The operator introduces the ANSYS Third Quarter 2023 Earnings Conference Call, with Ajei Gopal, Nicole Anasenes, and Kelsey DeBriyn as speakers. The call will include a presentation of forward-looking information and references to non-GAAP financial measures. ANSYS is on track to meet its third quarter guidance, but was recently notified by the U.S. government of a delay in a major contract.

The Department of Commerce has imposed additional restrictions on sales to certain Chinese entities, resulting in delays and potential loss of business for ANSYS in Q3. Despite this, the company still had a strong quarter with double-digit growth in ACV. China represents a small portion of their overall business and they are confident in their ability to execute on short and long-term objectives. The top contributing industries were high-tech and semiconductors, aerospace and defense, and automotive and ground transportation. The company also secured a large contract with a North American aerospace and defense company and highlights a specific aspect of their business on their calls.

ANSYS solutions are playing a critical role in the sustainability initiatives and development of semiconductors in the commercial aerospace industry. There is also a similar transformation happening in the automotive industry, where ANSYS is already working with top transportation OEMs and suppliers. ANSYS simulation is driving innovation in three key areas: electrification, autonomy and driver assistance, and software defined vehicles. ANSYS' solutions for powertrain electrification and battery management are enabling rapid electric vehicle innovation. Customers have seen significant cost and time reductions using ANSYS solutions, and even Porsche Motorsports has turned to ANSYS for their electric race car development.

ANSYS is a crucial tool for the TAG Heuer Porsche Formula E Team as they use it to optimize their cars' inverter and e-motor efficiency and test it on a virtual racetrack. Simulation is also being used to manage battery temperature and improve advanced driver assistance systems, such as sensors for human and autonomous decision-making. ANSYS is also being utilized by companies like Continental for optical integration analysis and software-defined vehicles, which are expected to grow in the market due to their safety, infotainment, and efficiency features. ANSYS solutions allow for model-based, certified embedded software, code generation, and electronics reliability and connectivity systems.

ANSYS's advanced solutions have enabled engineers to meet industry safety requirements faster and at lower costs. Companies like ZF Group have reported saving hundreds of hours by standardizing on ANSYS for analysis projects. ANSYS also plays a key role in vehicle development, with solutions for aerodynamics, crash safety, and material management. ANSYS's simulations have helped a global automotive OEM reduce engineering lead time and physical testing costs. Another customer has expanded their use of ANSYS solutions for various physics simulations.

ANSYS's expanded presence has benefited various projects, including simulating fan noise for ventilated seats and helping an automotive leader reduce development costs and respond faster to customer requests. ANSYS also congratulates its customer, Oracle Red Bull Racing, for winning the 2023 Formula 1 World Championships using ANSYS solutions. The company is also proud to have enrolled its 2000th member in the ANSYS Startup Program, which represents some of the most innovative users of ANSYS technology. Additionally, ANSYS has received numerous awards for employee engagement and satisfaction, showcasing its supportive and inclusive culture. Despite external challenges, ANSYS's global business remains strong and in high demand across industries.

ANSYS' global organizations recognize the value of their multiphysics solutions in solving key product and business challenges. This, combined with their strong product portfolio and customer relationships, gives them confidence in meeting their commitments. Despite challenges in China, they were able to achieve double-digit ACV growth in the third quarter. They are raising their full year guidance due to strong operational momentum, but this is offset by export restrictions and foreign exchange headwinds. Recurring ACV grew 13% and represented 83% of the total, driven by the shift towards subscription lease licenses. This creates stability and resilience in their business model.

The company's strong foundation allowed them to navigate business disruptions and they experienced a 3% decrease in revenue in Q3 due to changes in export compliance. This was below their expectations due to incremental approval processes and export restrictions in China, resulting in lower ACV and revenue. However, their year-to-date performance was strong with double-digit growth in ACV and a significant balance of deferred revenue and backlog. They remain optimistic about future growth despite the disruption in Q3.

The company had a strong third quarter with high gross and operating margins, resulting in better-than-expected EPS. Their effective tax rate for the remainder of 2023 is expected to be 17.5%. They also had strong cash flow and ended the quarter with a significant amount of cash. The company is confident in achieving their 2023 and long-term outlook, with updated ACV guidance for the year. However, they also faced challenges with additional export restrictions and foreign exchange headwinds, which will impact their growth in China.

Despite challenges in China, the company's ACV growth outlook for the full year is still expected to be 12% in constant currency. They have updated their revenue outlook and expect EPS to be in the range of $8.34 to $8.75. Their unlevered operating cash flow guidance has also been updated, with a range of $705 million to $735 million. The company's underlying model remains strong despite unexpected impacts in Q3.

The company's success is driven by market growth, a strong portfolio, customer relationships, and a recurring business model. Their full year 2023 guidance suggests a 14% growth in operating cash flow since 2021. For Q4, they expect ACV, revenue, operating margin, and EPS in specific ranges. Despite challenges in China, they are confident in their long-term model and plan to initiate full year 2024 guidance in February. The company reaffirms their long-term outlook of 12% ACV growth and $3 billion of unlevered operating cash flow from 2022 to 2025.

ANSYS' outlook for 2023 and Q4 is based on specific currency rates and other assumptions, which are detailed in the prepared remarks document. The company's business is resilient due to its diverse customer base, market-leading portfolio, strong customer relationships, and recurring financial model. The team's hard work and dedication are acknowledged, and the company remains confident in achieving its long-term outlook. The phone lines are now open for questions. The first question is about ANSYS' processes in China, and the CEO clarifies that there is a misunderstanding. The Department of Commerce is engaging with companies to apply export controls to certain technologies in China.

The ANSYS company has implemented additional vetting for prospects in China due to new restrictions from the U.S. Department of Commerce. This has caused delays in processing orders, but overall the company is performing well and has strong demand for its products. The company is confident in its ability to meet its objectives.

Nicole Anasenes, during a call discussing Q4 guidance and initial thoughts on next year, addressed the impact of changes in export compliance in China on the company's business. Despite this disruption, the company achieved 12% ACV growth in constant currency and has already committed to half of their Q4 outlook. Anasenes expressed confidence in achieving their guidance and noted continued momentum in the business outside of the impact from China and foreign exchange. The call also included questions about the contribution from new AIML enhanced products and the company's strong recurring revenue model.

The speaker is addressing a question about the potential risks from China export controls and how it may affect the company's 10% growth outlook for 2024. They mention that their business is diversified across many industries and geographies, with China accounting for around 5% of their ACV. In the third quarter, they experienced a $20 million headwind to ACV and revenue due to vetting processes and restrictions in China, but they still achieved double-digit growth. This resilience gives them confidence in their 2024 outlook.

The company expects a majority of the $20 million impact from export compliance changes to be a timing shift, with a small portion being lost in business. This will affect the company's growth in China in 2023 and 2024, with an estimated impact of $25 million in 2023 and $10-30 million in 2024. Despite these headwinds, the company is confident in achieving their long-term outlook and expects 10% ACV growth in 2024. The CEO also mentions the strong pipeline and momentum in the business.

The speaker talks about the strength of their business and their confidence in their ability to solve customers' problems. They also mention the impact of additional approval processes in China. The company has been outperforming their midterm plan and they attribute this to their focus on important technologies and next-generation use cases. They have been investing in their product portfolio and this has paid off in supporting their customers.

Jason Celino asks a question about China export restrictions and if other companies were approached as well. Ajei Gopal cannot comment on other companies but mentions that elite high-tech companies are facing similar restrictions. Nicole Anasenes answers a question about the types of revenue affected, which included a mix of both perpetual and lease. Ken Wong asks about any impact on the auto industry due to the strike, and Ajei Gopal responds that he cannot comment on other companies but mentions that there has been no erosion in their auto business.

The company's automotive business is driven by the ongoing R&D cycle and conversations with customers about electrification and autonomy. The use of digital techniques such as simulation is helping to reduce cycle time and bring innovation to market faster, which is important in a competitive industry like automotive. The company is expecting deals in China to return in the future, but it is unclear if they will fall into fiscal 2024 or 2025.

The speaker discusses the impact of a two-thirds timing shift and one-third loss of business in 2023 and 2024, which is related to the sale of prospects located in China who are performing R&D and other activities. This issue has affected the ACV, particularly in the electronics industry, but the additional vetting processes apply to all industries in China.

The speaker explains that the industry mix charts are relative and the mix shift is driven by relative growth rather than any particular weakness. They cannot say for certain if the issue is ANSYS-specific, but their products are widely applicable. The incremental vetting process adds some latency to the approval process, but it is not a major impairment in the ability to do business in China.

During a recent conference call, ANSYS CEO Ajei Gopal discussed the company's plans for pricing their new AI innovations, including ANSYSGPT and AI plus products. These products will incorporate and extend existing AI features and will be priced accordingly. The SimAI technology, a new cloud-based offering, was also announced.

The company has developed a cloud native AI platform that will enhance their 3D physics simulation capabilities. This platform will allow customers to use simulation results to train AI models and predict performance across design changes. It is applicable to various industries and can use simulation data from ANSYS or other sources. The pricing for this product has not been announced yet. The company's international performance was impacted by the 606 accounting change, with Germany seeing a significant year-over-year headwind due to lease accounting dynamics.

The growth last year was due to strong ACV growth and the mix of transactions in Germany. EMEA had good growth in Q3 and industries such as high-tech, aerospace and defense, and industrial equipment were strong. An example of this is a deal with a global semiconductor manufacturer and supplier, a research and development company in the A&D industry, and a European pump manufacturer. The underlying ACV performance in the region is strong and there is strength across multiple industries and market segments. Channel partners focused on the lower end are seeing a lot of activity.

The speaker discusses the high level of activity and design work taking place at their enterprise customers, and expresses excitement about their ability to support these customers. They also address the impact of China on their long-term targets and mention a $10 million to $30 million permanent shift in revenue. The speaker thanks their colleagues for their dedication to ANSYS.

The speaker thanks their channel partners and global customer base for their support and concludes the conference, thanking attendees for their time and allowing them to disconnect.

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