ANSYS Q1 boosted by biggest-ever deal

May 7, 2018 | Hot Topics

ANSYS reported Q1 results last week that blew past most estimates and forecasts because the company is starting to reap the benefits of its big-ness. Recall that It has gone from mechanical FEA (ANSYS) to adding CFD (Fluent) to including EMAG (Apache and Ansoft) and many other types of physics over the years, and that these acquisitions also led to it taking more of its business direct. It’s established major accounts sales and support teams, in addition to the geo- and product-focused teams and channel partners it has long relied on. The result, said CEO Ajei Gopal, is that in Q1, ANSYS “had 30 customers with orders of over $1 million, of which one was over $5 million and two were over $10 million. These customers tend to buy multiple products from the ANSYS portfolio. In fact, over three quarters of these deals included three or more of our product lines.” He buried the lead a bit, in that one of the these large deals is worth $50 million over 3 years.

And Mr. Gopal said that, yes, ANSYS is seeing more of these opportunities: “We’re going into existing customers, and broadening and deepening the footprint of our portfolio. In many cases, this is using our technology across different projects or in different areas or just frankly getting more people to take advantage of the technology … We’re looking at enterprise accounts a little bit differently from a territory accounts. And within the enterprise accounts, we’re allocating additional resources for presales, and that’s what’s driving some of these cross portfolio successes. The investments that we have made are paying off, but the business model is very consistent with what we’ve historically had.”

Accounting changes again led to an unusual number of numbers in the earnings report. We’re going with ASC 605, which ANSYS offers as a way of comparing to prior years – you may see other reports referring to different treatment so look at the source material for how to reconcile one with the other:

  • Revenue was up 12% (7% in constant currency, cc) to $285 million. This was above the high end of management’s earlier guidance of $261 million to $281 million. Why?
  • Software license revenue was up 9% to $155 million.
  • On a non-GAAP basis from here down, revenue from leases was $102 million**, up 9% (up 5% cc) and perpetual license revenue was $53 million**, up 10% (up 3.2% cc)
  • Maintenance revenue was $121 million**, up 16% (up 9%)
  • Finally, services revenue was up 26% (up 21% cc) to $8.9 million
  • By geo (non-GAAP), revenue from the Americas was $115 million, up 7%. ANSYS said that this reflects strong demand from the aerospace & defense, electronics/semiconductors, automotive and energy sectors. The biggest deal in ANSYS history, that three-year contract worth $50 million, was in North America. ANSYS wouldn’t say but it sounds likely that it was in the automotive industry
  • Revenue from EMEA was $92 million, up 24%. These results include 11 customers with orders over $1 million, up from seven a year ago. The company cited recovery in the automotive industry and said that France, Germany and the U.K. delivered double-digit cc revenues growth. Mr. Gopal also told investors that “the improved performance in the second half of 2017 continued in Q1 of this year with 9% year-over-year revenue growth, including over 15% year-over-year revenue growth in Germany, both in constant currency”.
  • Revenue from Asia was $79 million, up 8%, (up 4% cc). This is far slower that the other regions, but management seemed to say that this was anticipated, citing deal timing and and a strong Q1 2017.
  • Direct and indirect channels contributed 77% and 23%
  • During the quarter, the company had 30 customers with orders in excess of $1 million, including one customer with orders in excess of $5 million and two customers with orders of more than $10 million.

As far as these big deals continuing into Q2? Mr Gopal told investors that “larger deals for 2018 is skewed towards the back half of 2018. Based on everything we know right now, Q2 is not being driven by any significant deals and certainly nothing like the deal that we talked about for Q1. We have a strong pipeline, we’ve got a lot of work to do, but Q2 is not being driven by large deals”.

For Q2, ANSYS expects revenue in the range of $290 million to $300 million. For 2018, ANSYS raised its outlook to $1,214 million to $1,244 million. Both of those ranges are GAAP and ASC 605. See the end-note for a brief look at ASC 606.

Also during the first quarter, ANSYS closed its acquisition of OPTIS. ANSYS says it expects OPTIS’ sensor platform to complement current offerings for driverless vehicle development. OPTIS is expected to add $2 million to Q2 revenue and $13 million for the year on a GAAP basis and $26 million non-GAAP (ASC 605). CFO Maria Shields declined to say whether this represents growth for OPTIS, or how much (because OPTIS is a European company using European accounting standards) but this seems low to me. Mr. Gopal said that OPTIS was present in only a few key countries, and that ANSYS usually moves quickly to integrate and scale acquisitions, and that “OPTIS products will seamlessly and cost-effectively slide into our existing go-to-market motion, not only increasing the sales of the OPTIS products in an efficient manner, but also increasing our cross portfolio solution sales.” In that case, and given the interest in autonomous vehicles and sensor platforms in general, I would think OPTIS’ contribution could be significantly higher.

Complete topic switch. ANSYS Discovery Live launched in Q1, with much fanfare and excitement. ANSYS does not expect revenue from this new product to be significant this year but did offer one testimonial on the earnings call: “Mercury Marine, manufacturer of marine engines and related equipment, is adopting the Discovery product family to accelerate early design exploration and product optimization. Discovery is helping Mercury to validate new designs and has helped to reduce a three- to four-day simulation effort down to a few hours, streamlining new product launches and deliveries”. Many of you ask me whether Disco Live will cannibalize current users — I don’t think so. Everyone I’ve spoken with about it wants to use it in early-stage design, to weed out non-starter alternatives and guide design. These are not typical users of Workbench or standalone solvers.

Now to channel. In Q1, the split was 77% direct/23% indirect. Mr. Gopal said that ANSYS’ channel partners  are excited about ANSYS’ work around additive and autonomous — and that several have spun up separate businesses focusing on Discovery. “I would say it’s still early stages. A lot of action, a lot of activity, but as I said in Investor Day last year … these are incremental areas [that] will kick in some this year, but more next year and more the year after and more the year after that. We’re expanding and growing the long-term franchise and the success of the company”.

And one more topic switch: hiring is tough, says ANSYS, especially for application engineering and other technical support. Ms. Shields told investors that “it’s a very challenging talent environment. We have an aggressive plan to hire. We were a little bit behind in that plan in Q1, but we certainly are not slowing down any of our recruiting activity. And we will continue to march towards our hiring plan for 2018, because it’s important to set the stage for 2019 and beyond”. Fire up those resumes!

What does it all mean? When you have more solvers to sell, you can … sell more physics. When you have more channels, you can reach more customers. And so it goes. ANSYS capitalized on both in Q1 and seems likely to do it again in Q2 and Q3 and …

** Accounting: The above uses ANSYS’ descriptions of its revenue under ASC 605, its historic method for recognizing revenue. Like many, it adopted ASC 606 on January 1, 2018, which changes the way revenue is recognized. This doesn’t change anything in the way the business is run, etc. — the money still comes in and goes out as it always does. What does change is how this is all reported on the income statement, which ends at the bottom with earnings per share — a major item of interest for investors. The biggest change in going from 605 to 606 is in leases: under ASC 605, ANSYS reported $102 million in lease revenue in Q1 2018. Under ASC 606, it’s $49 million. Why? ASC 605 let ANSYS recognized this revenue over the term of the lease. Under ASC 606, 50% of the value of the lease is recognized up front as lease license revenue, while the rest is considered maintenance, recognized ratably over the rest of the contract’s duration. Why the change? To ensure job continuity for accountants, one presumes. What it means for ANSYS is a much bigger maintenance line and more volatility in its license revenue. But the bottom line (or top line, in this case) is that total revenue in Q1 was $285.2 million under ASC 605 and $283.3 million under ASC 606 — not a huge difference. For the year, ANSYS forecasts total revenue of $1,214 million to $1,244 million under ASC 605 and $1,189 to $1,254 million under ASC 606 — so we can see the possible swings in Q2-Q4. Stay tuned, read the fine print and don’t freak out. It’s just accounting.