Summary
Revenues and profits at Ansys, Inc. increased year-to-year in the third quarter, a better showing than the larger and more integrated engineering software companies such as Dassault Systèmes and Parametric Technology. So why is management hoarding cash?
Analysis
Ansys' results were boosted by revenues from Ansoft, acquired a year ago. Without Ansoft's quarterly contribution of $23.1 million, Ansys' revenues would have fallen 5.5 percent. Unless Ansys makes another acquisition, such revenue gains may be harder to achieve in the near future.
A cloud on Ansys' horizon is the five-percent year-to-year decline in license revenues, the largest such decrease on record. The $76.4 million in license revenue consists of paid-up license fees for new licenses ($31 million) plus accrual of annual lease payments ($45.6 million). Of these components, lease payments were flat while paid-up licenses slumped 12.4 percent. The decline in license revenue was offset by surging software maintenance, the fees paid annually by holders of paid-up licenses. A slowing of new paid-up license sales will slow the future growth of highly profitable software maintenance.
These facts may explain why Ansys continued with its plan to reduce employment. Headcount reductions have amounted to eight percent of 1,600 employees since the beginning of the year (about 130 people). In today's call with stock analysts, finance chief Maria Shields said these reductions would save Ansys about $9 million annually.
In the past 12 months, Ansys has trimmed research and development spending by four percent while carving 12 percent from sales, general, and administrative expenses. As a result, Ansys' cash and short-term investments have swelled to a record $294 million. Shields and Ansys CEO Jim Cashman told analysts they intend to hoard this cash, foregoing stock repurchases or early repayment of debt.
Ansys is a well-run company by the standards of engineering software, and its competitive position couldn't be better. Its cross-country rival, MSC.Software was recently taken private and appears in disarray. Its nearest competitors in the mechanical analysis market, Dassault Systèmes and Siemens PLM software, are much larger companies that can't be as nimble. Ansys' major competitive threat comes from privately held Altair Engineering. Any smaller competitors Ansys can afford to buy.
But the risk to investors from owning Ansys stock is much greater. Ansys shares trade for more than 34 times trailing earnings compared with an average of 15 for the S&P index of 500 large companies. At that lofty level, even a small decline in sales or profit growth could send Ansys stock over a cliff.
Ansys forecasts revenues between $136 million and $142 million in the fourth quarter. A look at a quarterly sales graph suggests that hitting even the lower end of that range will be a stretch unless Ansys finds another company to buy.
L. Stephen Wolfe consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
