Document
false--12-31Q120192019-03-310001013462YesfalseLarge Accelerated FilerANSYS INCfalseANSSP12YP13YP10Y800000086000000.010.01300000000300000000932360239323602311P15YP15YP10YP3YP5YP2Y0P1YP3M0.010.01200000020000000000P12MP12MP12M96016709357968

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-20853
ANSYS, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3219960
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2600 ANSYS Drive, Canonsburg, PA
 
15317
(Address of principal executive offices)
 
(Zip Code)
844-462-6797
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x     No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o
Emerging growth company
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, $0.01 par value per share
ANSS
The Nasdaq Global Select Market

The number of shares of the Registrant’s Common Stock, par value $.01 per share, outstanding as of April 26, 2019 was 83,928,433 shares.



ANSYS, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I – UNAUDITED FINANCIAL INFORMATION
Item 1.Financial Statements:
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
March 31,
2019
 
December 31,
2018
(in thousands, except share and per share data)
(Unaudited)
 
(Audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
607,391

 
$
777,139

Short-term investments
237

 
225

Accounts receivable, less allowance for doubtful accounts of $8,600 and $8,000, respectively
268,526

 
317,700

Other receivables and current assets
186,657

 
216,113

Total current assets
1,062,811

 
1,311,177

Long-term assets:
 
 
 
Property and equipment, net
63,301

 
61,655

Operating lease right-of-use assets
99,991

 

Goodwill
1,748,228

 
1,572,455

Other intangible assets, net
278,327

 
211,272

Other long-term assets
97,699

 
82,775

        Deferred income taxes
21,906

 
26,630

Total long-term assets
2,309,452

 
1,954,787

Total assets
$
3,372,263

 
$
3,265,964

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,502

 
$
7,953

Accrued bonuses and commissions
20,506

 
79,945

Accrued income taxes
15,694

 
8,726

Other accrued expenses and liabilities
124,818

 
99,559

Deferred revenue
330,890

 
328,584

Total current liabilities
503,410

 
524,767

Long-term liabilities:
 
 
 
Deferred income taxes
38,370

 
30,077

Long-term operating lease liabilities
87,259

 

Other long-term liabilities
58,843

 
61,573

Total long-term liabilities
184,472

 
91,650

Commitments and contingencies


 


Stockholders' equity:
 
 
 
Preferred stock, $.01 par value; 2,000,000 shares authorized; zero shares issued or outstanding

 

Common stock, $.01 par value; 300,000,000 shares authorized; 93,236,023 shares issued
932

 
932

Additional paid-in capital
824,997

 
867,462

Retained earnings
3,005,641

 
2,919,411

Treasury stock, at cost: 9,357,968 and 9,601,670 shares, respectively
(1,077,252
)
 
(1,075,879
)
Accumulated other comprehensive loss
(69,937
)
 
(62,379
)
Total stockholders' equity
2,684,381

 
2,649,547

Total liabilities and stockholders' equity
$
3,372,263

 
$
3,265,964

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

Table of Contents

ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


Three Months Ended
(in thousands, except per share data)
March 31,
2019

March 31,
2018
Revenue:



Software licenses
$
123,044


$
110,046

Maintenance and service
194,086


172,827

Total revenue
317,130


282,873

Cost of sales:



Software licenses
4,708


3,911

Amortization
4,547


8,786

Maintenance and service
25,560


26,341

Total cost of sales
34,815


39,038

Gross profit
282,315


243,835

Operating expenses:



Selling, general and administrative
112,169


87,809

Research and development
70,738


57,530

Amortization
3,759


3,435

Total operating expenses
186,666


148,774

Operating income
95,649


95,061

Interest income
3,442


2,285

Other expense, net
(425
)

(308
)
Income before income tax provision
98,666


97,038

Income tax provision
12,436


12,758

Net income
$
86,230


$
84,280

Earnings per share – basic:



Earnings per share
$
1.03


$
1.00

Weighted average shares
83,764


83,931

Earnings per share – diluted:



Earnings per share
$
1.01


$
0.98

Weighted average shares
85,493


86,152

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

Table of Contents

ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
(in thousands)
March 31,
2019
 
March 31,
2018
Net income
$
86,230

 
$
84,280

Other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments
(7,558
)
 
8,243

Comprehensive income
$
78,672

 
$
92,523

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

Table of Contents

ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Three Months Ended
(in thousands)
March 31,
2019
 
March 31,
2018
Cash flows from operating activities:
 
 
 
Net income
$
86,230

 
$
84,280

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,898

 
16,613

Deferred income tax benefit
(1,387
)
 
(3,245
)
Provision for bad debts
390

 
64

Stock-based compensation expense
23,800

 
15,269

Other
1,093

 
272

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
43,983

 
22,507

Other receivables and current assets
28,363

 
6,167

Other long-term assets
(2,516
)
 
1,189

Accounts payable, accrued expenses and current liabilities
(54,050
)
 
(40,009
)
Accrued income taxes
5,999

 
(1,807
)
Deferred revenue
2,235

 
31,704

Other long-term liabilities
(460
)
 
(583
)
Net cash provided by operating activities
151,578

 
132,421

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(244,323
)
 

Capital expenditures
(6,900
)
 
(2,933
)
Other investing activities
(460
)
 
(4,303
)
Net cash used in investing activities
(251,683
)
 
(7,236
)
Cash flows from financing activities:
 
 
 
Purchase of treasury stock
(44,856
)

(117,831
)
Restricted stock withholding taxes paid in lieu of issued shares
(32,994
)
 
(24,333
)
Proceeds from shares issued for stock-based compensation
10,376

 
12,759

Other financing activities
(1,617
)
 

Net cash used in financing activities
(69,091
)
 
(129,405
)
Effect of exchange rate fluctuations on cash and cash equivalents
(552
)
 
8,212

Net (decrease) increase in cash and cash equivalents
(169,748
)
 
3,992

Cash and cash equivalents, beginning of period
777,139

 
881,501

Cash and cash equivalents, end of period
$
607,391

 
$
885,493

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid
$
4,832

 
$
3,402

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

Table of Contents

ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

 
Three Months Ended March 31, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders'
Equity
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
Balance, January 1, 2019
93,236
 
$
932

 
$
867,462

 
$
2,919,411

 
9,602

 
$
(1,075,879
)
 
$
(62,379
)
 
$
2,649,547

Treasury shares acquired
 
 
 
 
 
 
 
 
250

 
(44,856
)
 
 
 
(44,856
)
Stock-based compensation activity
 
 
 
 
(42,465
)
 
 
 
(494
)
 
43,483

 
 
 
1,018

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(7,558
)
 
(7,558
)
Net income
 
 
 
 
 
 
86,230

 
 
 
 
 
 
 
86,230

Balance, March 31, 2019
93,236
 
$
932

 
$
824,997

 
$
3,005,641

 
9,358

 
$
(1,077,252
)
 
$
(69,937
)
 
$
2,684,381


 
Three Months Ended March 31, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive (Loss)/Income
 
Total
Stockholders'
Equity
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
Balance, January 1, 2018
93,236
 
$
932

 
$
873,357

 
$
2,316,916

 
9,044

 
$
(907,530
)
 
$
(37,844
)
 
$
2,245,831

Cumulative effect of the ASC 606 adoption
 
 
 
 
 
 
183,132

 
 
 
 
 
 
 
183,132

Treasury shares acquired
 
 
 
 
 
 
 
 
750

 
(117,831
)
 
 
 
(117,831
)
Stock-based compensation activity
 
 
 
 
(39,943
)
 
 
 
(492
)
 
43,648

 
 
 
3,705

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
8,243

 
8,243

Net income
 
 
 
 
 
 
84,280

 
 
 
 
 
 
 
84,280

Balance, March 31, 2018
93,236
 
$
932

 
$
833,414

 
$
2,584,328

 
9,302

 
$
(981,713
)
 
$
(29,601
)
 
$
2,407,360

The accompanying notes are an integral part of the condensed consolidated financial statements.


7

Table of Contents

ANSYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

1.
Organization
ANSYS, Inc. (hereafter the Company or ANSYS) develops and globally markets engineering simulation software and services widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia, including aerospace and defense, automotive, electronics, semiconductors, energy, materials and chemical processing, turbomachinery, consumer products, healthcare, and sports.
As defined by the accounting guidance for segment reporting, the Company operates as one segment.
Given the integrated approach to the multi-discipline problem-solving needs of the Company's customers, a single sale of software may contain components from multiple product areas and include combined technologies. The Company also has a multi-year product and integration strategy that will result in new, combined products or changes to the historical product offerings. As a result, it is impracticable for the Company to provide accurate historical or current reporting among its various product lines.

2.
Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by ANSYS in accordance with accounting principles generally accepted in the United States for interim financial information for commercial and industrial companies, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements (and notes thereto) included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K). The condensed consolidated December 31, 2018 balance sheet presented is derived from the audited December 31, 2018 balance sheet included in the 2018 Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for any future period.
Changes in Accounting Policies
The Company’s accounting policies are described in Note 2, “Accounting Policies,” in the 2018 Form 10-K. Summarized below is the accounting guidance adopted subsequent to December 31, 2018.
Leases: In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02). The Company adopted ASU 2016-02 and its related amendments (collectively known as Accounting Standards Codification (ASC) 842) on January 1, 2019 using the modified retrospective approach. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 840, Leases. ASC 842 requires virtually all leases, other than leases of intangible assets, to be recorded on the balance sheet with a right-of-use (ROU) asset and a corresponding lease liability.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward its historical assessments of whether a contract contains a lease, lease classification and initial direct costs. In addition, the Company elected the accounting policy to combine the lease and nonlease components as a single component for all asset classes.
The Company determines if an arrangement is a lease at inception. Leases are classified as either operating or finance leases based on certain criteria. This classification determines the timing and presentation of expenses on the income statement, as well as the presentation of the related cash flows and balance sheet. Operating leases are recorded on the balance sheet as operating lease right-of-use assets, other accrued expenses and liabilities, and long-term operating lease liabilities. The Company currently has no finance leases.

8

Table of Contents

ROU assets and related liabilities are recorded at lease commencement based on the present value of the lease payments over the expected lease term. Lease payments include future increases unless the increases are based on changes in an index or rate. As the Company's leases do not usually provide an implicit rate, the Company’s incremental borrowing rate is used to calculate ROU assets and related liabilities. The incremental borrowing rate is determined based on the Company’s estimated credit rating, the term of the lease, the economic environment where the asset resides and full collateralization. The ROU assets and related lease liabilities include optional renewals for which the Company is reasonably certain to exercise; whereas, optional terminations are included unless it is reasonably certain not to be elected.
The adoption of the new standard resulted in the recognition of ROU assets of $90.9 million and lease liabilities of $92.5 million, and corresponding deferred tax assets and liabilities, on the Company’s condensed consolidated balance sheet as of January 1, 2019. The adoption had no impact on the Company’s condensed consolidated statements of income or cash flows.
Accounting Guidance Issued and Not Yet Adopted
Credit losses: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The current guidance requires the allowance for doubtful accounts to be estimated based on an incurred loss model, which considers past and current conditions. ASU 2016-13 requires companies to use an expected loss model that also considers reasonable and supportable forecasts of future conditions. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within that reporting period. The standard requires a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company did not early adopt the standard. The Company is currently evaluating the effect that this update will have on its financial results upon adoption.
Implementation cost accounting for cloud computing arrangements: In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). The standard aligns the accounting for costs incurred to implement a cloud computing arrangement (CCA) that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Under ASU 2018-15, an entity would apply Subtopic 350-40 to determine which implementation costs related to a CCA that is a service contract should be capitalized. The standard does not change the accounting for the service component of a CCA. The associated cash flows will be reflected within operating activities. ASU 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date the guidance is first applied or (2) retrospectively. The Company is currently evaluating the effect that this update will have on its financial results upon adoption.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments such as deposits held at major banks and money market funds. Cash equivalents are carried at cost, which approximates fair value. The Company’s cash and cash equivalent balances comprise the following:
 
March 31, 2019
 
December 31, 2018
(in thousands, except percentages)
Amount
 
% of Total
 
Amount
 
% of Total
Cash accounts
$
379,831

 
62.5
 
$
331,084

 
42.6
Money market funds
227,560

 
37.5
 
446,055

 
57.4
Total
$
607,391

 
 
 
$
777,139

 
 

The Company's money market fund balances are held in various funds of a single issuer.


9

Table of Contents

3.
Revenue from Contracts with Customers
Disaggregation of Revenue
The following table summarizes revenue:
 
Three Months Ended
(in thousands)
March 31, 2019
 
March 31, 2018
Revenue:
 
 
 
Lease licenses
$
69,256

 
$
48,772

Perpetual licenses
53,788

 
61,274

Software licenses
123,044

 
110,046

Maintenance
181,461

 
163,896

Service
12,625

 
8,931

Maintenance and service
194,086

 
172,827

Total revenue
$
317,130

 
$
282,873


The Company’s software licenses revenue is recognized up front, while maintenance and service revenue is generally recognized over the term of the contract. The Company derived 29.5% and 23.5% of its total revenue through the indirect sales channel for the three months ended March 31, 2019 and 2018, respectively.
Deferred Revenue
Deferred revenue consists of billings made or payments received in advance of revenue recognition from software license and maintenance agreements. The timing of revenue recognition may differ from the timing of billings to customers. Payment terms vary by the type and location of customer and the products or services offered. The time between invoicing and when payment is due is not significant.
The changes in deferred revenue, inclusive of both current and long-term deferred revenue, during the three months ended March 31, 2019 and 2018 were as follows:
(in thousands)
2019
 
2018
Beginning balance – January 1
$
343,174

 
$
299,730

Acquired deferred revenue
2,349

 

Deferral of revenue
318,279

 
307,978

Recognition of revenue
(317,130
)
 
(282,873
)
Currency translation
(2,396
)
 
4,559

Ending balance – March 31
$
344,276

 
$
329,394


Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, and includes both deferred revenue and backlog. The Company's backlog represents installment billings for periods beyond the current quarterly billing cycle and customer orders received but not processed. Revenue recognized during the three months ended March 31, 2019 and 2018 included amounts in deferred revenue and backlog at the beginning of the period of $172.6 million and $145.8 million, respectively. Total revenue allocated to remaining performance obligations as of March 31, 2019 will be recognized as revenue as follows:
(in thousands)
 
Next 12 months
$
477,092

Months 13-24
119,694

Months 25-36
44,061

Thereafter
31,801

Total revenue allocated to remaining performance obligations
$
672,648




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Table of Contents

4.
Acquisitions
During the three months ended March 31, 2019, the Company acquired 100% of the shares of Granta Design Limited (Granta Design) and Helic, Inc. (Helic) for a combined purchase price of $260.8 million, paid in cash. The acquisition of Granta Design, the premier provider of materials information technology, expands ANSYS' portfolio into this important area, giving customers access to material intelligence, including data that is critical to successful simulations. The acquisition of Helic, the industry-leading provider of electromagnetic crosstalk solutions for systems on chips, combined with ANSYS' flagship electromagnetic and semiconductor solvers, will provide a comprehensive solution for on-chip, 3D integrated circuit and chip-package-system electromagnetics and noise analysis.
The assets and liabilities of Granta Design and Helic have been recorded based upon management's estimates of their fair market values as of each respective date of acquisition. The following tables summarize the fair value of consideration transferred and the fair values of identified assets acquired and liabilities assumed at each respective date of acquisition:
Fair Value of Consideration Transferred:
(in thousands)
Granta Design
 
Helic
 
Total
Cash
$
198,723

 
$
62,086

 
$
260,809


Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
(in thousands)
 
 
 
 
 
Cash
$
13,644

 
$
2,842

 
$
16,486

Accounts receivable and other tangible assets
6,926

 
6,008

 
12,934

Developed software and core technologies (12 year weighted-average life)
32,445

 
8,600

 
41,045

Customer lists (13 year weighted-average life)
20,016

 
11,500

 
31,516

Trade names (10 year weighted-average life)
4,579

 
890

 
5,469

Accounts payable and other liabilities
(6,176
)
 
(3,477
)
 
(9,653
)
Deferred revenue
(1,426
)
 
(923
)
 
(2,349
)
Net deferred tax liabilities
(9,822
)
 
(5,049
)
 
(14,871
)
Total identifiable net assets
$
60,186

 
$
20,391

 
$
80,577

Goodwill
$
138,537

 
$
41,695

 
$
180,232


The goodwill, which is not tax-deductible, is attributed to intangible assets that do not qualify for separate recognition, including the assembled workforce of the acquired business and the synergies expected to arise as a result of the acquisitions.
The fair values of the assets acquired and liabilities assumed are based on preliminary calculations. The estimates and assumptions for these items are subject to change as additional information about what was known and knowable at the acquisition date is obtained during the measurement period (up to one year from the acquisition date).
On May 2, 2018, the Company completed the acquisition of 100% of the shares of OPTIS, a premier provider of software for scientific simulation of light, human vision and physics-based visualization, for a purchase price of $291.0 million, paid in cash. The acquisition extends the Company's portfolio into the area of optical simulation to provide comprehensive sensor solutions, covering visible and infrared light, electromagnetics and acoustics for camera, radar and lidar.
The operating results of each acquisition have been included in the Company's condensed consolidated financial statements since each respective date of acquisition. The effects of the business combinations were not material to the Company's consolidated results of operations individually or in the aggregate.


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5.
Other Receivables and Current Assets
The Company's other receivables and current assets comprise the following balances:
(in thousands)
March 31,
2019
 
December 31,
2018
Receivables related to unrecognized revenue
$
129,917

 
$
167,144

Income taxes receivable, including overpayments and refunds
13,662

 
13,709

Prepaid expenses and other current assets
43,078

 
35,260

Total other receivables and current assets
$
186,657

 
$
216,113


Receivables for unrecognized revenue represent the current portion of billings made for customer contracts that have not yet been recognized as revenue.

6.
Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings by the weighted average number of common shares outstanding during the period. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding using the treasury stock method. To the extent stock awards are anti-dilutive, they are excluded from the calculation of diluted EPS.
The details of basic and diluted EPS are as follows:
 
Three Months Ended
(in thousands, except per share data)
March 31,
2019
 
March 31,
2018
Net income
$
86,230

 
$
84,280

Weighted average shares outstanding – basic
83,764

 
83,931

Dilutive effect of stock plans
1,729

 
2,221

Weighted average shares outstanding – diluted
85,493

 
86,152

Basic earnings per share
$
1.03

 
$
1.00

Diluted earnings per share
$
1.01

 
$
0.98

Anti-dilutive shares

 



7.
Goodwill and Intangible Assets
The Company's intangible assets and estimated useful lives are classified as follows:
 
March 31, 2019
 
December 31, 2018
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Developed software and core technologies (3 – 15 years)
$
450,361

 
$
(318,209
)
 
$
410,680

 
$
(314,730
)
Customer lists and contract backlog (5 – 15 years)
238,629

 
(120,682
)
 
209,031

 
(117,614
)
Trade names (2 – 10 years)
142,409

 
(114,538
)
 
137,225

 
(113,677
)
Total
$
831,399

 
$
(553,429
)
 
$
756,936

 
$
(546,021
)
Indefinite-lived intangible asset:
 
 
 
 
 
 
 
Trade name
$
357

 
 
 
$
357

 
 

Amortization expense for the intangible assets reflected above was $8.3 million and $12.2 million for the three months ended March 31, 2019 and 2018, respectively.

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As of March 31, 2019, estimated future amortization expense for the intangible assets reflected above is as follows:
(in thousands)
 
Remainder of 2019
$
25,433

2020
36,001

2021
33,709

2022
32,306

2023
30,442

2024
27,932

Thereafter
92,147

Total intangible assets subject to amortization
277,970

Indefinite-lived trade name
357

Other intangible assets, net
$
278,327


The changes in goodwill during the three months ended March 31, 2019 and 2018 were as follows:
(in thousands)
2019
 
2018
Beginning balance – January 1
$
1,572,455

 
$
1,378,553

Acquisitions and adjustments(1)
181,201

 

Currency translation
(5,428
)
 
905

Ending balance – March 31
$
1,748,228

 
$
1,379,458


(1) In accordance with the accounting for business combinations, the Company recorded adjustments to goodwill for the effect of changes in the provisional fair values of the assets acquired and liabilities assumed during the measurement period (up to one year from the acquisition date) as the Company obtained new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
During the first quarter of 2019, the Company completed the annual impairment test for goodwill and the indefinite-lived intangible asset and determined that these assets had not been impaired as of the test date, January 1, 2019. No other events or circumstances changed during the three months ended March 31, 2019 that would indicate that the fair values of the Company's reporting unit and indefinite-lived intangible asset are below their carrying amounts.


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8.
Fair Value Measurement
The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; or
Level 3: unobservable inputs based on the Company's own assumptions used to measure assets and liabilities at fair value.
The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following tables provide the assets carried at fair value and measured on a recurring basis:
 
 
 
Fair Value Measurements at Reporting Date Using:
(in thousands)
March 31,
2019
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
227,560

 
$
227,560

 
$

 
$

Short-term investments
$
237

 
$

 
$
237

 
$

Deferred compensation plan investments
$
2,138

 
$
2,138

 
$

 
$

 
 
 
Fair Value Measurements at Reporting Date Using:
(in thousands)
December 31, 2018
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
446,055

 
$
446,055

 
$

 
$

Short-term investments
$
225

 
$

 
$
225

 
$

Deferred compensation plan investments
$
1,646

 
$
1,646

 
$

 
$


The cash equivalents in the preceding tables represent money market funds, valued at net asset value, with carrying values which approximate their fair values because of their short-term nature.
The short-term investments in the preceding tables represent deposits held by certain foreign subsidiaries of the Company. The deposits have fixed interest rates with original maturities ranging from three months to one year.
The deferred compensation plan investments in the preceding tables represent trading securities held in a rabbi trust for the benefit of the non-employee Directors. These securities consist of mutual funds traded in an active market with quoted prices. As a result, the plan assets are classified as Level 1 in the fair value hierarchy. The plan assets are recorded within other long-term assets on the Company's condensed consolidated balance sheets.

9.
Leases
The Company primarily has operating leases for office space and leased cars included in its ROU assets and lease liabilities. The Company's executive offices and those related to certain domestic product development, marketing, production and administration are located in a 186,000 square foot office facility in Canonsburg, Pennsylvania. The term of the lease is 183 months, which began on October 1, 2014 and expires on December 31, 2029. The lease agreement includes options to renew the contract through August 2044, an option to lease additional space in January 2025 and an option to terminate the lease in December 2025. No options are included in the lease liability as renewal is not reasonably certain. In addition, the Company is reasonably certain it will not terminate the lease agreement. Absent the exercise of options in the lease, the Company's base rent

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(inclusive of property taxes and certain operating costs) is $4.3 million per annum for the first five years of the lease term, $4.5 million per annum for years six through ten and $4.7 million per annum for years eleven through fifteen.
The components of the Company's global lease cost reflected in the condensed consolidated statements of income for the three months ended March 31, 2019 are as follows:
(in thousands)
 
Lease liability cost
$
5,285

Variable lease cost not included in the lease liability(1)
797
     Total lease cost

$
6,082

(1) Variable lease cost includes common area maintenance, property taxes, utilities and fluctuations in rent due to a change in an index or rate.
Lease cost totaled $4.9 million for the three months ended March 31, 2018.
Other information related to operating leases for the three months ended March 31, 2019 is as follows:
(in thousands)
 
Cash paid for amounts included in the measurement of the lease liability:
 
     Operating cash flows from operating leases
$
(4,332
)
Right-of-use assets obtained in exchange for new operating lease liabilities

$
13,835


As of March 31, 2019, the weighted-average remaining lease term of operating leases was 8.0 years, and the weighted-average discount rate of operating leases was 3.3%.
The maturity schedule of the operating lease liabilities as of March 31, 2019 is as follows:
(in thousands)
 
Remainder of 2019
$
15,081

2020
18,043

2021
15,756

2022
13,415

2023
9,676

Thereafter
46,749

     Total future lease payments
118,720

Less: Present value adjustment

(16,195
)
     Present value of future lease payments(1)

$
102,525

(1)Includes the current portion of operating lease liabilities of $15.3 million, which is reflected in other accrued expenses and liabilities in the condensed consolidated balance sheets.
There were no material leases that have been signed but not yet commenced as of March 31, 2019.
The future minimum lease payments under ASC 840, including termination fees, under noncancellable operating leases for office space in effect at December 31, 2018 were as follows:
(in thousands)
 
2019
$
16,354

2020
12,469

2021
10,177

2022
8,523

2023
6,809

Thereafter
14,267

     Total
$
68,599




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10.
Debt
In February 2019, the Company entered into a credit agreement for a $500 million unsecured revolving credit facility, which includes a $50 million sublimit for the issuance of letters of credit, with Bank of America, N.A. as the Administrative Agent. The revolving credit facility is available for general corporate purposes, including, among others, to finance acquisitions and capital expenditures and becomes payable in full on February 22, 2024.
Borrowings under the revolving credit facility will accrue interest at the Eurodollar rate plus an applicable margin or at the base rate. The base rate is the applicable margin plus the highest of (i) the federal funds rate plus 0.500%, (ii) the Bank of America prime rate and (iii) the Eurodollar rate plus 1.000%. The applicable margin for these borrowings is a percentage per annum based on the lower of (1) a pricing level determined by the Company’s then-current consolidated leverage ratio and (2) a pricing level determined by the Company’s debt ratings (if such debt ratings exist). This results in a margin ranging from 1.125% to 1.750% and 0.125% to 0.750% for the Eurodollar rate and base rate, respectively.
The credit agreement contains customary representations and warranties, affirmative and negative covenants and events of default. The credit agreement also contains a financial covenant requiring the Company and its subsidiaries to maintain a consolidated leverage ratio of indebtedness to earnings before interest, taxes, depreciation and amortization of 3.50 to 1.00 as of the end of any fiscal quarter (for the four-quarter period ending on such date) with an opportunity for a temporary increase in such consolidated leverage ratio to 4.00 to 1.00 upon the consummation of certain qualified acquisitions for which the aggregate consideration is at least $250 million.
The credit agreement will terminate and all amounts owing thereunder will be due and payable on February 22, 2024 unless (i) the commitments are terminated earlier upon the occurrence of certain events, including an event of default, or (ii) the maturity date is further extended upon the Company's request, subject to the agreement of the lenders.
As of March 31, 2019, there were no outstanding borrowings under the credit agreement, and the Company was in compliance with all covenants.

11.
Stock Repurchase Program
Under the Company's stock repurchase program, the Company repurchased shares as follows:
 
Three Months Ended
(in thousands, except per share data)
March 31,
2019
 
March 31,
2018
Number of shares repurchased
250

 
750

Average price paid per share
$
179.42

 
$
157.11

Total cost
$
44,856

 
$
117,831


In February 2018, the Company's Board of Directors increased the number of shares authorized for repurchase to a total of 5.0 million shares under the stock repurchase program. As of March 31, 2019, 3.6 million shares remained available for repurchase under the program.


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12.
Stock-Based Compensation
Total stock-based compensation expense and its net impact on basic and diluted earnings per share are as follows:
 
Three Months Ended
(in thousands, except per share data)
March 31,
2019

March 31,
2018
Cost of sales:



Maintenance and service
$
1,228


$
1,010

Operating expenses:
 


Selling, general and administrative
13,131


8,278

Research and development
9,441


5,981

Stock-based compensation expense before taxes
23,800


15,269

Related income tax benefits
(11,076
)

(11,304
)
Stock-based compensation expense, net of taxes
$
12,724


$
3,965

Net impact on earnings per share:
 


Basic earnings per share
$
(0.15
)

$
(0.05
)
Diluted earnings per share
$
(0.15
)

$
(0.05
)


13.
Geographic Information
Revenue to external customers is attributed to individual countries based upon the location of the customer. Revenue by geographic area is as follows:
 
Three Months Ended
(in thousands)
March 31,
2019
 
March 31,
2018
United States
$
140,662

 
$
98,765

Japan
33,573

 
30,601

Germany
30,427

 
45,538

France
15,609

 
16,552

South Korea
15,078

 
15,054

Other Europe, Middle East and Africa (EMEA)
44,255

 
43,018

Other international
37,526

 
33,345

Total revenue
$
317,130

 
$
282,873


Property and equipment by geographic area is as follows:
(in thousands)
March 31,
2019
 
December 31,
2018
United States
$
47,219

 
$
46,605

India
4,217

 
4,176

EMEA
8,148

 
7,120

Other international
3,717

 
3,754

Total property and equipment, net
$
63,301

 
$
61,655




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Table of Contents

14.
Contingencies and Commitments
The Company is subject to various investigations, claims and legal proceedings that arise in the ordinary course of business, including commercial disputes, labor and employment matters, tax audits, alleged infringement of intellectual property rights and other matters. In the opinion of the Company, the resolution of pending matters is not expected to have a material adverse effect on the Company's consolidated results of operations, cash flows or financial position. However, each of these matters is subject to various uncertainties and it is possible that an unfavorable resolution of one or more of these proceedings could materially affect the Company's results of operations, cash flows or financial position.
An Indian subsidiary of the Company has several service tax audits pending that have resulted in formal inquiries being received on transactions through mid-2012. The Company could incur tax charges and related liabilities of approximately $7.2 million. The service tax issues raised in the Company’s notices and inquiries are very similar to the case, M/s Microsoft Corporation (I) (P) Ltd. Vs. Commissioner of Service Tax, New Delhi, wherein the Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT) passed a favorable ruling to Microsoft. The Company can provide no assurances on whether the Microsoft case's favorable ruling will be challenged in higher courts or on the impact that the present Microsoft case’s decision will have on the Company’s cases. The Company is uncertain as to when these service tax matters will be concluded.
The Company sells software licenses and services to its customers under proprietary software license agreements. Each license agreement contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that are incurred by or awarded against the customer in the event the Company's software or services are found to infringe upon a patent, copyright or other proprietary right of a third party. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims asserted under these indemnification provisions are outstanding as of March 31, 2019. For several reasons, including the lack of prior material indemnification claims, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

15.
Subsequent Event
In May 2019, the Company acquired certain assets and liabilities of DfR Solutions for approximately $41.0 million. The acquisition of DfR Solutions' electronics reliability technology, combined with the Company's existing comprehensive multiphysics portfolio, will give customers a complete designer-level solution to analyze for electronics failure earlier in the design cycle.


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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ANSYS, Inc.
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of ANSYS, Inc. and subsidiaries (the “Company”) as of March 31, 2019, the related condensed consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month periods ended March 31, 2019 and 2018, and the related notes (collectively referred to as the “interim financial information"). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our review in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
May 2, 2019




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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview:
Overall GAAP and Non-GAAP Results
The Company's growth rates of GAAP and non-GAAP results for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 were as follows:
 
GAAP
 
Non-GAAP
Revenue
12.1
%
 
12.9
%
Operating income
0.6
%
 
7.7
%
Diluted earnings per share
3.1
%
 
7.5
%
The Company experienced higher revenue during the three months ended March 31, 2019 from growth in lease licenses, maintenance and service, while revenue from perpetual licenses decreased. The Company also experienced increased operating expenses primarily due to increased personnel costs, higher stock-based compensation and additional operating expenses related to the OPTIS acquisition, partially offset by a reduction in expenses due to a stronger U.S. Dollar.
The non-GAAP results exclude the income statement effects of the acquisition accounting adjustment to deferred revenue, stock-based compensation, amortization of acquired intangible assets, transaction costs related to business combinations, and adjustments related to the transition tax associated with the Tax Cuts and Jobs Act. For further disclosure regarding non-GAAP results, see the section titled "Non-GAAP Results" immediately preceding the section titled "Liquidity and Capital Resources."
Impact of Foreign Currency
The Company's comparative financial results were impacted by fluctuations in the U.S. Dollar during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The impacts on the Company's revenue and operating income due to currency fluctuations are reflected in the table below. Amounts in brackets indicate a net adverse impact from currency fluctuations.
 
Three Months Ended March 31, 2019
(in thousands)
GAAP
 
Non-GAAP
Revenue
$
(9,158
)
 
$
(9,281
)
Operating income
$
(3,143
)
 
$
(3,504
)
In constant currency(1), the Company's growth rates(2) were as follows:
 
Three Months Ended March 31, 2019
 
GAAP
 
Non-GAAP
Revenue
15.3
%
 
16.2
%
Operating income
3.9
%
 
10.4
%
(1) Constant currency amounts exclude the effect of foreign currency fluctuations on the reported results. To present this information, the 2019 results for entities whose functional currency is a currency other than the U.S. Dollar were converted to U.S. Dollars at rates that were in effect for the 2018 comparable period, rather than the actual exchange rates in effect for 2019.
(2) The constant currency growth rates are calculated by adjusting the 2019 reported revenue and operating income amounts by the 2019 currency fluctuation impacts in the table above and comparing to the 2018 comparable period reported revenue and operating income amounts.
Other Financial Information
The Company’s financial position includes $607.6 million in cash and short-term investments, and working capital of $559.4 million as of March 31, 2019.
During the three months ended March 31, 2019, the Company repurchased 0.3 million shares for $44.9 million at an average price of $179.42 per share.

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Table of Contents

Business:
ANSYS develops and globally markets engineering simulation software and services widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia, including aerospace and defense, automotive, electronics, semiconductors, energy, materials and chemical processing, turbomachinery, consumer products, healthcare, and sports. Headquartered south of Pittsburgh, Pennsylvania, the Company employed approximately 3,700 people as of March 31, 2019. ANSYS focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its suite of simulation technologies through a global network of independent channel partners and direct sales offices in strategic, global locations. It is the Company’s intention to continue to maintain this hybrid sales and distribution model.
The Company licenses its technology to businesses, educational institutions and governmental agencies. Growth in the Company’s revenue is affected by the strength of global economies, general business conditions, currency exchange rate fluctuations, customer budgetary constraints and the competitive position of the Company’s products. The Company believes that the features, functionality and integrated multiphysics capabilities of its software products are as strong as they have ever been. However, the software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. The Company makes many operational and strategic decisions based upon short- and long-term sales forecasts that are impacted not only by these long sales cycles but also by current global economic conditions. As a result, the Company believes that its overall performance is best measured by fiscal-year results rather than by quarterly results.
The Company’s management considers the competition and price pressure that it faces in the short- and long-term by focusing on expanding the breadth, depth, ease of use and quality of the technologies, features, functionality and integrated multiphysics capabilities of its software products as compared to its competitors; investing in research and development to develop new and innovative products and increase the capabilities of its existing products; supplying new products and services; focusing on customer needs, training, consulting and support; and enhancing its distribution channels. From time to time, the Company also considers acquisitions to supplement its global engineering talent, product offerings and distribution channels.
Geographic Trends:
The following table presents the Company's geographic constant currency revenue growth during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018:
 
Three Months Ended March 31, 2019
Americas
41.1
 %
EMEA
(7.8
)%
Asia-Pacific
12.2
 %
Total
15.3
 %
The Company continues to focus on a number of sales improvement activities across the geographic regions, including sales hiring, pipeline building, productivity initiatives and customer engagement activities.
Industry Commentary:
The Company experienced industry trends consistent with those from the second half of 2018. The high-tech industry remained strong as companies continue to innovate and invest in smart connected products, 5G and artificial intelligence. The growing importance of data centers also bolstered the industry as companies gear up to address the coming data deluge from pervasive connectivity. The automotive industry continued its momentum due to continued investments in autonomous vehicles and electrification. Aerospace and defense was strengthened by an increase in defense spending on next-generation systems, particularly in the United States.

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Note About Forward-Looking Statements
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended March 31, 2019, and with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2018 included in the 2018 Form 10-K filed with the Securities and Exchange Commission. The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the fair values of stock awards, bad debts, contract revenue, acquired deferred revenue, the standalone selling prices of its products and services, the valuation of goodwill and other intangible assets, deferred compensation, income taxes, uncertain tax positions, tax valuation reserves, operating lease assets and liabilities, useful lives for depreciation and amortization, and contingencies and litigation. The Company bases its estimates on historical experience, market experience, estimated future cash flows and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, the following statements, as well as statements that contain such words as "anticipates," "intends," "believes," "plans" and other similar expressions:
The Company's expectations regarding the impacts of new accounting guidance.
The Company's estimates regarding the expected impact on reported revenue related to the acquisition accounting treatment of deferred revenue.
The Company's expectations regarding the outcome of its service tax audit cases.
The Company's assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings.
The Company's expectations regarding future claims related to indemnification obligations.
The Company's intentions regarding its hybrid sales and distribution model.
The Company's statement regarding the strength of the features, functionality and integrated multiphysics capabilities of its software products.
The Company's belief that its overall performance is best measured by fiscal-year results rather than by quarterly results.
The Company's expectations regarding increased lease license volatility due to an increased customer preference for time-based licenses.
The Company's expectation that it will continue to make targeted investments in its global sales and marketing organizations and its global business infrastructure to enhance and support its revenue-generating activities.
The Company's intentions related to investments in research and development, particularly as it relates to expanding the ease of use and capabilities of its broad portfolio of simulation software products.
The Company's intention to repatriate previously taxed earnings in excess of working capital needs and to reinvest all other earnings of its non-U.S. subsidiaries.
The Company's plans related to future capital spending.
The sufficiency of existing cash and cash equivalent balances to meet future working capital and capital expenditure requirements.
The Company's belief that the best uses of its excess cash are to invest in the business and to repurchase stock in order to both offset dilution and return capital to stockholders, in excess of its requirements, with the goal of increasing stockholder value.
The Company's intentions related to investments in complementary companies, products, services and technologies.
The Company's expectation that changes in currency exchange rates will affect the Company's financial position, results of operations and cash flows.
The Company’s expectations regarding acquisitions and integrating such acquired companies to realize the benefits of cost reductions and other synergies relating thereto.

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Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company’s control. The Company’s actual results could differ materially from those set forth in forward-looking statements. Certain factors, among others, that might cause such a difference include risks and uncertainties disclosed in the Company’s 2018 Form 10-K, Part I, Item 1A. "Risk Factors." Information regarding any new risk factors or material changes to these risk factors has been included within Part II, Item 1A of this Quarterly Report on Form 10-Q.

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Results of Operations
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Revenue:
 
Three Months Ended March 31,
 
Change
(in thousands, except percentages)
2019
 
2018
 
Amount
 
%
 
Constant Currency %
Revenue:
 
 
 
 
 
 
 
 
 
Lease licenses
$
69,256

 
$
48,772

 
$
20,484

 
42.0

 
44.9

Perpetual licenses
53,788

 
61,274

 
(7,486
)
 
(12.2
)
 
(9.3
)
Software licenses
123,044

 
110,046

 
12,998

 
11.8

 
14.7

Maintenance
181,461

 
163,896

 
17,565

 
10.7

 
14.1

Service
12,625

 
8,931

 
3,694

 
41.4

 
46.0

Maintenance and service
194,086

 
172,827

 
21,259

 
12.3

 
15.8

Total revenue
$
317,130

 
$
282,873

 
$
34,257

 
12.1

 
15.3

The Company’s revenue in the quarter ended March 31, 2019 increased 12.1% as compared to the quarter ended March 31, 2018, while revenue grew 15.3% in constant currency. The growth rate was favorably impacted by the Company’s continued investment in its global sales, support and marketing organizations, as well as its acquisitions. Lease license revenue increased 42.0%, or 44.9% in constant currency, as compared to the prior-year quarter, driven primarily by an increase in multi-year lease contracts. Annual maintenance contracts that were sold with new perpetual licenses, maintenance contracts for new perpetual licenses sold in previous quarters and the maintenance portion of lease license contracts each contributed to maintenance revenue growth of 10.7%, or 14.1% in constant currency. Service revenue, driven primarily by a focus on service offerings that provide on-site mentorship on simulation best practices, training and expanding simulation adoption, increased 41.4%, or 46.0% in constant currency, as compared to the prior-year quarter. Perpetual license revenue, which is derived primarily from new sales during the quarter, decreased 12.2%, or 9.3% in constant currency, as compared to the prior-year quarter.
With respect to revenue, on average for the quarter ended March 31, 2019, the U.S. Dollar was approximately 6.0% stronger, when measured against the Company’s primary foreign currencies, than for the quarter ended March 31, 2018. The table below presents the impacts of currency fluctuations on revenue for the quarter ended March 31, 2019. Amounts in brackets indicate an adverse impact from currency fluctuations.
(in thousands)
Three Months Ended March 31, 2019
Euro
$
(5,986
)
Japanese Yen
(799
)
South Korean Won
(644
)
British Pound
(637
)
Indian Rupee
(581
)
Other
(511
)
Total
$
(9,158
)
The net overall stronger U.S. Dollar also resulted in decreased operating income of $3.1 million for the quarter ended March 31, 2019 as compared to the quarter ended March 31, 2018.
The Company continues to experience increased interest by some of its larger customers in enterprise agreements that often include longer-term, time-based licenses involving a larger number of the Company's software products. While these arrangements typically involve a higher overall transaction price, the upfront recognition of license revenue related to these larger, multi-year transactions can result in significantly higher lease license revenue volatility. As software products, across a large variety of applications and industries, become increasingly distributed in software-as-a-service, cloud and other subscription environments in which the licensing approach is time-based rather than perpetual, the Company is also experiencing a shifting preference from perpetual licenses to time-based licenses across a broader spectrum of its customers.

24

Table of Contents

As a percentage of revenue, the Company's international and domestic revenues, and the Company's direct and indirect revenues, were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
International
55.6
%
 
65.1
%
Domestic
44.4
%
 
34.9
%
 

 

Direct
70.5
%
 
76.5
%
Indirect
29.5
%
 
23.5
%
In valuing deferred revenue on the balance sheets of the Company's recent acquisitions as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to its historical carrying amount. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and each acquiree absent the acquisitions. The impacts on reported revenue were $2.8 million and $0.4 million for the quarters ended March 31, 2019 and 2018, respectively. The expected impacts on reported revenue are $1.9 million and $7.3 million for the quarter ending June 30, 2019 and for the year ending December 31, 2019, respectively. The expected impacts on reported revenue include only the impacts for acquisitions that closed on or before March 31, 2019.
Deferred Revenue and Backlog:
Deferred revenue consists of billings made or payments received in advance of revenue recognition. The deferred revenue on the Company's condensed consolidated balance sheets does not represent the total value of annual or multi-year, noncancellable agreements. The Company's backlog represents installment billings for periods beyond the current quarterly billing cycle and customer orders received but not processed. The Company's deferred revenue and backlog as of March 31, 2019 and December 31, 2018 consisted of the following:
 
Balance at March 31, 2019
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
344,276

 
$
330,890

 
$
13,386

Backlog
328,372

 
146,202

 
182,170

Total
$
672,648

 
$
477,092

 
$
195,556


 
Balance at December 31, 2018
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
343,174

 
$
328,584

 
$
14,590

Backlog
315,998

 
147,299

 
168,699

Total
$
659,172

 
$
475,883

 
$
183,289

Revenue associated with deferred revenue and backlog that will be recognized in the subsequent twelve months is classified as current in the tables above.

25

Table of Contents

Cost of Sales and Operating Expenses:
The tables below reflect the Company's operating results as presented on the condensed consolidated statements of income, which are inclusive of foreign currency translation impacts and the OPTIS acquisition. Amounts included in the discussions that follow each table are provided in constant currency. The constant currency impact of the OPTIS acquisition and the impact of foreign exchange translation are discussed separately, where material.
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
4,708

 
1.5
 
$
3,911

 
1.4
 
$
797

 
20.4

Amortization
4,547

 
1.4
 
8,786

 
3.1
 
(4,239
)
 
(48.2
)
Maintenance and service
25,560

 
8.1
 
26,341

 
9.3
 
(781
)
 
(3.0
)
Total cost of sales
34,815

 
11.0
 
39,038

 
13.8
 
(4,223
)
 
(10.8
)
Gross profit
$
282,315

 
89.0
 
$
243,835

 
86.2
 
$
38,480

 
15.8

Software Licenses: The increase in the cost of software licenses was primarily due to increased third-party royalties of $0.6 million.
Amortization: The decrease in amortization expense was primarily due to a net decrease in the amortization of trade names and acquired technology due to assets that became fully amortized.
Maintenance and Service: The decrease in maintenance and service costs was primarily due to the cost decrease related to foreign exchange translation of $0.9 million due to a stronger U.S. Dollar.
The improvement in gross profit was a result of the increase in revenue and decrease in the related cost of sales.
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
112,169

 
35.4
 
$
87,809

 
31.0
 
$
24,360

 
27.7
Research and development
70,738

 
22.3
 
57,530

 
20.3
 
13,208

 
23.0
Amortization
3,759

 
1.2
 
3,435

 
1.2
 
324

 
9.4
Total operating expenses
$
186,666

 
58.9
 
$
148,774

 
52.6
 
$
37,892

 
25.5
Selling, General and Administrative: The net increase in selling, general and administrative costs was primarily due to the following:
Increased salaries, incentive compensation and other headcount-related costs of $12.7 million.
Increased stock-based compensation of $4.6 million.
OPTIS-related selling, general and administrative expenses of $4.6 million.
Increased professional fees of $1.6 million.
Increased business travel of $1.5 million.
Cost decrease related to foreign exchange translation of $3.1 million due to a stronger U.S. Dollar.
The Company anticipates that it will continue to make targeted investments in its global sales and marketing organizations and its global business infrastructure to enhance and support its revenue-generating activities.

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Table of Contents

Research and Development: The net increase in research and development costs was primarily due to the following:
Increased salaries and other headcount-related costs of $5.9 million.
OPTIS-related research and development expenses of $3.7 million.
Increased stock-based compensation of $3.1 million.
Cost decrease related to foreign exchange translation of $1.7 million due to a stronger U.S. Dollar.
The Company has traditionally invested significant resources in research and development activities and intends to continue to make investments in expanding the ease of use and capabilities of its broad portfolio of simulation software products.
Interest Income: Interest income for the quarter ended March 31, 2019 was $3.4 million as compared to $2.3 million for the quarter ended March 31, 2018. Interest income increased as a result of an increase in the average rate of return on invested cash balances.
Other Expense, net: The Company's other expense consisted of the following:
 
Three Months Ended
(in thousands)
March 31,
2019
 
March 31,
2018
Foreign currency losses, net
$
(513
)
 
$
(264
)
Other
88

 
(44
)
Total other expense, net
$
(425
)
 
$
(308
)
Income Tax Provision: The Company's income before income tax provision, income tax provision and effective tax rate were as follows:
 
Three Months Ended
(in thousands, except percentages)
March 31,
2019
 
March 31,
2018
Income before income tax provision
$
98,666

 
$
97,038

Income tax provision
$
12,436

 
$
12,758

Effective tax rate
12.6
%
 
13.1
%
In February 2019, the U.S. government published final regulations relating to the transition tax, enacted as part of the Tax Cuts and Jobs Act of 2017. In accordance with the final regulations, the Company adjusted its provisional transition tax calculations and recorded an additional tax benefit of $1.3 million for the quarter ended March 31, 2019.
The decrease in the effective tax rate from the prior year is primarily due to the additional transition tax benefit, offset by increased tax related to global intangible low-taxed income.
When compared to the federal and state combined statutory rate for each respective period, the effective tax rates for the quarters ended March 31, 2019 and 2018 were favorably impacted by tax benefits from stock-based compensation, the foreign-derived intangible income deduction and research and development credits.
Net Income: The Company's net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
 
Three Months Ended
(in thousands, except per share data)
March 31,
2019
 
March 31,
2018
Net income
$
86,230

 
$
84,280

Diluted earnings per share
$
1.01

 
$
0.98

Weighted average shares outstanding - diluted
85,493

 
86,152






27

Table of Contents

Non-GAAP Results
The Company provides non-GAAP revenue, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share as supplemental measures to GAAP regarding the Company’s operational performance. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure are described below.
 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
(in thousands, except percentages and per share data)
GAAP Results
 
Adjustments
 
Non-GAAP
Results
 
GAAP Results
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
317,130

 
$
2,780

(1)
$
319,910

 
$
282,873

 
$
401

(4)
$
283,274

Operating income
95,649

 
41,537

(2)
137,186

 
95,061

 
32,351

(5)
127,412

Operating profit margin
30.2
%
 
 
 
42.9
%
 
33.6
%
 
 
 
45.0
%
Net income
$
86,230

 
$
24,440

(3)
$
110,670

 
$
84,280

 
$
18,784

(6)
$
103,064

Earnings per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
$
1.01

 
 
 
$
1.29

 
$
0.98

 
 
 
$
1.20

Weighted average shares
85,493

 
 
 
85,493

 
86,152

 
 
 
86,152

(1)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(2)
Amount represents $23.8 million of stock-based compensation expense, $4.0 million of excess payroll taxes related to stock-based awards, $8.3 million of amortization expense associated with intangible assets acquired in business combinations, $2.7 million of transaction expenses related to business combinations and the $2.8 million adjustment to revenue as reflected in (1) above.
(3)
Amount represents the impact of the adjustments to operating income referred to in (2) above, decreased for the related income tax impact of $15.6 million