Saturday, December 11, 2010

Ansys ( Nasdaq - ANSS )

Ansys (ANSS $50.00) is the leading provider of engineering simulation software products.  The technology is used to design new products faster, cheaper, and better than traditional methods.  The software covers the entire development process from initial concept to final stage testing and validation.  Complex mathematical analyses are performed automatically with simple drop and drag desktop interfaces, allowing engineers to discover right away what will work and what won't.  The software includes interfaces with all of the main Computer Aided Design systems, so the design can go straight to manufacturing when it's ready.  Ansys dominates the market worldwide, having acquired all of its chief competitors over the years.  Just a handful of niche players remain.  Industries served include automotive (14% of sales), aerospace (19%), electronics (18%), industrial equipment (14%), and materials and chemical processing (11%).  Up and coming segments include biomedical and clean technology.

Financial results stalled last year due to the global recession.  Revenues only increased by 8% to $516.9 million.  Non-GAAP earnings rose 1% to $1.78 a share.  (See "Accounting Notes.")  Customer hesitation impacted performance in all geographic markets.  Business is divided pretty evenly at this point among the United States, Europe, and the Far East.  Renewal rates remained sturdy at 95%.  Ansys sells its software both on a  perpetual basis (with annual maintenance contracts equal to 20% of the selling price) and as annual licenses (40%-45% of the perpetual charge).  R&D spending is maintained at 15% of revenues.  Demand remained subdued through the first nine months of 2010, although the rebounding economy contributed to a somewhat faster growth rate than the year before.  For the entire year sales appear headed towards $575 million (+11%).  Income of $2.05 a share (+15%) appears achievable.

A major software upgrade in November has rekindled customer enthusiasm.  Improving economic conditions are providing further impetus.  And many customers are starting to bite the bullet and purchase more "seats" to the company's software to maintain their own competitive positions and expansion strategies.  Beta testing earlier in 2010 indicated a positive reception was in the cards.  Ansys responded to those indications by boosting hiring substantially, particularly in product development, sales and marketing, and customer service and support.  The company's beefed up workforce is reinforcing the emerging upturn in sales, laying the foundation for an acceleration in 2011 results.

We estimate 2011 income will advance 15%-25% to $2.35-$2.55 a share.  Revenues appear set to climb 15%-20% to $660-$690 million.  The split between perpetual and annual license sales will influence the final amount.  A restructuring of the company's two Japanese subsidiaries (one was picked up as part of an acquisition) will benefit margins and help earnings rise a little faster than sales.  Contribution margins on software sales are high, moreover, so pretax margins could benefit if sales achieve the upper end of the range.  Leverage is less dramatic than for most companies, though, since Ansys already produces exceptional profit margins from normal sales activity.  Pretax margins typically exceed 45%.

The long term outlook is bright.  The engineering simulation market is fairly well developed but much of its potential still remains untapped.  Larger customers could expand usage.  And smaller and midsize manufacturers are likely to rely increasingly on Ansys' automation tools.  Within a decade or two, moreover, it might become possible for consumers to customize highly complex products directly from their own computers.  Cash flow is unusually positive.  Cash on hand totalled $496 million at the end of September, up $153 million year to date.  Future per share results could be amplified with acquisitions and stock repurchases.  Assuming moderate growth by the world economy sales could reach $925 million in 2-3 years to provide earnings of $3.40 a share.  Applying a P/E multiple of 30x to those earnings suggests a target price of $100 a share, potential appreciation of 100% from the current quote.

( Click on table to enlarge. )

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