ANSYS Inc

NASDAQ:ANSS

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Fourth Quarter and Full Year 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.

[Kelsey DeBriyn, Vice President, Investor Relations]

Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our 2021 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 fourth quarter and full year financial results and business update, as well as our Q4 and fiscal year 2022 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. 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?

[Ajei Gopal, President and Chief Executive Officer]

Good morning, everyone, and thank you for joining us. Q4 was another excellent quarter for ANSYS, and largest quarter in our history. We beat our financial guidance for the quarter across all key metrics, including ACV, revenue, earnings per share and cash flow. Q4 was the capstone to an excellent year, in which we grew ACV by 16% in constant currency. Our industry-leading product portfolio, strong execution and growing market enabled us to beat and raise our guidance each quarter of 2021. We saw strength across all major industries, geographies and go-to-market routes over the course of the year. Our direct and indirect channels grew at double-digit. Similarly, each of our go-to-market customer segment, enterprise, strategic and volume accounts, all grew by double-digit. The high-tech and semiconductor, aerospace and defense, and automotive and ground transportation sectors were again our top industry and each demonstrated robust year-over-year growth. From a geographical perspective, we saw strong performance with each region going ACV at double-digit. I'm also pleased that we saw broad-based growth consistent with our expectations across product lines from our more established flagship products in structures, fluids, electromagnetics and semiconductors to our newer offerings such as optic, material and digital mission engineering. Our customer relationship continue to be strong and are helping to fuel the growth. In Q4, one of our key contracts came from Asia Pacific, a five-year multimillion dollar agreement with LG Electronics. This longtime customer uses ANSYS simulation to enable resource efficient production by significantly reducing material use, cost and the number of redesigns. That sustainability initiative has enabled the electronics giant to use high-quality next-generation products faster than expected, while reducing its carbon footprint. I'm also excited that Fraunhofer, a German research organization with 76 institutes spread across the country, standardized on the ANSYS simulation platform with a three-year seven-figure contract in Q4. It's researchers and engineers will use the entire ANSYS portfolio to support innovation efforts in the automotive, chemical, energy, aerospace and healthcare segments. Our ongoing broad-based business momentum and our strong customer relationships give us even greater confidence for a prospect in 2022 and beyond. We expect our 2022 ACV to go at about 10% at the midpoint in constant currency, which positions ANSYS to surpass our long-term target of $2 billion in ACV. Nicole will walk you through a guidance for 2022 in a moment. During these calls, I often highlight different aspects of our technology. For example, I discussed our solutions for optical simulation on the last call, and our unparalleled product scalability in August of 2021. Given the strength of our semiconductor, electronics business in Q4, I'd like to spend a little bit more time discussing that important segment. Based with mounting customer expectations, today semiconductor companies operate at the cutting edge of innovation and their products are continually pushing the boundaries of what is possible. Furthermore, some systems companies are turning to custom-built bespoke silicon to give the product an edge. At a cost of hundreds of millions of dollars for advanced process node tape out, the cost of failure is prohibitively expensive. The semiconductor and system companies are maximizing their likelihood of success by turning to technologies like scalable multiphysics simulation from ANSYS to develop advanced process node, and topologies like 3D and 2.5-D multi-die chip assemblies. A key deal in Q4 was a multiyear agreement with AMD, a global leader in high-performance computing and visualization product. AMD is the longtime ANSYS strategic customer. This new contract reflects AMD's rapid growth and the expanded use of ANSYS simulation and signoff tools. As a result, AMD's global engineering teams have increased access to ANSYS solutions, improving collaboration and organization across the company. Customers are also using ANSYS electromagnetic simulation to prevent electromagnetic interference and to ensure signal integrity. Our best-in-class structural and fluid simulation a critical to predicting cooling and thermal warping and to ensuring reliable IC package design. Customers are relying on our optical simulation to ensure the success of high-speed photonics interconductivity amongst data-hungry systems. And they are leveraging our safety solutions. For example, a large semiconductor supplier to the automotive industry is using ANSYS to support workflow that graphically link semiconductor design to key functions within the electronics architecture for electric vehicle battery management system. Customers can rely on ANSYS, because we continue to drive significant technological advances into the marketplace. In our recently released ANSYS 2022 R1, we introduce breakthrough new semiconductor functionality that targets DVD or dynamic voltage drop, which is traditionally been difficult to model and understand. DVD is a drop in the voltage rails cause by high transient current drawn from the power grid. It is analogous to your house lights dimming for a moment when air-conditioning turns on. Our new technology Sigma DVD is a powerful approach that significantly increases coverage of dynamic voltage drop. With this functionality we are empowering our customers to move from simulating triplets to simulating an entire chip for all switching scenarios We believe this breakthrough will spur innovation throughout semiconductor industry. ANSYS has always advocated for open ecosystems, which allow for best-of-breed interoperability and give our customers the ability to make the right decisions for their unique businesses. This is particularly important for semiconductor and systems companies. And that is why we partner with Foundry and other leading software companies. As part of our partnership, Synopsis has integrated ANSYS electronic solutions into its 3D IC compiler for highly accurate signal thermal and power data. The automated back annotation amongst these solutions enables faster convergence with fewer iterations to enable customers to bring next generation products to market faster. Earlier in 2021, we signed a multi-year, multi-million dollar contract with a major semiconductor company, which standard on ANSYS' multiphysics solutions including ANSYS HFSS and ANSYS RedHawk-SC for the latest finFET technologies and advanced 3d IC techniques. Not only was this customer able to realize the benefits from ANSYS products, but it was able to drive faster time to value. Thanks to our integration with synopsis's best-in-class technologies. Moving to our semiconductor foundry partners. Samsung Foundry has certified ANSYS RaptorH electromagnetic simulation solution for developing advanced systems on chip as well as for 3d ICs. That industry first certification enabled ANSYS to help Samsung designers, as well as Samsung foundry customers more accurately analyze and mitigate risks from electromagnetic effects when adopting Samsung's new sign-off flow. In Q4 TSMC named ANSYS as an OIP partner of the year for a joint development of four nanometer design infrastructure, which led to the certification of ANSYS RedHawk-SC enhances Totem for TSMC's most advanced three and four nanometer processes. TSMC honored us with an award for our development of ANSYS RedHawk-SC electrothermal for full chip and package thermal analysis. ANSYS has also partnered with Intel Foundry Services to become an inaugural member of the design ecosystem alliance. Through this alliance, Intel will use ANSYS's market-leading multi-physics solutions to enable Intel customers to create unique chips with tailor-made silicon. Turning to our environmental, social and governance initiatives. ANSYS and 3M have launched a material modeling training program that is helping engineers refine product development processes and reduce material waste. 3M is offering verified material models for its tape and adhesive products to all ANSYS users to help power environmental, sustainability initiatives. Finally, I'm excited that ANSYS has recently been recognized for our product innovation, as well as for our winning culture. The international society for optics and photonics presented the Prism Award in software for our OpticStudio STAR Module. This technology streamlines optical designs while reducing design errors, development time and material costs. ANSYS has also been recognized by the great places to work institute as a preferred employer in China, Japan South Korea and Taiwan. That is a testament to our colleagues in Asia, as well as to our culture of innovation. In summary, Q4 was a great quarter capping off an exceptional year for ANSYS. We beat guidance across all our key financial metrics and we delivered the best year in company history. Thanks to our market leading portfolio and our deep customer relationships, our customers are continuing to grow their ANSYS simulation for products as diverse as consumer electronics, electric vehicles, rocket ships and life-saving medical devices. Those factors combined with the momentum we experience in Q4 will propel us through this year and beyond. And with that, I'll now turn the call over to Nicole. Nicole?

[Nicole Anasenes, Chief Financial Officer]

Thank you Ajei. Good morning everyone. Let me start off by saying that financially 2021 was our strongest year ever. And we are optimistic about 2022 given the momentum in our business. For both the fourth quarter and full year 2021, we beat our financial guidance across all key metrics. And this is especially noteworthy as we've raised our full year guidance for ACV, revenue, EPS and operating cash flow for all three quarters throughout the course of the year. Additionally, in 2021, we achieved new company records across key financial metrics including ACV, revenue, EPS and operating cash flow. As Ajei mentioned, our growth was broad-based in 2021 with each of our customer segments and geographic regions growing double digits. Despite the lingering uncertainties around the pandemic, we saw growth across all industries as well as all product lines. Our wide-ranging growth is evidence of the critical capabilities our products deliver to our customers. 2021 was an outstanding year and we are entering 2022 with momentum and a strong backlog. Now, let me take a few minutes to add some additional perspective on our fourth quarter and full year financial performance. And then I will provide our outlook and key assumptions for 2022 and Q1. Beginning with ACV, we delivered $755.4 million in Q4, which grew year-over-year 14% or 16% in constant currency. For the full year we recognized $1.9 billion in ACV growing 16% in both reported and constant currency. We saw strong performance across customer types, geographies and industries. For the full year, ACV from recurring sources represented 81% of the total. Q4 total revenue was $661.4 million and grew 5% or 8% in constant currency, which exceeded the high end of our guidance. Full year revenue was $1.9 billion and grew 14% in both reported and constant currency. We had strong top line performance in 2021 with ACV and revenue both growing double digits at 16% and 14% respectively. At our 2019 Investor Day, we outlined our business model of double-digit growth including tuck-in M&A in both the fourth quarter and full year we executed against this business model. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $1.3 billion, which grew 30% year-over-year. During the quarter we continued to manage our business with financial discipline. This yielded a solid fourth quarter growth margin of 92.3% and an operating margin of 46.8%, which was better than our guidance. We had full year gross margin of 90.5% and operating margin of 41.4%. Operating margin was positively impacted by outperforming revenue. The result with fourth quarter EPS of $2.81, which was also better than our guidance. For the full year EPS was $7.37, similar to operating margin EPS benefited from strong revenue results. Our effective tax rate in the fourth quarter and full year was 19%, Our cash flow from operations in the fourth quarter totaled $101.7 million, which benefited from strong collections. For the full year we had operating cash flows of 4549.5 million. We ended the quarter with $668 million of cash and short-term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 250,000 shares during the quarter for around $99 million. For the full year we repurchased approximately 347,000 shares for around $135 million. We have 2.5 million shares available for repurchase under the current authorized share repurchase program. Now, let me turn to the topic of guidance. We expect the momentum we saw in 2021 to continue, which gives us confidence as we look ahead to 2022. As Ajei mentioned, our 2022 full-year ACV guidance surpasses the $2 billion goal we laid out at our 2019 Investor Day. We are also on our model of double digit growth including tuck-in MA with industry leading margins. Let me start with our full year 2022 guidance. We expect our full-year ACV outlook to be in the range of $1.990 billion to $2.050 billion. This represents growth of 6.4 to 9.6% or 8.3% to 11.5% in constant currency. We have a balanced and diversified business, which is driving the broad-based performance and double-digit ACV growth at constant currency that we expect to see in 2022. We expect revenue to be in the range of $2.040 billion to $2.110 billion, which is growth of 5.6% to 9.2% or 7.4% to 11.1% in constant currency. Let me touch on some of the assumptions considered in our full year guidance. We continue to expect broad-based growth and continued momentum from our large enterprise customers and SMB customers. We also assume that going forward we have a more normalized mix of business with our subscription lease licenses growing faster than perpetual licenses. As a result, ACV is expected to grow faster than revenue as the business model shifts to subscription lease licenses continues. Additionally, our full year guidance is based on how we see our book of business and pipeline today. As a result, we have assumed a neutral inflationary impact to our top line. However we have assumed a moderate impact from inflation on expenses. This brings me to our operating margin guidance. We expect our full year operating margin to be in the range of 41% to 42%. As a result we expect our full year EPS to be in the range of $7.64 to $8.10. We expect our full year effective tax rate to be 18%, which is one point lower than the 19% rate we had in 2021 due to recurring tax savings expected from tax planning initiatives. Now, let me turn to our full-year operating cash flow guidance. Our 2022 outlook is a range of $580 million to $620 million. We expect to see significant growth in operating cash flow levels year-over-year driven by strong operating leverage in our business model. However, our cash guidance absorbs the negative impact of approximately $60 million to $80 million in additional cash income taxes. This is driven by RNE capitalization tax legislation and other law changes that impact tax years starting January 1st, 2022. Although our overall 2022 tax rate is expected to be lower. The effect of the law changes the timing of cash tax payments, which creates near-term cash flow headwinds that will normalize through the amortization dynamics that occur over time. While there is still a possibility that legislation will be enacted that defers the requirement to capitalize RNE, we are including higher cash taxes in our current outlook, as we will be required to make these payments unless the existing law is amended. This legislation impacts timing of cash flow. It has no impact on our ability to operationally grow cash flow and does not create any incremental expense obligation. We remain optimistic about our cash generation in both the short and the long term. As you can calculate from our guidance, our current outlook absorbing the timing impact expects operating cash flows to grow faster than ACV in 2022. Additionally, since quarterly operating cash flow can be volatile, growth in our full-year cash outlook continues to be the best measure of success. We have seen significant currency volatility so far in 2022. When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on ACV by approximately $34 million and on operating cash flow by approximately $12 million. Further details around specific currency rates, changes in tax legislation and other receipts, changes in tax legislation and other assumptions that have been factored into our outlook for 2022 and Q1 are contained in the prepared remarks document. Now turning to guidance for the first quarter. This year we will provide quarterly ACV guidance to help with your modeling. As a reminder annual ACV is the best metric to observe the momentum in our business. We expect first quarter ACV in the range of $328 million to $348 million, revenue in the range of $395 million to $420 million, operating margin in the range of 29.1% to 31.9% and EPS in the range of a $1.05 to $1.22. Heading into 2022, we have a strong pipeline, diversified business model and a high level of recurring ACV, all of which contribute to our confidence in our outlook. I would like to thank the ANSYS team for another outstanding quarter topping off a fantastic year. Despite a continued challenging macro environment, we delivered broad-based growth. The team's exceptional operational discipline and customer centricity enables us to meet or exceed our internal models across every geography and customer segment and deliver extraordinary value to our customers across the globe. We continue to build on that momentum, invest in our business, while executing against our strategic priorities and we are well-positioned to deliver on our 2022 outlook. Operator, we will now open the phone lines to take questions.

[Operator]

Ladies and gentlemen, we'll now begin the question and answer session. [Operator Instructions] First question comes from Mr. John Walsh, Credit Suisse. Please go ahead.

[John Walsh, Credit Suisse]

Good morning everyone.

[Ajei Gopal, President and Chief Executive Officer]

Good morning.

[John Walsh, Credit Suisse]

Can you hear me all right?

[Ajei Gopal, President and Chief Executive Officer]

Yes.

[John Walsh, Credit Suisse]

Okay, great. Well, nice performance in the quarter start off there. Really my questions are first, how should we think about the SG&A costs for 2022? Maybe what's the incremental annualized from M&A, some of the inflationary pressures you talked about, and then obviously also growth investments? And then the second question, just to make sure I have the tax adjustment correct to the cash flow. If we get an amendment from the government which I think at least in our coverage there's some companies that believe that'll happen. Would we just reverse out that $70 million, is it as simple as that? Thank you.

[Nicole Anasenes, Chief Financial Officer]

Sure. Thanks John. Yes. So I'll answer your second question first and then the first question. So yes, if there was legislation that delayed or repeal the law that $60 million to $80 million would be added back to the cash flow outlook. Now that is that is pending. Any changes in tax law that could occur as a result of that repeal. So if it was just a straight repeal of that or delay of that then that would be the right interpretation. From an SG&A standpoint, I think the way to think about it is that it would be fairly consistent from an [Indiscernible] standpoint overall. Do we lose you?

[John Walsh, Credit Suisse]

Sorry, I was on mute there. That's great. Thank you for taking the questions. I'll pass it along.

[Nicole Anasenes, Chief Financial Officer]

Okay. Thanks so much John.

[Operator]

Thank you. The next question comes from Jay Vleeschhouwer, Griffin Securities. Please go ahead.

[Jay Vleeschhouwer, Griffin Securities]

Thank you. Good morning. Ajei, let me start with you with a question concerning the 2022 R1 release. One of the interesting components of the release was the reference to what you call custom workspaces or perhaps otherwise known as industry solutions. Could you comment on your broader plan or vision for packaging the software in that way with these custom work spaces for additional industries than the one you started with R1. How do you think this might affect your multi-solution sales over time, for example? And perhaps since you have such a large focus on process in the release, how you think this might affect your demand for Minerva over time? And then for you Nicole, according to the 10-k there was a very large increase in your expected revenue from RPO for 2022. Quite considerable increase in fact versus a year ago and from Q3. Is that mostly an artifact of the number of large transactions that you concluded in Q4? And is this perhaps a new more normal level of expected revenue coming out of RPO for the next 12 month periods?

[Ajei Gopal, President and Chief Executive Officer]

Yes. Okay. Jay, good morning first. Let me take the first question and then I'll hand it over to Nicole for the second. So the point that you're making actually is a very good point. We have invested in creating a comprehensive platform that supports simulation. And that platform allows for workflow, it allows for data management, it allows for a number of other elements that come together and allow us to move from being a provider of tools to a broader provider of solutions. And so for example one of the things that you saw in our 2021 -- 2022 R1 release was with ANSYS Fluent where we now have a dedicated aerospace workflow that tailors the UI, the user interface to external aerodynamic simulations. So that delivers built-in atmospheric conditions. It optimizes solver settings, relevant input and output parameters and so on. So that's an example of the power that we can bring to bear as a result of the investments that we've made. And of course you can see some of those being reflected throughout the portfolio. Nicole?

[Nicole Anasenes, Chief Financial Officer]

Yes. And so, Jay, to your question on the deferred revenue and backlog balance. Yes, you're correct. We closed the quarter with deferred revenue and backlog were about a 1.3 billion and that grew about 30% year-over-year. Now the strong growth came from the great momentum we've been seeing in our business and the success of the sales strategy to shift the business model to multi-year subscription leases. So to the point that you made earlier about strong multi-year performance. Now Q4 was especially strong because of the timing of some of the start dates of contracts executed in Q4. And since some -- since these contracts were signed before Q4 ended these contractual obligations are included in the deferred revenue backlog balance at the end of the year. But if you normalized for some of these contractual commitments which had later start dates, the growth would still be really strong. It would be close to the mid-teens. And so, I would say that overall really strong performance.

[Jay Vleeschhouwer, Griffin Securities]

Okay. Maybe one quick follow-up. Any update on the adoption of ANSYS cloud. You did announce the new relationship with AWS recently at the EDA Conference in December. There was considerable focus by ANSYS at the conference on your cloud work with Microsoft. Perhaps you could comment on that as well? Thanks.

[Ajei Gopal, President and Chief Executive Officer]

So Jay, I think to better understand the cloud strategy, it might just take me a moment to maybe repeat or to summarize for what -- how ANSYS takes advantage of the cloud and what's important to customers. So let's consider a typical enterprise application that's not simulation. So typical enterprise application like an ERP system for example. It enables some workflows and data sharing between users and a user interaction with that application typically involves something like a database lookup and a database update. The amount of compute power that's required is small and predictable and that allows the application vendor, the SasS vendor to choose a cloud for their application based on their criteria. The application runs in the vendor's instance in that cloud and the vendor will typically charge a customer a fee to use the application based on the number of users or other metrics. Now, with simulation, simulation is very different from the traditional enterprise application in that the amount of compute required to launch simulation can be enormous. So a single simulation can run for hours across hundreds of cores. A single user can launch multiple simulations in parallel. And that can translate into a lot of compute and related costs. And that's why high performance computing or HPC at scale is so important to us and to our customers. Now, historically customers have run HPC workloads in their own data centers, so their own private clouds if you will. And simulation has been one of the more demanding workloads. Now as a cost of and the availability of HPC has come down in the public cloud, some of our customers are working directly with the hyperscale cloud vendors to migrate or augment their private clouds with HPC in the public cloud. And so, a customer might often do this in the context of a broad data center update strategy in which multiple workloads including the HPC workload are being migrated to the public cloud. And obviously different customers will pick different hyperscale public cloud providers depending on the terms and the needs and the commercial arrangements and so forth. So there are two conclusions, Jay, to draw from these facts. The first is that it's essential for us to support HPC on multiple hyperscale cloud providers. And the second is because simulation workload could be run on premises in a private cloud one day and it could be run in the public cloud the next, we have to support flexible licensing. And specifically we must allow customers to be able to purchase incremental elastic licenses to support their public cloud simulation work, as well as giving them the ability to bring and use the licenses that they may have used on premises to bring it to the cloud. So that's the essence of our strategy. And we've continued to support our customers with flexible licensing as they use ANSYS products and in the public cloud of their choice. So you mentioned a couple of -- a couple of announcements. So first let me talk about ANSYS cloud. This is a product we've had in the market for a while. And I've spoken of it before. It's built on Azure. It supports flexible licensing. It allows our customers to take advantage of scale out compute on the Azure cloud running on the ANSYS managed instance. ANSYS cloud revenues customer usage are both growing. We've seen a ForEx increase in compute usage year over year. The second product that we refer to which we announced earlier this year is in collaboration with Amazon web services. The ANSYS' gateway powered by AWS, it provides a seamless access and deployment of ANSYS products on AWS. It offers scalability and flexibility. It allows customers to maintain their existing AWS relationships by pairing their hardware access through AWS with their ANSYS software. In other words, the customers run on their own instance and not on the ANSYS instance. And so this obviously provides a path for monetization for AWS and of course for ANSYS as well. So that's the strategy, that's the context of those products and obviously, hopefully this explains what we're trying to accomplish.

[Jay Vleeschhouwer, Griffin Securities]

Yes. Thanks very much.

[Operator]

Thank you. And the next question comes from Mr. Adam Borg of Stefil. Please go ahead.

[Adam Borg, Stefil]

Great. Thanks so much for taking the question. Maybe just to follow up on the ANSYS gateway question. So, I understand that that ANSYS gateway native AWS, excuse me, that's a browser-based solution. Is the goal for the entire ANSYS portfolio to be made available over time on ANSYS gateway?

[Ajei Gopal, President and Chief Executive Officer]

So obviously, the intent is to make sure that our customers can take advantage of the portfolio of -- the ANSYS portfolio on the public cloud. And you should expect to see ANSYS products being broadly available on the cloud.

[Adam Borg, Stefil]

Great. And maybe just to follow up with more of a housekeeping question. Nicole, could you just comment on what the organic constant currency growth rate was for ACV and revenue just for the 4Q and also for calendar year 2021? Thank you so much.

[Nicole Anasenes, Chief Financial Officer]

Yes. So thanks Adam. We saw strong growth [Indiscernible]. So as you can calculate some prior guidance on the impact of DGI and that the same actually investigated before. In 2021, we had really stronger growth [ph].

[Adam Borg, Stefil]

Thanks again.

[Operator]

Thank you. The next question is from Gal Munda of Berenberg. Please go ahead.

[Gal Munda, Berenberg]

Hey, good morning, and thank you for taking my questions. The first one is just around the commentary that we're getting on the automotive and just in general transportation industry, but maybe zooming out -- zooming in on the automotive side it's something that's been recovering after years of kind of subdued investment and now it seems like everyone's expanding the R&D expenditure there. In terms of what you're seeing in your results today when you're saying that those -- the vertical is starting to really ramp up. Would you say, it's the first inning of that or have you started seeing like the real benefit of electrification and obviously autonomy coming later down the line? So basically, is this another short cycle that is better off the weak cycle? Do you think this could start off a more substantial structural growth in the industry for you?

[Ajei Gopal, President and Chief Executive Officer]

Well, let me let me quickly take that, Gal. So when you think about the automotive industry, obviously, it's one of our Top Three verticals, electronics and semiconductors, automotive and ground transportation, aerospace, the top three verticals. It's an area where we've historically had a lot of strength. As you rightly point out, the areas where there is a lot of customer interest right now is in both electrification and autonomy. And a few years ago I would have said that there was a significantly more interest perhaps in autonomy as a possibly than more near-term activity. But what we're seeing right now is that some of the vendors or some of the OEMs have pulled back a little bit from their expectations maybe the more aggressive timelines they had. But a lot of the work that's on autonomy is going towards ADAS improving driver safety and so forth. So there continues to be lots of investment in that space even though full autonomy might be further away. As far as electrification is concerned, as you know, it's not just about the powertrain. Obviously when you're thinking about the powertrain and the electric, the transformation from the internal combustion engine into an electric motor, that's where our high fidelity multiphysics workflows come in that allows you to design better and more thermal efficient motors and batteries and power electronic components, all of that is part of the electrified powertrain. But in addition there is a change. It's not just about changing the internal combustion engine to an electric motor. This is an opportunity to rethink and redesign the car. And so that means, there's more analysis, for example, for safety and understanding what failure modes look like. More analysis on a noise and vibration and understanding what the ambience within the or the ambient experience in the car cabin is going to look like, on crash analysis and impact analysis. So there's a number of different areas, all of which where we have -- all of which we have strength in, which companies are pursuing in their pursuit of electrification. So we're very excited about the work that's taking place. And we see this as being an ongoing long-term tailwind for us in that particular vertical.

[Analyst]

That's really helpful. Thank you, Ajei. And then maybe Nicole, just the question on the guidance when you think about the ACV growth and the ACV number crossing that two billion for the first time. What are you assuming underlying in terms of the recurring ACV as a proportion of ACV as you have? Is the recent trends of going crossing the 80% in recurring? Is that what you're assuming in that? In other words, is that -- could there be increment of a little headwind for the next couple of years coming from the fact that you are assuming to sign more recurring deals versus perpetual?

[Nicole Anasenes, Chief Financial Officer]

Yes. That is definitely implicit in our guidance is that, as you recall in 2020 there was a more -- there was more of a trough around perpetual 2021 reflected I'd say kind of getting back to the normal level of perpetual we had. So our underlying view is that the momentum of customers is moving towards time-based licensing and that will continue over time as the business model has shifted pretty substantially towards that over the past five years. And so, our underlying assumption in 2022 is that the mix is a little bit more normalized. And as a result, ACV is growing faster than revenue as a result of that mixed compare dynamic.

[Analyst]

Sure. That's perfect. Thank you so much.

[Operator]

Thank you. Next question comes from Tyler Radke, Citi. Please go ahead.

[Tyler Radke, Citi]

Yes, good morning. Thanks for taking the question. I wanted to ask you Ajei about some of the semiconductor deals that you did this quarter. Seemed like there was a lot of activity between some of the certification on Samsung's three and four nanometer, as well as number of eight figure deals. I guess just a couple questions. I guess when you when you are building out these partnerships, are you seeing kind of your semiconductor customers take on more your products. I guess or is this a number of solutions beyond just RedHawk on the kind of the leading node processes. And then more broadly as you think about some of the multi-year chip shortages that semiconductor companies are facing. Like how is this kind of changing their road map for using ANSYS products? Thank you.

[Ajei Gopal, President and Chief Executive Officer]

Yes. So, when you think about our involvement with semiconductor companies and as I mentioned this, obviously, the companies have been historically doing semis as well as some of the system companies that are doing semis. There's obviously been a lot more activity in that space. What we are able to bring to bear is the entirety of the portfolio. And I mentioned some of this during my script. Look when you think about 3D ICs for example, that's really where you can scale performance and functionality across multiple dyes in a single package. And that requires an integrated multiphysics approach. And that includes simulating for example, the structures, the optics, the photonics electromagnetics, all of those are outside of the traditional RedHawk product line, right? So it's HFSS and others. So, when you think about these complex designs. And then certainly when you move beyond the chip itself and you think about chip package system for electronics, it really brings in -- brings to bear the entirety of a portfolio. So, and I gave you an example also in the script of a company that's using some of our safety analysis providing automotive -- providing semiconductors for the automotive industry and how our safety analysis work, which might seem counterintuitive or unintuitive. The safety analysis work is relevant at the semiconductor level all the way up to the larger automotive level. So those are examples of how our portfolio is being used. But we feel like we have a lot to offer our customers, because of the multiphysics investments that we've made over the years and the strength of the portfolio.

[Tyler Radke, Citi]

Great. And just on the second point of the question just around the supply chain constraints and semiconductor shortage. Like do you think that's kind of further evangelizing or increasing the amount of simulation that semiconductor companies are deploying?

[Ajei Gopal, President and Chief Executive Officer]

Yes. Look, I think for the shortage of semiconductors, obviously, there's a challenge in terms of being able to get semiconductors to where they need to be used and we're seeing this across multiple industries, that hasn't fundamentally affected the design activity. And that's really where we come in. We work with our customers on the design as opposed to the manufacturing of their products. And obviously, part of what we're doing with respect to the certifications with the foundries is to make sure that we are in a position to support them with our technologies as they go into to the foundry. But those are examples of us proactively working to make sure that the industry is able to move forward. But look it's -- we're not tied to manufacturing. We tied to design. And that's really primarily -- that's across all of our product lines. And so, even if a semiconductor shortage causes a shortage for example or some delay on an assembly line in a automotive company, again it doesn't affect the design work that we're involved with in the automotive company. So that's I think the strength of the ANSYS business and that gives us confidence in the way we think about our business going forward.

[Tyler Radke, Citi]

Great. And then just one last one for Nicole. If I look at your guidance on constant currency organic ACV for this year, it's a few points higher than the initial guidance that you gave last year. So just wanted to understand kind of what's giving you that that level of confidence especially comping a pretty strong year? Any changes in kind of your guidance philosophy or is it maybe the strong backlog number that's giving you that confidence? Thank you.

[Nicole Anasenes, Chief Financial Officer]

Yes. I mean, I would say, fundamentally 2021 was a really strong year. And I'd say, if you compare to where we were at the beginning of last year, we had just come off of a really significant compare dynamic around Q4 2020, right? But the underlying momentum of the business as you could see through the full year of beat and raise, definitely exceeded our expectations as we exited 2021. So going into 2022, our expectation is that guidance will -- or that performance will continue to be broad-based, it was broad-based across customer sets, geographies, industries, I mean it was pretty consistent. And so, I would say that that's the primary factor in the underlying confidence around what we consider to be a pretty strong expectation of double-digit growth of 10% at the midpoint in ACV.

[Tyler Radke, Citi]

Great. Thanks a lot.

[Operator]

Thank you. The next question will be from Ken Wong of Guggenheim Securities. Please go ahead.

[Ken Wong, Guggenheim Securities]

Great. Thank you for taking my question. I wanted to build off, Tyler's question just now, but perhaps this one targeted in the direction of Ajei. Just thinking about that that ACV growth number next year, any changes in the strategic priorities that you might be focusing on whether it's a go-to-market, end markets, partnerships that we should be thinking about that might help kind of influence the growth either at the lower or the high end of those targets?

[Ajei Gopal, President and Chief Executive Officer]

Well, as I said in my script, if you look back in 2020 to 2021 and certainly Q4 as well. In 2021, we saw strength across all major industries, across all major geographies, across all of our major go-to-market routes. And we saw growth in both direct as well as indirect. We saw growth -- if you look at the pyramid with enterprise customers at the tippy top and the volume accounts at the bottom of the pyramid, we saw growth across the customer segments. And the regions contributed there, they all grew double digits from ACV perspective last year. And the product lines kind of grew as expected. So I feel very good about all of that. That just should go goes to show that the business is performing across multiple dimensions in a way that you would want to have happen. And so, part of our plan going forward is to continue to be able to build on that momentum into 2022.

[Ken Wong, Guggenheim Securities]

Got it. Got it. And then, for Nicole, just wanted to ask about on the operating margin side. When we think about that 41%, 42%, is this more -- is there a heavier amount of catch-up spend inflation that's embedded in there relative to a typical year? And potentially we can see that is -- I don't want to say trough, but kind of abnormally lower than typical? Or is this generally just a heavier investment cycle that we should be thinking about? And just love some thoughts and color on kind of what's baked into the spend dynamics?

[Nicole Anasenes, Chief Financial Officer]

Sure. So, let me just start by saying, and I think I've mentioned this a couple time is that, we're committed to industry leading margins and the ANSYS business model is highly efficient. We have substantial operating leverage and low variable costs. Now, in our 2022 published guidance, you can see that operating leverage in the business model, When the guidance projects ACV to be stronger than revenue growth and cash flow to grow faster than ACV. And that cash flow growth is after absorbing the impact of R&E capitalization, right? Now, in terms of operating margin specifically, revenue growth headwinds from expected license mix really is the primary driver of those operating margin headwinds. And that dynamic is more about accounting in the P&L than operating leverage. The operating leverage really can be seen in those underlying dynamics between ACV and cash flow. Now, in addition, I mentioned in the prepared remarks in both cash flow and operating margin, we do have assumptions of a moderate impact of inflation on expenses. And so that is a bit of a headwind to both. But I would say primarily it's the underlying dynamic around just accounting and where revenue is this year relative to ACV.

[Ken Wong, Guggenheim Securities]

Got it. Fantastic. Thank you so much for the color.

[Operator]

Thank you. And the next question comes from Saket Kalia of Barclays. Please go ahead.

[Saket Kalia, Barclays]

Okay, great. Hey guys. It's Saket. Thanks for squeezing me in here. Ajei, maybe for you. It was a very helpful explanation earlier just around ANSYS strategy for simulation in the cloud. And certainly got the message across around flexible licensing as customers can choose either private or public. I guess maybe the follow-up question to that though is, in just the years that you've been in ANSYS, have you seen any changes I guess in that trend on customers preferring one versus the other? And how do you think about that going forward?

[Ajei Gopal, President and Chief Executive Officer]

Well, it's like, if you go back to the years that I've been with ANSYS. So if you go back five six years ago, obviously, the use of public cloud for HPC was much lower than it is today. And today the hyperscalers or the hyperscale public cloud providers have invested in building out HPC infrastructures. And they're all working with their customer bases. And as I think about our own customers, some of our customers are working with hyperscalers to figure out what their long-term data center strategy is going to look like. Do they continue to invest in their own data centers? Or they do take advantage of the public cloud -- some combination of the two where you have a hybrid structure where some stuff is running on-prem and you use the cloud as a burst capacity or for peak load periods or things of that nature. So, those are conversations that are ongoing. I think everyone realizes that there's now investment in the public cloud to support high performance computing and their high performance computing nodes. And so that's obviously a possibility that's available to our customers. From our perspective, one of the watch we're experience has always been flexibility to support and meet our customers where they want. And so, we are in a position to support our customers if they want to take advantage of our ANSYS cloud product, we can take it -- we can support them. And we can make it very easy for them to take advantage of the public cloud. If they want to run completely on premises, we can support that, and they can continue to do that. If they want to run on another public cloud, we can support that. So we -- if they want to run on Amazon, we are in a position to support that. In Azure, we're in a position to support that. So it's really -- it really is a flexible structure that we have in place. And I believe that this is exactly what customers are looking for that choice and flexibility on something as important to them as where they're computing and the cost of the compute that they're driving.

[Saket Kalia, Barclays]

That makes sense. Nicole, maybe my follow-up for you. I actually missed what you said earlier just on the organic constant currency ACV growth in 2021. Could you just recap that for us? And as part of that, can you just remind us how much Zemax is adding in? Or maybe just broadly, what the organic constant currency ACV growth is assumed in the 2022 guide?

[Nicole Anasenes, Chief Financial Officer]

Sure. Ye, I apologize. I had some technical difficulties earlier, so apologize for those who couldn't hear my answer. Yes. So, for both the fourth quarter and full year 2021, our ACV growth in constant currency was 16%. And when you back out the $86 million to $88 million associated with the combination of AGI and Zemax, You can see that's really strong organic growth both in the quarter and for the full year. Now, as we move into 2022, we're really pleased with ACV guidance of approximately 10% at constant currency at the midpoint. And again, on that business model of double digit growth including tuck-in M&A. And within 2022, we still expect Zemax to have an inorganic impact of about $20 million.

[Saket Kalia, Barclays]

That's very clear. Thanks very much guys.

[Nicole Anasenes, Chief Financial Officer]

Thank you.

[Operator]

Thank you. Next question will be from Andrew Obin, Bank of America. Please go ahead.

[Andrew Obin, Bank of America]

Hi, guys. Good morning.

[Nicole Anasenes, Chief Financial Officer]

Good morning.

[Ajei Gopal, President and Chief Executive Officer]

Good morning.

[Andrew Obin, Bank of America]

So, first question about cash flow. If you exclude the $60 million, $80 million incremental drag from the U.S. R&D tax credit change. 2022 for cash flow guidance is actually a nice step up from last year. What are the key factors driving the improvement and free cash flow conversion? How sustainable it is going forward?

[Nicole Anasenes, Chief Financial Officer]

Yes. I mean, I would say, as we go -- as we exited, went throughout 2021 and going into 2022, we saw more of a return to a more normalized collection environments past new environments. And so, the underlying momentum of the business and collections is quite strong. And in addition to that in the 2022 guidance, as I had mentioned in my earlier answer, there's significant operating leverage in the business overall around ACV. So although, operating margins overall are relatively flat, but on an -- when you compare the cash flow generation against ACV, because ACV is growing faster than revenue, you really see strong operating leverage. So it's a combination of the underlying momentum of kind of getting back to more normalized collection patterns and the underlying operating leverage in the business that has really driven the strength of the performance going into 2022.

[Andrew Obin, Bank of America]

Got you. And just a broader question. Philosophically, how do you think about the share price when considering buybacks versus M&A opportunities? And do you have any constraints really given that the balance sheet here on the $100 million debt?

[Nicole Anasenes, Chief Financial Officer]

Yes. No. I mean, obviously, the strength of the cash generation of the business and the balance sheet are great assets. And over the years the greatest return we've been able to provide to shareholders is the deployment of access cash using it to acquire premier simulation technologies to fill out the portfolio, to complete what's already the broadest and the deepest portfolio. And last year, some -- sometimes there's just not the right timing or there's nothing imminent to deploy that cash against, so we're not -- there's not something that's going to deliver the right return for shareholders and so in those times we do repurchase shares. Last year we repurchased about 347,000 shares for about $135 million. And so, we would expect to continue to think along those lines of how we think about capital allocation overall.

[Andrew Obin, Bank of America]

Terrific. Thank you very much.

[Kelsey DeBriyn, Vice President, Investor Relations]

So, thank you everyone for us. That's all the time we have today. I'm going to turn it over to Ajei, for some closing comments.

[Ajei Gopal, President and Chief Executive Officer]

Thanks, Kelsey. Once again, I am excited by the excellent progress that ANSYS has made in 2021. I would like to thank the one ANSYS team around the world for our ongoing success. Your work along with our broad-based business momentum and our strong customer relationships give us greater confidence for our prospects in 2022 and beyond. Thank you all for joining today's call. Have a great day.

[Operator]

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.