Schnitger Corporation

Siemens CEO says CD-adapco is a perfect fit

I put up a quick blog post yesterday about the planned acquisition of CD-adapco by Siemens and added more info to it as the day went along — please check back there for initial thoughts — but wanted to do a separate update today. Siemens held its December-quarter earnings call this morning and, not surprising, CD-adapco was a headline topic.

From Siemens CEO Joe Kaeser, during his opening remarks:

CD-adapco is a perfect fit to expand on our strategy to further strengthen our leading industrial software portfolio. We started building this as early as in 2007 with the UGS acquisition for product design and development. With CD-adapco, we add a spectrum of fluid simulations to our mechanical simulation and testing competency which we acquired with LMS, a Belgian company, in 2012 …

The strategic rationale is compelling in our view. First: CD-adapco is well positioned in a fast-growing market where growth rates are above PLM market growth of 8%. Second: margins are software-typical with, in other words, north-of-the-capital goods-sector margins and CD-adapco has an impressive customer list with a high share of recurring revenues. We expect recurring revenues to be north of 80%. Third: we know how to successfully integrate software companies, and we know how to capture revenue synergies by scaling up through cross-selling. We do expect the closing of the transaction during the course of the second half of our fiscal year.

These are the slides Mr. Kaeser was speaking to at this point in the call: 160126_q1_presentation_en

CFO Ralf Thomas said, in response to a question about outlook:

We now see with a strong market position of CD-adapco that we have more opportunities also to sell into their channels and into their lead customers and they’re very strong in their relevant market fields, which is going to give us additional opportunities to grow.

Siemens doesn’t offer much info on how the PLM business is doing, but did offer these nuggets. While Mr. Kaeser was talking about results for the quarter, his slide said that the Siemens saw “strong volume growth and profit contribution from PLM Software” and he added

Our Digital Factory division [the parent of the PL aka PLM business — Ed.] operated in an obviously difficult market environment. Order growth was mostly driven by the PLM software business. PLM delivered strong double-digit revenue growth driven by China and Germany 

During the Q&A, Mr. Kaeser was asked about the outlook for the rest of the year. In part, he said

if you look at the Digital Factory, what we also see is that our software strategy is clearly paying off [in] a very, very strong PLM business with significant growth rates …

and, about China:

[The Digital Factory business in China] has significant growth in software which is a nice development to see because China has been traditionally a bit slow in introducing modern ways of simulation and PLM systems. That is to say, quite an activity going on there …

Only one investor asked about the CD-adapco acquisition, pointing out that $1 billion is, well, a lot of money. Mr. Thomas said that he sees CD-adapco as having a positive impact on both revenue and profit, eventually. Specifically, he said “whenever we acquire a target we look into the industry-specific environment and also conclude what is an acceptable and an aggressive plan in terms to get the payback done. For software industries that is not a quick return, and so you will not be surprised to hear that the 15% cash return on investment that is a very important KPI for us, will be reached in 2020. And we will earn our cost of capital EVA positive first time two years later. In terms of EPS accretiveness, we first need to look into when exactly and how will be the timing of the integration efforts before we can conclude on that.”

Mr. Kaeser added that this is totally fine by him. “It’s a business of €200 million which is good and we like the business, but it’s not about whether this is going to be €20 [million] or €30 [million] or €40 million profitability, it is about that to scale it up and bring that technology and that solution also to the larger part of our customer base. So this is about the scale-up methods in the end. And that’s why we did it and that’s why we believe it’s a very good addition.”

No numbers for the PLM biz, but you couldn’t ask for a stronger endorsement of the software strategy overall and the CD-adapco deal in particular.

Slides from Siemens Analyst Call, January 26, 2016, quotes as transcribed by me from the call replay.

Siemens snaps up CD-adapco for a cool $1 billion Q&A Tuesday: It's not all about CD-adapco
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