ANSYS channel worries, Russia drag down Q1

ANSYS’s announcement that it was buying SpaceClaim took the spotlight off its Q1 earnings, but those deserve a look, too. The company reported Q1 revenue of $215 million, up 9% from a year ago, with software revenue up 6% to $126 million and maintenance and services revenues of $89 million, up 13%. That’s pretty good and allows ANSYS to claim that it, once again, hit revenue targets. But it was short of expectations and not even the news of the SpaceClaim acquisition could keep the share from diving 5% on the results release. The details (using GAAP data from the 10-Q SEC filing, rather than the mix of GAAP and non-GAAP found in ANSYS’ earnings release-day materials):

• Revenue from software licenses was $126 million, up 6% as reported and up 7% in constant currencies (cc).
• Revenue from the lease business was up 8% to $79 million, on sales of Apache products that are primarily lease-based.
• Revenue from the perpetual business was up 4% to $48 million.
• Maintenance revenue was up 13% to $83 million.
• Services revenue was $6 million, up 11% as reported and up 12% in cc due to an increase in consulting projects.
• By region, revenue from North America was $77 million, up 9%. ANSYS said sales to many industries are growing but said it is experiencing cautious customer sentiment in  government spending and other segments.
• Revenue from Europe was up 12% as reported (up 8% in cc) to $76 million. Revenue from Germany was revenue up 11% as reported to $25 million on growth in industrial equipment and automotive. The company noted, however, that the indirect channel didn’t perform to plan, mostly because of the political situation in Russia, Ukraine and Crimea. During the call with investors, Mr. Cashman said that the sanctions and uncertainty had a “several million dollar impact” in Q1. On the other hand, Benelux, Italy and Spain were bright spots in Q1.
• ANSYS’ “General International Area” reported revenue of $63 million, up 5% as reported and up 12% in cc. GAAP Revenue from Japan was $29 million, up 1% as reported (up 13% in cc), as the new senior sales leadership works to increase sales productivity in the region.Strength in Japan and South Korea offset weaker performance in India and China , where reductions and delays in government spending slowed growth.
• ANSYS reported 32 orders in excess of $1 million, up from the 26 recorded a year ago, and essentially flat with the seasonally strong Q4 total of 33.
• In a slight deviation from the norm, direct sales accounted for 77% of revenue in Q1, as compared to the typical 75%. CEO Jim Cashman said that this is due to the problems in Russia and apparently in other areas too, because “in trickier economies, the channel tends to feel it a little bit more. The more stable it is, the more they pace along with us”.

ANSYS also adjusted its guidance for 2014 to include SpaceClaim and to take into account the slowdown of sales in Russia and Ukraine. To see the pattern, the company started its 2014 GAAP revenue guidance at $934 million to $964 million in November, adjusted this a scosche to $935 million to $966 million at the end of February and, most recently, Mr. Cashman announced a range of $933 million to $959 million. If SpaceClaim is to have total non-GAAP revenue in 2014 of about $14 million, then from May to December it should add about $10 million to ANSYS’ revenue. If that’s +10, and the situation in Russia is “a couple of million” a quarter, that’s -10 or so for the year (assuming it continues for the rest of 2014). Why then, is ANSYS lowering the top end of guidance? It should be a wash, right? Apparently, ANSYS is being conservative on channel weakness outside Russia. The company now forecasts Q2 revenue in the range of $224 million to $233 million. So, what does it all mean? I’ve been saying for a while that ANSYS tends to acquire growth when its organic growth slows. SpaceClaim is an interesting choice that can take the company in many possible directions — but the $10 million it will add to 2014 revenue won’t give Wall Street the numbers it seeks. SpaceClaim shakes things up, but I still think ANSYS will spend some of its $850 million in cash on something bigger.