EUR 850.00 For Business Accounts Only

Morningstar | Dassault Posts Good 3Q Result; Broad-Based Growth Illustrates Industry Tailwinds; Shares Overvalued

Dassault posted a good third-quarter result that exemplified broad-based demand for its software portfolio. The firm saw double-digit software growth across multiple industry verticals and products, and tailwinds continue for this 3D design and engineering software leader. We see benefits for the company over the long term as it focuses on expanding it platform-based approach through the sales of its 3DExperience platform, otherwise known as Version 6 of its software. We continue to be encouraged by Dassault’s ongoing expansion of V6’s footprint at new and existing customers and believe it will underlie a critical component of these customers’ production processes. To that end, V6 software revenue grew 19% year over year and now constitutes 22% of total software revenue, excluding SolidWorks.

We remain confident in Dassault’s wide economic moat and see little risk to the firm’s strong long-term competitive position, with switching costs and network effects highly apparent. With management mostly confirming its full-year financial objectives and expecting a strong fourth quarter, we retain our EUR 81 fair value estimate. Despite a recent pullback, we continue to view the shares as overvalued and would seek a wider margin of safety before investing new capital in the name.

For the quarter, on an IAS 18 non-IFRS basis, total revenue grew 10% year over year to EUR 831.7 million in both reported and constant currency. Acquisitions contributed 5 percentage points to the revenue growth rate, and we believe the firm will continue to pursue acquisitions to bolster its long-term market positioning.

From a geographic standpoint, software revenue grew 8% in the Americas and Europe and 13% in Asia. After management changes in Latin America, the firm is seeing improved performance from this region. France and Germany continue to weigh on the European market with only mid-single-digit growth from both countries. Meanwhile, Dassault saw broad-based double-digit revenue growth across the Asian region.

By product, Catia and other software, such as Delmia and Simulia, performed well. SolidWorks had less impressive growth due to a tough comparison for last year, but we foresee good ongoing demand for it and believe the recently released SolidWorks 2019 will keep users engaged through greater design flexibility and enhanced experiences associated with virtual reality and augmented reality.

Dassault’s non-IFRS operating margin declined 110 basis points year over year to 30.9% but was in line with expectations and reflects acquisition dilution rather than anything more sinister like pricing compression. We continue to forecast a full-year operating margin around 31.5%, which aligns with management’s guidance.