Summary
- Ansys shares rose 11% to $294.75 on Thursday after Q4 2022 results overnight, and are now at 37x 2022 Non-GAAP EPS.
- Q4 was a solid finish to 2022. Full-year Annual Contract Value grew 14%, excluding currency, and Non-GAAP EPS grew 8% in dollars.
- 2023 outlook includes a 10%+ Annual Contract Value growth, but much lower EPS growth and a large rise in Share-Based Compensation.
- Including Share-Based Compensation costs would have reduced Non-GAAP EPS by 25%; Ansys' P/E is 49.2x on GAAP EPS.
- We expect a de-rating in Ansys’ P/E to offset much of its expected EPS growth, reducing mid-term returns to single digits. Avoid.
Introduction
We review ANSYS, Inc. (ANSS) after shares rose 10.5% on Thursday following Q4 2022 results released overnight.
We downgraded our rating on Ansys from Buy to Hold in May 2020, when the share price was $263.51. Ansys' share price is currently 12% higher after nearly 3 years, though having first risen to above $400 in late 2021:
Ansys Share Price (Last 5 Years) |
Q4 2022 represented a strong finish for the year, with Annual Contract Value up 14% excluding currency. Non-GAAP EBIT and EPS both grew by more than 8% in dollars, after currency headwinds. GAAP EBIT and EPS each grew by 16% year-on-year, after Share-Based Compensation costs stayed relatively flat. 2023 outlook includes similar 10%+ growth rates for ACV and revenues, but much lower EPS growth, with SBC costs growing 13-21%. We continue to worry about cost growth, especially in SBC. Relative to 2022, Ansys shares are at 37x Non-GAAP EPS, 49x GAAP EPS and a 1.7% Free Cash Flow Yield. We continue to expect the P/E to de-rate and reduce mid-term annualized returns to single digits, We wait for a better re-entry point. Avoid for now.
Ansys Hold Rating Recap
Ansys is a global leader in engineering simulation software and services. We recognise the quality of its business, and had been buyers in the past, but expect future returns in its stock to be limited because of valuation.
We expect a low-teens Non-GAAP EPS CAGR in 2022-25, based on a 12% Annual Contract Value ("ACV") CAGR and a stable EBIT margin, as implied by new medium-term targets announced at an investor update in August 2022.
However, we expect an exit P/E multiple of 25x based on Non-GAAP EPS. The multiple sounds superficially modest, but takes into account how Ansys (like many other Technology companies) focuses its reporting on Non-GAAP figures and excludes sizeable non-cash Share-Based Compensation ("SBC") costs from these figures.
We expect the implied de-rating from Ansys' current P/E to offset much of its Non-GAAP EPS growth in the medium term, leading to an annualized return that is below our 10% target.
As a reminder, ACV is a management metric that basically reflects the annualized value of bookings starting in each time period. ACV is a better metric for Ansys' size and growth than revenues, because the latter can be artificially boosted by the upfront recognition of revenues in large multi-year contracts:
Ansys Annualised Contract Value Definition |
Ansys' medium-term targets envisages Operating Expenses to grow in line with revenues but less than ACV, which would lead to its Operating Cashflows (which exclude SBC costs) growing faster than ACV.
Ansys Q4 Results Headlines
Excluding currency, Ansys' ACV grew 13% year-on-year in Q4 2022 and 14% in the full year; including currency, ACV grew 8.3% in Q4 and 8.6% in the full year, with the stronger dollar representing a significant headwind:
Ansys P&L and Cashflows (Q 4 and FY 2022 vs. Prior Periods) NB. Al figures are non-GAAP unless otherwise stated. |
Similar to previous years, Q4 ACV represented 40% of the full-year total, as more large contracts were signed in Q4. We therefore focus our year-on-year comparison on full-year financials.
Revenues grew 13% excluding currency and 7.3% including currency in 2022. Non-GAAP EBIT grew 8.8% in dollars, faster than revenues, as Non-GAAP EBIT margin expanded 56 bps to 42.0%. Non-GAAP Net Income grew 7.6% and Non-GAAP EPS grew 8.4%, the latter helped by a 0.7% reduction in the share count following share repurchases.
Ansys spent $206m to buy back 0.725m of its shares in 2022 (implying an average price of $284). The efficacy of Ansys buybacks is limited by its spend on acquisitions ($242m in Q1-3; full-year figure not yet reported) and high valuation (represented by a Free Cash Flow Yield of below 2%).
SBC costs and related excess payroll taxes amounted to $1.99 per share in 2022, equivalent to 0.25x its Non-GAAP EPS. The figure represents an increase of 2.5% year-on-year, lower than total cost growth of 6.3%.
GAAP EBIT and GAAP EPS actually grew faster than their Non-GAAP counterparts in 2022, by 15.5% and 16.0% respectively, largely due to SBC cost growth being relatively small. This may not have been intentional, and SBC costs are expected to grow by 13-21% (on a per-share basis) in 2023.
Operating Cashflows grew 14.8% year-on-year in 2022, but the figure is before non-cash SBC costs.
Ansys 2023 Outlook
Ansys' 2023 outlook includes similar 10%+ growth rates for ACV and revenues, but much lower EPS growth:
Ansys 2 023 Outlook Source: Ansys company filings. |
ACV is guided to grow by 9.9-13.4% excluding currency, or 11.5-14.9% including currency; revenues are guided to grow by 10.1-11.9% excluding currency, or 8.2-12.0% including currency.
EPS growth is guided to be just 4.4-10.9% on a Non-GAAP basis; on GAAP EPS, the guidance implies a range between a 10.1% decline and a 1.2% growth, likely due to much higher SBC costs and amortization of intangibles.
Other guidance in 2023 not listed above include:
- Non-GAAP EBIT margin is guided to be 41-42%, flat or slightly lower than 2022's 42.0%.
- SBC (and related tax) costs are expected to be $2.25-2.41 in 2022, 13-21% higher year-on-year.
- Effective tax rate is guided to be 17.5% in 2023, 0.5 ppt lower than 2022's 18.0%.
As before, Ansys' growth looks solid but we continue to worry about cost growth, especially in SBC.
Ansys Stock Valuation
At $294.75, Ansys shares are at 37x Non-GAAP EPS, 49x GAAP EPS and a 1.7% Free Cash Flow Yield:
Ansys Net Income & Cashflows (201 9 -2 2 ) Source: Ansys company filings. |
The biggest difference between GAAP and Non-GAAP EPS is SBC costs, which are a real cost. Including SBC would have reduced 2022 Non-GAAP EPS by 24%, and SBC costs are guided to rise by 13-21% (per share) in 2023.
Relative to the mid-point of 2023 guidance, Ansys stock is trading at a P/E of 34x relative to Non-GAAP EPS, but a P/E of 52x relative to GAAP EPS, and a FCF Yield of just 1.8%:
Ansys Cashflows & Valuation (202 3 E) Source: Ansys company filings. |
We assume an exit P/E multiple (relative to Non-GAAP EPS) of 27x, which implies a 21% re-rating from Ansys's current multiple. This would offset most of the low-teens EPS CAGR we expect, which means we believe Ansys' annualized return by 2025 year-end would be in the single digits.
Is Ansys a Buy? Conclusion
Our base case forecasts show a return that is below our target. We wait for a better re-entry point.
We reiterate our Hold rating on Ansys stock. Avoid for now.
For further details see:
Ansys: Solid Q4, But Not Worth 11% Rise To 37x Non-GAAP EPS