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Dassault Systemes' Underlying Strength Shines Through

Engineering design software company Dassault Systemes (NASDAQOTH: DASTY) reported a mixed set of third-quarter results. The underlying earnings are strong and the company is strategically setting itself up for long-term growth with its new licenses sales and exciting deals with large companies like Boeing and Scania. However, there was some near-term weakness in services revenue, and management was forced to lower full-year margin and earnings expectations due to adverse currency movements. Let's take a closer look at the quarter.

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Dassault Systemes third-quarter earnings: The raw numbers

France-based Dassault reports in euros using International Financial Reporting Standards (IFRS) and non-IFRS accounting (equivalent to how U.S. companies report GAAP and non-GAAP numbers) but generates around 58% of its revenue outside Europe. In other words, its revenue and earnings are moved by changes in currency -- a particularly relevant point in this quarter's earnings and guidance.

Starting with the headline numbers in the quarter:

  • Total non-IFRS revenue of 752.9 million euros fell below guidance for 760 million euros to 775 million euros, but on a constant-currency basis, it came in at the bottom of the guidance range of 6% to 8% growth.
  • Non-IFRS operating margin of 32% came in at the top of the guidance range of 31% to 32%.
  • Non-IFRS EPS of 0.64 euros came in toward the high end of the guidance range of 0.62 euros to 0.65 euros

In a nutshell, constant-currency revenue growth was a bit light, but margin came in line with expectations.

Guidance

As you can see above, adverse currency movements impacted third-quarter earnings, and they also caused management to lower full-year margin and earnings expectations. However, management also reduced full-year revenue growth expectations due to a combination of currency impact and services revenue that was lower than previously anticipated.

A look at full-year guidance:

  • Non-IFRS revenue expected in the range of 3.185 billion euros to 3.205 billion euros compared to previous guidance of 3.240 billion euros to 3.265 billion euros -- although on a constant-currency basis it represents a lowering of expectations for 6% growth from a range of 6% to 7%.
  • Non-IFRS operating margin of 31% to 31.5% compared to previous guidance of 31.5%.
  • Non-IFRS EPS of 2.57 euros to 2.61 euros compared to previous guidance for 2.62 euros to 2.66 euros.

Services and software revenue

As noted above, services revenue growth was weaker than expected, declining 3% in the quarter. CFO Thibault de Tersant discussed the matter on the earnings call and claimed that the 82.3 million euro figure was 9 million euros below the company's expectation. Tersant attributed half of the shortfall to delays in contract signings and the rest to "project work that is now going to system integrator partners and that we expected to be compensated for by several brands."

However, services revenue is a relatively small part of Dassault's revenue, and even though the shortfall helped reduce full-year revenue growth expectations, it didn't impact margin or earnings expectations.

Data source: Dassault Systemes presentations. In millions of euros.

On a more positive note, new licenses revenue growth of 12% in the quarter was in line with management's expectations for double-digit growth. Moreover, management maintained expectations for full-year new licenses revenue growth of 8% to 10% with double-digit growth in the fourth quarter.

Data source: Dassault Systemes presentations. Non-IFRS constant-currency revenue growth.

Growth in new license sales is good news because it's the key to future periodic and maintenance software growth -- how Dassault generates the bulk of its revenue.

Moreover, management lauded the signing of a deal with Scania to implement its 3DExperience platform. The platform allows users of Dassault's engineering design software to collaborate with other company functions (such as marketing, sales, research and development, support, etc.) in order to create and support products.

At the beginning of the year, management claimed it had passed an inflection point in customer adoption of the 3DExperience platform, and the Scania deal is further evidence, following from the Boeing deal, that it's becoming increasingly relevant to Dassault's customers. Indeed, CEO Bernard Charles claimed that 3DExperience new licenses "represented about one-third of the related new licenses revenue."

Looking ahead

Moving into the fourth quarter, investors will want to see double-digit growth in new licenses accompanied by ongoing growth in 3DExperience-related software sales. Dassault Systemes is achieving its main aims for 2017 even if adverse currency movements and weaker service revenue are holding the company's earnings back in the near term.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.