ANSYS hit Q2 out of the park

One giant deal, several large deals and new accounting rules helped ANSYS report a Q2 that knocked most metrics out of the park**. Details are below, but the main takeaway, for me, of ANSYS’ Q2 is this: being a one-stop shop matters. Having the ability to support a global account that buys $49 million worth of one type of physics solver in one deal, matters. Just think about that: for the sake of argument, a one-year license for a solver is $49,000. Totally making that up for this equation. $49 million buys 1,000 concurrent licenses or 50 licenses for 20 years or …. you get it. That giant deal was a massive endorsement of ANSYS’ current ability and its future potential.

Details:

• Total revenue for Q2 was $369 million, up 21% as reported and up 23% in constant currencies (cc). Just for comparison, guidance had been for $323 million to $343 million, so Q2 was a serious over-performance. CFO Maria Shields told investors that “Q2 was driven by strong sales execution, including a larger dollar value of multiyear lease transactions and the closing of a few deals that were originally forecasted to close in the second half of the year”.
• ANSYS said that it saw the most success in Q2 in the high-tech, automotive and aerospace and defense sectors. That giant $49 million deal is a multi-year agreement with a “South Korea high tech leader”, and is the largest single-physics deal in ANSYS’ history and, in case you’re counting, its third largest deal ever. (That means two are bigger — mind-boggling.)
• Total Software revenue was $171 million, up 30%
• On a non-GAAP basis, Lease revenue was $100 million, up 76% (up 80% cc) driven, said ANSYS, primarily by an increase in multi-year lease contracts and how accounting rules allow ANSYS to recognize that revenue. See below, about ACV
• Staying non-GAAP, Perpetual revenue was $71 million, down 5% (down 4%) as more buyers opted for leases
• Maintenance revenue was $187 million, up 11% (up 14%)
• Services revenue was $13 million, up 42% (up 46%), “strongly influenced by projects to assist our customers with broader adoption of ANSYS simulation tools, as well as the contributions from recent acquisitions”
• The direct channel contributed 80% of total revenue in Q2, likely because of that mega deal in Asia; for the year to date, it’s a more normal 76% of revenue
• By geo, non-GAAP, revenue from the Americas was $145 million, up 13%, as high tech customers continue to build-out their 5G offerings, and benefited from investment in data centers and smart connected products. Defense spending led to growth in the aerospace and defense industry
• Revenue from EMEA was $94 million, up 8% (up 12% cc), in part because of the automotive industry’s focus on autonomous vehicles, electrification and safety
• Revenue from Asia was $131 million, up 41% (up 45%) in part because of the mega deal in high-tech, helped by autonomous vehicle and electrification in automotive
• We also heard from ANSYS about China, and the potential impact of trade discussions. Bottom line: China represented less than 5% of revenue in 2018, but still almost $60 million. Ms. Shields said that ANSYS was lowering its expectations for China for 2019, especially when it comes to restrictions on selling to “certain prospective customers”. This isn’t expected, however, to materially affect 2019 result
• The partnerships with SAP and PTC are progressing well, said CEO Ajei Gopal, but didn’t give details. He reiterated what PTC said on its earnings call, that PTC closed 76 transactions in its last quarter, with an average deal size above the previous quarter’s level. Absolutely nothing else was said about SAP, which is too bad — that partnership is also very cool.

When talking about lease versus perpetuals, ANSYS said that it is “experiencing a shifting preference from perpetual licenses to time-based licenses across a broader spectrum of its customers”.

ANSYS tweaked its guidance for the rest of the year, to revenue between $1460 million and $1500 million — that would be growth of 12% to 15% as reported and 14% to 17% cc. ACV, annualized contract value, which was up 14% in Q2, is expected to rise 10% to 13% cc. All of that includes an expected $5 million to $10 million less from China, that’s expected to be made up elsewhere.

Why tell you about ACV, when I usually try to stay away from non-GAAP metrics? Because the accounting rules ANSYS now follows (as does nearly everyone else) add volatility to quarterly results. Large subscription and lease deals, under ASC 606, are recognized with a big chunk of revenue up front, just as if they were perpetual. That means a smoothing, as with ACV, gives a steadier measurement that smoothes out the bumps by mega deals (like the $49 million in Q2) and by unusually large quarters, like Q4. ANSYS defines ACV as “the annualized value of maintenance and lease contracts … plus the value of perpetual license contracts … plus the annualized value of fixed-term services contracts … plus the value of work performed … on fixed-deliverable services contracts” during the period.

So, bottom line? As I said above, scale matters. It enables ANSYS to sell to huge clients that expect massive support in exchange for massive payments. Of course, big deals are hard to predict and close and it would be a mistake for ANSYS (or any of us) to rely on them to run the business. Its scale also enables ANSYS to snare partners like PTC and SAP as it works to move simulation to new user types. And with industrial companies like BMW, which is working with ANSYS to “create a holistic simulation tool chain for developing autonomous vehicle technologies”. I’m not sure I know what that means, but Mr. Gopal told investors that the end-result will be a “development framework around rigorous safety planning, efficient test space exploration and data analytics in a virtual driving environment” that ANSYS will be able to commercialize for the automotive and aerospace and defense markets.

It’s good to be ANSYS right now.

***”Hitting it out of the park” is a baseball term. It means hitting a home run, which advances all runners on base to home plate. It’s fun and thrilling. No quarterly earnings report is ever truly thrilling, but this came close.