Siemens Digital Industries software revenue up 11% – and a hint that all is well at Bentley

Aug 7, 2020 | Hot Topics

Siemens AG is a huge and complicated business that announced fiscal third-quarter results yesterday. Total FQ3 revenue was down 5% from a year ago to €13.5 billion. Orders, an important metric for companies that sell hardware, fell by 7% to €14.4 billion, though it would have been worse if not for a €1.1 billion order for high-speed trains in Germany. This is apparently a common-enough order amount for trains: last year’s FQ3 saw a €1.2 billion order for trains in Russia.

Why am I telling you this? Because the part of Siemens that’s most relevant to our PLMish world, the Digital Industries business, was mentioned often in the overall AG’s results:

  • Total revenue for Digital Industries was €3.67 billion, down 6% as reported and down 5% in constant currencies and versus a comparable business structure (cc). The company said that “the decline in orders at Digital Industries was cushioned above all by China’s economic recovery and major contract wins in the software business. Revenue at the automation business fell significantly. Cost savings and a significant rise in revenue at the software business boosted profit considerably.”
  • SAP came up, too: “A groundbreaking partnership with SAP aims to develop an integrated solution for the end-to-end management of products and assets across their lifecycles. This partnership will drive digitalization and deliver a comprehensive solution for the Fourth Industrial Revolution (Industrie 4.0).”
  • The software business reported revenue of €1.054 billion, up 11% (up 10% cc)
  • “Digital Industries saw double-digit growth in its software business, including a number of larger contract wins for Mentor, but weaker demand in other industries, particularly automotive and machine-building”
  • “Growth in the software business was largest in the U.S.; China, which already showed signs of recovery, contributed double-digit growth in the automation business; in contrast, volume declines in the region comprising Europe, C.I.S, Africa, Middle East (Europe/CAME) were due mainly to the automation business”

During the call with investors, CFO Ralf Thomas added a bit more about Mentor’s “excellent performance was based on semiconductor demand in their customer base. So Mentor, just to give you a bit of flavor, in the quarter has been contributing about 40% to the revenue development” — so expansion in existing accounts, as we’ve heard from other PLMish vendors.

Mr. Thomas later said, “from a sequential perspective, I would see software being on a continuing growth path.”

CEO Joe Kaeser added that “our strategy to bring the hardware and the software together into what we call the EAD [Electrification – Automation – Digitalization = Siemen’s tagline for the last few years] system has been paying off. What we see in particular is that what Mentor provides is more and more making its way to the automotive industry with electrical simulation. And even the [semiconductor] world has been picking up on Mentor, to be supported by a corporation which understands a lot about automation. That’s the trend we have been seeing over time, and that is expected to be continued.”

When asked about other software products, management waffled a bit. MindSphere is important but didn’t contribute much to growth. Mr. Thomas said that “we are happy with Mendix even though not that material in terms of top line contribution and earnings but on a very good path also to unfold its beauty in our internal processes, supporting applications then based on MindSphere and the like”

Mr. Kaeser summed it up, this way: “Our early investments in software, digital services, and remote maintenance are clearly paying off; and we are taking market shares, as numbers show for the quarter.”

So much missing detail but we can see directionality: solid overall growth, the electronics/high-tech vertical is doing well, automotive isn’t, the US (for Siemens, at any rate) did well, as did China. Mentor seems to be rocketing along.

And buried in all of Siemens’ material about FQ3 was this little nugget:

Adjusted EBITA Industrial Businesses rose due to Digital Industries on a strong performance in the software business and a positive €211 million effect from the revaluation of the stake in Bentley Systems, Inc.; this more than offset declines at other industrial businesses; all industrial businesses benefited from cost savings resulting from pandemic restrictions

The benefit to Siemens was a 2% addition to the Digital Industries margin — but, why? I’ve asked for a clarification of what this means, specific to Bentley and Siemens. But here are some guesses:

When this sort of factoid hits the news, it can imply a new investment was made in the asset (in this case, that would be Bentley) that changed its valuation. Just yesterday I got a press release that said, “Epic Games today announced a $1.78 billion round of funding consisting of primary capital and secondary purchases from employee equity holders. Epic’s post-money equity valuation is now $17.3 billion.” That means that Epic games raised $1.78 billion by promising the investors 10%ish of the company — and since it all has to sum to 100%, this changed the valuation of all other investors. They likely own a smaller slice of a bigger pie.

What could this mean for Bentley? For the sake of argument, in 2018 Bentley’s Corporate Update said that Siemens owned 9% of Bentley. That’s a fact, from Bentley. WHAT FOLLOWS IS NOT FACT. IT’S PROBABLY NOT EVEN A GOOD GUESS. In that same update, in May 2018, Bentley said it was “On track to surpass annual revenue runrate of $700 million during 2018”, so let’s go with 2018 revenue of $700 million. Now more guesswork, on the multiple that takes revenue to valuation. Let’s go with 6x. That’s far below the 10x Oracle paid for Aconex in 2017 but I can’t imagine Siemens paying that much for anything. Multiple time revenue equals valuation, so 6x * $700 million get us to the notion that Bentley was worth $4.2 billion in 2018. Then that 9% ownership stake means that Siemens paid $378 million for its stake. (AGAIN, THIS IS A TOTAL GUESS. DO NOT RELY UPON THIS FOR ANYTHING.)

So now what?

Siemens tells us that “Adjusted EBITA …. benefited from a positive €211 million effect from the revaluation of the stake in Bentley Systems, Inc.; in contrast, revaluation of this stake in Q3 FY 2019 resulted in a negative effect

Our math was for 2018. In 2019, Bentley may have bought or sold shares that changed the valuation, as Epic did, though probably not on such an epic scale (see what I did there?!). That would lead to a change in the value of Siemens’ holdings in Bentley, which needs to be accounted for in its financial statements.

Siemens says there was a negative effect (which to my UNEDUCATED GUESS means Siemens’ investment in Bentley was worth less) in 2019, Siemens didn’t say how much less so let’s say it was down 10% (NO IDEA–TOTAL GUESS). That would take the value to $340 million in 2019. Adding back the €211 million gained in 2020 takes that to $550 million or so.

And now we’re out of luck. If Siemens’ 9% is now worth $550 million (WHICH IS A TOTALLY MADE UP NUMBER), we get to a valuation of $6 billion, a nice uptick for Bentley over just a few years. But if that $550 million now represents a different ownership percentage, all bets are off. We don’t know what Bentley’s valuation might be. (AND WE NEVER DID. ALL OF THIS IS MADE UP.)

Why go through this exercise? Why bother? Because it’s interesting to think about, to ponder what one of the last remaining independent software companies in our space might be worth. Because it’s an innocent factoid Siemens tossed out, thinking no one would notice — and we just can’t let that slip by.

But I do think we can infer that Bentley seems to be doing well, to have its valuation rise by some not-insignificant amount. Bentley didn’t hold its usual spring update because of a potential IPO, so we’ll have to get our news where we can. And it seems good.

SO, what did we learn? Siemens is happy with its software portfolio and specifically, the Mentor acquisition. Software revenue was up 11%, which leads Siemens to believe it’s taking share. And the prospects for the rest of 2020 are good.

I’ll update if I hear from Siemens to expand or clarify any of its statements — but it’s unlikely. Its earnings content is regulated, carefully created to highlight what the company wants made known, and nothing more.

The title image is from João Trindade, https://www.flickr.com/photos/joao_trindade/4362414729.