Siemens released numbers for FYQ3 2022, which show both good growth and interesting trends – particularly in regard to the impact of the transition to Software-as-a-Service models.
Dassault Systèmes is not the only player in the PLM arena that can report good figures for the past quarter. The same applies to one of Dassault’s main competitors, Siemens Digital Industries, which contains Siemens PLM software and automation divisions.
When Siemens AG—of which Siemens Digital Industries is a part—released the numbers for its fiscal third quarter 2022 (FYQ3) there were both good growth figures and trends being presented by the group’s CEO, Roland Busch. In the latter case, the phenomenon I call the “SaaS paradox” plays an interesting role; more on this will come later in the article.
What he had to say about Siemens Digital Industries is certainly of interest to the PLM community, since it includes both the PLM software and automation movements. These divisions show revenues of 4.9 billion euros—corresponding to $5 billion—which was an increase of 18 percent, up 12 percent in constant currencies. This result is slightly above the company’s own guideline of 10 percent for the quarter.
Moreover, software revenues within the Siemens Digital Industries area landed at 1.2 billion euros ($1.22 billion), also a good increase—plus 14 percent, in constant currencies up 3 percent. Among other things, this was due to ongoing wins from organizations such as Hyundai-Kia Motors Corporation and Lockheed Martin Aerospace “choosing to replace tools they have used for decades with solutions from the Siemens Xcelerator Portfolio software,” commented the software division’s CEO, Tony Hemmelgarn.
Other interesting observations are that revenues rose in all operations, with the strongest growth contributions from the motion control and factory automation operations. Furthermore, continued strong growth of the Electronic Design Automation (EDA) area on the PLM side—up 20 percent—was a trend that shows the strength of electronics software solutions for Siemens. It is also clear that the revenue increases for the entire software area, plus 14 percent, continue to rest heavily on the growth in electronic design automation.
However, while the profit margin was 18.3 percent in Siemens Digital Industries, profitability was still held back by lower revenue in the PLM business and higher expenses related to cloud-based activities. This is where the SaaS paradox comes into play.
In today’s article my focus will revolve around the impact of the transition when parts of a business move to a Software-as-a-Service model.
How Increased Sales Can Result in Lower Revenues
The SaaS model business approach has some paradoxical effects that affect the development of the revenue curve. In fact, it may result in initially lower reported revenue despite increased sales—“the SaaS paradox.” How is that?
The SaaS model means that revenues are not reported as before, with perpetual software licenses and maintenance fees. Instead of an initially large license income when a sale is made, revenues are spread out over time related to how far the subscription or rental agreement extends. The apparent effect on accounting is that reported revenues appear to be lower even though sales, as in the Siemens Q3 case, have actually increased considerably.
So, for example, software revenues decreased during the quarter. This was mainly due to lower PLM revenues and higher costs related to cloud-based development efforts, including the transition to Software-as-a-Service.
Here’s how this effect is described in Siemens’ press material:
“Profitability was held back primarily by … lower revenue in the product lifecycle management business and higher expenses related to cloud-based activities, including the impact of the transition of parts of the business to software-as-a-service.”
When the SaaS Paradox Hit PTC
In itself, this is not a strange development. The transition from the previous “perpetual licenses” model, including maintenance fees, gives software developers such as Siemens Digital Industries Software and, for example, competitor PTC, new more evenly spread fees over time—something that greatly changes the flow of the revenue curves. From previously being front-heavy—due to a large initial payment for the licenses from buyers—with rental fees, the distribution has been made more even over time.
For example, in principle with a 3-year SaaS agreement, you may only record the first year’s value for the current fiscal year in your accounting, while the other two years’ revenues are distributed over the next two years. It also means that during the transition phase from the old perpetual model to the new rental model (SaaS) you get a revenue dip in the first few years, normally even if sales have increased—what I call the “SaaS paradox.”
Heavy Investments in SaaS and Cloud Apps
In this stage Siemens, with its cloud as a technical distribution platform, has invested heavily in the SaaS model.
This means that the order value is at a record high, but a large amount of the already-sold values will not be booked and reported until later.
A similar example is when Siemens’ PLM competitor PTC suffered from this SaaS paradox during a 3-year period from 2016-2019 during the transition from perpetual licensing to the SaaS model. But since then, the revenue curve has clearly pointed upwards and has reached higher levels than ever before. This is a development that PTC’s Jim Heppelmann declared to the market early on, but which was questioned at first.
In Siemens Digital Industries Software’s FY3Q case, both SaaS and the cloud appear to have done very well.
PLM software revenue this quarter reported that the transition to cloud apps is progressing well.
There are also good reasons to see the same development that PTC experienced also occurring at Siemens. The company’s reporting from Q3 and earlier shows that its customers are moving to cloud apps—and seeing early success in SMBs after the initial success in the larger accounts that Siemens’ direct sales team was able to access during the early stages of the offering’s launch.
“At [Siemens Digital Industries], orders increased by a total of 32 percent on a comparable basis across all businesses and regions to €6.5 billion due to ongoing growth momentum in key market segments,” the FYQ3 report states.
The Value of the New Open Business Platform Xcelerator
Speaking of the importance of software, in a comment by Siemens AG’s CEO Roland Busch, he pointed out the value of the new open Xcelerator business platform as a strong reason for the faith in the future he believes characterizes the company. The portfolio and the thinking revolve around seamless and cloud-based SaaS solutions, with technical capabilities connected across the board. The PLM division under Tony Hemmelgarn started this concept a few years ago, and it has today become the template for Siemens’ entire gigantic business structure. That says something about the strength of the thinking.
“We made significant progress as a focused technology company in the third quarter with the launch of our open digital business platform, Siemens Xcelerator, which accelerated the digital transformation of our customers,” Busch said, noting in particular the acquisition of Brightly Software, which he characterized as, “an outstanding piece of software-as-a-service-actor in the construction field, which perfectly complements our leading position in smart buildings.”
Electronic Design Automation Software Up 20 Percent
Finally, during the results presentation, CEO Roland Bush shared a few more details:
- Discrete Automation revenue increased 16 percent, driven by Motion Control.
- Process Automation revenue increased by 8 percent.
- EDA software revenue increased by 20 percent.
- The SaaS transition is on track.
- Supplyframe integration and performance are ahead of schedule.
Among these points, the EDA revenue stands out. Why are the EDA solutions doing so well for Siemens?
First of all, the area of electronics is something that has been seeing strong growth for the last few decades as it has become a greater share of design work. This is similar to the developments seen in the software area.
Siemens has been an early bird when it comes to following up on these trends, specifically in the case of EDA, which is demonstrated by the fact that Mentor Graphics, which Siemens bought back in 2016, has been developed into Siemens EDA within the Xcelerator PLM portfolio.
Generally speaking, electronic design automation is the use of computer programs to design, simulate, verify and manufacture electronic systems such as integrated circuits (IC), IC packaging and printed circuit boards (PCB). EDA software (also known as ECAD software) has become essential for the development, testing and production of electronic systems due to the rise of very large scale integration (VLSI) systems and the ever-increasing complexity of ICs and PCBs (which can include millions of transistors, diodes and other individual components).
Otherwise, notable is that Siemens’ withdrawal from Russia after the country’s war of aggression against its neighbor, Ukraine, has been costly. Siemens took 572 million euros in fees during its second fiscal quarter, and during Q3 another 558 million euros in fees have been added related to write-offs of leases, adjustments to the value of loans and other factors.
