Monday, August 6, 2012

Ansys ( Nasdaq - ANSS ) -- Juggernaut Intact

Ansys (ANSS $66.00) reported excellent on target Q2 results.  The company is the leading provider of engineering simulation software systems.  Competition is provided by niche participants with specialties in narrow areas.  Ansys is the industry's only broad based supplier.  As a result it has extensive relationships with large corporations, spanning all geographic markets.  Margins are high due to the lack of direct competition.  They also benefit from the high rate of return the software delivers, which allows Ansys to charge high prices and collect additional fees for upgrades and consulting services.  Customers buy the packages either as perpetual licenses, which involve upfront fess and a 20% annual maintenance charge for upgrades; or as annual licenses, where they pay approximately 40% of the perpetual amount every year.  Revenues currently break down 40% annual licenses, 30% perpetual licenses, and 30% maintenance.

March quarter results revealed a shift from perpetual to annual licenses.  That affected near term revenue and income.  Ansys also experienced a handful of order delays, impacting reported results further.  The pendulum swung in the opposite direction in the June period.  Perpetual deals bounced back to normal levels and orders closed on time.  Performance benefited further from a pick-up in large (over $1.0 million) contracts (19 versus 8 the year before).  Revenues improved 20% to $195.0 million as a result.  Non-GAAP earnings rose 16% to $.72 a share.  Part of the revenue improvement stemmed from an acquisition that was completed in 2012.  Organic growth was 10%.

Wall Street estimates were lifted following the strong showing.  That enthusiasm probably was misplaced.  Sales cycles have grown longer due to the economic slowdown.  And the shift back and forth between perpetual and annual new business is likely to continue.  Our full year estimates are unchanged.  Income appears on track to rise 13% to $2.85 a share.  Next year $3.25 a share (+14%) remains a realistic target.

The long term outlook remains bright.  Existing customers are likely to expand the number of engineers with access to the technology.  Europe's largest airplane maker, EADS, recently announced a broad based expansion, for example.  Ansys is developing the mid-sized business market more thoroughly, as well.  Penetration of emerging geographies promises additional leverage.  And the company earns so much money, per share results are certain to be amplified by share repurchases and acquisitions.  Organic growth is likely to be maintained in the 10%-15% range, moreover, providing an ongoing tailwind.

Engineering simulation technology remains in an early stage of development.  Ansys has the potential to keep growing at above average rates into the next decade.  In 2-3 years earnings could attain $4.25 a share.  Applying a P/E multiple of 30x to those earnings -- realistic in light of the company's dominant market share, fantastic profitability, and the industry's open ended growth potential -- suggests a target price of $125 a share, potential appreciation of 90% from the current quote.

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