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In the autumn of 2020, I concluded that the long-term value creator ANSYS (NASDAQ:ANSS) was making its next value-creating move. The pure play on simulation equipment, and all related services and products, made its next bolt-on deal at the time. This bolt-on dealmaking and very strong positioning are compelling traits of the business, as an elevated multiple prevented me from getting upbeat and involved at the time.
Simulation
ANSYS is the market leader in simulation, a rapidly growing industry and service used in a wide range of industries and applications. This includes aerospace, general industrial applications, phones, cars, food, and healthcare, among many other applications and industries. The integrated set of services used with regard to simulation include autonomy, electrification, 5G, IoT, and the cloud. It is the cooperation of all these services makes it hard for competitors to replicate the solutions which ANSYS brings to its customers.
In the decade of the 2010s, ANSYS has tripled sales to $1.5 billion on which it posted very impressive operating profits, seen around half a billion. This growth has even been accompanied by a 5% reduction in the share count, as revenue growth, higher margins, and buybacks have done wonders for earnings per share growth over this period of time.
This was picked up by investors as a $40 stock in 2010 rose to $320 in October 2020. To put the valuations into perspective, ANSYS posted a 17% increase in 2019 sales to $1.53 billion on which GAAP operating margins were posted at 34%, with adjusted operating margins reported as high as 45%. The company posted adjusted earnings at $6.58 per share, with GAAP earnings reported at $5.25 per share. With most of the adjustments relating to stock-based compensation expenses, I pegged realistic earnings at $5.50 per share in 2019.
Even as the company held just over $300 million in net cash, this only worked down to $4 per share, as valuations were far too high for me to get involved at 55 times earnings. After all, a $27 billion valuation was equivalent to 17 times sales as well, nosebleed valuations, albeit in a low interest rate environment at the time.
Late in 2020, the company was spending $700 million to acquire Analytical Graphics, a provider of simulation, modeling, testing, and software in aerospace, defense, communication, and intelligence applications. With a $75-$85 million revenue contribution, the 9 times sales multiple was far cheaper than its own valuation, as a deal valued at 2-3% of the own business would boost sales by some 5%. With a $320 per share valuation, expectations were far too high for me to get involved.
2022 – Two Years Later
Trading at $320 in October, shares of ANSYS actually rose to a high around $400 early in 2021 and later on that year, only to become a victim of the decline in technology valuations as well. Right now, shares are down to $211 per share, with shares essentially losing half their value from the high, now back to 2019 levels.
In February 2021, ANSYS posted its 2020 results as revenues rose in a steady fashion to $1.68 billion, with non-GAAP earnings rising further to $6.70 per share on which GAAP earnings of $4.97 per share were reported. The company guided for 2021 revenues to rise to a midpoint in excess of $1.8 billion, yet earnings per share were only seen largely flattish.
Following two bolt-on deals being announced in 2021, on which no financial details have been announced, ANSYS has seen a very decent 2021. Revenues rose in a steady fashion to $1.91 billion. While guiding for flattish to slightly lower earnings in 2022, adjusted earnings actually rose to $7.37 per share on which GAAP earnings of $5.16 per share were reported. With much of the discrepancy stemming from stock-based compensation expense, I am still putting realistic earnings around $5.50 per share. Despite these deals and that of Analytical Graphics, net debt was very minimal at less than a hundred million.
The company guided for solid further growth in 2022 with sales seen between $2.0 and $2.1 billion, with adjusted earnings to rise modestly to $7.64-$8.10 per share. Following the release of the first quarter results, the midpoint of the full-year guidance was seen around $2.03 billion, as the company will lose some business in Russia, with earnings now seen between $7.53 and $7.94 per share. It should be noted that the decline in the guidance is reflective of the retreat in Russia, but better operating performance elsewhere.
After posting 17% revenue growth in the first quarter, topline sales growth slowed down to 5% in the second quarter, with much of the growth held back by a stronger dollar, as well as the impact of a softening economic environment. This resulted in a modest pullback in the full-year guidance, with revenues now seen at $2.03 billion. Earnings are now seen between $7.50 and $7.88 per share, as a couple of pennies are knocked off the guidance, mostly the result of an ever-stronger dollar.
What Now?
ANSYS has gradually taken on a net debt load of nearly a quarter of a billion, albeit this is not a worry given the profitability of the business here. The built-up in debt mostly relates to some bolt-on deals, as the company has been buying back some stock here as well in recent times.
With just over 87 million shares now outstanding, the market value has fallen to $18 billion and change, for a similar enterprise valuation. This means that with more than two billion in sales, ANSYS is now trading at around 9 times sales as well. Based on realistic earnings power close to $5.50 per share, that valuation has come down to 38 times. This is an improvement, but still a high multiple with the earnings yield just surpassing 2.5%, all while risk-free rates trade considerably higher than that, and the organic pace of organic growth is not that impressive as of recent.
The truth is that part of the slower growth comes from the fact that subscription sales have grown to just over half of sales, as that transition hurts topline sales growth, of course, with upfront license deals no longer announced at the same pace (and same way) as in the past.
The irony is that even as shares are down a third from the levels seen two years ago, I fail to see imminent appeal. The long-term potential and positioning are still fine, but the valuation is still steep and operational results are not that impressive (in light of this valuation). There are some positives as well, including a strong balance sheet and hope that margins might expand again, creating potential for earnings to outgrow these secular trends, but this is not yet seen with earnings coming in flat for a couple of years now.
Weighting it all together, appeal is certainly increasing, but given valuations elsewhere, I am not yet comfortable to commit yet to ANSYS here.
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