ANSYS - Q4 2018

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS 4th Quarter 2018 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. Please note the call is being recorded. At this time, I would like to turn the call over to Ms. Arribas 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 fourth quarter full year 2018 financial results and business update as well as our uncertainties that we highlight during the course of this call. Important factors that may affect our future results are discussed at length in our public 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, will be referring to non GAAP financial measures unless otherwise stated. Please take any reference to revenue to mean revenue under ASC 606 unless we explicitly note that we are referring to ASC 605 results. Note that all references to growth will be in terms of ASC 605 results since we have no baseline for last year under 606. A discussion of the various items that are excluded in a full reconciliation of GAAP to comparable non GAAP financial measures under both ASC 605 and 606 are included in this morning's earnings release materials and related Form 8 K.

In closing, I'd like to announce that our 2019 Investor Day will be held on Thursday, September 12th in Pittsburgh with a reception and technology showcase event the evening before. Further details around location, logistics and the agenda will be announced in the very near future and will be available 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. Q4 was yet another exceptional quarter for ANSYS. We delivered double digit growth in revenue, earnings per share and operating cash flow. Our ACV growth of 28% in constant currency was particularly notable because of the challenging comparison with Q4 of 2017. For the year, revenue grew by 11% and ACV grew 17%, both in constant currency.

And we ended the year with a record $957,000,000 in 605 deferred revenue and backlog, which is a 24% increase over Q4 in 2017. To summarize Our financial results in Q4 were outstanding and provided a great ending to a stellar 2018. At Investor Day in 2017, we announced that our objective was sustained double digit growth by 2020, while maintaining industry leading margins. We introduced several strategic pillars to guide our journey to that objective. I'm pleased that we have made important advances across all these priorities over the course of the past year.

And with double The central pillar of our growth strategy was the need to extend our leadership in the core business by introducing new innovations by transforming our go to market. Let me start with products. Building on the momentum from last year's 19.x series of releases, We launched ANSYS 2019 R1 earlier this month. R1 features innovation after innovation. Including a new multi body dynamics product line, an intuitive user experience influence our flagship CFT solution, and electromagnetic interference scanner that delivers results in seconds as part of our industry leading electronic solutions.

A new heads up display capability in SPEOS, our flagship optic solution and multi core platform support in SCADE our embedded software solution. Each of these individual innovations is important in helping customers solve some of the most challenging problems. Taken together, however, they show that ANSYS is leading the industry with advanced multi physics simulation capabilities. We also recently launched a new ANSYS cloud native solution enabled by Microsoft Azure that offers customers seamless access to on demand high performance computing in the public cloud. Initially ANSYS Mechanical and Fluent and dovetails nicely with offerings by ANSYS cloud hosting partners, which include both ANSYS and third party's products.

Based on the advances in our core products and the integration across our portfolio, we're continuing to help customers address some of the most challenging problems where they're aggressively investing in R&D. Today, let me highlight some of our successes with autonomous systems. 3M has developed advanced materials that enable sensors to deliver additional information from enhanced infrastructure, to advance driver assistance systems or ADAS. ANSYS tools and services are opening the doors to new opportunities in the fast changing automotive market, but providing 3M credibility in demonstrating their sensor material performance under adverse weather and lighting conditions. This is another example of how ANSYS is helping a customer chase a multibillion dollar market opportunity.

Another great example of our integrated solutions They are using a multi physics ANSYS solution to digitally test obstacle avoidance algorithms, a technique that could reduce costs by 90% and that's critical when in water test can run up to $150,000 each day. Moving to sales. Strategy to allow us to maximize our market opportunity and to correct underperformance in key geographies, notably Europe. Our new go to market approach enables us to effectively grow and close large enterprise deals through the ANSYS direct sales team. While simultaneously, efficiently addressing the large volume of our transactional or momentum business through a combination of territory sales channel partners and inside sales.

That strategy has unlocked new opportunities as you can see from our revenue and ACV growth numbers. We saw strength in all of our geographies. While North America led the way with 19% constant currency growth, I am delighted that Europe grew 10% in constant currency, both in Q4 and in 2018 continuing the growth recovery we had expected. On the large enterprise front, we began 2018 with a $50,000,000 customer contract. At the time the largest in the history of ANSYS.

And I'm thrilled to announce that we capped off the year with a Q4 $59,000,000 contract across multiple product lines with a longstanding customer. The 2nd pillar of our growth strategy was selectively investing in high potential adjacencies to expand our addressable market. You may remember We're sharing with our additive manufacturing solutions and in operations with Twin Builder. 2019 will be a validation and building year for these offerings, setting the stage for additional growth in 2020 and beyond. With its real time simulation capabilities, Discovery Live has captured the attention of design engineers across the globe.

One of the new users of Discovery Live, long time ANSYS customer, Andresonhauser, is seeing the benefits of simulation in product ideation. This global leader in measurement Instrumentation Services And Solutions for Industrial Process Engineering is cutting costs and reducing time to market by to quote 1 of the company's engineers. With Discovery Live, we are agile. We are fast and we are efficient. Discovery has picked up more best new product awards than any other Answer solution in the last decade.

And at the end of Q4, we signed our first 7 figure discovery deal. Another new solution Twin Builder enables our customers to build, validate and deploy simulation based digital twins. The market for Twin Builder is enormous with half of the large industrial companies expected to deploy digital twins in the next 3 years. And we are seeing early traction in the market. The home appliance and air solution division of the Global Giant LNG is using Twin Builder to create virtual prototypes at the component level and share IoT information amongst products.

Supporting research to boost product reliability, reduce the time to market, decrease the need for physical testing, and improve product development. The next pillar of our growth strategy was pursuing strategic partnerships and acquisitions. On the Partnership side, last week, PTC released Creo Simulation Live, which embeds ANSYS discovery technology into Creo. With PTC's market leadership, this partnership grows the ANSYS reach to a new and broader base of design engineers around the world. While it is too soon to evaluate market success, early indications are positive.

During its most recent earnings call, PTC reported that it already had orders from 20 customers following its December preview release as well as more than 160 customers in its short term pipeline. Ansys has a long history of successful M And A, where we acquire companies with leading technologies, invest in both innovation, and integration with the broader ANSYS portfolio and take advantage of the vast ANSYS customer footprint to increase customer adoption and sales, and drive growth for ANSYS. We're following that same playbook with our 2 most recent acquisitions, both of which closed earlier this month. The first is Granta Design, the pioneer of Material Intelligence And Information Technology. With the variety of materials information is increasingly critical to simulation accuracy.

Granza has proven world class technology that has enjoyed success in some of the largest and most sophisticated companies. Rolls Royce, for example, used Granite to save $10,000,000 to reduce testing, legacy data capture and other cost avoidance. And although we share a few customers with Granta, including Lockheed Martin, Saudi Aramco and Airbus, their distribution was limited because of their size. Now as part of ANSYS, with our ability to reach customers in all geographies, there are many new opportunities to drive growth by introducing Granta Material solution to a much larger customer base. We also closed a smaller acquisition, HELOC, which builds great technology to analyze and mitigate the risk of electromagnetic crosstalk for semiconductor designs.

This is particularly relevant because Medicare trends like 5G and artificial intelligence are driving the need for extensive on chip electromagnetic analysis to combat electromagnetic noise. Helix solutions, when combined with ANSYS power artist, our power integrity and noise analysis technology, as well as our market leading electromagnetic solvers, will help engineers deliver on the promise of next generation solutions. Our 2019 strategy for growth remains the same as last year. We'll continue to grow our core, expand into the adjacencies we've selected, drive partnerships and pursue appropriate M and A. With this strategy in place, I'm excited that our guidance for 2019 is 12% constant currency 606 revenue growth at the midpoint for the full year.

This is an ambitious growth objective, especially in the light of our stellar performance in 2018. And it is a testament to the strength of the ANSYS franchise. I wanna take a minute to talk about corporate commitment to environmental social and governance initiatives. Last month, we were named to the Global 100 Most Sustainable Corporations by Corporate Knights. A firm slowly focused on tracking and ranking companies is committed to sustainability.

This is a powerful recognition of our company and our employees. And now, I'd like to turn the call over to Maria.

Speaker 3

Thank you, Ajay. Good morning, everyone. As you heard from Ajay, By any financial measure, we delivered another strong comparable of both Q4 2017. I'll take a few minutes to add some additional commentary around our fourth quarter and annual financial performance, and we'll close with an update on our outlook and key assumptions for Q1 2019. Throughout 2018, we have been providing financial results and outlook under both ASC 605606.

Consistent with our messaging throughout the past year, beginning in 2019, we will transition to only reporting our financial results under ASC 606. For purposes of today's commentary, any comparisons that I make relative to growth rates we'll be comparing 2018 to 2017 results under ASC 605 and in constant currency. And for the last time, I'll provide key financial metrics under both 605606 and consistent with our standard practice my comments will be in terms of non GAAP unless I state otherwise. We would also like to announce that we will be removing the statistics on cumulative order above $1,000,000 in our future communications. While this metric was relevant when we first introduced it over a decade ago, The $1,000,000 threshold is arbitrary and has become less meaningful over the past 2 years as the company has begun to experience higher deal values with transactions increasingly incorporating multi physics.

It gives equal weight to both the $59,000,000 transaction that Ajay previously mentioned, and to a transaction that may be less than 2% of that value, which we believe is not useful in evaluating our performance. As we move forward we believe the best indicator of our go to market and large deal progress is the overall ACV customers that had orders over $1,000,000, a 39% year over year increase and four customers that had orders of over $10,000,000. Our Q4 results reflect a great finish to our strongest year ever. One in which we experienced continued accelerated business momentum and execution across the company. We reported constant currency revenue growth of 14% for the quarter and 11% for the year.

And EPS results that were above the high end of our guidance under both ASC 606 and 605. Our ongoing record of execution throughout every quarter of 2018 gives us against our strategic priorities and to deliver another record year of financial results Other key financial metrics that I would like to highlight begin with Q4 and fiscal year 2018 constant currency ACV growth of 28% 17% respectively. For the year, we reported total revenue of $1,200,000,000 $1,300,000,000 under 605606, respectively. 4th quarter revenue under ASC 605606 totaled $340,000,000 $418,000,000, with the large disparity between the 2 coming primarily. From the upfront recognition of the license component of leases under ASC 606.

As mentioned earlier the strong 4th quarter results included a $59,000,000 4 year deal, the largest in our history. This deal, which was not included in our guidance, was a principal driver of the overachievement in our Q4 606 results on both the top and bottom lines. It also illustrates the increased volatility that results from the upfront recognition And further, the earnings volatility is even more pronounced because the additional upfront revenue comes with minimal variable cost. The inclusion of this deal in our 2018 results also adversely impacts our fiscal year 2019 growth rates by approximately 1% for ACV, 2% for revenue and 5% for diluted EPS. The increase in software license sales combined with strong maintenance renewals contributed to our deferred revenue and backlog under 605 of $957,000,000, representing a new record Q4 high and a 24% increase over last year's very strong comparable.

Deferred revenue and backlog under ASC 606 totaled $659,000,000. Total recurring revenue for the quarter and the year under 605 grew 16% 12% in constant currency to totals of $245,000,000 $933,000,000 or 72% and 76% of total revenue, respectively. Lease and maintenance revenue each grew double digits for the quarter and the year. Indicative of strong renewals and expansions within our global customer base, as well as the value that our customer place on the ongoing investment in innovation and the high quality of our support services. This increase in our recurring revenue streams in Q4 2018 was relatively balanced across each of our 3 major geographies.

Each of which delivered double digit constant currency growth in recurring revenue. Under ASC 606, recurring revenue totaled $305,000,000 for Q4 and $962,000,000 for the year. Or 73% 74% of total revenue, respectively. Our strong and growing base of recurring revenue improves the predictability around our future performance. The operating margins under 605 were 40.5% for the quarter, and 44.4% for the full year.

The lower 4th quarter margin is consistent with our recent financial guidance, and reflects the significant incremental sales commissions that typically occur in the fourth quarter as high achieving sales personnel hit their commission accelerators. The full year margin is also consistent with the expectations that we set at the beginning of 2018 and maintained throughout the year. And 47.4% for the year. Both results exceeded our expectation and were driven primarily by the revenue over performance under ASC 606. Both sets of results are evidence that we are committed to managing our business with discipline and to ensuring that the incremental investments and top line growth that we have planned.

We reported 4th quarter EPS of $1.39 under 605 a 30% growth over last Q4 and $2.13 under 606. And for the year, we also finished with record EPS of $5.30 under 605 a 32% growth over fiscal year $2,022.98 under 606. The over performance on EPS in the quarter was driven With respect to taxes, under both standards, our effective tax and 17% to 18% for the 4th quarter. Looking ahead into 2019, we currently expect our effective our effective tax rate to be in the range in foreign jurisdictions, which have a totaled $133,000,000 for the 4th quarter $486,000,000 for the year. We closed the year with a total of $777,000,000 in cash and short term investments, of which 79% was held domestically.

And while we are discussing our $500,000,000 revolving line of credit. While the line of credit is new for ANSYS and is not for any imminent need, but simply intended to give us additional in line with our previously communicated capital allocation priorities, we repurchased 500,000 shares during the quarter, and 1,700,000 shares during 2018 at a total cost of $77,270,000,000, respectively. Currently, we have 3,800,000 shares available for repurchase. Now let me turn to the topic of guidance. We are initiating our guidance Q1 and expect non GAAP revenue in the range of $290,000,000 to $310,000,000 and non GAAP EPS in the non GAAP revenue in the range of $1,410,000,000 to $1,470,100,000 or constant currency growth of 10 Our 2019 outlook includes the contributions from the recently acquired Granta Design And HELOC Businesses.

We are currently forecasting The combined impact of the capital utilized in the acquisitions and the incremental integration investments that will be necessary throughout the remainder of the year will result in the near term impact of approximately $0.05 to $0.07 of dilution for 2019 as we integrate these acquisitions into our core business. Our ACV outlook for 2019 is a range of $1,410,000,000 to $1,465,000,000. This represents constant currency ACV growth of 8% to 12%. Our initial outlook for annual operating cash flows is a range of 4 $70,000,000 to $510,000,000 for 2019. I would like to highlight that our outlook for 2019 includes higher tax payments that relate to the accelerated lease 606 as well as the expected adverse 1st year impact of the acquisitions.

For modeling purposes, we're expecting 1st quarter operating margins in the range of 36.5% to 38.5%, and for fiscal year 2019 in the range of 43% to 44%. The recently announced acquisitions of Granta Design and HELOC are expected to adversely impact our operating As we head into 2019, I would like to again remind everyone that our focus will be on progress against annual targets as opposed to quarterly results, simply due to the volatility in quarterly revenue, operating margin and EPS, that result from the timing of large lease transactions under 606. As we saw in our 2018 results Our Q4 business volume with 28 percent constant currency ACV growth continues to grow seasonally stronger. It is by far our largest quarter for new business particularly for large multiyear deals. As we look ahead to 2019, we see a very similar seasonal pattern with a disproportionately large Q4 dynamic.

Further details around specific currency rates and other key assumptions that have been factored into our outlook for both Q1 2019 are contained in the prepared remarks document. In summary, we are very pleased to have delivered another excellent quarter to drive long term stockholder value through investing in our core business pursuing important M and A targets and additional share repurchases. Our strong close to another year both organically and through M And A supplemented by our growing base of recurring business, strong customer relationships, and a healthy sales pipeline provide a solid foundation to deliver on another strong year in 2019 as well as our

Speaker 2

questions.

Speaker 0

Session. The first question comes from Rich Valera of Needham And Company. Please go ahead.

Speaker 4

Thank you. Congratulations on the strong results. Just wanted to hone in on Discovery Live here, Ajay, and get your sense on the potential impact both in 2019 beyond, I'm sounding some promising initial returns from the PTC agreement as well as some sort of organically. So if you could just frame that out for us in terms of maybe what you've baked in for 2019 and how you think about that longer term. So,

Speaker 2

as far as discoveries concern, as I said in my comments, we are very excited about what we have in terms of the technology. And obviously, we're taking it to market both directly through our sales force as well as in conjunction with the OEM that we have with PTC. PTC recently announced its new product. It was announced last week. There was a, there was a webcast webinar yesterday.

I think that 2000 customers or 2000 individuals have signed up for that webinar as well. So there's obviously a lot of, excitement in the PTC customer base as well for that. We're very excited about it. We see 2019 as essentially a validation year. We don't really see this as being a big year yet.

This is not this is still early stages for a for product, which I think is it's transformative, but the fact is the fact is in our market it takes a while for profits to get to gain momentum. So we see this as a building year, and we'll continue to come out with new versions of the technology. PTC will continue to improve their product, with the integration of our technology into it. We'll learn this year and I'm looking forward to, you know, I'm looking forward really next year to seeing some more, tangible results. The

Speaker 0

next question comes from Ken Wong of Guggenheim Securities. Please go ahead.

Speaker 5

Great. Thanks for taking my question. This question maybe geared towards Maria. When looking at your margin outlook of 43%, 44% Obviously, that's a consistent with how you guys have been framing kind of where the margins could go with your investments in double digit growth. But obviously it's a step down from what we saw in fiscal year 2018.

Can you maybe just talk about kind of where some of those investments are coming and maybe some of the headwinds on on the margins for 2019?

Speaker 3

Yes. Ken, I'd say the biggest headwinds on the margins, are for the dilutive impact from the 2 acquisitions that Ajay spoke to in his remarks, as, as you can imagine, Most of the acquisitions that we're looking at, particularly the smaller tuck ins have no margin structure that's near So, but they're important technologies that advance our roadmap, and extend our multi physics capabilities So, we will be making some investments relative to integrating those 2 acquisitions And as a result of the capital deployed, as well as those integration investments, we'll have dilution in 2019 and we'll see them becoming more accretive to profitability as we head into 2020. Additionally, from the core business, we are continuing to invest in the business, in talent. R and D, AEs, field engineers and infrastructure to continue to be able to scale the business over the long term.

Speaker 0

The next question comes from Gal Munda of Berenberg Capital Markets. Please go ahead.

Speaker 6

Hey, thanks for taking my question. I would just like to focus a bit on the very, very large deals. I don't know if we can call them mega deals Or in terms of the fact that 2018 was kind of a breakthrough year for you, maybe after the number of those have through now. Can you talk a bit about the predictability and the nature of those deals that you're seeing in terms maybe of the sales cycle compared to what the usual deal kind of large deal previous it would take and how much effort it takes. I hope that makes sense.

Speaker 2

Sure. Hey, Gal. Thanks for the question, Dan. So, a couple of quick comments about large deals. Firstly, large deals don't just happen by themselves.

They happen as a result of a long term relationship between our others as a company and the customer. And, that's the relationship that takes years to develop. And it's a relationship that we pride ourselves on and we maintain because of the levels of investments we're making both product as well as in our technical capability with customers. And so that's one important aspect of those relationships. And as the $59,000,000 deal that we talked about is from a longstanding customer of ours, as an example.

And the second thing is what we're seeing, if many of these large deals are obviously not just single product deals. These are these pull together, multiple products from multiple product lines, and so they're essentially multi physics deals. And, and that's really important for us because when we think about the direction where some of these large companies are going, they're looking at more challenging problems. They're looking at more, they're looking at at solutions, which require necessarily this multi physics analysis that we can bring to the table. And so that's another element as well as some of these large deals.

And so when you think about the pipeline that we're seeing for this year for some of the larger deals, we're kind of back end focus we're back end loaded this year So a lot of activity is happening in the latter part of the year. Q4 is obviously going to be a heavier quarter. Much like Q4 in 2018 was a heavier quarter and that's also part of the part of the way that we're thinking about the year. So, we have visibility into the pipeline. We have been developing these deals and these relationships with customers, and as I said, the relationships take years to develop, and this is part of the cadence that we're building, into our business as we forward understanding how to manage these large deals, to understand what they look like in the pipeline make sure that we can bring the relevant sets of solutions to bear with both our sales organization as well as our technical organization, and then slot it in from an execution perspective.

Speaker 0

The next question comes from Sterling Auty of JP Morgan. Please go ahead.

Speaker 7

Yes, thanks. Hi guys. In your prepared remarks, you talked about some of the crosstalk and semiconductor design. Kind of curious as you look at 2019, how much of the growth dynamics are you expecting to come from more of your EDA portfolio versus the rest of the portfolio? And then, Maria, just to sneak in, can you give us a sense, what did 2018 acquisitions actually contribute to the 2018 full year ACV?

Speaker 2

So again, thanks for the question. So let me address very quickly the opportunity in 2019. Obviously, electronics in general is very strong for us. We have solutions that help us both in the traditional EDA market as well as in the broader high-tech market. And frankly, we see tremendous opportunity in 2019 and beyond.

And it's obviously being fueled by the complexity of semiconductor that are rolling into solutions for autonomous and for 5G for AI. Cloud Computing. All of these things are demanding more and more, complexity for semiconductors. Obviously, that's driving process node customers towards advanced process nodes. But from our perspective, that also pulls in a need to be able to do multi physics analysis.

And it's not uniquely about looking at 1 individual physics. It's understanding the implications of the chip level at the at the board level, at the system level, and that requires necessarily an understanding of across all of the different physics as we've discussed in the past. And so I think that's going to be very important certainly as we as we see the use of semiconductors in these next generation applications. Maria?

Speaker 3

Yes, Sterling relative to the contribution to ACV in 2018, from the acquisition, it was $25,000,000.

Speaker 0

The next question comes from Saket Kalia of Barclays. Please go ahead.

Speaker 8

Hey, thanks for taking my question here. Maybe for you, Maria, on the large $59,000,000 lease deal in the quarter. Can you remind us how the cash collections on that multi year deal will work?

Speaker 3

Yes. So Saket, as you as you saw in the materials, it's a 4 year deal with annual payments and that first payment will come into 2019.

Speaker 0

The next question comes from Steve Koenig of Wedbush Securities. Please go ahead.

Speaker 9

Hi, ANSYS. Thanks for taking my question. I'd like to maybe dig into your what you're doing in cloud here. And so, Ajay, you mentioned you've got a new cloud native solution on Azure. Maybe just can you back up a little bit and remind us what's how are you currently going to market through hosting partners And then what's different about the new Azure solution that you're offering relative to either product or pricing model?

You know, and just remind us, are the hosting partners, is that a BYO by BYOL model for them, and then customers rent? Or so just kind of refresh me on how you're going to market in cloud and how the new offering might be different here?

Speaker 2

Right. Great question. So we currently go to market, as you rightly pointed out, with a network of cloud partners who are essentially around the globe, and they provide turnkey access to the ANSYS portfolio. So our cloud hosting partners take advantage of whatever public cloud infrastructure they choose to use, the customer, the the the customer works with them and they're able to work with both ANSYS technology, as well as 3rd party technology and offer that as a, essentially, as a cloud, as a cloud solution. So they serve as the cloud partner, if you will, for the customer, and the customer directly works works with them.

And that's a great partnership with us and the cloud hosting partners that's been working very well. What we've done with the ANSYS cloud is we've taken a slightly different approach. And here now within, within directly within, our flagship products initially with fluent and mechanical, you can directly access the HPC capabilities in the cloud. In this case, the Azure public cloud. And so it's completely seamless.

It's completely built into the UI, and you have an off when you're using the product to then choose to use the public cloud, which essentially provides seamless HPC, for our customers. And obviously, that provides that makes the cloud a little bit more accessible. It provides convenience because customers, or engineers can, without having to leave the environment that they work in every day, they can enlist this additional compute power without even being an expert in HBC. And obviously this makes HBC easier to use, and we're excited about that. And in the coming months, we'll be adding more services and capabilities to the ANSYS cloud.

It dovetails nicely with what our public with our cloud hosting partners they provide, and we're excited about, providing our customers the choice of how they want to take advantage of the public cloud.

Speaker 0

Next question comes from Gabriel Borges of Goldman Sachs. Please go ahead.

Speaker 3

Hi, good morning. Ajay, I wanted to ask about the dynamic at your top 100 customers, whereas Advanced has dedicated more technical resources to those customers, we've actually grown as a percentage of sales. How do you think about how penetrated you are at your largest customers? And as part of that, any metrics you can share on multi physics penetration and adoptions would be helpful. Thank you.

Speaker 2

Sure. So as you well know that the, these larger deals, as I mentioned already, these larger deals do include multi deployments or multi physics, I mean, the multi physics in nature, I would say that for our largest 100 customers, most of them probably have 3 or more products from 3 or more physics, if you will, installed, and are taking advantage of them. So I would say that it's a pretty broad penetration of physics into the largest 100 customers. That being said, I think that the market for simulation is still it's still early stages because, because when you think about when you think about where the use of simulation is, even at the very large customers, plenty of opportunity to continue to increase the use of simulation in our strategy for simulation and the use of simulation is to make it more pervasive. Historically, it's obviously been used in the validation phase.

And even there, I think we're underpenetrated. But if you start to think about the opportunity going upstream to the designers and then downstream into manufacturing and operations, I think we have a significant opportunity. And we're seeing that because with some of these larger deals, yes, there is improved sales execution. Obviously, there's improved sales execution, but it's also the case that the customers need the technology, right? No one would be buying things if they didn't need it.

The customers need the technology because we're able to demonstrate the value of the technology in different use cases and to addressing different customer needs. And that's translating into greater demand for our offerings. And so you see with these large deals, these are customers we've had for numbers of years and then we continue to the footprint and the penetration into those organizations. And I don't believe that we're overreaching an app and tell it or anything of that nature. So we are excited about our future.

We are excited about the opportunity in front of us.

Speaker 0

The next question comes from Ken Talanian of Evercore ISI. Please go ahead.

Speaker 10

I was wondering if you could give us a recap of the changes you made to both the sales force and the channel this year and your plans for 2019?

Speaker 2

Sure. I think the further the importance and I couldn't tell you exactly what happened in 2017 versus 2018, but essentially what we did is did a pretty deep segmentation of our customers. And separated them into different, into different categories, if you will. There's a segment of our customer base where we directly address, the customer through the ANSYS Direct Salesforce. And, these tend to be the largest of customers And typically you'll have an account manager, looking after a small number or one customer, with with technical support.

And this is this is where a lot of the larger deals come from. We also have what we call we also have territory, sales sales individuals who are not focused on the largest accounts. And we have a we have what we call a momentum sales motion or a, which is more transactional in nature. And these are these are the next generation or the next level, if you will, of customers, where the coverage is less, it's not so much one to one. It's less, it's single sales individual may cover several different accounts, or we would have channel partners who are then, working with us to also cover accounts.

And so through the combination of channel partners and territory sales, we're able to cover some of these accounts. We also have invested in inside sales, and our inside sales activities is doing well. And we're able to then not just create inside demand. It's not just an organization to set up that can actually close business, telephonically through our inside sales organization. Obviously, that is that those tend to be smaller deals, but some of them are very nice deals as well.

And so that combination of being able to go direct to large organizations with more focus being able to manage the territories effectively and leveraging the channel partners and leveraging inside sales to be able scale, the transactional aspects of a business is really what's been contributing to our success on both fronts on the large enterprise side as well as on the smaller enterprise side. As we look as we go forward into 2019, you know, the challenges for the sales organization obviously are we have 2 new acquisitions in the form of Granta and HELOC. We're integrating them into the sales organization into our go to market motion. That technology will be available to obviously our direct sales people as well as to our channel partners to be in a position state to market. We're excited about that work and that means integrating the technical sales organizations as well as well as teaching our sales organization.

Outside of that, the same structure that I described, namely going after large enterprise customers, being able to manage the momentum accounts that remains in place. As we think about our business in 2019.

Speaker 0

The next question comes from Matt Pfau of William Blair.

Speaker 8

Hey guys, thanks for taking my question. Just wanted to ask on Discovery Live. Maybe you could talk about the the initial traction you're seeing? Is it different users than you would typically see using ANSYS? And then the funding for these deals is is it coming from different budgets that would typically be used to purchase ANSYS?

Thanks.

Speaker 2

Our approach for discovery has been twofold. One is that we think that it could be customers we've historically had, larger customers, we're taking advantage, we're taking advantage a different user base within that large customer. So it may be a different cadre of users who have not historically used the ANSYS flagship solutions, but who do who could benefit from the use of simulation. So even though it would be the same large customer, it would be a different user within that. And we're seeing that certainly within our own go to market with Discovery, But we're also seeing that, as you think about, some of the conversations we've been having with our, with our, colleagues at in terms of how they're thinking about positioning, accreo live as well.

And then the other area that we think that we will be able to bring in customers as customers have historically not necessarily been asked as users, who tend to, who are smaller haven't found, haven't felt that they could manage the use of simulation, even though they would benefit from that, and we believe that there's an there as well. And that's, I would say that that's harder for us to to quantify right now, but that's also an opportunity that we are excited about.

Speaker 0

The next question comes from Ross MacMillan of RBC Markets. Please go ahead.

Speaker 10

Thank you very much and congratulations for me as well. So when I look at 2018, I think your organic constant currency ACV growth was about 14% And even if we take out the large deal in Q4, I think it would be 12%. And then when I look at 2019, it on a constant currency organic basis in the kind of 7%, 8% range. So a big sort of step down And I just wanted to know if that's just elements of prudence or are there any other things that you're thinking about that would create that deceleration. And maybe related to all

Speaker 2

of this is just kind

Speaker 10

of we just touch on the philosophy on these large multi year transactions. You said the 1 in Q4 was not in the guidance. Does that imply that you are excluding deals like this from your future guidance? Thanks so much.

Speaker 3

So, Ross, relative to our outlook for 2019, I would say we have we have forecasted based on our visibility in the pipeline as it exists And, no doubt, we are going to be a little bit prudent as it's just the beginning of the year and similar to what we experienced in 2018, given that the majority of those large transactions are currently forecasted for Q4 We want to build in a little bit of conservatism if you will. That being said, relative to that $59,000,000 deal in particular. We did not include it in our guidance because the time that we gave our outlook back in November, there were still, a number of moving parts relative to that deal including some competitive dynamics that quite frankly could have easily made that a Q1 deal. And Given the size of it, particularly the impact under 606 with $30,000,000 of revenue and $0.28 of earnings, to the extent that it had closed in Q1, it would have just left too big a gap. So The downside risk was not worth trying to be aggressive on forecasting that deal.

The reality is, we're still in the learning stages relative to the predictability of these. And as it becomes more, more of an ongoing part of our business and we learn more about you know, exactly different personalities that have different perspectives on on closing, we'll get better at it. But for now, we are going to build a little bit of caution into to our outlook so that we don't have any downside surprises.

Speaker 0

The next question comes from Jay Vleeschhouwer of Griffin Securities. Please go ahead.

Speaker 8

Could you comment Maria on your expectation for expense growth in 2019? You grew your headcount by about 500 for the year versus a prior, many year average is just about 100 or so increase, in head account. Per year. So pretty, pretty considerable difference there. And relatedly for Ajay, having spent the last six to eight quarters on your go to market and A.

E. Investments, could you talk about the relative investments or initiatives on those two things the next year or more, as compared to the past year or 2, and the preparations you need to make or investing in visavis infrastructure, acquisitions integration, data centers, and the like to prepare for future growth. Thank you.

Speaker 3

Yes. So Jay, let me take, your first question relative to our plans relative to investing. Our 2019 plans currently anticipate adding about 300 new employees to the open for hire across the globe. Other things that I spoke to earlier, we will be absorbing the 2 recent acquisitions, which will require some additional integration costs in 2019. And then as you just heard, as you just mentioned, we do have a number of infrastructure investments, not necessarily data centers, certainly some of our own HPC capacity, internally, but most of our investments around talent and additional costs that that come with talent relative to licensing around digital technology that they're leveraging.

And we're also investing in our own digital technology to really be able

Speaker 2

And I think Jay, the other part of your question was around, our investment in our technical, capability, customer facing capability, our ACE organization, And yes, it continues to be an area that we are making investments and you'll see that. You'll see that if you look at our go online and look at kinds of people that we're looking to hire, and we're making investments in our ACE organization, essentially across the product portfolio, across the world. Obviously, we've got some new talent coming in through the acquisitions of Granta and HELOC, and those individuals will obviously join, join the company and will be central of course as we start to expand in those areas as well. So, so there will be expansion in our ACE capabilities in 2019.

Speaker 0

The next question comes from Monica Garg of KeyBanc. Please go ahead.

Speaker 11

Hi, thanks for taking my question. The question for you, Maria, it's like you are guiding a cash flow flattish year over year. Could we add some color around that? I mean, I usually talk about it could be slightly higher taxes. Could you quantify that number?

How much increase you are baking in for year over year? Thank you.

Speaker 3

Yes, Monica. So I'd say as you think about cash flow for 2019, there's a few headwinds that facing in addition to the additional taxes from the 606 over performance, we've also got a headwind of about 1% to 2% from currency. And the 2 acquisitions that we did are expected to be dilutive, to cash flow in 2019. If you think about relative to quantification of the tax impact, Our tax rate in 2018 was about 18% for the full year, and we're guiding to 21% to 22% for 2019. So that's really kind of the differential in tax payments relative to 606 as we head into 2019.

Speaker 0

The next question comes from Matt Lemenager of Robert W. Baird And Company. Please go ahead. Great. Thanks.

It's Matt on for Rob. Thanks for taking the question.

Speaker 2

I have

Speaker 0

a question around North America. It's now grown 13% or faster. I think 6 of the past 8 quarters Ajay. Is there anything in particular driving that simply sharper execution or anything standing out direct versus indirect, anything to that's kind of driving that?

Speaker 2

So I think there's obviously a great in North America and there's been a lot of large deals activity as well that we may able to drive from America. And I think to a certain extent, the, just given the nature of some of these large deals, these tend to be long term customers who've historically been with us for a long time, that's been we've been able to build on that given the way the North America team has been laid out. But no, I think from a market demand perspective and what customers are looking for, it's kind of you would expect the same sort of thing from customers, whether they're based in North America, whether they're headquartered in Europe or whether they're headquartered in Asia. And I think that the execution aspects of the North America business has also been very strong.

Speaker 0

This concludes our question and answer session.

Speaker 2

Thank you, Andrew. So 2018 was another outstanding year for ANSYS, which strength across all of our key financial metrics. We improved our go to market execution and we broadened our product capabilities These important accomplishments continue to move the business in the right direction and give us confidence in our ability to achieve our long term targets. We look forward to another exciting year in 2019. In closing, I would like to express my sincere gratitude to our customers, and to our partners for their support.

And a shout out to my ANSYS colleagues, thank you all for your efforts, and thank you for another exceptional quarter and an exceptional year. Thank you all for joining the call today, and I look forward to our next call. Enjoy the rest of your day.

Speaker 0

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