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Morningstar | Ansys Outperforms in 2Q as the Company Pursues Pervasive Simulation Strategy; Shares Overvalued

Ansys reported good second-quarter results, with revenue and EPS both outperforming our expectations. Although the early timing of some revenue helped the result, the company’s underlying growth was positive. Annual contract value grew 8% year over year to $293 million in constant currency, while the firm recorded 35 customer orders over $1 million, a 25% year-over-year increase. We remain bullish on Ansys’ long-term growth rate and believe there is ample opportunity for the firm to make simulation software more accessible and usable. The firm’s push for pervasive simulation, which touches the early ideation stage to late operations stage, is expected to help make the traditionally difficult software more easily workable, and we think new products like Ansys Discovery Live will help. Ansys’ recent partnership with PTC should also raise the profile of Ansys’ simulation tools among the discrete manufacturing market. Management tweaked its full-year outlook based on the second quarter, and we have slightly adjusted our financial model. However, the financial impact is negligible, and we maintain our $115 fair value estimate for this narrow-moat stock. The firm continues to trade at a hefty premium to our fair value estimate, and despite the rosy long-term outlook, we believe investors will be overpaying at its current price.

For the quarter, ASC 605 GAAP revenue grew 11% year over year to $294 million, up 13% in constant currency. The Americas segment performed well, with double-digit constant-currency growth across all revenue segments, while the European business showed ongoing recovery, with sales execution and go-to-market initiatives improving across the region. Of the few weak spots, the pace of new go-to-market changes were slow in South Korea, and some centralized purchasing of enterprise deals muted the sales performance within India.

Ansys’ ASC 606 GAAP and non-GAAP operating margins were above our expectations at 35.5% and 47.3%, respectively. Margins were boosted by better-than-expected revenue growth, the timing of contracts that were previously expected to come in the third quarter, and slightly slower hiring. We believe some of these impacts will be muted on a full-year basis and have only slightly adjusted our margin outlook for the year. We think Ansys can continue to post industry-leading non-GAAP operating margins, but don’t see much upside from the current mid-40% levels over the long-term.