EUR 850.00 For Business Accounts Only

Morningstar | Dassault Continues to Benefit From Digital Adoption by Clients; Shares Still Overvalued

Dassault Systemes reported a good start to the year. While the first quarter performance was in line with expectations, due to favorable foreign exchange effects, the firm mildly raised its revenue and EPS guidance for fiscal 2019. Group revenue was at the high end of expectations and software revenue in seven of the company’s 11 industries rose double-digits on a year-over-year basis. Dassault continues to benefit from the global shift toward digital transformation, whereby clients are increasingly looking to utilize computer-aided design and product lifecycle management tools to reduce costs and improve their time to market. We see this digital driving force as a long-term boon for Dassault and expect this well-positioned, wide moat stock to thrive over the coming years. Yet, we believe the market is pricing the stock at a significant premium, and we’d seek a wider margin of safety before investing new capital in the name. After taking the quarter into account and slightly adjusting our short-term revenue growth rate, we modestly raise Dassault’s fair value estimate to EUR 91 from EUR 86 (in USD to $102 from $98).

For the quarter, non-IFRS revenue rose 17% year over year to EUR 964 million (increased 13% in constant currency). The firm’s more mature brands, SolidWorks and CATIA, posted mid-single-digit revenue growth of 5% and 6%, respectively. Meanwhile, ENOVIA and Other Software, surged 19% and 22%, respectively, as global industrial operations have become an increasingly important investment for both Dassault and its clients. The company’s newest 3DExperience platform constituted 23% of the firm’s software revenue and 40% of its license revenue in the quarter, with both growing in the mid-20s on a year-over-year basis. We expect the 3DExperience platform to fuel healthy long-term growth and believe there are significant switching costs associated with the platform. Current strong adoption strengthens our belief in the firm’s wide moat.

Dassault’s non-IFRS operating margin improved 140 basis points year over year to 32.8%. The margin performance was ahead of management’s expectations of 31%-31.5%. Currency helped 50 basis points, while operating leverage and slower hiring bolstered the margins 210 basis points. On the other side acquisitions were dilutive by 120 basis points. Still, the fiscal 2019 margin target remains unchanged, and we believe the firm’s upward margin trajectory will be modest over the midterm as we see top-line growth taking precedence.