Ansys Earnings: Headwinds in China Appear Temporary as ACV Still Shines; Maintaining $262 FVE

Wide-moat Ansys ANSS delivered third-quarter results that fell short of our top-line expectations but were above our expectations on the bottom line as expenses were lower than anticipated along with beneficial timing of investments for the quarterly results. Its top line and annual contract value, or ACV, was negatively impacted to the tune of about $20 million by incremental approval processes and export restrictions on the sale of some of its products in China. This headwind was not included in management’s initial guidance for the third quarter, resulting in the disappointing revenue results. However, Ansys has worked to become compliant with the restrictions through adjusting business operations and will resume the affected business, albeit at a slower pace. We would also note that its business in China is 5% of total ACV, but we would like to see operations resume as normal. When considering this headwind and management’s guidance, our model adjustments are modest, and we are maintaining our fair value estimate of $262 per share. Shares are down around 2% upon our writing, getting a bit closer to our fair value estimate, and we view shares as fairly valued. Ansys’ business in China will be important to monitor moving forward.

Third-quarter revenue decreased 4% year over year in constant currency to $459 million, below guidance largely due to the China headwinds. Management noted that without the impact, ACV would have been at the high end of guidance and revenue would have been above guidance as strength was broad-based across customer types and geographies aside from China. In addition, ACV, which we view as the best indicator of Ansys’ business strength, grew 10% in constant currency year over year to $458 million, underscoring the stickiness of the firm’s offerings. On profitability, third-quarter non-GAAP operating margin came in at 34%, and non-GAAP EPS was $1.41, above both our and management’s expectations due to lower expenses than expected.