Ansys has a great Q2 and expects the momentum to continue

Ansys reported pretty awesome Q2 results last night, and this morning on its earnings call, said that growth was due to three things: increased optimism among its customers that end-market demand will come back post-pandemic, its own efforts to stay close to those customers over the last 18 months —even when deals seemed uncertain, and to the strength of its portfolio, helping customers solve gnarly design problems.

First, a few details and then what I think it all means — much more detail here:

• Total revenue in Q2 was $447 million, up 16% as reported (up 13% in constant currency, cc). Ansys had forecast revenue of around $425 million — so Q2 nicely beat expectations
• Within the software categories, lease revenue was $128 million, up 15% (up 14% cc), perpetual revenue was up 52% (up 45% cc) to $85 million, and maintenance revenue was $218 million, up 7% (up 5% cc). CFO Nicole Anasenes cautioned investors on the earnings call not to get too excited about that jump in perpetuals, that it’s not indicative of long-term trends and was due to customer choices in Q2. Long-term, she said, leases/subscriptions are the customers’ preferred buying mode
• Services revenue was $14 million, up 3% (flat cc)
• Channel revenue was 25% of total revenue in Q2, up from 22% of total revenue a year ago — a sign, said CEO Ajay Gopal of the increased confidence his SMB customers have about post-pandemic economies. Paraphrasing here, but he believes that these companies, and not just the large enterprises, are investing in their product development processes to create innovative products that the market will demand — once that demand picks up. Ms. Anasenes said that she doesn’t see SMB spend hitting pre-pandemic levels this year, however
• Ansys spoke about several large deals but didn’t say how many it had closed in total, or their cumulative value. Two “seven-figure sales” were to “leading medical device companies, both of which used our materials intelligence solutions for materials selection and data management. Additionally, one of the deals uses our simulation software to train AI algorithms while also replacing human clinical trials with virtual patients”. Also mentioned were “multi-year, multi-million-dollar sales” to a leading defense contractor; to North American, European and Asian semiconductor companies; and an “automotive supplier [that will use Ansys technology] to develop future propulsion technologies”
• Ansys’ industry vertical and geo breakdowns are more or less consistent with prior periods, so I won’t belabor them in this post — go here for details — but can be summarized by Ansys’ comment that “high-tech and semiconductor, aerospace and defense, and automotive and ground transportation industries continue to drive [Ansys] growth.”

One of the headlines in Ansys’ announcement was around ACV (annual contract value) growth of 25% as reported (up 23% cc) to $431 million. That increase in Q2 is newsworthy but also noteworthy is that year-to-date ACV was $750 million, up 16% (up 14% cc)— meaning that things seem to be on an upward trajectory. ACV measures the annualized value of maintenance and leases, perpetuals, and services contracts. In other words, ACV adds together all of the elements of the contract and divides it by its term. So, ACV for a contract might be ((initial perpetual+maintenance*number of years)/number of years). Because of this math, ACV is bumped up by that higher-than-expected perpetual revenue line — but even so, impressive.

That perpetual result in Q2, along with a longer-term view into its pipeline, led Ansys to up its forecast for the year. For fiscal 2021, Ansys expects total revenue to be between $1,819 million and $1,869 million, or up 8% to 11%, or 1.5% higher (in cc) than it thought just a few months ago (May). For Q3, Ansys expects total revenue of $396 million to $421 million, up 8% to 15%.

Ms. Anasenes also confirmed what we all know to be true: that one of the best uses of Ansys’ (growing) cash horde is acquisitions — but she and Mr. Gopal declined to be more specific about the company’s ambitions.

So, what does it all mean? That Ansys is set to capitalize on an increasingly complex world. Changing a car from combustion to electric isn’t as simple as swapping out the engine for a battery pack — you may need to reconfigure the vehicle body since it’s no longer front-end heavy because that big engine block is gone. What does this mean for crashworthiness? How do you deal with the potential fire danger of a battery explosion? (After going “eek.”) Or how can you help a surgeon best optimize a procedure for a patient? All via simulation. And complex simulations, at that. Mr. Gopal repeatedly emphasized that Ansys brings its big, multi-physics, compute-almost-anywhere portfolio into accounts and wins because it enables customers to work across tools and disciplines.