Last month, Siemens AG reported a solid result for its full fiscal year (FY) 2022, with €72 billion (around $75 billion), revenue increased by 8.2 percent compared to last year's corresponding €62.3 ($64.8 B). In fact, this is an excellent result given the general global economic conditions in 2022 as a whole, as well as COVID-19, Russia's war of aggression against Ukraine and the consequences to global industrial operations, including rising energy prices, shortages of key industrial components and a general recessionary trend.
“Based on strong growth momentum, all four industrial businesses recorded increases in order intake and revenue,” Siemens wrote in a press release, claiming that these increases were significant in some specific cases such as the PLM and automation businesses. So, how did these do?
To understand this, we have to divide the operations into three branches. In addition to the entire group Siemens AG, there are two divisions that are interesting from an industrial product realization perspective:
- Siemens Digital Industries, which includes both the automation and industrial software revenues. Here, a particularly sharp result is achieved with a revenue increase from €16.5 billion ($17.2 B) to €19.5 billion ($20.3 B), all garnished with a strong increase in profits.
- Of these €19.5 billion, the PLM division, Siemens Digital Industries Software, which covers all the industrial software businesses including PLM and EDA, recorded revenue of €4.4 billion, helping increase overall software revenue for Siemens from €5.6 billion ($5.8 B) FY 2021 to this year's €6.5 billion ($6.8 B).
"We have undoubtedly delivered a strong full fiscal year 2022. Things are going very well for us. We can show great Annual Recurring Revenues (ARR) growth and we're still winning new accounts, some of them that we pulled away from our competitor, but we're not ready to talk about these in this early stage," summarizes CEO Tony Hemmelgarn, the head of the digital industries software division, in an interview with engineering.com. In this article, I discuss Siemens’ year end results and analyze more of the details behind these developments at Siemens and their tough battle with Dassault Systèmes.
Four things stand out in particular:
- The SaaS paradox, which has to do with the shift to a Software-as-a-Service model and was the reason behind a slight near-term software revenue dip for FY 2022.
- The continued success of the Electronic Design Automation (EDA) space.
- The Polarion solution's extremely rapid growth in the Application Lifecycle Management (ALM) arena.
- And finally, an ace up Siemens’ sleeve, several high-volume license deals that have not yet been fully implemented.
On top of that is the company's dominant role when the automotive world electrifies cars and builds new giant battery gigafactories.
1. The Effects of the SaaS Paradox
For those who follow the PLM industry today, the acronym Annual Recurring Revenues (ARR) is a familiar one that has gained increasing weight as a measure of success for one primary reason: the transition from selling perpetual licenses to subscriptions and moving to the SaaS model.
ARR is a type of income that has become a measurement of what happens when you sell licenses as a service, typically a rental or subscription based-solution that is usually cloud-related and which sees the revenues distributed over months or quarters and for a certain number of years at a time.
Previously, the accounting revenue for a license sale was front-loaded. For example, when 100 licenses were sold, you were able to book the entire revenue directly in connection with the sale. But after that, there wasn't much more to pick up. Sure, there might be some lower-software update, maintenance or service revenue that could be achieved. But basically, there was no backlog.
With SaaS, the picture changes. The effect on accounting is that the income is now spread out over time—which means an initial income dip compared to the old upfront invoicing. On the other hand, SaaS gives a more even and extended income stream over time. The paradox is that this may mean that increased sales initially result in lower reported sales revenue.
"Between our capital markets day last year and our fiscal year 2025, we have promised to deliver 9 to 10 percent annual growth in ARR. But the reality as we now deliver the FY2022 numbers is that we have reached a 14.4 percent increase in ARR, which gives what you call the SaaS paradox,” says Hemmelgarn.
“The good news is that we're ahead of what we said we would do,” he adds.
A Mathematical Effect Turning Upwards Over Time
The SaaS paradox is going to be there for the next couple of years, Hemmelgarn adds. For Siemens, the ARR revenue, as mentioned above, is in a strongly expansive phase, but resulted in declining profits in the software business due mainly to lower revenue in the PLM business and higher expenses related to cloud-based activities, including the transition to SaaS.
“Yes, I mean when you change the revenue recognition model, the effects will remain for a while. It’s a mathematical effect,” Hemmelgarn says. “What we committed to the capital market is a 10 percent ARR growth at the end of the term, in our case up to 2025. In order to get that we planned for about nine percent this year. However, in 2022 we've grown the ARR revenue around five percent more than what we said we would do, at 14.4 percent. So, we’re well ahead of what we said we would do, and the only way you produce great ARR is by growing your business. Moreover, ARR is a better way to measure business because it can’t take all the revenues upfront like you used to. As you spread it out, that’s the effect of that SaaS transformation.”
“The good news is again that we're ahead of what we said we would do. But there are some negative effects too,” Hemmelgarn continues. “When you're doing the transition to the SaaS model faster than what you defined, then you have less profit in the short term, because you can't recognize the whole revenue upfront since it is spread out. So, simple math says that if you do it a lot faster, this has an impact. On the other hand, ideally this means that we'll get through this transition a bit earlier than we had hoped for.”
2. Hemmelgarn's and Siemens' Strategic Investment in EDA
Hemmelgarn explains that EDA is pure gold for the PLM division. The timing was almost perfect when the decision was made to purchase Mentor Graphics in 2017. The need of electronics for things such as integrated circuits (ICs) and printed circuit boards (PCBs) has grown significantly in today's products. Hemmelgarn recognized this early on, and currently the company's strong Siemens EDA program accounts for just over a third of the division's total software revenue with growth in 2022 being 20 percent.
With EDA software—such as Xpedition and Calibre—and hardware you can design, simulate, verify and manufacture electronic systems such as integrated circuits, IC packaging and printed circuit boards (PCB). Other solutions that came in the wake of the Mentor purchase, and which are now included in Siemens PLM portfolio Xcelerator, include Capital (harness), Valor (MES for electronics), Flow EFD, Flow Therm and more.
"EDA continues to grow very well for us. It’s a little bit easier to see where EDA is going than PLM generally, since we’re not taking the EDA business through the SaaS transformation right now. But roughly, yes, EDA stands in the range of 1/3 of software revenue. We keep it broad, not specific, because you can count many things in the framework of EDA. There is the IC business, the PCB parts, electrical systems and we have supply frame in EDA too, and more,” Hemmelgarn says.
As electrification and electronics in general have had a powerful and growing impact in a number of key industries for Siemens, such as automotive, aerospace & defense and heavy machinery, this domain has proven to be a way into companies that work with Siemens' competitors on the PLM side, such as Dassault and PTC.
With electrical solutions such as Capital, with Xpedition on the IC and PCB side and Valor for PCB MES, Siemens can get a foothold where the footprint on the PLM side is dominated by its competitors. In short, there is potential here for extended business relationships.
3. Polarion is Siemens’ Fastest Growing PLM Product in 2022
So, EDA is a success, which also goes for the Application Lifecycle Management (ALM) solution Polarion. Why is electronics software becoming more and more important in today's products?
The simple answer is that various forms of software are now found in almost every even slightly advanced product. At the same time, the development work in this domain is particularly tricky and complex to integrate into other product development loops. In older software development environments, many different point solutions are used to manage the application life cycle. This has its limitations, because one result of these arrangements is that development artifacts are spread out, which slows down collaboration, hinders transparency, undermines integrity and makes it harder to drive innovation.
For these reasons, among others, it is beneficial to use integrated solutions where the seamlessness is far driven. This is especially true for Polarion, which is Siemens Digital Industries Software’s main solution on the ALM side, and a component in its Xcelerator PLM portfolio.
“Yes, Polarion is growing extremely well for us. We don’t disclose numbers, but it was one of our fastest growing businesses in 2022,” Hemmelgarn comments. “It’s of course a smaller base compared to Teamcenter and those kinds of products in the same volume range. But it’s growing extremely fast.”
4. Hidden Treasures with Great ARR Potential
So, what do the future prospects look like? As noted above, Siemens Digital Industries Software’s 2022 ARR figures look good with a growth of 14.4 percent compared to the planned nine percent. But in this context, there are some of what I would like to call “hidden ARR treasures.”
In recent years, the company has signed several large agreements on the CAD side with NX, with subsequent investments in the PLM/cPDm (collaborative Product Definition management) suite Teamcenter. These agreements bring huge potential for Siemens in terms of user volumes, with companies such as the world's fifth largest vehicle manufacturer, Hyundai KIA Motors, as well as the South Korean Hyundai shipyard group and the American aerospace & defense company Lockheed Martin Aeronautics.
These companies have made major decisions, in principle, to swap their Dassault/CATIA/ENOVIA or PTC/Creo/Windchill environments to Siemens NX and Teamcenter. We’re talking about extremely important decisions initially based on Memorandums of Understanding (MoUs). These deals, involving thousands of users, take time to implement and will be launched in conjunction with new model projects.
"Right, it's still coming, some of those,” comments Tony Hemmelgarn. “It certainly takes a while for customers like these who are switching from other major accounts to move out of their existing vehicle programs to us. These numbers will show in future revenues as we go forward. We’re talking about vehicle programs of three to four years, so you don’t switch overnight.”
But ultimately, these companies' existing solutions will be replaced, often in step-by-step escalation of license volumes, by NX CAD and Teamcenter. According to my research, indications are that together they can—over time—end up with around a total of 20,000 new seats only in the three players mentioned above.
Dominating Position on the Battery Side
Speaking of vehicle development, it's also quite clear that Siemens brings in substantial revenue from the battery side as the world's car and truck industries electrify their vehicles. In Europe alone, around 40 projects are underway and, according to my research, Siemens has usurped the dominant role. This is thanks to PLM software, in terms of both design of these new battery gigafactories, as well as the design of battery solutions and the utilization of digital twins and threads.
However, this pales in comparison to the investment in automation tools required for these facilities. Here we are talking about investments from battery and vehicle companies, which are ten times the size compared to the PLM investments. In this, Siemens Digital Industries also has a significant role.
"Our unique advantage here is that not only do we bring automation capabilities that we are so strong in around the globe, but it's also everything that we do with our software. The design of the batteries, simulation, optimization, validation, the production of the battery and the manufacturing engineering. When you think about that, we're in a unique position to bring a more holistic solution to our customers, because it is not only automation, but automation linked to battery design, manufacturing engineering and solutions for recyclability of the batteries," Hemmelgarn states.
What about the commercial potential in all this? For Siemens, and certainly also for its competitors, battery projects involve making big bets. A 50 to 60 GWh battery gigafactory demands investments of $4 to $5 billion, whereas PLM-related investments in Europe, according to my findings, are about $150 to $200 million, while the automation investments are ten times larger. No doubt this is and will remain a commercially super interesting arena for Siemens.
Still Waiting for the SAP Deal Breakthrough
But there is more in the pipeline, where the time factor is important for when complex projects can be fully carried through and achieve commercial impact.
Siemens' agreement with SAP regarding Teamcenter, where SAP has just started to sell the PLM/PDM solution—with corresponding commitments for Siemens to sell SAP solutions in the ERP area—is now approaching the commercial executive stages.
“Already a number of orders have been made, but these things have a maturity growth period. We’re expecting growing numbers here,” says Hemmelgarn.
That said, it should be noted that it is not entirely easy to sort out how Siemens’ PLM business revenue is distributed at a precise level of detail. Although the majority of the software division's revenue is from the PLM business, minor amounts come from other areas, but Siemens does not break out revenue within that business.
But there are some clues when it comes to the distribution of revenue across the different PLM domains. In CIMdata's statement of the revenue distribution of the direct PLM-related software revenue per 2021, the graphic in a presentation made in connection with an "Education Seminar" in 2022 suggests that the distribution roughly adjusted per domain looks something like this:
- EDA, about 31 to 32 percent
- cPDm, about 19 to 20 percent
- CAD, about 20 to 21 percent
- Simulation & Analysis, about 19 to 20 percent
- Digital Manufacturing, about 5 to 6 percent
- Other tools, about 3 to 4
This is an indication of the 2021 distribution. For 2022 there are none available yet, but a qualified guess is that the distribution is close to these numbers.
Siemens AG’s CEO, Roland Busch, sees a great deal of potential and states in a press release that he expects Digital Industries, "for fiscal 2023 to achieve comparable revenue growth of 10 to 13 percent. The profit margin is expected to be 19 to 22 percent.”
Taken together, this and other existing pieces make the future prospects for Siemens Digital Industries Software look bright.