EUR 850.00 For Business Accounts Only

Morningstar | Dassault Posts Good 2Q; 3DExperience Platform Anchors Quality of Company; Shares Still Overvalued. See Updated Analyst Note from 24 Jul 2019

Dassault posted a good second-quarter result and outperformed revenue and earnings guidance. The firm's software growth continued to impress, and we remain bullish on the company's long-term ability to upgrade and sell its connected 3DExperience platform across its diverse and sticky customer base. To that end, total 3DExperience software revenue grew 52% year over year (in constant currency) and constituted 31% of total software revenue, up from 23% in the prior year. We expect the 3DExperience platform to fuel healthy low-teens revenue growth over our explicit five-year forecast period and believe there are significant switching costs and network effects associated with the platform. Current strong adoption strengthens our belief in the firm's wide moat. Management upgraded its full-year guidance for the year based on changes to foreign exchange, and while the upgraded outlook doesn't change our fair value estimate meaningfully, we are raising our fair value estimate to EUR 95 from EUR 91 (in U.S. currency to $106 from $102 including an updated USD/EUR rate) based on our assertion that the firm's competitive position in the market looks increasingly steadfast. We like Dassault's position and business model. However, from a pricing standpoint, we think the stock trades at a significant premium (41 times forward price to adjusted earnings) and would avoid investing new capital in the name.

For the quarter, non-international financial reporting standards revenue grew 16% year over year to EUR 965 million (rose 13% in constant currency). Excluding currency, non-IFRS Americas revenue grew 14% to EUR 252.3 million which was primarily driven by Dassault's direct salesforce. The firm saw good large deal activity within aerospace, energy, and consumer goods companies. In addition, last year's acquisitions of Centric PLM and IQMS gave the region a boost.

Europe performed well and was up 13% to EUR 348.3 million. While most of Europe grew nicely, management noted that Central Europe (including Germany) was a little lackluster with and was only up in the mid-single-digits for the first half of the year. Asia was also a mixed bag with India and China growing over 20%, which was countered by more mature markets in the region growing between 5%-10%.

From a competitive standpoint, it was interesting to hear management call out competitors in the quarter and its win rate versus these peers. For instance, Dassault noted that its product life cycle management, or PLM, product ENOVIA had been chosen 10 times out of 11 against PTC's competing PLM product Windchill in the first half of the year. Meanwhile, management gave similar rosy statistics against Siemens' Teamcenter PLM product. We continue to view such success as emblematic of Dassault's leading PLM position.

On the margin front, non-IFRS operating margin increased 130 basis points year over year to 30.7% and was ahead of management's approximate forecast of 29.5%. The margin improvement was boosted by positive foreign exchange effects, higher-margin revenue mix, and slower hiring within the R&D department. As such, the R&D hiring will ramp in the second half of the year and full-year margin expectations are still within last quarter's guidance albeit at the high end of roughly 32.5%.