ANSYS Q1 was a combo of platforms & headwinds

ANSYS just reported financial results for the first quarter of 2016. It wasn’t a bad quarter, overall, but it certainly wasn’t one that beat expectations. Tough comparable, the continued slowdown in the semiconductor industry, new sales heads that are yet to be productive, orders that shifted earlier into Q4 or slowed into Q2 and Q3 leading to a flatish bookings growth  — all contributed to a lackluster quarter. But there were bright spots, which CEO Jim Cashman laid squarely on ANSYS’ continuing buildout of a platform of inter-connected products.

In prepared remarks, CEO Jim Cashman said that Q1 results reflect “strong contributions from … India and China, partially offset by less than expected growth in Europe and North America”. Mr. Cashman sees this as partly an ANSYS-created problem, saying that he is focused on “improving direct and indirect sales execution”. ANSYS has been adding sales capacity in both direct and indirect and it takes time for those people to become productive, and to learn ANSYS’ increasingly complex product portfolio and license models. The company moved resources around last year so that its most experienced reps covered named accounts, to develop those accounts to use more of ANSYS’ portfolio, across more users. Other reps were added in territories — many of which are hit with economic slowdowns. Getting those reps up to speed is tough; they need to learn and to see more receptive customers before they can be fully productive.

We’ve been hearing from other suppliers that big deals are hard to close right now. Apparently not for ANSYS. Mr. Cashman announced that ANSYS “signed an enterprise license agreement of over $10 million with one of our long-standing industrial equipment customers, successfully completing the largest displacement of a competitor’s mechanical code in our history, [proving] that the ANSYS solutions are more capable, accurate and faster.” Hmm. Mr. Cashman backtracked from that just a tad during the earnings call, saying that many point-solutions suppliers are worthy competitors, but no longer sufficient in a climate where buyers increasingly want linked products that offer a systems view.

A lot of the interest on the earnings call that followed the announcement were related to cloud computing. How will this affect the traditional licensing? Mr. Cashman said over and over again that his customers are kicking the tires on cloud; R&D and IT need to work together to sanction cloud from the perspective of cyber-security and budgeting — more complicated than R&D looking at a solver and working with IT to determine if the machine is the best tradeoff of cost and capability. Bigger customers simply aren’t ready to commit. I’ve seen the same, but with a twist: smaller companies, those without a huge investment in compute hardware are more ready for this change (and often don’t have huge IT departments that are threatened by hardware not under their control). But all customers need to figure out how to deal with budgeting for cloud. As Mr. Cashman said, infinite computing could cost infinite dollars — and no one wants that.

The details of Q1’s results:

• GAAP revenue was $225.9 million, up 6% in constant currencies (cc) and essentially flat year/year as reported
• Software license revenue was $126 million, up 1%
• Maintenance and services revenue was $100 million, up 8%
• From here down, metrics are based on non-GAAP revenue. By that measure, total revenue was $226 million, up 5% cc and up 3% as reported
• On a non-GAAP basis, lease revenue was $82 million, up 4% (up 5% cc) while perpetual revenue was $44 million, down 5% as reported (down 3% cc)
• On a non-GAAP basis, maintenance revenue was $93 million, up 7% as reported and up 9% cc
• By geo, Q1 results were remarkably consistent, with 5% cc growth in North America to $89 million, 6% cc growth in Asia-Pacific to $68 million and 5% cc growth in Europe, to $69 million
• ANSYS reports closing 22 deals over $1 million and one in excess of $10 million. That is basically the same as a year ago, when ANSYS said it had 22 customers with orders in excess of $1 million.
• The direct and indirect split remains stable, 77% and 23%, respectively, of revenue for Q1

ANSYS tweaked its revenue guidance for the rest of 2016, given the lower than expected contribution from perpetual license sales. The company now forecasts GAAP revenue of $240 million to $248 million for Q2 and GAAP revenue of $990 million to $1,020 million for fiscal 2016, up 5% to 8% over 2015. That’s both a narrowing and a slight lowering from prior guidance of $995 million to $1,030 million issued during the Q4 earnings release in February, which makes sense if customers are opting for lease-type arrangements rather than upfront. One has to ask: will ANSYS see the same effect as others, struggling with the unpredictability of buyer choices? Will we see a further lowering of guidance as more take advantage of leases? This may have nothing to do with how ANSYS sells; if customers are feeling uncertain about the future, they may opt for the smaller annual outlay for leases — or for the bigger upfront payment and then non-payment of maintenance for codes that keep on working.

This type of change is challenging for software vendors, who will struggle to report profitability that investors expect in an environment where they actually take in more cash yet can’t put it into revenue until accounting rules say they can. But it’s also challenging for industry analysts who have to explain that the math may show a market that is growing less quickly than before where that’s an illusion, a math artifact, a blip that is probably going to be compounded by exchange rate effects. The CAE market is growing just as ANSYS predicts: more users, using more applications, more often and more strategically. Cloud and subscriptions obscure this growth but it is real.