ANSYS, Inc.
Q1 2014 Earnings Call Transcript

Published: 1 May 2014

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome Ansys Fourth (sic) [First] Quarter and Fiscal Year 2013 (sic) [2014] Conference Call. With us today is Mr. Jim Cashman, Chairman, President and Executive Officer; and Maria Shields, Chief Financial Officer. At this time, I would like to turn the conference over to Mr. Cashman.

[James E. Cashman:]

Will good morning, everyone, and thanks for joining us. Actually, today, we're going to be discussing 2014 first quarter financial results. So a little bit of bookkeeping first, consistent with our standard protocol, just be aware that all of the general information and key topics relative to Q1's business performance, and our updated 2014 outlook are included within this morning's earnings release and in the prepared remarks document that we posted on the homepage of our Investor Relations website this morning. So with that, and no further ado, I'll introduced Maria Shields, our CFO for our Safe Harbor statement. So Maria.

[Maria T. Shields:]

Okay, good morning. Thanks, Jim. I'd just like to remind you 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. 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 we undertake no obligation to update any such information unless we do so in a public forum. During the course of this call, and in the prepared remarks, we'll be making reference to non-GAAP financial measures. A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial measures are included in this morning's earnings release materials and the related Form 8-K. So Jim, I'll turn it back over to you.

[James E. Cashman:]

Okay, thanks Maria. So before we get started with Q&A, I'd like to briefly comment on a few important highlights regarding our Q1 results, our updated fiscal year 2014 outlook and this morning's announcement of our acquisition of SpaceClaim. So let's start by saying that Q1 was a solid quarter on many fronts. It was highlighted by record cash flows of $132 million, a deferred revenue and backlog balance of $437 million, and an operating margin of 47%. So we reported a consolidated non-GAAP revenue above the midpoint of our Q1 outlook range, or $216.5 million, which is an increase of 9% in both constant and reported currency, and our non-GAAP EPS was at the high end of our range, or $0.76. In addition, few little sub-points here, our first quarter non-GAAP revenues were driven by a combination of growth across each of our 3 major geographies. We had 32 customers, with orders in excess of $1 million. Our recurring revenue was very strong at 75%. In the first quarter, we welcomed Reaction Design to Ansys. And today, we want to welcome SpaceClaim to the Ansys family, and we'll talk more about that momentarily. And for those of you are interested on the hiring front, we netted about 80 employees during the quarter, including the new employees from Reaction Design. There were many positive aspects from the quarter, which like I said before, we saw growth in all regions, led by strong constant currency growth in Asia, most notably the 13% growth in Japan, which we had highlighted as an area of concern and effort over the previous quarters. Now even though we were above the midpoint of the revenue guidance, there was one significant downside aspect for the quarter, and that's namely the situation that developed in Russia and its several million-dollar impact on our business that otherwise would've seen us at the top of our revenue guidance. There was one other specific data point of interest, the relative strength of lease versus perpetual revenue. This is also of course, partially reflected in the aforementioned increase in our current revenue percentage. It was largely driven by continued growth in the Apache, and our electronics business unit lease businesses, as well as the small inclusion of Reaction Design which also offers both a subscription and paid-up model. While the Apache business has historically been a time-based license model that we continue to grow, it's a little too early to ascertain whether there's a shift towards time and usage-based subscription revenue in other elements of our business that were traditionally offered under a paid out model. Or even if this is a -- one of those responses to macro conditions. In any event, nevertheless, the increases in subscription and recurring revenue are 2 positive factors that have been part of our business model for decades. During the quarter, we combined a focus on a combination of sales improvement initiatives, and sales and technical support hiring in those market places where we see the most opportunity for growth in 2014 and beyond. The sales teams are focused on finding new and complementary ways to better address the market opportunities in their local geographies and increase the overall sale of productivities. These ongoing internal sales improvements are beginning to translate into top line results in certain regions, as I mentioned, Japan being one example. And we believe that the changes that we've made coupled with the continued focus on execution, should continue to produce improvement in sales through 2014. On the industry side, the industry composition continued to be diverse, while exhibiting strengths in electronics, so let's see materials, chemical processing, automotive and the industrial sectors kind of stood out. We had a host of new logos, and we also continued to see sales and strong renewal in our existing account base, reference back that growth of the $1 million-and-above customers. And then also, as you hopefully saw in this morning's announcement, we're excited to report that yesterday, we closed the acquisition of SpaceClaim. This addition, while relatively small in revenue contribution currently, is exciting, I'd say, for 3 major reasons

[Operator:]

[Operator Instructions] The first question comes from Steve Ashley with Robert W. Baird.

[Steven M. Ashley:]

Well, I'll take the easy question the one that's probably on most people's minds. I'm wondering if you can give us any quantification around the Russian impact in dollars to first quarter, second quarter, full year, just any kind of help or color there would be appreciated.

[James E. Cashman:]

Yes, well, for the fiscal year, it was probably slightly in excess of $10 million. I mean, no surprise, and we talked in previous quarters about Russia being -- relatively being one of those higher growing areas. And it was probably approximately in that $3 million kind of range for Q1, and then the rest of it of course spread out over the remainder of the year. And the bottom line is, we still have a high regard for the long-term aspects of that business, and we've heard nothing about the things sort of -- but there's a lot of saber-rattling. There is talk about export license kind of concerns, there are things like that. And we want the fact there that in the overall business operation. And basically, when it comes in, we can cut the keys and get into the customer.

[Steven M. Ashley:]

Perfect. Then I have a question. You may not have this at your fingertips but it has to do with the lease license mix. And you give us some nice color, pointing out that the Apache business, which tends to be more lease, was strong. But within your core business, kind of the Ansys core business, has there also been a shift there? Do you have any sense of that.

[James E. Cashman:]

Well, no. There has been some shift. Like we mentioned, there was an increase, particularly in the EBU, in our electronics business unit, and some of that could be a crossover thing of some of the cross-selling that we have between that. But again, we had relative performance of historical paid-up to lease ratios in our other main line businesses. It was more resilient, in the lease. And like I said, we want to -- there can be a couple of things at play here. There can either be some trends in the buying sentiment, as people get more comfortable with time-based licenses and subscription model. But if you recall, from other time frames of uncertainty, there were times where we would have short-term dislocations of lease. At the end of the day, we're both happy that customers are still coming on board in the purchase mechanism the fact that our recurring revenue percent went up, that our deferred balances are going up, some things like that. Those are all positives. But we do see some of those. But it was enough of a relative perturbation that we figured we'd call that out.

[Operator:]

The next question comes from Anil Doradla from William Blair.

[Anil K. Doradla:]

I think the question I have around here, now that you've got -- had Walid for I think almost a year as Chief Product Officer, can you share with us some of the key achievements in this new role, and the reaction of customers? And where I'm going with this question is, you've talked about democratization of these simulation tools, and him having a Microsoft background, I would love to hear your perspective given that we've got 12 months behind.

[James E. Cashman:]

Well, keep in mind, in terms of just the energy and new mindset coming in, and energy, that's probably one of the key things. But keep in mind, even once you to that, it takes a certain amount of time to create and develop code and get that in place. I think you'll start to see some of that coming out even in the upcoming releases that I mentioned. I mean, we've not formally announced the date, but we've got we've got our 15.1 and 16 releases coming up soon. Some also, some further ones from Apache in terms of RedHawk releases, and things like that. So I think this is really a thing where you see initial energy and enthusiasm and now it's -- now the function is really on the ongoing delivery of that. So nothing too surprising. But also not too surprising are some different perspectives of the computing industry and delivery models and things like that are particularly key. And I think also the different perspectives, not just from an IT standpoint but from some of the user paradigm, things that we want to do but -- where it's not going a change appreciably, but it's just going to get better due to that different mindset. Those are the key things we look at. All in all it's a positive.

[Anil K. Doradla:]

And as a follow-up. I think the key question that is on my mind and many investors' mind is this growth trajectory of Ansys. One of the key issues that I hear from investors is it's a high-end product, they fully penetrated with the high-end of the market, and it takes time to go down to the wider engineering space. Can you help us understand anything that can help? I know this is a question that's come before, but I would love to hear your latest thoughts on this especially in the context of...

[James E. Cashman:]

Well, the latest thoughts are the same as the oldest thoughts. And if you think about it, about 15 years ago, we had a patent technology which was really aimed at coming with very easy-to-use software for those historians in the crowd that was called DesignSpace. And we were trying to capture those elements of how you get that extreme ease-of-use. Even though at that time, we were heavily constrained by limitations in the computing infrastructure that would facilitate that. Now if you look going forward, you've heard an awful lot of talk about the Workbench architecture and some of the things in terms of our user experience that, over the last 2 or 3 years, has been a focus item for us. So we're starting to move into that. I would also accentuate the fact that, that was one of driving factors in terms of the acquisition of SpaceClaim, because they had a very modern kind of interaction, not only a user interface style, but way of interacting with geometry. And we wanted geometry to be able to move, if you will, at the speed of consensual thought, because a simulation-driven product development, you want to continuing look at many of many factors and use that, and get the product totally right before you even go into a detailed design phase. And this is one aspect that actually brought that into us. So but the third leg of this, which is one that we've also talked about extensively, is there is one element of making the tools available to -- comprehensible and usable by new cadres of less-sophisticated users from a simulation standpoint. But there's another -- one of the driving factors is, before, mainline companies will unleash all this capability and change their processes around it. They have to be able come up with something that says, "I'm comfortable by adding this in here. I'm not going to disrupt my age-old legacies of being able to get reliable brand-leading products out there." So we also want to make sure, we also have to work with helping customers bridge that. But obviously, if you can't get to that first step of making it embraceable by the new class of users, you're not going to get much of a push to move that in there. So this is something that's been identified for a long time. We've been working on mainline for a number of years now, and we're looking at different kind of technologies that can actually, as I mentioned, accelerate. That's what I meant by accelerating the division of simulation-driven product development and the democratization aspect. Is actually being able to get this in a place where we can reach those users. And do it in a totally immersive passion, not just by providing lesser capabilities that have less options and are dumbed down, because these aren't -- the less-sophisticated users aren't solving less-sophisticated problem. They're still making major commitments to things that have to be successful product launches.

[Operator:]

The next question comes from Jay Vleeschhouwer with Griffin Securities.

[Unknown Analyst:]

This is Zack Aisman [ph] in for Jay. We have a couple of technical and financial questions about SpaceClaim. First, how does the Ansys strategy, as described at the Analyst Meeting, and ANSYS as a platform at systemic and comprehensive engineering?

[James E. Cashman:]

Yes, well, the key thing is the geometry has always been a factor in there, and we've linked with a lot of other geometry systems, most notably the ones that, for instance, came from Kansas. We're not becoming a CAD company, we're a simulation company. But that ability to have something that we can organically blend in and go through rapid iterations and allow people, and in some cases, allow the simulation to actually drive the geometry. You remember the Investor Day, we talked adjoint solvers where are actually say, "What do I want the results to be? And therefore, tell me what the geometry should be." Kind of inverting that overall processes is a very key aspect. And clearly, the SpaceClaim product and direct modeling in general, allows a more intuitive way of being able to interact with that and it links in more naturally with the concept portion. But it also was done at a time without any legacy baggage work and look at all the modalities of construction kind of techniques and interaction techniques and the way that works with computing infrastructures and we could leverage off of that.

[Unknown Analyst:]

Okay. In recent years SpaceClaim seems to have been able to its base by about 10,000 licenses a year, including your prior resale activities on every half. How are you thinking about the unit opportunity here, given the size of your base or the needs of key verticals such as [indiscernible]?

[James E. Cashman:]

I'm not sure I actually understand the question. Could you just re-word that? I'm sorry.

[Unknown Analyst:]

So in recent years, the SpaceClaim license growth of about 10,000 licenses a year, including the presale activities on their behalf, how are you thinking about that unit opportunity?

[James E. Cashman:]

Okay. Look, the key thing is we want to actually maintain that. Remember, I talked about 3 things that were pretty -- that were exciting about us. So you'll -- maintaining some of those pushes into the -- some of those peripheral kind of areas are still very much of interest to those, because even those people, even if they're not going to be doing simulations, resulting benefiting from the benefit of simulation, is particularly key. And there are, at the low-end, they literally have tens of thousands of seats, but they are at the low end. Additionally though, we want to take -- the same thing that made that accessible to a much broader range of people, if we can apply that same kind of attractive inclusion element, and bring that in to our traditional simulation base, we feel that we can knock down yet another set of barriers that sometimes might have impeded people from taking those first steps.

[Unknown Analyst:]

Great. And as a follow-up, could you comment to the relative performance and outlook of your mechanical fluids and electronics business units, including Apache in particular?

[James E. Cashman:]

Well, I think they've all been growing. Like I said, you would notice that there had been, we mentioned, there had been some -- a little bit a shift in Q1 or a relative stronger element of the lease aspects. If you look at Apache, Apache actually is -- performed, been performing ahead of projections and growing well. So there really aren't too many surprises. I would mention that the high-performance computing continues to be one thing that tends to keep people pretty interested, particularly when sometimes their resource constrained and want to get that through. But those are the major ones. Now the other thing is, you might -- the one place where our traditional mechanical and fluids, in particular sales got disproportionately hit was most of the Russia impact is really in those mainline flagship products. So you'd see -- we'd see a little bit of a ding there, but that was really the only thing that kind of -- that was really the main thing that stood out as being anything even quasi-anomalous.

[Operator:]

The next question is from Steve Koenig with Wedbush Securities.

[Steven R. Koenig:]

I'll try to keep it -- it's a multi-part. I'll try to keep it slim here. So billings and bookings growth was much better than license growth. Is this mostly the mix shift to term or does it have to do with the timing of renewals. And I'll go ahead and throw in a related question, which is -- given that you're quota carriers, I think they were up 12% last year, from end of the year '12. Given that, can your bookings grow at this rate? And then I have one really one quick follow-up, if you don't mind.

[James E. Cashman:]

Yes. Well, if first of all, if we were comparing only new customers to new customers, it would be a certain linearity to booking rates. when you're talking about add-on, the impact of HPC to already validated customers that are starting long-term rollouts facet, that's a particular -- that's really not too much of an issue. First, first question help me on the...

[Maria T. Shields:]

Yes. Steve, Q1, if you look at bookings, has traditionally been a strong renewal period for us. It's either the beginning of the year in certain parts of the world or, in the case of Asia-Pacific, the end of the year. So Q1 and Q4 bookings are typically, heavily influenced by renewals.

[James E. Cashman:]

And yes, to a much smaller degree, the mix shift affected that, also, likewise. And then even then, if you look at the bookings, keep in mind there's there is a phenomenon, if we look at the Apache side, where you got -- last year, we had a number of customers that they settled around the multiyear time-based license where you get that commitment and booking early on. So even though the revenue continues to project up, you may say, "Oh, looks like the bookings might have even slowed down." Last year we had a phenomenon of several multiyear deals being booked out of the Apache multi-year, time-based license model. So therefore, if you were even comparing those, you might get a little bit of perturbation. But that's really the difference between single year and multiyear kind of things.

[Steven R. Koenig:]

Okay, Jim, and just for clarification then, you know, I'm trying to parse your words in your first part of your answer. If I think about where bookings will go for the whole year and, I were to net out kind of your thinking about the mix shift and also what renewal activity was like last year. Should we expect billings and bookings to grow faster than licenses or about in line this year, kind of what's the -- what's your sense there? And then I just -- I did to add a question as well, which was how are -- just any comments on how your pipeline for sales coverage and your pipeline coverage and your close rates are trending.

[James E. Cashman:]

Well, in general, pipeline trending is slightly up, even with the impact of the -- even accounting for the fact of the Russia stuff being now kind of clogged in the pipes, so we really don't count that as a -- we don't count that. And with regard to booking, probably a little bit advance of the actual revenue, probably expect double-digit booking growth for the year as we continued on. And keep in mind, that's even factoring in, if you will, the slight minus impact of some of the Apache business already being booked a year in advance as of last year. So actually even a little bit better when you look at that perspective.

[Operator:]

The next question comes from Matt Williams with Evercore.

[Matthew L. Williams:]

I just wanted to ask you on the indirect channel. It looks like your relative to some of the growth rates in fiscal '12, fiscal '11, slowdown fairly materially in '13, and then it was up a little bit this year over a fairly, I guess, weaker compare. So I guess is there anything going on in the direct business? I know it's about a quarter of revenue, so I was just curious for any additional color you could provide on the indirect channel.

[James E. Cashman:]

First, you said direct is the quarter, actually indirect is the quarter, I think that's what you meant. If you look at -- first of all, there's always spot things. In trickier economies, the channel tends to feel it a little bit more. The more stable it is, the more they pace along with us. And of course, if you look at it, yes, we last year or so, a little bit more than a year ago, we opened up our own direct kind of opportunity in Russia. But we still are serviced by channel partners there. So there was a disproportionate ding on the indirect side from the Russia business. And yes, there are always elements of the business that are -- that will change by region and different cycles, but nothing too much out of the ordinary.

[David E. Hynes:]

Okay. And then just one follow-up on the sales side of things. Can you provide any update on the search for sort of new Head of Sales and then sort of within that, obviously Japan. Much better this quarter. I'm wondering if you could sort of help quantify how much you think that was a result of some sales changes that you made there, versus just any macro impacts in that type of thing. Any color there would be great.

[James E. Cashman:]

I'm sure the macro is going to help a lot of things, but I also have no doubt that the -- that some of the investments and the leadership enhancements that we made in that area, definitely were contributory to the aforementioned pretty good response from Asia. With regard to the other search, hey, it's going on plan. And it's going well and we have -- we've got several good finalists that both bring a nice base of both scale and experience.

[Operator:]

[Operator Instructions] As we're showing no further questions, I would like to turn the conference back over back to Mr. Cashman for any closing remarks.

[James E. Cashman:]

Okay. So basically, in close, the -- let's see. The emphasis for Q2 and the remainder of 2014 will be continued growth, customer development, improved -- really improved execution across all parts of our business. No doubt, there's still a tremendous amount of long-term optimism driven by -- we've demonstrated several statistics here that kind of highlight the positive customer receptivity to our vision. But also the business model has been pretty resilient. If you look at the results, even with a major impact of something like Russia, so -- but that shouldn't be a surprise to anybody that's followed us through all the up and down periods of the last 10, 15, 20 years. But a lot of that is because we got really loyal customers that are adding that big growing base, our partners have been great with us for a long time. I think our technology speaks for itself and, as we mentioned on this call, with so many additions we've made there, it gets even better. And of course, even with our own adds, but also being able to add folks like from the Reaction Design and SpaceClaim team that, that team of employees really is at the heart of making all this happen is key. So -- but you know, over the short term, in this environment, we're balancing this with short-term caution, around some of the specific conditions that we mentioned even on this call. And those are the things that are largely outside of our direct control but we can manage and sail through those. So with that, I thank everybody for your time, and we'll see you next quarter.

[Operator:]

That does conclude our conference. Thank you for attending today's presentation. You may now disconnect your lines.