ANSYS (ANSS) Q4 2016 Results - Earnings Call Transcript

| About: ANSYS, Inc. (ANSS)

ANSYS, Inc. (NASDAQ:ANSS)

Q4 2016 Earnings Call

February 23, 2017 8:30 am ET

Executives

Annette N. Arribas - ANSYS, Inc.

Ajei S. Gopal - ANSYS, Inc.

Maria T. Shields - ANSYS, Inc.

Analysts

Anil Kumar Doradla - William Blair & Co. LLC

Monika Garg - Pacific Crest Securities

Jay Vleeschhouwer - Griffin Securities, Inc.

Ken Talanian - Evercore Group LLC

Sterling Auty - JPMorgan Securities LLC

Ross MacMillan - RBC Capital Markets LLC

Saket Kalia - Barclays Capital, Inc.

Jason Velkavrh - Robert W. Baird & Co., Inc. (Broker)

Steve R. Koenig - Wedbush Securities, Inc.

Erik Karlsson - Bodenholm Capital AB

Stephen Bersey - MUFG Securities America, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. With us today are Ajei Gopal, Chief Executive Officer; Maria Shields, Chief Financial Officer, and Annette Arribas, Senior Director, Global Investor Relations.

At this time, I'd like to turn the call over to Ms. Arribas for some opening remarks.

Annette N. Arribas - ANSYS, Inc.

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 supportive data relative to our fourth quarter and full year financial results and business update, as well as, our Q1 and fiscal year 2017 outlook and the key underlying assumptions.

So, I'd 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 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'll 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.

I'd now like to turn the call over to our CEO, Ajei Gopal for his opening remarks. Ajei?

Ajei S. Gopal - ANSYS, Inc.

Thank you, Annette and good morning, everyone. The demand for ANSYS' portfolio has never been stronger. The merger of the physical and the digital worlds is creating an unprecedented disruption, resulting in a new generation of innovative and transformative products, such as self-driving vehicles, personalized medical devices and smart buildings. The opportunity is immense, and we're seeing it play out in industries as diverse as industrial equipment, to consumer goods, to healthcare.

This coming generation of products will be significantly more complicated to design and manufacture than anything on the market today. And to make things even more challenging, these products will have to be produced more quickly than ever before. And it's not just the products themselves that are becoming smarter and more exciting, this disruption extends to the way they are being manufactured, brought to market, and operated.

Simulation, and whether you call it final for verification, simulation is the most important solution companies have to help them address product complexity and the need for speed throughout the product lifecycle. Whether it's just single physics or multi physics simulation, companies have come to rely on the accuracy, flexibility and robustness that simulation provides. And that's where ANSYS comes in. ANSYS is the only vendor with the depth and breadth of simulation capabilities across all major physics to empower our customers to bring this next generation of products to market.

I am more excited than ever about ANSYS' future, and I'm delighted to join you today on my first earnings call since becoming ANSYS' CEO on the 1 of January this year. If you recall, I joined as President and Chief Operating Officer in August, and I've been on our board of directors since 2011. So I've seen firsthand the remarkable work this company has done.

As you saw in our earnings documents, we closed 2016 on a strong note with financial results, which met or exceeded the guidance that we provided in November. I'm very pleased with the performance of the business in Q4, especially with our strong bookings that resulted in record deferred revenue and backlog of $638 million, which is a leading indicator of the ongoing health of our business.

Our 2017 guidance remains unchanged other than for adjustments to currency. We are also off to a fast start in Q1, with continued momentum from the higher growth that we just experienced in Q4. Maria will review the financial results in a bit more detail in a few minutes, but let me give you some color into the performance of our sales regions.

North America revenue grew 10% in Q4, including a 15% growth in leased revenue. For 2016, North America revenue grew 4% in constant currency, with 9% in leased revenue. This is further evidence of the shift in preference for time-based licenses that we have highlighted in recent quarters.

Electronics, aerospace and defense, and automotive were the strongest industries. Driven by continued strong performance in China, India and Taiwan, the Q4 results in Asia Pacific included a 12% revenue growth and a 6% increase in leased revenue, both in constant currency.

For 2016, the region experienced overall 9% revenue growth, including 8% growth in lease. We had double-digit growth from our indirect channels in China, India, Taiwan and South Korea. From an industry perspective, we continue to see the adoption of the broader portfolio, including integrated multiphysics, electronics and control software.

Our weakest region was Europe, delivering constant currency revenue growth of less than 1% in Q4 and 3% in 2016. These results reflect a combination of mixed sales execution and lingering pockets of economic and geopolitical issues. Germany led the region with 6% and 8% constant currency growth for Q4 and 2016 respectively, while we saw continued weakness in the UK and France.

With regards to industry performance in Europe in Q4, automotive, industrial equipment, electronics, aerospace and energy, all contributed relatively equally. In recognition of the disappointing results in our European business, in the fourth quarter, we took specific actions to improve sales execution and sharpen our go-to-market strategy in the region. These included, but were not limited to, senior sales leadership changes, a new organizational structure that allows for more effective deployment of sales resources by separating out the largest economies and consolidating smaller and similar economies, and a greater emphasis on partnering with the indirect channel. We believe these changes will set the foundation for a stronger 2017 and beyond in Europe.

As I mentioned in our last earnings call, one of my top priorities was to fill the vacant role of the Global Head of Sales. I'm really excited that Rick Mahoney joined our team as Vice President of Worldwide Sales and Customer Excellence in the middle of December. Rick is a superb sales leader. He's previously led global sales teams in the EDA space, and has been responsible for generating billions in business. He understands large deals, has relevant industry experience, and knows what it takes to build a winning sales culture. As an added benefit, given the highly technical nature of our products and our customers, Rick began his career in software development and technical presales. Simply put, he is the perfect fit to lead our sales and services organization. He has already made a difference in the short time here and I look forward to telling you more about his accomplishments on future calls.

In Q4, my extended leadership team and I worked on our 2017 plan. Our planning work was done in the context of our desire to reinvigorate top line growth, while preserving our commitments on strong margin structure and cash flow. The team has done a tremendous job, working collaboratively and cross-functionally to pull together detailed plans for product, go-to-market strategies, staffing and other areas of critical investment.

To drive growth, we realize that we had to increase the level of investment and emphasis in certain areas of our go-to-market, product and infrastructure activities. We also realized that with ANSYS' growth as a company from $50 million of revenue in 2000 to almost $1 billion today through a combination of organic investments and acquisitions that we have opportunities to fine tune our organization. As such, as mentioned in the last earnings documents, we began a workforce realignment in Q4 with the intention of freeing up investment capacity and reallocating that capacity to other areas that will generate the highest returns to the company. Maria will discuss the financial impact of this realignment in her comments.

Earlier this quarter, we launched the latest version of our industry-leading portfolio, ANSYS 18, and I'm excited to announce the demand for it is strong. Built on our industry-leading technology, ANSYS 18 is a feature-rich release that customers can use to accurately simulate and give insights into products that are as diverse as the latest smartphone to highly efficient aircraft engines. With ANSYS 18, users can reduce costly physical testing, improve time to market and lower development costs, all while spurring innovation.

We have a number of recent examples of customers around the world who have leveraged the power of ANSYS technology for amazing results. For example, a large defense contractor reduced testing time from a year of physical testing down to about three weeks of digital prototyping that significantly improved time to market. The company was also able to cut costs and estimates that it has saved about $2 million by leveraging ANSYS to reduce systems failures.

Another customer, Orbital Power designs, develops, and manufacturers the highest power-density heavy fuel rotary engines in the world. Based in the UK, this private company is making a big impact on the industry by using ANSYS solutions to create digital prototypes of its engines that are one-fifth the weight of competitor's products, while decreasing costs by 93% and shortening design time by 70%.

On the semiconductor side, ANSYS worked with a major mobile device manufacturer to deliver a tape-out on the most advanced process node, which is critical to deliver reliable, high-performance, cost-effective chips. We have grown our relationship with this company with a multiyear agreement.

Our historical strength in digital prototyping is just one way that ANSYS delivers values to customers across industries. In addition, ANSYS 18 expands the use of simulation throughout the product lifecycle from the earliest product concepts, all the way through operations. ANSYS 18 enables designers to make simulation based choices near the beginning of the design process, when 80% of the product cost gets locked in. Using ANSYS 18, a designer can rapidly evaluate thousands of widest possibilities for potential designs and quickly assess product performance. We call this process digital exploration.

You might have seen our press release yesterday, where we highlighted Grundfos' use of digital exploration. Based in Denmark, this multibillion euro pump manufacturer is using simulation to digitally examine thousands of design options to optimize pump efficiency. By using ANSYS simulation, Grundfos reduced its overall design time by 30%, allowing it to bring a more efficient product to market faster.

With ANSYS 18, we also move simulation downstream to production. We are enabling our customers to create digital twins of their products, so they understand the performance of individual products in production in real time, which dramatically reduces unplanned downtime. In fact, we're working with a European division of GE to jointly develop technology to accelerate digital twin adoption, quality and customer results.

As you can see, ANSYS 18 expands simulation from digital exploration to digital prototyping to digital twins. We call this pervasive engineering simulation and we believe that it will transform the industry. Simply put, the future is here today with ANSYS 18 and if you haven't already been to a website to learn more about this offering, I encourage you to go to ansys.com/18 after the call concludes.

Finally, Walid Abu-Hadba will be leaving the company for personal reasons on May 1. Now Walid has made many important contributions to ANSYS during his four-year tenure with the company. And perhaps the most important is the development of a key group of strong product leaders below Walid, who believe in and are committed to the ANSYS' vision and strategy.

Now that Rick is here, and I no longer drive day-to-day management of sales, and given my years of experience running product organization, I'm looking forward to working more closely with the product leaders over the coming months to help guide the product roadmap by incorporating customer feedback and to ensure that we are spending our R&D dollars in the areas that would yield the highest returns.

I want to take this opportunity to thank Walid for everything that he has done for ANSYS. Walid will always be a friend of the company and he will always be a friend of mine.

With that, allow me to turn the call over to Maria to discuss our financial results in a little bit more detail. Maria?

Maria T. Shields - ANSYS, Inc.

Okay. Thank you, Ajei. Good morning, everyone. For the next few minutes, I'll add some additional perspective on our Q4 and fiscal year 2016 operational performance, touch on some key financial highlights, and also comment on our Q1 and fiscal 2017 outlook.

Also just to note, I'll be commenting in terms of non-GAAP. The results of Q4 reflect improved execution across many aspects of our business. Key highlights include total revenue of $270.6 million for the quarter and $988.6 million for the year. We reported EPS of $0.98 for the fourth quarter and $3.63 for the year.

As outlined in our earnings release, the Q4 and 2016 GAAP results include approximately $3.4 million or $0.03 per share related to workforce realignment activities that were not previously included in the company's November financial guidance. The Q4 and 2016 results also include in both the GAAP and non-GAAP results a charge of $4.7 million in connection with an employment-related settlement, which was also not included in the financial guidance provided last November.

We achieved gross margins of 89% for the quarter and for the year, and operating margins of 45% and 47% for the quarter and the year respectively.

The fourth quarter's operating margin was adversely impacted by approximately 2% related to the previously mentioned employment-related settlement.

Sales bookings growth far outpaced revenue growth in Q4. This was driven by a combination of the 37 seven and eight figure deals which were closed in the quarter, eight of which were enterprise agreements, as well as an increase in software license sales and solid maintenance renewals. These factors all contributed to deferred revenue and backlog of $638 million, representing a new record high and a 26.5% growth as compared to Q4 of 2015. This puts us in a very good position as we head into 2017.

Recurring revenue for the year was a healthy 74%, higher than the 2015, and on a larger revenue base. The company's consistent ability to maintain a solid base of recurring revenue is one of the hallmarks of our business model.

We reported operating cash flow of $357 million for the year, and we ended the year with total cash and short-term investments of $823 million. We closed 2016 with a total of 3.7 million shares repurchased at a cost of $336 million, leaving 1.3 million shares in the authorized pool. And as you saw in last night's announcement, the board renewed our commitment to continue to return capital to our stockholders by increasing the authorized share repurchase program back to 5 million shares.

Now let me spend a moment on our outlook. We've initiated our outlook for Q1, with non-GAAP revenue in the range of $237 million to $246 million, and non-GAAP EPS in the range of $0.81 to $0.85. With respect to fiscal year 2017, we're updating our November outlook to factor in movements in currency, particularly the weakening of the Japanese yen. This translates to non-GAAP revenue in the range of $1.10 billion to $1.45 billion, and non-GAAP EPS of $3.63 to $3.83.

We are targeting a non-GAAP gross profit margin of approximately 88% to 89% for the quarter and the year, and non-GAAP operating margins of 45% to 46% for Q1 and 46% to 47% for 2017.

Before we move to Q&A, let me offer some brief commentary around trends in our licensing model. For 46 years, ANSYS has been committed to offering our customers a range of options to fit their licensing preferences. With 45,000 global customers, there is no one size fits all. Our history of growing these customer relationships over decades has shown that this flexibility helps to shorten sales cycles and to drive adoption of our platform and broad portfolio of solutions.

In the past year, we've seen both an increasing preference in certain markets for time-based licenses as well as an increase in enterprise agreements among our larger customers.

In the short-term, our flexible licensing model may create variability in our results due to variances in revenue recognition. However, over the long-term, we are confident that we will continue to achieve growth in revenue, sales bookings, deferred revenue and backlog, and most importantly, customer relationships that we can continue to grow for years to come.

Further details around specific currency rates and other key assumptions that have been factored into our outlook for Q1 and fiscal year 2017 are contained in the prepared remarks document.

So Andrea, I'll now suggest that we can open up the phone lines to take some questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. Our first question comes from Anil Doradla of William Blair. Please go ahead.

Anil Kumar Doradla - William Blair & Co. LLC

All right. Good morning, Ajei, and welcome to the company and your first earnings call.

Ajei S. Gopal - ANSYS, Inc.

Thank you.

Anil Kumar Doradla - William Blair & Co. LLC

I had a couple of questions. Well, let's open up with the backlog and deferred, good job on that. If I look at the short-term deferred and backlog, it just went up by $58 million, but if I take the longer term in consideration, that's almost $150 million. Now I compare this with your full year guidance, in absolute dollars that's about $20 million to $50 million increase from 2016. So the question is, I mean why is the guidance not higher? Are you just being conservative or is there a degree of caution in converting some of the backlogs?

Maria T. Shields - ANSYS, Inc.

So, Anil, I'll take that. I would say at this point in time, there is, as you can imagine, given the size of some of these deals, some volatility around the timing of the closing of those. We've got a healthy pipeline as we head into 2017, but we are being a little cautious given that Rick is new to the scene and we're working our way through some of the transformations in the sales organization. So, we feel good about the pipeline. We feel good about the opportunity, but we're also being cautious, given how early in the year it is.

Anil Kumar Doradla - William Blair & Co. LLC

Okay. Good. Ajei, you talked about mixed execution on sales on Europe, you're taking some steps. Can you just elaborate on it a little bit more?

Ajei S. Gopal - ANSYS, Inc.

Sure. So, there are couple of things that I highlighted in my comments. One is, we've made some leadership changes in the European sales organization, which we felt will improve our ability to execute. The second is with respect to how we were going to market. And before we had somewhat of a mix go-to-market strategy. To give you an example, we had the leader who was responsible for Germany also being responsible for the Nordics. And as a result, that was dissipating his efforts across both Germany and the Nordics, and Germany of course being a very strong economy and the Nordics being a little bit smaller, he was being pulled in two different directions.

So what we've done as a result of the go-to-market, as I described is, we've essentially separated out the UK, France and Germany as key regions with leaders who are focused on that. Germany is of course including Switzerland and Austria, so we've got a key set of leaders focused on those areas and then we've taken the other smaller economies and we've grouped them together in a couple of regions, where we've coupled and linked like geos together. So we feel that that will significantly improve and streamline our ability to execute and focus our team on the thing that's most important.

And then finally the last point is, with respect to channels, we're really making an investment in indirect channels. If you look at our performance in Asia, you'll see that we delivered double-digit growth in our indirect channel, and we've made some investments in channels last year. So we're trying to make investments in channel, in the channel in Europe, and you'll see the results of that as we start to execute through the year.

Anil Kumar Doradla - William Blair & Co. LLC

Great. And if you don't mind me squeezing in one last one, with the departure of Walid, are you going to fill up a product position or are you just going to keep it as is?

Ajei S. Gopal - ANSYS, Inc.

Well, Walid is leaving on the 1 of May and I'll have a plenty of time between now and then to work with the product team under Walid. And as I said in my comments, these are very seasoned executives. These are not uniquely technologists. These are people who understand how to run a P&L and they have an enormous amount of experience between them. So I am looking forward to working much more closely with them.

As you know or as you might know from my background, I am a product guy for many years and I believe I can bring a different perspective to the table and I'm looking forward to working with these guys on product roadmaps, bringing the customer perspective into the roadmap and also thinking about the longer-term strategy of the business. So this will give me a good opportunity to get my hands on into the details. Just as I did with the sales organization before Rick came on board and I believe that four-month period when I was running the sales organization gave me a really good insight into what was happening in sales. And so I am looking forward to spending some more time with the product team.

Anil Kumar Doradla - William Blair & Co. LLC

Great. And great job on the backlog and deferred revenue guidance.

Ajei S. Gopal - ANSYS, Inc.

Thank you.

Maria T. Shields - ANSYS, Inc.

Thank you.

Operator

Our next question comes from Monika Garg of Pacific Crest Securities. Please go ahead.

Monika Garg - Pacific Crest Securities

Hi. Thanks for taking my question. First, we've seen recent M&A in simulation space in last 12 months, Siemens, Dassault, Hexagon, all bought companies. So the question is, are you seeing an increased competition in the space?

Ajei S. Gopal - ANSYS, Inc.

So the question is, are we seeing an increased competition in the space as a result of the M&A. Well, what's happening is, when I look at our product portfolio and you look at what customers are looking for, I believe we have the strongest product portfolio in the industry for what we do. We address some of the key challenges that customers are having in the area of simulation. We provide the most – the best accuracy and the most effective, I believe solver technology in the industry and so that remains a constant. In many cases, you find technologies that were previously competing with us in the marketplace now under a different roof and we haven't really seen that – we don't really see that making a tremendous amount of impact on our business.

Monika Garg - Pacific Crest Securities

Got it. Then one for Maria. Well, your cash flow from operation is actually down two years in a row. I mean, given that your operating income is growing, why would that be the case? And then maybe I missed it, but have you provided cash flow from operation guidance for 2017? Thanks a lot.

Maria T. Shields - ANSYS, Inc.

So, Monika, I would say, Q4, if you look at Q4, there is really a significant factor relative to cash flow that was negatively impacted by three days of DSO, as it relates to the larger deals, which were highly backend loaded. So, we did not get the benefit of about $9 million worth of cash flow, which we had modeled into our outlook for Q4. And for the full year, in 2016 versus 2015, we did have about $11 million of incremental tax payment. So those are the two key factors relative to cash flow swings in Q4 and for the full year. We have updated our cash flow outlook to factor in, not only the changes in currency since we last guided, but also the restructuring and the settlement. So we are suggesting cash flow of $360 million to $380 million for fiscal year 2017 at this time.

Monika Garg - Pacific Crest Securities

Got it. Thank you.

Operator

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

Jay Vleeschhouwer - Griffin Securities, Inc.

Thank you. Good morning. I'd like to ask about your bookings results and what your expectations might be by end market or vertical. Based on the data that you provided last night on a trailing 12 month basis, we could see that certainly for Q4 and for the year, you had particularly strong results in the semiconductor market after having had a number of quarters of fairly weak bookings in semis. And similarly you had quite strong results in aero and defense, which was pretty consistently strong throughout the year. So, I guess, a couple of questions there. How are you thinking about growth by vertical in terms of your 2017 outlook, particularly given what might be tough comps for you in semis and A&D in 2016?

And were any of the ELAs, or any of the large deals in Q4 business that might otherwise have been done in 2017, particularly the semi business, were any of those, let's say, early EDA multiyear renewals?

Maria T. Shields - ANSYS, Inc.

So, Jay, let me just talk – I'll take the numbers piece and then I'll let Ajei take some of the qualitative commentary. So, you're correct in what you commented on relative to the strength, particularly in semis and aerospace and defense. The semis, none of those were early renewals, many of them were renewals that were in the pipeline and were slated to close. The good news is that with the addition of some of the technology that we have added into our semiconductor business unit, that bodes well, we believe, for continued growth in that aspect of our business. And as we look at the pipeline heading into 2017 as it currently exists, I think you'll see continued growth in those segments and we are also hopeful that some of the investments that we've made around the new initiatives in auto will continue to yield increased growth as we make our way through 2017.

Ajei S. Gopal - ANSYS, Inc.

Yeah. And then just to give you some perspective on the qualitative from a business perspective, if you think about the semis, as our customers are moving to advanced process nodes like 16-nanometer and below, the designs as you know are becoming significantly more complex and that will drive the need for more simulation and frankly that drives more seeds of our products. And especially when you start thinking about 10-nanometer and 7-nanometer, that's especially the case. So we see that's a natural driver for incremental demand for our offerings.

Also as you see, complex process is moving from the mobile space into new applications like autonomous vehicles, those systems require tremendous amounts of computing resources. They are creating power and thermal challenges, they require advanced multiphysics simulation and that's right up our sweet spot, that's exactly what we can do and we can help in this multi-domain simulation of the chip package system that's essential for those systems. So that's again going to drive more simulation.

And then finally, as traditional systems companies are moving into custom silicon, we see the opportunity as well for our technologies to continue grow. So that's in the semiconductor space. And of course, we talked about some of the others briefly, but Maria mentioned automotive, there, self-driving vehicles or ADAS is a big driver, and we see significant opportunity there.

Let me give you a very quick anecdote. One of the CEO's of a large automotive company predicted that to get a car, vehicle to be tested for self-driving capabilities completely certified, it would need about nine billion miles of road tests, to test every possible scenario and nine billion miles of road testing is simply not practical.

And if you think about that challenge, the only way in which you could get that certification is by simulating some of that, and that requires simulation across the entire portfolio, its mechanical, its electronics, its semiconductors, the entire portfolio comes to play, including of course embedded software, because these devices are essentially supercomputers on wheels now. So we see a very strong opportunity across some of these verticals.

Jay Vleeschhouwer - Griffin Securities, Inc.

For you, Ajei, let me ask you a technical follow-up, a product follow-up. One of the most interesting announcements the company made last year was around your SeaScape architecture, which was originally intended in support of your EDA products, but you've also committed to rewriting or porting your other physics products onto that new platform to deal with what are increasingly significant data infrastructure and data handling issues across simulation physics.

So the question is, are you in fact this year going to get those new non-EDA products onto the new platform as you had indicated you would do? And then lastly, the company has had a long time commitment to increasing its percentage of revenues invested in sales and marketing, R&D and also to grow your services business proportionately. Are all of those still your commitments?

Ajei S. Gopal - ANSYS, Inc.

So lot of questions. So let me start with the – let me start with your commentary about the big data architectures that we've talked about. As you rightly note, we started off with SeaHawk and SeaScape in the semiconductor space. We've had some good response from customers, and the idea there of course is with the increasing complexity of data and the analytics involved, you need a different way of thinking about your design and think – the different way of addressing the challenges that manufacturers and chip typically had. And so that's why the architecture helps, and as I said, we've seen some initial traction. It's of course early days yet.

We have ongoing development as we think about how this architecture would move to the other physics. We have ongoing development, but we will keep you posted and updates will follow on that space. It's obviously an area of tremendous amount of excitement for us.

The second with respect to sales and marketing and product. As you know, we are trying to be, and as I mentioned in our prepared comments, we went through – we're going through realignment this quarter. We've announced, so that we can free up resources and investment capacity to focus on those areas that we think are most important and that includes elements of sales and marketing, that includes some product areas, and that also includes some investments in infrastructure.

Jay Vleeschhouwer - Griffin Securities, Inc.

Thanks very much.

Operator

Our next questioner is Ken Talanian of Evercore. Please go ahead.

Ken Talanian - Evercore Group LLC

Hi, guys. Thanks for taking my question. Looking at your investor presentation for the fourth quarter, it looks like 2016 finished up with about a 8% organic growth. I was wondering if you could give us a sense for your expectations for organic growth over the next couple of years?

Maria T. Shields - ANSYS, Inc.

So Ken, we'll just stick with 2017 for now, because we've got a lot of moving parts as you know, and we're also dealing with longer term the impact of the change in software recognition, software revenue recognition that we and many of our software brethren are working through right now.

If you take a look at 2017, right now, we are booking at, for the full year, 4% to 8% and that 6% is the midpoint, and we are looking for about 8% at the midpoint for Q1, given the I'll call it, health and momentum that we have coming off a strong Q4, as well as what we will admit is a relatively weaker comp. So that's kind of the outlook that we'll give you currently and we will continue to update on out years as we prepare for Investor Day in September where we'll be rolling out our strategy and some metrics that we believe will be in a position to share with all of you relative to the longer term aspects of the business model.

Ken Talanian - Evercore Group LLC

Okay, great. And then also I was wondering, could you give us the sense of how your partnerships with PTC and GE on the IoT side have impacted your sales process if at all?

Ajei S. Gopal - ANSYS, Inc.

Well, the business model around areas like digital twin and so on are still, I would say, being developed by the industry. The opportunity is obviously enormous, because if you think about the digital twin space, which goes to the Internet of Things, the opportunity there is of course to be able to create a digital doppelganger, if you will, of every single product that's out there in the market place, and every instance of a product and get real-time analytics – do real-time analytics, not just statistical analytics, but to do real-time physics against those models to know what's happening for that particular instance of that particular product.

And so, that expands the use of simulation dramatically. And I think the industry is still trying to understand what and how this business model is going to look like as it evolves. But the good news for us of course is that, as you think about the Internet of Things, there is an element which collects information and brings it back in and then, of course, there is some statistical analysis that people do around machine learning. But I believe that one of the most important things there is the actual physics simulation, is to take that information and to figure out what's going on exactly.

And that means, if you have sensor information that's perhaps remote, using that remote sensor information to do a physics model and understand what's happening for example in the details or the insights of a particular component where you may have no sensors. And so I feel that we have, in simulation have an extremely strong position in this developing business model in this developing economy, but of course, that's still work in progress.

Ken Talanian - Evercore Group LLC

Okay, great. Thank you very much.

Operator

Our next question comes from Sterling Auty of JPMorgan. Please go ahead.

Sterling Auty - JPMorgan Securities LLC

Yeah, thanks. Hi, guys. Wanted to start with the long-term backlog. I think this is the biggest jump I've seen in the long-term backlog and multi-year deals. Can you give us a sense or more detail around what drove it, maybe what the average duration of those contracts look like? And when they come back through revenue, are they going to come back through as paid up or lease?

Ajei S. Gopal - ANSYS, Inc.

Yeah. There were some longer-term contracts in there, but those are frankly mostly three-year contracts and most of them show up as lease revenue. And so, obviously, they come in and they convert to revenue over a multi-year period.

Sterling Auty - JPMorgan Securities LLC

Okay. And then, can you give us a little bit more detail on the realignment. How many employees were actually let go, maybe some sense of the areas, and how you plan on rehiring and where they'll get layered in?

Maria T. Shields - ANSYS, Inc.

Yeah. So Sterling, Q4 impacted approximately 20 employees. The total as you saw from our announcement is approximately 4% during the course of the entire realignment, which we are currently planning to the majority to take place in Q1, some to take perhaps a little bit longer into Q2. It touched all parts of the organization in all geographies, and we are looking to redeploy, as Ajei said, I'll say three key areas. One around some of the product opportunities as we see areas like additive manufacturing, digital twin, IoT, and even some of our core products. Sales and sales operations and infrastructure, all the areas that we believe that we need to invest in to be able to drive not only higher growth in long-term, but be able to really scale the business from $1 billion to $2 billion.

Sterling Auty - JPMorgan Securities LLC

Okay. Thank you.

Operator

Our next question...

Ajei S. Gopal - ANSYS, Inc.

Yeah. On the go-to-market side to add to what Maria said, also investments on technical sales and also in channel and sales enablement.

Operator

Our next question comes from Ross MacMillan of RBC Capital Markets. Please go ahead.

Ross MacMillan - RBC Capital Markets LLC

Thanks so much for taking my questions, one for Ajei and one for Maria. So, Ajei, just obviously, you're making some tactical changes here, you've added Rick, you got the sales changes in Europe and now you're going through some sort of resource reallocations. I was just curious about, now you've been in the CEO role for a little while. What are the strategic things you're looking at. I'm just curious whether it's delivery models, whether it's pricing? I wondered if you could shed any early light on some of the strategic things you're thinking about?

Ajei S. Gopal - ANSYS, Inc.

Yeah. I've been in the CEO role since January 1 and until that time, I was spending a fair amount of time with the sales organization, of course, prior to Rick ramping up. I am obviously working with my leadership team. I've been spending a fair amount of time thinking through, of course, the long-term strategy for the business. I've been spending time with customers to understand where they are going. I've been talking to partners to understand what their thinking is. So for me there is a lot of data gathering and there is obviously some short-term decisions that we made, which are pretty obvious with respect to some of the tactical executions that you've talked about along the number of different dimensions.

Our expectation is to continue to work through the strategic direction for the company. We're not – I don't see any major strategic change in direction at this point of time, but we will be getting back to you on Investor Day, which I believe is on September 14 of this year, and we'll be in a position to have a more fulsome conversation about our long-term view of the business, about product strategies, about business strategies, business models, et cetera, and I think that will give us the opportunity to have a pretty detailed conversation at that time.

Ross MacMillan - RBC Capital Markets LLC

Great. And one just – thank you. One follow-up for Maria. I think Sterling sort of asked this, but just to be precise, if I look at the long-term backlog, I wondered if we compared the long-term backlog at the end of 2016 versus end of 2015, do you have weighted average duration of that backlog? I was just curious to – whether it's consistent one year versus the next? Thanks.

Maria T. Shields - ANSYS, Inc.

Ross, I don't have that currently off the top of my head, but I would suggest that this year, given the number of enterprise agreements, it is probably slightly higher than it was a year ago, given that last year at this time, we had only closed a handful of those. So I would suggest the duration is slightly up from a year ago.

Ross MacMillan - RBC Capital Markets LLC

Thank you.

Operator

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

Saket Kalia - Barclays Capital, Inc.

Hey, guys. Thanks. Thanks for taking my questions here and Ajei, of course, welcome to your first full call as CEO.

Ajei S. Gopal - ANSYS, Inc.

Thank you.

Saket Kalia - Barclays Capital, Inc.

I had a question just on longer-term product strategy and just kind of zeroing on one aspect of it. Historically, ANSYS has talked about simplifying the tools to appeal through your broader TAM and again, realizing it's early, again January 1, kind of taking the seed, how are you just thinking about broader democratization of simulation?

Ajei S. Gopal - ANSYS, Inc.

So, I see, when I look at our – when I look at the market, I think that there is a – there are probably three legs is the way I'm thinking about it to the stool. One is the traditional use of simulation by engineers, by analysts and we see an enormous amount of opportunity there as we start to talk about things like ADAS. As we look at our semiconductor business and so on and so forth, there is enormous amounts of opportunity there and we've talked about some of that. We see as purely incremental to our current business, we see as opportunity of moving upstream to address a new audience which is essentially the designer market. We see that as incremental upside. We've invested in this space. We are now with ANSYS 18. We have the third generation of a product in the space called AIM and it takes time to mature a product, but I think at this point, we have a product that meets the needs for a simulation market that's upstream of our existing install base.

And then of course as you look downstream, I see the opportunity around digital twin that we've already articulated. So, absolutely, there's an opportunity and we have activities underway there. We see that as being incremental. We see the downstream opportunities around digital twin as being incremental and we see our core business as being with all of the changes that are taking place in the industry, we see our core businesses as being stronger than ever.

Saket Kalia - Barclays Capital, Inc.

That's great. Just for my follow-up, maybe for Maria. Maria, could you just talk about current bookings growth this quarter? And of course, we all saw and appreciate I think the healthy big deal activity. I think you said seven $10 million-plus type of deals. How would you normalize that current bookings growth, if at all, for what some might argue sort of lumpy business, because that was significantly higher than what you had last year. So how do you sort of think about current bookings, maybe on a normalized basis, if that makes sense?

Maria T. Shields - ANSYS, Inc.

Yeah. So current bookings growth was around 12%, 13% in constant currency. Probably for full year 2016, bookings growth was 6%. I would anticipate for 2017 based on everything that we're modeling right now, it will be slightly higher than that.

Saket Kalia - Barclays Capital, Inc.

Got it.

Operator

Our next question comes from Jason Velkavrh of Robert W. Baird. Please go ahead.

Jason Velkavrh - Robert W. Baird & Co., Inc. (Broker)

Great. Thank you and thanks for taking my questions. First question I have, you signed eight ELAs in the period, which is very impressive, but more about the previous 10 customers that have been on ELA for a bit longer. I was wondering if you can give any color on how those customers are extending usage of ANSYS within their organizations?

Maria T. Shields - ANSYS, Inc.

Yeah. I can tell you that there actually were two of those customers who had previously signed deals, who either decided to extend the initial deal or have added incremental technology to their deployment. So it's still early in the game, but we are very excited about the opportunity that engaging with our customers at this level provides us relative to insight and also, I'll call it, knowledge relative to other customers that, as they work their way through tool consolidation and some of the challenges they have around their new growth initiatives relative to taking our story and our broad portfolio to help them through those transitions that they're going through.

Ajei S. Gopal - ANSYS, Inc.

And to add to what Maria is saying, our strategy for enterprise agreements is not just simply a fire and forget, where we consummate a deal, complete a deal, and then move on. It's really building an ongoing relationship with the customer, and this obviously as Maria pointed to, with the couple of deals that we've talked about, this translates into a long-term relationship that they can, they feel like we're a partner, we're able to work with them. And I think that's very helpful. In some cases, we have people onsite, in some cases we have ongoing business reviews. So there are a number of different mechanisms that we use to make sure that we have that ongoing relationship both at the strategic level as well as at the operational level with the people who are using our technologies.

Jason Velkavrh - Robert W. Baird & Co., Inc. (Broker)

Great. Thank you. And then my next question is about AEC or ANSYS Cloud product, I think the last update you gave there was a 50-customer pilot in place. I was just hoping you can give an update on, where you are with that product, where those customers are at their usage, and if more folks are using that product at this point?

Ajei S. Gopal - ANSYS, Inc.

Yeah. I mean we've had tremendous feedback on the product, and obviously we have customers who have been using it. It continues to be an area that I think is still developing, and we'll be in a position to share more strategy around our cloud and the cloud direction, when we get together in the September timeframe.

Jason Velkavrh - Robert W. Baird & Co., Inc. (Broker)

Got it. Thank you.

Operator

Our next question comes from Steve Koenig of Wedbush. Please go ahead.

Steve R. Koenig - Wedbush Securities, Inc.

Good morning, Ajei and Maria. Thanks for taking my questions.

Ajei S. Gopal - ANSYS, Inc.

Thank you.

Steve R. Koenig - Wedbush Securities, Inc.

So congrats on the strong quarter. I wanted to circle back to the last question on cloud briefly. I realize you are not in a position to talk about your products yet, but maybe just some color here, remind us the 50-beta customers, are they on, is that your multi-tenant product or is that, or is the multi-tenant still under development? And just more generally, how do you think of where you stand in cloud right now versus your competition and what you need to do kind of strategically in cloud?

Ajei S. Gopal - ANSYS, Inc.

Yeah. So, what we have right now is, this is not our multitenant product, that's still under development. And that's an area of frankly where I plan to spend a little bit more time with the development organizations to go through the cloud plans in some detail. As you know, I have a pretty strong background in that space and I think that the cloud is going to be very important for us in a number of different dimensions both from a licensing perspective as well as from a business model perspective, and I think that there is some usability and scalability challenges that we can address. So, I feel pretty good about the strategic direction, but again, as I said, this is an area where as we make this transition to multitenant, this is an area where we're doing more work and I'll be in a position to share more details with you guys when we talk about this at Investor Day in September.

Steve R. Koenig - Wedbush Securities, Inc.

Got it. Got it. Thank you. Quick one for Maria. Maria, what are you assuming in your 2017 guidance for ELAs? What are you targeting there? I think you did 18 in this last year, so what are you looking at going forward? And then how should we expect those to grow over time maybe more generally as well?

Maria T. Shields - ANSYS, Inc.

Yeah. So I would say, it's early and we sat down with Rick and his team and reviewed the health of the pipeline. Currently, I would say a good target would be somewhere in the – similar to this year, 18 perhaps 20 at the high end range, and we believe that those will grow, at least on a bookings basis over time in double-digits just given the extreme opportunity to not only increase the number of users, but also to deploy increased applications of our technology across the broader base across those enterprise customers.

Steve R. Koenig - Wedbush Securities, Inc.

Very good. Well, thank you very much.

Operator

Our next question comes from Erik Karlsson of Bodenholm Capital. Please go ahead.

Erik Karlsson - Bodenholm Capital AB

Thanks for taking my question. ANSYS has historically created tremendous shareholder value through capital allocation, mostly via acquisitions, primarily building out the multiphysics offering. Ajei, I would love to hear your thoughts on capital allocation going forward, given that the balance sheet is quite strong, which is a great thing. How do you look at the opportunity to create further value via the balance sheet?

Ajei S. Gopal - ANSYS, Inc.

I mean, obviously, we're going to look at all opportunities that are available to us and, I mean, your point about M&A, M&A is certainly one of the opportunities that's ahead of us. As you may know, I've had some experience in driving M&A and I've seen the transformative opportunity that can be created by doing the right M&A. But I want to be thoughtful and make sure that we do the right M&A. But obviously as you know, the wrong deal can have a very negative impact on an organization. So absolutely, M&A is something that we continue to look at and we will continue to look at. We see some opportunities and we will keep you posted as we think this through.

Erik Karlsson - Bodenholm Capital AB

If we look at the – because ANSYS generates very strong cash flow, as a follow-up then, if we look at the cash flow generated over the next year or two, do you think it's most likely that you can deploy it in M&A?

Maria T. Shields - ANSYS, Inc.

That would be our number one preference. However, to Ajei's point as you highlighted earlier, we've been extremely successful in creating long-term shareholder value because we were selective relative to how the M&A targets that we added to our portfolio really aligned with the future needs and directions of our customers. So, we are continuing to solicit inputs from not only our field and our customers around which would be the appropriate assets that we continue to differentiate off. And in the short-term, in the absence of significant M&A, we will continue to redeploy capital back to the shareholders through our share repurchase activity. But, we are committed to continue to take a look at opportunities for M&A that we'll continue to distinguish our portfolio from other offerings.

Erik Karlsson - Bodenholm Capital AB

Very good. Thank you very much.

Operator

Our next question comes from Stephen Bersey of MUFG. Please go ahead.

Stephen Bersey - MUFG Securities America, Inc.

Thanks, guys. Hey. As you step up your investments back into the business, whether it's on products or operations, I'm just wondering how we should think about the potential impact on operating margins and the balancing act that you mentioned that you'd like to walk. So just a philosophy on that.

Maria T. Shields - ANSYS, Inc.

Yeah. So, Steve, one of our problems is not our operating profit margins, relative to trying to expand them. We've taken a step back as part of our annual planning process and with Ajei coming in and having perhaps some different perspectives from his experience at other enterprise providers, and we made a conscious decision this year when we went out with our early outlook in November to at least reduce the margin by a point to 46% and then to also take on the realignment in recognition that we needed to make some improvements in our own business to allow us to fund areas that we believe are higher growth opportunities or have unfortunately been perhaps impediments to our growth. So, as I said, we are looking to maintain our industry leading margins. For this year, we're guiding for the full-year to 46% and our ability to stay at 46% is going to be dependent on really the pace of hiring in the remaining quarters and some of the initiatives that we currently have underway that we've already redeployed some of those dollars too.

Stephen Bersey - MUFG Securities America, Inc.

Great. And with the cloud subscriptions going on in the industry, there has been a few data points out there where vendors are having some flexibility to raise maintenance price as we've seen that, in particular Autodesk is saying that that's how they are going to press people on to the client. I'm just wondering how you guys are looking at your maintenance fees that you're charging and if you're seeing the opportunities for potentially boosting that up?

Ajei S. Gopal - ANSYS, Inc.

Well, I think, right now we have no significant or we have no increases that are assumed in our plan for this year as far as maintenance is concerned. So it's pretty much what we've been doing in the past is what we'll continue to do. So there is no change in the business model assumed in this year's guidance.

Stephen Bersey - MUFG Securities America, Inc.

So, do you look at them as reasonably fair or do you see some opportunity on the upside potential?

Ajei S. Gopal - ANSYS, Inc.

So, we're around 20% maintenance. We think that's a – in the short-term, that's what we've been planning for this year. Obviously, as we start to think about different offerings and different capabilities that we are planning that might have an impact, but that's still in the future as we think about the nature of our portfolio going forward. And, again, I think we'll be in a position to share some more insight into strategically where we're going and that might have some more context here in the September timeframe.

Stephen Bersey - MUFG Securities America, Inc.

Thanks. That's helpful.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Ajei Gopal for any closing remarks.

Ajei S. Gopal - ANSYS, Inc.

Thank you, Andrea. So I believe that ANSYS has a huge opportunity ahead. With ANSYS 18, our next step in making pervasive engineering simulation a reality, we brought to market a feature rich release that continues a long track record of providing the best simulation solutions in the market. I'm excited by our performance in Q4, I'm excited by our momentum early in 2017 and I'm looking forward to seeing the impact of the operational changes that we've made and that we will continue to make.

And with that, I'd like to close by saying thank you to our customers, my ANSYS colleagues and our longstanding partners. And I want to thank you for listening in today. I look forward to our next call. Enjoy the rest of your day. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Technical & System Software,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.