ANSYS, Inc.

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 5/5

ANSYS, Inc. is a global leader in engineering simulation software, enabling engineers, designers, researchers, and students across various industries to model, analyze, and validate complex systems.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ANSYS, Inc. (ANSS) is a leading provider of engineering simulation software. The company’s core business is providing comprehensive simulation solutions for complex engineering designs across various industries.

Business Overview

ANSYS develops and markets engineering simulation software and services. Its products are utilized by professionals in engineering design, product development, and research. The company’s suite of software simulates multiple phenomena including fluid flow, electromagnetics, structural mechanics, and other complex physics. This allows companies to predict and test products before production.

  • Revenue Streams:
    • Software Licenses: This accounts for the bulk of ANSS revenue through the sale of perpetual and term-based licenses.
    • Maintenance and Support: A major part of the revenue stream comes from the maintenance, upgrades, and support services provided to the users.
    • Professional Services and Training: ANSYS provides consulting and training services that aid clients to customize products.
  • Industry Trends:
    • Digital Transformation: There is an increasing shift of companies towards integrating digitalization within their infrastructure and workflow. ANSYS, with its simulation software capabilities, is well-positioned to benefit from this trend.
    • Advanced Manufacturing and Engineering: As industries strive for greater innovation and efficiency, the demand for sophisticated simulation software increases.
    • Growth in High-Tech: Increased investment in areas like electric vehicles, autonomous driving, new energy, AI, etc, creates a significant growth area for simulation companies.
    • Integration of AI/ML: Companies are integrating AI and ML into simulation to improve speed and create newer products.
  • Margins:
    • ANSS has historically maintained impressive operating margins. Over the past few years, gross margins have consistently remained near 85%, with operating margins usually in the 30% range and net margins closer to 25%.
    • These figures reflect the company’s ability to control costs and maintain profitability, due to the recurring revenue stream, the quality of their offerings, and the pricing power that their moat provides.
  • Competitive Landscape:
  • ANSS operates in a moderately competitive market, alongside companies such as Siemens, Dassault Systemes, and Altair. However, ANSYS’s diversified product offerings and high level of customer stickiness provide it with a distinct competitive advantage.
  • The company competes via their product capabilities, pricing power, and customer relations. They try to differentiate themselves on the bases of their software accuracy and customization.
  • What Makes ANSYS Different:
  • Comprehensive product offering: Their wide array of solutions spanning across various engineering disciplines is a major advantage.
  • High switching cost: The amount of money, time, energy, and training, required to completely switch the product, create a high switching costs, keeping existing customers within their ecosystem. * Strong brand reputation: The company is well known for its consistent product development, software accuracy, and strong support systems. * Long history of profitability: The company has a long history of being profitable, a testament to its excellent value creation and business model. * Strong customer base: The company has a loyal customer base, many of whom are Fortune 500 companies.

Financials

Here are the financials based on the most recent report. ANSYS generated strong financial performance in the nine months ending September 30, 2023, demonstrating growth and profitability:

  • Revenue: Total revenue was $1.4 billion, up 13.6% year over year in constant currency.
  • Net Income: Recorded a net income of $388 million, but when special items are adjusted the figure is $322 million.
  • Earnings Per Share: Reported GAAP earnings per diluted share of $4.33 for the nine months ended September 30, 2023 and Non-GAAP diluted EPS is reported to be $3.68.
  • Operating Margin: Maintained a non-GAAP operating margin of 38.9%

  • Gross Profit Margin: Gross margins remain close to 85%.

  • Cash Flow: The company reported a net cash from operations of $637 million for the first nine months of 2023. Cash and short-term investments totaled $1.3 billion.
  • Acquisition: Recently, ANSYS closed the acquisition of the software company, Synopsys for around $35 Billion. The management believes that this acquisition will be highly accretive.
  • Guidance: The management forecasts revenue between $2.3 and $2.4 billion, with EPS between $8.02 and $8.58. This is driven by strong market growth and demand for their software.

Moat Analysis

Rating: 4 / 5 ANSYS possesses a strong economic moat primarily due to its high switching costs and intangible assets.

  • High Switching Costs: The integration of ANSYS’s software into complex engineering workflows creates significant switching costs for customers. Users are highly invested in the software which would require significant disruption, time and money, to switch to a competitor, resulting in a high client retention rate.
  • Intangible Assets (patents and software code): ANSYS has over 300 patent families protecting their intellectual property and technology. They have a long history of continuous innovation, creating a differentiated and difficult-to-replicate suite of offerings. They own the source code of the simulation and have built expertise over many years.
  • Brand Reputation: ANSYS enjoys a strong brand reputation for quality and performance, making it a preferred option for many clients.
  • Network Effects: While not as prominent as in other industries, network effects are present for many multi-user licenses as clients and partners get better by using the software together and sharing data.

Risks to the Moat and Resilience

  • Technological Disruption: Rapid advancements in software technologies and emergence of new simulation methods could erode some of the advantages of the company. New emerging players might also come up with better alternatives.
  • Intense Competition: Increased competition, especially in areas such as cloud-based simulation or AI/ML driven tools, could put pressure on pricing and sales.
  • Cybersecurity Risks: If customer data is compromised, they will lose trust. Hence, data security should be top priority, and a failure to implement this might harm the company.
  • Acquisition integration risks: The recent purchase of Synopsys at a large premium might not give the results the company is expecting and might lead to large write-offs.
  • Macroeconomic Downturn: Given the economic slowdown, clients could cut spending on software, which might affect revenue.

Resilience: Despite these risks, the company appears well-positioned to withstand competitive challenges due to strong client relationships and high quality and diversified product portfolio.

Understandability

Rating: 3 / 5 The nature of the business is straightforward, but understanding the technical aspects of the software, the complex accounting, and the detailed pricing and licensing structure may pose a moderate level of difficulty.

  • Strengths:
    • The business is relatively straightforward: engineering simulations software and services for engineers and other technical people.
  • They have a recurring business model which has a predictable revenue stream.
  • Weaknesses:
    • The technical aspects of the simulation software and technology may be hard for non-technical people to understand.
    • The nuances of their pricing and licensing can be complex.

Balance Sheet Health

Rating: 5 / 5 ANSYS displays very strong financial health with low debt levels and high liquidity.

  • Debt: The company has a very small amount of debt.
  • Cash: Cash and short-term investments make up a good proportion of the company’s assets.
  • Share Buybacks: The company has consistently repurchased shares, signaling that they are confident on the price of the stock and its growth.
  • Profitability: The company has high profitability and profit margins, meaning they generate ample cash flow for operations and investing activities.
  • Solvency: They have consistently generated great free cash flow. The operating performance is excellent and their solvency ratio is very high.

Recent Concerns and Management Response

  • The largest concern has been the large acquisition of Synopsys. Investors are concerned about how that would affect the profits and free cash flows of the company, as they have paid a premium of around $35 billion for that purchase. However, management is very confident that this merger is accretive in the long run and would make it harder for any competitor to compete with their comprehensive offering. They also emphasized that this acquisition aligns with their strategic goals for growth.
  • The company has been facing pressure from a slightly weakened market and has seen some of its customer spending decrease slightly. However, they reiterated their confidence in their software, that remains a mission-critical need for their customers, as a driver for future profitability.
  • While overall growth has been great, there are certain areas that have seen a reduction in profits. The company is actively managing to reduce costs in those specific segments.
  • Management stated that they intend to continue innovation and R&D spending, despite macroeconomic uncertainties. They also mentioned that are working to improve customer relations and further improve their product range.
  • They have been actively managing prices and costs to ensure a continued stream of profits.
  • While the company has been enjoying high sales, the operating margin for the last quarter was a bit down. The management is actively trying to solve this issue, stating that they might be able to show high operating margins again in the future.

Summary

ANSYS appears to be a company with a solid business and a strong moat, that would continue to thrive for the foreseeable future. However, investors should also carefully consider the legitimate risks associated with a company of that size, like technological disruption, and changes in the marketplace. Even though the company is in a very specific niche industry, making it hard for non-technical investors to thoroughly understand it, their high profitability, low debt levels, and long history make it a reasonably compelling investment for a long term investor. However, valuation is also highly critical in making such investments.