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(Registrant's telephone number, including area code)
N/A
(Former name, former address
and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
iCommon
Stock, $0.01 par value per share
iANSS
iNasdaq Stock Market LLC
(Nasdaq Global Select Market)
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.
iYes☒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).
iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 Exchange Act).
Yes i☐ No ☒
The
number of shares of the Registrant's Common Stock, $0.01 par value per share, outstanding as of April 28, 2023 was i86,661,338 shares.
ANSYS,
Inc. (Ansys, we, us, our) 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 high-tech, aerospace and defense, automotive, energy, industrial equipment, materials and chemicals, consumer products, healthcare and construction.
As defined by the accounting guidance for segment reporting, we operate as ione segment.
Given
the integrated approach to the multi-discipline problem-solving needs of our customers, a single sale may contain components from multiple product areas and include combined technologies. We also have a multi-year product and integration strategy that will result in new, combined products or changes to the historical product offerings. As a result, it is impracticable for us to provide accurate historical or current reporting among our various product lines.
2.iAccounting
Policies
i
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information for commercial and industrial companies, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Form 10-K). The condensed consolidated December 31, 2022 balance sheet presented is derived from the audited December 31, 2022 balance sheet included in the 2022 Form 10-K. In our opinion, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be
expected for any future period. Certain items in the notes to the condensed consolidated financial statements of prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on reported net income, comprehensive income, cash flows, total assets or total liabilities and stockholders' equity.
iAccounting Guidance Issued and Not Yet Adopted
Recently issued accounting pronouncements are not expected
to have a material impact on our financial position, results of operations or cash flows upon adoption.
i
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments such as deposits held at major banks and money market funds. Cash equivalents are carried at cost, which approximates fair value. iOur
cash and cash equivalents balances comprise the following:
Indirect
revenue, as a percentage of total revenue
i23.7
%
i27.6
%
/
Our
software license revenue is recognized up front, while maintenance and service revenue is generally recognized over the term of the contract. The shift reflected above from indirect to direct revenue was driven primarily by our previously announced acquisition of DYNAmore, a channel partner that was formerly captured in our indirect business.
Deferred Revenue
Deferred revenue consists of billings made or payments received in advance of revenue recognition from customer agreements. The timing of revenue recognition may differ from the timing of billings to customers. Payment terms vary by the type and location of customer and the products or services offered. The time between invoicing and when payment is due is not significant.
i
The
changes in deferred revenue, inclusive of both current and long-term deferred revenue, during the three months ended March 31, 2023 and 2022 were as follows:
(in thousands)
2023
2022
Beginning balance – January 1
$
i435,758
$
i412,781
Acquired
deferred revenue
i6,555
i84
Deferral
of revenue
i483,502
i423,649
Recognition
of revenue
(i509,447)
(i425,077)
Currency
translation
i701
(i6,317)
Ending
balance – March 31
$
i417,069
$
i405,120
/
i
Total
revenue allocated to remaining performance obligations as of March 31, 2023 will be recognized as revenue as follows:
(in thousands)
Next 12 months
$
i825,244
Months
13-24
i345,708
Months 25-36
i147,965
Thereafter
i38,567
Total
revenue allocated to remaining performance obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes both deferred revenue and backlog. Our backlog represents deferred revenue associated with installment billings for periods beyond the current quarterly billing cycle and committed contracts with start dates beyond the end of the current period. Revenue recognized during the three months ended March 31, 2023 and 2022 included amounts in deferred revenue and backlog at the beginning of the period of $i317.6
million and $i244.6 million, respectively.
4.iAcquisitions
During
the quarter ended March 31, 2023, we completed the acquisition of DYNAmore for a purchase price of $i139.2 million, or $i126.4 million
net of cash acquired. The acquisition expands our position as a simulation solution provider within the automotive industry. The effects of the acquisition were not material to our condensed consolidated results of operations.
During the three months ended March 31, 2023, we incurred acquisition-related expenses of $i2.2 million. Acquisition-related expenses are recognized as selling, general and administrative and research and development
expenses on the condensed consolidated statements of income.
The assets acquired and liabilities assumed in connection with the acquisition have been recorded based upon management's estimates of the fair market value as of the date of acquisition. iThe following tables summarize the fair value of consideration and the fair value of identified assets acquired and liabilities assumed for the acquisition at the date of acquisition:
Fair
Value of Consideration:
(in thousands)
Cash
$
i134,103
Non-cash
consideration
i5,056
Total consideration
$
i139,159
i
Recognized
Amounts of Identifiable Assets Acquired and Liabilities Assumed:
(in thousands)
Cash
$
i12,779
Accounts
receivable and other tangible assets
i15,751
Developed software and core technologies
i3,594
Customer
lists
i75,690
Trade names
i2,220
Accounts
payable and other liabilities
(i7,944)
Deferred revenue
(i6,555)
Net
deferred tax liabilities
(i24,997)
Total identifiable net assets
$
i70,538
Goodwill
$
i68,621
/
The
goodwill, which is not tax-deductible, is attributed to intangible assets that do not qualify for separate recognition, including the assembled workforce of the acquired business and the synergies expected to arise as a result of the acquisition.
The fair value of the assets acquired and liabilities assumed are based on preliminary calculations. The estimates and assumptions for these items are subject to change as additional information about what was known and knowable at the acquisition date is obtained during the measurement period (up to one year from the acquisition date).
We determined the fair value of our intangible assets using various valuation techniques, including the relief-from-royalty method and the multi-period excess earnings method. These models utilize certain unobservable inputs classified as Level 3 measurements as defined by ASC 820, Fair
Value Measurements and Disclosures. The determination of fair value requires considerable judgment and is sensitive to changes in underlying assumptions, estimates and market factors. Estimating fair value requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include, but are not limited to: selection of a valuation methodology, royalty rate, discount rate and attrition rate.
The
weighted-average useful life, valuation method and assumptions used to determine the fair value of the intangible assets acquired are as follows:
Intangible Asset
Weighted-Average Useful Life
Valuation Method
Assumptions
Developed
software and core technologies
i8 years
Relief-from-royalty
Royalty rate: i20.0%
Discount
rate: i15.5%
Trade names
i5 years
Relief-from-royalty
Royalty
rate: i1.0%
Discount rate: i15.5%
Customer lists
i14
years
Multi-period excess earnings
Attrition rate: i5.0%
Discount rate: i15.5%
/
2022
Acquisitions
During the year ended December 31, 2022, we completed several acquisitions to enhance our customers' experience. These acquisitions were not individually significant. The combined purchase price of these acquisitions during the year ended December 31, 2022 was $i401.7 million, or $i390.9
million net of cash acquired.
The operating results of each acquisition have been included in our condensed consolidated financial statements since each respective date of acquisition. The effects of the acquisitions were not material to our condensed consolidated results of operations.
5.iOther Receivables and Current Assets and Other Accrued Expenses and Liabilities
i
Our
other receivables and current assets and other accrued expenses and liabilities comprise the following balances:
Income
taxes receivable, including overpayments and refunds
i14,458
i28,963
Prepaid
expenses and other current assets
i63,399
i51,159
Total
other receivables and current assets
$
i222,459
$
i289,261
Accrued
vacation
i46,285
i39,118
Payroll-related
accruals
i38,255
i20,716
Consumption,
VAT and sales tax liabilities
i15,754
i41,812
Accrued
expenses and other current liabilities
i83,860
i96,574
Total
other accrued expenses and liabilities
$
i184,154
$
i198,220
/
Receivables
related to unrecognized revenue represent the current portion of billings made for customer contracts that have not yet been recognized as revenue.
Basic earnings per share (EPS) amounts are computed by dividing earnings by the weighted average number of common shares outstanding during the period. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. To the extent stock awards are anti-dilutive, they are excluded from the calculation of diluted EPS.
i
The details of basic and diluted EPS are as follows:
The changes in goodwill during the three months ended March 31, 2023 and 2022 were as follows:
(in thousands)
2023
2022
Beginning
balance – January 1
$
i3,658,267
$
i3,409,271
Acquisitions
and adjustments(1)
i69,227
i1,961
Currency
translation
i9,701
(i11,335)
Ending
balance – March 31
$
i3,737,195
$
i3,399,897
(1)
In accordance with the accounting for business combinations, we recorded adjustments to goodwill for the effect of changes in the provisional fair values of the assets acquired and liabilities assumed during the measurement period (up to one year from the acquisition date) as we obtained new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
/
During the first quarter of 2023, we completed the annual impairment test for goodwill and the indefinite-lived intangible asset and determined that these assets had not been impaired as of the test date, January 1, 2023. No events or circumstances changed during the three months ended
March 31, 2023 that would indicate that the fair values of our reporting unit and indefinite-lived intangible asset are below their carrying amounts.
The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:
•Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
•Level 2: quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; or
•Level 3: unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
A financial asset's or liability's classification
within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Our debt is classified within Level 2 of the fair value hierarchy because these borrowings are not actively traded and have a variable interest rate structure based upon market rates. The carrying amount of our debt approximates the estimated fair value. See Note 10, "Debt", for additional information on our borrowings.
i
The following
tables provide the assets carried at fair value and measured on a recurring basis:
The
cash equivalents in the preceding tables represent money market funds, valued at net asset value, with carrying values which approximate their fair values because of their short-term nature.
The short-term investments in the preceding tables represent deposits held by certain foreign subsidiaries. The deposits have fixed interest rates with original maturities ranging from ithree months to ione
year.
The deferred compensation plan investments in the preceding tables represent trading securities held in a rabbi trust for the benefit of non-employee directors. These securities consist of mutual funds traded in an active market with quoted prices. As a result, the plan assets are classified as Level 1 in the fair value hierarchy. The plan assets are recorded within other long-term assets on our condensed consolidated balance sheets.
The equity securities represent our investment in a publicly traded company. These securities are traded in an active market with quoted prices. As a result, the securities are classified as Level 1 in the fair value hierarchy. The securities are recorded within other long-term assets on our condensed consolidated balance sheets.
Our right-of-use assets and lease liabilities primarily include operating leases for office space. Our executive offices and those related to certain domestic product development, marketing, production and administration are located in a i186,000
square foot office facility in Canonsburg, Pennsylvania. The term of the lease is i183 months, which began on October 1, 2014 and expires on December 31, 2029. The lease agreement includes options to renew the contract through August 2044, an option to lease additional space in January 2025 and an option to terminate the lease in December 2025. No options are included in the lease liability as renewal is not reasonably certain. In addition,
we are reasonably certain we will not terminate the lease agreement. Absent the exercise of options in the lease, our remaining base rent (inclusive of property taxes and certain operating costs) is $i4.5 million per annum through 2024 and $i4.7
million per annum for 2025 - 2029.
i
The components of our global lease cost reflected in the condensed consolidated statements of income are as follows:
Weighted-average remaining lease term of operating leases
i6.7 years
i7.3
years
Weighted-average discount rate of operating leases
i3.2
%
i2.9
%
/
i
The
maturity schedule of the operating lease liabilities as of March 31, 2023 is as follows:
(in thousands)
Remainder of 2023
$
i20,886
2024
i25,316
2025
i21,759
2026
i19,415
2027
i18,078
Thereafter
i43,495
Total
future lease payments
i148,949
Less: Present value adjustment
(i15,100)
Present
value of future lease payments(1)
$
i133,849
(1) Includes the current portion of operating lease liabilities of $i23.6
million, which is reflected in other accrued expenses and liabilities in the condensed consolidated balance sheets.
/
There were no material leases that have been signed but not yet commenced as of March 31, 2023.
On
June 30, 2022, we entered into a credit agreement (2022 Credit Agreement) with PNC Bank, National Association, as administrative agent, swing line lender, and an L/C issuer, the lenders party thereto, and the other L/C issuers party thereto. The 2022 Credit Agreement refinanced our previous credit agreements in their entirety. Terms used in this description of the 2022 Credit Agreement with initial capital letters that are not otherwise defined herein are as defined in the 2022 Credit Agreement.
The 2022 Credit Agreement provides for a $i755.0 million
unsecured term loan facility and a $i500.0 million unsecured revolving loan facility, which includes a $i50.0
million sublimit for the issuance of letters of credit. The revolving loan facility is available for working capital and general corporate purposes. Each of the term loan facility and the revolving loan facility matures on June 30, 2027.
Borrowings under the term loan and revolving loan facilities accrue interest at a rate that is based on the Term SOFR plus an applicable margin or at the base rate plus an applicable margin, at our election. The base rate is the highest of (i) the Overnight Bank Funding Rate, plus i0.500%,
(ii) the PNC Bank, National Association prime rate, and (iii) Daily Simple SOFR plus an adjustment for SOFR plus i1.00%. The applicable margin for the borrowings is a percentage per annum based on the lower of (1) a pricing level determined by our then-current consolidated net leverage ratio and (2) a pricing level determined by our public debt rating (if available).
The 2022 Credit Agreement also provides for the option to add certain foreign subsidiaries
as borrowers and to borrow in Euros, Sterling, Yen and Swiss Francs under the revolving loan facility, up to a sublimit of $i150.0 million. Borrowings under the revolving loan facility denominated in these currencies will accrue interest at a rate that is based on (a) for Euros, €STR, (b) for Sterling, SONIA, (c) for Yen, TONAR and (d) for Swiss Francs, SARON, plus an applicable margin calculated as described above.
Under the 2022 Credit Agreement, the weighted average interest rate in effect for the three months ended March 31,
2023 was i5.56%. Under the prior credit agreements, the weighted average interest rate in effect for the three months ended March 31, 2022 was i1.35%.
The rate in effect as of March 31, 2023 and for the second quarter of 2023 under the 2022 Credit Agreement is i5.87%.
The 2022 Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. The 2022 Credit Agreement also contains a financial covenant requiring us and our subsidiaries to maintain a consolidated net leverage ratio not in
excess of i3.50 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 net leverage ratio to i4.00
to 1.00 upon the consummation of certain qualified acquisitions for which the aggregate consideration is at least $i250.0 million.
As of March 31, 2023, we had $i755.0 million
of borrowings outstanding under the term loan, with a carrying value of $i753.7 million, which is net of $i1.3 million
of unamortized debt discounts and issuance costs. The total amount was included in long-term debt. As of March 31, 2023, no borrowings were outstanding under the revolving loan facility.
As of December 31, 2022, we had $i755.0 million of borrowings outstanding under the term loan, with a carrying value of $i753.6 million,
which is net of $i1.4 million of unamortized debt discounts and issuance costs. The total amount was included in long-term debt. As of December 31, 2022, no borrowings were outstanding under the revolving loan facility.
The
increase in the effective tax rate from the prior year was primarily due to decreased benefits related to stock-based compensation, many of which were recognized discretely. These benefits were offset by non-deductible compensation.
Revenue to external customers is attributed to individual countries based upon the location of the customer. iRevenue by geographic area is as follows:
We are subject to various claims, investigations, and legal and regulatory proceedings that arise in the ordinary course of business, including, but not limited to, commercial disputes, labor and employment matters, tax audits, alleged infringement of third parties' 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 consolidated results of operations, cash flows or financial position.
Our Indian subsidiary has several service tax audits pending that have resulted in formal inquiries being received on transactions
through mid-2012. We could incur tax charges and related liabilities of $i7.1 million. As such charges are not probable at this time, a reserve has not been recorded on the condensed consolidated balance sheet as of March 31, 2023. The service tax issues raised in our notices and inquiries are very similar to the case, M/s Microsoft Corporation (I) (P) Ltd. Vs. Commissioner of Service Tax, New Delhi, wherein the Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT) issued a favorable ruling
to Microsoft. The Microsoft ruling was subsequently challenged in the Supreme Court by the Indian tax authority and a decision is still pending. We can provide no assurances on the impact that the present Microsoft case's decision will have on our cases, however, an unfavorable ruling in the Microsoft case may impact our assessment of probability and result in the recording of a $i7.1 million reserve. We are uncertain as to when these service tax matters will be concluded.
We sell software licenses and services
to our customers under contractual agreements. Such agreements generally include certain provisions indemnifying the customer against claims, by third parties, of infringement or misappropriation of their intellectual property rights arising from such customer's usage of our products or services. To date, payments related to these indemnification provisions have been immaterial. For several reasons, including the lack of prior material indemnification claims, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.
Item
2.Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended March 31, 2023, and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the 2022 Form 10-K filed with the Securities and Exchange Commission (SEC). The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP).
Business
Ansys,
a 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 high-tech, aerospace and defense, automotive, energy, industrial equipment, materials and chemicals, consumer products, healthcare and construction. Headquartered south of Pittsburgh, Pennsylvania, we employed 5,900 and 5,600 people as of March 31, 2023 and December 31, 2022, respectively. We focus on the development of open and flexible solutions that enable users to analyze designs on-premises and/or via the cloud, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing, validation and deployment. We distribute our suite of
simulation technologies through direct sales offices in strategic, global locations and a global network of independent resellers and distributors (collectively, channel partners). It is our intention to continue to maintain this hybrid sales and distribution model. We operate and report as one segment.
When visionary companies need to know how their world-changing ideas will perform, they close the gap between design and reality using Ansys simulation. For more than 50 years, Ansys software has enabled innovators across industries to push the boundaries of product design by using the predictive power of simulation. From sustainable transportation and advanced satellite systems to life-saving medical devices, Ansys powers innovation that drives human advancement.
Our strategy of Pervasive Insights seeks to deepen the use of simulation in our core market, to inject simulation throughout
the product lifecycle and extend the accessibility to a broader set of users and use cases. Our business has three vectors of growth:
•More products. Our broad and deep multiphysics portfolio enables us to grow with customers as they use simulation to solve more complex problems across a broad set of industries.
•More users. Investments in simulation education and user experience simplification has made simulation more accessible to a broader user base.
•More computations. Larger and more complex simulations drive more computation, requiring customers to use more Ansys licenses to complete their simulations.
Through decades of investments in the academic community and enhanced user experiences, our solutions have become accessible
and relevant beyond our core "engineering" end user, to reach more users upstream and downstream from our core, which is the product validation process. Our multiphysics solutions enable our customers to address increasingly complex R&D challenges from the component through the system and mission level of analysis. Our products seamlessly enable access to high performance compute capacity to run simulations, on-premises or in the cloud, which means our customers' R&D teams are unencumbered by compute capacity limitations that can hinder R&D cycle times.
The engineering software simulation market is strong and growing. The market growth is driven by customers' need for rapid, quality innovation in a cost efficient manner, enabling faster time to market for new products and lower warranty costs. Increasing product complexity is driving sustained demand for simulations. Key industry trends fueling customers'
increasing needs for simulation include:
•Electrification;
•Autonomy;
•Connectivity;
•The industrial internet of things; and
•Sustainability, including minimizing waste and physical prototyping, and improving circularity and development time.
We have been investing and intend to
continue to invest in our portfolio to broaden the range of physics and enable customers to analyze the interactions among physics at the component, system and mission level. Our strategy of Pervasive Insights is aligned with the near-term market growth opportunities and is laying the foundation for a future where simulation can be further democratized to broader classes of end-users and end-use cases.
To augment our organic development roadmaps, we intend to continue our strategic and disciplined acquisition strategy to grow our business. Our strategy is to partner with industry leaders to extend simulation into other ecosystems and customer R&D workflows. Our business is built on a culture of high ethical standards and commitment to diversity, equity, inclusion and belonging.
We
license our technology to businesses in a diverse set of industries, educational institutions and governmental agencies. We believe that the features, functionality and integrated multiphysics capabilities of our software products are as strong as they have ever been. The software business is generally characterized by long sales cycles which 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.
We address the competition and price pressure that we face 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 increasing the capabilities of our existing products; maintaining a diverse industry footprint and focusing on customer needs, training, consulting and support; and enhancing our distribution channels. We also evaluate and execute strategic acquisitions to supplement our global engineering talent, product offerings and distribution channels.
Overview
Overall GAAP and Non-GAAP Results
This section includes a discussion of GAAP and non-GAAP results. For reconciliations of non-GAAP results to GAAP results, see the section titled "Non-GAAP Results" herein.
The
2023 period non-GAAP results exclude the income statement effects of stock-based compensation, excess payroll taxes related to stock-based compensation, amortization of acquired intangible assets, expenses related to business combinations and adjustments for the income tax effect of the excluded items. The 2022 period non-GAAP results also exclude the income statement effects of acquisition accounting adjustments to deferred revenue from business combinations closed prior to 2022. There is no adjustment in 2023 as the impact is not material.
Our GAAP and non-GAAP results for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 reflected the following growth rates:
Our strong results reflect an increase in revenue during the three months ended March 31, 2023 due to broad-based growth across all license types. We also experienced increased operating expenses during the three months ended March 31, 2023, primarily due to increased personnel costs. Additionally, the actual U.S. Dollar reported results were negatively impacted by a stronger U.S. Dollar.
This section also includes a discussion of constant currency results, which
we use for financial and operational decision-making and as a means to evaluate period-to-period comparisons by excluding the effects of foreign currency fluctuations on the reported results. All constant currency results presented in this Item 2 exclude the effects of foreign currency fluctuations on the reported results. To present this information, the 2023 period 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 2022 comparable period, rather than the actual exchange rates in effect for the 2023 period. Constant currency growth rates are calculated by adjusting the 2023 period reported amounts by the 2023 period currency fluctuation impacts and comparing to the 2022 comparable period reported amounts.
Our comparative financial results were impacted by fluctuations in the U.S. Dollar during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The impacts on our revenue and operating income as a result of the fluctuations of the U.S. Dollar when measured against our foreign currencies based on 2022 period exchange rates are reflected in the table below. Amounts in brackets indicate an adverse impact from currency fluctuations.
Annual Contract Value (ACV)is a key performance metric and is useful to investors in assessing the strength and trajectory of our business. ACV is a supplemental metric to help evaluate the annual performance of the business. Over the life of the contract, ACV equals the total
value realized from a customer. ACV is not impacted by the timing of license revenue recognition. ACV is used by management in financial and operational decision-making and in setting sales targets used for compensation. ACV is not a replacement for, and should be viewed independently of, GAAP revenue and deferred revenue as ACV is a performance metric and is not intended to be combined with any of these items. There is no GAAP measure comparable to ACV. ACV is composed of the following:
•the annualized value of maintenance and subscription lease contracts with start dates or anniversary dates during the period, plus
•the value of perpetual license contracts
with start dates during the period, plus
•the annualized value of fixed-term services contracts with start dates or anniversary dates during the period, plus
•the value of work performed during the period on fixed-deliverable services contracts.
When we refer to the anniversary dates in the definition of ACV above, we are referencing the date of the beginning of the next twelve-month period in a contractually committed multi-year contract. If
a contract is three years in duration, with a start date of July 1, 2023, the anniversary dates would be July 1, 2024 and July 1, 2025. We label these anniversary dates as they are contractually committed. While this contract would be up for renewal on July 1, 2026, our ACV performance metric does not assume any contract renewals.
Example 1: For purposes of calculating ACV, a $100,000 subscription lease contract
or a $100,000 maintenance contract with a term of July 1, 2023 – June 30, 2024, would each contribute $100,000 to ACV for fiscal year 2023 with no contribution to ACV for fiscal year 2024.
Example 2: For purposes of calculating ACV, a $300,000 subscription lease contract or a $300,000 maintenance contract with a term of July 1, 2023 – June 30, 2026, would each contribute $100,000 to ACV in each of fiscal years 2023,
2024 and 2025. There would be no contribution to ACV for fiscal year 2026 as each period captures the full annual value upon the anniversary date.
Example 3: A perpetual license valued at $200,000 with a contract start date of March 1, 2023 would contribute $200,000 to ACV in fiscal year 2023.
Our
trailing twelve-month recurring ACV, converted from the functional currency to U.S. Dollars at the 2022 period monthly average exchange rates, was as follows:
Twelve Months Ended March 31,
Change
(in thousands, except
percentages)
2023
2022
Amount
%
Recurring ACV at 2022 monthly average exchange rates
$
1,713,249
$
1,457,904
$
255,345
17.5
Recurring
ACV includes both subscription lease license and maintenance ACV and excludes perpetual license and service ACV.
Industry Commentary:
High-tech, aerospace & defense (A&D) and automotive continue to be our leading industries in 2023 as our value proposition remains highly attractive as companies seek to produce more competitive products while increasing the productivity and efficiency of engineering resources. Customers are heightening their focus on artificial intelligence and machine learning, driving growth in the high-tech industry. Mobile communications, automotive applications and three-dimensional integrated circuits were key segments of high-tech growth in the first quarter. Within the A&D industry, digital transformation technologies remain a necessity for government-led programs, supporting increased investment in our technology and aiding elevated direct engagements
across the branched armed services and intelligence community. As automotive manufacturers increase their investments in the development of electric vehicles and advanced driver-assistance systems, we continue to see growth in the automotive industry. The construction industry also had strong growth as the capabilities of multiphysics solutions are a vital component of addressing the diverse needs of the marketplace, with projects ranging from smart city infrastructure to advanced manufacturing.
Geographic Trends:
The following table presents our geographic revenue growth using actual and constant currency rates during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022:
The
value and duration of multi-year subscription lease contracts executed during the period significantly impact the recognition of revenue. As a result, revenue may fluctuate, particularly on a quarterly basis, due to the timing of such contracts, relative differences in duration of long-term contracts from quarter to quarter and changes in the mix of license types sold compared to the prior year. Large swings in revenue growth rates are not necessarily indicative of customers' software usage changes or cash flows during the periods presented.To drive growth, we continue to focus on a number of sales improvement activities across our geographic regions, including sales hiring, pipeline building, productivity
initiatives and customer engagement activities.
The preparation of our 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 contract revenue, standalone selling prices of our products and services, allowance for doubtful accounts receivable, valuation of goodwill and other intangible
assets, useful lives for depreciation and amortization, acquired deferred revenue, operating lease assets and liabilities, fair values of stock awards, deferred compensation, income taxes, uncertain tax positions, tax valuation reserves, 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.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 (the Exchange Act). Forward-looking statements are statements that provide current expectations or forecasts of future events based on certain assumptions. Forward-looking statements are subject to risks, uncertainties, and factors relating to our business which could cause our actual results to differ materially from the expectations expressed in or implied by such forward-looking statements.
Forward-looking statements use words such as "anticipate,""believe,""could,""estimate,""expect,""forecast,""intend,""likely,""may,""outlook,""plan,""predict,""project,""should,""target," or other words of similar meaning. Forward-looking statements include those about market opportunity, including our total addressable market. We caution readers not to place undue reliance upon any such forward-looking statements,
which speak only as of the date they are made. We undertake no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise.
The risks associated with the following, among others, could cause actual results to differ materially from those described in any forward-looking statements:
•adverse conditions in the macroeconomic environment, including high inflation, recessionary conditions and volatility in equity and foreign exchange markets; political, economic and regulatory uncertainties in the countries and regions in which we operate;
•impacts from tariffs, trade sanctions, export controls or other trade barriers including export control restrictions and licensing requirements for exports
to China, and impacts from changes to diplomatic relations and trade policy between the United States and Russia or the United States and other countries that may support Russia or take similar actions due to the conflict between Russia and Ukraine;
•constrained credit and liquidity due to disruptions in the global economy and financial markets, which may limit or delay availability of credit under our existing or new credit facilities, or which may limit our ability to obtain credit or financing on acceptable terms or at all;
•our ability to timely recruit and retain key personnel in a highly competitive labor market for skilled personnel, including potential financial impacts of wage inflation;
•declines
in our customers’ businesses resulting in adverse changes in procurement patterns; disruptions in accounts receivable and cash flow due to customers’ liquidity challenges and commercial deterioration; uncertainties regarding demand for our products and services in the future and our customers’ acceptance of new products; delays or declines in anticipated sales due to reduced or altered sales and marketing interactions with customers; and potential variations in our sales forecast compared to actual sales;
•increased volatility in our revenue due to the timing, duration and value of multi-year subscription lease contracts; and our reliance on high renewal rates for annual subscription lease and maintenance contracts;
•our ability to protect our proprietary technology; cybersecurity threats or other security breaches, including in relation to breaches occurring through our products and an increased level of our activity that is occurring from remote global off-site locations; and disclosure and misuse of employee or customer data whether as a result of a cybersecurity incident or otherwise;
•our ability and our channel partners’ ability to comply with laws and regulations in relevant jurisdictions; and the outcome of contingencies, including legal proceedings, government or regulatory investigations and tax audit cases;
•uncertainty regarding income tax estimates in the jurisdictions in which
we operate; and the effect of changes in tax laws and regulations in the jurisdictions in which we operate;
•the quality of our products, including the strength of features, functionality and integrated multiphysics capabilities; our ability to develop and market new products to address the industry’s rapidly changing technology; failures or errors in our products and services; and increased pricing pressure as a result of the competitive environment in which we operate;
•investments in complementary
companies, products, services and technologies; our ability to complete and successfully integrate our acquisitions and realize the financial and business benefits of the transactions; and the impact indebtedness incurred in connection with any acquisition could have on our operations;
•investments in global sales and marketing organizations and global business infrastructure; and dependence on our channel partners for the distribution of our products;
•current and potential future impacts of a global health crisis, natural disaster or catastrophe, and the actions taken to address these events by our customers, suppliers, regulatory authorities and our business, on the global economy and consolidated financial statements, and other public health and safety risks; and government
actions or mandates;
•operational disruptions generally or specifically in connection with transitions to and from remote work environments; and the failure of our technological infrastructure or those of the service providers upon whom we rely including for infrastructure and cloud services;
•our intention to repatriate previously taxed earnings and to reinvest all other earnings of our non-U.S. subsidiaries;
•plans for future capital spending; the extent of corporate benefits from such spending including with respect to customer relationship management; and higher than anticipated costs
for research and development or a slowdown in our research and development activities;
•our ability to execute on our strategies related to environmental, social, and governance matters, and meet evolving and varied expectations, including as a result of evolving regulatory and other standards, processes, and assumptions, the pace of scientific and technological developments, increased costs and the availability of requisite financing, and changes in carbon markets; and
•other risks and uncertainties described in our reports filed from time to time with the SEC.
Revenue
for the quarter ended March 31, 2023 increased 19.8% compared to the quarter ended March 31, 2022, or 23.1% in constant currency. Subscription lease license revenue increased 61.7%, or 64.6% in constant currency, as compared to the quarter ended March 31, 2022, with substantially all of the increase attributable to additional sales to our existing customers. The reported $56.5 million increase in lease license revenue was attributable to a $53.2 million increase in value from multi-year licenses and a $3.3 million increase in value from annual licenses. Maintenance revenue growth of 8.6%, or 12.3% in constant currency, is correlated with the license sales discussed earlier in this paragraph and is driven substantially by our existing customer base. The reported $21.4 million growth in maintenance revenue was attributable
to a $32.1 million increase in maintenance associated with lease licenses, partially offset by a $10.8 million decrease in maintenance associated with perpetual sales. Perpetual license revenue, which is derived from new sales during the three months ended March 31, 2023, increased 7.9%, or 10.5% in constant currency, as compared to the three months ended March 31, 2022. Driving the increase in perpetual license revenue was a 6.4% increase in average deal size and a 1.5% increase in volume of deals.
We continue to experience increased demand from our customers for contracts that often include longer-term, subscription leases involving a larger number of our software products. These arrangements typically involve a higher overall transaction
price. The upfront recognition of license revenue related to these larger transactions can result in significant subscription lease revenue volatility. Software products, across a large variety of applications and industries, are increasingly distributed in software-as-a-service, cloud and other subscription environments in which the licensing approach is time-based rather than perpetual. This preference could result in a shift from perpetual licenses to time-based licenses, such as subscription leases, over the long term.
With respect to revenue, on average for the quarter ended March 31, 2023, the U.S. Dollar
was 6.7% stronger, when measured against our foreign currencies, than for the quarter ended March 31, 2022. The table below presents the net impacts of currency fluctuations on revenue for the quarter ended March 31, 2023. Amounts in brackets indicate an adverse impact from currency fluctuations.
The
shift reflected above from indirect to direct revenue was driven primarily by our previously announced acquisition of DYNAmore, a channel partner that was formerly captured in our indirect business.
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 condensed consolidated balance sheet does not represent the total value of annual or multi-year, noncancellable agreements. Our backlog represents deferred revenue associated with installment billings for periods beyond the current quarterly billing cycle and committed contracts with start dates beyond the end of the current period. Our deferred revenue and backlog as of
March 31, 2023 and December 31, 2022 consisted of the following:
Revenue
associated with deferred revenue and backlog that will be recognized in the subsequent twelve months is classified as current in the tables above.
The tables below reflect our operating results on both a GAAP and constant currency basis. 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.
Selling,
General and Administrative: The net increase in selling, general and administrative costs was primarily due to the following:
•Increased salaries and other headcount-related costs of $14.3 million.
•Increased business travel of $5.2 million as in-person meetings and live attendance at trade events have continued to expand.
•Increased stock-based compensation of $3.5 million.
•Increased marketing expenses of $1.6 million.
•Decreased costs related to foreign exchange translation of $5.5 million due to a stronger U.S. Dollar.
•Decreased bad debt expense
of $2.4 million.
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 net increase in research and development costs was primarily due to the following:
•Increased salaries, incentive compensation and other headcount-related costs of $9.6 million.
•Increased stock-based compensation of $4.7 million.
•Decreased costs related to foreign exchange translation of $2.5 million due to a stronger U.S. Dollar.
We have traditionally invested
significant resources in research and development activities and expect to continue to make investments in expanding the ease of use and capabilities of our broad portfolio of simulation software products.
The impacts from currency fluctuations resulted in decreased operating income of $3.9 million for the quarter ended March 31, 2023 as compared to the quarter ended March 31, 2022.
Interest Income: Interest income for the three months ended March 31, 2023 was $4.1 million as compared to $0.5 million for the three months ended March 31, 2022. The higher interest rate environment and the related
increase in the average rate of return on invested cash balances was partially offset by the lower invested cash balance, as a result of investments in acquisitions and share repurchases.
Interest Expense: Interest expense for the quarter ended March 31, 2023 was $10.8 million as compared to $3.0 million for the quarter ended March 31, 2022 due to a higher interest rate environment.
Other Expense, net: Other expense for the quarter ended March 31, 2023 was $0.2 million as compared to other expense of $0.7 million for the quarter ended March 31, 2022. Other expense consisted primarily of foreign currency losses.
Income Tax Provision: Our income before income tax provision, income tax provision and effective tax rates were as follows:
Three Months Ended March 31,
(in thousands, except percentages)
2023
2022
Income before income tax provision
$
120,838
$
78,029
Income
tax provision
$
20,216
$
7,041
Effective tax rate
16.7
%
9.0
%
The increase in the effective tax rate from the first quarter of 2022 was primarily due to decreased benefits related to stock-based compensation, many of which were recognized discretely.
When compared to the federal
and state combined statutory rate for each respective period, the effective tax rates for the quarters ended March 31, 2023 and 2022 were favorably impacted by tax benefits from stock-based compensation, the foreign-derived intangible income (FDII) deduction and research and development credits, partially offset by the impact of non-deductible compensation.
Net Income: Our net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
We provide non-GAAP revenue, non-GAAP gross profit, non-GAAP gross profit margin, 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 its most comparable GAAP financial measure are included below.
We use non-GAAP financial measures (a) to evaluate our historical and prospective financial performance as well as our performance relative to our competitors, (b) to set internal sales targets and spending budgets, (c) to allocate resources, (d) to measure operational profitability and the accuracy of forecasting, (e) to assess financial discipline over operational expenditures and (f) as an important factor in determining variable compensation for management and employees. In addition, many financial analysts that follow us focus on and publish
both historical results and future projections based on non-GAAP financial measures. We believe that it is in the best interest of our investors to provide this information to analysts so that they accurately report the non-GAAP financial information. Moreover, investors have historically requested, and we have historically reported, these non-GAAP financial measures as a means of providing consistent and comparable information with past reports of financial results.
While we believe that these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, are not reported by all our competitors and may not be directly comparable to similarly titled measures of our competitors due to potential differences in the exact method of calculation. We compensate
for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.
The adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below:
Acquisition accounting for deferred revenue. Historically, we have consummated acquisitions in order to support our strategic and other business objectives. Under prior accounting guidance, a fair value provision resulted in acquired deferred revenue that was often recorded on the opening balance sheet at an amount that was lower than the historical carrying value. Although this fair value provision has no impact on our business or cash flow, it adversely impacts our reported GAAP revenue in the reporting periods following
an acquisition. In 2022, we adopted accounting guidance which eliminates the fair value provision that resulted in the deferred revenue adjustment on a prospective basis. In order to provide investors with financial information that facilitates comparison of both historical and future results, we have historically provided non-GAAP financial measures which exclude the impact of the acquisition accounting adjustment for acquisitions prior to the adoption of the new guidance in 2022. The 2022 non-GAAP financial measures presented in this document include the adjustment to exclude the income statement effects of acquisition accounting adjustments to deferred revenue from business combinations closed prior to 2022. There is no adjustment included for 2023 as the impact is not material.
Amortization of intangible assets from acquisitions. We incur amortization of intangible assets, included in our GAAP presentation
of amortization expense, related to various acquisitions we have made. We exclude these expenses for the purpose of calculating non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when we evaluate our continuing operational performance because these costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by us after the acquisition. Accordingly, we do not consider these expenses for purposes of evaluating our performance during the applicable time period after the acquisition, and we exclude such expenses when making decisions to allocate resources. We believe that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the effectiveness of the methodology and information used by us in our financial
and operational decision-making, and (b) compare our past reports of financial results as we have historically reported these non-GAAP financial measures.
Stock-based compensation expense. We incur expense related to stock-based compensation included in our GAAP presentation of cost of maintenance and service; research and development expense; and selling, general and administrative expense. This non-GAAP adjustment also includes excess payroll tax expense related to stock-based compensation. Although stock-based compensation is an expense and viewed as a form of compensation, we exclude these expenses for the purpose of calculating
non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when we evaluate our continuing operational performance. Specifically, we exclude stock-based compensation during our annual budgeting process and our quarterly and annual assessments of our performance. The annual budgeting process is the primary mechanism whereby we allocate resources to various initiatives and operational requirements. Additionally, the annual review by our board of directors during which it compares our historical business model and profitability to the planned business model and profitability for the forthcoming year excludes the impact of stock-based compensation. In evaluating the performance of our senior management and department managers, charges related to stock-based compensation are excluded from expenditure and profitability results. In fact, we record stock-based compensation
expense into a stand-alone cost center for which no single operational manager is responsible or accountable. In this way, we can review, on a period-to-period basis, each manager's performance and assess financial discipline over operational expenditures without the effect of stock-based compensation. We believe that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate our operating results and the effectiveness of the methodology used by us to review our operating results, and (b) review historical comparability in our financial reporting as well as comparability with competitors' operating results.
Expenses related to business combinations. We incur expenses for professional services rendered in connection with business combinations, which are included in our GAAP presentation of selling, general and administrative expense. We also incur other expenses
directly related to business combinations, including compensation expenses and concurrent restructuring activities, such as employee severances and other exit costs. These costs are included in our GAAP presentation of selling, general and administrative and research and development expenses. We exclude these acquisition-related expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when we evaluate our continuing operational performance, as we generally would not have otherwise incurred these expenses in the periods presented as a part of our operations. We believe that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate our operating results and the effectiveness of the methodology used by us to review our operating results, and (b) review historical comparability in our financial reporting as well as comparability
with competitors' operating results.
Non-GAAP tax provision. We utilize a normalized non-GAAP annual effective tax rate (AETR) to calculate non-GAAP measures. This methodology provides better consistency across interim reporting periods by eliminating the effects of non-recurring items and aligning the non-GAAP tax rate with our expected geographic earnings mix. To project this rate, we analyzed our historic and projected non-GAAP earnings mix by geography along with other factors such as our current tax structure, recurring tax credits and incentives, and expected tax positions. On an annual basis we re-evaluate and update this rate for significant items that may materially affect our projections.
Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Our non-GAAP financial measures are not meant to be considered in isolation
or as a substitute for comparable GAAP financial measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
We have provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures as listed below:
GAAP Reporting Measure
Non-GAAP Reporting Measure
Revenue
Non-GAAP
Revenue
Gross Profit
Non-GAAP Gross Profit
Gross Profit Margin
Non-GAAP Gross Profit Margin
Operating Income
Non-GAAP Operating Income
Operating Profit Margin
Non-GAAP Operating Profit Margin
Net Income
Non-GAAP Net Income
Diluted Earnings Per Share
Non-GAAP Diluted Earnings Per Share
Constant
currency. In addition to the non-GAAP financial measures detailed above, we use constant currency results for financial and operational decision-making and as a means to evaluate period-to-period comparisons by excluding the effects of foreign currency fluctuations on the reported results. To present this information, the 2023 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 2022 comparable period, rather than the actual exchange rates in effect for the 2023 period. Constant currency growth rates are calculated by adjusting the 2023 reported amounts by the 2023 currency fluctuation impacts and comparing the adjusted amounts to the 2022 comparable period reported amounts. We believe that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the effectiveness of the methodology and information
used by us in our financial and operational decision-making, and (b) compare our reported results to our past reports of financial results without the effects of foreign currency fluctuations.
Cash and cash equivalents consist primarily of highly liquid investments such as money market funds and deposits held at major banks. Short-term investments consist primarily of deposits held by certain of our foreign subsidiaries
with original maturities of three months to one year. The following table presents our foreign and domestic holdings of cash, cash equivalents and short-term investments as of March 31, 2023 and December 31, 2022:
In
general, it is our intention to permanently reinvest all earnings in excess of previously taxed amounts. Substantially all of the pre-2018 earnings of our non-U.S. subsidiaries were taxed through the transition tax and post-2018 current earnings are taxed as part of global intangible low-taxed income tax expense. These taxes increase our previously taxed earnings and allow for the repatriation of the majority of our foreign earnings without any residual U.S. federal tax. Unrecognized provisions for taxes on indefinitely reinvested undistributed earnings of foreign subsidiaries would not be significant.
The amount of cash, cash equivalents and short-term investments held by foreign subsidiaries
is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period, the offset to which is recorded in accumulated other comprehensive loss on our condensed consolidated balance sheet.
Cash Flows from Operating Activities
Three Months Ended March 31,
Change
(in
thousands)
2023
2022
Amount
%
Net cash provided by operating activities
$
260,766
$
210,936
$
49,830
23.6
Net
cash provided by operating activities increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The growth in net cash provided by operating activities was a result of increased customer receipts driven primarily by ACV growth, partially offset by increased payments related to higher operating expense, interest and income tax payments as compared to the three months ended March 31, 2022.
Cash Flows from Investing Activities
Three
Months Ended March 31,
Change
(in thousands)
2023
2022
Amount
%
Net cash used in investing activities
$
(128,390)
$
(9,964)
$
(118,426)
(1,188.5)
Net
cash used in investing activities increased by $118.4 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to increased acquisition-related net cash outlays of $115.7 million. We currently plan capital spending of $28.0 million to $38.0 million during fiscal year 2023 as compared to the $24.4 million that was spent in fiscal year 2022. The level of spending will depend on various factors, including the growth of the business and general economic conditions.
Net
cash used in financing activities increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to increased stock repurchases of $40.9 million, partially offset by decreased restricted stock withholding taxes paid in lieu of issued shares of $6.3 million.
Other Cash Flow Information
On June 30, 2022, we entered into the 2022 Credit Agreement with PNC Bank, National Association as administrative agent, swing line lender, and an L/C issuer, the lenders party thereto, and the other L/C issuers party thereto. The 2022 Credit Agreement refinanced our previous credit agreements in their entirety. The 2022 Credit Agreement provides for a $755.0 million unsecured term loan facility and a $500.0
million unsecured revolving loan facility, which includes a $50.0 million sublimit for the issuance of letters of credit. Terms used in this description of the 2022 Credit Agreement with initial capital letters that are not otherwise defined herein are as defined in the 2022 Credit Agreement.
As of March 31, 2023, the carrying value of our term loan was $753.7 million, with no principal payments due in the next twelve months. Borrowings under the term loan and revolving loan facilities accrue interest at a rate that is based on the Term SOFR plus an applicable margin or at the base rate plus an applicable margin, at our election. The base rate is the highest of (i) the Overnight Bank Funding Rate, plus 0.500%, (ii) the PNC Bank, National Association prime rate, and (iii) Daily Simple SOFR plus an adjustment for SOFR plus 1.00%. The applicable margin for the borrowings is a
percentage per annum based on the lower of (1) a pricing level determined by our then-current consolidated net leverage ratio and (2) a pricing level determined by our public debt rating (if available). The rate in effect for the second quarter under the 2022 Credit Agreement is 5.87%.
We previously entered into operating lease commitments, primarily for our domestic and international offices. The commitments related to these operating leases is $148.9 million, of which $27.5 million is due in the next twelve months.
Under our stock repurchase program, we repurchased shares as follows:
As of March 31, 2023, 1.1 million shares remained available for repurchase under the program.
The authorized repurchase program does not have an expiration date, and the pace of the repurchase activity will depend on factors such as working capital needs, cash requirements for acquisitions, our stock price, and economic and market conditions. Our stock repurchases may be effected from time to time through open market purchases including pursuant to a Rule 10b5-1 plan.
We continue to generate
positive cash flows from operating activities and believe that the best uses of our excess cash are to invest in the business; acquire or make investments in complementary companies, products, services and technologies; and make payments on our outstanding debt balances. Any future acquisitions may be funded by available cash and investments, cash generated from operations, debt financing or the issuance of additional securities. Additionally, we have in the past, and expect in the future, to 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.
We believe that existing cash and cash equivalent balances, together with cash generated from operations and access to our $500.0 million revolving loan facility, will be sufficient to meet our working capital, capital expenditure requirements and contractual obligations through
at least the next twelve months and the foreseeable future thereafter. Our cash requirements in the future may also be financed through additional equity or debt financings. However, future disruptions in the capital markets could make financing more challenging, and there can be no assurance that such financing can be obtained on commercially reasonable terms, or at all.
There were no material changes to our significant contractual and other obligations during the three months ended March 31, 2023 as compared to those previously
reported within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Form 10-K.
Critical Accounting Estimates
During the first quarter of 2023, we completed the annual impairment test for goodwill and the indefinite-lived intangible asset and determined that these assets had not been impaired as of the test date, January 1, 2023. No events or circumstances changed during the three months ended March 31, 2023 that would indicate that the fair values of our reporting unit and indefinite-lived intangible asset are below their carrying amounts.
No significant changes have occurred to our critical accounting estimates as previously reported within "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 2022 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk. As we operate in international regions, a portion of our revenue, expenses, cash, accounts receivable and payment
obligations are denominated in foreign currencies. As a result, changes in currency exchange rates will affect our financial position, results of operations and cash flows. We seek to reduce our currency exchange transaction risks primarily through our normal operating and treasury activities, including the use of derivative instruments.
With respect to revenue, on average for the quarter ended March 31, 2023, the U.S. Dollar was 6.7% stronger, when measured against our foreign currencies, than for the quarter ended March 31, 2022. The table below presents the net impacts of currency fluctuations on revenue for the three months ended March 31, 2023. Amounts in brackets indicate a net adverse impact from currency fluctuations.
The impacts from currency fluctuations resulted in decreased operating income of $3.9 million for the three months ended March 31, 2023 as compared
to the three months ended March 31, 2022.
A hypothetical 10% strengthening in the U.S. Dollar against other currencies would have decreased our revenue by $20.8 million and decreased our operating income by $5.1 million for the three months ended March 31, 2023.
The most meaningful currency impacts on revenue and operating income are typically attributable to U.S. Dollar exchange rate changes against the Euro and Japanese Yen. Historical exchange rates for these currency pairs are reflected in the charts below:
Interest
Rate Risk. Changes in the overall level of interest rates affect the interest income that is generated from our cash, cash equivalents and short-term investments and the interest expense that is generated from our outstanding borrowings. For the three months ended March 31, 2023, interest income was $4.1 million and interest expense was $10.8 million.
Cash and cash equivalents consist primarily of highly liquid investments such as money market funds and deposits held at major banks. Short-term investments consist primarily of deposits held by certain foreign subsidiaries with original maturities of three months to one year. A hypothetical 100 basis point change in interest rates on these holdings would have an immaterial impact on our financial results.
Our outstanding term loan borrowings of $755.0 million as of March 31, 2023 accrue interest at a rate that is based on the Term SOFR plus an applicable margin or at the base rate plus an applicable margin, at our election. The base rate is the highest of (i) the Overnight Bank Funding Rate, plus 0.500%, (ii) the PNC Bank, National Association prime rate, and (iii) Daily Simple SOFR plus an adjustment for SOFR plus 1.00%. The applicable margin for the borrowings is a percentage per annum based on the lower of (1) a pricing level determined by our then-current consolidated net leverage ratio and (2) a pricing level determined by our public debt rating (if available). Because interest rates applicable to the outstanding borrowings are variable, we are exposed to interest rate risk from changes in the underlying index rates, which affects our interest expense.
A hypothetical increase of 100 basis points in interest rates would result in an increase in interest expense and a corresponding decrease in cash flows of $7.7 million over the next twelve months, based on outstanding borrowings at March 31, 2023.
No other material change has occurred in our market risk subsequent to December 31, 2022.
Evaluation
of Disclosure Controls and Procedures. As required by Rules 13a-15 and 15d-15 of the Exchange Act, we have evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act.
We believe, based on our knowledge, that the financial statements and other financial information included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in this report. We are committed to
both a sound internal control environment and to good corporate governance.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
From time to time, we review the disclosure controls and procedures, and may periodically make changes to enhance their effectiveness and to ensure that our systems evolve with our business.
Changes in Internal Control. There were no changes in our internal control over financial reporting that occurred during the three months ended March 31,
2023 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
We are subject to various
claims, investigations and legal and regulatory proceedings that arise in the ordinary course of business, including, but not limited to, commercial disputes, labor and employment matters, tax audits, alleged infringement of third parties' intellectual property rights and other matters. Use or distribution of our products could generate product liability, regulatory infraction, or claims by our customers, end users, channel partners, government entities or third parties. Sales and marketing activities that impact processing of personal data, as well as measures taken to promote license compliance against pirated or unauthorized usage of our commercial products, may also result in claims by customers and individual employees of customers or by non-customers using pirated versions of our products. 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 have a significant adverse
effect on our condensed consolidated financial statements as well as cause reputational damage. In our opinion, the resolution of pending matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
We face a number of risks that could materially and adversely affect our business, prospects, financial condition, results of operations and cash flows. A discussion of our risk factors can be found in Part I, Item 1A "Risk Factors" in our 2022 Form 10-K. No material changes have occurred to such risk factors after the filing of our 2022 Form 10-K.
Item
2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average
Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs(1)
(1)
We initially announced our stock repurchase program in February 2000, and subsequently announced various amendments to the program. The most recent amendment to the program, authorizing the repurchase of up to 5.0 million shares, was approved by our Board of Directors in February 2018 and announced on February 21, 2018. There is no expiration date for the stock repurchase program.
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document)
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
