In the context of a stock market seeming worried about the prospect of cyclical slowdown and the impact of tariffs on international companies, Dassault Systemes' (OTC:DASTY) earnings were an island of calm. The maker of engineering design software pretty much affirmed all its underlying targets, and served notice of preparation for a good 2019. Let's sift through the numbers and information from its somewhat complex earnings report in order to see what's going on.

Dassault Systemes third-quarter earnings: The raw numbers

A France-based company, Dassault reports in euros, and as such reports using International Financial Reporting Standards (IFRS). Just as U.S. companies issue non-IFRS numbers too, in order to better represent trends in their business, so Dassault reports non-IFRS numbers as well.

A man in a hard hat looks at a floating 3D object

Image source: Getty Images.

To make matters even more confusing, this year, the company is shifting to a new accounting standard: IFRS International Accounting Standards (IAS) 15, in place of IFRS IAS 18. Since the company gives guidance under IFRS IAS 18, these are the numbers I will use throughout.

Bean-counting matters put aside, here are the headline numbers from the third quarter compared to management's guidance:

  • Revenue came in at 831.7 million euros, compared to guidance for 805 million euros to 825 million euros.
  • Revenue growth in constant currency of 10% came in at the high end of guidance for growth of 8% to 11%.
  • Earnings per share of 0.71 euros came in above the guidance range of 0.64 euros to 0.68 euros.
  • EPS growth in constant currency of 11% came in above the guidance range for growth of 1% to 8%.

As you can see above, on an underlying basis -- meaning non-IFRS IAS numbers at constant currency -- Dassault's revenue was at the high end of guidance, while earnings were above. This trend played out in a subtle change in full-year guidance:

  • Full-year revenue is now expected to be in the range of 3.425 billion euros to 3.45 billion euros, compared to previous guidance for between 3.41 billion euros and 3.44 billion euros -- an increase, but still a growth rate in constant currency of 9% to 10%.
  • EPS guidance range increased to 2.98 euros to 3.02 euros, compared to previous guidance of 2.95 euros to 3.00 euros -- a slight increase in constant currency guidance to 16%-17%, from 15%-17%.

Based on the underlying guidance, Dassault is pretty much on track for 2018.

Trends in Dassault Systemes' business

Probably the two most important indicators to follow with Dassault are its license revenue growth and the development of its 3DExperience platform sales.

New licenses are the key to future subscription and services revenue. As you can see in the chart below, the growth of 7% in licenses revenue suggests good future growth. Moreover, CFO Pascal Daloz stated that "we are also confirming our licenses revenue growth target of 9% to 11% in constant currencies for year 2018, and recurring revenue growth of about 9% in constant currencies."

Dassault Systemes revenue growth, Q1 2015 through Q3 2018

Data source: Dassault Systemes presentations. Non-IFRS at constant currency. Chart by author.

3DExperience is a platform that allows users of Dassault's design software to collaborate with other company functions (such as design, quality control, research, and sales and marketing) on a global basis, in order to cut production costs and better develop products and solutions.

The good news: 3DExperience and related sales of Dassault software continue to grow strongly. Daloz outlined that 3DExperience software sales grew 19% year to date, and 3DExperience-related sales now represent 22% of year-to-date sales compared to 20% a year ago.

Looking ahead

Dassault's earnings, guidance, and commentary suggest all is well with the company's growth trajectory, and 3DExperience sales continue to gain traction. However, the real question is likely to be whether the overall industrial economy slows down and creates hesitation among customers to buy new licenses. So far, there's no sign of it in Dassault's numbers, and the company remains on track.

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