Chit Chat Stocks - Jason Moser | Ansys (ANSS)

Episode Date: December 1, 2020

On the 1st day of Christmas Jason Moser gives to you, Ansys a highly specialized engineering software company based out of Pennsylvania. The Chit Chat Money team discusses the pros and possible cons of the business with Jason. Visit our website: https://www.chitchatmoney.com/ Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Okay, welcome to Chit Chat Money. This is the 25 Stocks of Christmas. It is a new segment. We're doing it for the month of December. Very exciting. Yeah, probably the most exciting thing we've ever done. And so for the structure, just so everyone knows, it's one episode every day, December 1st through the 25th. Each episode is an interview with an analyst or one of our friends, and they are basically pitching one of their best ideas, a stock they like at the time. And it's just a deep discussion on the business and sort of what they think of it as an investment. We should always remember, though, that these are not investment advice. This isn't anything that you should take formal advice on. These are all just things for getting information out there, getting ideas out there for you to learn about and do research on your own.

We won't say this every episode, but we want to make that clear with something like this. But it should be fun. But before we get to that, we have a word from our partners over at 7invest. do you want to give the sales pitch you want yeah i'll do the sales pitch i know you said that and in a future episode although we're because we're recording this that uh in different days that uh you got all the ones after you recorded so i got a better salesman yeah there's nothing you can do about it seven investing is almost like a financial advisor for yourself although they are not financial advisors it is a subscription service personable you can get ten

off with our promo code CCM. So it's only seven bucks your first month. You're not locked into any long-term deal. So you can try it out, see all the great things they have to offer. I know that they had something, I think Austin's picks, he's had four up over a hundred percent since the start they've done it. So that's really good. And they're also long-term oriented. So they're trying to help retail investors invest for the long-term in individual companies. That's all i can say they're great partners to have and it's code ccm so yeah we'll see whose sales pitch was better um but yeah that was decent uh but yeah code ccm for seven invest uh but next we have our interview with jason moser here you go welcome to chit chat money on this show host

ryan henderson and brett shaffer interview industry experts and riff on the world of investment. As a quick reminder, Chitchat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chitchat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. Welcome to 25 Stocks of Christmas. Today, we are welcomed by Jason Moser, a lead advisor for the motley fool uh jason we actually had you on what was that year year and a half ago now one of the first at it it was a while back any pigs on uh well it was always i mean you know it was fun joining you then and then i mean obviously uh being able to keep in touch

and um you know ryan with the the internship program i was really glad we're able to do that this this year at the fool so um yeah it's been nice to keep in touch with you guys yeah definitely and you are going to be talking about Ansys, right? Yeah, yeah, Ansys. I mean, just, you know, rolls right off the tongue. I'm sure a company that everybody out there is very familiar with, huh? Right, yeah.

Totally kidding. How'd you come across them? So, you know, it was interesting. So one of the services I run at work, it's a service that focuses on immersive technology. So primarily augmented virtual reality. But as I was putting together, you know, the research for that service to get it going, uh, Ansys was one of the companies that I ran

across in my research there. And, and so I, you know, I found it back, um, in early 2019 and, you know, I'd started digging into it and, and it was, it was not one that I had ever really looked at before. And, and, um, the more I dug into it, the more I started really becoming more interested in it. And, um, so I actually made it a formal recommendation in the service in September of 2019. And it's been a nice sort of steady performer for us so far. It's done well since the recommendation. I think the stock's returned about 50% and I'm outpacing the market. So it's not one of those newfangled tech companies that's out there just like doubling and tripling seemingly every other day. But it's a company that does something really well and it feels

like the market recognizes that and it continues to chug along nicely. Right. And then before we get into why you like it as an investment, can you explain what Ansys does? Yeah. So, I mean, in simplest terms, I mean, Ansys is a, it's a simulation software and services company. So they, they built software that, that ultimately lets its end users build simulation models. And so they serve end markets from aerospace and defense to automotive to electronics and energy to healthcare, consumer products, sports. I mean, it runs the gamut as far as the different serves. But the value proposition is fairly simple in that simulation

software, good simulation software saves time and money. So for companies that are building things, whether it's a building or a plane or whatever else, semiconductors, instead of having to sink a lot of time and money into actual designs, right? And then, you know, having to, you know, perform a lot of trial and error until you get the one that works. You know, Ansys' software, that simulation software, ultimately lets these companies build simulations

to whittle down the time and the investment so that they can really get to the finish line more quickly with ultimately better products. And is it a subscription service, I imagine? uh so yes and no that's you know one of the things with their business model that is it's noteworthy they they do have a subscription style offering they you know they have a uh what they call lease licenses um you know and they also as as many of these older uh players in in this industry have had for the longest time they they have a perpetual license dynamic to the business

model as well now it's worth noting they're steering away from that i mean that they're kind of naturally because that's where the ball is going right i mean that's where the that's where the the puck is going so to speak is is uh they're steering away from that perpetual model and more towards uh you know like a subscription style time timed uh lease license model which i think um ultimately will be the crux of the business but you know they're not there yet. Okay. And then the, uh, I assume that the subscriptions or the licenses are quite, uh, you know, expensive, you know, a team of maybe a few dozen aerospace engineers are probably paying, you know, a lot for one of these, correct? Or they're more than just like a Netflix subscription.

Um, yeah, it's definitely more than, more than a Netflix subscription. And for the most part, yeah, it is, it is, it is highly specialized software. Um, and so it is very costly. Um, You know, they have opened up recently as cloud computing has become more mainstream. They have this thing called the ANSYS Cloud, which has opened them up to, I think, a little bit more of a market opportunity and that they can bring people into their universe without having to necessarily make that large upfront commitment. So, you know, you could get in there and tinker around with some of the stuff that they have and sort of as a pay-as-you-go model. um you know similar kind of like to maybe something like a fastly i guess you know you pay for what you use um but ultimately the idea yeah is is to bring them in as as long-term clients where they're they're paying for that ongoing relationship and yeah because of the

specialized nature of the software it's it's pricey but you know what that what that does i mean it affords the business some very healthy margins and i mean obviously as investors we love that. And what about management? What do you think of them overall? Who's running the company? Yeah. So the company's headed, the CEO is a gentleman named Ajay Gopal. And so he's the CEO and the president of the company. He's been the CEO since 2017. He served as COO for a brief stretch. He's a, to call him smart is probably a disservice because, I mean, he's a doctor. He He holds a PhD in computer science, holds a master of science from Cornell, a master of science from University of Arizona, a bachelor of tech in mechanical engineering. I mean, this guy is wicked smart, to put it lightly.

And I would encourage listeners certainly to, you can Google him and see interviews from when he's been on, you know, various news shows talking about what the business does and, you know, customers that they serve and whatnot. it's just really interesting to hear him speak to the business because he knows it so well and he knows the tech side of things so well so so all in all I mean he seems like a he seems like a very good leader for the company and then they have a CFO there and Maria Shields she's been with the company since I think 1994 been a CFO since 1998 you know one of the things that we always love to see with management teams is some sort of ownership of the company right inside ownership and you know i i never consider that like a reason to invest but i it's

always nice to see they've got some skin in the game i think that's one one mark they have against them is it doesn't seem like there really is that much meaningful skin in the game on their part but you know you you take that as it goes but i think all in all i mean they seem like a very capable leadership team kind of just keep their heads down do their business when you listen to them on the calls uh they're very confident in their strategy and what they're doing obviously very well versed, you know, regarding the technology and what they're bringing to market. So, so yeah, I mean, all in all, I think you get to feel really good about the management team they had there today. Is it an American company? It's one probably a lot

of listeners are unfamiliar with. So is it? It is. Yeah. I mean, it's, it's actually headquartered out of Pennsylvania. So, I mean, it is, yeah, it's an American company. I think, you know, it's just, it's one of those companies that just flies under the radar. I think for a lot of folks. It just, it's not one that has ever been, you know, one of those obvious companies out there. And it feels like you see some of them out there. I mean, I would say Autodesk until recently was kind of the same way. You know, I was always surprised to see such a lack of coverage for companies like that in our universe at work, which, you know, honestly, I was excited to be able to bring them into our universe. I mean, that was one thing that kind of

surprised me, but yeah, it just kind of flies under the radar. But when you, when you look under the hood there, you can see it's, they got a really pretty sweet little business going on. Right. And you've explained some of this already, but, you know, feel free to go a little more, you know, long winded here. You know, no, no time limit. What, why do you like Ansys as an investment going forward? Yeah. I mean, I, you know, there, there are a few different reasons. I mean, for me, you know, I like to find businesses that are, that are pursuing, you know, large and growing market opportunities certainly that's one where where ansys uh is is that that's that's something that ansys is doing i mean they've seen uh the simulation software market

alone that they pursue um they see reaching somewhere in the neighborhood of around 20 billion dollars uh plus uh by 2023 i think they're talking about and i mean when you look at um when you look at the company today, I mean, it's generating around $1.5 billion in revenue. So it's still relatively small from a top line perspective. But, you know, it's always fun to find companies that have that reputation as sort of the gold standard in their space. And all of the research and digging that I've done in to Ansys, I mean, they really do seem to have that reputation. I mean, they're clearly not the only company out there that does simulation. But they do have a very strong reputation in the space for it. And so then, you know, when you couple that

along with the fact that really, I think we're seeing more and more the power of really good software. I mean, we're seeing great businesses all over that are really, really succeeding with powerful software offerings. And if you have really good software and, you know, you provide a really good service that big, important clients need, it can create some very long-lasting relationships, right? I think that good software over time can create some switching costs that ultimately can afford the company a little bit of pricing power. It certainly allows them to continue growing that annual contract value metric that a lot of these software companies report. And then, I mean, 90% plus gross margins. I mean, anytime I see a

company that's generating 90% plus gross margins, I got to take a closer look because these software companies can scale very nicely. And as those margins continue to maintain on the gross margin side, I mean, they can really start bringing more of that down to the bottom line over time. And that's what it seems like they're doing. So it just, it seems like a very well-run company that does something very well and just continues to pursue bringing new offerings in that simulation space. And to me, honestly, like the value proposition in simulation software makes perfect sense, right? I mean, the economics of that, of that make just perfect sense. And so I could see, you know, a world where more and more clients are going to be relying on software

like this. And it sounds like Ansys will, will be there to take its share. And I would assume that this is a low churn business. I'm not sure if they give out their actual number, whether it's like below 5%, but I would think with these large contracts, you got the embedded cost of learning these programs within, I guess the, you know, the one example I like to think about is aerospace, where switching, like you said, there's high switching costs, that churn number is likely low. Yeah, yeah. And I, you know, I can't speak to a specific churn number. I'm sure there's probably one that exists out there that I just don't have on me. But I think you're right in that when you look at the nature of some

of their clients, yeah, it's not something where you can just kind of start it and then stop it and then pick it back up at a later time. These are clients that need to use this software for ongoing long-term relationships as they're building what they're building. I mean, whether it's in tech or aerospace or automotive. And so you do see like from that annual contract value metric, they report as a sort of a metric

that matters for the business. I mean, you do see that number continue to remain stable and grow, which indicates obviously that they're keeping a lot of their clients as long-term clients of the business. So yeah, it is a fairly low-churn business by the nature of the product that they're offering.

And we didn't put this on our little tear sheet here, but you said they generate about 1.5 billion in sales, 90 plus percent gross margins. What's the business valued at today, do you know? The market cap of the business right now is 27, yeah, close to $28 billion today, yeah. uh and i mean it's a little bit smaller of course um when i first found it but you know that's that's a good thing it means it's it's continued to grow and the market's recognizing it um it does feel

like it's hard to find anything out there with a reasonable valuation today right um but i mean it's it's a business that is is nicely profitable and generates uh you know healthy amount of cash on an annual basis and so that's really encouraging the economics the economics of the business are or very attractive from that perspective. We're not kind of looking for that path to profitability, that path to profitability is already there. And that's, that's, you know, that's a nice thing. Okay. So we're going to have any, you have anything else now?

No. Okay. We're going to hit a quick break here. And then on the second half, we are going to try to poke some holes in Jason's thesis. So here you go. Cox panoramic wifi includes advanced security to help protect all your connected devices. You'll get real time alerts. Oh, like this one. So you don't have to worry about malware or when your kid downloads a song from a shady link. And now all your computer can play is red color, red color, where are you? All blocked thanks to advanced security included with Cox panoramic Wi-Fi.

Advanced security must be enabled in the panoramic Wi-Fi app. Restrictions apply. Welcome back in. Next segment, we have devil's advocate. So we have provided some bearish points for Jason to refute. I will go first. With the slowdown in air travel trickling down to the aerospace suppliers, which are typically ANSYS customers, we are going to see higher churn for ANSYS. Yeah, I mean, that's certainly something worth keeping in mind.

I mean, I think you could certainly see how that could happen. Now, I think it's important to note for ANSYS, certainly aerospace is one of their largest industries. I mean, if you look at their three largest industries, it's high-tech, automotive, and aerospace and defense. And they've noted that those markets have remained strong even through, you know, what we've been dealing with here throughout 2020. one thing that i'll note from the most recent call is they were talking more they were digging a little bit more into that aerospace and defense market that you're mentioning there that's their second largest sector right now it's about 18 of their trailing 12-month annual contract value so you're right it's an important part of the business and it's not one that that you should

take lightly it was encouraging they did note that while the pandemic has impacted commercial air travel, they continue to see strong spending in the sector, actually, thanks to strategic initiatives. And I think part of that is attributable to the defense part of that aerospace and defense. So that's encouraging, I think, from that point. I mean, they are a little bit diversified in that aerospace and defense part of the business in that it is something that goes beyond commercial air travel. And again, I think that kind of goes back to what we were talking about before is, you know, these are clients that because of the nature of what they do, they have to be long-term relationships because, you know, you're not designing planes over the

course of a month, right? I mean, these are year-long processes that are taking place. And so they do see a little protection, you know, in that regard. And I think the defense side of the aerospace and defense part of the business is encouraging too. So yes, a big part of the business, definitely something to watch out for. As of now, it seems like management feels like it's still in a pretty good spot though. Right. I guess that is a little smaller than I thought. I thought it would be almost the majority of their revenue, but my counterpoint is that Autodesk and Dassault Systems, two of their main competitors, they have a stronger foothold on college campuses. This may be anecdotal because I got a degree in mechanical engineering and I

know that you know people i knew and myself used assault and autodesk does that give these competitors an advantage at the top of the funnel where it takes you know hours and hours or even a few months to learn how to use these simulation software uh you know correctly yeah i mean i think you can definitely give them an advantage um and and you know i mean listen autodesk and assault i love them both and actually recommended of both in services as well um and i'll mention too. I own shares personally in Autodesk and in ANSYS. But to the point there, yeah, I think ANSYS has that same dynamic, fortunately, in that they have a foothold in the universities and the academic institutions. I mean, I think at this point to date, they supply just under 2,800

academic institutions, more than 92 countries, well over 600,000 licenses. So there is that dynamic there and that they they are at the top of the funnel getting students in and as you know based on based on what you've done in school um you know that's that's something that's attracted from the employer side when they see folks coming out of school being educated on those platforms it encourages those uh those employers to use those platforms and so that's certainly um something to keep in mind i think the one thing i would say with with autodesk and dissolve and one of the reasons why I like them too, is that they are, they're broader offerings, like the companies themselves, they have a broader universe of offerings. Whereas Ansys is a little bit more

focused on simulation specifically. And I mean, just as an example, I mean, if you just, I always do this, I search through, I search through documents for words and language just to get an idea of how often it's used. And so, you know, if you go through Ansys' 10K, you find the word simulation mentioned 84 times. You go through Autodesk, you'll see it mentioned two times in the context of the actual business. Just to say that, I mean, Autodesk, it's a much broader offering, whereas Ansys is certainly very much more focused on that simulation side of the business. With that said, I mean, you're looking at two very well-endowed competitors in the space in Autodesk and Dassault. Thankfully, it's a big market opportunity, but I think that's something

that Ansys will always have to keep an eye on. Interestingly enough, though, and I think this is a neat dynamic of Ansys' business, and I think we're seeing this with more companies in this space. You're seeing a lot of partnerships, a lot of relationships that are coming out of what these companies are doing.

And so, you know, specifically in Ansys' 10K, they mentioned the relationship they have with Autodesk, right? Ansys and Autodesk are actually partners. They work together along with another company that I've recommended in this, see um and so it's it's yes they're competitors absolutely um it's nice to see also that they that they collaborate together um maybe you know that's an opportunity for for all of those boats to rise uh with the incoming tide um but yeah i mean that's you gotta you gotta be you gotta

be aware of the fact that you've got some some strong competition out there and companies like Autodesk and Dassault. Okay. And one of the questions we tend to like to ask, because not a lot of people think about this side of purchasing shares in any company is the selling side. So what would have to happen for you to want to sell Ansys shares? Yeah. I mean, I feel like anytime you see, I mean, when you see a business's financials deteriorating, right? I mean, you can see the numbers ultimately start telling a tale. And if they start to lose market share, if they see that gold standard reputation in the space eroding, and they see a company like Autodesk getting in there and gaining more presence in that simulation space, I mean, you'll see that

play out in the financials. You'll see that play out in the number of relationships they have in the academic world. So anytime you see those numbers start deteriorating, that's when you got to start asking some more questions. Typically, longer term, that starts resulting in margin pressure. They have to, you know, they have to start conceding a little bit on the pricing side, for example. Or if you see that annualized annual contract value metric that they report, if you see that number start to level off or even even start to deteriorate um those are signs that something's wrong and and you have to dig a little bit deeper to see exactly what the nature of that that problem is but but i you know those are things that would make me think all right you

know i mean maybe this is a company that's losing its edge and maybe it's a company that you know maybe it's losing its edge to it to another one of these players it's it's better you know more more worth owning one of those one of those competitors um and then i think ultimately you you know, I always just like to really hold management accountable to what they say they're going to do. I'm not really much into like, you know, Wall Street's estimates. I feel like, you know, the management teams of these businesses typically know those businesses better than we do, or, you know, the Wall Street analysts that are always setting those targets. So, you know, I pay attention to what management says they're going to do. And if management

doesn't do what they say they're going to do, then, you know, I mean, how much can you really trust them? And you don't want to be invested with a management team that you don't trust. Is there large, I mean, I imagine the answer is yes, but is there a large customer overlap between what ANSYS and Autodesk customers, or is there sort of their specified own niche, if you will? Because I know ANSYS is more tailored towards simulation, Autodesk is more towards building, if I'm not mistaken. Construction, yes. Is there a lot of overlap there? That's a good question. I don't know that I can point you to a direct metric in noting a percentage of overlap there.

It certainly would make sense that clients would use, in some cases, both. But I don't know that there's necessarily as much meaningful overlap, particularly when you consider the collaboration, the collaborative nature of the businesses. But yeah, that's a good question. I'd have to actually dig in a little bit more to find that out. All right. And then I guess I was going to ask how you would know you were wrong, but you already kind of answered that. You gave a lot of metrics. One other one I would be interested in, though, is the R&D spend. Do you track that at all? Yeah, I think any of these types of businesses, R&D spend is always something worth watching because a lot of times that's going to be a competitive edge, right? I mean, that's going to be a competitive edge for these businesses.

And if you start seeing R&D is dwindling, right, if R&D over time becomes less and less meaningful, I mean, some folks might look at that and say, oh, okay, great. Well, they're saving a little bit, you know, on the expense side, which means they should be more profitable. When, you know, the fact of the matter is that really R&D expense is that that's sort of that's competitive advantage maintenance, right? I mean, that's really that's what fuels the fire for these guys. And so, if you look over the last, what, five years, go back to 2015, and you look at R&D spend as a percentage of overall revenue for the company, I mean, it tracks anywhere from 18% to 22% consistently. And as a matter of fact, in the more recent years, it is accelerating. I mean, it was 18% in 2017, trailing 12 months, it's 22%. And so, yeah, I actually, I appreciate seeing companies that continue to invest in R&D, particularly in this line of work, because that R&D really is, that's the maintenance for that competitive advantage that they have.

I mean, that gold standard, you know, they're not just given that, you have to earn it. And in order to earn that, you got to continue to invest in your business and bring new products and new offerings to market. And that all stems from just having that ongoing R&D expense. And, you know, that's the nice thing about finding business with economics like Ansys is, you know, strong gross margins, healthy cash flow. That means they can sell fun. They can continue to reinvest in the business and maintain that gold standard and bring new products to market. And I think a lot of people look at it and you're like, well, if they trim that down, they could be more profitable. But it's like, yes, that goes under the operating expense line, but it's more of an investment. Yeah, it is. I agree.

Totally. It's, it's, it's, it's kind of a forest for the trees thing, right? I mean, you in the near term, you want, you want to try to, you know, dial back expenses and induce profitability. You, you can absolutely do that, but is that really, you know, the best decision for the longer term success of the business, particularly in, in, it's a competitive industry is this one. I mean, I think we probably all three would agree. You got to maintain that R and D expense. You got to keep spending money to kind of make money as they say. Right. So if you were in charge, or I guess as a shareholder, what's one change you would make with ANSYS? Well, so I think it's something that they're doing now.

I think maybe, though, I would step on the gas a little bit in regard to the move away from the perpetual license toward the lease license. you know it's not something that seems like it's at top of mind for management right now or I mean they don't really they don't really harp on it on the call I think maybe they just they see it as sort of as something that's happening naturally as as the world sort of moves towards that sort of subscription style offering and so maybe they feel like you know they don't really have to do terribly much because it's just kind of naturally happening I understand some of the trepidation because we saw Autodesk kind of go through this a little while back. And, you know, for a little while, the market questions it, you know, wondering,

I mean, is that going to really work out for the business? I mean, it does place a little bit of pressure on the financials in the near term as they kind of, you know, recalibrate the business model, so to speak. But there are just so many examples that show that that subscription offering, that lease license style model works out very well, particularly when you have a good product like that that keeps people in your universe when the switching costs are pretty high so i i mean it's nitpicking i mean maybe i would maybe i would try to step on the gas a little bit more with that but i mean i can't really i can't really knock

them for it because they they really are continuing to do pretty well um and i don't know i mean maybe maybe try to be a little bit more like autodesk maybe broaden their offering a little bit i mean And maybe that's something that will develop through these partnerships and the collaboration. I think anything they can do to expand that total market opportunity could at least be worth examining. I mean, as long as it doesn't come at the cost of what they do today already. I mean, you know, I'd hate to see them try to expand that total market opportunity and then, you know, in the process, neglect, you know, what's gotten them to where they are today. Right. That wouldn't be ideal. ideal but you know those are a couple things i'd at least entertain okay well i think that's going

to do it thank you for joining us uh for all the listeners we are not financial advisors uh jason is uh but we are not if i'm not mistaken well i'm not a financial advisor no i mean i i do i do run the two services at work and and um and recommend stocks for our members but i'm not i'm not a financial advisor just a just a plain old dude okay so anything we say or discuss here on chit money is not formal advice or recommendation thank you guys for listening and we'll see you tomorrow