Siemens’ FQ1 saw solid contributions from EDA, Mendix but also PLM caution

Last week was a busy earnings week and we’re going to spend some time this week trying to catch up. First off, Siemens announced that its fiscal first-quarter (ended in December) revenue rose 3% to €14 billion, with growth across all four industrial businesses and in most geos, with notable growth in China and Germany.

Siemens’ Digital Industries business, home to Digital Industries Software (fka PLM) saw FQ1 revenue of €3.77 billion, flat as reported but up 5% in constant currencies. Order bookings in the quarter give rise to optimism for the future: Siemens said that it saw “strong order growth in the automation businesses, including double-digit growth in China and Germany”.

Siemens has taken to using a Hexagon-like combo of arrows to talk about end-markets — here’s its FQ1 representation for the Digital Industries business (remember that this is much more than software– and that the geo info on the right purposefully excludes software — no idea why):

CFO Ralf Thomas said that the software business in FQ1 “grew by 5% on strength in the EDA and Mendix segments while the PLM business continues to see a cautious investment attitude at their customers, for example, in aerospace”. He later said that “cloud and integration investments accounted for around 120 basis points negative impact [on profitability] in the first quarter”.

Looking ahead, Siemens expects the Digital Industries business to see “comparable revenue to grow clearly year-over-year instead of modestly” — in other words, it should be a good year. We don’t normally see a breakdown by month in these sorts of earnings releases but Siemens pointedly said that it saw an unusual uptick in December in the Digital Industries business, where December usually sees slightly more than 1/3 of total revenue for the quarter, as budget flush competes with the smaller number of working days around Christmas in many countries. But, said Mr.Thomas, “this year pent up demand, restocking effects, and faster industrial recovery led to an extraordinary strong December revenue share of 36% of quarterly revenue, close to €100 million above our own expectations”.

Mr. Thomas, in response to a question about the company’s prospects in the US said, “there is momentum that may build up later in the year … we were able to grow based mainly on EDA opportunities, also in the mid-teens in the first quarter, which is quite impressive, I think.”

In general, he added later, “we are very much benefiting at the moment from EDA demand. Yes, semiconductor businesses around the globe are benefiting from their market momentum and we are grasping that opportunity. We do have a tremendous conversion rate there. And we have been really enjoying a great margin development on the software side from that. We do foresee this momentum being up for the next quarter — visibility, as I said is fairly good at the moment. But we are very respectfully observing the market. And it would be too early to conclude whether this will be sustainable for the rest of the fiscal year. At the same time, we intensively invest in further opportunities to grow the cloud base. And that investment … will continue for the next couple of quarters, so if we compare the momentum in software to the underlying and what is sustainable, and that we need to take that into consideration as well. So for the time being, we are very happy with the margin development of software.”

Mr. Thomas also said that the company continues to look for other opportunities, too: “we are ready to invest into additional incremental opportunities if they arise … MindSphere [for example, is] changing our focus to software as a service. We also continue to look for our Mendix opportunities”.

CEO Joe Kaiser summed up his view of the quarter, saying “I’m particularly pleased with the performance of Digital Industries, as it seems that this business not only outperformed expectations, but also [its] peers.” This was Mr. Kaiser’s last earnings call, as he retired after the shareholder meeting last week. He handed the reins to Deputy CEO Roland Busch, who has been a strong supporter of Siemens going further into software and recognizes the need to invest differently in software than in Siemens’ traditional hardware businesses.

For fiscal 2021, Siemens now expects total revenue to be up 8% to 12% (a staggering rise from earlier forecasts of 5% to 8% growth) due to”faster recovery and higher than expected opportunities”.

There’s also one bit of news that actually came out of the company’s annual report, filed in December. The company transferred its stake in Bentley Systems (14% as far as I know, after Bentley’s IPO in 2020) is being transferred from Digital Industries to the Siemens Pension Fund. You may recall that before Bentley’s IPO, we used a revaluation of that stake to imagine what Bentley might be worth … Well, it appears that this periodic revaluation of the stake materially impacted the reported operating profit of the division, which makes its performance look more volatile than the company liked. Moving the asset to the Pension Fund removes the volatility. It’s an accounting thing (even though more interesting than many accounting things) that doesn’t change anything in the cooperation agreements the companies have in place. As before, Siemens continues to work with Bentley on design and simulation software for infrastructure and for visualization and other aspects of Siemens’ manufacturing offering.