Dassault Systèmes’ cautious outlook dampens good Q4
Earnings calls are interesting beasts: on the one hand, company executives have to speak to and perhaps justify the reported results. On the other, they need to spin everything as positively as possible to boost the stock price. Add in investors who may be argumentative about uses of cash, a questioner who is very interested in some minutia about foreign exchange hedging and someone else who doesn’t really grasp what the reporting company actually does … really, anything can happen.
Today Dassault Systèmes held a couple of conference calls for investors about results for the December quarter and fiscal 2012. Q4 actually was pretty good as the company moved a lot of product, exceeded the €2 billion milestone, added new accounts and channel partners, rolled out new solutions. All signs go, right? Not so much. The usually forceful CEO, Bernard Charlès, couldn’t muster any real enthusiasm. CFO Thibault de Tersant was his usual dry, witty self but stuck to the facts. Only towards the end of the North American call (which must have been hour 8 or 9 of earnings day for the DS team) did we get any real emotion, when M. de Tersant told a questioner that DS’ guidance is meant to be achieved — THAT’s why it is the way it is.
And that’s really the problem, isn’t it? DS has posted consistently strong growth in recent year, in part due to its acquisitions, and its 2013 forecast of 1% to 3% growth is gloomy in comparison. Investors don’t like slow growth and analysts spent much of each earnings call trying to get DS’ management to say that they were low-balling expectations with the hope of exceeding them. M. de Tersant was clear: he looked at Q3 and Q4, saw trends in buying patters and currency movements that lead him to be cautious. Not pessimistic, not doubtful about DS strategy, just cautious.
Forecasts drive share prices but so do results. To recap (you can read much more detail here in DS’ press release):
- Total revenue in Q4 was €563.5 million, up 10% year/year as reported and up 7% in constant currency (cc). DS reiterated a couple of times that this was near the high end of its earlier guidance, though it was below analyst consensus.
- Software revenue was €511 million, up 11% and up 8% in cc.
- New license revenue was up €165 million, up 6% and up 3% in cc. A couple of interesting things about new license revenue: DS sells both traditional perpetual and subscription-based licenses; for the first time, DS said that rental license revenue was up 29% in Q4 for CATIA and ENOVIA. This serves to bring the total new license revenue and growth rate down (since a smaller portion of the subscription can be recognized now). In general, new license revenue growth was strongest in Asia while rental licensing activity was strongest in Europe and the Americas. Rental interest was highest in the auto and aero verticals. I would have expected subscriptions to be most attractive to new users (so the new verticals) and new geos, where cash may be harder to come by for an upfront purchase.
- Software revenue growth slowed in Q4, down to 9% (cc) as compared to full-year growth of 10% (cc). Within that total, new license revenue increased 3% in Q4 vs. 9% for the full year (cc). Clearly, business slowed towards the end of the year. DS threw out some numbers to show what the effect would have been if the subscriptions had been perpetual sales and I’m still trying to work out the math but it’s clear that slowing software sales means lower maintenance growth and fewer implementation engagements in the future.
- In Q4, PLM software revenue was €407 million, up 10% and up 7% in cc.
- SolidWorks software revenue was €103 million, up 14% and up 11% in cc. M. de Tersant said that he continues to “see hesitancy in the market, with the quarter benefitting from special programs”. Didn’t notice any such hesitancy at SolidWorks World a few weeks ago, so we’ll see what Q1 brings.
- V6 accounted for 22% of new PLM license revenues and 11% of total revenue.
- M. Charlès said the “standout brand” for the year was SIMULIA with strong demand across industries, balanced growth across all three regions and strong interest from existing and new customers. ENOVIA was most affected by the weakening macro environment during the second half of the year, which led to flat software revenue in Q4. For the full year, software revenue increased 7%.
- By region, revenue from the Americas was €153 million, up 12% and up 8% in cc. Revenue from Europe was €266 million, up 6% and up 5% in cc, with Germany and France singled out. The company reports seeing a softening of the environment in the third and fourth quarters. Finally, revenue from Asia was €145 million, up 16% and up 12% in cc. M. de Tersant said that Asia’s results reflect both the Japanese economy bouncing back after the natural disaster in 2011 and strong demand from companies in Korea and China.
For 2012, total revenue was €2028 million, up 14% as reported and up 9% in cc. Excluding the acquisitions of Gemcom and other companies and the divestiture of Transcat, non-IFRS revenue growth would have been 8% in constant currencies. Software revenue was €1843 million up 14% as reported and up 9% in cc. PLM software revenue was up 13% as reported (9% cc) to €1440 million and SolidWorks revenue was €403 million up 18% as reported and up 12% in cc.
On the US call, Jay Vleeschhower of Griffin Securities asked about SolidWorks and CGM. According to my notes, M. Charlès said:
“Over the last few years, we’ve removed a lot of external components which were inside SolidWorks It was necessary in terms of moving to the next level of SolidWorks and visible in terms of benefits of performance, scalability and capacity. We have cleaned up a lot of the dependencies and external components that we thought were not really the right ones, long term. We believe that in the next year, the collection of SolidWorks applications will evolve a lot. It’s already evolving with electrical, plastic, now Mechanical Conceptual. [Unclear, something about SolidWorks Composer].
The SolidWorks portfolio is expanding rapidly and Mechanical Conceptual is a good illustration of that…. There is no intent to just replace components for what they do today without looking at the future needs of customers who expect to be connected, mobile, and use touch … It’s not a migration of a component. It’s the re-definition of next-generation system.”
My interpretation? He didn’t really answer the underlying question, which was probably along the lines of “Are you scaring your SolidWorks users away?” I think M. Charlès meant to be reassuring, and to say “We hear the concern about kernel changes but are doing what we need to in order to create the best-possible SolidWorks product for our customers and prospects.”
DS announced that its current 2013 financial objectives are for Q1 non-IFRS revenue of €470 million to €480 million, which would be 1% to 4% growth as reported and 6%ish excluding currency. For the year, DS expects growth of 1% to 3% as reported and also 6%ish growth excluding currency effects. The analysts on the call had modeled an average growth rate of about 9% in constant currencies, so this was quite a shock to their carefully constructed models.
Lost in the hoopla was the fact that DS also announced that it had acquired SquareClock, a start-up providing cloud-based, SaaS-delivered space planning solutions for residential, and professional design back in December. There’s a quick AVI in the earnings presentation video; I was not aware of the company before today. Financial terms were not disclosed.
Bottom line: DS did well in Q4, is cautious about 2013, has many diverse sources of revenue and still a significant number of accounts to convert from V5 to V6. But, as DS took pains to explain, it’s not a straight conversion as it was from V4 to V5. With industry solutions leading every sale, it’s more about what particular problems a customer elects to solve — and when.