Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Yes. So to echo what you say from a timing standpoint, this acquisition probably came at the right time. From an integration standpoint, being in the lockdown and doing the integration on -- without being in the same room, this is not an easy exercise. Nevertheless, nevertheless, I think the fact that we are sharing the same values, both companies, the vast majority have a scientific background, we are -- we consider ourselves, by the way, being industry expert more than technology experts. We have a lot of common DNA. And from a human standpoint, it works extremely well, extremely well. At a point whereby we gave more responsibility to the 2 cofounders, Tarek and Glen, Tarek Sherif and Glen de Vries. They are leading the entire strategy of Dassault Systèmes in the life science and health care sector at large, combining all the different pieces we have. In 2021, we are combining the 2 go-to-markets. So we will have one single go-to-market. And the guy who are going to lead this is Michael Pray, the guy who's leading the Medidata assets and now is leading the complete go-to-market for everything which is related to life science for us. And so that's basically from an organization and human standpoint. So early -- and the turnover, by the way, one of the KPIs because one of the biggest risks we had was to have the people leaving. And it has been the lowest, probably one of the lowest year for Medidata. The lockdown probably helped a little bit, but anyway, that's what it is. If I look at the commercial synergy, if you remember, one of the goals for 2020 was to have some early adopters. People will need to embrace the full scope of what we do. And we have been able to convince some of them, which is a good sign. Because it means that not only what we do on the paper works, but people are ready to commit themselves. And we signed significant contracts, combining Medidata, BIOVIA and also DELMIA, which was an interesting add-on into this picture. So clearly, the -- I will be not fully -- I mean I cannot claim right now that the platform concept is fully understood by this industry. But they discover the value to connect research and development, and development and production and supply chain. And the vaccine story is a good one, I mean 15 years usually to develop a vaccine, the research and development have been able to reduce the cycle to 15 months. And now we are at a point whereby all the industrials are telling us, it's going to take 2 years to ramp up the production. So that's definitely not acceptable. And what is changing, and this is very important to think about it. Until now, the CEO of a pharma company or a biotech company was a guy coming either from the research or from the finance, the general administration. And the production was something, he was delegating these topics to the specialist. But now if you take a company like Sanofi or Astra or whoever, they had the pressure from the government to accelerate the production of the vaccine. So they have to put their hands. And they are discovering the value to collect the different pieces together. And that's the reason why I'm pretty confident on the fact that our strategy is on the right path. Because to -- the biggest concern was for us how we can raise the visibility on the top of the company for them to consider the platform being the solutions to decide the different domain. And the situation is really helping us to make it happen. So that's on the commercial side. We have engaged with real customers. They are buying the fuller visions. And not only they are buying it, but we are engaging with them concretely with contract, with accelerated developments, with products and revenue coming from them. On the technical side, if you remember, we had 2 things we wanted to do. One is moving the cloud to our own infrastructure. This has been postponed. This will be done in 2021 and 2022, why so? Because we were not able to send people in Medidata to centers due to the lockdown. So that's something will come probably in a year from now. And from a product development standpoint, we started the co-development activities. And at the same time, we have scaled up the capacity we have in India, because we wanted to leverage the ability to do sales in India because the vast majority of their development is happening in New York and London, probably not the only place where you could do software development. So that's where we are. So clearly, it's really a green line for many, many --on many, many fronts with Medidata.

Yes. Because, I mean I think one of the things we see is the analogy is just as we came out of the financial crisis in '08, the banks had a massive wake-up call. And banks actually spend a lot of money on IT, but on in-house IT. So they had the dual challenge of cutting costs, but also digitizing and dealing with new competition. But if we think of the pharma and life science industry, as I think Bernard -- sorry, your CEO, described them as rather well off companies, that they have healthy margins, yet they still spend a very low amount on technology. So you've got to have a potential -- if you think of the addressable market growth could be quite strong, but still riddled with massive inefficiencies. So the tailwinds could be powerful, especially as you then not just sell a point solution, but the research and development, the lab work and then the collaboration and the production. And so is that your -- because we get a lot of questions around -- you have AVEVA with Vault and some of the CROs who are probably still more point-based. But you guys can sell, again, the 3DX, equivalent of a 3DX there. So how do you see that sort of playing out over the next sort of 5 years? And maybe how could that growth be accelerated or brought forward potentially from your number?

I mean you did a great analysis or more -- if you look at the vast majority of the companies in the life science sector, they spend around 5% of their revenue in the IT. And when I do my own works, it should be probably close to 10%, so twice. Why so? There are several reasons behind this. One is exactly what you say, their system is highly fragmented. They have -- and many homegrown systems, by the way. So that's the reason why they have a hard time to connect the different pieces together. But when they are under pressure, and that's what is happening, they discover that the only way for them, for example, the only way to scale the productions right now is to do it virtually because there is no way they can do the setup in all the manufacturing facilities they have because they have nothing in common. The vast majority of the processes are not shared. Every manufacturing plant has their own specialties. So they do not have the discipline, the organizational model, if you want, compared to many other industries. So that's point number one. If you want to [indiscernible] they're going to have to [ refound ] their foundations and probably move out from the homegrown systems to be much more open to commercial software. That's point number one. Point number two, you have also some fundamental changes happening in these industries. The patient is becoming the way to start. So this patient experience is also forcing them to connect with the patients. Until now, the many pharma companies, they were developing their drugs, introducing to the market. And then after other people was managing the connection with the patient. What is happening right now, it's more and more. For example, the vaccine is a good example. Moderna came to us and they say, "Hey, guys, we want to have a direct contact with all people who receive the vaccine coming from us, not only for the purpose to monitor what is happening, but also for the future. Because there is many things with our new technology, with the RNA Messenger, we can treat for them." So this ability to connect with the patients is becoming a must. And with the current infrastructure they have, there is no way they can do it. And again, if at the end, you just set up a specific environment, but we are not infusing the information to the rest of the company, you do not have the full benefit of it. That's the second reason. The third reason, the nature of the treatment are changing. More and more, it's a biological approach more than a clinical approach. And if you look at the pipelines under development right now, the vast majority of them are biologics, whatever it's cell therapeutics or [ obics ]. So -- but anyway, what it means, it means the process is becoming the products. At the end -- and the best example I can give you is what we did for a plasma company. You extract the blood from the patients, you separate the plasma from the blood, you treat the plasma with -- specifically in order to have some property and you reinject the plasma to the patients. This way of treating the people is very different, and this is what we call the precision medicine. But at the end, this is displacing, if you are displacing the core capability of pharma company to be a research development company to a process company. And without having a refoundation of your systems, it's transformation that they will have time to do. So if you combine all those factors, at the end, I'm pretty sure that the total spending will increase. And if you look at in the past, we had the first generation of spending happening almost 20 years ago when the genomics came, because all people, they started to spend a lot of time to do the sequencing of the genomes. But it was only on the research side, this is where the vast majority of the spend is happening. Now you see more and more spend coming on the supply chain and productions and the ability also to connect the patient and the practitioners ultimately. This is the reason why I'm pretty confident about exactly what you say, the total spending will improve significantly in the coming years.

So in the same vein, I think you sort of talked about low double-digit to sort of mid-teens growth as a starting point for your life sciences business, but it feels like that could still be a relatively conservative forecast if you're able to execute on this opportunity.

Let's say it this way. What I -- when I -- when we did the Capital Market Day, it was almost less than a year after the acquisition of Medidata. And I wanted first to demonstrate to you guys that we know how to create the value with them and to stick to our initial plan, which was to deliver a growth between 13% to 15%, okay. Now if you look at what is happening 2020, obviously, this has an acceleration effect on the life science for us. But we have to keep in mind that some of the things happening are probably not sustainable over the time. For example, we have some mega trial happening, this bigger mega trials happening in a very short period of time. It's not something we -- my view, continue to stay the way it is. So we have some inflections, and we are taking the benefit of it, and this is fulfilling the growth, obviously, for the next 18 months. But if I project myself on the 5-years basis, 10-years basis, obviously, it would not be sufficient. So the bet is also what we just described is, I'm convinced that we can do as much as money with the manufacturing and the supply chain in these sectors and what we do with research and developments right now. Because it's an entire space not well being served, having a lot of difficulties to transform themself, so that's against revenue. And the third leg is we need to capitalize on the ability to connect with the patients. And we have a solution called myMedidata to make it happen. So right now, it's heavily used to do the trials. But the reality, it's a foundation to connect with them, to grab informations, to connect with practitioners. So there is an option at this stage, it's much more an options and a business case which has been validated. But I think the platform, the 3DEXPERIENCE platform could be used also in this field, in the field of the care, if you want. So moving from cure to care by being the platform to connect the specialists, the practitioners, the specialists with the patients. And the modeling and simulation are very essential because they are used to help to the diagnostic and also to guide the specialists in what they do. So we have some research and experiments. We have, for example, this living heart, the virtual heart we have developed over the last decades. And people are using it as a way to place a stance when the surgeons need to operate. We have a Living Brain, which is also virtual brains people are using to diagnose the Alzheimer disease and also because Alzheimer's, Parkinson is also a good case. It's coming from an electrical signal in the brain and knowing how the brain is working, we can place a kind of small battery in the brains, send an electrical signal and correct the Parkinson disease. So we are also doing some experiments right now on the orthopedics because you see more and more with the 3D printing, with the scan, an ability to scan whatever the foot or the legs and being able to reconstruct with some biomaterials, some very advanced practices. So this new domain is really happening for us, and it's in the continuation of what we do.

Sure. So we've only got a couple -- sorry, go on.

So yes, the guidance could be seen a little bit shy. But we need to demonstrate our ability anyway to move forward along this way. But if I have to bet, because this is my bet, we can build an equivalent of Dassault Systèmes only on life sciences.

Yes, from a revenue standpoint. Yes. Yes. Okay. Maybe and maybe one last question, but there's sort of 2 parts because some of them are a bit linked. Maybe quick thoughts on SOLIDWORKS because that's been quite resilient. But then a common question we get is a lot of the European names -- software names are moving to and transitioning to subscription, albeit seems like a more bumpy journey for them. Remind us maybe on where you are. I know many of your customers are on a kind of subscription-like contract already. And is it still the case that it's still mostly in that SOLIDWORKS business unit? Or how should we think about it for the rest of the group?

Okay. So let's start with SOLIDWORKS first, and then after, we'll open to the subscription discussions. So SOLIDWORKS, the growth drivers are the following. You still have a number of people moving from 2D to 3D every year. And in average, you still have 4 million, 5 million people still working in 2D. And in average, you have between 1.5% to 2% of them moving to 3D every years, and we are capturing almost half of them with SOLIDWORKS. That's the reason why in 2020, we have been able to continue to capture new customers with SOLIDWORKS, 20,000 new customers, which is a huge number when you think about it. Because none of our resellers -- the vast majority of them, they were not able to visit their customers. And doing transaction when you do not know the people, this is not an easy thing to do. Because we have this, and the way we are accelerating these transitions is by -- we have a product called DraftSite, which is nothing more than an equivalent of AutoCAD. And this product line is relatively well designed to facilitate the transition from the 2D to 3D. The second growth lever for SOLIDWORKS is to expand -- is to grow the customer base, to grow the customers base by them continuing to add new SOLIDWORKS hits and expanding to the rest of what we do. And this is where I think there is a significant lever. Because if you look at the penetration of the simulations, the manufacturing, the collaborative environment, we are far from having the same penetration in the mainstream than we have in the large company we are serving, despite the fact that they have the same needs. They do not need the same kind of solutions, but they have the same needs. And to give you some statistics, if I look at the collaborative environment, we have the penetration of 70% for the large customers, and it's less than 20% for the mainstream. If you take the simulations, we are penetrated 30% for the large customers, it's less than 15% for the mainstream. The manufacturing, it's even worse. It's less than 5%, where it's more than 30% in the large companies we serve. So -- and this is the reason why we are coming with this strategy, which consists to connect the large desktop, it's the base we have with SOLIDWORKS, with 3DEXPERIENCE platform in order to ease these transitions, not too much to the SaaS or the cloud, which will be a consequences, but to ensure that they will expand the scope of what they do, leveraging the ability to connect all the different pieces together. That's really in the core. So that's the reason why we have created this product family called the WORKS, 3DEXPERIENCE WORKS family, with gathering almost all the additional products treatable for this market. And this product line is really growing nicely in the introductions. Now moving to the subscriptions. Yes, I think mainly -- I mean first of all, as you say, the subscriptions, it's a business model we have since day 1, so it's not new for us. But the beauty of having this model in place for a long time in conjunction with the license model, we know what works and what is difficult to do. You have industries, whatever you want to tend to do, they are CapEx based. And why so? Because usually, they do not have huge margin. That's the only reason why. And for them, whether it's a license or an upfront payment, this is a way to go because they want to be able to upfront most of the investments and try to contain as much as they can the recurring revenue on a yearly basis. Okay. That's the reason why we have this license model, and we have the equivalent for the cloud. You have other industries where the subscriptions is a way to go. And this growth is coming mainly from the new verticals. Why so? Because all the consumer-centric company, whether it's home and lifestyle, the life science is a good example also, the high tech, they have good margins and they are usually scaling very rapidly. So when they have -- because it's a mass market anyway. So when they have the blockbusters, they have to scale very rapidly. So for them, the subscription is really a way to go. That's the reason why you have seen in the recurrent revenue of Dassault Systèmes, representing 80% of the software right now, you have an acceleration of the growth, the organic growth. It's not only coming from Medidata, it is coming from the traction of those new industry where the subscription model is much more natural for them to move forward. Now, coming to SOLIDWORKS and making the connection between the 2. We have introduced a subscription model almost 2 years ago. I have to confess, the first year we didn't have too much traction. And the problem was not coming from the markets or the customers' adoption, it was coming from our resellers. Because the way we incentivize them was much more, I would say, beneficial for them to have front than to have a recurring revenue stream. And we took some actions. And last year, we changed the game. We have a way to compensate almost equivalently between the 2. And we start to see the benefit of it by having the acceleration of the subscription model in the SOLIDWORKS inside base. Do we want to take the decisions to do what Autodesk did, is to -- or PTC, to say, okay, no anymore upfront, and therefore, the subscriptions to happen? It's still an internal debate we have. There is pro to do this because I think the market is relatively ready for that. But there is -- I think we have some good reasons also probably to maintain the 2 models, even if we will probably give much more incentive for the people to move to subscriptions rather than to promote extensively the license. The net of this is what is -- the transition anyway is much more progressive compared to some of the largest company we are mentioning. And the fact that it's much more progressive, I think it's not at the stake of the growth, and it's not at the stake of the profitability also. I think the way it's done, the way we do it is much more in our control, and we are moving progressively by keeping almost all the indicators at the level they are without disrupting one of the others significantly.

Got it. Okay. Well, I think, Pascal, that was fantastic insight. We're unfortunately out of time. But as always, your thoughts and insights are always appreciated, and I hope to speak to you soon. But thank you once again, and thank you everyone for joining us.

Welcome, Mo. Goodbye.