ANSYS Inc (ANSS) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS's third-quarter 2016 conference call.

(Operator Instructions)

Please note this event is being recorded. With us today are Mr. Jim Cashman, Chief Executive Officer; Ajei Gopal, President and COO; 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.

Good morning, and thank you, everyone, for joining us to discuss our third-quarter and the year-to-date financial results. But as always, before we get started, I'll introduce Maria Shields, our CFO, for our Safe Harbor statement. Maria?

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. They contain all of the key financial information and supporting data relative to our quarter and year-to-date financial results, and our business update, as well as our current Q4 FY16 and preliminary FY17 outlook and our key underlying assumptions.

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.

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.

And as you heard, Ajei Gopal, our President and COO, has joined us on the call this morning. Ajei will be providing some comments during the prepared remarks session of the call, and then we'd ask participants please to direct the business-related questions to Jim or myself. So, Jim, I'll turn the call back to you.

Thank you, Maria. After I provide a recap of the Q3 results that the team achieved, I'll turn the call over to Ajei for some introductory comments, as this is his first call as part of the ANSYS team. After which, then Maria will provide an update on the financial highlights, and our outlook for the balance of this year and our preliminary outlook for 2017.

So with that being said, let's see, for Q3 we reported consolidated non-GAAP revenue of $246 million, with solid revenue growth in Germany, Japan, China, and Taiwan, counteracted by some pockets of weakness in North America and Europe. Revenue for the growth for the quarter was impacted by an increase in our lease business, which grew at 7% in constant currency. This is in line with our comments from recent calls.

The shift in customer preference from paid-up to lease was most pronounced in the US and Japan, where we both saw right around 10% growth in constant currency in our lease business in the third quarter. This shift to lease is in line with our comments from the recent calls we've made, as I mentioned.

And with this in mind, perpetual revenue was down due to this shift, but it was also heavily influenced by consideration of, if you recall from our last third-quarter call, we had a significant perpetual deal in North America. It was actually over $7 million, and it didn't repeat itself this year, obviously, and we actually alerted to that. But excluding that single transaction, the perpetual business for the quarter was relatively flat when compared to last year's third quarter.

From an industry perspective, aerospace and defense, automotive, healthcare and biomed performed well, while energy and the materials and chemical processing sectors continued to lag. Importantly, our recurring revenue base continued to be very strong at 76% of total revenue for the quarter and year to date. In addition, with the deepening of relationships with our major accounts and the growth of our lease business, we continue to see a strong balance of deferred revenue and backlog, resulting in a Q3 record high of $485 million, and that's 11% higher than Q3 of last year. Again, this growth in deferred is a positive result of the shift to lease that we've been seeing.

Now, in the third quarter, we had 20 customers with orders over $1 million, including one customer with cumulative orders of over $10 million for the quarter. These 20 customers compared to 18 customers over $1 million in Q3 of last year, and that's what's happening at the high end. But we also, at the SMB perspective, saw an 8% increase quarter to quarter in the number of new logos that were added in. Part of this improvement is from some new channel partners, particularly in Asia, that we've added, as well as some good early results from our newly introduced start-up program.

Non-GAAP gross and operating margins for the third quarter were a little bit over 89% and 49%, respectively, which were above our expected range. And that was driven by a combination of our own third-quarter spending seasonality, but also our continued efforts around cost discipline.

Non-GAAP EPS for the quarter was $0.95, or a 6% improvement over the $0.90 that were achieved in the prior-year period. And it was actually $0.01 above the high end of our guidance range. Operating cash flow for the third quarter was approximately $82 million, basically -- and also I'd say, continuing our commitment to return capital to shareholders, we repurchased 1.2 million shares during the quarter. And that makes it 2.7 million shares year to date.

Now also, those are the numbers, but during the quarter we had some other notable accomplishments, which I'd like to highlight. First was the August release of ANSYS 17.2. It basically just continues to offer this steady stream, a wealth of new functionality, including enhanced multi-physics coupling, new work flows, particularly for things like antenna design and things related to the Internet of Things.

The latest version of the ANSYS portfolio also enables engineers to combine advanced simulation technology across physics, to address complex engineering challenges inherent in today's smart and connected products. And on top of this, of course, we continue that common theme of continued ease of use to bring this to a much broader audience. So if you visit our website, you can get a lot more details on this release and other updates.

But when you do hit this website, one thing you might note is the increasing opportunity for ANSYS in systems. And as we continue expanding our leading simulation software platform, it's important to include capabilities that manage and streamline complex system engineering processes. And in light of this, you might have also noticed that we announced this morning the acquisition of medini Technologies. Now, this is a Berlin-based leading provider of system safety analysis solutions. Medini brings a world-class engineering team, of course, as well as solutions for systems safety analysis, reliability engineering, and quality management.

Its flagship solution, medini analyze, implements core functionality safety analysis activities, and they integrate them within their customers' existing work flows. This is especially important in the automotive industry, where medini really has been widely deployed and has gotten its start. Just imagine the systems and security issues surrounding all these new trends toward autonomously driven vehicles and drones, just for example, and you'll get an idea of what this has in the design of overall comprehensive products. With our strength in electronics and aerospace, we're also very well to expand the usage into those industries as well, to help customers in those other global industries innovate their products, probably in ways that they really had never envisioned.

So as you're also aware, we're going through a managed CEO transition, and it's part of a comprehensive multi-level initiative to help ANSYS realize opportunities over the next 20 years. So I've come to know and admire Ajei as a fellow Director, and I have no doubt that his outstanding leadership, and his unique perspectives and appreciation for the ANSYS culture, people, and organizations make him the right choice to serve as our next leader during this next phase. So as I move to the Chairman role, it's been a pretty darn smooth transition process.

So in keeping with that, I'd like to now welcome Ajei to the call, and have him maybe provide some commentary around his first couple of months here as part of the ANSYS team, and some of the operational priorities that he, his team, and all of us will be working on. So, Ajei?

Thank you, Jim, and good morning, everyone. I'm absolutely delighted to be here. I've been President and Chief Operating Officer here at ANSYS for about two years. I had a running start after over five years of tenure on the Board of Directors of ANSYS, and I've continued to learn more and more as I interact with employees, with customers, and with partners.

I am more excited than ever to be with the Company. Jim's vision and his tremendous leadership have set a high bar indeed, and I'm committed to building on this base of excellence. With new opportunities in big data, in the Internet of Things, and additive manufacturing, and in the cloud, to name a few, ANSYS will push the boundaries of innovation to help customers solve their most complex design challenges and also to broaden the use of simulation. I look forward to meeting with you in the next weeks and months to come, as we at ANSYS continue to define the future of simulation.

Now, from an operational perspective, let me update you on a few key initiatives under way. We are continuing our search for a new Global Head of Sales. We are working with a leading search firm, and interviews are under way. We have spoken to a number of highly qualified and seasoned candidates who have strong global sales experience, operational rigor, and enterprise account skills. All of these attributes are very important as we continue to drive the productivity of our global sales force, and build the operational foundation to grow and scale the Business. We will provide an update as soon as the search process is completed.

We are also in the midst of our annual planning process, and working through all of the detailed plans relative to products, go-to-market strategies, pricing, hiring, and other critical investment areas for 2017. We will share more of those details on the February call when the plan is finalized.

Finally, we went live on the first phase of our planned migration of our legacy CRM platform to a more modern salesforce automation platform. This is another important step in a multi-phase project to update our business infrastructure and processes. This will give us better visibility into our sales pipeline, it will improve our sales forecasting, and it will support the future growth of our Business. And I want to thank the ANSYS team involved in driving this important initiative.

I look forward to updating you on our final year-end results, and providing further details on our hiring, on our business progress, and on our 2017 growth initiatives on the next call at the end of February. I will now turn the call over to Maria to discuss our fourth-quarter 2016 and our preliminary 2017 outlook. Maria?

Okay, thanks, Ajei. As we outlined in this morning's press release, we've initiated our outlook for Q4, starting with non-GAAP revenue in the range of $263 million to $272 million, and non-GAAP EPS in the range of $0.94 to $0.99.

With respect to our previous guidance for FY16, we've narrowed the revenue range and factored in the Q3 results. This translates to our updated outlook of non-GAAP revenue in the range of $981 million to $990 million, and non-GAAP EPS of $3.59 to $3.64.

Our guidance for Q4 reflects a number of assumptions based upon our current view of the Business. These include a continuation of the existing overall macro environment, in which we and some of our key customers will continue to experience growth or other business challenges in certain geographies. These situations may lead to delays in closing larger transactions or prolonged sales cycles.

An increasing mix shift towards leases, particularly in our most mature markets in the US and Japan: This trend is accentuated by the closing of additional enterprise agreements, which, while expanding our relationships with key customers, are having the effect of shifting near-term revenues out over the term of the agreement. And continued weakness in certain parts of Europe, particularly in the UK, Russia, and France, as well as in South Korea and in the state-owned enterprise sector in China, the latter due to naturally occurring buying cycles in the Chinese government's five-year plan.

Taking all of this and our current planning efforts into consideration, our preliminary guidance for FY17 is non-GAAP revenue in the range of $1.02 billion to $1.06 billion, and non-GAAP EPS of $3.67 to $3.89. As Ajei mentioned earlier, we are still in the process of working through all the details of our 2017 operating plan. But for now, we're assuming no significant changes either way in the overall macro climate as we exit 2016 and head into early 2017.

This is our preliminary high-level view, and we will be in a position to share more of the details with you in February, as we finish out 2016, and the 2017 plan is actually finalized. But at a very high level, our guidance assumes a slight reduction in operating margins for 2017 due to planned increased investment in R&D initiatives in the areas of cloud, big data, and systems; investments in sales and channel enablement and some necessary company infrastructure. We're also assuming a slightly higher tax rate in the range of 33% to 34% that's a result of ongoing benefits associated with some entity structuring activities that we accomplished in 2016 that are expected to be lower in 2017. And lastly, our 2017 preliminary outlook does factor in the impact of the medini acquisition that we announced this morning.

Further details around specific currency rates and other key assumptions that have been factored into our Q4 2016 and FY17 guidance are contained in the prepared remarks that we posted on our Investor Relations homepage earlier this morning. With that, operator, we'll now open up the line to take questions.

Thank you. We will now begin the question-and-answer session.

(Operator instructions)

The first question comes today from Sterling Auty with JPMorgan.

Thanks, hi guys. During this transition with the head of sales, is there any other either sales management or sales rep turnover that could also be contributing to some of the weakness that you saw in bookings and business?

No, Sterling, it's pretty stable beyond that level, so nothing beyond like the normal movements in the sales organization. Now that being said, we are going to be looking, as both Maria and Ajei mentioned, we've already started to see some positive upticks from the ELA and the major account initiatives, those large orders we alluded to earlier.

We've also talked about at the lower level. Now that requires -- we've been encouraged by those results. That requires some slightly different investment that Maria signaled on there but we want to be prepared for that, because it is starting to pick up at the low end too. And quite frankly, the enterprise sales motion versus the transactional one is a little bit different.

And, of course, that being said, as we continue to evolve that, as we have for the last decade, we'll continue to assess all levels and activities of the sales team and continue on.

If you look at it, there's a couple of other things where I'll say. We're going to continue, as we've seen, we've seen positive movement in the channel activity. And we're going to continue to further that, not only strengthening our existing channels but adding additional channels, particularly in those developing areas in there.

And then, quite frankly, there's a number of other different initiatives. So maybe in those -- even apart from the channel in Asia, there's some other opportunities that have been looking pretty favorable for us there. So it's going to be a continual building in terms of preparing to harvest that opportunity.

Okay. Then the one follow-up would be, given that you're going through the manager transition, CEO, head of sales, you already have a significant part of the business that's leased. You have the new startup program where you're try to make it less expensive for start-ups to get in to the simulation area. Any further consideration or thoughts around taking the business much more to a subscription and less off the perpetual, especially following what we've seen with Adobe Autodesk and now PTC?

I think we're going to stay on -- well, again, that's something you continue to evaluate, because we still see a lot of people that are still interested in the capital thing. Right now, we're really worried more about adoption and not creating barriers to adoption.

That being said, some other companies that have really tried to push that model, they've actually seen declines in revenue and the like. We're not trying to force that one way or the other. But as the market trends pick up, we're definitely seeing that.

That caused -- that had a short-term, you can see the short-term impact that it had on some of the growth rates. But with our higher lease renewal rates and the growth and the deferred balance, you can also see that we're building up a pretty good base, which over the long term, actually adds to the growth potential for us as we have -- as business renews versus having to be replaced before growth even starts.

So we're still -- and with that being said, on the perpetual side, our text business has continued. It actually was strong before, and it's actually even a little bit stronger than its been before on that.

So essentially, in our [parlance], if you think back to our business model that we put forth about 15, 20 years ago, it was really subscription before subscription was even called that. And that met a high lease and these enhancement subscriptions through our text. We've been continuing to see that, and that's one reason why we're already pushing up into the upper 70% of recurring base.

So, in that respect, we've always had a very strong subscription element. Right now, we want to have the multiple avenues that allow people to adopt, because once they adopt our software, it's incredibly sticky and it stays and it normally is growth.

Almost every ELA that we've been involved with is part of ongoing growth with our existing customers. And so really getting that penetration and getting our footprint in there is one thing way what we want to do.

But that being said, we're very cognizant. We've always been very open. Lease has been a big part, subscription has been a big part of our model for decades. And it will continue to be so. And as the market tends to shift that way, it will move that way. And as cloud starts to become more prevalent in our particular sector, which it's not strongly the way other sectors are when that happens, we'll be well positioned for that because we already have the software and the investment for that.

Thank you.

The next question is from Ken Talanian with Evercore ISI.

Hi, guys. Thanks for taking my question. I noticed in your prepared remarks you mentioned that Caterpillar and GE have consolidated simulation on the ANSYS platform. Along with that, I was curious, is that fully reflected in the financial impact on your numbers? I'll start with that.

Those are examples, but keep in mind, those are ones, as companies start to adopt that, they build that. And then from that point forward, it becomes part of the run rate base we're talking about. So you'll see it reflected in referred revenues. You'll probably, actually in some of those, you'll see it also referred in the backlog for those further out areas.

Basically those have -- to my earlier point about ELAs and getting that footprint on these early adoption phases, you pick two customers that have been with us literally for decades. And those were with older generations of the technology, but as we've gotten into this new era, those are a couple examples of ones, and some we can't mention by name. But that's just part of what they're growing up.

What you're seeing there is not only growth in their continual usage of the traditional software, but you're also seeing an enlargement in the portfolio, so using this broader platform. Because, there is a strong advantage to being able to get multiple tools all working together in concert, particularly as you're trying to get complete systems to be operating.

Okay. And along those lines, how should we think about your M&A strategy? Are there particular physics where you feel acquisitions would accelerate your competitive position?

Well, I'll tell you right now, and this is going to sound like the same thing I've been saying for years. And the fact is M&A is one very part of our -- it has accounted for [one-fourth] to one-third of our growth over the last 15, 20 years. It is a great way to add additional strong members to our team and also proven solutions in there.

So if you think of it, every one -- we have leadership in every one of our individual fields of physics, but each one of them is only a shadow of what it's going to need to be in the next 10 to 15 years. Which means, we're going to continue to invest on the R&D line internally. We're going to look at ways of augmenting that with external acquisition. So every one of our physics can be -- is going to be strengthened whether it's internally or externally, and we'll look at the best mix of those things to go on.

That being said, now, you look at the other initiatives as apart from just physics. The proof that we are getting from both our cloud offerings, our platform offerings, and overall systems orientation are areas where we're going to also play. So every time you hear a buzz word term out there that sometimes almost gets over used, Internet of Things, additive manufacturing, 3D printing, big data, all those things, sometimes we overuse those throughout our industry. But the fact is, there are major customer-interest initiatives and value movements that we can take place on that.

So we're going to continue to move in that way and we're also going to be looking for best partners. We've been doing it continually. We always are looking at 20 or 30 companies on a continual basis, either for partnerships on a technology standpoint, acquisition, marketing relationships, anything that basically helps get this value to the customer. And I don't see that changing any time in the near future.

Okay. Great. Thanks very much.

The next question is from Steve Ashley with Robert W. Baird & Co.

Thank you very much. Jim, I wonder if you could ask Ajei what his early feedback has been from customers. I'm actually just kidding. In terms of --

He just gave you a thumbs up. He just gave two thumbs up. So you get a free question from there, but okay.

Okay. Good. It's going well. So I'm going to ask about ELAs. How many have we done to date? And when you started the year, you were hoping to maybe get to 15. Can we get an update on what that might look like?

To be overly precise, we weren't hoping to get to maybe 15, we were looking to get to 15. If you look at it right now, the scorecard is we actually had eight through the first half. You don't expect many in Q3; it's a sleepy corridor.

But we actually had one in Q3 and I'd say we had one that just squeaked out of Q3. In fact, it's one of the biggest ones that we had. It actually closed in the first week of October.

So you look at that scorecard right now, and we're sitting at 10, where Q4 was always considered the big quarter because, A, these are big things. They have major budget impacts and long selling cycles, even to established customers. So, in general, and quite frankly, the pipeline looks really good.

Now, again, the pipeline is much bigger than five; however, when you have anything this big and this kind of budgetary impact, they may slide a month or two, some of them. So the pipeline still supports that, and we've got increasing interest drive in there.

I'll take a breath now, but that's ELAs, again, at the high end going very well. As we mentioned, we're just starting to get some traction that we want to propel in the small to medium business. But ELAs moving right on target, maybe even a little bit ahead of where we thought we'd be.

As we look out into next year, not looking for exact numbers, but would that be something you would expect to maybe grow from the numbers you're doing this year? What does your guidance assume?

Well, we haven't gotten to the guidance of that, because, quite frankly, we're closing out Q4 and we're doing an awful lot of planning. Even when we give our preliminary look into 2017, we're not giving guidance on 2017, we're giving a preliminary look, as we always have.

In general, if you see the pipeline is going up, we also have a pipeline of these for 2017. And the pipeline for those look very encouraging; however, they're at very early stages in the selling cycle. And, quite frankly, you have to get through a point where you also know that the customer has not only bought into it conceptually, but they started to build it into their budgets and the like. And that kind of information it's very premature for. But pipeline in terms of sales, interest, and things of that nature, it's staying on a positive track for us.

Excellent. Thank you.

The next question comes from Monika Garg of Pacific Crest Securities.

Thanks for taking my question. Given you're seeing a shift toward the hard leases, going forward, do you think your release revenue growth, may be double digit and perpetual is more like flat to maybe down?

I don't think we're at that level of precision right now. But for instance, we know that, first of all, seeing the leases going up, the lease bookings were, like in high single digits, both for the last couple of quarters and also in the current period. So we've seen positive things there.

And keep in mind, mathematically, for the lease business to grow at that level given the fact that it's layering on top of accumulated leases of the previous couple decades, it takes a lot of new lease business to move that cumulative base up. So that's why we've been seeing that.

The other thing is when something moves to lease, keep in mind that over a 12-month period that maybe a lease is, just rough numbers, is maybe half of the billing of a perpetual. And given the fact that in the current quarter you only get to recognize like about one-twelfth of that, one shift of a perpetual to a lease has a huge impact on the short-term revenue.

However, you also see that now that goes into deferred balance, and you've seen the double-digit growth in the deferred balance for Q3. It takes a little bit of time for a lease shift to move forward into that.

Likewise, we're not trying to expand sales cycles by telling people that if they had capital ready to spend that they have to now force it into a period sale. That's one reason why we've tried to let this take its own course, which is why we've maybe had less disruption than some of the other people trying more significant binary shifts. But we see those things moving up.

Now, at that point, keep in mind, once something goes into lease with a high renewal rate, you have the basis of, if we sold a perpetual this year before we could show growth in perpetual next year, we have to replace what we sold last year and then sell new stuff on top of it. As we move into next year, there's a really high probability that, that lease continues to renew. So we're already at ground level there and everything is additive.

So, from that standpoint, it allows us to build that up. However, the lease space will take a little bit longer to build up to double digit in keeping with the opportunity. And we still believe that the opportunity is there, but it will take more time to build up because it's layering on top of a huge accumulated base to begin with. I know I threw a lot of stuff at you, but it's all related to that. Did that cover?

Yes. As a follow-up, generally, you have made small tuck-in acquisitions. Would you be interested to enter maybe semi-design verticals? You have [power simulation] to [apache] acquisition, but would you be interested to enter much wider semi-design [ETA] tools market?

We're interested in all aspects of simulation, and anything that allows products to -- keep in mind, if you actually divert from any particular target, and say, we want to be able to complete a virtual prototype of a complete system in the computer and put it through its entire duty cycle. You get a feeling of why years ago, nobody thought embedded software was important. Well, embedded software is a component in a complete operating system. That's why it makes complete sense. And you see how the work that we did in that actually helped drive our early successes in Internet of Things and the system simulation things.

So, that being said, we will be looking at all aspects. Because every portion of our portfolio, even if it's leading now, has to get a lot stronger over the next 10 years.

That being said, you started your question by saying the number of -- that we're focusing on tech tuck-ins. That just happens to be how it played out over the last couple of years. But if you look at our history, every few years we had some very -- we had, like, every couple of years, we might have a significant add-on. Then what we did was we focused on doing a very good job of integrating and really extracting the shareholder value.

And just because they don't fall out of the trees on an annual or quarterly basis, we're still always continuing to examine those and we will continue to examine those. So I would not at all be shocked to see some larger transactions. I would not at all be shocked to see a continuation of tech tuck-ins, but it's all part of building toward that strategy. This has always been an exercise in building out our product vision; it's not been an exercise in financial reconstruction. To be very unambiguous.

Got it. Thank you so much.

The next question is from Jay Vleeschhouwer with Griffin Securities.

Thank you. Good morning. Let me start, Jim, with a near-term question, and then follow up with a longer-term question related to business model and technology. For the nearer term, your bookings in the third quarter were down sequentially from Q2 by a more than usual amount when you look at prior years, second to third quarter trends in bookings. Was that, however, more or less what you had anticipated absolute bookings would be? Looking out, at least into the fourth quarter, could you talk about how you're thinking about your pipeline specifically for industrial, electronics, and auto? And then the follow-up question. Thanks.

Okay. Boy, so I'm trying to parse down. First of all, we might be debating small points here, but I wouldn't say, first of all, that it was down more than historical. But secondarily, I would say it was right in the line of what we were thinking, given the fact of, if you take into account things that might have been forecasted in perpetual that came in as lease, and you'll -- probably affected 1% to 1.5% of the growth rate.

But if you look at our view of current bookings, and keep in mind, we are still committed to coming up with a meaningful annualized contract value, some of those other metrics we talked about. If you look at it, we were in the high single digits for current bookings, and that's taking into account the reduction in long term, deferred, and backlog. And also trying to launder out, if you will, the timing of ELAs; they're just not as predictable since they're relatively new. By the way, the high single digits, that was a constant currency number.

Also, from the best numbers we have, the lease bookings were also in that high single digits, around the 8% or so. And that's been for about the last two quarters and taking on this concept of the annualized contact value. Essentially -- but again, these overall bookings in the lease, they've been counteracted partially by some of the paid-up shifts, and that's actually been true for about four quarters now. And I think that's -- we've been talking about it for at least that long anecdotally.

Jay, to your one question relative to the Q4 pipeline around those industries, if you take a look particularly, I'll call it the larger deals, heavily influenced by aerospace and defense, electronics, and industrials where many of our longstanding customers have big Q4 renewal activities around their annual budgeting cycle.

Jay, you'll have to repeat part of that question. The last part of your question, you were ask -- I think Maria started to address that, but you were asking something about on the industry sectors?

Maria touched on that.

I didn't know if that covered it for you.

Yes, so the longer-term question is as follows, and I appreciate that you're still working through the specific planning details for pricing, products, and so forth. But pursuant to what you were saying at the analyst meeting in June, is it still your general intent to broaden the portfolio across a wider range of functionality and price, particularly to engage a larger number of users, more so than in your core markets? So that's really the longer-term strategic question as to what you're meaning to do, tying your technology roadmap to the business model.

The bottom line is, if you look at it, probably if I had to categorize it, we probably, in the past, we probably had too many SKUs and too narrow a band. We'll probably have a broader band with fewer number of SKUs going forward. But it's really meant to have a broader coverage, both across industries and into things that comprehend what happens when you get into much broader user segments, even within existing companies.

Thanks very much.

Thank you.

The next question is from Anil Doradla with William Blair.

Hi, guys. Thanks for taking the question. Big picture question, Maria and Jim, you guys have provided preliminary markers for 2017. And when I look at that, I look at some of the issues that are playing around in the Company story into three buckets. You've got the ELA dynamics going on; that has impact on revenue, obviously, bookings and all that stuff. You've got the macros uncertainty playing around. Then, obviously, you've got the change in sales.

So what I'm trying to understand is that the preliminary outlook, Maria said that it sounds like you guys are still working through it. But I just want to understand the degree of conservativeness, the way you're looking at 2017, is that different from how you looked at the guidance or the outlook from your previous years, given that there's perhaps a little bit more uncertainty in the models? Can you help us appreciate that aspect?

Sure. I'd say there probably is more conservatism in there, but you -- think of the moving parts. A, we've been in the process of a managed, sane transition, but we wanted to make sure that, that hand-off continues to operate well.

We are moving up the maturity curve of the sales force enablement, but as we've mentioned, it happened a little bit slower than we're planning. We're not just plugging in an arbitrary number in a spreadsheet to hit a number. But we are expecting to see sales force productivity increases, but we're going to take some time on that.

Also embedded in the numbers are, we actually have a little bit stronger -- we're assuming, again, even though we're not forcing the market, we're assuming continued shift toward lease, like we've mentioned the last few calls. We're not saying it's all going 100% there. At some point, as you get there, it may want to rebounce back and come -- the market can be funny that way. But we want to be able to serve the market in any number of ways that the market wants to be served, given that they've chosen our software.

But when you continue to have this perpetual to lease preferenceship, as you start to move into a cloud model, we've already demonstrated that it can mean a couple of percent of short-term growth rates, but it can also provide some very nice expansion of the long-term deferred and backlog of models, moving in to the double-digit growth there, which long term, is a very good indicating sign.

So those are shifts that we see going on, and given the fact that all of those would be positive vectors for us, but they're going to happen in different mixes, we wanted to have a very strong operating model that we could continue to stick to and something that didn't -- let's say, didn't ransom the long term for any short-term fix.

Great. And as a follow-up, clearly a lot of transitions going on in the sales force. The average sales guy typically works for his own incentives. And given the change in management, what is the message and what kind of incentives are you giving to these individuals to make sure that it's business as usual, double down on your efforts, rather than some of these guys trying to figure out how their new compensation is going to be structured until they don't figure that out, they're just not going to put in the efforts?

Well, by the way, we've already got some things in play right now. And by the way, that's been done with the existing in-place sales management, so there's not going to be a whole lot of surprise there. There's been a number of other structural things, though, that we've done in terms of consolidating some of the sales ops so there's less chaff and chaos in some of the communication of things. Not that it was there before, but I'm just saying it's a much more coherent distribution capability along those lines.

But also, you can see that one thing that we've done is that there's different types of sales psyches that are better going after different models. And if you recall, like two, three years ago, we had a person in the territory, they tried to serve all markets. Well, it's tough going after a lot of the small transactional start-up S&B business at a relatively low rate one day and then turning on and being this maestro selling at the $1 million-plus level.

We've been able to focus a little bit more on that. And as all of us mentioned in some of our introductory comments this morning, we've seen some strong interest in the small/medium business. The growth in new logos, we've always had a healthy add, but I was surprised at the uptick in that. Very encouraged by the program and the startup program. But those are smaller -- different go-to-market movements in there. So we're going to continue to move along those lines.

Thanks a lot, guys.

Thank you.

Our next question is from Shateel Alam with Goldman Sachs.

Hi, thanks for taking my question. In your prepared remarks, you talked about increasing R&D investment, and you specifically mentioned cloud. Can you just talk about what exactly you're investing in, in terms of products and capabilities, and whether or not your margin guidance implies that you move beyond the 50 or so pilot customers you have today?

First of all, the easy one is, yes, we're planning on moving way past the 50 pilots. If you think about it though, the cloud has -- to be a fully democratized open environment, it has to move quite a bit beyond -- if you look at it, we've got the enterprise cloud model. It was kind of provisioned. It was almost a hardware displacement model where somebody could implement it inside their internet or they could provision it. But it was basically getting access to additional computing cycles but still acquiring the same way.

As you start to move toward multi-tenant and some of the other situations that allow it more to be more on tap, those are the areas that we really want to accelerate along that line.

Now also included in that are if you're going to move in to that market, it's not the traditional heavy upfront investment that the customer is buying into so we've invested in learning management systems that allow people to very quickly, at distance, at their own pace, start to learn the software. We've been talking about the ongoing push of ease of use. That's not like a one-and-done release. Think of how long ease of use had to move in the PC market from 1980 up until even now, like over 30 years. So there will be continued progressions there, but we want to do investments along those lines. All of those would relate to cloud type of activities.

Got it. Thank you. That's very helpful. Maria, just one for you. On the last call, you said you expected free-cash-flow growth in 2017. Do you still expect that considering the level investment you're taking on and some of the lower margin guidance you've put out there?

Yes. So at a very high level, as we have articulated throughout the call, we're still working through the details. But for now $370 million to $390 million of free cash flow.

Great. Thank you.

The next question comes from Steve Koenig with Wedbush Securities.

Hi, ANSYS. Thanks for taking my question. Maybe one really for anyone here, and then a follow-up for Ajei. Granted, the shift to leases makes it a little hard to gauge your performance in the quarter, and more generally, in trying to get clarity on your real trend growth. But maybe to parse it out a little bit, how should we think about your bookings growth trend, maybe as reported and if you were to adjust for the mix shift? Which I think, Jim, you suggested that's a 1 or 2 point hit.

So and relating that to the quarter, to put a finer point on it, is 3%, is that below trend or is that about right, meaning maybe a 5-point adjusted growth? How should we think about this trend?

First of all, 3% is year to date, but keep in mind, that the thing I tried to say before in terms of the current bookings, again, view those as the upper single digits, around that 8% in constant currency. That's really what's going on.

As for the numbers, without telling everybody how to do the model, you can almost back out, if you took out the growth in the lease space from historical purposes, and then took that amount of money and then translate it toward the impact of what that might have translated to in terms of perpetual, you can almost reverse engineer what the -- what it would have looked like if everything had stayed totally unchanged.

But, with that being said, I'd still say that you see in the bookings, as we've mentioned, even as I mentioned, the lease bookings have actually been up in the upper single digits over the last couple of quarters and we're continuing to see those trends moving on also. So I'd say that we probably see that as being, for right now, the closest thing to the new normal.

So just to clarify, Jim, and I do want to get the follow-up for Ajei, but it's a pretty big gap between 3% and 8%, so what's the 5% difference? Is that all the mix shift? That seems rather large.

The main thing on that is when you're looking at that aggregate rate, you're including perpetual. And like I say, $100,000 perpetual that shifted to a lease is probably going to see about one-tenth or less of what that is.

Secondarily, on the bookings growth, again, don't forget, take out immediately that $7-plus million from the one big customer. We guided and that was never in our guidance, but you take that out and that was always considered a one-time -- not a one-time, but a not-going-to-be-repeated-next-year, all with hyphens, balloon kind of a revenue thing.

But that one -- and we said that last Q3 at the time that we were talking about that order and we reminded people last quarter. So I think you take that element out and then you consider what the effective part is on the lease base, on the lease conversion, and it pretty much explains itself out.

Got it. So the quarter was basically in line with where you all expected, it sounds like.

Yes.

Okay. I'll move to the question for Ajei.

Actually, he's not in the room right now, so we may have to save that for later. But we also wanted to get him introduced to these calls, a good chance to introduce that. But if you've got a question I'd be happy to try to tackle it as best I can, with Maria's help.

Sure. I'll put it out there. I was basically interested in getting his perspective on biggest challenges and opportunities facing ANSYS going forward as he takes over. I'm sure you all have talked, if you want to opine on that.

I think what we do is we can set up some time, over the next few weeks or so, we're going to start to build that up. And I'd rather not put words in his mouth, even though we haven't had a lot of time discussing it. In fact, it was a point of discussion during the recruiting process.

Right. Sounds good, Jim. Thanks very much for taking my questions, I appreciate it.

The next question is from Ross MacMillan with RBC Capital Markets.

Thanks for taking my questions. Jim, you said 8% on current bookings for the quarter. Do you have that number for year to date? And then, Maria, do you have the run-rate revenue at the Medini acquisition?

First of all, we don't have -- I don't have the number handy for the year to date, but it's obviously been trending in that same direction. And as I mentioned before, it's been one that's been going pretty heavily. It's heavily influenced by various timings of ELAs, some of the lengths of the time-based licenses and the amount of shifts in there. But that's part of the complexity of the calculations we're working through.

And for Medini, we're assuming roughly about $2.5 million in revenue for next year.

That's great. Then maybe just one quick follow-up, Maria, we have an impending FASB Proposal 606, which has some potential implications for revenue recognition, especially for software companies. I was just curious, have you done your preliminary work there? Is there anything to talk about yet there? Thanks.

So we are continuing, as many of our software brethren are, to deal with our independent accountants and also a third-party firm that are specialist in revenue recognition and working our way through that. What it is preliminarily looking like, albeit the FASB has not finalized all the details and the rules, is the legacy on-premise software providers, such as us, particularly for leases, there will be a portion that will be recognized up front as it relates to license key deliverables, and then there will be an element of ratable recognition relative to the ongoing services provided. Not unlike what ANSYS was doing back in the year 2000 when we had to bifurcate the initial delivery of software from the ongoing other elements that we delivered.

So that's the preliminary view. We are working through all of that, and when we have, I'll call it finality around the rules, we will certainly update everybody at that time, Ross.

That's helpful. Just maybe one quick question on that, if I could. When you think about that key delivery versus the recurring piece, would that -- if we think about it relative to an existing lease in that, would that put some of the revenue a little more up front than a smaller recurring piece? Is that the way to think about it?

Correct. That's the way to think about it.

Great. Thanks for taking my questions. Thank you.

Next question comes from Erik Karlsson with Boldenholm.

Thanks for taking my question. On ELAs, when speaking to existing ELA users, the general comment seems to be that the key reason to sign an ELA is to reduce the internal barriers and increase the usage of simulation. And indeed, most of the ELA users I've talked to, at least, say they have achieved that if not overachieved it.

Could you just help us with your view on that? If you look at the first bunch you've signed, so the first four, five, six ones, what level of uplift are you seeing in usage among those customers? And I appreciate that won't translate into revenue 100%, but directionally it should be the same way. Thank you.

Well, over time, it will translate into that, and in some cases, well, it's always been at least in the lower double digits and we've seen some where at least the usage pattern and things have gotten up in the 20%, 30% mark.

You asked about our view of it. Our view and why we conceived this program a while back was for exactly that part. Once somebody had decided that this is the path they wanted to standardize on, what we wanted to do was help them start to extract the value immediately, as opposed to going into a multi-month transactional analysis of exactly how much hardware, exactly which modules and what they should be getting. So it actually allowed things for a much quicker start and with a much more strategic sale, as opposed to just the typical tactical product acquisition announcements.

As a follow-up, perhaps of the existing ELA users, how many of them are in the so big usage that you actually get the true-ups right now?

Keep in mind, it usually takes about a year or so for going through. So it's normally in the second year that you start to look at that particular thing. But we have already -- let's just say we've already received those adjustments from the people who have been in the program for a couple years.

That being said, we're coming out of the Q3 and there aren't many things that were cycled around the Q3 evaluation period. Typically, tends to be end of year, beginning of year type of thing; Q4, Q1.

Got you. Thank you very much.

The next question comes from Gal Munda with Berenberg.

Hi, I have a few questions. The first one is just in terms of competitive dynamic, a lot of things are happening this year, especially Siemens becoming more aggressive in the market, acquiring the CFD provider. Also (inaudible) simply entering the electromagnetic space and then saying that it's a big area of focus for them for the future. So my first question is, do you see any change in competitive dynamic when you're speaking to customers, and has it affected you?

Not -- actually, the quick answer is no. Obviously, those products were out there before. On one hand, they maybe get a little less focus. On the other hand, they're owned by some large remedy, but it really hasn't translated in to any particular competitive dynamic shift from our standpoint.

I think the thing to keep in mind though, is that anybody can add one or two additional incremental capabilities, but it still doesn't get to that end goal of having a complete platform that covers the totality of things that are required in a virtual prototype of a complete product, so that type of thing. And keep in mind, once that's even done, there's not an inconsequential amount of work. And it's true for them, it's true for us, it's true for anybody in terms of how you actually now integrate those products and actually make them actually flow together such that they can solve the combined problem, not just be a set of disassociated pieces.

Okay. That makes sense. The other question is just on Aim. It's not a new product anymore. Can you just comment a bit on the demand versus expectations for the first few years, and what the volume has been versus what you expected? Who's the typical user? Does it mainly come from existing company that potentially want to implement simulation further in the company to include more engineers? And also what are expectations for the ramp up for the next few years?

Again, Aim was always intended to be that starting push into the usability. But what we've been able to do and things that we are excited about is -- and I don't want to preannounce a lot of things, but the bottom line is that some of the things that we learned from the introduction of Aim has turned out to be very strong ease-of-use adjuncts and front ends to our traditional legacy products, which companies are standardized around.

So the bottom line is as a standalone product, it has some different advantages. But it's largely been in some of the newer and emerging markets. But, in general, what we've done is taken the best parts of that and made that available to our overall broad platform type of capability. And we see that as being a good, long-term direction.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Jim Cashman for any closing remarks.

Thanks, everybody, for the questions. And as you know, this is my final earnings call, technically, as the ANSYS CEO. So it's with mixed emotions that I want to thank all of you for your participation in our calls over the last 16, 17 years. And also, for your ongoing support of ANSYS and our vision. It's been a serious pleasure getting to know and work with all of you.

And I'd also like to take this opportunity to thank the entire ANSYS team for all the hard work and commitment, and also welcome the newest members of our team from Medini Technologies. We've built a world-class business and we've led the growth of simulation for over 46 years. And I look forward to many more years of growth in my new role as Chairman of the Board.

So much has been achieved so far this year from both an operations and a financial standpoint. But as you've always heard us say, there's a ton of work that continues to be done to continue to maintain our industry-leading competitive advantages and really drive toward the opportunity that we're firmly committed to.

We'll remain resolutely focused on improving our sales and channel execution, as we talked about on this call and your questions. And particularly in those geographies where we know that we could be performing better and that we'll make any necessary changes to better position ourselves to capture the opportunity for the next 20 years. So I can assure you that Ajei and I, as well as the entire management team, are dedicated to continue to driving both stockholder and customer value by continually leading our industry with innovation and outstanding customer support.

So with that, I thank you very much, and the ANSYS team will look forward to linking up with you over the next weeks, months, and on the next call in February. Thanks a lot.

Thank you, Mr. Cashman. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.