ANSYS Inc (ANSS) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS third-quarter 2015 conference call. Please note this event is being recorded. 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. Jim Cashman for some opening remarks.

Okay. Thanks, Emily. Good morning, everybody, and thank you all for joining us discuss our third-quarter and year-to-date fiscal results. Before we get started, I'll will introduce Maria Shields, our CFO, for our Safe Harbor statement. Maria?

Okay. Thanks, Jim. Good morning, everyone. Our earnings release and the related prepared remarks documents have been posted on the homepage of our Investor Relations website this morning, and they contain all the key financial information and the supporting data relative to our quarter and year-to-date financial results and business update, as well as our current Q4 FY15 and preliminary 2016 outlook and the key underlying assumptions that we have factored into that outlook.

I would 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 uncertainties that could impact our business in the future. These statements are based upon our view of the business as of today, and ANSYS undertakes no obligation to update any such information unless we do so in a public forum.

And finally, during the course of this call and in the prepared remarks, we will 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.

With that, I'll turn it back over to you, Jim, for some opening remarks.

Thank you, Maria.

Absolutely.

I would like to start with a recap of the results that the ANSYS team achieved in Q3. The results of the third quarter really are reflective of solid execution in what I call a mixed operating environment.

Our non-GAAP revenue for the quarter of $238 million came in at the high end of our expected range, and our non-GAAP EPS of $0.90 per share exceeded the high end of our guidance.

We achieved top-line growth of 9% on a constant currency basis. Several geographies experienced strong constant currency growth. Actually, most notably in our top three geographies. Japan was up 13%, North America up 14%, and Germany up 15%.

Those results are demonstrative of the early success in bolstering our sales organization and focusing our efforts on major accounts, which we talked about on prior calls. However, during the quarter there were also some lower ends on the performance scale. France, South Korea, the UK, and Taiwan were notable, but fortunately the diversity of our model, both geographically and across industries, helps to mitigate the volatility in revenue.

Our recurring revenue base continued to be strong at 72% of revenues for the quarter and 73% year-to-date. In addition, with the deepening of relationships with major accounts and growth of time-based licenses, we continue to see growth in deferred revenue and backlog.

It's also worth mentioning that on a constant currency basis we achieved 10% growth in paid up revenue and 12% in maintenance revenue. However, the growth in the lease business and our bookings has been impacted by the slowing growth in the Apache business, primarily due to the recent consolidation in the semiconductor industry.

Historically, these have been Apache's largest and fastest-growing customers. Now we think this actually creates opportunities and we have taken proactive steps, including the acquisition of Gear Design, to expand our market opportunity and to focus the technology on the problems of the future to reaccelerate our growth in this sector. So to this end, we have also created a market-unique solution for a complete chip package system workflow to support the growing trends in the market, particularly Internet of Things.

And then finally, we are increasingly seeing the some of our industrial customers are bringing chip design in-house to better control their design processes. We have active initiatives in place to leverage our long-standing relationships with them to expand the use of Apache technologies beyond their traditional customer base.

Some additional commentary on revenue. At the beginning of the year, at an Investor Day, we discussed a series of sweeping enhancements to our go-forward sales model. Now the majority of these have yielded positive outcomes, most notably the capacity increases and the increase in named accounts.

While the hiring and productivity ramps were slightly behind the ideal schedule, and we've talked about that the last couple of calls, we've seen some of the expected trends come to pass. One part of the model that has not taken hold as quickly is the channels contribution to new business production.

Now some of this is a function of coordinating independent companies and then preparing them for broader portfolio coverage. Nevertheless, performance issues have been felt. Our channel has been a positive factor in some major regions, as I previously mentioned, as Japan and Germany. It's not an unreasonable goal, but we need to have all elements contributing to meet the potential.

This will be a major focus for us heading into Q4 and 2016, in addition to continuing our progress in the other areas. Now, of course, our focus goes well beyond the top-line and for the third quarter we achieved non-GAAP gross margins of over 89% and operating margins of 48%, which was at the high end of our expected range.

From an operational standpoint we had several notable accomplishments during the quarter. I think I will take time to maybe highlight three of them.

First, was the August release of ANSYS 16.2. This the next logical step toward the creation of virtual prototypes of complete systems, which is unique in the marketplace. 16.2 release also offers new physics simulation applications, including advancements in heat transfer and thermal stress, gas flows, structural deformation and stress, and these new features on top of the cloud capabilities, which were introduced in May, continue to separate ANSYS from the competition.

Secondly, in September we announced the acquisition of Delcross Technologies, a premier developer of EMAG simulation and radio frequency system analysis. The acquisition will enable ANSYS users to understand how antennae interact within their operating environments and how the behavior affects the systems overall ability to transmit and receive data without interference. This is obviously a critical functionality as more and more devices become connected to the Internet of Things, and it further enhances the competitive advantages of our platform.

Finally, and most recently, we also announced that we were the chosen simulation partner for GE's Predix cloud platform, which is the first and only cloud offering for industrial data and analytics. The cloud platform enables companies and industries; such as aviation, transportation, oil and gas, and healthcare to drive insight and enable faster decision-making from real-time analytics.

While still in its early stages, the impact of this collaboration has enormous potential for users as efficiency and productivity gains could amount to hundreds of billions of dollars of savings over the next 15 years according to GE.

Before I turn the call over to Maria to delve a little deeper into the financial results, I also wanted to point out how aggressive we remain in returning capital to our shareholders. The resiliency of our revenue model enables us to invest in the organic growth of our business, also to augment that growth through strategic acquisitions, and return capital to shareholders simultaneously.

During the third quarter, we purchased 1.25 million shares of common stock for $114 million. And that brings our year-to-date share repurchases to 2.8 million shares for $243 million. At the end of the third quarter we still had approximately 3 million shares of capacity left in our share repurchase program. And consistent with the plan that we outlined at Investor Day back in June, we intend to dedicate a portion of our strong free cash flow to returning capital to shareholders in Q4 and in FY16.

With that brief highlights, I will now turn a back over to Maria to discuss our fourth-quarter, full year, and preliminary 2016 guidance before we move into Q&A. Maria?

Okay. Thanks, Jim. As we outlined in this morning's press release, we have initiated our outlook for Q4 starting with non-GAAP revenue in the range of $252 million to $260 million, and non-GAAP EPS in the range of $0.83 to $0.88.

That guidance for Q4 reflects a number of functions based upon our current view of the macro and our business overall.

First, ongoing pressure from FX, which we and all other multinational companies have felt all year long; continued weakness in Asia-Pacific, particularly in South Korea and in the state-owned enterprise business in China, as concerns around growth have caused the economy and our business to soften.

Continued channel weakness in new business production and increasing mix shift towards enterprise license agreements, which is expanding our relationships with key customers, but at the same time having the effect of shifting near-term revenues over the term of the agreement. And a higher tax rate as the five years of tax benefits associated with the change in the structure in Japan expired in the third quarter.

And last but not least, as Jim mentioned earlier, our forecast also reflects the positive impacts that we are seeing from the investments that we've made throughout 2015 in our direct sales force capacity.

And for 2016, our preliminary outlook is non-GAAP revenue in the range of $1.01 billion to $1.05 billion, and non-GAAP EPS of $3.58 to $3.76. I will caution, we're still in the process of working through all the details of the 2016 operating plan, but for now we are assuming no significant changes either way in the overall macro climate.

Further details around specific currency rates and other key assumptions, that we factored into our guidance, are contained in the prepared remarks that we posted on the Investor Relations homepage earlier this morning.

So with that, Emily, we will now open up the call for Q&A, please.

(Operator Instructions)

Anil Doradla, William Blair.

Good morning, Jim and Maria. This is actually Joe [Hodes] in for Anil. Quick question regarding deferred revenue and backlog. It looks like we a saw pretty significant sequential decrease in both, and I'm wondering if you can provide us with some more color on the basis for that decline?

Yes, I think the --

Go ahead.

Go ahead, Jim.

The main thing you will see is that -- what you are seeing is the impact of -- in particular, the multi-year deals. For instance, in Q3 of last year, we had $30 million, $40 million, for instance, of multi-year deals from the Apache business sector. Of course those things aren't -- while there might be some small adds over that time, there really is not a planned renewal for those.

That really speaks back to the thing that we talked about, and we are really still working on because it's a complicated set of things. But coming up with some form of an annualization of those booking rates. We just don't want to throw out numbers prematurely.

That was an expected consequence, in addition to the other things that we mentioned with regard to the Apache business. In the main part of the call I made a couple comments on there. The backlog thing you are seeing there is almost predominantly driven by that impact. And you will see those kind of timing things go on particularly as the number of those three, four year deals increased over time because they tend to also be very large volume deals.

Right. Okay. Great. From more of a competitive perspective, are you seeing any threat from EDA companies and CAD companies adding on simulation themselves?

No change in the trend. Keep in mind, most CAD players on both sides0 of the electronics and mechanical space had had some form of analysis capabilities bolted on for a decade or two.

Obviously, you will see a number of those people continuing to -- my guess is -- in addition to adding other things, in addition to going down different industry tunnels and things like that you, might see that type of thing. But I really don't think that it changes -- we really haven't seen anything that changes the competitive landscape along those lines.

It's really just kind of more of the same. Obviously, I think one thing that gets a little bit different is when you start looking at the -- we think, for instance, the Internet of Things which is still evolving itself, but there is an amazing amount of work there.

The thing there is that that's one where there's almost a perfect collision of the electronic and mechanical worlds because you have to have those type of devices, but they also have to have the same survivability built the also, which are also very much structural and mechanical and thermal kind of situations. We haven't really seen anything along those particular lines.

Okay. Great. If I could squeeze in one more. You noted, and you have before, that hiring ramps were behind schedule again. I noticed it was pretty much flat year-over-year. We follow your head count or your job openings online, and we've seen a little fluctuation there. Can you talk about how that buildup is playing out? And what your outlook is for the fourth quarter and moving into 2016?

I have to break that into two parts. First of all is that, yes, it was behind the ramp a little bit. We were pretty much we -- through Q3 we pretty much caught up. What that means is the bodies in place doesn't mean that they've now come up the productivity ramp. You will still see some tailing activities of that going forward.

The second part of that, that I really can't speak to because we're in the process of finalizing the 2016 plan is, to what degree we might come out of the ramps in 2016 with a certain one and to what degree we might even take advantage of Q4 to try to preload some of those. I really don't have an answer for that right now because we don't have those numbers, nor do we have the final approved plan.

Okay. Great. Thank you.

(Operator Instructions)

Jay Vleeschhouwer, Griffin Securities.

Thank you. Good morning. Jim, in your prepared remarks you noted that one of the reasons that Asia has such a pronounced effect on the business is not just the macro weakness, but that they have the propensity for doing perpetual licenses.

The question is, if you could talk about the license mix in vertical market terms. For example, when you look at electronics you noted Apache's high degree of lease revenue. But when you look at auto and other markets, are there any meaningful distinctions or trends that you might like to comment about as it concerns perpetual versus lease mix?

I'd say if you look at industry standpoints, the one where we saw a universal dip -- and this is through Latin America. This is through parts of the US, even though the US performed in the mid-teens. This affected the UK, as I mentioned.

The oil and gas expenditures are noticeably down. They tend to be one of the more cyclical industries that we get involved in. Electronics, in general, probably a little bit we see some turbulence. I think that's where we saw a lot of our turbulence in, I mentioned South Korea, and there is also some other shifts going on in there.

From that standpoint, as opposed industry-specific, in a couple of those major market they tended to be more governed by some of the turmoil that was actually going on in the macro markets of those.

Jay, just to follow on. One of the things I will say, particularly I think you asked about electronics. If you take a look at the commentary in the prepared remarks, we specifically called out one of the large perpetual deals. In electronics I'd say it is bifurcated.

The traditional buyers of the Apache technology that are also buyers of EDA technology tend to prefer time-based licenses. However, on the legacy ANSYS side of the equation, those buyers still want electronics that are largely the procurers of the legacy Ansoft technology. They still are very much perpetual models.

A large electronics customer in North America in Q3 expanded the footprint of ANSYS technology, but using perpetual models. We will continue as we have been saying because I know many people in our space seem to be wanting to push customers into a certain licensing model.

We're going to continue to have a hybrid model that allows them to choose whatever option they want, as long as it is our technology.

I think it's fair to note that while there has been a continuing shift toward the time-based licenses, we have had even a couple companies that have moved upstream that used to be traditional lease people that have come forth into perpetual.

The holistic move is toward more of the time-based and, of course, we're still in the middle of the ramp-up phases of the cloud business. So emphasizing Maria's point, that basically what we don't want to do is create some artificial constructs.

Our business model will evolve in the direction of the market, but in the interim we don't want to create any stumbling blocks based on pure acquisition of the technology.

All right. My follow-up has to do with your channel comments. And actually I do have a clarification question on Apache. But on the channel, earlier this year you segmented the channel between what you call the elite and standard designations.

Could you dive into that a little bit more as to how that is going? Is it the elite that perhaps might not be performing? Or the standard? Or both? Could you elaborate on that?

Then on Apache, shouldn't we have expected anyway that their growth might have slowed? They were pretty strongly in the mid- to high-teens for quite a while. They would have at least had a tough year-over-year comp, and they already have at least half of their addressable space in EDA. Shouldn't we have expected anyway that their growth might have slowed, irrespective of the consolidation of the customer base?

First of all, we did expect that but it was accelerated by some of the movements we have seen there. However, one of the things that was most important was the evolution of that technology from being primarily a validation tool at the end of the process to a design tool throughout the process.

Pretty much along the way that we have taken the rest of the technology. That was one of the main things that we have been driving with the development plans, as well as the acquisition of gear and some of the other things that we have done along those lines. That's still progressing, but it was a little bit more perturbed than usual.

With regard to the channel question, you asked about the elite. In general, I probably have to say holistically it has not been uniform. It's not like the elites all did well and the second tier did well. Most of the goodness happened in the elite, and I think I underscored that if you look at the overall performance in Germany and Japan. Obviously, those are areas where we have long-standing more mature channel partners who happened to be elite channel partners in that particular standpoint.

They cover broader portfolio already. They didn't have some of the issues that are involved in broadening out to cover some of those capabilities.

Again, sometimes with the smaller independent channels the movement; whether it's expanding their channel, getting certification, things like that are key. That's going to be a major focus, and that's what stretched out. That's why we don't see maybe the same commensurate production from them at the end of the year as we're going to see in some of the other parts of the business.

You will see a spread between there. However, that's going to be a major focus for us going on. Like I said before, it's not like the channel can't handle this because we have evidences of some of the really good channel partners who are just keeping step with us, and that's the thing we're going to do.

All in all, most of the things we did with the sales force evolution has borne fruit, but we just point this one out as one that needs additional work, but we've got our sites on it and we know what the issues are.

Thanks very much.

Okay. Thank you.

Steve Ashley, Robert W. Baird & Company

Great. Thanks. I would just like to ask about TBLs in the fourth quarter. I don't know if you're going to be able to put a number around this, but what kind of dollar impact might happen here in the fourth quarter because of the shift year-over-year to TBL purchases?

Steve, I could make up a number, but there would be no precision to it. We know that those deals are being worked, and whether or not they make it to Q4 or they push to Q1 we have tried to factor all of that into our outlook.

We do know of a few traditional deals that are being worked that those customers, in past times, have used year-end monies but have gone the perpetual route. And because of the terms and conditions of what we're working with them, those deals will manifest themselves as ratable recognition as opposed to paid (technical difficulty) in the fourth quarter.

Quite frankly, we know we have some other very large deals that are coming in, but they are going to come in as time-based license, which means you're going to see the expected depression in the first quarter of the implementation, be it Q4, Q1.

You should also see that catch up over the course of the year. For that matter, some of the deals have gotten complicated to the point where we run across the thing which our finance people love and sometimes I grouse at, but it's called DSOE. It's a vendor specific objective evidence, and it's essentially even sometimes when perpetual deals come in with a much broader structure attached to them, we may still have to ratably spread those over. That's some of the things you are seeing, which optically look one way but it's still building a reasonable book of business.

All right. As you look out to 2016, you provided guidance, and currently you have a couple areas that are soft. You talked about South Korea. You talked about the United Kingdom. Maybe even the oil and gas business. What are your assumptions or what did you think about those businesses regarding 2016 guidance, in general?

In general, Steve, since we see no indication of improvement, and I don't have any crystal balls, we're going to assume it's going to continue to be soft. That's why we've got, at least initially, a wider spread on the top line outlook just to compensate for things that hopefully get better, but may get a little worse before they get better.

We just don't know. We've tried to factor in everything that we know today into our very preliminary outlook for next year. As I said, we're still working through the details of the top down and bottoms up and everything that's going to going to it. So it is preliminary.

And by the same thing, since nobody has asked but somebody may ask, we are likewise not expecting Russia to return to its performance when it was one of the uprising BRICS two or three years ago. We're still expecting it at it's fairly sedate level.

When we see those type of things, if we don't see the evidence going forward -- bottom line is if it does pick up we already have the relationships. We already have the support structure in place. In most cases, we are just telegraphing some keys over to them, and we can cover that but we're just not building that into our overall assumptions. It will be upside, if it improves.

Perfect. Thanks.

Thank you.

Sterling Auty, JPMorgan.

Yes, thanks. I want to drill further, I guess, into the perpetual side. You mentioned the ones that might go TBL for the fourth quarter, but you have the large deal that closed here in the third quarter to aid the upfront or perpetual results. What does the pipeline look for the fourth quarter? And how much to your point did you factor in the potential for softness or slippage within the new guidance?

So, Sterling, what I will say is no doubt when we last talked to you guys in early August we were feeling much better about the world then, where it ended up at the end of the quarter. The good news is, and we have been saying, the sales pipeline was strong enough that as some of the fallout happened in Asia-Pac at the end of the quarter, we were able to make that up with other deals that were in the pipeline and that were being worked.

That deal that went perpetual, it was in the forecast. We knew it was coming. Luckily, there were enough other things happening that sales was able to compensate for the fallout in Asia-Pac in Q3. But as we look at the Q4 pipeline, because of the composition of the deals and the likelihood that those deals that will come in will be ratably recognized, we wanted to factor that in.

That's why we adjusted the guidance down to try to deal with the fact that some of those will not hit the top-line all in Q4.

I think that's fair. Follow-up question. I know it's tiny, but just so that we talk about it. What was the revenue contribution to the quarter into the guidance from the new acquisitions?

From Delcross?

Yes, and from Gear.

It's less than -- about $1 million.

I knew it was small, but again just wanted to ask. So $1 million to September, and is that what we should think the run rate contribution? Or does it ramp up a little bit for the next couple quarters?

No. For Q4, I think that's probably in line as well. That new technology, as you know, it takes a while. We are preparing all the materials and we are going to begin the training for the channel and for our own field, but it's going to take a while for some of those things to have an impact.

The other thing, exactly what Maria said, but additionally one of the things we really liked about Delcross was the way that it just automatically complemented another one of our flagship products, HFSS, for basically the high-frequency.

In keeping with all of our acquisitions, one of the first things we want to do is get that technical interaction -- the technical integration done between those so there is a natural link for people buying and it's just not buying a couple of random dissociated products.

Another thing, it came on because you were asking a little bit about the future and the buildup of these things. We've actually seen quite a build up in the pipeline, in particular, of the enterprise license agreements. It's well more than a doubling of the opportunity there, and the general pipelines have also been building up.

But now bringing those in, getting the channel ready to address those, taking those over a spread period, and also realizing that as particularly as the ELAs come in, that they -- again they start out ratably. They build up nicely, but they start out along those ways. So those forward signs are still in the same level of positivity.

Great. Thank you, guys.

Thank you.

(Operator Instructions)

Steve Koenig, Wedbush.

Good morning, Maria and Jim.

Good morning.

Hello.

One question and then one follow-up. I would like to get more specific about the ELAs. You talked about the mix shift that could happen in Q4, and you talked about the shift to leases. And you have also talked about potential shift to more ELAs.

Can you be a little more specific about ELAs versus the leases, and how much of your mix are we talking about for the ELAs? And this mix shift more generally, what's the composition of it?

First of all, I guess inherently leases are a traditionally time-based licenses themselves; however, the time is usually pegged right at about 12 months. There are a couple of exceptions there. They also can be anywhere over the spread in terms of revenue. They can be anywhere from $20,000 leases to a few hundred thousand dollars kind of leases.

Enterprise license agreement has -- typically it is time-based license. It is typically multi-year, as we discussed a little bit on some of the ebbs and flows of the Apache business, for instance. Typically being around three to four years. Almost always multi-product type of sales, which sometimes can be more complicated from a sale. It can be a little bit more complicated from a buy, as different buying centers inside of companies try to figure out how they are going to handle the purchase requisition and things like that.

That's the fundamental difference, and what we're seeing is that -- I would probably say that in general that leases have been a pretty steady, nice portion of our business for years. And those portions are staying. We see them inching up a little bit, but there is not a huge sea change there.

Where we are seeing major shifts are when people go from, if you will, generation one of usage patterns to now a much more prolific use of those. When they do that, now the purchase dynamics change and that in almost all cases is where you see the ELAs get invoked.

I'd say in most cases they tend to slightly protract the buying cycles, but we've already seen some of the positive results even in light of that.

Steve, one thing I will add to that is, don't expect that this is like hundreds of customers. What you are really talking about is a targeted group of probably, right now over the course of the next 12 months, let's just 20 that have been identified as real opportunities, both on their side of the equation as well as ours, to expand the use of simulation broader across those enterprises beyond what they have historically done.

As you said, it's been a year now. Our first one that we announced was almost a year ago in the fourth quarter in the form of come ins. They take much longer because some of it are, as Jim said, internal politics and budgeting and who's going to pay for it. But when they do happen, they are then -- I'll just call it a next important step in our journey with these customers, many of whom have been using our technology for decades.

When you talk about the current pipeline being -- we are dealing with 20, couple dozen, or something like that. If you look at the ones that we are engaging with, it might be in a multi-year buying cycle. You're getting closer to the 50 and above, which is more along the lines of named accounts that we're moving too. Again, these things tend to be highly developmental.

Got it. Okay. Thanks for that. My one follow-up is on the GE partnership. Could you give us a little bit more color about some of the milestones in that partnership? Specifically in terms of when revenues might start to flow from it? Who's going to be selling it and target market?

Are you talking about Predix?

Yes, Predix.

What I would say is the initial steps relative to that relationship, Steve, are really going to be expanding the growth within GE itself in some of the places within GE where ANSYS historically does not have as broad a footprint as say some of the very early adopters, like aircraft engines.

Then over time we see that as an opportunity as their platform expands to then be able to offer our simulation as an important part of that Predix platform. But given that this was just announced, we see this evolving over time. But the first manifestation of that will really be expanding our footprint within the GE businesses themselves.

I would say the primary thing is -- the interesting thing is that this was both predicated of facilitated by the fact that it really is right in line with our stated product road map for the last two or three years.

The fact is it was something we immediately were able to plug into. It's an area we're going to invest in, but it's really not -- if you'd call it an investment area from the standpoint of cordoning off and siphoning off a bunch of different resource in a skunk works product.

GE has been a great customer of ours for a number of years. A couple years ago we actually announced we'd signed a joint technology development agreement with them to push this new technology. I don't think maybe people can't say exactly where all this technology is going, but nobody denies the fact that it's going to be very large. And being partnered with the best companies in the world has always been a really good thing for us on a long-term product standpoint.

Great. Thanks a lot.

Thank you.

Absolutely.

Ross MacMillan, RBC Capital Markets.

Thanks a lot for taking my questions. Jim and Maria, I understand the shift towards time-based license has a depressing effect on the P&L, but if I look at bookings that should mitigate that impact because we should capture what's going both into deferred and into backlog. The bookings number this quarter, I think, was relatively weak. I'm trying to understand six months ago we were talking about the potential for acceleration in the business. Obviously, the global macro is not what we thought it might be, but is there anything else going on in the business that's creating this, I guess what I view at least in this quarter as a softer bookings number?

Yes. I think, Ross, Jim address this earlier, but just in case there's other people who didn't hear it. If you are just looking at Q3 specifically, the decline is because of about $30 million worth of deals that were booked last year in the third quarter related to the Apache business, which were in fact time-based licenses. We booked them.

They will roll out into revenue over the course of two or three years, depending on the length of them. We knew that they were not going to renew them again this year. When big deals like that happen, they can cause lumpiness in bookings if you are looking at a period to period.

Actually, we look at those numbers too. We saw it and dug into them pretty quickly. If you take out that multi-year impact of the Apache thing, the bookings growth are right in line with the revenue growth.

Constant currency.

Constant currency. Sorry.

Okay. One question is to help my math. Do you have the FX impact on the deferred revenue balance sequentially? Do you have that to hand?

It's about $300,000.

Okay. So pretty small. That's great. That's all for me. Thank you.

Okay. Thank you.

Monika Garg, Pacific Crest Securities

Thanks for taking my questions. First, on the Apache side. If I look at none of the ED companies have yet called out any impact on their business for semi consolidation. They do talk about it could impact them, but you did talk about Apache. You are seeing some impact.

Question is, do you think maybe it's the competition from either EDA companies getting up in that field, or maybe as [semi does to] consolidates. They are also consolidating their EDA vendors and maybe given that traditionally the EDA vendors (inaudible) cadence mentor has complete line of solutions in that they are consolidating towards those companies?

What I would say is, traditionally the Apache business has been heavily, heavily influenced by the top 20 in semis. As these renewals come up, no doubt when two our four or six of their largest customers now become half -- no doubt the capacity that they used to consume when they were standalone companies is not as great as the capacity that they are going to consume going forward.

That is why we have tried to take a look at where that technology and where those customers are going into the future, and have acquired technology like Gear to drive the use of that technology to solve the problems of the future, as well as created new uses and workflows with not only their technology but other technology we have in our portfolio to also address the needs of customers. And some customers who were not traditional Apache customers is where we see expanding our footprint with that technology. It is having an impact, but we believe there are opportunities as we shift our direction and our execution to reaccelerate some of the growth in that business.

Thank you. The follow-up. You've talked about double-digit top-line growth, but if you look year-to-date constant currency it has been less than 10%. And your next year outlook is still midpoint about 7.5%. Could you talk about is it that given that your business is not close to $1 billion top-line that it is harder to grow double-digit or is it something else? Thank you.

No doubt it's always hard to grow double digits. But as we look at some of the areas of the business that are softer, some of them are no doubt. They are macroeconomic and there's nothing we can do about it.

Jim mentioned Russia a few years back was tremendous growth for us. However, given the situation, there's not a lot of technology that's being deployed in Russia these days, at least not Western technology. But the things that we are doing on the direct sales capacity and signs that we are seeing, give us confidence and North America, Germany, and Japan; which are our three largest markets, all growing constant currency double digits.

We know it can be done, but we've got work to do in the elements of the business that are not producing. Putting aside macro issues, particularly in new business production, in the channel. It's just got to get better or we're going to have to do something about it.

But we still have confidence that if the macro were working and in our favor and the things we know could -- let just say from an execution perspective be stronger -- we could get to the high-end of the guidance as opposed to the midpoint. For now it's early and we're trying to give you a spread that we believe compensates for the things that will go well, as well as the things that won't go so well.

Thank you so much.

Absolutely.

Arvind Ramnani, Gordon Haskett.

Hi. I wanted to follow-up on Steve's question and address it a little bit more broadly. You talked about targeting the wider engineering community. You have various efforts to expand your target market base, but how are you measuring your progress? You are obviously not going to go from 10% or 90% over a short period of time, but how are you making progress to reach that broader client base?

The main thing we look at is the -- as we've always shown at Investor Day when we show some of the statistics. Obviously with 45,000 customers they don't all unveil all that. We couldn't handle all that data, but by sampling the top 100 or so that roughly represent around 30% of our business -- a really good sampling technique -- we look at the average penetration by number of users.

There's one thing that talks about you might have people buying higher levels of software and we've had that happening. We've seen HPC continue to grow. But looking at the number of users that are growing in those things.

The one thing that's pretty evident is that, entering into an enterprise license agreement almost always signals a broader base of those people. Again, if you will, it's moving down that pyramid of usage as opposed to it's not just one big step function of opening up the floodgates.

Great. That's helpful. Similar question on your broader opportunities in Internet of Things and your products. Clearly these may be smaller revenue contributors in the near-term, but over time they may end up contributing a bigger portion of the growth that comes from these new initiative. What are some of the internal things you use to measure success with these new initiatives that you are investing in these new initiatives?

For instance, there are different centroids. While the Internet of Things, for instance requires as we mentioned before, not only the electronic functioning but the structural reliability and survivability. We see those things -- the first wave of those though -- we look at those product lines and where we see growth by different customers going in there.

For instance, it started off with the electronics business unit has been a little bit stronger for us in the last couple of quarters moving the dial in that particular direction.

The second thing is, we'll be able to track is because we put together some specific packaging that relates to this overall concept of a comprehensive view of a chip packaged system. Being able to look at how those packages -- how quickly they gain traction as sellable entities because those are really focused towards some of these end-user use cases.

Arvind, one other thing I will add when you talk about some of the initiatives, and you have seen some of our recent announcements around startups. Startups they have a very short lifecycle. They can either make it or they don't make it.

So simulation is a huge opportunity for them to take their brilliant idea and either turn it into something, like the Nebia shower, or go out of existence. We've been also targeting not only our larger accounts where we know we are underpenetrated and there is a huge opportunity to grow within those, but also at the other end of the spectrum we are focusing on things like startups. As well as the new academic offering that we put out a couple of months ago relative to targeting future users in academia through giving them access to technology so they can get familiar with ANSYS technology.

We are doing a number of things at the high end and at the low end to try to continue to democratize the use of simulation across the broader population.

Great. That's very helpful, and good luck for the rest of the year.

Thank you.

Jason Rodgers, Great Lakes Review.

Hi, this is Dave Stratton on for Jason Rodgers. When I look back at the head count, if I go all the way back to March, it was at 2,750 and now it's at 2,760. I was wondering why that is marginally not very different considering all the hiring you have been doing?

We do hiring, but we also -- if you think about we've been over the past several years also acquiring. When you acquire, there are natural -- I'll call it redundancies -- and some of the go-to-market changes that we have been doing. It's not just incremental hiring. Some of it is also making changes in the organization that give us capacity to change our direction or to add talents that we need for the future.

It's not always just adding more heads. Some of it is extracting heads out of the existing business so that it gives us room as we move forward to think about what new talents and skill sets we need to add to the organization.

All right. Thanks. As a housekeeping issue, can you break out the FX impact on your operating income and net income?

I think it's all laid out in the prepared remarks.

Okay. Do you have what page that would be on?

Yes, I'm pulling it up right now. It's on page 8. $17.8 million on revenue and $11.5 million operating income.

All right. Thank you.

That concludes our question-and-answer session. I'd like to turn the conference back over to Jim Cashman for any closing remarks.

Okay. First of all, I'd like to thank all of you for your participation on the call today and for your ongoing support of all we have been doing over the years.

Summary, much has been achieved so far this year from both an operations and financial perspective. However, we know that a lot of work remains to be done to maintain our industry-leading competitive advantages, we've spoken about a lot of those thanks to your question. We have to continue to focus on improving our sales and channel execution in those certain geographies that are lagging, and again we discussed that in detail.

In closing, I would just like to take the opportunity as always to thank the entire ANSYS team for their commitment to driving the results we just had, in addition to the ones in the future. In short, we remain committed to driving shareholder value by continually leading our industry with innovation and outstanding customer support with some of those great customers we've talked about.

We look forward to sharing our fourth-quarter and full-year results with you in February. Thank you very much, and talk to you in a couple months.

Thank you for attending today's presentation. You may now disconnect.