Siemens FQ2 results highlight sharp growth in PLM

Siemens released its fiscal Q2 results this morning — and PLM software continues to be a bright spot, with frequent mentions of integration into other areas of the business and the opportunities ahead. Siemens said revenue from the PLM software business “grew sharply due to strong demand combined with new volume from the acquisition of Mentor Graphics in Q2 FY 2017” and that “Profit and profitability rose in all businesses [within the Digital Factory group], with the strongest growth contributions from the PLM software and factory automation businesses; overall profit and profitability [were] impacted by ongoing expenses related to Siemens’ MindSphere platform investments”.

Siemens didn’t disclose PLM revenue for the quarter, but said that it grew in the double digits, organically, “an excellent achievement against what we saw in the industry,” according to Siemens CFO Ralf Thomas. Mr. Thomas also said that the PLM business is on track to hit its target of €3.4 billion in fiscal 2018. And, for the first time (that I can recall), we saw a chart of software revenue and growth targets, on the right below:

The image above is from Siemens’ slide deck for the earnings call. I checked, and Siemens tells me the software total is for the PLM Software business and that the  biggest contributor to the increase in revenue is the Mentor acquisition.

And here’s what’s interesting: PLM had revenue of €2.6 billion in fiscal 2017 is only a teeny fraction of the company’s total revenue of €83 billion. PLM, Mentor, MindSphere, NX, Teamcenter and other parts of the PLM universe get far more mention on these calls and in public settings than its revenue contribution would indicate. I think that’s because of PLM’s impact within the other business lines, as I wrote about after the Innovation Day event, here, which is hard to quantify.

Mr. Thomas also recapped what Siemens showed at the Hannover Messe, a big annual industrial fair in Germany, saying that PLM and MindSphere enabled Siemens to show an integrated approach to design and simulation (and presumably manufacturing, though he didn’t mention it). MindSphere now has 140 apps available (or nearly available), has 40 partners signed on and attracted a great deal of interest in Hannover. The Mentor business integration continues to go well, as is the technical integration of NX and Mentor, with synergies appearing far ahead of plan, as teams streamline R&D roadmaps even while adding more EDA via bolt-on acquisitions (like Sarokal, which I wrote about here.)

Digital Factory, PLM’s parent business unit. reported a 21% profit margin in FQ2. That’s double the margin of most of the rest of Siemens’ businesses and catches investor interest every time it’s shown. Software is very profitable, since the cost to create one license-worth is more or less the same as it is to create millions of licenses. Goods are a lot less profitable, since there are materials and other inputs and assembly costs to consider. Siemens (and others, like Hexagon) acquire software companies to improve profitability but also need to invest more in R&D than they’re used to. Investors are wrapping their heads around both ends of that equation.

Siemens CEO Joe Kaeser summed up FQ2 this way: “Most of our businesses, primarily our digital offerings, showed impressive performance and operationally more than offset structural challenges in fossil power generation. By raising our guidance, we demonstrate our commitment to the company’s capability to master structural change and shape digital industry.” Digital. Digital. Digital.