Building the snowball: DS sees Q1 as “defining”

Every so often a CEO says something on an earnings call that’s too good not to repeat. Bernard Charlès, CEO of Dassault Systèmes said on the call held for European analysts (and available online) that software revenue was up only 3% in Q1 because DS still needs to “build back the snowball” — the new licenses that feed maintenance, rentals and services in future periods. That’s a great analogy for what every company is going through right now: rebuild new license revenue to bootstrap growth going forward. But back to DS’ Q1 results. DS characterized Q1 as a defining moment, with the close of the IBM PLM acquisition, the largest in DS’ history, and revenue at the top end of guidance at €312 million. Looking at the revenue components in more detail: • New license revenue was up 18% to €76 million, which, according to DS was “consistent across channels and brands”. ENOVIA new license revenue was up 29%, while CATIA was up a “similar number”. • Recurring revenue was down 2% to €204 million as anticipated due to lower new license revenue last year. CEO Thibault de Tersant pointed out that this is “just 1.5% below historic levels for renewals so we expect to return to more normal revenue growth in a few quarters.” • Total software revenue (including new license, rentals and maintenance) was up 3% to €280 million. When questioned about why this had grown so slowly over Q1 2009, M. Charlès explained that DS’ model, relying heavily on recurring sources like maintenance and rentals, is slow to show upturns, as he said, “we need to build back the snowball” of new licenses that will feed future growth in maintenance. • By brand, PLM revenue was up 4% to €209 million. Within the PLM bucket, CATIA revenue was up 4% to €121 million; ENOVIA was up 6% to €36 million, while “other PLM” was up 4% to €52 million. Mainstream 3D was essentially flat at €71 million, although this is up 1% on a constant currency basis. • SolidWorks unit sales were up 9% to 9843, as the price per seat exactly flat with last year. The company reports that it saw “double-digit seats growth in North America, Asia and Japan”. The Value Channel, serving SW customers, saw good growth in Q1, leading to optimism about an upturn in activity in the automotive supply chain. • DS also reports that it saw renewed interest in ENOVIA, mainly in high tech, CPG, apparel, and energy. M. Charlès characterized ENOVIA as a “very competitive platform because our customers want a new level of integration — the cost of having multiple components is too high. We are building great references in traditional verticals, too – auto, aero, etc. The ramp-up in these industries will be following [that in the new verticals] as a logical next step for V6. Since V6 requires ENOVIA as a backbone, ENOVIA will only grow as customers see it works for others.” • Overall, said CFO de Tersant, the contribution of new industry verticals in Q1 was a bit lower than in 2009 because of the rebound in auto due to economy. Looking purely at new licenses, 40% is from new industries, with ENOVIA a bit higher.” • Services are delivered to deploy licenses, so prior softness continues to depress services revenue — down 14%to €32 million in Q1. A rebound in licenses leads them to believe improvement n services in H2 2010. An interesting aside from M. de Tersant: for a company so determined to keep margins high, the decision was made to keep services capacity in place even as business slowed, taking a 6% hit on margins. • Regions: revenue from the Americas was down 6% as reported to €97 million, or flat excluding currency effects. Revenue was €137.6 million, up 2%, in Europe, which DS sees as encouraging since Europe did not decline as much, meaning that the effect isn’t purely due to economic recovery. Revenue from Asia was up 6% to €75 million, as, according to M. de Tersant, “we are starting to see signs of life in Japan but it is still significantly below levels of prior years.” DS says that about slightly over 10% of revenue came from BRIC (Brazil-Russia- India-China), up about 15% from 2009. • About the IBM PLM acquisition, M. Charlès said that “we are now operating as a single team, with a consistent objectives for the year. We have made sure to transition customers and transactions from IBM to DS, and customers are very pleased with the simplicity and consistent engagement across our brands. This was the right acquisition at the right time. 96% of IBM PLMers have joined DS.” • This, of course, leads to sales capacity. Ds reports that its resellers are in good health despite the “difficult time of last year”. DS strengthened its indirect channel, increasing the number of resellers by 7% (although this does not necessarily mean that “feet on the street” increased – I’m trying to find out). DS has retained the capacity of the combined IBM plus DS forces; its large account coverage is “broadening to serve full portfolio of products”. • DS also made a point of highlighting how much cash remains after the IBM acquisition: €704 million. Also discussed the price: which was net of what IBM would have earned in royalties from IBM — in other words, the actual net cash out was €321 million. DS’ objectives for 2010 are based on a progressive economic recovery; even so, DS sees growth coming from new industries and clients. DS kept its growth forecast as it had been (at 15%-17%, excluding currency effects) but shifting currency rates mean an upward adjustment from total 2010 revenue from €1.410 billion to €1.440 billion previously to €1.455 billion to €1.475 billion today. Keep in mind that this is mental math — DS sees no change to its business environment or ability to execute; raising this outlook is purely due to changes in the exchange rate. For Q2, DS forecasts revenue of between €360 million to €370 million, an increase of 16%-19% from last year. This is actually a bit conservative, as this is the quarter immediately following the close of the IBM deal — those reps are being trained on DS’ systems and team assignments are still being finalized.