ANSYS Inc (ANSS) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS' fourth-quarter and FY13 conference call. With us today are Mr. Jim Cashman, President and Chief Executive Officer; and Maria Shields, Chief Financial Officer. At this time, I would like to turn the call over to Mr. Cashman.

Good morning, everyone. Thanks for joining us. Actually, today we're going to be discussing 2014's 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 update in 2014 outlook, are included in this morning's earnings release and in a prepared remarks document that we posted on the homepage of our Investor Relations website this morning.

With that, and no further ado, I'll introduce Maria Shields, our CFO, for our Safe Harbor statement. Maria?

Okay, good morning. Thanks, Jim. I'd like to remind everyone 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 uncertainty 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.

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 FY2014 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, 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, a few little sub points here: our first-quarter non-GAAP revenues were driven by a combination of growth across each of our three 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 who 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 in the quarter. 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 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 mainly the situation that developed in Russia and its several million dollar impact on our business that otherwise would have seen us at the top of our revenue guidance. There was one other specific data point of interest -- the relative strength of leased versus perpetual revenue.

This is also, of course, partially reflected in the aforementioned increase in our recurring revenue percentage. It was largely driven by continued growth in the Apache, and our electronics business unit lease businesses, as well as a 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 toward time- and usage-based subscription revenue in other elements of our business that were traditionally offered under a paid-up model. Or, even if this is one of those responses to macro conditions. In any event, nevertheless, the increases in subscription and recurring revenue are two 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 marketplaces 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 opportunity in their local geographies, and increase the overall sales 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 a continued focus on execution, should continue to produce improvement in sales through 2014.

On the industry side, industry composition continued to be diverse, while exhibiting strengths in electronics, materials, chemical processing, automotive and the industrial sectors kind of stood out. We had a host of new logos, and 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 three major reasons. First, it accelerates by a few years, the delivery of our long-standing vision of Simulation Driven Product Development by injecting intuitive interaction into the simulation process. Secondly, it strengthens the democratization of our products, to help extend our potential user base from the traditional analyst and expert users, to a much larger cadre of design and nontraditional users as seen in the ranks of management, marketing, manufacturing sectors, as well as increased traction in our SMB and our SaaS subscription delivery models.

And, finally, it creates a new end-user market as an embedded application in the variety of OEM offerings that can benefit from a new paradigm for product innovation and collaboration. Basically, we're really excited to welcome the talented employees to the ANSYS family. I would mention that more information on the SpaceClaim acquisition is provided in this morning's prepared remarks document that I referenced earlier, as well as some supplemental materials posted on the acquisition page of our Investor Relations website.

So, as we look to the remainder of 2014, for Q2 we're currently forecasting non-GAAP revenue in the range of $226 million to $234 million, and GAAP revenue in the range of $224 million to $232.5 million; non-GAAP diluted EPS in the range of $0.77 to $0.81, and GAAP diluted EPS in the range of $0.57 to $0.62. We're adjusting our outlook for FY14, factoring in planned increases in sales capacity and other headcount additions; current visibility around sales pipelines and forecast, and the inclusion of SpaceClaim starting May 1; and some small changes in currency rate assumptions. What this translates to is we expect non-GAAP revenue in the range of $939 million to $964 million, or top-line consolidated growth of 8% to 11%, and GAAP revenue in the range of $932.5 million to $958.5 million.

Our updated non-GAAP diluted EPS outlook for 2014 reflects a range of $3.23 to $3.33, and we expect GAAP diluted EPS in the range of $2.44 to $2.62. Netting this -- kind of explaining -- digging into this just a little bit more, the revenue outlook for the full year remains unchanged at the low end of our guidance range, and is slightly down at the high end. While we expect SpaceClaim to add roughly $10 million in non-GAAP revenue for the remainder of the year, this amount is offset by reductions in the business we'd previously expected from Russia. And, also, by some weakness in portions of our indirect channel.

Given the ongoing uncertainty surrounding the situation in Russia, basically also including the most recent announcements of additional US sanctions earlier this week, we're being prudent in our business outlook and we're assuming no appreciable improvement through the remainder of the year. Of course, should the business conditions significantly improve, we'll factor those changes into our future outlook as upside. The full-year EPS range -- slightly lowered to account for the margin structure of SpaceClaim. And that's fairly typical of all of our previous acquisitions over the past 15 years or so.

So, summarizing the situation -- continued growth with upside potential for any reasonable Russian stabilization combined with new technology offerings that come from a combination of our own upcoming traditional product releases and our recent acquisitions. For the next few months -- no surprise here -- we'll continue to focus on driving increased productivity from our ongoing sales and support investments, while also balancing our investments for future growth against the realities of the current and changing economic conditions and cautious customer sentiment.

So, with that, we now open up the phone lines to take any questions that you might have.

Thank you.

(Operator Instructions)

At this time we will pause momentarily to assemble our roster.

Steve Ashley, Robert W. Baird.

Thanks very much. I'll take the easy question. The one that's probably on most peoples' 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.

For the fiscal year, it was probably slightly in excess of $10 million. I mean, no surprise. We talked in previous quarters about Russia 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 high regard for the long-term aspects of that business; and we've heard nothing about things -- 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 to factor that into the overall business operation. And basically when it comes in, we can cut the keys and get them to the customer.

Terrific.

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 gave us some nice color pointing out that the Apache business, which tends to be more leasem was strong. But within your core business, the ANSYS core business, has there also been a shift there? Do you have any sense of that?

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, 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 mostly happy that customers are still coming onboard and the purchase mechanism, the fact that are 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 would call that out.

Anil Doradla, William Blair.

Thanks for taking my question.

I think the question I have around here now that you've 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? 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.

Well, keep in mind, in terms of just the energy and new mindsets coming in, and energy, that's probably one of the key things. But keep in mind, even once you do 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've mentioned. I mean, we've not formally announced the date. But we've got our 15.1 and 16 releases coming up soon, also some further ones from Apache in terms of red-hot releases and things like that. So I think this is really a thing where you see initial energy and enthusiasm, and 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 wanted to do where it is not going to change appreciably, but it is just going to get better due to that different mindset. Those are the key things that we look at. All in all it's a positive.

As a follow-up, I think the key question that is on my mind and many investors' minds is just 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 could help?

I know this is a question that's come before, but I would love to hear your latest thoughts on it--especially in the context of--

The latest thoughts are the same as the oldest thoughts. If think about it, about 15 years ago we had a patented technology, which was really aimed at coming with very easy-to-use software. For those historians in the crowd, it 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 things in terms of our user experience that over the last two or three years have 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 the driving factors in terms of the acquisition of SpaceClaim. Because they have a very modern kind of interaction -- not only a user interface style, but a way of interacting with geometry. And we wanted geometry to be able to move, if you will, at the speed of conceptual thought. Because in simulation-driven product development, you want to continually look at many, 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.

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 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 to 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 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 the mainline for a number of years now. And we're looking at different kinds of technologies that can actually, as I mentioned, accelerate -- that's what I meant by accelerating the vision of simulation and 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 fashion, not just by providing lesser capabilities that have less options and are dumbed down. Because the less sophisticated users aren't solving less sophisticated problems. They're still making major commitments to things that have to be successful product launches.

Thank you.

Jay Vleeschhouwer, Griffin Securities.

Thanks, good morning. This is Zack Ajzenman for Jay. ¶

We have a couple of technical and financial questions about SpaceClaim. First, how does this fit into ANSYS' strategy as described at the Analyst Meeting if ANSYS is a platform and systemic or comprehensive engineering?

The key thing is, 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 CAD systems. We're not becoming a CAD company. We're simulation company. But that ability to have something that we can organically blend in and go through rapid iterations and, in some cases, allow the simulation to actually drive the geometry.

If you remember at the Investor Day, we talked about the adjoint solvers -- where you actually say, what do I want the results to be, and therefore tell me what the geometry should be. Kind of inverting that overall process 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 modernities of construction kind of techniques and interaction techniques and the way that it works with computing infrastructures. And we could leverage off of that.

Okay. In recent years, SpaceClaims seems to have been able to grow its space by about 10,000 licenses a year, including your prior resale activities on their behalf. How are you thinking about the unit opportunity here, given the size of your base or the needs of key verticals such as ADUP?

Actually, I'm not sure I understand the question. Could you just reword that? I'm sorry.

In recent years, the SpaceClaim license growth is about 10,000 licenses a year, including the presale activities on their behalf. How are you thinking about that unit opportunity?

Oh, okay. The key thing is we want to actually maintain that. Remember I talked about three things that were pretty exciting about us? So maintaining some of those pushes into 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 benefiting from the benefit of simulation, is particularly key. And at the low end, they literally have tens of thousands of seat; 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 into 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.

Great. And as a follow-up, could you comment on the relative performance and outlook of your Mechanical Fluids and Electronics business units, including Apache in particular?

Well, they've all been growing. Like I said, we mentioned there had been a little bit of shift in Q1 or a relative stronger element of the lease aspects. If you look at Apache, Apache actually has been performing ahead of projections and growing well. So they're 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, 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 we would see a little bit of a ding there. But that was the main thing that stood out as being anything even quasi-anomalous.

Thank you.

Steve Koenig, Wedbush Securities.

Good morning, ANSYS. Thanks for taking my question.

Okay.

It's a multipart; I'll try to keep it slim here. So billings in 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 your quarter carriers -- I think they were up 12% last year from end of year 2012. Given that, can your bookings grow at this rate?

And then I have one really quick follow-up if you don't mind.

Yes, well first of all, if we were comparing only new customers to new customers, no. There would be a certain linearity to booking rates when you're talking about add on and the impact of HBC to already-validated customers that are starting long-term rollouts. That's really not too much of an issue.

First question, help me on the --

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

And, yes, to a much smaller degree, the mix shift affected that also, likewise. Even then, if you look at the bookings, keep in mind there is a phenomenon. If we look at the Apache side, last year we had a number of customers -- basically it's centered around the multi-year time base license, where you'll get a commitment and a booking early on. So even though the revenue continues to project up, you may say -- Oh, it looks like the bookings might have even slowed down.

Last year, we had a phenomenon of several multi-year deals being booked out of the Apache multi-year time-based license model. Therefore, if you were even comparing those, you might get a little bit of perturbation. But that's really a difference between single-year and multi-year kind of things.

Yes. Okay, Jim.

And just for clarification then -- 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 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? What's your sense there?

And I just did want to add a question as well, which was just any comments on how your pipeline, your sales coverage and your pipeline coverage and close rates are trending?

In general, the pipeline trending is slightly up, even accounting for the fact of the Russia stuff being now kind of clogged in the pipe; so we really don't count that.

Now, with regard to booking, probably a little bit in advance of the actual revenue. Probably expect double-digit booking growth for the year as we continue on. And keep in mind, that's even factoring in the, 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 it from that perspective.

Matt Williams, Evercore.

Hello, good morning. Thanks for taking the questions.

Just wanted to ask you on the indirect channel, it looks like relative to some of the growth rates in FY12, FY11 slowed down fairly materially in 2013, and then was up a little bit this year over a fairly, I guess, weaker compare. So 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.

First, you said direct is the quarter; actually indirect is the quarter. I think that's what you meant.

If you look at it, no. 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, 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 will change by region and different cycles, but nothing too much out of the ordinary.

Okay, and then just one follow-up on the sales side of things.

Can you provide any update on the search for a new head of sales? And then within that, obviously Japan, much better this quarter. I'm wondering if you could help quantify how much you think that was a result of some of the sales changes that you've made there versus just any macro impacts and that type of thing? Any color would be great.

I'm sure the macro is going to help a lot of things. But I also have no doubt 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, it is going on plan. And it's going well, and we've got several good finalists that both bring a nice space of both scale and experience.

Thank you.

(Operator Instructions)

As we are showing no further questions, I would like to turn the conference back over to Mr. Cashman for any closing remarks.

Okay. Basically in close, the emphasis for Q2 and the remainder of 2014 will be continued growth, customer development, and 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 highlight the positive customer receptivity to our vision. But also the model has been pretty resilient if you look at the results, even with a major impact of something like Russia. But that shouldn't be a surprise to anybody who'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've got really loyal customers that are adding to 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 some of the 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 team of employees that really is at the heart of making all this happen is key.

But over the short term, in this environment, we're balancing this with short-term caution around some of the specific additions that we mentioned even on this call. And those are things that are largely outside of our direct control, but we can manage and sail through those.

With that, I thank everybody for your time. And we'll see you next quarter.

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