EUR 850.00 For Business Accounts Only

Morningstar | Ansys Records Largest Ever Deal in 4Q; Accounting Sees Firm Crush Expectations; Shares Overvalued

Ansys blew through its fourth-quarter guidance and posted strong revenue and EPS growth, which continued to signify the firm’s rosy position in the simulation software space. The strong outperformance versus expectations was attributable to a $59 million four-year deal that the firm signed in the fourth quarter that hadn’t been accounted for (the deal represented the largest in its history). With Ansys transitioning to ASC 606 accounting, we now expect a heightened level of earnings volatility, as exemplified this quarter, with the firm having to recognize the entire upfront license component of multiyear lease transactions (with minimal variable cost associated with the revenue). As such, Ansys expects there to be a 2% and 5% impact on fiscal 2019 revenue and EPS, respectively. From a competitive standpoint, we remain encouraged by Ansys’ long-term standing in the multiphysics simulation market and believe the firm remains the gold-standard provider. We see good long-term growth for the firm and think revised go-to-market initiatives, partnerships (recently with PTC), and pervasive simulation are some of the key growth factors. After accounting for the firm’s fiscal 2019 outlook and rolling our model forward by one year, we raise our fair value estimate for this narrow moat stock to $129 per share from $124. Still, we see shares as overvalued and would seek a wider margin of safety before investing new capital in the name.

For the quarter, ASC 605 GAAP revenue grew 11% year over year to $335.9 million (ASC 606 GAAP revenue was $415.4). Some of the key growth drivers for revenue were the continued investment in autonomous vehicles, the proliferation of smart, connected products and 5G, increased defense spending in the U.S. and Europe, and efficiency investments by industrial equipment vendors. We don’t expect any slowdown in these investment areas by these sectors, which underlies our confidence in Ansys’ long-term growth.

Consistent and healthy cash flow generation has led to Ansys bolstering its competitive position in the market through inorganic investments recently. The firm announced the acquisitions of Granta and Helic for a combined $261.5 million. We see these acquisitions as providing better material data and simulation, and improved electromagnetic and noise analysis for systems on chips.

Quarterly non-GAAP operating margin under ASC 605 was 40.5%, down from 42.6% in the year-ago period. On a non-GAAP ASC 606 basis it was 51.6%. The lower ASC 605 margin was in line with expectations and reflected higher sales commissions which are paid in the fourth quarter. Meanwhile, the ASC 606 margin was higher given the overall unexpected outperformance of the firm. We expect some margin pressure in fiscal 2019, in line with management’s expectations, due to the dilutive effect of recent acquisitions (expect a 2%-3% margin headwind in fiscal 2019).