and other autonomous vehicles as well. The Optus acquisition here really makes an incremental improvement to our overall capability. Because as you know, for the sensor business in the autonomous space, not just relying on electromagnetic and radar, you're relying also on camera and lidar.

And maybe ultrasound. And frankly with Optus coming on board, we now have that, as I said in my script, we now have a a comprehensive solution that goes across all of these different sensor modalities. So I'm expecting, more engagement. And one of the reasons why we're so excited this acquisition, if it fits so well into the ANSYS go to market routes, we already have many conversations taking place with customers around autonomous. And in some cases, we have sales, in some cases, we have advanced discussions, some cases, we have early prospects.

The Optus technology will fill straight in and will drive it forward. The other interesting thing is our channel partners, you find are very excited about some of the directions that we're going both in terms of additive. As well as in terms of autonomous. And of course, with discovery, we have channel partners in some cases who have spun up individual organizations that are trying to focus on, on the go to market around discovery as well. So I would say it's still early stages.

A lot of action, a lot of activity, But as I said, in earnings day or investor day last year, the whole idea here is we have a core business, our core business powering through. It's driving it's driving our business forward. It's driving our growth. But these are incremental areas we're making investments and these investments will kicking some this year. But more next year and more the year after and more the year after that.

So we're building the long we're expanding and growing the long term franchise and the success of the company.

Speaker 5

That's really helpful, Ajay. Thank you very much. And then Maria, just a very quick follow-up. I just was wondering if you if there's any chance for an increase in seasonality around the business with the addition of new products and expanding the go to market, whether it be different buyers or co terminus renewals. Just I know on a constant currency basis, revenue was a little below our estimate.

Just wondering, if there's anything we should keep in mind there. Thank you guys very much.

Speaker 3

Yes, I would say the main change in seasonality under 606 will be, you'll see it, in Q4 because as I mentioned earlier, given the strength of the pipeline and the timing of some of these large deals under 606, you will see a lot more impact on revenue in 4 than you historically would have under 605 where some of these multi year deals were all spread. You would have seen it in the the old bookings metric, now you will see a portion show up in revenue that didn't historically under 605. That's the only change that we see right now from a seasonality perspective.

Speaker 0

Our next question comes from Gabriela Borges with Goldman Sachs. Please go ahead.

Speaker 7

Hi, good morning. Thanks for taking my question. For Ajay, you talked a little bit about broadening and deepening in the conversation that you're having with customers. I'm hoping you can make that a little more tangible for us. As you add more technical and consultative salespeople to the conversation at the customer level, how does that change?

To talk more about ROI, able to talk more about, solving customer problems that maybe you won't be involved in those discussions before. And Is it changing the sales cycle at all either shorter or longer? Thanks.

Speaker 2

So, that's when we think about the engagement with customers, you have to consider our go to market. And we've taken a very thoughtful approach to expanding our go to market. We have tens of thousands of customers around the world. And some of these customers tend to be very small transactional in nature. Some of them tend very deep and require and spend enormous amounts of money.

These are the largest customers in the world. And so we've taken as we mentioned, we were going to in our Investor Day. We've taken a thoughtful segmented approach to go to market. That includes an enterprise, a global enterprise team that includes regional teams, which deal with strategic and territory accounts, include that we have an inside sales organization in the region. And then of course, we have channel partners who engage, and address many of them address customers that we would never we have never talked to and we don't have a relationship, but they have a relationship and they extend our footprint.

In some cases, we work on a sell through wave of channel partners. In some cases, we work with channel partners and accounts. So we have a nuanced relationship with the channel partners as well. So that's a it's a pretty broad go to market. Where we are, investing in our technical sales organization is to engage at the highest level in customers with the largest, with the largest the enterprise customers or some of the largest strategic customers.

In many cases, there's a presales activity, where we are able to explain to the customers how our technology would be relevant of Gabriela, just a single physics, whereas the previous sale may have been just around fluids or just around electronics or just around mechanical. In many case, customers are thinking about multi physics, and we need to explain how the multi physics solutions can be deployed. So there is that's how that comes in. In many cases, customers are buying or are contracting with us to provide mentoring experts. So they pay us and we place them on their site, to help them solve their problems at a greater level, at a greater level of detail.

So, and that's sort of a solution selling process. So, we don't see sales cycles short we don't see sales cycles lengthening. It's not like there's any fundamental change in the sales cycles because what's happening is the customers are taking advantage of our existing technology in this in the flow of what they've historically been doing. The sales cycles aren't elongated because we have to be consistent with the way in which they're building their product or their product life cycle and the natural ebbs and flows of their product life cycle. So that's what we've historically done.

It's no different from what we've historically done, and been able to sort of engage in the same way, even as we talked to some of these larger enterprise customers. And of course, you see the results. Last year, I talked about a $45,000,000 deal, this quarter, we talked about a $50,000,000 deal. We talked about a couple of deals over $10,000,000 this year. So you certainly see that in the results.

And the way the sales organization is engaging. I hope that helps.

Speaker 7

Yes, that makes sense. And the follow-up is for Maria. As you look through the rest of the year, if you're in the scenario where you outperform on the revenue line, how are you thinking about the merits of dropping through any outperformance to the bottom line versus reinvesting it? Thanks.

Speaker 3

So Gabriela, I'd say, you would probably see something similar to Q1. The reality is our spend is disproportionately around people. So to the extent that I mentioned, we are aggressively continuing to recruit and to hire according to our plan. But to the extent that we we outperform on the top line, there is a high likelihood just given the leverage in our model that we will, see see that drop to the bottom line well and help on the earning side. That being said, we want to continue as we committed at Investor Day, to invest in our business because right now is a tremendous time that if we set the foundation is what is going to enable us to get to our targets for 2020, but more importantly, to continue to drive growth in this incredible franchise.

The time is right. So disproportionately just driving growth at the for short term results.

Speaker 0

Our next question comes from Ken Talanian with Evercore ISI. Please go ahead.

Speaker 8

Guys. Thanks for taking the question. I

Speaker 9

was wondering if you could give us a sense for the pipeline growth by geography relative to your view last quarter.

Speaker 2

We don't really talk about, pipeline on this by geography. Certainly, we don't don't talk about this in public. Obviously, our total pipeline is strong and it's because of the strength of the pipeline that we feel very positively about the for this year. And that's there really isn't any more college add other than what Maria said, which is that in the second half of the year, that's when you'll expect to see some of the larger deals. Those larger deals tend to be, you know, North America and European based, some of them tend to be electronics or semiconductor in nature as well.

But that's the sort of the larger deal. And so Q2 tends to be it's Q2 is doesn't have any as we see it right now, any monster deals in place, but that's kind of how the total pipeline looks.

Speaker 9

Okay, great. And in the automotive world, we've heard some of the OEMs discuss their desire to reduce the variety of models that they produce. Curious, how might that impact those the OEM purchases from you?

Speaker 2

Well, we've continued to see strength in the automotive, as you can see from our breakdown by industry. We've continued to see growth in the automotive sector. And that frankly is being driven by a number of factors, the most important of which is, of course, is the electronification of the car. And so we're getting engaged Historically, we were engaged in things like in structures and fluid dynamics and combustion and so forth in aerodynamics those, those traditional areas of engagement have now been supplemented with new areas of engagement and we talk about chip package system, we talk about antenna placement on the vehicle. As you think about onboard electronics, we're doing functional safety analysis now.

Comprehensively with our Modini solutions, we're generating embedded software for the automotive space. We're working with these chain on semiconductors for the automotive space. And of course with Optus, we now have optical simulation and autonomous simulation capabilities that add to our existing portfolio. So we continue to go, if you will, or have technologies that address some of the new challenges that they have, and that's reflected in the way that these automotive companies are engaging with us moving from a history of just structures and then and Fluids now to the broader full suite of our offerings.

Speaker 0

Our next question comes from Monica Garg with KeyBanc. Please go ahead.

Speaker 10

Hi, thanks for taking my question. First on Optus, could you maybe talk about how much was Optus growing? Also talk about the competition, in the space? And also what is the yearly revenue expectation for Opry for 2018? I know you gave us how you are increasing, like just 25,000,000, but that's, probably only for 7 months.

And there must might be some definite revenue counting impact. So, you know, the total, what was active optics?

Speaker 3

Yes. So, Monica, relative to Optus, here's what I'll say. Let's just talk about its impact on consolidated results. It is going to be dilutive in 2018. Largely due to we're not assuming any revenue synergies for 2018.

We've got some upfront integration costs as you can imagine, they were a private company. They did not have U. S. GAAP accounting. So speaking to what their revenue growth might have been would completely inappropriate because it's under methods of which I'm not, I can't have any confidence how it translates to U.

S. GAAP. So, there will be some also slightly lower interest income and slightly higher share count from the usage the capital to acquire the office technology. But that being said, we've assumed $25,000,000 to $26,000,000, which covers both $605,000,000 $606,000,000 for the remainder of this year. And as I said, We are optimistic relative to 2019 that the office business will be accretive on a total basis to ANSYS standalone and that the opportunity that we see to, to bring off this into the ANSYS fold and do what we've done with many, many acquisitions over the past, almost 20 years now that

Speaker 1

and

Speaker 3

is a tremendous opportunity that we see ahead for 2019 and beyond.

Speaker 10

And then can you comment on the competition what Optus sees in the market or you don't see any competition?

Speaker 2

There are there's a couple of companies that have, that look at, light But what's interesting about what Optus is Optus takes a physics based approach towards light And so they look at incremental technology, they're bringing incremental technology to the ANSYS portfolio that's very consistent with our physics based approach. So you'll see a couple of companies out there that do life. And frankly, synopsis acquired 1 of those companies a few years ago, and so they have a business around rhyolite. Some of the light light work is around sort of lighting where you're looking at how the appearance of light is to the human eye. In a simulated environment and some of it is, but what's interesting about Optus and what we think is unique about Optus optics has some really great technology that allows us to move into the autonomous space because it's not just about the sensing of light, it's now about the use of optics and that same technology in sensors.

So for camera and for lidar, which changes the market opportunity from a sort of a traditional illumination market into a much broader market that includes the autonomous space. So that's what's unique about Optus and that's why we're so excited about

Speaker 0

Our next question comes from Ross MacMillan with RBC Capital Markets. Please go ahead.

Speaker 8

Well, thanks so much. Maybe just the first one on your ACV growth for the year, 14%. I think you said 11 percent constant currency. Maria, I wonder if you could also provide that on an organic constant currency basis ex Optus?

Speaker 3

Yes. Ross, $29,000,000 of our ACV outlook right now relates to Optus.

Speaker 8

Okay. That's helpful. And then just another financial one on the non GAAP margins for this year, you had mentioned that there's some integration expense with Optus. So, again, if I look I don't think you actually give us a ex ops number for non GAAP operating margins for the year, but it did come down including Optus. And I'm just curious, would it be the same as your prior guidance if we had looked at the non GAAP operating margin for the year again, excluding Optus?

Did that change?

Speaker 3

Yes, no. So Ross, last call, when we looked out, we gave our guidance for, for 2018, we were guiding non GAAP operating margin of 44 business. Now we're guiding 44. So Optus is about 1% dilutive. It would be 45 without Optus.

Speaker 8

Perfect. And then, one bigger question just for Ajay. Just, when I think about your semi footprint, I'm just curious, is there more you can do in GPU versus CPU simulation? And can you do that organically?

Speaker 2

I'm not quite sure exactly, the question that you're asking. If you're asking can we take advantage or do we work with customers who are building GPUs and looking at different processor technologies, absolutely. The answer is yes. If you're asking, do we take advantage of the GPU in in simulation solutions. The answer is absolutely yes.

We do that too.

Speaker 8

Yes. No, the question was more, your solutions for the semiconductor industry, you'd obviously made some historic acquisitions. And I'm just I'm not clear as to whether your solutions that you have in market today are equally as applicable to GPU design and simulation as they are to CPU design and simulation.

Speaker 2

I believe that the answer is yes. And so we we are equally, you know, equally capable to, to address, both, you know, GPU and, and CPU. I mean, obviously, as you know, we've made some investments in our, in our Seascape architecture, And that's resulted in some of the next generation of our semiconductor products, which are based on big data analytics, which allows us to deal with some of the massive scalability that we're on these transformation processor chips, whether they be GPUs or CPUs for that matter. And as a result of that, we can we can we can essentially reduce the time that is needed, to be able to do sign off. I mean, when you're dealing with 1,000,000,000 of transistors, as you might find, for example, in some of the largest GPUs, we can certainly do that using Red Hawk So we are we feel very confident, that we have the ability to support our customers as they are looking at both as looking at these next generation GPUs, which could be very, very sophisticated in terms of transistor count.

And in fact, if you just think about it, 9 out of the top 10 mobile CPU and GPU companies have invested in Red Oak see, for the next generation design.

Speaker 0

Our next question is from Steve Koenig with Wedbush Securities. Please go ahead.

Speaker 11

Hi, answers. One question and then one follow-up if you don't mind. First, just, maybe in the weeds a little bit here, the very large deal, the $50,000,000 deal, Any color on how much of it went and it looks like almost all of it went into backlog as opposed to revenue and split of that versus term versus perpetual? Hey Steve,

Speaker 3

that deal Under 605, there was no perpetual component. That's a multiyear deal, and it's all ratable under 605.

Speaker 11

It's all ratable. Okay. Got you. And great. So, good, good.

And then I want one more one follow-up here. For Ajay. So, a little bit of an obnoxious question. I hope you don't mind. But you so you are at, a goal of 43 45% margin and 10% growth for fiscal 2020.

Looks like you're there. So congratulations. What comes next? You know, potential to move to a different point on the growth margin curve. Keep along that same kind of what's your thinking about where answers can go?

Speaker 2

Well, we are very excited about our business as hopefully, it's come through in both our script as well as our responses. I think the business is off to an excellent start for the year. We've built on a really strong year last year. And frankly, we're investing in the business to build the foundations for sustained growth as we've discussed. We continue to have investments that we need to make.

We continue to need we continue to have markets, frankly, which are looking very positive for us where we need to where we need to tap the markets. We need to bring new technology in place. We will continue to look at incremental M and A as make sense within our business. So we want to get to that point where we have the sustained business momentum where we have sustained double digit growth. And I think we still have some work to do.

We are focused on our 2020 objectives. We're not changing those objectives. We're not bringing them in, but I have to say I'm very excited about the performance of the business so far. And I'm very excited about how the team has responded to some of the challenges that we've put in front of them.

Speaker 0

Our next question comes from Gal Munda with Berenberg Capital Markets. Please go ahead.

Speaker 12

I'd like to ask follow-up question on Discovery Life. You mentioned it's early days, but I just like to hear a quarter in kind of the feedback you've had from the customers in terms of the pricing. And if you think about the go to market for Discovery Life, how much, it will be through the channel. You mentioned that will be an important segment and how much will be direct? And then maybe also what you're seeing in terms of the opportunity new versus existing customers?

Speaker 2

So in terms of the pricing, it really depends on the packaging of discovery live. It can vary. From the the and so let's assume it's generally speaking on average approximately an order of magnitude less than our flagship products. But of course, there's an order of magnitude more customers than Aflacic products. We think our customers are the users of Discovery Live will fit into 2, 2 major categories.

They'll be, they'll be larger accounts, traditional customers of ours. Where they're moving simulation more broadly outside of the traditional group that's been using simulation to the designers, and discovery fits in directly into our in go to market motion, into those customers where these guys will, where our sales team will be able to engage with the same individuals with whom they've been engaged with for years and be able to sell discovery into that. And we're seeing certainly seeing that happen. We're seeing that in the pipeline. We're seeing that in the activity in the field.

So that's one go to market motion to one class for customers. There's a 2nd class for customers where frankly new to ANSYS. These are people who are, may not necessarily have used simulation that much, may have learned about simulation, may have these may be organizations, and that lends itself to the channel, as well as to inside sales. And in some cases, it's our existing in some cases, it might be new channel partners because they're reaching down to a level that's below where ANSYS is historically been playing. And in that situation, you have a different go to market that we're developing, that's rapid around the inside sales in the channel partner.

Both of those are important routes to market for us, and we are evaluating the level of activity across both of those go to market.

Speaker 12

Perfect. Just as a follow-up, you mentioned the mentoring experts and the importance of them in terms of being closer to your customers. Especially on the enterprise accounts. Does this when this change in the future, does this increase the level of services you guys have to provide to as a proportion of total revenue versus historically, what you guys have been doing and how do you see that? Some of the peers are much more intense in terms of the services?

Or do you still think you're going to partner a lot with that and let the partners to provide those services after that?

Speaker 2

Well, I think the thing to realize is that in many cases, we're fortunate that our products kind of work without the need for a major services in a customer. So we don't need to place a lot of people into a customer environment to make a product work. The products kind of work. They do what they're supposed to do and they work. In some cases, We have embedded experts who can help our customers pull together maybe an integrated workflow or figure out how you can drive some of these connections across multiple physics And we charge for those.

So those are not free resources. We charge for those. And these are These are skilled individuals and we charge in appropriate and commensurate price for those the time for those skilled individuals. And of course, we have some customers maybe who need a little bit more. And in many cases, our channel partners are able to provide the services that's around that, that might be at a and they can certainly manage a different margin structure within the context of our channel partners.

And we have channel partners, of course, around the world, and they have all have different business models. But no, no, we're not trying to build a big services business here. Embedded experts really help and facilitate the adoption of our technology. And we feel that the embedded experts also give us direct customer access on an ongoing basis, but it's very much on an as needed, occasional basis. This is not a pervasive deployment of people within our accounts.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Ajay for any closing remarks.

Speaker 2

I'd like to close by expressing my sincere gratitude to our customers and to our partners. And frankly, a big shout out to my ANSYS colleagues. Thank you guys for all your efforts, and thank you so much for another fantastic quarter. For everyone else, thank you so much for joining the call today. I look forward to our next call and please enjoy the rest of your day.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.