ANSYS, INC. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months endedMarch 31, 2020 , and with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2019 included in the 2019 Form 10-K filed with theSecurities and Exchange Commission . 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). Overview: Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout theU.S. and the world. While the full impact of this outbreak is not yet known, we are closely monitoring the spread of COVID-19 and continually assessing its potential effects on our business. The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on our business, employees, liquidity, financial condition, results of operations and cash flows. At the onset of the crisis, we took action to enable our employees to work from home. We have temporarily closed our globalAnsys offices inNorth America ,Asia andEurope , including our corporate headquarters inthe United States , and implemented certain travel restrictions, both of which have disrupted how we operate our business. We have subsequently reopened all of our offices inChina andSouth Korea using a phased approach, as the situation has improved. Remote work arrangements have not adversely affected our ability to maintain effective financial operations, including our financial reporting systems, internal controls over financial reporting and disclosure controls and procedures. We expect to continue to maintain these effective controls as we continue to work remotely during the COVID-19 pandemic. The impact from the rapidly changing market and economic conditions due to the recent COVID-19 outbreak is uncertain, disrupting the business of our customers and partners, and will impact our business and consolidated results of operations. Our current expectations are subject to significant uncertainty and dependent upon how widespread the virus becomes, the duration and severity of its impact, the geographic markets affected, the actions taken by governmental authorities, including the shelter-in-place orders, and other factors. Further spreading of the virus or economic deterioration caused by the virus could have a material adverse impact on our business, as well as on our ability to achieve the financial guidance. We are monitoring our discretionary spending and making adjustments to help mitigate the negative impacts of COVID-19 on our business in the short-term. At the same time, we continue to invest in projects that are critical to our long-term growth such as our customer relationship management (CRM) and human resource management system (HRMS) projects. Please see "Note About Forward-Looking Statements" and "Risk Factors" in Part I, Item IIA of our 2019 Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q for discussion on additional business risks associated with the COVID-19 pandemic. Overall GAAP and Non-GAAP Results Our growth rates of GAAP and non-GAAP results for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 were as follows: GAAP Non-GAAP Revenue (3.8 )% (3.4 )% Operating income (64.4 )% (34.0 )%
Diluted earnings per share (47.5 )% (35.7 )%
We experienced a decline in revenue during the three months endedMarch 31, 2020 from reductions in software license revenue, partially offset by growth in maintenance and service revenue and by contributions from our recent acquisitions. The outbreak of COVID-19 also adversely impacted our revenue during the three months endedMarch 31, 2020 . Due to our diverse customer base, both from a vertical and geographic perspective, as well as the close relationships with customers that enabled us to close a large amount of business remotely, we were successful at partially mitigating the impacts of the COVID-19 outbreak. We also experienced increased operating expenses primarily due to increased personnel costs, higher stock-based compensation and additional operating expenses related to acquisitions. The COVID-19 outbreak did not have a material impact on our operating expenses during the three months endedMarch 31, 2020 . A significant portion of our operating costs are fixed. As a result, when our revenue fluctuates due to timing of multi-year contracts or macro-economic factors such as COVID-19, there is a corresponding and direct impact on our operating income and diluted earnings per share. Given the reduction in our 20
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revenue for the three months endedMarch 31, 2020 , we experienced a decline in both operating income and diluted earnings per share, as shown above. 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." Impact of Foreign Currency Our comparative financial results were impacted by fluctuations in theU.S. Dollar during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . 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. Three Months Ended March 31, 2020 (in thousands) GAAP Non-GAAP Revenue$ (2,590 ) $ (2,596 ) Operating income $ (261 ) $ (371 )
In constant currency, our growth rates were as follows:
Three Months Ended March 31, 2020
GAAP Non-GAAP
Revenue (3.0 )% (2.6 )%
Operating income (64.1 )% (33.7 )%
Constant currency amounts exclude the effects of foreign currency fluctuations
on the reported results. To present this information, the 2020 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 2019 comparable
period, rather than the actual exchange rates in effect for 2020. Constant
currency growth rates are calculated by adjusting the 2020 reported revenue and
operating income amounts by the 2020 currency fluctuation impacts and comparing
to the 2019 comparable period reported revenue and operating income amounts.
Other Key Business Metric
Annual Contract Value (ACV) is one of our key performance metrics and is useful
to investors in assessing the strength and trajectory of our business. It is
used by management in financial and operational decision-making and in setting
sales targets used for compensation. ACV should be viewed independently of
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 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.
Our ACV was as follows:
Three Months Ended March 31, Change
(in thousands, except Constant
percentages) 2020 2019 Amount % Currency %
ACV $ 301,050 $ 303,490 $ (2,440 ) (0.8 ) 0.4
Other Financial Information
Our financial position includes $718.0 million in cash and short-term
investments, and working capital of $753.6 million as of March 31, 2020 .
During the three months ended March 31, 2020 , we repurchased 0.7 million shares
for $161.0 million at an average price of $233.48 per share.
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Business:
Ansys , aDelaware 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 ofPittsburgh, Pennsylvania , we employed approximately 4,200 people as ofMarch 31, 2020 . 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. 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, including the impact of the current COVID-19 outbreak. As a result, we believe that our overall performance is best measured by fiscal year results rather than by quarterly 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 three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 : Three Months EndedMarch 31, 2020 Americas (10.2 )% EMEA 1.3 %Asia-Pacific 5.2 % Total (3.0 )% The negative growth experienced in theAmericas is primarily due to an expected and significant reduction in multi-year lease contracts. 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. Continued trade tensions between theU.S. andChina , together with the uncertainty around the COVID-19 outbreak, may further restrict our ability to sell and distribute our products to certain customers and our ability to collect against existing trade receivables and could have an adverse effect on our business, results of operations or financial condition. Refer to additional details in Part I, Item 1A of our 2019 Form 10-K as supplemented by Part II, Item 1A of this Quarterly Report on Form 10-Q. Industry Commentary: The strong high-tech and automotive industry trends from 2019 continued into the first quarter of 2020. In these industries, our solutions that support key initiatives of autonomy, electrification and 5G continue to resonate with our customers. The complexity and cost associated with developing and certifying 5G technology continues to drive investments in simulation from the high-tech and semiconductor technology providers. In addition, the energy industry, particularly oil and gas, suffered from the combined effects of a substantial oil price contraction and the impact of COVID-19. Already in a low growth cycle, this is a significant challenge for the industry overall. Despite the challenges in this industry, we have continued to focus on strategic initiatives and work with our energy customers on their digital transformation journeys, additive manufacturing and design optimization. 22
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Use of Estimates: 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. Note About Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, the following statements, as well as statements that contain such words as "anticipates," "intends," "believes," "plans" and other similar expressions: • Our expectations regarding the impacts of the COVID-19 pandemic.
• Our expectations regarding the impacts of new accounting guidance.
• Our expectations regarding the outcome of our service tax audit cases.
• Our assessment of the ultimate liabilities arising from various
investigations, claims and legal proceedings.
• Our expectations regarding future claims related to indemnification
obligations.
• Our intentions regarding our hybrid sales and distribution model.
• Our statement 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 expectations regarding increased lease license volatility due to an
increased customer preference for time-based licenses.
• 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.
• 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 intention to repatriate previously taxed earnings in excess of working
capital needs and to reinvest all other earnings of our non-
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 and to repurchase stock in order to both offset dilution and
return capital to stockholders, in excess of our requirements, 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.
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• Our expectations regarding acquisitions and integrating such acquired
companies to realize the benefits of cost reductions and other synergies
relating thereto.
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 forward-looking statements. Certain factors, among others, that might
cause such a difference include risks and uncertainties disclosed in our 2019
Form 10-K, Part I, Item 1A. "Risk Factors." Information regarding any new risk
factors or material changes to these risk factors has been included within Part
II, Item 1A of this Quarterly Report on Form 10-Q.
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Results of Operations Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Revenue: Three Months Ended March 31, Change (in thousands, except Constant percentages) 2020 2019 Amount % Currency % Revenue: Lease licenses$ 44,874 $ 69,256 $ (24,382 ) (35.2 ) (35.0 ) Perpetual licenses 42,956 53,788 (10,832 ) (20.1 ) (19.5 ) Software licenses 87,830 123,044 (35,214 ) (28.6 ) (28.2 ) Maintenance 200,488 181,461 19,027 10.5 11.6 Service 16,667 12,625 4,042 32.0 33.0 Maintenance and service 217,155 194,086 23,069 11.9 12.9 Total revenue$ 304,985 $ 317,130 $ (12,145 ) (3.8 ) (3.0 ) Our revenue in the quarter endedMarch 31, 2020 decreased 3.8% as compared to the quarter endedMarch 31, 2019 , while revenue decreased 3.0% in constant currency. The volume of multi-year lease contracts, the shifting preference of customers toward time-based licensing, the trade restrictions betweenthe United States andChina and the impact of COVID-19, specifically withinAsia , each contributed to the first quarter adverse revenue variance reflected in the results above. The overall decrease was partially offset by our continued investments in our global sales, support and marketing organizations, as well as our 2019 acquisitions. Lease license revenue decreased 35.2%, or 35.0% in constant currency, as compared to the prior-year quarter, driven primarily by a decrease in multi-year lease contracts. Perpetual license revenue, which is derived primarily from new sales during the quarter, decreased 20.1%, or 19.5% in constant currency, as compared to the prior-year quarter. Annual maintenance contracts that were sold with new perpetual licenses, maintenance contracts for new perpetual licenses sold in previous quarters and the maintenance portion of lease license contracts collectively contributed to maintenance revenue growth of 10.5%, or 11.6% in constant currency. Service revenue, driven primarily by a focus on service offerings that provide mentorship on simulation best practices, training and expanding simulation adoption, increased 32.0%, or 33.0% in constant currency, as compared to the prior-year quarter. 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. This shifting preference was elevated in the first quarter as a result of the economic impacts of COVID-19. We expect that shifting preference to continue through at least the second and third quarters of 2020. In relation to COVID-19 and our revenue, we currently expect the most significant business disruption to occur in the second quarter. During much of the quarter, our teams and those of our customers will likely continue working remotely. As a result of social distancing, our demand generation events and those of our channel partners have been canceled. While we have adjusted to have a stronger digital focus for demand generation, we expect the absence of certain events to have an adverse impact on our results, especially for certain channel partners. In addition, we expect there to be a significant delay in the timing of closing certain transactions, and closing the larger enterprise-type deals may be especially difficult. These deals are often multi-year leases which have a significant impact on our operating results due to up-front revenue recognition of the license. We anticipate that customers will delay certain purchases to later in the year. We also anticipate some deterioration in renewal rates among our smaller customers, particularly small- and medium-sized businesses, with the largest adverse impact to occur during the second quarter. We expect a modest recovery in the business environment during the third quarter as people return to work and businesses begin to resume their operations. The third quarter business environment is expected to be stronger than that of the second quarter, but will remain adversely impacted by the continuing effects of COVID-19, with a disproportionate impact on certain customers and industries. We expect a stronger recovery in the fourth quarter with business resuming to near-normal activity, perhaps buoyed by sales transactions that may have been deferred from earlier quarters. 25
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With respect to revenue, on average for the quarter endedMarch 31, 2020 , theU.S. Dollar was approximately 1.8% stronger, when measured against our primary foreign currencies, than for the quarter endedMarch 31, 2019 . The table below presents the impacts of currency fluctuations on revenue for the quarter endedMarch 31, 2020 . Amounts in brackets indicate an adverse impact from currency fluctuations. (in thousands) Three Months Ended March 31, 2020 Euro $(2,003 ) South Korean Won (910 ) Indian Rupee (228 ) British Pound (182 ) Japanese Yen 532 Taiwan Dollar 168 Other 33 Total $ (2,590 ) The net overall strongerU.S. Dollar also resulted in decreased operating income of$0.3 million for the quarter endedMarch 31, 2020 as compared to the quarter endedMarch 31, 2019 . As a percentage of revenue, our international and domestic revenues, and our direct and indirect revenues, were as follows: Three Months Ended March 31, 2020 2019 International 59.0 % 55.6 % Domestic 41.0 % 44.4 % Direct 73.6 % 70.5 % Indirect 26.4 % 29.5 % 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$3.9 million and$2.8 million for the quarters endedMarch 31, 2020 and 2019, respectively. The expected impacts on reported revenue, including an estimate for theLumerical acquisition, are$4.1 million and$11.4 million for the quarter endingJune 30, 2020 and the year endingDecember 31, 2020 , respectively. We have not yet performed a valuation of theLumerical acquired deferred revenue. Until such valuation is completed, the expected impacts on revenue will remain preliminary estimates that are likely to change. Deferred Revenue and Backlog: Deferred revenue consists of billings made or payments received in advance of revenue recognition from customer agreements. The deferred revenue on our condensed consolidated balance sheets does not represent the total value of annual or multi-year, noncancellable agreements. Our backlog represents installment billings for periods beyond the current quarterly billing cycle. Our deferred revenue and backlog as ofMarch 31, 2020 andDecember 31, 2019 consisted of the following: Balance at March 31, 2020 (in thousands) Total Current Long-Term Deferred revenue$ 365,751 $ 352,964 $ 12,787 Backlog 469,275 211,842 257,433 Total$ 835,026 $ 564,806 $ 270,220 26
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Balance at December 31, 2019 (in thousands) Total Current Long-Term
Deferred revenue
505,469 218,398 287,071
Total $ 870,743 $ 569,751 $ 300,992
Revenue associated with deferred revenue and backlog that will be recognized in
the subsequent twelve months is classified as current in the tables above.
Cost of Sales and Operating Expenses:
The tables below reflect our operating results as presented on the condensed
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 fourth quarter 2019 acquisitions of LST and
Dynardo contributed $13.0 million to the overall increase in cost of sales and
operating expenses, inclusive of intangible asset amortization. The acquisitions
that occurred in the first half of 2019 did not materially contribute to the
variances below.
Three Months Ended March 31,
2020 2019 Change
(in thousands, except % of % of
percentages) Amount Revenue Amount Revenue Amount %
Cost of sales:
Software licenses $ 4,926 1.6 $ 4,708 1.5 $ 218 4.6
Amortization 9,552 3.1 4,547 1.4 5,005 110.1
Maintenance and service 35,638 11.7 25,560 8.1 10,078 39.4
Total cost of sales 50,116 16.4 34,815 11.0 15,301 43.9
Gross profit $ 254,869 83.6 $ 282,315 89.0 $ (27,446 ) (9.7 )
Software Licenses: The increase in the cost of software licenses was primarily
due to increased third-party royalties of $0.3 million .
Amortization: The increase in amortization expense was due to the amortization
of newly acquired intangible assets.
Maintenance and Service: The increase in maintenance and service costs was
primarily due to the following:
• Increased salaries and other headcount-related costs of $4.8 million .
• Increased third-party technical support of
• Increased stock-based compensation of
The reduction in gross profit was a result of a decrease in revenue and an increase in the cost of sales.
Three Months Ended March 31,
2020 2019 Change
(in thousands, except % of % of
percentages) Amount Revenue Amount Revenue Amount %
Operating expenses:
Selling, general and
administrative $ 130,522 42.8 $ 112,169 35.4 $ 18,353 16.4
Research and
development 86,112 28.2 70,738 22.3 15,374 21.7
Amortization 4,162 1.4 3,759 1.2 403 10.7
Total operating
expenses $ 220,796 72.4 $ 186,666 58.9 $ 34,130 18.3
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Selling, General and Administrative: The increase in selling, general and
administrative costs was primarily due to the following:
• Increased salaries and other headcount-related costs of
• Increased bad debt expense of
to COVID-19.
• Increased stock-based compensation of
• Increased marketing expenses of
• Increased IT maintenance and software hosting costs of
Currently, we continue to pay all of our salaried and hourly workers. 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 and other headcount-related costs of$11.6 million .
• Increased stock-based compensation of
• Increased IT maintenance and software hosting costs of
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, even through the COVID-19 pandemic. We do not anticipate the impact of COVID-19 to significantly delay our 2020 product releases. Interest Income: Interest income for the quarter endedMarch 31, 2020 was$2.8 million as compared to$3.4 million for the quarter endedMarch 31, 2019 . Interest income decreased as a result of a decrease in the average rate of return on invested cash balances. Interest Expense: Interest expense for the quarter endedMarch 31, 2020 was$3.7 million as compared to$0.1 million for the quarter endedMarch 31, 2019 . Interest expense increased as a result of the interest incurred on debt financing obtained in connection with the acquisition of LST in the fourth quarter of 2019. Other Income (Expense), net: Our other income (expense) consisted of the following: Three Months Ended March 31, March 31, (in thousands) 2020 2019
Foreign currency gains (losses), net
(19 ) 179
Total other income (expense), net
Income Tax (Benefit) Provision: Our income before income tax provision, income tax (benefit) provision and effective tax rates were as follows:
Three Months Ended
March 31 , March 31 ,
(in thousands, except percentages) 2020 2019
Income before income tax provision
(38.2 )% 12.6 %
The decrease in the effective tax rate from the prior year was primarily due to
increased benefits related to stock-based compensation. The effective tax rate
also benefited from the release of a valuation allowance in a foreign
jurisdiction.
When compared to the federal and state combined statutory rate for each
respective period, the effective tax rates for the quarters ended March 31, 2020
and 2019 were favorably impacted by tax benefits from stock-based compensation,
the foreign-derived intangible income (FDII) 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:
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Three Months Ended
March 31, March 31,
(in thousands, except per share data) 2020 2019
Net income $ 46,064 $ 86,230
Diluted earnings per share $ 0.53 $ 1.01 Weighted average shares outstanding - diluted 87,369 85,493
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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 its most comparable GAAP
financial measure are described below.
Three Months Ended
March 31, 2020 March 31, 2019
(in thousands,
except percentages
and per share Non-GAAP Non-GAAP
data) GAAP Results Adjustments Results GAAP Results Adjustments Results
Total revenue $ 304,985 $ 3,912 (1) $ 308,897 $ 317,130 $ 2,780 (4) $ 319,910
Operating income 34,073 56,500 (2) 90,573 95,649 41,537 (5) 137,186
Operating profit
margin 11.2 % 29.3 % 30.2 % 42.9 %
Net income $ 46,064 $ 26,241 (3) $ 72,305 $ 86,230 $ 24,440 (6) $ 110,670 Earnings per share - diluted: Earnings per share$ 0.53 $ 0.83 $ 1.01 $ 1.29 Weighted average shares 87,369 87,369 85,493 85,493
(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 $30.9 million of stock-based compensation expense, $7.0
million of excess payroll taxes related to stock-based awards, $13.7 million of amortization expense associated with intangible assets acquired
in business combinations,
business combinations and the $3.9 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 GAAP to non-GAAP tax
provision impact of
effective tax rate of 19.5%.
(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 $23.8 million of stock-based compensation expense, $4.0
million of excess payroll taxes related to stock-based awards,
of amortization expense associated with intangible assets acquired in
business combinations, $2.7 million of transaction expenses related to
business combinations and the $2.8 million adjustment to revenue as
reflected in (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
$15.6 million , adjustments related to the transition tax associated with
the Tax Cuts and Jobs Act of $1.3 million , and rabbi trust income of $0.2
million .
Non-GAAP Measures
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
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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. In
accordance with the fair value provisions applicable to the accounting for
business combinations, acquired deferred revenue is often recorded on the
opening balance sheet at an amount that is lower than the historical carrying
value. Although this acquisition accounting requirement has no impact on our
business or cash flow, it adversely impacts our reported GAAP revenue in the
reporting periods following an acquisition. In order to provide investors with
financial information that facilitates comparison of both historical and future
results, we provide non-GAAP financial measures which exclude the impact of the
acquisition accounting adjustment. We believe that this non-GAAP financial
adjustment is useful to investors because it allows 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 and future reports of
financial results as the revenue reduction related to acquired deferred revenue
will not recur when related annual lease licenses and software maintenance
contracts are renewed in future periods.
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 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. Stock-based compensation
expense (benefit) incurred in connection with our deferred compensation plan
held in a rabbi trust includes an offsetting benefit (charge) recorded in other
income (expense). 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 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. We similarly exclude income (expense) related to assets
held in a rabbi trust in connection with our deferred compensation plan.
Specifically, we exclude stock-based compensation and income (expense) related
to assets held in the deferred compensation plan rabbi trust 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.
Transaction costs 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. These expenses are generally not tax-deductible. We exclude these
acquisition-related transaction expenses, derived from announced acquisitions,
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.
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Tax Cuts and Jobs Act. We recorded impacts to our income tax provision related to the enactment of the Tax Cuts and Jobs Act of 2017, specifically for the transition tax related to unrepatriated cash and the impacts of the tax rate change on net deferred tax assets. We exclude these impacts for the purpose of calculating non-GAAP net income and non-GAAP diluted earnings per share when we evaluate our continuing operational performance, as (i) the charges are not expected to recur as part of our normal operations and (ii) the charges resulted from the extremely infrequent event of majorU.S. tax reform, the last such reform having occurred in 1986. 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. 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 will re-evaluate 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 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
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Liquidity and Capital Resources
March 31, December 31,
(in thousands) 2020 2019 Change
Cash, cash equivalents and short-term investments $ 718,030 $ 872,382 $ (154,352 )
Working capital $ 753,558 $ 860,340 $ (106,782 )
Cash, Cash Equivalents and Short-Term Investments
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, 2020 and December 31, 2019 :
March 31, December 31,
(in thousands, except percentages) 2020 % of Total 2019
% of Total
Domestic $ 427,709 59.6 $ 626,433 71.8
Foreign 290,321 40.4 245,949 28.2
Total $ 718,030 $ 872,382
In general, it is our intention to permanently reinvest all earnings in excess
of previously taxed amounts. As part of U.S. 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 global intangible
low-taxed income 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. While we believe that the financial
reporting bases may be greater than the tax bases of investments in foreign
subsidiaries for any earnings in excess of previously taxed amounts, such
amounts are considered permanently reinvested. The cumulative temporary
difference related to such permanently reinvested earnings is approximately
$33.9 million and we would anticipate the tax effect on those earnings to be
immaterial as a result of U.S. tax reform.
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.
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