ANSYS, Inc. (ANSS) develops and markets engineering simulation software and technologies widely used by engineers and designers across a spectrum of industries, including aerospace, automotive, manufacturing, electronics, biomedical, energy and defense. The Company focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS suite of simulation technologies through a global network of resellers and distributors (collectively, channel partners) and direct sales offices in global locations. The Company’s product portfolio consists of ANSYS Workbench, Multiphysics, Structural Mechanics, Fluid Dynamics, Explicit Dynamics, Electromagnetics, System and Circuit Simulation, Simulation Process & Data Management, Academic, High-Performance Computing and Geometry Interfaces.
With solid historical growth and dominance of a market niche, comes a price in the form of premium valuation. ANSS is experiencing both top and bottom-line out-performance, driven by an acceleration of revenue to a 14% growth rate in this fiscal year. There are potential catalysts for revenue acceleration: in the near-term, the company is expecting strong bookings growth (18%) to result in acceleration of maintenance and lease licenses in 2011; and in the second half of 2011 they expect to see the impact from the strong sales hiring in 4th quarter. The sales force headcount grew by 16% year over year which should help generate license acceleration as new sales representatives become productive.
There are many positives indicating potential growth ahead for the company. Over the last several years, ANSS has cemented a clear market leadership position in engineering simulation. While this software category has existed for many years as a niche, the industry continues to gain importance. This market appears to be still early in its adoption cycle, as more users in a variety of industries deploy simulation to improve product performance, shorten product cycles, and control the cost of inputs such as energy and materials. It is estimated that customers are only about 20% penetrated in terms of their use of simulation technology in current programs by sophisticated engineers. However, the long-term opportunity could be much larger than the current market, as simulation technology becomes easier to use by a wide range of engineers.
Ratios – P/E (ttm) 33.1X
Discounted Cash Flow Analysis –
As is typical for growth stocks, the premium valuation leaves little margin for error. This isn’t to say that the price isn’t justified; it simply means the company has a high hurdle to maintain for an extended period of time. While valuation multiples are below historical highs, it doesn’t mean the shares are cheap.
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The company recently held an investor day to highlight the management team and discuss future growth strategies. Key points as reported by the company’s management –
“ANSYS has expanded the breadth of their product offering to include fluids and electromagnetic analysis, and the long-term goal remains to elevate simulation from the component level, to the system level in which the performance of the entire product is simulated. This expanded vision of System Level Simulation is being made possible by: the increased robustness of the ANSYS Workbench platform; and the continued declines in the cost of compute power.
No competitor offers the breadth of simulation products as ANSYS, and at present cannot address the System Level Simulation. Deals typically do not involve price discounting. Management believes rising oil prices will only further enhance the recent focus on engineering products for increased energy efficiency.
One area of consistent interest was market penetration. Management again focused on the fact its top 10 customers have just 1.3% of their engineers using ANSYS products, suggesting lots of room for further adoption Again, increasing ease-of-use should enable broader adoption, as should adoption of System Level simulation. The fact that revenue from the top 10 customers grew 30% over the past two years compared to an 18% increase total revenue shows the most sophisticated companies are vanguard adopters of Simulation, and are a harbinger of wider future adoption.
The December 2010 release of ANSYS 13 represented a meaningful product upgrade. The strong upgrade coupled with more aggressive education of the advancements has resulted in strong upgrade adoption. The primary improvements in ANSYS 13 included: increased ease of use; the accuracy of simulation was advanced for several special use cases; additional processes were automated; and processing speeds were improved. The improved ease-of-use related to data transfer between applications which in ANSYS 13 can be done drag-and-drop, providing a material reduction in time and effort.”
- Premium valuation.
- Maintaining long-term revenue growth in the double-digits.
- Renewing license agreements.
- Larger competitors may begin to get traction in the market.
Ansys has done a tremendous job at growing in a niche software category. There is little doubt about their ability to grow and pick up market share. Results have been highly profitable, but given the rich valuation, value investors will most likely stay away.
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