DS: Industrie 4.0 is old news; makers and innovators will rule tomorrow
Dassault Systèmes just announced Q1 results, and they are mostly positive. As with each release, there are various accounting treatments, as-reported and constant currency, grouped-together buckets of revenue … I suggest that you dig through the details here, while I summarize some of what I found most interesting on the US analyst call and the Europe investor webcast.
For me, the most compelling tidbit was CEO Bernard Charlès’ declaration that DS is so over the whole Industrie 4.0 thing. He said that it is “yesterday’s way of thinking, that tomorrow is about ecosystems of makers inventing new things with the end-customer in mind: new services, new content, that industries will offer their clients.” That’s fascinating, because many of the industrial companies I deal with are still very much in the midst of Industrie 4.0. They’re trying to figure out what that means to them, and what/how to digitalize more of that they do and if they even should. To be sure, they’re looking for value internally and, ultimately, externally and that may include new customer offerings. M. Charlès didn’t coin a new term for what the next thing is going to be called, but I bet they’re working on it.
A brief overview of the financials:
- Total revenue for Q1 was €769 million, up 1% as reported using IAS accounting standards and up 9% on a constant currency (cc) basis/using other accounting treatments (see below for more on accounting)
- Software revenue was €686 million, up 2% (or up 10% cc etc.)
- Services revenue fell short, with revenue of €84 million, down 7% (or flat, cc) on soft demand for 3DEXCITE and other brand implementations. DS made sure to point out that 3DEXPERIENCE service engagements are proceeding as expected
- Within software, and now using cc and non-IFRS accounting,
- CATIA software revenue was €237 million, up 5%. New license revenue was up in double digits, let by Asia and the Americas and the global indirect channels. DS said that half of large deals are now on the 3DEXPERIENCE platform.
- ENOVIA software revenue was €73 million, up 11% on momentum in 3DEXPERIENCE adoption that drove new license revenue up 36%
- SOLIDWORKS software revenue was €173 million, up 13%. Unit volume was up 8%, so these must have been more expensive units — but it’s also likely that (maintenance) subscriptions contributed, too.
- Other software revenue €205 million, up 14%. For the first time, DS gave some color on its SIMULIA brand, saying that it now accounts for 15% of software revenue for the quarter and the year, and that Q1 organic revenue was up 9% cc (in other words, excluding Exa.) Including Exa, SIMULIA revenue was up 26% over Q1 a year ago. Why do this now? DS CFO Pascal Daloz explained that he believes DS is #2 globally in CAE software revenue, and that it wants to be recognized as such — possible only if there is greater disclosure. (Hint, hint, Siemens.) A bit of math indicates that SIMULIA had revenue of around €100 million in Q1, so maybe €400 million ($500 million) for the year.
- Again on a non-IFRS and constant currency basis, revenue by geo broke out as
- Revenue from the Americas: €225 million, up 10%, coming from both North and Latin America, and all major brands
- From Europe, €327 million, up 5% on a tough comparable a year ago, and with strong performance from France, Southern Europe and Russia
- Asia led the goes, with total revenue of €219 million, up 16%, on growth in Japan, China, India and South Korea
- All three sales channels did well, as did 9 of the 12 verticals. DS singled out transportation and mobility, aerospace and defense and industrial equipment among its traditional industries, and AEC, retail and natural resources in its “new” bucket as reporting double-digit cc software revenue growth.
Yup. Lots of numbers, mostly good. Also interesting was the color on adoption of V6/3DEXPERIENCE. M. Charlès told investors that it was now complete in terms of scope, and that it’s an operating system for DS solutions and, via POWER’BY, to legacy systems. You may recall that it’s been a slow roll, as switching to ENOVIA may not work for all possible adopters. DS said that 3DEXPERIENCE sales now make up 34% of license revenue overall (up 53% year/year cc), over half of CATIA license revenue and over 75% of ENOVIA license revenue in Q1. That’s all well and good, but it means that significant numbers of buyers are opting for not-V6/3DEXPERIENCE, even years after launch.
DS has completely changed its language around SOLIDWORKS and its convergence (or not) with the 3DEXPERIENCE platform and the CGM kernel. DS now sees says that it offers a a new portfolio that supplements the traditional SOLIDWORKS offering, bringing cloud and other technologies to the SOLIDWORKS users and channel, without disrupting the core products. They’re calling this “Powered by 3DEXPERIENCE” — it’s still in there, but clearly not as prominent as it was.
DS basically left its outlook for the rest of 2018 as it was, with a tiny downward move in services offset by slightly higher growth in software. It sees non-IFRS revenue growth for the year of 8% to 9% cc. For Q2, DS forecasts non-IFRS revenue of around €815 million to €830 million, which is cc growth of about 9%.
You might remember that last year DS made a bit of noise about a big Boeing win. DS said that its main impact isn’t financial (yet) but that it already affects how other clients look at the 3DEXPERIENCE and perhaps using the platform for service in addition to design/manufacturing and the other traditional applications. As for the financial contribution from the Boeing deal, for 2018 it will be an incremental €10 million; for 2019 Boeing alone will account for 1% of growth.
M. Charlès also reinforced DS’ commitment to the indirect channel, saying that he believes DS will ultimately see greater growth from indirect sources than its direct. He said that DS spends a lot of time and energy to ensure that value channel resellers understand their importance to DS and that coming cloud migration will not disenfranchise them. They will provide services and be directly involved in client success, he said, and remain crucial to both DS’ and the customer’s success.
Finally, why accounting matters. DS is now reporting using a couple of different accounting standards, including IFRS 15. IFRS 15 applies to reports issued after 1 January 2018 and has to do with how and when revenue is recognized. It’s meant ensure that companies use the same five steps to determine what can be recognized when, so that investors can better compare financials from one company to the next. For DS in Q1, it seems to have had a significant positive impact on reported revenue and, therefore, profit. From the company’s press release, total revenue was either €769 million under IAS guidelines, €737 million under IFRS 15 or €820 million under non-IFRS. Why should you care? Because public companies can legitimately cherry-pick which set of data they use to create the impression they want investors to have. It’s not unethical, it’s not illegal and it’s not really “wrong” –we all want to look good, right?– but it does mean that everyone needs to carefully read the fine print. Did DS do anything to bump total revenue from €737 million to €820 million? Sell more stuff? Find more customers? No. Purely accounting magic.
But don’t let that distract you too much –just read the fine print– from what were solid results for Q1 and a good start to the whole year.