DS’ Q4 blows past expectations; CEO doesn’t see AVEVA & CD-adapco as credible acquisitions

Feb 9, 2016 | Hot Topics

When Dassault Systèmes (DS) reports results, there’s a blizzard of information to wade through, all carefully orchestrated to lead the reader to the desired conclusion: that DS is a healthy, growing business with activities on many fronts contributing to long-term success. We get a lot of useful information, but many questions remain unanswered such as: how are SIMULIA and DELMIA doing? What types of customers are responding most strongly to DS’ many messages and why? What are they buying? But the earnings calls are always chock full of goodies, so read on.

DS’ Q4 basically blew past estimates and forecasts in nearly all categories. The following is a mix of IFRS (meaning to accounting standards) and non-IFRS (DS’ view, using different treatments for deferred revenue from acquisitions — only €6 million for Q4 so not a big difference). Too, we have as-reported and constant currency (cc) data, where there is a big difference this time. Look at the cc results to get a real sense of what’s going on and don’t stress too much about IFRS and non-IFRS:

  • Q4 IFRS revenue was €797 million, up 18% year/year as reported and up 11% cc. Non-IFRS revenue was €802million, up 8% cc. Both were well ahead of DS’ forecast and investor expectations. For the year, total revenue was €2,840 million (yes, just under €3 billion), up 24% as reported and up 13% cc. Non-IFRS full year revenue was €2,877 million, up 23% (12% cc)
  • Software revenue in Q4 was €703 million, up 19% as reported and up 11% cc —  and up 9% cc on an organic basis
  • New license revenue was €237 million, up 19%. On an organic basis, new license revenue grew 11% cc. CFO Thibault de Tersant said that 3DEXPERIENCE sales “accelerated traction” in Q4, benefiting CATIA and ENOVIA results for the quarter
  • Periodic license, maintenance and other software-related revenue was €462 million, up 19% as reported. On a non-IFRS basis, periodic license, maintenance and other software-related revenue increased 7%, “reflecting strong growth in maintenance revenue in all regions”
  • Services and other revenue was €93 million, up 15% (up 8% cc). DS continues to push services engagements to system integrator partners
  • As much as DS talks 3DEXPERIENCE and V6 adoption, it’s still nowhere near the majority of revenue. 3DEXPERIENCE sales represented 36% of second half new license revenue, up from 20% in the first half, and made up 29% of all new license revenue in 2015. Keep in mind that V6 and the 3DEXPERIENCE concept were introduced in 2008/2011 so we could expect a higher proportion of total but this relatively slow rate of adoption isn’t bad, it just shows how sticky CAD/CAM/PLM can be. Switching from V5 to V6 in the middle of a car or aircraft program is simply too complex to contemplate. On a positive note, however, M. de Tersant told investors that 3DEXPERIENCE sales “surged in the fourth quarter, with 3DEXPERIENCE software revenue up 45%” cc and new licenses up 64% in Q4. He expects around 1/3 of new licenses in 2016 to be V6
  • By product group, SOLIDWORKS software revenue was €151 million in Q4, up 20% as reported (up approx. 11% cc) even as unit sales fell 1% to 15,157 as the average selling price grew 15% (up 7% cc). For the year, SOLIDWORKS revenue was up 12% on strong growth in Europe and Asia and unit sales were up 5% on an ASP rise of 4% cc
  • CATIA software revenue was €262 million, up 14% as reported (up approx. 8% cc) on “doublie-digits new license revenue growth”. For the year, CATIA revenue was up 5% cc, showing good acceleration to the year-end. Could be tied to major account focus — see below
  • ENOVIA software revenue in Q4 was €95 million, up 22% as reported (and up approx. 14% cc) on “good 3DEXPERIENCE traction”. New license revenue was up in the double digits, said M. de Tersant. For the year. ENOVIA software revenue was up 5%. More major account work in Q4?
  • Other software revenue was €195 million, up 23% as reported and up about by 6% cc in Q4, led by SIMULIA. For the year, Other revenue was up 26% cc due to the inclusion of Accelrys (now BIOVIA) and Quintiq. On an organic basis, Other revenue was up 11% cc. The first question at the European earnings briefing asked about this category, and why it’s such a grab bag (paraphrasing). M. de Tersant said that this line mention that this line includes both smaller brands which are earlier in their lifespans and so see more volatility than established brands — but I’d bet that SIMULIA led growth on an organic basis
  • By geo, revenue from the Americas in Q4 was €253 million, up 12% cc on an improving Latin America
  • Revenue from Europe was €347 million, up 7% cc on a tough year/year comparison
  • Revenue from Asia was €196 million, up 15% cc on “broad-based strength”. For the year, DS said Japan was “terrific” and named South Korea and India as contributing to growth. CEO Bernard Charlès said that DS continues to win important clients in China in Transportation & Mobility, AEC and Energy, Process & Utilities
  • M. Charlès told investors that geographic diversification continues to be important and that DS “increase[d] the number of individual countries driving growth and becoming meaningful absolute contributors to our revenue base.”
  • DS continues its industry diversification strategy, DS’ grab bag of Diversified industries continues to grow as a percentage of the total, from 28% of total software revenue to 30% in 2015, driven most notably by Life Sciences, Energy, Process & Utilities, CPG and Natural Resources. However, that’s 7% growth and still lags DS’ core industries (Transport, Aerospace, Industrials), which reported software revenue growth of 9% cc in 2015.

In an interesting side comment, DS said that new license growth in Q4 was led by its direct sales channel and large account sales, especially in North America. M. Charlès said that the direct channel saw license revenue growth of 19% cc with average deal sizes growing by about 15%. That license revenue growth is nearly double the cc growth overall, so we might infer that the 3DEXPERIENCE message, which is about business transformation and not software implementation, requires the kind of approach best made by a direct sales force. We’ll have to wait for the formal filings later this year, though — many of DS’ recent acquisitions have had direct sales models, so some of this growth may also be inorganic.

CD-adapco was also addressed in the European earnings session. M. Charlès told investors that he thinks there’s significant opportunity in the historically conservative CFD market, but that DS intends to address this with its own, highly-integrated technology that is “breakthrough, new approach for CFD … I think we came to the conclusion that we should continue our own path”.

M. Charlès also took a swipe at AVEVA, saying “My comment [about not acquiring older technology – his words, not mine — Ed.] could be the same for AVEVA, which was almost a funny situation that happened last year. And you noticed that we did not even consider this as a credible option, as it correlates to where we see the megatrends.” I do believe you can now stop asking me about this one.

In general, though, the strategy for mergers and acquisitions (M&A) remains the same: “We don’t look for M&A to acquire market share. We look at M&A to acquire scientific technology … We’re going to continue to do the moves that we need to do to fulfill [the] space that we’re inventing because today none of the competitors are doing what we do and in fact the competitive landscape I think is even changing … We will continue to balance organic versus M&A [in a series] of moves where we acquire things that we think are valuable for the strategy.”

DS also set out its objectives for 2016. It sees Q1 non-IFRS revenue of about €690 million and full year non-IFRS revenue of €2980 million to €3010 million. This includes double-digit growth in new licenses revenue against a more volatile macro backdrop and a projected -2% currency headwind. On a positive note, M. de Tersant sees revenue growth accelerating in 2017.

At SOLIDWORKS World, before these results were announced, M. Charlès and SVP Strategy Monica Menghini spoke on stage and held briefings for media and analysts. I’ll post my SWW writeup soon, but their main message from the conference stage was unambiguous: DS brings a wealth of technology to SOLIDWORKS that they can use (or not, as they decide). SOLIDWORKS has a €3 billion parent company to bring it stability and fund research and development. Your investment with us and your trust in us is valued and will not be misplaced.

In the media sessions (again, before results were announced), M. Charlès and Ms. Menghini talked through some of their DS-wide initiatives. Ms. Menghini spoke about her reviews of DS’ technology portfolio and its broad applicability to many possible use cases; she made clear that DS is focusing on a subset of its potential market in order to not dilute its resources too far. M. Charlès spoke often about choice, saying that the 3DEXPERIENCE platform gives clients the option to go with perpetual or rental licenses; with on-premise or cloud software solutions; on mobile phones, tablets, laptops or desktops, from anywhere. Not disclosed yet is the cost of the SOLIDWORKS rentals option, but the users I spoke with are listening and intrigued (resellers, less so).

During his earnings calls on Thursday, M. Charlès said that 2015 was the first year of a five-year effort to double earnings per share. (As a reminder: earnings per share, or EPS, is net income divided by the number of shares outstanding.) You can do this in two ways, assuming no changes to the share count: growing revenue and/or shrinking costs. DS is off to a good start, with EPS up 24% y/y in 2015. M. Charlès’ comments made clear that, for the moment, his focus is on growing revenue by expanding the solution offering into new markets via R&D and acquisitions, and in deepening offerings for existing verticals through cloud offerings and tighter integration between simulation, modeling and manufacturing. It’s going to be a good year to be DS …