DS acquiring growth to bolster lackluster organic performance

Dassault Systèmes last week announced its fourth quarter and full-year 2013 results (summarized here). The company hosted a presentation for analysts as well as a conference call, and we’ve finally had time to comb through both for interesting nuggets. The headline really is about buying growth. DS has acquired something like 15 companies/technologies in the last 18 months, some of which are small and intended to bolster the industry-targeted Experiences; RTT and Accelrys take DS in new directions as well as adding a nice chunk of revenue to the top line. How recent acquisitions contributed to DS in 2013 is hard to parse, since DS added companies, sold Transcat and saw significant currency effects that muddy the picture. During one of the earnings calls, CFO Thibault de Tersant said that “total software was up 4% for Q4, 3% excluding Aprisio and Inceptra” — but that’s in cc terms, so it’s possible that organic software revenue went down by perhaps 1% as reported in Q4. For 2014, M. Tersant forecasts total revenue growth of 10% to 11% in cc; he told investors that “new licenses should grow between 6 and 10% organic.” Why so optimistic? M. de Tersant and CEO Bernard Charlès are bullish about the prospects for the 41 new Experiences coming out this quarter as part of the 2014X release; more and broader V6 implementations; a resurgence in Asia and continued strong demand in the “high growth countries” of China, India, South Korea, Latin America and Russia; and the momentum implied by SolidWorks unit seat sales growth 5% in Q4, reversing a year-long decline. DS forecasts 2014 revenue of between €2.21 billion and €2.23 billion, up 7% as reported. For Q1, it expects revenue of around €495 million; that would be growth of 2% as reported. Much depends on the timing of the close of the Accelrys deal (and the tender offer hasn’t started yet) but Accelrys could add as much as $145 million to DS’ top line for 2014, which would be another 5% of y/y growth. But that’s all about the future. To recap the main points of the Q4 and 2013 earnings release (more detail here in DS’ materials):

• Total revenue in Q4 was €565 million,flat year/year (y/y) as reported and up 5% in constant currency (cc).
• Software revenue was €511 million, flat y/y. But V6 appears to be picking up momentum, as DS said that V6 transactions represented 27% of PLM new licenses revenue. Of the company’s 20 largest customers, “about half” are engaged in V6 deployments.
• New license revenue was up €157 million, down 5%.
• By product, CATIA software revenue was €215 million, down 6%; ENOVIA revenue was €72 million, down 1%; SolidWorks software revenue was €104 million, up 1%, and Other software revenue was €120 million, up 9% (all growth rates as reported).
• By region, revenue from the Americas was €150 million, down 2% as reported but up 3% in cc, reflecting both increased new license revenue and demand from life sciences. Revenue from Europe was €272 million, up 2% and up 4% in cc, with the UK and Southern Europe singled out as strong performers, and France and German as “tough” because of a softer spending environment. Finally, revenue from Asia was €144 million, down 1% but up 10% in cc. M. de Tersant said that Asia’s results were led by India and China.
• V6 accounted for 27% of new PLM license revenues in Q4 2013, up from 22% of revenue a year ago.
• For 2013, total revenue was €2066 million, up 2% as reported and up 5% in cc. Software revenue was €1881 million, up 2% as reported and up 6% in cc; new license revenue was 500 million, up 7%. CATIA revenue was €819 million, down 1%; ENOVIA revenue was €249 million, down 4%; SolidWorks revenue was €410 million, up 2%; Other software revenue was up  software revenue was up 14% as reported to €403 million.

It was interesting to learn how the company looks at 2014, and at the art and science of forecasting. M. de Tersant is DS’ numbers guy; M. Charles provides the color (to use a football analogy) to support the forecasts. M. de Tersant speaks about how “converting pipeline to sales remained difficult in the fourth quarter [2103]” (which PTC also alluded to) and said that “it’s easier to do a revenue guidance for the full year, because it’s based upon customer budgets and projects, rather than predicting exactly when the decisions will happen, which quarter.” He said that analysts in Paris had asked, “am I still prudent? Very good question. I don’t think that I have changed, but you will judge on the results.” Financial analysts will, indeed, judge DS on how well it executes against its forecasts. Bottom line: Q4 2013 wasn’t great (but was within guidance) and Q1 2014 isn’t expected to be great. The economy is still uncertain in many industries and parts of the world, but DS is looking to continuing adoption of V6, a return to growth in SolidWorks and its diversification into new industries to boost growth to better levels. One final note about acquisitions: In 2013, DS spent €213.4 million on acquisitions (net of cash acquired, versus €281.5 million in 2012). That’s €500 million spent on a huge mix of technologies and companies: Gemcom, which takes DS into mining; FE-SAFE, SIMPOE and TOSCA that fill out its simulation offering; and Apriso for DELMIA. But it also investment for RTT (advertising), Archividéo (urban modeling), and SquareClock for retail and other visualizations under the 3DVIA brand. That’s not the whole list and already it’s such a broad portfolio that one can’t really see any overarching logic, other than adding to revenue and, we hope, profit. DS spent $413 million on Abaqus in 2005 and, by all accounts, this was a very smart buy, since it’s been adding to both top-line revenue and bottom-line profits ever since. Gemcom, acquired in 2012 for $360 million, is also likely contributing at both levels — but what about all the other deals? How are they contributing, and was each acquisition the best possible use of cash open to DS at the time? We can’t know from the outside, but M. de Tersant is nothing if not prudent.