DS models nature with Gemcom

By now you undoubtedly know that Dassault Systèmes had a very good first quarter 2012, with many aspects of its performance ahead of the objectives it set back in February. That’s all well and good, but what I found most interesting about its announcements last week was the acquisition of Gemcom, a Canadian company that makes mining software. Quite far outside DS’ traditional wheelhouse, no? So, first a quick recap of Q1, then more about Gemcom. DS reported Q2 revenue of €462 million well ahead of its conservative forecast of €430 million. In February, CFO Thibault de Tersant urged caution because of that the uncertain economy and tightening credit. But DS results were up 13% year/year as reported, with double-digit growth in almost all areas. Standouts were revenues from Asia, up 15% in constant currencies and up 20% as reported, to €132 million; and 17% growth in SolidWorks revenue. On a non-IFRS basis (think non-GAAP, but in French), software new license revenue was up 22% to €120 million, while software revenue overall was €420 million, up 13%. ENOVIA software revenue was up 21% to €58 million, non-IFRS. The company highlighted successes in consumer packaged goods and consumer goods during Q1, as well as “excellent new license revenue growth in automotive”. It also said that performance in China was “excellent”; Korea and India were “good”; and Japan was “better” in Q1. Revenue from the Americas was €126 million up 8% in constant currency. “In the Americas region, we saw good growth in our professional channel and improving results in our direct sales channels,” said CEO Bernard Charlès. DS expects the second quarter to be just as solid, but is again urging conservative outlook for the second half of 2012. M. de Tersant said that it “is appropriate to maintain our cautious stance given the volatility of the economic environment. Therefore, we are updating our 2012 fiscal year financial objectives for the full amount of the first quarter over-performance, and are updating our currency assumptions. We are leaving unchanged our underlying revenue growth assumptions in constant currencies for the remainder of the year in total.” The company forecasts Q2 revenue of between €470 million and €480 million and full year 2012 revenue of €1.905 billion to €1.935 billion. [Note that these forecasts do not include revenue from Gemcom.] But DS is not content to address only its traditional markets. Last week, the company announced its interest in “expanding our reach from the world of products to the world of nature with the objective to be able to model and simulate our planet. To do so we have created a new brand, GEOVIA, to help manage this ambitious goal, have announced a new acquisition, Gemcom, the leading software provider to the mining industry and a new industry focus, Natural Resources, to help companies in this industry improve predictability, efficiency, safety and sustainability.” Let’s take that statement apart. Gemcom is a 35-year old Canadian company that provides software and service solutions to mining companies that enables them to evaluate, manage, and monitor their operations from early-stage exploration to final production. Mining companies have typically been slow to invest in IT solution to manage their overall businesses, relying instead on point solutions where they can, like geologic modeling or CAD, but not integrated into operations. Mining, like many process industries, is seen as a dirty and dangerous occupation, and has an even more serious labor shortage than the rest of manufacturing, so these companies are slowly bringing on technologies to augment its skilled staff. Too, heightened regulation, activist scrutiny and potential legal issues are leading many mining companies to try to implement discovery and operational processes — a lot like PLM, but for a completely different industry. That perception, that mining is “completely different” from automotive, aero and other traditional PLMish industries, has made it difficult for companies like Dassault Systèmes to gain serious footholds here. Hence, Gemcom. Gemcom’s products include geology and mine planning, collaboration and production management software. In 2006, Gemcom acquired Surpac, its leading competitor, and with it a line of geology and mine planning applications. There are many types of mines, which is why some of these products appear duplicative — but they are not: GEMS, Surpac and Minex are used to solve mine-level business issues like evaluating whether extracting a particular ore deposit (an orebody) is economically feasible; PCBC is used to schedule block cave mining; MineSched is used to graphically visualize schedules; Whittle and Maximise are used for economic modeling of a mine; InSite helps create production analytics; and, since mines are almost always far away from its business management, Gemcom Hub provides data management “optimized for intermittent, low bandwidth internet connections”. Basically, Gemcom’s offerings cover the mine development process from modeling a mineral deposit using the data from exploratory drilling, to assessing the geology of an operating mine. Missing: the CAD tools to model the conveyors and equipment to exploit the natural resources in the mine. Gemcom was a publicly traded company until it was taken private in 2008 by JMI Equity, Carlyle Group and Pala Investments for about $180 million. According to DS, Gemcom had revenues of about $90 million last year and is growing around 25%/year — so this is a purchase price multiple of 4x and a return to current owners of double their original price. I think this acquisition has been in the works for a while: DS CEO Bernard Charlès spoke of harmonizing “products, nature and life” at SolidWorks World in February and made similar comments at the opening of DS’ new North American campus last Fall. He sees the new GEOVIA brand as enabling users to “model and simulate nature to improve predictability, efficiency, safety and sustainability”. Replace “nature” with “exploitable natural resources” and I think they’re on to something: DS has long been trying to get its CAD and PLM solutions into the process and power verticals, where entrenched CAD providers Intergraph, AVEVA, Bentley and Autodesk hold the vast majority of business. Mining is an area these vendors also compete in, so this seems to be an end-run-around play. From statements made by DS management and the CEO of Gemcom, Rick Moignard, it appears that DS intends to leverage its existing 3D tools (presumably CATIA and SolidWorks) to meet the CAD requirements of the mining companies, but it’s going to be a hard sell. Mining companies tend to do their own economic and geologic modeling, but leave the design work up to their engineering contractors who are definitely not up to speed on DS’ CAD brands. But if the owner is using Gemcom’s mine operations software, it may specify use of CATIA for modeling. Too, there’s a trend in this industry right now for deals that risk-share the design, construction and operations, where an engineering firm does it all, until a certain level of operational efficiency is achieved and the mine is handed over to its actual owner. A lot will depend on how well Gemcom’s solutions are integrated into the ENOVIA backbone without adding too much complexity to a well-tailored, mining-specific solution. The reality, of course, is almost always economics: if it’s cheaper for the engineering contractor to deliver a working ore processing facility, on budget and on schedule, using CATIA, then CATIA will be used. But if the contractor has built specifications, catalogs, customizations and business processes around other solutions, then CATIA will be a hard sell. It’s interesting to note that the $360 million cash payout to Gemcom’s current owners will barely dent Dassault Systèmes’ €1.56 billion cash and equivalents horde, which leaves plenty of room for other acquisitions. DS’ slide deck for investors defined “natural resources” as water, oil and gas, agriculture, forestry and landscape. Start guessing. DS has said that all 360 employees of Gemcom will remain in place after the acquisition closes (expected in July) and that Mr. Moignard would take over management of the GEOVIA brand. One last, non-Gemcom factoid: DS said that in Q1, V6 represented 15% of new PLM license revenues. No comparative data was offered, but that 15% is both heartening and discouraging. I would have hoped for more than 15% almost exactly 4 years after the introduction of V6, but CAD and PLM products are very, very sticky. Let’s see what happens next quarter.