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Ansys (ANSS) research page

We have assembled some important (in our view) quotes and sources, we’ll keep upgrading them, feel free to add, comment, criticize. This is just a first draft..  Our own comments are in [brackets]

Industry

  • [ANSYS develops and globally markets engineering simulation software and technologies widely used by engineers and designers across a broad spectrum of industries, including aerospace, automotive, manufacturing, electronics, biomedical and defence.]
  • Simulation software is an advanced engineering tool that formerly required high-end computers available only to senior engineers. One of the benefits of the vicious price environment for computer hardware is that the simulations can now be run on inexpensive equipment by any engineer. This is cutting the time and cost to develop all sorts of new products, and creating a much larger potential customer base for Ansys and Dassault. This is not a short term trend. [SA article]

Strategy

  • The Company’s management considers the intense competition and price pressure that it faces in the short and long term by focusing on expanding the breadth, depth and quality of the technologies, features, functionality and integrated multiphysics capabilities of its software products as compared to its competitors, investing in research and development to develop new and innovative products and increase the capabilities of its existing products, supplying new products and services, focusing on customer needs, training, consultation and support, and enhancing its distribution channels. From time to time, the Company also considers acquisitions to supplement its product offerings and distribution channels. [10K]
  • Our strong repeatable business base, it remains at a healthy 69%. So, even with our robust growth, the consistent ability to maintain a solid base of recurring or repeatable revenue has been one of the hallmarks of our business model, it basically afford us visibility going into the quarter and it’s helped to reduce the variability of the traditional back-end loading of revenue in the quarter. Basically, we think that this is direct result of the commitment that we’ve had over the years to invest a high percentage of our revenue back into R&D, which basically then allows our customers to solve their increasingly complex design issues [Q208 transcript]

Market opportunity

  • [The question came up on the cc. CEO Jim Cashman answered:] Well let me wind those backwards, because the easy one is that every time we have added a world class significant technology to the ANSYS portfolio, we have almost immediately seen at least increased interest across customer base and usually subsequent adoption that tracks with that.
  • So, in general, that is obviously some of the things, our technology teams and our customers’ teams need to deal with this thing, okay we now have increased opportunity. What do we choose to do with  that opportunity and obviously the right choice is to try to optimize it.
  • In terms of the, and boy this is the most bedeviling question, the thing in terms of percent penetration and total market size because, the fact is this is not a fixed aggregate pie that is growing in a certain standpoint anymore than, ask anybody what the size of the home computing market was, the home PC market back in the 80s with MS-DOS and then ask them the same question when this other thing came up.
  • So, in general we still have a long way to go in even the traditional core ANSYS businesses because the core ANSYS business is not a static concern. It is not an incremental concern. We are trying to push through the threshold barriers to people utilizing it, such that if people are trying to now, if the traditional automotive industries, at least some of them are trying to implement new technologies that they don’t have 30 years of tried and true practices on, they have got to have tools that allow them to project that without having the benefit of all the prototype and all the experience.
  • So, you got to have very predictive and accurate solutions. So, that is an essence of something you could not see as being a creeping organic growth when people try to say, here is the size of the current market and it is growing in aggregate at X%. These are things that are causing these dislocations that are driving the opportunity.
  • But, I think it is very safe to say that under any metric, the core penetration is way low and I do not think that we can think in terms of the long-term market as clearly being an existing pie that grows at some arbitrary percentage per year because that will miss all the new innovations and customer realities that we are try to go forward. However, I would still say any of the numbers that I have thrown out in the past that deal with all of this fuzzy logic is that 20%, 30% thing, but keep in mind the target is continuing to grow.
  • And all I have got to do is turn you back ten years ago when people were saying the size of the market is this and it is basically saturated and it is going to grow at 5%. I mean that has not been the truth and that methodology would not have led, in fact it probably kept people from even saying why bother investing in this because this is what the reality is.
  • So, I just definitely have problems answering the question because I have problems with the underlying premise, but it is under-penetrated by any metric you can use and we think the long-term opportunity while not knowing is it going to bubble up in three years, five years or ten years, the fact is the driving trends that are forcing customers to use this, they are increasing and they don’t show signs of slacking off.
  • At the end of the day, I think I have said a number of times we probably won’t sleep until every engineer has these tools at their beck and call, just the way they have word processing these days and ten years ago you would have been laughed at if you said every engineer will have word processing on their desks, they would say that is a waste of engineering talent. [Q208 cc]

Competitors

  1. DASTY
  2. MSCS
  3. PMTC
  • I am taking a look at a couple of the engineering software stocks, and a review of recent earnings call transcripts can frequently be a good place to start. [SA article discussing these]

Selling model

  • Typically, the Company’s software leases include PCS which, due to the short term (principally one year or less) of the Company’s software lease licenses, cannot be separated from lease revenue for accounting purposes under the AICPA’s Technical Practice Aid 5100.53. As a result, both the lease license and PCS are recognized ratably over the lease period. Due to the short-term nature of the software lease licenses and the frequency with which the Company provides major product upgrades (typically 12 – 18 months), the Company does not believe that a significant portion of the fee paid under the arrangement is attributable to the PCS component of the arrangement and, as a result, includes the revenue for the entire arrangement within software license revenue in the condensed consolidated statements of income.
  • The Company determines the fair value of post-contract customer support (“PCS”) sold together with perpetual licenses based on separate sales of PCS. Revenue from PCS contracts is classified as maintenance and service revenue and is recognized ratably over the term of the contract. [10K]
  • With regard to the pure body for hire services, we are a software technology company. And for us services are a way to amplify and accelerate software adoption. So, we said from the very beginning there were certain areas that would not grow at the same rate and for instance, if we did not have core competency in certain types of services we would use our channel, we would our partners for a range of those things which would allow us to deploy our people toward driving the technology and opening up new horizons of adoption. So, that is an example of a shift of a higher value thing as opposed to just doing traditional service and implementation work. So, that is the first one that is one that is very much in keeping with the trajectories we really have been talking about for several years now. [Q208 cc]

Gaap/Non-Gaap

  • Non-GAAP earnings include the usual amortization and stock-based compensation adjustments for both 2007 and 2008 again as detailed in our earnings announcement. And as always we feel that this really does give the most accurate representation of the business. [Q208 cc]

Q208 a good quarter

  • ANSYS, Inc.’s results for the three months ended June 30, 2008 reflect a revenue increase of 20.6%, and basic and diluted earnings per share growth of 50.0% and 47.8%, respectively, as compared to the three months ended June 30, 2007. ANSYS’ results for the six months ended June 30, 2008 reflect a revenue increase of 22.6%, and basic and diluted earnings per share growth of 56.8% and 53.5%, respectively, as compared to the six months ended June 30, 2007. The Company experienced higher revenues in 2008 from growth in both license and maintenance revenue. These revenues were partially offset by increased operating expenses, including higher salaries and related headcount costs. These operating results were also favorably impacted by reduced interest expense, increased interest income and changes in foreign currency exchange rates as compared to the prior year. The Company’s financial position includes $202.0 million in cash and short-term investments, and working capital of $128.5 million as of June 30, 2008. [10K]
  • The most important reason: primarily a direct consequence of strong top line performance which basically has been driven by increasing customer adoption [Q208 cc]
  • Overall, non-GAAP operating margins for the quarter were 48%. The reason for this is threefold. First of all, the strong revenue performance filtered disproportionately down to the bottom line. Secondly, license revenues composed a higher percentage than usual in the product mix. And then finally the Ansoft acquisition temporarily changed our expense landscape in a couple of ways. [Q208 cc]
  • consolidated paid-up software licenses grew by 30% quarter-to-quarter. The lease business as I mentioned has remained at 40% of total. All parts of our product spectrum did well with good overall balance. The software maintenance and enhancement subscription business grew at 23% for the quarter and 24% for the year-to-date. As I mentioned earlier, high end sales grew disproportionately, but the bottom line is with the pressures our customers are facing, they simply can’t compromise on the scope or the accuracy of the solutions that they’re trying to get. ASPs for the quarter actually increased noticeably at the high end largely driven by a move toward more comprehensive solution purchases. This has been a multi-quarter trend also that we have talked about if you go back and review. And at the low end, adjusted for volume purchases, ASPs were slightly up. [Q208 cc]

And raises guidance for full year 08

  • Higher guidance and a jump in second-quarter profit at Ansys(ANSS – Cramer’s Take – Stockpickr) pushed up shares Thursday. Revenue at the Canonsburg, Penn., maker of engineering-simulation software grew 20.6% to $111.2 million from $92.2 million for the same quarter of last year. Analysts were expecting $110.7 million, according to Thomson Reuters. Net income jumped 54% to $28.1 million, or 34 cents a share, from $18.3 million, or 23 cents a share, in the year-ago period. Excluding special charges, EPS was 42 cents. Analysts were looking for 38 cents a share. Shares in Ansys rose $2.10, or 4.7%, to $46.85 in recent trading. The company said it was raising guidance based on the performance during the first half of 2008 and completion of the acquisition of Ansoft on July 31. For the third quarter, Ansys projected revenue, excluding acquisition-related items such the write-down of deferred revenue and amortization of intangibles, of $123 million to $127 million and EPS of 36 cents or 37 cents. Analysts were expecting revenue of $116.3 million and EPS of 37 cents. Excluding special items, Ansys raised full-year projections for revenue to a range of $493 million to $499 million and for EPS of $1.61 to $1.64. The company had previously projected a top line of $448 million to $452 million and EPS of $1.40 to $1.45. Analysts were expecting a top line of $466.3 million and earnings of $1.57 a share. [TheStreet.com]
  • For fiscal year 2008, our guidance for non-GAAP revenue is an increase to the $493 million to $499 million range with non-GAAP EPS increasing again as Maria mentioned in the $1.61 to $1.64 range. Even despite the mild initial delusion from the Ansoft acquisition. 2009 is shaping up to be accretive on a non-GAAP basis, totally consistent with our earlier projections of a modest accretion in the first 12 months of combined operations, although we’re not giving specific guidance for 2009 at this juncture. [Q208 cc]

Economic crisis more opportunity

  • At the 50,000-foot level we are hearing the same messages from customers, there’s general economic concerns for sure that heighten the need for competitive advantages that basically we feel can greatly be facilitated by uncompromising simulation offerings. North America increased at 14% for the quarter, 13% year-to-date. And while certain pockets of North America have seen more economic slowdown, North America is also the place where we’ve seen some of the most robust large account activity. In fact, I mentioned that number, a seven figure deal, it’s actually nine of those seven figure deals and many, many more at the $0.5 million and above level came from North American customers.
  • But we are also seeing and you tell it from that list, we are seeing ripple effects from the rising energy costs that are benefiting us. The number of auto, aircraft, and engine companies that are modulating their businesses to the new economic realities of energy cost continues to grow. I think you can see that in just the sublists I provided. A similar pattern exists in the airframe and aero-engine arena where energy efficiencies with no margin for failure, no allowance for that, it is paramount, but it is not stopping there because in that list and the reason why it was a little bit longer, than maybe unusual was, you might have noticed that metals and mining figure prominently as do general heavy industries involving construction and infrastructure renewal around the globe and of course all of these are being driven by a combination of huge energy costs and environmental concerns, at least that’s the word we get from these range of customers. [Q208 cc]
  • [So the strong sectors, or ‘verticals’ as they’ve been called on the cc have to to with a drive to become more energy efficient (clients, that is, like cars, etc.)]

Risk factor, did they foresee the banking crisis?

  • [Funny, this:]
  • Other – the company listed a risk factor we have seldom seen, relating to the concentration of its deposits in a few banks and thus the lack of insurance on those deposits. The rarity of the risk factor caused us to wonder whether the company is concerned over the health of one of its banks, although presumably it would be easy enough for the company to switch banks if that were the case. (If anyone has followed up with the company about this or can otherwise explain it please give a response in the comment section.) [SA article]

But quarters can fluctuate

  • the software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. As a result, the Company believes that its overall performance is best measured by fiscal year results rather than by quarterly results. [10K]

Analists keep on being surprised

  • [It’s one of the first things we look at when researching a company, can it surprise on the upside on a consistent basis?]

Recommendation August 19, 2008

  • My favorite software company is Ansys (ANSS). Ansys designs engineering-simulation software used in such industries as aerospace, automotive, manufacturing, electronics, biomedical and defense. This software reduces the time it takes to move products from the design stage to manufacturing because it allows for much of the necessary product testing to be simulated rather than tested on prototypes. The company licenses its technology to businesses, educational institutions and governmental agencies. [TheStreet.com]

Take-over of Ansoft

  • On July 31, 2008, the Company completed its acquisition of 100% of Ansoft Corporation (“Ansoft”), a global provider of electronic design automation software. Under the terms of the agreement, Ansoft stockholders received $16.25 in cash and 0.431882 shares of ANSYS common stock for each outstanding Ansoft share held on July 31, 2008. ANSYS issued an aggregate of 12.2 million shares of its common stock, including 1.9 million shares pursuant to assumed stock options, valued at approximately $432.6 million based on the average closing market price on the two days preceding and the two days following the announcement of the acquisition, and paid approximately $387.3 million in cash. The total purchase price of approximately $823.3 million includes approximately $3.4 million in transaction fees. The Company used a combination of existing cash and proceeds from a $355 million unsecured senior term loan credit facility to fund the transaction. In addition to the $3.4 million in transaction-related costs, the Company incurred financing costs of approximately $4.6 million related to the credit facility. The acquisition of Ansoft is expected to increase operational efficiency and lower design and engineering costs for customers, and accelerate development and delivery of new innovative products to the marketplace. [10K]

Not everybody was convinced

  • [SA article commenting on the negative market reaction] This morning Ansys (ANSS) announced it would buy Ansoft (ANST) for $16.25 per share in cash and 0.431882 shares of Ansys. A conference call discussing the deal was webcast at 11:30 EST. [SA article]
  • our margins will be a blended ANSYS-Ansoft margin, that’s a little lower than our standard margins and therefore lower than those of this past quarter. But this has happened in every acquisition that we have done and we’ve demonstrated our ability to build of the strength of the ANSYS business model to grow these margins over time. [Q208 cc]

But company argues for synergies

  • Now being able to do complete product simulations across all industries with our customers’ products that are becoming an increasingly a blur of mechanical and electrical effects is particularly exciting to us. And especially key is to be able to do this in an egalitarian plug and play manner in a Cad-neutral environment that exists in most of our client supply chains and to do that with our myriad of partners. [Q208 cc]
  • [And did again in the question and answer session. They did manage to pull of the trick with Fluent]
  • Well, one of the fundamental differences is coming right out of the gate, their operating profit margins were a little stronger than Fluent’s were, when we acquired them. Certainly I would say for the rest of ’08, you are probably looking at combined operating profit margins more in the low 40s and I believe overtime we are going to make investments just like we did in Fluent and every other acquisition to build processes and infrastructure to absorb Ansoft into the ANSYS business that will certainly derive synergies, but they won’t be coming out of the gate. [Q208 cc]
  • [They will have to train sales people to cross-sell and familiarize them with the new products while technology people are linking capabilities. And there are plenty cross-selling opportunities]
  • There is a lot of company overlap by name, but if you look at it traditionally because of the DNA pools from which these things came, the electronics people sometimes tend to be different buying standards or different clusters than the traditional ones. I think if you ask the same question, if someone that buys an ECAD System versus buying an MCAD system. [Q208 cc]
  • [And improved visibility through more recurring revenues]
  • Well, starting out slightly less, their model does not have, very few models out there, traditionally had either the profitability or the visibility. They actually have pretty good profitability as Maria alluded to. However, their visibility is not quite up and those are elements if you recall in some of the points that I was trying to hit earlier on. I talked about certain elements of the ANSYS business model that I think will be one of those, one of those hidden synergies that will allow us to build the go forward.[Q208 cc]

Big deals increasing

  • Mark Schappel – The Benchmark Company: Okay. Thanks. And a follow up, this was the second consecutive quarter that we are seeing a seven-figure deals for the company. I think you did five in the quarter before that. Obviously much higher than the one to two deals we generally associate with the company. I was wondering if we should be changing the way we view the company with respect to large deals going forward?
  • Jim Cashman (CEO): Well I will tell you, we still are not. In fact the one thing I said back when we had not many six-figure orders I said, the string of grow with the customer real-time in a symbiotic fashion. That was what we started targeting ten years ago. And even when we started to get seven-figure deals, we said we are not actually, we are interested in supplying the demand as soon as it pops up, not waiting for it to get pent-up and then shoot behind the duck and go after it. So, actually we did have a disproportionate number last quarter and this quarter we had what12 of them. And I mentioned that the majority of that stuff though however went into deferred revenue. [Q208 cc]
  • [The deferred earnings bode well for the near future, but the move towards bigger contracts is even more important, it shows that the company, apart from getting bigger customers, is also getting closer to its customers solving their problems, rather than just providing products]

Finance

  • The $355 million term loan that was signed in connection with the Ansoft acquisition is scheduled to mature on July 31, 2013 and provides for tiered pricing with the initial rate at the prime rate with a 50bps margin or the British Bankers Association London Inter-Bank Offered Rate for dollar deposits (“LIBOR”) rate with a 150bps margin with step downs permitted after the initial six months under the credit agreement down to a flat prime rate or a LIBOR rate plus 75bps. Such tiered pricing is determined by the ratio of the total debt of the Company to the Company’s earnings before interest expense, taxes, depreciation, amortization and certain other items. The credit agreement includes financial covenants tested quarterly, requiring the Company to maintain certain financial ratios and, as is customary for facilities of this type, certain events of default that permit the acceleration of the loans. [10K]
  • And with the recent closing of the Ansoft acquisition, the company did borrow $355 million under a new five-year credit facility. The debt carries an initial effective rate of approximately 4.7% which will gradually migrate down to lower rate tiers as we utilize the operating cash flows to pay down the debt and reduce our leverage just like what you saw us do with the Fluent acquisition. [Q208 cc]

ANSS in index

  • ANSYS was recently upgraded to the Russell 1000, basically emblematic of the corporate strides that we’ve made. Additionally we were moved from the S&P 600 SmallCap to the S&P 400 MidCap. And then finally, we were one of only 13 US based IT company to be included in the S&P Global Challengers list, basically comprised of 300 strong performers across the globe. [Q208 cc]

Good articles

  1. From 2006, containing much fundamental analysis

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