EasyEquities Blog

Siemens' Cloud Business is Now €1.5 Billion

Written by Thulisa Shandu | Jun 25, 2024 6:53:28 AM

 EasyAssetManagement currently favours investments in companies with a narrower focus that directly target high-growth sectors. Siemens' strategic shift into cloud and subscription services is driving significant growth, with a focus on software and smart infrastructure. Despite challenges, the company is making smart moves to become a software powerhouse and boost long-term revenue.
 


Siemens is a tech titan now! This industrial giant, founded in 1847 as a telegraph company, has completely transformed into a diversified powerhouse across energy, transportation, and healthcare. 



They're making a strategic bet on the future by focusing on hot trends like automation, electrification, and digitalization. This focus could put their earnings and cash flow way ahead of the competition in the industrial sector.

After years of streamlining their business, Siemens is seeing a strong return on investment in areas like software (where they're moving to a subscription-based model) and smart infrastructure. However, there's a catch. Their complex portfolio of businesses makes it difficult to determine their true value, and a lack of complete transparency (although it's getting better) might explain why their stock price lags competitors. So, Siemens is a future-focused leader with impressive financials, but they need to clean up their act a bit to truly shine on the stock market.

The company is revamping their Digital Industries (DI) unit to focus on selling software as a service (SaaS), which means recurring revenue and potentially higher margins. Software currently only makes up 9% of their total sales, but it's a much bigger player within DI at 23%. The good news? The transition is working! Their annual recurring revenue (ARR) for cloud-based software jumped 15% in the second quarter of fiscal year 2024, and the total annualized value of their cloud business is now  €1.5 billion – 1.8 times higher than before.

This focus on DI software, along with selling off non-core businesses and strategic acquisitions, is a recipe for long-term growth for Siemens. Analysts are predicting a healthy 4.9% compound annual growth rate (CAGR) in organic revenue for their Industrial Business from 2023 to 2026, with adjusted profit margins climbing towards 17%.  In short, Siemens is making smart moves to become a software powerhouse, and it's paying off!



Siemens' profit forecast for 2024 is facing some bumps in the road. The company is counting on a rebound in automation demand, especially in China and Europe, but those bumps seem to be more like potholes.  They're also dealing with lower factory output (capacity utilization) and a shift in what they're selling (more complex systems, less basic equipment).

This is squeezing their profit margins in their DI, which only hit 18% in the first half of the year – that's on the low end of their target range.  Things got so uncertain that Siemens even had to lower their profit margin expectations for the whole year, down to 18-21% from their previous range of 20-23%.  In short, Siemens' industrial business might see its profit margins shrink by over 1% this year due to these headwinds.  They'll need to find a way to rev up automation demand and adjust to their changing sales mix if they want to hit their profit targets.

While this company is promising, Easy Asset Management currently favors investments in companies with a narrower focus that directly target high-growth sectors.




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