In an earnings season that has seen a number of companies talking about a slowing in industrial manufacturing, project pushouts, and inventory corrections, a company that merely confirms it's on track with its previous outlook should be viewed positively. Such is the case with engineering software company Dassault Systemes (OTC:DASTY). The company's second-quarter earnings contained a mix of pluses and minuses, but overall the company looks well set to hit its objectives in 2019. 

Dassault Systemes second-quarter earnings: The raw numbers

For reference, Dassault is based in France and reports figures in euros using International Financial Reporting Standards (IFRS). Just as U.S. companies issue non-GAAP (adjusted) numbers in order to better represent trends in their businesses, Dassault reports non-IFRS numbers as well.

An engineer using industrial design software.

Image source: Getty Images.

Starting with the headline numbers from the second quarter:

  • Non-IFRS revenue of 965.4 million euros ($1.07 billion), representing a 13% increase year over year at constant currency, compared with guidance for an increase of 10% to 13%.
  • Non-IFRS operating margin of 30.7%, compared with 29.4% in the same period last year -- guidance was for around 29.5%.
  • Non-IFRS earnings per share of 0.82 euros representing an increase of 15% at constant currency, compared with guidance for an increase of 7% to 12%.

Dassault Systemes full-year guidance

The headline numbers represent the third consecutive quarter of double-digit revenue growth at constant currency, and management continues to expect 10% to 11% for the full year. However, on a reported basis, management now expects 3.88 billion euros to 3.91 billion euros versus previous guidance of 3.845 billion euros to 3.875 billion euros, with the difference down to a more favorable currency outlook.

Turning to the full-year operating margin outlook, CFO Pascal Daloz adjusted it slightly to 32.5% from a previous range of 32% to 32.5%, citing a more favorable revenue mix with a "higher contribution from the recurring software" and currency.  

Ultimately, this led to an increase in the full-year EPS guidance from a range of 3.40 euros to 3.45 euros to a range of 3.45 euros to 3.50 euros, again the difference coming from more favorable currency.

All told, the headline numbers show a company on track compared with its original guidance for the year. However, there was one update that might cause some concern for investors.

Dassault license sales

The company generates around 62% of its revenue from subscription and support revenue (software) and only 11% from services revenue. But as ever with software companies, the key to its future growth prospects is its license and other software sales growth.

The chart below shows how it was another good quarter for license sales growth.

Dassault Systemes growth by activity.

Data source: Dassault Systemes.

However, there was a slight reduction to management's full-year guidance. Specifically, full-year license growth at constant currency is now expected to be 9% to 11% instead of the 10% to 12% forecast previously.

The subject came up on the earnings call, with Daloz explaining that the guidance for overall software (licenses plus subscriptions and support) remains the same at 10% to 11% for full-year growth at constant currency because subscriptions and support revenue growth is now expected to grow at 10% rather than 9% to 10%.

Daloz put the reduction in expectations for license sales growth down to what he had previously described as "moderation" of growth for its Solidworks software license. During the earnings call, CEO Bernard Charles explained that the computer-aided design and engineering software program, which is responsible for slightly less than a quarter of software sales, "is going through a significant upgrade" and this could be causing some disruption to normal sales patterns.

It's something to watch for in future quarters.

Looking ahead

While the slight downgrade to license sales expectations is a bit disappointing, it seems to be a consequence of the evolution of Solidworks software rather than any kind of slowdown in end demand -- what investors may have been worried about going into the quarter. As such, Dassault can probably be given the benefit of the doubt over its second-quarter and full-year guidance. Despite an uncertain economic environment, it remains on track in 2019.