ANSYS - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS' Q4 2020 Earnings Conference Call. With us today are Ajay Gopal, Chief Executive Officer Maria Shields, SVP and Chief Financial Officer Nicole Anacinas, Senior Vice President and Annette Arivas, Senior Director, Global Investor Relations. At this time, I'd like to turn the conference call over to Ms. Arivas for some opening remarks. Ma'am, you may begin.

Speaker 1

Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our fiscal year 2020 Form 10 ks have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our Q4 and full year 2020 financial results and business update as well as our initial Q1 fiscal year 2020 outlook and the key underlying qualitative and quantitative 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 public filings with the SEC, all of which are also available via our website. We note that the impacts of the COVID-nineteen pandemic on our performance could cause actual results to differ materially from our projections.

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. During this call and in the prepared remarks, We'll be referring to non GAAP financial measures unless otherwise stated. A discussion of the various items that are excluded and a full reconciliation of GAAP to the comparable non GAAP financial measures is included in this morning's earnings release materials and related Form 8 ks. Before I turn the call over to Ajay, I would like to let everybody know that we are continuing to make progress towards our environmental, social and governance road map.

Earlier this year, we published our first product handprint use case focused on electric vehicles, illustrating how ANSYS solutions play a critical role in solving many of the industry's challenges. Additionally, we published our non financial materiality assessment, which will guide our ESG strategy as well as the human capital infographic highlighting key aspects of our ANSYS culture and talent management. All of this information is available in the Sustainability section of our Investor Relations website. I would now like to turn the call over to our CEO, Ajay Gopal, for his opening remarks.

Speaker 2

Ajay? Good morning, everyone, and thank you for joining us. Q4 was another excellent quarter for ANSYS, Capping off the most successful year in our fiscal year history. We beat our financial guidance for the quarter across all key metrics, Including revenue, ACV, earnings per share and cash flow. Q4 saw stronger than expected sales activity, Which we believe was driven by a combination of deferred customer spending from earlier quarters, greater than expected end of year customer budgets in the Americas and in EMEA, coupled with increased, albeit cautious optimism in the economy, Thanks for the emergence of COVID-nineteen vaccine and expected government stimulus activities.

During Q4, We closed nearly 100 deals over $1,000,000 a total that includes 8 deals in the 8 figures. One of those agreements was the 2nd largest deal in the history of the company, a 5 year $79,000,000 contract with an enterprise customer. While economic conditions force this global company to reduce expenses across its business, it renewed and expanded its use of ANSYS Core Solver Technology Worldwide and added newly acquired ANSYS Technologies including electronics reliability and dynamic analysis. This contract reflects the customer's long term decision to standardize on ANSYS technology over other vendors and to reduce its reliance on physical testing and is a testament to ANSYS' market leadership. As we have consistently said, our years have become increasingly back end loaded due primarily to the timing of large deal.

This steady progression has allowed our sales and operations teams to support an increasingly higher magnitude of business in Q4 of each year. Our strong Q4 2020 execution drove record quarterly ACV, which is over $100,000,000 higher and the previous largest quarter in Q4 of 2019. The strength and volume of business that we closed in Q4 resulted in annual ACV growth of almost 10% in constant currency. The year developed largely as we had predicted in our May 2020 call with regards to our performance by industry, geography and company size. During the year, we exceeded our expectations with enterprise customers, including closing the 3 largest deals in our history.

That speaks to the importance of ANSYS' integrated multi physics simulation capabilities that connect all the major physics as well as to the trusted partnerships that we have built with our enterprise customers. Moving to products. We advanced our strategy of pervasive simulation with our recent delivery of ANSYS 2021 Release 1 to our customers. With R1, engineers can harness the advances in simulation technology together with ever increasing computing power to drive new levels of product innovation. This comprehensive release features advances across our entire integrated multi physics portfolio and our simulation platform, Including in ANSYS Cloud where customers can now scale beyond 1,000 cores for a single job In ANSYS Discovery, which now includes automated thermal analysis to predict fluid and solid thermal behaviors for electronic cooling and heat management devices In ANSYS' share lock, where customers can now incorporate ANSYS Mechanical's random vibration analysis into their design for reliability workflow thereby improving product reliability and lifetime.

Another key element of R1 ANSYS HFSS MeshFusion. This breakthrough solution simplifies the development of modern electronic products, Which are incredibly complex systems consisting of multiple interacting components. Today, engineers can analyze these systems using 1 of 2 suboptimal techniques, either individual component simulation with manual combination, which can be aeropro or a one size fits all approach which could result in long simulation times. Using ANSYS HFSS MeshFusion's game changing technology. An engineer can solve each component at a level of fidelity most relevant for that component.

And then HFSS automatically fuses the results. This virtually eradicates the costs and the risks of traditional methods, enabling engineers to efficiently design and optimize complex products. Samsung Electronics is using HFSS MeshFusion to create optimal designs and to shrink design cycle times and costs for its next generation flat screen television. The electronics giant uses this innovative technology to develop advanced designs that were previously unimaginable. Moving to M and A.

In Q4, we closed our acquisition of Analytical Graphics Incorporated or AGI. With AGI, we will be able to address a broader market called digital mission engineering, which combines mission simulation and analysis from AGI with component and system level simulation from ANSYS. Based on a third party market analysis and primary interviews with industry experts, We believe that the AGI acquisition increases ANSYS' total addressable market by $800,000,000 That market is being fueled by the replacement of open source Code, unsustainable in house code and the ongoing growth in the number of missions. Our combined portfolio will enable customers to simulate up and down the stack, starting at the chip level and going all the way up to customers' entire mission, increasing the likelihood of success and saving them time, money and other crucial resources. This week, we announced a relationship with Keysight, which connects AGI's mission analysis software with Keysight's high fidelity RF systems modeling capability.

This partnership builds on an existing relationship which empowers engineers to evaluate mission level behavior and is a key enabler for aerospace applications amongst others. PTC, another partner, continues to see success with its OEM of ANSYS technology. In its most recent earnings call, PTC reported that Creo powered by ANSYS products grew bookings by more than 20% in the quarter. The company highlighted one such deal at SharpNinja, which added Creo Simulation Live to help spark innovation and decrease product development Cycle Times. As we look ahead to 2021, I'd like to reflect on the COVID-nineteen pandemic and put it in context of the ANSYS business.

COVID had an adverse impact on our 2020 results, most pronounced in Q2 and Q3 with some customers choosing to be cautious with their spending. However, our strong execution in the back half of the year, including the record Q4 performance, Resulted in ACV above the high end of our updated MIG guidance and within the originally established range for the year. We are seeing a continuation of Q4's cautious optimism in our customer base with the expectation that the economic pressures of the pandemic will start to ease in the second half of twenty twenty one, but tempered by concerns with virus mutations and vaccine rollout schedules. The takeaway is that we're assuming greater uncertainty in the timing of sales activities than we would have had this been a non COVID year. We are also planning for 2021 to be heavily back end loaded, similar to or even slightly more pronounced in You will hear more about our guidance for 2021 shortly.

Speaker 3

Let me now move to

Speaker 2

the long term to when the pandemic is behind us. While we are not in a position to quantify these considerations, I believe that some customers who cut back during the pandemic We'll increase spending in R and D and simulation to compensate for underinvestments in 2020. More important, however, I believe that we will see a number of tailwinds that serve to increase the post pandemic market growth rates as compared with our pre pandemic projections. 1st, in a recent survey of nearly 900 executives and managers across industries, the firm McKinsey Found the pandemic may have accelerated digital transformation by as much as a decade. I believe this is particularly relevant for our customers And that they will hasten their digital transformations post pandemic in the process driving increased and deeper use of simulation.

The pandemic proved that R and D engineers are effective when working from home and that they can use simulation to They must accelerate their digital transformation to replace legacy product development processes with modern tools and techniques. Multi physics simulation with its core value proposition of helping to accelerate time to market and to deliver cost savings will be key to these transformations. Next, the pandemic seems to have pushed customers to accelerate roadmaps and to innovate faster in areas such as telecommunications and consumer electronics. We are also seeing increased R and D the creation of eco friendly products such as electric vehicles and lightweight fuel efficient aircraft engines as we discussed in our last earnings call. All of these products are sophisticated but complex and require integrated multi physics simulation for design and development.

That will continue to drive increased post pandemic demand across our entire portfolio, including our newly acquired AGI mission offerings. To summarize, despite the disruptions caused by the pandemic, Q4 was an outstanding quarter, marked by record financial results. Looking long term, we believe that the pandemic may actually cause our total addressable market to go faster than our pre pandemic projections. This makes me confident that as the market leader, ANSYS will be able to continue to drive strong and profitable long term growth. Our next speaker is Maria Shields.

As you may know, Maria has been our CFO since 1998. And for those of you counting, that's 90 quarterly earnings calls. She's been instrumental in guiding ANSYS on a remarkable journey from our initial public offering in 1996 to our status today as a simulation industry leader. And it's very fitting that we have delivered record results in the last full quarter as CFO. On March 1, she will transition into a new role of Senior Vice President of Administration, where she will focus on company culture, Talent and Technology to help us operate at even greater efficiencies.

BOLA Board member Nicole Anaspinas will succeed Maria as CFO on March 1. With her experience in the tech sector as well as the knowledge of ANSYS, Nicole has hit the ground running since joining ANSYS full time in December. In addition to the traditional CFO responsibilities, Nicole will direct and oversee our M and A function as well as ANSYS' digital transformation. Nicole was CFO and COO at Squarespace. She was CFO at InForm and spent 17 years with IBM in various leadership positions in Finance Mergers and Acquisitions and Market Development, including as CFO of IBM Software Middleware Business and its Cloud Business.

I'll now turn the call over to Maria to discuss our Q4 2020 financials and then to Nicole to give details around the 2021 outlook and assumptions for the Maria?

Speaker 4

Thank you, Ajei. I truly appreciate the kind words and your ongoing support and partnership over the past 4 years. Hello, everyone. We are very pleased to report another strong quarter, resulting in record financial performance for both the quarter the year. I'll spend a few minutes walking through an overview of the Q4 financial highlights And then I'll turn the call over to Nicole to add qualitative and quantitative color around our initial outlook and key assumptions for the Q1 and full year 2021.

Before I get into the details of our financial highlights, I would like to take a moment to say thank you to the entire ANSYS team. Your focus on execution, collaboration and ongoing commitment to customer excellence enabled us to finish with both a record quarter and year Both operational and financial for us, despite the many uncertainties and disruptions that accompanied the COVID-nineteen pandemic. We are also very excited about the closing of the AGI acquisition in early December and the positive progress that the teams have made on integration activities. We closed the quarter with total revenue of 628,000,000 For constant currency growth of 24% and operating margin and EPS results that were both well above the high end With every quarter of this past year, our revenue results as we closed out 2020 were driven by solid sales execution. Other key financial metrics for the quarter continued with 20% constant currency growth in ACV To a total of $666,000,000 of which 83% was from recurring sources.

This compares to 78 In last year's Q4. This is a new record for Q4 with respect to both total ACV and the percentage that is attributable to recurring sources. Q4's revenue results reflect The continued trend in solid lease sales that we've been experiencing throughout 2020 with a record 50 4% constant currency increase in lease license revenue. For the time in 2020, in the Q4, We reported a return to growth in the paid up software license line with 11% growth in constant currency. This yielded 38% constant currency growth in our software license revenue.

The increase in lease license sales combined with high renewal rates on maintenance contracts contributed to building our deferred revenue and backlog to a Q4 total of 967,000,000 An 11% increase over last year's comparable balance. The strong top line results combined with our continued focus fiscal discipline helped to drive a 4th quarter gross margin of 92% and an operating margin of 52%, which finished well above the high end of our Q4 guidance. With respect to taxes, Our effective tax rate in Q4 was 19.5 percent, in line with our expectations. The net result was 4th quarter EPS of $2.96 which also finished well above the high end of our guidance. We've covered Stryxus our cash and balance sheet position in the 4th quarter with cash flow from operations that totaled 174,000,000 A 25% increase over last year's Q4.

The quarter's cash flow benefited from very strong receivables collection As well as the deferral of certain tax payments into 2021. This translated to a new record of $547,000,000 for the full year. We closed the year with a total of 913,000,000 cash and short term investments and a total debt balance of $798,000,000 and hard work of our employees, customers and partners. Now, let me turn the call over to Nicole, who will continue with the topic of

Speaker 5

guidance. Nicole? Thank you, Maria. First, I want to echo Maria's congratulations and gratitude to the entire ANSYS team for such an amazing 2020. Together, we delivered stellar outcomes in the face of unprecedented business uncertainty.

The 1 ANSYS culture of teamwork and commitment to customer success that drove those results is one of the many reasons I am so thrilled to join the team. Looking into 2021, I want to share some of the key dynamics we have factored into our guidance. Due to the continued uncertainty about The timing and impact of a return to normal business operations post the pandemic. Our guidance ranges continue to be wider than those we provided pre pandemic. We anticipate that the current environment will continue through the first half of the year and expect a recovery in the business environment during the second We estimate trade restrictions between the U.

S. And China have adversely impacted our annual sales by approximately 25,000,000 While the trade environment has been rapidly changing and may continue to do so under the new U. S. Administration, our outlook factors in the existing trade and Dynamics that are in place today. We are expecting to see a continued mix shift from perpetual licenses to lease licenses As customers continue to find the flexibility of lease licensing and operating on the cloud more appealing.

The reduced capital associated with the leasing model is also more appealing to certain customers during a time of economic uncertainty. Our blended renewal rates across maintenance and leases have historically been approximately 90%, with the renewal rates on maintenance agreements being even higher. Our renewal rates have remained high with only a slight reduction as compared to our historical experience. And our assumptions are that they will tick up slightly in 2021 towards historical levels. We continue to adjust our spending to reflect our expectations for the pace at which economic recovery will while balancing the need to invest for the long term opportunity that we see ahead.

We have also maintained intend to continue our commitment to invest in our acquired companies as well as R and D and certain digital transformation projects as those projects are critical to our ability to operate efficiently and scale the business for future growth. We completed the acquisition of AGI on December 1 And have factored the expected impact into guidance, which translates to approximately one negative point of margin. We expect this dilutive impact to be the most pronounced in the 1st year post acquisition consistent with our past experiences and approach to integration. As we look ahead to 2021, we expect to see a very similar seasonal pattern as we've seen in prior years with a disproportionately large Q4 driven by customer planning and year end spending patterns. In Q4 2020, we saw an outsized shift in customer behavior in December relative to what has historically occurred.

There was a significant and unexpected acceleration in customer decisions to both purchase and pay. We exceeded the high end of our Q4 2020 guidance on ACV by $26,000,000 with 20 percent constant currency growth and full year 2020 cash flow guidance by $72,000,000 and grew 9%. Our strong finish leaves us optimistic and reinforces our belief that customers view simulation as essential and will continue to invest in their own digital transformation. Our full year 2021 guidance Reflects an improvement in momentum in both ACV and cash flow. However, some of the impact of that momentum started in December of 2020, Which was seen in the over achievement above the high end of our guidance.

While this momentum is positive, the dynamic also negatively affects 2021 gross comparisons For example, the $26,000,000 of overachievement in ACV creates a 2% headwind to 20 21 ACV growth. Although the environment remains fluid and we are still in the midst of the pandemic, we believe that Post COVID economic recovery and the current trade environment remains in line with our expectations, our long term guidance of $2,000,000,000 ACV in 2022 is attainable. Now let me get to the specifics of our guidance. In full year 2021, we expect non GAAP revenue in the range of $1,790,000,000 to $1,875,000,000 which is growth of 6% to 11% or 3% to 8% in constant currency and EPS of $6.44 to $6.92 For Q1 2021, we are projecting non GAAP revenue in the range of $335,000,000 to $360,000,000 which is 8% to 17% growth or 5% to 12% in constant currency and EPS of $0.73 to 0 point 9 0 dollars Our outlook for full year 2021 is to maintain industry leading operating margins, which we expect to be in the range of 40% to 41% and Q1 2021 operating margins in the range of 24% to 27.5%. The lower Q1 2021 operating margins The seasonal nature of our business with a relatively lower revenue contribution in the quarter, similar to what we experienced in Q1 of last With an operating margin below 30%.

For full year 2021, we expect ECB in the range of $1,750,000,000 to $1,825,000,000 which translates to 8 to 13% growth or 6% to 11% in constant currency. As we mentioned earlier, we expect ACV to be highly skewed towards the 4th quarter. We are expecting to deliver full year operating cash flow in the range of $475,000,000 to $515,000,000 This is reflective of our current view on full year ACV and profitability. It considers the continued trend of requests for extended payment terms negotiated in new contracts, as well as the timing of certain early collections and deferred tax payments in 2020 that collectively raised full year 2020 cash flow and lowers the full year 2021 outlook. Additional details related to the cash flow guidance and specific impacts to full year 2020 2021 are more fully provided in our prepared remarks document.

Further details around specific currency rates and other key quantitative and qualitative assumptions that have been factored into our outlook Q1 and full year 2021 are also contained in the prepared remarks document. I am so proud of and thrilled to be part of the team who has delivered such outstanding results despite so many macro headwinds and business disruptions during a time of personal hardship for many. I am confident that with this team, we will be able to continue to deliver on our strategy of pervasive stimulation and help our customers achieve their innovation and

Speaker 0

And ladies and gentlemen, at this time, we are ready to begin the question and answer In order to give as many people as Possible, the opportunity to ask questions. We do ask you to please limit yourselves to one question and one follow-up. And our first question today comes from Jackson Ader from JPMorgan. Please go ahead with your question.

Speaker 6

Great. Thanks. Good morning, guys. And I guess we should start off with Maria. Heartfelt congratulations on your 90th call and We're sad to see you go from the CFO role, but glad that you're sticking around with ANSYS and welcome to Nicole.

First question though is for Ajay and your comments about the TAM growth pre and post pandemic. So can we just get a little bit more color? Is this expectations for all the different components of the TAM, the core simulation and then the growth opportunities in the IoT and electrification and others? Or were you talking specifically about just maybe 1 or 2 components of that total TAM mix?

Speaker 2

Hey, Jack, and thanks for the question. So my comments very specifically in the script on TAM, One was around the increase in TAM as a result of the AGI acquisition, which we said added about $800,000,000 to our total addressable market. The other comments about tailwinds that I spoke of were more harder to quantify. As I said in the script, the point about digital transformation is that we have seen Customers embrace simulation more during the pandemic and certainly with the recognition that their engineers could work from home effectively away from corporate labs, That's also been another tailwind for the use of simulation. So we expect to see that continue certainly for the value proposition of simulation being able to drive Product to market faster and save money.

So that's the tailwind. And the second one that we that I pointed to was in certain areas, We've seen increased levels of investment. Now those are I specifically call that telecommunications and consumer electronics, And those are areas which require multi physics simulation analysis. So it really reflects on the multi physics nature of our portfolio, which I think was the question that you were asking. But also the other interesting thing that we've noticed, which I pointed to in the comments is in the area of eco friendly products, And I'm not sure if it's coincidence or there's a causality here with the pandemic, but with the in that area, we've seen certainly increased levels of investment and whether it's electric vehicles, which we've identified and pointed to before, but also in other things like Light Weighting and Eco Friendly Aircraft Engines and Others.

And so this area continues to be also an area of increased growth and something that requires multi physics simulation. So that was the context of my comments, Jack.

Speaker 6

Got you. Okay, great. And then a quick follow-up on the $26,000,000 of ACV upside in the quarter. Was that comment, Maria or Nicole, was that This was ACV that was coming up from renewal maybe in 2021 and was pulled into 2020.

Speaker 4

No, it was specifically just increments above what we had forecasted. There we in addition to a very solid sales execution, We did see year end budget flush, which we didn't see in Q4 of 2019, but we did see And I think some of it was just pent up demand from perhaps Q2 and Q3 where people were on the sidelines and with Some of the enthusiasm around perhaps the second half of twenty twenty one, a return to some sense Normalcy and Growth and the Vaccines, I think that we just saw some enthusiasm in customer base that we hadn't experienced in the earlier part of the year.

Speaker 0

Our next question comes from Ken Wong from Guggenheim Securities. Please go ahead with your question.

Speaker 3

Great. Thanks for taking my question and also my best wishes to Maria and hopefully you won't be a stranger going forward. So this question for you, Ajay. In terms of the shift to digital and I realize ANSYS Cloud is still small today, but just wondering how that might affect the adoption of ANSYS Cloud. And as we look ahead, would that be a positive from a monetization perspective relative to on prem lease?

Speaker 2

Yes. So if your question the question was about ANSYS Cloud and I guess usage during the pandemic or during the If you look at usage, the demand for ANSYS Pilatus continues to increase and we've seen usage increasing by over 100% between 2019 2020. And what's interesting and I think I mentioned this in the last call as well, We've had customers who've used ANSYS Cloud and reached a much more efficient solution than they would have on premises. For example, Rockwell Automation, I think I mentioned, It's using ANSYS Cloud to accelerate its product development process and they showed that they were able to reduce simulation run times by about 50%, Which allows obviously their engineers to solve problems more accurately. And the reason for that is because ANSYS Cloud is optimized for the ANSYS workload and we've done some work to make sure that the Azure infrastructure in which it runs is appropriate and we can take advantage of the latest hardware and interconnect that Azure has available.

So absolutely ANSYS Cloud is certainly something that customers are taking advantage of during this time. We've made the majority of our flagships available on ANSYS Cloud, mechanical fluids, electromagnetics, etcetera. I just talked about the scale I think we have available there on the script, as well as things like new workloads like optics, SPOs, VRx. So we're seeing the usage across all of our physics and we're obviously seeing greater usage. And that coupled with the flexibility that we have, which allows customers to bring their own license or bring their own hardware license or software license or just moving into a fast world.

The hybrid flexibility that we can afford, I think gives customers a lot of options. That being said, while we're excited about cloud offering and we're very encouraged by the rapid progress. I think it's important to note that the majority of our customers today use ANSYS products on premises in their own data centers or in their own private cloud. And so ANSYS Cloud is obviously growing rapidly, but it's still a very small piece of our business today and for the foreseeable future.

Speaker 3

Got it. Thanks for the color there, Ajay. And then maybe also another one for you, Ajay. Just wondering if the ship shortage has had any impact on the Red Hawk business or potentially change the buying behavior of any your automotive or consumer electronics customers.

Speaker 2

No, I think you're talking about the semiconductor, the available as it is manufacturing and semiconductor chips and the shortage of that. I think that has that's a sort of a different cycle on the design side. We continue to see demand, robust demand for our products because there continues to be robust demand and growth in both semis and electronics. So no negative impact at all, just the market tailwinds for usage of those technologies. And the fact is as customers are going to On more and more advanced process note, the investments that we've made in Red Hawk and in particular in Red Hawk SC is starting to pay off.

And that obviously translates into

Speaker 0

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

Speaker 7

Thank you. And let me add my congratulations to Maria on Great run-in your new role and welcome to Nicole. And with that, I just wanted to ask about the Asia Pac business where You've seen some pretty meaningful underperformance relative to the rest of the business. And I know you said it's and it was restricted in COVID, but Can't help but contrast that with the really strong demand that the pure play EDA companies are seeing in Asia, kind of exceptional strength, Especially out of China. And I'm going to thought that at least kind of the chip centric side of your business would be seeing that.

So just wondering if you can kind of push into that area and give us a little sense of what's going on under the covers.

Speaker 4

Yes. So, Rich, what I'd say is Some of Asia's performance is also influenced just like the other geographies relative to the timing of large deals. And so if you take a look at 2019, there were some larger deals in Asia Pacific that drove some of the growth that we enjoyed in 2019. We have, like Like many U. S.-based software companies, we have felt the impact of the sanctions on our business in China.

And specifically, China is one of those markets that still is a perpetual market for us just because of The timing of when they get access to money and then they tend to consume large quantities of licenses that will get them through to the next cycle. So I think the combination of the underperformance in not only China due But we also saw underperformance in India during 2020 that also influenced what you Saw in Asia Pac's results.

Speaker 2

And I'll just point out that China is less than 5% of our overall business, I think something like 4%. So it's a relatively small piece of our business overall.

Speaker 7

Got it. And then just as a follow-up, I know you've talked about the you've had some headwinds from COVID, particularly on the smaller customer side. Have you at all tried to quantify that, what the headwind was in 2020?

Speaker 4

Now, Rich, we can't do anything with precision around that. We just know that in Seeing the performance of the channel versus the direct, the enterprise and strategic customers were Are much more willing to continue to invest through the cycle, and largely because they didn't have some of the liquidity issues that The SMB market that we saw.

Speaker 0

Our next question comes from John Walsh from Credit Suisse. Please go ahead with your question.

Speaker 8

Hi, good morning.

Speaker 5

Good morning. Hello.

Speaker 8

Hi. Thank you to Maria for all the help with the ramp and a welcome to Nicole as well. Maybe two questions here, if I may. 1 on the operating margin guidance for next year. I think in the prepared script, you called out some headwinds from the dilution for the Acquisitions.

I think that explains a good portion of maybe the delta versus consensus, but Also wanted to understand maybe what you guys are doing in terms of SG and A, R and D. I think you added 300 people to Your sales and marketing this year, should we think that that kind of picks up as you take advantage of this TAM in front of you?

Speaker 5

Yes, sure. Thanks, John. So yes, so the AGI, as we discussed in the remarks, contributed to about a point impact, And it really accounts for a meaningful portion of the year to year expense growth. In the second half of last year, we onboarded about 300 Outside of acquisitions, and we ended at about 4,800 people. In 2021, we continue to make targeted investments and headcount.

So we are going to continue to invest and grow. We are confident in the long term outlook of the business. But they're going to be more targeted and primarily in areas of R and D and to some degree, the sales and operational roles that support our digital transformation.

Speaker 0

Our next question comes from Jay Vleeschhouwer from Griffin Securities. Please go ahead with your question.

Speaker 9

Thank you. Good morning. Ajay, I'll direct my two questions to you, but First for Maria and on a personal note, it's been a fascinating quarter century. So thank you for Matt. Welcome to the call.

So for Ajay, in the last call, we touched on the subject of your availability of and development of what we call domain specific applications or industry solutions, Perhaps the work you're doing with BMW and a simulation toolchain for automotive is an example of that, plus AGI now of course. The question is, how are you anticipating the rollout of or adoption of what you suggested would be more and more industry Solutions. So how does that factoring into your thinking on results over the next couple of years? And then relatively, Over the last 2 or more years, the company has been depicting its technology roadmap, your 8 long term Technology Dimensions, each of which is interesting. But perhaps you could talk about the progress you've made on those, but more specifically, which of those 8 are perhaps priorities for 2021 and beyond in terms of internal investments or how you think they might actually affect financial results.

Thank you.

Speaker 2

So Jay, thanks for the questions. There's a lot that we could go through and maybe in the interest of time, I'll just focus on a couple of things. When you think about our journey as a company, we've gone from providing Point Technologies back when we started like structures. Over the years, we've brought together a comprehensive set of physics through a combination of acquisitions as well as organic development. And now we have a full fledged set of physics that are integrated together.

And it's this integration capability across all of these physics that's profoundly important. And we continue to add to that with materials technologies, for example, with optimization capabilities, etcetera. And that has led to the building up of our platform capability, which is profoundly important to be able to address and provide that agility to support different industry applications. And because we have all of these multi physics capabilities integrated together and exposed on a platform, that makes it easier for our customers as well as our own AACE engineers to build industry specific or customer specific solutions that take advantage of the core capabilities that we provide As well as integrate with core components that might be available from outside of our own ecosystem. So that's been the direction that we're pursuing.

Our technology is available both on premises and in the cloud. And I think we have a very robust and a very strong technical underpinnings to be able to support not only the more traditional use case where you're dealing with the use of simulation and the tool, but also the use of simulation within as part of an integrated platform to deliver You added applications to customers. And you're seeing this in some of the announcements that we've made. You referenced one of them with respect BMW. We've made some announcements in the healthcare space and others where we're working with partners who are able to provide application specific intelligence that wraps on top of our simulation solutions because of the way that we're architecting our platforms and our capability.

Now with respect to the long term roadmap, I would refer you one of those key elements is the platform and obviously we just talked about platform a 2nd ago. Another area that perhaps might be interesting is AI ML, where we've talked about the use of machine learning. We see that we continue to make investments in AI ML capability because we really see AI ML as a orthogonal but supportive technology simulation. Simulation makes AI ML better, the insights from AI ML better and AI ML can support insights from simulation. And you see this You see these technologies and techniques already being incorporated into our products.

You see this, for example, in our semiconductor portfolio And you continue to see this integrated into other aspects of our products, whether it comes to usability, whether it comes to helping customers or helping engineers navigate the solution space and so forth. And we can obviously go into more details, but in the interest of time, Let's just leave

Speaker 7

it at that.

Speaker 0

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

Speaker 10

Firstly, I'd just like to touch a little bit on this trend that you continue to see in And maybe, Ajay, can you talk a little bit about the predictability of those deals and what you've learned over the last few years, especially in terms The sales cycle or the pipeline, it seems like the ability to be able to close those deals during the pandemic definitely shows that there's an increased activity. So maybe just a little bit of color around how those sales cycles maybe have evolved over the last few years.

Speaker 2

So Gal, thanks for the question. So your question is really how are we integrating with some of these larger customers and how are we working with them? So if you recall, when we went through the good market transformation that we spoke of a couple of years ago, And we really started to accelerate in the last couple of years. It was around putting together a traditional customer pyramid where we had enterprise customers at the top of the pyramid. And enterprise customers were deemed to be such Not only because they had significant spending powers and had large and complex problems to solve and therefore we're spending a lot of money on R and D, But also because we had enterprise customers who were being supported by specialized teams.

And so we would have we were able to allocate to these enterprise customers dedicated account management, both on the technical side as well as the sales side to help navigate through the account. That process has been underway for a few years. When you when and so that gives us within some of these large customers, it gives us great relationships and A very good understanding of what's going on and we've been able to help educate the customers about the capabilities that ANSYS can provide. That coupled with the other comment I made about digital transformation. Clearly, this is an important area for customers And the digital transmission of that product life cycle continues to be important.

The pandemic, as I mentioned earlier, accelerated that and made it clear in NASA's customers that they needed to enable their engineers to be able to work from anywhere and that's obviously possible through a digital thread and simulation in some sense is the purest digital representation of a product. And so that was that's the second sort of broad thread about the recognition that people can be effective, engineers can be effective in taking advantage of this technology from wherever. I think the 3rd and perhaps the most important is that, look, at the end of the day, simulation provides tremendous value to customers. They are we've talked about this for a long time. We've said, look, we can help you accelerate product to market.

That's one area. That drives top line revenue growth. And we've also said we can help you save money. We can help you save money because you don't have to build physical prototypes. You can view the proposal more with less.

And that also resonates with customers, especially in tough economic side. So when you put all of this stuff together, it's no wonder that we're seeing some large deals from customers. This is not accidental. This has and plan. This has been multi years in planning to make sure that we build these relationships to help them with their digital transformation and to continue to drive investments in the portfolio and to continue to show the value that simulation can provide.

Speaker 0

Our next question comes from Joe Freweink from Baird. Please go ahead with your question.

Speaker 11

Great. Hi, everyone. Maria, a big congratulations to you and my welcome to Nicole. Ajay, I wanted to go back to just the comments and discussion on TAM growing faster. This trend towards system level engineering, it's happening across many of your end markets.

It's a notable one. You just discussed how it complements the ANSYS platform strategy. I would have expected that some of these developments would have been on the long term planning roadmap. So I guess the question is how or Why are these developing differently such that now it seems to be actually exceeding your expectation?

Speaker 2

Well, firstly, with respect to our analysis of the TAM, if you go back to our Investor Day from a couple of years ago, 2019. We gave a pretty comprehensive analysis of the TAM and where it is today and where it's going. And We talked about a number of areas. We talked about the core business. We talked about which is the historical use of simulation and the design and validation phase of the product lifecycle.

We talked about high growth solutions like electric vehicles or electrification, autonomy, IoT, 5 gs. And then we talked about simulation being used in non traditional use cases and things like predictive maintenance through digital twins and so forth. And what we did when we presented that is we pointed out that there was more predictability on the base case use cases of simulation as it's historically been. But in some of these longer term opportunities, in particular simulation being used, for example, in predictive maintenance and digital twins. We pointed out that there was a significant amount of variability depending on the rate of adoption of digital technologies and we talked about how that was being affected by assumptions you make about the pace and rate of deployment of capabilities that may have historically not used simulation.

So that's the that's where we were a couple of years ago. The observations that we've seen in the pandemic, as I said in my script, have been very specifically on certain areas. The digital transformation comment is real. Customers are recognizing they need to spend to pay more attention to the digital transformation. We've talked a lot about this on the call already.

And so that we believe represents and Aggregate Tailwind, an acceleration of activities that may have taken place already, but that's an acceleration. And when you start to think about Some of these other areas like electronics, consumer electronics, telecommunications, again, the pandemic caused people to think more about what does it mean for infrastructure, how do I interact with my office working remotely, etcetera. And you started to see that level of interest in the end markets, which has obviously translated into increased demand in the electronics and high-tech vertical for us, which translates across And as I said, in certain areas like green, it's not clear that it's directly related to the pandemic, but we continue to see increased focus on this. Perhaps it's because of broader recognition of the importance of ESG initiatives. Maybe it's because of the pandemic, but we're continuing to see more activities there.

And again, this entire area of getting to an eco friendly set of products accelerates activities that might otherwise have taken longer, come in a little bit earlier. So I think the core recognition and the elements of the market remain what we had talked about. The question is timing. And as I said also in the call, it's hard for us to quantify what the effects of these tailwinds are going to be. So I want to be very clear that we see this anecdotally, but it's hard we're not quantifying the effects of the tailwinds at this point.

Speaker 0

Our next question comes from Tyler Radke from Citi. Please go ahead with your question.

Speaker 6

Hey, good morning everyone and thanks for taking my questions and best wishes to Maria and Nicole. I think in the past ANSYS has talked about how Yes, R and D budgets are one of the first budgets to be restored out of the downturns and ANSYS as a company typically sees Kind of the inflection faster than maybe some of your peers in the industrial space. And I guess with the strong Q4, you put up 20% constant currency organic ACV growth, large deals, budget flush. It would appear that Certainly, you're seeing some strength here and some might argue you're seeing some of these budgets come back online. But when I look at your guidance, It implies that ACV growth doesn't really get much better on an organic basis next year.

So I guess What's driving that? Are there certain end markets or geos that you're seeing caution? Or is it just conservatism? I know there with the CFO transition. Just trying to understand what would drive such a relatively cautious outlook given the strong results you've put up here in the quarter.

Thank you.

Speaker 5

Yes. Thanks, Tyler. Thanks for your question. So Let me characterize kind of some of the assumptions that we put into guidance. And I'd say the first thing I'd point out is what Maria spoke about, which is Significant overachievement of ACV and therefore revenue and the rest of the P and L in the quarter.

And so that overachievement on the ACV side alone is about a 2 point headwind to growth year on year. And so what we're seeing really what we saw in the Q4 leaves us a lot of optimism that Once that we get through the capitulation of the pandemic that things that there's a strong demand for simulation that Our accelerating their digital transformation and that we are well positioned based on the investments we've made in the portfolio over the past couple of years because we've been investing through the pandemic to come out of it with a position of strength that we're going to benefit from it. I think what we're expecting to see and What's baked into the guidance is that generally speaking, the first half is going to continue to have its ups and downs really because of COVID uncertainty. And by the second half of the year, we expect to see more momentum in economic activity as things start to open up and governments continue to do the right thing to Support Economic Development. And so we have visibility into the Q1 and into the full year pipeline, and the guidance really reflects Strength of the pipeline.

And like other years, we're expecting to see it more back end loaded from an ACV and a revenue perspective Driven by the timing of large multi year deals and customer planning activities. So from our perspective, sitting here in February, it's just a little Difficult to predict such a significant level of overachievement that we saw in the Q4 sitting where we're at right now. But the situation is fluid and we'll continue engaging with you throughout the years updated as we know more.

Speaker 0

Our next question comes from Matthew Swanson from RBC Capital Markets. Please go ahead with your question.

Speaker 12

Yes. Thanks. This is Matt Swanson on for Matt Hedberg. Maria, I'll just add on my congratulations. Nicole, welcome.

Look forward to working with you. A question for both of you. I mean, just given the strength of your year during this challenging pandemic, Does it open up or change your philosophy at all around M and A? Just thinking there might be some value and some opportunities for some companies that maybe weren't able Fair as well throughout this year. And maybe from a technology tuck in standpoint, maybe some time sensitivity around companies

Speaker 10

that might not be able to make it through this pandemic.

Speaker 4

Yes. So Matt, what I'd say is, look, we always have an active pipeline of M and A. We've got a team that's dedicated And we're always looking for things that complement the portfolio and that align with our strategy of pervasive stimulation And equally as important that align with our culture. We've been extremely successful in integrating these acquisitions over the past 20 plus years because we look for companies that are like us that are dedicated to customer excellence, that are dedicated to advancing the technology and solving the world's most complicated problems. And so we will absolutely continue to actively search for opportunities to add to the portfolio and to continue to maintain our leadership in this exciting space.

Speaker 12

And then, Ajay, if I could just add in a quick one for you. Could you just talk a little bit more about Moxie, which was announced last week. And then kind of more broadly, just I feel like in this environment, especially those high ROI solutions might be really compelling to your customers. Could you just talk a little bit about how that's finance for demand process right now?

Speaker 2

So, Moxi, again, I don't want to get too detailed here, but Moxi is a new capability that's being offered by AGI. And essentially, the engineers, it enables engineers to execute behavioral SysML models in a virtual simulation environment Such as AGI's SDK toolkit. And it's really to be able to analyze and validate the models to make sure that they can meet Mission Requirements. So we're very excited about the technology. I think it adds to our portfolio and capabilities And we can certainly talk more about the technical details perhaps at a later point.

Speaker 0

And ladies and gentlemen, with that, we've reached the end of the allotted time for today's question and answer session. I'd like to turn the conference call back over to for any closing remarks.

Speaker 2

Thank you, operator. Q4 was an excellent quarter and a great ending to a strong 2020, All thanks to our OneAnsys team around the world. We continue to demonstrate the strength of our business as well as our deep customer relationships. Several of those customers will discuss their use of as a simulation during our upcoming simulation world, which is on April 20 to 21 this year. This virtual event, the longest of its time, drew tens of thousands of customers, prospects, seasoned threats and of course, investors last year.

This year, Simulation World will feature customers such as Johnson and Johnson, HPE, Ferrari, Pratt and Whitney and Northrop Grumman. You can register by attending simulationworld.com. Thank you for attending today's call and I hope you enjoy the rest of your day.

Speaker 0

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your