EUR 850.00 For Business Accounts Only

Morningstar | Ansys Starts 1Q on a Good Note; High-Tech Sector Driving Demand; Shares Overvalued

Ansys reported a good start to fiscal 2019 with the firm posting better-than-expected revenue and earnings. Management was heavy on high-tech commentary during its prepared remarks, highlighting the strength of the industry as megatrends such as 5G, artificial intelligence, electrification, and data center development take place. With the high-tech industry providing ample headroom for growth, we think Ansys’ recent acquisitions of Helic and DfR Solutions will help round out the firm’s high-tech simulation offerings and provide customers with more complete solutions versus peers. We continue to believe in Ansys’ gold-standard position in the simulation software market. We see good long-term growth potential as products get smarter and clients look to speed their time to market and improve development efficiency. Buoyed by its strong position, management mildly raised its fiscal 2019 guidance and we have modestly adjusted our expectations as a result. As such, we raise our fair value estimate to $135 from $129 for this narrow-moat company. Still, we would seek a wider margin of safety before investing capital in the name.

For the quarter, non-GAAP revenue rose 13% year over year to $319.9 million (increased 16% in constant currency). In addition to the strong growth seen in the high-tech area, the aerospace and defense and automotive sectors also saw healthy demand as next-generation systems, autonomous vehicles, and electrification drove client interest in Ansys’ tools. Lease license revenue grew 45% year over year in constant currency to $69.4 million as demand for multi-year contracts surged, while services revenue improved 46% to $12.6 million as customers sought project assistance from Ansys given broad adoption of its simulation products. We continue to believe that lease licenses will be the driving force behind Ansys’ revenue growth over the long term as it sells more products on a recurring revenue basis.

In terms of margin, gross margin improved 130 basis points year over year to 91.1% and non-GAAP operating margin fell 210 basis points to 42.9%. Both margin targets were ahead of guided expectations and were positively impacted by the quarter’s revenue outperformance and subsequent operating leverage. In addition, Ansys’ hiring was slightly slower than expected as tight labor market conditions led to less expenses surrounding these activities. For the full year, we expect non-GAAP margins to hover around 43%-44%.