Saturday, May 4, 2013

Ansys ( Nasdaq - ANSS ) -- Software Re-Write Cycle Dims Growth Outlook

Ansys (ANSS $75.00) reported lower than expected Q1 results.  The company also reduced its financial outlook for the remainder of 2013.  Sales improved by 8% year to year to $199.5 million.  That figure included contributions from recent acquisitions, though.  Organic growth was 5%.  Earnings increased 8% to $.71 a share.  Performance was retarded by a $10 million negative currency swing in Japan.  Sales force additions failed to contribute as expected, moreover.  And a significant number of orders were delayed or scaled down as a result of economic conditions.  Margins remained at superior levels but they did decline in response to the revenue shortfall.  Renewal rates remain solid.  As the industry leader in engineering simulation software that recurring business will keep Ansys extremely profitable in coming periods.  But growth is flattening out.  Acquisitions could reinforce the company's growth trajectory.  But the underlying technology has begun to change in the industry, making consolidation more difficult.

Ansys's legacy software platform is approximately 10 years old.  The company has made a series of acquisitions during that time to address new markets.  The purchased technologies were modified to work with Anysys's existing programs.  Those integration efforts required a tremenous proliferation of software code, making subsequent updates increasingly complex.  The more modern cloud based computing approach has created a superior alternative.  Updates are distributed consistently from a central repository, instead of requiring each location to install those updates individually.  Most of the individual sites have unique features that require special attention, unlike the more streamlined cloud based format.  Ansys has been shifting elements of its software to cloud computing but most customers still rely on the older arrangement.  Cloud based competitors are starting to arise, nibbling away at corners of Ansys's market.  The company remains the dominant participant in the industry.  To preserve that advantage over the long haul a re-write of the software likely will be necessary.  That project could last several years, divert resources, and make additional acquisitions more difficult to integrate in the short run.

Under more dynamic economic conditions Ansys probably could sustain above average growth while updating its software technology.  As things stand, a more muted growth curve is likely.  The company has terrific cash flow and a sturdy balance sheet.  So the stock could advance in response to some sort of financial engineering.  Substantial appreciation potential appears limited, though, due to the near term pressure on organic expansion.  Our advice is to close out positions and reinvest the proceeds in a different Special Situation stock with better defined prospects.

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