EUR 850.00 For Business Accounts Only

Morningstar | Dassault Reports Solid 2Q, With Client Wins and M&A Supporting Wide Moat; Shares Overvalued

Dassault Systemes produced a solid second-quarter performance, announcing several key client wins and the acquisition of retail-focused product lifecycle management firm Centrix Software (it acquired 63% of the company for roughly $350 million with the remaining portion to be acquired in 2020 and 2021 based on performance). We think Centric will bolster Dassault’s 3DExperience platform, particularly in its consumer goods-retail industry solution. In terms of client wins, we believe the recently signed partnership with EDF Group, which spans 20 years, is indicative of Dassault’s ability to secure highly sticky deals via its flagship products with market-leading firms. This helps support our wide economic moat rating and gives us comfort in our healthy long-term growth outlook. Dassault modestly adjusted its revenue and earnings outlook for the year based on acquisitions, currency, and a slightly lower tax rate. However, the impact is negligible, and we reiterate our EUR 81 fair value estimate. With the stock trading at a large premium to our valuation, we’d seek a significant pullback before considering it for investment.

For the quarter, on an IAS 18 non-IFRS basis, total revenue increased 4% year over year to EUR 840.3 million (8% in constant currency and 6% excluding acquisitions). In constant currency, by brand, Dassault experienced broad double-digit license growth. We continue to expect high-single-digit to low-double-digit revenue growth for both software and licenses for the year, and we think customers will keep migrating to the firm’s 3DExperience platform to meet the current and future demands of digital transformation. To that end, we were encouraged by 3DExperience license growth of 27% in the first half of the year (now 33% of total license revenue).

Dassault’s second-quarter operating margin expanded 10 basis points year over year to 30.2%, which reflected an underlying organic improvement of 100 basis points offset by foreign currency effects of 40 basis points and acquisition dilution of 50 basis points. We expect the full-year margin to be about 31.5% and foresee modest midterm margin expansion as a result of operating leverage and higher-value sales related to the 3DExperience platform.