Ansys reported record sales for the fourth quarter and full fiscal 2014 last week. Total revenue for Q4 was $254 million, up 8% year/year (y/y) as reported and up 12% in constant currencies (cc), ahead of both the company’s forecast and analyst consensus. Software revenue was $158 million, up 7% y/y and up 11% in cc. On a non-GAAP basis, paid-up license revenue grew 10% in Q4 to $78 million while lease license revenue grew 4% to $80 million. Maintenance revenue of $89 million (non-GAAP) was up 10% and service revenue of $8 million was up 15% y/y non-GAAP.
Looking at the full year, total revenue was $936 million, up 9%. software license revenue was $547 million, up 7%. Revenue from software leases was $318 million, up 7%; perpetual was $246 million, up 7%. Maintenance revenue was $347 million, up 12% and service revenue was $25 million, up 7%.
What led to all of those upward-pointing arrows?
The first thing we need to remember is that ANSYS is an acquisition juggernaut. During 2014 alone, it acquired Reaction Design for combustion simulation and SpaceClaim for model building/tweaking. Reaction Design is small and niche-y, so no one was looking for a big contribution to overall revenue but it appears that SpaceClaim is not performing quite as strongly as expected. ANSYS didn’t give data that could lead us to infer SpaceClaim’s contribution —other than writing in the 10K, filed with the SEC last week, that “[p]ro forma results of operations have not been presented as the effects of the SpaceClaim business combination were not material to the Company’s consolidated results of operations.” Material usually means 10% of total revenue — so we need to rely on commentary to get a hint. During the company’s call with investors, CEO Jim Cashman said that SpaceClaim’s results were “depressed” for the last couple of quarters, “sometimes that happens when there’s that changing of the guard. But I’ll say that once we got through that, once we were able to go through a broader base sales training, and introduction of what this technology means as well as customers realizing that this just wasn’t a cute little third-party addition into our suite but it was a key part of what we’ve going forward, it became something. Interest levels and the pipeline is actually pretty strong right now. We look towards getting back on the take-off trajectory that we had envisioned for this, albeit maybe a few months slower.” As Mr. Cashman would say, “net-net”, the contribution in 2014 wasn’t as high as $95 million, but we didn’t think it was going to be. It’s likely SpaceClaim contributed a couple of points of growth, however, which is still quite relevant when overall revenue was up 9%.
Second, maintenance growth was 10% in Q4 and 12% for the year on a non-GAAP basis. That’s really good, but may not be indicative of either past or future trends. Annual maintenance contracts are sold with new perpetual licenses, so deals signed in 2014 count in the 2014 total along with maintenance contracts sold in previous years. Why does this matter? Because ANSYS reports that it had 35 orders over $1 million and 2 orders in excess of $15 million in Q4 2014, up from 33 $1 million orders a year ago and up from 22 in Q3 2014 — a significant change. ANSYS doesn’t give the total value of the orders, but Mr. Cashman told investors that the average value of these orders was “a little bit above 14%” more in 2014 than in 2013. That’s hugely important — ANSYS has a big portfolio of products; focusing its sales force on big deals allows it to be a more strategic partner across its customers’ many divisions and makes it easier to cross-sell mechanical, fluids, electronics, etc. simulation solutions as those needs are discovered. These huge deals are good for immediate revenue recognition (as license and maintenance) and for the future, as a lease or other recurring revenue cushion. They are, of course, also risky: they may be first on the chopping block if a buyer is feeling tense about the future and they may or may not close at any particular point in time (and for a company so focused on beating each quarter’s target, that’s a huge risk).
The big deal activity also highlights stresses in the partner ecosystem. The big and mega deals are becoming more and more important, going from 94 in 2013 to 109 in 2014, with 7 valued at more than $10 million in 2014, as compared to 4 in 2013. According to the 10K, the proportion of indirect revenue has gone from 26% in 2012 to 25.3% in 2013 to 24.9% in 2014. That doesn’t seem like much of a shift, but means that direct revenue of $703 million in 2014 was up 9.3%, while indirect revenue of $233 million was up 6.9% y/y. ANSYS is trying to address this, with its Elite program but the reality is that large accounts with complex multiphysics needs want to deal directly with ANSYS and not a middleman, no matter how capable. It’ll be interesting to watch how ANSYS keeps its channel engaged.
Geos are always a mixed bag, and 2014 was no exception. In Q4, ANSYS reports that non-GAAP revenue from North America was $91 million, up 12%; from Europe, $87 million, up 3% as reported and up 9% in cc; from General International, $78 million, up 10% and up 15% in cc. ANSYS says that sales In North America were primarily driven by the aerospace and defense, automotive, automotive electronics, and mobile electronics — the Internet of Things, energy efficiency, automotive emissions control/reduction, and the increased electronics content of just about everything continued to cause customers to seek out ANSYS solutions. The company says that it saw ongoing economic and geo-political challenges in Europe in Q4. Even so, the UK and Germany saw 18% and 14% cc revenue growth that partially offset continued weakness in Russia. For the year, ANSYS saw an increase in business in France, Italy and Spain and from chemical and metals industries, driven by the need to improve energy efficiency, sustainability, emissions controls and engineered materials. Finally, the General International Area (GIA) includes strong growth in Japan, Korea and Taiwan partially offset by weaker performance in China and India. Once again, the chemicals and metals, commercial aerospace, networking equipment, wireless, power electronics and smart medical device industries drove growth. For the year and on a GAAP basis, revenue from the US was $320 million, up 10%; from Europe, $318 million, up 8% and from Japan, $109 million, essentially flat as reported.
This balance is good. ANSYS operates in just about every vertical, just about every geo. If the price of oil nosedives, the company’s exposure is limited. If a particular country sees geopolitical or other turmoil, the exposure is limited. Its balance will insulate the company from most types of shocks. Though automotive is still the single largest vertical, that now encompasses the mechanics of the drive train, electronics, infotainment, fuel economy, batteries, materials for lightweighting — all areas in which ANSYS offers solutions.
What does this all say about 2015? ANSYS see the Q4 2014 business climate continuing, but currency deteriorating. The company expects Q1 GAAP revenue in the range of $217 million to $225 million and full year of 2015 GAAP of $945 million to $975 million. That’s roughly $40 million lower than had been modeled; CFO Maria Shields said this was due to currency movements and to the big deals that include more leases than expected —leases spread over a long period, unlike perpetuals where the biggest portion is recognized upfront. Ms. Shields said, “we’ll take the long-term gain for what [other] people might perceive as short-term pain”.
Leases, subscriptions, whatever we want to call them, the transition from perpetual is going to be painful. Luckily for ANSYS, it isn’t the first company to go through this change, so investors are clued-in and know what to expect. The balance across industries, geos, technology types, physics, all bode well for 2015. Now if only we can get people to stop thinking SpaceClaim is “cute” … [I love that quote. I’m not sure I’ve ever thought of a CAD product as “cute” but will have to try!]