Siemens FQ3 flatish, PLM “outstanding”, reorg looms

Yesterday Siemens announced the acquisition of Mendix; today’s news was fiscal third quarter earnings and a reorg. Tariffs came up early and often, as the uncertainty surrounding global trading frameworks affect many parts of Siemens’ business. Lack of certainty leads to lower confidence in price and availability — but also, says CEO Joe Kaeser, to an increase in local partnering, which creates new opportunities for Siemens. While FQ3 was basically flat overall, performance of the Digital Factory segment was called “outstanding”. It’s a complex business so check on the details for the big picture; here’s what I found most interesting:

• Digital Factory revenue was up 12% as reported (up 13% in constant currencies (cc) and on an organic basis) to €3.3 billion, while orders were up 12% cc organic. Standout growth was in  China, up 18%, Italy up 15%, Germany up 4% (likely all cc). By industry, automotive moderate somewhat, especially in the US moderate, and growth overall is expected to moderate in 2019
• The PLM business was up “mid-teens organically”, fueled by wins at Mentor Graphics. CFO Ralf Thomas said that Mentor is a real integration and top line success story; teams of traditional PLM plus Mentor people are able to reach customers they wouldn’t have been able to reach before as separate sales efforts. PLM is also seeing success outside of automotive, largely because of the combination. CEO Joe Kaeser also pointed out that the PLM business is allowed to be entrepreneurial, and that combining mechanical and electrical can enable users to model very complex systems. Customers are starting to see the benefit, and the pipeline is growing as a result. he expects this to accelerate as more industrial systems are miniaturized. Mr. Kaeser did sound a caution: Mentor is also in the semiconductor business, which may slow
• Mr. Kaeser sees moderating momentum in industries and/or geos creating opportunity for customers to up-level their businesses, from supporting IT to factory operations — also creating opportunity for Siemens
• Mr. Kaeser also introduced a reorganization that will go into effect on October 1, 2018 and be complete by March 31, 2019. The company’s Building Technologies Division (BT), Energy Management Division (EM), Power and Gas Division (PG), Digital Factory Division (DF) and large parts of its Process Industries and Drives Division (PD) will be combined to form three new operating companies: Gas and Power, Smart Infrastructure and Digital Industries. There will also be three “strategic companies” when all is said and done: Siemens Healthineers, Siemens Gamesa Renewable Energy, two companies in which Siemens holds a majority stake, and Siemens’ mobility business, until its intended merger with Alstom completes. There’s more to it (there are airport logistics, real estate and other businesses that generate €5 BILLION in revenue per year)–go here for details
• Why do this? Mr. Kaeser said that the time to reinvent is when things are going OK, not under too much stress — so, now. The new structure is intended to give the individual businesses “more entrepreneurial freedom to focus on their respective markets”. Mr. Kaeser mentioned entrepreneurship a lot –I wonder if that’s to counter the perception of Siemens as a rigid, hierarchical entity that can’t move quickly– and clearly wants his people to be more creative and to take measured risk. He also said that he now has the right leadership in place to be more entrepreneurial, to focus on markets and not internal factors
• Digital Industries (DI — I had hoped they’d get rid of the acronyms; of course not) will be headquartered in Nuremberg, Germany, and led by CEO Klaus Helmrich and COO Jan Mrosik (former CEO of Digital Factory). Mr. Helmrich is a member of Siemens’ board and, I believe, had oversight of Digital Factory as part of his board responsibilities. Siemens’ press release adds, “with about 78,000 employees worldwide, DI businesses generated revenue of around €14 billion and had a profit margin of about 16 percent in fiscal 2017”.
• DI will include factory automation, motion control (which includes the former PD Large Drives Products and Cranes businesses), process automation, software and customer services.
• Each business will be free to do what it needs to in order to compete, sharpen focus on very specific customer needs — and, Mr .Kaeser says, “that focus will take precedence over synergies, when necessary”. The goal will be to lead each market. Each will design its go-to-market strategies and sales channels, (though there are “corporate countries” such as the US and China to coordinate efforts and “political activities”)
• Siemens is also starting an IoT integration service business, an offshoot of the Mendix acquisition. Mr. Kaeser said that the IoT Integration Services business unit will enable Siemens to offer “comprehensive support to customers in their digital transformation. Leveraging many years of experience in a wide range of industries as well as leading technologies such as artificial intelligence and
  cybersecurity, Siemens plans to offer consulting, design, prototyping and implementation services. Until 2025, the market for IoT integration services is expected to achieve annual growth rates of ten to fifteen percent. Siemens plans to hire about 10,000 employees in this area by 2025.” Get those resumes together!
• One last element of the reorg: Siemens said it is naming chief technology officer Roland Busch its chief operating officer, perhaps signaling that he could eventually replace Mr. Kaeser. As far as I can tell, there is no new CTO.

We also learn a bit more about Mendix: It has over 500 customers, with an ecosystem of 50,000 developers and 100 solution partners. Mr. Kaeser said Mendix will enable Siemens to massively expand customer support. He plans to merge Mendix and MindSphere platforms together, to “deliver huge benefits for Siemens and [its] customers”. He didn’t offer a revenue number, but said that Siemens paid a “multiple in line with comparable deals”.

The investors in the room wanted to know about how costs will allocated to the new businesses, how/if there was a global cost-control component to this reorg … Mr. Kaeser shut these down, saying that this is about revenue growth and market penetration, and that it makes more sense, from his perspective, to focus on the top line, on results, since that trickles down to profits. He sees the reorg as a cascading process, from the top down, starting in October, to reassign people and therefore costs. This will all end by March 31 — and a Capital Market Day will follow a few months later, where these numbers will be ready.

So, what does it all mean? Reorgs are always unsettling but, honestly, it seems like a good thing to move much of what had been centralized into the operating businesses. Giving them greater control over products and research, go-to-market, partnerships and how to respond to competitive situations is smart. No one said anything about layoffs* and most businesses will move in their entirety to the new structure. It does sound like there might be some reassigning of HQ staff into the operating and strategic businesses.

It’ll take time to shake out, but it sounds like the PLM business is doing extremely well — and it would be foolish of Siemens to destabilize it too much. If anything, it seems like Siemens is applying the lessons learned from the successes of the PLM business to the rest of the company.

Oh – and Bentley was mentioned, as a valued strategic partner that obviates the need for acquisition. A non-sequitur mic drop.

*Siemens had already announced layoffs in the power and gas businesses. This reorg doesn’t seem to change that plan.