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 September 30, 2018
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
The number of shares of the Registrant’s Common Stock, par value $.01 per share, outstanding as of October 31, 2018 was 83,560,018 shares.



ANSYS, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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

 
September 30,
2018
 
December 31,
2017
(in thousands, except share and per share data)
(Unaudited)
 
(Audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
729,180

 
$
881,501

Short-term investments
211

 
286

Accounts receivable, less allowance for doubtful accounts of $8,100 and $6,800, respectively
235,547

 
124,659

Other receivables and current assets
162,629

 
263,820

Total current assets
1,127,567

 
1,270,266

Property and equipment, net
57,902

 
57,096

Goodwill
1,575,567

 
1,378,553

Other intangible assets, net
219,564

 
157,625

Other long-term assets
53,226

 
35,972

Deferred income taxes
22,285

 
42,111

Total assets
$
3,056,111

 
$
2,941,623

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,767

 
$
6,042

Accrued bonuses and commissions
46,720

 
69,925

Accrued income taxes
5,911

 
5,760

Other accrued expenses and liabilities
83,169

 
86,335

Deferred revenue
272,872

 
440,491

Total current liabilities
415,439

 
608,553

Long-term liabilities:
 
 
 
Deferred income taxes
29,955

 
1,461

Other long-term liabilities
62,171

 
85,778

Total long-term liabilities
92,126

 
87,239

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
850,616

 
873,357

Retained earnings
2,766,259

 
2,316,916

Treasury stock, at cost: 9,213,790 and 9,044,498 shares, respectively
(1,008,370
)
 
(907,530
)
Accumulated other comprehensive loss
(60,891
)
 
(37,844
)
Total stockholders' equity
2,548,546

 
2,245,831

Total liabilities and stockholders' equity
$
3,056,111

 
$
2,941,623

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

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Table of Contents

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


Three Months Ended

Nine Months Ended
(in thousands, except per share data)
September 30,
2018

September 30,
2017

September 30,
2018

September 30,
2017
Revenue:







Software licenses
$
109,103


$
156,580


$
350,296


$
448,368

Maintenance and service
180,315


119,005


527,908


344,546

Total revenue
289,418


275,585


878,204


792,914

Cost of sales:







Software licenses
4,291


7,395


12,301


24,197

Amortization
5,530


9,004


23,403


26,892

Maintenance and service
26,487


19,584


80,092


58,263

Total cost of sales
36,308


35,983


115,796


109,352

Gross profit
253,110


239,602


762,408


683,562

Operating expenses:







Selling, general and administrative
97,576


80,015


280,443


230,483

Research and development
59,019


50,144


174,906


153,524

Amortization
3,491


3,260


10,421


9,506

Total operating expenses
160,086


133,419


465,770


393,513

Operating income
93,024


106,183


296,638


290,049

Interest income
3,213


1,910


7,674


4,827

Other expense, net
(974
)

(168
)

(2,289
)

(1,512
)
Income before income tax provision
95,263


107,925


302,023


293,364

Income tax provision
5,927


34,295


35,811


86,698

Net income
$
89,336


$
73,630


$
266,212


$
206,666

Earnings per share – basic:







Earnings per share
$
1.06


$
0.87


$
3.17


$
2.43

Weighted average shares
84,158


84,774


84,065


85,132

Earnings per share – diluted:







Earnings per share
$
1.04


$
0.85


$
3.09


$
2.38

Weighted average shares
86,043


86,588


86,060


86,902

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

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Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Net income
$
89,336

 
$
73,630

 
$
266,212

 
$
206,666

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(5,102
)
 
4,149

 
(23,047
)
 
18,225

Comprehensive income
$
84,234

 
$
77,779

 
$
243,165

 
$
224,891

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

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Table of Contents

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

 
Nine Months Ended
(in thousands)
September 30,
2018
 
September 30,
2017
Cash flows from operating activities:
 
 
 
Net income
$
266,212

 
$
206,666

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
47,341

 
49,939

Deferred income tax benefit
(28,175
)
 
(4,217
)
Provision for bad debts
1,389

 
1,382

Stock-based compensation expense
58,887

 
39,408

Other
2,039

 
241

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
32,356

 
17,899

Other receivables and current assets
23,207

 
60,754

Other long-term assets
2,458

 
4,495

Accounts payable, accrued expenses and current liabilities
(31,243
)
 
(22,362
)
Accrued income taxes
(2,581
)
 
(221
)
Deferred revenue
1,175

 
(35,502
)
Other long-term liabilities
(19,562
)
 
8,478

Net cash provided by operating activities
353,503

 
326,960

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(283,026
)
 
(25,998
)
Capital expenditures
(13,077
)
 
(14,815
)
Other investing activities
(5,510
)
 
(20,810
)
Net cash used in investing activities
(301,613
)
 
(61,623
)
Cash flows from financing activities:
 
 
 
Purchase of treasury stock
(192,787
)

(223,291
)
Restricted stock withholding taxes paid in lieu of issued shares
(26,955
)
 
(10,075
)
Proceeds from shares issued for stock-based compensation
37,398

 
47,992

Other financing activities
(4,939
)
 

Net cash used in financing activities
(187,283
)
 
(185,374
)
Effect of exchange rate fluctuations on cash and cash equivalents
(16,928
)
 
17,129

Net (decrease) increase in cash and cash equivalents
(152,321
)
 
97,092

Cash and cash equivalents, beginning of period
881,501

 
822,479

Cash and cash equivalents, end of period
$
729,180

 
$
919,571

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid
$
74,086

 
$
84,760

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

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Table of Contents

ANSYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(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 and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the accompanying 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 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, 2017. The condensed consolidated December 31, 2017 balance sheet presented is derived from the audited December 31, 2017 balance sheet included in the most recent Annual Report on 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. Certain items in the notes to the condensed consolidated financial statements of prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on reported net income, comprehensive income, cash flows, total assets or total liabilities and stockholders' equity. Operating results for the three and nine months ended September 30, 2018 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Summarized below is the accounting guidance adopted subsequent to December 31, 2017.
Revenue from contracts with customers: In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). The Company adopted ASU 2014-09 and its related amendments (collectively known as ASC 606) effective January 1, 2018 using the modified retrospective approach. See Note 3 for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition.
Income taxes: In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). The Company adopted ASU 2016-16 effective January 1, 2018 using the modified retrospective approach. Previous guidance required the tax effects from intra-entity asset transfers to be deferred until the asset was sold to a third party or recovered through use. ASU 2016-16 eliminated this deferral for all intra-entity asset transfers other than inventory. The adoption of the standard did not have a material effect on the Company’s condensed consolidated financial statements.
Business combinations: In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). The Company prospectively adopted ASU 2017-01 effective January 1, 2018. This standard narrows the definition of a business. If substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the acquiree is not a business. The standard also requires a business to include an input and a substantive process that significantly contributes to the

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ability to create outputs. This definition is expected to reduce the number of acquisitions accounted for as business combinations, which will impact the accounting treatment of certain items, including the accounting treatment of contingent consideration and transaction expenses.
Accounting Guidance Issued and Not Yet Adopted
Leases: In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires virtually all leases, other than leases that meet the definition of a short-term lease or leases of intangible assets, to be recorded on the balance sheet with a right-of-use asset and a corresponding lease liability. Leases will be classified as either operating or finance leases based on certain criteria. This classification will determine the timing and presentation of expenses on the income statement, as well as the presentation of related cash flows. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. A modified retrospective transition is required upon adoption. The Company plans to adopt ASU 2016-02 effective January 1, 2019 and continues to evaluate the effect that this update will have on its financial results upon adoption. The Company's preliminary assessment is that this update will materially increase the Company's assets and liabilities upon adoption. The Company has completed the inventory of its leases and policy elections, and expects that it will primarily have operating leases. The Company is currently implementing new processes and controls to meet the accounting and disclosure requirements under the new standard.
Credit losses: In June 2016, the FASB issued Accounting Standards Update 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 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 Accounting Standards Update 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:
 
September 30, 2018
 
December 31, 2017
(in thousands, except percentages)
Amount
 
% of Total
 
Amount
 
% of Total
Cash accounts
$
332,097

 
45.5
 
$
568,587

 
64.5
Money market funds
397,083

 
54.5
 
312,914

 
35.5
Total
$
729,180

 
 
 
$
881,501

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


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Table of Contents

3.
Revenue from Contracts with Customers
Adoption of ASC 606, Revenue from Contracts with Customers
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach for all contracts not completed as of the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition (ASC 605). The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s software licenses, maintenance and services. ASC 606 requires an entity to evaluate revenue recognition by identifying a contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the entity satisfies a performance obligation.
The Company recorded an increase to retained earnings of $242.4 million, or $183.1 million net of tax, on January 1, 2018 due to the cumulative effect of the ASC 606 adoption, with the impact primarily derived from revenue related to time-based software lease licenses.
Revenue Recognition
Revenue is derived principally from the licensing of computer software products and from related maintenance contracts. The Company enters into contracts that include combinations of products, maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Revenue from perpetual licenses is classified as software license revenue. Software license revenue is recognized up front upon delivery of the licensed product and the utility that enables the customer to access authorization keys, provided that a signed contract has been received. Typically, the Company’s perpetual licenses are sold with post-contract support (PCS), which includes unspecified technical enhancements and customer support. The Company allocates value in bundled perpetual and PCS arrangements based on the standalone selling prices of the perpetual license and PCS. Revenue from PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as the Company satisfies the PCS performance obligation over time.
In addition to perpetual licenses, the Company sells time-based lease licenses. Lease licenses are sold only as a bundled arrangement that includes the rights to a term software license and PCS. Maximizing the use of observable inputs, the Company determined that 50% of the estimated standalone selling price of the lease license is attributable to the term license and 50% is attributable to the PCS. Consistent with the perpetual sales, the license component is classified as software license revenue and recognized as revenue up front at the commencement of the lease. The PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as the Company provides the PCS benefit over time.
Revenue from training, support and other services is recognized as the services are performed. For contracts in which the service consists of a single performance obligation, such as providing a training class to a customer, the Company recognizes revenue upon completion of the performance obligation. For service contracts that are longer in duration and often include multiple performance obligations (for example, both training and consulting), the Company measures the progress toward completion of the obligations and recognizes revenue accordingly. In measuring progress towards the completion of performance obligations, the Company typically utilizes output-based estimates for services with contractual billing arrangements that are not based on time and materials, and estimates output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates are utilized for services that involve general consultations with contractual billing arrangements based on time and materials, utilizing direct labor as the input measure.
The Company also executes arrangements through independent channel partners in which the channel partners are authorized to market and distribute the Company's software products to end users of the Company's products and services in specified territories. In sales facilitated by channel partners, the channel partner bears the risk of collection from the end-user customer. The Company recognizes revenue from transactions with channel partners when the channel partner submits a purchase commitment, collectability from the channel partner is probable, a license agreement signed by the end-user customer is received and the performance obligation was met, at a point in time or over time as appropriate, provided that all other revenue recognition criteria are satisfied. Revenue from channel partner transactions is the amount remitted to the Company by the channel partners. This amount includes a fee for PCS that is compensation for providing technical enhancements and the second level of technical support to the end user, which is recognized over the period that PCS is to be provided. The Company does not offer right of return, product rotation or price protection to any of its channel partners.
Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the condensed consolidated balance sheet as accounts receivable and accrued expenses. The collection and payment of these amounts are reported on a net basis in the condensed consolidated statements of income and do not impact reported revenues or expenses.

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The Company warrants to its customers that its software will perform substantially as specified in the Company's current user manuals. The Company has not experienced significant claims related to software warranties beyond the scope of maintenance support, which the Company is already obligated to provide. The warranty is not sold, and cannot be purchased, separately. The warranty does not provide any type of additional service to the customer or performance obligation for the Company.
Significant Judgments
The Company’s contracts with customers typically include promises to transfer licenses and services to a customer. Judgment is required to determine if the promises are separate performance obligations, and if so, the allocation of the transaction price to each performance obligation. The Company uses the estimated standalone selling price method to allocate the transaction price for items that are not sold separately, particularly lease licenses sold with PCS. The estimated standalone selling price is determined using all information reasonably available to the Company, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied.
The Company applies a practical expedient to expense sales commissions as incurred when the amortization period would have been one year or less. Sales commissions associated with the initial year of multi-year contracts are expensed as incurred due to their immateriality. Sales commissions associated with multi-year contracts beyond the initial year are subject to an employee service requirement and are expensed as incurred as they are not considered incremental costs to obtain a contract.
The Company is required to adjust promised amounts of consideration for the effects of the time value of money if the timing of the payments provides the customer or the Company with a significant financing benefit. The Company considers various factors in assessing whether a financing component exists, including the duration of the contract, market interest rates and the timing of payments. The Company’s contracts do not include a significant financing component requiring adjustment to the transaction price.
Impact of ASC 606 on Condensed Consolidated Financial Statement Line Items
The following table compares the impacted assets and liabilities on the condensed consolidated balance sheet as of September 30, 2018 to the amounts had ASC 605 been in effect:
 
September 30, 2018
 
 
(in thousands)
As Reported (ASC 606)
 
ASC 605
 
Change
Accounts receivable, less allowance for doubtful accounts of $8,100
$
235,547

 
$
102,626

 
$
132,921

Other receivables and current assets
162,629

 
255,654

 
(93,025
)
Other long-term assets
53,226

 
38,670

 
14,556

Deferred income tax assets
22,285

 
61,123

 
(38,838
)
Accrued income taxes
5,911

 
5,853

 
58

Other accrued expenses and liabilities
83,169

 
84,836

 
(1,667
)
Deferred revenue - current
272,872

 
434,129

 
(161,257
)
Deferred income tax liabilities
29,955

 
22,535

 
7,420

Other long-term liabilities
62,171

 
73,008

 
(10,837
)
Stockholders' equity
$
2,548,546

 
$
2,366,649

 
$
181,897

The Company recorded $244.1 million of deferred revenue to retained earnings upon the adoption of ASC 606 on January 1, 2018. The pattern of software lease license revenue recognition has changed under ASC 606. Software lease license revenue was recognized ratably over the term of the contract under the previous guidance; however, approximately 50% of the contract is recognized up front at the commencement of the lease under ASC 606. This change in the pattern of revenue recognition, coupled with the recording of deferred revenue to retained earnings at the adoption date, resulted in the changes to the condensed consolidated balance sheet line items as noted in the table above.

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The following table compares the impacted amounts on the condensed consolidated statements of income for the three and nine months ended September 30, 2018 to the amounts had ASC 605 been in effect:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
(in thousands, except per share data)
As Reported (ASC 606)
 
ASC 605
 
Change
 
As Reported (ASC 606)
 
ASC 605
 
Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
109,103

 
$
166,606

 
$
(57,503
)
 
$
350,296

 
$
482,656

 
$
(132,360
)
Maintenance and service
180,315

 
135,350

 
44,965

 
527,908

 
397,895

 
130,013

Cost of sales:
 
 
 
 
 
 
 
 
 
 


Software licenses
4,291

 
8,488

 
(4,197
)
 
12,301

 
25,078

 
(12,777
)
Maintenance and service
26,487

 
22,290

 
4,197

 
80,092

 
67,315

 
12,777

Income tax provision
5,927

 
7,685

 
(1,758
)
 
35,811

 
36,089

 
(278
)
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.06

 
$
1.19

 
$
(0.13
)
 
$
3.17

 
$
3.19

 
$
(0.02
)
Diluted
$
1.04

 
$
1.16

 
$
(0.12
)
 
$
3.09

 
$
3.12

 
$
(0.03
)
The impacts to reported software licenses revenue, and maintenance and service revenue, were primarily due to the PCS portion of lease license contracts now being allocated to maintenance and service revenue under ASC 606. Under the previous guidance, this revenue was reported as software licenses revenue. This decrease to software licenses revenue was partially offset by the upfront recognition of the license component of lease revenue, which would have been recognized ratably over the contract under prior guidance. Consistent with the change in revenue, there was a corresponding reclassification within cost of sales. Costs incurred related to the PCS portion of lease license contracts are reflected in cost of maintenance and service. Under the previous guidance, such costs were reflected within cost of software licenses.
The adoption of ASC 606 had no impact on the Company’s cash flows from operations. However, with the adoption of ASC 606, there will be income tax payments associated with deferred revenue and backlog credited to retained earnings and never recognized as revenue in the financial statements. The 2018 tax payments related to the adoption of ASC 606 are expected to be $12.0 million - $15.0 million.
Disaggregation of Revenue
The following tables summarize revenue:
 
Three Months Ended September 30,
(in thousands)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
Revenue:
 
 
 
 
 
Lease licenses
$
43,202

 
$
106,461

 
$
93,956

Perpetual licenses
65,901

 
60,145

 
62,624

Software licenses
109,103

 
166,606

 
156,580

Maintenance
171,463

 
126,436

 
112,300

Service
8,852

 
8,914

 
6,705

Maintenance and service
180,315

 
135,350

 
119,005

Total revenue
$
289,418

 
$
301,956

 
$
275,585

The Company’s software licenses revenue is recognized up front, while maintenance and service revenue is generally recognized over the term of the contract. Under ASC 606, the Company derived 24.5% of its total revenue through the indirect sales channel for the three months ended September 30, 2018. Under ASC 605, the Company derived 23.5% and 24.1% of its total revenue through the indirect sales channel for the three months ended September 30, 2018 and 2017, respectively.

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Nine Months Ended September 30,
(in thousands)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
Revenue:
 
 
 
 
 
Lease licenses
$
148,795

 
$
308,699

 
$
279,855

Perpetual licenses
201,501

 
173,957

 
168,513

Software licenses
350,296

 
482,656

 
448,368

Maintenance
500,962

 
370,847

 
324,338

Service
26,946

 
27,048

 
20,208

Maintenance and service
527,908

 
397,895

 
344,546

Total revenue
$
878,204

 
$
880,551

 
$
792,914

Under ASC 606, the Company derived 23.9% of its total revenue through the indirect sales channel for the nine months ended September 30, 2018. Under ASC 605, the Company derived 23.5% and 24.3% of its total revenue through the indirect sales channel for the nine months ended September 30, 2018 and 2017, 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, are as follows:
(in thousands)
Nine Months Ended September 30, 2018
Beginning balance – January 1
$
299,730

Acquired deferred revenue
2,470

Recognition of deferred revenue
(878,204
)
Deferral of revenue
868,522

Currency translation
(6,065
)
Ending balance – September 30
$
286,453

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes 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 nine months ended September 30, 2018 reflected above of $878.2 million included amounts in deferred revenue and backlog at the beginning of the period of $334.4 million. Total revenue allocated to remaining performance obligations was $544.7 million as of September 30, 2018 and will be recognized as revenue as follows:
(in thousands)
 
Next 12 months
$
412,113

Months 13-24
97,182

Months 25-36
26,976

Thereafter
8,444

Total revenue allocated to remaining performance obligations
$
544,715



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4.
Acquisition
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 will extend 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 acquisition met the definition of a business under ASU 2017-01.
The operating results of OPTIS have been included in the Company's condensed consolidated financial statements since May 2, 2018, the date of acquisition.
The assets and liabilities of OPTIS have been recorded based upon management's estimates of their fair market values as of the acquisition date. The following tables summarize the fair value of consideration transferred and the fair values of identified assets acquired and liabilities assumed at the acquisition date:
Fair Value of Consideration Transferred:
(in thousands)
 
Cash
$
290,983

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
(in thousands)
 
Cash
$
7,957

Accounts receivable and other tangible assets
16,026

Developed software and core technologies (9 – 10 year life)
47,593

Customer lists (12 year life)
41,303

Trade names (4 – 10 year life)
10,749

Accounts payable and other liabilities
(13,396
)
Deferred revenue
(2,470
)
Net deferred tax liabilities
(21,576
)
Total identifiable net assets
$
86,186

Goodwill
$
204,797

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 acquisition of OPTIS.
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). During the period since the OPTIS acquisition date, the Company adjusted the fair values of the assets acquired and liabilities assumed, with the offset recorded as a $2.1 million increase to goodwill. These adjustments were based on refinements to assumptions used in the preliminary valuation of accounts receivable and other tangible assets, developed software and core technologies, accounts payable and other liabilities, and information about what was known and knowable as of the acquisition date in the calculation of the net deferred tax liabilities.
In valuing deferred revenue on the OPTIS balance sheet as of the acquisition date, the Company applied the fair value provisions applicable to the accounting for business combinations. Acquired deferred revenue with a historical carrying value of $14.2 million under ASC 606, and $22.3 million under ASC 605, was ascribed a fair value of $2.5 million on the opening balance sheet. 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 OPTIS absent the acquisition. Under ASC 606, the impacts on reported revenue for the three and nine months ended September 30, 2018 were $3.5 million and $6.2 million, respectively. The expected impacts on reported revenue are $2.5 million and $8.7 million for the quarter ending December 31, 2018 and for the year ending December 31, 2018, respectively. Under ASC 605, the impacts on reported revenue for the three and nine months ended September 30, 2018 were $5.9 million and $10.4 million, respectively. The expected impacts on reported revenue are $4.1 million and $14.5 million for the quarter ending December 31, 2018 and for the year ending December 31, 2018, respectively.

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Full pro forma results of operations have not been presented as the effects of the OPTIS business combination were not material to the Company's consolidated results of operations. The table presented below reflects the impact of OPTIS from the date of acquisition to September 30, 2018. The operating loss is derived from the OPTIS legal structure and does not include integration costs borne directly by ANSYS, Inc. and its non-OPTIS subsidiaries as a result of the acquisition.
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
(in thousands)
ASC 606
 
ASC 605
 
ASC 606
 
ASC 605
Revenue
$
6,021

 
$
3,803

 
$
9,187

 
$
5,873

Operating loss
$
(2,769
)
 
$
(4,987
)
 
$
(6,081
)
 
$
(9,395
)

5.
Receivables and Other Current Assets
The Company's receivables and other current assets comprise the following balances:
(in thousands)
September 30,
2018
 
December 31,
2017
Accounts receivable, less allowance for doubtful accounts of $8,100 and $6,800, respectively
$
235,547

 
$
124,659

 
 
 
 
Receivables related to unrecognized revenue
$
93,960

 
$
215,155

Income taxes receivable, including overpayments and refunds
32,444

 
21,663

Prepaid expenses and other current assets
36,225

 
27,002

Total other receivables and current assets
$
162,629

 
$
263,820

Receivables for unrecognized revenue represent the current portion of billings made for software maintenance that have not yet been recognized as revenue.
Upon the adoption of ASC 606 on January 1, 2018, the opening balances of accounts receivable and receivables related to unrecognized revenue were $278.8 million and $136.4 million, respectively.

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. 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
 
Nine Months Ended
(in thousands, except per share data)
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Net income
$
89,336

 
$
73,630

 
$
266,212

 
$
206,666

Weighted average shares outstanding – basic
84,158

 
84,774

 
84,065

 
85,132

Dilutive effect of stock plans
1,885

 
1,814

 
1,995

 
1,770

Weighted average shares outstanding – diluted
86,043

 
86,588

 
86,060

 
86,902

Basic earnings per share
$
1.06

 
$
0.87

 
$
3.17

 
$
2.43

Diluted earnings per share
$
1.04

 
$
0.85

 
$
3.09

 
$
2.38

Anti-dilutive shares

 
27

 

 
112



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7.
Goodwill and Intangible Assets
The Company's intangible assets and estimated useful lives are classified as follows:
 
September 30, 2018
 
December 31, 2017
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Developed software and core technologies (3 – 11 years)
$
411,406

 
$
(311,938
)
 
$
365,317

 
$
(297,645
)
Customer lists and contract backlog (5 – 15 years)
209,172

 
(113,881
)
 
171,048

 
(104,522
)
Trade names (2 – 10 years)
137,402

 
(112,954
)
 
127,200

 
(104,130
)
Total
$
757,980

 
$
(538,773
)
 
$
663,565

 
$
(506,297
)
Indefinite-lived intangible asset:
 
 
 
 
 
 
 
Trade name
$
357

 
 
 
$
357

 
 
Amortization expense for the intangible assets reflected above was $9.0 million and $12.3 million for the three months ended September 30, 2018 and 2017, respectively. Amortization expense for the intangible assets reflected above was $33.8 million and $36.4 million for the nine months ended September 30, 2018 and 2017, respectively.
As of September 30, 2018, estimated future amortization expense for the intangible assets reflected above is as follows:
(in thousands)
 
Remainder of 2018
$
7,142

2019
31,618

2020
32,823

2021
30,029

2022
26,342

2023
23,429

Thereafter
67,824

Total intangible assets subject to amortization
219,207

Indefinite-lived trade name
357

Other intangible assets, net
$
219,564

The changes in goodwill during the nine months ended September 30, 2018 and 2017 were as follows:
(in thousands)
2018
 
2017
Beginning balance – January 1
$
1,378,553

 
$
1,337,215

Acquisitions and adjustments(1)
204,271

 
11,719

Currency translation
(7,257
)
 
4,510

Ending balance – September 30
$
1,575,567

 
$
1,353,444

(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 2018, 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, 2018. No other events or circumstances changed during the nine months ended September 30, 2018 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.
A financial asset's or liability's classification 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)
September 30,
2018
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
397,083

 
$
397,083

 
$

 
$

Short-term investments
$
211

 
$

 
$
211

 
$

Deferred compensation plan investments
$
1,840

 
$
1,840

 
$

 
$

 
 
 
Fair Value Measurements at Reporting Date Using:
(in thousands)
December 31, 2017
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
312,914

 
$
312,914

 
$

 
$

Short-term investments
$
286

 
$

 
$
286

 
$

Deferred compensation plan investments
$
3,742

 
$
3,742

 
$

 
$

The cash equivalents in the preceding tables represent money market funds.
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 maturity dates 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.
The carrying values of cash, accounts receivable, accounts payable, accrued expenses, other accrued liabilities and short-term obligations approximate their fair values because of their short-term nature.


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Table of Contents

9.
Income Taxes
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Reform), making broad and complex changes to the U.S. tax code. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of Tax Reform and allows for provisional adjustments recorded in the December 31, 2017 financial statements to be adjusted as calculations are completed during the measurement period. SAB 118 provides a measurement period that should not extend beyond one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. As further discussed below, in accordance with SAB 118, the Company was able to complete final or provisional calculations for certain elements of Tax Reform, and the amounts and estimates are included in the financial statements and have been updated as additional information was gathered. For other elements, the Company was not yet able to make reasonable estimates, and therefore, those elements have not been recorded and are accounted for in accordance with ASC 740 on the basis of the tax laws in effect before Tax Reform.
The Company’s accounting for the transition tax is incomplete. However, reasonable estimates of certain effects could be calculated, and a provisional adjustment of $16.0 million was recorded in the December 31, 2017 financial statements. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on revised E&P calculations updated during the measurement period, the Company recognized an additional measurement-period adjustment of $0.9 million to the transition tax obligation and a corresponding adjustment to tax expense, resulting in a total transition tax obligation of $16.9 million. The Company plans to elect to pay this liability over eight years; however, in accordance with IRS issued guidance, tax overpayments from the year ended December 31, 2017 are required to be applied to the transition tax obligation. Based on this guidance, $15.7 million of the obligation has been paid, with the remaining $1.2 million recorded in other long-term liabilities at September 30, 2018. The Company will continue to gather additional information to more precisely compute the final amount as further adjustments to E&P are determined. The Company expects to complete the accounting within the prescribed measurement period.
The Company’s accounting for the indefinite reinvestment assertion is incomplete. However, a reasonable estimate of book and tax basis was calculated, and the Company made a provisional assertion. In general, it is the practice and intention of the Company to repatriate previously taxed earnings and to reinvest all other earnings of its non-U.S. subsidiaries. As part of Tax Reform, the Company incurred U.S. tax on substantially all of the earnings of its non-U.S. subsidiaries as part of the transition tax. This tax increased the Company’s previously taxed earnings and allows for the repatriation of the majority of its foreign earnings without any residual U.S. federal tax. The Company does not believe that there is an excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries. Accordingly, any repatriation in excess of previously taxed earnings will be a non-taxable return of basis. This assertion is subject to change as additional information is gathered to precisely compute the book and tax bases of the Company’s non-U.S. subsidiaries. During the quarter ended June 30, 2018, the Company repatriated $144.3 million of foreign cash. The Company has not made any measurement-period adjustments related to its indefinite reinvestment assertion during the nine months ended September 30, 2018. However, the Company will continue to gather additional information and expects to complete the accounting within the measurement period.
The Company’s accounting for the global intangible low-taxed income tax (GILTI) is incomplete. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of Tax Reform and its application under ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the period cost method) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the deferred method). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing global income to determine whether future U.S. inclusions in taxable income related to GILTI are expected and, if so, the anticipated impact. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends not only on the current structure and estimated future results of global operations, but also on the Company’s intent and ability to modify the structure and/or the business. The Company has not made the accounting policy decision regarding whether to record deferred taxes on GILTI or expense taxes as incurred on GILTI. The current GILTI impact, which was immaterial for the three and nine months ended September 30, 2018, was recorded in the financial statements. The Company expects to complete the accounting for GILTI within the prescribed measurement period.
Other Income Tax Matters
The Company has $30.2 million of unrecognized tax benefits, including estimated interest and penalties, that have been recorded in other long-term liabilities in accordance with income tax accounting guidance and for which the Company is uncertain as to if or when such amounts may be settled.


17

Table of Contents

10.
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 September 30,
(in thousands)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
United States
$
106,229

 
$
121,131

 
$
105,480

Japan
36,309

 
33,331

 
30,779

Germany
27,831

 
30,728

 
28,395

China
14,568

 
14,703

 
14,043

France
14,035

 
15,116

 
13,438

South Korea
12,943

 
14,068

 
15,292

Other Europe, Middle East and Africa (EMEA)
45,602

 
43,066

 
40,887

Other international
31,901

 
29,813

 
27,271

Total revenue
$
289,418

 
$
301,956

 
$
275,585

 
Nine Months Ended September 30,
(in thousands)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
United States
$
327,784

 
$
345,886

 
$
305,661

Japan
109,050

 
101,789

 
94,612

Germany
97,262

 
92,262

 
79,160

South Korea
45,468

 
46,305

 
45,633

France
44,638

 
45,511

 
37,997

China
38,616

 
37,870

 
35,429

Other EMEA
136,719

 
132,482

 
116,844

Other international
78,667

 
78,446

 
77,578

Total revenue
$
878,204

 
$
880,551

 
$
792,914


Property and equipment by geographic area is as follows:
(in thousands)
September 30,
2018
 
December 31,
2017
United States
$
44,117

 
$
45,498

India
3,708

 
3,704

EMEA
6,326

 
5,114

Other international
3,751

 
2,780

Total property and equipment, net
$
57,902

 
$
57,096



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Table of Contents

11.
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

Nine Months Ended
(in thousands, except per share data)
September 30,
2018

September 30,
2017

September 30,
2018

September 30,
2017
Cost of sales:







Software licenses
$


$
140


$


$
711

Maintenance and service
1,438


739


3,880


1,894

Operating expenses:




 


Selling, general and administrative
13,484


8,782


33,288


23,310

Research and development
8,061


5,112


21,719


13,493

Stock-based compensation expense before taxes
22,983


14,773


58,887


39,408

Related income tax benefits
(8,611
)

(6,080
)

(30,311
)

(23,980
)
Stock-based compensation expense, net of taxes
$
14,372


$
8,693


$
28,576


$
15,428

Net impact on earnings per share:




 


Basic earnings per share
$
(0.17
)

$
(0.10
)

$
(0.34
)

$
(0.18
)
Diluted earnings per share
$
(0.17
)

$
(0.10
)

$
(0.33
)

$
(0.18
)

12.
Stock Repurchase Program
Under the Company's stock repurchase program, the Company repurchased shares as follows:
 
Nine Months Ended
(in thousands, except per share data)
September 30,
2018
 
September 30,
2017
Number of shares repurchased
1,174

 
2,000

Average price paid per share
$
164.14

 
$
111.65

Total cost
$
192,787

 
$
223,291

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 September 30, 2018, 4.3 million shares remained available for repurchase under the program.

13.
Restructuring
During the fourth quarter of 2016, the Company initiated workforce realignment activities to reallocate resources to align with the Company's future strategic plans. The Company completed the workforce realignment activities as of September 30, 2017. The Company incurred related restructuring charges as follows:
(in thousands)
Gross
 
Net of Tax
Q4 2016
$
3,419

 
$
2,355

Q1 2017
9,273

 
6,176

Q2 2017
2,000

 
1,435

Q3 2017
466

 
331

Total restructuring charges
$
15,158

 
$
10,297

The restructuring charges are included in the presentation of cost of software licenses; cost of maintenance and service; research and development expense; and selling, general and administrative expense. The gross charges were fully paid as of March 31, 2018.


19

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 $6.8 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 Microsoft case ruling was subsequently challenged in the Supreme Court by the Indian tax authority. The Company can provide no assurances 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 September 30, 2018. 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.


20

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 September 30, 2018, the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods then ended and of cash flows for the nine-month period then ended, 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, 2017, 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 22, 2018, 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, 2017, 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
November 8, 2018




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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview:
Overall GAAP Results
The Company's growth rates of GAAP results for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 were as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Under ASC 605
 
Impact of ASC 606 Adoption
 
Total
 
Under ASC 605
 
Impact of ASC 606 Adoption
 
Total
Revenue
9.6
 %
 
(4.6
)%
 
5.0
 %
 
11.1
%
 
(0.3
)%
 
10.8
%
Operating income
(0.6
)%
 
(11.8
)%
 
(12.4
)%
 
3.1
%
 
(0.8
)%
 
2.3
%
Diluted earnings per share
36.5
 %
 
(14.1
)%
 
22.4
 %
 
31.1
%
 
(1.3
)%
 
29.8
%
Under ASC 605, the Company experienced higher revenue during the nine months ended September 30, 2018 across all classes of revenue, including license revenue, maintenance and services. The Company also experienced increased operating expenses primarily due to increased personnel costs, higher stock-based compensation and OPTIS expenses for the period from the acquisition date (May 2, 2018) through September 30, 2018. These increases were partially offset by restructuring in 2017 that did not reoccur in 2018.
Overall Non-GAAP Results
The Company's growth rates of non-GAAP results for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 were as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Under ASC 605
 
Impact of ASC 606 Adoption
 
Total
 
Under ASC 605
 
Impact of ASC 606 Adoption
 
Total
Revenue
11.3
%
 
(5.4
)%
 
5.9
 %
 
12.2
%
 
(0.8
)%
 
11.4
%
Operating income
6.7
%
 
(11.1
)%
 
(4.4
)%
 
7.7
%
 
(1.8
)%
 
5.9
%
Diluted earnings per share
39.0
%
 
(14.2
)%
 
24.8
 %
 
33.3
%
 
(2.0
)%
 
31.3
%
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, restructuring charges, transaction costs related to business combinations, and the impact of the enactment of 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 OPTIS
On May 2, 2018, the Company completed the acquisition of OPTIS. The tables presented below reflect the impact of OPTIS from the date of acquisition to September 30, 2018. The operating (loss) income is derived from the OPTIS legal structure and does not include integration costs borne directly by ANSYS, Inc. and its non-OPTIS subsidiaries as a result of the acquisition.
 
Three Months Ended September 30, 2018
 
ASC 606
 
ASC 605
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
6,021

 
$
9,509

 
$
3,803

 
$
9,663

Operating (loss) income
$
(2,769
)
 
$
1,401

 
$
(4,987
)
 
$
1,555

 
Nine Months Ended September 30, 2018
 
ASC 606
 
ASC 605
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
9,187

 
$
15,430

 
$
5,873

 
$
16,266

Operating (loss) income
$
(6,081
)
 
$
1,312

 
$
(9,395
)
 
$
2,148



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Table of Contents

Impact of Foreign Currency
The Company's comparative financial results were impacted by fluctuations in the U.S. Dollar during the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017. The impacts on the Company's revenue and operating income due to currency fluctuations are reflected in the tables below.
 
Three Months Ended September 30, 2018
 
ASC 606
 
ASC 605
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
(2,124
)
 
$
(2,142
)
 
$
(1,811
)
 
$
(1,843
)
Operating income
$
(759
)
 
$
(804
)
 
$
(918
)
 
$
(485
)
 
Nine Months Ended September 30, 2018
 
ASC 606
 
ASC 605
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
20,135

 
$
20,199

 
$
19,125

 
$
19,231

Operating income
$
11,647

 
$
11,979

 
$
10,646

 
$
11,028

Using ASC 606 and ASC 605 results for the three and nine months ended September 30, 2018 and 2017, respectively, the Company's constant currency(1) growth rates were as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
5.8
 %
 
6.6
 %
 
8.2
 %
 
8.8
%
Operating income
(11.7
)%
 
(3.8
)%
 
(1.7
)%
 
2.7
%
In constant currency, the Company's growth rates under ASC 605 were as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
10.2
%
 
11.9
%
 
8.6
 %
 
9.8
%
Operating income
0.3
%
 
7.0
%
 
(0.6
)%
 
4.8
%
(1) Constant currency amounts exclude the effect of foreign currency fluctuations on the reported results. To present this information, the 2018 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 2017, rather than the actual exchange rates in effect for 2018.
Other Financial Information
The Company’s financial position includes $729.4 million in cash and short-term investments, and working capital of $712.1 million as of September 30, 2018.
During the nine months ended September 30, 2018, the Company repurchased 1.2 million shares for $192.8 million at an average price of $164.14 per share.
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 3,300 people as of September 30, 2018. 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

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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:
Compared to the ASC 605 revenue for the three and nine months ended September 30, 2017, the Company's geographic constant currency revenue growth during the three and nine months ended September 30, 2018 was as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
ASC 606
 
ASC 605
 
ASC 606
 
ASC 605
Americas
1.2
%
 
14.0
%
 
6.1
%
 
11.7
%
EMEA
7.0
%
 
8.6
%
 
11.8
%
 
8.8
%
Asia-Pacific
11.0
%
 
6.6
%
 
7.6
%
 
4.2
%
Total
5.8
%
 
10.2
%
 
8.2
%
 
8.6
%
Due to the change in revenue recognition under ASC 606, the ASC 606 growth rates presented above, which compare the 2018 results under ASC 606 to the 2017 results under ASC 605, are less representative of the underlying operations of each region than those presented under ASC 605.
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:
Consistent with the first half of 2018, the automotive industry remained strong due to continued investments in autonomous vehicles and electrification. Investments in smart, connected products and 5G by companies around the globe bolstered the high-tech industry in the third quarter. The industrial equipment industry saw growth as companies continued to focus on the use of simulation in maintenance, repair and overhaul projects. Aerospace and defense had strong performance due to increased defense spending in both the United States and Europe.
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 nine months ended September 30, 2018, and with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2017 filed on the Annual Report on Form 10-K 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, 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:

24

Table of Contents

The Company's assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings.
The Company's expectations regarding the outcome of its service tax audit cases.
The Company's expectations regarding future claims related to indemnification obligations.
The Company's expectations regarding the impacts of new accounting guidance.
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 the adverse impact on license and maintenance revenue growth in the near term, as well as increased lease license volatility, due to an increased customer preference for time-based licenses.
The Company's estimates regarding the expected impact on reported revenue related to the acquisition accounting treatment of deferred revenue.
The Company's expectation that it will continue to make targeted investments in its global sales and marketing organization 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 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 the impacts of the Tax Cuts and Jobs Act.
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 most recent Annual Report on Form 10-K, Part I, Item 1A. Information regarding new risk factors or material changes to these risk factors have been included within Part II, Item 1A of this Quarterly Report on Form 10-Q.

25

Table of Contents

Results of Operations
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Revenue:
 
Three Months Ended September 30,
 
Change
(in thousands, except percentages)
2018
(ASC 606)
 
2017
(ASC 605)
 
Amount
 
%
 
Constant Currency %
Revenue:
 
 
 
 
 
 
 
 
 
Lease licenses
$
43,202

 
$
93,956

 
$
(50,754
)
 
(54.0
)
 
(53.4
)
Perpetual licenses
65,901

 
62,624

 
3,277

 
5.2

 
6.2

Software licenses
109,103

 
156,580

 
(47,477
)
 
(30.3
)
 
(29.6
)
Maintenance
171,463

 
112,300

 
59,163

 
52.7

 
53.5

Service
8,852

 
6,705

 
2,147

 
32.0

 
32.6

Maintenance and service
180,315

 
119,005

 
61,310

 
51.5

 
52.3

Total revenue
$
289,418

 
$
275,585

 
$
13,833

 
5.0

 
5.8

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach for all contracts not completed as of the date of adoption. The adoption of ASC 606 significantly impacted the timing, allocation and presentation of lease license, perpetual license and maintenance revenue. Among the most significant changes is the PCS portion of lease license contracts now being allocated to maintenance revenue. Under the previous guidance, this revenue was reported as lease licenses revenue. This decrease to lease licenses revenue was partially offset by the upfront recognition of the license component of lease revenue, which would have been recognized ratably over the contract under the prior guidance. For further information on the impact of this adoption on the Company's results, see Note 3 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
For purposes of comparability, the changes in the following table and the related discussion that follows are presented in accordance with ASC 605.
 
Three Months Ended September 30,
 
Change
(in thousands, except percentages)
2018
(ASC 605)
 
2017
(ASC 605)
 
Amount
 
%
 
Constant Currency %
Revenue:
 
 
 
 
 
 
 
 
 
Lease licenses
$
106,461

 
$
93,956

 
$
12,505

 
13.3

 
13.8

Perpetual licenses
60,145

 
62,624

 
(2,479
)
 
(4.0
)
 
(3.1
)
Software licenses
166,606

 
156,580

 
10,026

 
6.4

 
7.1

Maintenance
126,436

 
112,300

 
14,136

 
12.6

 
13.3

Service
8,914

 
6,705

 
2,209

 
32.9

 
33.6

Maintenance and service
135,350

 
119,005

 
16,345

 
13.7

 
14.4

Total revenue
$
301,956

 
$
275,585

 
$
26,371

 
9.6

 
10.2

The Company’s ASC 605 revenue in the quarter ended September 30, 2018 increased 9.6% as compared to the quarter ended September 30, 2017, while revenue grew 10.2% 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 May 2, 2018 acquisition of OPTIS. Lease license revenue increased 13.3%, or 13.8% in constant currency, as compared to the prior-year quarter. Annual maintenance contracts that were sold with new perpetual licenses, along with maintenance contracts for new perpetual licenses sold in previous quarters, contributed to maintenance revenue growth of 12.6%, or 13.3% 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 32.9%, or 33.6% in constant currency, as compared to the prior-year quarter. Perpetual license revenue, which is derived primarily from new sales during the quarter, decreased 4.0%, or 3.1% in constant currency, as compared to the prior-year quarter.

26

Table of Contents

With respect to revenue, on average for the quarter ended September 30, 2018, the U.S. Dollar was approximately 1.4% stronger and 1.3% stronger, when measured against the Company’s primary foreign currencies, than for the quarter ended September 30, 2017 under ASC 606 and ASC 605, respectively. The table below presents the impacts of currency fluctuations on revenue for the quarter ended September 30, 2018. Amounts in brackets indicate an adverse impact from currency fluctuations.
 
Three Months Ended September 30, 2018
(in thousands)
ASC 606
 
ASC 605
Euro
$
(875
)
 
$
(882
)
Indian Rupee
(809
)
 
(634
)
Japanese Yen
(198
)
 
(174
)
British Pound
(120
)
 
(45
)
Other
(122
)
 
(76
)
Total
$
(2,124
)
 
$
(1,811
)
The net overall stronger U.S. Dollar also resulted in decreased operating income of $0.8 million and $0.9 million for the quarter ended September 30, 2018 as compared to the quarter ended September 30, 2017 under ASC 606 and ASC 605, respectively.
A substantial portion of the Company's lease license and maintenance revenue is derived from annual lease and maintenance contracts. These contracts are generally renewed on an annual basis and have a high rate of customer renewal. In addition to the recurring revenue base associated with these contracts, a majority of customers purchasing new perpetual licenses also purchase related annual maintenance contracts. As a result of the significant recurring revenue base, the Company's lease license and maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new licenses sold during that period under ASC 605. The same is true for maintenance revenue growth under ASC 606. However, under ASC 606, lease license revenue is entirely attributed to license sales completed during the period, resulting in a higher correlation of lease license revenue growth to the growth rate of new lease license sales than that under ASC 605. To the extent the rate of customer renewal for lease and maintenance contracts is high, incremental lease contracts, and maintenance contracts sold with new perpetual licenses, will result in lease license and maintenance growth in constant currency. Conversely, if the rate of renewal for these contracts is adversely affected by economic or other factors, the Company's lease license and maintenance growth will be adversely affected.
The Company has been experiencing an 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 revenue from these contracts is typically deferred and recognized over the period of the contract under ASC 605, resulting in increased deferred revenue and backlog. To the extent these types of contracts replace sales of perpetual licenses, there could be a near-term adverse impact on software license and maintenance revenue growth. Under ASC 606, 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, particularly in the more mature geographic markets, such as the U.S. and Japan. To the extent this shift continues or becomes more prevalent, the result could be a similar and incremental near-term adverse impact on software license and maintenance revenue growth under ASC 605, as well as an adverse impact on maintenance revenue growth and increased lease license volatility under ASC 606.
As a percentage of revenue, the Company's international and domestic revenues, and the Company's direct and indirect revenues, are as follows:
 
Three Months Ended September 30,
 
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
International
63.3
%
 
59.9
%
 
61.7
%
Domestic
36.7
%
 
40.1
%
 
38.3
%
 

 

 

Direct revenue
75.5
%
 
76.5
%
 
75.9
%
Indirect revenue
24.5
%
 
23.5
%
 
24.1
%

27

Table of Contents

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. Under ASC 606, the impacts on reported revenue were $3.5 million for the quarter ended September 30, 2018. The expected impacts on reported revenue are $2.5 million and $9.4 million for the quarter ending December 31, 2018 and for the year ending December 31, 2018, respectively. Under ASC 605, the impacts on revenue were $6.0 million and $1.2 million for the quarters ended September 30, 2018 and 2017, respectively. The expected impacts on revenue are $4.2 million and $15.6 million for the quarter ending December 31, 2018 and for the year ending December 31, 2018, respectively.
Deferred Revenue and Backlog:
Deferred revenue consists of billings made or payments received in advance of revenue recognition from software license and maintenance agreements. The deferred revenue on the Company's condensed consolidated balance sheets does not represent the total value of annual or multi-year noncancellable software license and maintenance 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 September 30, 2018 and December 31, 2017 consist of the following:
ASC 606
Balance at September 30, 2018
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
286,453

 
$
272,872

 
$
13,581

Backlog
258,262

 
139,241

 
119,021

Total
$
544,715

 
$
412,113

 
$
132,602

ASC 605
Balance at September 30, 2018
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
458,547

 
$
434,129

 
$
24,418

Backlog
303,013

 
133,673

 
169,340

Total
$
761,560

 
$
567,802

 
$
193,758

ASC 605
Balance at December 31, 2017
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
468,560

 
$
440,491

 
$
28,069

Backlog
301,150

 
97,283

 
203,867

Total
$
769,710

 
$
537,774

 
$
231,936

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

28

Table of Contents

Cost of Sales and Gross Profit:
The table below reflects the Company's operating results as presented on the condensed consolidated statements of income, which are inclusive of foreign currency translation impacts. The adoption of ASC 606 resulted in a reclassification of expenses within cost of sales from software licenses to maintenance and service. Amounts included in the discussion that follows are provided in constant currency and do not include the impact of the OPTIS acquisition. The impact of the OPTIS acquisition on each expense line is provided separately, where material. The impact, where material, of foreign exchange translation on each expense line is also provided separately and is inclusive of the OPTIS acquisition.
 
Three Months Ended September 30,
 
 
 
 
2018
 
2017
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
4,291

 
1.5
 
$
7,395

 
2.7
 
$
(3,104
)
 
(42.0
)
Amortization
5,530

 
1.9
 
9,004

 
3.3
 
(3,474
)
 
(38.6
)
Maintenance and service
26,487

 
9.2
 
19,584

 
7.1
 
6,903

 
35.2

Total cost of sales
36,308

 
12.5
 
35,983

 
13.1
 
325

 
0.9

Gross profit
$
253,110

 
87.5
 
$
239,602

 
86.9
 
$
13,508

 
5.6

Software Licenses: The decrease in the cost of software licenses was primarily due to the following:
Reclassification of $4.2 million of cost of sales, previously reflected within software licenses, to maintenance and service due to the adoption of ASC 606 in 2018.
OPTIS-related software license expenses of $0.4 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 have become fully amortized.
Maintenance and Service: The increase in maintenance and service costs was primarily due to the following:
Reclassification of $4.2 million of cost of sales, previously reflected within software licenses, to maintenance and service due to the adoption of ASC 606 in 2018.
Increased third-party technical support of $1.1 million.
OPTIS-related maintenance and service expenses of $1.1 million.
The improvement in gross profit was a result of the increase in revenue, partially offset by the increase in the related cost of sales.
Operating Expenses:
The table below reflects the Company's operating results as presented on the condensed consolidated statements of income, which are inclusive of foreign currency translation impacts. The adoption of ASC 606 did not impact operating expenses. Amounts included in the discussion that follows are provided in constant currency and do not include the impact of the OPTIS acquisition. The impact of the OPTIS acquisition on each expense line is provided separately, where material. The impact, where material, of foreign exchange translation on each expense line is also provided separately and is inclusive of the OPTIS acquisition.
 
Three Months Ended September 30,
 
 
 
 
2018
 
2017
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
97,576

 
33.7