Meet The Disruptors Of The Design Software Industry

• Gal Munda of Berenberg argued in a note that "disruptions" within computer-aided design (CAD) and product lifecycle management (PLM) software is already underway.
• Munda added that "disruptive" companies offer a "real alternative" to legacy PDM and CAD systems.
• Munda also noted that the barriers to entry remain "significant" at the high end of the market, disruption is most likely to happen first at the lower end of the market.

Gal Munda of Berenberg published a research report on the Software & IT Services, noting that several legacy companies within the computer-aided design (CAD) and product lifecycle management (PLM) segment are facing threats to their margins and top-line growth from "disruptors." "The disruptors come in different shapes and sizes, but commonly offer more open infrastructure and, most importantly, deliver most of the functionality for a fraction of the price of legacy systems," Munda wrote. Munda highlighted five key developments that support the ongoing "disruption" in the market: 1) the release of a commercial version of Onshape, the first fully cloud CAD software, 2) Autodesk, Inc. ADSK's announcement that it will end the perpetual licensing of its suite product line (40 percent of revenue) as of next summer, 3) AVEVA GROUP PLC AVEVF's proposed acquisition of Schneider's software assets, 4) Aras PLM signing 30,000 licenses with Airbus, and 5) Dassault Systemes S.A. (ADR) DASTY "impressive" mid-double digit topline growth. Buy Recommendations: Munda stated that his "base case" for Autodesk ($69 price target, reduced from $75) assumes the company will "significantly" increase both revenues and margins in the long run, despite the company set to enter a period of negative revenue growth and earnings in the near-term. On the other hand, the company's investor day is setting up to be "one of the most anticipated in a while." Also of note, the company could see itself as "the next activists' target" within the software and IT services space. PTC Inc PTC ($43 price target) has seen its stock perform poorly as of late, but Munda suggested the performance is not company specific. The analyst added that he is "not worried" about the company's core business and its investor day in November could likely provide the investment community with "key information" for the next stage of its transition to a subscription-based model. German-based NEMETSCHEK AG ORD NEMTF's market cap has exceeded one billion euro and continues to attract new investors who are "interested" in the story. According to the analyst, the company's current organic growth rates are "sustainable" on the back of strong growth in CAD (the market has grown six to eight percent per year), Bluebeam (still growing more than 40 percent), and new initiatives and product releases. Hold Recommendations: Ansys, Inc ANSS ($94 price target) offers a "unique portfolio" of multiple physics that were developed over time by combining internally developed IP with a set of "carefully selected" acquisition assets. The company most recently released ANSYS 16.2 which tries to utilise that portfolio by integrating past acquisitions and offering a "seamless multiphysics environment" – a "perquisite" for simulating complete systems. However, according to Munda, the company has to improve its sales productivity in order to return to 10 percent growth. As such, the analyst's rating is "sort of a bullish Hold" until there are signs of improving productivity. Aveva Group's Hold rating is based on "limited upside" from the proposed Schneider Electric deal which poses a "modest risk" of actually not happening given Aveva's "relatively low" share price. Moreover, the analyst stated that any true upside is limited to Aveva's performance (i.e what it would generate as a stand-alone entity) and any synergies the companies are able to generate in the mid-run. Sell Recommendations: Munda's only Sell recommendation is Dassault Systemes and highlighted the company's organic growth (constant currency) which read just below seven percent year over year in the recent quarter. The analyst noted that a seven percent organic growth rate is "strong" and "may not be sustainable in the long run." Finally, in order for the company to achieve its 2019 targets, the company has to accelerate its organic growth by two percentage points per year which may not be possible.