If the global economy is supposed to be slowing down and taking software sales to industrial companies with it, you wouldn't know it from Dassault Systemes' (OTC:DASTY) latest earnings report. Its results confirm that the company's long-term strategy is on track, and the forecast for 2019 implies another round of double-digit revenue growth. Let's take a look.
Dassault Systemes' fourth-quarter earnings report: The raw numbers
Dassault is based in France, so it reports in euros and uses International Financial Reporting Standards (IFRS). Just as U.S. companies issue non-GAAP numbers in order to better represent trends in their business, so Dassault reports non-IFRS numbers as well.
If that weren't confusing enough, the company shifted to a new accounting standard in 2018 -- IFRS International Accounting Standards (IAS) 15, in place of IFRS IAS 18 -- but will shift to implementing IFRS 16 as of January 2019. Nonetheless, the numbers used here are on a like-for-like basis.
- Full-year revenue (non-IFRS under IAS 18) went up 10% in constant currency to 3.488 billion euros compared to guidance for 3.245 billion euros to 3.45 billion euros, an implied growth rate of 9%-10% at constant currency.
- Full-year EPS (non-IFRS under IAS 18) increased 20% in constant currency to 3.11 euros compared to guidance of 2.98 to 3.02 euros, an implied growth rate of 16%-17% at constant currency.
Thus, revenue and earnings came in at or above the high end of the guidance given on the third-quarter earnings call, and management made good progress on its underlying objectives. For example, new license revenue growth is the key to Dassault's future growth prospects. As you can see below, license and other software sales tend to lead subscription and support as well as services revenue.
The good news is that license revenue at constant currency grew 11% for the full year, compared to guidance for 10%-11%. Furthermore, management expects license growth of 10%-12% at constant currency for 2019.
Dassault Systemes' key growth driver
The company's 3DExperience platform allows businesses to use 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. It's the key to Dassault's future sales growth.
So, according to CEO Bernard Charles on the earnings call, "Everything that Dassault Systemes is doing for the future will be based on this platform, with most of the current large customer industry solution[s] already there."
Indeed, Dassault is making strong progress in encouraging its clients to adopt the platform. Charles discussed some high-profile adopters like Boeing and Safran and revealed that 3DExperience-related sales increased 24% at constant currency in 2018. CFO Pascal Daloz said the 3DExperience platform now represents "25% of the total software revenue compared to 21% last year" and half of new license sales in the fourth quarter.
Whichever way you look at it, Dassault is achieving good adoption of the 3DExperience platform, and its guidance for 2019 implies another strong year ahead.
Management's (non-IFRS 15 and 16) guidance for 2019 calls for constant currency growth of 10%-11%, implying revenue of 3.81 billion to 3.84 billion euros. Operating margin is expected to improve to 32%-32.5% compared to 31.8% in 2018. However, a higher tax rate of 29% compared to 28.2% in 2018 will lead to EPS of 3.35 to 3.4 euros, representing growth of 7%-9% and 9%-11% in constant currency.
Putting aside the bewildering amount of numbers, it's clear that Dassault is on track for another year of double-digit revenue growth as its 3DExperience sales gain traction.