DS’ Q3 shows the challenges in the perpetuals-to-subs transition

If you look at the financial news, you’ll probably see headlines about today’s earnings announcement by Dassault Systèmes that focus on how license revenue was below expectations — and that’s true. But it doesn’t tell the whole story. DS says the miss is due to lower-than-anticipated perpetual license sales in China, which again saw COVID-related shutdowns during the quarter. Not in the company’s control. In the old world, where all sales were perpetual, a company could focus its resources on another geo to try to make up the deficit, but today the math is different. For one perpetual, DS probably has to sell 3-5 subscriptions, a tough ask.

Here are some of the details —many more here— then some thoughts on what it all means. For the third quarter, 

• Total revenue was €1,373 million, up 18% as reported and up 8% in constant currencies (cc) 
• Software revenue was €1,230 million, up 18% (up 8% cc)
• Licenses and other software revenue decreased by 2% cc to €221.3 million
• By product grouping, software revenue from the Industrial Innovation brands was up 6% cc to €624 million. CATIA “exhibited continued strong momentum with revenue up double-digits.” ENOVIA and DELMIA showed “strong growth during the period”
• Mainstream Innovation software revenue was €312 million, up 5% cc. SOLIDWORKS sales, in particular, were affected by China’s COVID-related lockdowns
• Finally, Life Sciences software revenue was up 14% cc to €295 million, led by MEDIDATA
• And because you want to know: 3DEXPERIENCE software revenue grew 15% cc in Q3 and now represents 32% of software revenue
• By geo: revenue from the Americas was up 7% cc to €510 million, driven by strong performance in life sciences and high tech 
• Revenue from Europe was €299 million, up 9% cc, on “good performance in transportation and mobility”
• Revenue from Asia Pacific was €510 million, up 6% cc, driven by double-digit growth in India and Korea.
• China came up often as business there was worse than anticipated. COVID-related shutdowns made selling a challenge, and the country’s preference for perpetual licenses (and SolidWorks) had a disproportional effect on those specific results
• Services revenue increased by 16% cc to €143 million.

During its call with investors, DS explained more fully the part of the earnings announcement that deals with OUTSCALE, the company’s “sovereign cloud infrastructure.” A teeny comment in the press release said that OUTSCALE has been made a brand at the same level as CATIA, ENOVIA, etc. Why? And why tell us about it? Because, said CEO Bernard Charlès, it’s the way of the future. Paraphrasing here, “OUTSCALE is becoming the common operating infrastructure for all we do. We have virtualization to support multiple clouds already in place. We can run services on Amazon AWS and our instances — and we plan to support more multiscalers in future years. We expect to offer cyber-governance at three levels of security: across international frontiers; regional environments aligned to local laws; and dedicated clouds that are physically located and operated by us for special, highly sensitive programs. Those three levels of cyber-governance are fully integrated into the OUTSCALE framework so that we can support clients depending on what they do —most are likely to use at least two levels to respect their governance needs.” DS COO Pascal Daloz added that this wouldn’t be as expensive to DS as it may sound. (Again paraphrasing) “We can put different hyperscalers underneath OUTSCALE, like Amazon AWS. There’s no need for us to invest too far ahead of revenue. We can build capacity as we need it” and work with partners like Amazon and others where that makes the most sense.

DS management also teased the Q4 results announcement in February, saying it would have more about the company’s plans for this whole cyber venture. But one data point we already have might explain why the company sees this as a necessary expansion. In Q3, DS said cloud revenue was up 21% and now represents 24% of software revenue. So it’s not the majority of any revenue category but is growing significantly faster than any other software category.

And one other announcement was tucked into the earnings news: DS acquired StyleSage, an AI-powered competitive benchmarking, price optimization, and trend forecasting platform that will be added to the CENTRIC PLM offering. It adds a web-crawling capability to enable users to capture data for “price improvement, margin and profit visibility, and optimization.” As M. Charlès described it, brands can use StyleSage to examine what retailers are charging and how items compare and then use that data to calculate demand and set prices. I believe StyleSage is a fashion industry acquisition, but M. Charlès also spoke about extending Centric’s reach into more areas, so perhaps this will also lead to a more general e-commerce offering.

TLDR? These results were really very good, except for the one glaring not-so-great factoid about the license revenue shortfall. All geos were up, it sounds like all industries were up, too — this is likely a momentary blip. I’m more interested to see how DS rolls out its OUTSCALE offer in a world where 76% of buyers still habe to be converted to the cloud way of life. We’ll just have to tune in again in February.