Ansys: Design Solutions for the Future

The company's design solutions cater to many emerging technologies, including industrial IoT, 5G and autonomous vehicles

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Mar 17, 2021
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Ansys Inc. (ANSS, Financial) has a strong market position in the engineering simulation software space to cater to 3-D printing and other emerging manufacturing technologies. It has faced challenges in the oil and gas industry, which are projected to continue, but its recent acquisition of Analytical Graphics and other companies is expected to present a strong upside case given the exposure that it provides to the digital mission engineering space. The company's design offerings and simulation solutions are particularly apt for domains like industrial internet of things, autonomous vehicles and 5G.

Financial performance

Ansys reported strong fourth-quarter results with healthy growth in recurring revenues as well as a decent performance in the semiconductor, defense and technology sectors. The company reported a top-line of $627.77 million, which was significantly above the analyst consensus estimate of $565.31 million. It implied nearly a 28% growth as compared to the $486.23 million reported in the corresponding quarter of 2019. This revenue translated into a gross margin of 90.94% and an operating margin of 41.96%, which was also higher than that in the prior-year quarter.

The company recorded net income of $215.63 million, which translated into adjusted earnings of $2.96 per share, which was also above the analyst consensus estimate of $2.54. In terms of cash flows, Ansys reported $173.77 million in the form of operating cash flows. The company has a particularly strong financial position with low debt and high operating margins.

IoT, 5G and autonomous vehicle upside

Ansys' offerings have strong application in the IoT space within the manufacturing industry as its software helps in the simplification of highly complex product designs. The company offers simulation solutions that can prove to be a cost-effective approach not just for industrial IoT, but also for product design within the next generation of 5G technology. In order to ensure the highest possible flexibility for its industrial clients and the best quality of service, the company has partnerships with other computer-aided design competitors, like Autodesk (ADSK, Financial), PTC Inc. (PTC) and Siemens (SIEGY), to ensure a smooth transfer of data between systems.

On the cloud front, it has partnerships with Microsoft (MSFT, Financial) Azure as well as Amazon (AMZN, Financial) Web Services, so it is adapting well to the industry-wide cloud shift. There are many other upcoming industries where Ansys' solutions have a strong application, such as autonomous driving (including a partnership with the BMW group), a sector where every large automaker is investing billions of dollars. While Ansys' offerings may be pricey in absolute terms, its market position is strong enough to command a premium. The company has a particularly wide economic moat in this regard as customer switching costs are high, making the company particularly robust in the long term.

Acquisition-led growth

Ansys has been known for having a particularly aggressive approach toward inorganic growth. This was recently demonstrated by its $700 million acquisition of Analytical Graphics Inc., provides analysis and simulation solutions for the defense and aerospace industries. Its simulations are particularly key in critical aspects like satellite launches. Management expects the acquisition to add $75 million to $85 million in sales in 2021.

In 2020, Ansys also acquired Lumerical Inc., which is known for providing photonic design and simulation tools. Its other key recent acquisitions within the simulation and design optimization space were that of Dynardo and Livermore Software Technology Corp. We expect the company to continue pursuing acquisitions to add more offerings to its product portfolio and also drive top-line growth.

Final thoughts

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Ansys operates in a competitive environment with respect to the CAD market. Its key competitors include Cadence Design Systems Inc. (CDNS, Financial) and Autodesk. As illustrated in the chart above, all three companies have had a strong upward trajectory over the past 12 months.

Given the limited barriers to entry, smaller players are also entering the domain, which is also part of the reason why Ansys is continuing its acquisition spree. The company has a strong balance sheet with a debt-to-equity ratio of 0.22 along with very high margins and cash flows, which provide it with significant leeway to continue its pursuit of acquisitions.

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The stock trades at nearly 17 times revenue and its enterprise-value-to-Ebitda ratio has been as high as 46.95 in recent months. The stock is not cheap by any standard and could be considered slightly overvalued too, given the high multiples and the GF Value Line. However, given its futuristic solutions, I believe Ansys definitely deserves to be held onto for potentially above-average returns.

Disclosure: No positions.

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