ANSYS, INC. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the six months endedJune 30, 2022 , and with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2021 included in the 2021 Form 10-K filed with theSecurities 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 ofPittsburgh, Pennsylvania , we employed 5,300 people as ofJune 30, 2022 . We focus on the development of open and flexible solutions that enable users to analyze designs directly on the desktop and/or via the cloud, 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 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. Our strategy of Pervasive Engineering Simulation™ seeks to deepen the use of simulation in our core, to inject simulation throughout the product lifecycle and to embed simulation into our partners' ecosystems. 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 of new products and lower warranty costs. We are investing in solutions to help engineers deal with increasing product complexity in:
•Electrification, including electric vehicles;
•Autonomy, including self-driving vehicles;
•5G and telecommunications; and
•IIoT.
In the longer term, we are also investing in opportunities around digital twins
and simulation for additive manufacturing. Our strategy of Pervasive Engineering
Simulation is aligned with the market growth.
To support our strategy of Pervasive Engineering Simulation, we will continue to
follow a series of pillars that we believe will drive future growth. We will
reinforce and extend our leadership in core and the high-growth solutions. We
will build and grow our offerings and expertise in adjacencies to our current
core competencies. We will also continue to pursue a smart and strategic
acquisition strategy to grow our business, and we will partner with other
industry leaders to broaden pervasive simulation into other ecosystems.
Importantly, we will continue to win in the right way, built on a culture of and
commitment to diversity, equity, inclusion and belonging.
We license our technology to businesses, 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. However, the software business is generally characterized
by long sales cycles. These long sales cycles increase the difficulty of
predicting sales for any particular quarter. We make many operational and
strategic decisions based upon short- and long-term sales forecasts that are
impacted not only by these long sales cycles, but also by current global
economic conditions. As a result, we believe that our overall performance is
best measured by fiscal year results rather than by quarterly results.
Management addresses 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 evaluate and execute
strategic acquisitions to supplement our global engineering talent, product
offerings and distribution channels.
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Overview:
Update on the Impact of the COVID-19 Pandemic
We continued to employ measures intended to mitigate the effects of the COVID-19 pandemic on our business in the second quarter. Our direct and indirect sales and support teams continue to use collaborative technology to access bothAnsys' data centers and the public cloud, and to meet virtually with customers to mitigate disruptions to our sales pipeline. Our sales team continues to engage with customers around the world in a mix of virtual and in-person meetings, depending on the location specific guidelines and customer preferences. They continue to deliver customer value and generate business momentum. Our research and development teams have also continued to be productive and meet our product release targets, as evidenced by the recent release ofAnsys 2022 R2 in July.
Please see "Forward-Looking Information" herein and "Risk Factors" in Part I, Item 1A of our 2021 Form 10-K for discussion on additional business risks, including those associated with the COVID-19 pandemic.
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 non-GAAP results exclude the income statement effects of the acquisition accounting adjustments to deferred revenue from business combinations closed prior to 2022, 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. 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. Constant currency is a non-GAAP measure. 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 2022 results for entities whose functional currency is a currency other than theU.S. Dollar were converted toU.S. Dollars at rates that were in effect for the 2021 comparable period, rather than the actual exchange rates in effect for 2022. Constant currency growth rates are calculated by adjusting the 2022 reported revenue and operating income amounts by the 2022 currency fluctuation impacts and comparing to the 2021 comparable period reported revenue and operating income amounts.
Our GAAP and non-GAAP results for the three and six months ended
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
GAAP Non-GAAP GAAP Non-GAAP
Revenue 6.1 % 5.2 % 11.0 % 9.7 %
Operating income 9.6 % 2.6 % 25.4 % 9.3 %
Diluted earnings per share 6.6 % (4.3) % 2.6 % 5.4 %
Our results reflect an increase in revenue during the three and six months ended
June 30, 2022 due to growth in subscription lease licenses, maintenance and
service revenue, partially offset by a reduction in perpetual license revenue.
We also experienced increased operating expenses during the three and six months
ended June 30, 2022 , primarily due to increased personnel costs. The actual U.S.
Dollar reported results were significantly impacted by a stronger U.S. Dollar.
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Impact of Foreign Currency
Our comparative financial results were impacted by fluctuations in theU.S. Dollar during the three and six months endedJune 30, 2022 as compared to the three and six months endedJune 30, 2021 . The impacts on our GAAP and non-GAAP revenue and operating income as a result of the fluctuations of theU.S. Dollar when measured against our primary foreign currencies based on 2021 exchange rates are reflected in the table below. Amounts in brackets indicate an adverse impact from currency fluctuations. Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 (in thousands) GAAP Non-GAAP GAAP Non-GAAP Revenue$ (28,785) $ (28,878) $ (40,110) $ (40,267) Operating income$ (17,346) $ (18,077) $ (21,840) $ (23,148)
In constant currency, our growth was as follows:
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
GAAP Non-GAAP GAAP Non-GAAP
Revenue 12.5 % 11.5 % 15.9 % 14.6 %
Operating income 24.5 % 12.2 % 38.5 % 16.6 %
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. Given that revenue is more volatile due to the upfront revenue recognition of perpetual licenses and multi-year subscription lease license sales, we provide ACV as a supplemental metric to help evaluate the annual performance of the business. Summed over the long term, ACV and revenue are equal. However, there will be years in which ACV growth lags revenue growth and other years in which ACV growth leads revenue growth. 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 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.
Our ACV was as follows:
Three Months Ended June 30,
(in thousands, except percentages) 2022 2021 Change
Constant Constant
Actual Currency Actual Actual Currency
Amount Amount % Amount %
ACV $ 460,273 $ 487,222 $ 430,539 $ 29,734 6.9 $ 56,683 13.2
Six Months Ended June 30,
(in thousands, except percentages) 2022 2021 Change
Constant Constant
Actual Currency Actual Actual Currency
Amount Amount % Amount %
ACV $ 804,418 $ 841,014 $ 749,921 $ 54,497 7.3 $ 91,093 12.1
21-------------------------------------------------------------------------------- Table of Contents Our trailing twelve-month recurring ACV, converted from the functional currency toU.S. Dollars at the 2021 monthly average exchange rates, was as follows: Twelve Months Ended June 30, Change (in thousands, except percentages) 2022 2021 Amount %
Recurring ACV at 2021 monthly average exchange rates
$ 1,379,670 $ 192,752 14.0
Recurring ACV includes both subscription lease license and maintenance ACV, and excludes perpetual license and service ACV.
Industry Commentary:
High-tech, aerospace and defense (A&D), and automotive continued to be strong as companies sought to improve efficiency and innovation through digital technologies. Our high-tech and semiconductor industry remained strong due to continued investments in 5G, sustainability and high-performance computing. Our comprehensive multiphysics portfolio is responsible for the growth in A&D as customers address modernization needs via digital transformation and new engineering challenges stemming from products that must travel farther, faster and more efficiently. The automotive industry continues to invest in electrification and advanced driver assistance systems (ADAS) in response to increasing demand for safety and reliability. The industrial equipment and energy industries also had strong performance as companies use our solutions for their sustainability and digital transformation initiatives.
Geographic Trends:
The following tables present our GAAP and non-GAAP geographic revenue variances using actual and constant currency rates during the three and six months endedJune 30, 2022 as compared to the three and six months endedJune 30, 2021 : GAAP Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Actual Constant Currency Actual Constant Currency Americas (9.4) % (9.3) % 6.6 % 6.7 % EMEA 17.1 % 29.1 % 9.5 % 18.4 % Asia-Pacific 23.6 % 36.3 % 19.7 % 29.1 % Total 6.1 % 12.5 % 11.0 % 15.9 % Non-GAAP Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Actual Constant Currency Actual Constant Currency Americas (11.0) % (10.9) % 3.8 % 3.9 % EMEA 17.2 % 29.2 % 9.7 % 18.6 % Asia-Pacific 23.5 % 36.2 % 19.7 % 29.1 % Total 5.2 % 11.5 % 9.7 % 14.6 % 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 significantly, 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 pipeline building, customer engagement activities, productivity initiatives and sales hiring.
During the six months endedJune 30, 2022 , trade restrictions limited our ability to deliver products and services to customers inRussia andBelarus and certain entities inChina . For context, the combined 2021 revenue for all customers inRussia andBelarus was$15.1 million , less than 1% of our total 2021 revenue.China's 2021 revenue represented 4.3% of our total 2021 revenue. Additional restrictions or a further deterioration in the global trade environment could have a material adverse impact on our business, results of operations or financial condition. Refer to additional details in Part I, "Item 1A. Risk Factors" in our 2021 Form 10-K and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2022 for a discussion of additional business risks, including those associated with the Russian invasion ofUkraine . 22
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Use of Estimates:
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 the Private Securities Litigation Reform Act of 1995. 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 (including as a result of the conflict betweenRussia andUkraine ); •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; •impacts from tariffs, trade sanctions, export license requirements or other trade barriers (including impacts from changes to diplomatic relations and trade policy betweenthe United States andRussia (orthe United States and other countries that may supportRussia or take similar actions) due to the conflict betweenRussia andUkraine ); •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; •current and potential future impacts of a global health crisis, natural disaster or catastrophe, including the COVID-19 pandemic and actions taken to address the pandemic by our customers, suppliers, regulatory authorities, and our business, on the global economy and our business and consolidated financial statements, and other public health and safety risks; and government actions or mandates surrounding the COVID-19 pandemic; •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 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; •the quality of our products, including the strength of features, functionality and integrated multi-physics capabilities; our ability to develop and market new products to address the industry's rapidly changing technology; failures or 23 -------------------------------------------------------------------------------- Table of Contents 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;
•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 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 service tax audit cases;
•our intention to repatriate previously taxed earnings in excess of working
capital needs and to reinvest all other earnings of our non-
•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 slowdown in our research and development activities;
•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;
•our ability to execute on our strategies related to environmental, social, and governance matters, and achieve related 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 incarbon markets; and
•other risks and uncertainties described in our reports filed from time to time
with the
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Results of Operations
The results of operations discussed below are on a GAAP basis unless otherwise stated.
Three Months EndedJune 30, 2022 Compared to Three Months EndedJune 30, 2021 Revenue: Three Months Ended June 30, (in thousands, except percentages) 2022 2021 Change Constant Constant GAAP Currency GAAP GAAP Currency Amount Amount % Amount % Revenue: Subscription lease licenses$ 135,031 $ 145,850 $ 129,794 $ 5,237 4.0$ 16,056 12.4 Perpetual licenses 73,950 77,136 85,028 (11,078) (13.0) (7,892) (9.3) Software licenses 208,981 222,986 214,822 (5,841) (2.7) 8,164 3.8 Maintenance 247,635 261,619 218,297 29,338 13.4 43,322 19.8 Service 17,234 18,030 13,535 3,699 27.3 4,495 33.2 Maintenance and service 264,869 279,649 231,832 33,037 14.3 47,817 20.6 Total revenue$ 473,850 $ 502,635 $ 446,654 $ 27,196 6.1$ 55,981 12.5 Revenue for the quarter endedJune 30, 2022 increased 6.1% compared to the quarter endedJune 30, 2021 , or 12.5% in constant currency. The growth rate was favorably impacted by our continued investment in our global sales, support and marketing organizations, and the timing of our multi-year subscription lease contracts. Annual maintenance contracts that were sold with new perpetual licenses, maintenance contracts for new perpetual licenses sold in previous quarters, maintenance renewals and the maintenance portion of subscription lease license contracts collectively contributed to maintenance revenue growth of 13.4%, or 19.8% in constant currency. Subscription lease license revenue increased 4.0%, or 12.4% in constant currency, as compared to the prior-year quarter. Service revenue increased 27.3%, or 33.2% in constant currency, as compared to the prior-year quarter. Perpetual license revenue, which is derived from new sales during the quarter, decreased 13.0%, or 9.3% in constant currency, as compared to the prior-year quarter primarily due to customers' preference shifting to subscription lease licenses and the timing of contracts executed. We continue to experience increased demand from our customers for contracts that often include longer-term, subscription lease licenses 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 license 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 endedJune 30, 2022 , theU.S. Dollar was 12.0% stronger, when measured against our primary foreign currencies, than for the quarter endedJune 30, 2021 . The table below presents the net impacts of currency fluctuations on revenue for the quarter endedJune 30, 2022 . Amounts in brackets indicate an adverse impact from currency fluctuations. (in thousands) Three Months Ended June 30, 2022 Euro $(11,325) Japanese Yen (10,454) South Korean Won (4,175) British Pound (1,333) Taiwan Dollar (862) Indian Rupee (376) Other (260) Total $ (28,785) 25
-------------------------------------------------------------------------------- Table of Contents The impacts from currency fluctuations resulted in decreased operating income of$17.3 million for the quarter endedJune 30, 2022 as compared to the quarter endedJune 30, 2021 .
As a percentage of revenue, our international and domestic revenues, and our direct and indirect revenues, were as follows:
Three Months Ended June 30,
2022 2021
International 60.5 % 53.3 %
Domestic 39.5 % 46.7 %
Direct 73.7 % 75.4 %
Indirect 26.3 % 24.6 %
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 closed prior to 2022,
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 $2.0 million and $5.9
million for the quarters ended June 30, 2022 and 2021, respectively. The
expected impacts on reported revenue are $1.2 million and $7.3 million for the
quarter ending September 30, 2022 and the year ending December 31, 2022 ,
respectively.
Deferred Revenue and Backlog:
Deferred revenue consists of billings made or payments received in advance of revenue recognition from customer agreements. The deferred revenue on our condensed consolidated balance sheet does not represent the total value of annual or multi-year, noncancellable agreements. Our backlog represents installment billings for periods beyond the current quarterly billing cycle. Our deferred revenue and backlog as ofJune 30, 2022 andDecember 31, 2021 consisted of the following: Balance at June 30, 2022 (in thousands) Total Current Long-Term Deferred revenue$ 383,622 $ 360,910 $ 22,712 Backlog 795,626 364,413 431,213 Total$ 1,179,248 $ 725,323 $ 453,925 Balance at December 31, 2021 (in thousands) Total Current Long-Term Deferred revenue$ 412,781 $ 391,528 $ 21,253 Backlog 845,079 373,334 471,745 Total$ 1,257,860 $ 764,862 $ 492,998
Revenue associated with deferred revenue and backlog that will be recognized in the subsequent twelve months is classified as current in the tables above.
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Cost of Sales and Operating Expenses:
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.
Three Months Ended
2022 2021 Change
GAAP Constant Currency GAAP GAAP Constant Currency
(in thousands, % of % of % of
except percentages) Amount Revenue Amount Revenue Amount Revenue Amount % Amount %
Cost of sales:
Software
licenses $ 8,509 1.8 8,612 1.7 $ 8,065 1.8 $ 444 5.5 $ 547 6.8
Amortization 17,414 3.7 17,808 3.5 15,025 3.4 2,389 15.9 2,783 18.5
Maintenance
and service 36,564 7.7 38,361 7.6 41,068 9.2 (4,504) (11.0) (2,707) (6.6)
Total cost of
sales 62,487 13.2 64,781 12.9 64,158 14.4 (1,671) (2.6) 623 1.0
Gross profit $ 411,363 86.8 437,854 87.1 $ 382,496 85.6 $ 28,867 7.5 $ 55,358 14.5
Amortization: The increase in amortization expense was primarily due to the amortization of newly acquired intangible assets.
Maintenance and Service: The decrease in maintenance and service costs was primarily due to the following:
•Decreased costs related to foreign exchange translation of
•Decreased incentive compensation and other headcount-related costs of
•Decreased stock-based compensation of
The improvement in gross profit was a result of the increase in revenue and the decrease in the cost of sales.
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Three Months Ended June 30,
2022 2021 Change
GAAP Constant Currency GAAP GAAP Constant Currency
(in thousands, % of % of % of
except percentages) Amount Revenue Amount Revenue Amount Revenue Amount % Amount %
Operating expenses:
Selling, general and
administrative $ 170,383 36.0 $ 176,406 35.1 $ 160,410 35.9 $ 9,973 6.2 $ 15,996 10.0
Research and
development 108,941 23.0 111,833 22.2 100,879 22.6 8,062 8.0 10,954 10.9
Amortization 4,029 0.9 4,259 0.8 4,434 1.0 (405) (9.1) (175) (3.9)
Total operating
expenses 283,353 59.8 292,498 58.2 265,723 59.5 17,630 6.6 26,775 10.1
Operating income $ 128,010 27.0 $ 145,356 28.9 $ 116,773 26.1 $ 11,237 9.6 $ 28,583 24.5
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
•Increased business travel of
•Increased marketing expenses of
•Increased IT maintenance and software hosting costs of
•Increased consulting and professional fees of
•Decreased costs related to foreign exchange translation of
•Decreased stock-based compensation of
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 of
•Increased stock-based compensation of
•Increased IT maintenance and software hosting costs of
•Increased business travel of
•Decreased costs related to foreign exchange translation 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. Interest Expense: Interest expense for the quarter endedJune 30, 2022 was$4.6 million as compared to$3.3 million for the quarter endedJune 30, 2021 due to a higher interest rate environment. Other (Expense) Income, net: Other expense for the quarter endedJune 30, 2022 was$0.8 million as compared to other income of$14.9 million for the quarter endedJune 30, 2021 . Other (expense) income consisted primarily of losses and gains on equity investments during the second quarter of 2022 and 2021, respectively. 28
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Income Tax Provision: Our income before income tax provision, income tax provision and effective tax rates were as follows:
Three Months Ended June 30,
(in thousands, except percentages) 2022 2021
Income before income tax provision $ 122,894 $ 128,860
Income tax provision $ 24,094 $ 35,144
Effective tax rate 19.6 % 27.3 %
The decrease in the effective tax rate from the second quarter of 2021 was primarily due to a decrease in non-deductible compensation in 2022 and an increase in tax benefits from the foreign-derived intangible income (FDII) deduction, partially offset by a decrease in benefits related to tax planning 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 endedJune 30, 2022 and 2021 were favorably impacted by tax benefits from the FDII deduction and research and development credits. Additionally, tax expense/benefits related to stock-based compensation impacted the rate in each period.
Net Income: Our net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
Three Months Ended (in thousands, except per share data) 2022 2021 Net income$ 98,800 $ 93,716 Diluted earnings per share $ 1.13$ 1.06 Weighted average shares outstanding - diluted 87,321
88,053
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Six Months Ended
Revenue:
Six Months Ended June 30,
(in thousands, except
percentages) 2022 2021 Change
Constant Constant
GAAP Currency GAAP GAAP Currency
Amount Amount % Amount %
Revenue:
Subscription lease licenses $ 226,488 $ 239,133 $ 194,871 $ 31,617 16.2 $ 44,262 22.7
Perpetual licenses 139,938 144,713 152,555 (12,617) (8.3) (7,842) (5.1)
Software licenses 366,426 383,846 347,426 19,000 5.5 36,420 10.5
Maintenance 494,876 516,290 431,971 62,905 14.6 84,319 19.5
Service 37,625 38,901 30,483 7,142 23.4 8,418 27.6
Maintenance and service 532,501 555,191 462,454 70,047 15.1 92,737 20.1
Total revenue $ 898,927 $ 939,037 $ 809,880 $ 89,047 11.0 $ 129,157 15.9
Revenue for the six months ended June 30, 2022 increased 11.0% compared to the
six months ended June 30, 2021 , or 15.9% in constant currency. The growth rate
was favorably impacted by our continued investment in our global sales, support
and marketing organizations and the timing and duration of our multi-year lease
contracts. Subscription lease license revenue increased 16.2%, or 22.7% in
constant currency, as compared to the six months ended June 30, 2021 . Annual
maintenance contracts that were sold with new perpetual licenses, maintenance
contracts for new perpetual licenses sold in previous quarters, maintenance
renewals and the maintenance portion of subscription lease license contracts
collectively contributed to maintenance revenue growth of 14.6%, or 19.5% in
constant currency. Service revenue increased 23.4%, or 27.6% in constant
currency, as compared to the six months ended June 30, 2021 . Perpetual license
revenue, which is derived from new sales during the six months ended June 30,
2022 , decreased 8.3%, or 5.1% in constant currency, as compared to the six
months ended June 30, 2021 primarily due to customers' preference shifting to
subscription lease licenses and the timing of contracts executed.
With respect to revenue, on average for the six months ended June 30, 2022 , the
U.S. Dollar was 9.6% stronger, when measured against our primary foreign
currencies, than for the six months ended June 30, 2021 . The table below
presents the net impacts of currency fluctuations on revenue for the six months
ended June 30, 2022 . Amounts in brackets indicate an adverse impact from
currency fluctuations.
(in thousands) Six Months Ended June 30, 2022
Euro $ (16,973)
Japanese Yen (13,894)
South Korean Won (5,830)
British Pound (1,673)
Taiwan Dollar (849)
Indian Rupee (661)
Other (230)
Total $ (40,110)
The impacts from currency fluctuations resulted in decreased operating income of
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As a percentage of revenue, our international and domestic revenues, and our direct and indirect revenues, were as follows:
Six Months Ended June 30,
2022 2021
International 57.2 % 55.4 %
Domestic 42.8 % 44.6 %
Direct 73.1 % 73.8 %
Indirect 26.9 % 26.2 %
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 closed prior to 2022,
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 $5.6 million and $14.8
million for the six months ended June 30, 2022 and 2021, respectively.
Cost of Sales and Operating Expenses:
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.
Six Months Ended June 30,
2022 2021 Change
GAAP Constant Currency GAAP GAAP Constant Currency
(in thousands, % of % of % of
except percentages) Amount Revenue Amount Revenue Amount Revenue Amount % Amount %
Cost of sales:
Software
licenses $ 16,945 1.9 $ 17,069 1.8 $ 15,671 1.9 $ 1,274 8.1 $ 1,398 8.9
Amortization 34,666 3.9 35,242 3.8 29,974 3.7 4,692 15.7 5,268 17.6
Maintenance
and service 75,636 8.4 78,594 8.4 80,616 10.0 (4,980) (6.2) (2,022) (2.5)
Total cost of
sales 127,247 14.2 130,905 13.9 126,261 15.6 986 0.8 4,644 3.7
Gross profit $ 771,680 85.8 $ 808,132 86.1 $ 683,619 84.4 $ 88,061 12.9 $ 124,513 18.2
Software Licenses: The increase in the cost of software licenses was primarily
due to increased third-party royalties of
Amortization: The increase in amortization expense was primarily due to the amortization of intangible assets acquired within the last year.
Maintenance and Service: The decrease in maintenance and service costs was primarily due to the following:
•Decreased costs related to foreign exchange translation of
•Decreased stock-based compensation of
The improvement in gross profit was a result of the increase in revenue, partially offset by the increase in the cost of sales.
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Six Months Ended June 30,
2022 2021 Change
GAAP Constant Currency GAAP GAAP Constant Currency
(in thousands, except % of % of % of
percentages) Amount Revenue Amount Revenue Amount Revenue Amount % Amount %
Operating expenses:
Selling, general and
administrative $ 340,138 37.8 $ 349,696 37.2 $ 306,625 37.9 $ 33,513 10.9 $ 43,071 14.0
Research and development 214,215 23.8 218,920 23.3 201,358 24.9 12,857 6.4 17,562 8.7
Amortization 8,154 0.9 8,503 0.9 8,841 1.1 (687) (7.8) (338) (3.8)
Total operating expenses 562,507 62.6 577,119 61.5 516,824 63.8 45,683 8.8 60,295 11.7
Operating income $ 209,173 23.3 $ 231,013 24.6 $ 166,795 20.6 $ 42,378 25.4 $ 64,218 38.5
Selling, General and Administrative: The net increase in selling, general and administrative costs was primarily due to the following:
•Increased salaries, incentive compensation and other headcount-related costs of
•Increased business travel of
•Increased marketing expenses of
•Increased consulting costs of
•Increased IT maintenance and software hosting costs of
•Increased bad debt expense of$1.8 million due to the write-off of receivables due from Russian customers as a result of sanctions imposed related toRussia's invasion ofUkraine .
•Decreased costs related to foreign exchange translation of
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
•Increased IT maintenance and software hosting costs of
•Increased business travel of
•Decreased costs related to foreign exchange translation of
Interest Income: Interest income for the six months endedJune 30, 2022 was$0.8 million as compared to$1.0 million for the six months endedJune 30, 2021 . The lower invested cash balance, as a result of investments in acquisitions and share repurchases, was partially offset by the higher interest rate environment and the related increase in the average rate of return on invested cash balances. Interest Expense: Interest expense for the six months endedJune 30, 2022 was$7.6 million as compared to$6.7 million for the six months endedJune 30, 2021 . Interest expense increased as a result of a higher interest rate environment, partially offset by lower principal balances on our outstanding debt. Other (Expense) Income, net: Other expense for the six months endedJune 30, 2022 was$1.5 million as compared to other income of$15.3 million for the six months endedJune 30, 2021 . Other (expense) income consisted primarily of losses and gains on equity investments during the six months endedJune 30, 2022 andJune 30, 2021 , respectively. 32
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Income Tax Provision: Our income before income tax provision, income tax provision and effective tax rates were as follows:
Six Months Ended June 30,
(in thousands, except percentages) 2022 2021
Income before income tax provision $ 200,923 $ 176,483
Income tax provision $ 31,135 $ 10,369
Effective tax rate 15.5 % 5.9 %
The increase in the effective tax rate from the prior year was primarily due to decreased benefits related to stock-based compensation.
When compared to the federal and state combined statutory rate for each
respective period, the effective tax rates for the six months ended
Net Income: Our net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
Six Months Ended (in thousands, except per share data) 2022 2021 Net income$ 169,788 $ 166,114 Diluted earnings per share $ 1.94$ 1.89 Weighted average shares outstanding - diluted 87,535
88,019
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Non-GAAP Results
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.
ANSYS, INC. AND SUBSIDIARIES
Reconciliationsof GAAP to Non-GAAP Measures
(Unaudited)
Three Months Ended
June 30, 2022
(in thousands, except
percentages and per share Operating
data) Revenue Gross Profit % Income % Net Income EPS - Diluted1
Total GAAP $ 473,850 $ 411,363 86.8 % $ 128,010 27.0 % $ 98,800 $ 1.13
Acquisition accounting for
deferred revenue 2,036 2,036 0.1 % 2,036 0.3 % 2,036 0.02
Stock-based compensation
expense - 2,264 0.5 % 39,498 8.3 % 39,498 0.45
Excess payroll taxes related
to stock-based awards - 27 - % 217 0.1 % 217 -
Amortization of intangible
assets from acquisitions - 17,414 3.6 % 21,443 4.5 % 21,443 0.25
Expenses related to business
combinations - - - % 2,428 0.5 % 2,428 0.03
Adjustment for income tax effect - - - % - - % (9,839) (0.11) Total non-GAAP$ 475,886 $ 433,104 91.0 %$ 193,632 40.7 %$ 154,583 $ 1.77
1 Diluted weighted average shares were 87,321.
Three Months Ended
June 30, 2021
(in thousands, except
percentages and per share Operating
data) Revenue Gross Profit % Income % Net Income EPS - Diluted1
Total GAAP $ 446,654 $ 382,496 85.6 % $ 116,773 26.1 % $ 93,716 $ 1.06
Acquisition accounting for
deferred revenue 5,896 5,896 0.2 % 5,896 0.9 % 5,896 0.07
Stock-based compensation
expense - 3,519 0.8 % 42,885 9.5 % 42,885 0.48
Excess payroll taxes related
to stock-based awards - 182 0.1 % 2,319 0.6 % 2,319 0.03
Amortization of intangible
assets from acquisitions - 15,025 3.3 % 19,459 4.3 % 19,459 0.22
Expenses related to business
combinations - - - % 1,321 0.3 % 1,321 0.02
Adjustment for income tax effect - - - % - - % (2,997) (0.03) Total non-GAAP$ 452,550 $ 407,118 90.0 %$ 188,653 41.7 %$ 162,599 $ 1.85
1 Diluted weighted average shares were 88,053.
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ANSYS, INC. AND SUBSIDIARIES
Reconciliationsof GAAP to Non-GAAP Measures
(Unaudited)
Six Months Ended
June 30, 2022
(in thousands, except
percentages and per share Operating
data) Revenue Gross Profit % Income % Net Income EPS - Diluted1
Total GAAP $ 898,927 $ 771,680 85.8 % $ 209,173 23.3 % $ 169,788 $ 1.94
Acquisition accounting for deferred revenue 5,596 5,596 - % 5,596 0.4 % 5,596 0.06 Stock-based compensation expense - 4,827 0.6 % 75,149 8.4 % 75,149 0.86 Excess payroll taxes related to stock-based awards - 444 0.1 % 5,270 0.6 % 5,270 0.06 Amortization of intangible assets from acquisitions - 34,666 3.8 % 42,820 4.7 % 42,820 0.49 Expenses related to business combinations - - - % 4,166 0.4 % 4,166
0.05
Adjustment for income tax effect - - - % - - % (28,971) (0.33) Total non-GAAP$ 904,523 $ 817,213 90.3 %$ 342,174 37.8 %$ 273,818 $ 3.13
1 Diluted weighted average shares were 87,535.
Six Months Ended
June 30, 2021
(in thousands, except
percentages and per share Operating
data) Revenue Gross Profit % Income % Net Income EPS - Diluted1
Total GAAP $ 809,880 $ 683,619 84.4 % $ 166,795 20.6 % $ 166,114 $ 1.89
Acquisition accounting for deferred revenue 14,819 14,819 0.3 % 14,819 1.4 % 14,819 0.17 Stock-based compensation expense - 7,081 0.9 % 78,004 9.5 % 78,004 0.88 Excess payroll taxes related to stock-based awards - 1,047 0.1 % 11,454 1.4 % 11,454 0.13 Amortization of intangible assets from acquisitions - 29,974 3.6 % 38,815 4.7 % 38,815 0.44 Expenses related to business combinations - - - % 3,291 0.4 % 3,291
0.04
Adjustment for income tax effect - - - % - - % (50,976) (0.58) Total non-GAAP$ 824,699 $ 736,540 89.3 %$ 313,178 38.0 %$ 261,521 $ 2.97
1 Diluted weighted average shares were 88,019.
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.
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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 provide 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. 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 subscription 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 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. As of
the second quarter of 2022, we have updated this non-GAAP measure to include, in
addition to professional services rendered in connection with business
combinations, 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. The additional expenses were not material in the current or comparable
period. We exclude these acquisition-related expenses for the purpose of
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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 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 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 2022 results for entities whose functional currency is a currency other than theU.S. Dollar were converted toU.S. Dollars at rates that were in effect for the 2021 comparable period, rather than the actual exchange rates in effect for 2022. Constant currency growth rates are calculated by adjusting the 2022 reported amounts by the 2022 currency fluctuation impacts and comparing the adjusted amounts to the 2021 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. 37
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Liquidity and Capital Resources
June 30, December 31,
(in thousands) 2022 2021 Change
Cash, cash equivalents and short-term investments
668,028$ (150,393) Working capital$ 702,526 $ 860,082 $ (157,556)
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 ofJune 30, 2022 andDecember 31, 2021 : June 30, December 31, (in thousands, except percentages) 2022 % of Total 2021 % of Total Domestic$ 249,061 48.1$ 365,390 54.7 Foreign 268,574 51.9 302,638 45.3 Total$ 517,635 $ 668,028 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 residualU.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$16.4 million and we would anticipate the tax effect on those earnings to be immaterial. 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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