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Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Third Quarter 2021 Earnings Conference Call.
With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor Relations.
All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today’s event is being recorded.
At this time, I would now like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.
Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our third 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 third quarter financial results and business update, as well as our Q4 and updated fiscal year 2021 outlook, and the key underlying quantitative and qualitative assumptions.
Today’s presentation contains forward-looking information. Important factors that may affect our future results are discussed in our public filings with the SEC, all of which are available on our corporate website. We note that uncertainty regarding the impact of the COVID-19 pandemic on our performance could cause actual results to differ materially from our projections. Forward-looking statements are based upon our view of the business as of today, and ANSYS undertakes no obligations to update any such information.
During this call, we will be referring to non-GAAP financial measures, unless otherwise stated. A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non-GAAP financial measures are included in our earnings release materials.
I would now like to turn the call over to our President and CEO, Ajei Gopal, for his opening remarks. Ajei?
Good morning, everyone, and thank you for joining us. Q3 was another excellent quarter for ANSYS, where we beat our financial guidance across all key metrics.
With strong ACV growth in the quarter, I’m delighted that year to date, we’re on our stated goal of double-digit ACV growth with tuck-in acquisitions. Our accomplishments thus far in 2021 are further evidence of the success of our strategy of making simulation pervasive across the product lifecycle, our multiphysics product leadership, and our strong customer relationships. Those factors, combined with customers’ continued investment in R&D initiatives are driving demand for ANSYS’ multiphysics solutions.
With a robust deal pipeline and momentum in the business bolstering our confidence, we are raising our full-year financial guidance above and beyond the impact of our strong Q3 top-line performance. Nicole will have the details in a few minutes.
From vertical and geographical perspectives, our Q3 results came in as expected. The high-tech and semiconductor, aerospace & defense, and automotive and ground transportation sectors were again our largest contributors.
Looking at our major geographies, the Americas again led the way, followed by Asia Pacific. We expect each region to have its largest quarter in Q4, with the quarterly skew to be more pronounced in Q4 for Europe.
One of Q3’s highlights was a 3-year $58 million agreement with a North American high-tech customer. From an ACV perspective, this deal was the second largest multiyear contract in our history. This customer was already using solutions from across the ANSYS multiphysics portfolio and is now expanding its number of simulation users.
It is using ANSYS for diverse applications, ranging from ensuring the reliability of radio frequency systems to meeting sustainability goals across its product line and to chip-package-system analysis for power and signal integrity.
Another key deal in Q3 was a multiyear agreement with Seagate technology, a leader in mass data storage solutions. Seagate is a longtime ANSYS customer, and this new contract broadens the company’s use of multiphysics simulation, to address next generation product challenges faced by its global customer base.
For example, Seagate is using ANSYS multiphysics products to assess thermal effects and acoustics to create a seamless workflow to enable higher capacity hard drives and to streamline process integration for heat-assisted magnetic recording. The company also now has access to our optical suite of products to drive further innovations.
As we have discussed, our small and medium-sized customers, or SMBs, were disproportionately affected by the pandemic. However, during the last few quarters, we are seeing a recovery. And SMB customers have increased their investment in ANSYS simulation. Our ongoing increase in sales from our SMB customers gives me further confidence as we plan for Q4 and beyond.
During these calls, I typically give you some insights into various aspects of the ANSYS business. In the past, I have discussed our best-in-class electromagnetic solutions, our unparalleled product scalability and the extreme accuracy of our structural solutions.
As you heard me discuss with Seagate, optical simulation is becoming increasingly important for our customer base. In fact, in Q3, about 5% of our agreements included an optical simulation product in the order. Given that, as well as our recent closing of the Zemax acquisition, I would like to spend some time today, discussing our offerings for optical simulation.
Three years ago, ANSYS did not have any optical simulation products in our portfolio. Today though, companies can rely on ANSYS for an end-to-end solution, spanning the gamut from photons to electrons based on 3 product lines.
The first, ANSYS Lumerical empowers users to design and analyze integrated photonic components and systems, and model challenging product problems including interacting optical, electrical and thermal effects.
The second product line, ANSYS SPEOS simulates the system’s optical performance and evaluates the final illumination effect by enabling high-fidelity visualization based on human vision and camera-sensing capabilities.
Third is our recent acquisition of Zemax, which enables customers to accurately model the behavior of lights through complex optical lens systems. Instead of working independently as a siloed offering, our optical simulation suite operates as part of a complete multi-physics workflow. Taken together, the ANSYS optical solution is used for a diverse set of applications ranging from camera and lidar arrays found in autonomous vehicles, to telecommunications and mobile phone cameras, to medical equipment and other visual aids.
For example, in Q3, Sandia National Lab signed an agreement leading to expanded use of Lumerical technologies. Sandia develops leading-edge integrated photonic and nano-photonic solutions for quantum computing, imaging and sensing. The lab uses Lumerical tools to design model and simulate custom photonic components and behavior in a circuit environment. In the automotive sector, industry leader, Ford, uses ANSYS products including SPEOS, and the ANSYS vehicle headlight solution in the styling and design of its predictive smart headlamps, and to optimize and validate headlight performance.
Our headlight solution features real time physics-based optical simulation and driver in the loop functionality to replicate the physical world with a high degree of predictive accuracy. Automotive giant Mazda is also increasing its use of SPEOS for internal and exterior lighting, head up displays and cameras, thanks to a sales agreement in Q3.
In aerospace and defense, an ANSYS customers using all 3 of our optical product lines across multiple applications, the customer relies on Lumerical for creating photonics integrated circuits, it uses SPEOS for detecting radiation leaks from aircraft enclosures, and this customer is also using Zemax to study lens deformation. While still new to our portfolio and a relatively small contributor to our overall financial results, these optical solutions fit squarely into our go-to-market motion, and our sales team understands how to market these products.
Based on the ANSYS strategy of pervasive simulation, our optical customers can easily access products across our portfolio to perform true multi-physics analysis. We saw an excellent example of that with another aerospace and defense customer that was challenged with a wing camera that was capturing blurry images. By using a combination of ANSYS optical and ANSYS fluids products, the customer was able to correct the problem and deliver crisp images even at extreme speeds in bad weather.
Moving to our partners, I’m excited that we are expanding our relationship with Autodesk by embedding ANSYS’ electromagnetic simulation capabilities to explore and validate printed circuit board designs within the Fusion 360 workflow. This first of a kind Autodesk Fusion 360 extension will enable CAD users to perform near real time PCB analysis and retrieve real time insights into their electromagnetic performance to accelerate the development of next generation products.
We have also expanded connectivity of ANSYS Twin Builder to industrial control systems through Rockwell Automation enhanced Studio 5000 Simulation Interface. Users can connect digital twins to emulator controllers to optimize production at the design stage, or physical controllers to enhance equipment performance in real time, for example, in predictive maintenance.
I am pleased that we have expanded our partnership with TSMC to create a comprehensive thermal analysis solution for multi-dye semiconductor designs using ANSYS RedHawk-SC Electrothermal and ANSYS Icepak. Along with TSMC’s silicon stacking and advanced packaging technologies, users can analyze complete chip and package systems with high fidelity results.
We are also collaborating with Fujitsu to enable more sustainable product development for our customers. ANSYS LS-DYNA now supports Fujitsu’s energy efficient prime HPC supercomputers, which will help customers reduce energy consumption and costs by offloading simulation workloads to a more energy efficient machine.
Keeping with our environmental, social and governance initiatives for a moment, we recently published our simulation products handprint for autonomous vehicles. This report illustrates the role that simulation plays in the development of autonomous vehicles, including in sensors, automated driving software, and safety testing. Using simulation to develop autonomous vehicles will lead to significant societal and environmental benefits, ranging from a drop in traffic fatalities to a reduction in emissions.
We have also submitted our initial report with the climate disclosure project and expect results by the end of the year. Similarly, we have begun working on our reports to the task force on climate related financial disclosures, which focuses on governance, strategy, risk management, and metrics and targets.
In summary, Q3 was another remarkable quarter for ANSYS. We beat guidance across all key financial metrics, and have met our goal of delivering double-digit growth year-to-date. We’re also expanding our product leadership in our core solutions as well as an important emerging area such as optical simulation. These factors combined with a strong Q4 sales pipeline and outstanding execution give me further confidence in our ability to meet our newly increased outlook for 2021.
And with that, I’ll turn the call over to Nicole. Nicole?
Thank you, Ajei. Good morning, everyone. Let me take a few minutes to add some additional perspective on our third quarter financial performance and provide context for our outlook and assumptions for Q4 and 2021. The third quarter demonstrated the strength of our business as we delivered robust growth during the quarter. ACV was strong and in line with our expectations, while revenue, operating margin and EPS exceeded the high-end of our Q3 guidance driven by the mix of license types sold in the quarter, both our large enterprise customers and SMB customers performed well, and our growth during the quarter with broad-based.
Now, let me discuss some of our Q3 financial highlights. Q3 ACV was $365.4 million, and grew year-over-year 20% or 19% in constant currency. We saw strong performance across customer types, geographies and industries. ACV from recurring sources represented 76% of the total.
Q3 total revenue was $445.4 million and grew 21% or 20% in constant currency, which as I mentioned, exceeded the high-end of our guidance driven by license mix. Q3 revenue growth was also wide ranging across tough customer types and industries. For the first 3 quarters of 2021, we had strong top-line performance with ACV and revenue both growing double-digit at 17% and 19%, respectively.
As Ajei mentioned, for both Q3 and Q3 year-to-date, we are executing against our business model of double-digit growth, including tuck-in M&A. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $899.5 million. During the quarter, we continue to manage our business with fiscal discipline. This yielded a solid third quarter gross margin of 89.9% and an operating margin of 39.7%, which was better than our Q3 guidance.
Operating margin was positively impacted by revenue performance from license mix, as well as the timing of investments. The results with third quarter EPS of $1.59, which was also above the high-end of our guidance. Similar to operating margin, EPS benefited from strong revenue results from license mix and the timing of investments.
Our effective tax rate in Q3 was 19%, the tax rate we expect for the fourth quarter of 2021. Our cash flow from operations in Q3 totaled $157.8 million, which benefited from strong collections, primarily driven by robust Q2 growth, favorable timing of intra-quarter sales, and a reduction in the percent of receivables past due.
We ended the quarter with $1,081.4 million of cash and short-term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 97,000 shares during the quarter for around $36 million. We have 2.7 million shares available for repurchase under the current authorized share repurchase program.
Additionally, on October 1, we acquired Zemax for a purchase price of $399.1 million net of cash acquired.
Now, let me turn to the topic of guidance. We continue to build confidence in our outlook for the year given the improved sales pipeline we see in the fourth quarter. As a result, we are initiating guidance for Q4 and increasing our ACV revenue, operating margin, EPS and operating cash flow outlook for the full year. This raise reflects the strong financial performance in the third quarter and the increased momentum of our sales pipeline going into the fourth quarter.
For the fourth quarter, we expect revenue in the range of $614.9 million to $654.9 million, operating margin in the range of 44.5% to 47%, and EPS in the range of $2.48 to $2.81.
As I mentioned, for the full year, we are raising our ACV revenue, operating margin, EPS and operating cash flow outlook. We are increasing our full-year ACV Outlook to be in the range of $1,825 million to $1,860 million. This represents growth of 12.9% to 15.1% or 12.6% to 14.7% in constant currency.
Our Q4 and full year 2021 guidance is based on continued momentum in the business and a Q4 pipeline that has accelerated since our August guidance. It does not include a repeat of the outside spending behavior we saw in December 2020 after vaccines were announced.
The raise also incorporates approximately $6 million to $8 million of contribution from Zemax in Q4, which is offset by approximately $6 million to $8 million of currency headwind. As a result, we are raising the midpoint of our ACV guidance by $20 million, which translates to an increase of 1.5 points of constant currency growth compared to our August guidance.
We expect revenue to be in the range of $1,885 million to $1,925 million, which is growth of 11.2% to 13.5% or 10.6% to 12.9% in constant currency. This raise reflects our strong Q3 revenue performance driven by license mix, as well as the incremental organic revenue from the momentum of our Q4 pipeline.
Like ACV, our increased revenue incorporates approximately $6 million to $8 million contribution from Zemax, which is offset by approximately $6 million to $8 million of currency headwinds.
As a result, we are raising the midpoint of our revenue guidance by $40 million, which translates to constant currency growth of 3 points higher, than the midpoint of our August guidance.
As you know, ASC 606 introduces revenue growth volatility within the quarters. However, on a full-year basis, revenue growth is less volatile. In the fourth quarter of 2021, we expect the revenue growth rate to be impacted by the year-over-year compare and mix of license types sold in the fourth quarter 2020 versus our current 2021 fourth quarter pipeline.
We are increasing our full-year operating margin and now expect operating margin to be in the range of 40.5% to 41.5%.
Additionally, we are increasing our full-year EPS, and now expect EPS to be in the range of $7.05 to $7.38. This increase incorporates our Q3 performance and is offset by approximately $0.05 of currency headwinds. It is worth noting that some of our strong Q3 EPS performance was driven by the timing of investments that move from Q3 to the fourth quarter of the year.
Now, let me turn to our full-year operating cash flow guidance.
We are increasing our 2021 outlook to a range of $505 million to $535 million. This increase is driven by stronger collections expected during the year and is partially offset by approximately $3 million to $5 million of currency headwinds.
Further details around specific currency rates and other assumptions that has been factored into our Q4 and 2021 guidance are contained in the prepared remarks document. Consistent with our standard practice, we will provide detailed 2022 guidance once we finalize our 2022 planning process and close out 2021.
I would like to thank the ANSYS team for their outstanding execution during the quarter, which drove our robust Q3 financial performance and continued momentum going into our last quarter of the year. We once again delivered a strong quarter, which coupled with our recurring business model and growing sales pipeline, demonstrated the strength of the ANSYS business. We are well positioned to deliver on our 2021 outlook, as well as our longer-term financial objectives.
Operator, we will now open the phone lines to take questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And, ladies and gentlemen, our first question today comes from John Vruwink with Baird. Please go ahead.
Oh, great. Hi, everyone. Just on the points of ANSYS growing in line with the targets, you provided back in 2019, how different is the composition of the growth today relative to the original budget? For instance, something like optical, not around to 2019, now 5% of bookings. Is it true to say there is maybe newer and faster growing contributors to ACV? And if that is true, does it suggest that there is also areas of the business that might be on the lagging end of recovery, and so you get bigger contributors in future years?
Yeah. So I’ll take that. Thanks so much for your question, John. So, yes, as you can – as you point out, we are well within our model of double-digit growth. With tuck-in acquisitions on the year-to-date basis, our growth certainly puts us squarely on that model.
What I would say is, there are 2 components to that. So the core itself, the core structures, fluids, those businesses are still solid contributors to growth and continue to grow. As you point out, we have been building the broadest, deepest simulation portfolio over multiple decades. And that has only accelerated in the past 5 years. And so, I think Ajei’s talk about the optical business is an example of something that was maybe quite nascent, a couple of years ago, that is quite robust, competitive and extensive right now.
And so, I would give that as an example. Ajei, do you want to comment anything for that?
Yeah, so when we talked about in 2000, when we gave long-term guidance, if you look at the addressable market, we talked about the core, the foundations of the business. And then, we talked about a high growth adjacencies, including areas such as autonomy, electrification, IoT, 5G. And we talked about some of the investments that we were making.
And in particular, we did talk about optical as an area that we were investing in, in particular, to support things like autonomous vehicles, as well as to support things like 5G for the purposes of interconnects, and so forth. And so, we’ve essentially been executing against the strategy that we laid out.
I’ll also want to correct a point that you made in your question. You said 5% of the bookings came from optical. That’s not what I said in my script. What I said is that 5% of the deals had some optical component within the within the agreement with the customer. So there was some aspect of optical within that. Optical, of course, is a relatively small piece of our business today.
Okay, thanks, Ajei, for the clarification. I’ll leave it there. Thanks.
And our next question today comes from Andrew Obin of Bank of America. Please go ahead.
Hey, guys, good morning.
Good morning.
Good morning.
Just a question. If you look at the numbers, sort of a fairly significant outgrowth in the U.S., relative to the rest of the world. Could you just talk about how this COVID – A, what’s driving it? I assume a lot of it is COVID driven. And how the reopening dynamic could sort of change those going into the yearend and into next year, i.e., what would it take for the rest of the world to catch up with the U.S.? And why is the U.S. so robust? Thank you.
Yeah. Thanks so much for your question, Andrew. So as you pointed out, over the last 12 months, America has continued to be a consistent strong performer, and lead the company in creating value for our customers. A couple of deals with the, one that Ajei mentioned in his remarks, the $58 million agreement with a leading North American technology company is an example of – I think the model that we have exported around the world and leaves some of the strength in our other regions like APAC, where the customer has already been using solutions from across the ANSYS multiphysics portfolio, but is now expanding the number of simulation users.
And so, we’ve done a very good job at building deep relationships with customers, understanding their short and their long-term development roadmaps, and enabling them to be able to propagate the use of simulation to broader use-cases, to connect to physics and to also connect to other users and in the process to leverage that simulation.
And so, that model that America executes quite well, is the model that we’re executing around the world. And just as an example, our Asia-Pacific region has executed exceptionally. They had another quarter, a very strong growth with 21%, constant currency growth – I’m sorry, 21% growth in the region at a constant currency basis.
And the strength in that region was broad-based across industry, customer types, geographies. We had several 7 figure contracts in Asia Pacific, that added growth to the high-tech sector, where customers are really showing enthusiasm for not just the core portfolio, but the adjacencies as well. So there is a common theme here, where we’re broadening and deepening the relationships within the customer, with our core technology, having strong footholds and solid growth, but also leveraging the organic and the inorganic investments that we’ve been making over the past 5 years, to accelerate the footprint globally.
And so, I would say the core strength of the portfolio and the investments that we’ve been making, during the course of the pandemic, with our customers and in our portfolio are really the drivers of the acceleration and performance of growth.
To some degree, there is a little bit of recovery. It’s that Asia Pacific probably had a little bit ahead in the recovery versus America. There are still unevenness in terms of customers are preferring to meet in person. So I wouldn’t characterize things as returned to normal quite yet. But certainly, the business model is resilient. It is showing through, regardless of the challenges that we’ve seen in the pandemic.
Oh, wow. Thank you. So it has much as sort of reopening as structural changes in the business model, is that the right way of reading it?
Yeah, I’d say it’s the success that the management team is enjoying as a result of building out that robust portfolio in that business model. But I think, also the point around investing during the pandemic is, is important to note.
I mean, it’s really easy in a tough time to barrel down the hatches and not make investments in the business. That’s kind of what people might expect. But there is a very proactive or very deliberate decision to not over-pivot in that direction, because of our confidence in the opportunity around what we do and the value that we can add to our customers.
And so, I really do feel like we’re going to be coming out of the pandemic, whenever that might be in a real position of strength.
And I think, just to add one small point to Nicole’s response there, when you think about the investments that customers make in ANSYS, it’s really triggered by their investments in R&D. And obviously, globally, you’re seeing investments in R&D, customers continuing to look at next generation products and offerings, and that’s where simulation comes in.
So the fact that we can help them with building their next generation, again, points to the importance of our technology. And that’s what allows us to be in a position to make these relationships and sales during a pandemic, or any other time for that matter.
Thank you. And just a follow-up question, I think on a previous call, you guys highlighted how small and medium business sort of tends to lead your core business. And you made some remarks about small and medium. You are continuing to see improvement. But can you just talk about sort of sequential trends in SMB? And what this portend – if you still view it as a leading indicator for the rest of the business go into the yearend and next year? And I know you did improve your 4Q outlook, but just maybe more color there. Thanks so much.
Sure, I’ll start and if there’s anything you have to add – you’d like to add, Ajei. So, yes, as I mentioned in our opening remarks, we continue to see strength in the SMB customer-set in Q3. And we’re really pleased with the momentum that we’ve seen now 4 quarters in a row. And so, I think that’s what’s given us the confidence in continuing to raise throughout the year, in addition to the fact that our pipeline with our large customers is solid, robust, and continues to evolve and improve.
And so, I’m not sure that the two are interrelated. I think that they’re somewhat related in the broader sense of recovery. But I do feel like, although we’re not quite at pre-pandemic behavior within the SMB set, we’re really pleased with the ongoing momentum, and what we’ve been delivering in that business.
Yeah. And just to amplify one of the points Nicole made, the large customer dynamic is somewhat different from the SMB. For the most part, the large customer dynamic is driven by the long-term relationships that we’ve maintained with our direct sales-force with these customers. Many of these are long-term customers of ours. They’ve built their processes around ANSYS.
And when it comes to a new project, or a new activity, as they start to continue to evolve their R&D efforts, they turn to us as a vendor. And so, there’s an opportunity within those customers to expand the footprint based on long-term relationships.
In the case of SMBs, in many cases, the SMBs are relationships that we have through channel partners. And, some of these customers may be relatively new customers. They may be relatively early in their life as an organization. And so, I wouldn’t necessarily say SMB is a leading indicator, which was the point that you made. I wouldn’t necessarily say it’s a leading indicator.
These are two different – there are slightly different dynamics across both the SMB and enterprise. And, each one of them has their own go-to-market motion and supporting activity.
Fantastic. Thanks so much.
And our next question today comes from Gal Munda with Berenberg. Please go ahead.
Yeah. Good morning. And thank you for taking my questions. Maybe the first one, just in terms of the raised ACV guidance that we’re seeing, again, you did a second time in a row, kind of becoming material. I was just wondering what enabled you that. Is it this trend that you’ve seen in SMB in Q3 or – and also, coupled with strength in Asia that you mentioned? Or is it just the outlook? As you look into Q4, you mentioned the pipeline looks really strong in terms of what’s still to come in Q4 versus what you originally expected?
Sure. So, in Q3, we had a really strong Q3 as you point out with that strong double-digit growth. Q3 ACV did come in line really close within our expectations. And so, the raise on ACV in Q4 is really a function of the improved momentum that has been building since the last time we shared guidance in August, across the board.
And so, what I would say is when you look at how we delivered year to date and in the quarter, it’s been pretty broad-based across industries and customers. And, that’s kind of the reflection of what I would characterize the momentum in Q4. There is not any isolated one-off thing that is driving that view. It is more kind of an overall momentum building that you’ve been seeing, as you rightly point out, we’ve been able to raise throughout the year, I mean, as you recall in the beginning of the year, we still were not sure whether what the kind of dynamics around recovery were going to look like. And so, we’ve been kind of sharing with you as we see things ahead of us, and systematically raising expectations over time.
That’s very helpful. Thanks, Nicole. And then just as a follow-up, maybe, Ajei to you. You mentioned Autodesk partnership that is expanding again, especially in terms of electromagnetic introducing PCB simulation within the Fusion 360 product. You’ve also worked closely with PTC on the test side with both Discovery Live and ANSYS simulation. It’s kind of a slightly different physics for each of the partners. Is there a possibility that you start introducing more of the traditional physics solvers into the Autodesk partnership and vice versa? Would you expand the PTC partnership with electromagnetic side as well?
Well, I think, look at the end of the day, Gal, when you think about it, partnerships allow ANSYS to really expand our market reach by leveraging what our partners bring to the table. They’ll bring complementary technology skills. They have a brand. They can help us reach different customer segments, so that more people can benefit from simulation. Partnering allows us to create a combined solution with a leading vendor. So at the end of the day, customers can benefit from a more complete solution than either one of us can provide on our own.
Now, key to our partnerships and you’ll see this all along, key to our partnerships is maintaining an open ecosystem. So we’re not about – our partnerships are not about blocking things off, but are making things available, opening things up. And our strategy and our products remain open, so that customers can create the optimal system to meet their needs. So as you think about our partnership strategy, just think about that, we are open to trying to make sure that we can leverage and work with our partners to make our customers benefit from the entirety of what we can bring to bear, because we have an open strategy. I can’t comment about specifically any individual partnership of the direction that it may go. But, hopefully have some perspective of how we think about partnerships.
That’s helpful. Thanks, Ajei.
Ladies and gentlemen, our next question comes from Tyler Radke of Citi. Please go ahead.
Hey, thanks. Good morning. Ajei, just a high-level question for you, I mean, clearly, you put up a couple really strong quarters here, and it sounds like the pipeline is really healthy into Q4. Just as we think about what’s going on more broadly with supply chain constraints and, obviously, putting pressure on kind of physical testing requirements. How much of the strength do you think could be attributed to some of the supply chain and just macro challenges that the customers are going through? And, I guess, just curious if you feel like this period is further evangelizing or potentially accelerating the need for simulation. In other words, do you feel like this is kind of a new sustainable growth rate going forward? Thank you.
Well, so let me address your question in 2 sort of timeframe, one is you think about the short term. So in the short-term, supply chain disruptions may be affecting many businesses, but we’re really not one of the businesses that’s affected by the supply chain. And the reason is, as I mentioned earlier, the use of our software is tied to the design of products, is tied to the R&D phase for the most part, and it’s not denominated by manufacturing. So whether if a customer has challenges with the supply chain, and they can’t produce as many units of a particular product that’s been designed with our technology that doesn’t affect our relationship with the customer, they’re already designing what that next product looks like, and they’re working with our engineers, or they’re working with our technology to figure out what the future looks like.
So our customers continue to make investments during – in R&D, and it’s really not affected by the supply chain in the short-term, so we have no real short-term issues there. When you think about it from a long-term perspective, I think, you’re also alluding to this in your question. When you think about the long-term perspective, companies, I think, around the globe are questioning exactly how they need to think about their supply chains going forward.
So will they be a change in the way they’ve been thinking about the supply chains, and in some cases, you’re seeing customer thinking about moving manufacturing closer to where the final product is actually going to be used. This isn’t necessarily building factories in the more traditional way. In many cases, customers are thinking about building next generation factories where they have much more automation, robotics, next generation manufacturing techniques, all of these things are relevant for simulation.
We’re in a position – we had ANSYS there in a position to help our customers as they go through this rethinking process, as they go through the design of these next generation capabilities, as they start to think about advanced manufacturing techniques, materials, as they work through the simulation that goes with that we’re in a position to help them. And so, we see this as a long-term tailwind, where we can help customers as they try to figure out what this next generation looks like in their own evolution.
Great. Thank you.
And our next question today comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Thank you. Good morning. First question, Ajei, at the company’s IDEAS conference last month hosted by your semiconductor business unit, there were 2 very interesting comments from management regarding the strategic vision that ANSYS has. There was a reference to your becoming a quote cloud first digital platform as a foundation for your future growth that’s quote from the presentation. Similarly, that you foresee a time of simulation platforms and insights as a service again it’s a direct quote. So, and thinking about your cloud future, was the commentary your conference mentor suggests that cloud is not just an adjunct or complement to what you’re doing today in terms of delivering technology, but ultimately becomes the Nexus of how you deliver technology, perhaps, not unlike what PTC discussed for itself on their call last night?
And then as a follow-up question, in light of the improving disability in terms of pipeline and the like, can you talk about the investments you’re making or planning to make in technical support and consulting? That’s typically you’re certainly lately, your second highest number of open positions after R&D, and you look like you’re ramping up in that area. So maybe talk about those investments and the availability of the necessary personnel for that function.
Sure, Jay, so let me try to unpack your question. And let me start with the longer-term direction comment that you asked. And, I think, look you’ll hear a lot more about strategic direction for where we’re going over the next year, and so on, think of some of the comments that you heard as [dembrading] [ph] some of the super exciting times that [our hit branches] [ph] and our customers. You talked a little bit about Cloud, we’ve got ANSYS Cloud out there, which manages access to high performance computing resources, it’s just remember that many of our customers for them Cloud is about being able to access high performance computing at scale, and enabling some of these larger high fidelity simulations to run a scale.
And so, in this last quarter on this call, I talked about the scalability of some of our product products that was enabled by a customer for us at the Technical University of Eindhoven, where they solved a an aerodynamic problem with something like 3 billion computational cells with 20 billion unknowns. And that scalability is possible, of course, because of core technical advancements that we’ve done. So, for example, we sped up mesh generation by 20X, which is obviously a bottleneck in the creation of detailed simulation of transient phenomena. But also, we were in a position to give access to cloud computing resources.
And, in fact, just this week, Satya Nadella in his keynote at Microsoft Ignite use the same example to show what is possible on the ANSYS Cloud platform, which is essentially ANSYS’ products running on Azure on the world’s most powerful AI supercomputer. So that was one example, I think of Cloud that I’m excited about. We support flexible licensing models, we support an elastic pay-as-you-go model, we support a hybrid model, which mixes and matches elastic as well as lease licenses.
And this year, we’ve continued to expand the number of products that we’ve added into cloud capabilities. For example, we’ve added an LS-DYNA, we’ve added in Lumerical products, we’ve added in SOC2 certification, we continue to improve our overall customer experience. And we’ve also seen significant increases in cloud usage. So one of the ways that we monitor that, of course, is by looking at core hours. And this year, year-to-date, we’re seeing almost 4 times as many for core hours as compared to this time last year. And we still haven’t hit that inflection point. So we believe that there is still much greater demand within our customer base.
And we’re watching our customers, we’re seeing where they’re going, we’re anticipating where they’re going, and we’re giving them the opportunity to be able to drive some of the scale out compute. So I’m really excited about where we are with cloud and some of that capability. There was a number of other things, I’m sure, that were also mentioned in that conversation, some of the things that we’re excited about the new capabilities we have in our product.
We’ve talked about AIML, and how AIML supports our technology and simulation. All of those are interrelated, because the advances that we make in one area can be delivered to our customers in other ways, and that allows us to be a more responsive vendor to our customers or partner to our customers that allows us to continue to drive leadership in the marketplace. So that was the first question. What was the second question, Jay? It was around…
Yeah, it was around the investments in technical consulting and support positions, which as I noted, is typically your second largest number of open positions after R&D?
Yeah, so I think if the question is, are we continuing to make investments in that area, that’s absolutely the case. We do continue to make investments in the area, we think our relationship that we have with customers at a technical level is something that our customer’s value, it gives us insight into the way we work with our customers use our technology, and it’s a 2-way street, we’re in a position to help our customers as they evolve. And, certainly, we’re in a position to take customer feedback and insight into the next generation of our products coming in from the field. So, I think, we’re excited and we continue to make investments in those areas.
Okay. Thanks, Ajei.
And our next question today comes from Jason Celino with KeyBanc Capital Markets. Please go ahead.
Hi, thanks for taking my question. Related to Zemax, I’d be curious on how that acquisition came together? I know in the past, you said that sometimes customers make requests. And I was wondering if this was one of those instances, and then maybe a quick follow-up, Zemax contribution on an annual basis? Is it fair to think its $24 million to $26 million of it is annualized the contribution for Q4? Thank you.
Yeah, so I can quickly answer that question on the contribution. So we expect – so we had – as we’ve said, we think it’ll have about $6 million to $8 million of ACV impact and revenue impact. This year, which will be offset by – largely offset by currency. Next year, we’re estimating an incremental approximately $20 million in organic impact.
And as far as how the acquisition comes together, as I’ve said many times, acquisitions are not a strategy on to themselves; acquisitions are in support of a strategy. And clearly one of the areas that we have continued to drive is the broadening of our multi-physics capability. As I mentioned in the call, we have some leading optical simulation products and capabilities, but Zemax obviously, has been on our radar for a while as an opportunity for us to be able to broaden and deepen our portfolio in that space.
And, I think in the script, you heard me talk about customers who are using all of the products and how the technologies could work together to support their R&D efforts. And so, this kind of technology fits right into our go-to-market motion. Our salespeople are very familiar with being able to position technology of this nature. So it’s a very natural acquisition for us to conclude. We’re excited about the technology. We’re excited about bringing those people on board.
Great. Excellent. I appreciate the color.
And our next question today comes from Ken Wong of Guggenheim Securities. Please go ahead.
Great. Thank you for taking my question. Ajei, I wanted to touch on an announcement you guys made last month, the ANSYS and Apple, RF safety testing simulation module for MagSafe. Apple obviously has a very large partner ecosystem should we expect that this brings in a wave of new potential customers? Or is it simply additive to your existing tech relationships?
So I can’t talk about what any specific company may or may not do. But what I can tell you is that, we’re really excited that we can make our technology available to customers who are not necessarily experts in using simulation. Our strategy for simulation is to take simulation and make it more pervasive across the product lifecycle. And part of that is creating applications that are easier for non-engineers to use. And so as part of our strategy, we’re creating applications that include various elements of our technology that can be integrated together to deliver a SaaS experience for our end users, wherein they can simply invoke our technology under the covers if you will to solve specific problems.
So those are the kinds of applications that we are excited also about bringing to market. And those are not – that’s typically not an area that we’ve historically participated in. But we certainly see that as being part of the overall strategy that we’re driving of making simulation pervasive across the product lifecycle.
Got it. Really appreciate the color there. And, Nicole, just wanted to touch on the higher mix of perpetual, is that simply a snapback to suppress perpetual buying from 2020? Or is there some other element causing that that higher perpetual mix?
Yeah, no, I would characterize it, as you recall perpetual licenses during the pandemic did take a quite a significant hit, particularly in the first 3 quarters of last year. And so they did recover quite a bit in the fourth quarter of last year, which is one of the reasons why the compares a little more challenging in Q4. But customers continue to prefer time based licensing models, because it really enables them to be more flexible as their needs evolve.
And so over the past several years, the business model has really been shifting away from perpetual licenses. If you look over longer periods of time, it’s been pretty flat. And the growth has been primarily through the acceleration of leases. And so that’s really built a very strong annuity business for us over the past 5 years, and has been a very successful evolution of the business. And so, while we did see – we are seeing kind of some of the compare effects in the first 3 quarters of this year, we believe over the long-term that the shift that customer – we’re seeing from customers is going to continue towards that lease-based licensing.
Great. Thank you very much.
You’re welcome.
And our next question today comes from Blair Abernethy of Rosenblatt Securities. Please go ahead.
Thanks. Nice quarter, everyone. Just following on Jay’s question around the cloud. Ajei, I was just wondering if you can maybe help us understand where the customer interest lies right now, in terms of cloud-based simulation tools, so not just HPC, which has been in use for a long time. But, our customers looking to shift from on-prem to cloud with our tools, and if they are sort of – where are you seeing the traction out there.
So, we’re certainly seeing customers wanting to take more advantage of the cloud during the – certainly that happened during the pandemic, when people were working remotely and didn’t have access as easy access to their offices. And that certainly drove some cloud usage, I mean, the fact remains that we can give our customers, who want to take advantage of our technology, we can give our customers an experience where they have elastic compute driven from the cloud, it’s a fast like experience, we can give them that using our elastic licensing capabilities. So that that feels to them like a SaaS experience, and similarly, we can give our customers access to on premises technology in a lease model, which they’ve used for a while. So we give our customers a choice of what they want to be in a position to do.
ANSYS Cloud gives them that ability to support they need for cloud compute, both from the server perspective as well as scale up for HPC. So it really is up to the customers. And, many of our customers have made investments that are within their own to building out data centers, so they prefer to take advantage of their own data centers, some customers will look at the amount of data that they have to manage. I mean, when you think about a simulation, a complex multivariate simulation that’s running across our multivariate optimization could result in terabytes of information. And so then there’s a question of where do you store that information? How do you keep it? Do you move it from one cloud to another? What is their standard model?
So it’s not simply a matter of moving piece parts into the cloud. It’s really thinking holistically from the part of the customers on where and how they want to make this transition, because it’s an entire workflow that’s across multiple vendors that needs to be managed.
And I think we’re very well positioned. Our technology is ready for the cloud. We’re very well positioned. We’re excited about our capabilities. And it really is a matter of meeting the customers as and when they’re ready.
Right. Thank you.
And our next question today comes from Jackson Ader with J.P. Morgan. Please go ahead.
Great. Thanks for taking my questions, guys. Actually just, if we can follow up on, I mean, I know there has been a lot of questions on the cloud. But if we think about, if there are more deals that shift to either the ANSYS cloud or maybe through your partnership with Microsoft, how would that actually impact the revenue line items? And is there any kind of a difference in recognition, depending on where the cloud deployment is?
Yeah, I mean, I would say that the part of the business that customers are using on the cloud itself is very small and immaterial. The vast majority of the use-case is around seamless access to HPC capacity and other capacity outside the cloud, which has no impact on our current – it’s exactly the same revenue recognition model that we have in the – whether it’s a lease or perpetual license, because their entitlements would be separate from that usage.
And the way we built our product, Jackson, is that customers can bring their own licenses, right? So it turns, you can seamlessly take advantage of both ANSYS cloud compute capabilities as well as you can take advantage of the same license running on premises. And so, the fact that we give you the flexibility of managing that, that’s what customers are looking for.
And so, we’re not asking them to give up their investments in their on-prem compute. If they’ve got that, that’s great. They can take advantage of that. In addition, they can take advantage of cloud. Or if they want to choose to completely take advantage of the cloud, they can do that too. So that flexibility is what customers are looking for, and we’re in a position to support them with that.
Okay, that makes sense. And then, a follow-up on DYNA. So the use-cases that we’re kind of talking about here are different and are expanded from what we probably would have thought when you first acquired LS-DYNA, right down the middle, crash and impact. Is the malleability of the DYNA solver specific to DYNA or is this also something that like other solver portfolios can do, they can kind of be flexible outside of their core use-case?
Yeah, I’m not sure what you mean by the malleability. I think that, firstly, DYNA provided an explicit analysis capability into the portfolio, which obviously has use-cases, of wide variety of use-cases. And we’ve continued to expand those use-cases within the ANSYS portfolio as we’ve integrated the technologies together, and combine both explicit and implicit capabilities.
It broadens the addressable opportunity. So that’s obviously the case. I think perhaps you might be referring to the announcements we – the comment I made about Fujitsu. And I think in that, what is important to recognize is that the DYNA solver is available on the Fujitsu machine, on their PRIMEHPC supercomputer. And essentially because that machine is efficient, we can help our customers, because they’re supporting DYNA on the – they’re supporting their large-scale DYNA runs on the Fujitsu hardware platform. And that’s more efficient, because they can offload some of their simulation workload onto to an efficient compute platform.
So that was the point on that piece, and hopefully, that clarifies the comment about Fujitsu.
Yeah. Okay. That’s helpful. Thank you.
Thank you. That’s all the time we have. I’m going to turn it over to Ajei, for some closing comments.
Thanks, Kelsey. So, I’m really excited about our excellent execution, our broad customer base and our robust pipeline. Our customers’ reliance in simulation, the strengthening of the small and medium business market, and our ability to close large contracts only add to that excitement and give me further confidence as we look to close out 2021.
I would like to express my sincere gratitude to our customers and to our partners for their continued support. And a special thank you to my ANSYS colleagues. You have my gratitude for delivering yet another strong quarter. Thank you, everyone, for joining the call today. Enjoy the rest of your day.
Thank you. Ladies and gentlemen, this concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.