CAE is cautiously optimistic: News from Altair, ANSYS, and ESI

May 18, 2020 | Hot Topics

The New York Times recently had an article about the language companies are using on their earnings calls, and how it’s different now than in prior periods. Many calls started and ended with CEOs saying that the welfare of colleagues and customers is of prime importance. A few are gung ho, saying that this will make Company X stronger than ever. But most are cautious, saying that they’re managing conservatively, taking it day by day, and listening to local authorities for clues on when (and how) to reopen. Our PLMish world is no different, though our CAE companies had a bit more swagger during their earnings calls, given their global and industry-spanning footprints, and their place in the innovation part of most customers’ businesses.

Since many of the themes were common, here’s a quick recap and then my take on what it all means. In alphabetical order:

Altair reported total revenue of $132 million, up 3%, as a 5% increase in software revenue to $108 million could not offset weakness in software-related services revenue, which declined 29% as customers deferred projects. Client engineering services, on the other hand, were up 15% to $14 million as a result of business momentum brought into 2020. Confusing the picture is a 30% decline in perpetual license revenue as more customers (and the product set) shift to leases and tokens.

Looking ahead, Altair sees Q2 revenue of around $94 million, down 19% from a year ago, with software revenue of $78 million down 13%. Altair did offer full-year revenue guidance of $450 million, down 6% or so.

Altair also announced the acquisition of the WRAP software business from WRAP International AB. According to Altair, WRAP is a world-leading technology for spectrum management and radio network planning for civil and defense organizations. Price etc. were not disclosed, but Altair CEO Jim Scapa said that WRAP complements Altair’s existing portfolio for wireless communications including 5G, connectivity, and IoT.

ANSYS reported total revenue of $305 million, down 4% from a year ago on a GAAP basis. Software revenue was $88 million, down 29%, while maintenance and service revenue was $217 million, up 12%. Don’t read too much into the software decline; the company said it’s partly due to the expected reduction in multi-year lease contracts. (New accounting rules let ANSYS recognize a bunch of that revenue upfront, like with perpetual. No long, multi-year deal, less revenue to recognize.)

For Q2, ANSYS guides to revenue in the range of $331 million to $371 million — that’s a massive range for a quarter that’s already partly in the books, and maybe down around 7% from a year ago. That ripples through the rest of 2020, for which management sees revenue of $1,544 million to $1,619 million, up in the neighborhood of 4%.

Finally, ESI Group reported total revenue of €55 million, down 6%. Software revenue was €49 million, down 4%, while services revenue was €6 million, down 20%. As with ANSYS, ESI said they had seen increased demand for leases, which contributed to the decline in software revenue. Perhaps reflecting its European focus, ESI reports that its Automotive & Ground Transportation business “remained stable”, while its Aeronautics & Aerospace business was impacted by China’s Covid-19-related shutdown. (Recall that ESI has a key partner in China’s AVIC aviation corporation.). ESI doesn’t give guidance.

All of the companies mentioned to one degree or another that they were looking at cost containment, to try to balance an uncertain revenue future against known costs. Potential furloughs and wage reduction, cutting the use of outside consultants, lower travel and event costs, and not needing to pay bonuses all came up as likely cost reductions.

What did we learn? That Q1 played out in a predictable pattern, though the slowdown was both deeper and longer than expected. As we heard when these companies spoke about Q4 at the very end of January, China closed and then reopened slowly. Then Europe, then the US. Reopening remains a challenge, and it’s not clear when or how each geo/industry/individual company will be able to get to whatever the new normal turns out to be. Signing new business is likely to remain tough since that’s often best done face-to-face. But repeat business is likely to be solid, especially in markets where cloud or virtualized CAE is more the norm, and smaller deals are expected to ramp up as the year moves ahead.

Looking ahead, everyone sees Q2 as tough. Each of these companies does more business in Europe and North America than in China, so the late Q1/Q2 shutdown will hurt. Everyone sees (as of the date of their public comments) a recovery that accelerates sequentially through the rest of 2020 — Q3 will be better than Q2, Q4 better than Q3. How much better? No one knows.

The bottom line for me (as a technologist and not an investor): these companies will be fine. Absolutely fine. While there may be a hiccup in spending on CAE, automotive companies are still racing towards autonomous and electrification. Telecoms, towards 5G. Manufacturing, to innovative materials. Everybody, to better and faster. Simulation is key to making all of those things happen, and each of these companies has created ways for that innovation to take place in an office or at home. Not being able to do a demo hurts, but it’s a surmountable problem. And we’ll be back, face-to-face (maybe with masks?) soon.