Ansys Inc (ANSS, Financial) is a premier player in the realm of 3D engineering, with its headquarters in Pennsylvania. It offers cloud-based software solutions tailored to various industries, including aerospace, automotive, energy, and semiconductors. The core strength of Ansys lies in its simulation software, designed to tackle diverse engineering challenges.
Industries are continually grappling with evolving, unique challenges. Ansys steps in with its expertise, tools, and capabilities, revolutionizing design and production processes across sectors like automotive, energy, and healthcare.
Customers license Ansys's software. However, additional computational needs, expanded product usage, or more users result in higher revenues for Ansys. Ansys's success is closely tied to the overall research and development spending in the economy. When companies innovate and design more, they inevitably rely more on Ansys's products.
Government’s Industrial Strategies and Ansys
Current fiscal trends are favorable for Ansys. The predominant economic themes of 2022 involved reshoring supply chains and bolstering military expenditures. This shift occurred on both sides of the Atlantic, driven by legislation such as the Chips and Science Act, the Inflation Reduction Act in the US, and the European Union Chips Act. These measures directed significant focus and funding toward the energy, military, and semiconductor industries to enhance security.
Ansys benefits from this heightened international competition that is creating stimulative industrial policies. In the second quarter, its top revenue generators included semiconductors (31%), aerospace (23%), automotive (17%), and energy (9%). The remainder was divided among industrial equipment, chemicals, and construction.
Global Market Exposure
While Ansys operates largely in the United States, it has substantial exposure to important industrial markets in South Korea, Japan, and Germany, all of which are investing heavily in their semiconductor and energy sectors. In the previous quarter, the US accounted for 44% of revenue, Germany contributed 8%, Japan 13%, South Korea 10%, and the rest came from European countries. Notably, less than 5% of Ansys's revenue came from China.
Increasing Demand for 3D Simulation
According to management, the increasing complexity of semiconductors has heightened demand for 3D simulation. For instance, graphics processing units, known as GPUs, are designed on a nanometer scale to maximize core integration but must be stacked with memory chips, creating electromagnetic interference that necessitates simulation.
Ansys counts Intel Corp (INTC, Financial), Samsung, Taiwan Semiconductor Manufacturing Co Ltd (TSM, Financial), and NVIDIA Corp (NVDA, Financial) among its semiconductor customers. For instance, Samsung certified Ansys's Redhawk technology for thermal analysis in its advanced '2nm' process. All three foundries have received significant funding from governments, further solidifying Ansys's prospects.
Role of Digital Engineering in Energy Sector
In the energy sector, digital engineering—the application of digital technologies to engineering—plays a crucial role in enhancing energy efficiency and sustainability, addressing the energy trilemma. Although I can’t be sure they are using Ansys's software, energy and materials engineering company John Wood Group Plc (LSE:WG., Financial) said in their recent first half results that the cost of their software spending was going up, because they were buying more advanced software and required more user licenses as their own engineering headcount was growing. With a boom in infrastructure build out in many parts of the industrialised world, advanced engineering software is only going to grow.
Steady Growth and Strong Cash Flow
Even before the surge in semiconductor investments, Ansys consistently posted year-on-year growth. Between 2019 and 2022, sales grew by 36% to $2 billion, while operating profit increased by 16% to $603 million. The operating margin, typically around 30% over the past decade, remains competitive.
Ansys generates significant cash, with about half of sales stemming from licenses and the remainder from maintenance and services. Upfront payments for licenses result in deferred revenue, contributing to a conservative profit figure.
In the second quarter, Ansys reported a 4.8% revenue increase to $497 million, with deferred revenue and backlog rising 10% to $1.3 billion. Annual contract value, which is likely to produce recurring revenue, increased by 10.4%, or 12.3% in constant currency terms, suggesting substantial sales predictability for the year ahead.
Valuation
GF Value shows the stock is Modestly Undervalued. The stock also has a pretty much perfect GF Score of 99, indicating high outperformance potential. The stock has a perfect Piotroski F-Score of 9 out of 9 and a very strong Altman Z-Score of 11.7. This financial strength will come in handy if the company wants to engage in M&A.
In addition, one of my favourite gurus Joel Greenblatt (Trades, Portfolio) has been adding to his position recently.
Maintaining Competitive Edge
To maintain its competitive edge, Ansys allocates substantial cash reserves to acquisitions. Since 2017, it has directed nearly all of its $3 billion in free cash flow toward acquisitions. In the current year, it acquired DYNAmore, a German automotive simulation software company, and Diakopto, a US semiconductor simulation company specializing in identifying bottlenecks and faults in semiconductor designs before production.
Ansys's commitment to research and development consistently surpasses industry standards. In the past 12 months, research and development spending reached $465 million, accounting for 21% of its $2.2 billion in revenue, far exceeding the industry average of around 10%. Coupled with strategic acquisitions, this investment bolsters Ansys's products and enhances its competitive position.
Conclusion
In conclusion, Ansys is strongly positioned in the 3D engineering market, and supplies a diverse array of industries which themselves are growing thanks to the macroeconomic and geopolitical environment. Ansys’s resilience, strategic acumen, and unwavering commitment to innovation position it as a frontrunner, ready to profit from the winds of change and opportunities that are looming on the horizon.
