The first thing to note about Dassault Systèmes’ earnings release is that it is a complicated, day-long affair that involves face-to-face meetings with analysts in Paris, interviews with Bloomberg news and other outlets and an analyst earnings telephone call — all before 10AM Eastern US time and most available on the Web. Add to that the inscrutability of DS"s announcements, with IFRS/non-IFRS and as-reported/constant currency figures, and you see that there’s a lot to sift through to try to get at what makes DS tick.
One thing is clear, however: Q2 was a good quarter for DS with both revenue and earnings ahead of plan by pretty much all measures. DS closed the IBM PLM acquisition on April 1, 2010, so the Q2 2011 are the first in a while where the year/year comparisons are not skewed by so much acquired revenue. DS has made acquisitions since IBM PLM, but these have been relatively small so should have minor impacts on revenue. The results from Q2 2011 give us a reasonable perspective on DS’ actual business performance.
The details (everything below uses as-reported IFRS data unless otherwise noted and year over year growth rates):
• Total revenue was €429 million, up 11% and well ahead of the company’s earlier objective of around €405 million. DS notes that the US dollar weakened by 13% against the Euro during Q2; that and other currency volatility was responsible for a 6% hit on overall reported revenue. In constant currencies, revenue was up 17%.
• By category of revenue, software was €388 million, up 12% as reported and up 18% in constant currency. Within the software total, new license revenue was €110 million, up 29% as reported and up 36% in constant currency (ENOVIA, up 49% in constant currency).
• Maintenance, periodic licenses and product development services revenue was €277 million, up 6%. This is “not bad” according to CFO Thibault de Tersant.
• Services and other revenue was €39 million, down 2%, a “disappointing” result according to M. de Tersant because the company has undertaken some loss-making engagements. The company has done a full review of all engagements, and he believes that the services business will return to growth and profitability in the second half of 2011. He also sees V6 as being very attractive to system integrators and that DS resources will be in supporting roles in the future.
• By product category, PLM software revenue was €307 million, up 14%. DS reports that CATIA software revenue was €183 million, up 13%; ENOVIA at €56 million was up 17% and "Other PLM" at €68 million was up 17% in Q2.
• Mainstream 3D software revenue was €81 million, up 4% as reported an 11% on a constant currency basis. The company reports that 11,893 units were sold in Q2, up 22%, even as the ASP fell 8% to €5274, assuming a 45% VAR margin.
• By channel, DS reports that 57% of revenue came from its PLM Business Transformation channel (direct, includes the former IBM PLM, up 15% over last year. The next tier, the indirect PLM Value channel, represented 24% of revenue and uncreased 18%. Finally, the Professional or volume/multi-brand/reseller channel, accounted for 19% of total and increased 11%. DS sees this split as very important — each has its own identity and serves a distinct market. During the Q&A session, the company was asked about plans to build out each of these channels. CEO Bernard Charlès said that the first priority, a year ago, was to “integrate the IBM PLM and DS’ own direct sales teams and reallocate customers around the globe; this has worked extremely well. Nevertheless, we believe we can expand the revenue/sales person by improving our value creation solutions by industry, by improving the way we engage with customers on a daily basis and learning from them how to expand in their businesses” M. de Tersant added that “we are doing some increases in direct sales staff in high growth countries — China, India, Eastern Europe, Latin America. For Solidworks, we also have a model to increase staff to support VARs”.
• Looking at geographies, revenue from the Americas was €124 million, up 7% as reported but up a much stronger 21% excluding the effects of currency.
• Revenue from Europe was €188 million, up 8% on a tough comparable from a year ago because of the number of one-time maintenance catch-up payments the company recorded.
• Revenue from Asia was €116 million, up 21%, with China and India singled out as strong performers in Q2. Performance in Japan (particularly in automotive and electronics) was impacted by “circumstances” but not as drastically as had been considered on the Q1 earnings call.
Some other very interesting topics were raised in the published materials, calls, interviews and presentations:
• M. de Tersant assured investors that DS’ “cloud solution will not dilute revenue growth because they are increments to what we do today, so there is no cannibalization. And there are advantages: we sell middleware and hardware in our cloud solutions, so there is incremental revenue to what we would make in on-premise sales.” Need to investigate: what hardware?
• The V6 adoption rate caused a bit of controversy on the analyst earnings call. DS says that it now was 720 customers using V6 and that it is seeing increased deal sizes. Jay Vleeschhouwer of Griffin Securities pointed out that this is not very many, considering the thousands of customers DS has. M. Charles defended the company’s progress, saying that he considers the total to be “close to a thousand” and M. de Tersant added that this total represents only the company’s largest, most important customers. In the earlier meeting with analysts, M. Charles also pointed to the most recent V5 release that eases interoperation between V5 and V6 as increasing the rate of adoption of V6. But Jay does have a point – I need to research how the V6 adoption curve compares to the V4/V5 transition of the last decade.
• M. Charlès said that ENOVIA V6 is very strong in many sectors (though not all sectors have the same magnitude) but did not say whether grow this coming from any particular verticals.
• The company also did not, as in previous quarters, break out revenue by vertical to show growth in new verticals. In the past couple of quarters, DS made a point of its progress outside its traditional auto/aero markets.
• SolidWorks units were up 22%, though the “ASP is under pressure, declining 2% [in constant currency – down 8% as reported — Ed.]. Revenue growth from new licenses was 20%. SolidWorks has a relatively constant maintenance renewal rate” so recurring revenue should accelerate slightly in the second half, according to M. de Tersant.
• M. de Tersant said that he sees a very healthy deal pipeline (perhaps the strongest in a while) but that the mood of customers can change in an instant, and leads to a conservative view on the rest of the year.
The positive surprise in Q2 led DS to up its forecast for the full year 2011 — but only by the €20 million that Q2 exceeded its targets. M. de Tersant said that Q3 2010 was "well above seasonal historical revenue trend" and that the second half of 2010 saw "an important level of maintenance recoveries that were one-time in nature". In other words, the second half of 2010 was exceptional and we shouldn’t expect that level of growth to recur on 2011. Nonetheless, the company’s new target of €1.71 billion means growth of 8% to 9%. For Q3, the company forecasts revenue of €405 million to €415 million.
Lots of data, presented in many ways but all pointing in the same general direction: upwards. DS had a great Q2, surprised even itself, and is cautiously optimistic about the rest of 2012.