ANSYS beats some expectations, lowers others

EarningsANSYS is in a no-win situation: reporting the best first-quarter revenue in its history, within its guidance for the first quarter but lower than some financial analysts had expected. Too, like many other tech companies, ANSYS lowered its revenue forecast for the rest of 2013 as customers slowdown spending in an uncertain end-buyer climate. Taken together, it’s not all that bad and certainly not a reason to overreact. Investors didn’t see it that way; ANSYS’s share got hammered on Wall Street last week, dropping 7% even as the Dow and NASDAQ hit record highs.

This quote, from CEO Jim Cashman, describes how he sees Q1:

“Our Q1 results reflect a resilient business in a less than robust and somewhat unpredictable global economy. Most major metrics of the business performed as anticipated, highlighted by solid margins and earnings, a record deferred revenue and backlog balance of $399 million, and all-time high first quarter cash flows from operations of $95 million… We entered the year with cautious optimism and throughout the quarter we focused on those aspects of the business that we could control. While we continued to deliver on a number of key financial metrics, we also see opportunities as 2013 continues to unfold.”

Focusing on what we can control, performing as anticipated, deliver on key metrics: To me, that sounds like a company that knows what it’s doing, but decide for yourself if ANSYS is in trouble. The full earnings release is here; I found the following to be the most interesting:

  • Total GAAP revenue was $198 million, up 7% (versus prior guidance of $198 million to $204 million) as reported and up 9% in constant currency (cc). Esterel contributed $5.3 million in non-GAAP revenue, implying ANSYS’ organic growth rate was around 4%.
  • License revenue was $119 million, up 5% as reported and up 7% in cc.
  • On a non-GAAP basis, the lease business grew 6% to $73 million while paid-up licenses were essentially flat at $47 million.
  • Maintenance and services revenue was $79 million, up 10%. Looking at non-GAAP, maintenance grew 12% to $74 million while services continues its planned decline to $5.2 million.
  • The general business environment worsened during the quarter, leading CEO Jim Cashman to say that “Q1 finished softer than we had planned” as customers were more cautious in their spending. This led to some delays in closing deals, especially large ones.
  • Even so, ANSYS reports that it closed 26 deals over $1 million, up from 21 a year ago. Mr. Cashman cited the success of selling ANSYS broader portfolio into its marquee accounts and the broader adoption of CAE in general.
  • On a geo basis, North America was up 4% to non-GAAP revenue of $71 million. The company says that customers are particularly cautious here, though there was “relative strength in automotive, industrial equipment and electronics”. Also, Mr. Cashman had on prior calls highlighted issues in the company’s sales team in this region; in Q1, the company continues to ramp up new sales resources.
  • Sales in Europe were up 9% to non-GAAP revenue of $$68 million. Germany and the UK were both up 10% as reported (up 10% and 12% in cc, respectively)while “Other Europe” was up 9% (10%), on strong performance from Russia. The company used strong language when speaking about Europe, including “volatility and prolonged customer procurement processes”, “extended”, “customers delayed projects”. During the earnings call Mr. Cashman backed off this a little, saying that there were pockets across the region and across industries in Europe where business was better.
  • The company’s General International Area had revenue up 6% as reported to $61 million (up 13% in cc) even though revenue from Japan fell 4% as reported (but rose 9% in cc). Our General International Area (GIA) showed progress, growing double digits in constant currency for the quarter. The company cited growth in China and South Korea, improvement in Japan, and softness in India where “fiscal year-end spending did not align with historical patterns”.

Given how Q1 ended more slowly than it began, ANSYS lowered its forecast for 2013 to GAAP revenue of $850 million to $870 million, from the $875 million and $900 million target set earlier this year. Roughly half of the decrease is due to the weakening Japanese Yen, the rest to the caution its customers exhibited at the end of Q1, which also led to a more cautious forecast for Q2, which is expected to see GAAP revenue in the range of $205 million to $211 million.

You may remember that ANSYS recently brought onboard a Chief Product Officer who comes from outside the world of CAE. Mr. Cashman said that the CPO will add a new perspective that is critical in the world ANSYS now finds itself in, with new delivery models; mobile, cloud and other devices; and installations that have grown, on average, from a couple of seats/customer to, in some cases, thousands/customer. He looks to the CPO to manage these new models of delivering enterprise computing but made clear that the product direction and vision are not changing though this new model may require strengthening of individual products and portfolio unification in a “rational manner”.

What does it all mean? ANSYS may be slowing down a bit, which usually means a major acquisition is coming to boost perceived growth to higher levels, though the company gave no hints about this at all. None. Pure speculation based on its history with Fluent, Ansoft, Apache … But even without acquiring growth, ANSYS is doing just fine, and with far better prospects than many investors seem to believe.

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