UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: 0-20853
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of Principal Executive Offices) | (Zip Code) | ||||
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
(Nasdaq Global Select Market) | ||||
Securities registered pursuant to section 12(g) of the Act: | ||||
None | ||||
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ☒
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 ☒ No ¨
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 ☒ No ¨
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.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price per share of the registrant's common stock on June 28, 2019, as reported on the Nasdaq Global Select Market, was $14,436,000,000 .
The number of shares of the registrant's common stock, par value $0.01 per share, outstanding as of February 20, 2020 was 85,914,375 shares.
Documents Incorporated By Reference:
Portions of the Proxy Statement for the registrant's 2020 Annual Meeting of Stockholders are incorporated by reference into Part III.
ANSYS, Inc.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2019
Table of Contents
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
Item 16. | ||
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Important Factors Regarding Future Results
Information provided by us in this Annual Report on Form 10-K may contain forward-looking statements concerning such matters as projected financial performance, market and industry segment growth, product development and commercialization, acquisitions or other aspects of future operations. Such statements, made pursuant to the safe harbor established by the securities laws, are based on the assumptions and expectations of management at the time such statements are made. We caution investors that our performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors including, but not limited to, those discussed in Item 1A. Risk Factors, may cause our future results to differ materially from those projected in any forward-looking statement. All information presented is as of December 31, 2019, unless otherwise indicated.
Note About Forward-Looking Statements
The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Our discussion and analysis of our financial condition and results of operations in Part II, Item 7 of this Annual Report on Form 10-K are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us 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, we evaluate our estimates, including those related to fair values of stock awards, bad debts, contract revenue, acquired deferred revenue, the standalone selling prices of our 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. We base our estimates on historical experience, market experience, estimated future cash flows and various other assumptions that management believes are 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 apparent from other sources. Actual results may differ from these estimates.
This Annual Report on Form 10-K 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:
• | Our intentions regarding our hybrid sales and distribution model. |
• | Our intentions related to investments in research and development, particularly as it relates to expanding the ease of use and capabilities of our broad portfolio of simulation software products. |
• | Our expectations regarding the accelerated development of new and innovative products to the marketplace while lowering design and engineering costs for customers as a result of our acquisitions. |
• | Our statements regarding the impact of global economic conditions. |
• | Our expectations regarding the outcome of our service tax audit cases. |
• | Our belief that, in most geographical locations, our facilities allow for sufficient space to support present and future foreseeable needs, including such expansion and growth as the business may require. |
• | Our expectation that we can renew existing facility leases as they expire or find alternative facilities without difficulty, as needed. |
• | Our assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings. |
• | Our statements regarding the strength of the features, functionality and integrated multiphysics capabilities of our software products. |
• | Our belief that our overall performance is best measured by fiscal-year results rather than by quarterly results. |
• | Our estimates regarding the expected impact on reported revenue related to the acquisition accounting treatment of deferred revenue. |
• | Our expectation that we will continue to make targeted investments in our global sales and marketing organizations and our global business infrastructure to enhance and support our revenue-generating activities. |
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• | Our intention to repatriate previously taxed earnings in excess of working capital needs and to reinvest all other earnings of our non-U.S. subsidiaries. |
• | Our plans related to future capital spending. |
• | The sufficiency of existing cash and cash equivalent balances to meet future working capital and capital expenditure requirements. |
• | Our belief that the best uses of our excess cash are to invest in the business, make payments on outstanding debt balances and repurchase stock in order to both offset dilution and return capital, in excess of our requirements, to stockholders with the goal of increasing stockholder value. |
• | Our intentions related to investments in complementary companies, products, services and technologies. |
• | Our expectation that changes in currency exchange rates will affect our financial position, results of operations and cash flows. |
• | Our expectations regarding future claims related to indemnification obligations. |
• | Our estimates regarding future stock-based compensation. |
• | Our expectations regarding the impacts of new accounting guidance. |
• | Our assessment of our ability to realize deferred tax assets. |
• | Our performance expectations related to our partnerships and strategic alliances. |
• | Our expectations regarding acquisitions and integrating such acquired companies to realize the benefits of cost reductions and other synergies relating thereto. |
• | Our statements regarding market opportunity, including the size and growth of addressable markets. |
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 our control. Our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in Item 1A. Risk Factors.
PART I
ITEM 1. | BUSINESS |
ANSYS, Inc. (Ansys, we, us, our), a Delaware corporation formed in 1994, 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, we employed approximately 4,100 people as of December 31, 2019. We focus 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. We distribute our suite of simulation technologies through a global network of independent resellers and distributors (collectively, channel partners) and direct sales offices in strategic, global locations. It is our intention to continue to maintain this hybrid sales and distribution model. We operate and report as one segment.
Our product portfolio consists of the following:
Platform
Ansys Workbench™ is the framework upon which our suite of advanced engineering simulation technologies is built. The innovative project schematic view ties together the entire simulation process, guiding the user through complex multiphysics analyses with drag-and-drop simplicity. With bi-directional computer-aided design (CAD) connectivity, powerful highly-automated meshing, a project-level update mechanism, pervasive parameter management and integrated optimization tools, the Ansys Workbench platform enables Pervasive Engineering Simulation™.
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Our Workbench framework allows engineers and designers to incorporate the compounding effects of multiple physics into a virtual prototype of their design and simulate its operation under real-world conditions. As product architectures become smaller, lighter and more complex, companies must be able to accurately predict how products will behave in real-world environments where multiple types of physics interact in a coupled way. Our multiphysics software enables engineers to simulate the interactions between structures, heat transfer, fluids and electronics all within a single, unified engineering simulation environment.
Ansys Workbench enables companies to create a customized simulation environment to deploy specialized simulation best practices and automations unique to their product development process or industry. With Ansys ACT™, our partners and end users can modify the user interface, process simulation data or embed third-party applications to create specialized tools based on Ansys Workbench.
Our high-performance computing (HPC) product suite enables enhanced insight into product performance and improves the productivity of the design process. The HPC product suite delivers cross-physics parallel processing capabilities for the full spectrum of our simulation software by supporting structures, fluids, thermal and electronics simulations. This product suite decreases turnaround time for individual simulations, allowing users to consider multiple design ideas and make the right design decisions early in the design cycle.
Refer to the section titled "New Product Offerings" for solutions added to our platform offerings in 2019.
Structures
Our structural analysis product suite offers simulation tools for product design and optimization that increase productivity, minimize physical prototyping and help to deliver better and more innovative products in less time. These tools tackle real-world analysis problems by making product development less costly and more reliable. In addition, these tools have capabilities that cover a broad range of analysis types, elements, contacts, materials, equation solvers and coupled physics capabilities, all targeted toward understanding and solving complex design problems. We also provide comprehensive topology optimization tools that engineers use to design structural components to meet loading requirements with minimal material and component weight. We offer a complete simulation workflow for additive manufacturing that allows reliable 3D printing by simulating the laser sintering process and delivering compensated CAD geometries that ensure reliable printed parts.
Fluids
Our fluids product suite enables modeling of fluid flow and other related physical phenomena. Fluid flow analysis capabilities provide all the tools needed to design and optimize new fluids equipment and to troubleshoot already existing installations. The suite contains general-purpose computational fluid dynamics software and specialized products to address specific industry applications.
Electromagnetics
Our electromagnetics product suite provides field simulation software for designing high-performance electronic and electromechanical products. The software streamlines the design process and predicts performance of mobile communication and internet-access devices, broadband networking components and systems, integrated circuits (ICs) and printed circuit boards (PCBs), as well as electromechanical systems such as automotive components and power electronics equipment, all prior to building a prototype.
Semiconductors
Advancements in semiconductor design and manufacturing enable smaller electronic architectures. Shrinking geometries, especially in the emerging 3D IC, FinFET and stacked-die architectures, reveal design challenges related to power and reliability. Our power analysis and optimization software suite manages the power budget, power delivery integrity and power-induced noise in an electronic design, from initial prototyping to system sign-off. These solutions deliver accuracy with correlation to silicon measurement; the capacity to handle an entire electronic system, including IC, package and PCB, efficiently for ease-of-debugging and fast turnaround time; and comprehensiveness to facilitate cross-domain communications and electronic ecosystem enablement.
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Embedded Software
Our SCADE® product suite is a comprehensive solution for embedded software simulation, code production and automated certification. It has been developed specifically for use in critical systems with high dependability requirements, including aerospace, rail transportation, nuclear, industrial and automotive applications. SCADE software supports the entire development workflow, from requirements analysis and design, through verification, implementation and deployment. SCADE solutions easily integrate with each other and the rest of our product suite, allowing for development optimization and increased communication among team members.
Systems
We deliver a unique and comprehensive system simulation capability that is ideal for the design of today's increasingly automated products. This collaborative environment leverages our multiphysics, multibody dynamics, circuit and embedded software simulation capabilities, enabling users to simulate the complex interactions between components, circuits and control software within a single environment. These technologies provide a complete view into predicted product performance, which creates greater design confidence for engineers.
3D Design
Our Discovery™ product family allows every engineer to benefit from the insight of simulation in their product design. The Discovery products range from early design exploration tools powered by interactive real-time simulation and intuitive geometry editing, to detailed product validation solutions utilizing proven flagship solver technology with easy-to-use guided workflows. These tools allow for design engineers of all levels of expertise to utilize simulation across the entire product design process and to work seamlessly with simulation experts using our flagship products for even more advanced analysis.
Optical
Using optical sensor and closed-loop, real-time simulation, our capabilities now span the simulation of all sensors, including lidar, cameras and radar; the multiphysics simulation of physical and electronic components; the analysis of systems functional safety; as well as the automated development of safety-certified embedded software. This functionality can be integrated into a closed-loop simulation environment that interacts with weather and traffic simulators, enabling thousands of driving scenarios to be executed virtually.
Materials
Ansys Granta products give our customers access to material intelligence, including data that is critical to simulations. Refer to the section titled "New Product Offerings" for additional discussion around our materials offerings.
Academic
Our academic product suite provides a highly scalable portfolio of academic products based on several usage tiers, including associate, research and teaching. Each tier includes various non-commercial products that bundle a broad range of physics and advanced coupled field solver capabilities. The academic product suite provides entry-level tools intended for class demonstrations and hands-on instruction. It includes flexible terms of use and more complex analysis suitable for doctoral and post-doctoral research projects. We also provide a special product at no cost to students that is suitable for use away from the classroom and in non-commercial applications.
PRODUCT DEVELOPMENT
We make significant investments in research and development and emphasize frequent, integrated product releases. Our product development strategy centers on ongoing development and innovation of new technologies to increase productivity and to provide engineering simulation solutions that customers can integrate into enterprise-wide product lifecycle management (PLM) systems. Our product development efforts focus on extensions of the full product line with new functional modules, further integration with CAD, electronic CAD (ECAD) and PLM products, and the development of new products. Our products run on the most widely-used engineering computing platforms and operating systems, including Windows, Linux and most UNIX workstations.
Our total research and development expenses were $298.2 million, $233.8 million and $202.7 million in 2019, 2018 and 2017, respectively, or 19.7%, 18.1% and 18.5% of total revenue, respectively. As of December 31, 2019 and 2018, our product development staff consisted of approximately 1,500 and 1,200 employees, respectively, most of whom hold advanced degrees and have industry experience in engineering, mathematics, computer science or related disciplines. We have traditionally
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invested significant resources in research and development activities and intend to continue to make investments in expanding the ease of use and capabilities of our broad portfolio of simulation software products.
We recently completed the following major product development activities and releases:
• | In January 2020, we released Ansys 2020 R1, which streamlines product development lifecycles and helps boost product performance with enhancements to the interfaces, functionality and power of our simulation solvers. Among these advances is Ansys Minerva, a knowledge management application platform that delivers an integrated suite of Ansys tools, fusing simulation and optimization to product lifecycle processes across any enterprise. Minerva spurs collaboration within global engineering teams and increases data sharing to innovate product designs and reduce development costs. From improving product development with Ansys Minerva to running complex simulations with substantially streamlined workflows with Ansys Fluent to optimizing electromagnetic design processes with Ansys HFSS, Ansys 2020 R1 helps enable companies to pioneer innovations and create cost-effective designs. |
To leverage the combined benefits of cloud computing and best-in-class engineering simulation, we are partnering with Microsoft® Azure™ to create a secure cloud solution. In Ansys 2020 R1, Ansys Cloud™ introduced new licensing options to enable greater business flexibility. Companies can cost optimize cloud software usage by mixing elastic (usage-based) and traditional (leased or paid-up) licensing while accessing on-demand compute resources. In addition, within Ansys Mechanical, Ansys Fluent and Ansys Electronics Desktop, you can directly access HPC in the Cloud.
• | In September 2019, we released Ansys 2019 R3, which strengthens our autonomous vehicles (AV) solutions with the addition of Ansys Autonomy. Ansys Autonomy enables engineers to develop safer AV through advanced closed-loop scenario simulation, automated driving and control software development, functional safety analysis, and sensor, camera, lidar, and radar simulation. Among a number of other enhancements to our product portfolio, Ansys 2019 R3 also includes the SPEOS Road Library for Sensors Simulation, a comprehensive, retro-reflecting materials database, as well as updates to Ansys HFSS SBR+ that provide greater accuracy in predicting radar cross sections of large targets with curvatures. |
As fully autonomous vehicles edge closer to real-world deployment, operating safely becomes more critical than ever. AVs require rigorous testing in complex environments and under variable conditions. Physical testing would require billions of miles of driving or flying — a time-consuming, cost-prohibitive approach. Using simulation to virtually test AVs is the only viable option for validating systems safety and accelerating AV development. From sensors to virtual environments to artificial intelligence, Ansys 2019 R3 includes robust offerings that speed the safe development and deployment of AVs on the road and in the air.
• | In June 2019, we released Ansys 2019 R2, which accelerates, streamlines and simplifies the product life cycle through new functionalities. With the new functionalities, including new materials capabilities for structural analysis following the acquisition of Granta Design Limited (Granta Design), our simulation solutions accelerate collaboration, validation and verification, creating a reliable digital thread throughout operations. The release also includes a revolutionary Ansys Mechanical™ user experience, simplified simulation of complex electronics and a new Ansys FluentTM workflow that significantly speeds meshing of dirty geometries. |
New Product Offerings
Our 2019 acquisitions, each a leader in their respective fields, are intended to bolster our strategy of Pervasive Engineering Simulation. The acquired technologies offer solutions that significantly enhance our portfolio, providing solutions valuable to our customers.
The acquisition of material intelligence leader Granta Design gives our customers access to material intelligence, including data that is critical to successful simulations. With Granta Design technology, our customers benefit from access to the world's premier system for managing corporate material intelligence and the market-leading solution for materials sources, selection and management. Ansys Granta MI is a leading system for materials information management in engineering enterprises. Ansys Granta Selector is the standard tool for materials selection and graphical analysis of materials properties. A comprehensive materials data library plus unique software tools enable engineers to use materials to innovate and evolve products, quickly identify solutions to material issues, confirm and validate choice of materials, and reduce material and development costs. CES EduPack is a unique set of teaching resources that supports materials education across engineering, design, science and sustainable development. Granta Materials Data for Simulation provides easy access to materials property data from within Ansys Mechanical and the Ansys Electronics Desktop environment.
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The acquisition of Helic, Inc. (Helic), an industry-leading provider of electromagnetic (EM) crosstalk solutions for systems on chips, combined with our flagship electromagnetic and semiconductor solvers, provides a comprehensive solution for on-chip, 3DIC and chip-package-system electromagnetics and noise analysis. Helic’s software products (VeloceRF, RaptorX, Exalto and Pharos) help engineers analyze and mitigate the risk of on-chip EM crosstalk, which can lead to silicon failure and time to market delays. VeloceRF is an inductive device synthesizer and modeler for geometries as small as 5 nm and frequencies up to 110Ghz. RaptorX is an electromagnetic modeling, extraction and analysis tool for chip designs pre-layout-vs-schematic (LVS). Exalto is a post-LVS resistance, capacitance, self and mutual inductance (RLCk) extraction tool for electromagnetic coupling. Pharos is a tool that identifies wires that are susceptible to EM and substrate crosstalk.
The acquisition of DfR Solutions' electronics reliability technology, combined with our existing multiphysics portfolio, gives customers a complete designer-level solution to analyze for electronics failure earlier in the design cycle. DfR Solutions' Sherlock is the industry's only automated design reliability analysis software. Sherlock revolutionizes electronic design by empowering designers to simulate real-world conditions and accurately model PCBs and assemblies to predict solder fatigue due to thermal, mechanical, and shock and vibration conditions. During pre-processing, Sherlock automatically translates ECAD and MCAE data into 3D finite element models in minutes. In post-processing, Sherlock automates thermal derating and democratizes the thermal and mechanical analysis of electronics - meaning analysis is done in minutes rather than weeks. Sherlock seamlessly integrates with already existing simulation workflows in the hardware design process making Ansys SIwave, Ansys Icepak and Ansys Mechanical users more efficient. It directly connects simulation to material and manufacturing costs.
Our acquisition of Livermore Software Technology (LST) and its technologies empower customers to solve a new class of engineering challenges, including developing safer automobiles, aircraft and trains while reducing or even eliminating the need for costly physical testing. LST's LS-DYNA is an advanced general-purpose multiphysics simulation software package that can simulate many complex, real-world problems. LS-DYNA is the most advanced multiphysics simulation technology for high-speed, short-duration events (for example, a cell phone drop or automotive crash). Additionally, the acquisition results in an even tighter integration between LS-DYNA and Ansys Workbench (already a leading pre- and post-processor for LS-DYNA) computations. Most automotive companies use LS-DYNA to design and optimize automobile components or entire vehicles to produce safe cars for consumers. Companies all over the world have developed a trust in LST for their vehicle development process due to deep technical relationships. While we have partnered with LST for years, their industry-leading vehicle crash capabilities were not traditionally part of our offerings. Now, we have much greater access and available know-how in those industries to sell the rest of our platform.
Our acquisition of Dynardo, a leading provider of multidisciplinary analysis and optimization technology, gives customers access to a full suite of process integration and robust design tools — empowering users to identify optimal product designs faster and more economically. Dynardo’s flagship offering, optiSLang, is a comprehensive multi-disciplinary design optimization solution with a full suite of multi-objective optimization, sensitivity, reliability, and robust design capabilities. Customers of all sizes and across industries leverage optiSlang to integrate chained simulation flows and automate execution for design space exploration and optimization, greatly reducing development time and accelerating the evaluation of optimal product design alternatives for cost and performance. Ansys optiSLang has an intuitive graphical user interface that enables engineers to connect computer-aided design tools together in a way that captures both the simulation process automation and workflows, such as sensitivity analysis or robust design optimization. Ansys optiSLang supports interfacing with most software tools used in virtual product development.
Ansys Minerva is a centralized knowledge management application engineered with an open and vendor-neutral architecture that improves multiphysics collaboration by making data, project plans and analytics easily accessible in one place so team members across the world and in different functional silos can work with the same, most up-to-date information. Minerva improves productivity and maximizes the value of existing engineering technology investments by providing simulation process and data management, life cycle traceability, process integration, design optimization and simulation-driven data science capabilities. Available for both on-premise and cloud deployment, Minerva connects to most leading product life cycle management systems.
PRODUCT QUALITY
Our employees generally perform product development tasks according to predefined quality plans, procedures and work instructions. Certain technical support tasks are also subject to a quality process. These plans define, for each project, the methods to be used, the responsibilities of project participants and the quality objectives to be met. The majority of software products are developed under a quality system that is certified to the ISO 9001:2015 standard. We establish quality plans for our products and services, and subject product designs to multiple levels of testing and verification in accordance with processes established under our quality system.
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SALES AND MARKETING
We distribute and support our products through our own direct sales offices, as well as a global network of independent channel partners. This channel partner network provides us with a cost-effective, highly-specialized channel of distribution and technical support. It also enables us to draw on business and technical expertise from a global network, provides relative stability to our operations to help mitigate geography-specific economic trends and provides us with an opportunity to take advantage of new geographic markets or enhance our sales coverage in existing markets.
The channel partners sell our products to new customers, expand installations within the existing customer base, offer training and consulting services, and provide the first line of our technical support. Our channel partner certification process helps to ensure that each channel partner has the ongoing capability to adequately represent our expanding product lines and to provide an acceptable level of training, consultation and customer support. We derived 22.9%, 22.4% and 24.8% of our total revenue through the indirect sales channel for the years ended December 31, 2019, 2018 and 2017, respectively.
We also have a direct sales organization to develop an enterprise-wide, focused sales approach and to implement a worldwide go-to-market account strategy. The sales management organization also functions as a focal point for requests from the channel partners and provides additional support in strategic locations through the presence of direct sales offices.
During 2019, we continued to invest in our existing domestic and international strategic sales offices. In total, our direct sales organization comprised 2,100 and 1,700 employees as of December 31, 2019 and 2018, respectively, who were responsible for the sales, technical support, consulting services, marketing initiatives and administrative activities designed to support our overall revenue growth and expansion strategies.
Our products are utilized by organizations ranging in size from small consulting firms to the world's largest industrial companies. No single customer accounted for more than 5% of our revenue in 2019, 2018 or 2017.
Information with respect to foreign and domestic revenue may be found in Note 17 to the consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K and in the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K.
STRATEGIC ALLIANCES AND MARKETING RELATIONSHIPS
We have established and continued to pursue strategic alliances with advanced technology suppliers, cloud computing providers, hardware vendors, specialized application developers, and CAD, ECAD and PLM providers. We believe that these relationships facilitate accelerated incorporation of advanced technology into our products, provide access to new customers, expand our sales channels, develop specialized product applications and provide direct integration with leading CAD, electronic design automation (EDA), product data management and PLM systems.
We have technical and marketing relationships with leading CAD vendors, such as Autodesk, PTC and Siemens Digital Industries, to provide direct links between products. These links facilitate the transfer of electronic data models between the CAD systems and our products.
We partnered with PTC to accelerate product innovation by providing customers a world-class simulation-driven design solution. Working together, we are delivering Ansys Discovery Live real-time simulation within PTC’s Creo® 3D CAD software. The combined solution, Creo Simulation Live, is sold by PTC as part of the Creo product suite. This solution offers customers a unified modeling and simulation environment, removing the boundaries between CAD and simulation and enabling design engineers to gain insight into each of the many design decisions they make throughout the product development process. This insight enables design engineers to create higher quality products, while reducing product and development costs.
Similarly, we maintain marketing and software development relationships with leading EDA software companies, including Cadence Design Systems, Synopsys, Mentor Graphics, Zuken and National Instruments. These relationships support the transfer of data between electronics design and layout software and our electronics simulation portfolio. In 2017, we entered into an integration and distribution agreement with Synopsys to cooperatively integrate Ansys RedHawk technology into an in-design add-on to a Synopsys design tool for the primary purpose of providing customers with direct, in-design access to the RedHawk technology's capabilities.
We also have relationships with Siemens and Spatial Corporation to provide the 3D modeling kernel and format translation technologies upon which our in-house geometry modeling software solutions are built.
The main method we employ to democratize HPC to a wider audience is through partnerships with a number of companies, such as cloud computing providers, HPC hardware manufacturers and supercomputing centers such as HLRS in Stuttgart,
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Germany. In 2019, we launched a new cloud service fully managed by us and developed in collaboration with Microsoft Azure that provides on-demand access to HPC directly from within our flagship applications. We also collaborated with Flexera to improve our elastic licensing solution by now supporting on-premise use and internet-based usage monitoring. We added Hewlett Packard Enterprises and Dell Technologies as new members to the HPC appliance program that is designed to simplify and accelerate HPC cluster deployment.
Our open cloud strategy allows us to work with various public cloud providers and cloud-hosting partners. This approach makes it easy for customers to use the same workflows on-premise and in the Cloud. Cloud-hosting partners such as Nimbix, Rescale and Gompute provide cloud access to us and/or third-party applications for customers having very complex workflows or other restrictive security certification requirements. Furthermore, we continued to enjoy mutually-committed alliances with large cloud platform providers such as Microsoft, AWS, Google and Alibaba. In 2018, we entered into an agreement with SAP SE (SAP) to embed our pervasive simulation solutions for digital twins into SAP's market-leading digital supply chain, manufacturing and asset management portfolio. The partnership's first solution launched in 2019 and runs on the SAP Cloud Platform and empowers industrial asset operators to optimize operations and maintenance through real-time engineering insights, which reduces product cycle times and increases profitability.
Our Partner Program actively encourages developers of specialized software solutions to use our technology as a development platform for their applications and provides customers with enhanced functionality related to their use of our software. With more than 200 active solution partnerships, spanning a wide range of technologies, including materials, optimization, electronics, optical, mechanical, fluid and systems simulation, our partner ecosystem extends the depth and breadth of our technology offerings.
We have a software license agreement with HBM that provides the advanced fatigue capabilities of nCode DesignLife™, a leading durability software from HBM. nCode DesignLife™ technology leverages the open architecture of our platform and enables mechanical engineers to more easily address complex product life and durability issues before a prototype is built. A similar agreement was executed with VirtualMotion to offer Ansys Motion™ as a tightly-integrated, next-generation capability for simulating complex multi-body mechanisms and assemblies.
COMPETITION
We believe that the principal factors affecting sales of our software include ease of use, breadth and depth of functionality, flexibility, quality, ease of integration with other software systems, file compatibility across computer platforms, range of supported computer platforms, performance, price and total cost of ownership, customer service and support, company reputation and financial viability, and effectiveness of sales and marketing efforts.
We continue to experience competition across all markets for our products and services. Our competitors include large, global, publicly traded companies; small, geographically-focused firms; startup firms; and solutions produced in-house by the end users. Some of our current and possible future competitors have greater financial, technical, marketing and other resources than us, and some have well-established relationships with current and potential customers of ours. Our current and possible future competitors also include firms that have elected, or may in the future elect, to compete by means of open source licensing. These competitive pressures may result in decreased sales volumes, price reductions and/or increased operating costs, and could result in lower revenues, margins and net income.
PROPRIETARY RIGHTS AND LICENSES
We regard our software as proprietary and rely on a combination of trade secret, copyright, patent and trademark laws, license agreements, nondisclosure and other contractual provisions, and technical measures to protect our proprietary rights in our products. We distribute our software products under software license agreements that predominantly grant customers nonexclusive licenses, which are typically nontransferable, for the use of our products. License agreements for our products are generally directly between us and end users. Use of the licensed software product is restricted to specified sites unless the customer obtains a multi-site license for its use of the software product or the software product is by its nature a multi-site use product. Software security measures are also employed to prevent unauthorized use of our software products and the licensed software is subject to terms and conditions prohibiting unauthorized use or reproduction. For most products, customers may purchase a perpetual license of the technology with the right to annually purchase ongoing maintenance, technical support and upgrades, or may lease the product on a fixed-term basis for a fee that includes the license, maintenance, technical support and upgrades. For some products, customers purchase an annual subscription for a certain number of named users that includes the license, maintenance, technical support and upgrades or purchase elastic units hosted by our Cloud and use any supported product at any time until their licensed volume is met.
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We license our software products utilizing a combination of web-based and hard-copy license terms and forms. For certain software products, we primarily rely on "click-wrapped" licenses (i.e. online agreements where the website provider posts terms and conditions, and the user clicks on the "accept" button). The enforceability of these types of agreements under the laws of some jurisdictions is uncertain.
We also seek to protect the source code of our software as a trade secret and as registered unpublished copyrighted work. We have obtained federal trademark registration protection for Ansys and other marks in the U.S. and foreign countries. Additionally, we were awarded numerous patents by the U.S. Patent and Trademark Office and have a number of patent applications pending. To the extent we do not choose to seek patent protection for our intellectual property, we primarily rely on the protection of our source code as a trade secret. We seek additional protection of our proprietary rights in our source code via copyright registrations.
Our employees have signed agreements under which they have agreed not to disclose trade secrets or confidential information. These agreements, where legally permitted, restrict engagement in or connection with any business that is competitive with us anywhere in the world while employed by us (and, in some cases, for specified periods thereafter) and state that any products or technology created by employees during their term of employment are our property. In addition, we require all channel partners to enter into agreements not to disclose our trade secrets and other proprietary information.
Despite these precautions, there can be no assurance that misappropriation of our technology and proprietary information (including source code) will be prevented. Further, there can be no assurance that copyright, trademark, patent and trade secret protection will be available for our products in certain jurisdictions, or that restrictions on the ability of employees and channel partners to engage in activities competitive with us will be enforceable. Costly and time-consuming litigation could be necessary in the future to enforce our rights to our trade secrets and proprietary information or to enforce our patent rights and copyrights, and it is possible that, in the future, our competitors may be able to obtain our trade secrets or to independently develop similar, unpatented technology.
The software development industry is characterized by rapid technological change. Therefore, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are also important to establishing and maintaining technology leadership in addition to the various legal protections of our technology that may be available.
We do not believe that any of our products infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by us or our licensors or licensees with respect to current or future products. In addition, there are non-practicing entities (NPEs) and patent assertion entities (PAEs) whose business models are built on not producing any products but rather extracting payments from revenue generating companies through patent infringement assertions and/or litigation. We expect that software suppliers will increasingly be subject to the risk of such claims as the number of products and suppliers continues to expand and the functionality of products continues to increase. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product release delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us.
SEASONAL VARIATIONS
Our business has experienced seasonality, including quarterly reductions in software sales resulting from slowdowns of customer activities during the summer months, particularly in Europe, as well as from the seasonal purchasing and budgeting patterns of our global customers. Lease and maintenance contract renewals are typically highest in the first and fourth quarters. Our revenue is typically highest in the fourth quarter.
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DEFERRED REVENUE AND BACKLOG
Deferred revenue consists of billings made or payments received in advance of revenue recognition from customer agreements. The deferred revenue on our consolidated balance sheets does not represent the total value of annual or multi-year, noncancellable agreements. Our backlog represents installment billings for periods beyond the current quarterly billing cycle. Our deferred revenue and backlog as of December 31, 2019 and 2018 consisted of the following:
Balance at December 31, 2019 | |||||||||||
(in thousands) | Total | Current | Long-Term | ||||||||
Deferred revenue | $ | 365,274 | $ | 351,353 | $ | 13,921 | |||||
Backlog | 505,469 | 218,398 | 287,071 | ||||||||
Total | $ | 870,743 | $ | 569,751 | $ | 300,992 | |||||
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.
EMPLOYEES
As of December 31, 2019, we employed approximately 4,100 people. At that date, there were also contract personnel and co-op students providing ongoing development services and technical support. Certain employees are subject to collective bargaining agreements and have local work councils.
ACQUISITIONS
We make targeted acquisitions in order to support our long-term strategic direction, accelerate innovation, provide increased capabilities to our existing products, supply new products and services, expand our customer base and enhance our distribution channels.
2019 Acquisitions
On November 1, 2019, we completed the acquisition of 100% of the shares of LST for a purchase price of $777.8 million.
On February 1, 2019, we completed the acquisition of 100% of the shares of Granta Design for a purchase price of $208.7 million.
Additionally, during the year ended December 31, 2019, we acquired Dynardo, Helic and DfR Solutions to combine the acquired technologies with our existing comprehensive multiphysics portfolio. These acquisitions were not individually significant. The combined purchase price of these acquisitions was $136.2 million.
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The 2019 acquisitions are further described in the table below:
Date of Closing | Company | Details | ||
November 1, 2019 | LST | LST, the premier provider of explicit dynamics and other advanced finite element analysis technology, empowers our customers to solve a new class of engineering challenges, including developing safer automobiles, aircraft and trains while reducing or even eliminating the need for costly physical testing. | ||
November 1, 2019 | Dynardo | Dynardo, a leading provider of multidisciplinary analysis and optimization technology, gives our customers access to a full suite of process integration and robust design tools — empowering users to identify optimal product designs faster and more economically. | ||
May 1, 2019 | DfR Solutions | DfR Solutions' electronics reliability technology, combined with our existing comprehensive multiphysics portfolio, gives our customers a complete designer-level solution to analyze for electronics failure earlier in the design cycle. | ||
February 4, 2019 | Helic | Helic, the industry-leading provider of electromagnetic crosstalk solutions for systems on chips, combined with our flagship electromagnetic and semiconductor solvers, provides a comprehensive solution for on-chip, 3D integrated circuit and chip-package-system electromagnetics and noise analysis. | ||
February 1, 2019 | Granta Design | Granta Design, the premier provider of materials information technology, expands our portfolio into this important area, giving customers access to materials intelligence, including data that is critical to successful simulations. | ||
2018 Acquisition
On May 2, 2018, we 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. The acquisition extended our 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.
2017 Acquisitions
During the year ended December 31, 2017, we completed various acquisitions which were not individually significant. The combined purchase price of the acquisitions was approximately $67.0 million.
The 2017 technology acquisitions are further described in the table below:
Date of Closing | Company | Details | ||
November 15, 2017 | 3DSIM | 3DSIM, a developer of premier additive manufacturing technology, gives us a complete additive manufacturing simulation workflow solution. 3DSIM's software solutions empower manufacturers, designers, materials scientists and engineers to achieve their objectives through simulation-driven innovation rather than physical trial and error. | ||
July 5, 2017 | Computational Engineering International, Inc. (CEI Inc.) | CEI Inc., the developer of EnSight, aids engineers and scientists in their ability to analyze, visualize and communicate large simulation data sets in clear, higher-resolution outputs. | ||
March 10, 2017 | CLK Design Automation (CLK-DA) | CLK-DA offers fast transistor simulation technology that complements our semiconductor product portfolio. | ||
For further information on our business combinations, see Note 4 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
AVAILABLE INFORMATION
Our website is www.ansys.com and our investor relations website is https://investors.ansys.com. We make available on our investor relations website, free of charge, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, interactive data files, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such materials are electronically filed or furnished to the Securities and Exchange Commission (SEC). Our reports may also be obtained by accessing the EDGAR database of the SEC's website at www.sec.gov.
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ITEM 1A. | RISK FACTORS |
The following are important factors we have identified that could affect our future results and an investment in our common stock. In addition, from time to time we provide information, including information contained in this Annual Report on Form 10-K, that contains forward-looking statements concerning, among other things, projected financial performance, total addressable market, market and industry sector growth, product development and commercialization or other aspects of future operations. Such statements are based on the assumptions and expectations of our management at the time such statements are made. We caution investors that our performance and any forward-looking statements are subject to risks and uncertainties, including but not limited to, the following:
Global Operational Risks
Adverse economic and geopolitical conditions may impact our operations and financial performance.
Our operations and performance depend significantly on global macroeconomic, specific foreign country and U.S. domestic economic conditions. Adverse conditions in the macroeconomic environment may result in a decreased demand for our products and services, constrained credit and liquidity, reduced government spending and volatility in equity and foreign exchange markets. In addition, to the extent the global economy experiences a significant downturn or volatility, we may be exposed to impairments of certain assets if their values deteriorate. Tighter credit due to economic conditions may diminish our future borrowing ability and increase borrowing costs under our existing credit facilities. Customers' ability to pay for our products and services may also be impaired, which could lead to an increase in our allowance for doubtful accounts and write-offs of accounts receivable.
A majority of our business comes from outside the U.S. and our customers supply a wide array of goods and services to most of the world’s major economic regions. International revenue represented 57.9%, 60.9% and 61.9% of our total revenue for the years ended December 31, 2019, 2018 and 2017, respectively. In fiscal year 2019, our largest geographic revenue bases included the U.S., Japan, Germany and South Korea.
If any of the foreign economies in which we do business deteriorates or suffers a period of uncertainty, our business and performance may be negatively impacted through reduced customer and government spending, changes in purchasing cycles or timing, reduced access to credit for our customers, or other factors impacting our international sales and collections. Furthermore, customer spending levels in any foreign jurisdiction may be adversely impacted by changes in domestic policies, including tax and trade policies. For example, the United Kingdom withdrew from the European Union effective as of January 31, 2020 and is now in a period of transition until the end of 2020. We have significant operations in the United Kingdom and the European Union. It remains unclear as to what the terms of the new relationship between the United Kingdom and the European Union will be. Terms that are disadvantageous to us, including those related to trade, tax and the movement of people across borders could negatively impact our results.
A substantial portion of our license and maintenance revenue is derived from annual lease and maintenance contracts which typically have a high rate of customer renewal. If the rate of renewal for these contracts is adversely affected by economic or other factors, our lease license and maintenance growth will be adversely affected. As a result, our business, financial position, results of operations and cash flows may also be adversely impacted during those periods.
We face compliance risk as a result of our international operations and our sales model, including pertaining to anti-corruption and data privacy laws.
The laws with which we need to comply due to our international operations vary from country to country and are subject to frequent change and interpretation. In May 2018, the General Data Protection Regulation (GDPR), which governs data privacy practices within the European Economic Area (EEA), went into effect. The law, which applies to our data processing activities within the EEA, as well as the processing of EEA citizen data globally, imposes various compliance obligations related to the handling of personal data in the delivery of our products and services and to business operations involving employee data. Compliance with the GDPR has and will continue to require deployment of substantial resources and increased costs. If we fail to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of annual worldwide revenue, private lawsuits, extensive and prescriptive consent decrees or judgments that may require additional resources or expenses for compliance and may cause reputational damage.
In the U.S., California implemented the California Consumer Protection Act (CCPA) as of January 2020, which requires compliance measures similar to those of the GDPR and establishes the first state standard for a comprehensive set of data privacy rights. Several other states have proposed data privacy laws that would impose obligations on us with respect to how we collect and use personal data, including customer data. In order to comply with U.S. state laws, as well as any data breach notification laws that vary across states, we may be required to invest in additional resources or tools to manage our data
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processing activities. If we fail to comply with the requirements of U.S. data privacy and data breach notification laws, we will be subject to state monetary fines, consent decrees issued by the Federal Trade Commission, and possible reputational damage.
Our global reach, including within countries considered high-risk environments for public corruption, exposes us to risks associated with violations of anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. We develop and sell software and consulting services and maintain support operations in more than 40 countries whose laws and practices differ from one another and are subject to unexpected changes. Managing these geographically diverse operations requires significant attention and resources to ensure compliance. To promote compliance, we forbid our agents and employees from engaging in corrupt behavior and have implemented a compliance plan to prevent and detect violations of anti-corruption laws. There remains, however, a risk that illegal conduct could occur thereby exposing us to the financial and reputational risks associated with a violation of anti-corruption laws.
Noncompliance with these regulations could adversely impact our financial results or stock price as well as divert management time and effort.
We are subject to trade restrictions that could impact our ability to sell to customers and result in liability for violations.
Due to the global nature of our business, we are subject to import and export restrictions and regulations that prohibit the shipment or provision of certain products and services to certain countries, governments and persons targeted by the U.S., including the Export Administration Regulations administered by the U.S. Bureau of Industry and Security (BIS) and economic and trade sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). During the second quarter of 2019, the BIS placed certain entities on the Entity List. Certain of our existing and prospective customers, including Huawei, were included in this list. In addition, restrictions implemented by OFAC restrict our ability to sell to some companies in certain countries, such as Russia. The Entity List and OFAC restrictions limit our ability to deliver products and services to these customers and, in the absence of a license, our ability to sell products and services to these customers in the future. The inclusion of companies on the Entity List may encourage them to seek substitute products from competitors who are not subject to these restrictions or to develop their own products. We cannot predict whether or when any changes will be made that eliminate or decrease these limitations on our ability to sell products and provide services to these customers. Additionally, other customers may continue to be added to the Entity List and/or be subjected to trade restrictions. There may be indirect impacts that cannot be quantified, including that our business may also be impacted by other trade restrictions that may be imposed by the U.S., China, or other countries. Restrictions on our ability to sell and ship to customers could have an adverse effect on our business, results of operations or financial condition.
Violators of these export controls may be subject to significant penalties, which may include considerable monetary fines, criminal proceedings against them and their officers and employees, a denial of export privileges, and suspension or debarment from selling products or services to the federal government. Any such penalties could have an adverse effect on our business, financial condition, operating results and cash flows. In addition, the political and media scrutiny surrounding any governmental investigation could cause significant expense and reputational harm and distract senior executives from managing normal day-to-day operations.
Our products could also be shipped to denied parties by third parties, including our channel partners. Even though we take precautions to ensure that our channel partners comply with all relevant import and export regulations, any failure by channel partners to comply with such regulations could have negative consequences for us, including reputational harm, government investigations and penalties.
The effect of foreign exchange rate fluctuation may adversely impact our revenue, expenses, cash flows and financial conditions.
As a result of our significant international presence, we have revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies, most notably the British Pound, Euro, Japanese Yen, South Korean Won and Indian Rupee. Our revenue and operating results are adversely affected when the U.S. Dollar strengthens relative to foreign currencies and are positively affected when the U.S. Dollar weakens relative to foreign currencies. If the U.S. Dollar strengthens relative to other currencies, certain channel partners who pay us in U.S. Dollars may have trouble paying on time or may have trouble distributing our products due to the impact of the currency exchange fluctuation on such channel partner's cash flows. This may impact our ability to distribute our products into certain regions and markets.
We seek to reduce our currency exchange transaction risks primarily through our normal operating and treasury activities, including derivative instruments, but there can be no assurance that these activities will be successful in reducing these risks. In addition, we incur transaction fees in the usage of such derivative instruments. Changes in currency exchange rates will affect our financial position, results of operations and cash flows.
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A natural disaster or catastrophic event may disrupt our business.
A significant portion of our software development personnel, source code and computer equipment is located at operating facilities in the U.S., Canada, India, Japan and throughout Europe. The occurrence of a natural disaster or other unforeseen catastrophe at any of these facilities could cause disruptions to our operations, services and product development activities. Additionally, if we experience problems that impair our business infrastructure, such as a computer virus, telephone system failure or an intentional disruption of our information technology systems by a third party, these disruptions could have a material adverse effect on our business, financial position, results of operations, cash flows and the ability to meet financial reporting deadlines. Further, because our sales are not generally consistent across quarterly periods, the potential adverse effects resulting from any of the events described above or any other disruption of our business could be accentuated if they occur close to the end of a fiscal quarter.
In addition, our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases, and other adverse public health developments, may cause us or our customers to temporarily suspend operations in the affected city or country. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products, our ability to collect against existing trade receivables and our operating results.
Industry Operational Risks
Our industry is highly competitive, which could result in downward pressure on our prices.
We continue to experience competition across all markets for our products and services. Some of our current and potential competitors have greater financial, technical, marketing and other resources than we do, and some have well-established relationships with our current and potential customers. Our current and potential competitors also include firms that have competed, or may in the future compete, by means of open source licensing. Companies we have, or could have, strategic alliances with could reduce or discontinue technical, software development and marketing relationships with us for competitive purposes. If our competitors offer deep discounts on certain products or services, or develop products that the marketplace considers more valuable, we may need to lower prices or offer discounts or other favorable terms in order to compete successfully. Our maintenance products, which include software license updates and product support fees, are generally priced as a percentage of new software license fees. Our competitors may offer lower percentage pricing on product updates and support. Some competitors may bundle software products for promotional purposes or as a long-term pricing strategy or provide guarantees of prices, product implementations or wider geographical license usage provisions. Any of these practices could, over time, significantly constrain the prices that we can charge for certain products.
Furthermore, if we do not adapt pricing models to reflect changes in customer usage of our products or changes in customer demand, our new software license revenues could decrease. Additionally, increased distribution of applications through application service providers, including software-as-a-service providers, may reduce the average price of our products or adversely affect other sales of our products, reducing new software license revenues unless we can offset price reductions with volume increases.
These competitive pressures may result in decreased sales volumes, price reductions and/or increased operating costs, and could result in lower revenues, margins and net income.
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We may not be successful in developing and marketing new products to adequately address the rapidly changing technology industry.
We operate in an industry generally characterized by rapidly changing technology and frequent new product introductions, which can render existing products obsolete or unmarketable. A major factor in our future success will be our ability to anticipate technological changes and to develop and introduce, in a timely manner, new products to meet those changes. Our ability to grow revenue will be dependent on our ability to respond to customer needs in the areas of, among others, 5G, autonomous vehicles, Industrial Internet of Things (IIoT) and electrification, and to leverage cloud computing and new computing platforms. In addition, our future success may depend on our ability to continue to develop a systems integrator ecosystem able to handle integrations and process and application development to address the challenge of the increasingly complex integration of our products’ different functionalities to address customers’ requirements. In addition, for those customers who authorize a third-party technology partner to access their data, we do not provide any warranty related to the functionality, security and integrity of the data transmission or processing. Despite contract provisions to protect us, customers may look to us to support and provide warranties for the third-party applications, integrations, data and content, even though not developed or sold by us, which may expose us to potential claims, liabilities and obligations, all of which could harm our business.
We devote substantial resources to research and development, which could cause our operating results to decline.
We devote substantial resources to research and development. New competitors, technological advances in the software development industry by us or our competitors, acquisitions, entry into new markets, or other competitive factors may require us to invest significantly greater resources than anticipated. If we are required to invest significantly greater resources than anticipated without a corresponding increase in revenue, operating results could decline. In addition, our periodic research and development expenses may be independent of our level of revenue, which could negatively impact financial results.
There can be no assurance that we will be successful in developing and marketing, on a timely basis, new products or product enhancements or that the new products will adequately address the changing needs of the marketplace or that we will successfully manage the transition from existing products. Software products as complex as those we offer may contain undetected errors when first introduced, or as new versions are released, and the likelihood of errors is increased as a result of our commitment to the frequency of product releases. There can be no assurance that errors will not be found in any new or enhanced products after the commencement of commercial shipments. Certain products require a higher level of sales and support expertise. Failure of our sales channel, particularly the independent channel partners, to obtain this expertise and to sell the new product offerings effectively could have an adverse impact on our sales in future periods. Any of these problems may result in the loss of or delay in customer acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could have a material adverse effect on our business, financial position, results of operations and cash flows.
Consolidation among our customers as well as our industry competitors may negatively impact our operating results.
There have been consolidations among our customers in the semiconductor, electronics and automotive industries, among others. This may result in the newly combined entity wanting the most favorable pricing from the former contracts and expecting larger volume discounts on future purchases. If a customer is acquired by an entity that does not utilize our products in favor of a competing product, we may not have future orders from the enterprise. Further, consolidation of our competitors may result in synergies that allow those competitors to benefit from broader sales channels and increased access to capital. Any of these impacts could adversely affect our business, financial position, results of operations and cash flows.
The price of our common stock is subject to volatility.
The market price of securities of software companies is subject to significant fluctuations. The valuation and trading price of our common stock may not be predictable. Factors that may adversely impact our share price include our failure to meet analyst expectations, reduced expectations regarding financial outlook, increases in our debt levels, changes in management or our material announcements or those of our competitors. In addition, volatility could result from causes that are unrelated to our operating performance such as conditions in the financial markets or the software industry generally.
Company Operational Risks
We are dependent upon our channel partners for a significant percentage of our revenue.
We distribute our products through a global network of independent channel partners, which accounted for 22.9%, 22.4% and 24.8% of our revenue during the years ended December 31, 2019, 2018 and 2017, respectively. Channel partners sell our software products to new and existing customers, expand installations within the existing customer base, offer consulting
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services and provide the first line of technical support. In Asia-Pacific and EMEA, we are highly dependent upon our channel partners. Difficulties in ongoing relationships with channel partners, such as failure to meet performance criteria and differences in handling customer relationships, could adversely affect our performance. Additionally, the loss of any major channel partner, including a channel partner's decision to sell competing products rather than ours, could result in reduced revenue. Moreover, our future success will depend substantially on the ability and willingness of our channel partners to dedicate the resources necessary to promote our portfolio of products and to support a larger installed base within each of our geographic regions. If the channel partners are unable or unwilling to do so, we may be unable to sustain revenue growth.
We have been increasing the number of channel partners, particularly in international locations. The business relationships with these channel partners are recently established and could result in additional compliance burdens for us. In addition, these partners have a less-established payment history and revenue from these partners could come with a higher rate of bad debt expense. Where channel partners operate on our behalf to collect and process personal data of customer contacts, failure to comply with relevant data privacy laws in the handling of such personal data could result in our liability for any fines, civil suits or non-financial performance obligations imposed by regulatory authorities on these partners with respect to our customer data.
We may not be able to realize the potential benefit of our acquisitions and such acquisitions could pose risks to our business.
We consummate acquisitions to support our long-term strategic direction. We have completed a number of acquisitions in recent years, and in 2019 we acquired Granta Design, Helic, DfR Solutions, LST and Dynardo.
Any acquisitions that we complete may present risks, including: difficulty in integrating the management teams, strategies, cultures and operations of the companies or businesses; failing to achieve anticipated synergies, revenue increases or cost savings; difficulty incorporating and integrating the acquired technologies or products with our existing product lines; difficulty with sales, distribution and marketing functions; failure to develop new products and services that utilize the technologies and resources of the companies; disruption of our ongoing business and diversion of management's attention to transition or integration issues; liabilities that were not identified during the buying process; the loss of our key employees, customers, partners and channel partners or those of the acquired company; and cybersecurity and data privacy risks, including any liabilities for failure to comply with data privacy laws and obligations for collection, use and retention of personal data.
Future acquisitions may involve the expenditure of significant cash resources; the incurrence of debt, which increases our interest expense and leverage; or the issuance of equity, which is dilutive to stockholders and may decrease earnings per share.
We allocate a portion of the purchase price to goodwill and intangible assets. If we do not recognize all the economic benefits of an acquisition, there could be an impairment of goodwill or intangible assets. Furthermore, impairment charges are generally not tax-deductible and will result in an increased effective income tax rate in the period the impairment is recorded.
If we do not achieve the anticipated benefits of our acquisitions as rapidly or to the extent anticipated by our management or the financial and industry analysts, there could be a material adverse effect on our stock price, business, financial position, results of operations and cash flows. Where customer contacts and leads are a significant consideration in the purchase price or expected financial outcome of an acquisition, failure to identify or mitigate data privacy concerns with the collection, use and retention of personal data may adversely impact our ability to use this information as anticipated and regulatory obligations may require that we delete all or a portion of the database, or take additional remediation measures before use. This may impact the value of the acquisition or reduce forecasted sales.
The implementation of a new CRM system may not achieve the corporate benefits initially identified in the anticipated time frame or at all.
We are in the process of implementing new functionality in our existing Customer Relationship Management (CRM) system. While this system is anticipated to simplify the demand generation, sales cycle, order processing and customer service activities, there is a risk that the project will not achieve the anticipated benefits or that the benefits will not be achieved as quickly as anticipated. There is also a risk that we will have to write off previously capitalized expenditures if the project is not successful or if implementation decisions regarding the project are modified. The project implementation timeline and scope may change and become longer and broader as new facets of the design and implementation efforts are undertaken. This may take the attention of key operational management away from other aspects of the business, including the integration of acquisitions, and may also result in increased consulting and software costs. These factors may have a significant negative impact on our business, financial position, profit, cash flows and reputation.
If we are unable to attract and retain key talent, our business could be adversely affected.
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Our success depends upon the continued service of our senior executives and our key technical and sales employees. Each of our executive officers and key technical personnel could terminate his or her relationship with us at any time. The loss of any of our senior executives or key personnel for which there has not been adequate knowledge-sharing and transfer might significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships.
In addition, because of the highly technical nature of our products and services, we must attract and retain highly skilled engineering and development personnel. The market for this talent is highly competitive and we have difficulty filling these roles for this reason. While we have historically recruited from outside of the U.S., in recent years our ability to do so has been curbed by more restrictive domestic immigration laws. If the immigration laws become even stricter or the processing of immigration requests becomes even more cumbersome or less efficient, or if we have less success in recruiting and retaining key personnel, our business, reputation and operating results could be materially and adversely affected.
We may be subject to proceedings that could harm our business.
We are 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 and litigations, alleged infringement of intellectual property rights and other matters. Use or distribution of our products could generate product liability, regulatory infraction, or similar claims by our customers, end users, channel partners, government entities or other third parties. Sales and marketing activities that impact processing of personal data, as well as measures taken to ensure license compliance, may also result in claims by customers and individual employees of customers. Each of these matters is subject to various uncertainties, and it is possible that an unfavorable resolution of one or more of these matters could materially and adversely affect our results of operations, cash flows and financial position, as well as cause damage to our reputation.
We may not be able to continue to obtain licenses to third-party software and intellectual property on reasonable terms or at all, which may disrupt our business and harm our financial results.
We license third-party software and other intellectual property for use in product research and development and, in several instances, for inclusion in our products. We also license third-party software, including the software of our competitors, to test the interoperability of our products with other industry products and in connection with our professional services. These licenses may need to be renegotiated or renewed from time to time, or we may need to obtain new licenses in the future. Third parties may stop adequately supporting or maintaining their technology, or they or their technology may be acquired by our competitors. If we are unable to obtain licenses to such third-party software and intellectual property on reasonable terms or at all, we may not be able to sell the affected products, our customers’ use of the products may be interrupted, or our product development processes and professional services offerings may be disrupted, which could in turn harm our financial results, our customers' ability to utilize our software, and our reputation.
We may suffer reputational or financial harm if we have product standard or quality issues.
We have separate quality systems and registrations under the ISO 9001:2015 standard in addition to other governmental and industrial regulations. Our continued compliance with quality standards and favorable outcomes in periodic examinations is important to retain current customers and vital to procure new sales. If it was determined that we were not in compliance with various regulatory or ISO 9001 standards, our certificates of registration could be suspended, requiring remedial action and a time-consuming re-registration process. Product quality issues or failures could result in our reputation becoming diminished, resulting in a material adverse impact on revenue, operating margins, net income, financial position and cash flows.
Our short-term and long-term sales forecast may not be accurate which could result in an adverse impact on our business.
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The software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. Many operational and strategic decisions are based upon short- and long-term sales forecasts. Our sales personnel continually monitor the status of proposals, including the estimated closing date and the value of the sale, in order to forecast quarterly sales. These forecasts are subject to significant estimation and are impacted by many external factors, including global economic conditions and the performance of our customers. A variation in actual sales activity from that forecasted could cause us to plan or budget incorrectly and, therefore, could adversely affect our business, financial position, results of operations and cash flows. Management also forecasts macroeconomic trends and developments and integrates them through long-range planning into budgets, research and development strategies and a wide variety of general management duties. Global economic conditions, and the effect those conditions and any disruptions in global markets have on our customers, may have a significant impact on the accuracy of our sales forecasts. These conditions may increase the likelihood or the magnitude of variations between actual sales activity and our sales forecasts and, as a result, our performance may be hindered because of a failure to properly match corporate strategy with economic conditions. This, in turn, may adversely affect our business, financial position, results of operations and cash flows. To the extent our forecasts are incorrect and, as a result, we fail to meet analyst expectations regarding financial performance or miss or reduce the financial guidance we give to investors, our share price may be adversely impacted.
Intellectual Property and Cybersecurity Risks
Our success is highly dependent upon the legal protection of our proprietary technology.
We primarily rely upon contracts and copyright, patent, trademark and trade secrets laws to protect our technology. We maintain intellectual property programs, including applying for patents, registering trademarks and copyrights, protecting trade secrets, entering into confidentiality agreements with our employees and channel partners, and limiting access to and distribution of our software, documentation and other proprietary information. However, software programs are particularly prone to piracy, which is a global phenomenon, and as a result we may lose revenue from the distribution of unlicensed software. Additionally, patent, copyright, trademark and trade secret protection do not provide the same coverage in every country in which we sell our products and services. Policing the unauthorized distribution and use of our products is difficult, and software piracy (including online piracy) is a persistent problem. While we continue to develop better mechanisms to detect and report or investigate unauthorized use of our software, we are also constrained by data privacy laws that restrict our ability to collect data about unlawful usage in some countries. We cannot assure that the steps we take to protect our proprietary technology are adequate to prevent misappropriation of our software by third parties, or that third parties will not be able to develop similar technology independently. Despite our efforts to prevent such activities, we may nonetheless lose significant revenue due to illegal use of our software.
Costly and time-consuming litigation would be necessary to enforce and determine the scope of trade secret rights and related confidentiality and nondisclosure provisions across our contractual agreements and partnerships. While we are not aware that any of our technology infringes upon the rights of third parties, there can be no assurance that other parties will not assert technology infringement claims against us, or that, if asserted, such claims will not prevail. Any such litigation could be costly to defend, damage our reputation, and distract our employees from their daily work. Any successful infringement claims asserted against us could require us to develop technology workarounds for the impacted products or product development, which could be costly, disrupt product development, and delay go-to-market activities. Such disruption and delay could negatively impact our financial results.
Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our reputation.
While we undertake commercially reasonable efforts to maintain and improve the security and integrity of our products, source code, computer systems and data with respect to the relative sensitivity of such software, systems and data, the number of computer “hackers” developing and deploying destructive software programs that attack our products and computer systems continues to increase. We have incurred and will continue to incur additional costs to enhance our cybersecurity efforts. Because the tactics and tools used to obtain unauthorized access to networks or to sabotage systems are constantly evolving, we may be unable to implement adequate preventive measures. Such an attack could disrupt the proper functioning of our products, cause errors in the output of our customers' work, or allow unauthorized access to and disclosure of our sensitive, proprietary or confidential information or that of our customers and employees. In the event of a serious breach of our products or systems, or where a breach occurs due to our failure to implement reasonable and appropriate safeguards, our reputation may suffer, customers may stop buying products or may terminate current services, we could face lawsuits and potential civil liability, as well as regulatory fines and non-financial penalties for any personal data breach, and our financial performance could be negatively impacted.
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There is also a danger of industrial espionage, cyberattacks, misuse, theft of information or assets (including source code), or damage to assets by people who have gained unauthorized access to our facilities, systems or information. This includes access to systems or information through email phishing attacks on our employees which has become a very prevalent technique used against companies, often delaying detection through increasingly complex practices. The objective of these attacks is often to acquire user account credentials in order to access other computer systems through linked accounts or where users have recycled passwords across systems.
Inadequate security practices or inadvertent acts or omissions by our employees and partners may also result in unauthorized access to our data. Employees or third parties may also intentionally compromise our or our customers’ security or systems. Such cybersecurity breaches, misuse of data or other disruptions could lead to loss of or unauthorized disclosure of our source code or other confidential information, unlicensed use and distribution of our products without compensation, illegal use of our products that could jeopardize the security of customer information stored in and transmitted through our computer systems, and theft, manipulation and destruction of proprietary data, resulting in defective products, performance downtimes and possible violation of export laws and other regulatory compliance requirements. Although we actively employ measures to combat such activities, preventing unauthorized access to our systems and data is inherently difficult. In addition, litigation to either pursue our legal rights or defend any claims against us could be costly and time-consuming and may divert management's attention and adversely affect the market's perception of us and our products.
We have experienced targeted and non-targeted cybersecurity attacks and incidents in the past that have resulted in unauthorized persons gaining access to our information and systems, and we could in the future experience similar attacks. To date, no cybersecurity incident or attack has had a material impact on our business, results of operations or financial condition.
A number of our core processes, such as software development, sales and marketing, customer service and financial transactions, rely on IT infrastructure and applications. We also rely on third-party service providers and products, which are exposed to various security vulnerabilities outside of our control. Malicious software, sabotage and other cybersecurity breaches of the types discussed above could cause an outage of our infrastructure, which could cause short-term disruption in operations or, in the event of a longer disruption, lead to a substantial denial of service to our customers and ultimately to production downtime, recovery costs and customer claims for breach of contract, as well as reputational damage and impact to employee morale and productivity.
We rely on service providers for infrastructure and cloud-based products.
We use a number of third-party service providers for key components of our infrastructure, particularly with respect to development and delivery of our cloud-based products. The utilization of these service providers gives us greater flexibility in efficiently delivering a more tailored, scalable customer experience but also exposes us to additional risks and vulnerabilities. Those of our products and services that depend upon hosted components delivered by third parties are vulnerable to security risks inherent in web-based technologies, including greater risk of unauthorized access to or use of customers’ protected data. Interception of data transmission, misappropriation or modification of data, corruption of data and attacks by bad actors against our service providers may also adversely affect our products or product and service delivery. Malicious code, viruses or vulnerabilities that are undetected by our service providers may disrupt our business operations generally and may have a disproportionate effect on those of our products that are developed and delivered in the cloud environment. These risks, though largely outside our control, may impact customer perception of our products, service and support, and may damage our brand. While we devote resources to maintaining the security and integrity of our products and systems, as well as ensuring adequate due diligence for our third-party service providers, cloud security and reliability is inherently challenging. In the event of a material breach of data hosted by our service providers or a serious security incident on behalf of, caused by or experienced by a service provider, we may experience significant operational and technical difficulties, loss of data including customer data, diminished competitive position or reputation, and loss of customer engagement, which could result in civil liabilities and a negative impact to financial performance.
Financial Risks
Our revenue is subject to increased volatility due to the adoption of a new revenue recognition accounting standard on January 1, 2018.
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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). We adopted ASU 2014-09 and its related amendments (collectively known as Accounting Standards Codification (ASC) 606) on January 1, 2018 which significantly impacted the timing, allocation and presentation of our lease license, perpetual license and maintenance revenue. Under previous revenue guidance, revenue was recognized ratably from the sale of software lease licenses and software maintenance subscriptions. However, under ASC 606, the license component of lease revenue is recognized up front. The post-contract support portion of lease license contracts continues to be recognized over the contract term, but it is now allocated to maintenance and service revenue.
We continue to sell perpetual licenses that involve the payment of a single, upfront fee. Historically, these licenses have been more typical in the computer software industry and remain as the preferred licensing approach in certain markets. The revenue associated with perpetual licenses continues to be recognized up front, consistent with prior revenue guidance.
The adoption of this revenue recognition guidance, coupled with our continued sales of perpetual licenses, creates the likelihood for software license revenue volatility to increase across periods, particularly as compared to our results under the previous revenue recognition standard. Our revenue in any period will depend significantly on sales contracts completed during that period.
Changes in existing financial accounting standards could adversely impact our financial results and operations.
Changes in existing accounting rules or practices, new accounting pronouncements, or varying interpretations of current accounting pronouncements could have a significant adverse effect on our results of operations or the manner in which we conduct our business.
In addition, we could incur significant costs for changes to our business systems, processes and internal controls as a result of the transition. These costs could have a significant adverse impact on our results of operations and cash flows. The transition could also cause management to divert time from day-to-day operations, which could impact our business. If we are unable to successfully transition our business systems, processes and internal controls before the guidance effective date, it could impact our ability to meet financial reporting deadlines. For further information on the impact of recently issued accounting guidance, see Note 2 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Changes to tax laws, variable tax estimates and tax authority audits could impact our financial results and operations.
Our operations are subject to income and transaction taxes in the U.S. and in multiple foreign jurisdictions. A change in the tax law in the jurisdictions in which we do business, including an increase in tax rates, an adverse change in the treatment of an item of income or expense, or a decrease in tax rates in a jurisdiction in which we have significant deferred tax assets, could result in a material increase in tax expense. Furthermore, we have recorded significant deferred tax liabilities related to acquired intangible assets that are not deductible for tax purposes. These deferred tax liabilities are based on future statutory tax rates in the locations in which the intangible assets are recorded. Any future changes in statutory tax rates would be recorded as an adjustment to the deferred tax liabilities in the period the change is announced and could have a material impact on our effective tax rate during that period.
We also make significant estimates in determining our worldwide income tax provision. These estimates involve complex tax regulations in many jurisdictions and are subject to many transactions and calculations in which the ultimate tax outcome is uncertain. The outcome of tax matters could be different than the estimates reflected in the historical income tax provision and related accruals. Such differences could have a material impact on income tax expense and net income in the periods in which such determinations are made.
The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities. These audits can result in additional assessments, including interest and penalties. Our estimates for liabilities associated with uncertain tax positions is highly judgmental and actual future outcomes may result in favorable or unfavorable adjustments to our estimated tax liabilities, including estimates for uncertain tax positions, in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis.
Our indebtedness could adversely affect our business, financial condition and results of operations.
In connection with our acquisition of LST, we borrowed $500.0 million under a term loan facility which matures on November 1, 2024. We also have access to a $500.0 million revolving credit facility, which includes a $50.0 million sublimit for the issuance of letters of credit. The credit agreement governing these loans contains customary representations and warranties, affirmative and negative covenants and events of default. The credit agreement also contains a financial covenant requiring us
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to maintain a consolidated leverage ratio of indebtedness to earnings before interest, taxes, depreciation and amortization not exceeding 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 $250.0 million.
Notwithstanding the limits contained in the credit agreement governing our credit facility, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, share repurchases, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of debt could intensify. Specifically, our level of debt could:
• | make it more difficult for us to satisfy our debt obligations and other ongoing business obligations, which may result in defaults; |
• | result in an event of default if we fail to comply with the financial and other covenants contained in the agreement governing our debt, which could result in all of our debt becoming immediately due and payable or require us to negotiate an amendment to financial or other covenants that could cause us to incur additional fees and expenses; |
• | limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements; |
• | reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes; |
• | increase our vulnerability to the impact of adverse economic and industry conditions; |
• | expose us to the risk of increased interest rates as certain of our borrowings, including borrowings under the credit facility, are at variable rates of interest; |
• | limit our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate, and the overall economy; |
• | place us at a competitive disadvantage compared to other, less leveraged competitors; and |
• | increase our cost of borrowing. |
Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under our debt agreements.
Furthermore, borrowings under the credit agreement use the London Interbank Offering Rate (LIBOR) as a benchmark for establishing the interest rate. LIBOR has been the subject of recent national, international and other regulatory guidance and proposals for reform, and the financial industry is currently transitioning away from LIBOR as a benchmark for the interbank lending market. The consequences of these developments cannot be entirely predicted but could include an increase in the cost of our variable rate indebtedness.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Our executive offices and those related to certain domestic product development, marketing, production and administration are located in a LEED certified, 186,000 square foot office facility in Canonsburg, Pennsylvania. The lease for this facility was effective as of September 14, 2012 and expires on December 31, 2029, excluding any renewal or termination options.
We own: a 70,000 square foot office facility in Lebanon, New Hampshire; a 62,000 square foot office building near our current Canonsburg headquarters; a 59,000 square foot facility in Pune, India; a 40,000 square foot campus in Livermore, California; and a 5,000 square foot facility in Apex, North Carolina.
We also lease office space in various locations throughout the world. We own substantially all equipment used in our facilities. Management believes that, in most geographic locations, our facilities allow for sufficient space to support present and future
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foreseeable needs, including such expansion and growth as the business may require. In other geographic locations, we expect that we will be required to expand capacity beyond that which we currently own or lease.
Our properties and equipment are in good operating condition and are adequate for our current needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.
ITEM 3. | LEGAL PROCEEDINGS |
We are 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 our opinion, the resolution of pending matters is not expected to have a material adverse effect on our 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 our results of operations, cash flows or financial position.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock trades on the Nasdaq Global Select Market tier of the Nasdaq Stock Market under the symbol: "ANSS".
On February 14, 2020, there were 126 stockholders of record.
We have not historically paid cash dividends on our common stock as we have retained earnings primarily for acquisitions, for future business opportunities, to make payments on outstanding debt balances and to repurchase stock when authorized by the Board of Directors and when such repurchase meets our objectives. We review our policy with respect to the payment of dividends from time to time; however, there can be no assurance that any dividends will be paid in the future.
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Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return of our common stock, based on the market price per share of our common stock, with the total return of companies included within the Nasdaq Composite Stock Market Index, the S&P 500 Stock Index, a new industry peer group of seven companies (Autodesk, Inc., PTC Inc., Cadence Design Systems, Inc., Synopsys, Inc., Altair Engineering Inc., Aspen Technology, Inc. and Dassault Systemes SE) and an old industry peer group of four companies (Autodesk, Inc., PTC Inc., Cadence Design Systems, Inc. and Synopsys, Inc.), for the period commencing December 31, 2014 and ending December 31, 2019. The calculation of total cumulative returns assumes a $100 investment in our common stock, the Nasdaq Composite Stock Market Index, the S&P 500 Stock Index, the new peer group and the old peer group on December 31, 2014, and the reinvestment of all dividends, and accounts for all stock splits. The historical information set forth below is not necessarily indicative of future performance.
ASSUMES $100 INVESTED ON DECEMBER 31, 2014
ASSUMES DIVIDENDS REINVESTED
FIVE FISCAL YEARS ENDED DECEMBER 31, 2019
As of December 31, | |||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||
ANSYS, Inc. | $100 | $113 | $113 | $180 | $174 | $314 | |||||
Nasdaq Composite | $100 | $107 | $116 | $151 | $147 | $200 | |||||
S&P 500 Stock Index | $100 | $101 | $114 | $138 | $132 | $174 | |||||
New Peer Group(1) | $100 | $103 | $119 | $169 | $193 | $273 | |||||
Old Peer Group | $100 | $103 | $128 | $187 | $214 | $305 | |||||
(1) The new peer group is inclusive of the old peer group plus three companies added in 2019 (Altair Engineering Inc., Aspen Technology, Inc. and Dassault Systemes SE). The companies were added to enhance the comparability of the peer group to our size and business.
Unregistered Sale of Equity Securities and Use of Proceeds
None.
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Issuer Purchases of Equity Securities
None.
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ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected financial data as of and for the year ended December 31 for each of the last five years. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included in Part IV, Item 15 of this Annual Report on Form 10-K.
Year Ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2019(1) | 2018(2) | 2017 | 2016 | 2015 | |||||||||||||||
Total revenue | $ | 1,515,892 | $ | 1,293,636 | $ | 1,095,250 | $ | 988,465 | $ | 942,753 | ||||||||||
Operating income | 515,040 | 476,574 | 390,728 | 376,242 | 353,679 | |||||||||||||||
Net income | 451,295 | 419,375 | 259,251 | 265,636 | 252,521 | |||||||||||||||
Earnings per share – basic | $ | 5.36 | $ | 4.99 | $ | 3.05 | $ | 3.05 | $ | 2.82 | ||||||||||
Weighted average shares – basic | 84,259 | 83,973 | 84,988 | 87,227 | 89,561 | |||||||||||||||
Earnings per share – diluted | $ | 5.25 | $ | 4.88 | $ | 2.98 | $ | 2.99 | $ | 2.76 | ||||||||||
Weighted average shares – diluted | 85,925 | 85,913 | 86,854 | 88,969 | 91,502 | |||||||||||||||
Total assets | $ | 4,838,887 | $ | 3,265,964 | $ | 2,941,623 | $ | 2,800,526 | $ | 2,729,904 | ||||||||||
Working capital | 860,340 | 786,410 | 661,713 | 630,301 | 592,280 | |||||||||||||||
Long-term liabilities | 690,368 | 91,650 | 87,239 | 53,021 | 51,331 | |||||||||||||||
Stockholders' equity | 3,453,379 | 2,649,547 | 2,245,831 | 2,208,405 | 2,194,427 | |||||||||||||||
Cash provided by operating activities(3) | 499,936 | 484,988 | 427,660 | 365,980 | 375,699 | |||||||||||||||
(1)Effective January 1, 2019, we adopted new guidance on leases. We elected to adopt the change in accounting principle using the modified retrospective approach. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance (ASC 840). For further information, see Note 2 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
(2)Effective January 1, 2018, we adopted new guidance on revenue recognition. We elected to adopt the change in accounting principle using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. For further information, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
(3)During fiscal year 2019, we retrospectively adopted new guidance on the accounting for costs incurred to implement a cloud computing arrangement (CCA) that is a service arrangement. As a result of the adoption, operating cash flows decreased with a corresponding increase to investing cash flows by $2.5 million, $1.4 million and $2.8 million for the years ending December 31, 2019, 2018 and 2017, respectively. The adoption had no impact on our consolidated balance sheets or consolidated statements of income. Fiscal years 2016 and 2015 have not been restated in the table above. For further information, see Note 2 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
In the table above, the comparability of information among the years presented is impacted by our acquisitions. The operating results of our acquisitions have been included in the results of operations since their respective acquisition dates. For further information, see the “Acquisitions” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note 4 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
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ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Overall GAAP and Non-GAAP Results
Our growth rates of GAAP and non-GAAP results for the year ended December 31, 2019 as compared to the year ended December 31, 2018 were as follows:
Year Ended December 31, 2019 | |||||
GAAP | Non-GAAP | ||||
Revenue | 17.2 | % | 17.3 | % | |
Operating income | 8.1 | % | 12.0 | % | |
Diluted earnings per share | 7.6 | % | 10.0 | % | |
We experienced higher revenue during the year ended December 31, 2019 from double-digit growth in lease licenses, maintenance and service, partially driven by contributions from our recent acquisitions. We also experienced increased operating expenses primarily due to increased personnel costs, higher stock-based compensation and additional operating expenses related to acquisitions, 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 adjustments 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
Our comparative financial results were impacted by fluctuations in the U.S. Dollar during the year ended December 31, 2019 as compared to the year ended December 31, 2018. The impacts on our revenue and operating income due to currency fluctuations are reflected in the table below. Amounts in brackets indicate an adverse impact from currency fluctuations.
Year Ended December 31, 2019 | |||||||
(in thousands) | GAAP | Non-GAAP | |||||
Revenue | $ | (24,008 | ) | $ | (24,235 | ) | |
Operating income | $ | (10,213 | ) | $ | (11,062 | ) | |
In constant currency, our growth rates were as follows:
Year Ended December 31, 2019 | |||||
GAAP | Non-GAAP | ||||
Revenue | 19.0 | % | 19.2 | % | |
Operating income | 10.2 | % | 13.8 | % | |
Constant currency amounts exclude the effects 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. Constant currency growth rates are calculated by adjusting the 2019 reported revenue and operating income amounts by the 2019 currency fluctuation impacts and comparing to the 2018 comparable period reported revenue and operating income amounts.
Other Financial Information
Our financial position includes $872.4 million in cash and short-term investments, and working capital of $860.3 million as of December 31, 2019.
During the year ended December 31, 2019, we repurchased 0.3 million shares for $59.1 million at an average price of $179.41 per share under our stock repurchase program.
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Business
Ansys, a Delaware corporation formed in 1994, 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, we employed approximately 4,100 people as of December 31, 2019. We focus 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. We distribute our suite of simulation technologies through a global network of independent resellers and distributors (collectively, channel partners) and direct sales offices in strategic, global locations. It is our intention to continue to maintain this hybrid sales and distribution model.
We license our technology to businesses, educational institutions and governmental agencies. Growth in our revenue is affected by the strength of global economies, general business conditions, currency exchange rate fluctuations, customer budgetary constraints and the competitive position of our products. Please see Part I. Item 1A. of this Annual Report on Form 10-K for a complete discussion of factors that might impact our financial condition and operating results. We believe that the features, functionality and integrated multiphysics capabilities of our 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. We make 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, we believe that our overall performance is best measured by fiscal year results rather than by quarterly results. Please see the sub-section entitled "Financial Risks" under Part I. Item 1A. of this Annual Report on Form 10-K for additional discussion of the potential impact of our sales forecasts on our financial condition, cash flows and operating results.
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 our software products as compared to our competitors; investing in research and development to develop new and innovative products and increase the capabilities of our existing products; supplying new products and services; focusing on customer needs, training, consulting and support; and enhancing our distribution channels. We also consider acquisitions to supplement our global engineering talent, product offerings and distribution channels.
Geographic Trends
The following table presents our geographic constant currency revenue growth during the year ended December 31, 2019 as compared to the year ended December 31, 2018:
Year Ended December 31, 2019 | ||
Americas | 25.4 | % |
Europe, Middle East and Africa (EMEA) | 13.8 | % |
Asia-Pacific | 15.6 | % |
Total | 19.0 | % |
We continue to focus on a number of sales improvement activities across the geographic regions, including sales hiring, pipeline building, productivity initiatives and customer engagement activities.
As trade tensions between the U.S. and China continue, as well as the uncertainty around China's ability to control the coronavirus outbreak, our ability to sell and ship our products to certain customers and our ability to collect against existing trade receivables may be further restricted and could have an adverse effect on our business, results of operations or financial condition. For additional details, refer to Part I. Item 1A. of this Annual Report on Form 10-K.
Industry Commentary:
Our three largest industries — high-tech, automotive, and aerospace and defense (A&D) — remained strong throughout 2019. The high-tech industry was positively impacted by companies' investments in 5G and smart connected products. The automotive industry continued its momentum due to continued investments by our customers to capture the disruptive mobility trends of autonomy and electrification. Defense spending continued to support growth in the aerospace and defense industry.
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Acquisitions
On November 1, 2019, we completed the acquisition of 100% of the shares of LST, the premier provider of explicit dynamics and other advanced finite element analysis technology, for a purchase price of $777.8 million. The acquisition empowers our customers to solve a new class of engineering challenges, including developing safer automobiles, aircraft and trains while reducing or even eliminating the need for costly physical testing.
On February 1, 2019, we completed the acquisition of 100% of the shares of Granta Design, the premier provider of materials information technology, for a purchase price of $208.7 million. The acquisition expands our portfolio into this important area, giving customers access to materials intelligence, including data that is critical to successful simulations.
Additionally, during the year ended December 31, 2019, we acquired Dynardo, Helic and DfR Solutions to combine the acquired technologies with our existing comprehensive multiphysics portfolio. These acquisitions were not individually significant. The combined purchase price of these acquisitions was $136.2 million.
During the year ended December 31, 2018, we 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. The acquisition extended our 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.
During the year ended December 31, 2017, we completed various acquisitions to expand our customer base and accelerate the development of new and innovative products to the marketplace while lowering design and engineering costs for customers. The acquisitions were not individually significant. The combined purchase price of the acquisitions was approximately $67.0 million.
For further information on our business combinations during the years ended December 31, 2019, 2018 and 2017, see Note 4 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
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Results of Operations
For purposes of the following discussion and analysis, the table below sets forth certain consolidated financial data for the years 2019, 2018 and 2017. The operating results of our acquisitions have been included in the results of operations since their respective acquisition dates.
Year Ended December 31, | ||||||||||||
(in thousands) | 2019 | 2018 | 2017 | |||||||||
Revenue: | ||||||||||||
Software licenses | $ | 699,630 | $ | 576,717 | $ | 624,964 | ||||||
Maintenance and service | 816,262 | 716,919 | 470,286 | |||||||||
Total revenue | 1,515,892 | 1,293,636 | 1,095,250 | |||||||||
Cost of sales: | ||||||||||||
Software licenses | 23,944 | 18,619 | 34,421 | |||||||||
Amortization | 21,710 | 27,034 | 36,794 | |||||||||
Maintenance and service | 120,619 | 110,232 | 78,949 | |||||||||
Total cost of sales | 166,273 | 155,885 | 150,164 | |||||||||
Gross profit | 1,349,619 | 1,137,751 | 945,086 | |||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 521,200 | 413,580 | 338,640 | |||||||||
Research and development | 298,210 | 233,802 | 202,746 | |||||||||
Amortization | 15,169 | 13,795 | 12,972 | |||||||||
Total operating expenses | 834,579 | 661,177 | 554,358 | |||||||||
Operating income | 515,040 | 476,574 | 390,728 | |||||||||
Interest income | 12,796 | 11,419 | 6,962 | |||||||||
Interest expense | (3,461 | ) | (59 | ) | (86 | ) | ||||||
Other expense, net | (1,792 | ) | (849 | ) | (1,910 | ) | ||||||
Income before income tax provision | 522,583 | 487,085 | 395,694 | |||||||||
Income tax provision | 71,288 | 67,710 | 136,443 | |||||||||
Net income | $ | 451,295 | $ | 419,375 | $ | 259,251 | ||||||
Effective January 1, 2018, we adopted new guidance on revenue recognition. We elected to adopt the change in accounting principle using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. For further information, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
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Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenue:
Year Ended December 31, | Change | ||||||||||||||||
(in thousands, except percentages) | 2019 | 2018 | Amount | % | Constant Currency % | ||||||||||||
Revenue: | |||||||||||||||||
Lease licenses | $ | 406,043 | $ | 275,619 | $ | 130,424 | 47.3 | 49.4 | |||||||||
Perpetual licenses | 293,587 | 301,098 | (7,511 | ) | (2.5 | ) | (1.1 | ) | |||||||||
Software licenses | 699,630 | 576,717 | 122,913 | 21.3 | 23.1 | ||||||||||||
Maintenance | 760,574 | 676,883 | 83,691 | 12.4 | 14.3 | ||||||||||||
Service | 55,688 | 40,036 | 15,652 | 39.1 | 41.5 | ||||||||||||
Maintenance and service | 816,262 | 716,919 | 99,343 | 13.9 | 15.8 | ||||||||||||
Total revenue | $ | 1,515,892 | $ | 1,293,636 | $ | 222,256 | 17.2 | 19.0 | |||||||||
Our revenue in the year ended December 31, 2019 increased 17.2% as compared to the year ended December 31, 2018, or 19.0% in constant currency. The growth rate was favorably impacted by our continued investments in our global sales, support and marketing organizations, as well as our 2019 and 2018 acquisitions which contributed incremental revenue of $72.9 million. Lease license revenue increased 47.3%, or 49.4% in constant currency, as compared to the year ended December 31, 2018, 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 years and the maintenance portion of lease license contracts each contributed to maintenance revenue growth of 12.4%, or 14.3% 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 39.1%, or 41.5% in constant currency, as compared to the year ended December 31, 2018. Perpetual license revenue, which is derived primarily from new sales during the year ended December 31, 2019, decreased 2.5%, or 1.1% in constant currency, as compared to the year ended December 31, 2018.
We continue to experience increased interest by some of our larger customers in enterprise agreements that often include longer-term, time-based licenses involving a larger number of our 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 and corresponding revenue growth 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, we are also experiencing a shifting preference from perpetual licenses to time-based licenses across a broader spectrum of our customers.
With respect to revenue, on average for the year ended December 31, 2019, the U.S. Dollar was approximately 3.3% stronger, when measured against our primary foreign currencies, than for the year ended December 31, 2018. The table below presents the impacts of currency fluctuations on revenue for the year ended December 31, 2019. Amounts in brackets indicate an adverse impact from currency fluctuations.
(in thousands) | Year Ended December 31, 2019 | ||
Euro | $ | (17,361 | ) |
South Korean Won | (5,097 | ) | |
British Pound | (1,881 | ) | |
Japanese Yen | 1,791 | ||
Other | (1,460 | ) | |
Total | $ | (24,008 | ) |
The net overall stronger U.S. Dollar also resulted in decreased operating income of $10.2 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018.
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As a percentage of revenue, our international and domestic revenues, and our direct and indirect revenues, were as follows:
Year Ended December 31, | |||||
2019 | 2018 | ||||
International | 57.9 | % | 60.9 | % | |
Domestic | 42.1 | % | 39.1 | % | |
Direct | 77.1 | % | 77.6 | % | |
Indirect | 22.9 | % | 22.4 | % | |
In valuing deferred revenue on the balance sheets of our recent acquisitions as of their respective acquisition dates, we applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to the historical carrying amount. As a result, our post-acquisition revenue will be less than the sum of what would have otherwise been reported by us and each acquiree absent the acquisitions. The impacts on reported revenue were $12.5 million and $9.4 million for the years ended December 31, 2019 and 2018, respectively. The expected impacts on reported revenue are $3.9 million and $8.0 million for the quarter ending March 31, 2020 and the year ending December 31, 2020, respectively.
Cost of Sales and Operating Expenses:
The tables below reflect our operating results as presented on the consolidated statements of income, which are inclusive of foreign currency translation impacts. Amounts included in the discussions that follow each table are provided in constant currency and are inclusive of costs related to our acquisitions. The impact of foreign exchange translation is discussed separately, where material. The 2019 and 2018 acquisitions contributed $54.7 million to the overall increase in cost of sales and operating expenses with the most significant contributions from the OPTIS (May 2, 2018) and Granta Design (February 1, 2019) acquisitions of $17.3 million and $18.9 million, respectively.
Year Ended December 31, | ||||||||||||||||||
2019 | 2018 | Change | ||||||||||||||||
(in thousands, except percentages) | Amount | % of Revenue | Amount | % of Revenue | Amount | % | ||||||||||||
Cost of sales: | ||||||||||||||||||
Software licenses | $ | 23,944 | 1.6 | $ | 18,619 | 1.4 | $ | 5,325 | 28.6 | |||||||||
Amortization | 21,710 | 1.4 | 27,034 | 2.1 | (5,324 | ) | (19.7 | ) | ||||||||||
Maintenance and service | 120,619 | 8.0 | 110,232 | 8.5 | 10,387 | 9.4 | ||||||||||||
Total cost of sales | 166,273 | 11.0 | 155,885 | 12.1 | 10,388 | 6.7 | ||||||||||||
Gross profit | $ | 1,349,619 | 89.0 | $ | 1,137,751 | 87.9 | $ | 211,868 | 18.6 | |||||||||
Software Licenses: The increase in the cost of software licenses was primarily due to increased third-party royalties of $5.6 million.
Amortization: The net decrease in amortization expense was primarily due to a decrease in the amortization of trade names and acquired technology due to assets that became fully amortized, which was partially offset by the amortization of newly acquired intangible assets.
Maintenance and Service: The net increase in maintenance and service costs was primarily due to the following:
• | Increased salaries of $4.0 million. |
• | Increased stock-based compensation of $3.3 million. |
• | Increased consulting costs of $1.7 million. |
• | Increased IT maintenance and software hosting costs of $1.3 million. |
• | Decreased costs related to foreign exchange translation of $2.0 million due to a stronger U.S. Dollar. |
The improvement in gross profit was a result of the increase in revenue, partially offset by the increase in the related cost of sales.
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Year Ended December 31, | |||||||||||||||||
2019 | 2018 | Change | |||||||||||||||
(in thousands, except percentages) | Amount | % of Revenue | Amount | % of Revenue | Amount | % | |||||||||||
Operating expenses: | |||||||||||||||||
Selling, general and administrative | $ | 521,200 | 34.4 | $ | 413,580 | 32.0 | $ | 107,620 | 26.0 | ||||||||
Research and development | 298,210 | 19.7 | 233,802 | 18.1 | 64,408 | 27.5 | |||||||||||
Amortization | 15,169 | 1.0 | 13,795 | 1.1 | 1,374 | 10.0 | |||||||||||
Total operating expenses | $ | 834,579 | 55.1 | $ | 661,177 | 51.1 | $ | 173,402 | 26.2 | ||||||||
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 $63.7 million. |
• | Increased stock-based compensation of $13.5 million. |
• | Increased business travel of $6.5 million. |
• | Increased marketing expenses of $5.4 million. |
• | Increased professional fees of $4.5 million. |
• | Increased consulting costs of $4.2 million. |
• | Decreased costs related to foreign exchange translation of $7.1 million due to a stronger U.S. Dollar. |
We anticipate that we will continue to make targeted investments in our global sales and marketing organizations and our global business infrastructure to enhance and support our revenue-generating activities.
Research and Development: The increase in research and development costs was primarily due to the following:
• | Increased salaries, incentive compensation and other headcount-related costs of $41.1 million. |
• | Increased stock-based compensation of $16.0 million. |
We have traditionally invested significant resources in research and development activities and intend to continue to make investments in expanding the ease of use and capabilities of our broad portfolio of simulation software products.
Interest Income: Interest income for the year ended December 31, 2019 was $12.8 million as compared to $11.4 million for the year ended December 31, 2018. Interest income increased as a result of an increase in the average rate of return on invested cash balances.
Interest Expense: Interest expense for the year ended December 31, 2019 was $3.5 million as compared to $0.1 million for the year ended December 31, 2018. Interest expense increased as a result of the interest incurred on debt financing obtained in fiscal year 2019.
Other Expense, net: Our other expense consisted of the following:
Year Ended December 31, | |||||||
(in thousands) | 2019 | 2018 | |||||
Foreign currency losses, net | $ | (2,510 | ) | $ | (3,058 | ) | |
Investment gains, net | 333 | 2,204 | |||||
Other | 385 | 5 | |||||
Total other expense, net | $ | (1,792 | ) | $ | (849 | ) | |
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Income Tax Provision: Our income before income tax provision, income tax provision and effective tax rate were as follows:
Year Ended December 31, | |||||||
(in thousands, except percentages) | 2019 | 2018 | |||||
Income before income tax provision | $ | 522,583 | $ | 487,085 | |||
Income tax provision | $ | 71,288 | $ | 67,710 | |||
Effective tax rate | 13.6 | % | 13.9 | % | |||
The decrease in the effective tax rate from the prior year was primarily due to $6.7 million of benefit related to the release of valuation allowance in a foreign jurisdiction and $1.8 million of benefit related to transition tax recorded in 2019. These benefits are offset by $6.7 million of benefit recorded in 2018 related to global legal entity restructuring activities that did not recur in 2019.
When compared to the federal and state combined statutory rate for each respective period, the effective tax rates for the years ended December 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: Our net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
Year Ended December 31, | |||||||
(in thousands, except per share data) | 2019 | 2018 | |||||
Net income | $ | 451,295 | $ | 419,375 | |||
Diluted earnings per share | $ | 5.25 | $ | 4.88 | |||
Weighted average shares outstanding - diluted | 85,925 | 85,913 | |||||
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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue:
Year Ended December 31, | Change | ||||||||||||||||
(in thousands, except percentages) | 2018 (ASC 606) | 2017 (ASC 605) | Amount | % | Constant Currency % | ||||||||||||
Revenue: | |||||||||||||||||
Lease licenses | $ | 275,619 | $ | 376,886 | $ | (101,267 | ) | (26.9 | ) | (27.4 | ) | ||||||
Perpetual licenses | 301,098 | 248,078 | 53,020 | 21.4 | 20.2 | ||||||||||||
Software licenses | 576,717 | 624,964 | (48,247 | ) | (7.7 | ) | (8.5 | ) | |||||||||
Maintenance | 676,883 | 440,428 | 236,455 | 53.7 | 51.6 | ||||||||||||
Service | 40,036 | 29,858 | 10,178 | 34.1 | 33.1 | ||||||||||||
Maintenance and service | 716,919 | 470,286 | 246,633 | 52.4 | 50.4 | ||||||||||||
Total revenue | $ | 1,293,636 | $ | 1,095,250 | $ | 198,386 | 18.1 | 16.8 | |||||||||
The adoption of ASC 606 significantly impacted the timing, allocation and presentation of lease license, perpetual license and maintenance revenue. For further information about this adoption, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
For purposes of comparability, the changes in the following table and the related discussion that follows are presented in accordance with ASC 605.
Year Ended December 31, | Change | ||||||||||||||
(in thousands, except percentages) | 2018 (ASC 605) | 2017 (ASC 605) | Amount | % | Constant Currency % | ||||||||||
Revenue: | |||||||||||||||
Lease licenses | $ | 421,268 | $ | 376,886 | $ | 44,382 | 11.8 | 10.7 | |||||||
Perpetual licenses | 255,578 | 248,078 | 7,500 | 3.0 | 2.0 | ||||||||||
Software licenses | 676,846 | 624,964 | 51,882 | 8.3 | 7.2 | ||||||||||
Maintenance | 499,510 | 440,428 | 59,082 | 13.4 | 11.6 | ||||||||||
Service | 40,113 | 29,858 | 10,255 | 34.3 | 33.4 | ||||||||||
Maintenance and service | 539,623 | 470,286 | 69,337 | 14.7 | 13.0 | ||||||||||
Total revenue | $ | 1,216,469 | $ | 1,095,250 | $ | 121,219 | 11.1 | 9.7 | |||||||
Our ASC 605 revenue in the year ended December 31, 2018 increased 11.1% as compared to the year ended December 31, 2017, while revenue grew 9.7% in constant currency. The growth rate was favorably impacted by our continued investments in our global sales, support and marketing organizations; continued progress with market segmentation and go-to-market adjustments; and the May 2018 acquisition of OPTIS. Lease license revenue increased 11.8%, or 10.7% in constant currency, as compared to the year ended December 31, 2017. Perpetual license revenue, which is derived primarily from new sales during the year, increased 3.0%, or 2.0% in constant currency, as compared to the year ended December 31, 2017. Annual maintenance contracts that were sold with new perpetual licenses, along with maintenance contracts for perpetual licenses sold in previous years, contributed to maintenance revenue growth of 13.4%, or 11.6% 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 34.3%, or 33.4% in constant currency, as compared to the year ended December 31, 2017.
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With respect to revenue, on average for the year ended December 31, 2018, the U.S. Dollar was approximately 2.3% weaker and 2.6% weaker, when measured against our primary foreign currencies, than for the year ended December 31, 2017 under ASC 606 and ASC 605, respectively. The table below presents the impacts of currency fluctuations on revenue for the year ended December 31, 2018. Amounts in brackets indicate a net adverse impact from currency fluctuations.
Year Ended December 31, 2018 | |||||||
(in thousands) | ASC 606 | ASC 605 | |||||
Euro | $ | 12,498 | $ | 11,915 | |||
Japanese Yen | 2,088 | 2,075 | |||||
South Korean Won | 918 | 1,182 | |||||
British Pound | 870 | 1,083 | |||||
Indian Rupee | (1,623 | ) | (1,372 | ) | |||
Other | (129 | ) | (36 | ) | |||
Total | $ | 14,622 | $ | 14,847 | |||
The net overall weaker U.S. Dollar also resulted in increased operating income of $9.6 million and $10.3 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017 under ASC 606 and ASC 605, respectively.
As a percentage of revenue, our international and domestic revenues, and our direct and indirect revenues, were as follows:
Year Ended December 31, | ||||||||
2018 (ASC 606) | 2018 (ASC 605) | 2017 (ASC 605) | ||||||
International | 60.9 | % | 60.5 | % | 61.9 | % | ||
Domestic | 39.1 | % | 39.5 | % | 38.1 | % | ||
Direct | 77.6 | % | 76.5 | % | 75.2 | % | ||
Indirect | 22.4 | % | 23.5 | % | 24.8 | % | ||
In valuing deferred revenue on the balance sheets of our recent acquisitions as of their respective acquisition dates, we applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to the historical carrying amount. As a result, our post-acquisition revenue will be less than the sum of what would have otherwise been reported by us and each acquiree absent the acquisitions. Under ASC 606, the impact on reported revenue was $9.4 million for the year ended December 31, 2018. Under ASC 605, the impacts on reported revenue were $15.6 million and $2.9 million for the years ended December 31, 2018 and 2017, respectively.
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Cost of Sales and Operating Expenses:
The tables below reflect our operating results as presented on the 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.
Year Ended December 31, | ||||||||||||||||||
2018 | 2017 | Change | ||||||||||||||||
(in thousands, except percentages) | Amount | % of Revenue | Amount | % of Revenue | Amount | % | ||||||||||||
Cost of sales: | ||||||||||||||||||
Software licenses | $ | 18,619 | 1.4 | $ | 34,421 | 3.1 | $ | (15,802 | ) | (45.9 | ) | |||||||
Amortization | 27,034 | 2.1 | 36,794 | 3.4 | (9,760 | ) | (26.5 | ) | ||||||||||
Maintenance and service | 110,232 | 8.5 | 78,949 | 7.2 | 31,283 | 39.6 | ||||||||||||
Total cost of sales | 155,885 | 12.1 | 150,164 | 13.7 | 5,721 | 3.8 | ||||||||||||
Gross profit | $ | 1,137,751 | 87.9 | $ | 945,086 | 86.3 | $ | 192,665 | 20.4 | |||||||||
Software Licenses: The net decrease in the cost of software licenses was primarily due to the following:
• | Reclassification of $18.2 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 $1.6 million for the period from the acquisition date (May 2, 2018) through December 31, 2018. |
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 increase in maintenance and service costs was primarily due to the following:
• | Reclassification of $18.2 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 $5.5 million. |
• | OPTIS-related maintenance and service expenses of $2.8 million for the period from the acquisition date (May 2, 2018) through December 31, 2018. |
• | Increased salaries of $2.1 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.
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Year Ended December 31, | |||||||||||||||||
2018 | 2017 | Change | |||||||||||||||
(in thousands, except percentages) | Amount | % of Revenue | Amount | % of Revenue | Amount | % | |||||||||||
Operating expenses: | |||||||||||||||||
Selling, general and administrative | $ | 413,580 | 32.0 | $ | 338,640 | 30.9 | $ | 74,940 | 22.1 | ||||||||
Research and development | 233,802 | 18.1 | 202,746 | 18.5 | 31,056 | 15.3 | |||||||||||
Amortization | 13,795 | 1.1 | 12,972 | 1.2 | 823 | 6.3 | |||||||||||
Total operating expenses | $ | 661,177 | 51.1 | $ | 554,358 | 50.6 | $ | 106,819 | 19.3 | ||||||||
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 $35.2 million. |
• | Increased stock-based compensation of $15.3 million. |
• | OPTIS-related selling, general and administrative expenses of $13.8 million for the period from the acquisition date (May 2, 2018) through December 31, 2018. |
• | Increased business travel of $3.9 million. |
• | Increased severance expenses of $3.7 million. |
• | Decreased consulting costs of $7.1 million. |
Research and Development: The net increase in research and development costs was primarily due to the following:
• | Increased salaries, incentive compensation and other headcount-related costs of $15.2 million. |
• | Increased stock-based compensation of $11.6 million. |
• | OPTIS-related research and development expenses of $5.9 million for the period from the acquisition date (May 2, 2018) through December 31, 2018. |
• | Increased IT maintenance and software hosting costs of $1.5 million. |
• | Restructuring costs of $6.8 million related to 2017 workforce realignment activities that did not reoccur in 2018. |
Interest Income: Interest income for the year ended December 31, 2018 was $11.4 million as compared to $7.0 million for the year ended December 31, 2017. Interest income increased as a result of an increase in the average rate of return on invested cash balances.
Other Expense, net: Our other expense, net consists of the following:
Year Ended December 31, | |||||||
(in thousands) | 2018 | 2017 | |||||
Foreign currency losses, net | $ | (3,058 | ) | $ | (1,935 | ) | |
Investment gains, net | 2,204 | 24 | |||||
Other | 5 | 1 | |||||
Total other expense, net | $ | (849 | ) | $ | (1,910 | ) | |
Income Tax Provision: Our income before income tax provision, income tax provision and effective tax rate were as follows:
Year Ended December 31, | |||||||||||
(in thousands, except percentages) | 2018 (ASC 606) | 2018 (ASC 605) | 2017 (ASC 605) | ||||||||
Income before income tax provision | $ | 487,085 | $ | 409,918 | $ | 395,694 | |||||
Income tax provision | $ | 67,710 | $ | 53,067 | $ | 136,443 | |||||
Effective tax rate | 13.9 | % | 12.9 | % | 34.5 | % | |||||
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On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Reform). Tax Reform made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time federal income tax on certain unrepatriated earnings of foreign subsidiaries (transition tax); (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) creating a new provision designed to tax global intangible low-taxed income (GILTI) which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) repealing the domestic production activity deduction; (6) creating the foreign-derived intangible income deduction; (7) creating the base erosion anti-abuse tax, a new minimum tax; (8) allowing for full expensing of qualified property through bonus depreciation; and (9) creating limitations on the deductibility of certain executive compensation.
The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provided a measurement period that was limited to one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, throughout the measurement period, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 was complete in the financial statements. To the extent that a company’s accounting for certain income tax effects of Tax Reform was incomplete, but a reasonable estimate was able to be made, the company must record a provisional estimate in the financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of Tax Reform.
As further discussed below, we finalized our provisional Tax Reform calculations as of the end of the measurement period, based on guidance and information available as of the reporting date. The U.S. government has not yet issued final guidance related to a portion of the new rules enacted as part of Tax Reform. Subsequent adjustments, if any, will be recorded in the period in which guidance is finalized.
Our accounting for the impact of the reduction in the U.S. federal corporate tax rate on our deferred tax assets and liabilities is complete. Tax Reform reduced the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we recorded a net adjustment to deferred income tax expense of $1.9 million for the year ended December 31, 2017 to revalue our deferred tax assets and liabilities. No further adjustments were recorded for the year ended December 31, 2018.
Our accounting for the transition tax is complete. Reasonable estimates of certain effects were 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, we determined, 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, we recognized an additional measurement-period adjustment for the year ended December 31, 2018 of $0.9 million to the transition tax obligation and a corresponding adjustment to tax expense.
Our accounting for the indefinite reinvestment assertion is complete. In general, it is our intention to permanently reinvest all earnings in excess of previously taxed amounts. As part of Tax Reform, substantially all of the previous earnings of our non-U.S. subsidiaries were taxed through the transition tax and current earnings are taxed as part of GILTI tax expense. These taxes increased our previously taxed earnings and allow for the repatriation of the majority of our foreign earnings without any residual U.S. federal tax. During the year ended December 31, 2018, we repatriated $144.3 million of foreign cash. We did not make any adjustments related to our indefinite reinvestment assertion during the year ended December 31, 2018.
Our accounting policy choice for GILTI is complete. Under U.S. GAAP, we are 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 measurement of our deferred taxes (the deferred method). We selected the period cost method and recorded GILTI tax expense of $0.4 million in the financial statements for the year ended December 31, 2018.
The decrease in the effective tax rate from the prior year was primarily due to the reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent enacted as part of Tax Reform, the additional $15.1 million of transition tax in 2017 when compared to 2018, and a net $6.7 million benefit related to global legal entity restructuring activities. The effective tax rate was also reduced by the foreign-derived intangible income deduction, increased research and development credits and increased stock-based compensation benefits, partially offset by the loss of the domestic manufacturing deduction, which was repealed as part of Tax Reform.
When compared to the federal and state combined statutory rate, the effective tax rates for the years ended December 31, 2018 and 2017 were favorably impacted by tax benefits from stock-based compensation and research and development credits.
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Net Income: Our net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
Year Ended December 31, | |||||||||||
(in thousands, except per share data) | 2018 (ASC 606) | 2018 (ASC 605) | 2017 (ASC 605) | ||||||||
Net income | $ | 419,375 | $ | 356,851 | $ | 259,251 | |||||
Diluted earnings per share | $ | 4.88 | $ | 4.15 | $ | 2.98 | |||||
Weighted average shares outstanding - diluted | 85,913 | 85,913 | 86,854 | ||||||||
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Non-GAAP Results
We provide 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 our 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 our most comparable GAAP financial measure are described below.
ASC 606 | |||||||||||||||||||||||
Year Ended December 31, | |||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||
(in thousands, except percentages and per share data) | GAAP Results | Adjustments | Non-GAAP Results | GAAP Results | Adjustments | Non-GAAP Results | |||||||||||||||||
Total revenue | $ | 1,515,892 | $ | 12,514 | (1) | $ | 1,528,406 | $ | 1,293,636 | $ | 9,442 | (4) | $ | 1,303,078 | |||||||||
Operating income | 515,040 | 177,093 | (2) | 692,133 | 476,574 | 141,442 | (5) | 618,016 | |||||||||||||||
Operating profit margin | 34.0 | % | 45.3 | % | 36.8 | % | 47.4 | % | |||||||||||||||
Net income | $ | 451,295 | $ | 113,702 | (3) | $ | 564,997 | $ | 419,375 | $ | 94,510 | (6) | $ | 513,885 | |||||||||
Earnings per share – diluted: | |||||||||||||||||||||||
Earnings per share | $ | 5.25 | $ | 6.58 | $ | 4.88 | $ | 5.98 | |||||||||||||||
Weighted average shares | 85,925 | 85,925 | 85,913 | 85,913 | |||||||||||||||||||
(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 $116.2 million of stock-based compensation expense, $4.9 million of excess payroll taxes related to stock-based awards, $36.9 million of amortization expense associated with intangible assets acquired in business combinations, $6.6 million of transaction expenses related to business combinations and the $12.5 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 $61.2 million, adjustments related to the transition tax associated with the Tax Cuts and Jobs Act of $1.8 million, and rabbi trust income of $0.4 million. |
(4) | 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. |
(5) | Amount represents $83.3 million of stock-based compensation expense, $4.3 million of excess payroll taxes related to stock-based awards, $40.8 million of amortization expense associated with intangible assets acquired in business combinations, $3.5 million of transaction expenses related to business combinations and the $9.4 million adjustment to revenue as reflected in (4) above. |
(6) | Amount represents the impact of the adjustments to operating income referred to in (5) above, decreased for the related income tax impact of $47.9 million and increased for a measurement-period adjustment related to the Tax Cuts and Jobs Act of $0.9 million and rabbi trust expense of $0.1 million. |
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ASC 605 | |||||||||||||||||||||||
Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
(in thousands, except percentages and per share data) | GAAP Results | Adjustments | Non-GAAP Results | GAAP Results | Adjustments | Non-GAAP Results | |||||||||||||||||
Total revenue | $ | 1,216,469 | $ | 15,583 | (1) | $ | 1,232,052 | $ | 1,095,250 | $ | 2,856 | (4) | $ | 1,098,106 | |||||||||
Operating income | 399,407 | 147,583 | (2) | 546,990 | 390,728 | 118,567 | (5) | 509,295 | |||||||||||||||
Operating profit margin | 32.8 | % | 44.4 | % | |||||||||||||||||||