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Dassault Systemes Plunges on Shortfall

The French company, the world leader in 3D software, didn't meet expectations, but blamed a weak dollar and a former partnership with IBM

Shares in pioneering French software company Dassault Systèmes (DASTY) tumbled as much as 14% in Paris trading on Feb. 13, to €32.50 ($47.45)—their biggest decline in five years—after the company reported higher revenues and profits for 2007, but fell short of analyst expectations. Investors were especially worried by a weak fourth quarter and decline in profit margins. Dassault Systèmes shares ended the day down 3.7%, at €36.40 ($53.14).

The world leader in 3D design and engineering software, Dassault Systèmes posted revenues of $541 million in the quarter ended Dec. 31, 2007, up 5.1% from the same period a year earlier, on a non-GAAP basis. (Non-GAAP, or generally accepted accounting principles, exclude acquisition and stock-option costs and do not meet U.S. accounting practices.) Fourth-quarter GAAP revenues totaled $529.4 million, a year-on-year increase of 4%. For the year, revenues grew 8%, to $1.86 billion.

The company said its top line would have climbed 12% in constant currency, but was hurt by the strong euro and weak dollar. Net profit for the quarter rose 10%, to $137.4 million, and climbed 9% for the year, to $346 million.

Concern over Global Slowdown

In research notes, Citibank (C) analysts Gerardus Vos and Hoi Chuen Lam in London called the results "light," and Credit Suisse (CS) analyst James Clark pointed out fourth-quarter revenues were about $10 million short of the bank's forecast of $551.1 million. He also stated the "currency headwind" would likely affect Dassault's financials through the first half of 2008.

In another note, Dresdner Kleinwort (AZ) London analyst Adam Shepherd called Dassault's quarterly software sales of $460.5 million—an increase of 9% year-on-year, or 16% in constant currency—"robust," but said the company would "increasingly struggle to offset slowing growth in aerospace and a tough automotive market." Concern over a possible global economic slowdown also weighed on the shares.

An offshoot of French aerospace company Avions Marcel Dassault (AVMD.PA), Dassault Systèmes has been a premier developer of applications for aeronautical and automotive design since the 1980s, scoring clients such as Airbus, Boeing (BA), BMW (BMWG.DE), Volvo (VOLVA.ST), and Toyota Motor (TM).

Old IBM Deal Depresses Revenue

Its newest software, known as Product Lifecycle Management, or PLM, allows businesses to simulate and manage products from initial design through to support and reengineering. Dassault has recently begun attracting clients from the high-tech, apparel, and consumer goods industries, such as LG Electronics, Under Armour (UA), and Gucci Group. Architect Frank Gehry even uses the company's software to design his buildings (, 12/20/06).

The company said complications with former business partner IBM (IBM) were to blame for a $5.8 million shortfall in service revenue from consulting and tech support. Service revenue amounted to $79.7 million, a 13% drop, year-on-year. "IBM spoils the party, as expected," was the title of the Credit Suisse note. Last year, Dassault assumed control of sales to small and midsize businesses from IBM. Under the old agreement, IBM would provide distributors with Dassault software to resell, and Dassault would bill IBM for technical support.

To resist the economic slump in the West, Chief Executive Bernard Charlès said Dassault would continue to diversify geographically, especially in China, India, Russia, and Eastern Europe. Sales in Asia grew 22% last quarter, compared with 8% in Europe and 10% in the U.S., which comprises 31% of Dassault revenue.

Charlès also said the company made a "colossal investment" in PLM 2.0, a new application that he expects will "revolutionize" e-commerce within the next two years by giving online shoppers a 3D experience comparable to that of a brick-and-mortar store.

Fishbein is a reporter in BusinessWeek's Paris bureau .

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