Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Good afternoon. Thank you for standing by, and welcome to the Dassault Systèmes Q1 2021 Earnings Investors call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, François Bordonado. Please go ahead.

Thank you, Shani. Thank you for joining us on our first quarter earnings conference call with Bernard Charlès, Vice Chairman and CEO; and Pascal Daloz, Chief Operating Officer and CFO. 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 2020 registration document. 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 for joining, and good morning and good afternoon to all of you. Before moving to my formal presentation, I would like to share a few words on the COVID-19 health crisis. If a number of countries are in -- somewhat into post COVID-19 situation, this is not the case everywhere, especially in India where we are worried about our colleagues, clients and partners. I offer them our most sincere sympathies and thoughts. Moving to the presentation, let me share some observations. We are in a very profound period in human history. The entire world has now experienced lockdowns. We've had restrictions affecting normal family, work, leisure and social activities for more than one year. For some, there has been human tragedy resulting directly and indirectly from the pandemic. The health crisis has forced companies, industries and governments to adjust to these new circumstances, and each of us individually, and acting together, we can have a positive impact. With the real-world held in suspension to some degree, we have soon turned more virtual to help the real world be improved. That's a system has a resonate and has a big play in this area. This time frame on shared experience have brought a new perspective on the future. What does it mean? We are entering a new accelerated period of innovation. I'm not alone in thinking this. It is very clear from discussion with our top clients and partners that industries are entering a new cycle, a new cycle of innovation driven by sustainability, and truly characterized by preoccupation on a human-centric approach. Most companies want to move faster. Change is going to happen on a new and remarkable timetable. Further, innovation has a much broader definition. We speak about new products, new use, new experiences and less impact on the planet. Science-based innovation, modeling and simulation, coupled with real-world evidence, the data, is game changer. This accelerated pace of innovation is required in the 3 sectors of the global economy we are addressing: Manufacturing, Life Sciences & Healthcare, as well as Infrastructure & Cities, can only be achieved by continued platformization, virtualization of the industry with our 3DEXPERIENCE platform. Coupling, modeling, simulation and extensive data science capabilities, we are very well positioned to help customers reset their value chain, thanks to a wide platform adoption within the ecosystem. Moving briefly to the first quarter, we delivered a very solid start on 2021 with results underscoring our strategic positioning. Our software revenue increased 10%, EPS grew 20%, and recurring software revenue represented 81% of total revenue. The 2001 (sic) [ 2021 ] Q1 result demonstrate the momentum on strong growth outlook for Life Science. It begins with Medidata's platform performance, the Life Science industry more broadly and with the life science global sales organization we established this past quarter. In Mainstream Innovation, we had a strong Q1 performance with our largest brand, SOLIDWORKS and Centric PLM, great results. In February, our 3DEXPERIENCE world event for SOLIDWORKS global community was held with the focus 100% on the future, which is now the exploitation of the 3DEXPERIENCE platform through the new portfolio that we call 3DEXPERIENCE WORKS. We are seeing positive momentum, especially in the simulation domain and all this, of course, on the cloud. Customer engagements confirm the critical value of the 3DEXPERIENCE platform and industry solutions, clearly to provide an avenue for desktop users to go cloud. Looking at the financial perspective for 2021, we are confirming our revenue objectives and upgrading our EPS growth objectives to 12% to 14% or 17% to 18% at constant currency. Now let me move to some updates on our business. Addressing industries within 3 sectors of the economy, our objective is to be, as I said, a game changer, providing new experiences, new value networks, and new ways of working the workforce of the future. For example, in Life Science, we have spoken about the shift to a human-centric approach, with what we call, passion-centric innovation. When companies in the industry use the virtual world to help and improve real world passion experiences, the results are improved outcomes. Continuous monitoring with devices sending information, virtual surgeries, next-generation precision medicines are such as examples -- great examples. We bring significant assets to this industry, where we are #1 in the world. We estimate that 50% of drugs on medical devices are designed with our solutions. In clinical trial, for example, more than 50% of our new -- of new clinical trials use our Dassault Systèmes Medidata Solutions. Our presentation details many more metrics that Pascal will cover. We are mission-critical to addressing these key challenges, creating precision medicine platforms, deploying digital on AI in developing therapeutics, and three, helping the healthcare industry deliver value-based care. Let me share 2 examples. BioNTech, well-known now, beautiful European company, utilizing their mRNA technology platform to develop rapidly COVID-19 vaccines, has now adopted the 3DEXPERIENCE platform on our ONE Lab industry solution on BIOVIA with modeling and simulation capabilities to analyze the different COVID-19 variants, a key preoccupation right now and potential new ones that could raise. BioNTech has been a large client of Medidata's clinical trial software. Another example is Karyopharm developing novel therapeutics in oncology, has extended its multiyear agreement with Medidata. A fast-growing company, we are supporting them selling one product in 2040 to now 10 solutions in 2021. Similarly, as they have expanded the number of trials they do among the new products are AI, artificial intelligence for machine learning -- on machine learning, by the way. Moving to the Manufacturing industry. As many of you know, we are the world leader in the automotive industry with global car manufacturer on supply chain. We have expanded our market presence, working with literally all of the new EV startups, strengthening our position in electrical, and now we continue, again, with large OEMs standardizing with us as they advance their time lines on their next-generation vehicles portfolio. Moreover, we are doing the same with the new players becoming part of the EV value network. This is happening because our portfolio well matches the needs of this industry. Data-centric is a key element of the 3DEXPERIENCE platform. In that regard, we are pleased to share that Jaguar Land Rover is expanding its use of the 3DEXPERIENCE platform. We will be supporting the global strategy, Reimagine, under the leadership of their CEO, Thierry Bolloré. Our industry solutions will help them reach critical objectives, including a net 0 carbon business by 2039, Jaguar all-electric luxury brand from 2025, and the first all-electric Land Rover model as announced by them in 2024, clean hydrogen fuel-cell power development and collaboration with the value network. Our work is around several axis, creating a unique experience for its customers advancing its electrification initiatives, improving efficiency and with respect to the value network for electrical cars, recomposing the actors in order to achieve these objectives, Dassault has selected several industry solution experience, notably data-centric role representing half of the new investment, underscoring our strength in the critical area of investment by companies and the 3DEXPERIENCE platform for data science and data analytics, as an enterprise platform for all type of function in the company. Turning to the world of retailing. Gautier turned to our HomeByMe for Home Retailers 3D planning cloud solutions. This helps Gautier from 2 important perspectives. First, the nature of the client experience, providing a truly unmatched experience for customers; and second, strengthening the client relationship with -- by changing the nature to an advisory role for Gautier. We will help you imagine and create your dream home environment, is their statement. By the way, I'm also extremely pleased with the strong dynamic of growth with Centric PLM in this area. In Infrastructure & Cities, we are pleased to announce the extension of our strategic partnership with Bouygues -- with Bouygues Construction. The success of our current project with Bouygues Construction calls for an accelerated and an extended cooperation. By bringing the virtual twin experience to the construction site for this industry, we are introducing new sustainable experiences never seen before, all in the cloud, all mobile-enabled, enabling all actors of the value chain, from site workers to suppliers to collaborate and innovate. The initial target number of users with Bouygues Construction is about 15,000 users and more so with the ecosystem, of course. With respect to the cloud, with our 2 diversification sectors, we prioritize cloud, and for manufacturing, we have a full cloud portfolio. But we'll go at the pace of our clients, including specific solutions like private cloud. I would like to draw your attention to some of our initiatives in sustainability. We have become a signatory of the UN Global Compact, and we are a founding member of the European Green Digital Coalition. From the untwin perspective, we have initiated plans to have 2/3 of our new license from products providing a sustainability impact. Last quarter, we were included in the Global Clean 200, the largest 200 publicly trade companies ranked by green revenue. One example of our work with BMW as a catalyst of sustainable innovation is a good illustration of that. They are expanding their use of SIMULIA for electric vehicles and hybrid systems. An important area of simulation is how to design the most efficient energy management system while taking into account range requirements and user comfort. Thanks to the 90 to 95 of the analysis being completed using virtual simulation, just a twin of simulation. This reduces significantly the number of physical prototypes by BMW. With that, let me pass the floor to Pascal.

Thank you, Bernard. Thank you to all of you for joining us today. Let's start with the financial performance first. So total revenue increased 8% at the high end of our 6% to 8% range at EUR 1.174 billion. Software revenue growth of 10% came in above our range of 7% to 9%. From a profitability standpoint, lower-than-planned expenses, combined with the high end of the guidance for the revenue, led to a significant outperformance at the operating margin and EPS level. In fact, our operating margin came in at 33.9% versus the midpoint of our guidance of 30.7%. Results, in fact, the revenue result contributed to 70 basis points of the upside and the lower operating expenses to 250 basis points. Finally, EPS came in at EUR 1.14, growth of 20% versus our guidance of 3% to 8%. Let's zoom on the component of the revenue. First, license and other software increased 25% versus our guide of 0% to 5%. About 5 points of this growth came from a CapEx preference coming from our customers, of course, and the other contributions to the upside came from results in strong performance in China and SOLIDWORKS as well as large 3DEXPERIENCE transaction, especially in transportation and mobility. Subscription and support revenue increased 7% versus our guide to 8% to 10%. And during the quarter, about 1 point of the estimated recurring revenue growth outlook moved to a CapEx purchase. However, subscription revenue increased double digits, and the churn is really consistent with what we have seen last year and early this year. With respect to services, we were able to improve our gross margin to 12.1% from 2.9% last year. Thanks to all the work we completed over the last 12 months despite a revenue decrease of 9% compared to our range of minus 2% to plus 2% due to the extended lockdown, in fact, in many countries. Moving to a regional software revenue. In Asia, first, software revenue increased 10% in Q1. China was, by far, the best-performing geo, up sharply, reflecting strong growth across all the engagement models. It had the highest growth, both for software licenses as well as for the recurring software revenue. Korea saw the beginning of a recovery, and we had key wins for 3DEXPERIENCE platform in both China and Korea. In Japan -- sorry, we also saw a strong performance in our indirect engagement model, and all our major 3DEXPERIENCE engagements are proceeding as planned, such as Toyota, today we are equipping 18,000 people and the 3DEXPERIENCE platform has been deployed to 14 programs. In India, despite the very difficult situation and environment today, we saw some year-over-year improvement. And for that, I should thank the team who did it. In Europe, we are still seeing a mixed environment with software revenue up 6% in total. Northern and Southern Europe were the best-performing Geo and improved activity in transportation and mobility, both with large mobility players as well as the automotive players. In the Americas, software revenue increased 14% with a strong growth in Life Sciences and in Transportation & Mobility. Now let's move to a view of our software revenue by product line. In fact, we continue to increase the reach and the balance. If you look at what we did over the last few years, during the first quarter, the mainstream innovation represent 23% of the software revenue. Life Sciences was 20%. And within the industrial innovations, CATIA accounts for about 1/4 of our total software, with complementary brands adding to 32%. In industrial innovation, we saw a strong momentum with these brands, notably, SIMULIA, ENOVIA, DELMIA and NETVIBES, while CATIA 3DEXPERIENCE software increased 12%, overall activity lead to a decrease of 1% for CATIA. In total, software revenue increased 4% in industrial innovations. For Life Sciences software revenue increased 16%. We are seeing strong momentum led by Medidata, where software revenue increased 20% in Q1, driven by Rave in clinical and data management, Patient Cloud and Acorn AI. Medidata had also a solid operating margin performance and a strong cash flow from operations this quarter. BIOVIA is also shifting to subscriptions with its clients and to the cloud. One example is Axendia, a contract development and manufacturing organizations involved in the manufacturing of biological drugs include COVID-19-related agents. They had adopted the 3DEXPERIENCE platform with our license to cure for biopharma and our ONE Lab solutions on the cloud. And this is an interesting case because we see more and more traction on the manufacturing side in this industry. And again, our ONE Lab solution is really suitable for this market. Moving to mainstream innovation software revenue had increased by 20% in Q1 and a strong growth for SOLIDWORKS and Centric PLM. SOLIDWORKS software revenue grew 18% in Q1 on both licenses software and recurring revenue strength. Software was up double-digit in all the 3 regions, and we saw a record that happens at our virtual 3DEXPERIENCE WORKS events. Our partners are also seeing good traction with the 3DEXPERIENCE WORKS portfolio with a role leveraging our strength in collaboration and simulations, especially. Moving to Centric PLM, software and services revenue were up sharply in Q1, sustaining a recovery began in Q4 with record bookings, and a strong new customer acquisitions, at least multiplied by 3. It shows an improvement in the key geographic markets, including Asia, with a notable expansion in China. And finally, in addition to its leading market position in Home & Lifestyle with global brands in fashion, it seems early -- it's seeing early tractions in Diversification and Retail and Food & Beverage. To be noticed that the acquisition of Centric PLM will be completed at the end of Q2. I wanted to share one of our SOLIDWORKS customer, Steel Plastic, who has adopted DELMIAWORKS. This engagement, I think, illustrates very well our ability to address a large scope of our clients' needs. This is what we call Value App. In this example, Steel Plastic, is able to quickly scale and manage multiple production site at the same time, and it's important because it's part of the COVID-19 swap testing products. And given the time constraint, I mean, having this ability to deploy on the multiple sites in a very short period of time it's key advantages. Let's cover some strategic trends in the industry sectors. While we have covered a number of our industry indirectly, let me share some of the Q1 performance highlights to give you a sense of activity by industry as we start the year. Beginning with manufacturing industry, we had a double-digit growth revenue in Transportation & Mobility, Marine & Offshore and Home & Lifestyle. Looking at Transportation & Mobility, this growth came from the strength across a number of domain, including simulation as well as data analytics and artificial intelligence with NETVIBES. We are starting to see a recovery with the automotive suppliers and some acceleration of investment by OEMs as they advance their mobility initiatives. Centric PLM drove the double-digit growth in Home & Lifestyle, of course, in the Life Science and Health Care sectors, Life Sciences software revenue grew 16%, benefiting from growth in Life Science product line as well as from increased customer activity for SOLIDWORKS in the medical devices company as well as SIMULIA. So this is also important because you remember, when we completed the acquisition of Medidata, I told you that we have a lot of levers, we could expand the footprint, specifically in the medical devices, and now you start to see the benefit of this. We are also seeing an increased customer sale engagement in Manufacturing with Life Sciences company. In the Infrastructure & Cities sectors, constructions increased double-digits, led by our activity in China this past quarter. Now how are we progressing against our growth objectives? You remember at our Capital Markets Day in Q4 last year, we discussed our growth goals and strategy to reach them. Regarding 3DEXPERIENCE platform adoptions, we have 2 growth axis. First one, so-called Value App. In fact, increasing the value we bring to our existing customers, our large installed base, through broader adoptions of all the domain of expertise. The second is so-called Value Wide to extend 3DEXPERIENCE to new customers, including the mainstream market adoptions. Both Value App and Value Wide will bring 3DEXPERIENCE to represent about 2/3 of our software revenue by 2025. In addition to this, you remember that the cloud adoption is an opportunity for us to bring new category of users and new category of usages, not to substitute our existing footprint. Now let me recap some key metrics on 3DEXPERIENCE and cloud progressions. First of all, on 3DEXPERIENCE, our non-IFRS software revenue increased 18%, 1-8, with licenses and other software revenue up sharply, 57%, which is almost twice the growth of the license overall. The largest license deal in Q1 were more heavily weighted towards Asia and especially China. Cloud, looking at our cloud contribution, it represents about 18.5% of the total software, a 2 point increase from one year ago. Based upon of our end market sectors, we set the goal last year to reach EUR 2 billion in cloud software revenue by 2025, which would represent an estimated 1/3 of our total software compared to 17% in 2020. Our cloud strategy is set to meet our clients wherever they are in the context of their industry. Our strategy is not to have one size fits all, but a cloud path for all. And for that, we have 3 different paths. The native one, people, especially for the newcomers, they start from scratch, and they start immediately on the cloud. An extended one are on the edge. When you have a large on-premise installed base and you want to complement with additional set of solutions using the cloud advantages for collaborations, for simulations, to connect also with the value network, that's usually the type of situation we see in this path. And the last one, the connected. When you have on-premise software solutions connected to our 3DEXPERIENCE platform on the cloud for collaborations specifically, and this is what we -- and build data as well. And this is what we call the power by strategy. In terms of capability, we released 21x 95% of our portfolio on-premise capability are available as cloud solutions, and with the one coming this year, we will have more solutions on the cloud that we have on-premise. Moving to cash flow. We had a very strong Q1, up 40% to EUR 642 million. Net income and noncash items grew 18% with working capital evolution, in particular, nonoperating working capital up sharply. Our net financial debt position at the end of March was EUR 1.5 billion, which is very consistent with the deleverage plan we communicated to you, and we are still targeting to be at 1x EBITDA at the end of the year. Turning now to our 2021 financial objectives. The updates following Q1 are straightforward, taking into account the OpEx upside and maintaining our revenue at constant currency. We are, first, increasing our non-IFRS diluted EPS objective to EUR 4.24 to EUR 4.28, leading to an expected growth of about 12% to 14% or about 17% to 18% in constant currency, capturing the earnings upside from Q1. At the midpoint of the range, this represents an upgrade of EUR 0.14, comprised of EUR 0.02 contribution from the revenue and EUR 0.12 from lower operating expenses coming from Q1, obviously, and also Q2 adjustment because we do not expect to have the deconfinement in all the country in Q2, and we will still have some restriction in terms of travel and marketing spending. Similarly, we increased the operating margin 90 basis points to about 31.7% at the midpoint from 30.8%. We see a higher contribution mix from software revenue as Q1 lockdowns show on-site services work on the -- on one hand, as well as the expense timing ramp-up around travel highers on the other side. This is important because one of the explanation of the good performance of the operating margin is coming from the fact that we have an attrition starting again, and we're not in a position to hire sufficiently to compensate to fit to our plan. But nevertheless, starting Q2, we will accelerate in order to recover. And I'm sure you noticed that we are still increasing the number of people we have in research and development, which is really the core of our investment. We are reconfirming our revenue objective range of 9% to 10% in constant currency. Inside this, we shift up by 1 point of growth our previous software range, bringing it to 10% to 11% growth. And for services, we shift down, bringing the services growth range to 4% to 6% growth, removing about EUR 21 million. The top line growth this year is essentially all organic, with the growth levers aligned with our midterm's plan we shared at the Capital Market Day last year. With respect to Q2, you will find our guidance in the earnings press release and presentation. To summarize, we had a solid start to 2021 in financial terms. And looking at the growth of our largest industry is the strength in 2 of the 3 product lines and improving dynamic in some of our largest Geo is really giving confidence for the year. We look forward to speaking with many of you in the coming days and weeks for virtual roadshow and conferences. And now I think Bernard and I would like now to take and answer your questions.

[Operator Instructions] And your first question comes from the line of James Goodman calling from Barclays.

Firstly, on Medidata, another outstanding quarter, plus 20%, same as Q4. Just wanted to come back to the guidance for the full year. I think last time we spoke, you guided to 14% this year for Medidata. So I wondered where your expectation was now for the business? And just secondly, on M&A, I think you've made some comments earlier this year about stepping back perhaps towards another large deal. Clearly, Medidata has been a big success. You're probably down to hardly any debt end of next year. So I wondered if you could make a comment there around your M&A sort of strategy? And finally, just really a sort of clarification actually on topic that you discussed this morning. And again, just now in terms of this preference for CapEx versus recurring that you're seeing in your customer base. Is that specific clients within auto, which are taking license rather than recurring deals? Or is it more -- are you talking more to sort of coincidentally you're seeing more demand for license in some industries and slightly less for recurring in others?

Pascal, do you want me to start first with Medidata guidance? You noticed that I had EUR 20 million software revenue in the guidance. So I think I'm already capitalizing on the good momentum with Medidata. Now you have to take into account that you are right. I mean, we had a good performance in Q4, we continue to have a good performance in Q1, but the base will not help on the second half of the year. So that's the reason why I would say, 15% is probably the right way to land.

M&A, I think it's too -- there are so many things you need to do. We'll discuss that later. I think there is no comment at this point in time.

Capex, Pascal?

Yes. I would say it maybe a coincidence more than -- that's basically -- the customer, we have engaged this quarter are the one having a preference for the CapEx. I do not see a strong pattern, except that last year, it was mostly opposite. We -- the vast majority of the people willing to invest just to be secure, they have -- the vast majority of them, they have the preference for the subscriptions because it was a way to go without having too much commitment. Now the fact that they have been selective in their investment, they are raising their strategy. I think for some of them it makes more sense to be CapEx based, and this is what we are seeing. So to a certain extent, we will have much more rebalance compared to last year. That's my only message.

Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities.

I think you'll be both pleased to know I have only 5 or 6 questions this morning. So Pascal, you alluded to your headcount and your hiring, and a year ago, you made the commitment to keep DSO's headcount flat in 2020, which you did. And for a number of months, Dassault had the smallest number of openings within your peer group. All of your competitors had also cut for the most part, but you had fewer than they. Now as it turns out, you have the most number of openings within your peer group, so a pretty steep recovery there, including themselves. The question is, how do you think about your additional headcount vis-à-vis your margin assumptions? If you were to add everyone of your current openings, is that -- can you absorb that within your current margin outlook?

Yes. Yes. Yes. The way we have developed it, Jay, is relatively simple. If you do the math, in terms of attrition, we are talking about a little bit less than 500 people per quarter. It was almost half last year. And at the same time, we are hiring, in average between 600, 700 people. So we need to obviously improve the situations, and our goal is to hire much more close to 800 people per quarter. And if you do the reverse engineering of the operating margin, you will find that approximately that's the order of magnitude of the number of people we are talking about.

Right. Okay. Secondly, with respect to cloud, thank you for sharing a percentage of revenue. But the question has to do with your cloud capacity. When we spoke about this last summer, you committed to your vertically integrated approach to DS Cloud. My question is, how has your cloud services provisioning or capacity evolved over the last 6 to 12 months? How much larger is your capacity? And how do you see that capacity evolving over the next 1 or 2 years to sustain the growth you foresee in cloud services revenue?

First of all, the strategy we have adopted is working. It's not a limiting factor right now. As you know, we have a balance between an external operator on our own cloud. We just opened our new cloud in Japan. We probably will have different kind of solutions for China, but things are also progressing to be a local operator in China for the Chinese customers. So I think the -- on the -- the second remark I would do on this is, at this point in time, we are quite agile in setting up a dedicated center. I think it's a fast path process, and we continue to keep the flexibility of -- and elasticity of using commercial cloud to -- in case a customer needs our solution, and we would not be ready to provision them on our own cloud. We can start with a commercial cloud and then migrate to our own transparently without even them noticing it. So it's a highly flexible environment. We master it well. And I think for cybersecurity, we think we have an interesting case here as well as for private cloud. So then to be seen as customer demand evolve with the specificity that we have with our own customers because they do very sensitive things with our system.

On SOLIDWORKS and relatedly, 3DEX WORKS. First, SOLIDWORKS had what appeared to be its first up quarter in new licenses in 9 quarters. So that was consistent with what we had expected, and you'll have easy comps for the rest of this year. But looking past 2021, what do you think is the sustainable growth rate for SOLIDWORKS new licenses? And then relatedly, on 3DEX WORKS, my understanding is that last year, which was just a few months of availability, 3DEX WORKS or SOLIDWORKS cloud revenues were less than EUR 10 million. When do you think this might become a EUR 100 million or more business? Could that be as soon as this year? Or do you think that's more likely next year or beyond?

The dynamic for SOLIDWORKS, clearly, double-digit growth is sustainable. There is no doubt about it. And the proof of I'm seeing, if you look at the performance for this quarter, only in volume, you have a double-digit growth in terms of units, not taking into account the fact that with the WORKS family, we are also increasing the value. And the dynamic for the WORKS family is to supplement desktop with cloud only. So simulation is cloud only. Project management is cloud only. The future of DELMIAWORKS is cloud only. So as we expand the portfolio around SOLIDWORKS with cloud only, currently we can -- we provide 2 great levers of opportunities for clients. First, a true collaborative native cloud environment fully mobile through web browser, which we think is high-performance. And keeping for the vivid community of desktop users, what they like, taking advantage of the cloud for things which are complex to do on a desktop, like simulation. Many of them are now migrating from legacy competitor solutions to our SIMULIA solution because it's extremely well integrated. And that has been a good factor that I'm sure Gian Paolo mentioned that at the 3DEXPERIENCE World. And we don't see this slowing down, but it's the other way around. So all future portfolio is cloud.

Okay. And then lastly, Bernard, on the fourth quarter call, you made some very interesting comments with regard to your internal or cross-segment initiatives, particularly as it relates to Life Sciences with DELMIA, for example, or Manufacturing and SIMULIA. Do you have an update on that particular cross-segment work that's going on? And are there any other examples you can give, not necessarily related only to Life Sciences where you're coordinating internally among your various segments?

Well, clearly, it's happening on Life Science or for Manufacturing systems. And we are pleased with that. It's happening in Construction with -- which is cloud only, mobile only, 0 code development. It's all parametrization on what we call business -- better than business experience on top of the platform. We do construction lean -- lean construction. And the lean construction is a derivative of a business experience from lean manufacturing, extremely successful for construction site. So we have more and more of those good examples. Another those are example for construction project setup, when you are 40, 60 supplier all connected online on the platform in a native mode, I think this is unprecedented in this industry because even the current player don't offer native cloud at this scale, that's why we said that they will easily reach 15,000 users in a short time period, which -- and by the way, we took the opportunity to provide a dark side based on the 3DEXPERIENCE platform to replace AutoCAD LT, which is quite interesting. And why that, not because only a dark side, but because the platform is phenomenon. So everything is connected on the consistent data environment for the working people on the field. So I think this is significant illustration. Analytics, same thing. When you do cost analytics in different sectors, it can be shared across both economy -- sector of the economy as well as industries. When you do supply management, same thing. So there is a lot of -- it's only about doing a business experience that speaks the language of the people. But the infrastructure and the services for data science and data analytics are the same.

Your our next question comes from the line of Jason Celino calling from KeyBanc Capital Markets.

Strength in SIMULIA. This is a segment we don't hear from much, but is the strength more on the SIMULIAworks side? Or is it more broad-based? And then secondly, is it the strength in Transportation & Mobility? Or is it also in other sectors?

On the similar work, if I understand well the question. A lot of SOLIDWORKS customers have been using legacy systems on their PCs basically, on their desktop. It's complex. So the number of users has not been what it should be, the number of simulation users. They are discovering cloud-based simulation. They love it. And I think Gian Paolo presented it with Manish very well at the 3DEXPERIENCE World online few weeks ago. So we believe that for the type of SOLIDWORKS community, cloud simulation as well as manufacturing by the way with DELMIAWORKS as well as project management, all this will become cloud native. And that people are replacing -- we have, I think, 14 partners today who have been selling. Another competitor solutions that I will not name, and they have decided to stop to sell this competitor solution and to really replace it by the native cloud solution. So the dynamic is a positive dynamic. And I think this is a high-value for them in terms of simplicity, adoption on ease of use. The second part of your question, was it related to T&M? Pascal do you want to make a couple of comments?

It was, but my -- I guess, the first part of my question was more about the prepared remarks for SIMULIA. It was mentioned that it was strong in the quarter. Was it for the stand-alone business? Or was the comment more related to the 3DEXPERIENCE WORKS part of it?

The SIMULIA growth is coming from both sides. So we still have the larger Bouygues installed base. We have consumed additional capacity. But also we have more and more customers using our integrated solution in terms of simulations because there is a lot of value to have all those applications, those roles being integrated with the platform. Because it's a way to do multiphysics, multiscale simulation, which is difficult to do if you do not have this. So Transportation & Mobility, Aerospace & Defense, Industrial Equipment, Life Sciences as well, this is where we are seeing the traction and Medidata also. So it's really relatively broad where -- for SIMULIA where the growth was coming from.

Great. And then my second question is for Pascal. Last quarter, you outlined how February might be more gradual or at least that's what you were building into your guidance. But the license performance for Q1 and the guidance for Q2 suggests it might be more of a pronounced bounce back. Any update to your framework here?

No. You noticed that I didn't change the revenue target even if the mix has more software in it. And why so? Because there is something we were not expecting, frankly speaking. Usually, the large transaction are happening in Q4. And we saw big transaction happening in Q1, especially in Transportation & Mobility. And it's -- I will not say it's unusual, but it's rare. So -- and when I look at the pipeline, the pipeline didn't grow significantly compared to last time when we spoke. So that's the reason why I think we are doing some pull forward, which is good because we are securing, to a certain extent, the guidance, we are derisking the guidance for the full year. But at this stage, we are still in Q1. I will not look forward to improve the revenue target, to be clear.

Our next question comes from the line of Michael Briest calling from UBS.

A couple of follow-ups from me. Just on the cost side of things, Pascal, obviously, very good performance in Q1, and particularly Q2, partly because of the hiring situation. How should we think about margin progression next year and out to 2024? Are the savings this year sustainable? Or does it sort of dampen the level of margin expansion we should get next year? And then just in terms of the recurring revenues, helpful to get that 17% for 2020 of cloud revenues. I think that means it's 21% of recurring revenues. So what's the breakdown of the rest of recurring between maintenance and subscription, so that we get a feel for what's driving each of those?

Okay. So let's start with the first question on the margin, Michael. Now, I think we took some actions to contain the spending last year because we are facing the pandemic. I mean, our model is requesting to invest, especially if you look at the broad scope of things we do. I mean, there is no reasons for us to push the margin at a higher level. So clearly, next year, you should consider that we will come back to the nominal margin we used to have and we still have some improvement expecting from Medidata because you know we have this plan to gain almost 2 points EBIT margin every year over the next now 2 years -- additional 2 years. So that's really what's going to drive the margin. Related to the recurring revenue, it's why -- it's not because I want to hide something, I do not want to give you the precise split, it's because you guys, you try to sometimes do complex calculations because at the end, what is the most important is what is the level of recurring revenue we have, whatever it's coming from, the maintenance or the subscriptions. Because if it is really recurrent, you will have almost the same level next year. And you do -- you could expect to have some growth. So nevertheless, what I could say to you is, in the past, we used to have 2/3 coming from the maintenance and support and 1/3 coming from subscriptions. And since the acquisition of Medidata, we are much more close to 60, 40. We'll take a last question.

Okay. And your last question comes from the line of Laurent Daure from Kepler Cheuvreux.

Three short questions from me. The first is on the Life Science business. I understand Medidata is still driving the growth, but the other activity seems to be heading to a better trend. Do you expect over the medium-term to match the Medidata growth from the other healthcare activity? That's the first one. The second one is just a clarification on the services revenue of the first quarter. Do they just reflect the low licenses of last year? Or do you still have issues to build like you had last year with Boeing? And my final question is on the second half margins, which implicitly are calling to be down year-on-year. So I was just wondering what kind of hypothesis you are built in the model on top of the headcount addition. Do you expect travel already to come back, marketing to be spent more aggressively? Any granularity on that would be useful.

Okay. So let's start with your first question, are we willing to have all the product line we have in Life Sciences converging with the performance of Medidata? The answer is yes. Now you have to take into account, it's a different model for BIOVIA. The beauty with Medidata is really related to the number of clinical trials. For BIOVIA, it's a little bit different. It's really related to the number of new research projects they are doing, which is, to a certain extent, not having the same dynamicity. Nevertheless, what we are doing right now, we are against migrating as much as we can BIOVIA to subscriptions and to the cloud because we want to have a consistent way to engage. We want to have, to a certain extent, one contractual framework with all the customers we have. And we could expect that the two will align because we will maybe not split on the long run, the revenue between Medidata and BIOVIA, it will be through the solution and the solutions combining the two. That's what I can say. On the services side, no, I think -- thank you for the question, Laurent, because you're right, I should have been probably more explicit about this. So definitively, the free services we did last year for some of our largest clients is not something we are doing in 2021, for sure. So the gap -- the EUR 10 million gap is only coming from the fact that some of our services activities cannot be completed because this has to be done on site. And just because we still have customers having -- not opening their site, it's not something we can do. That's as simple as that. And as you may know, when you miss services activity, it's difficult to recover over the year because it's -- we have a limited capacity. Nevertheless, I think you noticed that we did great to reprofile our services organization in order to deliver the margin and to have a much better utilization rate. And the fact that we have been able to move from 3% to 12% margin, it's basically the proof of what I'm saying. Related to the H2 margin, yes, you are right. I mean, you could assume that the margin will be down compared to last year, but I just want to remind you that last year, we almost cut all the spending, we increased the hiring and the growth will come from on both sides. I mean, as I was explaining previously, we will -- I will accelerate the hiring because we need to reinforce some of the organizations in order to have the muscle to continue to -- basically to do what we do and especially to prepare in a proper way 2022. And the second thing is the more countries are reconfining, the more the travel will start again and also the marketing and events will start again. So that's really what is factored into the guidance for H2.

With that, thank you very much for participating to this call. We are always here for you. Don't hesitate to call us for any further questions. Thank you very much again, and hope to talk to you soon. Have a great day.

Thank you. That concludes today's conference call. Thank you for participating. You may all disconnect.