What happened

Shares of engineering simulation software company Ansys (ANSS -0.13%) rose 14% in February, according to data provided by S&P Global Market Intelligence. The move came after the company reported an excellent set of fourth-quarter earnings on Feb. 23. 

Like many other companies with heavy exposure to the industrial world, Ansys is susceptible to a slowdown in its end markets due to a moderation in industrial production. Therefore, going into the earnings report, investors were concerned about any sign of a cyclical slowdown for the company. 

But Ansys has very strong underlying growth prospects coming from the increasing use of simulation software, not least to produce data used in a so-called "digital twin" -- a digital model of a physical asset. The data from digital simulations is used in Internet of Things platforms that connect the digital world with the physical world to predict the physical asset's behavior better.

Ansys reported non-GAAP revenue growth of 10% in constant currency in the fourth quarter and full-year non-GAAP revenue growth of 13% in constant currency. Management uses another metric, annual contract value (ACV), to measure performance. ACV represents a customer's total value over a contract's lifetime, which is a better way to judge a company generating revenue from subscriptions. 

Anysys' ACV grew 13% in constant currency in the fourth quarter and 14% in the full year. The $2 billion in ACV reported at the year-end was in line with the target management laid out in 2019.

So what

The strength of Ansys' results and its guidance -- calling for ACV growth in constant currency of 12.4%-18.6% in the first quarter and 9.9%-13.4% for the full year, gives confidence that the underlying growth drivers in its business are strong enough to overcome any cyclical weakness in a challenging year for the industrial sector.

ACV is forecast to grow more than revenue as "the business model shift toward subscription lease continues," according to CFO Nicole Anasenes on the earnings call.

Now what

Ansys has many exciting long-term growth prospects, and double-digit ACV growth in a challenging year underscores its potential. With simulation becoming an ever-increasing part of industrial customers' daily workflow, Anysys will likely grow strongly for many years.