The ANSYS Second Quarter 2023 Earnings Conference Call is taking place, and is being led by Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Kelsey DeBriyn, Vice President, Investor Relations. The earnings release, related prepared remarks document, and link to the second quarter 2023 Form 10-Q have all been posted on the homepage of the Investor Relations website. Ajei Gopal opened the call by discussing the momentum of the first quarter of 2023, noting that Q2 was another excellent quarter for ANSYS in which they beat their guidance across all key metrics, with double-digit growth in ACV and revenue.

ANSYS had a successful Q2 with strong growth in their top three industries: high-tech and semiconductors, aerospace and defense, and automotive and ground transportation. They also signed a long-term 8-figure agreement with a Japanese industrial company and a nearly $57 million multiyear agreement with a US aerospace and defense company. The CEO highlighted the importance of ANSYS solutions in sustainability and the innovation they are driving across their multiphysics portfolio.

The aerospace industry has seen a resurgence since the pandemic, and ANSYS simulation is playing a key role in this transformation. Companies can now choose from traditional aircraft fuel or alternative fuels, including hydrogen, as part of their sustainability initiatives. ANSYS simulation is also being used to boost aircraft efficiency, such as with a biomimetic coating that emulates shark skin to reduce fuel consumption and carbon dioxide emissions.

ANSYS and OneSky Systems are collaborating to create AI-based software to streamline and optimize the development, validation and certification of autonomous advanced air mobility systems. At the Paris Air Show, ANSYS customers such as Rolls-Royce showcased how they are using simulation to reduce the time it takes to perform a thermomechanical model of gas turbine engines from 1,000 hours to less than 10 hours. Simulation is also playing a critical role in the space sector, as it is the only way to test in the unforgiving environment of space.

In Q2, ANSYS secured contracts with Space 2.0 customers to use its products for various missions such as delivering radar coverage of broadband services, designing and operating satellite systems, and understanding how lunar landers will operate in space. These customers are taking advantage of the full ANSYS portfolio including core products, newer solutions for materials, motor design, digital mission engineering and digital twins. ANSYS is helping to put humans back on the moon and beyond and expand our knowledge of the Kosmos.

ANSYS is in a unique position to propel the industry forward with its highly scalable solutions and access to high-performance computing via the cloud. Intel Foundry Services has certified ANSYS solutions for power integrity sign-off verification of integrated circuits, and Samsung Foundry has certified ANSYS RedHawk-SC for heterogeneous multi-die packaging technologies. ANSYS and Synopsys have also announced a new reference flow for Samsung's 14 LPU technology, and ANSYS and PTC have expanded their partnership.

In the second quarter, ANSYS demonstrated the strength of their business by exceeding their financial guidance across all key metrics. This was driven by ACV outperformance and the mix of license types sold. Additionally, ANSYS was named to USA Today's inaugural list of America's climate leaders and Newsweek's list of most loved global workplaces. This indicates the impact of their team and their ability to meet short and long-term goals.

In Q2, ACV grew 6% year-over-year and total revenue grew 4%, both exceeding the guidance. This outperformance led to a solid gross margin of 91% and an operating margin of 36.4%, with an EPS of $1.60. The company is raising its full year ACV and revenue outlook due to the strength of demand for simulation. The momentum in the pipeline is also driving the improvement.

The company's effective tax rate for the second quarter was 17.5%, and their unlevered operating cash flow was $72.1 million. The company ended the quarter with $478 million of cash and short-term investments. They have increased their full year ACV outlook to a range of $2.275 billion to $2.340 billion, and their revenue outlook to a range of $2.257 billion to $2.327 billion. They expect their full year EPS to be in the range of $8.39 to $8.88.

The company is providing updated full year EPS guidance, including $0.04 of improvement from increased revenue offset by $0.06 of higher interest expense and onetime items. Additionally, they are providing a range of $699 million to $749 million for 2023 unlevered operating cash flow. For the third quarter, ACV growth is expected to be 13% constant currency growth at the midpoint, with revenue in the range of $453.7 million to $473.7 million, operating margin in the range of 29.6% to 31.3%, and EPS in the range of $1.18 to $1.31. However, the year-over-year revenue and resulting P&L in the third quarter is not a reflection of a change in business momentum.

Ajei Gopal, CEO of ANSYS, discussed the company's continued success and momentum, which is reflected in increased ACV and revenue. He highlighted the company's strong execution in the first half of the year, expanding product leadership, robust pipeline, and diversified business. He also spoke about the potential for new products in development, such as machine learning-based solvers and cloud platforms, to become additive and provide additional monetization opportunities. He expressed confidence in the company's ability to deliver its 2023 and long-term outlook.

ANSYS has five broad areas of technology investment, with AI being one of the key pillars. AI is being used to improve user experience and make simulation easier and faster. An example of this is ANSYS GPT, a virtual support technology that is multilingual and can summarize public information. ANSYS AI capabilities have also enabled a large European automaker to get to an ADAS solution 1,000x faster than using traditional Monte Carlo simulations.

The Aerospace and Defense industry is an example of an industry that is experiencing a transformation and is using ANSYS software to solve complex multiphysics problems. This is driving growth in the industry due to the need for additional licenses and capacity to accommodate the computational complexity of the solutions being created. ANSYS software is being used to add more products to solve problems, driving more usage across the development life cycle.

Ajei Gopal discussed the sustainability of growth in the aerospace and defense market, which is now the second largest market for the company, surpassing the automotive market. He noted that the aerospace industry is going through an interesting transition and that the supply chain crosses industry verticals, as components from high-tech markets may be used in the production of airplanes.

ANSYS has a number of customers in the aerospace industry, and the Paris Air Show was a great opportunity to meet with them and see the different designs of aircraft that are being developed. There is a lot of conversation in the industry about different kinds of takeoff modalities, and ANSYS has many technologies and capabilities that can help aerospace companies in this rapidly changing market.

Ajei Gopal discussed how AI can be used to improve their own company, their products, and the end markets. He mentioned the use of multivariate optimization and how AI techniques can be used to optimize and iterate to get to the design. He also discussed how AI can make simulation easier, faster, and improve the user experience.

The high-tech and semiconductor industry is being affected the most by the use of technologies such as Red Hawk Raptor and Red Hawk-SC, which are being used by customers such as NVIDIA and Cerebras. The use of AI is also driving greater use of simulation, as customers explore different design options and use simulation to validate them. However, the impact of AI on other industries such as aerospace and automotive is further out, as they have longer design cycles than the high-tech industry.

ANSYS has seen broad-based growth across industries, geographies, and customer segments in the first half of the year, leading to sustained performance in the SMB sector. The ANSYS start-up program has also seen success, with no changes in the underlying momentum of the business expected in the second half of the year.

The company has had success in its start-up program, having helped over 1,900 start-ups from 58 countries and graduating more than 415 of them to commercial relationships. Examples of successful graduates include Relativity and Climb works. The company's main business is in the R&D space, and the question of decoupling and moving global supply chains is complex and relies on understanding the nature of the decoupling.

Ajei Gopal discusses the simulation intensity and attach rate of various types of chips, such as those from the auto industry and GPUs. He states that it is too early to tell how the decoupling of manufacturing will affect R&D, but that it is important to consider the high-performance chips being built and the advanced designs when assessing the simulation intensity and attach rate.

This paragraph discusses the challenges associated with designing next-generation silicon technologies such as 3D ICs or stack chiplets. It notes that these designs require a lot of simulation for sign off and involve dealing with multiscale and multiphysics challenges. These include thermal effects at the nanometer scale, package design at the millimeter scale, and PCP design at the centimeter scale, as well as the traditional challenges of SoCs. Additionally, interconnections between different chip layers introduce further complexity.

Nicole Anasenes discussed the performance of the company in the second quarter and Q3 outlook, noting that there was strength in Europe and APAC. She discussed that the U.S. performance was in line with expectations and that the Americas region has historically been the company's largest region. She also highlighted the importance of multiphysics in the development of next-generation silicon and systems to address the needs of AIML.

In the second quarter of 2020, revenue growth was 12% in constant currency and the performance was in line with expectations. The Americas, Asia Pacific, and EMEA all performed well, with automotive, aerospace, industrial equipment, and ground transportation being particularly strong. The strong performance allowed the company to beat the midpoint of their guidance and they raised the full year ACV by 0.5 point. Regarding M&A, the Diakopto acquisition was discussed and Nicole provided a contribution from it in terms of percent growth or dollar amount. Ajei Gopal also touched on the EDA portfolio, discussing if they will invest more in it and how they balance it with their partnership with Synopsys.

Ajei Gopal and Nicole Anasenes discuss Diakopto, a complementary IP to their core business that was developed by a high performance team of experts. It was designed to shift left in the design cycle and address key challenges for analog and mixed signal circuit design, such as automotive electronics and RF communications. ANSYS RedHawk is a portfolio product used for power integrity and thermal effects, and 3D ICs use multiphysics to consider thermal effects in traditional ICs. There is no material impact from this acquisition in the quarter or in the second half outlook.

In the third quarter, there was a disconnect between the P&L and ACV, but the underlying ACV growth was accelerating throughout the quarter. ANSYS believes in an open ecosystem and partnering with other vendors to ensure their customers' success. They discussed the automotive segment, noting that chips in cars need to be analyzed to ensure reliability in different environments, such as extreme heat and vibrations.

The ECB, which is the basis of cash generation, has remained consistent. However, the mix of license types that generate upfront recognition in Q3 is lower in 2022 than 2023, creating a headwind in the quarter. This disconnect between the P&L in the quarter and the strong and accelerating third quarter and second half ACV outlook is not reflective of a change in the business. The full year ACV guidance is the best metric to observe momentum in the business, as it has increased by 1.5 points since February. There is nothing operational driving the disconnect between the quarter and the full year, as the pipeline and mix of license types remain the same.

The speaker discusses how the revenue recognition rules can sometimes lead to anomalies in growth rates due to a different mix of license types in a comparative period. However, the overall dynamics of the business remain unchanged and the implied SKU of the business is consistent with prior quarters. The speaker concludes by expressing his confidence in the company's ability to achieve their goals due to their excellent execution, expanding product leadership, and strong pipeline.

This summary was generated with AI and may contain some inaccuracies.