“If you've ever seen a rocket launch, flown on an airplane, driven a car, used a computer, touched a mobile device, crossed a bridge, or put on wearable technology, chances are you've used a product where Ansys software played a critical role in its creation.”
Pennsylvania-based Ansys (ANSS, Financial) is the world’s leading engineering simulation software maker. Predicting how products will behave and how manufacturing processes will operate in real-world environments, simulation plays an active role in lowering costs, reducing cycle time and increasing quality. Simply put, with the help of Ansys, companies can innovate more rapidly and efficiently.
As indicated by the company’s statement quoted above, Ansys serves a highly diversified pool of customers across sectors and industries globally, including BMW, Airbus (AIR), Caterpillar (CAT), Procter & Gamble (PG) and GlaxoSmithKline (GSK). As of fiscal 2019, the Americas, EMEA and APAC accounted for 44%, 29% and 27% of the company’s total sales, respectively.
We think Ansys is a forecastable business, as nearly 80% of its revenue is recurring, generated through lease license, maintenance and service. Further strengthening the predictability is the dominant position sharing roughly a quarter of the market as well as the economic moat built on the company’s solid reputation in a mission-critical application and the high switching cost due to required skillset among engineers. According to the management, Ansys is twice the size of its nearest competitor in the space. Moreover, to widen the moat, it reinvests almost 20% of its annual sales in R&D for its only focus, simulation software, and takes advantage of its scale as the market leader. We also think that Ansys is smart in terms of penetrating thousands of academic institutions in 80 countries, which provides a steady stream of engineers proficient in its software.
According to the chart below, over the last decade, Ansys gradually improved its return on assets, which is now outperforming the like at its two major competitors, Autodesk (ADSK, Financial) and Dassault (XPAR:DSY, Financial).
The company does not pay a dividend, as it tends to retain all its earnings to fuel long-term growth. It does buy back shares from time to time, mostly for its employee stock option program. For the past ten years, the top line, operating income, bottom line and EPS at Ansys all grew at a low-teen CAGR, which is in line with the return on equity capital of the business – i.e., the theoretical sustainable growth rate for Ansys. It appears to us that the management has allocated capital well.
The trend of product testing and complexity looks favorable, creating an industry tailwind for Ansys, in our view. In addition to regional expansion, we see the room for the potential increase in average revenue per client for the company. Of course, Ansys may leverage acquisitions to drive growth inorganically, as it did several times in recent years.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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