Software & IT Services
Design Software: it is not all about CAD
8 April 2015
Gal Munda Analyst +44 20 3465 2746 [email protected]
Daud Khan Analyst +44 20 3465 2638 [email protected]
Jean Beaubois Specialist Sales +44 20 3207 7835 [email protected]
ATLAS ALPHA • THOUGHT LEADERSHIP • ACCESS • SERVICE Software & IT Services
THE TEAM
Gal Munda joined Berenberg in 2014 from PricewaterhouseCoopers, where he worked in the financial decision and analysis department. Previously, he was part of PricewaterhouseCoopers’ assurance practice. He started his career at Raiffeisen Bank where he was a trainee analyst supporting coverage of CEE mid-caps. Gal is a qualified accountant (ACA) and holds a Masters degree in Finance & Investments from the University of Nottingham.
Daud Khan joined Berenberg in September 2011 with responsibility for Software and IT Services research. Previously, Daud worked at JPMorgan Cazenove for five years, covering software and latterly heading up the mid-cap technology team. Daud has been an analyst since 1999, having worked for Merrill Lynch, where he headed up the European software team, and for MF Global. He was a founding principal of Clear Capital, an equity research boutique. Daud is also an ACA, having qualified with PricewaterhouseCoopers.
Je an Beaubois has 12 years of equities experience working both on the buy-side and the sell-side. Jean joined Berenberg in 2010 having previously been a portfolio manager on the cUSD3bn Morgan Stanley Global Value Fund where he was in charge of TMT investments. He was also an analyst on the Global SmallCap Fund in charge of the DACH region. He holds a Masters in Finance from INC and is a CFA Level 3 Charterholder.
For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and our disclaimer please see the end of this document.
Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.
Software & IT Services
Table of contents
Design Software: it is not all about CAD 4
Introduction 5
Technological analysis of the design software sector 8
The driving forces behind the industry shift 20
Comparative analysis of the design software sector 22
Financial analysis 27
Comp sheet 31
Individual companies section 34
Companies
Ansys: A quality asset trading at a fair price 35
Autodesk: Business model shift is not in the price yet 53
Dassault Systèmes Long-term financial targets will not be met 75
PTC: Still misunderstood, still undervalued 104
AVEVA Group High-quality business in cyclical malaise 124
Nemetschek: Potential for further US growth 127
RIB Software: Perfectly positioned to continue growing 134
Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) 141
3 Software & IT Services
Design Software: it is not all about CAD
● Sector initiation with a selection of Buys and a Sell: In today’s sector report, we HOLD Ansys are extending our coverage of the design software sector by initiating on Ansys, (initiation) Autodesk, Dassault and PTC – four industry-leading design software companies.
By increasing our coverage to seven companies, we will now be providing research Price target USD 88.00
updates and recommendations for around 90% of the listed assets in the design Current price USD 88.69 software space. 02/04/2015 New York Close
● Changing industry dynamics: These companies are working hard to continue to BUY Autodesk deliver their historically high growth rates. However, with the traditional CAD (Initiation) market much more stable than it was a decade ago, their challenge now is to embark on new ventures outside of their core strength. We believe that a reduced Price target USD 75.00 focus on their core business may leave some of the companies exposed to the Current price USD 59.82 disruptors that are keen to take market share by delivering software through 02/04/2015 New York Close rental-based models. For those new players, it represents an opportunity to become established in the market that would otherwise impossible to penetrate. SELL Dassault ● Buy Autodesk: We are initiating on Autodesk with a Buy rating and a price target Systèmes of $75. Our 25% upside potential comes mainly from the fact that the market has (initiation) not factored in the benefits of the business model shift that is set to change the company over the next four years. Price target EUR 49.00 Current price EUR 61.69 ● Buy PTC: Our Buy rating on PTC reflects the company’s acknowledgement of its 02/04/2015 Paris Close past mistakes and its efforts to rebalance its core. At the same time, the business is BUY now focusing on the internet of things (IoT) opportunity which we believe is not PTC factored into the current share price. Our price target of 43 indicates 16% upside (Initiation) potential.
Price target USD 43.00 ● Hold Ansys: Ansys has done a wonderful job of becoming the world’s leading Current price USD 37.17 specialised simulation software vendor. Even though the market is far from 06/04/2015 New York Close saturated, we believe that future growth will come in the more competitive mass- market environment which will result in the gradual reduction of the company’s BUY AVEVA current industry-leading operating margins. We believe that the current valuation
of the stock fully reflects the mid-term opportunities for Ansys and we therefore Price target GBp 1,977
initiate with a Hold rating and a price target of $88. Current price GBp 1,492 02/04/2015 London Close ● Sell Dassault: Our Sell recommendation on Dassault is based on the fact that the drive towards new industries seems to be taking some of the focus away from its HOLD Nemetschek highly competitive core CAD business, which today generates more than 60% of its revenue (and a larger share of profits). We believe that the current valuation Price target EUR 114.00 overestimates the potential of the adjacent markets and that its aggressive M&A (71.50)
strategy will continue to provide headwinds to the operating margin. Our price Current price EUR 118.60 target of €49 reflects our view that the clearly defined FY19 EPS targets will be 02/04/2015 XETRA Close missed, not only due to lower-than-expected top-line growth, but also lower-than- expected operating margins. BUY RIB Software ● Updates on AVEVA, Nemetschek and RIB: We remain buyers of AVEVA. We Price target EUR 16.00 believe that the current pressures are cyclical and that the company is extremely (14.50) well positioned to bounce back once oil capex recovers. RIB remains a Buy on the Current price EUR 13.33 back of its strong FY14 performance and the increased traction of its innovative 02/04/2015 XETRA Close iTWO solution. We believe that the 5D BIM market remains significantly
underpenetrated and that the current level of licence growth is sustainable in the mid-term; we thus raise our price target on Nemetschek but remain holders of the stock. Since our last update, the company has made a significant acquisition in the US which indicates that its future focus will be on reducing its reliance on the traditional DACH region. To construct a Buy case for Nemetschek, we would have to see signs of the company taking away AEC market share from Autodesk.
8 April 2015
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
Software & IT Services
Introduction
Design software has an impact on many aspects of our lives, more than we imagine. Almost all the products we use have been digitally designed using computer-aided design (CAD) software. With the increasing interchangeability of virtual and physical processes, we are losing the need to produce real-life prototypes. Today, we are able to design products that will be successful in the market from first release. This is not a coincidence. Behind modern product design, there is an ecosystem of product lifecycle management (PLM) that enables it. PLM is a complex concept that is made up of many parts, and CAD systems are but one of these. Modern product development processes also include virtual simulation, which is part of computer-aided engineering (CAE). The manufacturing process is becoming standardised with the use of automated manufacturing (CAM) software and products are serviced by technicians using service lifecycle management (SLM) solutions. Not every vertical today is as IT intensive as the manufacturing. And some of the companies under our coverage are increasingly gambling on the trend to improve the efficiency of those industries, just like the ERP systems did a decade or so ago.
Design software is one of the pillars of the enterprise software space
Enterprise software
PLM ERP Supply chain CRM
CAD CAM PDM
CAE
Source: Berenberg
Today, the large enterprise vendors who have built their empires through years of stable growth still largely dominate the global software space. For an investor, enterprise software is usually synonymous with the ERP providers, such as Oracle or SAP. This is only part of the truth and the modern (consumer-based) economy is supported by the underlying infrastructure of PLM. Design software companies have become so significant in our lives that it is impossible to imagine a modern economy without them. Over the last 20 years, a few large players have dominated this space, which is now considered as a very profitable market with high barriers to entry. The main players today are generating the majority of their revenue through CAD-based licences and maintenance revenue. The CAD market is the oldest part of the design software space: it grew as a result of the increased use of PCs in the 1990s (which significantly reduced the cost of product design and engineering) and through the shift to 3D, which was the trend of the 2000s. This market is now becoming more mature, especially at the high end, with TAM growth rates approaching the mid- to low single digits.
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Design software sub-market environment
Source: Berenberg
In CAD, the next wave of disruption will come from the different software delivery models and its move to the cloud. This is perhaps more relevant for the mass market and products like Solidworks, Solid Edge or Inventor and less so for the high-end solutions like NX, Creo or CATIA. We believe that the high-end market will continue on the same, slower growth path over the mid-term, and occasional shocks (like Daimler’s decision to move from CATIA to NX) will be the main driver behind any material shift in market share. The slowing growth of the core high-end CAD market is now resulting in those companies entering adjacent markets and industries; mainly through M&A. Dassault has been the most acquisitive company in the CAD space as it implements its strategy to become the digital company of the world. Its ambition is to own and design the process part of each key vertical, which has seen it expand from the core aero and automotive space into markets such as mining and life sciences. This has been achieved by a selection of highly valued acquisitions, the cash for which was mainly provided by its core CAD software. For Dassault, CAD software and the traditional verticals still generate more than 60% of revenue and a lot more in terms of profitability. Management intends to continue to embark on the M&A route as it looks to expand further into the financial services and construction verticals in the near term. PTC is also chasing incremental growth in adjacent markets, but rather than entering new verticals, it has decided to gamble heavily on the IoT opportunity. The company acquired ThingWorx and Axeda, two of the leading IoT vendors, in order to build what it calls the ultimate IoT platform. Its rationale, rather than chase new logos, is to utilise the 27,000- strong existing customer pool and sell them a product that is becoming a significant part of their development agenda. This market is the fastest growing software segment at the moment; however, due to its immaturity, it is almost impossible to say with certainty which platform will be the preferred choice in the future. PTC, however, appears to have learned something from the past. In the 2000s, the company lost its leading CAD market position as it neglected the development of the core design tools. Today, with the introduction of Creo 3.0, the company now seems much better placed to defend (or perhaps even retain) its share of the CAD pie. Siemens, on the other hand has adopted a more stable approach. The company seems to be completely focused on the core CAD/PDM market and will continue to try to disrupt Dassault’s leading position by concentrating its efforts on customer care and support to gain incremental market share. Whether the Daimler example was the start of something bigger, a monumental industry shift, or just a black swan that is unlikely to appear again is not yet clear. At the mass-market level, we believe that the mass market will be affected by disruptors]. The latest market share figures from industry analyst blog CNCcookbook indicate that the
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industry-standard product Solidworks might slowly come under attack from the new cloud-first design software vendors. It is difficult to say now how quickly products such as these can penetrate the market, but it seems that the excitement that accompanied Autodesk’s Fusion 360 and Onshape launch shows that the market is not only intrigued by such products but that customers are also willing to take the plunge with them. It is clear that Onshape – a product that has been developed by a team that includes two ex-CEOs (one of them was also a co-founder) of Solidworks – will be able to compete with the bigger players’ products. Only time will tell whether cloud-only players can be as successful in taking the market as salesforce.com did a decade ago in CRM. Cloud-based products also have the ability to capture some of the low-end of the market that is out-of-reach for Solidworks due to its high-upfront-cost, licence-orientated business model. Autodesk has high hopes, not only for its new (cloud-based) Fusion 360 product, but also because it continues to innovate in terms of its business model. The company that grabbed significant market share in the 1990s with its 80:20 approach (80% of functionality for 20% of the price) is now the first major CAD vendor and the second enterprise software company (after Adobe) that is ceasing to offer perpetual licences (from 2016). The company’s dominant position in the low-end of the market makes it uniquely placed (a bit like Adobe) to “force” the move to rentals and benefit from a significantly higher proportion of recurring revenues in the future. Ansys is a company that has never entered the CAD market but which nevertheless has become the largest pure-play simulation vendor in the world. The company has benefited enormously from the increased use of digital simulation as the manufacturers are trying to avoid physical prototyping. Until recently, this was a double-digit growth market but, due to the fact that penetration at the high end has increased significantly, it has now become a mid- to high single-digit growth sector. The space is far from being over-penetrated and we believe that its growth can accelerate if the company manages to successfully develop a product that can be easily used by engineers (and not only highly skilled analysts). The appeal of a mass-market offering might, however, come at a lower price, and we believe that some of Ansys’s industry-leading operating margin might come under pressure once the company penetrates the mainstream market. This report also provides an update on AVEVA, Nemetschek and RIB Software. We have been covering these names for a while, but they all fit perfectly into this broadened coverage of the design software industry. With our initiations on Ansys, Autodesk, Dassault and PTC (and the three names mentioned above), we now cover around 90% of the public design software space. This “handbook” is a result of extensive research into the sector. Through our historical analysis, we understand the current state of the market and the reasons for it. The design software market will change significantly over the next decade and the winners of this battle are also likely to come out on top as the best-performing companies in the capital markets. The more notable companies omitted from this research are Trimble, Bentley, 3D Systems, Msc Software and Hexagon, while the analysis of Siemens PLM was somewhat limited by the disclosures that the company provides to the market.
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Technological analysis of the design software sector
In this section, we aim to bring the user closer to the main components of the design software industry. The sector has its roots in CAD, but has evolved significantly since and even though computer-based design is still one of the main building blocks of the industry, it is the ecosystem around it that provides the more attractive growth rates. The chart below shows the current design process; traditionally, software was used only in the first two stages. In today’s space, however, there are a number of vendors that help with maintaining and making sense of all the data produced within many design software systems (PDMs) and then subsequent production systems (where CAM comes into its own). The drive towards more efficient product development and better quality products has led to the emergence of the simulation software industry and solutions like Ansys are becoming an integral part of the process. Even though this report is mainly focussed on those main aspects of product design, we would like to emphasise that there are many other (usually vertical-specific) vendors who play an important role in the ecosystem.
The five stages of the product design process
Design process
Manufacture Conceive Design Develop
Validate
PDM
Source: Berenberg
CAD Computer-aided design is the use of computer technology for design and documentation of the development process. It is an old concept, which started in 1960s and replaced manual drafting engineering processes. CAD software is structured in two ways – on one side, there is simplified two-dimensional vector-based modelling, and on the other, more complex 3D modelling of solid surfaces. Market dynamic: The CAD space today is dominated by the companies that made a successful transition from mainframe to PCs in the 1990s. The current market could be split into two segments – 1) the high-end market for major automotive and aerospace manufacturers (this space is dominated by Dassault’s CATIA, Siemens’ NX and PTC’s Pro/E (now Creo and 2) software for designing slightly less complex products or parts that are owned by brands like SolidWorks, Solid Edge and AutoCAD. Today, there is no perfect CAD solution and every vendor has its strengths and weaknesses. This is usually a sign of a market that is coming close to maturity and is waiting for a breakthrough technology to take it on another level.
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CAD 2013 estimated market shares shows that our coverage now includes 68% of the global CAD market and almost 90% of the listed software assets
Source: CIMdata
More recently (with the emergence of cloud computing), there has been an influx of SaaS vendors. The most prominent has been the introduction of Onshape, a disruptor that was set-up by the co-founder of SolidWorks, Jim Hirschtick. Fusion 360 stirred up the market in 2014, which is reflected in the latest CAD survey of the “mainstream” CAD software. This indicates that cloud-based software is taking the market away from incumbents such as Solidworks and 3D Systems’ Alibre (now Geomagic), which both appear to have lost around 2% points in a year. While Solidworks still holds the dominant position, the trend suggests that the threat of new products might disrupt the market further over the next few years.
The lower end of the market is still dominated by SolidWorks, but the introduction of Fusion has taken some share away from both SolidWorks and Geomagic (ex-Alibre)
Source: CNCcookbook 2015 CAD market survey
This is a stable market in the higher-end of the spectrum with an assumed market growth of around 4-6% and is closely related to global GDP growth and the manufacturing activity.
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A brief history of CAD CAD is where it all started. As all of today’s concepts of design, mock-up, plant set-up, BIM and even simulation have their roots in CAD, we prepared a brief summary of the main events that shaped the industry since its beginnings in the mid-20 th century. Throughout history, one of the main forces behind the increased productivity of labour arose from automation practices. Ever since Henry Ford introduced the automated assembly line in 1913, the efficiency of manufacturing process has risen significantly. The CAD commercial industry was started in 1969 by Applicon and Computervision. While the early in-house developed systems were built around costly mainframe computers, the commercial software focused on minicomputers. These were the hardware-first companies that saw the opportunity to add on a software layer in order to increase their sales. A typical single-station system then cost about $150k (around $700k in today’s terms). Only a select few large companies could afford such costs; it is therefore understandable that all revenue was generated via the direct sales channels. Throughout the 1970s, the CAD industry evolved into a $1bn hardware and software business. The main reason for adopting CAD was of course the increased productivity that comes with it – it is estimated that the introduction of CAD halved the required number of people in the drafting departments of manufacturing companies. The next stages of CAD development were mainly based on the evolution of geometrics modelling in 60s and 70s and the move from mainframes and surface geometry to three- dimensional solids modelling (introduced by The CAD Group). The 1980s then brought the most significant changes in the evolution of CAD. The main difference was that the space started to be dominated by specialised software vendors in place of hardware-first firms. The introduction of mini-computers was the driving force behind the change. “Democratisation of CAD” As prices of CAD systems started to lower, their adoption naturally increased. Companies like CADAM continued to gain market share, but we also saw the emergence of UGS and SDRC (both are now part of Siemens PLM), Autodesk and Parametric Technology. The introduction of PCs and falling prices enabled CAD systems to be used outside CAD departments, such as the design and manufacturing organisations. By 1983, Autodesk was selling around 1,000 copies of AutoCAD (with sales worth around $1m). They were the innovators in the business sense – their approach was to sell 80% of the functionality for the 20% of the cost. The approach was a pure success, and by 1986 Autodesk was generating more than $50m in annual turnover. The next big shift occurred in 1987 when Parametric Technology (now PTC) introduced the first feature-based parametric modelling package – Pro/ENGINEER (Pro/E). Companies like UGS, SDRC and Dassault followed and made a successful transition whereas the old legacy guard (such as Applicon, Computervision and Auto-trol) slowly faded away. This was the time when PTC became the market leader in CAD. The emergence of PCs resulted in a few more disruptors entering the market, such as the start-up company called SolidWorks. Their approach was to further differentiate themselves in terms of both the technology used and the business model behind the software. These companies implemented software on computers running Windows-only environments. They were focused on design and less on drafting. The majority of their sales were done by the dealers and the typical software prices declined to around $3k-6k per seat. These mid-range systems have eventually merged with the functionalities of the full-function software. This prompted the first consolidation in the industry – Dassault acquired SolidWorks and UGS acquired Intergraph’s Solid Edge unit. Autodesk entered the space with its Inventor software and PTC repackaged Pro/E to compete in the mass market. The period from the mid-1990s to today has been dominated by the introduction of concept of PLM. No product, electronic component or a factory is now developed without the use of PLM concepts (defined further below). The main features of today’s computer engineering are the management’s (in)ability to efficiently manage the global development teams, the integration of new companies and new business models, and the shift to opex from capex. Technologically, the two main forces behind this shift are the adoption of the cloud and the emergence of smart, connected products.
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PLM PLM is often defined as a set of processes rather than a piece of technology. It is an approach to solving a set of business challenges when managing a product-orientated organisation. Oversimplifying it, we could define PLM as the processes and tools that are responsible for managing the virtual product, whereas the ERP and MES systems are the managers of the physical product. PLM brings together various software solutions in order to standardise those virtual product management processes. One of the main parts of any PLM concept is the CAD modelling software. However, PLM also includes software to store information and relationships, and tools for collaboration and even 3D visualisation. If we were to develop a formula for all the tools that facilitate the PLM process, it would look something like this: PLM = (CAD + CAM + CAE + SLM)*PDM This, of course, could be extended further to split each factor into several sub-components or to include a series of specialised tools which are often referred to as CAx (computer- aided technologies). For simplicity’s sake, we believe that this definition will suffice. The broadest, definition of PLM was developed by industry-leading PLM research organisation CIMdata. It defines the core concepts of PLM as: 1. universal, secure and managed access and use of product information; 2. maintenance of the integrity of that product definition and related information throughout the life of the product; and 3. management and maintenance of the business processes used to create, manage, share and use the information. As can be seen from the definition above, PLM is more than a set of software solutions – it provides a guide for manufacturing companies to better manage their operations through all phases of a products lifecycle, from design and manufacture to deployment and, later, servicing. PLM software usually links many information sources and inherently requires a lot of customisation. It therefore usually encompasses a large ecosystem of IT services providers. Due to its complexity, the PLM market is often compared to ERP solutions. There is an implicit assumption that large, complex companies do not change their PLM vendors often, if at all. There have been a few shocks over the years, mainly due to the fact that companies use multiple providers for their PLM needs. Consolidation in the industry further confuses the issue, as companies look to standardise their product development processes.
Companies like to mix and match The world’s largest manufacturers are now employing more software than mechanical engineers, which results in the fact that the way they are utilising their software infrastructure can often provide a competitive advantage. Just as software vendors do not like to be too reliant on one customer (we would say a company is over-reliant on a customer if it represents more than 5% of its overall revenue), manufacturers also do not like to be dependent on only one software vendor. At the moment, there are two opposing trends in the PLM industry. On one side, there are the companies that try to lock in their customers by making them use their system exclusively, and on the other, there are vendors that acknowledge that the design industry is fragmented and are moving towards more open infrastructure. We believe that the open infrastructure model should be the preferred standard, especially for those vendors that are providing software to the larger organisations. The reality is that a company should never use an exclusive software provider: even if only one link in the design and production chain is excluded from the ecosystem, the loss to the business can be enormous. Such an exclusion will often result in design conflicts, loss of data and designs that are not backward-compatible.
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PLM software market shares indicate a strong position for both Dassault and Siemens
35% PLM Software market share 30% 30% 28% 25% 19% 20% 17%
15% 11% 10% 10% 9% 10% 5% 0% Dassault Siemens PTC Autodesk 2011 2013
Source: CIMdata
PDM
PLM vversuersuersuss PDM The terms PDM and PLM are sometimes used interchangeably, which we find inappropriate. The concept of PDM was actually born before PLM, when designers were looked for ways to manage the large amount of data and files produced during a design process. The main challenge was to keep track of the latest versions, especially as the products became more complex and started involving more interdisciplinary teams or designers working from various locations. Early PDM systems acted as a data depository that enabled the files (and their sub-components) relationships to be stored, tracked and managed. This is key when a product is made up of multiple parts and assemblies. PDM has become a building block that supports PLM and is therefore a subset of it. There are generally not many intellectual assets that are created in PDM (other than the process structures) and the infrastructure is sometimes considered as the back-office of the product development process. PDM products are priced at a lower point than CAD software, but are used by a wider range of users across a firm. Integration includes a high level of professional services, so partner agreements and/or improvement of existing processes will have a large impact on the overall profitability of a company. Recent developments in PDM have mainly related to the utilisation of cloud technology. It provides the perfect infrastructure for sharing data between multiple users. Each change in technology opens the door for disruptors to shake up the market. The PDM space is not an isolated market, and we expect that this space will attract many start-ups in the future. Some of them, like the new cloud-based CAD vendor Onshape, took PDM principles to a new level and built the data management, collaboration and version control systems within the CAD software itself. Even though it is still early days, it appears that the future of PDM might become a lot more integrated with CAD than it has been to date. CAE CAE (or computer-aided engineering) refers to the use of computer software in order to simulate a design or assist in the resolution of engineering problems for a wide range of industries. CAE includes simulation, validation (of a concept) and optimisation of products or processes. The three main steps in CEO are generally pre-processing, solving and post-processing. The first step defines the geometry of a system (along with its physical properties and constraints), the second step solves the problem by using some sort of mathematical solver (appropriate for the underlying physics). The last, post-processing stage presents the results to the analyst. Modern CAE systems support a wide range of disciplines, including stress and dynamics analysis using finite element analysis (FEA), thermal and fluid dynamic analysis with the use of computational fluid dynamics (CFD), acoustics analysis, mechanical event simulation (MES) or a manufacturing process such as casting, moulding and die-press forming.
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Modern engineering problems (that analyse multiple structures and their co-existence) require the use of multiple simulations at the same time. These are often referred to as multiphysics solutions. The market for simulation is often seen as an integral part of PLM. The “concept of digital before physical” has been developed in order to reduce the total cost of development of a product and shorten the time needed to go to market. However, rushed releases have been known to damage the reputation of a company before, and manufacturers have to be certain of the functionality before a product is released for a general use. They are increasingly looking for ways to outsource the need for physical prototyping to the simulation software. Today, CAE is one of the fastest growing markets within PLM, with the TAM growing at roughly 7.5% per annum. The main drivers of the growth historically have been the falling barriers for simulation, especially limited computer power. The main barrier preventing the wider adoption of simulation is that these solutions are extremely complex to use. If we compare today’s CAE market to that of CAD, it would appear that the CAE market is currently at a stage where the CAD market was in the mid-1990s, when the introduction of the mid-range CAD systems significantly expanded the market’s size. We believe that the winners in this market will be those that will be able to capture the incremental TAM of engineer-level users. However, to date, none of the vendors under our review has yet managed to achieve this, and we believe this race is likely to continue for the next five to 10 years.
Simulation and analysis: estimated TAM
Source: CIMdata
Market dynamics Just like the CAD industry in the 1990s, the CAE market is going through a comprehensive consolidation, especially at the lower end. All the major CAD vendors have realised the need to own part of the space and have invested heavily over the years. For example, Autodesk acquired Algor and part of Nastran technology whereas Dassault acquired Abaqus at the high-end to compete with Ansys. For its part, Ansys is today the largest pure- play simulation software vendor in the world and has been acquiring various adjacent functionalities to add to its strong portfolio of solutions. Its recent deals have mainly focused on the IoT opportunity through microelectronics simulation (ie the acquisition of Apache). This is the industry where the barriers to entry remain very high. We believe that the push towards more mainstream adoption of simulation could represent some opportunity for a potential disruptor. This disruptor may come in the form of a CAD vendor (such as Autodesk) rather than a pure-play lower-end vendor. Relationships are key and the simulation capabilities are being increasingly integrated into CAD. The emergence of cloud-CAD and products like Fusion 360 may not give engineers a perfect picture, but they will enable them to amend designs early in the concept phase. At the high end, the use of high-performance computing (HPC) is still low, yet its potential remains significant.
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Ansys is retaining its market-leading position, but the competition at the lower-end is increasing
Source: BeyondCAE
CAM Computer-aided manufacturing (CAM) is the use of computer software to control machine tools and related machinery in the manufacturing organisations (source: Wiki). The main goal of CAM is to accelerate the pace of the production process and produce more consistent and better-performing products. The principles of CAM software go back to the beginnings of CAD but its use has been limited to the highly skilled CNC (computer numerical control) machinists who require basic programming skills to operate the machines using numerical control (NC) programming. Today’s market for CAM is estimated to be worth around $1bn/year and is fairly fragmented. Following Autodesk’s acquisition of Delcam in 2013, interest in CAM assets has accelerated and Hexagon last year acquired one of Delcam’s main competitors, Vero. CAM software can be a good fit for a PLM company and we believe that further consolidation is likely in this space.
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CAM market shares (by the number of seats installed)
Source: CIMdata
CAM market remains fragmented but the number of independent fast-growing vendors is declining
Source: CIMdata
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Vertical-specific design software Design software had its beginnings in manufacturing, but today many other industries are utilising its advantages. The principles of all CAD systems are the same, but there is an important underlying difference in how mature elements of those verticals are implementing them. For example, the construction industry is utilising their full capabilities when it comes to the early design and even the virtual presentation stage of the process, but once the construction process commences, the process approach to managing it is still far from being standardised. In any industry, specialisation offers additional benefits to all stakeholders. It increases productivity through the introduction of specific tools that are missing from the general solution. The opportunities are sometimes enormous and the emergence of vertical- specific vendors over the years justifies the market for highly specialised design software providers. Our analysis of the space is limited to only a few of those segments, but those represent the largest part of the market outside of manufacturing. AEC The AEC industry has now mainly moved on from the 2D design to the 3D world, but it continues to under-utilise the latest technological advancements in the space. With many governments now mandating BIM as the industry standard, the market is expected to grow above the overall CAD market over the next 3-5 years. The global market share structure for the AEC CAD software market is not widely released. We know that Autodesk has the leading market share in the US and generally does well in the global markets. Nemetschek, on the other hand, has the leading position in historical markets of its software – for example, Allplan is the market leader in the DACH region whereas Graphisoft has the main market share in Hungary and Japan. The table below shows the 2014 split of the UK market according to research carried out by consultant NBS. The main CAD vendors in the global space today include Autodesk (with both AutoCAD and Revit products and the Building Design Suite), Nemetschek (with Allplan, Vectorworks and Graphisoft) and Bentley’s Microstation.
Autodesk still holds a significant share of the UK market followed by Nemetschek
Vectorworks
Others
Graphisoft Sketchup Bentley AutoCAD LT Microstation
AutoCAD Autodesk Revit
Source: NBS 2014 national BIM report
Even though the construction industry has been increasing its digital literacy, the overall spend of the sector still trails the average sector by a wide margin. In reality, much collaboration is still carried out by sharing files via emails. Indeed, the on-site construction process still utilises 2D-printed versions of building plans. This process is bound to change and the first results of investment in this process are already showing.
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…however, the momentum is switching as companies start to The construction sector is the lowest consumer of IT as a replace legacy systems in order to introduce efficiencies in the percentage of sales… construction process
Software Publishing and Internet Services 8.9% Software Publishing and Internet Services 9.5% Banking and Financial Services 6.8% Retail and Wholesales 6.8% Media and Entertainment 4.8% Banking and Financial Services 5.2% Education 4.6% Media and Entertainment 4.7% Industrial Manufacturing 3.7% Professional Services 4.4% Professional Services 3.6% Telecommunications 4.1% Utilities 3.6% Healthcare Providers 3.9% Insurance 3.2% Cross-Industry Average 3.5% Construction, Materials and Natural Resources 3.0% Insurance 3.5% Cross-Industry Average 2.9% Pharmaceuticals, Life Sciences and Medical Products 3.2% Consumer Products 2.7% Utilities 2.9% Healthcare Providers 2.2% Transportation 2.7% Pharmaceuticals, Life Sciences and Medical Products 2.2% Industrial Electronics and Electrical Equipment 2.2% Transportation 2.2% 2.1% Consumer Products 2.0% Telecommunications Food and Beverage Processing 1.9% Industrial Manufacturing 1.7% Chemicals 1.0% Retail and Wholesales 1.5% Industrial Electronics and Electrical Equipment 0.8% Food and Beverage Processing 1.3% Government - State / Local 0.2% Chemicals 1.1% Education 0.2% Energy 1.0% Energy 0.1% Construction, Materials and Natural Resources 1.0% Government - National / International -0.4% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% Source: Company, Berenberg Source: Company, Berenberg
BIMBIMBIM is becoming the standard Building information modelling is a new approach to managing construction projects. It allows stakeholders in the process to share a single informational database with object- orientated information (CAD drawings). This creates a so-called “single source of truth” for the firms and enables better flow of information throughout all phases of the construction process. In 2016, all UK government-funded projects will require at least level 2 BIM to be used. Awareness of BIM has mainly been driven by the 2016 deadline – in 2010, only 13% of construction companies were aware of, and using, the concept. In 2013, the number increased to 54%. However, the estimates from the industry analyst firm MarketAndMArkets.com show that globally more than 50% of construction firms are still not prepared for the next generation of building standards and this represents an interesting opportunity for the AEC software vendors. The concept of 5D BIM is now evolving. This contains all information of the object-defined 3D drawings (CAD files) and adds the aspects of time and cost as the fourth and fifth dimensions. The technology is still evolving, but the main vendors in the BIM segment have been able to capture a significant market opportunity here over the last five years. The size of the BIM market is currently estimated to be somewhere in the region of $2.5bn and the increased spending in this sector is making it one of the fastest growing design software markets, with an estimated CAGR of around 15% over the next three years. The main reason for the growth is that software vendors are developing a market that never existed before. Today, a lot of cost scheduling is still done in Excel. Although Excel remains a great tool, it is not fit for modern building practices. Replacing it represents an enormous opportunity not only for the vendors but also for the construction companies, as the estimated efficiencies could surpass the 30% mark.
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BIM is being mandated by governments and this is driving the worldwide adoption which will result in continued market growth of >15% per year
Source: MarketsandMarkets .com
The four levels of BIM. According to the recent survey, only 4% of the construction firms are achieving level 3 which indicates an opportunity for cloud BIM vendors
Source: 2014 National BIM report
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UK government’s description of 4 levels of BIM
Source: www.bdonline.co.uk
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The driving forces behind the industry shift
Cloud impact Demographics will play a key part in the future development of CAD: At the recent Develop3D Live (D3D) industry conference, the Siemens PLM solutions presenter pointed out that 25% of aerospace, industrial and electrical engineers are older than 55 years. While they are certainly not expected to change their working methods significantly over the next few years, they are also not expected to be in their position for ever. They will be slowly replaced by newly-skilled young professionals who are used to the new working methods and who demand simplicity and flexibility in their software packages. We believe that the generation change over the next 10 years or so will be a key factor in the changing landscape of the industry. Due to the complexity of current CAD systems at the high end, we believe that cloud-based offerings will affect the mass market first and that it will be some time before a major manufacturer decides to move its processes over to a datacentre environment. However, the mass market today is dominated by Solidworks, which seems to be very cloud- indifferent and we wonder whether other vendors, such as Autodesk and the disruptors, such as Onshape, can influence a change in the competitive landscape over the next few years. The early signs indicate that they might – not through Solidworks directly losing customers in the near term, but as a result of the expansion of the TAM and other manufacturers penetrating those segments of the market currently not paying for perpetual licences (ie occasional users or even pirates).
Onshape’s public launch presentation at the D3D conference grabbed the highlights and indicates that the users are starting to consider CAD in the cloud as a viable option
Source: Berenberg Archive
Big data The concept of users helping to create an end-product is appealing as it helps to address the main fear of any product-orientated business – the fear of rejection. The recent surge of crowdsourcing and a number of social platforms has taken power away from the providers of goods and services and handed it directly into the hands of consumers. Bad user experiences have never before been transmitted to the world as fast as they are today, thanks to social media. A negative review, however trivial, can hurt the image of a very successful brand almost in a split second. Many companies are starting to respond to complaints on Twitter a lot faster than they do through traditional communication channels. Large manufacturers can learn a lot from the notion of crowdsourcing. Even though they cannot make every product release dependent on a response rate from potential customers (like Kickstarter does), they can include them at early stages of the design process.
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There are various implications for big data, but, to give an example, the vast amount of regionalised data could help a clothing company to tailor its products or design for the specific needs (and preferences) of a market. This could result in better adoption of a product and ultimately higher ROI. We believe that big-data-driven product design will become mainstream over the next few years and that companies will have to amend their processes in order to include an additional stream of information at the early development stage. The internet of things (IoT) One of the (over)hyped terms of today’s technology world is certainly the internet of things, or the IoT. The expectations of companies providing TAM estimates that are based on the potential success of a product that might potentially be developed sometimes in the future are large, to say the least. We believe that behind the hype, there is a true need for IoT in the market. The fact that manufacturing companies are starting to invest and develop new, connected products indicates that the industry has recognised the potential of IoT and that the future will be “smarter”. Which companies are likely to benefit from IoT in the near term? The manufacturers that are on the end of the chain will of course benefit, but the supply chain and the ecosystem around it will also reap the benefits. Software providers are part of that chain and the immediate opportunity appears to be threefold: 1. the need for a central IoT platform that will connect the dots and make sense of the data at the end-point in order to provide valuable insight[to who?]; 2. insight into better product design – this will be shared between the manufacturers and the software supply chain which will see incremental increase in the use of the design software; 3. improved services for the new market that is built around IoT – PTC seems to be in the best position here and we believe that its strong ecosystem of 27,000 customers will be able to see the benefits of exploiting improved insight into the lifecycle of the product, its potential misuse and the ability to deliver a better post-purchase service network, which significantly increases the prospects for customer satisfaction The IoT battle for the software companies has only just begun and even though some of the companies have a head start, the clear winner will not be known for some time.
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Comparative analysis of the design software sector
Operational analysis
Sales channel and S&M philosopphilosophyhyhyhy
Estimated share of direct sales per company: sales channel strategy is heavily dependent on the end-customers – mass market organisations like Nemetschek and Autodesk have a significantly lower proportion of direct sales than vendors which sell to the high-end market
100%
50%
0%
Source: Berenberg Archive
Autodesk’s current sales strategy is still very much reliant on its indirect channel. In 2014, around 84% of its revenue was generated by sales partners. This is understandable considering that the company is mainly playing into a fragmented mid-market for design software. We understand that the introduction of Fusion 360 and desktop licences may lead to a change in the sales channel model in the future. Autodesk is reconsidering its strategy and there are indications that some of the distributors might become agents, which would result in more direct revenues for Autodesk (but also increase sales and marketing costs). Nemetschek sells most of its software through its well-developed indirect sales channel. Partners are usually specialised and only sell certain types of software. For example, a Graphisoft partner would rarely sell Vectorworks solutions. As the brands are managed separately and sometimes sold into the same geographies, teams could end up competing against each other. The main target for the next year will be how to leverage the existing sales channels in Europe to cross-sell the newly acquired Bluebeam product. Dassault’s revenue is mainly derived from sales efforts within the organisation. Dassault keeps hold of the main accounts whereas its partners usually sell to the supply chain. This was not always the case, however, as a substantial portion of sales in the past were carried out by its main partner IBM (up to two-thirds of sales were then indirect). This changed in 2009/10, when Dassault acquired the main part of IBM’s PLM business that used to sell and service clients on their behalf. It will be interesting to see if its planned penetration of adjacent markets will lead to changes in its approach in the future. PTC belongs to that group of vendors that sell mainly into a larger customer base. This is reflected in the fact that its direct sales channel generates about two-thirds of its revenue. Companies like PTC sell directly into their key accounts in order to maintain strategic relationships within the business. We do not expect to see a significant shift in the split of sales when the IoT becomes a more material part of PTC’s business. Any investment that will be required in order to fully capture the opportunity of adjacent segments will probably result in limited S&M leverage over the mid-term. Ansys is another one of the large players which sells mostly via a direct sales force. We estimate that around three-quarters of its revenue is generated in-house. The company has recently announced significant changes in its sales channel strategy: it has creating an “Elite Channel Partner” programme which is designed to promote the channel sales of
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multiphysics. These complex systems used to be sold mainly in-house to the key accounts, but with the increased ease of use, Ansys is trying to develop ways to market its multiphysics solution throughout its sales channels. Its other partners will likely remain on the “Standard” level, which will have less stringent requirements, but will also result in limitations in terms of the selection of products they can sell to the market. AVEVA generates almost all of its revenues via the direct sales channel. This is understandable as its product is closely tailored to a few selected verticals, making it difficult for resellers to market. The company recently amended its sales approach for the two service lines (EDS and ES) towards the account-focused “One AVEVA” approach which better reflects the commercial reality of the business. Its sales force used to be focused on either EDS or ES, but the model has now been changed to an account-based model with three different levels of customers. There is a global account sales team that services strategic accounts, and two separate sales teams for managing a) EPC sales and b) the owner-operator market. RIB mainly uses the direct sales channel, although some of its strategic partners (such as McKinsey) often generate leads for it. The main part of RIB’s licences is currently being generated by “Key account” customers, which it services directly. Management recently announced plans to significantly ramp up its sales force as it continues to target 80% large deal growth per year. As the ecosystem around the main accounts develops, we would expect the company to further develop its partner sales channel. This would enable RIB to consolidate some of the fragmented sub-contractors that are involved in the construction process for those key accounts. Attitude towards business model change Ansys: The company has recently said that it will maintain an open model to allow customers to access the technology in whatever way is feasible for them. The push towards the mainstream simulation market is unlikely to change this approach, but might increase the use of its “per-transaction” HPC offering. Note that leases are already contributing 34% to the overall revenue of the business. Autodesk: Autodesk is the first design software company to announce that it will stop selling most of its perpetual licences by the end of the year. The new ways to consume the technology will be through desktop rentals or cloud-based software. The current surge in uptake has mainly come from the perpetual-only users who have subscribed to maintenance deals in order to receive software updates in the future. The company will be looking to gradually convert those to desktop rentals over the mid-term. In order for the business model to work, we estimate that only around half of the current pool of 2.9m perpetual-only users need to subscribe to the rental model in the future. Dassault Systèmes: Rentals already represent a portion of licence revenues and we do not expect any changes in the split of how revenue is sold in the mid-term. Around two-thirds of the company’s revenue is already recurring and there is no need to push harder for the rentals. Note that large customers prefer to own their core licences but they use rentals for any spike in demand (such as the development of a new aircraft in the case of aircraft manufacturers, for example). Nemetschek: The company realises that the rental model is probably the way that its software will be delivered in the future, but due to its market-leading position in the DACH region, it does not plan a significant push to rentals: historically, continental Europe has been more inclined to consume perpetual licences, and this is still the case today. The company is also hoping to benefit from its business-model-agnostic status to capture some of the potential global market that might churn away from Autodesk as a consequence of the business model change. PTC: The company is developing a hybrid model; it assumes that 30% of its 2018 L&SS (Licences and Subscription Solutions) revenues will come from the rentals (Q115: 19%). The short-term impact is likely to be the reduced licences revenue growth, but will increase the proportion of recurring revenue from today’s levels. Its new IoT offering strategy is still evolving and the rental-based model may become a significant part of the platform offering. RIB: The main portion of RIB’s growth comes from the licences it sells to key accounts. This will remain the case, even though we do expect increased demand for its mass market iTWO offering, including SaaS-based iTWO. The company is business-model-indifferent,
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but we expect that the new cloud products that it is about to introduce to the market in the next 12 months will increase the proportion of cloud revenues in total sales. Competitive environment
Our assessment of the peer-group’s competitive environment
Company Overall Threat of new entrants Competitive rivalry Pricing power
Unlikely to see significant new player in the At high end the market is stable. Too early to Very high-end software with great value to ANSYS existing market. The mainstream market is say what the impact of the mass-market move clients - price is rarely an issue. Entering mass much more receptive to disruptors though. might be. market might prove to be different though
Adoption of the rental model will eventually The company is trying to disrupt the market Still an absolute market leader in the low-end result in customers paying more for the Autodesk itself but might face competition from the segment. Increasing the pressure in mid- software which indicates the strength of the other cloud-only providers. market. business
With the current environment in the Oil & Gas High barriers to entry in a very specialised Stable competition from the other two main Aveva segment the company might struggle space makes increased competition unlikely. players. increasing the spend per user.
Increased competition from Siemens and PTC at high end and Autodesk and other Perceived pricing power might be higher than High in the Solidworks space whereas barriers disruptors at the mid-market level. Has to actual. Slow adoption of v6 has been linked to Dassault at high-end (CATIA) are much higher. address completely different environment in increased prices and it is not working. Current the new industries where it competes with a price point is very high anyway. selection of smaller specialised vendors. Looking to benefit from the business model The solutions are not highly priced and we New entrants might appear, but the vertical- change, which might prove to be the case. believe that any significant changes in the Nemetschek specific focus limits the threat, for now. AEC Unlikely to lose share to Autodesk in the near policy would result in the gradual market segment is slower to move to the cloud. term. share loss The company is not in the position to raise A lot of competition expected in the IoT (e.g. CAD market is heating up, but the company is prices in the core market (even though they Wipro/SOW). Creo might get some PTC now better equipped to defend or even regain indicated that the FX shift might result in competition at the lower-end from Cloud-only some of the lost market share them adjusting worldwide prices). Unlikely to software vendors. happen.
The main selling point of iTWO are potential Expecting increased competition that might cost savings during the build phase of the The existing competition are mostly in-house actually turn out to help creating the 5D BIM projects. This makes it an ROI-based sale and RIB Software developed systems which are not fit for market and increase the speed of adoption of the software is sold at a relatively high ticket purpose. RIB is therefore winning with ease. the new technology price. Large deals might come at a discount though.
Source: Berenberg
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M&A The design software space is still very complex and fragmented – and the new technologies and global trends discussed above are only adding to the complexity. Nevertheless, the legacy design software vendors are generating stable operating cash flows and this puts them in a strong position to carry out continuous M&A. The table below shows the most acquisitive companies in the sector. Dassault has spent the most of all the design software vendors over the last 10 years. This has accelerated over the last few years, when we estimate that around 5% of the company’s revenue growth was generated through M&A.
Dassault remains the top acquirer in the sector
Source: Companies reports , Berenberg
Our assessment of the potential M&A activity in the sector
We have also tried to determine whether the companies are likely to acquire over the next two years or even become a target for another organisation. The results presented above are our best guess, based on the public knowledge accumulated about the companies over the last few years. The underlying message is that while we expect most of the companies to continue to carry out some sort of M&A, some of them are more transformational than others. We expect AVEVA to engage in small tuck-ins, consistent with management’s reputation for preferring to build rather than buy. Nemetschek will first need to digest Bluebeam before embarking on another target, while PTC and Ansys might continue to carry out mid-sized deals in their future growth markets in order to enhance their current solutions offerings. Autodesk has been acquiring a lot of incremental technology and we believe that this might remain the case in the future, while RIB might embark on a larger deal (up to €100m EV) in order to ramp up its future growth potential. Dassault will remain
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highly acquisitive: any deals it carries out could be focused on financial services and construction verticals. On the other side of the matrix, we believe that PTC, RIB and AVEVA could all themselves become a takeover target. Both RIB and AVEVA own distinct pieces of technology that would fit well into another vendor’s portfolio without the need for a large integration. Rumours that PTC could be a potential target for an industrial business are not new and the current valuation could represent an interesting opportunity for an acquirer wishing to gain access to the key vertical software space. Other vendors are a lot less likely to be acquired in the near future for various reasons. Nemetschek’s shareholder structure makes it impossible to sell, while Ansys’s and Dassault’s valuations are probably the main obstacles precluding any deal for either of them.
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Financial analysis
Revenue growth rates
Licence growth has been closely related to the number of acquisitions made over the past few years – for RIB, one large order significantly accelerated FY14 revenue growth
Licence revenue growth
40% 30% 20% 10% 0% -10% -20% FY2011 FY2012 FY2013 FY2014 FY2015e
Ansys Autodesk Dassault PTC Aveva Nemetschek RIB
Source: Company, Berenberg
Future growth drivers
Company Main growth drivers for the future Inorganic contributioncontribution throughout the period
About half of the growth should be coming from the imitative of ANSYS "Democratisation of simulation" which is planned to expand the Not very significant number of users. Density and intensity of the usage should also help
New business model should start yielding significant growth in FY18. Autodesk Revenue growth will be under pressure over the next few years due Not very significant to the end of perpetual licences
Growth is expected to return in FY16 as the pressures around falling Aveva Not significant oil capex eases
New markets - the new market organic growth will have to be close Dassault to 15% over the next 5 years in order to meet the FY19 targets. Significant Expect 5% CAGR contribution from M&A
Organic growth should reach c8% mainly from the new investments Nemetschek into Build segment. Expecting the growth to be supported by the Significant continued global presence
IoT and SLM are likely to drive the growth whereas CAD and PLM PTC Not significant markets are should provide the solid base
Some of the growth will come from the Deutsche Bahn effect - as the RIB Software subcontractors join the platform in FY16. This year's revenue will Significant in FY12 grow on the basis of 25 targeted large deals (vs 14 in FY14)
Source: Companies reports, Berenberg
Margins Our assessment of the profitability of researched companies is based on Berenberg-defined EBITDA margins. We believe that in order to account for the differences in the PPA rates (as a result of past acquisitions), EBITDA margins would be a better measure than EBIT. We have also adjusted profitability for capitalised R&D costs (we treated these as an expense in the year in which they occurred). We further treated the SBC charges as expenses.
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Berenberg-defined SBC can therefore be significantly lower than the company-defined EBITDA measure. Our analysis of the sector’s profitability sector shows that Ansys is still the undisputed leader, with a current Berenberg-defined EBITDA margin of around 54%. Part of the reason for Ansys’s higher profitability is the fact that only 2% of its revenues come in the form of services, while 71% of its FY14 revenue was a highly profitable recurring revenue stream. However we believe that the trend of declining margins over the last few years will continue in the mid-term. This is consistent with our bearish view of Ansys’s future margin prospects as the company continues to invest in the mainstream simulation market.
Ansys has been the most profitable company in the industry, where margins are clearly on a downward trend
EBITDA margin (Berenberg)
64% 59% 54% 49% 44% 39% 34% 29% 24% 19% 14% FY2011 FY2012 FY2013 FY2014 FY2015e
Ansys Autodesk Aveva Dassault Nemetschek PTC RIB
Source: Company, Berenberg
Not many companies have managed to leverage their sales and marketing costs over the last four years – their future growth ambitions will probably have to result in ongoing investment
S&M&A as % revenue
60% 55% 50% 45% 40% 35% 30% 25% 20% FY2011 FY2012 FY2013 FY2014 FY2015e
Ansys Autodesk Aveva Dassault Nemetschek PTC RIB
Source: Company, Berenberg
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Autodesk’s investment in the cloud is clearly showing in the amount of R&D spend and RIB is nearing the end of its major cloud-based product development which should provide some leverage in the future; other companies have fairly stable R&D spend
R&D as % revenue
30% 28% 26% 24% 22% 20% 18% 16% 14% FY2011 FY2012 FY2013 FY2014 FY2015e
Ansys Autodesk Aveva Dassault Nemetschek PTC RIB
Source: Company, Berenberg
SBC is much more common at US companies ; Dassault is the only European vendor that materially utilises SBCs
SBC as % revenue
8% 7% 6% 5% 4% 3% 2% 1% 0% FY2012 FY2013 FY2014 FY2015e
Ansys Autodesk Aveva Dassault Nemetschek PTC RIB
Source: Company, Berenberg
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Autodesk’s cash conversion is expected to increase as a result of its ongoing business model change (with customers effectively pre- paying for a year) while some of the other companies have been experiencing weaker cash conversion; PTC’s cash conversion rate seems very cyclical while Dassault’s cash conversion has been trending down for the last two years
Cash conversion
135%
115%
95%
75%
55%
35% FY2011 FY2012 FY2013 FY2014 FY2015e
Ansys Autodesk Aveva Dassault Nemetschek PTC RIB
Source: Company, Berenberg
Legacy players have an understandably larger proportion of recurring revenues in their profile (mainly through maintenance); however, Ansys and AVEVA both generate a significant share of revenues through rentals; Nemetschek and RIB’s strong licence growth is still outpacing maintenance growth while Autodesk’s business model shift will significantly change its recurring revenue profile over the next three years
Recurring revenue as % total revenue
80% 75% 70% 65% 60% 55% 50% 45% 40% 35% FY2011 FY2012 FY2013 FY2014 FY2015e
Ansys Autodesk Aveva Dassault Nemetschek PTC RIB
Source: Company, Berenberg
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Comp sheet
Comp sheet for Design software peer group
Design software Mkt Cap EV/Sales EV/Ebitda P/EP/EP/E EBITDA Margin
Company Price $m$m$m EV ($m) 2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016
ANSYS INC 89.3 8,009 7,220 8.5 7.7 7.5 6.9 18.2 16.8 14.2 13.6 26.5 32.6 25.5 23.4 46.7% 45.9% 52.7% 50.5% AUTODESK INC 59.7 13,566 12,014 3.1 5.2 4.7 4.5 16.3 28.4 44.1 21.9 30.8 53.8 165.9 44.4 18.8% 18.2% 10.6% 20.5% AVEVA GROUP PLC 1492.0 1,426 1,323 6.8 3.7 4.0 3.6 21.5 11.5 13.0 11.2 30.2 16.8 18.2 15.7 31.3% 32.2% 30.5% 31.8% DASSAULT SYSTEMES SA 61.7 17,419 16,347 4.9 6.5 5.6 5.1 15.6 23.8 17.7 15.6 26.2 33.3 29.7 26.3 31.2% 27.4% 31.5% 32.8% NEMETSCHEK AG 120.0 1,270 1,184 2.4 5.0 4.7 4.4 9.6 20.5 18.8 17.3 19.4 33.1 34.9 32.0 24.9% 24.3% 25.2% 25.6% PTC INC 37.2 4,272 4,616 2.6 3.4 3.5 3.3 16.6 16.8 12.5 11.4 19.6 21.1 16.1 14.2 15.8% 20.2% 27.7% 29.5% RIB SOFTWARE AG 13.3 637 477 3.6 6.4 4.9 4.0 11.0 14.0 13.6 10.4 21.2 38.9 31.7 22.2 33.0% 45.7% 36.3% 38.4% ADOBE SYSTEMS INC 76.2 38,136 36,860 6.5 8.7 7.2 5.9 35.6 49.4 21.6 14.7 78.0 108.9 35.3 22.9 18.3% 17.5% 33.4% 40.0% CADENCE DESIGN SYS INC 18.5 5,401 5,070 2.5 3.2 3.0 2.8 12.9 15.7 9.6 8.7 16.2 29.8 18.4 16.3 19.7% 20.4% 31.0% 32.3% HEXAGON AB-B SHS 310.0 13,032 15,227 0.4 4.7 4.0 3.7 1.7 21.8 14.0 12.4 18.7 26.9 22.2 19.5 25.9% 21.6% 28.6% 29.9% SYNOPSYS INC 46.9 7,203 6,589 2.4 3.1 2.8 2.6 10.8 14.3 10.3 9.6 14.6 29.3 17.3 15.6 22.1% 21.5% 27.3% 27.3% LECTRA 13.2 440 397 1.1 1.7 1.6 1.5 8.5 14.9 10.6 9.0 7.8 27.1 21.0 17.4 12.5% 11.5% 14.7% 16.4% ESI GROUP 25.0 163 175 1.4 1.5 1.3 1.2 6.0 12.3 13.5 10.9 23.0 61.1 19.9 16.5 24.2% 12.0% 9.6% 11.1% Mean 3.63.63.64.74.74.7 4.24.24.2 3.83.83.8 14.2 20.0 16.4 12.9 25.6 39.4 35.1 22.0 25.0% 24.5% 27.6% 29.7% Median 2.62.62.64.74.74.7 4.04.04.0 3.73.73.7 12.9 16.8 13.6 11.811.811.8 21.2 32.6 22.2 19.5 24.2% 21.5% 28.6% 30.9% Source: Bloomberg (at 6 April 2015 close)
Relative valuation section
This sector has been historically trading on high multiples due to its high growth rates: today, Autodesk and Dassault look the priciest assets and Autodesk’s earnings growth has stalled momentarily until the higher bookings growth increases revenues in a few years; Dassault’s re-rating, on the other hand, is mainly related to increased expectations following the introduction of its new FY19 EPS target; RIB looks reasonably priced considering its 25% targeted growth rate – however, one has to note that reported EPS will not grow significantly in FY15 due to one-off profit items (c€10m) recognised in FY14; both PTC and AVEVA still look cheap
Trailing PE ratio 50
45
40
35
30
25
20
15 01/09/2011 01/07/2012 01/05/2013 01/03/2014 01/01/2015 ANSS ADSK AVV RSTA PTC DSY Peer Group
Source: Company, Berenberg
31 Software & IT Services
Comparison of FY16 (calendar) earnings expectations versus share price performance: the expectations have been decreasing for all stocks except for Dassault; Autodesk, Ansys, RIB and Nemetschek all seemed to have re-rated recently whereas PTC and AVEVA have not – overall, the expectations for the sector decreased by c5% while the share prices rose 18% on average
Autodesk ––– decreased est and Ansys --- decreased est and RIBRIBRIB --- decreased est and positive positive rere----ratingrating positive rere----ratingrating rerere-re ---ratingrating (recently)
70 3 90 4.1 15 0.6
60 2.5 0.5 85 4 50 2 10 0.4 40 80 3.9 1.5 0.3 30 75 3.8 1 5 0.2 20 70 3.7 10 0.5 0.1
0 0 65 3.6 0 0
Autodesk share price 2015e EPS Ansys share price 2015e EPS RIB share price 2015e EPS
PTC ––– decreased expectations Dassault ––– increased expectations NEM --- decreased est and positive and no re ---rating and small re ---rating rerere ---rating (recently)
40 2.8 70 2.4 30 2.5 65 60 25 2.7 55 2 2.3 50 45 20 2.6 40 1.5 35 35 2.2 15 2.5 30 1 25 10 20 2.1 2.4 15 0.5 10 5 5 30 2.3 0 2 0 0
PTC share price 2015e EPS Dassault share price 2015e EPS NEM share price 2015e EPS
Aveva ––– decreased expectations Peer Group rerere-re ---ratingratingrating;;;; falling and no rere----ratingrating expectations
2500 1.4 120 120
1.2 115 100 2000 1 110 80 1500 0.8 105 60 1000 0.6 100 40 0.4 Peer group performance (equal- 500 95 weight) 20 0.2 Peer group EPSe 0 0 90 0
Aveva share price 2015e EPS
Source: Bloomberg, Berenberg calculations
32 Software & IT Services
EV/recurring revenue
Quality costs money: Ansys has always been trading at a premium to the peers whereas the recent re-rating of AVEVA is apparent; if the rental revenues turn out to be more recurring than currently expected, then the company is trading on historical lows in terms of EV/recurring revenue
12
10
8
6
4
2 2012 2013 2014 Current ANSS AVV DSY ADSK PTC RSTA NEM
Source: Company, Berenberg
33 Software & IT Services
Individual companies section
34 Ansys, Inc Software & IT Services – Software
A quality asset trading at a fair price
● We initiate on Ansys with a Hold rating and the price target of $88. We 8 April 2015 believe that the current share price fairly reflects the value of the company’s mid-term prospects. ● Ansys is a software company which develops and markets engineering Hold (Initiation)
simulation solutions and services that are widely used by engineers, Current price Price target designers, researchers and students across a broad range of verticals.
USD 86.99 USD 88.00 ● Industry-leading margins: The company’s strong market position is reflected in a market-leading design software operating margin that has 02/04/2015 New York Close recently been moving around 48%. Even though manufacturing companies are increasing their usage of simulation methods when designing new Market cap (USD m) 8,194 Reuters ANSS.O products, simulation is still mainly used in the later stages of the process. Bloomberg ANSS US The main reason for this is the lack of skilled users in this area. The company is now actively looking to expand its total addressable market Share data (TAM) to “non-PhDs” – an initiative it calls “democratisation of simulation”. Shares outstanding (m) 94
Enterprise value (USD m) 7,050 ● A very stable core business: Ansys boasts an extremely loyal customer Daily trading volume 390,000 base, enabling it to invest a lot of resources in the development of additional solutions by way of R&D and M&A. It is still early days in the use Key data of multiphysics simulation and the potential for future expansion is very large. More complex products and the need to reduce cost-to-market will Price/book value 3.3 drive adoption. Net gearing -45.7% CAGR sales 2014-2017 6.4% ● Penetration of new segments: We believe that the industry-leading CAGR EPS 2014-2017 5.1% operating margin will gradually reduce as the company introduces more mainstream solutions. The incremental opportunity from democratisation of simulation is attractive. Ansys prides itself on best-of-breed technology and there is a risk that the company will find it difficult to win market share in an environment where cost-advantage has been the main differentiator. ● Valuation: Our valuation is based on a DCF model using assuming high single-digit revenue growth for the next 10 years. Our DCF model is based on a 6.9% WACC and a 0% terminal growth rate.
Y/E 31.12., USD m 2013 2014 2015E 2016E 2017E Sales 866 941 966 1,041 1,135 EBITDA 504 534 525 561 606 EBIT 423 452 453 489 533 EBIT (Berenberg) 423 415 413 449 493 Free Cash flow 304 322 315 361 391 Free Cash flow (Berenberg) 304 322 315 361 391 Net profit 311 323 324 349 375 Y/E net debt (net cash) -725 -789 -1,144 -1,545 -1,975 EPS (adjusted) 3.27 3.43 3.44 3.71 3.99 EPS (Berenberg) 2.90 3.04 3.02 3.28 3.56 CPS 3.20 3.81 3.77 4.26 4.58 DPS 0.00 0.00 0.00 0.00 0.00 EBITDA margin 58.2% 56.7% 54.3% 53.9% 53.4% EBIT margin 48.9% 48.0% 46.9% 46.9% 46.9% Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% EV/sales 8.6 7.9 7.3 6.4 5.5 EV/EBITDA 14.8 13.9 13.4 11.9 10.3 EV/EBIT 17.7 16.4 15.5 13.6 11.7 P/E 24.0 22.9 21.8 19.1 16.6 Free Cash flow yield 3.7% 4.4% 4.3% 4.9% 5.3% Source: Company data, Berenberg
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
35 Ansys, Inc Software & IT Services – Software
Hold Investment thesis
● Ansys boasts an extremely loyal customer base, enabling it t o 8 April 2015 invest a lot of resources in the development of additional solutions by way of R&D and M&A. Behind Dassault, Ansys is the second
Current price Price target most acquisitive company in the design software space. ● It is still early days in the use of multiphysics simulation and the Market cap (USD m) 8,194 USD 86.99 USD 88.00 potential for future expansion is very significant . More complex 02/04/2015 New York Close EV ( USD m) 7,050 products and the need to reduce cost-to-market will drive Trading volume 390,000 adoption. Free float -% ● We believe that the industry-leading operating margin will
Non-institutional shareholders Share performance gradually reduce as the company introduces more mainstream solutions. The incre mental opportunity from democratisation of
- High 52 weeks USD 88.57 simulation is attractive. Ansys prides itself on best-of-breed technology and there is a risk that the company will find it difficult Low 52 weeks USD 72.21 to win market share in an environment where cost advantage has Business description Performance relative to been the main differentiator.
- SXXP NASDAQ 1mth -0.8% 2.7% 3mth -13.8% 3.3% 12mth 0.0% -3.4%
Profit and loss summary Cash flow summary USDm 2013 2014 2015E 2016E 2017E USDm 2013 2014 2015E 2016E 2017E Revenues 866 941 966 1,041 1,135 Net income 245 255 262 287 313 EBITDA 504 534 525 561 606 Depreciation 20 21 48 48 49 EBITA 524 555 573 609 655 Working capital changes 4 42 21 43 48 EBIT 423 452 453 489 533 Other non-cash items 3 6 24 24 24 Associates contribution - - - - - Operating cash flow 333 385 379 427 459 Net interest 2 2 3 3 3 Capex 29 26 24 26 28 Tax -112 -129 -132 -143 -161 FCFE 304 322 315 361 391 Minorities 0 0 0 0 0 Acquisitions, disposals -4 -103 0 0 0 Net income adj. 311 323 324 349 375 Other investment CF - - - - - EPS reported 2.90 3.04 3.02 3.28 3.56 Dividends paid 0 0 0 0 0 EPS adjusted 3.27 3.43 3.44 3.71 3.99 Buybacks, issuance -113 -230 0 0 0 Year end shares 95 94 94 94 94 Change in net debt 148 64 355 401 431 Average shares 95 94 94 94 94 Net debt -725 -789 -1,144 -1,545 -1,975 DPS 0.00 0.00 0.00 0.00 0.00 FCF per share 3.20 3.81 3.77 4.26 4.58
Growth and margins Key ratios 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Revenue growth 7.2% 8.7% 2.7% 7.8% 9.0% Net debt / equity -33.9% -35.6% -45.7% -54.9% -62.7% EBITDA growth 2.8% 5.9% -1.6% 6.9% 8.0% Net debt / EBITDA -1.4 -1.5 -2.2 -2.8 -3.3 EBIT growth 4.6% 6.8% 0.4% 7.8% 9.0% Avg cost of debt -9.2% - - - - EPS adj growth 12.3% 4.9% 0.3% 7.7% 7.4% Tax rate 26.5% 28.5% 29.0% 29.0% 30.0% FCF growth 10.8% 18.1% -1.3% 13.0% 7.4% Interest cover -301.3 -240.1 -187.5 -200.4 -216.4 EBITDA margin 58.2% 56.7% 54.3% 53.9% 53.4% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% EBIT margin 48.9% 48.0% 46.9% 46.9% 46.9% ROCE 24.8% 26.2% 23.4% 22.4% 22.0% Net income margin 36.0% 34.3% 33.5% 33.5% 33.0% Capex / sales 3.3% 2.8% 2.5% 2.5% 2.5% FCF margin 35.1% 38.2% 36.7% 38.5% 37.9% Capex / depreciation 143.9% 124.6% 50.5% 53.6% 57.4%
Valuation metrics Key risks to our investment thesis 2013 2014 2015E 2016E 2017E ● The adoption of an incremental user base could be better than P / adjusted EPS 24.0 22.9 21.8 19.1 16.6 anticipated at stable margins. This could add around 15% upside to P / book value 3.8 3.7 3.3 2.9 2.6 our current price target. FCF yield 3.7% 4.4% 4.3% 4.9% 5.3% The margin erosion could be worse than expected as the company Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% ● moves further into the mass market. EV / sales 8.6 7.9 7.3 6.4 5.5 EV / EBITDA 14.8 13.9 13.4 11.9 10.3 ● If the growth rate stabilises at around 5%, we see c10% downside to EV / EBIT 17.7 16.4 15.5 13.6 11.7 the stock. EV / FCF 24.6 20.6 19.9 16.6 14.4 EV / cap. employed 3.5 3.3 2.8 2.4 2.0
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
36 Ansys, Inc Software & IT Services – Software
Ansys
Business description Ansys is a software company which develops and markets engineering simulation solutions and services widely used by engineers, designers, researchers and students across a broad range of verticals including aerospace, automotive, manufacturing, electronics, biomedical, energy and defence. The company employs around 2,600 people and distributes its Ansys suite of simulation technologies through a global network of independent channel partners and direct sales in strategic accounts. One of the flagship products is Ansys CFD, software for computational fluid dynamics. The company was founded in 1970 by Dr John Swanson as Swanson Analysis Systems. The main target was to develop finite element analysis software for structural physics that could simulate stationary, moving and heat transfer problems. The company was sold to private equity firm TA Associates in 1994 and later rebranded to Ansys. Ansys has been public since 1996 and the shareholder structure is well diversified. The company’s main competitors include Dassault’s Simulia brand (formerly Abaqus) and Msc’s Nastran software. At the lower end of the spectrum, Ansys also competes with more commoditised simulation software, such as Autodesk’s Simulation Multiphysics solution. The company’s strong market position is reflected in a market-leading design software operating margin that has recently been moving around 48%. Even though manufacturing companies are increasing their usage of simulation methods when designing new products, simulation is still mainly used in the later stages of the process. The main reason for this is the lack of skilled users in this area. The company is now actively looking to expand its total addressable market (TAM) to non-PhDs – an initiative it calls democratisation of simulation.
Key investment points ● Ansys boasts an extremely loyal customer base, enabling it to invest a lot of resources into the development of additional solutions by the way of R&D and M&A. Behind Dassault, Ansys is the second most acquisitive company in the design software space. ● It is still early days in the use of multiphysics simulation and the potential for future expansion is very large. More complex products and the need to reduce cost-to-market will drive adoption. ● We believe that the industry-leading operating margin will gradually reduce as the company introduces more mainstream solutions. The incremental opportunity from democratisation of simulation is attractive. Ansys prides itself on best-of-breed technology and there is a risk that the company will find it difficult to win market share in an environment where cost-advantage has been the main differentiator.
Management Ansys boasts a very stable management team that has been in place for more than 15 years. Ansys’s board of directors includes Bill McDermott, the CEO of SAP AG. CEO: James E Cashman III was appointed as CEO of the company in 2000. He joined Ansys in 1997 where he first worked as a senior vice president of operations. Before joining Ansys, Mr Cashman was vice president of marketing and international operations at PAR Technology Corporation, a computer software and hardware transaction processing company. His expertise lies in product and market strategy management as well as sales, operational and international management. CFO: Maria T Shields has been the CFO of Ansys since 1998. Before this, she served as the group’s corporate controller from 1994. Before joining Ansys, she qualified as an accountant (CPA) with Deloitte and Touche LLP.
37 Ansys, Inc Software & IT Services – Software
Company at a glance
Revenue split by geography Licences growth and EBIT margin
52% 25% Other Int'l, 19% 51% 20% North America, 50% 36% 15% Japan, 12% 49% 10% 48%
Other 47% 5% Europe, 19% Germany, 11% 46% 0% FY2010 FY2011 FY2012 FY2013 FY2014 FY2015e FY2016e FY2017e EBIT margin (non-GAAP) Licence revenue growth UK, 5% Source: Company, Berenberg Source: Company, Berenberg
Revenue forecast – Berenberg versus consensus EBIT forecast – Berenberg versus consensus
1,200 50.0%
1,150 49.0% 48.0% 1,100 47.0% 1,050 46.0% 1,000 45.0% 950 44.0%
900 43.0%
850 42.0% FY2015 FY2016 FY2017 Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY2015 Berenberg estimates Consensus - Bloomberg Guidance Berenberg estimates Consensus - Bloomberg
Source: Company, Berenberg Source: Company, Berenberg
Timeline of selected milestones
Source: Company, Berenberg
38 Ansys, Inc Software & IT Services – Software
Investment thesis in pictures
A stable client base generates a large proportion of recurring Management has identified three main growth drivers for the revenues future
100% 90% 80% 70% 60% 50% 40% 30% 61%61%61% 63%63%63% 63%63%63% 64% 61%61%61% 64% 63%63%63% 66% 20% 10% 0% Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Recurring revenue Non-recurring revenue
Source: Company, Berenberg Source: Company
Traditional product design processes are too rigid and costly The simulation market is still underpenetrated at the lower end
5%5%5%
Engineers not using simulation Engineers using simulation
Source: Company Source: Company, Berenberg
However, we believe that the sustainable growth rate is below …and the valuation looks expensive as growth normalises around 10%... the peer group average
1,000 80% 13 900 70% 12 800 60% 11 700 10 600 50% 500 40% 9 400 30% 8 300 7 20% 200 6 100 10% 5 0 0% FY2006FY2007FY2008FY2009FY2010 FY2011 FY2012 FY2013 FY2014 4 Total revenue Annual reported revenue growth 2012 2013 2014 Current Trailing revenue CAGR (since FY05) Linear (Total revenue) ANSS Peer group* avg
Source: Company, Berenberg Source: Company, Berenberg
39 Ansys, Inc Software & IT Services – Software
Investment thesis in detail Over the last few decades, Ansys has become the world’s largest pure-play simulation software provider. The company is achieving best-in-class operating margins, driven mainly by increased sales to its existing user base. Penetration of the simulation within the manufacturing industry has been improving, but is still far from mature. The company has been growing its top line at double digits for most of the last decade, although this growth has slowed in recent years, prompting investors to question future sustainable growth rates. We believe that a combination of factors, such as investment in its sales force (which accelerated in Q414), penetration of more commoditised markets (with inherently lower margins) and the potential change in customers’ preferences in the way they procure their software will result in lower margins. Even though Ansys has been indifferent about the way it sells its software, the company’s revenue can be lumpy and any large rental deal will result in a significant portion of revenue being deferred over a period of time. This has been fairly immaterial in the past, but at the FY14 results, management noted that in future these deferrals could have a more serious impact on revenue growth (annual bookings will therefore become an important measure). One of the rental deals that was signed last year is expected to have a marginal impact on Q115 revenue due to relatively large proportion of deferred revenue. Term-based licences (TBLs) have traditionally been a large part of the Apache business Ansys acquired in 2011 and recent contract wins indicate that TBLs could become an even more material part of the business (in FY14, they contributed around one-third of revenue). Ansys is one of the most acquisitive companies in the sector and we understand that M&A will remain an important part of its strategy. The main aim of future M&A will be to develop Ansys’s simulation expertise in segments that are currently under-represented.
The existing product development process
Source: Company
Ansys’s vision of the simulation-driven product development process
Source: Company
Future growth will come from increasing the number of simulation users (winning new clients) and from increasing the density and intensity of the existing customer base. As the focus will be on the former, we believe further investment in technology (to improve ease of use) and sales and marketing will result in gradually decreasing operating margins.
40 Ansys, Inc Software & IT Services – Software
However, we recognise that the existing customer base is extremely sticky and will continue to provide Ansys with a stable core which will enable the company to invest in further M&A. These offsetting factors combined with the current share price result in our Hold recommendation for Ansys. We believe that growth would have to accelerate and margins remain at current levels to justify a more bullish view on the stock.
41 Ansys, Inc Software & IT Services – Software
Investment thesis in detail
Point ###1:#1: the era of doubledouble----digitdigit growth might be over Our analysis shows that any bull case for the company has to be based on the underlying assumption that Ansys will continue to deliver double-digit revenue growth. Management has been extremely successful in implementing its vision and has established the world’s leading pure-play simulation software vendor. The company started its journey in a period when simulation was rarely used in product design, and by creating a unique user-friendly approach to complex simulation, Ansys has significantly increased the use of simulation methods in product design, resulting in its market-leading position.
A double-digit growth rate is unlikely to return unless there is a significant shift towards a lower-end user base, which will ultimately result in lower margins
1,000 80% 900 70% 800 60% 700 600 50% 500 Apache acquisition effect 40% 400 30% 300 20% 200 100 10% 0 0% FY2006FY2007FY2008FY2009FY2010 FY2011 FY2012 FY2013 FY2014 Total revenue Annual reported revenue growth Trailing revenue CAGR (since FY05) Linear (Total revenue)
Source: Company, Berenberg
Although management recently introduced its vision of how simulation-driven product development will result in the company expanding its TAM to $20bn over the next five to seven years, we believe that the sustainable growth rate for the business is below 10%.
(Un)identifiable TAM
Source: Company, Berenberg
42 Ansys, Inc Software & IT Services – Software
TAM expansion plan: the growth drivers If the company is to return to double-digit revenue growth rates, it will need to accelerate the impact of all three main growth drivers of the business.
Three main growth drivers as identified by management
Source: Company, Berenberg
1) Increasing the number of users (50% of the overall TAM expansion): Management has referred to this initiative as the democratisation of simulation. Management expects that easier-to-use products will eventually result in more people using the product earlier in the design process. Today, fewer than 5% of all engineers use simulation methods when working on the design of a new product. 2) Increasing the density of usage (25% of the overall TAM expansion): More complex products require more accurate simulation and management’s expectation is that customers will move from using single physics to multiple physics (about 30% of the simulation market) and then to multiphysics simulation (still very rarely used). Increased collaboration and cross-departmental product design will increase density of usage. 3) Increasing the intensity of usage (25% of the overall TAM expansion): This initiative is linked to the fact that even though some firms have invested in IT infrastructure, they are not using it to its full potential. Ansys estimates that 80% of its customers own some sort of high-performance computing infrastructure, but less than 10% use it for simulation. Our view: The growth drivers identified above are not new. What is different today is that the company believes the key barriers against the use of simulation are finally coming down and that Ansys will be the main beneficiary of the increased use of simulation over the mid-term. To realise this potential, Ansys will have to convince its customers to change the way they approach product design. It takes time for organisations to adopt new business processes and we believe that change will be more incremental than revolutionary. The ever-increasing complexity of the products being designed will help to increase the density of usage. Ansys’s M&A strategy has enabled it to become an important player in multiphysics simulation and the company is well positioned to benefit from the emergence of smart products. We are, however, more sceptical about Ansys’s initiative to increase the number of users by expanding its footprint into more commoditised simulation markets. We believe that Ansys will conquer the technological obstacles and create a simple-to-use product that will be suitable for engineers. Indeed, in our view, Ansys 16.0 (with Ansys AIM) is a step in this direction. However, we are concerned that operating margins will decrease as a result of the required opex investment (in R&D and S&M) and the inherently lower pricing point. By entering the lower end of the market, Ansys will compete with a new set of vendors which are happy to provide a scaled-down solution for a fraction of the licence fee. So far,
43 Ansys, Inc Software & IT Services – Software
Ansys’s competitive environment has been fairly stable and the company has mainly grown from existing users’ increased spend. While this has ensured that margins remain high, it has slowed down the overall revenue growth of the business. Management finds the incremental TAM related to engineers very attractive, but we believe that future growth will come at a lower margin.
Point ###2: #2: the company has a stronstrongg track record of identifyingidentifying and integrating attractive M&A targets A series of acquisitions has enabled Ansys to move to adjacent markets to continue delivering exceptional growth. The company has a strong balance sheet with around $800m of net cash. It also generates approximately $370m of operating cash flow per year. An analysis of recent M&A deals shows that the sweet spot for the deals has been a size of around $50m-100m. Strong financials will enable the company to continue expanding its portfolio of solutions beyond its traditional segments. While we believe that Ansys will continue with such acquisitions, our estimates are based on organic growth only. The rapid integration of these companies is a consequence of a targeted approach in which the valuation multiple is often less important than compatibility and the need for that technology within the Ansys product line. Ansys also has a network of enhanced-solutions partners and the recent acquisition of SpaceClaim was a result of years of cooperation and the integration of SpaceClaim’s CAD capabilities within Ansys’s simulation software was a logical step. It will be interesting to see whether the acquisition will result in any change in Ansys’s relationship with the major CAD vendors. We believe that the SpaceClaim deal is not enough of a game-changer to alienate the partner ecosystem, but it does indicate the direction in which the company is heading.
Summary of M&A activity over the last four years
Date completed Target Company Consideration ($m) Comment
Provider of direct 3D easy-to-use modelling technology for concept design. The company was previously Ansys' Solution Partner and was acquired on the May-14 SpaceClaim 85 back of the successful relationship. The idea is to enable engineers to simulate the concept early in the design phase and to make any changes required before the first physical prototype has been produced.
Developer of chemistry simulation software. Expected to be integrated with Jan-14 Reaction design 19 ANSYS CFD solutions
Composite analysis and optimisation technology Cloud provider. Acquired Apr-13 EVEN 8.1 with the aim to strengthen simulation for composites to enhance the manufacturing vertical where a range of metrials is often used
Provider of embedded software simulation solutions for mission-critical application (mainly required in highly regulated industries, such as software Aug-12 Esterel 58.2 in the aerospace and the automotive). It automatically produces certified embedded software and expended ANSYS presence in software simulation
Apache is a leading provider of simulation software for the advanced, low- powered solutions for electronics. It enables engineers to design more balanced products in terms of power-efficiency vs performance. Seen as a Aug-11 Apache Design 314 transformational deal as it enables ANSYS to round up its offering in connected and smart products. Operationally, Apache business has had a larger proportion of TBLs than the rest of ANSYS business.
Source: Company, Berenberg
44 Ansys, Inc Software & IT Services – Software
The Apache deal was transformational
Ansys recently began investing in microelectronics and the acquisition of Apache provided an entry ticket into this booming market
Source: Company
The acquisition of Apache in 2011 was transformational in many ways. Not only was the deal significantly larger in terms of value than Ansys’s usual targets, it provided the technology Ansys needed to penetrate the fast booming microelectronics market. While Ansys started the move to electromagnetics in 2008, Apache has been in this vertical for much longer, as its chip power testing solutions were first introduced in 2001. Apache’s focus today is on the semiconductor industry. The company currently supplies its power sign-off solutions to 19 out of top the 20 semiconductor companies.
Ansys solutions now include all multiphysics from semiconductors to electromagnetic and structural mechanics – this enables early-stage testing of new products and decreases development costs
Source: Company
Today, Ansys’s value proposition in this space is built around the chip package system (CPS) convergence. As mobile processors become increasingly complex (encompassing many functions such as GPS, WiFi, CPU and GPU), this drives the need for a complete solution that enables customers to design the chip and package together. With Apache, Ansys has acquired a product that handles all the required physics to simulate the system behaviour.
45 Ansys, Inc Software & IT Services – Software
Point ###3:#3: as the growth rate is slowing, valuation looks ffullull The combination of slowing top-line growth (which we believe will be less than 10% in the mid-term), our expectations of operating margin pressure and the recent re-rating of the stock lead us to believe that valuation is full at these levels. In order to justify further expansion of the valuation multiple, we would have to see significant acceleration of the growth rate, another Apache-like transformational deal or a higher degree of operating leverage. Of the main possible drivers for the stock, we believe that M&A is the most likely at this stage. We are cautious about the R&D cycle, which is bound to drive up spending in some the company’s main verticals.
The stock has re-rated significantly in 2015 as the share price increased while consensus EPS decreased
88 4.1 86 4.0 84 82 4.0 80 3.9 78 3.9 76 74 3.8 72 3.8 70 68 3.7 66 3.7
Ansys share price 2016 EPS consensus
Source: Company, Berenberg
EV/recurring revenue: Ansys has always traded at a premium to its peers
13 12 11 10 9 8 7 6 5 4 2012 2013 2014 Current ANSS Peer group* avg
Source: Company, Berenberg *Peer group: Aveva, Dassault, Autodesk, PTC, Nemetschek and RIB Software
Historically, Asnys has traded at a premium to the sector in terms of EV/recurring revenue. We believe that some premium is justified due to its superior margin profile and extremely loyal user base. Even more importantly, two years ago Ansys’s recurring revenue was growing at 10% versus the sector average of 6.5%. This year, even taking into account the FX impact and the weakness in oil and gas that has hurt Aveva’s top line, Ansys’s growth will only be in line with its peers. We therefore believe that the recent premium expansion (seen in the chart above) is not justified.
46 Ansys, Inc Software & IT Services – Software
Valuation
We value Ansys on a DCF basis assuming high single-digit revenue growth for the next 10 years. In order to continue to deliver this kind of growth, we believe that the company will eventually have to enter the more competitive and commoditised lower-end simulation market. This will put some pressure on the overall profitability of the group; we are expecting c4ppt dilution over the next 10 years. Our DCF model is based on a 6.9% WACC and a 0% terminal growth rate. As we believe that there are a number of possible outcomes for Ansys in the mid-term, we ran a series of scenarios which are presented in the section below. The results of these scenarios support our valuation and the price target of $90 which indicates that the shares are currently trading close to their full value. The stock has re-rated significantly over the last three months. In order to create a bull scenario, we would need to see organic revenue growth accelerating above 10% while the company keeps the margins above 48%. We believe that this will be unachievable in the near term and therefore we initiate with a Hold rating.
Ansys DCF model summary
AAA Est Est Est Est Est Est Est Est Est Est Est USDm FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 TYTYTY Revenues 808 866 941 966 1,041 1,135 1,232 1,336 1,450 1,559 1,676 1,801 1,936 Operating profit 405 423 452 460 495 540 579 621 667 709 754 802 852 EBITDA 490 504 534 531 568 613 656 703 754 801 851 904 960 SBC proxy charge - - 37 40 40 40 40 40 40 40 40 40 40 Tax rate 31.5% 26.5% 28.5% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% NOPAT 336 370 355 349 375 407 438 471 507 540 576 613 653 Depreciation 18 20 21 48 48 49 53 58 63 68 73 78 84 Amortisation 67 61 61 24 24 24 24 24 24 24 24 24 24 Capex (24) (29) (26) (24) (26) (28) (31) (33) (36) (39) (42) (45) (48) Net working capital 9 4 42 21 43 48 ------FCF 321 346 371 346 392 427 407 438 471 501 534 568 605 Terminal value 8,768 NPV of FCF 346 367 374 333 335 337 336 335 333 332 4,499 % value in each year 4.4% 4.6% 4.7% 4.2% 4.2% 4.3% 4.2% 4.2% 4.2% 4.2% 56.8% WACC 6.9% NPV 7,927 Net (debt)/cash 577 Market value 8,504 Implied Share price 909090 Revenue growth 7.2% 8.7% 2.7% 7.8% 9.0% 8.5% 8.5% 8.5% 7.5% 7.5% 7.5% 7.5% - Operating margin (non-GAAP) 48.9% 48.0% 47.6% 47.6% 47.6% 47.0% 46.5% 46.0% 45.5% 45.0% 44.5% 44.0% Operating margin (Berenberg) 48.9% 44.1% 43.4% 43.7% 44.1% 43.8% 43.5% 43.2% 42.9% 42.6% 42.3% 41.9% capex/sales 3.3% 2.8% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Source: Company, Berenberg
47 Ansys, Inc Software & IT Services – Software
Scenario analysis and risks to our investment thesis
Price target sensitivity to WACC and terminal growth Price target sensitivity to terminal EBIT margin and growth rate
Terminal growth rate Terminal growth rate 88.26684 (1.0%) (0.5%) - 0.5% 1.0% 88.26684 (1.0%) (0.5%) - 0.5% 1.0% 8.4% 69 71 73 75 77 41.0% 79 82 85 88 92 7.9% 73 75 77 80 83 42.0% 80 83 86 89 94 7.4% 77 80 82 85 89 43.0% 81 84 87 91 95 6.9% 82 85 88 92 96 44.0% 82 85 88 92 96 WACC 6.4% 88 91 95 100 105 45.0% 83 86 89 93 97 5.9% 94 98 103 109 115 46.0% 84 87 91 94 99 5.4% 102 107 113 120 128 FY2024 EBIT margin 47.0% 85 88 92 96 100 Source: Company, Berenberg Source: Company, Berenberg
Positive risks The company could be more successful in penetrating the mass market which could result in higher growth rates (closer to double digits). This would result in around a 10% higher justified valuation. Stable margins would add another 4% to the target, which would push the stock closer to a Buy. Negative risks Margin erosion could be higher than expected. We stress-tested a 1% point erosion per annum which would result in a 10-year target operating margin of 41%. This would result in around 4% downside risk to our price target. If the revenue growth for the next 10 years stabilises at 5%, then we would see further 10% downside to our price target.
48 Ansys, Inc Software & IT Services – Software
Appendix
Strategic alliances Ansys’s products are CAD-agnostic (ie they can link to any major CAD software) and the company has established a number of alliances with technology vendors in hardware, CAD, ECAD and PLM.
CAD Its main technical and marketing relationships within the CAD space are with Autodesk, Dassault Systèmes, PTC and Siemens PLM.
EDA In electronic design automation (EDA), Ansys has relationships with all major software providers such as Cadence, Synopsys, Mentor Graphics, Zuken and Agilent.
Enhanced Solution PartnePartnerr Programme Ansys has over 100 active enhanced-solution partners which specialise in developing software add-ons and specific solvers to enhance the use of the Ansys software suite. The main relationships include Livermore Software Technology Corporation (for explicit dynamics solutions, such as crash test simulations for the automotive industry) and NICE (which helps run some Ansys apps in a data centre environment). The company also had a relationship with SpaceClaim (direct modelling geometry creation and editing) before acquiring it in May 2014. Ansys’s product portfolio analysis Ansys products can mainly be segmented into six flagship lines: ● Simulation Platform (Ansys Workbench); ● Structures; ● Fluids; ● Electronics; ● Systems and Multiphysics; and ● Academic.
Ansys Workbench Workbench is the framework on which Ansys’s simulation applications are built. It uses an innovative UI that brings together the entire simulation process and guides the user through complex multiphysics analyses with drag-and-drop simplicity. Workbench has the ability to connect to CAD systems to read and feed back information and has powerful automated meshing. Applications include engineering knowledge management – solutions for simulation data management, high-performance computing, geometry interfaces and meshing.
Structures The Structures suite offers simulation tools for product design and optimisation that increase productivity and minimise physical prototyping hence reducing the time it takes to bring the product from concept to end-user. The Structures line includes applications for explicit dynamics (to simulate short-term, large-strain and large-deformation material failure) and composites (the blending of two or more materials with very different properties).
49 Ansys, Inc Software & IT Services – Software
Fluids This enables the modelling of fluid and gas flow, often referred to as CFD (computational fluid dynamics). This has historically been Ansys’s main market and represents its real area of strength.
Electronics The Electronics suite of products provides simulation software for designing high- performance electronic and electromechanical products. The software streamlines the design process and predicts the performance of mobile communication and internet-access devices, broadband networking components, integrated circuits and printed circuit boards, as well as automotive electromechanical components.
Systems and Multiphysics These solutions are used to simulate the performance of automated products. It is a collaborative solution that leverages multiphysics, multibody dynamics, circuit and embedded software simulation capabilities. This enables manufacturers of those complex products to simulate the complex interactions between components, circuits and control software within a single environment.
Academic Ansys’s Academic suite provides various tiers of usage levels from associate through research to teaching. Each tier includes various non-commercial products that bundle a range of physics and the corresponding solver abilities. This product suite provides entry- level tools intended for class demonstrations and hands-on learning. The company also provides a low-cost limited-volume solution for students to use outside the classroom. The Academic part of the product offering is important as Ansys’s long-term users usually familiarise themselves with the product at university and it helps the building of an ecosystem of young users who have just started their careers and will be likely using the software for years to come.
50 Ansys, Inc Software & IT Services – Software
Financials
Profit and loss account Year-end December(USD m) 2013 2014 2015E 2016E 2017E Sales 866 941 966 1,041 1,135 EBITDA 504 534534534 525525525 561561561 606 Depreciation and amortisation 20 21 48 48 49 EBIT 423423423 452 453 489 533533533 Financial result 2 2 3 3 3 EBT 424424424 452 456 492 536536536 Taxes -112 -129 -132 -143 -161 Net income 311311311 323323323 324324324 349 375375375 Source: Company data, Berenberg estimates
Balance sheet Year-end December (USD m) 2013 2014 2015E 2016E 2017E Liquid assets 743 789 1,144 1,545 1,975 Short-term debt - - - - - Long-term debt 18 0 0 0 0 Net debt ---725-725725725 ---789-789789789 ---1,144-1,144 ---1,545-1,545 ---1,975-1,975 Intangible assets 1,547 1,571 1,510 1,448 1,386 Property, plant and equipment 61 65 79 95 112 Other non-current assets 47 27 27 27 27 Fixed assets 1,655 1,664 1,616 1,570 1,525 Working capital before deferred income 90 98 94 102 111 Deferred income 318 345 350 401 458 Total working capital ---228-228228228 ---247-247247247 ---256-256256256 ---299-299299299 ---348-348 Other assets/ (liabilities) 261 269 298 334 374 Net assets ------Source: Company data, Berenberg estimates
Cash flow statement USD m 2013 2014 2015E 2016E 2017E Cash flow from operations before changes in w/cw/cw/c 329329329 343 358358358 384384384 410410410 Change in working capital 4 42 21 43 48 Net cashflow from operations 333333333 385385385 379379379 427427427 459 CapEx -29 -26 -24 -26 -28 Free Cash flow 304 359359359 355355355 401 431 Payments for acquisitions -4 -103 0 0 0 Financial investments 0 0 0 0 0 Increase/decrease in debt position 18 -18 0 0 0 Net share issuance 3 4 0 0 0 Dividends paid 0 0 0 0 0 Others -30 87 0 0 0 Effects of exchange rate changes on cash -4 -25 0 0 0 Increase/decrease in liquid assets 166166166 464646 355355355 401 431
Source: Company data, Berenberg estimates
51 Ansys, Inc Software & IT Services – Software
Growth rates yoy (%) 2013 2014 2015E 2016E 2017E Sales 7.2 % 8.7 % 2.7 % 7.8 % 9.0 % EBITDA 2.8 % 5.9 % -1.6 % 6.9 % 8.0 % EBIT 4.6 % 6.8 % 0.4 % 7.8 % 9.0 % Net income 12.5 % 3.8 % 0.2 % 7.7 % 7.4 % EPS reported 12.8 % 4.8 % -0.8 % 8.8 % 8.4 % EPS recurring 12.3 % 4.9 % 0.3 % 7.7 % 7.4 % Source: Company data, Berenberg estimates
52 Autodesk, Inc Software & IT Services – Software
Business model shift is not in the price yet
● We are initiating on Autodesk with a Buy recommendation and a price 8 April 2015 target of $75, implying 24% upside. ● We believe that the company will significantly benefit from the change in business model as it ceases to sell perpetual licences and moves to a rental- BUY
based model. We believe that the current valuation does not reflect the Current price Price target high proportion of recurring revenues that will be generated from FY18
onwards . USD 59.82 USD75.00 ● Autodesk is a design software company that mainly provides solutions for 02/04/2015 New York Close the engineering, construction, manufacturing, media and entertainment verticals. Its flagship product, AutoCAD, was launched more than three Market cap (USD m) 13,874 Reuters ADSK.O decades ago and is still one of the most popular and widely-used CAD Bloomberg ADSK US products in the market. ● Innovative business model: The company is not generally known as a Share data technology leader in the design software space. Over time, however, it has Shares outstanding (m) 229 adopted the strategy of being an early follower, which has enabled the Enterprise value (USD m) 12,073 company to innovate on the business/delivery side. This has earned Daily trading volume 2,534,000 Autodesk a reputation for being successful in extracting high margins in combination with relatively low technological risk. It has continued to do Key data so recently, and is the first major design software player to announce a significant push to the cloud. Price/book value 5.7 Net gearing -73.8% ● The initial adoption of the subscription model has been very strong. The CAGR sales 2015-2018 9.0% company revised its new subscriber figures three times in FY15 and ended CAGR EPS 2015-2018 20.0% up with 385k new subscribers versus the initial guidance of 150k-200k. Within the mix, more than 30% of customers were new to Autodesk. ● We believe that even though there might be some attrition within the pool of users who prefer to buy their licences, the majority of this base will eventually sign up to the subscription model. ● Valuation: We value the company in line with some of the more mature subscription-only players on a multiple of 6x 2019 recurring revenue discounted back three years to 2016. We believe that the multiple is justified given that Autodesk holds the dominant market position in many
of its segments and is profitable unlike many of the other SaaS vendors.
Y/E 31.01., USD m 2014 2015 2016E 2017E 2018E Sales 2,274 2,512 2,625 2,578 3,250 EBITDA 639 528 495 406 814 EBIT 511 382 345 257 640 EBIT (Berenberg) 378 217 175 90 429 Free Cash flow 367 467 351 402 616 Free Cash flow (Berenberg) 367 467 351 402 616 Net profit 386 272 247 182 465 Y/E net debt (net cash) -1,521 -1,279 -1,800 -2,370 -3,198 EPS (adjusted) 1.68 1.17 1.08 0.79 2.03 EPS (Berenberg) 1.10 0.46 0.33 0.06 1.11 CPS 2.17 2.73 2.28 2.49 3.61 DPS 0.00 0.00 0.00 0.00 0.00 EBITDA margin 28.1% 21.0% 18.9% 15.7% 25.0% EBIT margin 22.5% 15.2% 13.1% 10.0% 19.7% Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% EV/sales 5.4 5.0 4.6 4.5 3.3 EV/EBITDA 19.3 23.8 24.4 28.4 13.1 EV/EBIT 24.2 32.9 35.0 44.7 16.7 P/E 32.0 46.3 48.9 63.2 22.9 Free Cash flow yield 3.6% 4.6% 3.8% 4.1% 6.0% Source: Company data, Berenberg
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
53 Autodesk, Inc Software & IT Services – Software
BUY
Investment thesis
● We believe that the company will benefit significantly from a 8 April 2015 business model change as it ceases to sell perpetual licences and moves to rental-based model. We believe that the current valuation
Current price Price target does not reflect the high proportion of recurring revenues that will be generated in FY18/19.
Market cap (USD m) 13,874 USD 59.82 USD 75.00 ● The new Fusion 360 software has potential to disrupt the mid- 02/04/2015 New York Close EV ( USD m) 12,073 market CAD sector. Trading volume 2,534,000 ● Similar to Adobe, the company can unlock the potential of Free float -% incremental sales by marginally reducing high current piracy rates.
Non-institutional shareholders Share performance These are still as high 20% in the developed economies and exceed 70% in emerging markets.
- High 52 weeks USD 64.24
Low 52 weeks USD 45.19
Business description Performance relative to
- SXXP NASDAQ 1mth -5.8% -2.3% 3mth -18.5% -0.8% 12mth 11.8% 8.6%
Profit and loss summary Cash flow summary USDm 2014 2015 2016E 2017E 2018E USDm 2014 2015 2016E 2017E 2018E Revenues 2,274 2,512 2,625 2,578 3,250 Net income 229 82 49 -11 225 EBITDA 639 528 495 406 814 Depreciation 48 53 55 54 68 EBITA 688 581 550 460 882 Working capital changes 86 296 247 343 281 EBIT 511 382 345 257 640 Other non-cash items 120 184 154 167 245 Associates contribution - - - - - Operating cash flow 564 708 600 647 925 Net interest -3 -14 -11 -11 -11 Capex 64 76 79 77 98 Tax -122 -96 -87 -64 -164 FCFE 367 467 351 402 616 Minorities 0 0 0 0 0 Acquisitions, disposals -111 -826 0 0 0 Net income adj. 386 272 247 182 465 Other investment CF - - - - - EPS reported 1.10 0.46 0.33 0.06 1.11 Dividends paid 0 0 0 0 0 EPS adjusted 1.68 1.17 1.08 0.79 2.03 Buybacks, issuance -136 -237 0 0 0 Year end shares 230 232 229 229 229 Change in net debt 312 -242 521 570 828 Average shares 230 232 229 229 229 Net debt -1,521 -1,279 -1,800 -2,370 -3,198 DPS 0.00 0.00 0.00 0.00 0.00 FCF per share 2.17 2.73 2.28 2.49 3.61
Growth and margins Key ratios 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E Revenue growth -1.7% 10.5% 4.5% -1.8% 26.1% Net debt / equity -67.2% -57.6% -73.8% -91.4% -105.6% EBITDA growth -10.7% -17.4% -6.2% -18.1% 100.7% Net debt / EBITDA -2.4 -2.4 -3.6 -5.8 -3.9 EBIT growth -13.2% -25.1% -9.7% -25.5% 149.0% Avg cost of debt 0.4% 1.9% 1.5% 1.5% 1.5% EPS adj growth -13.5% -30.1% -8.1% -26.4% 155.8% Tax rate 24.0% 26.0% 26.0% 26.0% 26.0% FCF growth -0.7% 26.7% -17.6% 9.3% 45.3% Interest cover 206.3 36.7 44.0 36.1 72.4 EBITDA margin 28.1% 21.0% 18.9% 15.7% 25.0% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% EBIT margin 22.5% 15.2% 13.1% 10.0% 19.7% ROCE 21.0% 16.1% 13.6% 9.6% 21.3% Net income margin 17.0% 10.8% 9.4% 7.1% 14.3% Capex / sales 2.8% 3.0% 3.0% 3.0% 3.0% FCF margin 22.0% 25.2% 19.9% 22.1% 25.5% Capex / depreciation 133.2% 142.7% 142.9% 142.9% 142.9%
Valuation metrics Key risks to our investment thesis 2014 2015 2016E 2017E 2018E ● The main negative risk to our thesis is the potential rejection of the P / adjusted EPS 32.0 46.3 48.9 63.2 22.9 business model which we believe is unlikely considering that the P / book value 6.1 6.3 5.7 5.3 4.6 initial subscription numbers exceeded compan y’s expectations by FCF yield 3.6% 4.6% 3.8% 4.1% 6.0% 2.2x. Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% The potential threat of disruptors in the market is not significant at EV / sales 5.4 5.0 4.6 4.5 3.3 ● the moment, but the noise around pure cloud vendors has created EV / EBITDA 19.3 23.8 24.4 28.4 13.1 some anxiety among the investment community. We believe that the EV / EBIT 24.2 32.9 35.0 44.7 16.7 risk of new entrants to the market is fairly low. EV / FCF 24.7 19.9 23.2 20.2 12.9 EV / cap. employed 4.1 4.2 3.8 3.4 2.8 ● The company could lose some perpetual-only clients who will never sign up to the rental model.
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
54 Autodesk, Inc Software & IT Services – Software
Autodesk
Business description Autodesk is a design software company that mainly provides solutions for the engineering, construction, manufacturing, media and entertainment verticals. The company has been listed since 1985 and is headquartered in San Rafael, California. Its flagship product, AutoCAD, was launched more than three decades ago and is still one of the most popular and widely-used mechanical computer-aided design (MCAD) products in the market. When it comes to technology within the wider computer-aided design (CAD), product lifecycle management (PLM) or building information modelling (BIM) space, Autodesk will happily admit that it has never been the leader. Over time, however, it has adopted the interesting approach of being an early follower which enables the company to innovate on the business/delivery side. This has earned Autodesk a reputation of being successful in extracting high margins in combination with relatively low technological risk. It has continued to do so recently, and is the first major design software player to announce a significant push to the cloud. Although it is still early in the model shift, we note that the initial signs are good, and we believe that being first to transform will provide significant benefits in the mid-term. Due to the nature of perpetual licences (and the significant share of indirect sales within the mix), Autodesk historically had a lower proportion of recurring revenues than some of its peers (namely Dassault, Siemens and PTC), and the adoption of the new business model will change this dynamic.
Key investment points ● Initial adoption of the subscription model has been very strong. The company revised its new subscriber figures three times in FY15 and ended up with 385k new subscribers versus the initial guidance of 150k-200k. Within the mix, more than 30% of customers were new to Autodesk. ● There is still a significant pool (2.9m) of existing perpetual users who are not subscribers. Most of them are paying customers who usually skip a few versions before upgrading their software. We believe that even though there might be some attrition within the pool of users who prefer to buy their licences, the majority of this base will eventually sign up to the subscription model. ● Management has set clear financial targets for the period of the business model transition (FY14-FY18). They are chasing 50% growth in the recurring customer base, 20% additional value per account and a 12% billings CAGR. At the same time, management believes that the operating margin will increase to 30% by FY18. We believe that these targets are achievable, but that some of them will be pushed back to 2019. This, however, does not change our mid-term view of the business as the company will come out of this transition much stronger and will be able to significantly increase both the addressable customer base and the visibility of the top line. The current valuation looks cheap even if the targets turn out to be delayed by a year.
Management CEO: Carl Bass joined Autodesk in 1993 and has been the CEO since 2006. He was also an interim CFO from August to November 2014 before the appointment of Mr Scott Herren. Before becoming CEO, Mr Bass was COO and chief strategy officer (from 2001-2002). CFO: Scott Herren has been in the post for less than six months, replacing Mark Hawkins who moved to salesforce.com in November 2014. Before joining Autodesk, Mr Herren was the senior vice president of finance at Citrix from 2011 to 2014, heading the company’s finance, accounting and tax teams. Before Citrix, he was with IBM for 13 years and spent a few years at FedEx as a vice president of financial planning.
55 Autodesk, Inc Software & IT Services – Software
Company at a glance
Revenue split by industries Revenue split by product
100% 100% 8.4% 7.7% 6.7% 90% 90% 14.6% 14.4% 16.1% 80% 24.8% 25.5% 26.9% 80% 70% 70% 29.7% 34.5% 36.5% 60% 60% 50% 30.0% 32.1% 34.7% 50% 40% 40% 30% 30% 55.7% 51.2% 47.4% 20% 20% 36.7% 34.7% 31.7% 10% 10% 0% 0% FY2013 FY2014 FY2015 FY2013 FY2014 FY2015
Platform Solution and Emerging Business AEC Manufacturing Media and Entertainment Rev from Flagship Rev from Suites Rev from New and Adjacent
Source: Company, Berenberg Source: Company, Berenberg
Revenue forecast – Berenberg versus consensus EBIT forecast – Berenberg versus consensus
3,400 24%
3,200 21% 3,000
18% 2,800
2,600 15%
2,400 12% 2,200
2,000 9% FY2015 FY2016e FY2017e FY2018e FY2015 FY2016e FY2017e FY2018e
Revenue, CC Consensus revenue Consensus EBIT margin EBIT margin (non-GAAP)
Source: Company, Berenberg Source: Company, Berenberg
Timeline of selected milestones
Source: Company, Berenberg
56 Autodesk, Inc Software & IT Services – Software
Investment thesis in pictures
The estimated impact on revenue and margins due to model Subscription revenue as a percentage of total revenue has been leverage (versus Adobe) indicates that the FY18 operating increasing, but valuation does not yet reflect this potential margin target might be pushed back a year, but the market already expects it
70% 40.0
60% 35.0 30.0 50% 25.0 40% 20.0 30% 15.0 20% 10.0 10% 5.0 0% -
Subscription revenue as & total revenue EV/subscription revenue
Source: Company, Berenberg Source: www.financepersonal.info
So far many of the subscribers have been new customers, but the App users today, pro subscribers tomorrow opportunity in the installed base (not pirates) is still large
Source: www.yachtpals.com Source: Company website
We think that organic growth is good and note that potential The move to Cloud can spur growth of the adjacent markets acquisitions do not play any part in our investment thesis (but (such as simulation) as it makes it more accessible could provide upside to top-line growth)
Source: www.drexel.edu Source: Company website
57 Autodesk, Inc Software & IT Services – Software
It is all about the (recurring) money In today’s world, there is a constant need for change. Companies need to be agile and open to adopting new business models and technologies in order to ensure sustainable growth. Every now and then, companies in a specific industry experience more fundamental changes, and we are at the start of one such change in the software industry. Users’ perceptions of how we procure our software have changed significantly over the last few years. Even though early adopters have enjoyed the benefits of more flexible budgets and less rigorous IT infrastructure for some years already, the majority of industries are still using traditional perpetual licencing when they buy their new software. The architecture, engineering and construction (AEC) and manufacturing industries are no exception. If anything, these are among the more conservative verticals with sophisticated users who are slow to adjust their preferences. This explains why the market (and, to be honest, Autodesk’s management) has been taken by surprise by the speed of growth of new subscribers following the announced change to its business model. During fiscal year 2015, management revised its expectations for the number of new subscriptions twice (at Q2 and at Q3). The year delivered 385k new subscribers, 2.2x the initial expectations for the year, at the mid-point.
New subscriptions guidance for FY15
At Q4 14 At Q1 15 At Q2 15 At Q3 15 FY15 Actuals
New subscription additions 150k-200k 150k-200k 200k-250k 325k-375k 385k
Change at midpoint vs 0% 29% 100% 120% starting guidance (%)
Source: Company, Berenberg
A large part of the new subscriptions were due to non-subscribers (perpetual licence-only buyers) opting in for maintenance ahead of the planned termination of perpetual licences for most products in January 2016. This is understandable and ties with our previous assumption that the CAD and PLM software users are slow to embrace change so the move to purchase maintenance can be viewed as a hedge against subscribing to the rental model. This, however, is only part of the truth. It is key to note that out of those 385k new subscribers, almost one-third of them are new Autodesk customers. This indicates a much more significant point – that the company has managed to attract new customers by offering a rental-based licence model. Traditionally, Autodesk’s customers have been the mid-market users. The company has the largest presence in the so-called MCAD market. In comparison to the large PLM software vendors, it has a significantly lower number of seats (c5-10 versus Dassault’s implementations that reach close to 100 seats on average). The rental model makes use of Autodesk’s advantages and goes a step further by unlocking an additional level of even smaller users. Flexibility has an advantage for both Autodesk and the end-user. The owner of a start-up studio, for example, will probably be prudent when purchasing the initial equipment as at that stage they will be unsure of the upcoming workload. In the case of a large spike in demand, the old model would force them to add additional perpetual seats which they will try to avoid. The consequence is a mix of perpetual licences in a combination of licence co- using and sharing and, in some cases, even increased piracy rates. The rental model would allow them to defer the amount of capex required to set up the premises and adjust their needs for seats on an annual or even monthly basis. This is not only important in the AEC segment, where the workload is seasonal and can fluctuate significantly, but also in manufacturing where orders have become increasingly lumpy in nature. At this point, one might ask the obvious question: “If the model makes sense for users, how does it work for Autodesk?” We believe that Autodesk has been extremely cautious, tactical and smart in the way it has structured and approached the move towards a rental-based model. The table below shows
58 Autodesk, Inc Software & IT Services – Software
the analysis of the pricing points of Autodesk’s 10 most popular perpetual licence products. It shows that most products have a breakeven period of 2.5 to five years if paid for annually in advance. Considering that only around half of Autodesk’s paying customers are subscribers (ie they also pay for maintenance), we can assume that the actual revenue breakeven period will be somewhere around 3.5 years.
Pricing analysis of Autodesk’s subscription versus the perpetual licence model*
1M 12M Breakeven (yrs) Breakeven (yrs) Breakeven (yrs) Breakeven (yrs) Price ratio 1 vs 12 Price ratio 1 vs 12 Maintenance Maintenance as Name Licence cost subscription subscription on 1M incl. on 12M incl on 1M ex. on 12M ex months incl months ex cost % licence cost cost cost maintenance maintenance maintenance maintenance maintenance maintenance 1 AutoCAD Architecture 2015 4,400 768 17% n/a n/a n/a n/a n/a n/a n/a n/a 2 3ds Max 2015 3,100 630 20% 155 1,240 2.5 5.1 1.7 2.5 202% 150% 3 3ds Max Design 2015 3,100 630 20% n/a n/a n/a n/a n/a n/a n/a n/a 3ds Max Entertainment Creation Suite 4 4,800 864 18% 240 1,920 2.4 4.5 1.7 2.5 191% 150% Standard 2015
5 Alias Design 2015 5,200 936 18% n/a n/a n/a n/a n/a n/a n/a n/a 6 AutoCAD 2015 3,800 660 17% 190 1,520 2.3 4.4 1.7 2.5 188% 150% 7 AutoCAD Civil 3D 2015 5,200 918 18% n/a n/a n/a n/a n/a n/a n/a n/a 8 AutoCAD Design Suite Premium 2015 4,900 882 18% 245 1,960 2.4 4.5 1.7 2.5 191% 150% 9 AutoCAD Design Suite Standard 2015 4,300 642 15% 215 1,720 2.2 4.0 1.7 2.5 180% 150% 10 AutoCAD Design Suite Ultimate 2015 5,700 1,092 19% 285 2,280 2.4 4.8 1.7 2.5 196% 150% Source: Company’s website, Berenberg * prices are in £ excluding VAT and any special discounts for electronic download of new stand-alone perpetual licence correct as at 20 March 2015
The powerful force of desktop rentals shows that the breakeven period has a range of 1.7 to five years
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY1 FY2 FY3 FY4 FY5 Option 1 Option 2 Option 3 Option 4
Source: Company, Berenberg *Option 1: perpetual licence-only; Option 2: licence and maintenance; Option 3: monthly rentals; Option 4: Annual rental
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The table below shows Autodesk’s top 10 subscription products, as published on its website on 20 March 2015. We note that the result differs significantly from the table above (which shows its top 10 perpetual licence products). This supports the company’s statement that a significant portion of the subscribers (around one-third) who signed up for the rental model have so far been incremental to the business.
The most popular cloud products have been incremental to sales as they rank nowhere near the most popular licence products
Position in Name Licences 1 AutoCAD LT 2015 for Mac 13 2 Maya 2015 36 3 AutoCAD 2015 6 4 3ds Max 2015 2 5 AutoCAD Inventor LT Suite 2015 12 6 AutoCAD Revit LT Suite 2015 18 7 Maya LT 2015 38 8 Product Design Suite Premium 2015 42 9 Product Design Suite Ultimate 2015 43 10 Building Design Suite Premium 2015 19 Source: Company’s website on 20 March 2015, Berenberg
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Investment thesis in detail Autodesk currently generates around half of its revenues from subscriptions. The vast majority of recurring revenue is related to maintenance. We believe that there is significant value hidden within the ecosystem of 2.9m active perpetual licence users who are currently not paying the maintenance fee. We are more cautious about the phasing of the revenue ramp-up and believe that Adobe’s transition to the Cloud provides a good case study. Both companies hold unique positions in their respective markets and are looking to go through a similar business model transition. Autodesk is a market leader with AutoCAD, which still generates the majority of the business’s revenue. The lack of a serious competitor in the domestic market enables Autodesk to make the transition more smoothly than would have been the case had it been forced to compete with more aggressive companies. On the other hand, it is reasonable to assume that some existing customers will never convert to desktop rentals due to their preference for owning the software outright. In our model, we assume that around one-third of users will not take up the rentals until 2023. These can be seen as lost customers and competitors like Nemetschek will work hard to capture some of this market, especially in the US, on the back this change. Our analysis suggests that the next few years will be transformational for Autodesk, perhaps more than management expects as revenues in FY17 could see a slight contraction. However, it is only fair to value a changing business at the back end of the cycle. Our analysis suggests that investors have not realised the full opportunity that the business model change will bring and we believe that Autodesk shares are significantly undervalued.
Point ###1:#1: subscription revenue will increase toptop----lineline visibvisibility,ility, which has not been reflected in the share price The plan: management aims to cease perpetual licencing for most of Autodesk’s products at the start of 2016. This makes forecasting more difficult and management only provides guidance for the year ahead. The new business model will have several consequences for the top line. There will be short-term pressure on revenue growth (discussed in detail in point 2) but also increased visibility. At present, Autodesk starts every quarter with less than half of its revenue pre-booked. From the start of 2016, even though no perpetual licences will be sold, the “licences and other revenue” income statement line will not decline to zero. This is due to 1) the services portion of revenue that will continue to be booked into this line and 2) the specific accounting treatment of rental licences. Under existing accounting rules, the fair value of the licence portion of the revenue is recognised rateably in the income statement as a portion of deferred revenue is being unwound. The general rule of thumb is that 60% of the quarterly desktop rental revenue will feed into the licences line with the rest being recognised as “subscriptions revenue”. This means that future recurring revenue will include all subscriptions and a significant portion of the disclosed licence and other revenue line. Our view: To some extent, Autodesk’s revenue has always been recurring, even in the period of perpetual licences. An active user would buy a version of the latest AutoCAD on a perpetual basis and then be happy to use it for, say, three to five years. It is a bit like changing a mobile phone – even though we do not sign up for smartphone upgrades, companies like Apple manage to forecast when we are due for an upgrade quite accurately (this will usually be somewhere close to two years). In the case of AutoCAD, a customer might only purchase it every five years or so. However, upgrades do happen and a majority of Autodesk’s customer base are infrequent recurring customers. Therefore we cannot argue that the licences were completely sporadic in the past. We believe that a lengthening product replacement cycle could have played a significant role in management’s decision to push harder for rentals. The higher proportion of recurring revenues increases the business’s stability and profitability (as discussed below). As a consequence of the increasing subscription revenues, the stock should be trading at a higher multiple than the average of the past few years. This is not the case at current prices and our analysis shows that the estimated 2017 EV/subscription revenue is at its lowest point since 2010. Adding to this a portion of recurring licences, the gap becomes even larger.
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Subscription revenue as a percentage of total revenue is expected to increase significantly, resulting in a high proportion of recurring revenue which has not been fully reflected in the stock price
70% 40.0
60% 35.0 30.0 50% 25.0 40% 20.0 30% 15.0 20% 10.0 10% 5.0 0% -
Subscription revenue as & total revenue EV/subscription revenue
Source: Company, Berenberg
Point ###2:#2: An Adobe case study suggests that the FY18 targetargett might be pushed to FY19, but the market is already expecting it The plan: Management presented a clear set of fiscal 2018 financial targets. These were first introduced in 2013 and have not been amended. The main objective is to increase billings at a 12% CAGR along with driving 20% more value per account. The underlying target is to grow subscriptions by more than 50%. Operating margins have recently been decreasing as the company prepared for the business model change. A long-term target of 30% seems out of reach for a while, but management believes they can deliver it by FY18.
Management’s 12-20-50 (and now 30) FY18 targets
Billings CAGR 12% Value per account 20% Operating margin target* 30% Subscription growth 50% *non-GAAP Source: Company
Our view: We tend to take a sceptical stance on any mid-term (three- to five-year) plan, but we are extremely cautious when it comes to forecasting in a period of change. However, Autodesk’s change has been underway for the last few years, although with more of a pull than push approach. The last few years provide us with some critical data points that help us to develop our own view of the business model change. We believe that the billings growth CAGR until FY18 will be just below 12%, peaking close to 12% in FY19. We believe that the average value per account will grow at almost 30% and that recurring customer growth will increase by more than 80%. This will provide significant operating margin leverage which will start in FY18 but accelerate in FY19 to reach the peak margins of 30% that year. The fact that our outlook for management’s targets is more cautious would normally suggest that a certain discount should be applied to the stock. In this case, however, we note that the sell-side consensus shares our view and is expecting margins closer to 22% in FY18. We therefore believe that the market is well prepared for any pushback of the FY18 targets by a year.
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Our estimates reflect the view that FY18 operating margin target will be met a year later than management forecasts
30% 5,000 4,500 25% 4,000 3,500 20% 3,000 15% 2,500 2,000 10% 1,500 1,000 5% 500 0% 0 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016e FY2017e FY2018e FY2019e
EBIT margin (non-GAAP) Revenue, CC Billings Recurring revenue
Source: Company, Berenberg
Changing sales channel and the operating leverage We expect most of the operating leverage to come through the lower proportion of sales and marketing in the total revenue. A key data point to consider is that more than 50% of new subscribers bought their licence through Autodesk’s e-store which is virtually costless. The company is also looking to amend its existing re-seller and distributor agreements. The new structure and plans are still being finalised, but we believe that the traditional distribution channels might evolve into agent-based agreements in the future. This will have an implication for the net revenue and gross margin structure of the business. Autodesk currently sells its products mainly to its channel partners at which point it recognises revenue. In the principal-agent relationship the company would be recognising the higher dollar value of the revenue, but also the increased opex (as this would become part of sales and marketing expenses).
In our view, operating leverage in FY19 will be stronger than consensus estimates; we also believe that revenue growth will start to flatten out after FY20
30% 4,000
3,500 25%
3,000 20% We are more bullish on FY19 outlook due to 2,500 strong operating leverage 15% 2,000 We (and the market) do not believe that 10% We believe that the 30% operating 1,500 margin will bottom margin by FY19 is at c10% in FY17 (vs achievable 12% cons) 5% 1,000 FY2015 FY2016e FY2017e FY2018e FY2019e Consensus EBIT margin EBIT margin (non-GAAP) Revenue, CC Consensus revenue Source: Company, Berenberg
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What does the Adobe case study teach us?
Adobe versus Autodesk: comparison of revenues following business model changes in 2013
5,500 Autodesk's business model 5,000 transition appears to be a year behind 4,500 Adobe's
4,000
3,500
3,000
2,500
2,000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 ADSK Revenue ADBE Revenue
Source: Berenberg, Bloomberg
Autodesk’s transition is still underway, but a very similar Adobe’s model transition is nearly done with both revenue and business model suggests that FY17 (calendar 2016) will be the margins expected to rebound strongly in FY15 trough year
7,000 50% 4,000 40% 45% 6,000 3,500 35% 40% 3,000 30% 5,000 35% 2,500 25% 4,000 30% 25% 2,000 20% 3,000 20% 1,500 15% 2,000 15% 1,000 10% 10% 1,000 5% 500 5% - 0% - 0% 2010 2011 2012 2013 2014 2015e 2016e 2012 2013 2014 2015 2016e 2017e 2018e 2019e ADBE Revenue ADBE EBITm ADSK Revenue ADSK EBITm
Source: Company, Berenberg Source: Company, Berenberg
Point ###3:#3: the opportunity in the installed base is still llargearge (and expanding) The plan: Autodesk currently has around 2.9m active users who purchase their products without buying a licence. In addition to its paying customers, the company also disclosed around 10m registered AutoCAD 360 users who are currently not paying for the service and more than 65m students who obtained the licence for free. The company says that all these represent an untapped opportunity which will be utilised over the mid-term. As management recently noted, “these are not pirates” – indeed, they are legitimate active users, which is why the company is confident that a large portion of them will convert to the rental model in the future.
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Non-subscribers, registered cloud users and students represent a pool of addressable market
Source: Company, Berenberg
Our view: creating an ecosystem is important for any enterprise-level software vendor as it will aid adoption in a specific industry. Autodesk has managed to do just that. By being very good in more than one area (rather then excelling in a niche market), the company now has access to vast amounts of customer data and potential subscribers who it can target. Licence-only users: Naturally the easiest segment to penetrate will be the licence-only users who would have purchased the new licence in any event. Based on the current pricing structure, these users will bring Autodesk incremental revenue in 1.7 to 2.5 years. In our model, we assume that around two-thirds of those will convert to recurring revenues (maintenance, desktop rentals or cloud) by 2023. Registered AutoCAD users: “Trial users” will be more difficult to capture than the active paying users, but the concept that someone will buy after trying is not an impossible one. Although some of the market will churn away once they are asked for their credit card details, all revenue captured from them is incremental to the business and would come in at a very high margin. Student licence holders: Autodesk has significantly increased the size of its student user pool over the last few years. We believe that cloud applications are ideally suited to capture that part of the market. Cloud applications require less computer power which enables customers to use it on their personal laptops whereas in the past they required a powerful desktop. As these students move on to become architects, animators or graphic designers, they will naturally be inclined to opt for familiar software, if possible. Pirates: piracy within consumer-oriented software applications is still a significant issue. Autodesk noted that piracy rates for perpetual licences are still exceeding 20% in developed markets and are as high as 70% in developing markets. The end of perpetual licencing will also end the era of “free of charge” software across the globe and some users will have to pay for the product for the first time in order to continue their day-to-day work.
Summary of our assumptions In our model, we estimate that around two-thirds of non-subscribers will sign up to either maintenance or the rental-based model over the next few years. Initially, we expect that 15% of annual rental subscribers and 20% of cloud customers will churn away. We assume that the attrition rate will gradually decline and stabilise at 10% per annum. We also forecast a steady inflow of additional customers – those who have not paid for Autodesk’s software before. These are most likely to come from the rest of the pools mentioned above. Naturally, we expect the highest conversion from registered AutoCAD 360 customers. Overall, we assume that c30% of the total new additions (or 70k per annum) will come from new customers. Considering the number of registered AutoCAD 360 users (13m) and the more than 65m student users, we believe that the estimated annual conversion rate of 30bp of the addressable market (excluding pirates) is achievable.
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Estimated split of the new subscribers (FY16-FY23)
600
500
400
300
200
100
0 FY2016e FY2017e FY2018e FY2019e FY2020e FY2021e FY2022e FY2023e New customers to the business (ex licence-only converts) Non-subscribers converted to desktop rentals
Source: Berenberg estimates
Point ###4: #4: Autodesk is creating an ecosystem of lowlow----costcost applications with the aim of capturing the professionals of tomorrow, not only increase direct revenues The plan: the idea is to penetrate the software and brand name deeper into the market. If that means creating (or buying) an application for designing your own toy that later you can print in 3D then Autodesk will do it. If it means buying a promising photo-editing app for millions of young users who post on social media Autodesk is happy to invest in it. The plan? Increase the creativity of the youngest and popularise virtual design among the population. Our view: the question of who would use Autodesk’s applications on their mobile device and why has been around for a while. Autodesk’s consumer market analysis suggests that these are mainly younger people with little or no professional experience in 3D design or animation. These apps actually do not have many things in common with the desktop software, but they follow similar principles and of course an underlying theme which is to design or animate. What is interesting is that it introduces them to the Autodesk-specific workflow, much like Microsoft did with the release of the Office suite. We would argue that this approach creates advocates of the company who will be keen to purchase the software if they pursue a career in the professional design space. Even though the revenue contribution is not material at this stage Autodesk indicated in 2013 that it is reaching out to more than 150m users who generate c$20m of consumer revenue per year.
Pixlr and Sketchbook remain key apps in the main markets
US iPad ADSK Top Apps UK iPad ADSK Top Apps Germany iPad ADSK Top Apps 1 Pixlr Pixlr Pixlr 2 ForceEffect Motion SketchBook ForceEffect 3 SketchBook ForceEffect Motion SketchBook 4 ForceEffect BIM360 Glue ForceEffect Motion 5 BIM360 Glue 123D Sculpt A360 Source: Comp any, Berenberg
Building the corporate image and improving brand recognition is important as it can significantly lower sales and marketing costs. The products eventually require fewer overheads to sell. The first signs of a change in buying pattern are already showing as 51% of cloud products are now purchased directly from Autodesk’s e-store.
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Point ###5:#5: even though Autodesk is a very acquisitive compacompany,ny, acquisitions are not part of our estimates (but could provide an upside) The plan: Autodesk completed no less than 50 acquisitions under the helm of the previous CFO Mark Hawkins. Although most of these were incremental rather than transformational, they have provided a steady stream of incremental inorganic revenue to the business. The recent acquisition of Delcam is one of Autodesk’s largest ever deals and provides the company with the access to the computer-aided manufacturing (CAM) market where it previously did not feature. Our view: Acquisitions have always played an important part of Autodesk’s corporate strategy and we believe that this will continue. The company has a very healthy balance sheet with the net cash position in excess of €1.5bn. As a lot of the cash balance is based outside the US, we believe that it could be used for M&A activities in foreign markets. Our forecasts do not factor in any accretion from potential future deals and we are confident that the estimates can be reached with organic growth and the shift in the business model.
There has been a stable stream of acquisitions over the years but most of them have been marginal in terms of revenue contribution
Source: Company, Berenberg
Point ###6: #6: the move to the cloud will make certain applicatapplicationsions more accessible and will increase the potential TAM of the adjacent products The plan: Autodesk’s approach to some specific vertical software and more specialised design features differs to that of a specialised vendor. It considers the move to the cloud transformational as it provides users with almost unlimited amounts of computing power which is critical when solving complex engineering problems, such as simulation, rendering or generative design. Our view: To date, simulation software has been almost exclusively used by highly educated analysts (usually PhD-level) due to the demanding nature of those products. Simulation space software is not really based on drag-and-drop functionality. It is used with a lot of coding done by the user on the spot. In line with its overall business strategy, Autodesk does not provide a state-of-the-art multiphysics simulation suite (like Ansys or Simulia), but is pitching to the lower-end customer base. This is an important point as Autodesk is trying to eventually unlock the same market as many have tried and failed before, mainly because of the lack of infrastructure. The mass market for this type of software is still mainly untapped and it will be interesting to see whether Fusion 360 customers will start using simulation methods early in their design process. The idea of testing a product before producing a physical prototype is appealing to manufacturing companies as it shortens time to market and also improves the cost-structure of a product development project. Our estimates do not explicitly assume
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any material revenue from the adjacent products, but will help Fusion 360 to compete against legacy PLM products, such as Dassault’s Solidworks and Siemens’ Solid Edge.
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Changed business model and valuation
Summary business model indicates another two transition years with significant revenue growth and operating profit leverage starting in FY18
FY2015 FY2016e FY2017e FY2018e FY2019e
Total paying active user base 5,000 5,115 5,332 5,593 5,858 Licence-only user base 2,900 2,515 2,181 1,891 1,606 % of customers not subscribers 58% 49% 41% 34% 27% Conversion of licence holders only to subscritpions 14% 14% 14% 16% % of converted non-subscribers to rental model 13% 25% 35% 45%
New customers to the business (ex licence-only converts) 115 217 261 266 Portion of new customers within new subscribers 23% 39% 47% 48% Non-subscribers converted to subscriptions 385 334 290 285 Licence and other revenue 1,341 1,231 719 914 1,299 Subscription revenue 1,171 1,391 1,859 2,336 2,781 Total revenue 2,512 2,622 2,578 3,250 4,080 Revenue growth 4% -2% 26% 26% Trailing revenue CAGR (vs FY14) 7% 4% 9% 12% Total billings 2,769 2,981 2,933 3,627 4,439 Trailing billings CAGR (vs FY14) 13% 8% 12% 14% Gross profit margin 88.9% 88.3% 88.1% 87.8% 87.6% EBIT 382 345 257 640 1,165 EBIT Margin 15% 13% 10% 20% 29% Sales & Marketing 926 957 980 1,074 1,175 Research and development 669 713 730 809 877 General and Admin costs 266 302 304 332 355 Source: Company, Berenberg
We estimate that by 2019 Autodesk will be generating around $4bn of revenue, with the recurring portion representing around 90% of total revenue. To hit $4bn, revenue will have to increase at a 12% CAGR over the next four years. We value the company in line with some of the more mature subscription-only players, such as salesforce.com on a multiple of 6x 2019 recurring revenue discounted back three years to 2016 using a 10% cost of equity. We believe that the multiple is justified given that Autodesk holds the dominant market position in many of its segments. One might argue that Autodesk’s business model transition only started a few years ago and that the risk of the implementation of the strategy warrants a discount to SaaS providers. However, we believe the sector multiple is justified as the company is profitable today and generates decent cash flows compared to the majority of the cloud-only sectors. We also believe that other competitors (which have not announced a change of model) are aware that rental-based licences or SaaS will be the business model of the future. The only difference is that they are waiting to make the change they know is inevitable.
Autodesk valuation approach
FY 2019 Comment Total revenue ($) 4,080 Assume 12% revenue CAGR based on bottom-up model Recurring revenue % 90% Recurring revenue ($) 3,672 Target value of firm 22,032 Average multiple for the sector Net cash/(debt) 1,279 Discount to cash position* 1,151 Discounting using 10% rate Total value 23,183 Discounted to 2016 17,418 Using 10% cost of capital to reflect relatively high risk Number of shares 232 Price target ($) 757575 Indicates 27% upside *due to the fact that 82% of the overall cash is based offshore and can be used for limited purposes or be subject to withholding taxes Source: Company, Berenberg
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Scenario analysis and risks to our investment thesis
Sensitivity to revenue growth rates and valuation multiple
Revenue and CAGR (2014-2019) 3,729 3,901 4,079 4,264 4,456 75.10168 10% 11% 12% 13% 14% 4.5 53 55 57 60 62 5.0 58 61 63 66 69 5.5 64 66 69 72 75 6.0 69 72 75 78 82
revenue) 6.5 74 78 81 85 88 7.0 80 83 87 91 95 (x-times recurring recurring (x-times Valuation Valuation multiple 7.5 85 89 93 97 101 Source: Company, Berenberg
Positive risks If the EBIT margin increases as management plans (to 30% in FY18), this would add c10% to our price target. If the market re-rates Autodesk to the peer-group average multiple of EV/recurring revenues of 7.5x, then the stock could almost double in value (using our base- case adoption scenario). Negative risks The future uptake of the subscription model could be slower than the one in FY15. If we assume a 10% decline in the number of new users per year, the revenue CAGR (FY14-19) would drop from 12% to 7% and billings growth could amount to c9%. This would result in a c15% negative impact to our $75 price target.
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Appendix
Product portfolio Autodesk classifies its products into three different segments: ● flagship products (48% of revenue); ● suites (36% of revenue); and ● new and adjacent products (16% of revenue).
Flagship products These represent the core standalone horizontal, vertical and model-based design products. They include the company’s oldest brand AutoCAD along with AutoCAD LT, AutoCAD Mechanical, AutoCAD Civil 3D, AutoCAD Map, AutoCAD Architecture, 3ds Max and Maya.
Suites Suites are Autodesk’s response to the holistic approach to design software (such as the 3dExperience platform from Dassault). They are a combination of products targeted at a specific user base (product, building or games design). The portfolio includes seven suites – AutoCAD Design Suite, Product Design Suite, Factory Design Suite, Building Design Suite, Infrastructure Design Suite, Plant Design Suite and Entertainment Creation Suite.
Autodesk suites have been the fastest-growing part of the business and represent the main focus as the business shifts to the cloud
Source: Company
New and adjacent products These currently contribute only 16% to the total revenue of the company and include some standalone products that have not been integrated into a suite and are not considered a flagship product. These include Moldflow, Alias Design, Autodesk Creative Finishing and Autodesk’s response to product data management (PDM) – the Vault software.
Description of sselectedelected products AutoCAD is still Autodesk’s largest revenue-generating product. It is a flexible and extensible CAD application for professional design, drafting, detailing and visualisation. The product can be used individually or in conjunction with other vertical-specific solutions, such as in manufacturing, civil engineering and plant design. AutoCAD LT is the scaled-down version of the core AutoCAD and is company’s second-largest revenue- generating product.
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3ds Max provides 3D modelling, animation and rendering solutions that enable game developers, design professionals and visual effects artists to create realistic images, animation and complex scenes, in a digital format. Maya is usually used by film and video artists, game developers and design professionals to create realistic animations, sophisticated visual effects and full-length feature films. Considering the many similarities of 3ds Max and Maya, we performed a user-based table of their main characteristics in order to differentiate the usability and ultimately identify the end-user market.
Comparing features of 3ds Max and Maya
Functionality 3ds Max Maya
Rendering Both are using the same rendering engine
Large library of modifiers which make modelling process Less forgiving software, but recent version have Modelling easier significantly improve the workflow Complex animations can be produced, but more Animation Large library of animation tools complex than Maya
Rigging Ok for less complex rigging More sophisticated, but requires more programming
Very fast workflow. Architects and designers that want Best suited for Animation. Professional animators and the film industry to visualise interiors and buildings. Source: digital -tutors.com
Revit is a purpose-built software for BIM. It contains various information about a building project and ensures collaboration throughout the design and building process. It helps to increase the quality of the construction process. Various tools have been developed for the architects (AutoCAD Revit Architecture Suite), mechanical, electrical and plumbing engineers, structural engineers and other design and construction industry professionals. AutoCAD Inventor is Autodesk’s response to PLM. It allows manufacturers to go beyond 3D design by providing the tools for simulation, analysis, tooling, visualisation and documentation. Autodesk Moldflow is a family of injection moulding simulation tools that help manufacturers optimise the design of plastic parts and injection moulds.
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Financials
Profit and loss account Year-end January(USD m) 2014 2015 2016E 2017E 2018E Sales 2,274 2,512 2,625 2,578 3,250 EBITDA 639639639 528528528 495 406 814814814 Depreciation and amortisation 48 53 55 54 68 EBIT 511511511 382382382 345 257257257 640 Financial result -3 -14 -11 -11 -11 EBT 507 368368368 334334334 246246246 629629629 Taxes -122 -96 -87 -64 -164 Net income 386386386 272272272 247247247 182182182 465 Source: Company data, Berenberg estimates
Balance sheet Year-end January (USD m) 2014 2015 2016E 2017E 2018E Liquid assets 2,267 2,026 2,548 3,117 3,945 Short-term debt 0 0 0 0 0 Long-term debt 746 747 747 747 747 Net debt ---1,521-1,521 ---1,279-1,279 ---1,800-1,800 ---2,370-2,370 ---3,198-3,198 Intangible assets 1,073 1,543 1,448 1,353 1,248 Property, plant and equipment 130 159 183 206 235 Other non-current assets 557 541 541 541 541 Fixed assets 1,760 2,243 2,171 2,100 2,024 Working capital before deferred income 339 358 346 352 448 Deferred income 901 1,157 1,392 1,741 2,118 Total working capital ---561-561561561 ---799-799799799 ---1,045-1,045 ---1,389-1,389 ---1,670-1,670 Other assets/ (liabilities) 393 683 794 1,052 1,195 Net assets ------Source: Company data, Berenberg estimates
Cash flow statement USD m 2014 2015 2016E 2017E 2018E Cash flow from operations before changes in w/c 478478478 412412412 353353353 303 644 Change in working capital 86 296 247 343 281 Net cashflow from operations 564564564 708 600 647 925925925 CapEx -64 -76 -79 -77 -98 Free Cash flow 499 633633633 521521521 570570570 828828828 Payments for acquisitions -176 -630 0 0 0 Financial investments 65 -196 0 0 0 Increase/decrease in debt position 1 1 0 0 0 Net share issuance 288 135 0 0 0 Dividends paid 0 0 0 0 0 Others 11 1 0 0 0 Effects of exchange rate changes on cash -2 -5 0 0 0 Increase/decrease in liquid assets 241241241 ---442-442 521521521 570570570 828828828 Source: Company data, Berenberg estimates
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Growth rates yoy (%) 2014 2015 2016E 2017E 2018E Sales -1.7 % 10.5 % 4.5 % -1.8 % 26.1 % EBITDA -10.7 % -17.4 % -6.2 % -18.1 % 100.7 % EBIT -13.2 % -25.1 % -9.7 % -25.5 % 149.0 % Net income -14.3 % -29.4 % -9.2 % -26.4 % 155.8 % EPS reported -12.9 % -58.3 % -27.4 % -81.2 % 1669.6 % EPS recurring -13.5 % -30.1 % -8.1 % -26.4 % 155.8 % Source: Company data, Berenberg estimates
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Long-term financial targets will not be met
● We initiate on Dassault Systèmes (Dassault) with a Sell recommendation 8 April 2015 and a price target of €49 per share, indicating 22% downside to the current share price. ● Dassault is one of the largest software companies in the world with a SELL (Initiation)
market cap in excess of €16bn. The company is the market leader in PLM Current price Price target and its flagship products are CATIA, ENOVIA and Solidworks. The business
has transformed many times in the past. Its initial CAD product has been EUR 61.69 EUR 49.00 supplemented with a series of adjacent technologies that now serve a wide 02/04/2015 Paris Close range of verticals. Some of those have been developed internally whereas others were obtained through acquisition. Market cap (EUR m) 15,757 Reuters DAST.PA ● The most acquisitive company in the design software space: Its recent Bloomberg DSY FP acquisitions have become the focal point of Dassault’s future. The company has emphasised the importance of new brands on a number of occasions. Share data The strategy is not only to further develop existing brands (like Geovia), but also to penetrate the industries in which Dassault is currently not an Shares outstanding (m) 255
established name, such as construction or financial services. Enterprise value (EUR m) 14,497 Daily trading volume 339,000 ● Our negative stance: In June 2014, Dassault’s management presented a clear financial target which was extremely well received in the investment Key data community. However, we believe that the target to double EPS by 2019 is too ambitious and will not be met. We estimate that it will be delayed by Price/book value 4.7 around two years due to the company not being able to achieve the Net gearing -37.9% required organic revenue growth over the next five years. CAGR sales 2014-2017 8.4% CAGR EPS 2014-2017 4.6% ● The company’s recent track record suggests that the acquisition of new revenue is becoming more important than the acquired companies’ profitability and valuation. We believe that future M&A will continue to provide headwinds to group margins and will make FY19 financial targets even more distant. ● Our valuation is based on sum-of-the-parts. We value the CAD business on DCF and the faster-growing new industries’ products on 30x 2016 estimated earnings.
Y/E 31.12., EUR m 2013 2014 2015E 2016E 2017E Sales 2,073 2,347 2,687 2,824 2,988 EBITDA 794 873 924 952 993 EBIT 653 699 759 784 822 EBIT (Berenberg) - - - - - Free Cash flow 427 400 395 431 449 Free Cash flow (Berenberg) 427 400 395 431 449 Net profit 446 466 491 508 532 Y/E net debt (net cash) -1,424 -815 -1,260 -1,744 -2,250 EPS (adjusted) 1.75 1.82 1.93 1.99 2.08 EPS (Berenberg) 1.65 1.71 1.80 1.85 1.94 CPS 1.81 1.74 1.74 1.90 1.98 DPS -0.14 -0.13 0.00 0.00 0.00 EBITDA margin 38.3% 37.2% 34.4% 33.7% 33.2% EBIT margin 31.5% 29.8% 28.3% 27.8% 27.5% Dividend yield 0.2% 0.2% 0.0% 0.0% 0.0% EV/sales 6.9 6.4 5.4 5.0 4.5 EV/EBITDA 18.1 17.1 15.7 14.7 13.6 EV/EBIT 22.0 21.4 19.1 17.9 16.4 P/E 32.2 32.1 29.5 27.6 25.4 Free Cash flow yield 2.9% 2.8% 2.8% 3.1% 3.2% Source: Company data, Berenberg
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
75 Dassault Systèms SA Software & IT Services – Software
SELL Investment thesis
● In June 2014, Dassault’s management presented a clear financial 8 April 2015 target which was extremely well received in the investment community. The aim is to double 2013 EPS and revenues (while
Current price Price target keeping the operating margin flat) by 2019. However, w e believe that the revenue target is too ambitious and will not be met. In our view, the market will react negatively once the company pushes Market cap (EUR m) 15,757 EUR 61.69 EUR 49.00 back the target. We estimate that it will be delayed by at least two 02/04/2015 Paris Close EV ( EUR m) 14,497 years. Trading volume 339,000 ● Dassault has been the most acquisitive company in the M&A- Free float -%
intensive design software sector. Management will continue Non-institutional shareholders Share performance acquiring as its strategy states that acquisitions will add c5% of revenue CAGR over the next five years. To put this into context, - High 52 weeks EUR 63.56 this equates to one-third of all assumed revenue growth over th e
Low 52 weeks EUR 41.59 next planning period. The company’s recent track record suggests
Business description Performance relative to that the acquisition of new revenue is becoming more important than the acquired companies’ profitability and valuation.
- SXXP CAC 40 ● The company’s core products are growing at a much slower pace 1mth -2.9% -2.4% than r equired. V6 adoption has been disappointing and the 3mth 3.4% 2.8% company has gone back to the drawing board (six years after the 12mth 29.1% 31.4% initial release) and has since introduced V5.6.
Profit and loss summary Cash flow summary EURm 2013 2014 2015E 2016E 2017E EURm 2013 2014 2015E 2016E 2017E Revenues 2,073 2,347 2,687 2,824 2,988 Net income 355 293 382 396 419 EBITDA 794 873 924 952 993 Depreciation 33 35 44 47 50 EBITA 827 909 969 999 1,043 Working capital changes -17 4 -48 -24 -25 EBIT 653 699 759 784 822 Other non-cash items 24 10 0 0 0 Associates contribution - - - - - Operating cash flow 504 481 499 541 565 Net interest 18 13 0 0 0 Capex 42 38 54 56 60 Tax -222 -245 -266 -274 -288 FCFE 427 400 395 431 449 Minorities -3 -2 -2 -2 -2 Acquisitions, disposals -126 -691 0 0 0 Net income adj. 446 466 491 508 532 Other investment CF - - - - - EPS reported 1.65 1.71 1.80 1.85 1.94 Dividends paid -35 -32 0 0 0 EPS adjusted 1.75 1.82 1.93 1.99 2.08 Buybacks, issuance -17 -95 0 0 0 Year end shares 255 255 255 255 255 Change in net debt 168 -608 445 484 505 Average shares 255 255 255 255 255 Net debt -1,424 -815 -1,260 -1,744 -2,250 DPS -0.14 -0.13 0.00 0.00 0.00 FCF per share 1.81 1.74 1.74 1.90 1.98
Growth and margins Key ratios 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Revenue growth 1.7% 13.2% 14.5% 5.1% 5.8% Net debt / equity -54.3% -27.7% -37.9% -46.9% -54.3% EBITDA growth 2.3% 10.0% 5.8% 3.0% 4.3% Net debt / EBITDA -1.8 -0.9 -1.4 -1.8 -2.3 EBIT growth 1.3% 7.1% 8.6% 3.3% 4.9% Avg cost of debt -4.6% -3.6% 0.0% 0.0% 0.0% EPS adj growth 3.5% 4.4% 5.6% 3.2% 4.9% Tax rate 33.1% 34.4% 35.0% 35.0% 35.0% FCF growth -11.5% -4.1% 0.4% 8.8% 4.4% Interest cover -45.1 -66.7 0.0 0.0 0.0 EBITDA margin 38.3% 37.2% 34.4% 33.7% 33.2% Payout ratio 7.8% 6.9% 0.0% 0.0% 0.0% EBIT margin 31.5% 29.8% 28.3% 27.8% 27.5% ROCE 29.3% 28.7% 27.9% 26.0% 24.7% Net income margin 21.5% 19.8% 18.3% 18.0% 17.8% Capex / sales 2.0% 1.6% 2.0% 2.0% 2.0% FCF margin 22.3% 18.9% 16.6% 17.1% 16.9% Capex / depreciation 124.6% 106.7% 121.5% 119.6% 119.2%
Valuation metrics Key risks to our investment thesis 2013 2014 2015E 2016E 2017E ● The growth in the core CAD sector could accelerate if the economic P / adjusted EPS 32.2 32.1 29.5 27.6 25.4 environment continues to improve. However, even a growth rate of 8% P / book value 6.0 5.3 4.7 4.2 3.8 (above the historical 4-6% in CAD) would only just justify the current FCF yield 2.9% 2.8% 2.8% 3.1% 3.2% trading levels. Dividend yield 0.2% 0.2% 0.0% 0.0% 0.0% The potential market for the new industries could turn out to be EV / sales 6.9 6.4 5.4 5.0 4.5 ● significantly larger than currently expected. If the organic growth of EV / EBITDA 18.1 17.1 15.7 14.7 13.6 the new industries accelerates to above 30% (currently estimated to EV / EBIT 22.0 21.4 19.1 17.9 16.4 be around 15-20%), then this part of the business deserves higher EV / FCF 31.0 33.7 32.6 28.9 26.7 than a 30x earnings multiple. EV / cap. employed 4.8 4.5 3.9 3.4 3.0
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
76 Dassault Systèms SA Software & IT Services – Software
Dassault Systèmes
Business description Dassault was created in 1981 as a spin-off out of Dassault Aviation. The first flagship product was CATIA. CATIA was developed in the 1970s as a new generation computer- aided design (CAD) tool to help to develop Dassault’s Mirage fighter jet. After the spin-off, the software was quickly adopted in the aerospace, automotive and shipbuilding industries. The business has transformed many times in the past. Its initial CAD product has been supplemented with a series of adjacent technologies that now serve a wide range of verticals. Some of those have been developed internally whereas others were obtained through acquisitions. Over the last 24 months, the company has embarked on a significant M&A spree. During that time, it acquired 11 companies, for which it has spent almost $2bn. The investment was carried out with the aim of supporting Dassault’s new “3D Experience” vision, which will provide tools for the visualisation and optimisation of business processes across the entire lifecycle of its products – from the first concept all the way to the maintenance stage. The new vision is supported by redefined architecture platform “V6”. At present, around 10% of the customer base is using the V6 platform. Even though Dassault is now a more diversified business than it was 10 years ago, CATIA still generates the largest part (c40%) of Dassault’s software revenues.
Key investment points ● In June 2014, Dassault’s management presented a clear financial target which was extremely well received in the investment community. The aim is to double 2013 EPS and revenues (while keeping the operating margin flat) by 2019. We believe that the revenue target is too ambitious and will not be met. In our view, the market will react negatively once the company pushes back the target. We estimate that it will be delayed by at least two years. ● Dassault has been the most acquisitive company in the M&A-intensive design software sector. Management will continue acquiring as its strategy states that acquisitions will add c5% of revenue CAGR over the next five years. To put this into context, this equates to one-third of all assumed revenue growth over the next planning period. The company’s recent track record suggests that the acquisition of new revenue is becoming more important than the acquired companies’ profitability and valuation. Management recently noted that the negative impact of acquisitions on the FY14 margin has been 2.4ppt. We believe that this is natural and will continue as long as the acquisitions materially contribute to total growth. ● The company’s core products are growing at a much slower pace than required. V6 adoption has been disappointing and the company has gone back to the drawing board (six years after the initial release) and has since introduced v5.6.
Management CEO: Bernard Charlès joined Dassault in 1983 to develop new design technologies. He was appointed CEO of the group in 1995 and during his time with the company has helped to establish CATIA as the world’s leading design software. He is regarded by many as a visionary figure in the industry. CFO: Thibault de Tersant has been on the board of directors at Dassault since 1993. He is also responsible for mergers and acquisitions. Under his leadership, Dassault has acquired more than 20 companies (for more than $2bn) over the last 10 years. He oversaw Dassault’s IPO in 1996. Prior to joining Dassault Systèmes, he served as a finance executive at Dassault Aviation from 1983 to 1988.
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Company at a glance
Software revenue by product Revenue split by Industry vertical
25% Industrial Transportation Equipment 40% & Mobility 19% 30% Marine and Aerospace & Offshore Defense 1% 12% New Industries 22% 27% Business Services 11% 13%
CATIA SW revenue ENOVIA SW revenue SOLIDWORKS SW revenue Other SW revenue
Source: Company, Berenberg Source: Company, Berenberg
Revenue forecast – Berenberg versus consensus EBIT forecast – Berenberg versus consensus
3,500 20% 30.0% 18% 3,000 28.0% 16% 26.0% 2,500 14% 24.0% 12% 2,000 22.0% 10% 20.0% 1,500 8% 18.0% 1,000 6% 4% 16.0% 500 2% 14.0% - 0% 12.0% FY2015 FY2016 FY2017 Berenberg estimates Consensus - Bloomberg 10.0% FY2015 FY2016 FY2017 Consensus growth (post FY15 org) Berenberg growth (post FY15 org) Berenberg operating margin % Consensus operating margin %
Source: Company, Berenberg Source: Company, Berenberg
Timeline of selected milestones
Source: Company, Berenberg
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Investment thesis in pictures
Core industry growth is expected to slow down V6 adoption has been poor
Source: Berenberg Source: Company, Berenberg
New industries organic growth needs to accelerate Cloud transition will not help in achieving the FY19 targets
100%
90% Transportation 80% Aerospace Core 70% Industrial equipment High Tech 60% Growth Consumer Goods & Retail 50% Marine & Offshore 40% CPG & Retail Expand 30% Life Sciences Energy & Utilities 20% AEC (Construction) InvestigateInvestigate 25%25%25% 30% 10% 20% Financial and Business Services 0% 2009 2013 2019E
Source: Company, Berenberg Source: Company, Berenberg
Management expects stable profitability, but acquisitions have Acquisitions will continue, but the prices of assets are rising been dilutive to both gross and operating margins
Source: Company, Berenberg Source: Company, Berenberg
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The end of one period, the start of another There is no denying that Dassault has been successful in capturing and changing the design software space by re-defining the needs of its customers through the introduction of v5 of its software, which was launched in 1999. Its success was so significant that the company overtook PTC as the main design software player in the 2000s and is today the undisputed PLM leader with a c30% market share. However, past success rarely guarantees future victory. The fact that Dassault operates in an extremely sticky market will ensure that the company’s core (high-end CAD solutions) remains successful in the near term, but we are concerned that the drive towards achieving very specific financial objectives will dictate the operational and M&A strategy over the next few years. Some of the acquisitions made over the last three years (when almost €2bn was spent to acquire more than 10 companies) will prove to be a success, we believe. For example, we are extremely positive about the outlook for brands like GEOVIA (ex-Gemcom), Biovia (ex-Accelrys) and (even though it is still early days) Quintiq. However, the share price move over the past 12 months has been mainly driven by the company’s 2019 financial objectives, introduced in June 2014. These breathed life into the shares and the recent solid results have increased expectations about the viability of achieving the targets. However, we note that even though the FY14 results were strong, they were just about in line in terms of what the company needs to replicate every year until 2019. They were also supported by a large boost of inorganic revenue which will need to continue in future. We believe that management’s 2019 target is too ambitious. In its chase to achieve the goal, we worry that capital may not be allocated in the most efficient manner for investors. Any growth strategy rarely works well with the margin target and the integration efforts – incremental transition to the cloud alone will result in dilution of Dassault’s operating margin. Adding to the pressure will be the changing competitive environment of the company’s core products, CATIA and Solidworks. Both currently generate the largest portion of company’s earnings and operating cash; however, we are aware of the mid-term pressure on the Solidworks brand as the disruptors move into its space. When there is a battle between profitability and growth, one usually has to give way and we forecast that the company will miss the main 2019 target to double its EPS by a few years. The current share price, however, reflects a different expectation and we believe that in order to justify the valuation, the business has to achieve both the revenue and the margin targets. We therefore believe that the stock is currently significantly overvalued and see around 20% downside risk.
Analysis of historical targets In order to establish a view on the viability of Dassault’s 2019 targets, we have analysed company’s guidance behaviour over the last 10 years. The target announced in June 2014 is effectively a replication of the previous 2009-2014 target, as management again aims to double revenue (at a c14% top-line CAGR) and EPS over the next five years. Even though the 2014 target was met, management has only a 50% success rate in delivering guidance, after missing the previous cycle’s (2005-2010) by two years.
Analysis of the guidance versus the actual outcome for the last three planning periods
2005-2010 2009-2014 2014-2019 Double revenue (€2,300m- RevenueDouble revenue (€1,900m) Double revenue €2,500m)
EPS*Double EPS (€1.60)Double EPS (€1.85-€2.00)€3.50€3.50**
Berenberg Target last confirmed in Target introduced in June Introduced in June 2014. comment March 2008. Not met. 2010. Implied 5 yr 14.4 13.2 14.6 fwd EPS Source: Berenberg Bank, Company Reports *adjusted for the 2-4-1 stock split **assuming €/$:1.37 and €/JPY: 140 Source: Company, Berenberg
80 Dassault Systèms SA Software & IT Services – Software
The chart above should raise some questions about the viability of clear long-term financial targets. Every time management releases such an ambition it should be driven by the opportunities it sees in the market and tailored to a specific planning period. In setting goals, executives, just like investors, are often susceptible to the anchoring bias. In our view, Dassault’s previous goals represented a benchmark to guide for the future and the 2019 ambition is a clear result of this. A deep-dive into the past two planning periods shows that even though both targets were identical in terms of the wording, the first one (that missed by 25%) is much closer to the current ambition. In our view, the 2009-2014 plan was less demanding than the other two due to the following factors: ● it was first announced in June 2010, 18 months into the planning period as it uses 2009 as the base year; ● in 2009, the company recorded the weakest top line since 2006, which made it an easy comparator to start from; ● recent acceleration in M&A activity (since H2 2012) was the key contributor to achieving the required top-line growth.
We believe that the FY19 target is not achievable and will be missed by two years
Our estimate
4,400 Actual revenue 2005-2010 target 2009-2014 target
3,900 2014-2019 target Expon. (Actual revenue)
3,400 Met the target after 2,900 €300m rev’s The business has to acquired since H2 12 change materially to meet 25% miss, (33% excl 2,400 2019 target – current IBM acquisition) trend (10% CAGR) 1,900 indicates a 2 year gap 1,400
900 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Company, Berenberg
Even though Dassault only recently entered the high-growth new markets, we believe that the core business would have to change significantly if the 2019 target is to be met. However, to do that, it would need either the CAD market to accelerate in terms of growth (which is very unlikely) or ensure a very large uptake of the V6 platform over the next few years. Considering the slow adoption of V6 over the last six years, we do not believe that the latter will happen.
“Plan A” In order to achieve the new 2019 target, management has highlighted a number of factors that will contribute to future growth. These are: 1) core industries growth; 2) V6 adoption; 3) new industries growth; 4) emerging markets growth; 5) tailwinds from transition to the cloud; 6) continuation of M&A activity; and 7) stable profitability.
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Dassault’s strategy to achieve the target of €3.50 EPS by 2019
Source: Company, Berenberg
As part of its analyst presentation in June 2014, management also provided a rough split of how those factors will contribute to overall growth. We have summarised this in the waterfall chart below.
Acquisitions and the new industries organic growth will be key in achieving the target
4 0.60 3.5 2019 EPS target per initiative
3 0.66 0.00 0.12 2.5 0.24 2 0.12
1.5
1
0.5 1.75 3.50 0 2014 EPS (non-IFRS) Core industries growth V6 adoption (+2%) New industries growth Emerging markets Cloud transition (+1%) Acquisitions (+5%) 2019 EPS (+14.5%) (+1%) (+5.5%) (n/a)
Source: Company, Berenberg
82 Dassault Systèms SA Software & IT Services – Software
Investment thesis in detail
In our view, management’s targets are too ambitious and it will not be able to deliver. In order to justify the current valuation, however, the market expects them to be met. Our bear case comes from the fact that management significantly overestimated the V6 uptake opportunity, and the profit contribution of the new industries’ growth. We also believe that the cloud transition will not provide the expected leverage to the business over the next five years. New industries’ expansion will continue to come in but at inherently lower margins. In the mid-run, we believe that an increased lower-margin revenue mix will provide a c2ppt headwind to group operating profitability. This will be further challenged by the integration activities necessary to improve the efficiency of the companies that will join the group in the future. It is important to note that the plan was announced under clear FX rate assumptions and is deemed to be in constant currencies (€/$: 1.37 and €/¥: 140). Therefore, any tailwind coming from the USD strength should be stripped out when assessing the final outcome. The table below summarises how our expectations differ from management’s view. In order to support our investment thesis, we discuss each factor of the company’s seven growth factors (as outlined on page 82) in further detail in the following section. We have approached this analysis in a systematic way and contrasted our view against the initial plan. While we agree on some points, we believe that the benefits of many of the initiatives are significantly overstated by the company, which translates into our lower projections for FY19 EPS. In the table below, we highlight our belief that the 2019 EPS target will not exceed €3.00 in constant currency terms.
We believe that the 2019 EPS target will not exceed €3.00
EPS '14-'19 EPS CAGR Berenberg est Management's comment Our view Contribution (€) waterfall CAGR Stable market, R&D-dependent seat growth. Core industries growth 0.12 1% 2D to 3D conversion 1% Siemens cutting prices Slow uptake since 2008. Lost key customers. V6 adoption 0.24 2% 10% licence and maintenance uplift 1% v5/6 might help New industries TAM est to grow 9% CAGR until 2018. Will Need the organic growth to accelerate from New industries growth 0.66 5.5% 4% contribute 30% to total revenue in 2019. 5% to 19% Not quantified to avoid double-counting. Emerging markets - - High growth countries represent 12% revenue - Risks in Russia, Brazil Half of new business with Cloud to be incremental to Until 2019, Cloud transition should depress Cloud transition 0.12 1% 0% licences revenue growth through cannibalisation Organic growth 1.75 9.5% 6%6%6% vs c5% 2005-2014 Acquisitions contributed c5% to '09-'14 and Acquisitions 0.6 5% Continue to make investments into new verticals 5% will continue over the next period Total 1.75 14.5% 11%11%11% Estimating EPS: €2.95 per share New industries at lower margin - c200bp Operating leverage in the core, but investment in S&M and Stable EBIT margin headwind. Will not be offset by the core. integrations Downside risk to our EPS Source: Company, Berenberg
Introducing FY19 target acted as a catalyst for the share price
Source: Bloomberg
83 Dassault Systèms SA Software & IT Services – Software
Factor #1: core industry growth is expected to slow down
Factor #1: Core industry growth is expected to slow down
Source: Company’s presentations
The plan: Core industry growth will be driven mainly by design applications and the other parts of the 3DEXPERIENCE platform. The company expects an increased rate of migration from 2D to 3D modelling mainly in aerospace and defence, industrial equipment and transport and mobility. Collaboration and digital marketing tools will penetrate the existing customer base with the ENOVIA and 3DEXCITE products. Big data analysis solutions are currently an immaterial part of the business, but EXALEAD and NETVIBES will aim to take some market share away from the traditional business intelligence (BI) players.
CATIA has significantly underperformed Solidworks in terms of growth over the last few years
Source: Company, Berenberg
Our view: We believe that the core industries provide some level of growth, especially in terms of the expansion of traditional design tools to other elements of the 3DEXPERIENCE. We are positive about the trend of big data analytics and the digital marketing tools which can provide significant ROI. ENOVIA’s redesigned infrastructure should provide some level of growth, but will be heavily reliant on the future uptake of V6. The company has been successful in taking the PLM market share in the past, but we believe that future growth will have to come in the face of tougher competition from other key vendors, especially Siemens PLM. The most interesting point is that the recent growth of Solidworks outperformed both CATIA and ENOVIA. The company has recently noted an increase in the ASP and the number of users of Solidworks, which should be good for the future. In reality, Solidworks’
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outlook seems more uncertain. Users point to the lack of a clear product development roadmap and the ultimate positioning for Solidworks within Dassault. It is a product used by designers and engineers who are extremely passionate about it and would not like to see it “end up as a part of the 3DEXPERIENCE platform”. However, we note that this space is becoming increasingly competitive with a number of cloud disruptors entering the space over the last few quarters. We are interested to see how Autodesk’s Fusion 360 software and Onhape’s full-cloud PLM solution will change the competitive landscape. Factor #2: core industry growth is expected to slow down
Factor #2: V6 adoption has been poor
Source: Company
The plan: Around 2ppt of the required annual growth target is expected to come from the adoption of V6 within the installed user-base. Management forecasts that the benefit will come through as the new V6 products are 10% more expensive (licence fee upgrade) and because of the maintenance fee applied to the 10% additional licences. At the same time, the company has increased maintenance prices by 10%.
The company estimates that V6 adoption will provide c2ppt to the revenue growth
5,000
4,500
4,000
3,500
3,000
2,500
2,000 2014 2015 2016 2017 2018 2019 Base With V6
Source: Berenberg, Company reports
Our view: V6-based products have been around for more than five years. Even though some prominent customers (such as Renault and P&G) decided for an early adoption, the general penetration of V6 in the current installed base has been low. Management does not disclose the latest figures, but we understand that only around 10% of CATIA customers migrated to v6. The slow uptake might be a result of well-documented issues with the initial versions of the product. We understand that the current platform is technologically much more stable, but note that the recent V6 numbers have been far from impressive. We believe that the damage of releasing the product prematurely can cause a degree of fear and uncertainty in the market. Reputation and the trust in the software industry have built over the course of many years but it only takes a few mistakes for this trust to diminish. Concerns about the support side of the business are also important as the company is still trying to become a more client-orientated business. Our feedback suggests that not much has changed since the IBM consulting business was acquired. Furthermore, the recent
85 Dassault Systèms SA Software & IT Services – Software
announcement of (V5.6 and V5/6) confused many clients and has not facilitated the transition. Some consider it as a step back in the company’s approach in order to support financial objectives amid slow uptake of the “pure” V6.
Promotion material on Applied Group’s website (Dassault’s UK partners)
. Source: http://www.appliedgroup.com/whitepaper-reasons-to-transition-v6/
The Daimler lesson One of the most apparent signs of increased competition – and at the same time, weakened relationships with key customers – is Daimler’s decision to move to Siemens NX in 2015. The CAD market usually works under the assumption that the large automotive clients do not switch their software vendors. The fact that a company decides to re-train 6,000 employees to NX software indicates that it considers the move to another vendor to be as pricey and time-consuming as the upgrade to V6 would be. The effect of the migration should be shown to its full extent in 2015 when Daimler intends to stop using CATIA altogether. The impact will not only be on the licences from Daimler, but also from the ecosystem of the supply chain of suppliers have to use the same design tools as the OEMs. The main reason for this well-documented switch appears to be the infrastructure around the new V6. The 3DEXPERIENCE tools use ENOVIA as a product data management (PDM) solution whereas a lot of car manufacturers still prefer Siemens’ Teamcentre. In simplified terms, this means that any OEM that wants to use V6 in future will have to stop using the competitive product if they want to see the functional benefits of the upgrade. This brings us to the issue of data migration. Even though technological changes play a significant part in the decision to switch vendors, ultimately the most important considerations will be efficiency and total cost of ownership (TCO). With ticket prices for V6 licences higher than V5 and with the new platform also introducing the concept of named licences, many Dassault’s customers will pay a significant premium to the current spend when investing in the V6-based 3DEXPERIENCE solution. CATIA is already sold at a premium pricing compared to competitors and we do not believe that the V6 upgrades should be taken for granted due to the increase in TCO. It has been reported that some of the large auto manufacturers have their licences up for renewal over the next few years and we believe that the risk of more attrition in key accounts is likely, especially in the light of increased competition from Siemens. Ultimately there can be endless discussions about the functionality and TCO consideration of each software package, but we believe that enough white papers have been issued on this subject not to need to discuss it here in more detail. We like to consider the end-facts and at the moment we are extremely cautious about any bullish projections for V6 uptake in the near future.
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Factor #3: new industries organic growth needs to accelerate
Factor #3: New industries organic growth needs to accelerate
Source: Company
The plan: New industries have been an area of focus for some time and Dassault has taken some big steps towards penetrating adjacent markets with the recent acquisitions of Gemcom and Accelrys. The company identified the following industries of focus: AEC (architecture, engineering and construction), consumer goods and retail, energy and utilities, financial services, life sciences, natural resources, and marine and offshore. Dassault estimates that the overall addressable market in fast-growing verticals will increase from 8.9bn consumers in 2015 to 11.2bn in 2018 (a c9% CAGR in the TAM). As per our analysis, the company needs to increase revenues from new industries by 20ppt on average in each of the next five years in order to increase the proportion contribution to total revenue to 30% from the current level of 25%. In order to grow at a faster pace than the market, the company will have to further invest in acquisitions and sales and marketing in order to take market share away from competitors.
New industries’ proportion of total software revenue
100%
90% Transportation 80% Aerospace Core 70% Industrial equipment High Tech 60% Growth Consumer Goods & Retail 50% Marine & Offshore 40% CPG & Retail Expand 30% Life Sciences Energy & Utilities 20% AEC (Construction) Investigate 25%25%25% 30% 10% 20% Financial and Business Services 0% 2009 2013 2019E
Source: Company reports
Required organic growth rate of new industries to achieve the 30% target by 2019
2013 2014E 2019E 2014-2019 Total Software revenue* 1,880 1,980 3,960 Software revenue CAGR 14.9% New industries % of Software revenue 25% 25% 30% New industries revenue 470 495 1,188 New industries required revenue CAGR 19.1%
Source: Company reports
Our view: This is the key part of management’s strategy and the execution will directly impact the outcome of the 2019 targets. When a company reaches a point where the core market growth dries up, it is faced with two options. First, it can continue to innovate and focus on delivering the best-of-breed solutions to the core. This will ensure a stable growth rate, strong operating leverage and often result in successful retention of the market share. Selling to an existing customer base should also ensure higher margins as the sales effort is than that required when trying to win over a new client. The second option is to diversify by entering new markets.
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Risks and rewards of the diversification approach Some might argue that a specialist company in a certain field should continue to focus on its core strengths in order to most efficiently allocate resources and leave diversification to investors as they invest in a range of those specialist vendors. They will argue that the risks, such as overcommitting funds to the markets that turn out to be less lucrative than initially planned, will outweigh potential benefits. Furthermore, as the business turns its focus away from its core activity, it risks alienating that art of the base that earns the highest margins, which can result in attrition. The competitive landscape will also change as the business enters new markets. As we have summarised in the product section below, Dassault will have to compete against smaller, more focused specialised vendors than it is used to. In the past, the fact that Dassault was the more agile company resulted in it taking market share away from the incumbents. As it moves into new industries, it might appear to be the “big player” with a lot of smaller companies aiming to displace it by using different tactics and disrupting the market with innovative approaches. On the rewards side, a successful transformation can be game-changing. If Dassault eventually manages to penetrate the new industries while retaining its market-leading position in the core PLM segment, the 2019 target will seem much more achievable. For evidence of this, we only need go back c30 years to the time when Dassault engineers realised the opportunity to utilise the company’s platform and apply it to the wider audience. Back then, the leap was successful and now the company is on the threshold of making another such jump. If it succeeds, it will become one of the most important companies in the world. But the consequences of failure could be very damaging. The stakes are becoming higher and every move is more important than the previous one. A lack of focus could turn into a downward spiral which will affect not only mid-term profitability and growth prospects, but could put at risk the healthy core of the company, which currently provides the necessary resources to embark on those shopping sprees. The industry has experienced such a move when PTC lost its market share in 2000s. Factor #4: high-growth geographies are not growing
Factor #4: High growth geographies are not growing
Source: Berenberg
The plan: Management noted that high-growth countries and regions (China, India, Latin America and Russia) represented 12% of total revenue in 2013. These countries grew at a CAGR of c15% in the period 2009-13 and therefore positively contributed to the overall organic growth rate ofr the group. The next five-year plan assumes that growth rates will remain high during the period, but does not explicitly define the contribution to the overall target. Our view: We believe that management considers high-growth countries more as an enabler than a standalone factor. As such, higher growth rates in those areas have already been quantified under other drivers discussed in this section. Management assumed in its strategic plan that high growth rates will continue for the foreseeable future, but we note
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that a material slowdown in the certain areas would put the 2019 targets at further risk. Past performance does not guarantee future success and the current bleak outlook on Brazil (following last autumn’s elections) combined with the Ukrainian crisis provide reasons for caution rather than optimism. Factor #5: cloud transition will not help achieve the FY19 targets
Factor #5: Cloud transition will not help in achieving the FY19 targets
Source: Berenberg
The plan: So far the move to the cloud has not significantly affected Dassault and management estimates that roughly 1ppt of the required 14% CAGR will come from sales of its SaaS-based model. Management expects the cloud to provide incremental revenue to perpetual licences with a cannibalisation rate assumed to be around 50%. Using the revenue break-even period of three years, the positive benefits should start feeding though throughout the last two years of the planning period. Our view: Other companies with a higher proportion of smaller customers and less recurring revenue (such as Autodesk) are accelerating the rate of transition to the cloud faster than Dassault. Considering that both Solidworks and 3DEXPERIENCE are now delivered also in the cloud, we believe that the move will mirror the adoption rate of V6 platform-based products. At the same time, we expect the cannibalisation rate will slow down the initial licences legacy business significantly, should the growth of cloud revenues accelerate. We believe that the effect of cannibalisation of licences will result in the company missing its second operating target, which assumes a 2pp CAGR contribution through the adoption of V6. The best-case scenario to support the 2019 targets would be that cloud does not provide a headwind to V6 growth but rather helps the company grow. Factor #6: acquisitions will continue, but the prices of assets are growing
Factor #6: Acquisitions will continue, but the prices of assets are rising
Source: Company
The plan: The company is expected to continue to embark on acquisitions over the next five years. This will support the required growth in those new industries that are experiencing above-average expansion rates. The new management’s target assumes that c5-6% of the total 14% revenue CAGR will be inorganic. This implies c€550m-600m of additional software revenue that will be acquired. The company’s current financial position will allow it to leverage up and will provide the financing for such deals.
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Dassault has been the most acquisitive company in a transaction-dynamic sector
Source: Berenberg estimates, Company reports
Our view: The recent acquisitions have become the focal point of Dassault’s future. The company has emphasised the importance of new brands on a number of occasions. The vast majority of the future organic growth will be coming from new industries and future M&A activities will support it by expanding the technical and go-to-market capabilities of current brands. The strategy is not only to further develop existing brands (like Geovia), but also to penetrate the industries where Dassault is currently not an established name, such as construction or financial services.
Dassault’s estimated growth rates (total versus organic versus excluding FX)
16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 Total revenue g post FX Total revenue organic g Total revenue g ex FX
Source: Berenberg estimates, Company reports
The approach is not new, as we estimate that the inorganic contribution to total 2009-2014 revenue growth of €1,070m has been c€340m (or 32%). Over that period, the company’s revenue grew by a c14% CAGR and inorganic growth contributed c5% to the total growth. This has accelerated over the last few years, when the company acquired no less than 11 businesses of various sizes. This affected recent profitability, as can be seen from the picture below.
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And the opex is growing as resources are spent on higher S&M Software gross margin has been decreasing while R&D investments are declining
95.6% 25.0% 38%
95.4% 20.0% 33% 95.2% 15.0% 10.0% 95.0% 28% 5.0% 94.8% 0.0% 23% 94.6% -5.0% 18% 94.4% -10.0% 94.2% -15.0% 13% Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 94.0% -20.0% R&D as % revenue M&S as % revenue Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Software gross margin (lhs) Services gross margin (rhs) Linear (R&D as % revenue) Linear (M&S as % revenue)
Source: Company, Berenberg Source: Company, Berenberg
In our view, Dassault’s ability to continue to successfully integrate the acquisitions lies at the heart of any buy-case scenario. This strategy will be mainly dependent on future core FCF generation – the ability to raise funds. The chart below shows some of the main acquisitions made by Dassault over the last few years and their valuation multiples. A good high-growth product (such as Accelrys) inevitably comes with a certain price tag. Future acquisitions could change the capital structure of the business and Dassault might resort to borrowing in order to finance them. Timing of M&A activity will also be key. In order to provide the required organic expansion in new industries, acquisitions would have to be made early in the planning period: we might therefore see some activity in 2015 or early 2016. The later the revenue is acquired, the higher the required growth rate from existing brands like Geovia and Biovia. To avoid the double-counting of the growth, we have split the current brands required growth (factor #3 above) and the inorganic contribution to total growth.
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Dassault’s main acquisitions since 2009 (excluding Quintiq)
Source: Company reports
Factor #7: management expects stable profitability, but we believe that the margin will decline “Cold water in warm water makes the warm water a little bit less warm…” Bernard Charles at FY14 results conference call The goals are clearly set-up in order to drive top-line growth without any material operating margin expansion, as EPS growth will only reflect the increase in the top line. We believe that the recent acquisitions have shown that the margin decline will offset any operational improvement in the margin structure as: ● the company will have to fund growth by expanding the sales force (this is already happening as can be seen in the increased sales and marketing costs as a proportion of revenue – see the chart in factor #6); ● increased competition in core industries will not provide organic margin expansion; ● R&D is likely to accelerate again after edging down recently in order to develop additional capabilities to support organic growth in new industries; ● the shift to the cloud is likely to initially dilute operating margins; and ● integration costs have to be absorbed. As the contribution of higher-margin legacy CAD business slowly decrease, we expect group margins to come under pressure and reduce to around 27.5% by 2017. This is against the current consensus, which estimates that margins will start improving in 2016 and remain at today’s levels – close to 30%. One only has to go back as far as the last quarterly results presentation to note how acquisitions are diluting the operating margin of the business. We believe that this effect will be magnified once the company enters new verticals (there is talk about the finance and construction sector), where it currently has no presence and where, therefore, any potential opex synergies will be negligible.
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Dassault’s FY14 presentation on operating margin development
Source: Company, Berenberg
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Valuation
Our valuation approach for Dassault reflects the structure of the business. Dassault today is two-tiered – it has a stable and fairly predictable core and a fast growing (but lower margin) new industries segment. We therefore use a sum-of-the-parts approach to derive the price target for the business. We believe that the best way to value the stable CAD business is by using a DCF model with 5% discount rate (to reflect inherently low risk in the revenue profile of the stable business) and the growth rate of 4% for the next 10 years. After that we assume that the terminal growth of this revenue stream will be zero. To support this, we also assume that any capital expenditure will only relate to maintenance. The company’s net cash position is reflected in the value of this core part of the business. Our valuation for the non-CAD business is carried out using a multiple of earnings. We estimate that this revenue stream has the potential to grow by the mid-teens organically, even though our analysis shows that the organic growth has been below the double-digit level over the past three years. The main reason for our optimism is because its recent acquisitions (especially in the new industries, such as mining and life sciences) are growing a lot faster than the rest of the business. However, they are lower-operating-margin businesses than the average of the company. Even though management does not disclose profitability by revenue segment we estimate that the new industries and Enovia are running at around a 23% operating margin. Within that group, Enovia is the higher-margin and lower-growth part. It is important to note that the assumption of the split of operating margin (35% to the CAD and 23% to other revenue) is not key, and flexing it does not make a material difference to our investment case. This is also shown in the sensitivity section below. Even after taking into account th4e higher growth part of the business (and assigning it a valuation multiple of 25x earnings), we believe that the business is currently overvalued. Our price target of €49 indicates a c20% downside to current trading levels.
Valuation summary
Valuation (SOTP) Comment Core: CATIA&SOLIDWORKS Revenue g 4% Terminal growth 0% EBIT margin 35%-33% In line with historical margin, adj for 2% SBC Tax rate 35% Discount rate 5% Value of Core equity 8,874
High growth ENOVIA & Others Revenue 792 EBIT margin 23% Bal fig to Current blended margin: 29.8% Tax rate 35% NOPAT 118 At our PT of €49 494949 Target Mcap 12,408 Implied value of High Growth 3,534 Implied earnings multiple of High Growth 30x30x30x Our assumed multiple Current share price 61.6 Number of shares (m) 255 Current Mcap 15,726 Current value of High Growth 6,853 Current earnings multiple of High Growth 58x58x58x At current trading level Source: Company, Berenberg
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Summary DCF of CATIA and Solidworks
AAA Est Est Est Est Est Est Est Est Est Est Est USDm FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 TYTYTY Revenues 1,205.5 1,228.3 1,286.3 1,350.6 1,418.1 1,489.1 1,548.6 1,610.6 1,675.0 1,725.2 1,777.0 1,830.3 1,885.2 Operating profit* 421.9 429.9 450.2 472.7 496.4 521.2 537.4 554.0 571.2 583.1 595.3 607.7 620.2 EBITDA 460.3 470.3 490.9 513.4 543.6 571.3 590.6 610.6 631.2 646.9 663.1 679.6 696.7 SBC proxy charge 24.1 24.6 25.7 27.0 28.4 29.8 31.0 32.2 33.5 34.5 35.5 36.6 37.7 Tax rate 34.6% 33.1% 34.4% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% NOPAT 285.4 298.1 305.2 316.2 334.9 352.0 363.8 376.0 388.5 398.1 407.9 418.0 428.3
Non-cash items 38.4 40.4 40.7 40.7 47.2 50.1 53.3 56.6 60.1 63.8 67.8 72.0 76.4
FCF 285.4 298.1 305.2 316.2 334.9 352.0 363.8 376.0 388.5 398.1 407.9 418.0 428.3 Terminal value 8,332.6 NPV of FCF 316.2 318.5 318.4 313.0 307.6 302.4 294.7 287.2 279.9 272.8 5,047.7 % value in each year 3.9% 4.0% 4.0% 3.9% 3.8% 3.8% 3.7% 3.6% 3.5% 3.4% 62.6%
WACC 5.1% NPV 8,058.4 Net (debt)/cash 815.4 Market value 8,873.8 Revenue growth 1.9% 4.7% 5.0% 5.0% 5.0% 4.0% 4.0% 4.0% 3.0% 3.0% 3.0% 3.0% - Operating margin (non-GAAP) 35.0% 35.0% 35.0% 35.0% 35.0% 34.7% 34.4% 34.1% 33.8% 33.5% 33.2% 32.9% Operating margin (Berenberg) 33.0% 33.0% 33.0% 33.0% 33.0% 32.7% 32.4% 32.1% 31.8% 31.5% 31.2% 30.9% *assuming other revenue currently at 23% operating margin Source: Company, Berenberg
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Scenario analysis
Scenario #1: the organic growth rate for core business achieves an 8% CAGR over the next 10 years leaving other parameters unchanged – this would only bring us to the current share price of ~€60
Valuation (SOTP) Core: CATIA&SOLIDWORKS Revenue g 8% Terminal growth 0% EBIT margin 35%-33% Tax rate 35% Discount rate 5% Value of Core equity 11,647
High growth ENOVIA & Others Revenue 792 EBIT margin 23% Tax rate 35% NOPAT 118 At our PT of €60 606060 Target Mcap 15,190 Implied value of High Growth 3,544 Implied earnings multiple of High Growth 30x30x30x Source: Company, Berenberg
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Scenario #2: Assuming that the company starts losing some of the market share in traditional CAD segments, this alone would push our price target down to €43 per share (still assuming that the high- growth segments achieve 15%-20% CAGR and are valued at 30x earnings)
Valuation (SOTP) Core: CATIA&SOLIDWORKS Revenue g 1% Terminal growth 0% EBIT margin 35%-33% Tax rate 35% Discount rate 5% Value of Core equity 7,403
High growth ENOVIA & Others Revenue 792 EBIT margin 23% Tax rate 35% NOPAT 118 At our PT of €43 434343 Target Mcap 10,952 Implied value of High Growth 3,549 Implied earnings multiple of High Growth 30x30x30x Source: Company, Berenberg
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Appendix
Product portfolio Dassault’s current product portfolio is a diverse mixture of core CAD products combined with additional aspects of various collaboration tools and industry-specific solutions which have mainly been acquired in the past. Some of these have remained standalone solutions (such as Solidworks), whereas the others represent an integral part of the new 3DEXPERIENCE product bundle. Technologically, most of the products are still supported in the older V5 architecture; however, the company is now in full swing to convert users and accelerate the adoption of a brand new V6 platform. Reports from the industry indicate that the uptake of V6 has been modest. Based on previous experience of the pace of transition for the largest customers and early technological hiccups, we estimate that the replacement cycle will take around five to eight years for the majority of customers to start using V6-based products. Dassault’s applications can broadly be classified into four different segments: ● 3D modelling applications; ● content and simulation applications, ● social and collaborative applications, and ● information intelligence applications.
The company’s “competitive environment wheel” shows how diverse the ecosystem is – in order to protect its market share in the core and grow in new industries, Dassault will have to adjust its tactics on a product-by-product basis, which could be costly
Source: Company, Berenberg
3D modelling applications These applications provide product architects and designers with the ability to visualise the idea all the way from the initial draft drawing to the final working model which is ready for the simulation phase.
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CATIA is Dassault’s legacy brand and the most successful modelling application in the aerospace and automotive industries. CATIA’s main advantage is the ability to accurately present a digital image of very complex products, such as a motor engine. Starting as a 3D CAD software, it now includes several modules that go far beyond their initial functions. CATIA epitomises the Dassault brand and, even though it operates in a very mature market, it generates c40% of the stable annual software-related revenue. The product is sold at the initial licence fee with the annual maintenance rate charged on top. CATIA is used by most of the largest automotive and aerospace concerns in the world, such as Boeing, BMW and Renault. CATIA’s main competitors in the market include Siemens with its NX design software and Parametric’s Creo solution.
Solidworks is well established software for 3D design, simulation, technical communication and data management. From a technological standpoint, it is an easy-to- use software for less complex design industries than aerospace, for example. It enables rapid creation of parts, assemblies and 2D drawings, data management, simulation, technical documentation and electrical design. Solidworks was acquired by Dassalt in 1997 and has remained a fairly standalone product since that time. The company has tried re-engineering the software and moving the core on Dassault’s own kernel (visual engine). Following adverse feedback from the customer base, the company decided to cancel the migration and continue to use Siemens’ engine. Since the beginning of 2014, Solidworks is also integrated in the 3DEXPERIENCE platform through the Solidworks Mechanical Conceptual, which is software for conceptual design and is available in the cloud. Solidworks’ main competitors are Autodesk, PTC and Siemens. Recently, new pure-play cloud disruptors have entered the market from which Onshape (led by a couple of ex- Solidworks CEOs) had been the most advanced in the market.
GEOVIA is one of the most recent of Dassault’s brands, and was developed after the acquisition of Gemcom in 2012. Geovia models and simulates a landscape to improve the efficiency and sustainability of natural resources management. GEOVIA is a leader in the mining industry, where it helps geologists, surveyors, mining engineers and operations managers better understand and optimise their mining operations. GEOVIA mainly competes with privately held, smaller vertical-specialised vendors.
BIOVIA provides a scientific collaborative platform for advanced biological, chemical and materials experiences. Solutions help science-driven companies create and connect biological, chemical and material innovations to develop new products. The brand was developed recently and is a result of the acquisition of Accelrys in 2014. BIOVIA’s main competitors include smaller life sciences specialised vendors like Inforsense.
Content and simulation applications Simulation is becoming an integral part of the PLM ecosystem. The main vendors use it as a differentiator that can bridge the gap between the expected and tangible performance of a designed object. Dassault has continued to make investments in this space, with the acquisition of Abaqus in 2005.
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SIMULIA is a basic tool that enables the users of various experience levels to collaborate and share simulation data without loss of information fidelity. SIMULIA’s portfolio consists of different levels of analysis, such as 1) finite element analysis, 2) multiphysics solutions, 3) design optimisation, and 4) simulation lifecycle management. Finite element analysis allows companies to create and test virtual prototypes of products and processes (using a simple linear simulation). Multiphysics solutions enable companies to simulate two or more interacting physical phenomena (ie non-linear simulation, such as the engine performance, which has multiple moving parts and forces). Design optimisation helps designers and engineers to quickly test the real-world behaviour of a product. Simulation lifecycle management simplifies the deployment of approved simulation methods and best practices that can be shared in the future product development and save time and cost. SIMULIA’s main competitor is pure-play simulation provider Ansys.
DELMIA is a set of applications for digital manufacturing and production. It allows all stakeholders in the manufacturing process to be part of a single community which results in all team members working towards the same shared objectives. It enables users to plan the work schedule with process and resource planning tools to optimise global production process. Customers can simulate and optimise their global manufacturing assets and systems and track real-time production activities reaction to disruptions and introduce new products. These factors contribute to reduce the time-to-market for a new product. DELMIA’s main competitors are companies in the CAM space, such as Delcam, which was recently acquired by Autodesk.
3DVIA offers retailers and manufacturers the virtual 3D space planning solutions. By creating a virtual shop, a company can improve the user experience and increase sales productivity without having to build a real-world sample shop space. Store design and space is therefore optimised and can represent a template for all shops in a group. This is known to increase customer experience and brand satisfaction. HomeByMe is a solution that falls under 3SVIA portfolio. It was designed for individual users to enable them to plan and design their home space, interact with social media and eventually link them to furniture and equipment providers which could then provide the with a quotation.
3DXCITE represents another new segment for Dassault following the acquisition of RTT. This product provides high-end 3D visualisation in real time to enhance storytelling across various media channels. With 3Dxcite, companies are now able to create marketing material including commercial videos from virtual drawings. The product requires a high proportion of associated services. Visualisation solutions are usually outside the remit of traditional PLM providers. Competition mainly comes from the broadcasting technology space and vendors such as Adobe.
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Social and collaborative application
Collaboration functionality is the key element of every modern PLM solution. Dassault’s ENOVIA is at a centre of the new 3DEXPRIENCE platform. It enables companies to bring together all the people, processes, content and systems involved in product creation, development, introduction and maintenance. The set of ENOVIA applications is important to the concept of 3DEXPERIENCE as it facilitates interoperability of business processes in context of data generated from CATIA, DELMIA and SIMULIA. It is here that Dassault is trying to expand its presence within its core markets by taking away the market share from Siemens’ Teamcentre and PTC’s Windchill. The fact that the V6 infrastructure object-based references in the place of files reduces the ability to integrate other vendors’ data management systems with the 3DEXPERIENCE. This increases barriers to entry, but also creates operational problems within a large user base who might have previously used Teamcentre for data management and CATIA for design. Even though this might ensure an increase in ENOVIA’s market share, it could also result in attrition of some customers who will select other design providers instead of moving to V6.
Information intelligence applications These applications play a key role in presenting the data captured in all phases of the process and stored and managed within ENOVIA. Competition in this space is fierce, with traditional and new-breed business intelligence and Big Data providers such as Tibco, Tableau or Qlikview. For Dassault, these applications do not represent the core of the platform, but enhance the user experience without the potential need to engage with a specialised analytics provider.
EXALEAD helps companies access, explore and analyse their most relevant information using data discovery applications that make sense of large volume of digital assets. The system analyses various sources of data, such as customer interaction, digital assets (old 2D/3D drawings) or machine data for a manufacturing business.
NETVIBES is a dashboarding tool that helps companies monitor and manage operations in real time. It includes a social analytics engine that helps them understand the trends after the actual product release and therefore provides an additional insight into acceptance in the early stages of its lifecycle.
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Financials
Profit and loss account Year-end December(EUR m) 2013 2014 2015E 2016E 2017E Sales 2,073 2,347 2,687 2,824 2,988 EBITDA 794794794 873873873 924924924 952952952 993 Depreciation and amortisation 33 35 44 47 50 EBIT 653653653 699 759759759 784784784 822822822 Financial result 18 13 0 0 0 EBT 670670670 712712712 759759759 784784784 822822822 Taxes -222 -245 -266 -274 -288 Net income 448 467 493 509 534534534 Source: Company data, Berenberg estimates
Balance sheet Year-end December (EUR m) 2013 2014 2015E 2016E 2017E Liquid assets 1,804 1,176 1,620 2,104 2,610 Short-term debt 20 10 10 10 10 Long-term debt 360 350 350 350 350 Net debt ---1,424-1,424 ---815-815815815 ---1,260-1,260 ---1,744-1,744 ---2,250-2,250 Intangible assets 1,532 2,703 2,582 2,461 2,340 Property, plant and equipment 100 137 147 156 165 Other non-current assets 136 149 149 149 149 Fixed assets 1,768 2,989 2,877 2,766 2,654 Working capital before deferred income 388 497 511 542 582 Deferred income 489 637 602 609 624 Total working capital ---101-101101101 ---139-139139139 ---91-919191 ---67-676767 ---42-424242 Other assets/ (liabilities) 93 134 77 29 -29 Net assets ------Source: Company data, Berenberg estimates
Cash flow statement EUR m 2013 2014 2015E 2016E 2017E Cash flow from operations before changes in w/c 521521521 477477477 547 565565565 590590590 Change in working capital -17 4 -48 -24 -25 Net cashflow from operations 504 481 499 541 565565565 CapEx -42 -38 -54 -56 -60 Free Cash flow 462 443 445 484 505 Payments for acquisitions -213 -657 0 0 0 Financial investments 87 -33 0 0 0 Increase/decrease in debt position 322 -10 0 0 0 Net share issuance 40 35 0 0 0 Dividends paid -35 -32 0 0 0 Others 42 -4 0 0 0 Effects of exchange rate changes on cash -36 4 0 0 0 Increase/decrease in liquid assets 576576576 ---383-383383383 445 484 505 Source: Company data, Berenberg estimates
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Growth rates yoy (%) 2013 2014 2015E 2016E 2017E Sales 1.7 % 13.2 % 14.5 % 5.1 % 5.8 % EBITDA 2.3 % 10.0 % 5.8 % 3.0 % 4.3 % EBIT 1.3 % 7.1 % 8.6 % 3.3 % 4.9 % Net income 4.6 % 4.2 % 5.6 % 3.3 % 4.9 % EPS reported 3.8 % 3.7 % 5.0 % 3.0 % 4.7 % EPS recurring 3.5 % 4.4 % 5.6 % 3.2 % 4.9 % Source: Company data, Berenberg estimates
103 PTC Inc Software & IT Services – Software
Still misunderstood, still undervalued
● We initiate on PTC with a Buy recommendation and a price target of $43 8 April 2015 per share. We believe that the company’s current value discounts any upside from the entrance of the adjacent markets. The company is currently under-researched and we believe that it represents a good pair BUY (Initiation) trade against Dassault.
Current price Price target ● PTC is a specialised 2D and 3D design software vendor which became the
market leader in the CAD industry until the mid-1990s when the USD 37.17 USD 43.00 competition (especially CATIA, Solidworks and AutoCAD) started to edge 06/04/2015 New York Close closer. In a bid to recapture its position, the company has been restructuring for the past three years and has been looking to improve the Market cap (USD m) 4,350 efficiency of the sales force and profitability of its professional services. Reuters PTC.O Bloomberg PTC US ● The Phoenix: Five years after changing the leadership team, PTC is now becoming a company with well-aligned strategic goals and a strong Share data operational structure to support it. Even though some of the restructuring is still ongoing, PTC has changed a lot over that time. Newsflow on new Shares outstanding (m) 116
products and recent acquisitions has changed the industry’s perception of Enterprise value (USD m) 4,645 a business that lost its market-leading position in the 2000s. Daily trading volume 1,077,000
● The IoT opportunity: The Internet of Things (IoT) segment can ultimately Key data be much larger than the service lifecycle management (SLM) market opportunity and PTC is one of the first major players to have its ecosystem Price/book value 2.7 in place. We believe that the company will benefit significantly from its Net gearing 34.0% expansion into smart products market. CAGR sales 2014-2017 2.5% CAGR EPS 2014-2017 8.6% ● Valuation: Our valuation approach for PTC is very similar to that of Dassault. In order to reflect the changing nature of PTC’s business, we value the company using a sum-of-the-parts approach. We value the more predictable CAD, EPLM and SLM segments using DCF method. The fast- growing IoT revenue stream is valued using a combination of the revenue and earnings multiples. Our assumptions predict slower-than-average industry growth in CAD and a CAGR for the IoT segment of 35% over the next three years. We believe that profitability will be boosted in FY16 by the recently announced efficiency measures, but see limited potential for a margin increase beyond 2017 as the company will have to continue to
invest in opex in order to capture the IoT opportunity.
Y/E 30.09., USD m 2013 2014 2015E 2016E 2017E Sales 1,297 1,358 1,309 1,331 1,462 EBITDA 361 408 417 453 499 EBIT 284 331 318 345 389 EBIT (Berenberg) - - - - - Free Cash flow 147 228 121 278 332 Free Cash flow (Berenberg) 147 228 121 278 332 Net profit 217 259 261 282 311 Y/E net debt (net cash) 0 318 295 217 83 EPS (adjusted) 1.79 2.16 2.25 2.48 2.76 EPS (Berenberg) 1.39 1.73 1.78 1.95 2.23 CPS 1.61 2.33 1.52 2.97 3.48 DPS 0.00 0.00 0.00 0.00 0.00 EBITDA margin 27.8% 30.0% 31.8% 34.0% 34.1% EBIT margin 21.9% 24.3% 24.3% 25.9% 26.6% Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% EV/sales 3.4 3.4 3.5 3.4 3.0 EV/EBITDA 12.1 11.4 11.1 10.1 8.9 EV/EBIT 15.3 14.1 14.6 13.2 11.4 P/E 20.1 18.0 17.8 16.2 14.2 Free Cash flow yield 4.5% 6.4% 4.1% 7.8% 9.0% Source: Company data, Berenberg
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
104 PTC Inc Software & IT Services – Software
BUY Investment thesis
● After years of restructuring and rediscovering itself, PTC is now a 8 April 2015 changed company. Newsflow on new products and recent acquisitions has changed the industry’s perception of a business
Current price Price target that lost its market-leading position in the 2000s. The company is currently under-researched and we believe that it represents a good pair trade with Dassault. Market cap (USD m) 4,350 USD 37.17 USD 43.00
06/04/2015 New York Close EV ( USD m) 4,645 ● The IoT segment can ultimately be much larger than the SLM Trading volume 1,077,000 market opportunity and PTC is one of the first major players to have its ecosystem in place. We believe that the company will Free float -%
benefit significantly from its expansion into the smart products Non-institutional shareholders Share performance market.
- High 52 weeks USD 39.79 ● PTC has been perceived as a potential takeover target fo r a while now, and many see GE as the potential bidder. Their argument is Low 52 weeks USD 32.84 that large industrial firms like to own their software layer – the Business description Performance relative to example of Siemens acquiring Unigraphics (UGS) back in 2007 is often used to support this view. - SXXP NASDAQ 1mth 8.2% 11.1% 3mth -17.2% -0.2% 12mth -8.6% -12.5%
Profit and loss summary Cash flow summary USDm 2013 2014 2015E 2016E 2017E USDm 2013 2014 2015E 2016E 2017E Revenues 1,297 1,358 1,309 1,331 1,462 Net income 144 160 127 190 220 EBITDA 361 408 417 453 499 Depreciation 31 27 25 24 27 EBITA 392 435 442 477 526 Working capital changes 30 41 -60 12 37 EBIT 284 331 318 345 389 Other non-cash items -26 26 34 52 52 Associates contribution - - - - - Operating cash flow 225 305 200 362 419 Net interest -7 -10 -14 -10 -10 Capex 29 25 24 24 27 Tax -60 -61 -43 -54 -68 FCFE 147 228 121 278 332 Minorities 0 0 0 0 0 Acquisitions, disposals -246 -324 0 0 0 Net income adj. 217 259 261 282 311 Other investment CF - - - - - EPS reported 1.39 1.73 1.78 1.95 2.23 Dividends paid 0 0 0 0 0 EPS adjusted 1.79 2.16 2.25 2.48 2.76 Buybacks, issuance -70 -224 -120 -240 -240 Year end shares 121 120 116 114 113 Change in net debt 0 -318 23 79 133 Average shares 121 120 116 114 113 Net debt 0 318 295 217 83 DPS 0.00 0.00 0.00 0.00 0.00 FCF per share 1.61 2.33 1.52 2.97 3.48
Growth and margins Key ratios 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Revenue growth 3.1% 4.8% -3.6% 1.7% 9.8% Net debt / equity 0.0% 37.3% 34.0% 25.4% 9.6% EBITDA growth 23.8% 13.1% 2.2% 8.6% 10.3% Net debt / EBITDA 0.0 0.8 0.7 0.5 0.2 EBIT growth 26.3% 16.4% -3.8% 8.5% 12.8% Avg cost of debt 2.6% 1.7% - - - EPS adj growth 449.1% 20.6% 4.5% 9.8% 11.6% Tax rate 21.8% 19.2% 14.2% 16.0% 18.0% FCF growth 4.7% 43.0% -36.8% 91.2% 16.2% Interest cover 53.0 39.0 30.3 46.7 51.5 EBITDA margin 27.8% 30.0% 31.8% 34.0% 34.1% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% EBIT margin 21.9% 24.3% 24.3% 25.9% 26.6% ROCE 29.4% 27.2% 41.6% 46.8% 52.9% Net income margin 16.7% 19.1% 19.9% 21.2% 21.3% Capex / sales 2.3% 1.9% 1.8% 1.8% 1.8% FCF margin 15.1% 20.6% 13.5% 25.4% 26.8% Capex / depreciation 93.2% 93.7% 93.9% 100.0% 100.0%
Valuation metrics Key risks to our investment thesis 2013 2014 2015E 2016E 2017E ● The IoT market is still very immature and it may take longer than P / adjusted EPS 20.1 18.0 17.8 16.2 14.2 many currently expect for the full potential to show. Competitive P / book value 3.8 4.1 2.7 2.8 3.0 environment there is still evolving and it is too early to call the FCF yield 4.5% 6.4% 4.1% 7.8% 9.0% ultimate winner of the space. Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% The company’s recent restructuring came as a shock and some might EV / sales 3.4 3.4 3.5 3.4 3.0 ● wonder whether additional efficiency measures could be announced. EV / EBITDA 12.1 11.4 11.1 10.1 8.9 If so, this could hurt employee satisfaction in the core business and EV / EBIT 15.3 14.1 14.6 13.2 11.4 translate into lower productivity. EV / FCF 22.3 16.7 26.3 13.5 11.3 EV / cap. employed 3.7 3.2 5.3 5.4 5.1
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
105 PTC Inc Software & IT Services – Software
PTC
Business description PTC is a specialised 2D and 3D design software vendor which was founded in 1985. Its first flagship product – Pro/ENGINEER (Pro/E) – was released in 1988 as the first parametric modelling design software in the market. It became the market leader in the CAD industry until the mid-1990s when the competition (especially CATIA, Solidworks and AutoCAD) started to edge closer. In 2011, Pro/E was updated and rebranded as PTC Creo; at the same time, many adjacent products (such as Mathcad) were added to the Creo suite. The company went public in 1989, making it one of the oldest listed design software companies in the world. The company has R&D centres in the US, India and Israel. It sells the majority of its software through its direct sales channel, with less than a quarter of revenues coming from third-parties. Geographically, revenue is split almost equally between the Americas and EMEA (each representing around 40% revenue), with the rest coming from Asia-Pacific. After years of dominance, PTC lost its leading position in the PLM market to Dassault and Siemens. In a bid to recapture its position, the company has been restructuring for the past three years and has been looking to improve the efficiency of the sales force and profitability of its professional services. Operationally, the main change in the future will come from increased use of IT services partners who will be delivering lower-margin professional services (PS). PTC’s plan is to retain in-house only the more profitable PS , which should help it achieve its long-term margin target of 28% (2014: 24.3%).
Key investment points ● After years of restructuring and rediscovering itself, PTC is now a changed company. Newsflow on new products and recent acquisitions has changed the industry’s perception of a business that lost its market-leading position in the 2000s. The company is currently under-researched and we believe that it represents a good pair trade with Dassault. ● The IoT segment can ultimately be much larger than the SLM market opportunity and PTC is one of the first major players to have its ecosystem in place. We believe that the company will benefit significantly from its expansion into smart products market. ● PTC has been perceived as a potential takeover target for a while now, and many see GE as the potential bidder. Their argument is that large industrial firms like to own their software layer – the example of Siemens acquiring Unigraphics (UGS) back in 2007 is often used to support this view.
Management CEO: Jim Heppelmann joined PTC in 1998 following its acquisition of Windchill Technology, which he co-founded and served as CTO. In 2001, he was appointed the CTO of PTC – he held that position until 2009 when he became the COO responsible for managing PTC’s operating units. Mr Heppelmann became the CEO in 2010. CFO: Andrew Miller became CFO of PTC very recently, in February 2015. He has more than 30 years of experience in the high-tech and med. tech industries. He was previously with Cepheid, a high-growth molecular diagnostics company where he had been CFO since 2008.
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Company at a glance
Revenue split by industries Revenue split by product line
Life Sciences, Other, 9% 4% Retail & Consumer, 8% Industrial products, 31%
Automotive, 14%
Federal, Electronics & Aerospace and High Tech, Defence, 19% 15%
Source: Company, Berenberg Source: Company, Berenberg
Revenue forecast – Berenberg versus consensus EBIT forecast – Berenberg versus consensus
1,550 29.0%
1,500 27.0%
1,450 25.0%
1,400 23.0%
1,350 21.0%
1,300 19.0%
1,250 17.0%
1,200 15.0% FY2015 FY2016 FY2017 FY2015 FY2016 FY2017 Berenberg estimates Consensus - Bloomberg Berenberg estimates Consensus - Bloomberg
Source: Company, Berenberg Source: Company, Berenberg
Timeline of selected milestones
Source: Company, Berenberg
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Investment thesis in pictures
PTC is not the same business as it was 18 years ago, when CAD The new release of Creo 3.0 is a step in the right direction for the represented 100% revenues and EV was 25% above the current core CAD market and will help PTC to at least retain its market level share
Source: Company, Berenberg Source: Company
Conversion from Pro/E to Creo has been strong and accelerated The IoT opportunity is large significantly in FY14
100%
50%
0% FY12 FY13 FY14 Creo Pro/ENGINEER
Source: www.yachtpals.com Source: Company website
However, the market is not yet convinced and PTC is trading at IoT will also provide a growth opportunity in the SLM segment a significant discount to its peer group
60 Historic PE ratio (PTC vs Peer group) 55
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PTC US Equity DSY FP Equity Peer Average Source: www.drexel.edu Source: Company website
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Investment thesis in detail
Point #1: PTC has changed and will continue to do so “Once upon a time, we were the innovators. We had a great product. We had the only product. Somewhere along the way, we became complacent.” Jim Heppelmann, 2011 (source: www.thecadinsider.com)
PTC is changing and the investment IoT will soon become material part of the group
Source: Company, Berenberg estimates
Management’s view of the addressable market and growth rates
Management's target End market Estimated TAM ($bn) Market growth rate growth rate for L&SS Comment CAD 4.3 4% 3-5% We believe that the growth rate for PLM 5.2 6% 6-8% CAD, EPLM and SLMwill be closer ALM 3.5 8% 7-9% to the lower end of the range SLM 4 11% 10-15% IoT 1.1 38% 40% Our IoT assumptions are similar Source: Company, Berenberg estimates
The plan: When Jim Heppelmann became the CEO of PTC in 2010 he made a bold decision to gradually change the fortunes of the business that had been underperforming its peers for years. The idea was to revive what was once a great story of an industry-leading CAD product by rebranding it, making it more user friendly and focusing on delivering an outstanding level of professional services. In its beginnings, Pro/E was successful due to its innovative approach to 3D modelling. The company had a unique vision of how to initially design and subsequently change products once they had already been developed. It provided a tool for engineers that shaped the way the product design process is done today. The company was the leading provider of CAD solutions in the mid-1990s. If we fast-forward five years, we find that PTC entered what some may call “a lost decade”. The company that was once known for its innovative approach took its eye off the ball and its competitors (especially Solidworks) started taking a significant share of the market. At that time, the company accelerated investment in Windchill and subsequently gained some traction in the product data management (PDM) market but continued to lose market share in the CAD segment. By the end of the 2000s, it became clear that a change of direction was needed, and the co-founder of Windchill and then COO of PTC, Jim Heppelmann, took over as CEO.
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Our view: Five years after changing the leadership team, PTC is now becoming a company with well-aligned strategic goals and a strong operational structure to support it. Mr Heppelmann approached the reorganisation of the company from the perspective of an outsider – his idea was to listen to the company’s customers before changing the products in order to develop a clear roadmap that would be more closely aligned to the needs of the user base. This was an important shift in the company’s thinking as PTC was previously not particularly regarded as a customer-orientated firm. 1. Back to the basics in CAD: PTC realised that even though the CAD market might not be the most dynamic and innovative segment, it is still key to its success in other product lines as it is the backbone of any design software company, providing a stream of stable revenues at relatively high margins. Increased focus on CAD tools (which has resulted in key enhancements of Creo in the latest 3.0 version) arrested the decline and the company is now maintaining its market share in the core market. User base transformation from Pro/E to Creo has been taking[going on for?] years, but still at a much faster pace than that of Dassault’s move towards V6. At the beginning of 2013, the company noted that only around 25% of Pro/E users had migrated to Creo, and it said then that it expected the proportion to be closer to 50% by the end of the year. We understand that at present, around 80% of the former Pro/E customers are using Creo and the introduction of version 3.0 should facilitate the transition to it for the rest of the user base. We note that the Creo suite is fully-backward-compatible with the previous versions of the software (unlike Dassault’s V5 and V6). This is key, as it enables the company to retain a database of previous projects that can not only be read but also edited in the latest version of the software.
Creo adoption has been strong and has accelerated recently
100%
50%
0% FY12 FY13 FY14 Creo Pro/ENGINEER
Source: Company, Berenberg
Adoption to date has reportedly been stronger among SMEs, whereas larger companies (understandably) lag behind. If we further compare the transition to Creo and that of Dassault’s towards V6, we note another major difference. PTC does not assume any direct impact from the transition on the company’s financial growth prospects. Management recently noted that the CAD space is mature and that the replacement cycle will not materially accelerate its growth. We support PTC’s view and believe that migration to the latest version of a design software rarely kick-starts growth of that vendor. This is mainly due to the fact that large customers are last to move and they only hesitate for longer when a company tries to make significant money out of it by raising prices. We believe that the main motivation for transition should come from customers requesting the new software and that financial success will follow if the customers like the new product and then adopt it over time. 2. Restructured PS: Years of restructuring are now yielding results and we believe that this could be a great time for an investor to benefit from the turnaround story. PTC today is a much leaner company and the improvements made in PS will provide an important source of margin improvement for the group over the next three years. The company has spent more than $100m on restructuring over the last three years and is now expected to gradually increase PS margins as lower-value integration services are outsourced to IT partners while the company retains ownership of its high-margin
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consulting business. Margins will be mechanically improved as management expects PS to represent 22% of the overall revenue in 2018, down from 33% in 2013. 3. The Incremental use of Windchill technology: In its revised strategy, PTC devoted an important part of the increasing focus to further exploitation of the PLM market. The company is already successful at the end-point of PLM – SLM – where it is considered to be one of the top vendors in the space. SLM currently generates around 13% of total group revenue and is growing at double rates compared to the CAD and PLM segments. Windchill continues to perform well and we estimate that the platform will benefit from the company’s new IoT relationships. Point #2: the IoT opportunity is real and PTC can be a best play The plan: How many times has a technician tried to repair a broken fridge only to realise that he has to come back in a week’s time as he does not stock that specific part and has to order it directly from the manufacturer? This is only one of the many frustrating service- related scenarios that many of us have experienced before. PTC realised some years ago that there was an opportunity for it in better management of service projects and established its SLM offering. With the emergence of its smart/connected products, it believes it can take SLM to the next level. A recent article in Harvard Business Review projects that by 2020 there will be more than 50 billion connected products around the world (with the market growing at around a 40% CAGR). Over the last few years, PTC has invested heavily (through R&D and the acquisitions of ThingWorx and Axeda) in order to be involved in all aspects of the IoT opportunity. Its ambition is to build a platform that will enable to service products better, operate them more efficiently and ultimately design products that will be accepted in the market from first release, thus reducing the threat of rejection.
PTC’s vision of the IoT space
Source: Company
111 PTC Inc Software & IT Services – Software
PTC’s main acquisitions since FY13 shows that the recent focus has been on IoT
Date completed Target Company Consideration ($m) Comment Developer of solutions for secure connection of physical products and Q4'14 Axeda 166166166 sensors to the cloud Developer of model-based systems and software engineering applications. This Q3'14 Atego 46 acquisition will enhance ALM and PLM solutions. Creator of an award-winning platform to build and run applications designed Q2'14 ThingWorx 112112112 to leverage the IoT Developer of software for the mangement and maintenance of large complex Q4'13 Enigma 10 equipment that is often located in industrial machinery. PTC's long-time services partner, a provider of hosting and technical consulting Q4'13 NetIDEAS 15 services for PLM. NetIDEAS has been PTC's partner for more than a decade. Software provider for management of service contracts, warranties and technical Q1'13 Servigistics 220 information. It is included within company's SLM segment.
Source: Company, Berenberg
Proactive servicing In a perfect world, technicians would stock every possible fridge spare part in their vans, but such an investment would put them out of business before they start. Working capital management is one of the main aspects of a successful servicing organisation. Better inventory planning enables PTC’s customers to perform more tasks and potentially expand their operations to service a wider range of manufacturers. This however is not possible in today’s “don’t-know-until-you-take-it-apart” world.
Smart/Connected products will be autonomous and will be able to interact directly with the users, manufacturers and technicians
Source: Company
To continue our analogy, PTC’s idea is to guarantee that the fridge is fixed before it even stops working. An appliance will have a number of embedded sensors that will be sending data to an IoT platform for analysis (such as ThingWorx). This platform will have analytical capabilities and will be monitoring performance in real-time. Here, PTC is partnering with many big-data analytics vendors, such as Splunk. If a logarithm notices an issue in the fridge’s functionality, it will trigger what PTC calls an “SLM event”. The knowledge base (built upon telemetry of previous data) will diagnose the issue and determine whether it is covered by warranty or not. At this point, the owners would receive a tailored message informing them of a problem and the possible remediation plans. If the owners opt for a repair instead of the replacement option, relevant spare parts would be ordered
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automatically (this triggers the whole supply chain movement) and delivered to the optimal inventory location just in time for a scheduled visit from a technician.
ThingWorx Marketplace The IoT opportunity for PTC is more than just at the application layer or an extension of the SLM process. PTC showed its ambition to participate in all aspects of the IoT with the acquisition of ThingWorx in December 2013. ThingWorx was one of the first – and to date the most established – IoT platforms in the market. The idea is to provide the platform on which vertical-specific partners can build and ultimately monetise their applications.
PTC’s direct go-to-market strategy within IoT is focused on manufacturers, application developers and service organisation within the SLM
Source: Company
Now talking to the CEOs not engineers: The go-to-market strategy for IoT is two-fold. In the vast majority of the cases, PTC sells to the existing CAD and PLM user-base not by utilising existing (mainly direct) sales channels, but by pitching to the new target audience of high-level executives. Companies that have been using Creo for years would not normally involve C-level (ie CEOs, CIOs, COOs) management in their direct negotiations for annual software upgrades or licence extensions. The IoT opportunity gives PTC a brand new product that appeals to high-level management. This acts as a door opener and conversations are now shifting away from design engineers to C-level executives who are making strategic decisions about which platform to chose for their IoT offering. As a separate channel, PTC will be going directly to the market to capture new logos for the business. This approach might turn out to be more costly initially (as the company ramps up its IoT-dedicated sales force), but eventually could result in some high-value cross- selling opportunities for the more mature parts of the business (like PLM and CAD). It is clear that connected products have the potential not only to change the servicing aspect of the market, but also the manufacturers, their supply chain, the distribution channel and even the media and advertisers. We will only fully understand the actual impact of the IoT opportunity of IoT in a few years time, but we believe that the companies that position themselves in that space early enough will reap the benefits of the growing market for decades.
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Point 3: The IoT opportunity is not in the valuation PTC management, like many in the design segment, recently provided its mid-term revenue and EPS targets (see table below). As we argued before, we are extremely cautious every time such a long target is introduced, especially when the company is experiencing changes, like PTC is. Our estimates for 2017 indicate that the company will fall short of these targets. In order to avoid the anchoring bias, we have used our own valuation methodology, which we believe is more appropriate than using the multiple of those long- term ambitions.
PTC is trading at a similar discount to peers as it was when the company was rapidly losing CAD market share; recent acquisitions have not contributed to a re-rating
60 Historic PE ratio (PTC vs Peer group) 55
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Source: Bloomberg, Berenberg Our view: In FY17, the company will be on a path of achieving the lower-end of its FY18 target
FY15-18 target* Berenberg FY15-17* Comment L&SS Revenue 12-15% 10% Assuming industry CAGR for CAD/PLM and ~40% IoT Support Revenue 2-4% 6% Assuming higher proportion of maintenance subscriptions Prof Services Revenue 0-(-3%) -2% In line with the company's strategy to reduce PS Total Revenue 6-10% 6% Gross margin 76-78% 76% Slight margin imrpovement due to lower % of services Operating margin 28-30% 26% c50bp below cons on FY17 due to consitnued investment in IoT Tax rate 18-20% 20% Share out 112m 113 Assuming buybacks continue in line with the capital allocation strategy EPS growth 15% 9% CC estimates would be closer to 11% USD/EUR 1.25 1.08 Assume current FX YEN/USD 115 120 * CAGR when applicable All figures are non-GAAP, assuming current rate of SBCs Source: Company, Berenberg
As with its peer Dassault, we value PTC using a sum-of-the-parts approach which we feel is the correct method as both companies are currently ongoing a slow transition to decrease dependency on their core design software revenues. In both cases, we value the core using DCF and the new revenue using the market multiple of next year’s estimated revenues. In order to reflect Dassault’s stronger market position in CAD, we assigned PTC a higher cost of equity in the DCF (6% versus 5% for Dassault). We also assume that the core of PTC will be growing at a 50% lower rate than the rest of the market (including Dassault). We believe that these assumptions are achievable as 1) Creo adoption has accelerated significantly over the past 24 months, 2) Creo 3.0 introduced functionality which we believe can surprise on the upside and help the to regain some of the lost market share, 3) the Windchill customer base is very sticky, 4) its PS operations have been reorganised, and 5) a high level of investment has been made in the best-of-breed technology for fast growing adjacent markets. Even after accounting for our prudent assumptions, we believe that PTC is currently significantly undervalued. The implied value of the core itself indicates an upside potential (c6%) to the current share price. We believe that the current share price significantly undervalues the IoT opportunity. Our valuation of the core also suggests that the current capitalisation does not assign any value to the segment. Our view is that the present value
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of the IoT opportunity is certainly positive and therefore should be reflected in the stock price. If we take into account the value of the new revenue stream, the upside potential for the stock increases to 17%. Our estimates assume that in 2017, the IoT segment will contribute around 9% to the group’s revenue and around 7% to the FCF. This would imply that at our price target the IoT segment would be valued on around a 5% FCF yield, which we believe is reasonable considering the 40% revenue CAGR and the expected further margin improvement.
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Valuation
Our valuation approach for PTC reflects the changing nature of the business. On one side, there is a stable and fairly predictable core with established products and loyal customers, and on the other there is a fast-growing (but lower-margin) IoT segment. We therefore believe that the sum-of-the-parts method best reflects the valuation of the business. We value the CAD, extended PLM (EPLM) and SLM parts using a DCF model with a 6% discount rate (to reflect the inherently low risk in the revenue profile of the stable business) and a below-industry average growth rate of 2% for the next 10 years. Our assumption is that the terminal value of the FCF after that will be zero. We reflect the company’s net debt position by reducing the value of core part of the business. The new IoT segment is valued by using the multiple of earnings. We estimate that this revenue stream has the potential to grow at 40% over the next few years to reflect the booming market of smart products. To put this into context, PTC paid around 6x revenue for Axeda and around 12x for ThingWorx. At our valuation of $500m, the IoT part of the business would be valued at around 5.5x estimated FY16 revenue. With the shares currently trading at around $36.5 this would imply that the value of IoT is currently negative. We are of a different opinion, and believe that the potential value could exceed $1bn if the company manages to capture its fair share of the platform market. Our price target of €43 indicates c18% upside to the current trading levels.
Valuation summary
Valuation (SOTP) Comment Core: CAD, EPLM and SLM Revenue g 2% Terminal growth 0% EBIT margin 26%-24% In line with historical margin, adj for 4% SBC Tax rate 35% Discount rate 6% Value of Core equity 4,604
High growth IoT segment Revenue 93 EBIT margin 23% Based on the blended target margin of 25% Tax rate 20% NOPAT 17 At our PT of $43 434343 Target Mcap 5,111 Implied value of High Growth 508 Implied earnings multiple of High Growth 30x30x30x Our assumed multiple Current share price 36.5 Number of shares (m) 120 Current Mcap 4,379 Current value of High Growth -224 Indicating that IoT has negative value to the business Current earnings multiple of High Growth n/mn/mn/m At current trading level Source: Company, Berenberg
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Summary DCF of CAD, EPLM and SLM
AAA Est Est Est Est Est Est Est Est Est Est Est USDm FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 TYTYTY Revenues ex IoT 1,255.7 1,296.8 1,352.0 1,252.8 1,237.9 1,337.5 1,377.6 1,418.9 1,461.5 1,490.7 1,520.6 1,551.0 1,582.0 Operating profit* 263.7 298.3 338.0 313.2 321.9 347.7 354.0 360.4 366.8 369.7 372.5 375.3 378.1 EBITDA 302.8 329.7 365.0 338.4 346.0 374.3 383.2 392.4 402.0 408.3 414.9 421.8 429.2 SBC proxy charge 43.9 45.4 47.3 43.8 43.3 46.8 48.2 49.7 51.2 52.2 53.2 54.3 55.4 Tax rate 24.0% 21.8% 19.2% 14.2% 17.0% 19.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% NOPAT 196.7 222.5 256.8 252.7 251.2 265.2 268.0 274.2 280.6 284.9 289.3 294.0 299.0
Non-cash items 39.1 31.5 27.0 25.2 24.1 26.5 29.1 32.0 35.1 38.6 42.3 46.5 51.1
FCF 196.7 222.5 256.8 252.7 251.2 265.2 268.0 274.2 280.6 284.9 289.3 294.0 299.0 Terminal value 4,990.5 NPV of FCF 252.7 237.0 236.1 225.0 217.2 209.8 200.9 192.5 184.6 177.1 2,788.8 % value in each year 5.1% 4.8% 4.8% 4.6% 4.4% 4.3% 4.1% 3.9% 3.8% 3.6% 56.7%
WACC 6.0% NPV 4,922 Net (debt)/cash (318) Market value of core 4,604 Revenue growth (ex IoT) 3.3% 4.3% (7.3%) (1.2%) 8.0% 3.0% 3.0% 3.0% 2.0% 2.0% 2.0% 2.0% - Operating margin (non-GAAP) 23.0% 25.0% 25.0% 26.0% 26.0% 25.7% 25.4% 25.1% 24.8% 24.5% 24.2% 23.9% Operating margin (Berenberg) 19.5% 21.5% 21.5% 22.5% 22.5% 22.2% 21.9% 21.6% 21.3% 21.0% 20.7% 20.4% *assuming running 1% above group margin
Source: Company, Berenberg
117 PTC Inc Software & IT Services – Software
Scenario analysis
Scenario #1: the organic growth rate for core business meets Dassault’s growth rate target of 4% over the next 10 years and the margins in the core remain under the industry average, but stable – this would add $6 to our price target
Valuation (SOTP) Core: CAD, EPLM and SLM Revenue g 3% Terminal growth 0% EBIT margin 26%-24% Tax rate 35% Discount rate 6% Value of Core equity 5,420
High growth IoT segment Revenue 93 EBIT margin 23% Tax rate 20% NOPAT 17 At our PT of $49 494949 Target Mcap 5,927 Implied value of High Growth 507 Implied earnings multiple of High Growth 30x30x30x Source: Company, Berenberg
118 PTC Inc Software & IT Services – Software
Scenario #2: the organic growth is barely positive (+1%) in the core for the next 10 years and the company margins fall by 70bp per year in the core CAD, EPLM and SLM segments – this would still result in an overall value of $37 per share and indicates limited downside potential even in the “worst- case” scenario
Valuation (SOTP) Core: CAD, EPLM and SLM Revenue g 1% Terminal growth 0% EBIT margin 22% Tax rate 35% Discount rate 6% Value of Core equity 3,925
High growth IoT segment Revenue 93 EBIT margin 23% Tax rate 20% NOPAT 17 At our PT of $37 373737 Target Mcap 4,439 Implied value of High Growth 514 Implied earnings multiple of High Growth 30x30x30x Source: Company, Berenberg
119 PTC Inc Software & IT Services – Software
Appendix
PTC’s business segment and product portfolio analysisanalysis PTC’s business can be broken down into four main segments: ● CAD (43% of revenue); ● EPLM (44% of revenue); ● SLM (13% of revenue); ● IoT (1% of revenue).
CAD PTC’s CAD products enable users to sketch and design in 2D or 3D using parametric and direct modelling design approaches. Previously branded Pro/ENGINEER, the company rebranded their flagship product to Creo in 2011. The main part of the Creo suite comprises PTC Creo and PTC Mathcad. PTC Creo: PTC Creo comprises design software that provides capabilities for design flexibility, advanced assembly design, piping, cabling design, advanced surfacing, comprehensive virtual prototyping and other essential design functions. The latest version, Creo 3.0, is unique as it imports the native file data (including hierarchies) from other CAD vendors (such as Solidworks, CATIA, NX or SolidEdge). This is a new and efficient approach to product design as it significantly increases efficiencies in the design process when many EOMs and suppliers are involved. PTC Mathcad: PTC Mathcad is a popular product for solving, analysing and sharing vital engineering calculations. It bridges an engineering notebook with the powerful engineering calculation tools.
EPLM This segment provides solutions mainly for manufacturing companies which need to manage the product lifecycle, from early concept to retirement. These products help to manage product configuration through its life and establish collaboration channels across the entire enterprise. EPLM is used in product development, manufacturing and the supply chain. PTC Windchill: PTC Windchill is a production-oriented PLM suite that offers complete lifecycle information, from design to service. It creates a single repository for all product information (a single source of truth) and all product-related content, such as CAD models, documents, technical illustrations, embedded software (ALM) and specifications for each product. This helps companies streamline enterprise-wide communication and make more informed decisions and ultimately build better products. Windchill’s main competitors are Siemens’ Teamcentre and Dassault’s Enovia, and to some extent, Autodesk’s Vault. SAP and Oracle also compete in this space, but approach it more from the inventory-ERP side and therefore do not handle CAD data or become involved in[pls confirm] the pre-final design process. ALM: PTC has extended the traditional view of PLM by including ALM (application lifecycle management). ALM is built on the premise that even unconnected products (not IoT) are currently using some sort of software while in operation. There is an increasing need to manage software versions and upgrade and fix certain bugs. ALM provides manufacturers with the framework to manage software and consequently increases the reliability of electronic products. PTC Integrity is the principal ALM product suite and enables users to manage system models, software configurations, test plans and defects. It helps engineering teams improve productivity and the quality of the software-rich product, streamlines compliance and ultimately provides better and more complete product design. PTC Creo View: This is a visualisation tool for a wide range of product data formats including 2D and 3D CAD, ECAD and various documents. It provides access to designs and related data without requiring the original authoring tool.
120 PTC Inc Software & IT Services – Software
SLM and IoT SLM provides solutions for manufacturers that improve service efficiency and quality. It improves working capital by more efficient service parts planning and optimisation, scheduling, warranty and contract management. The recent acquisitions of ThingWorx and Axeda fit well into this space as they provide connectivity of devices on one side (Axeda) and the platform to develop applications to gather and analyse the product data (ThingWorx).
121 PTC Inc Software & IT Services – Software
Financials
Profit and loss account Year-end September(USD m) 2013 2014 2015E 2016E 2017E Sales 1,297 1,358 1,309 1,331 1,462 EBITDA 361361361 408 417417417 453 499 Depreciation and amortisation 31 27 25 24 27 EBIT 284284284 331331331 318318318 345 389389389 Financial result -7 -10 -14 -10 -10 EBT 277277277 320320320 304 335335335 379379379 Taxes -60 -61 -43 -54 -68 Net income 217217217 259259259 261261261 282282282 311311311 Source: Company data, Berenberg estimates
Balance sheet Year-end September (USD m) 2013 2014 2015E 2016E 2017E Liquid assets 242 294 0 0 0 Short-term debt 15 25 0 0 0 Long-term debt 243 587 0 0 0 Net debt 000 318318318 295295295 217217217 838383 Intangible assets 1,042 1,349 1,260 1,177 1,093 Property, plant and equipment 65 68 66 66 66 Other non-current assets 251 253 289 289 289 Fixed assets 1,358 1,671 1,615 1,532 1,448 Working capital before deferred income 0 236 222 237 259 Deferred income 0 383 395 421 480 Total working capital 000 ---147-147147147 ---173-173173173 ---185-185185185 ---222-222222222 Other assets/ (liabilities) 514 130 -444 -474 -517 Net assets ------Source: Company data, Berenberg estimates
Cash flow statement USD m 2013 2014 2015E 2016E 2017E Cash flow from operations before changes in w/c 194194194 263263263 260260260 350350350 382382382 Change in working capital 30 41 -60 12 37 Net cashflow from operations 225225225 305 200 362362362 419419419 CapEx -29 -25 -24 -24 -27 Free Cash flow 195195195 279279279 177177177 338338338 392392392 Payments for acquisitions -246 -324 0 0 0 Financial investments - - - - - Increase/decrease in debt position -112 354 -6 0 0 Net share issuance 5 1 0 0 0 Dividends paid 0 0 0 0 0 Others -13 -15 136 240 240 Effects of exchange rate changes on cash -1 -9 -10 0 0 Increase/decrease in liquid assets 272727 401 190190190 362362362 419419419 Source: Company data, Berenberg estimates
122 PTC Inc Software & IT Services – Software
Growth rates yoy (%) 2013 2014 2015E 2016E 2017E Sales 3.1 % 4.8 % -3.6 % 1.7 % 9.8 % EBITDA 23.8 % 13.1 % 2.2 % 8.6 % 10.3 % EBIT 26.3 % 16.4 % -3.8 % 8.5 % 12.8 % Net income 460.9 % 19.3 % 0.8 % 7.9 % 10.5 % EPS reported n.a. 24.8 % 2.7 % 9.6 % 14.4 % EPS recurring 449.1 % 20.6 % 4.5 % 9.8 % 11.6 % Source: Company data, Berenberg estimates
123 AVEVA Group plc Software & IT Services – Software
High-quality business in cyclical malaise
● AVEVA provides design and information management tools for three 8 April 2015 primary sectors: oil and gas, power and marine. 80% of its sales are to the EPC (engineering, procurement and construction) sector, with the remainder to owners/operators. It provides engineering design, BUY information management solutions and CAD/CAM software along with
technology consulting services. The business is split into two divisions: Current price Price target Enterprise Solutions (which includes its AVEVA NET product) and Engineering and Design. GBp 1,492 GBp 1,977 ● With 80% of sales being made to EPC companies, growth in the 02/04/2015 London Close Engineering and Design business is strongly linked to engineering Market cap (GBP m) 991 headcount growth. We estimate that across the cycle, headcount growth is Reuters AVV.L c10-12% pa. Engineering and Design currently represents 88% of revenue Bloomberg AVV LN and all of the profit. Everything 3D (E3D) is the next product evolution which centralises the design and construction process around a central 3D Changes made in this note model. This is expected to create an upgrade cycle over the next five years and has started to increase contract sizes and key EPC customers are Rating: Buy (no change) signing multi-year contracts despite the current collapse in the oil price. Price target: GBp 1,977 (no change) ● Enterprise Solutions, which consists of the flagship AVEVA NET product, Estimates changes represents 12% of revenues. However, it had a negative profit contribution 2015E 2016E 2017E old ∆ % old ∆ % old ∆ % in FY14 and in H115. AVEVA NET is an asset lifecycle software that aims to Sales 211 - 225 - 252 - provide a holistic view of any asset by linking the various sources of data. EBIT 54 - 61 - 73 - The market opportunity exists for brownfield sites where sources of design EPS 74.19 - 85.68 - 99.80 - Source: Berenberg estimates and maintenance information are held in different repositories. Alternatively, it can be used in new builds to ensure effective monitoring of Share data the project, as well as a smooth handover process at the end of it. Shares outstanding (m) 64
● The current collapse of the oil price is likely to lead to some project push- Enterprise value (GBP m) 854 outs which could see engineering headcount fall. We believe that much of Daily trading volume 155,089 that impact is in the share price, although there is still downside risk to estimates. AVEVA remains a high-quality business in a strategically Key data important sector with high barriers to entry. It remains an acquisition Price/book value 4.9 target. Net gearing - ● Valuation: Our valuation is based on 18x FY 2017E earnings (ex-cash), CAGR sales 2014-2017 2.0% which assumes a recovery starting in FY17. CAGR EPS 2014-2017 3.9%
Y/E 31.03., GBP m 2013 2014 2015E 2016E 2017E Sales 220 237 211 225 252 EBITDA 71 82 62 70 81 EBIT 62 69 54 61 73 EBIT (Berenberg) 71 73 62 69 80 Free Cash flow 38 48 37 51 60 Free Cash flow (Berenberg) 37 46 37 50 60 Net profit 53 60 49 56 65 Y/E net debt (net cash) -190 -118 -137 -168 -208 EPS (adjusted) 77.19 88.90 74.19 85.68 99.80 Interactive model click here to explore EPS (Berenberg) 75.39 88.61 73.81 84.52 98.65 CPS 57.70 73.51 57.02 77.72 92.32 DPS 22.32 178.03 26.84 29.53 32.48 Gross margin 92.7% 92.7% 92.3% 92.7% 92.7% EBITDA margin 32.4% 34.5% 29.4% 30.9% 32.1% EBIT margin 28.3% 28.9% 25.5% 27.4% 28.9% Dividend yield 1.5% 11.8% 1.8% 1.9% 2.1% EV/sales 4.0 3.7 4.1 3.9 3.5 EV/EBITDA 12.3 10.7 14.1 12.6 10.8 P/E 20.1 17.1 20.5 17.9 15.4 Free Cash flow yield 4.6% 5.2% 4.3% 6.1% 7.6% * there may be a delay for the new estimates to be updated on the interactive model Source: Company data, Berenberg
Daud Khan Gal Munda Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2638 +44 20 3465 2746 +44 20 3207 7835 [email protected] [email protected] [email protected]
124 AVEVA Group plc Software & IT Services – Software
BUY Investment thesis
● AVEVA is a CAD software company focused on the oil and gas 8 April 2015 industry, power and marine, which together make up 90% of its sales.
Current price Price target ● Its industry has high barriers to entry, with three major players, and its end-markets enjoy long-term structural growth dynamics. Market cap (GBP m) 991 GBp 1,492 GBp 1,977
02/04/2015 London Close EV ( GBP m) 854 ● Oil and gas represents 45% of the revenue mix, and the sector is currently seeing capex cuts (linked to improving investment Trading volume 155,089 returns), pockets of weakness linked to specific factors (Brazil and Free float 99.0% Russia) and weakne ss in the oil price, putting both existing projects
Non-institutional shareholders Share performance and planned projects at risk. ● We see the current malaise as cyclical, not structural, as the long- - High 52 weeks GBp 2,350 term dynamics of oil demand remain robust. Power continues to Low 52 weeks GBp 1,255
grow at a steady pace, and we expect it to g row as part of the Business description Performance relative to revenue mix. Marine remains soft, but, again, this is cyclical, not
structural, in our view. AVEVA provides design and information SXXP FTSE 100 management tools for three primary sectors: 1mth -2.6% 1.2% ● We still see AVEVA as a take-out target, given its exposure to the oil and gas; power; and marine. 80% of its 3mth -7.2% 9.1% strategically-important oil sector. sales are to the EPC sector with the remainder to owners/operators. 12mth -41.3% -27.9% ● Our valuation is PE multiples-based, assuming a recovery in FY17.
Profit and loss summary Cash flow summary GBPm 2013 2014 2015E 2016E 2017E GBPm 2013 2014 2015E 2016E 2017E Revenues 220 237 211 225 252 EBITDA 71 82 62 70 81 EBITDA 71 82 62 70 81 Capex 5 5 4 4 5 EBITA 69 79 59 67 78 Dividends to subsidiaries - - - - - EBIT 62 69 54 61 73 Other - - - - - Associates contribution - - - - - FCF to the firm 38 48 37 51 60 Net interest 1 0 1 1 1 Net interest 2 1 1 1 1 Tax 18 18 14 15 18 FCFE 38 48 37 51 60 Minorities - - - - - Acquisitions, disposals 12 0 0 0 0 Net income adj. 53 60 49 56 65 Other investment CF -17 97 4 4 5 EPS reported 66.82 77.99 63.60 73.07 87.19 Dividends paid -15 -116 -18 -19 -21 EPS adjusted 77.19 88.90 74.19 85.68 99.80 Buybacks, issuance - - - - - Year end shares 68 65 64 64 64 Change in net debt -11 72 -19 -32 -39 Average shares 68 65 64 64 64 Net debt -190 -118 -137 -168 -208 DPS 22.32 178.03 26.84 29.53 32.48 FCF per share 0.56 0.74 0.58 0.80 0.95
Growth and margins Key ratios 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Revenue growth 12.4% 7.8% -11.2% 6.6% 12.1% Net debt / equity - - - - - EBITDA growth 12.2% 14.9% -24.2% 12.0% 16.4% Net debt / EBITDA -2.7 -1.4 -2.2 -2.4 -2.6 EBIT growth 10.4% 9.8% -21.5% 14.3% 18.5% Avg cost of debt - - - - - EPS adj growth 21.2% 15.2% -16.5% 15.5% 16.5% Tax rate 25.6% 26.1% 25.1% 24.9% 24.4% FCF growth -18.0% 27.4% -22.4% 36.3% 18.8% Interest cover - - - - - EBITDA margin 32.4% 34.5% 29.4% 30.9% 32.1% Payout ratio 28.9% 200.3% 36.2% 34.5% 32.5% EBIT margin 28.3% 28.9% 25.5% 27.4% 28.9% ROCE 17.6% 27.3% 19.9% 20.0% 20.4% Net income margin 23.9% 25.4% 23.2% 24.9% 25.8% Capex / sales 2.0% 2.0% 2.0% 2.0% 2.0% FCF margin 17.1% 20.3% 17.7% 22.6% 24.0% Capex / depreciation 173.5% 164.1% 144.4% 153.2% 171.8%
Valuation metrics Key risks to our investment thesis 2013 2014 2015E 2016E 2017E ● An elongated oil downturn; continued oil price weakness will affect P / adjusted EPS 20.1 17.1 20.5 17.9 15.4 longer-term decision-making. P / book value 3.9 5.4 4.9 4.3 3.7 The E3D product cycle does not lead to the expected uplift in ASPs. FCF yield 4.7% 5.5% 4.4% 6.2% 7.7% ● Dividend yield 1.5% 11.8% 1.8% 1.9% 2.1% ● Brazil remains weak for longer than expected and AVEVA is unable to EV / sales 4.0 3.7 4.1 3.9 3.5 gain market share upstream. EV / EBITDA 12.3 10.7 14.1 12.6 10.8 EV / EBIT 14.0 12.7 16.2 14.2 12.0 ● AVEVA remains exposed to China and continued power (nuclear) EV / FCF 21.2 18.2 22.9 16.2 13.0 segment growth. EV / cap. employed 3.2 4.7 4.2 3.6 2.9
Daud Khan Gal Munda Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2638 +44 20 3465 2746 +44 20 3207 7835 [email protected] [email protected] [email protected]
125 AVEVA Group plc Software & IT Services – Software
Financials
Profit and loss account Year-end March(GBP m) 2013 2014 2015E 2016E 2017E Sales 220220220 237237237 211211211 225225225 252252252 Cost of sales 16 17 16 16 18 Gross profit 204 220220220 195195195 208 234234234 EBITDA 717171 828282 626262 707070 818181 Depreciation and amortisation 7 8 8 7 7 EBIT 626262 696969 545454 616161 737373 Financial result 1 0 1 1 1 Income on ordinary activities before taxes 646464 696969 545454 626262 747474 Adjustments (Intangible amort., SBC) 7 9 7 8 8 EBT 717171 787878 626262 707070 828282 Taxes 18 18 14 15 18 Net income 535353 606060 494949 565656 656565 Source: Company data, Berenberg estimates
Balance sheet Year-end March (GBP m) 2013 2014 2015E 2016E 2017E Liquid assets 190 118 137 168 208 Long-term debt - - - - - Net debt ---190-190190190 ---118-118118118 ---137-137137137 ---168-168168168 ---208-208 Intangible assets 66 60 - - - Property, plant and equipment 9 8 - - - Other non-current assets 7 6 - - - Fixed assets 828282 747474 717171 686868 666666 Working capital before deferred income 40 44 46 48 53 Deferred income 34 34 37 39 42 Total working capital 747474 787878 828282 878787 969696 Other assets/ (liabilities) -27 -17 -16 -16 -16 Net assets 252252252 185185185 201 230230230 269269269 Source: Company data, Berenberg estimates
Cash flow statement GBP m 2013 2014 2015E 2016E 2017E Cash flow from operations before changes in w/c 707070 757575 585858 707070 818181 Change in working capital -10 -5 1 0 2 Cash flow from operating activities 606060 707070 595959 707070 828282 Tax paid -20 -18 -18 -15 -18 Net interest paid 2 1 1 1 1 Net cash flow from operations 414141 525252 414141 555555 646464 Capex -5 -5 -4 -4 -5 Free cash flow 383838 484848 373737 515151 606060 Payments for acquisitions -12 0 - - - Financial investments -6 96 - - - Net share issuance - - - - - Dividends paid -15 -116 -18 -19 -21 Effects of exchange rate changes on cash - - - - - Increase/decrease in liquid assets 555 272727 202020 323232 393939 Source: Company data, Berenberg estimates
126 Nemetschek AG Software & IT Services – Software
Potential for further US growth
● 2014 was a great year and the shares have reflected this: Nemetschek 8 April 2015 shares have been the best-performing assets over the last 12 months, not only in design software, but broadly within our software and IT services coverage. Many investors are now wondering whether this is the time to HOLD take some profits off the table or whether the stock can re-rate further. We
believe that the answer depends on penetration of the US market. We Current price Price target believe that the key drivers for the company’s recent performance were: 1) the acquisition of Bluebeam Software; 2) the operating margin beat for EUR 118.60 EUR 114.00 FY14; and 3) closing the discount gap to Autodesk’s current valuation. 02/04/2015 XETRA Close ● The Bluebeam deal shows that the company is serious about the US: The Market cap (EUR m) 1,142 Bluebeam acquisition not only boosts the company’s overall revenue (at Reuters NEKG.DE 40%+ FY14 top-line growth), it also acts as a potential door opener for Bloomberg NEM GY Nemetschek to the top 75% of US construction companies which are current Bluebeam customers. Changes made in this note ● Nemetschek will not push towards rentals: We understand that Rating: Hold (no change)
Nemetschek’s move towards a rental model will be much more gradual Price target: EUR 114.00 (71.50) than that of Autodesk. This is important as some of Autodesk’s perpetual- Estimates changes licence-only users may never subscribe to the rental-based model; we only 2015E 2016E 2017E assume a 60% adoption rate for Autodesk’s rental model among non- old ∆ % old ∆ % old ∆ % subscribers. Sales 230 16.9 246 20.8 - - EBIT 49 4.9 53 8.9 - - ● Bull case: If Nemetschek is successful in penetrating the US market further EPS 3.44 4.3 3.75 7.0 - - Source: Berenberg estimates but gains just 10% of the market that we assume Autodesk might lose when changing its business model, our calculations suggest that the company Share data could gain up to €1.5 in additional EPS by 2017. This would add c€30 to our Shares outstanding (m) 10 current price target and make the bull case for Nemetschek stock very Enterprise value (EUR m) 1,118 realistic. However, we believe that we first need to see the signs of Daily trading volume 6,189 potential market share gains before we incorporate such a scenario into our valuation. Key data ● Valuation: We value the company on 20x estimated 2017 Berenberg- Price/book value 7.2 defined earnings; we exclude PPA costs from the reported figure. To reflect Net gearing 14.6% the new estimates (and incorporating the Bluebeam acquisition), we are CAGR sales 2014-2017 14.6% raising our price target to €114 per share. At 20x earnings, Nemetschek CAGR EPS 2014-2017 12.2% would be trading in line with the current design sector peer group. ● With this note, we transfer coverage to Gal Munda.
Y/E 31.12., EUR m 2013 2014 2015E 2016E 2017E Sales 186 218 268 297 329 EBITDA 46 57 66 74 84 EBIT 36 47 51 58 67 EBIT (Berenberg) 40 50 61 68 77 Net profit 25 33 36 40 46 Y/E net debt (net cash) -46 6 -23 -53 -87 EPS (reported) 2.49 3.27 3.58 4.01 4.62 EPS (Berenberg) 2.98 3.68 4.62 5.05 5.66 CPS 3.62 4.22 4.57 5.20 5.91 DPS 1.15 1.30 1.30 1.87 2.09 Gross margin 95.3% 96.1% 96.0% 96.0% 96.0% EBITDA margin 24.9% 26.0% 24.6% 24.9% 25.6% EBIT margin 19.2% 21.3% 19.1% 19.5% 20.4% Dividend yield 1.0% 1.1% 1.1% 1.6% 1.8% EV/sales 6.2 5.3 4.3 3.9 3.5 EV/EBITDA 24.8 20.2 17.4 15.5 13.6 EV/EBIT 32.2 24.7 22.4 19.8 17.1 P/E 39.8 32.3 25.7 23.5 20.9 Source: Company data, Berenberg
Gal Munda Daud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
127 Nemetschek AG Software & IT Services – Software
HOLD Investment thesis
● The company is one of the global leaders in the AEC CAD market 8 April 2015 with a well diversified revenue base and a dominant position in local markets such as Germany and Japan.
Current price Price target ● The pace of future growth will mainly depend on the company’s success in capturing market share in the fast-growing build and Market cap (EUR m) 1,142 EUR 118.60 EUR 114.00 manage segments. 02/04/2015 XETRA Close EV ( EUR m) 1,118 Following the appointment of Mr Patrick Heider as CF O, the new Trading volume 6,189 ● management structure now looks to be complete. Free float 46.4% ● The industry has been experiencing favourable legislative changes Non-institutional shareholders Share performance – from 2016 onwards, European-tendered projects will have to utilise BIM building methods. Nemetschek family: 53.6% High 52 weeks EUR 131.30
Low 52 weeks EUR 58.00
Business description Performance relative to
Software for construction SXXP SDAX 1mth -4.3% -5.0% 3mth 18.3% 21.7% 12mth 80.2% 80.7%
Profit and loss summary Cash flow summary EURm 2013 2014 2015E 2016E 2017E EURm 2013 2014 2015E 2016E 2017E Revenues 186 218 268 297 329 Net income 36 47 51 57 67 EBITDA 46 57 66 74 84 Depreciation -4,268 -6,370 -4,789 -6,030 -7,140 EBITA 4,304 6,416 4,840 6,088 7,207 Working capital changes 0 -2 0 2 2 EBIT 36 47 51 58 67 Other non-cash items - - - - - Associates contribution 88 -42 41 41 41 Operating cash flow - - - - - Net interest 1 0 -1 -2 -3 Capex 5 4 8 9 10 Tax -11 -13 -15 -17 -20 FCFE 35 41 44 50 57 Minorities - - - - - Acquisitions, disposals -16,229 -75,984 0 0 0 Net income adj. 25 33 36 40 46 Other investment CF - - - - - EPS reported 2.49 3.27 3.58 4.01 4.62 Dividends paid -11 -13 -13 -18 -20 EPS adjusted 2.49 3.27 3.58 4.01 4.62 Buybacks, issuance - - - - - Year end shares 10 10 10 10 10 Change in net debt -5 52 -29 -30 -34 Average shares 10 10 10 10 10 Net debt -46 6 -23 -53 -87 DPS 1.15 1.30 1.30 1.87 2.09 FCF per share 3.62 4.22 4.57 5.20 5.91
Growth and margins Key ratios 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Revenue growth 6.2% 17.5% 22.9% 10.5% 10.9% Net debt / equity 39.7% -4.4% 14.6% 29.2% 41.9% EBITDA growth 13.5% 22.8% 16.2% 12.1% 13.8% Net debt / EBITDA - 0.1 - - - EBIT growth 22.5% 30.4% 10.1% 13.2% 15.7% Avg cost of debt - - - - - EPS adj growth 21.2% 23.5% 25.7% 9.3% 12.1% Tax rate 30.2% 28.1% 29.0% 30.0% 30.5% FCF growth 15.2% 16.5% 8.4% 13.6% 13.7% Interest cover - - 62.2 34.3 28.2 EBITDA margin 24.9% 26.0% 24.6% 24.9% 25.6% Payout ratio 46.1% 39.7% 36.3% 46.5% 45.2% EBIT margin 19.2% 21.3% 19.1% 19.5% 20.4% ROCE 21.2% 24.7% 23.1% 22.5% 22.6% Net income margin 13.6% 15.3% 13.4% 13.6% 14.1% Capex / sales 2.9% 1.6% 3.0% 3.0% 3.0% FCF margin 18.8% 18.6% 16.4% 16.9% 17.3% Capex / depreciation -0.1% -0.1% -0.2% -0.1% -0.1%
Valuation metrics Key risks to our investment thesis 2013 2014 2015E 2016E 2017E ● A significant downturn in the global construction industry. P / adjusted EPS 39.8 32.3 25.7 23.5 20.9 Escalation of political risks in key areas (we note that Nemetschek’s P / book value 9.8 8.5 7.2 6.3 5.5 ● exposure to the Russian market is not material, at less than 1% of total FCF yield 3.1% 3.6% 3.9% 4.4% 5.0% revenues). Dividend yield 1.0% 1.1% 1.1% 1.6% 1.8% EV / sales 6.2 5.3 4.3 3.9 3.5 ● A slower-than-expected uptake of new construction standards, such EV / EBITDA 24.8 20.2 17.4 15.5 13.6 as 5D BIM. EV / EBIT 32.2 24.7 22.4 19.8 17.1 EV / FCF 31.4 28.2 25.4 21.8 18.5 ● Piracy issues when moving to new (emerging) markets, particularly EV / cap. employed 9.4 8.5 7.1 6.0 5.1 China.
Gal Munda Dud Khan Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2746 +44 20 3465 2638 +44 20 3207 7835 [email protected] [email protected] [email protected]
128 Nemetschek AG Software & IT Services – Software
The stock is up by 100%: what next?
Nemetschek shares have been the best performing assets over the last 12 months, not only in design software, but broadly within our software and IT services coverage. The shares are up 99.5% over the last year. Many investors will be asking if this is the time to take some profits off the table. To answer the question, one needs to understand the three underlying drivers of the shares over that period and consider whether any of these are likely to outperform over the next year or so. 1) The Bluebeam acquisition: The significant share price movement really started last October when the company announced the acquisition of US-based construction software vendor Bluebeam. The move was seen by many as an ideal acquisition due to the following factors. First, it has accelerated Nemetschek’s presence in the US. Second, the potential for cross-selling other Nemetschek solutions to Bluebeam’s customer base is very great. Third, the company itself is profitable and has been growing the top line at above a 40% CAGR over the last two years. Fourth, at the EBITDA level, the acquisition was slightly dilutive to overall group margins (19% versus the company average of 26%); however, management expects that even though Bluebeam’s sustainable growth might be closer to 20-30% in the mid-term, its ability to optimise operations could result in it achieving group-level operating margins by the end of 2017. Following the Bluebeam acquisition, the company now generates almost two-thirds of its total revenue outside its domestic markets and the plan is to increase this further. 2) (Over) delivering on the guidance: The company started the year with guided revenue growth of 11-14% and 23-25% operating margins. Growth was stronger mainly due to the inorganic contribution of Bluebeam, while the EBITDA margin outperformed due to delayed opex that was initially planned for FY14 but which was actually invested in Q115. We believe that the re-rating on the back of the FY14 beat will not be sustainable as the margin will slowly edge down to the targeted range of 23-25%. The opex increase is understandable and to be expected for a high-growth company like Nemetschek, and we would be more worried if the management tried to both increase the growth trajectory and margins at the same time. 3) A re-rating to reduce the discount to the peer group: The fact that Autodesk is currently trading on 40+ times 2016E EPS only tells part of the story however, as the business transition to a rental-based model is expected to materially change the business and profitability over the next three years. Any direct multiple comparison is therefore not appropriate. In 2014, Nemetschek clearly took significant steps towards realising its long-term strategy of internationalisation of its operations and the company has shown it can do this while remaining competitive and growing the core business. We believe that its success is partly due to the unique decentralised brand-management structure, which has however at times been inefficient]. In the case of a growing company like Nemetschek, the structure is proving to be extremely successful as it enables top management to focus its efforts on M&A while the brands themselves continue to grow. However, we believe that investors have priced in a lot of the recent improvement, and we see the current share price as a fair reflection of our base-case scenario. We also note that the stock could potentially re-rate further if the market sees any sign of Nemetschek taking market share away from Autodesk.
129 Nemetschek AG Software & IT Services – Software
Berenberg versus consensus versus blue-sky scenario EBITDA Berenberg versus consensus versus blue-sky scenario revenues margin
400,000 35.0%
350,000 30.0% 300,000 25.0% 250,000 20.0% 200,000 15.0% 150,000 10.0% 100,000
50,000 5.0%
- 0.0% 2015e 2016e 2017e 2015e 2016e 2017e Revenue Consensus revenue Bull-case revenue EBITDA mgn Consensus EBITDA mgn Bull-case EBITDA mgn
Source: Company, Berenberg Source: Company, Berenberg
BaseBase----casecase scenario Our base-case scenario assumes that the company will be growing at a CAGR of around 8.5% over the next three years. We believe this is achievable as Bluebeam (c10% of revenue) will be growing at 20-30% and new 5D BIM product Nevaris is about to be introduced. In its core business, Nemetschek could continue growing at high single digits without taking significant market share away from Autodesk. In our bull-case scenario below, we assume that Nemetschek can take up to 4% US market share.
Potential bull case Our bull-case scenario is structured around the same assumptions as the base-case, but with an important caveat. We ask what the potential value could be of taking some market share away from Autodesk. This scenario includes some estimates about market size which are based on our own data points. Note that changing those assumptions (eg market size) by 10% only affect the end-result by 6.5%. We have presented a scenario where Nemetschek takes 5% of the US AEC CAD market over the next three years. This could happen, as even Autodesk has recognised the threat that some of those customers that used to only buy perpetual licences could churn away. Our calculation assumes that any incremental market share would be highly accretive to the bottom line due to the fact that the business (with Bluebeam) has now a very strong list of contacts in the 75% of top US construction companies. We assume the cost of that incremental revenue will be 20%. Our estimates show that the 5% market share gain would translate into around €30 of upside to our price target. If this was the case, there is an argument that even after its recent performance, Nemetschek could still be a Buy.
Bull-case scenario where NEM takes 5% of the US AEC CAD market
Berenberg comment US % of revenue in Group's revenue before Bluebeam 11% Estimated NEM's US mkt share 5% Estimated US revenue (ex Bluebeam) 25 Estimated US TAM (€m) 500 Additional revenue from taking 1% market share (€m) 5 Additional revenue from taking 5% share in the US (€m) 25 Revenue comes at high margin as S&M Incremental EBITDA (€m) 20 network already there and products developed so not much incremental OPEX Incremental NOPAT (€m) 14.2 required to sell EPS increment (€) 1.48 Potential PT upside 29.5 At industry multiple of 20x earnings Source: Company, Berenberg
130 Nemetschek AG Software & IT Services – Software
Valuation
We value the company on 20x estimated 2017 Berenberg-defined earnings; we exclude PPA costs from the reported figure. To reflect the new estimates (and incorporating the Bluebeam acquisition), we are raising our price target to €114 per share. At 20x earnings, Nemetschek would be trading in line with the current design sector peer group.
131 Nemetschek AG Software & IT Services – Software
Financials
Profit and loss account Year-end December(EUR m) 2013 2014 2015E 2016E 2017E Sales 186186186 218218218 268268268 297297297 329329329 Cost of sales 9 9 11 12 13 Gross profit 177177177 210210210 258258258 285285285 316316316 Net Operating Expenses -131 -153 -192 -211 -232 EBITDA 464646 575757 666666 747474 848484 Depreciation and Amortisation 11 10 15 16 17 EBIT 363636 474747 515151 585858 676767 Financial result 1 0 -1 -2 -3 EBT 36 47 50 56 64 Taxes -11 -13 -15 -17 -20 Net income 252525 333333 363636 404040 464646 Source: Company data, Berenberg estimates
Balance sheet Year-end December (EUR m) 2013 2014 2015E 2016E 2017E Intangible assets 31 69 59 49 39 Goodwill 60 111 111 111 111 Property, plant and equipment 5 11 14 17 20 Financial assets 0 1 1 1 1 Other 2 1 1 1 1 Fixed assets 999999 193193193 187187187 179179179 172172172 Inventories 1 1 1 1 1 Accounts receivable 22 29 36 39 44 Other assets and short-term financial assets 8.407 11.81 11.81 11.81 11.81 Accounts receivable and other assets 30 41 47 51 56 Liquid assets 49 57 86 116 150 Current assets 808080 989898 134134134 167167167 206 TOTAL 179179179 292292292 321321321 347 378378378 Shareholders' equity 117117117 135135135 158158158 181181181 207 Pensions provisions 1 2 2 2 2 Accrued taxes 4 15 15 15 15 Other provisions and accrued liabilities 1 54 55 55 55 LongLong----termterm liabilities 666 717171 727272 727272 727272 Accounts payable 5 6 7 7 8 Other liabilities 25 46 46 46 46 Deferred income 23 32 39 43 49 Current liabilities 545454 848484 919191 979797 104104104 Minority Interest 2 2 2 2 2 TOTAL 179179179 292292292 324324324 351351351 384384384 Source: Company data, Berenberg estimates
132 Nemetschek AG Software & IT Services – Software
Cash flow statement EUR m 2013 2014 2015E 2016E 2017E Net profit/loss before tax 363636 474747 515151 575757 676767 Amortisation, depreciation and impairment of intangibles and PPE 11 10 15 16 17 Other 1 1 1 1 0 Change in working capital 000 ---2-222 000 222 222 Interest received 0 0 0 0 1 Income taxes paid -8 -12 -15 -17 -20 Cash flow from operating activities 404040 444444 525252 595959 676767 CAPEX -5 -4 -8 -9 -10 Payments for acquisitions -16 -76 0 0 0 Decrease (Increase) in Loans Granted 0 0 0 0 0 Income from asset disposals 0 0 0 0 0 Cash flow from investing activities ---22-222222 ---80-808080 ---8-888 ---9-999 ---10-101010 Capital measures 0 59 0 0 0 Dividends paid -11 -13 -13 -18 -20 Others -2 -4 -2 -3 -3 Cash flow from financing activities ---14-141414 434343 ---15-151515 ---20-202020 ---23-232323 Increase/decrease in liquid assets 555 888 292929 303030 343434 Effects of exchange rate changes on cash -1 1 0 0 0 Liquid assets at start of period 44 49 86 145 208 Liquid assets at end of period 494949 575757 115115115 174174174 242242242 Source: Company data, Berenberg estimates
133 RIB Software AG Software & IT Services – Software
Perfectly positioned to continue growing
● Strong FY14 results: 2014 was probably the most successful year for RIB 8 April 2015 Software (RIB) since the company became public. Management delivered on its ambitious revenue guidance while the game-changing German railway (Deutsche Bahn – DB) deal was signed at the end of last year. BUY
● Aiming to grow above 20% again: We believe that the company will be Current price Price target able to continue its c20% top-line CAGR over the next few years. We expect
EBITDA margin to fluctuate around 32-38% as the company initially EUR 13.33 EUR 16.00 invests significantly in the sales force before starting to reap the benefits in 02/04/2015 XETRA Close FY17.
● The new xTWO product to be released later this year: Organic cloud Market cap (EUR m) 529 Reuters RSTAG.DE revenue growth will be mainly generated by the introduction of the new Bloomberg RSTA GY generation xTWO platform. We understand that xTWO is building on top of the ICEPRICE acquisition but will be more than an e-commerce Changes made in this note platform. It will be the full version of iTWO product delivered in the cloud, intended specifically for use on construction sites. This will significantly Rating: Buy (no change)
expand the breadth of usage of RIB’s software. Price target: EUR 16.00 (14.50) ● M&A is very likely this year: Management is looking to deploy some of its Estimates changes c€140m of net cash and we believe that an acquisition is likely to 2015E 2016E 2017E old ∆ % old ∆ % old ∆ % materialise in the next few quarters. It could be larger in size than previous Sales 91 -4.1 112 -5.0 - - RIB deals, but the strategy remains the same – to acquire a company in a EBIT 28 -1.3 38 0.1 - - new market where iTWO is currently underpenetrated. EPS 0.42 -3.7 0.60 -2.5 - - Source: Berenberg estimates ● The shares are undervalued: RIB is currently trading at a 15% discount to Share data the peer group while growing its top line at a significantly higher pace. We believe that the discount to the sector is unjustified and would expect the Shares outstanding (m) 41 stock to re-rate after the introduction of the FY15 guidance. We raise our Enterprise value (EUR m) 373 price target to €16 per share and retain our Buy recommendation. Daily trading volume 18,814
● Valuation: We value RIB on a 2017 EV/NOPAT multiple to account for the Key data large net cash position of the business. We believe that sustainable mid- term top-line growth is in the high double digits, with EBITDA margins Price/book value 2.1 Net gearing -63.5% expected to roam around the low to high 30% mark. At our new price target CAGR sales 2014-2017 20.4% of €16, RIB shares would be trading on 10.6x EV/EBITDA and 20.8x PE CAGR EPS 2014-2017 17.9% ratio. This compares with 12.9x EV/EBITDA and 22x P/E for the sector.
Y/E 31.12., EUR m 2013 2014 2015E 2016E 2017E Sales 57 70 87 106 122 EBITDA 19 35 33 43 50 EBIT 13 29 28 38 44 EBIT (Berenberg) 10 15 24 35 43 Net profit 9 21 20 27 31 Y/E net debt (net cash) -71 -133 -156 -181 -211 EPS (reported) 0.24 0.52 0.49 0.66 0.77 EPS (Berenberg) 0.20 0.45 0.40 0.59 0.74 CPS 0.39 0.50 0.78 0.80 0.92 DPS 0.14 0.04 0.00 0.00 0.00 Gross margin 62.0% 66.8% 68.7% 70.5% 72.2% EBITDA margin 32.8% 50.1% 37.4% 40.5% 40.5% EBIT margin 23.6% 41.3% 32.1% 35.9% 36.2% Dividend yield 1.1% 0.3% 0.0% 0.0% 0.0% EV/sales 6.9 5.7 4.5 3.7 3.2 EV/EBITDA 21.2 11.3 12.1 9.2 8.0 EV/EBIT 29.5 13.7 14.1 10.4 9.0 P/E 55.5 25.4 27.3 20.1 17.3 Source: Company data, Berenberg
Daud Khan Gal Munda Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2638 +44 20 3465 2746 +44 20 3207 7835 [email protected] [email protected] [email protected]
134 RIB Software AG Software & IT Services – Software
BUY Investment thesis
● Unlike some other segments which have high level of IT equipment 8 April 2015 integration within their working processes (eg the automotive industry), the construction industry has historically relied on
Current price Price target custom-made legacy solutions (often spreadsheet-based) that are not fit for purpose. As the industry seeks operational efficiencie s, RIB is looking to standardise the processes and increase the ability Market cap (EUR m) 529 EUR 13.33 EUR 16.0 0 of architects and engineers to collaborate, and monitor the cost 02/04/2015 XETRA Close EV ( EUR m) 373 and the time spent on a project. RIB’s iTWO solution bridges the Trading volume 18,814 gap between company’s CAD and ERP software. Free float 38.0%
● Similarly to ERP systems, 5D BIM implementation takes time and Non-institutional shareholders Share performance requires buy-in from the top management of a construction company. This results in low attrition rates and increases barriers - High 52 weeks EUR 14.00 for new players to enter the market.
Low 52 weeks EUR 8.95 ● With significant wins in 2014, RIB is we ll positioned to capture Business description Performance relative to share of the global 5D BIM market as the technology gradually becomes the industry standard. Software for the construction industry SXXP MSCI Euro 1mth 0.7% 0.8% ● We value RIB share on EV/NOPAT basis where we adjust NOPAT 3mth -2.2% -2.7% for capitalised development costs (we treat them as operating 12mth 1.6% -0.4% expenses).
Profit and loss summary Cash flow summary EURm 2013 2014 2015E 2016E 2017E EURm 2013 2014 2015E 2016E 2017E Revenues 57 70 87 106 122 Net income 13 29 28 38 44 EBITDA 19 35 33 43 50 Depreciation 0 1 1 1 1 EBITA 18 34 32 42 49 Working capital changes 0 -2 6 0 0 EBIT 13 29 28 38 44 Other non-cash items 0 -8 0 0 0 Associates contribution - - - - - Operating cash flow - - - - - Net interest 0 0 0 0 0 Capex 8 8 15 15 15 Tax -4 -8 -8 -11 -13 FCFE 15 20 31 32 36 Minorities - - - - - Acquisitions, disposals -1 -6 0 0 0 Net income adj. 9 21 20 27 31 Other investment CF 0 - - - - EPS reported 0.24 0.52 0.49 0.66 0.77 Dividends paid -5 -2 0 0 0 EPS adjusted 0.20 0.45 0.40 0.59 0.74 Buybacks, issuance - - - - - Year end shares 38 40 41 41 41 Change in net debt 0 -1 0 0 0 Average shares 38 40 41 41 41 Net debt -71 -133 -156 -181 -211 DPS 0.14 0.04 0.00 0.00 0.00 FCF per share 0.41 0.50 0.76 0.78 0.89
Growth and margins Key ratios 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Revenue growth 45.4% 22.8% 24.7% 21.6% 15.2% Net debt / equity -47.9% -58.7% -63.5% -66.1% -69.2% EBITDA growth 16.7% 87.5% -7.0% 31.8% 15.2% Net debt / EBITDA - - - - - EBIT growth 13.3% 115.5% -3.1% 35.8% 16.1% Avg cost of debt - - - - - EPS adj growth 17.9% 127.6% -10.9% 45.6% 26.4% Tax rate -30.3% -27.9% -28.9% -29.0% -29.0% FCF growth 13.7% 28.6% 55.5% 2.1% 15.0% Interest cover - - - - - EBITDA margin 32.8% 50.1% 37.4% 40.5% 40.5% Payout ratio 58.8% 8.3% 0.0% 0.0% 0.0% EBIT margin 23.6% 41.3% 32.1% 35.9% 36.2% ROCE 6.4% 9.2% 8.1% 9.9% 10.3% Net income margin 15.9% 29.7% 22.7% 25.4% 25.6% Capex / sales 14.8% 11.7% 17.2% 14.1% 12.3% FCF margin 27.2% 28.5% 35.5% 29.8% 29.8% Capex / depreciation 2026.2% 1356.5% 2278.3% 2521.1% 2789.8%
Valuation metrics Key risks to our investment thesis 2013 2014 2015E 2016E 2017E ● Positive risk: The construction industry could increase the average P / adjusted EPS 55.5 25.4 27.3 20.1 17.3 IT spend to move in line with other industries. This would P / book value 3.6 2.3 2.1 1.9 1.7 considerably expand RIB’s total addressable market. FCF yield 2.9% 3.8% 5.9% 6.0% 6.9% Positive risk: Any large insurance contract could generate material Dividend yield 1.1% 0.3% 0.0% 0.0% 0.0% ● adjacent revenue and would provide further upside to our estimates. EV / sales 6.9 5.7 4.5 3.7 3.2 EV / EBITDA 21.2 11.3 12.1 9.2 8.0 ● Negative risk: A significant slowdown in macroeconomic activity EV / EBIT 29.5 13.7 14.1 10.4 9.0 could hurt construction companies and reduce their ability to invest EV / FCF 29.5 19.9 12.0 11.0 8.7 in new technologies. EV / cap. employed 3.1 1.7 1.5 1.3 1.0
● Negative risk: Potential bottlenecks which could delay pr oject implementations.
Daud Khan Gal Munda Jean Beaubois Analyst Analyst Specialist Sales +44 20 3465 2638 +44 20 3465 2746 +44 20 3207 7835 [email protected] [email protected] [email protected]
135 RIB Software AG Software & IT Services – Software
There is growth post-DB after all
2014 was probably the most successful year for RIB since the company went public in 2011. Management delivered on its ambitious revenue guidance while the game-changing German railway (Deutsche Bahn – DB) deal was signed at the end of last year. The stock reacted positively at first but then many started to worry what life for RIB would be like after the DB deal. The concerns were mainly about the company’s ability to keep growing at the pace set in 2014, when it grew licence revenues by 42%. Investors were worried about the state of the pipeline, and the fact that H114 pipeline presentation had shown that total potential deals worth around €80m and dominated by one large deal that was then in the late stages of negotiations – the DB deal. The fear was that the revenue could decline if the new opportunities did not materialise. Management indicated on its FY14 results conference call that the current pipeline is stronger than it was before the DB deal (it is thought to be around $100m). This is key as it shows that the DB deal had the effect of being an enabler for many conversations in the infrastructure space. Going into the FY14 annual report, investors feared that the FY15 guidance would disappoint. However, it did not and the current guidance of €85m-95m of revenue for FY15 is at the mid-point exactly of where consensus was before the results. Even though management has changed its communication style significantly over the last few quarters (by talking about the market trends in general rather than specific deals that might come in the next year), the granularity about guidance was precise enough to reassure the market that the target for this year is achievable. The chart below represents our assumptions behind the FY15 estimates.
FY15 licence and cloud revenue growth will outpace maintenance revenue, which is a feature of a fast-growing software company
100
90
80
70
60
50 87.30 40 70.00 30
20
10
0 FY14 Revenue Key account licence Mass market licence Cloud Maintenance Services FY15 Revenue estimate
Source: Company, Berenberg
We believe that the main part of the growth will come as a result of an increase in software revenue (in key account and mass market licences, along with the cloud). The cloud is expected to grow significantly in H1 due to consolidation of last year’s Byggeweb acquisition into the group. We believe that organic cloud growth will be around €2.5m for the year, which is slightly more than 25% growth. In terms of licence growth, management explained that the 25 targeted projects in FY15 will come at an average contract value of around €650k. The licence part of that revenue stream will be fully captured within the key account reporting line.
136 RIB Software AG Software & IT Services – Software
xTWO to hit the market in 2015/16 Organic cloud revenue growth will be mainly generated by the introduction of the new generation xTWO platform. xTWO will be a fully web-based e-commerce software that will soon be linked to the iTWO CX (RIB’s e-collaboration exchange solution) and iTWO TX (its e-tendering platform). We understand that xTWO will be more than just an e-commerce platform. It will be the full iTWO in the cloud, intended specifically for use on construction sites. This is key as iTWO is currently mainly used in the offices, as a back-office solution for monitoring costs. With the use of xTWO, the engineers will be able to access 5D data on their iPads on construction sites. Not only does it have the potential to improve the efficiency of the construction process (by eliminating the need for paper plans and print- outs), it will also enable RIB to upsell it to the existing customer base.
DB ecosystem to contribute to mass market We expect DB suppliers and subcontractors to start using the iTWO platform (or even xTWO) by the end of 2015, with the main benefit being visible in FY16. This ecosystem is made up of more than 1,000 people and could alter the revenue structure of FY16 revenues so that they are weighted more towards the iTWO mass market and cloud product revenues. We estimate that the opportunity could be in the region of €6m-10m in licence billings. However, it is not known what percentage of total revenue will end up being rented and what proportion will come through perpetual licences. On the assumption that 50% will be SaaS and 50% mass market perpetual licences, the incremental revenue impact for FY16 is expected to be in the region of €3m-4m.
The first insuranceinsurance----basedbased pilot projects to start soon The company is in advanced negotiations to sign the first two of the proposed five pilot projects by the end of Q215. This will not have a material impact on FY15 revenue, but could act as a proof of concept of what could become a material revenue stream in the future. The table below shows the potential of the insurance opportunity assuming the policy is adopted at a total estimated volume of €7bn of infrastructure projects per year. This is reasonable as DB alone has more than €5bn on construction capex per annum.
Berenberg assessment of potential short-term contribution of insurance products and the estimated revenue contribution if a large entity starts to insure its project
Short-term potential Number of projects 5 Average project size ($m) 75 Assuming target pilot projects will be $50m-$100m in size Average premium as % of the project size 1.50% We are estimating 1-2% premium RIB share 20% Berenberg estimate of RIB share between 10-30% of the premium RIB revenue opportunity from premium ($m) 1.125 RIB opportunity from iTWO sale ($m) 0.5 Assuming these 'proof of concept' licences are only $100k per company Total short-term insurance opportunity ($m) 1.625
"Blue-sky" scenario Annual project size ($m) 7,000 Infrastructure capex of a large potential client % of projects insured 80% Berenberg estimate Total insurable projects per annum ($m) 5,600 Assuming a major customer insures 80% of their annual portfolio Average premium as % of the project size 1.50% We are estimating 1-2% premium RIB share 20% Berenberg estimate of RIB share between 10-30% of the premium RIB revenue opportunity from premium ($m) 16.8 Source: Company, Berenberg
137 RIB Software AG Software & IT Services – Software
Valuation
We value RIB on a 2017 EV/NOPAT multiple to account for the large net cash position of the business. We believe that sustainable mid-term to-line growth is in the high double digits, with EBITDA margins expected to roam around the low to high 30% level. As licence revenue can be very lumpy, we believe that using the 2017 multiple and discounting it back one year (using 9% cost of capital) is appropriate. We treat capitalised R&D costs as an expense in order to make the EBITDA balance comparable between all companies in our extensive design software coverage. At our new price target of €16, RIB shares would be trading on a 10.6x EV/EBITDA and a 20.8x PE ratio. This compares with a 12.9x EV/EBITDA and 22x P/E for the sector.
Valuation multiple sensitivity to stock price
Price EV/NOPAT* P/EP/EP/E EV/EBITDA* EV/EBITDA 14.5 15.6 18.8 9.3 8.2 15 16.4 19.5 9.7 8.6 15.5 17.1 20.1 10.2 9.0 161616 17.8 20.8 10.6 9.49.49.4 16.5 18.6 21.4 11.0 9.8 17 19.3 22.1 11.5 10.2 17.5 20.0 22.7 11.9 10.6 Source: Berenberg, Company reports * Adjusted for R&D capitalisation
138 RIB Software AG Software & IT Services – Software
Financials
Profit and loss account Year-end December(EUR m) 2013 2014 2015E 2016E 2017E Sales 575757 707070 878787 106106106 122122122 Cost of sales 22 23 27 31 34 Gross profit 353535 474747 606060 757575 888888 Sales and marketing -12 -15 -18 -21 -28 General and administration -5 -6 -7 -8 -10 Research and development -5 -7 -8 -8 -6 Net Operating Expenses ---23-232323 ---28-282828 ---32-323232 ---37-373737 ---45-454545 Other operating income 3 11 1 1 1 Other operating expenses -2 -1 -1 -1 -1 EBITDA 191919 353535 333333 434343 505050 EBIT 131313 292929 282828 383838 444444 Financial result 0 0 0 0 0 EBT 13 29 28 38 44 Taxes -4 -8 -8 -11 -13 Net income 999 212121 202020 272727 313131 Source: Company data, Berenberg estimates
Balance sheet Year-end December (EUR m) 2013 2014 2015E 2016E 2017E Intangible assets 71 98 101 104 105 Property, plant and equipment 11 13 12 11 11 Financial assets 0 0 0 0 0 Fixed assets 838383 111111111 114114114 117117117 117117117 Accounts receivable 10 14 19 23 27 Accounts receivable and other assets 13 14 19 24 27 Liquid assets 82 138 161 186 216 Current assets 959595 152152152 181181181 209 243243243 TOTAL 178178178 263263263 295295295 326326326 360360360 Shareholders' equity 149149149 226226226 246246246 273273273 305 Pensions provisions 3 4 4 4 4 Accrued taxes 8 12 12 12 12 Other provisions and accrued liabilities 11 2 2 2 2 LongLong----termterm liabilities 222222 171717 171717 171717 171717 Accounts payable 1 2 1 2 2 Other liabilities 8 16 16 16 16 Deferred income 4 5 17 20 23 Current liabilities 131313 222222 343434 383838 414141 TOTAL 178178178 263263263 295295295 326326326 360360360 Source: Company data, Berenberg estimates
139 RIB Software AG Software & IT Services – Software
Cash flow statement EUR m 2013 2014 2015E 2016E 2017E Net profit/loss before taxtaxtax 131313 292929 282828 383838 444444 Depreciation of fixed assets 0 1 1 1 1 Amortisation of intangible assets 5 6 4 4 5 Other 0 -8 0 0 0 Change in accounts receivable 1 -2 -5 -4 -4 Change in accounts payable -1 -1 12 4 3 Change in other working capital positions 0 1 0 0 0 Change in working capital 000 ---2-222 666 000 000 Cash generated from operations 191919 262626 393939 434343 494949 Interest paid 0 0 0 0 0 Interest received 1 0 0 0 0 Income taxes paid -3 -5 -8 -11 -13 Cash flow from operating activities 161616 212121 313131 323232 363636 CAPEX -8 -8 -15 -15 -15 Payments for acquisitions -1 -6 0 0 0 Financial investments 34 4 0 0 0 Income from asset disposals 0 0 0 0 0 Cash flow from investing activities 252525 ---11-111111 ---15-151515 ---15-151515 ---15-151515 Capital measures 0 0 0 0 0 Repayment of financial assets 0 -2 0 0 0 Dividends paid -5 -2 0 0 0 Others 0 -1 0 0 0 Cash flow from financing activities ---5-555 ---5-555 000 000 000 Increase/decrease in liquid assets 363636 555 161616 171717 212121 Effects of exchange rate changes on cash -1 6 0 0 0 Liquid assets at end of period 787878 138138138 161161161 185185185 216216216 Source: Company data, Berenberg estimates
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Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General investmentinve stmentstment----relatedrelated disclosures” and the “Legal disclaimer” at the end of this document. For analyst certification and remarks regardinregardingg foreignforeign investors and countrycountry----specificspecific disclosures, please refer to the respectivrespectivee paragraph at the end of this document.
Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz ––– WpHG)
Company Disclosures Ansys, Inc no disclosures Autodesk, Inc no disclosures Dassault Systèms SA no disclosures PTC Inc no disclosures AVEVA Group plc no disclosures Nemetschek AG no disclosures RIB Software AG 1, 3
(1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead Manager or Co- Lead Manager over the previous 12 months of a public offering of this company. (2) The Bank acts as Designated Sponsor for this company. (3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. (4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. (5) The Bank holds a trading position in shares of this company.
Historical price target and rating changes for Ansys, Inc in the last 12 months (full coverage)
Date Price target --- USD Rating Initiation of coverage 08 April 15 88.00 Hold 08 April 15
Historical price target and rating changes for Autodesk, Inc in the last 12 months (full coverage)
Date Price target --- USD Rating Initiation of coverage 08 April 15 75.00 Buy 08 April 15
Historical price target and rating changes for DassaultDassault Systèms SA in the last 12 montmonthshs (full coverage)coverage)
Date Price target --- EUR Rating Initiation of coverage 08 April 15 49.00 Sell 08 April 15
Historical price target and rating changes for PTC Inc in the last 12 months (full coverage)
Date Price target --- USD Rating Initiation of coverage 08 April 15 43.00 Buy 08 April 15
Historical price target and rating changes for AVEVA Group plc in the last 12 months (full coverage)
Date Price target --- GBp Rating Initiation of coverage 21 November 14 1977.00 Buy 13 March 12
Historical price target and rating changes for Nemetschek AG in the last 12 months (full coverage)
Date Price target --- EUR Rating Initiation of coverage 07 August 14 71.50 Hold 12 September 12 08 April 15 114.00 Hold
Historical price target and rating changes for RIB Software AG in the last 12 months (full coverage)
Date Price target --- EUR Rating Initiation of coverage 04 August 14 14.50 Buy 16 March 11 08 April 15 16.00 Buy
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Berenberg Equity Research ratings distribution and in proportion to investment banking services, as of 1 April 2015
Buy 45.07 % 60.00 % Sell 15.86 % 0.00 % Hold 39.07 % 40.00 %
Valuation basis/rating key The recommendations for companies analysed by Berenberg’s Equity Research department are made on an absolute basis for which the following three-step rating key is applicable: Buy: Sustainable upside potential of more than 15% to the current share price within 12 months; Sell: Sustainable downside potential of more than 15% to the current share price within 12 months; Hold: Upside/downside potential regarding the current share price limited; no immediate catalyst visible. NB: During periods of high market, sector, or stock volatility, or in special situations, the recommendation system criteria may be breached temporarily.
Competent supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Straße 108, 53117 Bonn and Marie-Curie-Str. 24-28, 60439 Frankfurt am Main, Germany.
General investmentinvestment----relatedrelated disclosures Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note. Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by the Bank are divided into two groups: those under “full coverage” (regular updates provided); and those under “screening coverage” (updates provided as and when required at irregular intervals). The functional job title of the person/s responsible for the recommendations contained in this report is “Equity Research Analyst” unless otherwise stated on the cover. The following internet link provides further remarks on our financial analyses: http://www.berenberg.de/research.html?&L=1&no_cache=1
Legal disclaimer This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”). This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document. This document is not a solicitation or an offer to buy or sell the mentioned stock. The document may include certain descriptions, statements, estimates, and conclusions underlining potential market and company development. These reflect assumptions, which may turn out to be incorrect. The Bank and/or its employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the use of this document or any part of its content. The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. The Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services.
142 Software & IT Services
Analyst certification I, Gal Munda, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.
I, Daud Khan, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.
Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.
United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.
United States of America This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617 292 8200) if you require additional information.
ThirdThird----partyparty research disclosures
Company Disclosures Ansys, Inc no disclosures Autodesk, Inc no disclosures Dassault Systèms SA no disclosures PTC Inc no disclosures AVEVA Group plc no disclosures Nemetschek AG no disclosures RIB Software AG no disclosures
(1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month.* (2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject company.* (3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. (4) Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months.* (5) There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows or has reason to know at the time of publication of this research report.
* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.
Copyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent.
© May 2013 Joh. Berenberg, Gossler & Co. KG
143 Contacts – Investment Banking www.berenberg.com e-mail: [email protected] / e-mail US: [email protected]
EQUITY RESEARCH Internet www.berenberg.com E-mail: [email protected] RESEARCH AEROSPACE & DEFENCE CHEMICALS HOUSEHOLD & PERSONAL CARE OIL & GAS Andrew Gollan +44 20 3207 7891 John Klein +44 20 3207 7930 Ana Caludi Muldoon +44 20 3207 7841 Asad Farid +44 20 3207 7932 Tom O'Donnell +44 20 3465 2668 Evgenia Molotova +44 20 3465 2664 Bassel Choughari +44 20 3465 2675 Jaideep Pandya +44 20 3207 7890 Jaideep Pandya +44 20 3207 7890 James Targett +44 20 3207 7873 AUTOMOTIVES REAL ESTATE Adam Hull +44 20 3465 2749 CONSTRUCTION INSURANCE Tina Kladnik +44 20 3465 2716 Paul Kratz +44 20 3465 2678 Lush Mahendrarajah +44 20 3207 7896 Peter Eliot +44 20 3207 7880 Kai Klose +44 20 3207 7888 Chris Moore +44 20 3465 2737 Matthew Preston +44 20 3207 7913 BANKS Robert Muir +44 20 3207 7860 Sami Taipalus +44 20 3207 7866 TECHNOLOGY Nick Anderson +44 20 3207 7838 Michael Watts +44 20 3207 7928 Adnaan Ahmad +44 20 3207 7851 Adam Barrass +44 20 3207 7923 LUXURY GOODS Rebecca Alvey +44 20 3207 7910 James Chappell +44 20 3207 7844 DIVERSIFIED FINANCIALS Bassel Choughari +44 20 3465 2675 Gergios Kertsos +44 20 3465 2715 Andrew Lowe +44 20 3465 2743 Pras Jeyanandhan +44 20 3207 7899 Zuzanna Pusz +44 20 3207 7812 Daud Khan +44 20 3465 2638 Eoin Mullany +44 20 3207 7854 Gal Munda +44 20 3465 2746 Eleni Papoula +44 20 3465 2741 FOOD MANUFACTURING MEDIA Tammy Qiu +44 20 3465 2673 Fintan Ryan +44 20 3465 2748 Robert Berg +44 20 3465 2680 BEVERAGES James Targett +44 20 3207 7873 Laura Janssens +44 20 3465 2639 TELECOMMUNICATIONS Javier Gonzalez Lastra +44 20 3465 2719 Jessica Pok +44 20 3207 7907 Wassil El Hebil +44 20 3207 7862 Adam Mizrahi +44 20 3465 2653 FOOD RETAIL Sarah Simon +44 20 3207 7830 Usman Ghazi +44 20 3207 7824 Estelle Weingrod +44 20 3207 7931 Siyi He +44 20 3465 2697 BUSINESS SERVICES, LEISURE & TRANSPORT MID CAP GENERAL Paul Marsch +44 20 3207 7857 Najet El Kassir +44 20 3207 7836 GENERAL RETAIL Robert Chantry +44 20 3207 7861 Barry Zeitoune +44 20 3207 7859 Stuart Gordon +44 20 3207 7858 Michelle Wilson +44 20 3465 2663 Gunnar Cohrs +44 20 3207 7894 Simon Mezzanotte +44 20 3207 7917 Sam England +44 20 3465 2687 TOBACCO Yousuf Mohamed +44 20 3465 2672 HEALTHCARE Benjamin May +44 20 3465 2667 Erik Bloomquist +44 20 3207 7870 Matthew O'Keeffe +44 20 3207 7895 Scott Bardo +44 20 3207 7869 Virginia Nordback +44 20 3465 2693 Josh Puddle +44 20 3207 7881 Alistair Campbell +44 20 3207 7876 Anna Patrice +44 20 3207 7863 UTILITIES Graham Doyle +44 20 3465 2634 Simona Sarli +44 20 3207 7834 Andrew Fisher +44 20 3207 7937 CAPITAL GOODS Klara Fernandes +44 20 3465 2718 Stanislaus von Thurn Mehul Mahatma +44 20 3465 2698 Alex Deane +44 20 3465 2730 Tom Jones +44 20 3207 7877 und Taxis +44 20 3465 2631 Lawson Steele +44 20 3207 7887 Rui Dias +44 20 3207 7823 Louise Pearson +44 20 3465 2747 Stephan Klepp +44 20 3207 7819 Laura Sutcliffe +44 20 3465 2669 ECONOMICS Sebastian Kuenne +44 20 3207 7856 Holger Schmieding +44 20 3207 7889 Kai Mueller +44 20 3465 2681 Christian Schulz +44 20 3207 7878 Horace Tam +44 20 3465 2726 Robert Wood +44 20 3207 7822
EQUITY SALES E-mail: [email protected]
SPECIALIST SALES SALES (cont.) SALES (cont.) ELECTRONIC TRADING BANKS & DIVERSIFIED FINANCIALS LONDON ZURICH Matthias Führer +49 40 350 60 597 Iro Papadopoulou +44 20 3207 7924 John von Berenberg- Andrea Ferrari +41 44 283 2020 Julian Winter +49 40 350 60 463 CONSUMER Consbruch +44 20 3207 7805 Stephan Hofer +41 44 283 2029 Rupert Trotter +44 20 3207 7815 Matthew Chawner +44 20 3207 7847 Carsten Kinder +41 44 283 2024 SOVEREIGN WEALTH FUNDS HEALTHCARE Fabian De Smet +44 20 3207 7810 Gianni Lavigna +41 44 283 2038 Max von Doetinchem +44 20 3207 7826 Frazer Hall +44 20 3207 7875 Toby Flaux +44 20 3465 2745 Jamie Nettleton +41 44 283 2026 INDUSTRIALS Karl Hancock +44 20 3207 7803 Benjamin Stillfried +41 44 283 2033 CRM Chris Armstrong +44 20 3207 7809 Sean Heath +44 20 3465 2742 Edwina Lucas +44 20 3207 7908 INSURANCE David Hogg +44 20 3465 2628 SALES TRADING Ellen Parker +44 20 3465 2684 Trevor Moss +44 20 3207 7893 James Matthews +44 20 3207 7807 HAMBURG Greg Swallow +44 20 3207 7833 MEDIA & TELECOMMUNICATIONS David Mortlock +44 20 3207 7850 Sebastian Grünberg +49 40 350 60 763 Julia Thannheiser +44 20 3465 2676 Richard Payman +44 20 3207 7825 Alexander Heinz +49 40 350 60 359 INVESTOR ACCESS MATERIALS George Smibert +44 20 3207 7911 Marc Hosthausen +49 40 350 60 761 Jennie Jiricny +44 20 3207 7886 Jina Zachrisson +44 20 3207 7879 Anita Surana +44 20 3207 7855 Gregor Labahn +49 40 350 60 571 TECHNOLOGY Paul Walker +44 20 3465 2632 Patrick Schepelmann +49 40 350 60 559 EVENTS Jean Beaubois +44 20 3207 7835 Lars Schwartau +49 40 350 60 450 Charlotte Kilby +44 20 3207 7832 Marvin Schweden +49 40 350 60 576 Natalie Meech +44 20 3207 7831 SALES PARIS Tim Storm +49 40 350 60 415 Charlotte Reeves +44 20 3465 2671 BENELUX Alex Chevassus +33 1 5844 9512 Philipp Wiechmann +49 40 350 60 346 Sarah Weyman +44 20 3207 7801 Miel Bakker +44 20 3207 7808 Dalila Farigoule +33 1 5844 9510 Hannah Whitehead +44 20 3207 7922 Alexander Wace +44 20 3465 2670 Clémence La Clavière- LONDON Peyraud +33 1 5844 9521 Mike Berry +44 20 3465 2755 FRANKFURT Stewart Cook +44 20 3465 2752 Michael Brauburger +49 69 91 30 90 741 SCANDINAVIA Chris McKeand +44 20 3207 7938 Nina Buechs +49 69 91 30 90 735 Marco Weiss +49 40 350 60 719 Simon Messman +44 20 3465 2754 André Grosskurth +49 69 91 30 90 734 Paul Somers +44 20 3465 2753 Joerg Wenzel +49 69 91 30 90 743
US SALES E-mail: [email protected] BERENBERG CAPITAL MARKETS LLC Colin Andrade +1 646 445 7214 Zubin Hubner +1 646 445 5572 Member FINRA & SIPC Burr Clark +1 617 292 8282 Jessica London +1 646 445 7218 CRM Julie Doherty +1 617 292 8228 Emily Mouret +1 415 802 2525 Laura Cooper +1 646 445 7201 Scott Duxbury +1 646 445 5573 Peter Nichols +1 646 445 7204 Kelleigh Faldi +1 617 292 8288 Kieran O'Sullivan +1 617 292 8292 INVESTOR ACCESS Shawna Giust +1 646 445 7216 Jonathan Saxon +1 646 445 7202 Olivia Lee +1 646 445 7212 Tristan Hedley +1 646 445 5566 Bob Spillane +1 646 445 5574
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