ANSYS' (ANSS) CEO James Cashman on Q2 2016 - Earnings Call Transcript

| About: ANSYS, Inc. (ANSS)

ANSYS, Inc. (NASDAQ:ANSS)

Q2 2016 Earnings Conference Call

August 04, 2016, 10:30 AM ET

Executives

James Cashman - President, Chief Executive Officer

Maria Shields - Chief Financial Officer & VP of Administration

Analysts

Anil Kumar Doradla - William Blair

Jason A. Rodgers - Great Lakes Review

Monika Garg - Pacific Crest Securities

Jay Vleeschhouwer - Griffin Securities

Saket Kalia - Barclays Capital

Steve M. Ashley - Robert Baird

Steve R. Koenig - Wedbush Securities

Shateel Alam - Goldman Sachs

Operator

Good morning, and welcome to the ANSYS Quarter Two 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

With us on the call today are Jim Cashman, CEO and President, and Maria Shields, Chief Financial Officer.

I would now like to turn the conference over to Jim Cashman, President and CEO. Please go ahead.

James Cashman

Okay. Thank you. Good morning and thanks to everyone for joining us to discuss our second quarter and first half of 2016 financial results. But of course before we get started I will introduce Maria Shields, our CFO, for our Safe Harbor statement. Maria?

Maria Shields

Okay. Thanks, Jim. Good morning, everyone. Our earnings release and the related prepared remarks documents have been posted on the home page of our Investor Relations website this morning. They contain all of the key financial information and supportive data relative to Q2 and the first half 2016 business results as well as our current Q3 and fiscal year 2016 outlook and the key underlying assumptions.

I’d also 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 related Form 8-K. So Jim, I will now turn it over to you.

James Cashman

Okay, thanks, Maria. Well, first, I would like to start with a recap of the results that the ANSYS team achieved in Q2. Basically, the quick headline is that all of our recent communications on performance metrics, including at our last Investor Day, they are track or even ahead of projections.

So as you may recall from our Q1 earnings call and from the Investor Day in early June, we laid out a number of key financial and operational objectives for Q2. These included, first, achieving non-GAAP revenue in the range of $240 million to $248 million; secondly, achieving strong margins and earnings per share; three, high rates of recurring revenue; fourth, continued growth in both deferred revenue and backlog; and then finally, an improvement in our direct sales and channel productivity, particularly in those areas where we have ramped up the new sales hires.

And I am encouraged to say that we did, in fact, deliver on every one of these goals in the second quarter. So specifically, first, our non-GAAP revenue for the quarter was $246.1 million, in the upper half of our range.

Our revenue growth was led by solid sales execution, particularly in Germany and Japan, which reported, let’s see, 12% and 9%, respectively, growth in constant currency, as well as in China, which was actually our fastest growing of the larger markets. Now this in turn was offset by the UK and France, which were the softer performing parts of Europe.

Our overall revenue growth was also suppressed in the short term for the quarter by a shift away from perpetual licenses to leased licenses whereby the revenue is spread ratably over the term of the contract. But this shift also contributed to the record deferred revenue and backlog. And we will talk about that in a few minutes.

Now this shift was particularly true in the more mature markets like the U.S. and Japan. So notably growth came across a broad base of industries, including aerospace and defense, electronics and automotive. And all of these are actually highlighted in more detail in this quarter’s prepared remarks, which are posted on the website so you can check into that if you haven’t already.

Okay, secondly, non-GAAP EPS in Q2 was $0.93, which is actually above the high end of our guidance range. The 2016 second quarter and year-to-date results included approximately $2.4 million, or about $0.03 per share, related to incremental tax benefits that were associated with some end of the structuring and related repatriation activities that were not included on our previous guidance. Our non-GAAP operating margin was 47%, well within the projected margin range.

Okay, so now if we dig into just highlights, operational highlights in the first quarter included, well, 31 customers’ orders in excess of $1 million. This is inclusive of the five enterprise agreements, actually one of which was in excess of $16 million with one of our long-standing aero and defense customers.

So through the first half we’ve now closed eight enterprise agreements and we continue to build a solid pipeline for the second half. This should put us in good position to achieve our target of around 15 of these deals by the end of 2016.

In particular, these deals are a validation of the evolving licensing and increasing usage trends that we are seeing within some of our largest and most long-standing in terms of time customers. They tend to be very similar to Cummins and P&G, customer stories that were actually highlighted if you attended our Investor Day in June.

In addition, I am actually pleased to report that in addition to those long-standing customers that we also added over 350 new company logos to the roster of ANSYS customers during our second quarter. It’s really important because ANSYS really has a long history of retaining and growing our relationships with customers for, well, basically literally decades.

This remains true today in our recurring revenue as I think are demonstrative of that success. These new logos complement our solid customer base. And basically, they represent all major verticals, but I’d say there was a particular strength in sales to new companies, particularly in the sectors like, let’s see, electronics, industrial equipment, automotive and the material and chemical processing areas.

Okay. Our recurring revenue for the quarter was 74%. And our deferred revenue and backlog as of June 30 was at a record-high $524 million. So I guess overall the second quarter results, they reflect a mixed bag of pluses and minuses. Most importantly, we saw improved execution in targeted areas of our business, while we also saw the continuation of softness in certain markets and parts of the channel.

In addition, we see the same ongoing geopolitical tensions that we highlighted last quarter and everybody is seeing. They maybe got a tweak worse in the short term as a result of things like the recent Brexit vote and some of the other activities going on around the globe. So on the technical side during Q2 we also released the latest ground-breaking version of our software, ANSYS 17.1.

In this we also launched our new ANSYS SeaScape platform and our SeaHawk solution. And both of these are spelled out in more detail in separate releases you can find on our website. But the key of these is that they leverage the power of really what are ANSYS-proven technologies for low-power designs, but it also combines them with Big Data analytics, and taking techniques that are useful in all forms of high-performance computing, such as Big Data, MapReduce, Hadoop and machine learning, we’ve actually applied them to chip design. So coupled with an open interface, we are able to do things that really are very revolutionary compared to the previous state of the art.

So basically what it does is it creates a system of aware chip flow and also a chip aware system flow that our customers can leverage the technology to predict expensive failures and optimize designs and innovate actually before volume production.

So enabling this faster design convergence is extending our leadership in this important and growing market. I think the combination of advances of existing products such as chip package system and this next-generation innovation is what was really behind driving accelerated bookings growth in the first half of the year in our semiconductor business unit even amidst all the consolidations that we’ve talked about and heard about in the news.

And I would also say we are well-positioned to leverage these technologies to close deals that are filling up the pipeline in the second half.

So now the one thing on the technology, as we’ve said a number of times and particularly in recent calls, we know we have to make our software easier to use to bridge now to a broader range of engineers. For several decades we’ve had strong relationships with academia. But we have really taken it to another level recently with new initiatives. These include, I am thinking, including our campus-wide licensing, our student version of the software, which actually recently went over the hundred thousand-download mark. And with massive online courses, or MOOCs, that actually one of - the largest ever with over 20,000 participants.

And then capped off by at our Investor Day on June 2 we also announced our new partnership with Carnegie Mellon University which basically includes an ANSYS simulation site to be built near the engineering - actually built on the engineering campus.

On top of that we also recently announced our University of Pittsburgh partnership whereby we actually jointly established and added a manufacturing lab to further education and research in next-generation manufacturing. So I think the key of all this is we are moving into not just providing current technology to students but we are actually proactively teaming with world-renowned institutions to drive how tomorrow’s engineers are actually being prepared to tackle the challenges of the future. And this is a really big part of pre-equipping an ever-expanding user community.

So with that I’ll - those brief comments, I will actually turn it back over to Maria and she will discuss our Q3 and 2016 guidance and then we will move on to Q&A. So, Maria?

Maria Shields

Okay. Thanks, Jim. So as we outlined in this morning’s press release, we’ve initiated our outlook for Q3 with non-GAAP revenue in the range of $244 million to $253 million and non-GAAP EPS in the range of $0.90 to $0.94.

With respect to our previous guidance for fiscal year 2016, we’ve tightened the revenue range and factored in Q2 EPS outperformance as well as incremental tax benefits in the second half that we believe now are more likely to occur. So this translates to our updated outlook of non-GAAP revenue in the range of $990 million to $1.01 billion and non-GAAP EPS of $3.57 to $3.67.

For the second half of 2016 we are assuming no significant changes either way in the overall macro climate. We also see sales rates ramping up, particularly in Q4 as some of the newer sales investments have been brought on and begin producing and as the channel improvement and expansion initiatives also continue to drive incremental sales.

Our updated guidance also factors in assumptions around the enterprise agreements that are in the pipeline for the second half and the high probability that those deals will be recognized ratably over the contract period given what we experienced in the first half of 2016 and also given the current dialogue with many of these customers around the compositions of the deals and the licensing terms. Further details around specific currency and tax rates and some of the other key assumptions that we factored into Q3 and 2016 outlook are outlined in the prepared remarks.

So during the second quarter we repurchased 1 million shares at an average price of $86.08 and for the first half we repurchased 1.5 million shares at an average price of $85.84. And as of the end of June we’ve got 3.5 million shares of capacity left in our share repurchase program. So consistent with what we have been communicating, including at Investor Day, it is our intention to continue to dedicate a portion of our free cash flow to returning capital to shareholders through our share repurchase program. We currently anticipate that the second half share repurchase activity will be similar to that of what we did in the first half.

So with that, operator, now we can open up the phone lines and take some questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operators Instructions] Our first question is from Anil Doradla from William Blair. Please go ahead.

Q - Anil Kumar Doradla

Hey, guys, Jim and Maria. Good job on the quarter. I had a couple of questions. So Jim, obviously, you know, you folks have embarked on big changes within the company, whether it is sales force, whether it is products, whether it is pricing. We saw some positive impacts through the channel it looks like in some of the Asia Pac regions. Can you help us understand a little bit where you are on - or what innings you are on in terms of improving sales force productivity, improving [ph] B channel (14:20) and...

A - James Cashman
Yeah.

Anil Kumar Doradla

And adoption of these new products?

A - James Cashman

Okay. Well, I will go along with your baseball metaphor and let’s just say we are probably in about the 4th inning, but trends, as you can see, as you noted, are going pretty well. I mean first of all, the acquisition of the talent, whether it is channel or direct, is the one element. Second of all is the training. And keep in mind we are continuing to broaden, extend the product base, so it is not like it is this static base of technology that people can get on top of. So it is a continual learning process. And then actually the time it takes for them to actually take those skill sets and employ them into the field and actually interact with customers effectively. And that’s why I’m saying, we have gotten through pretty much the ramp-up in staffing. Actually what you were witnessing in the first part so far is that ramp-up in terms of the training and the efficiency of the team. And now we are into more of the traditional sales comment.

But you also mentioned a couple of other things. Because actually it is not that we are changing because things were inherently bad, because actually they have been very good for a long time. Actually we are changing because - we are evolving because the world is evolving an awful lot. So the presence of cloud computing, some of the buying preferences of customers, basically being able to embrace all of those. One of the most notable recent additions is we’ve always had - perpetual - we’ve always had software as a service, we’ve always had time-based licenses. But now you get into some of these things that are being prompted about by cloud and you get into the concept of elastic licensing and different kinds of mechanisms like that. And that’s really just meeting an evolving consumer demand.

So all the while, while technology is continuing to progress because we see with new technologies like additive manufacturing come forth, well, it brings a new set of pressures as to what can really benefit from simulation.

So it’s just one of those things. You cannot stand pat in this industry. You have to continue. So we’ve done a lot of organic investment, but we also continue to stay very active, even in these kind of like tricky valuation times, of a heavy search on potential partners for mergers and acquisitions.

Q - Anil Kumar Doradla

Okay. Clearly, you’re on track of a good year on ELAs. You’re talking about 15. I think you did like four or five in 2014 and 2015. So the question is, given that ELA is turning out to be actually much more on the upside and given that you’ve been making some changes in your traditional sales force, is there a kind of taking a second look at your sales force strategy? In other words, people that you’re allocated on these verticals, on these customers and clients, and not turning kind of the demand environment on versus focusing on ELAs where you’re seeing a lot more productivity. Can you help us understand how you’re balancing these two?

A - James Cashman

Oh, sure. Yeah, sure. No, it is a totally fair question. First of all, we don’t sit there and say we are going to hit X number of these things. Because as we talked about, you talk about something this big and the buying cycles can move and push a little bit therefore. However, it’s also one where it takes a very deep understanding and usually already a long history with customers who have already proven it internally.

So we actually mentioned about a year ago that we - actually more than that. We started to shift some of our sales force because there are an increasing number of customers that are interested now in moving toward these system-wide adoptions of simulation.

However, there is still a lot of traditional base. They’re still doing tactical, technical buys. And we need to be able to serve both of those markets as that latter market continues to mature. So what we started to do was actually segment from what was basically an all-geographic-based sales force to one that are actually more targeted toward those larger engagements while also not leaving the tactical, territorial ones behind also.

So in fact that was part of the transition and turbulence that we were seeing, talking about probably even as recently as four quarters ago. So that’s still going on in place. But the fact is we are now starting to ramp up. And I think you can even see from the measures of these that they are, in fact, starting to ramp up.

The other interesting part of this is that we’re also seeing, though, that once people get into this mode, they’re able to now adopt the value much more quickly. And we’re seeing that we’re getting some periodic additions from companies that may have already even committed to a multiyear deal, but now they’re actually accelerating that. It’s just that we’ve removed some of the barriers by making it very easy for them to adopt on an enterprise basis and quickly learn internally as to which paths are the right way to go.

Q - Anil Kumar Doradla

All right. Great. Thanks a lot.

A - James Cashman

Thank you.

Operator

[Operator Instructions] Our next question comes from Jason Rodgers with Great Lakes Review. Please go ahead.

Q - Jason Rodgers

Good morning.

A - Maria Shields

Hi, Jason.

Q - Jason Rodgers

Hello. It was good to see the double-digit growth in Germany. And I wonder if you can talk about the factors that contributed to that and how sustainable that is going forward?

A - James Cashman

Well, I mean, the factor is there, I mean, keep in mind that there has been a lot of ups and downs in Europe of all sorts of major votes and various domestic and all sorts of things like that. However, Germany is a really strong industrial base. It’s been perennially one of our top three markets. So with that in mind, we’ve also been doing some ramping up. We’ve got one of our best long-term partners who has continued to grow and evolve with us also, which is of course one thing that we have always looked for. So they’ve been very solid. They in particular - the channel activity was particularly strong there.

Now, how sustainable is it? Yes, it is sustainable. I think that even during this ramp-up thing we will see some ebbs and flows, but if you could pass a trend line through it you will see positive activity. Because, again, the same things that we saw in North America and Japan are fairly evident also in Germany where you’ve got a strong industrial base, it’s fairly mature, developed, we’ve got long-standing relationships and now we just have to bring those same skills and processes into it.

I don’t think it will be like a monotonically linear type of uptick curve, but it will be a - it should be trending continually up-wise and being in particular pretty positive. Now that being said, any time you talk about anything projected for Q3 in Europe, there is always a bit of ups and downs in there. So I mean I will put that caveat in any - well, I’d probably put that in every Q3 for the last 17 years that we have been doing this. Did that hit you?

Q - Jason Rodgers

Yes. That’s helpful. Thank you. And then just looking at the perpetual license performance in the U.S. or North America in the quarter, would you expect that to be a similar rate for the next several quarters, or were there some unusual factors that led to the results there such as the signing of the ELAs?

A - James Cashman

Well, ELAs can affect that, but keep in mind some ELAs, some customers doing ELAs still do perpetuals. They are not all time-based licenses. And I think in general what you will see is, yes, there does seem to be that trend that we have been talking about and trying to delineate in the last few quarters where there is more of a trend toward time-based licenses. But we’ve also said that there is a lot of - actually a lot of financial examinations that companies are looking at. They’re doing everything and looking at the trade-off between time-based licenses and perpetual licenses. They are comparing that to, oh, what if I use the cloud and elastic pricing, how does the economics of that work? We have got a number - in fact, most of our cloud activity is really right now tied up in customers doing economic comparison evaluations of on-premise versus cloud.

And I think during this situation where you have more and more companies entering that kind of thing on top of the macroeconomic choppiness, I think there will be some chop in those numbers. The bottom line is, at the end of the day, I don’t want to be cavalier about this, we don’t care that much over the long term because as long as we lock in customers we know our retention rates are very high. And right now, we are really trying to get the ramp of having more people utilizing the technology. So we just want to make sure that there are numerous ways and no particular enforced financial hurdles that could slow down that potential ramp-up.

Q - Jason Rodgers

Thank you.

A - James Cashman

Thank you.

Operator

Our next question is from Monika Garg with Pacific Crest Securities. Please go ahead.

Q - Monika Garg

Hi. Thanks for taking my question. You know first is perpetual license, first half 2016 over first half 2015 is down. But you know you talked about some shift to time-based license, but the lease of first half 2016 is only growing 5% over first half 2015. Could you maybe talk about the reason for that?

A - James Cashman

Well, keep in mind if a perpetual license shifts to a lease, each time you compare a perpetual license you are renewing what happened that year before. When you are growing on the lease base, you are growing on something that has been accumulating for 20 years or 30 years.

So you can have a pretty dramatic swing in a shift toward lease-based licenses. But if you compare it to the total accumulated over history standpoint, it may look like a lower number but it’s really showing some fairly significant growth. I think that’s maybe the big comparison is when you compare perpetual growth, you are comparing it to only what happened last year.

When you are comparing lease growth, you are comparing to what added on to what preceded by the previous 30 years or 40 years of accumulated lease base. I think that’s more of just a mathematical analysis of it.

The other thing is when you shift from a perpetual to a lease, I mean while the deferred balances go up and things like that, first of all, an annual lease is less than a perpetual license. And on top of it it gets ratably recognized, so you don’t even see all the impacts of that. But in general you see a steady growth going up. But I think that’s how the math is working if I am understanding the question right.

Q - Monika Garg

Okay. So would you see similar phenomenon going forward, that perpetual lease coming down but the lease growth is less than, you know, still mid-single digit?

A - Maria Shields

Yes. And particularly, Monika, I will also point out particularly in Q3 the decline in the comparative numbers to Q3 a year ago is probably going to be more significant because last year’s Q3 contained a very, very large perpetual that we don’t see repeating in this year’s Q3. So I think you will see this phenomena continuing throughout the remainder of 2016.

Q - Monika Garg

Then operating cash flow is also down, right, first half 2016 over first half 2015. Maybe just some points on that.

A - Maria Shields

Yes, most of that is just around the timing of tax payments compared to a year ago. We are still looking at cash flow for fiscal year 2016 in the $355 million to $370 million range.

Q - Monika Garg

Okay. Thanks. But that’s still down year-over-year, right?

A - Maria Shields

It is.

Q - Monika Garg

Okay. Thank you.

A - Maria Shields

About - It will be about even.

Q - Monika Garg

Thank you.

Operator

Our next question is from Jay Vleeschhouwer from Griffin Securities. Please go ahead.

Q - Jay Vleeschhouwer

Thank you, good morning. Maria, let me start with you and then turn to Jim for a longer-term product or technology question. So for Maria, you had a surprisingly large increase in maintenance revenue in the second quarter versus our model, but particularly given the quarterly and trailing 12-month weakness in perpetual. Was there anything with an unusual nature in the maintenance revenues that that level might not be sustainable in the second half?

Also for you, we see that you are now providing your bookings numbers, which is very helpful, and you were up 4% year-to-date and by our calculation about 2% to 3% bookings growth trailing 12. What does your guidance contemplate in terms of the annual increase in bookings? And then for Jim. Thanks.

A - Maria Shields

Okay. So let’s start with the first one. I am sorry, I lost track.

Q - Jay Vleeschhouwer

The maintenance question.

A - Maria Shields

I am sorry. So the maintenance question, Jay, sometimes that will be a catch-up of renewals that didn’t renew on time. So some of those were renewals that flipped from Q1 into Q2. So you get the benefit of what I’ll call back tax. So I think at least through the remainder of 2016 we are expecting the maintenance rate to continue at a healthy pace while renewals on maintenance continue to be in the mid-90s% and we don’t see that trend changing.

A - James Cashman

I would like - the other thing I’d add is you asked the question about the bookings situation. And I would say right now, as we talked about the last call or two, we are - I mean the big issue particularly perturbed by the enterprise license agreements are the bookings being affected by the multi-year deals and then our push toward being able to look at the annualized contract value of that. I mean, you will notice that we’ve actually tried to put a little bit more additional information on that as we have gotten to it on the prepared remarks. But we really aren’t at a position right now to nail down guidance, at least for that on the long term right now. But again the main issue there being the preponderance of ELAs and the multi-year impacts of that, which tend to cause some real ripples.

Q - Jay Vleeschhouwer

Jim, for you on the product and technology side, at the analyst meeting two months ago the company intimated that perhaps by the end of this year you would broaden your portfolio and necessarily also broaden your price ranges in an effort to broaden the user base or grow the number of users, which has long been one of your major objectives. But you didn’t really say very much about it then. I am wondering now whether, two months later, you would be willing to say a little more about that.

And relatedly, with respect to the SeaScape architecture, could you talk about the longer-term implications of that for pricing and packaging? When we think about the modular architecture of SeaScape around the three different services that it is built upon and your wanting to become more of a platform, so to say, what are the longer-term implications for the business of SeaScape, particularly for non-EDA applications?

A - James Cashman

Okay. Well, the first part of it is related to - I mean, the simple, non-profound answer is that we are always continuing to broaden the technology base. And yes, the pricing comes on a number of things. Actually, we talked about the inclusion of elastic pricing, which is an effective pricing addition as it is. But we are also trying to broaden things out because we’ve seen, as people get the broader portfolio, there are going to be larger sales but we also want to come in at the entry level.

Amidst all that we are also - over the years we’ve tended to get a very complicated number of SKUs, if you will, and we are trying to simplify the SKU base. So even while it’s getting broader, it’s probably going to have more discrete chunks in there. That being said, I really want to wait until we get the specific product release information on that, which is going to be later this year. Because anything else would be - there could still be some fine tuning. It would be like a pre-announce. It really wouldn’t be right. Other than the fact that trajectory-wise those are the trends that we are doing, but they are also in support of what we have done forever.

So now the second part of the question was related to SeaHawk and SeaScape, right? You are absolutely right. Now, it got its start in the chip business. And that was really where some of the main brain power from our technology group put that to play. And also you look at the complexity, when you are talking about 5 billion to 10 billion transistors and how you look at all the permutations and how do you actually simulate all that, and just doing brute force computations is one of the reasons why it was very difficult to apply that.

Well, so that’s why it came out in that manner. But as opposed to putting things in individual products, we - you just mentioned the word platform, and as that, there are certain things that need to transcend and go across all products. So you look at multi-physics; that’s got to be handled at a platform level through our flagship products. You look at the advanced kind of calculations. So in general the SeaScape-SeaHawk was actually made a platform element. And it is our full intent, again, not pre-announcing specific releases here, but it is our intent to actually apply that in.

So I think you can see, as you started to do some very complicated simulations, maybe particularly of complete mechanical systems, or you look at complex hybrid systems between software, mechanics and electronics all combined, it might be needed in Internet of Things or autonomously driven cars, those type of things, or very, very complicated non-linear calculations, even in a particular, like mechanics or fluids, kind of situation. These kind of capabilities for handling the big data and then also using machine learning to learn from that and make it more efficient are clearly things that we have slated on. It is just that we haven’t attributed those to any specific release, but they have applicability across a broader range of calculations for sure.

Q - Jay Vleeschhouwer

Thanks, Jim. Thanks, Maria.

A - James Cashman

Thank you.

Operator

Our next question is from Saket Kalia with Barclays. Please go ahead.

Q - Saket Kalia

Hey, guys. How are you doing?

A - James Cashman

Hello.

A - Maria Shields

Hi, Saket.

Q - Saket Kalia

Hey, so first and foremost, thanks for the additional disclosure on the bookings, and a nice acceleration in growth here in the second quarter. Jim, you kind of hinted at this in one of your prior questions. I kind of wanted to ask it a little bit of a different way. But lots of talk about sort of the ELA activity and a lot more multi-year renewals. So can you just talk about how much of that bookings growth that we saw this quarter, I think it was roughly 14% or 13% constant currency, how much that would have been excluding some of those longer-duration contracts?

A - James Cashman

Oh. Hang on, pulling out the calculator here. This is not a - we didn’t parse it down to that particular number.

Q - Saket Kalia

Sure. And I didn’t mean to put you on the spot, but even qualitatively, how much that might have added.

A - James Cashman

Yeah. My guess is it is somewhere in the mid-to-upper single digits in constant currency, but that’s finger in the wind. Please, I mean just - I normally I like to give precise answers, and I wouldn’t be able to do that in a couple of minutes, but I know it’s kind of safely in that range.

A - Maria Shields

Yeah, and, Saket, the other thing I will add too is let’s not discount the semiconductor business unit, the legacy Apache business also had a number of renewals and expansions that were scheduled in Q2 which took place. So it is a combination of not only new enterprise agreements that are expanding the usage and the product portfolio but also a good renewal and expansion in the semiconductor business unit.

A - James Cashman

And the other thing I will add. You commented on what we tried to add to the prepared remarks. Like I told you before, we are committed both internally but also making that available externally. So as we start to evolve and enhance those disclosures, if there are certain things that you don’t like or certain things that you specifically do like, we welcome that kind of input because I think it is an important part going forward. So I appreciate your comments on that, too.

Q - Saket Kalia

No, absolutely. It is very helpful. Just to clarify the answer to that and, of course, Jim, we won’t hold you to it. Maybe we could take the specific math offline, but just to clarify. Would bookings growth have been - was it mid-to-upper single digits benefit to that growth? Or would bookings have grown mid-to-upper single digits excluding the long term, just to be absolutely...?

A - James Cashman

The latter, the latter. So we would have been in like that kind of upper-digit range, upper-single-digit range without and then the rest was additive.

Q - Saket Kalia

Got it. Got it. Okay, that is very helpful.

A - James Cashman

Sorry I wasn’t clear on that.

Q - Saket Kalia

No. Not at all, not at all. Just for my follow-up, more of an accounting question but, Maria, I guess how do you recognize the sales commissions on multiyear contracts and the ELAs? A lot of the longer-term kind of subscription companies that all of us cover kind of recognize that up front, in which case you could get a big bookings benefit but actually get a little bit of a ding on the margin. But maybe just walk us through how the sales commissions are recognized as that becomes a larger part of the business.

A - Maria Shields

Yes. So in the period in which the deal is recorded we take commissions on the first year and also a portion of the second year, largely the new business, if you will. And those all flow through the period in which the deal is booked. So in Q2 for those enterprise agreements, no doubt the commissions were all run through the P&L in that period. Not unlike, as you mentioned, other people.

Q - Saket Kalia

Great. That is very helpful. Thanks very much for the clarification, guys.

A - James Cashman

Okay, thank you.

Operator

Our next question is from Steve Ashley with R. W. Baird. Please go ahead.

Q - Steve Ashley

Terrific. I’d just like to ask on the ELAs you signed in the period, and you may not have a line of sight on this, but if you had any sense whether some of the usage or use case of those would extend outside of the core QA and validation areas that you historically dominated? Thanks.

A - James Cashman

No, no, they definitely have. And in fact if you look at it, the part you are calling like the QA and the validation, the traditional analyst market, in fact that’s one of the reasons why if you will on the overall push we have been on is because that part has been relatively - has a pretty good attach rate. However, it is a very small part of the overall engineering, design and innovation process. So this is actually, if anything, it usually signals the fact of a company now bridging and going to a broader range.

So it is clearly - I can only think of maybe one of the situations where that wasn’t the case, where it was just in some cases they were just expanding and already well staffed that group. But really the premise of that is, if you will, moving down the pyramid into broader bases of usage and usually involved with that also is utilizing it earlier in the design cycle where you have a disproportionate impact on innovation.

Q - Steve Ashley

Terrific. And then I would just like to ask about the vertical markets. You kind of - semis, I think, have been challenged over the last maybe year. But I think I heard a comment today thinking maybe that had gotten a little bit better. So my question is around the vertical markets. Number one, outside of oil and gas, is there anything else that is really weak? And number two, has the semi business shown some recent improvement here? Thank you.

A - James Cashman

Well, okay. So in general, I would say that you might get into some of the commodity-based, the mining stocks, in addition to that that are a little bit - they are relatively suppressed. The one thing I would say is I wasn’t trying to infer that I felt that the semi, their market was turning the corner and was coming around.

I am just saying that our relative positioning in it as a result of both chip package system and the SeaScape kind of platform type of things have put us in a much better competitive situation which in turn has led to accelerating growth where actually it’s - well, it is all time-based and you have got a long pipeline of things. The pipeline is building nicely. And as we mentioned, the growth is accelerating, which kind of turned - reversed the trends that we might have been seeing last year.

So I still think the - I don’t know, Maria, do you have different comments on this? I still think the headwinds are still kind of there but our relative stead in there has actually improved.

Q - Steve Ashley

Perfect. That’s helpful. Thanks.

A - James Cashman

Okay.

Operator

Our next question is from Steve Koenig with Koenig (sic) [Wedbush Securities]. Please go ahead.

Q - Steve Koenig

I guess I am with my own firm now.

A - James Cashman

You’re not with Wedbush anymore?

Q - Steve Koenig

Okay, let’s see. I want to start with a question about guidance and tuck in another financial question, and then I have a follow-up on cloud. So you all lowered the full-year guide on the top end despite the beat. Are you able to talk about, relative to your prior plan, did you take that more out of Q3 or Q4? And what do you attribute that lower guidance to? Is it mostly de-risking or is it Brexit? I mean just some more color there would be helpful.

And I will add in opportunistically just to follow up to Monika’s question on cash flow. For the full year, it’s flat, relatively flat. What - despite the increase in deferred - and, Maria, I guess the follow-up there is why? Can you give us some color on that?

A - Maria Shields

Yeah. So let’s start with tightening of the range. No doubt it is de-risking. And as I said in my prepared comments, Steve, as we looked at the pipeline for the second half, a number of these deals, particularly the larger ones, are really going to translate to ratable revenue recognitions. So there are some paid-ups, no doubt, that are still in there, particularly I would say in the Asia Pac area. In some of the larger markets paid-ups are still the preferable licensing models. So it is a combination of de-risking. It is a combination of the composition of the deals. And as a result, we thought it would be wiser to go ahead and tighten the range.

Relative to cash flow, if you look at the plan and the way the numbers are working out, since Q4 is going to be the strongest growth quarter and the build-up of receivables, you will see that manifest in improved cash flow going into early 2017.

Q - Steve Koenig

Got it. Okay. Great. Thanks, Maria. And if I could then shoot one to Jim here. So simulation seems ideal for the cloud where compute capacity is cheap and can be scaled up or down quickly. From our check, we see that customers are interested and it sounds like the main barrier is an effective pricing model. So you remarked that cloud activity was tied up in customers doing economic evaluations.

A - James Cashman

Yes.

Q - Steve Koenig

Can you talk about is this phenomenon impacting ANSYS’s growth rate right now or is that a concern for the future? And then just any thoughts or metrics on adoption of enterprise cloud and also your elastic pricing model?

A - James Cashman

Yes. Absolutely. The first part is long term, no, it is nothing but a plus. Short term, I mean anything that causes people to spend more cycles comparing and deciding, yes, it is going to slow things down along that standpoint. You talked about an effective pricing model. I think you brought up that term. I’d say to that, I mean luckily we have been able to look at this in two different steps. First of all is people can host existing licenses on a cloud and therefore pay on a basis of that versus actually acquiring hardware on-premise and all that type of thing. So that actually zeros out, if you will, it makes it a one-to-one on the software pricing.

That being said, they are still right now comparing what does it mean to turn loose that amount of computing, pay for it through a service versus the not having to maintain an IT staff and all the different things that are associated with that. And that really is what has been the major things that people have been doing. It’s almost the comparative of the cost of the infrastructure, control of the infrastructure, things like that.

Now that being said, there will be an additional layer there, so okay, what’s the advantages of actually doing flexible licensing versus actually hosting owned licenses, be they time-based or perpetual? That’s one that people will only be starting to dig into now, but that’s really kind of the age-old question on anything. Do you buy something? Do you lease something? Or do you just rent it for the weekend that you need it, if you are buying like - getting access to yard equipment, things like that?

So that’s part, given the elastic pricing hasn’t been out that long and given the fact that people are still trying to single out, if you will, the infrastructural cost, we are still at the early stages of that. But we have time to adjust. I agree with you there is interest. There’s maybe a little bit of a gap between interest and ultimate adoption, but that ultimate adoption will come.

Q - Steve Koenig

Got you. Great. Thank you so much.

A - James Cashman

Okay, thank you.

Operator

[Operator Instructions] Our next question is from Shateel Alam with Goldman Sachs. Please go ahead.

Q - Shateel Alam

Hi, thanks for taking my question. I had one on the competitive dynamics in the space and your acquisition strategy. So CD-adapco has been under Siemens for a few months now. Dassault just acquired a smaller simulation vendor. Two parts. Does this change your go-to-market in any way, especially if these vendors are likely to be able to bundle along with CAD and PLM at lower prices? And then in terms of your own acquisition strategy, are there any areas of simulation that you want to build out, or should we expect more the bigger acquisitions to be in areas that are adjacent to simulation, a little like SpaceClaim was?

A - James Cashman

First of all, I think the first way I’d view that is, a lot of other companies are actually now kind of validating the path that we took years ago when people were saying, why are they doing that? And they are actually kind of, if they will, they are validating that in a form of imitation. I think more importantly is it’s not just adding a bigger grab bag of products. You have to have a comprehensive set that actually allows those to do a complete virtual prototype. And of the various situations that are out there right now, really nobody runs the gamut like we do. And there are barriers to being able to do that.

And that being said, I’d say that, if you will, our independence has actually made us attractive in mixed-vendor environments and mixed supply chains to being able to do that. So it really - we really haven’t seen a lot of change, I mean other than the fact that - I’d say the one change we’ve seen, which usually happens when a CAD/CAM company buys a simulation product, is people that were on a different platform now are strongly kind of looking at moving into that environment with us. So really it’s - I guess we really don’t see any directional change or we’re not really surprised by too many things.

Now, to answer the first part of your question or at least one of the parts of the question is, oh, yeah, we still like some of the larger ones, but you said which parts of the - we have the basic families of physics all covered, had that for a while, and the only ones who do. However, every one of those continue to need to be continued to develop. So even though our home PC was around for many years, the processors need to get faster, the graphics need to get better, the connectivity needs to get better. Likewise, even though we have got industry-leading capabilities and have had, we need to continue to progress those further in addition to meeting the evolving and emerging new trends that are pretty much in the news today, like the Internet of Things, like autonomously driven car, getting into additive manufacturing, all those things that put new twists, if you will, on building virtual prototypes.

Q - Shateel Alam

Got it. That’s helpful. And then just a follow-up on territory sales. Last quarter you said these reps were a little bit slow to ramp. Just wanted to get an update there. And then your 4Q guidance assumes an acceleration. How important is it for territory reps to get up to productivity to make that guidance?

A - James Cashman

Well, let’s put it this way. We do have an assumption on productivity of the newer hires, which tend to be more in the territory alignment one. We do have - but we’ve also got fairly conservative - we haven’t made - based on our historical observation of the last few quarters as we’ve been ramping up on here, we do see a progression. Of course, it maps very well into data that we’ve shown at previous meetings where it shows, if you will, the sales force productivity as a function of maturity of the sales person, year one, year two, year three, year four. So we expect that kind of ramp up to come forward. But we’re not relying on any kind of herculean effort. We are relying on continued progression along that path. So that definitely is part of it.

Q - Shateel Alam

Great. Thank you. Very helpful.

A - James Cashman

Okay. Thank you.

Operator

[Operator Instructions] This concludes the question-and-answer session. I would now like to turn the conference back over to Jim Cashman for any closing remarks.

James Cashman

Okay. Well, thanks. And I would like to thank actually all of you for your participation in our call today and for the ongoing support of ANSYS. So we’re really encouraged by what we accomplished in the first half of 2016. But again, as we discussed on this call, and thanks to your questions, we have a lot of work ahead to deliver on our goals for the full year and the years beyond.

Nevertheless, I would still like to thank our entire ANSYS team, as we mentioned some of our key partners for their commitment to driving results. So all I would say is I think in general, the general tenor here is it is a really exciting time to be in the simulation market. We have seen a lot of trends that are driving that. We see other companies that are now interested in entering it. And it’s really exciting in terms of the product advancements, things that we didn’t even envision a few years ago like additive manufacturing, like the autonomously driven cars, like this whole concept of a digital twin for industrial use for prescriptive analytics, just to name some of the opportunities.

So it just continues to grow from this point and it tends to be pretty exciting and we’re happy to be in the position we are to be able to embark upon that. So basically as the simulation market is proposed to enter what we feel is a new era, we are proactively evolving our ANSYS teams. I know some of your questions brought that up. But this is in terms of technology, infrastructure, the actual ANSYS sales teams and even the partner ecosystems to take advantage of what we see as a really tremendous opportunity over the next few years. So I think basically, unimpeachably, we have a proven product strategy, one that other people are trying to emulate. We’ve got a progressing go-to-market plan, and on top of it all we have got a solid financial foundation that enables us to continue to invest in our business.

So I guess over the decades we have built I think unparalleled product offerings. We’ve got longevity with our customers, very high reoccurring revenues and the opportunity to augment growth through new features and exciting technology. So bottom line is we’re continuing to expand our direct sales force. We have a renewed focus on the indirect channel and we’re basically committed to driving those solid financial results we have been talking about and generating long-term value for our shareholders and everyone else involved.

So with that I thank you very much, and we will catch you on the next call if not sooner.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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