ANSYS Inc

NASDAQ:ANSS

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to ANSYS' Second Quarter 2020 Earnings Conference Call. With us today are Ajei Gopal, Chief Executive Officer; Maria Shields, SVP and Chief Financial Officer; and Annette Arribas, Senior Director, Global Investor Relations.

At this time, I would like to turn the call over to Ms. Arribas for some opening remarks. Please go ahead.

[Annette Arribas, Senior Director, Global Investor Relations]

Good morning everyone. Our earnings release, the related prepared remarks document, and the link to our second quarter Form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our second quarter financial results and business update, as well as our Q3 and updated fiscal year 2020 outlook, and the key underlying qualitative and quantitative assumptions.

I would like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call important factors that may affect our future results are discussed at length in our public filings with the SEC all of which are also available via our website. We note in particular that uncertainty regarding the impact of the COVID-19 pandemic on our performance could cause actual results to differ materially from our projections.

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 this call and in the prepared remarks, we'll be referring to non-GAAP financial measures unless otherwise stated. A discussion of the various items that are excluded and a full reconciliation of GAAP to the comparable non-GAAP financial measures is included in this morning's earnings release materials and related Form 8-K.

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

[Ajei Gopal, Chief Executive Officer]

Good morning everyone and thank you for joining us. Thanks to strong execution, ANSYS delivered Q2 revenue operating margin and earnings that exceeded the high end of our guidance. Our Q2 results illustrate the close relationships we have built with our customers, which were important as the overwhelming majority of our business in Q2 was transacted remotely.

That included two notable sales. First, we closed the largest total contract in our 50-year history at almost $100 million with an existing customer in the automotive and ground transportation space. This customer is standardizing on ANSYS solutions for multi-physics, additive manufacturing, electrification, and digital twin to develop great products faster and more affordably.

Our second notable deal was our largest new business professional agreement which was driven by our flagship HFSS for electromagnetics and LS-DYNA for explicit analysis. This $12 million agreement with a major high-tech company had been forecasted for the second half of the year. But based on the customer's evolving needs and strong sales execution we were able to sign the contract in Q2. That contract was the primary contributor to our Q2 revenue coming in over the high end of our guidance.

Turning to our performance by industries, Q2 played -- largely played out as we had expected. We saw little to no reduction in demand in the high-tech and semiconductor vertical which included the $12 million new business deal that I have already mentioned.

Similarly, the defense segment remains relatively stable due to its focus on technology to support national security. For example, in Q2, we closed a seven-figure multiyear deal with a European defense contractor. Even while many manufacturing plants were idle due to COVID, the automotive industry is continuing its investment in R&D.

In particular, OEMs and their supply chains continue to rely on simulations for emerging solutions and electrification and autonomy. Our optical solutions were adopted by a North American autonomous electric vehicle developer and by an Asian automotive OEM to advance their ADAS programs.

Also in Asia Tier 1 automotive supplier DENSO signed a three-year multimillion-dollar deal to adopt ANSYS solutions for automotive parts development for electrification and autonomy.

Our Q2 performance by geography was as we expected with North America leading the way. North America has our largest installed base of enterprise customers with a number of them due to renew their leases in 2020. We are seeing a high renewal rate for those leases and are expanding on them by attaching new product sales. However, as we mentioned in our prepared remarks document we saw a slowdown in the SMB space across all our major geographies as we had predicted in our last earnings call.

Despite the uncertain economic times, companies are continuing their investments in R&D. As we have previously discussed R&D is typically the initiative least impacted by budget cuts and the first restored, primarily because it drives future growth and market success. Customers view simulations and the key component of R&D a force multiplier that helps them drive both top-line revenue growth and achieve significant cost savings.

Furthermore, the pandemic has limited access to labs for some customers making simulations even more important than ever. Some other customers have struggled with remote access to corporate data centers and are taking advantage of ANSYS Cloud to give their engineers access to high-performance compute capacity. For example our customer Coca-Cola is reporting that ANSYS Cloud is dramatically reducing the time required for simulations making its engineers working from home even more productive than when they were in the office.

Our inaugural Simulation World virtual conference clearly illustrated the importance of simulations to customers and prospects across industries. More than 55,000 registrants from around the world signed up to learn how companies such as Ferrari, HPE, Honeywell, Siemens, Ford, Seagate and Bosch are using ANSYS simulation to develop their next-generation products.

They also heard from our partners including Microsoft, PTC, Autodesk and Rockwell Automation. Simulation World demonstrated the power of digital transformation and the key role that simulation plays in making our customers' digital transformation is successful.

Our customers continued reliance on simulation. Along with our proven ability to close even the largest deals remotely gives us confidence as we forecast the second half of the year. We have increased our guidance to reflect currency changes, improved cash flow and our EPS overachievement in Q2. Maria will give you the details in a few minutes.

Moving to our product successes. We recently released ANSYS 2020 R2. This innovative release helps distributed engineering teams accelerate innovation by harnessing new streamlined workflows and dynamic capabilities across our multiphysics product suites.

Some of the many highlights of R2 include: a streamlined fluids workflow to simulate capacity fade and cell life in Fluent; integration of solver capabilities from LS-DYNA into our mechanical interface; the ability to solve over 100 million unknowns in a single simulation, while delivering a nearly 10x increased solution size in our electromagnetics flagship product HFSS; a new electrothermal option in our semiconductor solution RedHawk-SC, which uses our big data platform to solve coupling of various structures on over one billion instances concurrently; and platform upgrades that empower engineers to rapidly process and finalize their designs through cloud-based high-performance computing.

As part of our ANSYS 2020 R2 launch, we also unveiled our next-generation upfront simulation solution ANSYS Discovery. With built-in seamless connection to ANSYS flagship products, Discovery now empowers all engineers to explore large -- larger design spaces and quickly answer critical design questions early, resulting in improved ensuring productivity and product quality.

Our partner PTC has embedded Discovery into CAD solution Creo Simulation Live. On its recent earnings call, PTC announced the closing of its first 7-figure Creo Simulation Live deal with a large U.S. government agency as well as the closing of 10 follow-on expansion deals. As the product continues to build momentum PTC is planning new marketing programs to support sales.

We have partnered with Microsoft, Dell, GE and Lendlease to form the Digital Twin Consortium. Physics-based digital twin technology enables companies to head off problems before they occur, prevent unplanned downtime, improve the customer experience and drive innovation and performance. This consortium will build an ecosystem of digital twin users, drive best practices and define requirements for new digital twin standards across industries.

Due to our deep commitment to encouraging innovation at all levels Fast Company has once again named ANSYS as one of the best workplaces for innovators. Working with Accenture, Fast Company recognized ANSYS for giving employees the freedom to explore the ideas that benefit our customers and the communities we serve.

Turning to our recent moves and M&A. We started Q2 with our acquisition of Lumerical which enables ANSYS customers to predict the behaviour of light within complex photonic devices structures and systems. By integrating Lumerical's photonics products with our semiconductor and optical suites, designers can accurately predict the impact of both nanoscale and macroscale optics for automotive displays, autonomous vehicles, augmented reality and even the development of cosmetics.

Our acquisition of LSTC continues to play a key role in expanding our solution footprint with customers around the world. In Europe our channel partner DYNAmore inked an important deal with BMW to adopt ANSYS LS-DYNA for virtual crash testing replacing an incumbent competitor. And in Asia a major global automotive OEM continued its investment in LS-DYNA as the product of choice for crash safety analysis. This is exciting news coming just months after we closed the acquisition of LSTC.

Finally I'm proud that ANSYS has been named one of the Bay Area's Best Places to Work by the San Francisco Business Times and the Silicon Valley Business Journal. This recognition is a testament to our diverse and inclusive culture which incorporates valuable perspectives and background to solve complex challenges for our customers.

To summarize, Q2 was a strong quarter highlighted by great execution across the board thanks to our global team of dedicated employees and channel partners. Despite the economic uncertainties our customers know that ANSYS' simulation technologies help them solve their most vexing product challenges, whether they're working in a corporate research lab or using the cloud from their home offices.

They know that ANSYS simulation delivers both top line revenue growth and significant cost savings. And they know that ANSYS simulation will position them for future growth and market success. Our ability to close business and to support our customers even if they work remotely gives us confidence to deliver against our objectives for the second half of the year.

And with that I'd like to turn the call over to Maria to discuss our financials for Q2 as well as the details around our outlook and the assumptions for the remainder of 2020. Maria?

[Maria Shields, Senior Vice President & Chief Financial Officer]

Thank you, Ajei. Hello everyone. Ajei shared a few highlights from our Q2 results. And now let me take a few minutes to add some additional perspective on our strong second quarter financial performance and provide both qualitative and quantitative color around our outlook and key assumptions for Q3 and the remainder of 2020. I also encourage you to please review all of the Q2 earnings documents that we have posted to our Investor Relations website.

Before I begin, I would like to take a moment to again say thank you to the ANSYS team. In our efforts to remain focused on employee safety, most of our colleagues continue to work from home throughout the second quarter and we believe that this will likely continue to be the case throughout most of what remains of 2020.

We have leveraged our previous investments in collaboration and infrastructure to remain connected and we continue to seamlessly support our customers and each other. Our HR team has also promoted initiatives around health and wellness so that we can support our employees' well-being through these historic times.

Now let me move on to our financial performance. Our Q2 results reflect the resiliency from the ANSYS business model combined with our continued focus on executing against our plans. We finished the quarter with total revenue of $389.7 million or constant currency revenue growth of 6% and operating margin and EPS results that were both well above the high end of our Q2 guidance.

Our revenue in Q2 was driven by strong sales execution. As Ajei mentioned earlier the closing of the largest new business professional license deal in the company's history was the primary contributor to our revenue being above the high end of our guidance range.

I would also just like to highlight that these results are quite impressive when considering the very strong comparable of last year's second quarter in which we reported constant currency revenue growth of 23%. The combination of our strong second quarter and first half results and the strength of our sales pipeline give us confidence that we are on the right path as we continue to make meaningful progress towards achieving our longer-term strategic objectives and delivering on our 2020 financial commitment.

Key financial metrics for the quarter continue with Q2, ACV of $344 million or constant currency growth of 6% with 83% of ACV coming from recurring sources. Strong lease sales which drove a 14% increase in lease license revenue combined with a continued high renewal rate on maintenance contracts contributed to building our deferred revenue and backlog to a Q2 total of $846.5 million, an 18% increase over last year's comparable balance and a new record Q2 high. This provides us good visibility into the second half of 2020.

The strong top line results combined with our continued focus on fiscal discipline helped to drive a second quarter gross margin of 90% and an operating margin of 43% which finished well above the high end of our Q2 guidance. In line with the plans that we had communicated last quarter, we continued to manage our business at reduced levels of discretionary spending.

The most notable being in the category of business travel and entertainment as safety concerns continued to limit our ability to travel throughout the second quarter. These positive variances were partially offset by higher bad debt expense. While we have been managing the business throughout most of the first half of 2020 at a reduced pace of hiring, we did increase our employee base by approximately 170 employees in Q2 which included the addition of 58 employees through the acquisition of Lumerical that we closed on April 1.

The net result was second quarter EPS of $1.55 which also finished above the high end of our guidance and which benefited from the overperformance in revenue. With respect to taxes our effective tax rate in Q2 was 19.5%, which is also the rate that we expect for the remainder of 2020.

We further strengthened our cash and balance sheet position in the second quarter with cash flow from operations that totaled $132 million for the quarter. Cash flow from operations was $279 million for the first half. We closed Q2 with a total of $745 million in cash and short-term investments.

And through the combination of our current cash position, the additional $500 million that we have available under our undrawn revolver and our projections for 2020 operating cash flow, we remain confident that we have ample liquidity to continue to progress against our long-term strategy, while at the same time remaining cognizant of the uncertainties that exist in the current operating environment.

As we had previously communicated, against the backdrop of ongoing volatility and uncertainty in the global marketplace, we elected to cease our share repurchase activity during the quarter, which lays up with 2.8 million shares available for repurchase under the current authorized program.

We will continue to assess both our own financial performance as well as market conditions in determining when might be the most opportune time to consider reinstating future share repurchases.

While no shares were repurchased during the quarter, substantially all of our cash flow from operations in the first half was deployed on the combination of share repurchases, capital expenditures and the acquisition of Lumerical.

Now let me turn to the topic of guidance. Before I get into the specific numbers, let me just provide a few qualitative comments with respect to the ongoing impact of COVID-19 and how we are thinking about our business for the second half.

During our last call, Ajei discussed how our team had created multiple scenarios to build out what we believe was the most appropriate framework based upon everything that we knew at the time.

As we progressed through the second and into the current quarter, we have continued to execute against that framework and to evolve our plans factoring in both new data as it becomes available and the continuing uncertainty that exists in the global market.

Consistent with our practice from last quarter, we will continue to provide outlook for Q3 and the remainder of 2020, but with ranges that are wider than those historically provided to account for the increased uncertainty.

To summarize, coming off our very strong finish in Q2, we are initiating guidance for the third quarter and increasing our revenue earnings ACV and operating cash flow outlook for the full year. The increases to revenue and ACV are to reflect a weaker dollar currency environment.

Now let me move on to the details of our outlook. For Q3, we expect non-GAAP revenue in the range of $347 million to $377 million and non-GAAP EPS in the range of $1.10 to $1.34.

For the full year, we are increasing our outlook to factor in both our strong second quarter financial results as well as changes in key currency rates that may have taken place since we last provided our outlook in early May.

Starting with non-GAAP revenue in the range of $1.57 billion to $1.645 billion, or constant currency growth in the range of 2% to 7% and EPS in the range of $5.75 to $6.35. We are also increasing our full year 2020 ACV outlook to a range of $1.52 billion to $1.585 billion. This represents constant currency ACV growth of 4% to 8%.

With respect to the remainder of the year, in Q3, we expect the business environment that is similar to or marginally better than Q2 as many customers have not resumed full operations and employees continue to work from how.

We also continue to expect that the effects of the pandemic will continue to adversely impact our levels of new business, particularly in the SMB space and disproportionately affecting perpetual licenses.

Our current outlook continues to anticipate a stronger recovery in the fourth quarter buoyed by the pipeline for multi-year leases that are currently forecasted to close in Q4.

Our outlook for the remainder of 2020 factors in everything that we are currently aware of, with respect to ongoing trade discussions and customer sentiment across our geographically and industry-diverse customer base.

It also reflects spending in the second half related to several business infrastructure and digital transformation projects as well as increased sales and third party commissions.

With respect to annual operating cash flow, we are increasing our outlook for 2020 to a range of $435 million to $475 million. This is reflective of our current view on full year ACV, revenue, profitability estimates and tax payments. As we have previously communicated, we have also factored into our outlook, the adverse impact of customer payments that may be delayed into 2021 as a result of extended payment term negotiations on new contracts and delayed payments on existing contracts. Currently we are increasing our estimates of the impact of 2020 operating cash flow to be in the range of $15 million to $25 million.

Looking ahead to Q3, we are expecting operating margins in the range of 34.5% to 38.5% and for the full year in line with our previous communications, we're expecting to finish the year with strong operating margins in the range of 40% to 42%. These targets are reflective of our adjusted spending plans for the second half of 2020. These plans continue to include a slower pace of hiring, reduced discretionary spending and decreased spending on noncritical facilities and infrastructure projects.

In line with our previous commentary, it is our intention to continue to fund our internal digital transformation projects as these are critical elements in building the foundation to efficiently operate and scale our business over the long-term.

Further details around specific currency rates and other key quantitative and qualitative assumptions that have been factored into our outlook for Q3 and 2020 are contained in the prepared remarks document.

We are striving to be as transparent as we can and have tried to factor in the added uncertainty around the timing of closing larger enterprise deals. We also trust that you will appreciate that there is no certainty in our assumptions and that conditions will continue to evolve and change in either direction depending on how long the pandemic continues to negatively impact global economies, customer sentiments and purchasing decisions as it has since this global crisis first began to unfold late in the first quarter.

We will continue to remain focused on the things that we can control, aiming to strike a balance between short and long-term strategic initiatives that we believe are critical to strengthening our leadership position and to capturing the long-term market opportunity that we see ahead of us.

In closing, we are very fortunate to start the year with strong first half financial and operational results. We were able to deliver well ahead in our Q2 financial commitment, including the closing of the two milestone deals that Ajei spoke to earlier. These strong results are a testament to both the resiliency of the ANSYS business model and to the collective efforts and dedication of our employees, customers and partners.

The combination of our long-standing customer relationships, best-in-class products, diverse customer base, high level of recurring ACV, stable renewal rates and the strength of our balance sheet and operating cash flow, all contributed to the stability of our business in these challenging times. We saw that strength and stability reflected in our results for the second quarter and first half and these foundational pillars are what give us confidence in our outlook for the remainder of the year and our longer term vision of making simulation pervasive.

Operator, we are now ready to open the call for questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Joe Vruwink with Baird. Please go ahead.

[Joe Vruwink, Baird]

Great. Hello, everyone. Hope you're all doing well. I wanted to dig in to the ACV forecast for the remainder of the year, because the 3Q and 4Q does imply an acceleration in growth. And I'm just wondering, it sounds like renewals and continuing the success of the renewal rates you've seen already that plays a big factor at the same time in thinking about the ability to sign milestone deals in the type of environment we've been in. That sounds maybe better than I would have thought three months ago.

So I was wondering if you could maybe just provide a little more colour on the scenario analysis. And if you do end up at/or above the high end of expectations what are maybe some of the reasons for that as we think about the year playing out?

[Maria Shields, Senior Vice President & Chief Financial Officer]

Yes. So Joe let me start off by saying, if you look at the guide for the remainder of the year and second half and in line with some of the comments that Ajei and I made around how Q2 had played out, if you look at the overperformance in Q2 right, influenced by two milestone deals and in particular the one paid-up deal that contributed about $10 million to paid up that was originally scheduled for Q3 that came into Q2.

So our outlook on the full year hasn't really changed. But given the dynamics and the fact that the pace of acceleration in Q3 is not happening at the rate that we had projected when we spoke to you back in early May, we just thought it was more prudent based on everything that we're seeing and the fact that customers are having extended work from home and the coronavirus situation continues to have a lot of volatility around it, it was just more prudent to go ahead and increase the ACV to take into account what's happened relative to currency, but not change our outlook on the full year.

We've got a good strong pipe. We got good visibility into it. The fact that we can close those milestone deals in Q2 during the height of the pandemic continues to give us confidence that even though we've got this extended work-from-home situation that our team is effective in engaging with customers and being able to close these deals. So at this point, I don't think we're ready to start talking about upside. I think we're just ready to talk about the confidence that we have in the outlook that we've put out there today.

[Operator]

Thank you. And our next question will come from Andrew DeGasperi with Berenberg. Please go ahead.

[Andrew DeGasperi, Berenberg]

Good morning. I just wanted to ask a question on the hiring and the pace of it. I know you've added 170 employees in June. I was just wondering in terms of how is that going relative to your pre-pandemic plans? And how is that potentially impacting your midterm growth plans?

[Maria Shields, Senior Vice President & Chief Financial Officer]

So Andrew, relative to the 170, let me just highlight that was the higher end during all of Q2 not just in June. And that did include 58 of the employees that we brought on board in April through the Lumerical acquisition. We are on pace against our reduced hiring plan that we spoke about in May. And we're continuing to operate the business against that reduced plan just in light of the fact that the COVID situation is going on much longer than we had anticipated when we had these conversations back in May.

But we are continuing to hire and we are continuing to invest because we believe that when this turns, we are going to be in an even stronger situation given the importance of simulation and the role that it plays in mission-critical R&D within our customers. So we don't want to stop investing albeit, we are investing at a slower pace and very much in line with the scenarios that we had created back in May when we have realigned all of our business plans for the remainder of the year.

[Ajei Gopal, Chief Executive Officer]

And just to add a little bit more colour on the recruiting, we are hiring people of course across the company. You saw as Maria said with Lumerical, we got a number of R&D, very skilled executive -- employees who joined the company. And we've also been recruiting in our ACE organization and our shared services team. So, we're really recruiting across all of the different functions in the areas -- the strategic areas that we have talked about in the past. And so we're continuing to execute against the longer-term plans that we've put in place and that we've discussed with you earlier.

[Operator]

Next question comes from Jackson Ader with JPMorgan. Please go ahead.

[Jackson Ader, JPMorgan]

First one is on the -- how we square the idea of the largest deal in the company's history coming from automotive and ground transportation, where that also seems to be what you guys have mentioned to be the weakest segment in terms of people asking for payment extensions. And so yes, just any colour you can give on how we rationalize the strength in this one giant deal with maybe the weakness around them?

[Ajei Gopal, Chief Executive Officer]

Well, I think its -- Jackson, it goes to the point that I've been making all along. As you consider our relationship with our customers, we have built over the decades very deep relationships with our customers and they rely on us for the areas that are most important to them specifically in the areas of R&D and the creation of new products. And even as we're seeing in certain parts of the economy and certainly automotive is a great example where there is some short -- where there is a demand challenge that you're seeing in -- and you're seeing slowdowns and you're seeing shutdowns in plants. What's really important to recognize and certainly automotive companies recognize as well is that, as we come out of the pandemic investment in R&D is what allows them to maintain their edge as they come out of this.

And so, that's it. It's a commitment to R&D. It's a commitment to the long-term success of their business. And it's a recognition that simulation what we provide is absolutely essential. It's a force multiplier, as I said in my comments. It's a force multiplier to their R&D initiatives. So this is one thing.

The other thing is, I think that, when you consider people working from home or rethinking the digital nature of their product processes and exactly what it means now to be able to take all of your employees and have them be effective from home, it becomes even more important to consider that digital transformation. And in our opinion, there isn't a pure representation of the digital behaviour of the product and simulation. That is the essence of the digital behaviour of a product.

And again, our customers recognize this. And as you start to see this transition and the understanding that digital transformation or the understanding of how to take advantage of digital technologies is going to be essential for product development in the future, I think that plays into our sweet spot. So it's customer relationships, it's the importance of simulation. It's the nature of the businesses that our customers that are running. All of those are important.

[Operator]

And our next question will be from Tyler Radke with Citi. Please, go ahead.

[Tyler Radke, Citi]

Hey. Thank you and good morning, everyone. I wanted to talk a little bit about the SMB segment. I think you referenced some headwinds there, as it relates to payment terms and potentially churn. But could you just remind us how big the SMB segment is? And what kind of your expectations are there, in terms of timing of when you start to see improvements? Thank you.

[Maria Shields, Senior Vice President & Chief Financial Officer]

Yes. So, with respect to SMB, it's about a-third of our business, Tyler. And a lot of that business is covered by our channel partners. And if you look at the reduction in our plans since COVID began, about 75% of the reduction comes from the SMB space. And you're also seeing that in the decline in the perpetual business, which is largely attributable to that space as well.

We are not factoring in into our outlook, for the remainder of the year, any significant recovery in that space. We think it's going to take longer, just given that they are not as well capitalized and don't have the same liquidity that our enterprise customers do. And so, what we're doing, we are trying to help our customers and our channel partners through these very challenging times, because as we discovered in 2008 and 2009, when you go through difficult times, you're able to create very strong relationships that then you can build off for the next decade.

And so we want to continue that practice, because it's important that we maintain those relationships. And so, we're doing everything that we can relative to helping from a cash flow perspective, extending payment terms. And as you saw we went ahead and increased our outlook relative to the amount of 2020 cash flow that will be impacted where we will see payments shift into 2021 as we help our customers and our channel partners through these challenging times.

[Operator]

And the next question will come from Jay Vleeschhouwer with Griffin Securities. Please, go ahead.

[Jay Vleeschhouwer, Griffin Securities]

Thank you. Good morning. With respect to the largest deal in the company's history and -- which by the way, based on the number you've shared, is one of the largest deals in all of technical software to date. Perhaps we could talk a little bit about the ingredients of that?

In other words, could you speak about the deployment or deployment ramp that you anticipate? You've been hiring quite a bit in the area of technical support and consulting for the last number of years. Do you have the requisite capacity for the kind of ramp that's large deal and visions? And given its scope, would it be fair to assume that there had to have been some SPDM components to the transaction?

And then, for Maria, looking past the current perturbations on cash flow from COVID, longer term, is there anything that you could foresee doing that is structurally or in terms of mix, to further improve the visibility of operating cash flow? Or is it just going to be indefinitely subject to the quarterly vagaries of 606?

[Ajei Gopal, Chief Executive Officer]

So, let me take the first question and then Maria will take the second question. So with respect to your comment about the capacity, as I said before, this was a customer who's a long-time customer of ours and we have a long-standing relationship with this customer, both at the executive level as well as the technical level. And so, we're very comfortable, both in our ability to be able to provide the products and to support our customer through this next generation of their usage of our technology.

So this is -- we don't anticipate any challenges or any concerns in our ability to support our customers. As I said, the areas that they're standardizing on obviously, it's a multiphysics deal. I've mentioned, the additive use of that in manufacturing. I mentioned electrification. I mentioned digital twins. I did not mention SPDM, but, yes, SPDM was also part of that particular relationship. So, as I said, long standing customer, we're very confident about our ability to support that customer. Maria?

[Maria Shields, Senior Vice President & Chief Financial Officer]

Yes. So, Jay, relative to your question around cash flow longer-term, what I'd say is if you think about longer-term, ACV margin less taxes is probably the metric that will be more correlated than the 606 P&L, because of the volatility that you mentioned. But larger deals come with more favourable payments. So sometimes in connection with those larger deals, we will grant extensions as part of the negotiation. So I can't say all of the volatility will be removed. But certainly if you take that ACV margin less taxes, I think that is -- it will give you a more stable prediction around operating cash flow going forward.

[Operator]

And the next question will come from Jason Celino with KeyBanc Capital. Please go ahead.

[Jason Celino, KeyBanc Capital]

Hi. Thanks for taking my question. It’s nice to hear from everybody. If we think about -- and this is more of a broad kind of question. If we think about the linearity of improvement through the quarter anything to call out specific to maybe like the last month?

[Maria Shields, Senior Vice President & Chief Financial Officer]

Yes. So what I'll say, if you take a look at Q2 and obviously, we did Q2's linearity, it was extremely similar to Q2 of 2019. So the third month still disproportionately is where the largest deals and the largest volume of business tend to close. And so we didn't see any changes relative to linearity nor do we expect any significant changes in linearity as we look out for the remainder of the year.

[Jason Celino, KeyBanc Capital]

Okay. Great. Thank you. I’ll get back in queue.

[Operator]

And the next question will be from Matt Hedberg with RBC Capital Markets. Please go ahead.

[Matt Hedberg, RBC Capital Markets]

Hi, guys. Great. Thanks for taking the question. I know ANSYS Cloud is still pretty small relative to your overall business, but it was really good to hear how Coke adopted it to support remote work. As you guys talk to customers, do you get a sense that ANSYS Cloud adoption could perhaps accelerate even faster than previously expected in a post-COVID world?

[Ajei Gopal, Chief Executive Officer]

So Matt, as we said this was an example where -- and what Coke referred to was the fact that their engineers were more productive than they might have been in their data centres and that's reflective of the fact that the Cloud provides them with access to the latest hardware. They're not necessarily -- in general, it provides engineers with access to the latest hardware. They're not tied to whatever investments may have been made in the data centres of -- at the time that the data centres were set up or at the time that they were updated.

So there's some real advantages to being able to take advantage -- to use the Cloud. And certainly as people and engineers are trying to get access to cloud technology from -- or access to simulation activity from wherever they may be working from home from remote locations, certainly we see the cloud as being important.

You have to recognize of course that, our customers have made in many cases significant investments in data centres and they continue to take advantage of those data centres. And many of our customers have built in place a working model where you have engineers in remote locations accessing their data centres remotely to be able to take advantage of our technologies.

So it's a mix. I mean, they're taking advantage of cloud technology. Sometimes they're using on-premises, sometimes they'll use a hybrid. We certainly do expect to see an acceleration in the use of cloud technology, and certainly the acceleration of use of ANSYS Cloud as a result of this pandemic. There is no question that that will be the case.

However, it is off a small base, as we've said to you before, and our -- and we have a very long tail in terms of the investment that our customers have made in HPC. So you should factor all of that when you consider the dynamic in the marketplace.

[Operator]

Thank you. Our next question will come from Ken Wong with Guggenheim. Please go ahead.

[Ken Wong, Guggenheim]

Great. Sorry, if this has already been asked. My line kept dropping earlier. But just wanted to check in on North America, I was a little surprised to see it growing 33% and outpacing the other region. Can you talk about kind of the shape of the recovery in your various regions, and kind of where you think we are in terms of how the U.S. is tracking versus some of your other regions?

[Ajei Gopal, Chief Executive Officer]

Well, Ken if I talk about larger deals as an example, you'll see that the U.S. has a number of large customers. And certainly, if you start to look to the second half of the year, we do have some renewals from these larger customers and that obviously also causes us to look to the U.S. in terms of driving activity.

And part -- as we look to the second half of the year, we also do have some larger transactions that we're expecting from Europe as well. So we're expecting some larger activity in the second half of the year from the EMEA team as well.

So North America, generally speaking much larger number of large deals spread more over the Europe. There are some large deals more towards the second half of the year.

[Operator]

Thank you. Our next question will come from Adam Borg with Stifel.

[Adam Borg, Stifel]

Great. Thanks so much for taking the questions. I just got two quick ones. Just on Discovery Live, you've talked in the past about that being a medium-term opportunity. But the new upgrades in Discovery seemed really interesting.

So I was just curious if this can help accelerate the time line for adoption around Discovery? And then two, just to clarify the ACV and revenue guide rates for the full year was that just due to FX tailwinds? Or was there something else? Thanks so much.

[Ajei Gopal, Chief Executive Officer]

So, let me address the question about Discovery. As I said in the script earlier, and if you -- if you listened to our launch last week you probably would have seen that, we -- when we launched Discovery the current version of Discovery, it is an improvement over the previous version in that we have seamless connections into our flagship solvers.

So not only have we made a number of improvements to the Discovery Live engine as well we've built these seamless connections and the UI has been -- and the interface has been completely revamped as well. So it's a very interesting -- we think it's a very exciting product and it brings together the notion of interactive modelling, it brings together real time simulation and it brings together the accuracy of the ANSYS flagship solvers into one end-user experience that, we think is radically easy to use.

So we're very excited about this technology. The reason obviously, we've made these enhancements is because we're getting feedback from customers and we're evolving the technology. So we see this as being -- as certainly helping our ability to continue to sell and be successful in the marketplace.

I also mentioned, as we're talking about Discovery, I also mentioned our partner PTC and the success that they're seeing with their OEM of Discovery into Creo Simulation Live. So we're seeing continued trials and adoption of Discovery.

We're excited about the product line. It is as I said, and as I've been very careful to caution all of you it is off a very small base. It's a new product in a conservative market. But we're very excited about the product and the capabilities and similarly excited about our relationship with PTC.

[Maria Shields, Senior Vice President & Chief Financial Officer]

Yes. And Adam with respect to the second part of your question on the ACV and revenue increase, yes, it's basically currency-related. At this stage, we didn't feel that the movement of one large deal from Q3 to Q2 would warrant us increasing the full year outlook just given the pipe and what we see right now we feel comfortable with the guide that we gave last evening.

[Operator]

Thank you. Our next question will be from Saket Kalia with Barclays. Please go ahead.

[Saket Kalia, Barclays]

Okay. Great. Hey, guys. Thanks for taking my questions here. Listen, most of my questions have been answered. Maybe just one for you Maria. Just a quick follow-up on the last one with respect to ACV guide. I think, we said it's about 4% to 8% on constant currency growth with the revised guide. Can you just remind us how much of that is inorganic?

[Maria Shields, Senior Vice President & Chief Financial Officer]

Yes. So Q3 about 5% to 6% and for the full year 5%, Saket.

[Saket Kalia, Barclays]

Great. That's helpful. Thanks very much.

[Operator]

[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Ajei Gopal for any closing remarks.

[Ajei Gopal, Chief Executive Officer]

Thank you. With our strong execution, coupled with a diverse customer base Q2 has once again demonstrated the strength and the resilience of the ANSYS business. I would like to really thank the global ANSYS team, including our employees, our channel partners and our other strategic partners, for their continued dedication and their passion in helping our customers develop the best products in the market that are making simulation pervasive.

And thank you everyone for joining the call. Be safe and enjoy the rest of your day.

[Operator]

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