Ansys: Solid Q4, But Not Worth 11% Rise To 37x Non-GAAP EPS

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Introduction

We reappraisal ANSYS, Inc. (NASDAQ:ANSS) aft shares roseate 10.5% connected Thursday pursuing Q4 2022 results released overnight.

We downgraded our standing connected Ansys from Buy to Hold successful May 2020, erstwhile nan stock value was $263.51. Ansys' stock price is presently 12% higher aft astir 3 years, though having first risen to supra $400 successful precocious 2021:

Ansys Share Price (Last 5 Years)

Source: Google Finance (24-Feb-23).

Q4 2022 represented a beardown decorativeness for nan year, pinch Annual Contract Value up 14% excluding currency. Non-GAAP EBIT and EPS some grew by much than 8% successful dollars, aft rate headwinds. GAAP EBIT and EPS each grew by 16% year-on-year, aft Share-Based Compensation costs stayed comparatively flat. 2023 outlook includes akin 10%+ maturation rates for ACV and revenues, but overmuch little EPS growth, pinch SBC costs increasing 13-21%. We proceed to interest astir costs growth, particularly in SBC. Relative to 2022, Ansys shares are astatine 37x Non-GAAP EPS, 49x GAAP EPS and a 1.7% Free Cash Flow Yield. We proceed to expect nan P/E to de-rate and trim mid-term annualized returns to azygous digits, We hold for a amended re-entry point. Avoid for now.

Ansys Hold Rating Recap

Ansys is simply a world leader successful engineering simulation package and services. We recognise nan value of its business, and had been buyers successful nan past, but expect early returns successful its banal to beryllium constricted because of valuation.

We expect a low-teens Non-GAAP EPS CAGR successful 2022-25, based connected a 12% Annual Contract Value ("ACV") CAGR and a unchangeable EBIT margin, arsenic implied by caller medium-term targets announced astatine an investor update successful August 2022.

However, we expect an exit P/E aggregate of 25x based connected Non-GAAP EPS. The aggregate sounds superficially modest, but takes into relationship really Ansys (like galore different Technology companies) focuses its reporting connected Non-GAAP figures and excludes sizeable non-cash Share-Based Compensation ("SBC") costs from these figures.

We expect nan implied de-rating from Ansys' existent P/E to offset overmuch of its Non-GAAP EPS maturation successful nan mean term, starring to an annualized return that is beneath our 10% target.

As a reminder, ACV is simply a guidance metric that fundamentally reflects nan annualized worth of bookings starting successful each clip period. ACV is simply a amended metric for Ansys' size and maturation than revenues, because nan second tin beryllium artificially boosted by nan upfront nickname of revenues successful ample multi-year contracts:

Ansys Annualised Contract Value Definition

Source: Ansys results position (Q2 2019).

Ansys' medium-term targets envisages Operating Expenses to turn successful statement pinch revenues but little than ACV, which would lead to its Operating Cashflows (which exclude SBC costs) increasing faster than ACV.

Ansys Q4 Results Headlines

Excluding currency, Ansys' ACV grew 13% year-on-year successful Q4 2022 and 14% successful nan afloat year; including currency, ACV grew 8.3% successful Q4 and 8.6% successful nan afloat year, pinch nan stronger dollar representing a important headwind:

Ansys P&L and Cashflows (Q4 and FY 2022 vs. Prior Periods)

Source: Ansys institution filings.

NB. Al figures are non-GAAP unless different stated.

Similar to erstwhile years, Q4 ACV represented 40% of nan full-year total, arsenic much ample contracts were signed successful Q4. We truthful attraction our year-on-year comparison connected full-year financials.

Revenues grew 13% excluding rate and 7.3% including rate successful 2022. Non-GAAP EBIT grew 8.8% successful dollars, faster than revenues, arsenic Non-GAAP EBIT separator expanded 56 bps to 42.0%. Non-GAAP Net Income grew 7.6% and Non-GAAP EPS grew 8.4%, nan second helped by a 0.7% simplification successful nan stock count pursuing stock repurchases.

Ansys spent $206m to bargain backmost 0.725m of its shares successful 2022 (implying an mean value of $284). The efficacy of Ansys buybacks is constricted by its walk connected acquisitions ($242m successful Q1-3; full-year fig not yet reported) and precocious valuation (represented by a Free Cash Flow Yield of beneath 2%).

SBC costs and related excess payroll taxes amounted to $1.99 per stock successful 2022, balanced to 0.25x its Non-GAAP EPS. The fig represents an summation of 2.5% year-on-year, little than full costs maturation of 6.3%.

GAAP EBIT and GAAP EPS really grew faster than their Non-GAAP counterparts successful 2022, by 15.5% and 16.0% respectively, mostly owed to SBC costs maturation being comparatively small. This whitethorn not person been intentional, and SBC costs are expected to turn by 13-21% (on a per-share basis) successful 2023.

Operating Cashflows grew 14.8% year-on-year successful 2022, but nan fig is earlier non-cash SBC costs.

Ansys 2023 Outlook

Ansys' 2023 outlook includes akin 10%+ maturation rates for ACV and revenues, but overmuch little EPS growth:

Ansys 2023 Outlook

Source: Ansys institution filings.

ACV is guided to turn by 9.9-13.4% excluding currency, aliases 11.5-14.9% including currency; revenues are guided to turn by 10.1-11.9% excluding currency, aliases 8.2-12.0% including currency.

EPS maturation is guided to beryllium conscionable 4.4-10.9% connected a Non-GAAP basis; connected GAAP EPS, nan guidance implies a scope betwixt a 10.1% diminution and a 1.2% growth, apt owed to overmuch higher SBC costs and amortization of intangibles.

Other guidance successful 2023 not listed supra include:

• Non-GAAP EBIT separator is guided to beryllium 41-42%, level aliases somewhat little than 2022's 42.0%.
• SBC (and related tax) costs are expected to beryllium $2.25-2.41 successful 2022, 13-21% higher year-on-year.
• Effective taxation complaint is guided to beryllium 17.5% successful 2023, 0.5 ppt little than 2022's 18.0%.

As before, Ansys' maturation looks coagulated but we proceed to interest astir costs growth, particularly successful SBC.

Ansys Stock Valuation

At $294.75, Ansys shares are astatine 37x Non-GAAP EPS, 49x GAAP EPS and a 1.7% Free Cash Flow Yield:

Ansys Net Income & Cashflows (2019-22)

Source: Ansys institution filings.

The biggest quality betwixt GAAP and Non-GAAP EPS is SBC costs, which are a existent cost. Including SBC would person reduced 2022 Non-GAAP EPS by 24%, and SBC costs are guided to emergence by 13-21% (per share) successful 2023.

Relative to nan mid-point of 2023 guidance, Ansys banal is trading astatine a P/E of 34x comparative to Non-GAAP EPS, but a P/E of 52x comparative to GAAP EPS, and a FCF Yield of conscionable 1.8%:

Ansys Cashflows & Valuation (2023E)

Source: Ansys institution filings.

We presume an exit P/E aggregate (relative to Non-GAAP EPS) of 27x, which implies a 21% re-rating from Ansys's existent multiple. This would offset astir of nan low-teens EPS CAGR we expect, which intends we judge Ansys' annualized return by 2025 year-end would beryllium successful nan azygous digits.

Is Ansys a Buy? Conclusion

Our guidelines lawsuit forecasts show a return that is beneath our target. We hold for a amended re-entry point.

We reiterate our Hold standing connected Ansys stock. Avoid for now.

Global, long-term, fundamentally-oriented & concentrated investing. With much than 10 years' buy-side experience, I look astatine stocks globally and crossed industries, pinch a attraction connected nan U.S. and U.K.. My investing style tin champion beryllium described arsenic "Quality Growth" aliases "Growth At a Reasonable Price". (previously penning nether nan sanction "Blue Sky Capital" until December 2019)