In a departure from the recurring theme of this quarter's earnings season, engineering and design software company Dassault Systemes saw a benefit from currency effects in its recent first-quarter results. Of course, it's a French company and reports in euros, so don't be fooled by the startling headline revenue increase of 32%. Nevertheless, the company's constant currency revenue growth of 19% is still very strong. In addition, the company is tracking significantly ahead of company expectations for the full year. Let's look at the underlying themes in the earnings report and what to expect going forward.
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At the last set of earnings, CFO Thibault de Tersant outlined the company's expectations for the first quarter, which included non-IFRS EPS to grow 11% and constant currency revenue to increase 15%-17% on a constant currency basis. (IFRS, or International Financial Reporting Standards, is an international accounting standard, similar to U.S. GAAP.) However, his predictions proved too conservative, as non-IFRS EPS came 18% ahead, and constant currency revenue increased 19%.
Moreover, the company is tracking ahead of the full-year goals outlined at the end of 2014. For example, management expects "organic, double-digit growth in non-IFRS new licenses on a constant currency basis," with "12% to 15% growth in non-IFRS earnings per share" for the full year. The first-quarter earnings more than match up to these expectations with 14% growth in organic new licenses in constant currency and the aforementioned 18% EPS increase.
Given that the first-quarter earnings beat expectations, it wasn't a surprise that the full-year non-IFRS EPS objective was raised to 2.10-2.13 euros, representing a growth target of 15%-17%, compared with the previous target of 12%-15% growth
However, even this may prove too conservative, primarily because new-licenses revenue is growing at such a healthy clip. As the following chart demonstrates, increases in new-licenses revenue tend to lead to a boost in revenue with periodic licenses, maintenance, and other software. This matters because the latter contributed 64% of revenue in 2014.
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Source: Dassault Systemes presentations.
As a company that reports in euros, the strengthening of the dollar versus the euro has obviously flattered its reported growth rate, but the reality is that if Dassault can continue to generate new license growth, then history suggests the periodic licenses and maintenance revenue will surely follow.
Recurring revenue from the cloud, and secular growth
In addition, management believes it has an opportunity to increase recurring revenue as percentage of software revenue -- something likely to be positive for margin and cash flows in future. For example, on the earnings call, an analyst asked about management's "long-term expectation for recurring revenue as a percent of total software revenue," which is "about 80% to 85%, versus low 70s today."
Here is part of de Tersant's response:
I think it is true that we can expect the recurring to go from essentially 72% right now to about 80%. This will be done actually by essentially all our products because of the contribution of CATIA and 3DEXCITE [two of the company's product offerings] on the cloud side. ... The combination of cloud and our recurring business model for newer brands ... is going to lead to that outcome.
In addition, Dassault has been able to report growth from areas of the economy that have seen some weakness. For example, in the earnings presentation, management highlighted notably solid new business activity in areas such as industrial equipment, marine and offshore, and energy, process, and utilities. This is heartening for investors, given the recent weak results from companies that service such end markets, such as MSC Industrial and Illinois Tool Works. It also suggests that Dassault can grow irrespective of the economy.
All told, this was a strong set of results for Dassault Systemes, and the company continues to make hay while the sun shines on the dollar versus the euro. Moreover, its long-term plans to increase revenue through cloud initiatives and new products looks to be on a good course. Meanwhile, Dassault is reporting strength in areas of the economy where others are suffering. Finally, the strong increase in new-licenses sales suggests continued growth in 2015. In all, a strong set of results.
The article Dassault Systemes Continues to Outperform originally appeared on Fool.com.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Dassault Systemes S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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