Ansys ( Nasdaq - ANSS ) -- Gains Momentum in Q3

Ansys (ANSS $58.00) reported excellent on target Q3 results.  Non-GAAP earnings (excluding non cash stock option and acquired intangible expenses) advanced 29% to $.66 a share.  Revenues climbed 27% to $177.9 million.  Ansys completed its purchase of Apache in August.  That unit was consolidated for two months.  Excluding that contribution organic growth was 20% year to year.  Apache is a leading provider of engineering silulation software for power management applications, like smart phones and tablet computers.  Its revenues are virtually all derived from annual subscription licenses.  That pricing scheme has become more popular among Ansys's other product lines, too.  Recurring revenues amounted to 70% of the total in Q3.  The renewal rate topped 95%.  A substantial though undisclosed amount of revenue was generated by existing customers that expanded their relationship with the company.  Ansys already has penetrated most of the Fortune 100.  But it still has plenty of opportunity to expand by selling its software to additional business units.

Ansys said backlog remained robust despite the questionable economy.  Fourth quarter performance is likely to be excellent, fueled by the Apache transaction and a growing proportion of recurring revenues.  Demand is continuing to rise in huge industries including automobile manufacturing, electronics, and energy production.  Geographic strength is stable, as well.  Demand for engineering simulation technology is poised to keep growing well into the decade.  Competition is compelling companies to invent products with original features, lower costs, and greater reliability.  It also is exerting pressure on turnaround time.  The software itself is improving with the help of academic research and internal efforts.  A bigger factor, though, is the ongoing improvement in parallel processing.  Strings of high power computers now work together on extremely complex problems, sharing intermediate solutions as they go along, and also updating common databases.  Instead of working through problems in a linear manner it's become increasingly feasible to break them down into separate parts and arrive at "go -no go" decision points more rapidly.  Ansys also has improved user interfaces so problems can be set up quicker and more accurately. 

The trend away from physical testing to computer simulation is likely to continue.  Ansys faces competition in several niche markets.  But the company is unrivaled in its overall breadth.  Small users may select a competitor for particular applications.  Large companies with more extensive requirements probably will continue to standardize on Ansys.

Solid gains are likely in 2012.  We estimate sales will increase 19% to $825 million.  Earnings could rise 14% to $2.90 a share.  Our outlook assumes a relatively dismal economic scenario.  Margins probably will finish higher if the environment is livelier.  Order growth could moderate if conditions weaken.  But a solid performance is anticipated nonetheless.  Ansys's customer base is likely to emphasize simulation if their own businesses soften, as a tool for enhancing profitability and market share.  They also will have the money to pay.  Longer term, internally generated growth of 10%-20% appears sustainable.  Ansys throws off substantial amounts of cash flow which should enable it to make further acquisitions without dilution.

( Click on Table to Enlarge )