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ANSYS – weak Q4 leads to worries about 2009

ANSYS shares were hammered late last week, falling to a 52-week low after the company
dramatically lowered its forecasts for 2009 — even though results for 2008 were OK.

On the plus side:

– CEO Jim Cashman said that companies continue to see a need to innovate, and feel
that they need ANSYS’ premium CAE solutions to make this happen. At least for now,
ASPs seem to be holding even as seat volume declines.

– ANSYS reported Q4 2008 revenue of $135.3 million, up 22% from $111.2 a year ago –
but including a full 3 months of Ansoft. For 2008, ANSYS reported revenue of $478.3
million, up 24% from $385.3 million in 2007.

– ANSYS sells software in paid-up (perpetual) and lease modes. The company reports that
the lease business grew 13% in Q4 and equaled about 33% of total business, including
Ansoft. The company sees potential upside in the lease business, as Cashman said,
"given the current challenge that some of our customers face relative to access to capital
budgets." Depending on the tax code, perpetual software counts as an asset, which
comes out of a different budget than would normal operating costs – such as a lease.

– The company reported that high-end sales grew disproportionately, at "double digit" rates
for the year. Said Cashman on the analyst call: "Basically our major customers and, you
know, these are the premiere companies in the world, are telling us that while they might
be slowing and reviewing IT spending in general, they are not pulling back on new product
innovations or R&D." One can’t help but wonder at how ANSYS’ priorities will shift to
support these mega-customers at a time when smaller companies may not be able, in
aggregate, to spend as much.

– One concern that ANSYS, Fluent and Ansoft users may have had: the company CFO,
Maria Shields, said that ANSYS is targeting the "low to mid-teens" for investing in R&D. In
2007 and 2008, the company invested about 15% of revenue in R&D. So it seems that the
company’s R&D spend, as planned for 2009, is more or less on par.

– Cashman said, but did not quantify, that the outlook is positive: "I will say renewal rates
have stayed solid, and the gross pipelines have actually gotten larger."

But there are negatives:

– ANSYS gave some insight into growth of its core (aka organic aka "not acquired")
products. For the year, organic revenue grew 16% but only 5% in Q4, signaling a clear
slowing in demand for core ANSYS and CFD products.

– Equally worrisome is that the growth ANSYS sought to buy with the Ansoft acquisition
may not materialize. Looking at the data (and, yes, weird purchase accounting makes
this difficult), it appears that Ansoft contributed $31 million for the 5 months as part of
ANSYS and $18.5 million in Q4 – quite a slowdown considering that Ansoft revenue was
$26 million in the quarter ended 1/31/08.

– Breaking down ANSYS’ core revenue further, we see that organic license revenue grew
at only 2% in Q4 but at 16% for the year – further evidence of a slowdown in customer
spend patterns. Total paid-up licenses were down in Q4 (from a tough comparable in
2007) but up 18% for the year as a whole.

The geographies were mixed: Due to the tough comparable in Q4 2007, growth in North
America was only 1% for the quarter and 8% for the year. The positive: Direct sales were
up, in the "upper teens for the year" as major customers continued to buy. The negative
(by inference, since it wasn’t stated): channel partners selling to smaller accounts had a
tougher time of it, not surprising, given the economic squeeze many of these companies
are in.

Revenue from Europe grew 13% in Q4 and 24% for the year. Germany and central Europe
led the way, while "our French business was also quite strong", said Cashman. ANSYS’
General International Area is heavily weighted towards Japan, where Ansoft had a strong
presence. Organic growth for the region was 13% in Q4 and 23% for the year. Japan grew
49% in Q4 and organically at 10%. For the year, on an organic basis, Japan grew at 19%.
Most of the rest of GIA grew in excess of those numbers, 60% for the year or about 28%

ANSYS also offered guidance for 2009 – which is likely what killed the share price late last
week. ANSYS now expects revenue of $522 million to $582 million for 2009 – down from
around $600 million in November. Q1 is expected to be in the range of $117 million to
$125 million. Important to note here is that, if this comes to pass, it would be the first time
in years that ANSYS has reported a Q1 lower than the prior Q4 – since just before the
Fluent acquisition, in fact. Hmm …

One more point: investors like certainty. When a company like ANSYS, which always
mentions that 66% of its revenue is repeatable, then give such an enormous revenue
range, investors get nervous. And investors sell.

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