Schnitger Corporation

Quickies: CAE earnings show fx, momentum effects

EarningsIt’s been a busy Fall — and Winter is creeping up fast while there are still Q3 earnings to write about. Crazy, right?! We’re tackling them one PLM-subgroup at a time. Last up, AEC; this time, CAE.

ESI reported yesterday that Q3 (which for them ended October 31) was tough. Total revenue was €19.6 million, down 11% as reported or €2.3 million — but down 3% in constant currencies (cc), as foreign exchange had a negative impact of €1.7 million. Licenses revenue was €12.7 million, down 11% as reported but down just 1% in cc. Services revenue was €6.8 million, down 12% as reported and 6% in cc. CEO Alain de Rouvray said that Q3 a year ago was particularly strong, which made this Q3 slow by comparison; an economy “in a phase of consolidation and transition” didn’t help matters. However, “strong sales growth seen in the previous period is continuing and our solutions are showing good momentum … [T]he recent acquisition of CyDesign brings novel SaaS and open-source and cloud access solutions which provide an exceptional boost to productivity and competitiveness.”

Exa announced results last week; I covered that in one of my news quickies from AU but put it here, too, for completeness. Total revenue was up 12% as reported and up 15% in cc. License revenue was up 8% to $11 million while project revenue was up 30% to $3 million (remember that Exa typically engages with customers on a specific project before license sales take place).  CEO Steve Remondi told investors that demand for Exa’s CFD solutions continues to gain momentum among passenger car OEMs and suppliers, even as the truck and off-highway segments of the ground transportation market are “challenged”. Mr. Remondi also said that early renewals (ahead of the historically strong Q4 renewal period) and “a number” customers topping up their tokens in mid-year led to the strong Q3 results.

ANSYS reported Q3 revenue of $213 million, up 8% y/y as reported and up 9% in cc. Revenue from North America was up 12%; from Europe, up 17% with the best performers being Germany, France, and Russia. In its “Rest of World” category, revenue was down 5% due in part to a 20% weakening of the Japanese Yen against the US Dollar. Software revenue was $129 million, up 5%, while maintenance and services revenue was up 13% to $84 million. Esterel is on plan to contribute over $20 million for 2013, ahead of internal projections.

A couple of interesting highlight from the ANSYS earnings release that have broader implications, too: By revenue, ANSYS’ lease business grew at roughly twice the y/y rate of the upfront/maintenance business, as reported and in cc. Since lease $/transaction are so much smaller than upfront $/transaction, a lot more users are choosing leases; some of these are undoubtedly Apache customers (since that’s how it’s sold) but I wonder how many are core ANSYS — and what this means for CAE software in general. Are we seeing a broader shift to pay-as-you-go?

CEO Jim Cashman told investors that the cloud “really doesn’t impact our markets a right now. Long term, there’s no doubt that this is going to be something that is at least an interesting adjunct to the business. We architected the software such that it serves our customers today but it immediately transplants into any kind of a large-scale cloud proliferation. Most of our major customers have their own internal cloud, behind their firewall; they control the bandwidth, they control the prioritization of processing.” Mr. Cashman says that in the long-term customers are likely to use a hybrid model, where they use their on-premise compute capacity on a regular basis and use the cloud when there’s a “surge” in demand. That’s what large customers are telling me; they are likely to have an IT department that acquires and manages hardware. Smaller firms may want to skip their next hardware buy and move straight to offsite compute capacity for some simulations — whether it’s called cloud or not.

Mr. Cashman downplayed acquisition activity, saying that any that did happen would be a deepening of existing capabilities. For 2014, he’s looking at what he called “ultimate materials”, system simulation, “blending together all of the applications that may have come from different parts of engineering disciplines” — in other words, more realistic simulation of common problems, rather than attacking new, cutting-edge problems. That’s exactly what customers are looking for, regardless of provider.

Mr. Cashman also said that his customers are hiring, but it seems that they’re hiring subject matter experts and not necessarily simulation experts: “I’d say that the key thing is that customers don’t want to compromise on the accuracy of the solutions they’re getting. A “good enough” software isn’t good enough for where these customers are going; they validate the technology internally. A lot of it now gets workflow-related; [with the ANSYS 15 release] you’ll start to see some significant product surges in those particular areas”. The simulation has to be dead accurate and the tools easier to use — also a common theme when talking to users.

ESI and Exa don’t offer formal guidance, but ANSYS does. Back in November when they announced Q3, ANSYS said it sees revenue in 2014 coming in at $935 million to $965 million, or growth of 9% to 12%, assuming Q4 comes in as planned.

Bottom line: As these companies get bigger, double-digit growth gets harder to find and a few large deals do little to move the needle. Currency, however, can torpedo growth if revenue sources are concentrated in one geography — as can a concentration in a single end-user industry like automotive. But the general themes are remarkably consistent: All of the vendors are poking at new business and technology delivery models to see what sticks, extending ease of use to the most complex software and improving the accuracy of simulations to get closer to real life.

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