Ansys, Inc. (NASDAQ:ANSS) develops and globally markets engineering simulation software and services widely used by engineers, designers, researchers and students across a spectrum of industries and academia, including aerospace, automotive, manufacturing, electronics, biomedical, energy and defense. Its customers include 96 of the top Fortune 500 industrials.
The company's stock has recently suffered a sell-off after the acquisition of Reaction Design (a developer and seller of chemistry solution and simulation software) and the last earnings call. Here are some of the highlights of the company's performance in the last quarter of FY 2013.
- Yearly revenue came in midpoint of guidance at $236.7 million
- Margins and earnings were above the upper limit of guidance
- 7% growth in Q4 2013 and 9% growth in FY 2013
- Repurchased 1.5 million shares each in FY 2012/ FY 2013
- Finished last fiscal year with total deferred revenue and backlog balance of $409.5 million, a record high for the company
- Scheduled to repurchase 3 million shares in FY 2014, up from 1.5 million in 2013
Source: Q4 2013 Earnings Transcript
As seen in the chart above, the recent sell-off has caused the stock's PE ratio to slump to a cyclical low of ~28 which represents the perfect buying opportunity for investors.
The main reason for the recent decline in share price in my view is the unjustified disappointment with the company's numbers for Q1 numbers. Ansys reported Q4 EPS of $0.96 versus a consensus of $0.86, which is almost a 12% positive surprise. However, revenue came in slightly shy of the consensus at $236 million vs. $237.84 million. However, this is an extremely minor issue, and if anything these results indicate the robust growth that the company has been experiencing for the last 5 years.
Also, Ansys issued a non-GAAP guidance of $0.73-$0.76 for its Q1 2014 EPS versus the consensus of $0.76 and non-GAAP revenue of $210.5-219.0 million versus consensus of $217.84 million. It estimates FY 2014's revenue to be $935-$966 million versus consensus of $950.3 million. It has to be noted here that the company has an incredible track record in meeting expectations as illustrated in the following chart.
Source: Q4 2013 Earnings Call Transcript (link above)
Source: Past Earnings Transcripts and 10-Ks
Thus, it is reasonable to estimate a revenue of ~$935 million (lower range of guidance) for the current fiscal year which translates to a potential year-over-year revenue growth rate of 8.6%.
Low Debt, High Cash Flow
The company has an extremely healthy balance sheet with a high cash to debt ratio. What is even more notable is that the company financed all its recent acquisitions with existing cash reserves and did not have to dilute ownership or take on more debt.
As seen above, the company's cash ratio has increased every year for the last 4 years with the exception of 2011 due to the Apache acquisition. In the recent earnings call, the company's management has emphasized that it intends to not only increase top-line growth through acquisitions but organically as well.
…So really, the key point here is there should be no doubt that driving double-digit organic top line growth has been and will continue to be one of our key areas of focus we as we enter into 2014. - Jim Cashman during Q4 2013 earnings call
Source: Earnings Transcript Q4 2013 (link above)
The amount of cash spent on acquisitions in the last 5 years has been ~$400 million with the largest acquisition being Apache Design Solutions in June 2011 for a whopping $314 million. The latest acquisition was Reaction Design which was acquired just 2 months ago for $19 million.
Recent acquisitions have strengthened Ansys' product portfolio. Both Apache (acquired in Aug 2011) and Esterel (acquired in Aug 2012) fit perfectly with Ansys' criteria. Both have outstanding technology that meshes with Ansys' product direction of end-to-end system simulation. Both have customer bases that complement Ansys and provide cross-selling opportunities.
Since acquiring Apache, which focuses on power management for semiconductors and chips for mobile devices, Apache's revenues and margins have both exceeded expectations. Esterel, a leader in embedded software simulation, has solutions now being adopted in other industries that rely on certified embedded software, such as the automotive industry.
The latest acquisition, Reaction Design, which uses its chemistry simulation software to help transportation and energy companies develop clean technologies, will supplement Ansys' computational fluid dynamics solutions to create a product unmatched in its class. All these acquisitions further strengthen Ansys' product portfolio helping to accelerate Ansys' growth. This shows that Ansys enjoys a persistently high free cash flow which it uses to make strategic acquisitions.
Simulation/Virtual Prototyping Market Size Growing at Double Digits
This is perhaps the most exciting factor contributing to Ansys' growth rates. At the most recent Investor's Day in Feb 2014, management estimated the simulation industry to grow to $20 billion in the next 5-7 years. A valid question to ask is, if the industry is indeed that large, then why hasn't it grown to that levels yet?
There are multiple reasons for this, the first being a tremendous growth in computing power in the last 5 years and in near future due to increase in parallel computing trends. Simulation is a very computationally intensive task and the recent trends in computing make Ansys poised to reach new heights. A major barrier for companies desiring to adopt simulation based prototyping was the traditional IT infrastructure. In the past, if a company wanted to purchase simulation software, it had to do an in-house procurement for a machine that could run such computationally intensive software. With high computing power easily available in a standard 16 core machine, these concerns have been largely alleviated.
The above chart shows various companies in the simulation industry having increased revenues for the past 10 years. Notably, Ansys is the smallest of them in terms of revenue but it is also clearly the fastest growing by far. The figure also illustrates the fact that there is an upwards macro trend in this industry given the increase in revenues that all players in the industry are enjoying. It is also worth noting that most companies enjoyed increases in revenue even during recessions (shaded area).
Apart from benefiting from a general growth in the market size, the company has also taken advantage of certain market trends to provide unique solutions to its clients.
As companies design increasingly complex smart products, they want to engage in multiphysics simulation and simulations of entire systems rather than single physics simulations. Notably, only 1/3 of customers have multiphysics capabilities; however, 2/3 of its customers have cross-functional design teams (structural engineers working with thermal engineers etc.) which would greatly benefit upgrading Ansys software capable of multiphysics simulation. An example of a design process needing multiphysics simulation would be in automotive design where in wind tunnel testing, there are structural elements as well as elements of fluid dynamics.
Source: 2014 Investor Day (Video)
High Performance Computing Leader
Ansys has had a long-term relationship with Nvidia (NASDAQ:NVDA), the leader in GPUs, to ensure that it stays ahead in providing the best high performance computing solutions for its clients. 80% of Anysys' customers have HPC infrastructure; however, less than 10% actually make use of their HPC infrastructure. As multiphysics and simultaneous design points get adopted, the need for HPC will only increase. With engineers needing to scale up simulations dramatically on a global basis and tap into the cloud for extra capacity, the increasingly complex environment plays to Ansys' strengths. For example, in fluid dynamics, Ansys' closest competitor can scale up into a few hundred cores at 90% efficiency whereas Ansys' products can scale into 3000 cores at 90% efficiency. Ansys' pricing model for HPC is based on the marginal benefit a customer receives for running the additional analyses/simulations.
Sources: 2014 Investor Day (Video Link Above), 2013 Investor Day Summary
Estimating Fair Value/Upside
As mentioned before, a reasonable estimate for this fiscal year's revenue is $935 million and profit margins for Ansys can be reasonably estimated at 28.5% based on the chart above which brings net earnings to $266.475 million. Since the company plans to repurchase 3 million shares this year, the number of outstanding shares would remain constant (after accounting for dilution) at about 92.54 million, bringing EPS to $2.879. Under the conservative assumption that the Ansys' P/E ratio remains at this cyclical low of 28.5, fair value for the underlying security would be $82. Assuming a more optimistic P/E of 35 would imply a fair value of $100. This represents an upside of ~11% and ~35%, respectively.
Disclosure: I am long ANSS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is my first article on Seeking Alpha. As a budding college investor, I hope to get more exposure to equity research. Any constructive criticism/comments will be greatly appreciated and welcomed.