Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Dassault Systèmes Q2 and H1 2020 Earnings Call. [Operator Instructions] For your information, the conference is being recorded. Now I would like to hand the conference over to your speaker today, François Bordonado. Please go ahead, sir.

Thank you, Andrea. Thank you for joining us on our second quarter earnings conference call with Bernard Charlès, Vice Chairman and CEO; and Pascal Daloz, Chief Operating Officer and Chief Financial Officer. Dassault Systèmes results are prepared in accordance with IFRS. Most of the financial figures discussed on this conference call are on a non-IFRS basis with revenue growth rates in constant currencies, unless otherwise noted. Some of our comments on this call contain forward-looking statements that could differ materially from actual results. Please refer to today's press release and the Risk Factors section of our 2019 Document d'enregistrement universel. All earnings materials are available on our website. And these prepared remarks will be available shortly after this call. I would like now to introduce Bernard Charlès.

Thank you, François-José. We hope all of you are well, first. And for those of you in the North Hemisphere, that you will enjoy some vacation time with friends and family this summer. To begin, let me share some key points on the quarter and first half. We delivered a second quarter financial performance well aligned with our guidance and consistent with the framework we outlined in April. Total revenue was up 10% in Q2 and 14% for the first half. Our results underscore the resiliency of our financial model with a high base of recurring software revenue and strong operating profitability. Recurring software grew 30% in Q2 as well as in H1, first half of 2020, benefiting from good performance for Medidata and solid renewals on organic basis. As the cloud continues to grow over time and as our clients choose subscription model, recurring software revenue will continue to increase as a percentage of software mix at 83% in the first half. All 3 key metrics, recurring software, operating margin and earning per share, came at the high end of our guidance range. We are benefiting from a well-structured saving plan, thank you to Pascal, helping mitigate approximately half of the economical impact of the global pandemic while enabling investments for the future. In research and development, we continue to strengthen our industry and domain leadership and to support closely our customers. Research and development staffing increased 5.5% in organic -- on organic basis. We are also continuing to make investments. This morning, we announced the acquisition of Proxem, a beautiful startup, to expand our 3DEXPERIENCE collaborative data science capabilities. Looking at the year. The financial framework we shared with you last quarter had the objective of maintaining 2020 earnings per share stable with 2019, thanks to 3 critical factors: recurring software resiliency, a continued strong level of operating profitability and our savings plan. Today, we are confirming and upgrading our EPS objective for 2020 with growth at about 1% to 3%. Just talking about the purpose. Each quarter, we keep coming back to it. The virtual world improves and extends the real world. Creating virtual twins and experiencing virtual twins enables to explore and imagine sustainable innovation. With our new equity revealed earlier this year, experiences are human. When you move from social to human, it becomes very clear that innovations are made by people for people. And if all of us think in this fashion, we can really change the world. The pandemic is reminding all of us that, in a very harsh manner, we are all connected. We need to think about each other, our environment, our health, our world. We are all human. This theme that we launched in February and to open the new horizon for Dassault Systèmes is really about extending 3DEXPERIENCE from things to life. Linked together, we also launched the theme, The Only Progress is Human, and believe me, it was before the reveal of the pandemic in some way, a global initiative to increase awareness of today's societal and environmental challenges and to inspire people to use the virtual world to imagine sustainable innovation for a better future. Remember, what we do is at the core of the innovation process. During a 2-year period, we are engaging with the public through 10 acts to focus on some of the most pressing, long-term issues humanity faces with respect to health, cities, energy, water and other areas. At the same time, the business continuity is important. The global health emergency has underscored the power of 3DEXPERIENCE platform to run our business from anywhere and to engage digitally with our customers as well as our partners. The platform on the cloud is providing digital continuity for us, including sales partners and for our clients' interaction. While a number of our sites have seen a return of the workforce following phased-in processes, our #1 priority remains safety first for people. Let me comment briefly strategic trends in key sectors. Turning and looking at our markets from 3 strategic economy, the pandemic has revealed deep vulnerabilities in Manufacturing Industries, Life Sciences & Healthcare and Infrastructure & Cities. In discussions with our clients, they believe that the health crisis will have a lasting impact on how they do business and on the changing needs of their end customers or consumers in some cases. We are committed to help them make this crisis an opportunity. A number of topics emerged in our discussions with them and materialized in a beautiful collection of wins this quarter. Let me share some illustrations of that. In Life Sciences, Moderna and Medidata are collaborating on Moderna's mRNA-1273 trials, including its upcoming Phase III trial, the largest COVID-19 trial in the world of this kind, at least to date, involving about 30,000 patients. The trial leverages our common perspective to push forward a patient-centric approach, incorporating directly data from patient and not receiving it from sites, such as hospitals. The Medidata and Moderna team are moving forward with the speed and urgency necessitated by the global pandemic, using the world's most innovative and scalable cloud platform for clinical development, the Medidata platform. Working with BIOVIA brand, Galapagos, our clinical-stage biotechnology company, has adopted our ONE Lab industry solution to improve collaboration as well as efficiency and to reduce regulatory compliance risk with a comprehensive digital trail. Moving to the world of communication, the 5G technology. Ericsson is providing with a progressive company-wide rollout of the 3DEXPERIENCE platform. Key values are strong collaboration across the research and development and manufacturing workflows, thanks to the 3DEXPERIENCE platform, managing all the requirements driving the product definition. This marks the next step of a long-term partnership with targets -- which targets to the quick and efficient delivery of innovative 5G solutions with ultra connectivity enabling connected objects and driving change worldwide in health care, energy, transportation, cities, home life and infrastructure at large. In e-mobility, a well-known company now being visible, Nikola, a U.S.-based pioneer in electrical heavy-duty SUVs and trucks, has adopted the 3DEXPERIENCE platform on several industry solutions to roll out an R&D platform to support rapid global expansion and to design and launch new models faster. We are also pleased, as a side note, to see the success of Tesla, of course, a long-lasting 3DEXPERIENCE client. GDC Technics, an A&D supplier in Europe, see significant business benefits in time, in cost and in efficiency from improved collaboration with the 3DEXPERIENCE platform and its associated industry solutions. 3DEXPERIENCE will become the new backbone for engineering, manufacturing and service for strategic programs at Airbus Defence and Space. They are deploying the 3DEXPERIENCE platform, especially for their MALE RPAS, a drone program, ensuring end-to-end continuity from design to shop floor and operations. Key business values include improving affordability, time-to-market and maintainability of this next-generation, highly complex products. More broadly, we are seeing increased investments in defense program as well as space among a number of companies across the world. Governments are providing stimulus to the aerospace industry in this unprecedented period. In June, the French government passed a measure with EUR 17 billion in investment and loans to Air France, Airbus and other smaller companies in their supply chain. Moving to Infrastructure & Cities. This morning, we had just a joint announcement with Bouygues Construction, a world leader in construction, reinforcing our partnership with the objective of recreating a new construction industry. In this second phase of the partnership, we will focus together on developing a residential product line with 3DEXPERIENCE platform on the cloud for modular construction. A few quick comments on collaborative data intelligence because we are a player there. We continue to invest in expanding our collaborative data intelligence. We are pleased to welcome Proxem, a specialist in AI-powered semantic processing software and services that transform text data in actionable content and insights. With Proxem, we will deliver new collaborative data science experiences on the 3DEXPERIENCE platform to enable industry to leverage data patrimony, which is becoming bigger and bigger, of course. The combination of AI with modeling and simulation will drive new learning methods and the capitalization of knowledge and know-how. With that, let me turn the call over to Pascal. He has a few things to tell you.

Thank you, Bernard. Hello to everyone. We hope you and your family are well. I would like to start my comments with a quick overview of our financial performances. First, total revenue was EUR 1.070 billion, increasing 10% in constant currency in Q2. Revenues came in at the high -- at the midpoint of our guidance, sorry, with software at the high end and services below. For H1, total revenue increased 14%. Operationally, we are well managing our cost reduction efforts. And during the second quarter, operating expenses decreased 5% on an organic basis. Our operating margin came in at the high end of our guidance range at 26.7% in Q2. And for the first half, we are at 28%. EPS was EUR 0.80 compared to our guidance range of EUR 0.72 to EUR 0.77 with EUR 0.02 benefit from currency. So we also are at the high end of guidance. Zooming in on our revenue by type. Software revenue was well aligned with our planning, both recurring software and licenses revenue. In total, software revenue increased 12% in Q2 and 15% in H1. On an organic basis, it was lower by 7% in the second quarter and 4% for H1 due to the impact of many lockdowns on the new business activity. Subscription and support. Our recurring software revenue represented 82% of total software in the second quarter. And recurring software revenue grew 30% in total on a good performance for renewal across virtually all of our geos and double-digit growth for Medidata. On an organic basis, recurring software increased 4% in Q2 and 5% for H1. Zooming in on licenses and other software. It came at the low end of our planning range, decreasing 32%. We do expect this to be the weakest quarter of the year with a slow ramp, albeit much better in total for H2 compared to Q2. With respect to services, the COVID-19 pandemic has created a significant headwind with revenue decreasing 5% in Q2. On an organic basis, we saw a decline of 22% in Q2. Moving to our regional software review. Let me share perspective on the impacts of the pandemic in Q2 compared to Q1. Beginning first with Asia, software revenues slowed from 7% in Q1 to 3% in Q2. On an organic basis, Q1 was lower by 1% and 4% in Q2. Licenses revenue decreased in a similar manner compared to Q1, about 20% versus Q2 at 21%. Asia Pacific sales performed well and both China and Japan were much more resilient this quarter. It was a tough quarter for India, as one would expect. Support revenue growth was very solid in Asia, except for India. Zooming in on China. Our direct sales had the best performance, continuing to show pickup in activity, following what we saw at the end of Q1. Wins in the second quarter included High Tech, Marine & Offshore, Transportation & Mobility. And among our clients is NIO, a high-end smart electrical vehicle OEM. They have adopted the 3DEXPERIENCE platform in connection with rolling out an R&D platform to support rapid global expansion and to design and launch new model faster. In Europe, the health crisis had a big impact in Q2 in terms of slowing customer decisions. In combination with a high Q2 2019 comparisons, Europe software revenue decreased 4% in Q2 from growth of 2% in Q1. Our traction in Life Sciences continue with MIGAL, a research and development center based in Israel, and selecting our Designed to Cure industry solution with BIOVIA in connection with research they are doing to fast-track development of the COVID-19 vaccine. In the Americas, overall software grew 43% in Q2 and 44% in H1. Life Sciences and Aerospace & Defense were key contributors. North America had the most deals in the top 20, spread across a number of industries. A good example could be Dot Foods, the largest foodservice redistribution company in the United States. They are expanding their use of DELMIA Quintiq to increase warehouse efficiency. This is another example displaying the wide diversity of industries and companies where DELMIA Quintiq's technology brings significant value. Moving to a view of our software revenue by product lines. Industrial Innovation software revenue decreased 9% in Q2 and 5% in the first half. Support revenue was very solid. But this growth was more than offset by the sharp decline in license revenues. In addition, you may recall that both CATIA and ENOVIA had a very good Q2 last year, so this adds to the swing. In Life Sciences, Medidata total revenue was up double digits in Q2 and for H1 as well on a comparable basis. During Q2, Medidata achieved record new bookings, up over 20%, accelerating backlog growth, driven by, on one hand, patient cloud and, on the other hand, by the data analytics offers. We could also notice a substantial operating margin improvement at the same time. Importantly, Medidata is well positioned to achieve its growth objective for the full year. And while the global health pandemic has been a headwind to the single-study clinical trial, the strong new booking is a tailwind for the full year. Moving to the Mainstream Innovation. It showed a good resiliency with strong growth in recurring software. In Q2, we also saw growth for Centric PLM and for DELMIAWORKS. And software revenue for Mainstream Innovation decreased 2% in Q2 and were stable for H1. Zooming in on our profitability. Our non-IFRS operating margin of 26.7% came in just ahead of the high end of our objective range of 25% to 26.5%. The 2 principal factors were: first, a stronger performance in our core business, bringing about 120 basis points; secondly, Medidata coming in ahead of the plan, adding about 20 basis points; and 10 basis points from the currency compared to our guidance rates. The offset to this was our recent acquisition of Centric PLM and IQMS, coming in 50 basis points below plan combined. Let me remind you our saving plan, targeting about EUR 170 million and offsetting about half of the revenue reduction we had to estimate in Q1 from the COVID-19 compared to our initial 2020 guidance in February. About half of the targeted savings relates to the selective hiring as we are just doing in research and development, in particular with the staffing increase 5.5% on an organic basis; and on the other half, due to discretionary expenses. At the end of H1, we are well aligned with our target with more than half of the savings been achieved. Our operating cash flow for H1 reached EUR 894 million, a strong level overall and just 4% below H1 year 2019. We benefited from Medidata's improved cash generation and better collections on the one side. Offsetting this factor is part of -- was some of the extended payment terms to help our clients as well as our resellers. Contract liabilities totaled for EUR 1.160 billion and were up about 3% in constant currency and perimeter. DSOs remained stable on a constant perimeter basis. Zooming for a minute on our cash position. It increased 23% in H1, and we are now back to pre-Medidata levels with cash and cash equivalents of EUR 2.410 billion. Combined with the debt of EUR 4.610 billion, our net financial position improved EUR 460 million to a negative EUR 2.210 billion at June 30. Moving to our financial objectives. As we outlined last quarter, our key objective is our commitment to achieve a stable non-IFRS earnings per share for 2020 in comparison to 2019 in the midst of the global pandemic. Based upon our results of the first half and assessment for the second half, we confirm our objective, now targeting a non-IFRS EPS of EUR 3.70 to EUR 3.75. This estimated effective tax rate remains unchanged at about 25.2%. And our exchange rate assumptions for the USD and Japanese yen remain unchanged for Q3 and Q4 in spite of euro-dollar volatility we have seen the last few days. On the revenue side, we are following closely the financial framework we laid out last quarter and summarized in today's earnings press release. First, we are maintaining our revenue growth range at plus 12% to plus 13% in constant currency. We are increasing the reported revenue range at the midpoint by EUR 15 million to EUR 4.540 billion with some puts and takes: first, plus EUR 20 million for currencies; plus EUR 20 million for software; and minus EUR 30 million for the services. For software, we are increasing the range to 14% to 15% from 13% to 14% with recurring revenue expectation unchanged for the full year. On a sequential quarterly basis, we would expect a progressive lowering of our organic support revenue growth as we saw in 2009. Based upon our updated perspectives, we are improving our outlook for licenses software revenue evolution. And looking at our updated pipeline for the year, we do see a willingness on the part of clients to resume investments. And we are not generally seeing large deals with the pipeline made of smaller deals. The sales process in terms of maturity seems well advanced, giving us greater conviction for Q3 and also Q4. For services, we removed about EUR 20 million from H2 outlook. This implies that a little less than 10% of our services staff is on the bench due to the postponement of activities by clients beyond 2020. We have observed a willingness on the part of clients to resume investment. And we have decided to keep these resources. We now estimate a services revenue trajectory ranging from a decrease of 2% to growth of 1% for 2020 compared to a growth of 5% to 7% estimated earlier this year. Operating margin. We are refining our non-IFRS operating margin target to about 29.3% to 29.4% for the full year 2020. For EPS, we are adding 3 points at the high end and tightening the range to EUR 0.05 from EUR 0.07, bringing us to EUR 3.70 to EUR 3.75. To summarize, while our business is not immune to the COVID-19 crisis, I think our financial result demonstrated the resiliency of our business model. Moreover, our strong level of profitability and financial strength enable us to continue to invest in our strategic priorities to create value for our customers and to position us for the growth reacceleration exiting this global health crisis. Bernard and I would like now to take and answer your questions.

Andrea, let's start the Q&A session.

[Operator Instructions] We are now taking our first question from the line of Andrew DeGasperi from Berenberg.

I just had two quick ones for you. I just -- first of all, in terms of the SMBs, I know you mentioned that churn will likely pick up in the second half. I know you foresee some bankruptcies emerge in September in Europe, specifically. Can you tell us if you've seen, as of today, any delayed payments from these small and medium businesses? And then secondly, I know you said that Medidata bookings were up 20%. Can you maybe give us overall bookings from a constant currency basis?

Okay. So Bernard, I will probably answer these two questions.

Please, please, please.

Please free to add what you want.

Of course.

So related to the churn for the SMB, you are right. We raised the guidance when we made the framework last quarter. We raised from 10% to 12% the churn. Actually, we have observed in Q2 a 9% churn, which is a good sign because it's usually the historical level we have seen. Nevertheless, we decided to keep the guidance the way it has been designed because we do expect to see some bankruptcy in Q3, at least more than what we have seen in Q2. So we keep the 12% churn for the SMB market compared to the 9% we are seeing right now. Related to Medidata, yes, there are a few things we can say. The first, the new booking has been extremely good this quarter, for Q2. It's almost the size of a Q3 new booking quarter. So that's a good sign. And the new booking is up more than 20%, for sure. We are also seeing an acceleration of the backlog growth. And there are a few things you should take into consideration. First, the way we monitor this growth, along 2 different axis. The first one is what we call the 12 months' backlog at par, assuming that we will renew the existing customer without increasing the bill. And the backlog is growing at 13% at par, which is exactly in line with our plan. And then you have the renewal. And we are also monitoring the renewals. And over the last 12 months, in average, the renewal growth has exceeded 20%. So the combination of the 2 give us certain level of confidence to deliver the H2 for Medidata aligned with the plan and give us also some good perspective for 2021. Last but not least, to answer to your questions, we have roughly 95% coverage of H2 for Medidata. So the remaining piece we have to fill with incremental booking is, I think, achievable.

Next question comes from the line of Jay Vleeschhouwer from Griffin Securities.

A few questions, starting with SOLIDWORKS. Looking back at Q2, Pascal, how would you say the year-over-year decline in new SOLIDWORKS licenses compared with the 11% decline in Q1? I'll assume it might have been a larger decline, but perhaps you can clarify that. And then looking forward, what are you thinking in terms of the adoption of 3DXWORKS, which has just been released to the channel? And I know that SOLIDWORKS has a program in place to try to activate or reactivate what is a substantial dormant base of customers not on maintenance. Your nonmaintenance paying base is larger than the active bases of your peers. What are you doing programmatically to convert more of that back on to maintenance? And then some other questions besides SOLIDWORKS.

So Bernard, I take the first one and then you maybe answer the second one?

Yes, please.

So the -- for Q2, the performance for SOLIDWORKS, you have seen it, it's minus 3% total software revenue. And if you split between the new license and the recurring part, the recurring part is growing at 6%. And if you do the math, you will discover that the new license are decreasing by a little bit less than 20%.

Regarding the adoption of the 3DEXPERIENCEWORKS, the -- as you know, the entire now SOLIDWORKS-associated portfolio is moving from functionalities to roles on process coverage. An example of that is what we are doing with DELMIAWORKS connected with SOLIDWORKS or SIMULIAworks, which, by the way, are showing very interesting success dynamic. So that program is well understood by partners and clients. We are just at the beginning, as you said. It was announced during the SOLIDWORKS -- during the 3DEXPERIENCE World early this year and now it's just being released. So we are very confident that, number one, it's well received by the clients who have seen it. Second, the 3DEXPERIENCE platform helps to expand the functionalities of SOLIDWORKS desktop and also open the possibilities of SOLIDWORKS through a browser. So this is now -- can be provisioned just with a click-and-buy process, which is quite interesting. So we're at the beginning of this program, but there is no doubt that the powered by the cloud, 3DEXPERIENCE cloud infrastructure, should be a good lever for our future growth, which, by the way, is also a kind of answer to your third question related to the subscription. SOLIDWORKS is providing a very high degree of satisfaction to users -- very high. I mean the user community is powerful, very vivid and very active. And I think the fact that it was demonstrated with MySolidWorks, I mean, they share a lot of information. This is being powered by 3DEXPERIENCE. So we believe that progressively, just the virtue of being connected, will buy -- as a result, create a subscription revenue flow at least related to the, what we call, the collaborative process that should be a very interesting value for the SOLIDWORKS base. We don't want SOLIDWORKS users to be isolated. MySolidWorks was the first step. 3DEXPERIENCE.WORKS is the second one with capabilities both on new roles as well as Marketplace that, I think, is quite promising. It's also a way to make sure that our partner sees the value up with their clients. So that's basically how the 3 topics are connected.

Okay. Secondly, in your remarks earlier, Pascal, I think you used the phrase "resume investments" when speaking of certain customers. Could you relate that view to the manufacturing and supply chain business specifically? There seems to be a good deal of, let's say, ferment in that part of the engineering software market, where a number of your peers are paying a good deal more attention to that class of software, enterprise software companies as well. Microsoft highlighting it, for example, at their conference this week. So over the years, DELMIA and Quintiq have grown, but it's been a fairly lumpy business, as you know. So what could change that lumpiness and make this look much more like an ongoing retooling or reinvestment cycle, specifically for DS in that area?

Before to answer to your question, I want to correct one thing. The Quintiq business is right on plan compared to the acquisition plan we developed at that point. So -- and the reason is, as you clearly express, believe it or not, this market is not well served right now. There is this strong belief that the ERP players are serving extremely well this market. But that's not true. What they do, they do inventory management. Managing an end-to-end supply chain process is much more complex because you need to have the virtual twin of the supply chain to make it happen. And that's one of the unique differentiators we have with Quintiq. Because not only we have the optimization engine, others they have, but it's in conjunction with the virtual twin of the supply chains. So we can do multi-scale optimization, the other, usually they are struggling to do. So coming back to your questions, yes, you are right. This domain is extremely important for many customers right now because they are looking for a short return of their investment. And optimizing the supply chain is one of the easiest way to reduce your cost of operations. Believe it or not, when you buy a product, between 1/3 to sometimes more than 2/3 of the product's cost are coming from the logistics. So if you know how to reduce significantly the logistic costs, frankly speaking, you are doing a lot of savings. And with the new technology coming, like 3D printing, it's a way to redesign and reshape completely the supply chain. And that's what is happening right now. So to come back to your questions, we are seeing a lot of traction in the manufacturing industry coming from the integration of the supply chain management with the manufacturing operation management.

Related to the win rate in the MES sector, which is then the DELMIA -- not DELMIA Quintiq, but DELMIA Apriso and also DELMIAWORKS, we have a high -- very high win rate in MES. I mean DELMIA Apriso is becoming a [indiscernible] in several industries. And we have replaced those MES of competitors, like Siemens or SAP, quickly and it's working. And the track record is there, whether you talk about A&D, Tier 1 automotive and many other sectors, like industrial machines. Now I think it's a wrong perception. The DELMIA portfolio is progressing very well.

Okay. And lastly, on Medidata, is it possible that the strong bookings, the 20% or so, which is above the revenue CAGR that you've talked about for that business could, in fact, translate into an even faster revenue CAGR from Medidata for some time? And if that were to occur, would there be faster margin leverage in Medidata than you've spoken of previously, such as at your presentation at the Life Sciences Day back in November?

So I will -- to answer to your question, I will start with the second part of the questions. Because as you remember, we outlined the plan for the profitability of Medidata 1.5 years ago, where we said we will win 2 points EBIT margin every year for the next 5 years. So where are we? In Q2, we had 20% operating margin with Medidata, which is well aligned with the plan. In fact, we are slightly ahead. And the reason, it's obviously coming from the good momentum, but also -- and I should thank Tarek and Rouven for -- and Glen for what they did. They have put the discipline, financially speaking, without compromising the momentum on the top line, which is a very good thing. So now coming back to your point, I think -- let's assume we have an acceleration of the growth for Medidata. It's in our interest anyway to continue to invest. So I will follow the plan we have defined because we need to reinforce our ability and capability to tackle this market. And I think from a pure sales coverage and also from a research and development standpoint, we are far from having the full capacity. So I will not try to overachieve compared to the plan I just outlined.

We are taking next question from the line of Jason Celino from KeyBanc Capital.