Annette N. Arribas - ANSYS, Inc.

Ajei S. Gopal - ANSYS, Inc.

Maria T. Shields - ANSYS, Inc.

Kenneth Hoi Fung Wong - Citigroup Global Markets, Inc. Ken Talanian - Evercore ISI Matt S.

Lemenager - Robert W. Baird & Co., Inc.

Anil Kumar Doradla - William Blair & Co. LLC Richard Valera - Needham & Co.

LLC Jay Vleeschhouwer - Griffin Securities, Inc. Monika Garg - KeyBanc Capital Markets, Inc.

Ross MacMillan - RBC Capital Markets LLC Steve R. Koenig - Wedbush Securities, Inc.

Sterling Auty - JPMorgan Securities LLC Alexander Frankiewicz - Berenberg

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 third quarter and year-to-date financial results and business update, as well as our Q4 and fiscal year 2017 outlook, and the key underlying assumptions. Unless otherwise noted, all revenue growth rates will be provided in constant currency.

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.

Statements made on today's call 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. 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. During our recent Investor Day in mid-September, my team and I discussed how engineering simulation, what we do, is at the center of a profound transformation, in which digital technologies are changing the way products are designed, manufactured and operated.

Simulation helps our customers lower cycle times and reduce costs, increase quality and decrease risk, and drive innovation while managing complexity. We described our vision of Pervasive Simulation, in which engineering simulation is embedded in the entire product lifecycle from ideation, to design, to manufacturing, to operations and in actual products.

We discussed some of our core strengths, the scalability and the accuracy of our solvers, the power of our electronics and embedded software solutions, the integrated multi-physics nature of our portfolio, the comprehensiveness and effectiveness of our platform, and the depth of our technical relationships with our customers. All of these strengths are highly valued by our customers and, as you will hear in a moment, helped contribute to our successes in Q3.

We also discuss our investment in key adjacencies, including additive manufacturing, digital twins and the Internet of Things, which will broaden and expand our core product capabilities. We believe our vision of Pervasive Simulation will continue to give us access to a large and growing market opportunity, will allow us to broaden and deepen our relationships with our existing customers, and will continue to propel the broad adoption of ANSYS solutions.

Our performance this quarter is another excellent proof point that our growth strategy is succeeding. Driven by strong execution and deepening relationships with large customers, we delivered an outstanding quarter of double-digit revenue growth and exceeded the high end of guidance for both revenue and earnings.

Q3 was also an excellent bookings quarter with 38% year-over-year growth, which illustrates that customer demand for our products is very strong. In fact, we have grown revenue double digits for the first nine months of this year, all the while maintaining industry-leading margins.

This is the strongest growth in the third quarter and in the first nine months since 2012. I'd like to spend a few minutes illustrating how our strategy of Pervasive Simulation and the core strengths I mentioned earlier are helping us win in the market.

Our scalability and accuracy drive the use of our solutions in the most demanding of applications. The U.S.

Department of Energy, acting on behalf of its contractor, Bechtel Marine Propulsion Corporation, signed a seven-figure deal to bring in ANSYS technology to be used in the research and development of nuclear propulsion systems for the U.S. Navy.

Bechtel is a longstanding ANSYS customer who will use ANSYS Fluid Dynamics and high performance computing software to extend their robust design optimization simulation capabilities. The breadth of physics and the multi-physics nature of our Pervasive Simulation strategy, coupled with our investment in key adjacencies, allows us to expand existing relationships with customers.

In Q3, we closed a multi-year deal with longtime customer, Cummins. Cummins, as you may remember, has embraced simulation as part of its product development process through a practice it calls Analysis Led Design.

This new agreement will further expand Cummins' use of ANSYS technology across every area of physics, as well as the systems and engineering knowledge management, to put more advanced tools in the hands of more engineers. This tight collaboration will help Cummins innovate around its emerging strategic initiatives in electrification and functional safety.

Also in Q3, a leading supplier of automotive propulsion products significantly increased its adoption of ANSYS simulation solutions through a new enterprise agreement. The company moved from using a small portion of ANSYS products to a broad agreement, giving them worldwide access to ANSYS' full-suite of structures, fluids, electromagnetics, embedded software and system solutions.

They will also provide designers and non-analysts, who historically have not used simulation, with access to ANSYS' products. In other words, they will use ANSYS technology pervasively in the product design cycle, from ideation, to detailed product verification.

This quarter, we also closed a multi-year seven-figure deal at one of the largest social media companies. This deal includes the full ANSYS portfolio of solutions to support the development of virtual reality, Internet of Things, networking applications and other hardware products.

ANSYS' Multiphysics was key to addressing their upfront design considerations for complex thermal, signal integrity, power integrity and antenna design challenges. The strength and completeness of our electronics and embedded software solutions are critical to our many successes in an increasingly digital landscape.

Honeywell, a world leader in cockpit display and flight management systems, has invested in ANSYS SCADE Solutions to create the next-generation ARINC 661 compliant cockpit display platform. By using the SCADE model-based solution, Honeywell will be able to develop the next generation platform four times faster than current processes.

Honeywell's use of SCADE is a strategic decision that will allow them to expand market share and remain a leader in both the business and regional jet industries. A North American provider of networking solutions for data center, cloud and high-performance computing adopted ANSYS' Multiphysics solution for electronics cooling and board reliability in Q3.

ANSYS' coupled electrical and thermal analysis will enhance their simulation workflow, predicting reliability issues early in the design cycle, with potential savings in the millions of dollars. And finally in Q3, a global semiconductor customer in Asia increased their long-term commitment to ANSYS, adopting our next generation RedHawk-SC solution, as well as adding our new Path FX technology to analyze the interaction between power integrity and timing performance to optimize their next generation semiconductor designs.

Now, let me shift to the performance of our three major sales regions. I am pleased with our North America performance, with Q3 revenue growth of 18%, lease revenue growth of 18% and perpetual revenue growth of above 20%.

I am also delighted that in Q3, our North America team signed the largest deal in the history of the company, a three-year lease contract of over $45 million. Shifting to Asia-Pacific, the Q3 results reflect overall revenue growth of 11% that include a 12% growth in maintenance and above 10% growth in each of lease and perpetual revenue.

China and Taiwan continue to deliver a strong revenue growth, both in excess of 30% for the third quarter and the first nine months of the year. Our Asia-Pacific indirect business continues to demonstrate strength with double-digit revenue growth resulting from the ongoing focus and the investments that we have been making over the past few years.

Our slowest growth region in the quarter was Europe, delivering revenue growth of 5% in Q3. We continue to see strength in France for the third quarter in a row, up 20% in the quarter and 18% year-to-date.

The UK showed significant improvement with 16% revenue growth in the quarter, albeit off a weak year-over-year compare. Although our channels business in Germany continues to be strong, the revenue performance of our direct business in Germany has lagged.

As I have shared with you on previous calls and as we discussed at Investor Day, we have a recovery plan in place for Europe. We are making good progress and I am confident that our rebuilding efforts will set the stage for improved performance in Europe in 2018 and beyond.

Looking at our performance across industries, sales in electronics and semiconductors, automotive, aerospace and defense, and industrial equipment continue to be steady drivers of growth across all geographies. In automotive, we continue to see R&D investment in disruptive technologies such as autonomous systems and electric vehicles.

In aerospace and defense, initiatives around reducing costs and environmental impact are leading to the increased use of simulation in aircraft engines. The space sector remains strong for ANSYS as the disruptive Space 2.0 companies continue to drive innovation through simulation.

The resurgence of the defense sector continued in Q3, especially in North America and Europe. Although, oil and gas remains weak, the energy sector as a whole continues its steady recovery from the oil price crash and we saw increased customer investment in Q3, particularly in North America.

Now, let me move to the innovation coming from our business units. We recently released ANSYS 18.2, which continue to improve our solutions for autonomous vehicles, additive manufacturing, electric machines, and smart connected products.

Also in Q3, we gave users a technology preview of an exciting new product called ANSYS Discovery Live. At Investor Day, you heard about this new breakthrough technology, which revolutionizes the speed and ease of use of engineering simulation, to make digital exploration available to all engineers.

The Discovery Live announcement was the largest event in ANSYS' history and the technology preview had more than 10,000 downloads in the first month alone. User feedback from the technology preview is being incorporated into the commercial product, which we're expecting to offer next year.

Also in Q3, in an industry-first, ANSYS and industry giant TSMC published a Joint Automotive Reliability Guide that provides an exclusive ANSYS Multiphysics simulation methodology to address the market needs for high-reliability semiconductors and electronic systems for automotive applications. TSMC also recognized ANSYS as a Partner of the Year.

As we look beyond Q3, it is important to note that Maria, Rick Mahoney, our Head of Sales, and I have been working closely together in our respective roles for only just over 10 months. As we refine our operational cadence, I believe we can tighten up the variance between our guidance and our actual performance.

We have good visibility into our expected performance in Q4. Our pipeline has strengthened considerably and a couple of large deals are already in.

As such, we are raising our Q4 guidance by $6 million at the midpoint. Because of our increased confidence in Q4 and the over-performance in the third quarter, we are raising our 2017 guidance by $20 million at the midpoint.

Please note that currency is not a factor in our Q4 and 2017 raise, since the dollar has strengthened slightly against the yen since our last guidance. Now, before I hand over to Maria, I'd like to reflect for a moment on our long-term prospects.

As you recall, at Investor Day, we told you that we plan to achieve sustainable double-digit revenue growth by 2020. We ended 2016 at just under 5% revenue growth.

With our strong performance thus far in 2017 and our expected results for Q4, we're on track this year to approximately double last year's growth rate. Our fiscal year guidance implies revenue growth of 9% to 10%.

This is exciting news, indeed, and it's validation of what we told you at Investor Day that the strength of our core business can get us to double-digit growth. It is also a testament to the commitment of our employees to our mission and to our internal focus on execution.

However, I believe that we still have work ahead of us before we can achieve our target of sustainable double-digit growth. Let me explain, first and obviously, with improved performance, year-over-year growth comparisons become more challenging.

This is the case with Q4 2017, which suffers because of the year-over-year comparison with a strong Q4 in 2016. As an aside, by the way, our Q4 2017 comparison additionally suffers because of the disproportionately high perpetual license content of Q4 2016, it is a strong comparable for perpetual licenses that is primarily affecting growth in Q4 2017.

Second and most importantly, as we discussed at Investor Day, we must make some key investments in product and engineering, go-to-market and infrastructure. The results of these investments will take time to come to fruition.

And when they do, we will have both strengthened the core of our business and expanded the core of our business into key adjacencies. We will have put in place a well-architected multi-channel go-to-market motion that will allow us to efficiently sell to and support customers of all sizes across the world, and we will have created an infrastructure – a strong infrastructure that effectively supports the growth we have ahead.

In short, these investments are needed to allow us to deliver predictable, superior performance on a sustained basis. While we do have a lot of work ahead of us, I am more confident than ever in ANSYS' long-term prospects.

I believe that we have the best products and the best people in the industry, and I know that we can solve some of the most challenging problems faced by our customer. The future looks bright for ANSYS.

And with that, I will now turn the call over to Maria to discuss our financial results in a little bit more detail. Maria?

Thank you, Ajei. Good morning, everyone.

Ajei shared a few of our financial results, but let me take a few minutes to add some additional perspective on our Q3 2017 operational performance, financial metric highlights and also to comment on our outlook for Q4 and fiscal year 2017. Also, just to note, I will be commenting in terms of non-GAAP unless I state otherwise.

The results of Q3 reflect strong execution across most aspects of our business. This enabled us to deliver record Q3 results with both revenue and earnings, well above the upper end of our guidance.

Key financial highlights begin with total third quarter revenue of $276.8 million a year-over-year growth of 12%. The 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.

The strength in North America, China, Taiwan and the indirect channel also contributed to the strong revenue performance. The Q3 results include a positive currency impact of $1.2 million.

Recurring revenue for the quarter totaled $207.4 million or 75% of total revenue, and grew 11% over last year's third quarter. The company's ability to maintain its solid base of recurring revenue has been one of the hallmarks of our business model for decades.

Sales bookings growth significantly outpaced revenue growth in Q3. This was driven by a combination of the 25 seven-figure deals, which were closed in the quarter, including three customers with orders in excess of $5 million, two of which were in excess of $10 million; and as Ajei mentioned earlier, one of which was the largest deal in the company's history, a three-year lease deal, totaling over $45 million.

We also reported increases in software license sales and solid maintenance renewals, both of which have contributed to deferred revenue and backlog of $669.3 million, representing a new record high, and 38% growth as compared to Q3 of 2016. This positions us well for the remainder of 2017 and as we continue to work through our plans for 2018.

In Q3, we achieved a gross margin of 90.7% and an operating margin of 48.7%. These were both slightly ahead of the margin guidance that we had provided for Q3 and largely driven by the revenue over-performance in the quarter.

We reported EPS of $1.05 for the quarter, representing 11% growth over last year's third quarter earnings. Q3's GAAP earnings included approximately $500,000 related to our previously announced workforce realignment.

In line with what we had previously communicated, as of the end of the third quarter, the company has completed the realignment initiative that we began late last year, and we do not anticipate any further charges related to this activity. Our operating cash flow for the quarter and the first nine months of 2017 totaled $89 million and $327 million, respectively.

And we ended the quarter with cash and short-term investments of $926.6 million. Now, let me turn to our current outlook for Q4 and fiscal year 2017.

We have increased our outlook for Q4 with non-GAAP revenue in the range of $284 million to $293 million, and our non-GAAP EPS guidance is in the range of $0.99 to $1.05. With respect to 2017, we're increasing our outlook to factor in both our Q3 over-performance and an increase in our Q4 guidance.

This translates to non-GAAP revenue in the range of approximately $1.079 billion to $1.088 billion, and non-GAAP EPS of $3.93 to $3.99. We are targeting a non-GAAP gross profit margin of approximately 90% for the quarter and the year, and non-GAAP operating margins of 44% to 45% for Q4, and 46.5% to 47% for 2017, in line with what we have been communicating for our annual targets throughout the year.

I will also highlight that the fourth quarter margin targets include increased sales commission expense, the impact of a full quarter of the additional 100 employees that we hired in Q3, as well as our plans around hiring to better position us for a fast start as we head into 2018. Further details around specific currency rates and other assumptions that we have factored into our outlook for Q4 and fiscal year 2017 are contained in the prepared remarks document.

I would just like to remind everyone, as I communicated at our recent September Investor Day, we will be providing our outlook for 2018 in February, when we announce our Q4 and 2017 results , and after we finalize our 2018 planning process, which is currently underway. In summary, in Q3, we delivered another very solid quarter with strength across all of the key financial metrics that we track and measure; top-line growth, operating margins, earnings, operating cash flows, bookings and deferred revenue and backlog.

This strong performance allows us to not only increase our outlook for 2017, but it also gives us confidence that our continued focus on execution and investing for the future with financial discipline, combined with the strength of our portfolio and sales pipeline provides us a strong foundation to deliver on our near term and recently announced 2020 financial targets. And with that, operator, we will now open the phone lines to take questions.

Hey, great. Thanks a lot, guys.

Ajei, I wanted to maybe ask a little bit about the $45 million deal there. Could you, perhaps, give us some color in terms of what were some of the expansion components that were able to push that deal into record high territory?

Yeah. So, firstly, the deal was with a customer who is a longtime ANSYS customer and this reflected their success so far with the ANSYS portfolio and a broad expansion of the opportunity that they are driving across all of the physics.

So, it represented essentially an expansion across all of our physics and a significant broadening of their usage of our capabilities.

I guess one sense I'm trying to get is how much of that was, were you able to kind of push down into – when I think about the strategy of Pervasive Simulation, were you able to kind of push down to their designers, were you able to move into some of the operational applications that you guys have talked about in terms of IoT? I just wanted to get a sense for kind of how that customer may be using you guys differently than what they have in the past?

Yeah. So, firstly, it is, as I said, Multiphysics.

And secondly, you're absolutely right, they are broadening the usage up earlier in the design process as we discussed. So, it's moving earlier in the design process.

The details of exactly what they're doing, they are somewhat coy about us actually sharing that in public. So, I have to be a little bit careful about.

I can't mention who they are and I can't mention exactly the applications.

Hi, guys. Thanks for taking the question.

So, first off, I was wondering could you talk about how we should think about head count growth going forward. I know it's typically been flat and the additional heads this quarter came from acquisition, but some color around that would be helpful.

Yeah. Ken, I'll take that.

So, while we had some additional heads from the CEI acquisition, we also added, net, almost 100 people that we hired in Q3, for which we will have the full impact of that burn rate in Q4. And we are continuing to aggressively hire in all areas across the company, in line with what we communicated at Investor Day, relative to the changes that we're making in the go-to-market, the focus on not only the core technology, but some of the adjacencies that Ajei mentioned in his prepared remarks, and also in the areas of infrastructure, and particularly in the go-to-markets, as we talked about at Investor Day, also increasing our investment and focus on expanding the channel as we did initially in Asia-Pac to other parts of the globe, particularly Europe is where our focus is now as we exit 2017 and enter 2018.

Great. And I guess, following the large deal that we saw this quarter and your continued traction not only with the mega-sized deals, but with large deals in general, could you frame the magnitude of the potential impact of these deals on your long-term growth assumptions?

And how we should think about those impacting that double-digit growth?

Absolutely. We definitely see the opportunity to continue, as we've seen over the past five years, for these enterprise deals to play a larger role.

And as we think about those targets and that sustainable double-digit growth that we are looking at for 2020, these continued expansion in our largest customers across Multiphysics and to align with all of this – the, I'll call it, new problem challenges that they have from electrification, to IoT, to autonomous, all of these trends are significant opportunities for us to drive deeper penetration within these important customers. And the beauty of these customers is many of them have been ANSYS customers for literally decades.

So, we have a strong foundation and partnership that's been built that will allow us to leverage that strong foundation and trust that we've built with these customers.

And as Rick mentioned at Investor Day, we're making investments in these relationships with our large customers. What they value is the technical relationship that we have with them.

We're certainly investing in that, in those relationships. They also value the nature and the completeness of our offerings.

And so, as we go to market with these customers, we have a new organizational approach, Rick mentioned that in Investor Day, and that allows us to bring the right and relevant experts to be able to have these conversations in depth with our customers. And certainly, when you see the expansion capabilities within our portfolio, no one's going to show up on day one and never having been a customer with ANSYS and sign a multi – double-digit-million-dollar deal.

That typically isn't going to happen. What instead will happen is the customer will come on board.

They'll have some success with some set of technologies and some capabilities, we'll prove ourselves out in a project and that activity has been going on, frankly, for years with some of these customers. Now as they're seeing these additional pressures where businesses are now having to respond to digital technologies, electrification, areas, for example, they may not necessarily have been historically participating in, they're now recognizing that they have to take this broader multi-physics approach to being able to address their product lifecycle.

And as I said earlier, it isn't just about sign off. It's about the entire lifecycle of the product.

And so, we're able to have and engage in these conversations and then work with customers on a long-term map that allows them to be successful. Because ultimately, as I said, what we're doing is driving and helping them compete from a top-line growth perspective and helping them be competitive in a very challenging marketplace.

And so, that translates into, obviously, larger deals and deeper relationships.

Hey. Good morning.

This is Matt Lemenager on for Rob this morning. Question around, were there any deals that were perhaps pulled or perhaps landed in Q3 that you had previously thought might land in Q4 and this drove some of extra upside in Q3.

I guess what I'm wondering is, do the strong bookings in Q3 have any implications to Q4 pipeline or bookings, just given how strong the third quarter was?

Yeah. So, what I'll say is, the reality is given the number of transactions that we process in any quarter, there are deals that move from quarter to quarter.

The good news is that we have really focused in the past year on improving our visibility and our forecasting and understanding the mix as we make our way through the quarter. So, I wouldn't say that there was a huge trend of things coming in early.

And what I will say is, no doubt, the strength of the deferred revenue and backlog balance headed into Q4 definitely gives us confidence and improved visibility around the business. And we're also expecting that Q4 bookings growth will also probably not be quite as robust as Q3, but given the number of salespeople that we see in the opportunity to close out with a very strong year, that's why we built in the increased anticipation of higher sales commissions for Q4 because we are expecting to have a strong close, perhaps, not quite as strong on the bookings side as we did in Q3.

Great, and that's very helpful. And Maria, is there any update to the full year cash flow guidance?

Yes. We've updated our full year cash flow guidance now to $400 million to $425 million, mostly in line with the strength of bookings that we saw in Q3.

Yes. Congrats from my end, too.

Couple of questions. So, Ajei, when I look at the results, and maybe it's a little tough to answer this, but I'll try, can you decouple your execution versus, perhaps, some more benign demand environment?

Clearly, the tech space is seeing some very positive trends from a demand point of view. But on top of that, you guys are executing.

So, can you help us understand how you could kind of separate the two?

I mean, it's very hard to say quantitatively this percent is because of this and this percent is because of that. At the end of the day, Anil, when I look at the market, there clearly is demand for our offerings and it starts from there.

If we didn't have – if what we were building and what we were offering to customers was not valuable, then we wouldn't really be able to sell anything. Obviously, what we do and bring to market is incredibly valuable.

They need it. We happen to be well-positioned in this time of change with the digitization of the industry and we're well-positioned with the ideal portfolio.

We have a singular focus on simulation. We're not being distracted by chasing after a number of different elements.

We're not selling a basket of goods across wide variety of areas. We're incredibly focused on simulation.

And I think all of that translates into a comfort and value to our customers. They see the value of what we provide and they're able to get benefit from what we do.

In addition, of course, we have improved our execution. We have improved our capability to reach and support our customers.

And I think that also has a huge impact. So, it all works together synergistically.

I couldn't tell you specifically what percentage comes from what. But I feel like we're in a great position, both from a market perspective as well as from an execution perspective.

And as a follow-up. Maria, you talked about providing 2018 guidance in February when you guys come back.

But given our recent Analyst Day, given some of the targets that you've laid out over the next couple of years on margins, there is a potential that you guys may blow out of those targets in the near term in terms of growth and everything. So, the question I have is, is there a potential for you guys to come back and revisit your margin targets, which you guys gave out, two- to three-year targets, based on what the near-term trends are playing out?

Anil, what I would say is, right now, we are still very comfortable with the 2020 targets that we've laid out. We're finalizing our 2018 plan and we will have all the details around that and the metrics that are going to be the key metrics that we will measure and communicate as we exit 2017 and head into 2018.

But nothing has changed relative to our targets, our outlook and the things that we're working towards since we communicated at Investor Day.

Thank you. Appreciate the comments on Discovery Live.

I was wondering if you could give any more color in terms of the potential timing of when that would be in sort of production release and a little more color on the feedback you've seen so far that might give you the confidence that this is the product that really sort of gives you that democratization that you've been looking for, for I guess a number of years in the company's history? Thanks.

So, as I've mentioned in the call, I mean Discovery Live is currently available as a free technology preview. And during this technology preview, anyone can download and use the software for free.

And as I also mentioned in the call, we've had multiple people who've downloaded it. I think we have 10,000 downloads in the first month alone.

As you can imagine, many of the people who have downloaded the software are very avid users. They're giving us a lot of feedback and we're working through our plans right now as to when we would release the commercial version and exactly what that would look like.

So, that's software is (38:08) currently being made. We will, of course, have a product in 2018, but we're working our way through that through the planning right now.

Got it. And just a quick follow up.

Maria, can you say that computational engineering had any material revenue in 3Q or 4Q guidance?

It was about $1 million, so nothing material.

Thank you. Good morning.

Ajei, I'd like to refer back to a couple of things you talked about at the Analyst Meeting, as you did in your prepared remarks, specifically, the following. You mentioned at the meeting that you do a couple of things with regard to R&D; refocus on the core, spend 80% of R&D on the core, R&D have been spread too thin and so forth.

Can you give us an update on the progress you've made there or how you think about that in terms of getting to those objectives in 2018? And then relatedly, Rick, in particular, talked about your investments in AEs as part of your account relationships.

And the question there is, when we go through the financial details on your newly public competitor, Altair, they showed that they have over five AEs per sales rep in their head count breakdown, which seems a fairly high ratio in the industry. And I'm wondering, as part of your thinking of investing into AEs, as per Rick's plan, is that a ratio that you contemplate for yourselves or how are you thinking about those kinds of investments, and a follow up?

Thanks.

Sure. So just, firstly, with respect to the investments in R&D, I think the discussion that we had a little over a month ago remains in place.

So, we talked about the 80/20. That's exactly what we have in mind.

So nothing has really deviated from the conversation we had at Investor Day with respect to priorities in the R&D organization. And obviously, we're going through the final planning for next year to take that and to put it into the actual operating plan for next year.

With respect to your question about AEs, Rick mentioned that we are definitely going to be continuing to focus on these relationships that we have with our customers and we are certainly increasing our number of AEs that's been part of our Q3, Q4 hiring that we talked about. But we certainly do not see a 5-to-1 ratio, as you articulated, in our future.

We don't think it's necessary. We think that we have fantastic products and our customer is able to take advantage of our technology.

And obviously, we've built a deep relationship with them, but we don't need a 5-to-1 ratio of technical salespeople to our salespeople.

Hi. Thanks for taking my question.

First of all, I understand you'll provide 2018 guidance on the next call. But just wanted to understand is, coming back to your comments in the beginning, Ajei, you provided, what are the reasons to think 2018 growth could it be lower than 2017?

And if you just can, a little bit talk about that.

Yeah. Monika, I'll just say, we're in the midst of finalizing 2018 plans.

So, I would rather save that commentary for February when we've completed that activity and we've got the best visibility to provide numbers that we have confidence in.

What I'm trying to understand is, is there any reason to think that growth could be lower than 2017?

I would suggest at this time you shouldn't think that, but the reality is we need to finish out 2017 before I can opine on that with confidence.

Thank you very much, and congratulations from me as well. I just had a couple of questions on the large deal, the $45 million deal, two specifically.

Did that renew in line with the scheduled renewal date? And was the three-year term of that deal consistent with the prior term?

And then I had one follow-up.

Yeah, Ross, that particular customer has asked us to not get into specifics of that deal outside of what we've already talked about in the prepared remarks document and in the script. So out of professional courtesy at their request, we're not going to give further details around that.

Okay. Maybe as a follow-up, though, historically, your traditional lease terms for your electromagnetic and semi-related products have been longer than, I think, the other products in your portfolio.

And I'm just trying to get a sense for whether, in general, you're seeing elongation of term deal contract length as you get deeper into customers. In other words, is the TCV going up because of extended duration of terms as well as – and your contract value going up because of broader usage, broader consumption, more users, et cetera?

Just trying to understand that dynamic.

Yes, I would say, Ross, as we get into, I will call, the second and third cycles of the expansion of our relationships with these customers, we are definitely seeing both, because they've now proven and have been able to measure the success and the value that they've derived from the first and second deals. And so, now, their confidence level rises.

So, they are expanding across the portfolio and across their enterprise. So, we're seeing both, a willingness on the customers' part to do a longer deal as well as to expand the size of that deal.

One other indicator that I'll point you to is, if you take a look at the long-term deferred revenue, it is up from 2016 to 2017. It was $75 million in 2016 and now it's up to $196 million in 2017.

So, that's an indicator of the trends that we're seeing, to your point. The one other last thing, I'll say, Ross is, I believe, on your previous question you asked on that $45 million deal, I will tell you that the revenue impact for Q3 was about $1 million.

Hi. Thanks for taking my questions.

If I could start, let me start with Europe. So, Ajei, maybe just a little bit more color, remind us again or tell us what's new here in terms of Europe.

Why is the execution so much different than the other regions? The contrast in the outperformance is pretty stark.

I understand it's more Germany. What needs to happen in Europe or what's underway that's going to change this?

Sure. So – and I think I've alluded this in prior calls, but let me summarize, if you don't mind, just quickly, and this might be material that we discussed earlier.

As you recall, I've been with the company for about a year now. And one of the early things that I did in the Q4 period of last year, when we did not have a head of sales, was for me to personally get involved and to spend time with the sales leaders of the individual regions.

And one of the – looking at Europe in particular, I felt it was necessary at that point to make some changes, and we did. We now have – within our European organization, we have a new leader of sales for Europe, who has been in place since almost a year now, a little bit less than a year.

And he was certainly – he has been working with Rick Mahoney, who is now our new Head of Sales. The two of them came up with a view of how to think about the European structure.

So rather than the previous structure that we have, we rationalized the structure. We went to the UK, France, the German-speaking countries, Germany, Austria and Switzerland – DACH.

And then we have a Northeast region and we have a Southwest region. So, we went to five regions in Europe that normalized the way in which we were doing it.

We drove alignment across the organization between marketing and sales and so forth, which was previously misaligned across regions. We made some changes at country management level as well.

And in addition, we supported our European team by placing a couple of worldwide positions within Europe. So not only now is the head of Europe based out of our Munich offices, but we also have our worldwide head of major accounts or enterprise accounts, who is a new hire to our company.

He is also based in Germany and brings his network of individuals. He's a German national, brings his network of individuals as well to the table in some of the largest companies around the world and certainly in Germany as well.

And these are just sort of some examples of the changes of personnel. The culture, I think, is really focused on winning.

There is a clear change in the tone on the ground within the organization. There is also an investment in the channels.

And as you'll see, in some of the areas, for example, in Germany, we have a very strong performing channel relationships. But in other geos, we don't necessarily have that level of channel relationships.

We're making investments in the channels accordingly so that we can replicate the success of the German channels elsewhere. The focus I mentioned on organizational structure that I talked about earlier on large accounts is translating into a major focus on major accounts.

And the early evidence is here. We have seven customers with orders of over $1 million in Q3, which was in our prepared remarks.

And so, you can see – I mean I can go to chapter versed on each one of these things, but we have a lot of eyes on this. This was the subject of a fair amount of discussion during the recent review I had with the sales organization.

We feel very confident at this point that the team has a good handle on it. And as I said in my comments, we're expecting to see improvement in 2018 and beyond.

Great. Okay.

Thanks for that, Ajei. I'll move to my second question then.

It's almost habitual on earnings calls these days that vendors will say something about cloud. I can't count the number of times I hear that on earnings calls.

But you guys are unusual in that, you don't talk that much about, at least on earnings call. Is that because simulation is still largely a desktop activity or is it because you still have work that you need to do in this area before you surface what's going on?

Maybe just give us an update on cloud and how important is it really?

Sure. And if you remember, at Investor Day, we had a commentary from CIMdata, and they also talked about a cloud adoption by customers of simulation.

And what we're seeing is that, that cloud adoption for simulation, essentially, it lags other areas in the market. So, this is just the reality of what we're seeing.

Customers are perfectly willing to take advantage of their private clouds, HPC environment. That's something they've done for a long time.

But broad-based public cloud adoption for simulation lags other application areas. And it's in part due to the complexity of the problems, maybe it's concerns about security, it's workflow, there's a number of reasons why, but that's the fact.

Now, we however do have offerings that we can offer to our customers. I mean, we have, as you know, with our Open Cloud Strategy, we have a network of over 10 partners, 11 partners around the world who can help our customers get to the cloud, take advantage of cloud resources.

And that can be both for short-term-burst capacity or it could even be for longer-term situations. We don't force our customers to just run their compute on prem.

They can certainly and are perfectly capable of running the same technology and the licenses in the public cloud and some choose to do that. And for customers who need burst capacity, we've got an Elastic Licensing capability for customers who are looking for just a few more licenses and few more capabilities to take advantage of whatever project or to get ahead of whatever project they may have in front of them.

So, it's really a combination of, yes, we're capable, but the industry for simulation and the usage isn't quite there. Obviously, this is a long-term trend.

We certainly see that the industry will continue to embrace and take advantage of cloud and will continue to be a bigger and bigger factor, but it's not yet that big transformative activity that you're seeing in some of these other application areas that you've talked about.

Yeah. Thanks.

Hi, guys. I want to tie together, in some of the prepared remarks, looking at the large deal activity in the U.S., can you give us a sense how much commonality in terms of industry or the lead product, meaning the thing that they're trying to solve, you saw in those large deals?

Yeah. In terms of industry, I mentioned the industries already – it's pretty much in line with the ones that I mentioned.

It's aerospace and defense, automotive, industrial and certainly electronics. So, those represent some of the industries.

In terms of the lead product, in some cases, obviously, it's the electronics portfolio. But in other cases, it's really a discussion about Multiphysics.

And while the customer may start with one particular area, they may be a long time structures customer, a long time fluids customer. They can certainly move into a different area and it goes to Multiphysics.

We're also seeing with – by the way, with the electronification, we're seeing an increased demand for our SCADE offerings and our functional safety offerings. And so, as people are looking at smarter products, they're trying to do safety analysis.

That's where some of our work in our embedded software capable organization comes to play. So, that's driving both a new business and it's also a growth vector within existing customers.

So, it's really these megatrends, I think, that are driving things forward in automotive, obviously autonomous vehicles is pretty strong. The aerospace, I talked about a couple of trends.

But once again, in the Space 2.0 companies, you'll see this, electric vehicle. So, these trends tend to pull a number of products.

But it's important to realize that even when we go after – even when we talk about a particular industry like, for example, electronics, it isn't just about our products that address electronics, because when you think about electronics and you take the journey all the way from chip package board, it brings in a variety of offerings, the semiconductor offerings, it's electronics offering, signal integrity, but you're also dealing with structural integrity, thermal analysis, heat transfer, that all of these physics come into play. And so, it's a pretty robust conversation that we're able to have with our customers, primarily because we have representation and presence across the entire gamut of physics that they're interested in.

And then the on follow-up, Maria. Looking at the jump in maintenance revenue quarter-over-quarter, it's much larger than what I would have expected given the paid up performance, even though that was strong.

Was there something in particular, did you pass through a price increase on those renewals?

No, Sterling. No price increase outside upside of the normal activity.

We did have some customers that came back on to tucks (56:03). As you can imagine, in certain geographies, maintenance may not be part of their natural annual cadence, but when they want to get on to the current version, then they may have to pay for the lapse in maintenance.

And we also – as I commented in my remarks, we also had a very strong renewal rate for maintenance in the quarter. So – but nothing outside of the usual relative to pricing.

Hi. Thanks for taking my question.

I was just wondering, looking at the pipeline for the next couple of years, how many more mega deals are you seeing? Will they become more regular or is this just a one-off situation?

As I said, we have a focus on increasing our relationships with customers. We see the opportunity for what we're doing out there in the industry being very strong.

And so, suddenly, we see strong robust demand for our customers, where we're working with them on taking advantage of our solutions. So, absolutely, we're excited and looking forward to seeing deals in the future as well of size.

If you look at the seven-figure deals, for example, as just one metric, we've been announcing the seven-figure deals since 2007. So with – we have 10 years of history.

And what you can see is, we continue to increase the number of seven-figure deals as we have been going forward year-over-year. And so, we're very excited about our large deal pipeline and our capabilities to address those deals.

Okay. Thanks.

And then one follow-up on Discovery Live. What type of pricing are you expecting for that product and what type of TAM expansion are you expecting, based on addressing designers rather than just engineers with your traditional simulation offering?

We're still working through our pricing on that. But obviously, it's a product that's addressing a different market.

And so, the price point is going to be significantly lower than the flagship price points, because it's a different kind of product, it provides different capabilities, and it gives people a different level of insight, it focuses on ease of use as opposed to the other features that you would expect from the flagship products. It provides real-time simulation.

The flagships are significantly more accurate, of course, but they represent a different use case. So, we do see this as TAM expansion, because it's a different cadre of users, but we're working our way through trying to understand exactly what our penetration would look like within the user community that we're going after.

And that's something we're actually working throughout, as we speak.

Hi. It's Erik Karlsson of IBP (59:12).

Thanks for taking my question. I would love to hear a little bit more about Europe where you talked about different alignments in different subparts of the region and you shaved (59:21) some country management, et cetera.

We'd love to hear how you think it's looking now in terms of quality of the management teams and also how your sales force turnover is looking at the moment? That would be very helpful.

Thank you.

Well, I think, firstly, I have to say that I'm pleased with the leadership team in Europe. I think that the team there has a good handle on what needs to be done and I think they're focused on the results that we want to drive.

So, I'm excited about the management team. Obviously, if you looked at the performance in Europe, you saw that in France, for example, we've had a good performance for a few quarters.

Obviously, we've had some short-term improvements in the near-term improvements that we've had in Q3 in the UK. But as I said in my remarks, it was off a relatively weak compare from last quarter.

So, we are seeing early signs of improvement. Germany, as I said, we have some challenges with our direct sales revenue numbers, but we certainly have strength with our channel partners.

And of course, revenue, in many cases, is a trailing indicator of what the activity is within the region. So, I'm pretty pleased with the management.

I'm pleased with their focus on demonstrating success in Europe. And I'm looking forward to improvement, as I said, in 2018 and beyond.

Maybe as a follow up there. When you talked about Europe at the Q1 and Q2, you said that it will take some time for this to improve and so on.

Would you say that your view has changed either that it can take a bit longer time or happen a bit faster now?

No. I think it's – we had to bring in people there, people had to come up to speed.

So, I continue to be – stick by what I said earlier, which is 2018 was a year of transition for our European business with a lot of changes, and we see the improvements in – being demonstrated in 2018 and beyond, and that's when we're expecting to see the results.

So, I'd like to close by expressing my sincere gratitude to our customers and to our partners. And to the ANSYS team, I am so proud of what we have achieved as one ANSYS.

Thank you all for your efforts and thank you for another great quarter. Thank you all for joining the call today.

I look forward to our next call.