ANSYS (NASDAQ:ANSS) Reports Sales Below Analyst Estimates In Q1 Earnings

Kayode Omotosho 2024/05/01 4:30 pm EDT

Engineering simulation software provider Ansys (NASDAQ:ANSS) missed analysts' expectations in Q1 CY2024, with revenue down 8.4% year on year to $466.6 million. It made a non-GAAP profit of $1.39 per share, down from its profit of $1.85 per share in the same quarter last year.

ANSYS (ANSS) Q1 CY2024 Highlights:

  • Revenue: $466.6 million vs analyst estimates of $555 million (15.9% miss)
  • EPS (non-GAAP): $1.39 vs analyst expectations of $1.98 (29.8% miss)
  • Gross Margin (GAAP): 85.3%, down from 90.6% in the same quarter last year
  • Market Capitalization: $28.36 billion

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.

Design Software

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 three years, growing from $363.2 million in Q1 2021 to $466.6 million this quarter.

ANSYS Total Revenue

This quarter, ANSYS's revenue was down 8.4% year on year, which might disappointment some shareholders.

Looking ahead, analysts covering the company were expecting sales to grow 13.1% over the next 12 months before the earnings results announcement.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 85.3% in Q1.

ANSYS Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.85 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite its decline over the last year, ANSYS's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Key Takeaways from ANSYS's Q1 Results

We struggled to find many strong positives in these results. Its revenue unfortunately missed analysts' expectations and its gross margin shrunk. This underperformance was driven by a worse-than-expected average contract value of $407 million (compared to estimates of $433). Overall, this was a mediocre quarter for ANSYS. The company is down 3.2% on the results and currently trades at $311 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.

We think ANSYS is a good business. Although its revenue growth has been weak over the last three years, its impressive gross margins indicate excellent business economics. And while its customer acquisition is less efficient than many comparable companies, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

ANSYS's price-to-sales ratio of 11.2x based on the next 12 months indicates the market is certainly optimistic about its growth prospects. There are definitely a lot of things to like about ANSYS, and looking at the tech landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $345.82 right before these results (compared to the current share price of $311), implying they see short-term upside potential in ANSYS.

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