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Ansoft Shows Consistent Performance Over Time As Well As Strong
Analyst Interview Covering:
Ansoft Corp. (Nasdaq-ANST)
Bradley L. Mook, CFA
Boenning & Scattergood, Inc.
4 Tower Bridge
200 Barr Harbor Drive, Suite 300
W. Conshohocken, PA 19428-2979
Interview conducted by:
Lynn Fosse, Senior Editor
Published - September 14, 2007
Bradley Mook, CFA, is Senior Technology Analyst at Boenning & Scattergood, Inc. and
has covered small-cap software for the firm since March 2005. He previously covered
small-cap software as Partner and Director of Research at Emerging Growth Equities and
prior to that covered software and hardware at Investec/PMG, Schroder, NatWest and Value
Mr. Mook was selected as the #2 software analyst in the Wall Street Journals Best on
the Street 2007 Analysts Survey. He earned the Chartered Financial Analyst designation in
2000 and is and a member of the CFA Institute and the CFA Society of Philadelphia. He
graduated from Williams College with a B.A. in Political Economy in 1994.
Ansoft develops and markets electronic design automation (EDA) software used in
electromagnetic simulation by design engineers at over 1,000 of the worlds largest
semiconductor, electronics, automotive and aerospace companies. The company was founded in
1984 by its current senior management team with technology developed out of Carnegie
Mellon University, and went public in 1996 at $8.50 a share ($4.25 a share adjusted for
the 2-for-1 stock split). The company has approximately 300 employees and is headquartered
in Pittsburgh, Pennsylvania.
CEOCFO: Mr. Mook, please tell us about your background
and interest in ANSOFT.
Mr. Mook: I have been an equity research analyst
for about thirteen years, principally interested in small-cap technology. I have covered a
wide variety of companies ranging from semiconductor companies to embedded system
companies and software companies in various industry verticals. My interest in Ansoft is
two-fold. One, we have been focused on regional companies; Ansoft, located in
Pittsburg, falls within that realm. It is also a terrific business model. It has
technology that is becoming increasingly important, and the company has been around awhile
and has a mature business model with very strong business performance characteristics. It
is a great story and fits our model from a coverage standpoint almost to a T.
CEOCFO: What sets the
Mr. Mook: Their software enables portions of the
design process behind semiconductors and electronics systems and wireless products.
Technology products being designed today are higher performance and faster than ever
before, and they operate at higher frequencies and are being implemented in smaller form
factors, which creates tremendous complexities from a physical design standpoint. Their
software allows designers to model some of the design properties to make sure they will
work when implemented. Not doing that can be an expensive proposition. The costs of
introducing a product to market that does not work could be tens or hundreds of millions
of dollars, including the costs to recall, redevelop and reissue the product.
Ansofts software, which is relatively inexpensive in that context, can certainly
help that process.
CEOCFO: How does the
cyclicality of the market affect Ansoft?
Mr. Mook: It hasnt to a great degree. They
have only had two years where their revenue has actually declined in the past twenty years
and part of the reason for that is that they have a broad base of customers. They have
something like two thousand customers and in industries ranging from high-tech wireless to
aerospace to automotive and a number of others. That diversity cushions them to a degree.
They are also geographically broad, with roughly forty percent of their revenue coming
from Asia, forty percent from North America and the remaining 20% from Europe. That
industry and geographic diversification really helps them be somewhat defensive against
the various cycles.
CEOCFO: Where do you see growth
Mr. Mook: Right now they are seeing growth from
a number of areas. The technology becomes increasingly important as the world continues to
move in that direction. Specifically we are seeing it from automotive with the increasing
electronic content in cars, in particular hybrids. Consumer electronics companies are
using their design tools and there is a lot of strength out of Asia right now for some of
the consumer electronics applications. Just last quarter they said that wireless
infrastructure equipment is making a bit of a comeback. There are various pockets that are
driving the strength now but in general it tends to be broad based.
CEOCFO: What do you look out
Mr. Mook: We need to continue to keep an eye on
growth as supported by economic strength. We have had good economic conditions in all
three of their major global geographies. If there were to be significant decline in any
one or multiple geographies, the growth rate could slow. There are two factors that help
offset that risk. One is that they have new products that are contributing nicely to
growth and could help offset the effects of economic weakness on the general products
portfolio. The other is that in the past we have not seen a material slow down in
Ansofts revenues in the absence of a big economic shock. Unless we saw a huge swing
to significant recession, it is unlikely it would have a material impact on the overall
growth. To be clear, when I say material I am talking about growth slowing from fifteen
percent down to potential decline. They have guided to ten to fifteen percent growth, and
they have been growing about fifteen percent. We could a slight slowdown, but growth is
likely to remain in managements guidance range. The other thing we have to keep an
eye on is the margin structure; they have done a great job creating operating leverage
within their model because they have a relatively mature infrastructure. With a mature
infrastructure you can drive a lot of leverage with revenue growth, achieving high
margins. If revenue growth slows or at some point if they reach a theoretical margin
threshold or ceiling, then that could slow down earnings growth more in line with revenue
growth and that could effect the valuation.
CEOCFO: Do you see new
competition or is the barrier to entry really strong?
Mr. Mook: I think the barrier to entry is very
strong. They have specific capabilities around modeling the electromagnetic fields and
some of the specific modeling properties associated with their design tools. We have seen
competitors like Agilent and a few other players offer technology that does more less the
same thing but Ansoft has proven consistently through the years that it is stronger.
Something could come along but Ansoft has pretty good market penetration at this point and
their expertise has so far remained at the head of the pack.
CEOCFO: Would you comment on
management for me?
Mr. Mook: You cannot argue with success. It had
a great track record over the past twenty years in terms of growing the company and
growing the cash flow. They tend to be pretty conservative. They are not making aggressive
acquisitions to try to accelerate the growth, which the investment community has at times
pressured them to do. On the whole, they certainly seem capable and I think their track
record bears that out.
CEOCFO: What is your current
rating and target and why the recent raise?
Mr. Mook: We recently upgraded it to Market
Outperform, basically from a hold we upgraded it to a buy, and that was on August 15th.
Our target is thirty-five dollars a share, and at the time we upgraded it was about
$27.50. We had downgraded it to hold in the mid-thirties several months ago, a move based
on anticipation of the typical summer seasonal weakness that we have seen in the shares in
the past and the fact that the valuation was pretty aggressive. With the shares having
backed down to the twenty-seven and change level, the valuation having improved and the
company exiting the slow summer season, we thought it was time we upgrade the
CEOCFO: What should people
realize about Ansoft that does not jump off the page?
Mr. Mook: I think it is important to look
at the consistent performance over time and the strong cash flow of the company. When you
see those very desirable characteristics over an extended period, it points to this being
a good story to follow and to own for many years ahead.
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