Dassault Systèmes Earnings: China Softens Software Sales, but Pickup Underway; Shares Fairly Valued

Dassault Systèmes DSY reported generally in-line first-quarter results. Total revenue and earnings per share came in right at our expectations. However, the shares dipped after the report as the market appeared to be unhappy with software revenue coming in under expectations, even though services revenue outperformance made up the difference. We are not as shaken by the more moderate software results, since the weakness stemmed from China, which is showing signs of a pickup. As a result, management’s outlook for the year is unchanged. We are maintaining our EUR 37 ($41 with updated foreign exchange) fair value estimate for the wide-moat computer-assisted design company. We view the shares as fairly valued and stress that this a rarity over the last six years, when we have often found them to be overvalued.

First-quarter revenue increased 7% year over year in constant currency to EUR 1.4 billion. Total software revenue rose 6% year over year in constant currency. Asia was a weak market for Dassault; China sales declined 8% year over year as investments in innovation mimicked low economic and production activity. Nonetheless, we see evidence of a rebound as the region accelerated in March. Non-IFRS earnings per share came in at EUR 0.28, marking a 1% year-over-year increase (in constant currency), right in line with our estimates.

Dassault’s non-IFRS outlook for fiscal 2023 includes reiterated year-over-year revenue growth between 8% and 9% at constant currency and an EPS midpoint of EUR 1.19. We remain confident that Dassault can reach a five-year revenue compound annual growth rate of 10%, especially given its increased take of car engineering. Dassault says approximately 72% of cars have been engineered with its Catia platform over the last decade, but in new electric vehicles, the company estimates 85% are engineered with Dassault software.