What happened
Shares of engineering simulation software company Ansys (ANSS -0.41%) have risen by more than 10% as of midday today. The move comes after an impressive set of earnings released after the close of trading yesterday.
In common with many other software companies, Ansys is moving toward more subscription lease contracts as opposed to perpetual licenses. The shift has an initial "valley of death" associated with it whereby upfront revenue and cash flow (typically generated by perpetual license sales) are forgone in favor of long-term annual subscription revenue.
So looking at Ansys' 10% non-GAAP (adjusted) revenue growth (constant currency) in the quarter isn't the best way to judge the company's growth. Instead, Ansys encourages investors to look at its annual contract value (ACV), which rose an even more impressive 13% in the quarter in constant currency.
Whichever way you look at it, Ansys is a double-digit grower, and management guided toward ACV growth of 9.9% to 13.4% for full-year 2023.
So what
The results and guidance highlight Ansys' ability to grow, even in a slowdown. The company is a leader in engineering simulation and has a growth opportunity from its existing client base (for example, Formula-1 teams use Ansys to model the aerodynamic performance of their cars), and from new case uses of its technology.
The latter is likely to be highly significant due to the explosion of digitization and advanced analytics in the industrial sector. By simulating the engineering properties of a physical asset using Ansys software, users can gain insights that can be used to improve the performance of the asset.
Now what
Management's guidance for 2022-2025 calls for a 12% compound annual growth rate in ACV, which is in the range of the guidance for 2023. That's not bad in what's likely to prove a difficult year in the industrial sector. Ansys will hopefully remain on track to hit its guidance through 2023.
