Dassault Expects Slower License Growth in Fiscal-Year 2022, but Subscriptions Are the Future

Dassault Systèmes reported a nice quarter, beating our expectations on all fronts—thanks to foreign exchange tailwinds for the wide-moat French software firm. Despite the nice results, shares are down approximately 3% near EUR 35, which we attribute to management’s lower growth expectations (in constant currency) for license and other software revenue for the year. On the bright side, guidance for recurring revenue growth (in constant currency) was upped at the high end. We view recurring revenue as a more important long-term value driver for the firm over software licenses, as subscriptions continue to make up a greater mix of the business. We think this mix shift will persist even if the rate at which this is occurring is more gradual than some investor would like. We much prefer Dassault’s gradual nudging of customers toward subscriptions compared with a forced, abrupt switch that could leave customers frustrated. All things considered, we reiterate our EUR 37 fair value estimate for Dassault, which leaves shares fairly valued.