Dassault Shares Dip on New Forecast

Opinion is divided over whether the shortfall posted by design software leader Dassault Systèmes should be cause for concern

Shares in French software developer Dassault Systèmes (DASTY) dropped as much as 7.22% Oct. 30 on news the company lowered its full-year earnings and sales forecasts after third-quarter financial results fell short of expectations.

Dassault, the world leader in 3D design and engineering software, posted revenues of $430.8 million in the quarter ended Sept. 30, an 8.3% increase year-on-year. The company said revenues would have climbed 13% in constant dollars, but it was hit by the rising euro. Net profit dropped 24%, to $44.8 million. Dassault now predicts 2007 revenues of up to $1.85 billion, down from earlier estimates of up to $1.87 billion.

End Users Are in a Slump

Investment banks Dresdner Kleinwort (AZ) and Société Générale (SOGN.PA) reacted quite differently to the news. In an Oct. 30 report, Société Générale called the outlook for 2008 "reassuringly upbeat," while a Dresdner report the same day stated that "caution is warranted."

"In some of Dassault's end markets—automotive and manufacturing—there's a bit of a recession," says London-based analyst Adam Shepherd of the Dresdner report. "These people are in cost-cutting mode."

Dassault Systèmes creates software to help businesses simulate the life cycle of a product, from conception to design to production. It has been a premier developer of applications for aeronautical and automotive design since the 1980s, racking up clients such as Boeing (BA), Airbus, Volvo (VOLVA.ST), and Toyota Motor (TM). More recently, Dassault has developed 3D software to enable businesses to create digital mockups of products ranging from mobile phones to sneakers. Architect Frank Gehry even uses the company's software to design his distinctive curvaceous buildings.

Is the Market Overreacting?

Chief Executive Bernard Charlès described the third-quarter shortfall as minimal, attributing losses to tax restructuring done last year and the weak U.S. dollar. He pointed out the company's software revenue surpassed market expectations this quarter and climbed 12% year-on-year, to $370 million.

"Overall, we have tried to communicate as clearly as we could that for us, there is no necessary sign of business slowing down from a geographical standpoint or a product standpoint," he told BusinessWeek in an interview.

Dresdner's Shepherd agrees. "I think Dassault has been punished a little unfairly. It suggests how nervous the market is on any kind of underperformance."

By the end of the day in Paris, Dassault shares closed down 6.36% and were off 5.92% in midday New York trading.

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