ANSYS(ANSS) - 2023 Q3 - Quarterly Report

Part I - Financial Information Financial Statements The company's total assets were $6.67 billion as of September 30, 2023, a slight decrease from $6.69 billion at year-end 2022, with revenue increasing to $1.46 billion and net income decreasing to $225.7 million for the nine months ended September 30, 2023, while operating cash flow rose to $484.4 million Condensed Consolidated Balance Sheets Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,542,499 | $1,664,122 | | Total Assets | $6,673,520 | $6,687,945 | | Total Current Liabilities | $634,431 | $794,836 | | Total Liabilities | $1,666,720 | $1,822,094 | | Total Stockholders' Equity | $5,006,800 | $4,865,851 | Condensed Consolidated Statements of Income Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $458,795 | $472,511 | $1,464,841 | $1,371,438 | | Gross Profit | $393,538 | $410,544 | $1,263,592 | $1,182,224 | | Operating Income | $69,816 | $123,384 | $293,135 | $332,557 | | Net Income | $55,502 | $95,975 | $225,650 | $265,763 | | Diluted EPS | $0.64 | $1.10 | $2.58 | $3.04 | Condensed Consolidated Statements of Cash Flows Cash Flow Highlights for the Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $484,400 | $457,031 | | Net cash used in investing activities | ($220,166) | ($258,622) | | Net cash used in financing activities | ($232,600) | ($197,978) | | Net increase (decrease) in cash | $24,951 | ($35,158) | | Cash and cash equivalents, end of period | $639,342 | $632,509 | Notes to Condensed Consolidated Financial Statements Key notes detail revenue disaggregation, showing a shift in license types and strong maintenance growth, alongside two acquisitions totaling $222.4 million, an increase in goodwill to $3.77 billion, a $755.0 million term loan, $196.5 million in stock repurchases, and a potential $7.1 million Indian service tax liability - For the nine months ended Sep 30, 2023, subscription lease license revenue grew to $386.5 million from $363.0 million YoY, while perpetual license revenue declined to $200.0 million from $212.4 million YoY, and maintenance revenue showed strong growth, increasing to $820.4 million from $742.6 million[29] - In 2023, the company completed the acquisitions of Diakopto for $83.3 million and DYNAmore for $139.2 million, with total cash consideration of $217.4 million, adding $113.5 million to goodwill[35][37][53] - As of September 30, 2023, the company had $755.0 million of borrowings outstanding under its term loan, with a carrying value of $753.8 million, and an interest rate of 6.37% in effect for Q4 2023[69][70] - The company repurchased 650,000 shares for a total cost of $196.5 million during the nine months ended September 30, 2023, with 1.1 million shares remaining available for repurchase as of the period end[75] - A potential contingency exists from several pending service tax audits in India, which could result in tax charges and liabilities of $7.1 million, though no reserve has been recorded as the charge is not considered probable at this time[83] Management's Discussion and Analysis (MD&A) Management reports a 6.8% GAAP revenue increase for the first nine months of 2023, driven by maintenance and subscription lease growth, though Q3 revenue declined 2.9% YoY due to U.S. export restrictions, while Annual Contract Value (ACV) grew 10.4% in constant currency in Q3, and operating expenses increased, leading to lower operating and net income for both the three and nine-month periods Business Overview and Strategy Ansys develops and markets engineering simulation software globally, with its 'Pervasive Insights' strategy focusing on deepening and extending simulation use across the product lifecycle, driven by expanding product offerings, increasing user base, and handling more complex computations, fueled by key market trends such as electrification, autonomy, connectivity, IIoT, and sustainability - Ansys's business strategy, 'Pervasive Insights,' aims to expand simulation use through three growth vectors: more products, more users, and more computations[87] - Market growth is driven by customer needs for innovation and efficiency, fueled by key industry trends such as electrification, autonomy, connectivity, the industrial internet of things, and sustainability[89] Financial Performance Overview In Q3 2023, GAAP revenue decreased by 2.9% and operating income fell by 43.4% YoY, while for the nine-month period, GAAP revenue grew 6.8% but operating income declined 11.9%, with performance affected by new U.S. export restrictions on China, which negatively impacted Q3 revenue and ACV by $20 million, despite Annual Contract Value (ACV) growing 10.4% in constant currency in Q3 GAAP & Non-GAAP Performance vs. Prior Year | Metric | Q3 2023 (GAAP) | Q3 2023 (Non-GAAP) | 9 Months 2023 (GAAP) | 9 Months 2023 (Non-GAAP) | | :--- | :--- | :--- | :--- | :--- | | Revenue | (2.9)% | (3.1)% | 6.8% | 6.3% | | Operating Income | (43.4)% | (19.5)% | (11.9)% | 0.6% | | Diluted EPS | (41.8)% | (20.3)% | (15.1)% | (1.0)% | - New U.S. Department of Commerce restrictions on sales to certain Chinese entities negatively impacted revenue and Annual Contract Value (ACV) by $20.0 million in Q3 2023, with an expected full-year headwind of $25.0 million[96] Annual Contract Value (ACV) Growth (in thousands) | Period | ACV (Actual) | ACV (Constant Currency) | YoY Change (Actual) | YoY Change (Constant Currency) | | :--- | :--- | :--- | :--- | :--- | | Q3 2023 | $457,549 | $451,779 | 11.8% | 10.4% | | 9 Months 2023 | $1,345,305 | $1,355,529 | 10.8% | 11.7% | Results of Operations For Q3 2023, total revenue decreased 2.9% YoY to $458.8 million, driven by declines in subscription lease and perpetual licenses, partially offset by increased maintenance revenue, while for the nine-month period, revenue grew 6.8% to $1.46 billion, led by maintenance revenue, with operating expenses rising due to higher personnel and stock-based compensation costs, resulting in lower operating income and a decreased effective tax rate for both periods Q3 Revenue by Type (in thousands) | Revenue Type | Q3 2023 | Q3 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Subscription lease licenses | $103,573 | $136,489 | (24.1)% | | Perpetual licenses | $58,849 | $72,417 | (18.7)% | | Maintenance and service | $296,373 | $263,605 | 12.4% | | Total Revenue | $458,795 | $472,511 | (2.9)% | Nine-Month Revenue by Type (in thousands) | Revenue Type | 9M 2023 | 9M 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Subscription lease licenses | $386,494 | $362,977 | 6.5% | | Perpetual licenses | $199,977 | $212,355 | (5.8)% | | Maintenance and service | $878,370 | $796,106 | 10.3% | | Total Revenue | $1,464,841 | $1,371,438 | 6.8% | - Q3 selling, general, and administrative (SG&A) expenses increased 11.0% YoY to $194.6 million, and R&D expenses increased 14.0% to $123.2 million, primarily due to higher salaries and stock-based compensation[125] - The effective tax rate for Q3 2023 was 11.3%, down from 18.7% in Q3 2022, and for the nine-month period, the rate was 15.6%, down from 16.7% in the prior year[130][148] Non-GAAP Results The company provides non-GAAP metrics to supplement GAAP results, adjusting for items like stock-based compensation, amortization of acquired intangibles, business combination expenses, and historical deferred revenue write-downs, with non-GAAP diluted EPS at $1.41 for Q3 2023 (vs GAAP $0.64) and $4.85 for the nine months (vs GAAP $2.58), aiming to provide a clearer view of ongoing operational performance - Non-GAAP results exclude items such as stock-based compensation, amortization of acquired intangibles, and expenses related to business combinations to better reflect ongoing operational performance[158][159][160] GAAP to Non-GAAP Reconciliation Highlights (Q3 2023) | Metric (in thousands) | GAAP | Adjustments | Non-GAAP | | :--- | :--- | :--- | :--- | | Operating Income | $69,816 | $86,421 | $156,237 | | Net Income | $55,502 | $67,395 | $122,897 | | Diluted EPS | $0.64 | $0.77 | $1.41 | Liquidity and Capital Resources As of September 30, 2023, the company held $639.5 million in cash, cash equivalents, and short-term investments, with net cash from operations for the nine-month period at $484.4 million, primarily used for $197.8 million in acquisitions and $196.5 million in stock repurchases, and the company believes existing liquidity, including its $755.0 million term loan and $500.0 million revolving credit facility, is sufficient to meet needs for at least the next twelve months - Cash and cash equivalents increased to $639.5 million at Sep 30, 2023 from $614.6 million at year-end 2022, with 48.9% of this cash held by foreign subsidiaries[169][171] - For the nine months ended Sep 30, 2023, cash from operations was $484.4 million, cash used in investing was $220.2 million (primarily for acquisitions), and cash used in financing was $232.6 million (primarily for stock repurchases)[173][174][175] - The company believes existing cash, cash from operations, and access to its $500.0 million revolving loan facility will be sufficient to meet working capital and capital expenditure requirements for at least the next twelve months[182] Market Risk Disclosures The company is exposed to foreign currency exchange risk and interest rate risk, with currency fluctuations having a mixed impact on operating income, and a hypothetical 10% strengthening of the U.S. Dollar decreasing nine-month revenue by $63.6 million, while a 100 basis point increase in interest rates on its $755.0 million variable-rate term loan would raise annual interest expense by $7.7 million - The company is exposed to foreign currency risk, where a hypothetical 10% strengthening of the U.S. Dollar would have decreased revenue by $63.6 million and operating income by $22.6 million for the nine months ended September 30, 2023[188] - The company is exposed to interest rate risk on its $755.0 million of variable-rate debt, where a hypothetical 100 basis point increase in interest rates would increase annual interest expense by $7.7 million[190] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the third quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[192] - No changes in internal control over financial reporting occurred during Q3 2023 that materially affected, or are reasonably likely to materially affect, internal controls[194] Part II - Other Information Legal Proceedings The company is subject to various claims and legal proceedings in the ordinary course of business, with management believing the resolution of pending matters is not expected to have a material adverse effect on its financial position, results of operations, or cash flows - The company states that the resolution of pending legal matters is not expected to have a material adverse effect on its financial condition[196] Risk Factors The company highlights a significant risk related to expanding U.S. trade restrictions, particularly export controls to China, which have already limited sales to certain Chinese entities, elongated transaction cycles, and could continue to adversely affect business and financial results, with potential violations leading to significant penalties - The company is subject to expanding U.S. export control restrictions, particularly regarding China, which have limited and could continue to limit its ability to sell products and services to certain customers[199] - These trade restrictions have led to elongated transaction cycles and may result in reduced sales or delays in delivery, adversely affecting business and financial statements[199] - Violations of trade restrictions can result in significant penalties, including monetary fines, denial of export privileges, and reputational harm[201]