ANSYS - Q2 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Second Quarter 2019 Earnings Conference Call. With us today are Ajay Gopal, Chief Executive Officer Maria Shields, SVP and Chief Financial Officer and Annette Aribas, Senior Director, Global Investor Relations. At this time, I would like to turn the call over to Ms. Arribos for some opening remarks.

Speaker 1

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 the key financial information and supporting data relative to our Q2 financial results and business update, as well as our Q2 2019 outlook and the key underlying assumptions. I would like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results are discussed at length in our filings with the SEC, all of which are also 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. During this call and in the prepared remarks, we'll be referring to non GAAP financial measures unless otherwise stated. Please take any reference to revenue to mean revenue under ASC 606. A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non GAAP financial measures under ASC 606 is included in this morning's earnings release materials and related Form 8 ks. In closing, I would like to remind everyone that our 2019 Investor Day will be held on Thursday, September 12 in Pittsburgh with a reception and technology showcase event the evening before.

Further details around location, logistics, agenda and registration can be found on our IR website. I would now like to turn the call over to our CEO, Ajay Gopal for his opening remarks. Ajay?

Speaker 2

Thank you, Annette, and good morning, everyone. Q2 was another record setting quarter for ANSYS. We surpassed the high end of our guidance in revenue as well as earnings per share, setting new Q2 records in each category. Our ACV growth was excellent coming in at mid teens for the quarter in constant currency. Based on our outstanding financial performance and the strength of our pipeline, I'm excited to announce that we're raising our 2019 revenue, EPS and ACV guidance for the 2nd time this year.

Maria will provide the details shortly. Our success over the past several quarters is due to a number of factors, including our strategy of making simulation pervasive across the product lifecycle. That strategy is driving more simulation and therefore larger deals. We are operating across 2 vectors to increase the size of our deals. First, by enabling deeper penetration of a single physics through new use cases and users and second, cross selling our broad multi physics portfolio to help customers address modern product challenges.

Let me give you an example of the first vector. In Q2, we closed a $49,000,000 deal, the 3rd largest in our history with a South Korean high-tech leader. This, the largest single physics deal in our history demonstrates that we can significantly increase the size of our transactions with the power of our gold standard solutions. Moving to the 2nd vector, as products become more complex, companies are increasingly addressing product challenges that involve multiple physics. That creates significant opportunities across our market leading multi physics portfolio.

In Q2, we closed a large multi physics deal with a U. S. Department of Defense prime contractor. In addition to our flagship physics solutions, our materials intelligence solution from this year's Granta Design acquisition coupled with the additive manufacturing applications built on a foundation from the 3 d SIM acquisition were key considerations in the deal to help them modernize their workforce and accelerate the development of complex systems. This is just one of many examples that demonstrates our technology leadership and the broad moat that separates us from our competitors.

On the partnership side, I was excited to discuss our alliance with SAP and the value that we are jointly bringing to customers during a presentation at SAP's SAPPHIRE NOW conference. During the conference, we heard how SAP's predictive engineering insights enabled by ANSYS has helped the customer to streamline its order timeline from months to days. SAP representatives also joined me during June's Paris Air Show where we showcased the benefits of digital twin technology with leaders from the aerospace and defense industry. Our partnership with PTC where ANSYS Discovery Live has been embedded into PTC's new CRIvios simulation live is also gaining momentum. During its most recent earnings call, PTC reported that it has closed 76 transactions with an average deal size above the previous quarter's level.

Our 2 companies collaborated at the defense contractor I mentioned earlier, resulting in PTC landing the largest ever Creo Simulation Live deal and the ANSYS team closing a substantial Discovery Live order. That contractor is noteworthy because it intends to deploy both Creo Simulation Live and ANSYS Discovery Live to potentially thousands of users across multiple business units. That demonstrates the opportunity for Discovery Live some of the largest enterprises where it complements traditional simulation and CAD offerings and drives even more value for users. Staying with Discovery Live for a moment, I'm excited that this new product continues to garner accolades from the market as well as the media. The most recent recognition was from Fast Company, which in its September issue named ANSYS as one of the 50 best workplaces for innovators for our development of this groundbreaking product.

In past earnings calls, I've highlighted specific products or solution areas in the ANSYS portfolio. For example, during our Q1 call, I spoke about how our gold standard solutions like ANSYS HFSS and ANSYS Red Hawk are driving success in their respective markets. In Q2, I'd like to highlight the ANSYS solutions that are making autonomous vehicles a reality. With an estimated $7,000,000,000,000 impact on the global economy by 2,050, the financial implications of autonomous vehicles are considerable and will dramatically impact OEMs in the entire supply chain. Given the sophistication, complexity and safety critical nature of these products, it is clear that they cannot be developed without the extensive use of simulation.

As a result, we are seeing increased interest from automotive OEMs, A and D companies and their entire supply chains to make these next generation vehicles a reality. And while there may be speculation around the timing of when truly autonomous vehicles will take to our roads and airways, the simulation work around autonomy is paying dividends in the form of ongoing improvements in vehicle safety, features and efficiency. ANSYS' best in class multi physics products coupled with leading technologies that we've obtained through our recent acquisitions, including Modena and Optus are enabling automakers and aircraft manufacturers to virtually test their products to ensure safety and reliability for these future transportation systems. In Q2, we announced a landmark deal with automotive leader BMW to create what we believe to be the industry's first holistic simulation tool chain for developing autonomous vehicle technologies. The tool chain will optimize valuable test data by providing a development framework around rigorous safety planning, efficient test space exploration, and data analytics in a virtual driving environment.

Using this solution, the company expects to launch its highly automated BMW Inext in 2021. As part of this agreement, ANSYS will also assume exclusive rights to the BMW developed portion of this tool chain for commercialization to the wider market. Autonomy will affect multiple industries including automotive and aerospace and defense. In Q2, we also announced an agreement with Airbus Defense and Space, which will use ANSYS SCADE solutions to enable safety critical controls with sophisticated artificial intelligence with the goal of fully autonomous flight by 2,030. Airbus plans to use our solutions to link traditional model based software development with new AI based workflows.

Their goal is to drive the development and certification of drone flight control software to accelerate time to market and cut associated expenses. We further expanded our product leadership in the simulation of autonomous systems with the Q2 release of ANSYS 20 19 R2. In R2, we've expanded the capabilities of our VR experience driving simulator to prepare advanced scenarios and run simulations with complete and accurate multi body vehicle dynamics. This innovation is already being used by automotive leader Renault to reduce physical testing, shorten time to market and ensure safety for its autonomous vehicle initiatives. ARSU also dramatically enhances capabilities crucial to the design and analysis of radar used in autonomous vehicles.

Our new innovation around accelerated Doppler processing provides more than 100x speed up for the time it takes to simulate radar systems. This new breakthrough capability delivers gold standard accuracy and enhances collaboration between radar sensor designers and the OEMs that incorporate the sensors on vehicles. Autonomous vehicles have the potential to fundamentally reshape the way we think about safety, mobility, land use and our environment. With our powerful multi physics solutions and partnerships, I'm excited that ANSYS is well positioned strategically and can play a role in making the dream of autonomous vehicles a reality. This represents a significant long term market opportunity for ANSYS.

Switching gears, I'd like to welcome Lynn Ledwith as our Vice President of Marketing. Lynn has more than 30 years of experience and brings an outstanding track record across digital and field marketing, as well as corporate branding. She has held marketing leadership positions at Worldwide Clinical Trials, Click Technologies, Sun Guard, Siemens and HP amongst others. Lynn brings a fresh approach to how we market that will open new avenues to build demand and to branding. In summary, I'm proud of what we've accomplished in Q2.

Our excellent financial performance coupled with the increased functionality of our gold standard solutions and our ability to help customers take advantage of megatrends like autonomy, electrification, 5 gs, IoT and others give us confidence in our ability to achieve our goals for the remainder of 2019 beyond. And with that, I'd like to turn the call over to Maria. Maria?

Speaker 1

Thank you, Ajay. Good morning, everyone. Ajay shared a few highlights from our Q2 results. And now let me take a few minutes to add some additional perspective on our very strong second quarter financial performance and provide color around our outlook and key assumptions for Q3 and the remainder of 2019. Consistent with our standard practice, my comments will be in terms of non GAAP unless I state otherwise.

Our record Q2 results reflect continued strong customer and business momentum combined with solid execution across the business. We finished the quarter with constant currency revenue growth of 23% and operating margin and EPS results that were both well above the high end of our Q2 guidance. The revenue performance in Q2 was driven by strong sales execution, including a larger dollar value of multi year lease transactions and the closing of a few deals that were originally forecasted to close in the second half of the year. The combination of our strong second quarter and first half results, which have been driven by success, most notably in high-tech, automotive and A and D, and the strength of our pipeline, gives us confidence that we are on a path to continue to make progress against our strategic priorities and to deliver another year of record financial performance in 2019. Key financial metrics for the quarter begin with Q2 ACV of $326,000,000 or constant currency growth of 14% and total revenue of $370,500,000 Key currency exchange rates were within the ranges that we provided with our Q2 guidance.

The increase in software lease license sales combined with strong maintenance renewals contributed to building our deferred revenue and backlog to a Q2 total of 717,000,000 a 22% increase over last year's comparable balance and a new record Q2 high. The exceptionally strong top line results helped to drive a second quarter gross margin of 91% and an operating margin of 46%. We also experienced a slightly slower pace of hiring than we had planned for the quarter. That being said, we did increase our employee base by approximately 100 employees in Q2. It's our intention to continue to execute on our hiring plans throughout the second half of the year.

We reported record second quarter EPS of $1.61 benefiting from the revenue over performance and representing growth of 19% over Q2 of 2018. With respect to taxes, our effective tax rate in Q2 was 19%, which was slightly below the range that we had guided coming into the quarter. Going forward, we expect our effective tax rate to be in the range of 20% to 21 percent for Q3 and 20% to 20.5% for the full year. Our cash flow from operations totaled $89,000,000 for the quarter and $240,000,000 for the first half, and we closed Q2 with a total of $632,000,000 in cash and short term investments. We repurchased 80,000 shares during the quarter, which leaves us with 3,500,000 shares available for repurchase under the current authorized program.

Now let me turn to the topic of guidance. Coming off our exceptionally strong finish in Q2, we are initiating guidance for the Q3 and increasing our revenue, earnings and ACV outlook for 2019. Before I get into the specific numbers, let me just provide a few comments with respect to the impact of the ongoing trade discussions between the U. S. And China.

I'd like to remind everyone that in 2018, our China business accounted for less than 5% of our total annual revenue and point out that our increased outlook for 2019 does take into consideration our reduced expectations from China. Now let me move to the details of our outlook. For Q3, we expect non GAAP revenue in the range of $320,000,000 to $340,000,000 and non GAAP EPS in the range of $1.15 to $1.28 For the full year, we are increasing our outlook to non GAAP revenue in the range of $1,460,100,000 to $1,500,000,000 or constant currency growth in the range of 14% to 17% or 15% at the midpoint and EPS in the range of $5.98 to $6.28 We are also increasing our ACV outlook for 2019 to a range of $2,440,000,000 to $1,475,000,000 This represents constant currency ACV growth of 10% to 13%. Our outlook for the remainder of 2019 factors in everything that we are currently aware of with respect to ongoing trade discussions, political situations and customer sentiment across our geographically and industry diverse customer base. It also reflects additional spending in the second half related to several business infrastructure and digital transformation projects, increased sales commissions and hiring costs that were delayed from the first half hiring shortfall.

With respect to annual operating cash flow, currently we are maintaining our outlook for 2019 in the range of $470,000,000 to 510,000,000 dollars I would like to remind everyone that our outlook for operating cash flow in 2019 includes higher tax payments that relate to the acceleration of lease license revenue and the related profitability under ASC 606, including additional tax payments relating to the strong Q4 finish in 2018 and the 1st year impact of the acquisitions that we closed earlier this year. Looking ahead to Q3, we're expecting operating margins of 39% to 40% and for the full year we're expecting a slight uptick in operating margins in the range of 43.5% to 44.5%. Further details around specific currency rates and other key assumptions that have been factored into our outlook for Q3 2019 are contained in the prepared remarks document. The key takeaway from our Q2 and first half results is that our strategy to make simulation pervasive is working, as evidenced by double digit growth on both the top and bottom lines and strength across the business. Part of our confidence behind raising our guidance for the remainder of the year is based upon the continued momentum that we see from our diverse customer base.

We believe that the megatrends that Ajay mentioned, along with industry wide recognition that simulation can drive a competitive advantage for our customers are bolstering demand for our products and services. We remain confident that our continued focus on execution and investing in the business combined with the ongoing growth in our recurring business, our strong customer relationships and healthy sales pipeline provide a solid foundation to continue to deliver on our 2019 goals as well as our longer term 2020 financial targets. Operator, we will now open the phone lines to take questions.

Speaker 0

And our first question today comes from Ken Wong with Guggenheim. Please go ahead.

Speaker 3

Hi, thanks a lot for taking my question guys and another great quarter. On the topic of China, could you tell us whether or not you guys saw any immediate impact, I guess, in Q2? And then as we look ahead, you mentioned in guide, you guys have factored in some conservatism in guide. Any

Speaker 4

chance you guys

Speaker 3

can help quantify what that headwind is? And as far as kind of recent headlines, obviously, there's a lot of currency headlines right now. Was that also already considered in the outlook?

Speaker 1

Yes. So Ken, I'll take that. Yes, we did see a little bit of positive impact from the China situation in Q2, which helped to drive some of the over performance in revenue. That being said, it wasn't material to the quarter. We have factored in a reduction in our expectations from the China business in the second half.

I would say somewhere in the $5,000,000 to $10,000,000 range. And yes, the what evening in our earnings announcement.

Speaker 5

Got it. And then maybe

Speaker 3

a follow-up for Ajay. You mentioned the large single physics deal, the $49,000,000 multiyear deal. When you think about kind of similar type transactions in the past, is there an opportunity to turn this into a multi physics type of a transaction? And typically what kind of uplift could something like that deliver in

Speaker 6

terms of future results?

Speaker 2

Yes. There is always an opportunity for us to convert single physics deals into multi physics deals. Obviously, some of

Speaker 7

it depends on the use cases, so I'm

Speaker 2

speaking in generalities, but it depends on the use cases where customers have for their specific application. But I said in general, as I said on the call, we're trying to expand deal sizes not only by focusing on single physics as is the case with this one, but we're also trying to drive the multi physics cross sell across the organization. And those 2 work together. So even as we deepen single physics, we're continuing to look at broadening the multi physics. And even in an organization which has a multi physics sale, there's opportunities to deepen individual physics.

So they both kind of work in parallel with each other, but absolutely, it's the basis of our ability to drive larger deals.

Speaker 0

And our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Speaker 6

Thank you. Good morning. Ajay, two questions for you. You noted the strength in high-tech, which is quite evident and you're also seeing momentum in Monero and auto. But you do seem to be seeing not quite the same growth in industrial Industrial Equipment for the last couple of quarters or more.

Perhaps you could talk about that end market and what your thinking is for the intermediate term in terms of the industrial market showing some improved momentum, that's the shorter term question. Long term question, at the Designer Automation Conference 2 months ago in Las Vegas, ANTUS Management, including your new CTO, gave a very interesting presentation on Antis' long term technology vision. And there were references, for example, to things like new computational methods in new business areas, collaboration in cloud, services based architecture, including interestingly, at least for me, SPDM services. So the question is with regard to that technology vision, how is that today informing your internal investments in R and D and perhaps even in sales and marketing to effectuate that longer term vision?

Speaker 2

So let me start with the second question first. As you know, we at ANSYS pride ourselves on the nature of our technology, the accuracy of our solutions and the effectiveness that we have in bringing new ideas and new technologies and new techniques to market, and we continue to make investments. And obviously, Jay, what you're referring to and what you saw is a glimpse into some of the work that we're doing within our organization to continue to drive innovation. You mentioned the cloud, obviously, we continue to make investments in the cloud. We continue to drive product capabilities in the cloud.

We have most recently an announcement, I think a couple of quarters ago for ANSYS Cloud, which is obviously driving cloud usage as well as, of course, HPC usage within the traditional data center. We've talked about investments that we're making in computational techniques that result in faster speed up of our algorithms. We continue to make investments. In fact, I referred to one of those investments where we were able to get 100x speed up in some of our capabilities in my script. So I think that there is a significant amount of investment that we're making in a different set of vectors.

You mentioned componentized architectures and that obviously reflects the next generation as we invest in our platform activity. We have a industry leading platform in the form of ANSYS Workbench and we continue to make investments in that technology as well. So there's a number of different investments we're making in machine learning, artificial intelligence, big data analytics, all of which we think support our business and make us most successful. So that's obviously the case and you're seeing some of that and I'm glad you were able to look at that presentation. As far as the industry verticals are concerned, what I'm excited about of course is the growth that we're seeing in the high-tech markets, aerospace and defense and automotive.

And all of these areas are drive there's a significant level of industry focus on those areas. And frankly those constitute tailwinds that are driving the growth of our business. And we're excited about the activity that's taking place and the activity that's taking place really permeates the entire supply chain. And in many cases, as you know, when we think about the end markets, we refer to customers where they belong, even though from an electronics company might be supplying other companies elsewhere in the supply chain as well. So I hope that answers your question.

Speaker 0

And our next question comes from Matt Pfau with William Blair. Please go ahead.

Speaker 8

Hey, guys. Thanks for taking my question. Just wanted to get some additional detail on how you're driving deeper penetration with single physics products within your customer base. And I guess I'm trying to understand, are you gaining additional business units? Are you getting new types of engineers to use ANSYS?

Or are they competitive displacements? Some additional detail there would be helpful. Thanks.

Speaker 2

So usually what happens is, firstly, there are obviously 2 vectors. 1 is there are more users using the technology and there's more usage of that technology and that might be in more use cases, that may be in more complex products that require greater amounts of simulation. Our sales teams engage with the customers. We try to understand the nature of the technologies, the nature of the problems that they're trying to solve. And we are obviously effective in positioning simulation as a way of being able to address some of their challenges.

And so as they take on more and more different products, in some cases across different departments, across different parts of their organization, the success that we are enjoying in one part of the organization starts to become infectious across that organization. And so I think that that's one important dimension. The other thing to realize is as products become more complex, the amount of simulation required to validate or to effectively launch those products increases and that requires more simulation to be run. So that's greater use of HPC, high performance computing and that translates obviously in to ultimately more business for ANSYS. And so it's more users, it's more use cases, it's more HPC, all of which drive the use within a single physics.

And then of course, as I've said before, problems tend to be multi physics in nature for especially for larger companies that are looking at and broader products. And in that case, we're able to then leverage a single physics into a multi physics sale.

Speaker 8

Great. Thanks for taking my questions.

Speaker 0

And our next question comes from Sterling Auty with JPMorgan. Please go ahead.

Speaker 8

Thanks. This is Jackson Ader on for Sterling this morning. If we could just touch maybe going back to the streets, if we take autonomous driving out of the automotive sector, how does the maybe traditional simulation in the automotive space, particularly in the U. S. Look in the first half of twenty nineteen and then for the second

Speaker 2

half? So it's when we think about the automotive industry, the 2 broad trends I would say that are perhaps addressing and changing the way that the automotive industry thinks. The first is electrification and the use of electric power to drive these cars. And the second is autonomy and the use of and the creation of safer and smarter cars are leading ultimately to autonomous cars. And both of those are massive there's massive levels of investment in both of those areas.

And if you have a conversation with an automotive company, those two areas tend to be huge areas where they're spending spending money, they're retooling, they're trying to make sure that they can stay ahead as the industry goes through this transition. So those remain big. But at the same time, car companies are building cars. So they're still worried about the fundamentals that they've worried about for many years, which include, how you deal with structural analysis and integrity. But to give you one example, the problems of structures and vibration analysis and noise is an area that we've been in for a number of years.

We've helped customers solve that problem. Well, when you move to an electric car, that problem becomes even more pronounced. And so what might have been okay with an internal combustion engine, which was drowning out the noise in a car is no longer okay when you're dealing with an electric car which might be much quieter. So the problems that they're dealing with and they're trying to solve in some cases are even more complex because of this new technology. And so absolutely, we see an ongoing demand for simulation to be used, not only where it's historically been used, but also for these incremental new use cases like electrification and autonomy.

The other thing that I would draw attention to is materials. I mean companies are starting to look at the use of different materials and understanding the role of materials and the nature of the interaction between the materials they use and the outcome that they get, that's also important. And of course, that's where some of the acquisitions and technology that we go through Granta come in to play a role. So when I think about the automotive industry, every single one of our technologies and techniques, whether it was original ANSYS Mechanical, which was the heritage and the foundation of the company to the most recent acquired technologies that we have are all relevant for the automotive industry are solving problems that are absolutely pertinent and center for them being successful as they go forward in the industry.

Speaker 8

Okay, great. Thank you for the thorough answer. One quick follow-up for you, Maria, just on the cash flow.

Speaker 5

I think we want to

Speaker 8

make sure we're clear. So the are these large lease deals that you signed in the first half or particularly in the second half, are they leading to larger tax payments than you previously contemplated? And that's why the operating cash flow guide has remained unchanged?

Speaker 1

No. So just to be clear, that deal was actually in our forecast. It wasn't an outlier. But that being said, as we began to articulate in Q1 that under 606, no doubt, the tax payments have increased. So as a result, the combination of the increase in tax payments under 606 as well as about a 2% headwind for the full year and the dilutive impact on cash flows from the acquisitions that we did earlier in the year all lead to us deciding that it's probably prudent not to take up the cash flow guidance until we get a sense of the timing around closing of those larger deals in the second half to see whether or not they will impact 2019 cash flows or move into Q1 of 2020.

Speaker 0

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

Speaker 2

Hi, thanks

Speaker 7

I was wondering if you could give us a sense for how you're thinking about organic ACV growth for the remainder of the year?

Speaker 1

Yes, I would say the impact the inorganic impact of the acquisitions that we did this year are about 3%, so the remainder is all organic.

Speaker 7

Okay, great. And then, Ajay, it sounds like R2 offers a more integrated workflow than available before. Could you discuss where you are more broadly in terms of technical integration for both your existing products and recent acquisitions?

Speaker 2

Well, as you know, we've had a strategy for a number of years that we've been executing against to integrate our products together through the ANSYS workbench. And that continues to be the strategy. It was a very innovative solution that made simulation dramatically easier and it gave us a framework and a mechanism where which new technologies could be integrated together. And frankly, our strategy continues to be to drive that level of platform integration both through Workbench. And as I said earlier, we continue to invest in our ongoing platform work to componentize the platform to make it easier for people to drive that level of integration because we believe an open strategy here is in the best interest of ANSYS and our customers.

So we define APIs, we allow 3rd parties to integrate in, we certainly integrate our technologies together and we define workflows. And we continue to do that And that's part of the strategy that we've had for a number of years. Of course, we continue to increase our levels of investment in that. When you think about some of these next generation challenges that we're addressing with our customers, I mentioned electrification, I mentioned autonomy, 5 gs etcetera. These are also intrinsically multi physics solutions, which require an integrated workflow, and we're able to position and provide those to our customers as well based on the integration work we've done across our products.

Speaker 0

And our next question comes from Steve Koenig with Wedbush Securities. Please go ahead.

Speaker 4

Terrific. Thank you very much. Hi, Anshus. Congratulations on a great quarter. I got one for Maria and a follow-up for Ajay, if you don't mind as well.

So for Maria, we've been hearing from some other companies about maybe selected weakness in certain countries, maybe towards the end of the quarter and some sort of kind of non linearity from some people in certain countries. Did you see any pockets of weakness or was everything pretty much good across most every country and what did your linearity look like?

Speaker 1

Yes, so I would say the linearity was about the same as we've experienced throughout 2018 and Q1 of 2019. I can't speak to any specific country that we saw weakness at the end. Obviously, the tariff situation in China, but we've got enough resiliency in the model from our geographic and our vertical distribution that we were able to execute against our forecast and closed successfully. And as you saw, each of the major geographies delivered double digit constant currency revenue growth. So we feel good about our execution in Q2.

And obviously, as we've taken up our guide on all of our key metrics for earnings, ACV and revenue for the full year, we still see a lot of momentum and we've got a healthy pipeline. So now we just need to focus on execution for the remainder of the year.

Speaker 4

Got it. Got it. Great. Thank you. And for you, Ajei, could you give us some color on the Discovery Live activity that you're seeing?

And like what's the value proposition for Discovery Live? And maybe distinguish that from the value prop or the situations in which you're selling as part of the PTC CAD workflow?

Speaker 2

The value proposition for Discovery Live is really unchanged from what it's been and what I've very quick way, a real time way of getting a directionally accurate solution or an analysis of a particular problem. The real time nature of Discovery Live is what makes it so valuable and the fact that it's so intuitive to use and so easy to use is what makes Discovery Live accurate. Now we found that there are use cases certainly where customers or users are completely new to simulation who see the benefit of the use of Discovery Live and there are we have cases where that's the case. And we also have other cases where Discovery Live is being used by people who are much more adept, who've used simulation in the past, in fact, are able to use the ANSYS flagship tools as part of their day to day work, but are using Discovery Live to give them a directional idea of where they may meet where they need to apply deeper levels of simulation. And obviously, as I said, the value proposition for Discovery Live is it gives them that immediate it gives them that immediate feedback without having to do the deeper analysis.

And then they can use that immediate feedback to figure out where they should start looking to do deeper analysis. So we see both of those kinds of use cases. Certainly, when you think about enterprise customers, you see exactly that because there are people in within larger enterprise organizations who are users of ANSYS and you see people in there who are taking advantage of Discovery Live who are not currently users of the ANSYS suite but take advantage of Discovery Live to give them insight simulation based insight. Now as far as the coexistence with PTC and is concerned as an example in CAD or in general with CAD, there are some there's a cadre of users who are using CAD from CAD from their vendor. And what we are in a position to do in that model with PTC, of course, is to make discovery live capabilities visible to the CAD user natively.

So someone who's laying out a CAD design will be able to use the PTC Creo Simulate Live solution to be able to quickly iterate and that gives them an integrated workflow within the PTC solution. And so that's an advantage. But there are also users, as I pointed out in the case of the defense DoD contractor that I referred to in my script, there are also users who are not currently CAD users. And we have a situation where in that case where the customer made a decision to purchase both Discovery Live as well as PTC Creo Simulate Live. They are trying to strategically drive upfront simulation across the supply chain both internally and externally and what they want to try to do is to get every single engineer to be able to run their own simulation whether they're a simulation expert or not so that they can get to more rapid and informed decisions early.

And as I said, in that situation, we expect to see potentially 100 or 1000 of engineers across multiple business users taking advantage of simulation. Some cases they'll be CAD users using the PTC solution. In some cases they won't be CAD users, they'll be taking advantage of the Discovery Live solution. And of course, if a customer is using another CAD solution, we have natural interconnections between Discovery Live and the other CAD solutions where you have the ability to take advantage of both technologies in parallel.

Speaker 0

And our next question comes from Tyler Radke with Citi. Please go ahead.

Speaker 5

Hey, thanks very much for the opportunity to ask a question here. You touched on China and obviously sounds like you didn't see much macro weakness broadly in Q2. I guess my question is, have you seen any changes here in the first month or 5 weeks since you've closed Q2? And how are you just thinking about the ability to close large deals in the second half of the year relative to the first half just given a potentially weaker macro backdrop? Thank you.

Speaker 2

I mean, I think the Maria's comment actually said it very clearly. We have looked closely at our pipeline and given where we are, the guidance that we're giving takes into account everything that we understand about our pipeline and what we understand about the macro and the situation in the trade discussions between the U. S. And China, as well as the broader macro. So we are in a position our guidance is based on what we know now and what our analysis is based upon the circumstances that we see in the market today.

Speaker 5

Great. And then you talked a lot about kind some of the autonomous and electrification trends in the autos and high-tech end market. In addition, you talked about 5 gs. I guess just how far do you think we are through that opportunity? Is this the multi year opportunity to come or how are you thinking about just where we are through the various stages of that?

Thank you.

Speaker 2

All of the ones that I mentioned, autonomy, electrification, 5 gs, IoT, all of these are I think are very early in their development. We think we're broadly very early in their development. We certainly see customers who will make significant levels of investments in this over multiple years as products get better and better and as technology starts to improve. Certainly in the case of autonomous, as I mentioned, and I alluded to I think in my script, I don't think you would you can get experts to agree on when the But the fact remains that on the path towards level 5, But the fact remains that on the path towards level 5, full autonomy, there are all kinds of innovations which are being created that will make vehicles better and safer and even partial autonomy starts to significantly improve the safety capabilities on the road. And simulation plays a significant role.

So this is a multiyear journey that the industry is on where simulation is going to play a huge role in autonomy. And I would make the observation of course that it's not just in automotive, it's aerospace, it's other industrial equipment. I think I talked in an earlier conference call about on the sea equipment as well, so an autonomous submersible. So there are all kinds of areas where autonomy is applicable, and there continues to be enormous amounts of work ahead of us as an industry. Similarly for electrification, I could go through it in similar detail and equally for 5 gs, equally for IoT.

All of these are major, major megatrends that we believe to be multiyear trends that are frankly driving the growth of our core business. And so I think we're in a very enviable position as a company to have a core business that's in a very strong and actively growing part of the market and with products that are leading edge products to be able to address customers' problems in these multiyear mega challenges that they're facing.

Speaker 0

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

Speaker 9

Hi, everyone. Thanks for taking my questions. So the first one is just for you guys in terms of the ability to forecast those large deals that are coming in. Now you've had the 4th deal above €30,000,000 coming in less than a year and a half. What have you learned from those deals?

And what is when you look at your pipeline and the potential for those deals to close kind of towards the end of the year, but even going forward, are you able to say a bit more confident in kind of having the ability to predict when those deals might close considering the fact that we only really started a year and a bit ago?

Speaker 2

I think that anytime you're looking at a pipeline and trying to predict exactly what happens in the in the pipeline, especially for some of these larger deals, it varies on an individual customer by customer basis. We're not I mean, we obviously the ANSYS business as you think about the overall volume, we do have a certain number of large deals and larger customers. But of course we have a large amount of the business that's much more that's much smaller, more transactional in nature. And obviously that's easier to predict because we know we have a law of large numbers of volumes working as we're dealing with the more transactional piece of the business. For the larger deals, of course, we understand exactly what the customer problem is.

We know what the value proposition is. In many cases, we've been working with the customer for a while. We understand the challenges that they're dealing with, and we understand the compelling event that's driving them to spend the money with us. They're trying to make a particular product launch. They're trying to get some particular technology out to market.

They're trying to compete in a different way in the market. All of these are major drivers and they're spending money with us to help achieve these business objectives. And so when we link these business objectives with our understanding of the value that we can provide and we put it together given the nature of the relationships we have with some of customers, we can predict and we factor that in into our prediction of the pipeline. So it's a more it's a thoughtful analysis of where we are and that results in the guidance obviously that we give to you guys.

Speaker 9

That's helpful. And then just as a follow-up, got a question on Discovery Live. It seems like from both commentary around you and what PTC has said recently, It's getting more traction definitely. We understand that there's nothing material in the numbers, especially for this year. But could it become more material driver of growth in, let's say, a year or so?

Do you have expectations for that? Did you think that Discovery Life will take another few years in order to really ramp up in terms of the volume to move the needle?

Speaker 2

Yes. We will obviously be able to give you a longer discussion during Investor Day when we'll talk a little bit more about Discovery Live and the technology. But I think a quick way to think about it, Gal, is that in our industry, our customers tend to be quite conservative. And even for a breakthrough product like Discovery Live, our internal expectations are that it will take time for customers to take advantage of these technologies. And so as you rightly point out, it's not really a material part of our business as we think about it this year or in the short term.

So we'll give you more insights perhaps be able to address these questions and others during the Investor Day presentation in a couple of months next month.

Speaker 0

And our next question comes from Adam Borg with Stifel. Please go ahead.

Speaker 10

Great. Thanks for taking the question. Regarding services, so it's great to see the continued strong services momentum as you sell a broader platform to customers. And I was just curious about your plans continue getting partners involved with services and how sustainable the recent trends in the 30% to 40% growth is?

Speaker 2

So one of the areas one of the reasons why customers are looking to answer for more services and as they start to solve some of these more complex problems, we're able to help them understand by using services capabilities, using our services capabilities, how to solve some of these next generation problems. So they're looking to solve some of these complex problems. They're reaching out to us to help them do that and that's why we provide services. But as you know, our business model is not to be a services company. We're a software business and services is not a big portion of our business and it's not going to be a big portion of our business going forward.

Our plan is to work continue to work with 3rd parties and partners as appropriate. And we're continuing to evaluate 3rd parties to take on responsibility for some of these newer solution areas that customers are looking to. And we'll continue to drive our investment in our business where services drive license revenue. So that's the way you should think about the services business. And obviously, we don't see that services ratio really changing as a percentage of our overall revenue in the term.

Speaker 10

That's really helpful. And maybe just a quick follow-up for Maria. Could you just remind for what the percentage of lease deals are that are 1 year versus multi year and what's the average duration for the multi year deals? Thanks.

Speaker 1

Yes, we don't bifurcate between 1 year and multiyear. Today, the 1 year tend to be at the transactional level, and the multi year obviously tend to be at the enterprise and strategic level. And the second part of your question? The duration. Oh, duration hasn't really changed.

I'd say those multi year deals still tend to be between 2 3 years.

Speaker 0

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

Speaker 7

Good morning. This is Nate Hitchcock on for Rich. Thanks for taking my question. Thinking about the simulation tool chain tech with BMW, the release note that ANSYS will assume exclusive rights for commercialization. And we were wondering if you've begun marketing this product, they're marketing this tech to other auto OEMs or if you can share anything regarding vision or plans in this space?

And then I do have one follow-up.

Speaker 2

We'll talk more about autonomy in general perhaps our Investor Day and you'll have a chance to understand a little bit more about perhaps at a technical detail about what we're doing in autonomy in general. But no, in answer direct answer to your question, no, we're not marketing that externally at this point of time. We're working with BMW as they lead up to the launch of the BMW iNEXT, which is expected to launch within the next couple of years.

Speaker 7

Okay. All right. Thank you. And then also in 2Q, we saw very strong revenue year over year growth in other Asia Pacific up 74% constant currency. And considering the point of prepared remarks regarding some of the second half deals closing earlier ahead of schedule.

We're wondering if some of the strength in the other Asia Pacific geography is a result of companies buying ahead due to trade relations or if you can provide really any additional detail here?

Speaker 1

Yes. I would say it was driven by 2 things. Yes, some companies buying ahead, but that was a smaller portion. The other was the large transaction that Ajei referred to in his prepared remarks. So the impact of both are what drove the performance in those numbers that you referred to.

Speaker 0

And our next question comes from Jason Celino with KeyBanc Capital. Please go ahead.

Speaker 11

Hey, guys. Thanks When I look at Q3 guidance for operating margins, it kind of suggests 400 basis points or 500 basis points of operating margin compression. Can you just talk about some of the investments you plan making or at least the increase in spend? Just a little more color.

Speaker 1

Yes. So I would say, 1st of all, it's lower revenue is really the primary driver. But no doubt, if you heard my commentary in my remarks, we are in the second half contemplating continuing to hire and making up for some of the slower pace in the first half. We've got a number of digital transformation projects underway that we will continue to invest in heavily across the business and of course, the acquisitions that we closed earlier. So a combination of all of those are what's driving the operating margin outlook for Q3 and the remainder of the year.

Speaker 11

Great. Thank you.

Speaker 0

And our next question comes from Robert Simmons with RBC. Please go ahead.

Speaker 12

Great. Thank you. So like you just mentioned, you've been behind on your hiring both Q1 and Q2, so I had a few questions on that. Are there particular areas that you're behind on or is it kind of across the board and then kind of what's the bottleneck?

Speaker 1

Yes, it's across the board. As I spoke on the last earnings call, Q1 was a combination of not only, I'll call it, a challenging hiring environment, and that's not just a domestic issue, that's really globally. Also impacted by, as you can imagine, when you do 2 acquisitions in a quarter, before we just keep the hiring pipeline open, we take a look at the new talent that has joined ANSYS to see if there's opportunities to fill open positions and to broaden some of our new teammates' responsibilities. So that slowed down some of the activity in Q1. As I said, we did hire 100 people in Q2.

And the reality is we are going to continue to aggressively pursue our hiring plans throughout the remainder of the year. And we are recruiting for physicians across the business. So there's no single function or part of the business that's disproportionately impacted. It's really across the business. And it is a more challenging hiring environment than we've seen, at least I've seen in at least a decade.

Speaker 12

Okay, great. Thanks. And then are you seeing turnover, people quitting rising or is that been pretty steady and are you seeing wage demands going up or is it just harder to find people?

Speaker 1

Yes. No, we still got single digit turnover. So we are able to retain, but it is the recruiting efforts that just take longer. And as you can imagine, sometimes when you have very highly talented employees who go to their existing employer and announce they're going to be leaving, their existing employers are getting more aggressive relative to what do they have to do to retain those people. So it's tricky.

We're continuing to find people. As you also know, we are looking for highly selective candidates in what we're hiring for. So it's not always easy to find them. But we're confident that we can continue to attract and retain our talent as we've done for almost 50 years now.

Speaker 0

And ladies and gentlemen, this will conclude our question and answer session. I'd like to turn the conference back over to Ajay Gopal for any closing remarks.

Speaker 2

Thank you all for your questions. Before I sign off, I'd like to once again thank my colleagues at ANSYS as well as our channel partners around the world for all of their hard work and their efforts that are leading to our success. Thank you all so much. And for the rest of you, thank you for joining the call, and please enjoy the rest of your day.

Speaker 0

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time. Have a wonderful day.