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Morningstar | Ansys Continues to Outperform in 3Q; Sales Channel Investments Paying Off, but Shares Overvalued

Ansys had another strong quarter, with the firm seeing good growth in its deferred revenue backlog and average contract value, reflecting healthy demand for Ansys’ products and a strong pipeline of business. With the first nine months of the fiscal year outperforming management expectations, the company raised its full-year revenue, EPS, and operating cash flow guidance. A better go-to-market strategy within the direct sales organization seems to be resonating with clients, with Ansys matching clients with specific sales teams. To that end, Ansys added 30 customers with orders over $1 million in the quarter, which represents a 20% increase year over year in high-value customers. On the indirect sales side, Ansys also continues to expand its channel partner program with eight new partners joining Ansys in the quarter. We think the firm’s sales channel focus should help Ansys meet the good level of current and future demand for its leading simulation software portfolio. As a result, we expect the firm to record strong ongoing top-line growth over the midterm. After slightly tweaking our model to account for the strong third quarter, we modestly raise our fair value estimate to $124 per share from $120 and reiterate our narrow economic moat rating. With shares remaining at a considerable premium to our fair value, we’d seek a substantial pullback before considering the stock for investment.

For the quarter, ASC 605 GAAP revenue grew 10% year over year to $302 million, while non-GAAP revenue rose 11% to $307.9 million. We’ve been impressed with Ansys’ large deal wins in the year, and we believe the firm’s heightened investment in its field engineering teams has led to deeper penetration within clients, which will continue to support the company’s high switching costs and its recurring services business.

Europe, Middle East, and Africa recorded revenue growth of 11% in constant currency, and we are seeing better results out of this region due to the company’s focus on sales execution. We expect this sales performance to be more consistent over the near term as prior sales issues seem to be remedied. Like the first half of the fiscal year, from an industry perspective, Ansys continued to see strong growth in the automotive, industrial, and aerospace and defense sectors.

In terms of margin, Ansys’ ASC 606 GAAP margin and non-GAAP margin was 32.1% and 44.0%, respectively. The margin performance was slightly above our expectations given the strength of Ansys’ revenue in the quarter and a slower pace of hiring from the firm due to the summer season and some challenges with finding talent. Still, despite a tough hiring environment we expect the company to aggressively recruit over the coming months and use tuck-in acquisitions over the midterm to recruit the required talent.