France-based engineering and design software company Dassault Systemes (NASDAQOTH: DASTY) produced a mixed set of results in its first quarter. The headline numbers were fine, and management sounded an upbeat tone with regard to its 3DExperience and Solidworks platforms, but new software license sales were lower than the forecast rate for the full year. Let's take a closer look at what happened.
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Dassault Systemes first-quarter earnings: The raw numbers
For reference, Dassault reports in euros and uses International Financial Reporting Standards (IFRS). Companies give non-IFRS numbers for the same reason that many U.S. companies use non-GAAP numbers: They feel they report better on underlying conditions.
Starting with the headline numbers:
- First-quarter non-IFRS revenue of 765.7 million euros was ahead of previous guidance in the range of 740 million euros to 750 million euros.
- First-quarter constant currency non-IFRS revenue increased 8% year over year compared to previous guidance for a 6% to 7% increase.
- First-quarter non-IFRS earnings per share of 0.53 euros was ahead of guidance of 0.48 euros to 0.50 euros.
Designers use Dassault's Solidworks software to develop new products. Image source: Dassault Systemes.
However, management didn't change its base assumptions for full-year 2017 guidance, even though headline revenue and EPS guidance was moved higher on the back of more favorable currency movements.Dassault reports in euros, but nearly 58% of its revenue comes from outside Europe, so its revenue and earnings are materially subject to currency movements.
- Full-year non-IFRS revenue growth target of 6% to 7% in constant currency was maintained, but favorable currency movements mean management now expects full-year revenue of 3,290 million euros to 3,315 million euros instead of a previous range of 3,275 million euros to 3,300 million euros.
- Full-year non-IFRS operating margin still expected to be at 31.5%.
- Full-year non-IFRS EPS now expected to be in the range of 2.67 euros to 2.72 euros compared to previous guidance for 2.65 euros to 2.70 euros.
All told, management maintained constant currency revenue guidance, but favorable currency movements are leading to an increase in the reported revenue and EPS guidance figure, even though the first-quarter headline numbers were ahead of general expectations.
New software licenses
New software licenses only make up around 20% to 25% of total revenue. However, they are the key to future periodic licenses and maintenance and services growth.
Data source: Dassault Systemes presentations. Chart by author.
As such, it's a closely followed metric for Dassault Systemes. Going back to the fourth-quarter 2016 earnings presentation, CFO Thibault de Tersant said, "For 2017, we see a year of solid new business activity, translating into similar new licenses revenue growth to that of the 2016 fourth quarter." Given that new license growth was 10% in the fourth quarter, management forecast 8% to 10% growth in new license revenue in constant currency.
Fast-forward to the first quarter, and management maintained the full-year target, despite only achieving a 6% growth rate in new license revenue in constant currency in the quarter.
What management said
Listening to the earnings call, it's clear that management believes its key growth drivers are Solidworks (3D computer-aided design, or CAD, software) and its 3DExperience platform. In a nutshell, the latter is a solution that allows corporations to navigate and access Dassault's design software as part of a collaborative interactive environment.
Solidworks sales grew strongly in the first quarter, and CEO Bernard Charles said, "Solidworks has developed a unique position in the entry-level market as companies continue to standardize on it, resulting in an extension of its market leadership."
Data source: Dassault Systemes presentations. YOY = year over year.
As for 3DExperience, Charles talked of its potential to drive future software sales: "[W]e are now addressing a much larger software market scope -- 26 billion in USD, a doubling of our previous perimeter -- and we have a significant revenue opportunity and runway."
All told, investors in Dassault should be looking forward to a pickup in new licenses sales growth while hoping 3DExperience adoption takes off in the manner that management expects.
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