Jan. 11, 2008 (Investor's Business Daily delivered by Newstex) --
Suppose the alternator rattles free on the first 10 cars rolling off an automaker's assembly line and bangs into the cooling fan. The line is stopped at a big cost to the company.
The interaction between these two critical parts had not been simulated. If it had, disaster would have been averted, saving the automaker millions of dollars.
A perfectly engineered design these days typically doesn't happen without the use of simulation software. Virtual tests can save companies bundles of money.
Simulation software illustrates realistic imitations and accurate modeling for a host of products and systems. It can catch operational flaws in an idea before full-out production begins.
"Simulation capability has become something like a spell-checker for design engineers," analyst Richard Davis of Needham & Co. said.
The new age of innovation could signal the end for vehicle crash sites, wind and water tunnels. Crash test dummies would be out of work.
World Leader
Ansys ANSS is a worldwide leader in developing and delivering simulation systems, a component of computer-aided engineering (CAE).
The software maker's simulation programs aim to cut time, labor and development costs in the building and testing of prototypes.
"Ansys simulation software is driving the margin of error out of design work and plays a critical role in allowing its customers to get new products to market cheaper, faster and at an overall lower cost," said analyst Elliott Schlang of Great Lakes Review.
Its software is used by engineers and designers in aerospace, automotive, manufacturing, electronics, biomedical and defense industries. Repeatable business is now generating around 70% of the company's revenue, Schlang said.
In the third quarter, revenue grew 34% to $94 million, while earnings rose 38% to 29 cents a share ex items. Analysts polled by Thomson Financial expected 25 cents.
Its diversified end markets allowed Ansys to compound revenues and earnings at 33% and 28%, respectively, over the past five years, Schlang said. The firm has met or exceeded analyst expectations for 40 straight quarters.
Ansys' products are now sold to over 13,000 companies, and no single customer has ever accounted for more than 6% of its revenue, he said.
That assortment of customers and clients helped Ansys survive the technology debacle in the late 1990s, 9/11 and a recession, he said.
"Even after more than 35 years in the engineering field, Ansys estimates less than 25% of engineers that could be using simulation technology are now using it, indicating plenty of potential among the non-adopters," Schlang said.
Today, there are roughly one million commercial users of simulation software vs. about 8.5 million users of computer-aided design (CAD).
"We believe that it is reasonable to assume that eventually simulation (users) will at least approximate the number of worldwide CAD seats," Davis said.
However, he believes the simulation market is far from over-saturated and that it will be a multiyear process before it reaches the levels of CAD users. Ansys is selling into a market that is less than 10% penetrated, Davis said.
Meanwhile, there are upwards of a half-million users of simulation software in schools that are either given away or sold for very low prices, he said.
"The idea is to get budding engineers comfortable with a system so that they might recommend the software when they join the job market," he said.
Over the past five years, Ansys has been able to grow faster than its largest public competitor, MSC Software (NASDAQ:MSCS) MSCS, which it competes against in the traditional CAE space.
Davis said the reason is that Ansys was the first to recognize and design appropriate software for a new, untapped segment of the market: small and midsize enterprises.
Ansys has developed a range of virtual product design software in terms of complexity and cost, allowing it to sell to new users in new industries, Davis said.
High-end simulation software can cost $50,000 to $120,000 per user, while low-end software carries a price tag of $5,000 to $10,000 a pop, Davis said.
"All of the sudden midmarket companies started to grow and processing powers on desktops improved," he said.
However, one of the firm's greatest challenges will be its ability to manage expected growth as well as its power to handle integration risks and competitive threats, Davis said.
The company bolstered its portfolio with a 2006 acquisition of Fluent, a global supplier of computational fluids dynamics software technologies and services.
The $598 million buyout, including the issuance of 12 million new Ansys shares based on a $22.84 split-adjusted price and roughly $315 million in net cash, was the largest transaction in company history.
Balance Sheet
The Fluent purchase gave Ansys a leg up in the global market. Today, about two-thirds of its business is derived from overseas, Schlang said.
Net cash on the balance sheet was $75.4 million in the third quarter vs. $39.5 million from the previous June quarter. Schlang said Ansys will be on the lookout for potential buyout candidates, but not nearly as large as the Fluent acquisition.
Ansys also generates strong returns, he said.
In 2006, net return on sales was 24%, net return on equity was 17% and net return on invested capital was 32%.
"Even by our yardstick, these returns are extraordinary," Schlang said. "We expect returns in 2008 to be just as robust."
There is a tremendous amount of potential left, despite what Ansys already has done in the space, Schlang said.
"Simulation software technology is still in its infancy," he said