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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to ANSYS Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. With us today are Ajei Gopal, Chief Executive Officer; Maria Shields, Chief Financial Officer; and Annette Arribas, Senior Director, Global Investor Relations.
At this time, I would like to turn the call over to Ms. Arribas for some opening remarks.
Good morning, everyone. Our earnings release and the related prepared remarks document have been posted on the homepage of our Investor Relations website this morning. They contain all of the key financial information and supporting data relative to our fourth quarter and full year financial results and business update, as well as our Q1 and fiscal year 2018 outlook, and the key underlying assumptions.
I would like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results are discussed at length in our public filings with the SEC, all of which are also available via our website.
Additionally, the company's reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future. These statements are based upon our view of the business as of today, and ANSYS undertakes no obligation to update any such information, unless we do so in a public forum.
During the course of this call and in the prepared remarks, we'll be making reference to non-GAAP financial measures. A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial measures are included in this morning's earnings release materials and related Form 8-K. All growth percentages will be constant currency, unless otherwise noted.
I would now like to turn the call over to our CEO, Ajei Gopal, for his opening remarks. Ajei?
Thank you, Annette, and good morning, everyone. Our performance in 2017 significantly exceeded my expectations coming into the year. We broke through the $1 billion revenue barrier, we grew our annual revenue by double digits for the first time in five years, and we were added to the S&P 500 Index.
Our recurring revenue, which comes from leases and maintenance, grew double-digits to 75% of revenue. And we further illustrated the sustainability of our business model by growing deferred revenue and backlog by 21% over 2016, ending the year with a record $770 million. We did all of this while maintaining excellent margins, delivering higher than expected EPS, and extending our technology lead against the competition.
Our success in 2017 reaffirmed what I knew to be true when I joined the company from the board of directors. Our growing market, world-class products, robust recurring revenue stream, and industry leading margins give ANSYS an outstanding foundation for long-term success and sustained stockholder value creation.
To build on that great base, I approach my first year as the CEO with three objectives in mind. First, to establish a multi-year strategy for the company; second, to both internally promote and externally recruit top-tier talent; and third, to significantly improve execution. I'm excited by the progress that we made in 2017 towards each of these objectives.
Let me start with strategy. As a reminder, at our Investor Day in September we articulated a compelling vision of how simulation becomes pervasive across the product lifecycle in the ideation, design, manufacturing, maintenance, and operations phases. We highlighted our commitment to extending our technical leadership by continuing to improve the already market leading accuracy and effectiveness of our flagship products and Multiphysics solutions.
We also described how we are broadening our capabilities to selective adjacencies, namely digital exploration, additive manufacturing, and digital twins.
We also laid out our corresponding 2020 financial objectives to achieve sustained double digit revenue growth, while maintaining industry leading margins.
ANSYS's success in the market is a testament to the passion and the dedication of our 2,900 employees around the world. ANSYS is a company in demand. And job postings consistently attract some of the best minds in the industry. The ANSYS senior leadership team includes long-term ANSYS executives, some with expanded or new responsibilities, as well as key external executive hires in sales, product, legal, and corporate development.
Together we're amplifying the strength of the ANSYS culture, one that starts and ends with a passion for solving customer problems and for winning in the marketplace.
Moving to execution. 2017 saw improved performance and better results across all functions in the company. I already mentioned some of the financial results. So now let me talk about Q4 and put it in context of the full year.
I'm excited by the performance of our largest region, North America, which represents 39% of our annual revenue. Both our total revenue and our lease revenue in the region grew by 10% in Q4. For the full year, total revenue grew 13% while leases grew 17%. The strength of our North American business was driven by our direct sales team.
Asia-Pacific represents 32% of our annual revenue. With continued strong performance in China, Korea, and Taiwan, the Q4 results in Asia-Pacific include 7% revenue growth and a 12% increase in lease revenue. For 2017, the region experienced 10% growth in total revenue and 9% growth in lease revenue. Our investments over the past several years in the indirect sales channel helped deliver double digit revenue growth for the indirect channel for both the fourth quarter as well as for the full year.
Despite some variability in Europe, we showed in Q4 that the region could once again achieve double digit organic revenue growth. Over the course of the year, we made several changes to address underperformance in Europe, including recruiting new leadership, re-segmenting the region, developing a more strategic focus on large deals, and expanding the channel.
I previously stated that 2017 would be a transition year in a long-term recovery for Europe, and that we would start to see the initial results at the end of 2017 or in early 2018. After hitting a low point in Q2, we have seen improvement over the last couple of quarters with Europe achieving a growth rate of 10.5% for Q4, its strongest growth quarter since Q3 of 2013. This pulled Europe's annual growth rate up to 8%.
And while I'm excited to see the early improvements in Europe's growth, I expect the full effect of the changes we've made will continue to be realized in 2018 and beyond, as we continue to build a sales pipeline, both direct and indirect, and deepen our relationships with large customers.
Worldwide, our indirect channel continues to be a critical contributor to our success, driven by the performance of existing channel partners as well as our ability to recruit new channel partners. I'm happy to report that the indirect channel delivered over 11% revenue growth for both Q4 and for 2017.
From an industry perspective, North America and Asia-Pacific led the way in automotive and high tech, strengthened by trends like the electrification of products. The energy and industrial equipment sectors also performed well in these regions, supported by an improvement in the oil and gas sector. Europe showed strong performance in the aerospace supply chain, as well as seven-figure deals in the renewable energy sector.
Let me now move to products. At Investor Day, we discussed our customers' top priorities, which include accuracy, Multiphysics capabilities, electrification, and advanced methods. Those priorities drove many of the new enhancements we delivered in last month's release of ANSYS 19, which is the most feature-rich portfolio release in our nearly 50-year history.
ANSYS 19 includes enhancements across our entire offering, from structures to fluids, to electromagnetics, to semiconductors, to systems, to embedded software. Using these solutions, customers can more accurately simulate and drive actionable insight for next generation products like autonomous vehicles, reusable rockets, and lifesaving medical devices. We're helping engineers manage complexity and enhance productivity across the broadest range of applications, making simulation even more pervasive.
Let me give you some highlights. ANSYS 19 delivers enhanced electromagnetic capabilities like radar cross section, a measure of how large an object looks to a radar system. Now engineers with these systems can quickly predict far field and near field radar signatures for complex 3D objects like aircraft, ships, and automobiles. This is, as you would expect, a key requirement for autonomous vehicle development.
Looking at our structural solutions, ANSYS 19 brings major advancements in our non-linear adaptivity and fracture mechanics technologies. Now problems that were very hard to simulate, such as complex crack propagation, can be solved quickly in ANSYS Mechanical, saving customers weeks of analyst time.
Our newly enhanced topology optimization delivers solutions five times faster than the competition. And this is of course particularly significant for additive manufacturing.
In our fluid solutions, ANSYS 19 delivers new streamlined workflows, drastically reducing the time needed to deliver airflow and other simulations.
Customers clearly appreciate this new functionality and have made ANSYS 19 the most in-demand release in our history, based on number of downloads.
By addressing our customers' top priorities, ANSYS 19 accelerates our ability to grow with large enterprise customers. As a trusted advisor with world class product capability, we can better support our customers' initiatives and help them drive long-term business successes, even as we increase the adoption of ANSYS products and solutions. This allows us to convert a small footprint into a large ongoing relationship.
That strategy is continuing to gain momentum with large companies around the world. In Q4 alone, we had 49 seven-figure deals, including three over $10 million, of which two were over $25 million.
For the full year, we had 149 customers with cumulative orders in excess of $1 million. And I'm delighted to report that both the quarterly and the annual numbers are records.
One of these Q4 deals was with DENSO, a leading global supplier of advanced automotive technology, systems and components for major automakers, who signed an enterprise agreement to significantly expand the use of ANSYS simulation products. As the automotive industry responds rapidly to the need for developing lighter, cleaner, more fuel efficient, intelligent, and electrified vehicles, DENSO maintains its competitive edge by investing in technologies that continually improve their products and product design processes.
A key to their success is investing in simulation to enable their design teams to collaborate across engineering disciplines, using an integrated workflow based on ANSYS Workbench and ANSYS structural fluids and electromagnetic products. This expanded workflow will enable DENSO to further share and leverage insights gained from simulation across their organization.
As you may have seen in our announcement last week, Richard Childress Racing, or RCR, is another great example of our strategy in action. RCR designs, develops, manufacturers, and races cars in the NASCAR Monster Energy Cup Series.
The ability to simulate and model all aspects of the car, which races every week in challenging physical environments, enables RCR to optimize the car performance more efficiently. RCR relied on our flagship products to develop the 2018 Camaro ZL1 that is racing this season. And if any of you follow the sport, you'll know that earlier this week RCR's Austin Dillon won the prestigious DAYTONA 500.
In a new agreement with ANSYS, RCR will start to model the electrical and other systems in the car to create a true digital twin and simulate it in a hostile environment that is difficult or impossible to test.
As we expand our presence with customers with our best-in-class physics and integrated solutions, we are displacing the competition.
Aeroflex Colorado Springs, doing business as Cobham Semiconductor Solutions, a provider of ASIC's HiRel for harsh environments, entered into a multiyear partnership in Q4 as they expand their ASIC design capability to advanced process nodes and create more efficient workflows to collaborate with their packaging teams. ANSYS became a top tier provider with this deal, establishing a chip package system workflow and displacing a competitor.
In another example, after a series of successful benchmarks, a major global aerospace company based in Europe standardized on ANSYS Mechanical in Q4 through a multi-year agreement, displacing the incumbent competition. The customer is adopting a comprehensive ANSYS platform and reshaping their simulation process through an integrated workflow based on ANSYS Workbench and our flagship fluids and mechanical products.
As reliability and performance remain paramount for next generation aircraft designs, digital prototyping through ANSYS solutions will enable them to realize more efficient, more reliable, and more cost effective designs.
Our commitment to bringing advanced methods to market to solve next generation problems for customers is also bearing fruit.
One of our Q4 deals was with a large global automotive OEM to deliver a comprehensive solution to simulate fully autonomous vehicles. This agreement provides the customer with ANSYS's industry leading simulation software and a team of experts to accelerate critical advancements in sensors of self-driving cars.
ANSYS's breakthrough engineering simulation technology will enable the safety, reliability, and performance requirements needed to bring fully autonomous vehicles to market.
Finishing off the product news. I'm excited that we released Discovery Live commercially just last week, following a tremendously successful technology preview.
Now as you may recall, Discovery Live provides interactive real-time simulation, which is particularly useful in the ideation and the early design phases of the product lifecycle. Discovery Live will help us to democratize simulations and will empower engineers who previously could not leverage simulation. It will also help engineers proficient with simulation to become more efficient by giving them quick directional guidance on where to focus their deeper analysis.
And while we are very excited with the Discovery Live opportunity, it is important to note that this is the first version of a transformative product. As such, we expect commercial pickup to be deliberate as customers figure out how the product fits into their workflows. Hence, we do not expect any material revenue contribution from Discovery Live this year.
Let's move to M&A. Additive manufacturing is one of our key strategic adjacencies. To accelerate our technology roadmap, in Q4 we acquired 3DSIM, a developer of premier additive manufacturing simulation technology. By integrating 3DSIM into the ANSYS platform, we will offer the industry's only complete design-to-print, additive manufacturing simulation workflow.
The 3DSIM acquisition won't have a material impact on revenue in 2018, while we develop our integrated solution and bring it to market.
We continue to drive significant value from previously acquired products and solution, as we enhance the capabilities integrated with other ANSYS products and cross-sell within our customers.
As an example, when we acquired medini in late 2016, the company was focused on the automotive sector. We have since expanded ANSYS medini in two dimensions. First, to offer robust safety analysis to industries beyond automotive, including rail, aerospace, nuclear, and other industries; and second to integrate with other ANSYS products.
Now only ANSYS can provide comprehensive integrated solutions that span safety systems, safety critical embedded software, system simulation, and 3D physics simulation for critical systems across multiple industries.
And while I'm excited and proud of our performance in 2017, it's important to remember that this was only the first year in a multi-year journey to achieve sustained double digit revenue growth. We still have a lot of work ahead of us. But with our strategy, with our team, and our laser focus on execution, I am confident that we can help our customers win in the marketplace with their next generation of products, while we continue to deliver value to our stockholders.
And with that I will now turn the call over to Maria to discuss our financial results and outlook in a little more detail. Maria?
Thank you, Ajei. Good morning, everyone. Ajei shared a few of our key financial highlights, but let me take a few minutes to add some additional perspective on our Q4 and 2017 operational performance and key financial metrics, including the impact of tax reform.
I'll also spend some time commenting on our outlook and assumptions for Q1 and 2018, as well as additional key performance metrics that we will be disclosing in our outlook going forward. And also just to note, I will be commenting in terms of non-GAAP, unless I state otherwise.
The results of Q4 reflect strong execution across our business. In line with the key messages that we communicated at Investor Day, this enabled us to deliver record Q4 results with both revenue and earnings above the high end of our guidance.
Key financial highlights begin with total Q4 revenue of $303.4 million and total revenue for 2017 of $1.098 billion, or constant currency growth of 9% and 10.5% respectively. Both of these were important milestones, as they are firsts for ANSYS, in terms of not only crossing a quarterly revenue threshold of $300 million, but more importantly crossing $1 billion in annual revenue.
The Q4 over-performance on the top line was driven by a number of factors, including a higher than expected perpetual mix as we closed out the quarter. Double digit growth in North America, China, Taiwan, and the UK also contributed to the strong Q4 revenue performance.
The Q4 and 2017 results include a positive currency impact on the revenue line of $8.1 million and $5.4 million.
Recurring revenue for the quarter and the year totaled $214 million and $820 million. On an annual basis, recurring revenue were double digits in constant currency and increased to 75% of total revenue.
The company's ability to continue to maintain and to grow a solid base of recurring revenue has been one of the hallmarks of our business model for decades.
I'd like to remind everyone that Q4 of 2016 included constant currency sales bookings growth of 36%. So not surprisingly, sales bookings declined 11% in constant currency in the fourth quarter of this year. However, most importantly, sales bookings grew 7% for the full year.
As we've seen over the course of the past year, as we continue to execute on our go-to-market initiatives to expand the overall size and duration of customer commitment, our historical bookings metrics can vary significantly across the quarters, based upon the seasonality of renewals and the timing of large multi-year contracts.
This quarterly volatility is specifically why we will be moving away from bookings to focusing on annual contract value, or ACV, as a new and more relevant measure in 2018. I'll provide some additional color on this topic in just a few moments.
I want to highlight that we continue to manage the business with financial discipline. And we closed 2017 in line with the annual target range for operating margin that we had committed coming into the year.
For the quarter and for 2017 we achieved a gross margin of 90% and operating margins of 43% and 46%, respectively. The Q4 margin was slightly below the guidance that we had provided and was mostly impacted by sales commission expense, in conjunction with both our very strong close in the fourth quarter and record sales performance for the full year.
To a lesser extent, the inclusion of 3DSIM, some 2018 pre-hiring activities in Q4, and incremental consulting cost in connection with the go-to-market changes that we highlighted at Investor Day also impacted Q4's margins.
We reported record EPS of $1.07 for the quarter and $4.01 for the year, representing 9% and 10% growth over last year's fourth quarter and full year earnings.
Now let's move to the topic of taxes. The recently enacted changes under U.S. tax reform negatively impacted both our Q4 GAAP income tax provision and EPS results. Q4 included a $1.9 million charge in connection with the adjustment toward net deferred tax assets. We also recorded an estimated transition tax of $16 million on certain, unrepatriated earnings of foreign subsidiaries, which is payable over eight years.
Additionally, we lost a benefit of $4.8 million related to foreign earnings repatriation that was previously expected and otherwise to be recognized in the fourth quarter. These items, which were excluded for non-GAAP purposes, are discussed in further detail in the earnings announcement and prepared remarks.
For 2018, we currently expect our effective tax rate to be in the range of 22% to 23.5%, subject to further interpretation and clarification of the many nuances of U.S. tax reform. We will continue to refine our estimates and provide updates.
Our operating cash flow for the quarter was $103.5 million, and we reached a record high of $430.4 million for the year. This represents 18% growth over 2016.
In line with our capital allocation priorities, we closed 2017 with a total of 2.8 million shares repurchased, including 750,000 shares repurchased during the fourth quarter at a total cost of $336 million. As you saw in last evening's announcement, the board has renewed our commitment to continue to return capital to our stockholders by increasing the authorized share repurchase program back to a total of 5 million shares.
Now let me turn to our commentary on our guidance. As we had previously communicated, as part of the company's adoption of ASC 606 in Q1 of 2018, not only will we be providing outlook under the new revenue recognition rules, that is ASC 606, but in 2018, our first year of adoption, we will also be providing outlook under the previous ASC 605 rules. We believe this will provide investors and analysts with an additional level of comparability to historical financial results, as we transition to the new rules.
Additionally, beginning in 2018 we will also be providing guidance on two new performance measures. The first metric is annual contract value, or ACV. Going forward we believe that the change in ACV will be a more meaningful metric for measuring the underlying performance and health of the business, particularly in light of the variability in revenue that results from the adoption of ASC 606, as well as the volatility in the bookings metric that we have historically provided that resulted from multi-year transactions and the impact of movement in the timing of renewals.
Further details around our definition of ACV are provided in our prepared remarks.
The second new performance metric is annual operating cash flows, also a key metric in measuring the underlying performance of the business that will not be significantly impacted by ACS 606, as we do not expect the new standard to impact how we go to market or how we bill or collect from our customers and our channel partners.
We have initiated our outlook for Q1 with non-GAAP revenue under ASC 605 in the range of $275 million to $285 million and non-GAAP EPS in the range of $1.02 to $1.09. Non-GAAP revenue under ASC 606 is in the range of $261 million to $281 million and non-GAAP EPS in the range of $0.90 to $1.05.
For 2018, our current outlook includes non-GAAP revenue under ACS 605 in the range of $1.192 billion to $1.227 billion or constant currency growth of 6% to 9% and non-GAAP EPS in the range of $4.76 to $5. Non-GAAP revenue under ASC 606 is in the range of $1.152 billion to $1.232 billion and non-GAAP EPS in the range of $4.41 to $5.04.
Our ACV outlook for 2018 is $1.230 billion to $1.275 billion. This represents constant currency ACV growth of 7% to 11% over the 2017 baseline or 9% at the midpoint, ahead of the overall simulation market growth rate.
Our outlook for annual operating cash flows for 2018 is in the range of $430 million to $470 million. I would also like to make clear that our outlook for operating cash flow in 2018 includes the estimated adverse impact of approximately $20 million related to the acceleration of income tax payments under ASC 606 that's associated with deferred revenue and backlog credited to retained earnings that will never be recognized as revenue in the company's financial statements.
Also in connection with ASC 606, we are currently estimating a reduction in our total deferred revenue and backlog in the range of $230 million to $260 million, or $165 million to $190 million net of tax, that will become part of our cumulative effect adjustment within retained earnings.
For modeling purposes, under ASC 605 we are targeting a non-GAAP gross profit margin of approximately 89% to 90% for both the first quarter and 2018 and non-GAAP operating margins of 42% to 43% for Q1 and 44% to 45% for 2018. This aligns with what we communicated at Investor Day regarding a reduction in the margin to enable incremental investment in the business that will drive sustainable double digit top line growth by 2020.
In 2018, the key areas of incremental investment include additional hires, particularly in the technical sales and support teams and R&D, as well as incremental investment in the company's HPC compute capacity and its business system infrastructure.
Further details around specific currency rates and other assumptions that have been factored into our outlook for Q1 and 2018 are contained in the prepared remarks document.
In summary, in Q4 and 2017 we delivered a record quarter and year with strength across all of the key financial metrics, top-line growth, operating margin, earnings, operating cash flows, and deferred revenue and backlog.
This solid performance, delivered across each quarter, gives us confidence that our continued focus on execution and investing in the business with financial discipline, combined with the strength of our business model, product portfolio, and sales pipeline, provides a strong foundation to deliver on our near-term 2018 goals, as well as our longer-term 2020 financial targets.
And with that, operator, we will now open the phone lines to take questions, please.
Thank you. We will now begin the question-and-answer session. We ask that you limit yourself to one question and one follow up. Our first question comes from Rob Oliver with Robert W. Baird & Company. Please go ahead.
Hi, guys. Good morning. Thanks for taking my question. One quick one and then a follow up. First, on the contract lengths, I just wanted to kind of dig into that bookings number, since it's the last time we're going to get it. So I might as well go for it.
Was there any anything around contract lengths? Or how do they compare year over year that could have had a meaningful impact on that bookings number? I'm aware you guys were coming up against an awfully tough comp year over year. But just wanted to dig into that. Thanks.
Yeah. I'll take that. When you take a look at the duration of either current or long-term deferred, it's largely in line with Q3 and with Q4 of last year. So no real changes in contract duration.
Okay. Great. Thanks. And then maybe one for Ajei. At the Analyst Day, I know in Rick's presentation you guys talked a lot about moving more into that consultative sale and spreading more within accounts. It sounds as if that's starting to really gain traction. Maria mentioned as one of your spending outlooks for this year would be hiring more in that technical sales area, that field technical sales area.
Where are you in that trajectory in terms of that field technical sales hire, as you seek to expand within those accounts? And how – so that we can sort of think about how you plot that out this year as part of your investment? Thanks, guys.
Sure. So as Maria mentioned in her comments, one of the areas where we are planning on investing this year is to continue to ramp up our ACE resources, or our technical sales resources. So that's the activity that we have planned for this year. We got a little bit of a head start on that as well in Q4, as Maria mentioned in the comments. So we have a good pipeline of people. And we're seeing some really good quality candidates.
And as you can see from some of the comments that I made as well, the strategy of being – of increasing our – the number of technical salespeople we have is paying off. It's helping us to drive some deeper relationships with our customers. And that allows us obviously at the end of the day to create a situation where we can broaden the usage of ANSYS technologies within the customers. And we can monetize the relationship on an ongoing basis at a deeper level than we've been able to in the past.
Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Thanks. Good morning. Let me ask my questions all together, just to get that out of the way. First for Ajei. When you think about your 2018 outlook and perhaps even through 2020, as talked about at the Analyst Meeting, how are you thinking about your specific end markets? In other words, if for example, your two largest end markets by bookings proportion, electronics and/or semis, were to slow or grow at some rate less than the corporate expectation, could you still make your numbers based on the expected growth in your other verticals?
Number two. At the Analyst Meeting you talked about devoting about a fifth of R&D into next generation technology. And you highlighted four areas. One of those was digital exploration. So I assume Discovery Live takes care of that. And you talked about additive manufacturing, so perhaps 3DSIM takes care of that. Could you talk about the other couple of pieces within next generation R&D?
And then finally, if I could just squeeze in a bonus question. On the margin, are you seeing or expecting more displacement activity? I'm just reading into your language, it sounds as though you are perhaps a little bit more expectant of displacement activity than you might typically have been before?
So let me try to quickly address some of those questions, Jay. As far as the end markets are concerned, there's some major trends right now taking place that I think are inexorable, which is – one of which is the electronification if you will of the world.
And we're seeing products get smarter, green products. This is not uniquely a trend that's related to the electronics industry. It is essentially the broad-based electronification across a number of different product areas and a number of different industry verticals. So that remains a broad-based tailwind I think that helps us, given the nature of our portfolio.
We're also frankly seeing strength in a number of the other end markets. I mentioned for example, energy in Europe. For example, we saw in renewable energy a number of large deals as well come down in Q4.
So while there may be quarter-over-quarter variations from one market to the other, generally speaking, I think these broad-based trends that we see, Multiphysics, electronification, et cetera, apply across a number of the industries that we participate in. So we feel like we're immunized from these minor variations from quarter to quarter. That's number one.
As far as other areas, you're right to say that the digital exploration was Discovery Live. And as I mentioned, we now have Discovery Live, the product now available commercially. And it just came out a few days ago.
And obviously I mentioned 3DSIM, the acquisition. And that includes – our solution for additive manufacturing will include not just the work that came from the 3DSIM team, which was fantastic, but it's also the integration into our overall portfolio, where we have an end-to-end workflow that goes all the way from design to manufacturing. And we believe that that's an incredibly compelling value proposition to a number of different end users. So we're excited about that.
I also mentioned in my comments some work that we're doing with – in the autonomous space. And we're excited about the opportunity there, specifically – or in particular because we can take both a sensor-oriented view as well as a systems-oriented view towards the autonomous vehicles and the development of those. So I think that's exciting.
Another area that we're seeing – where there continues to be traction and a lot of interest is digital twin. And in that case, what you're seeing with digital twin is really the opportunity to try to optimize on maintenance downtime or field optimization of products. And more and more industries are finding this to be an interesting concept and are now starting to participate in that. And we're seeing more demand from customers around understanding what's involved in creating digital twins.
So I think those were the questions. And I think you mentioned – you talked about prioritization of R&D as well. And absolutely. I mean as we discussed with our broad-based allocation at Investor Day, we have a certain amount that we set aside for some of these advanced initiatives. And we continue to develop some of what I've talked about already and other things in our labs. And we can obviously talk more about next generation products as we get closer to product innovation.
Our next question comes from Rich Valera with Needham & Company. Please go ahead.
Thank you. Ajei, I was wondering if you could shed a little more light on the agreement you announced with GE yesterday? Particularly the part about the advisory board you'll be forming with them. Sort of, one, have you done this before? Two, sort of what are the objectives of that? And maybe, three, do you think this is something you could repeat with other major customers? Thanks.
So as you know GE is a longtime customer of ours. I think they've been a customer of ours for 30 years or longer. And they've been – they've used essentially a lot of our portfolio. And this agreement – which is a Q1 agreement. This agreement essentially gives them access to the full breadth of our portfolio and across essentially all of the physics.
Now the management review board, we do have relationships with some of the other large customers, where we have a review board, where we get together to talk about areas of mutual interest, how we can collaborate, where our technology is going, and where their product areas – where their business challenges are going. And we find frankly that's a very important opportunity for us to be able to understand what leading customers want and also to validate where our solutions are going with leading customers. So we like that.
Obviously this is something that we can do with our largest customers, because it does take time and effort. And we're excited to engage in this kind of a relationship with GE. And we believe that this is – this has value across a number of the large customers.
Got it. And then just on Discovery Live, understand you're not planning on any material revenue contribution from that this year. But can you talk about what you learned during the, call it, trial or beta period of the product? How you've changed it? And what might make that the kind of the solution you've been looking for I think for a while? The sort of truly democratized physics based simulation?
Well, I think that as I said earlier, it's obviously early days from a commercial perspective. But in the trial period we saw people using the product for all kinds of interesting use cases. Frankly, use cases that we didn't expect. And I think that was very gratifying.
And so we had a lot of change – a number of changes that came in that people had suggested in terms of expansions that have all been put into our roadmap. And we realized that we need to have a more rapid development cycle. So we're going to be pushing the leases out more rapidly.
So it's a number of learnings I would say around the core technology to make it easier to use and to think about the nature of the physics that we have in the product.
There's also the go-to-market, because we've made this technology available obviously through our traditional channels. But we also make it available through an online download. And we've had to get all of that infrastructure up and running to be able to process orders from the e-commerce channel as well.
So those are – I think those are also learnings. It's not necessarily around the product. But it's in the how we transact business. And so the e-commerce channel is live right now for both North America and for Europe.
So these are all – these are the kinds of learnings that we've gleaned from our work with Discovery Live so far. But as I said, it's early days. And we're really excited about the use cases. And we expect that customer feedback will continue to influence the direction that the product goes.
Our next question comes from Saket Kalia with Barclays Capital. Please go ahead.
Hi, guys. Thanks for taking my questions here. How are you?
Good.
Good. How are you doing, Saket?
How are you?
Not bad. Not bad. Hey, Ajei, maybe just to start with you. It seems like the energy sector is seeing the stronger recovery in North America and is perhaps starting internationally. I think the sector is about 10% of total sales. So could you just talk about whether you think it's just a matter of time for these other geographies to catch up? And also maybe just touch on whether your sector exposure here is significantly different in the other regions? Qualitatively, of course.
So as I just – I think as I just mentioned in Europe, when it comes to energy we just saw some renewable energy deals in Q4.
As far as oil is concerned, in North America we're seeing land drilling is accelerating. But I think the Middle East, Russia, Latin America, are all ramping up, maybe a little bit behind North America. But we see that happening. And frankly in North America we saw some pretty decent growth. And it was fueled by some of the long-term trends that persist and are shaping investments in the industry.
So obviously there's the ongoing increased demand for energy. And that's obvious. There's also safety and regulation. And that's driving the use of simulation. And that's an important driver of the use of our technologies.
Also reliability and asset management. And asset management is an example where customers are evaluating digital twin technology to be able to optimize the performance of their assets in the field. And so it's really around asset performance more than asset management, per se.
So those are some of the long-term trends that we're seeing here. And we see the ramping up in some of the other geos outside of North America, as I just mentioned.
Got it. Got it. Thanks for that. Maybe for my follow-up, a quick one for you, Maria. First of all, thanks for the new ACV disclosure and guidance. Could you just maybe talk about how much 3DSIM might be contributing to ACV? I know we said it's immaterial on revenue, but just wanted make sure we ask the question on ACV.
And also how you think about the components of ACV maybe trending qualitatively as part of that guide? Because I believe it includes not just lease and maintenance, but also perpetual and services?
Yeah. So, Saket, relative to ACV, we don't expect material contribution to ACV from 3DSIM. So immaterial for 2018 on both the top line as well as the ACV.
Relative to our expectations for perpetuals, right now we're assuming that the 2018 model is similar to 2017, relative to the proportion of perpetuals. We aren't seeing any significant deviations away from 2017 in our 2018 outlook at this time.
Our next question comes from Gabriela Borges with Goldman Sachs. Please go ahead.
Great. Good morning. Thank you for taking my question. Congrats on the results. I have a follow-up on the sales and marketing and the go-to-market commentary from earlier in the conversation.
Ajei, maybe you could just talk a little bit about any specific changes that you're looking to make this year? Is it more just a continuation of all the discussions that we had last year? Or any specific changes in how you're thinking about the channel of the direct sales force? Thanks.
So I think we laid out, Gabriela, the – Rick laid out in his discussion at Investor Day strategically where we're driving the sales organization, driving our go-to market. And let me just emphasize a couple of those points, because we continue to execute against that plan that he laid out or the direction that he laid out.
The first is on enterprise accounts. As I mentioned in my comments, we're seeing more and larger deals coming into the business. And that's driven by a focus on some of these larger accounts, where we can land and where we can work with our existing footprint within the account. And broaden and deepen it as we get more ingrained in usage within the accounts.
And so we're increasing the number of enterprise customers or customers who are managed through our enterprise program. So that's one area.
Last year as you remember, we mentioned we had hired a new leader for that group reporting into Rick. And that individual is actually headquartered in Germany. So he has a worldwide team. He's based out of Germany. He has experience, years of experience in managing large enterprise accounts. And we're increasing his portfolio if you will, the number of companies that he is responsible for around the world. So that's one area.
The other area is with the channel. We believe that as we continue to grow our business, the channel is as important to – as it's ever been for us and more important. And we continue to ensure that we enable our existing channel partners, as well as recruit new channel partners. And so that is an important area as well for us moving forward.
The other area that we are starting to invest in the segmentation that Rick mentioned to you is, we're taking our regional sales organizations and we're really – we're splitting them into – from a go-to-market perspective, we have a strategic account sales motion, and we have a more of a volume or momentum sales motion.
And we're approaching customers, depending on how they like you to buy and how we can access them, either as a strategic customer, as a volume or momentum customer.
So when you put it all together, what Rick laid out was a comprehensive go-to market strategy where we segment the customers and we approach them as is appropriate for that particular customer, for that particular geo. And that's what we're executing against this year.
That's very helpful. And two quick follow-ups for Maria, if I could. Maria, you mentioned the higher perpetual mix intra-quarter. Any commentary on why you think that mix played out a little more weighted towards perpetual? And just qualitatively, could you give us a sense on the large deal pipeline? How does that compare to maybe what you were seeing this time last year? Thanks.
Yeah. So relative to perpetual, I would just say it's the end of the year. The customer spend environment is very positive. And particularly, you heard some of the performance in the channel and Asia tends to be perpetual. So I just think those combination of factors all contributed to a very strong close. And perpetuals are still in certain parts of the world and in certain segments of our customers the preferred licensing model.
And with respect to the second part of the question, I apologize. Oh, large deal pipeline. I would say, following on Ajei's commentary about the enterprise team, we are seeing more activity. We've identified more accounts. We've taken some of the technical resources and specifically tied them to some of those key accounts.
The pipeline is stronger. It is certainly stronger than it was a year ago at this time. And all of the initiatives and the efforts around that segmentation, we're confident will continue to yield results in 2018 and, more importantly, set the stage for us continuing to grow the ACV so that we can accomplish our 2020 targets.
Our next question comes from Ken Talanian with Evercore ISI. Please go ahead.
Hi, guys. Thanks for taking the question. So I was wondering if you could discuss how you're thinking about the cost of sales for new deals versus sales to existing customers? And along those lines, whether you're using some type of CAC versus LTV analysis or some other framework?
Ken, let me just start, and then I'll ask Maria to jump in as well. So it is generally speaking for our customers, very few customers, if any, will simply jump in with a large multimillion dollar agreement on day one with no prior relationship with us.
So what always happens, so you see, walk through the life cycle of a customer. If they've never used ANSYS, they have to understand how to use the solutions, they have to understand the value; one.
And that might be an initial small deal. And that might require a little bit more effort than a similar deal of that size to a well-established customer, where a deal of that size might just be a flow through, where they just want a few more licenses, because they've been using the technology for years. So there's a difference between those two.
But once you've established a footprint within the customers and once you can show the value of what you do, which we can, then you can start to move in two dimensions.
One is you obviously start to increase the usage within the customer, and then you cross-sell across all of the different physics and you move across multiple use cases.
Now this strategy of broadening and deepening the usage of customers is facilitated when you can go in and talk about problems that are particularly challenging and relevant that customers may be dealing with today. And a great example of that is autonomous. And we're getting pulled into a number of conversations around autonomous.
And when we get pulled in, these are larger conversations that are taking place and customers are trying to figure out how to make and what bets that they need to make, as they think about the evolution of their businesses.
So there's no one size fits all across these go-to markets. And when we engage with the customers, we have to understand what their challenges are and what the opportunity is. And then sometimes it's very clear. If you're engaging with a customer in a particular area, you can look at how much money equivalent customers spend on simulation for example of similar size and scale and that can translate into what the opportunity is that we have ahead of us. You can look at the incumbents, if there are other incumbents, you can look at our footprint within the customer.
All of that leads to our ability to evaluate what the opportunity is like at the customer. And that's what influences the resources we apply to a particular account, whether we take the account as an enterprise account, whether we take it as a strategic account, whether we work with a channel partner. So all of that segmentation is driven by that analysis.
So it's a pretty sophisticated piece of work that we need to do in order to make sure that our year is set up for success, and that we're able to maintain our business model, which we're so proud of.
Yeah. And the only additional commentary I'll add is, as a follow on to some of the comments that Ajei spoke to, is why the channel, which currently is about 25% of our revenue today, is so important. Because from a go-to-market for those smaller deals that are perhaps single physics, and that's where they begin, that is a much more cost efficient go-to market for us, so that we can focus on some of those longer, more established customer relationships, while the channel is doing more of the early hunting and farming.
And so that balance of direct and the indirect is what enables us to really capture more of the market share than we could on our own, as well as some of the initiatives that we've been investing in and talking about that are early relative to inside sales, particularly for products like Discovery Live that lend themselves to inside sales.
So all of those are important parts of our go-to market and that we will continue to invest in and refine.
Our next question comes from Gal Munda with Berenberg. Please go ahead.
Hey, I'd just like to follow up a bit about the growth in the pipeline that you mentioned. Historically you've said that about a majority of the growth is going to come from existing accounts, which makes sense. But today you're talking more about displacing competition than previously. So how much of the growth within the existing accounts is expanding the usage and addressable market itself? And how much it is displacing competition? Just kind of broad view? Thank you.
So a lot of the growth that we're driving comes from expanding use cases, growth in the business. Because simulation continues to be a very sticky technology in the installed base.
What I was highlighting is that in some cases as customers start to – as customers start to broaden the usage of our solutions, and they start to standardize, in some cases that can lead to standardization on ANSYS technologies. And customers are willing to invest. Just because of the capabilities of our product, they're willing to invest in standardizing on us and taking on the challenge of replacing simulation technology from other vendors.
So for many large accounts, you'll definitely find ANSYS may have a presence. But there may be others – there certainly may be other vendors in there as well. If not – no one is uniquely single vendor. It's just the nature of companies, how they grow through acquisitions and so on and so forth and through projects. So that's the dynamic.
But we see clearly significant opportunity and a significant part of our business comes from expanding usage within existing customers, as they start to think about new use cases, new projects, and getting involved.
In some cases, when customers think about the use of a technology, they'll standardize on the use of a technology for a particular project. And they'll use that technology. And so that's an expansion, that's a new opportunity we'll get in to participate. It may be competitive in the sense that others are also trying to get into that same activity. But that's the beauty of our solutions and our capabilities.
Our next question comes from Monika Garg with KeyBanc. Please go ahead.
Thanks for taking my question. If I look at the revenue guidance, about 8% to 10%, what would have been the constant currency growth rate? And your revenue guidance is kind of couple of points lower than year over year from 2017. Any reason to guide slight lower growth? Thank you.
Yeah, Monika, as I said in my commentary, we're guiding under [ASC] 605, 6% to 9% constant currency growth rate as we head into 2018 for the full year.
Our next question comes from Steve Koenig with Wedbush Securities. Please go ahead.
Hi and thanks for taking my question. I want to follow up on Monika's question and just ask you about the guide. So 7.5% constant currency at the midpoint, yet the ACV guide is 9%. I would have thought this was due to mix shift. But Maria you said the mix assumption is similar to 2017. So maybe you could talk about why the difference in those two metrics?
And then just if you can put it in the context of the long-term guide as well. Your guide calls for about 45% operating margin in fiscal 2018. So you're already at the high end of your long-term guide on margin, but you're below on revenue. So how do we think about that trajectory? And how do we think about the potential for variance from your guide in 2018, either upside or downside?
Yes. So, Steve, essentially we're looking at the full here, and it's February right now. So the way that we've mapped out, based on our current visibility, based on our current pipeline, is Q1 is no doubt the slowest revenue growth quarter of the year.
And when we look at particularly some of those larger deals, they are right now largely scheduled in the second half of the year. So just because of timing of those larger deals, that's kind of what's driving the guidance right now.
Relative to the margin. In line with what we communicated at Investor Day, we're going to continue to try to trade off top line growth for some reduction in the margin that enables us to invest. Because right now we see this incredible opportunity. And we don't want to put the long-term health of the business at risk just to drive short-term margin.
So we feel very good about our ability to trade off investment in the business to drive top line growth, so that we can get to 2020 and get to sustainable double digit growth. And an important part of being able to get to that is to get to that double digit ACV, which is really the foundation that will drive double digit sustainable revenue growth by 2020.
Our next question comes from Ross MacMillan with RBC Capital Markets. Please go ahead.
Thanks a lot for taking my question. I actually had one for Maria on costs. So OpEx per employee, I think grew in the low teens in 2017. And that compares with the mid-single digit growth in 2016.
So I guess what is driving that ramp in higher OpEx per employee? And how should we think about it in terms of, does it normalize at some point? Should we get back to a kind of normal wage inflation type growth rate in that OpEx per employee? And when might that happen? Thanks.
So, Ross, can I ask when you're doing your calculation, are you including stock compensation expense?
No, I'm doing non-GAAP. So excluding stock-based comp. I'm only looking at the operating expenses, so I'm not including any of the COGS in there. But it seemed like it accelerated a lot last year. You mentioned there were some one-time costs like consulting.
But I'm just wondering if there's some other underlying inflation in your employee cost structure, maybe as a result of some of these initiatives that you put in place?
No. I would say probably the commentary relative to Q4 and even throughout 2017 is the variable cost that's driven by sales commissions. And the reality is, is we had a record year. And our sales teams as well as the variable costs related to our employees, because when we do well, we share with our employees in the form of bonuses. And so the variable compensation element for all the employees was greater than it was say in 2016, where we finished at 4.9% constant currency growth and as you can imagine, below our plan.
This concludes our question and answer session. I would like turn the conference back over to Ajei Gopal for closing remarks.
Thank you, Brandon. So 2017 was an outstanding year for ANSYS. We believe that the combination of our pervasive simulation strategy, our high quality team, and our focus on execution will differentiate us and will drive our successes in 2018 and beyond. I am more excited than ever about the opportunities ahead of us.
I would like to close by expressing my sincere gratitude to our customers and to our partners. And to the ANSYS team, I'm so proud of what we have achieved as one ANSYS. Thank you all for your hard work and for your many successes. And thank you all for joining our call today. And I look forward to our next call. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.