Siemens orders ahead of plan, SaaS booming

Ah, Siemens. If you thought Hexagon was complicated, buckle in. Siemens AG just reported fiscal Q1 2022 results, and we’re going to roll that into a recap of fiscal 2021. There’s a lot of ground to cover, so let’s get going.

Siemens AG reported fiscal 2021 results back in November. Very briefly, total revenue for the year was €62.3 billion, up 13%. Digital Industries revenue for the year was €16.5 billion, up 10% as reported and up 13% on an organic basis and in constant currencies (occ). Within DI, Software revenue was €4.3 billion, up 4% (up 7% occ). A quick refresher: Digital Industries makes factory automation systems, motion control systems like drives and motors, and process automation systems –things like power supplies. That is roughly 2/3 of Digital industries; a tiny bit is customer services, the remaining 1/4 is Software. What we used to know as Siemens PLM (Teamcenter, NX, etc.) now also includes electronic design automation (fka Mentor), digital manufacturing, industrial IoT (Mindsphere), and the Mendix low-code/no-code platform.

Under new CEO Roland Busch, Siemens AG is doubling down on its evolving image — it wants to be known as a technology company, which to some extent, it already is. For years, Siemens claimed to be in the top 10 of global software companies — and surprise, it may well be, if we include software offerings from outside the Digital Industries Software unit (although that continues to be the only one to specifically report software revenue). In its FQ4 material, Siemens showcased its “Digital Businesses,” the software and software-related services from across the Smart Infrastructure, Digital Industries, Mobility, and Siemens Advanta businesses:

As you can see in slide 13 of the Q4 presentation, Siemens says its Digital Business generated €5.3 billion in revenue in fiscal 2020, €5.6 billion in fiscal 2021, and is expected to grow at around 10% per year through fiscal 2025. How? Digital Industries Software is likely the largest component of that growth, even though it will initially be slowed by the move to SaaS subscriptions. DI Software is expected to accelerate after fiscal 2023. Smart Infrastructure includes digital building services –think sensors, predictive maintenance, space utilization analytics, and so on. The Mobility business intends to expand on its Mobility as a Service offering — also around asset management, but of rail assets rather than buildings. Finally, Siemens expects to grow its Advanta digital transformation services consultancy. Add it all up and Siemens expects these Digital Businesses to have revenue of around €8 billion in fiscal 2025.

I don’t follow every software company on the planet, but Siemens’ Digital Business revenue of €5.6 billion in 2021 is BIG — it’s about $6.2 billion, which would put it just outside the top 10 software vendors in the world, according to the list generated by https://www.alltopeverything.com/top-10-software-companies/. In our little PLMish patch, the Siemens’ Digital Business mashup is bigger than Dassault Systèmes (which reported last week that its 2021 revenue was €4.9 billion). DS is just a bit larger than Siemens Digital Industries Software on its own (€4.9 billion for DS vs. €4.3 billion for Siemens Digital industries Software).

Big-ness isn’t everything. Even more interesting was this, page 9 of Siemens’ fiscal Q4 presentation:

Technology means innovation, and that is expensive. Siemens is ramping up its investment in R&D, with (as you can see from the slide) 7.8% of revenue in R&D, almost half of that in Digital Industries. Mr. Busch told investors that around 50% of this investment is allocated to software and IoT. Some of this is about integrating the offerings from the various Digital Businesses where that makes sense, some of it is about re-imagining products for the cloud where that’s warranted–but there’s also still a lot being spent on research and development within the various DI Software brands, such as Xcelerator, NX, Teamcenter, etc.

Those are forward-looking promises. What’s happened since November’s announcement?

In fiscal Q1, which ran from 1 October to 31 December 2021, Siemens says the AG beat expectations for orders, sales, profits, and cash — all metrics investors love. In Q1, total revenue was €16.5 billion, up 17% as reported and up 9% occ. That’s great, but we care about Digital Industries, which reported revenue of €4.3 billion, up 15% (up 11% occ), within which the DI Software business reported revenue of €1.2 billion, up 14% (up 7%). The company said that DI revenue was up in all parts of the businesses, “led by the automation businesses, and in all reporting regions, including substantial software growth in the U.S. [due to] large orders for electronic design automation (EDA) solutions.”

During the FQ1 earnings call, Mr. Busch told investors that DI “Software closed several larger deals in the PLM and EDA business, leading to substantial order growth north of 30% on easy comparables [in FQ1 2021]. Some of these orders came in earlier than expected … Annual recurring revenue grew by 11% year-over-year to €3 billion, in line with our midterm target of 10% annual growth. Cloud ARR grew by 1 percentage point in this quarter to 6% overall. After the first quarter of actively selling our cloud-based offerings, customer feedback is positive … Our plan is to increase the speed of the SaaS transition in upcoming quarters. Around 500 customers have signed on to the new software as a service business model, seeing the distinct value of this enhanced offering.“

About those contracts that came in earlier than expected: CFO Ralf Thomas told investors, “we were pleased by the fact that we received EDA orders earlier than originally expected. That kind of pull-in won’t repeat itself endlessly, but it’s too early to assess what impact that is going to have on the full fiscal ’22. If and when there’s an opportunity to grab a major order, we take that. And as I have pointed out many times before, those large orders are building up over years.” Mr. Thomas also said that it is too early to know the magnitude of orders that move from perpetual to Saas/subscription, which would lower revenue and affect margins in any one period — a story we’ve heard over and over again as companies add subs to their price books.

And that leads to outlook. Siemens says that its targets for fiscal 2022 remain unchanged. Digital Industries is expected to deliver occ revenue growth of 5% to 8%. Specifically for DI Software, revenue may decrease from a year ago, as there is a “higher volume of PLM contracts, which are up for renewal and where we target to convert a sizable number to SaaS.”

You can read much more on Siemens’ investor website, here.

OK. That’s a lot — TL;DR. What does it all mean? I’ve met Mr. Busch a couple of times and he is dead set on refocusing Siemens as a “global technology powerhouse that has stood for engineering excellence, innovation, quality, reliability and internationality for more than 170 years.” That’s tricky — drawing a continuous line through 170 years of history, from the early days of electricity to the massive technology changes going on now. For Siemens, part of that change is “portfolio simplification”, selling off or spinning out the parts of the business that don’t fit into this vision. It’s still very much a work in progress, with another divestiture announced just this week, and more to come. But ultimately, Siemens will be able to put that cash and energy into the “technology powerhouse” parts of the business. And that includes DI Software, which seems to have the AG’s full backing.

Siemens Digital Industries Software may have a bit of a rocky 2022 from a financial perspective since selling more SaaS will depress revenue in the short-term and require investment in both software and hardware infrastructure, which will drag down margins. But the AG is in this for the long haul and keeps pumping investment back into the business, which should contribute to that upward trajectory of over 10% starting in fiscal 2024.

I also had a conversation earlier this week with Siemens Digital Industries Software CEO Tony Hemmelgarn, but putting all of that into one post is simply too long — look for another post soon.