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Morningstar | Schneider's Early Aggressive Software Acquisition Approach Sets It Up Nicely for Industry 4.0

We believe Schneider Electric’s software strategy offers competitive advantages and should add revenue visibility and returns stability. While stand-alone software sales comprise less than 5% of the group total on our estimates, they support sales for other products and increase customer retention, as the software systems are deeply integrated with end users’ operations. They also provide recurring revenue through licensing fees. We expect software sales to outgrow the group and increase as a portion of revenue over the medium term. Schneider Electric's two divisions--energy management and industrial automation--offer a mix of electrical products, power distribution equipment, and automation components. Two thirds of its sales comes from specialist third-parties such as system integrators, panel builders, and original equipment manufacturers for industrial equipment. They serve end-market customers in the energy and food and beverage sectors, as well as power and water utilities. Increasingly, operations in these end markets are using more software to data mine from ground-level equipment and sensors to extract efficiencies. Over the past several years, Schneider has built up a portfolio of software that customers across its disparate end markets can use to run their plants. The Invensys acquisition, with its Scada and HMI software, and the most recent Aveva deal were pivotal to this strategy.We think the Aveva deal gives Schneider a competitive advantage, particularly with integrators and end users setting up automation systems in processing or manufacturing plants. Aveva’s software includes plant design, which naturally precedes equipment purchases. This places Schneider earlier in the equipment decision-making process of its end users. In its portfolio of automation components, it offers ground level elements like DCSs and PLCs that can offer basic instructions to run individual equipment. On top of this, the company offers operations software that uses algorithms to analyse data and make complex decisions across an entire line or several lines in a plant. Overall, it now offers products that touch all levels of plant operations.