Dassault Systèmes reports Q4 2023, all in on subs

Feb 7, 2024 | Hot Topics

Earnings season is in full flow, and it’s time to catch up. Sandvik and SAP told us that the December quarter was pretty good. Demand was better than expected; those projected economic slowdowns, the effects of wars, and supply chain interruptions weren’t as harmful as expected. Does the streak continue? Sort of.

First, the data. Dassault Systèmes reported:

  • Total revenue in Q4 was €1,643 million, up 4% as reported (up 8% cc)
  • Total software revenue was €1,476 million, up 3% (up 8% cc)
  • License (meaning perpetual) revenue was down 4% cc in Q4 (vs. up 20% cc in Q3), which was below the guidance of revenue in the range of down 1% decline to 3% growth
  • Subscription and support revenue was €1,124 million, up 12% cc in Q4 (vs. up 10% cc in Q3), smack in the middle of the company’s guidance of growth between 11% and 13% cc
  • Subscription revenue was up 22% cc vs. 18% in Q3
  • 3DEXPERIENCE software revenue was up 21% cc in Q4 (down sharply on a sequential basis from up 46% cc in Q3 and up 2% cc in Q2) and “represented 42% of 3DEXPERIENCE Eligible software revenue.” (Eligible Software Revenue excludes SOLIDWORKS on premise, MEDIDATA, CENTRIC PLM and recent acquisitions — in other words, it includes all DS products that could reasonably be expected to be 3DX-ed. It’s a more sensible measure than “all software” but sounds a bit strange.) It’s worth noting that a decade into 3DX, 3DX revenue is still less than half of “eligible”
  • Cloud software revenue was up 11% cc in Q4 (vs. 10% cc in Q3) and now represents 23% of software revenue
  • By product category, Industrial Innovation revenue was up 11% cc to €837 million (slowing from growth of 18% cc in Q3) as “CATIA, SIMULIA and DELMIA delivered double-digit growth, driven by strong subscription acceleration”
  • Mainstream innovation revenue was up 5% cc in Q4 to €344 million (slowing from up 7% cc in Q3) as the “SOLIDWORKS transition to subscription accelerated and … CENTRIC PLM maintained a strong momentum”.
  • Life Sciences revenue was up 2% cc year over year on a strong Q4 2022 to €295 million amid the“continued slowdown in clinical study starts in the fourth quarter”
  • By geo, Americas software revenue in Q4 was up 3% cc (vs 9% cc in Q3). The company said it had “significant wins in Transportation & Mobility and Aerospace & Defense” and saw an acceleration in the shift to subscriptions. Europe software revenue grew 15% cc (vs. 21% cc in Q3) “driven by transformation deals in Transportation & Mobility, Aerospace & Defense and Home & Lifestyle,” while software revenue from Asia was up 5% cc (vs. 5% cc in Q3), with “contrasted performances across countries. China and India delivered double-digit growth.”

Quickly, for all of 2023 under IFRS, DS reported total revenue of €5,951 million, up 5% (up 9% cc). Software revenue was €5,360 million, up 5% (up 8% cc). License revenue was €1,088 million, down 2% (up 2% cc); subscription revenue was €4,272 million, up 7% (up 10% cc). Industrial Innovation software revenue was €2,908 million, up 7% (up 10% cc); Mainstream Innovation software revenue was €1,293 million, up 2% (up 7% cc) and Life Sciences revenue was €1,159 million, up 3% (6% cc). Finally, by geo, revenue from the Americas was up 4% (up 7% cc), from Europe up 12% (up 14% cc) and from Asia, down 4% (up 3% cc). DS added, “After a challenging start of the year, performance in China progressively improved but remained volatile.”

For 2024, DS forecasts total (non-IFRS) revenue to be between €6,350 million and €6,425 million, which would be growth of 8% to 10% cc. Software revenue is expected to grow between 8% and 10%; license revenue is expected to decline 1% to increase 3%; subs revenue is expected to grow 10% to 11%. For Q1 2024, DS expects total revenue of €1,490 million to €1,515 million, up 4% to 6% year/year, with most other numbers following the 2024 annual pattern.

TL;DR. What does it all mean? The investors I’ve been in touch with are underwhelmed by the Q4 results and the forecast for 2024 — they were expecting bigger numbers in almost all categories. But if we ignore that (and we can; DS can’t), these results weren’t bad. Of concern is Medidata, which roared during the COVID crisis and has slowed significantly since then, but of more interest to me is the mediocre performance of SOLIDWORKS and the rest of the Mainstream portfolio — it should be growing faster than the reported 2%/7%cc. DELMIAWorks is useful and easy to get started with; SOLIDWORKS itself is a dynamite CAD engine. It appears to be slowing a bit, too. But that slowing in Mainstream revenue could simply be due to the switch from perpetuals (higher $ amounts) to subscriptions (lower $ amounts) and not an actual slowdown in adoption — it’s time for DS to start sharing unit data again, IMHO.

During the earnings presentation, DS said that the large “transformation deals” the company has been highlighting —like the 10-year expansion deal it signed with BMW— are taking longer than expected to ramp up, which has the immediate effect of moving revenue from the first half of 2024 to the second half and beyond. DS expects that, in time, the current 3,000 Catia V5 users will grow to 17,000 3DExperience users, “expanding the engineering platform across multiple disciplines.” That’s a huge potential, but the drawn-out transition creates risk for DS; the longer the customer waits, the less likely the deal is.

Perhaps the biggest non-financial news from this release is that the handoff from Bernard Charlès, who becomes Dassault Systèmes’ Executive Chairman, to new CEO Pascal Daloz is complete. After expressing his support for M. Daloz, M. Charlès said, “The genius of Dassault Systèmes lies in its ability to translate a dream into reality and to drive science-guided imagination. There is more to be invented to advance our mission.” I like this very much: “more to be invented” to me means new — not pushing further forward what already exists.

Of course, in the earnings press release, M. Daloz almost immediately tamped down expectations as he sought to calm any nerves: “As the new CEO, I am honored to lead our company, alongside a talented team, into a new chapter – an evolution, not a revolution.” [I don’t believe he said this in the earnings call; I wonder why?]

In both the press release and on the earnings call, M. Daloz laid out some of his vision: “We are entering an era defined by the principles of the ‘Generative Economy’ … a new equilibrium that prioritizes ‘generation’ over mere ‘consumption’ … “This is not generative AI. ‘Generative’ is the method of life. Imagine self-healing materials. Imagine customers can grow products rather than manufacture them. Imagine net-positive business models giving as much
back to society as they take away… We want to push our Virtual Twin Experience approach further. [For example], mobility is not about devices only, it’s about environments involving passengers, vehicles, buildings, and air quality. Cancer is not just cells: it’s the effect of an organic process. For all this, we have to connect many virtual twins together …”

M. Daloz then introduced something called Science-Based V+R, UNIV+RSE, where “we unify the virtual and the real to reveal the world of possibilities and generate experiences.” I am totally not sure what that means, but it does sound exciting.

Go here for much more detail on the Q4 and 2024 results: https://investor.3ds.com/highlights-q4-2023 .

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