Dassault Systemes Earnings: Upfront Licenses Strong as Subscription Conversions Progress

Dassault Systèmes DSY reported results right in line with our expectations—thanks to a boost in upfront license revenue and strength in its industrial innovation software. While this quarter saw upfront license revenue strength, conversion to subscriptions is progressing at a healthy pace—which we think will bode well in the long term, carrying a host of benefits from increased customer retention to easier upselling. The firm is still experiencing meaty foreign exchange headwinds, but with this baked in previously, management has maintained its outlook for the year. Shares are up 2% upon results and remain near our EUR 37 fair value estimate, which we reiterate for the wide-moat firm. While we believe Dassault shares are fairly valued at the moment, for investors looking to enter the moaty CAD software market, we think Autodesk is attractively priced given our $247 fair value estimate, as the firm boasts additional undervalued greenfield opportunities—like building information modelling, or BIM.

Third-quarter revenue increased by 4% year over year as reported (and 11% in constant currency), to EUR 1.42 billion. Total software revenue rose by 5% year over year as reported (and 12% in constant currency), with industrial innovation software greatly leading the pack, growing revenue by 12% year over year as reported. While we believe PTC is ahead of Dassault in cloud progress, we don’t think Dassault is far behind with its cloud revenue now representing 25% of software revenue as of this quarter. Additionally, a rebound in license growth in the quarter (up by 20% year over year) stemmed from new business growth. Nonetheless, we think Dassault remains focused on the more lucrative long-term opportunity: conversions to the subscription model. Non-IFRS earnings per share in the quarter was EUR 0.28, benefiting from operating margins up 50 basis points year over year.