It’s good to be a CAE supplier: notes on Ansys and Altair earnings

Nov 16, 2020 | Hot Topics

Altair and Ansys reported results for the quarter ended September 30, 2020, a few weeks agoand it’s time to catch up. First, a quick recap of the individual results, then what investment analysts call a read-across — what it means in a bigger-picture world.

For Q3, 2020 Ansys reported

  • Total GAAP revenue of $367 million, up 7% as reported and up 5% in constant currencies (cc)
  • Software license revenue was $142 million, up 3%
  • By license type, lease revenue was $79 million, up 12% (up 10% cc); revenue from perpetual license sales was $63 million, down 6% (down7% cc) while maintenance revenue was $212 million, up 10% (up 8% cc). Ansys said that it continues to see customers shifting from perpetual licenses to time-based licenses “as a result of the economic impacts of COVID-19, and we expect it to continue into the foreseeable future.”
  • Services revenue was $13 million, down 1% (down 3% cc) as it continues to be difficult to get people to customer sites
  • By geo, revenue from the Americas was $162 million, up 6% (up 6% cc); from Europe, $107 millon, up 7% (up 2% cc); and from Asia, $99 millon, up 7% (up 7% cc)
  • Looking at end-industries, commercial aviation continues to suffer as no one flies, but defense spending remained strong, booting revenue in military aerospace and defense. High-tech, semiconductor, and automotive did well in Q3, especially in Asia
  • By channel, direct revenue was 75% of total, slightly below the year-to-date average of 76% and last year’s Q3 77% of total. Ansys announced that it signed its second-largest-ever contract in Q3, a five-year, $72 million lease deal — that follows a record $100 million, five-year deal signed in Q2 2020. We know big deals are lumpy and hard to close (and management attention-grabbing); even so, the channel recorded double-digit revenue growth in Q3
  • Ansys expects Q4 revenue between $541 million and $581 million, which means a fiscal 2020 revenue between $1,599 million and $1,638 million, up 6% at the midpoint. Ansys raised the bottom end of guidance by $40 million and the top end by $5 million from its Q2 earnings release

While for Q3, Altair reported:

  • Total revenue of $107 million, up 6%
  • Total software revenue of $88 million, 13%
  • Within software, license revenue was $55 million, up 17% maintenance and services revenue was $33 million, up 6%
  • Software-related services revenue was $6 million, down 22%, while client engineering services revenue was down 15% to $11 million, as CFO Howard Morof said, “customers continue to adjust [downward] their external project spend in response to market conditions”. He noted that both segments actually improved from Q2, when the year/year declines were 331% and 22%
  • Altair gives little data on goes and verticals, though CEO Jim Scapa did tell investors that ” [auto and aero have] been a fairly stable part of the business. We have very, very high recurring revenues in those accounts [but] there has been more softness and in terms of growth in those accounts. This year, I am seeing improved sentiment in the automotive and aerospace markets there; there’s no doubt about that, especially in the supply base. I think it’s going to get better as time goes on”
  • Mr. Scapa also said that China and Korea have “come back very, very strongly” while “India has suffered a lot with COVID. They’ve hung in there pretty well. In general, things are operating reasonably well across the world for us and across all the different verticals. And across the different solutions that we have, everyone is coming in pretty normally a little bit muted.”
  • More broadly, he said, “the number of new customers in Q3 was very similar to the prior year. And year-to-date things are worse off because of Q2. In general, things were pretty, pretty normal in Q3″
  • For Q4, Altair guides total revenue of $112 million to $117million, which means the full 1010 target is now $448 million to $453 million, a decline from 2019 of around 2% because of the services decreases; it expects software revenue to be between $373 million and $377 million, up 2% to 3% from 2019.

One thing you might immediately notice when we put these two earnings recaps side by side: Altair sees its strong performance in Q3 and low-balls Q4 (and therefore the year) because of the uncertainty it sees with “prudent caution”. Ansys, on the other hand, used its strong Q3 to raise guidance and expectations. I don’t know if either approach is right or wrong — it is interesting to note the differences.

OK. Now, the read-across.

CAE is becoming ever-more important, as its reach expands outwards from the traditional simulations as an offshoot of the design process. It’s being embedded into CAD for design via generative design and other techniques, used in CAM processes to predict whether products coming imperfectly off the assembly one are OK or need to be scrapped, and in operations, as we see Ansys partnering with SAP for failure prediction. We’re adding data-driven or simulation-driven artificial intelligence into many processes, as well. What was theoretically possible a few years ago, is increasingly becoming real — and that’s exciting.

Everything these companies say (and their customers tell me) points to the fact that simulation isn’t optional. Ansys is able to close these huge deals while many people are working from home, complicating the selling process on the vendor’s end, and the purchase approval process at the buyer’s. The two sides make it work, underscoring how important these technologies are. Both of these huge deals have 5-year terms, which Ansys CEO Ajey Gopal says is due to the fact that “these particular customers [may] already [be] two or three cycles into multi-year leases, so they’ve got a lot of confidence. And they also tend to be in verticals where the product life cycles are much longer. They’ve been using simulation for much longer than other customers. The combination of all those factors drives them to have the confidence to extend the term so that they can plan and we can work with them on the successful deployment of particularly new technologies that they’re trying to roll out across their R&D teams.”

To paraphrase, companies that are deep into using simulation look ahead to what’s coming technologically and in their own product plans. They roll out technologies that can help achieve those plans, as they come onto the market. They grow both the types of simulation and the humans using them. They look at simulation as a set of essential tools that will grow and adapt to their needs and be flexible enough to support them as they change.

The biggest CAE players all boast huge product catalogs, from concept discovery to material design to IoT applications. All claim varying degrees of openness and interoperability with outside solutions. A user could opt for best-of-breed and create a custom platform specifically suited to their needs, but it’s increasingly true that it’s just simpler to standardize on one set of solutions from one of the big players to take advantage of integrations, suites/volume pricing, and other benefits.

It’s good to be Altair and ANSYS. Even with much of the world still struggling through Covid, the need for more and better simulation technologies shows no (long-term) signs of slowing down.