ANSYS’ good Q1 disappoints investors

ANSYS reported results yesterday that were actually quite good, yet the company’s stock price went down 10% for the day and is down another 2% as of the opening of the markets today. CEO Jim Cashman was his usual upbeat self on the earnings call, most analysts seemed to regard the results as OK, so what happened? For the quarter, ANSYS reported total GAAP revenue of $185 million, up 17%, and non-GAAP revenue of $188 million, right in the middle of the forecast $183 million to $190 million. On a GAAP basis, software revenue was $114 million, up 18%, while maintenance and service revenue was $72 million, up 15%. Most of the details are provided on a non-GAAP basis, so:

• Apache contributed $16 million to the quarter (slightly ahead of plan, according to Mr. Cashman), meaning that ANSYS’ organic revenue growth was 9%.
• Looking only at ANSYS’ organic revenue, total software revenue was $100 million, up 4%.
• Of that software revenue total, the lease business was $54 million, up 8%; paid-up was $47 million, flat with last year.
• ANSYS’ organic maintenance revenue was $66 million, up 14%.

This low level of organic growth is likely one contributing factor to the stock price decline. Mr. Cashman explained that one reason for the relatively lackluster growth is that a number of customers opted to lease products rather than buy on a paid-up basis, leading to lower immediate revenue but greater long-term visibility. CFO Maria Shields said that this deal structure “did affect short-term license revenue growth, [but also] contributes to the deferred revenue balance” which hit an all-time high of $299 million, including Apache; excluding Apache, deferred revenue was $259 million, up 10% over Q1 2011. On a geographic basis, again using non-GAAP figures for the organic ANSYS business:

• Revenue from North America was $58 million, up 11% — a slight improvement over the 8% organic growth rate reported in Q4.
• Revenue from Europe was $60 million, up 7% in Q1 — quite a slowdown from the 16% growth reported in Q4. Germany continues to be ANSYS largest European contributor, with revenue of $20 million in Q1, up 19% as reported and up 25% in constant currency. The company said in prepared remarks that “the ongoing economic concerns in certain markets continued to impact the timing and composition of customer buying decisions, but overall the pipeline, renewal rates and customer engagements remained intact. As previously noted, there were some isolated sales execution issues that impacted our Q1 results in the UK. These were known issues and are being addressed.”
• Revenue from ANSYS’ “General International Area” (GIA) was $53 million, up 7% — also a lot slower than the 15% reported in Q4. Japan is the largest GIA market, with Q1 revenue of $29 million, up 7% as reported and in constant currency. In prepared remarks, ANSYS said that “Japan … continued to experience some challenges associated with the strong currency and a general weakness in the consumer electronics market. We also experienced some isolated sales execution issues in Japan that are being addressed. Other regions within GIA, most notably Korea, saw faster growth rates.”

A couple of key phrases there: “sales execution issues” in the UK and Japan, “ongoing economic concerns”, “timing and composition”, “general weakness in …”. Investors don’t like any of those, especially the “sales execution issues” that bring to mind PTC’s recent statements. Mr. Cashman tried to reassure investors by saying that the issues in the UK are a result of austerity measures which “tend to put a dampening effect [on sales] in the short term.” He also said that addressing these issues is “the top priority for us in Q2 and the remainder of 2012”. Too, the slowing growth in ANSYS’ core products in Europe and GIA is worrisome, especially if it is not driven by macro-economic factors. Apache contributed $16 million in total for the quarter on a non-GAAP basis, $10 million of that in North America, $2 million in Europe and the rest from GIA. Other factoids:

• ANSYS had 21 customers with orders in excess of $1 million, on par with 22 last quarter.
• The direct/indirect split held relatively constant, at 75%/25%.
• Mr. Cashman briefly discussed the announcement made earlier in the week of a strategic relationship between ANSYS and FMC Technologies. He said that the company is seeing a growing interest in these relationships, but that “the more strategic they get, the more secretive they get. FMC is a long­standing customer that is starting to move up our S­curve, using a much broader segment of our product portfolios.” So no details on what they’re using, but FMC is likely expanding usage into more projects and divisions.

ANSYS also updated its guidance for 2012 and issued a forecast for Q2. For Q2, the company sees GAAP revenue of between $191 million and $198 million. For the year, ANSYS is now forecasting GAAP revenue in a narrower range of $807 million to $827 million, or growth of 16% to 18%.