ANSYS’ strong Q2 highlights portfolio effect
Note: This blog was written before ANSYS updated its prepared remarks, which lowered the number of big deals from 35 to 27 and the size of the largest from $30 million to $16 million. You can read about that here — but none of the company’s revenue, expense or forecast numbers are affected.
ANSYS’ Q2 results came in almost exactly at the midpoint of its guidance –how do they DO that??– with growth every category. Of special note, the company said that 35 customers placed orders in excess of $1 million, and one placed an order worth over $30 million. CEO Ajei Gopal told investors that these big orders typically include products from across the ANSYS portfolio, and enable ANSYS to extend its footprint within its customer companies, making its solutions ever more pervasive.
The details, using the ASC 605 accounting standard for backwards consistency:
- Revenue of $294 million, up 11% on a GAAP basis
- Software license revenue was $161 million, up 8%
- Maintenance and services revenue was $133 million, up 17%
- From here down, the data is non-GAAP, by which metric total revenue was $299 million, up 13% in constant currencies (cc)
- Perpetual license revenue was $62 million, up 7% (up 5% cc)
- Lease license revenue was up 10% (up 8% cc) to $102 million
- Maintenance revenue was $126 million, up 17% (up 13% cc)
- Service revenue was $9 million, up 40% cc
- ANSYS reported that 35 customers had cumulative orders over $1 million, with one customer having an order worth over $30 million. That’s up from 28 and one, respectively, a year ago but down from 30 in Q1.
- By geo, revenue from the Americas was $122 million, up 15%. This was the region of the big deals, with 17 of the 35
- Revenue from Europe was $91 million, up 18% as reported and up 11% cc. Eight of the big deals occurred here. France, the UK and Italy each grew in the double digits, cc. constant currency, on what Mr. Gopal said was improved sales execution
- Revenue from Asia was $85 million, up 6% (up 5% cc). Japan grew faster than the regional growth average, and China and Taiwan saw “stronger growth”. South Korea was “comparatively reduced … mainly the result of in-process go-to-market changes that were recently finalized, and India, which was mainly the result of an increased level of centralized purchasing related to
larger, enterprise deals”
- The channel mix stayed relatively where it has been, with 24% of revenue from indirect channels. That said, ANSYS seems to be focusing more on indirect access to market, adding 11 new (8 in Europe) partners. Twenty partners have now gained Elite status, up from 5 a year ago. Even so, Mr. Gopal doesn’t expect the proportion of direct/indirect to change in the short-term
- Finally, ANSYS completed the acquisition of OPTIS in May. OPTIS contributed $6.6 million to revenue in the quarter
There were slight updates to the PTC and SAP partnerships. Neither is on the market and neither is expected to contribute to revenue in 2018. An analyst on the call wondered about the likelihood of success given that Discovery Live will cost about/nearly/not quite sure but a lot when compared to a Creo license — Mr. Gopal said that he didn’t see this as an obstacle, since Discovery Live + Creo could significantly influence product design in a positive direction. The prospects for the SAP partnership are equally robust, with Mr. Gopal saying that ANSYS Twin Builder will create, validate and deploy, digital twins for constant monitoring to optimize performance and improve next generation design. The companies are embedding this into SAP’s digital supply chain offerings, to tie together engineering models and manufacturing insights, enabling businesses to evaluate realtime operations. Customer feedback on both is so far very positive.
Given exchange rate fluctuations and the acquisition of OPTIS, ANSYS tweaked its outlook. Under ASC 605, it now expects Q2 revenue between $296 million and $306 million, and for fiscal 2018, $1.21 billion to $1.23 billion.
What does it all mean? Embracing a flexible go-to-market that can sell a single physics or many is smart, since many buyers and prospects are still early in their CAE rollouts and could be overwhelmed by a “you must do multiphysics NOW” approach. Growing the channel footprint is smart, too, since the personal, local approach matters so much in CAE. Finally, partnering with PTC and SAP shows creativity and modesty, acknowledging that they can’t reach everyone, everywhere on their own. (Of course, these are intention at this point; we’ll have to see how 2019 works out.) Discovery Live is out there, as is the version 19 of releases. ANSYS seems to be firing on all cylinders.
Some of you have gotten in touch about accounting standards, and asked why so many companies currently issue a lot more numbers than usual, leading to more confusion than even the subs-as-if-they-were-perpetual and as reported-versus-constant-currencies reporting of the last couple of years.
In most of the world, companies are supposed to issue earnings reports that are comparable to one another and follow accepted accounting practices. The rationale is that investors can then better compare one company to another in order to make judgments about the future. But comparing modern companies is tough because their interactions with customers vary so widely. I buy a shirt and it’s an easy transaction to record; a CAE deal may include leases for some products and perpetual licenses for others as well as implementation, engineering and other services. How that revenue is recognized and how R&D and other expenses are assigned against that revenue is complicated. ASC 606 is a US standard that the Financial Accounting Standards Board (FASB) believes better represents how and when revenue is recognized.
Under ASC 605, the old way, a subscription was recognized evenly over its term; in other words, 1/12 of the total value for each of the 12 quarters of a 3 year term. Under ASC 606, ANSYS says that it will recognize “approximately 50% of the value of the lease license up front in a lease license revenue category, while the remainder is recognized as maintenance revenue ratably over the contract duration”. So 50% in year 1, then 25% in year 2 and year 3 (or 6%ish per quarter).
The change can be significant. From ANSYS’ Q2 materials, note the difference between ASC 606 on the left and ASC 605 just to its right:
As you can see, revenue shifts between license and maintenance, and the way costs below the Total revenue line shift. Under ASC 606, ANSYS reported net income of $93 million in Q2 2018; under ASC 605, it reported $82 million. Both are correct using their respective frameworks, but could lead investors to different conclusions about whether things are going well or badly.
As always, when you look at financial statements, read the fine print and understand what the companies put into each revenue and cost bucket.
One CFO (not ANSYS’ Maria Shields) told me that going through this change, from 605 to 606, is an IT nightmare. His teams had to know far more, as accountants, about how each contract is structured and to work with sales teams to explicitly clarify what falls into each revenue bucket. They implemented “bots” to ensure consistency in revenue allocations. And the dual reporting of both 605 and 606 for this transition year causes nightmares. Whether this new mechanism provides clarity to the company and its investors remains to be seen; it certainly created new jobs in IT and accounting.