Engineering simulation software provider Ansys (NASDAQ:ANSS) beat analyst expectations in Q1 FY2023 quarter, with revenue up 19.8% year on year to $509.4 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $485.5 million, 7.04% below analyst estimates. ANSYS made a GAAP profit of $100.6 million, improving on its profit of $71 million, in the same quarter last year.
ANSYS (ANSS) Q1 FY2023 Highlights:
- Revenue: $509.4 million vs analyst estimates of $492.3 million (3.47% beat)
- EPS (non-GAAP): $1.85 vs analyst estimates of $1.61 (14.8% beat)
- Revenue guidance for Q2 2023 is $485.5 million at the midpoint, below analyst estimates of $522.3 million
- The company reconfirmed revenue guidance for the full year, at $2.28 billion at the midpoint
- Gross Margin (GAAP): 86.7%, down from 88.8% same quarter last year
Used to help design the Mars Rover, Ansys (NASDAQ:ANSS) offers a software-as-a-service platform that enables simulation for engineering and design.
The company’s product suite includes Ansys Fluent for fluid dynamics analysis, Ansys Mechanical for structural assessments, and Ansys Electronics for electromagnetic testing. These products provide engineers with the ability to simulate and analyze complex designs, identify potential issues, and optimize performance before production. Ansys software is also compatible with third-party CAD and product lifecycle management (PLM) tools, making engineers' lives easier because it integrates into their favorite tools.
Product development and design optimization would be an extremely expensive and time-consuming (as well as frustrating) process if manufactured goods could only be tested after production, only to be redesigned and produced again and again. Instead, simulations in different thermal environments or testing the structural integrity of a product can be done using Ansys’ software. This saves resources and time, as designs can be altered over and over before going to final production.
Ansys principally generates revenue by selling seat licenses for its software suite, based on number of users in a customer’s organization. In addition, the company generates a smaller portion of revenue from training, consulting, and support services to ensure that customers succeed with the Ansys software suite.
The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.
Competitors in engineering and design software include Aspen Technology (NASDAQ:AZPN), Cadence Design Systems (NASDAQ:CDNS), and Bentley (NASDAQ:BSY).Sales Growth
As you can see below, ANSYS's revenue growth has been unremarkable over the last two years, growing from quarterly revenue of $363.2 million in Q1 FY2021, to $509.4 million.
This quarter, ANSYS's quarterly revenue was once again up 19.8% year on year. But the revenue actually decreased by $184.7 million in Q1, compared to $221.6 million increase in Q4 2022. ANSYS's sales do seem to have a seasonal pattern to them, however the management is guiding for a further drop in revenue in the next quarter, so we think it is worth keeping an eye on the situation.
Guidance for the next quarter indicates ANSYS is expecting revenue to grow 2.46% year on year to $485.5 million, slowing down from the 6.09% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 8.38% over the next twelve months.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. ANSYS's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 86.7% in Q1.
That means that for every $1 in revenue the company had $0.87 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop that is still a great gross margin, that allows companies like ANSYS to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Key Takeaways from ANSYS's Q1 Results
With a market capitalization of $26.8 billion and more than $507.9 million in cash, the company has the capacity to continue to prioritise growth.
It was good to see ANSYS outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and gross margin deteriorated. Overall, this quarter's results were not the best we've seen from ANSYS. The company is down 0.94% on the results and currently trades at $305.09 per share.
Is Now The Time?
ANSYS may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that ANSYS is not a bad business. However, its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. But on a positive note, its impressive gross margins are indicative of excellent business economics.
ANSYS's price to sales ratio based on the next twelve months of 11.6x indicates that the market is definitely optimistic about its growth prospects. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that ANSYS doesn't trade at a completely unreasonable price point.
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