Dassault Systèmes pivots further to life sciences but industrial still dominates revenue

Dassault Systèmes announced results this morning that are generally seen as a bit “light”, meaning below analyst consensus even though they were at the top end of the company’s own guidance. No acquisitions were announced, but there is a pretty major move on the personnel front: Pascal Daloz, a long-time DSer who is currently CFO also takes on the title of Chief Operating Officer, COO. Just like Hexagon yesterday, DS characterizes this as looking to a “new generation of leaders” to “carry forward our ambitions into the future”. This move formalizes what many had been expecting — M. Daloz was instrumental in the Medidata deal, and has worked in DS’ strategy, mergers and acquisition, and finance groups.

OK. On to the results, shown here as non-IFRS because that’s how DS does it. It’s too confusing to switch back and forth between IFRS and non-IFRS and the difference is relatively small right now. Also, bear in mind that many of these results include Medidata for 2 months, so look for organic data where it’s been given:

• Total revenue for Q4 was €1212 million, up 16% and exactly at the top end of guidance. On an organic, constant currency (cc) basis, total revenue was up 3%
• In Q4, by type of revenue, software revenue was up 17% cc to €1067 million. Growth is due to two months of Medidata but also what the company characterized as “solid performances by SOLIDWORKS, SIMULIA, BIOVIA and Centric PLM”. On an organic, cc basis, revenue was up 3%
• License and other software revenue was up 2% (flat cc) to €341 million, reflecting the strong quarter a year ago and softness in the automotive vertical. On an organic, cc basis, revenue was flat
• Recurring revenue, that metric everyone is focused on right now, was up 27% to €724 million because of the addition of Medidata and a strong performance globally for support revenue. On an organic cc basis, recurring revenue was up 5%
• Services revenue was €132 million, down 1% organically reflecting a difficult comparable in Q4 2018, when Boeing did a large services engagement around its adoption of the 3DEXPERIENCE platform
• To recap, organically, software revenue was up 3%, license and other software revenue was flat, and recurring revenue was up 5%.
• By brand, in Q4, CATIA revenue was €293 million, ip 1% as reported and cc. DS said that CATIA had a good first half of 2019, but that revenue “softened” in the second half because of weakness in the automotive supply chain in Germany and Japan
• ENOVIA revenue was €110 million in Q4, down 5% as reported (down 7% cc) because of strong comparables to Q4 2018, when license revenue was up 84% cc
• SOLIDWORKS revenue was €233 million, up 11% (up 9% cc) with double-digit revenue growth in Asia and Europe
• Other Software was €430 million, up 51% as reported and up 48%cc. DELMIA had a good Q4; BIOVIA is “improving”
• In Q4, by geo, revenue from the Americas was €334 million, up 37% (up 35% cc), reflecting addition of Medidata. Revenue from Europe was €448 million, up 8% (up 7% cc). Revenue from Asia was €257 million, up 8% *up 5% cc), led by Korea and China.
• For the year, total non-IFRS revenue was up 16% (up 13%cc) to €4.06 billion. Revenue related to the 3DEXPERIENCE platform was up 22% cc in 2019, and license rev up 6% cc

CEO Bernard Charlès summarized 2019 by saying that DS achieved the 5-year plan set out in 2014 and set the stage for further expansion. He said that 3DEXPERIENCE now accounts for 29% of related software revenue, and the company is reaching more industries, with diversification industries representing 1/3 of revenue in 2019. He also said that 3DEXPERIENCE will move further into life sciences and health care in 2020 and beyond, to make digital twins of humans. With Medidata, he said, DS can expand from “things” to “life” and apply experiences (as DS envisions them). To move into new areas, M. Daloz will lead a new executive committee that will manage the comapny’s transitions to focus 3 market areas: life sciences/health care, cities/infrastructure and manufacturing.

Let’s talk revenue reporting. You’ll see that DS lumped Medidata into “Other Software” in Q4, making it by far the largest single brand. That’s not useful – the category also includes SIMULIA, BIOVIA and GEOVIA, all of which DS spent significant money to acquire. Starting with the Q1 results, DS will change how it reports:

• Industrial Innovation Software Revenue — this will include CATIA, ENOVIA, SIMULIA, DELMIA, GEOVIA, NETVIBES, EXALEAD and 3DEXCITE. M. Daloz said that DS will still break out the CATIA, ENOVIA totals
• Life Sciences Software Revenue — this will include Medidata and BIOVIA
• Mainstream Innovation Software Revenue — Centric, 3DVIA, and the 3DEXPERIENCE.WORKS family, where DS will break out SOLIDWORKS

DS helpfully provided a chart showing how this would have looked for 2019:

It’s better but not great — we still can’t compare SIMULIA to ANSYS or Altair, for example, and there is still a very big “Other” in the Industrial bucket. I think most investors would prefer an “Other” that’s maybe 10% of the total, not 40%. But we can see the impact Medidata will have, so that’s helpful.

Other interesting nuggets from the earnings call:

• Keep an eye on announcement from 3DExperience World (fka SolidWorks World) next week. It sounds like some pretty significant announcements will be made — user roles, cloud, platform … M. Charlès says this will create the next 20 years of growth for SolidWorks (the brand)
• M. Charlès also said that DS will start being a bit more aggressive in getting customers to convert to (paid) license models. It’s not clear to me exactly what he meant — whether everyone must someday soon be on subscription — but it is clearly a warning to non-paying users (maybe who dropped off maintenance?) that their world may change
• Cloud continues to be interesting, but prior forecasts of revenue contribution and adoption seem to have been aggressive. M. Daloz says that DS isn’t prepared to report on this now, but perhaps in 2021
• Coronavirus in China caused caution in DS’ outlook for 2020, but hasn’t yet affected revenue forecasts – DS is also taking a wait-and-see approach, just as Hexagon did yesterday.

As far as that guidance goes, DS sees 2020 full year non-IFRS revenue between €4.84 billion and €4.89 billion, or cc growth of about 22%. If we subtract out Medidata as per the chart above, that looks like revenue growth of 8%ish cc in 2020. For Q1, DS expects non-IFRS revenue to be in the range of €1.145 billion and €1.175 billion, cc growth of 20% to 23%.

A lot of numbers and factoids, I know. My main takeaway isn’t about the numbers but about the creation of the COO role, and the focus on 3 major application areas (even though cities and infrastructure weren’t mentioned after M. Charlès’ opening remarks). DS has been trying to reinvent itself since 2010 or so, when it realized that being known as “the CATIA company” was too limiting. Enter the 3DEXPERIENCE idea, which combined brands into solutions — but were still mostly applied to its traditional auto/aero/manufacturing verticals. Trying to grow its “diversification” industries was hard since so much of the focus was on the traditional. M. Daloz has the opportunity now, with full backing and authority, to steer the big DS ship into new directions, which should boost the top line by more tightly focusing DS on new markets.

M. Charlès talked about DS’ direction for 2020 and beyond, being technology that enabling us to make virtual twins of the human body. DS has a start on this, with its Living Heart project, but much remains to be done. Personalized health, the idea that a drug can be created for a specific human or that an implant is specifically manufactured for me and not you, is very powerful. It requires combinations we haven’t made before: genomics and data systems, human behavior analytics, modeling, regulatory compliance and, yes, manufacturing. Can DS pivot? It certainly wants to.