Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Thank you for joining. My name is Stacy Pollard. I'm the JPMorgan software and IT services analyst based out of Europe. And today is the 24th of May 2021, and this is part of the JPMorgan Global TMT Conference. During this session, we are speaking to Dassault Systèmes' CFO, Pascal Daloz, and we will cover key investor topics, including recent Q1 results, I'll go through some outlook for 2021, long-term strategy and a lot of other topics. The session is planned for 35 minutes, and I'll run a fireside chat for about 20 minutes, and then I'd love to open it up to audience Q&A. [Operator Instructions] So feel free to start out putting your questions through as you like. But in the meantime, I want to say Pascal, welcome. Thank you very much for joining us today.

You're welcome, Stacy. it's always a pleasure to be with you and all of you at this time of the year.

Great. Great. So really, I'm going to start with a big picture question, if it's okay. Look, there are so many interesting things going on right now, both short term and long term. But I'd love to just talk about the long-term big picture Dassault strategy and vision for long-term sustainable growth.

That's not an easy question, but I will start to do it in less than 1 minute. So as you may know, Stacy, our belief is we can use the virtual world in order to imagine the future. And this is what we put behind the concept of the virtual twin. The virtual twin is really not the digital twin because having virtual objects, you could do many things. You could simulate, you could capture all the knowledge and know-how. You could collaborate, you could basically connect with what is happening to the real world. So this is all this concept behind. And our goal is to provide this virtual twin to a reality in 3 sectors of the economy: the manufacturing space at large, the health and life sciences and as well as city and territories and infrastructure, which is much more an [indiscernible] market for us.

So I was looking through actually, and of course, at your Capital Markets Day, you gave growth scenarios for each of those. So what's kind of -- well, kind of interesting, I guess, the manufacturing industries perhaps, either you're a bit more mature there or indeed those industries are more mature. And you're looking at 6% to 8% growth for Dassault in those areas versus, let's say, a market growth of 5%. And then in Life Sciences & Healthcare, clearly, market growth is quite speedy there. I'm seeing 9% on your numbers, 13% to 15% for you. And then -- sorry, and 10% of the group Infrastructure & Cities, 7% market growth, 12% to 14% for Dassault. This new area -- I won't say new, it's not fair, but it's -- you guys talk about being the challenger there. So I'm very interested in what you're doing in Infrastructure & Cities and how are you challenging that industry? And what do you guys do to really break in and become a leader?

So you're right. I mean if you look at the 3 sectors of the economy, we have the leader in manufacturing, and we are sharing the leadership, I should say, in health and life sciences. But as soon as we are focusing on the infrastructure and cities, we are the challenger. And our goal is to disrupt this market. The way we want to do it is by applying the platform concept, which is something that does not exist yet. And why it's becoming relevant to do it in these sectors? There are a few reasons for that. The first one is because we are focusing on the construction more than on the architecture side. And as you may know, on the construction, you need to connect all the stakeholders. And this platform concept is really relevant. The second thing is you need more and more to change the way to build. In the past, many of the activities were happening on site. We are almost doing everything on site. And for productivity reasons, more and more, what is happening on site is much more a preassembly or final assembly of all the different pieces. So which basically means what we have developed in other industries is collectively relevant because you need to do modeling and simulations, you need to do a lot of collaborations. You need also to be able to simulate many things. And every -- all those technology are basically what we are doing. The proof of what I'm saying is we signed big contract recently, most of them in Asia, but in Europe, specifically a large one with Bouygues Construction. It's a sizable company in the construction side, and they are generalizing the usage of the platform to the 14,000 people of this business entities.

That's quite impressive scale on that deal. We look forward to seeing how that continues because I know you've had a partnership with them for a bit. And then -- I'm just going now backwards in order. On Life Sciences & Healthcare, you talked about being one of a couple of players. Interested in how this -- from a competitive perspective, who you're seeing, where you're seeing yourself going and maybe where it looks like the competition is moving. Because I know the likes of Veeva have been making a lot of noise, but perhaps they're not quite on the same track as you. So I'm interested in how you see them coming through or potentially competitively.

Yes. So what are the competitors we are facing in life sciences? There are a bunch. Because as you may know, we have a significant presence on the research side, on the clinical side and more and more on the manufacturing side. And we do not have one single competitor for everything we do. If I look at the research side, which is something we are doing for almost -- more than a decade, the #1 competitor we have right now is Schrödinger, a U.S.-based company, probably well known by our folks. And I think we are competing relatively head to head. We have some differentiations, but in terms of scope and what we do is relatively equivalent. In the clinical space, Oracle used to be the competitor because it's a database-driven business and they have this huge installed base. And Medidata, they capture a lot of market share against them over the last decade. And we start to see Veeva, right, coming into this space with, I think, a different value proposal because they are coming from the commercializations and they are expanding into the product development, focusing mainly on the quality management where I think they have good solutions. And also what we put behind the acronym of CTMS, which is the program management, if you want, for all the trials. But the core functionality, which consists to collect the information from the patients wherever they are, on site, from home, to treat these information, to extract the insight, to do the statistic, to do the randomizations, all this core functionality when you do trials are really the core of Medidata and they are by far the leader. And in the manufacturing space, this is an interesting space because it has been relatively well served by the people doing the -- mastering the process industries for almost 20 years. And with the introduction of the biologics, this is changing the game because it's much more a hybrid systems. So it's a mix between the process industries and the discrete industries. This domain is not well mastered. So you have to do a lot of simulations right now in order to do the setup for manufacturing systems. What is happening in the vaccine right now is a good illustration of how difficult it is to scale. And we are seeing more and more opportunity into this space. And the reality, it's relatively an untouched market because you have a lot of own homegrown systems.

Great. And then the third leg, I guess, of your trio, Manufacturing Industries. Of course, this is a little bit more your traditional area. And one thought is, historically, you've leaned a bit more towards discrete industries on this, although arguably less so when you think about life sciences. Is there -- do you think there's an emerging of competition between processes industries and discrete? Or it's still decently separated out? Because a lot of times, when I think of your competition, I might think of Siemens and PTC, Autodesk. And maybe then on the process side, in oil and gas, for example, I might think of AVEVA, Bentley, Hexagon. Do you see any of these sort of coming together or not yet? Or do you have a special [ competition ]?

That's an interesting question because as -- you're right, Stacy. If you subsegment the manufacturing industries, they are organized around the discrete and the process industries. And from a solution standpoint, it's 2 different set of solutions. Nevertheless, if you look at what we did in the last, I would say, 5 years, we have some large process industries companies who has adopted the 3DEXPERIENCE platform. And why so? Because the vast majority of the people serving the process industry are serving with point solutions. I mean it's highly verticalized, very specialized. However, they do not have the full digital continuity across all the different domain, upstream, downstream. And more and more, you have to connect also the supply chain. So basically, you have all the set of requests you could have when you are deploying the platform. And I think if there is maybe a way to, as you say, to have a certain level of conversions between the 2, it's through the platform. Because as far as the application are concerned, it's still 2 different set of specialized solutions.

Yes. No, that makes sense definitely. Now maybe we'll talk a little bit more recent, so kind of back it down to short term or more recent stuff at least. You had a pretty good Q1, good demand recovery in the quarter. We saw Q1 revenues up 8%, software was up 10%. Could you talk about some of the drivers there? I know, for example, you had very strong performance in Mainstream Innovation. You had some large deal activity, if you could maybe touch on that. And then maybe some of the different industries.

So I would say differences in Q1 compared to last year is we saw the rebound of the new license. You remember, it's a 25% growth compared to last year. And it has been driven by exactly what you said, by the recoveries in certain industries, such as the auto sector. Last year, it was really a difficult sector for us. And we saw some significant growth coming from both OEMs as well as the supply chain. The growth has been driven also by the continuing momentum we have in Life Sciences with an excellent performance of Medidata, plus 20% this quarter, which was also the case in Q4. So clearly, this increased activity coming from the COVID-19 are still fulfilling the pipeline. And people are also accelerating some trials. This is the reason why we have this good momentum. And last but not least, you're right, the mainstream market at large. So it's not only SOLIDWORKS, but it's also the WORKS family. It's also Centric PLM. So -- and why so? Because we discover that for the market where the price point is relatively affordable, the rebound is extremely high. And in many, many countries, when the economy is starting again, we are seeing significant traction on this product line. So the combination is plus 25% on the license and plus 7% for the recurring revenue mix at the same time. Having the subscriptions growing double digits, which is also a key point.

Can I dig on the SOLIDWORKS and the WORKS family strategy actually. This is really quite interesting to me because I feel like we're kind of at a breakout point. What is -- maybe to start the question, and I'm not sure how to ask it, even, what percentage of the revenues perhaps or deals is CAD or design-oriented? And then what -- how many -- what's the attach rate of all the extras, the DELMIA or SIMULIA or -- how does that work? And what do you anticipate, I guess? Well, what's the opportunity?

So if you look at -- again, the mainstream, is not only -- it's not anymore only SOLIDWORKS, and you know it's -- but let's focus on SOLIDWORKS because I think this is the question. The penetration rate of the manufacturing is extremely low. It's below 5%. And you remember, we have developed through an acquisition the complete new product lines called DELMIAWORKS in order to be able to fulfill these needs. And it's a significant one because we believe there is more than 10 million company, having these needs one way. If you look at the simulation space, the attach rate is around 20%. So there is still -- we still have a lot of opportunity to continue to expand. Then if you look at the collaboration, sorry. It's around 1/3. 1/3 of the installed base have collaborations capabilities, whatever, it's PDM systems, platform or sometimes a simple file sharing system. So that's the reason why we are convinced that the WORKS family is really a significant growth driver for us because we have more than 1 million commercial users with SOLIDWORKS. And if you do the math, the penetration rate on the rest of what we do is relatively underpenetrated. So -- and that's the purpose. To do it, we want to be -- to make it in an affordable way. That's the reason why we are promoting a lot of the cloud because this is the easiest way to do. And we have redesigned the complete set of solutions to be -- to have the right scope of functionality but also to have the right price point for them.

Yes, that makes sense. Now just going back to -- on the opposite side of the mainstream perhaps, large deals. Can you talk us through any of the larger deals that you had come through in Q1? To what degree was that either carryover from Q4 or maybe pull forward from Q2? And then talk about the pipeline as you see it building out through the rest of the year.

So yes, you're right. I mean the good news in Q1, we had the large deal bring back was basically the missing piece last year. I believe we saw some of them in Q4. So the vast majority are not coming from slip deal in Q4 move into Q1. It's really coming from the deal we have in the pipeline for 2021. Nevertheless, some of them they are relatively and expected to be closed in Q1. I mean they were positioned later in the pipelines, especially the one in the auto sector. And that's where I think something has changed in Q1 because we saw some of our large customers participating some transactions in order to have the functionality, to have the software much more rapidly and to accelerate the deployment. That's, I think, what we have seen. Now coming back to the pipeline. The pipeline is relatively okay for the full year. I mean it's relatively well covered for the revenue we have to make. In terms of maturity, it's much better compared to last year. Last year, there are -- we were almost missing 15% in terms of pipelines. And to avoid to be in this same situation, we took extra decision and extra -- we did some extra activity in the second half of last year in order to fulfill the pipeline, and we are seeing the benefit of it. And in terms of maturity, we are also seeing the sales cycle being a little bit shorter. Having said that, we are still backloaded. It's -- all the time, this is what is happening in our industry. But this is also the case for this year. And in terms of large deals, again the auto sector is really where we are seeing big difference compared to last year. We have less contribution of the aerospace and defense compared to last year, which has been an extremely good year despite what was happening in this industry. We are also seeing good traction of the industry in life sciences and health care and also consumer goods and consumer packaged goods. The industrial equipment is starting again, mainly driven by the mainstream market. But for the large machine builder, we are not yet seeing the big transactions the same way we used to have before the crisis.

Okay. And any color by geography other -- is China, for example, automotive? Or -- yes, I mean, any big things you'd like to highlight?

So the momentum in the geo is 100% linked to the deconfinement, right? As simple as that. So to start with Asia, yes, you're right. China, we are almost back where we used to be before the crisis. We had an extremely good Q1 with more than 40% growth. So we almost catch up in -- between, I will say Q3, Q4 and Q1 this year. Japan and Korea, we are seeing the recovery, especially also the -- coming from the direct sales but also the indirect sales. We are still under pressure in India, obviously, for good reasons because this country is still suffering right now and not all the regions are open. And the south part of Asia, Australia, Vietnam, Thailand, Singapore, we are also starting to see a good momentum. U.S., last year, I mean, we had a good year in the U.S., specifically driven by life sciences and also aerospace. And we are still seeing the good momentum in the U.S. on all the growth drivers I was mentioning before, the mainstream life sciences and also the auto. Europe, it's a little bit mixed because we are seeing the recovery in the north of Europe. But for the south and -- I would say, including France, same mix. And again, in all the country where it's fully deconfined, we are seeing the activities starting to be back. And for all the others, it's still difficult because we cannot visit all the customers. We still have to do remotely, so it's not helping. But I do expect end of Q2 in vast majority of the country will be behind us.

Are there any areas where implementation has been held back or your ability to sort of push forward with a customer because of COVID? Is that still a factor? Or is that virtual now?

It was. Yes, it was. It was because all the office in all the countries are not completely reopened. So -- and usually, our people are not the first ones going back to the office, I mean, in our customer's facilities. But again, we had some constraint in Q1. We still have some in Q2. But I do expect for H2, it will not be the case. So -- and a good indicator is really the services performance. You have seen in Q1, we were a little bit short. And I do -- and I slightly adjust the guidance for the full year, taking into account that we will have almost the same situation in Q2. But after, I mean, it's not anymore a concern.

In fact, that was my next question. You raised your full year guidance with Q1 results. Maybe just talk us through a few of the details of what was driving that. And you did also mention there was an element of, I think, a little bit of a beat on the margin associated with maybe some late hirings. Maybe just sort of walk us through that and how you see that developing through the year?

On the revenue side, I didn't change the guidance, except that I rebalanced EUR 20 million in services into software, which is, I think, much better. And the reason is because we signed some sizable deal in Q1, and I do expect to do slightly better in Q3, Q4. So to a certain extent, I think counterbalancing the lack of revenue on the services side by additional software services was still something which was consistent with the pipeline and the visibility I have. On the margin side, yes, I mean, Q1 has been extremely good for a couple of reasons. One is because we still have country where still not fully reopen. So people are not traveling, we are not organizing marketing events. And this has definitely an impact. And if you look at the good performance we have, you could explain probably half coming from there. And also because we were late in the hiring because we have to hire. You remember last year, I kept flat the number of people compared to end of March. And in 2021, we need to -- despite the fact that we were increasing the research and development. So clearly, we continue to invest last year. But overall, especially on the sales and marketing side, I need to hire people this year in order to be in a good -- I mean to be in a good place for 2022 and also the end of the year. And I'm late, that's point number one. And point #2, we have seen the attritions being back, which was something. Last year, the attrition rate was below 4%. Now we are back to 8%, which is usually the normal level for us. And obviously, if you are late in terms of new hiring and you have additional attritions compared to last year, this has automatically an effect on your margins. So for the full year, we have upgraded the margin, taking into account the benefit of Q1. And also I still expect to have some benefit in Q2. But H2 I will be on plan. I mean I do not expect to have some additional difficulty to hire. Also, people will be back on the road and we will start to organize again the event face to face.

Yes. And then talk us through the mid- to long-term drivers, since we're on margins, mid- to long-term expectations, every year sort of organically and what the driving factors for that are, yes.

So you remember, in the EUR 6 EPS targets, I slice the margin improvement in 2 different places. So you have this dedicated -- you have a specific plan for Medidata. Because at the time of the acquisitions, we committed with Rouven, he was the CFO at the time, that we will increase by 200 basis point every year, at least for the next 4 years. So you still have these contributions in the EUR 6. And then from a pure organic standpoint, I'm still believing we could improve the margin by 50 basis points on a yearly basis. And we will probably have some dilutions coming from some acquisitions because it's very rare when we are acquiring a company being at the profitability we are. So if you do the math, you will land to basically the improvement I described during the Capital Market Day last year.

Great. And just a quick reminder, if you have any questions, put them in the session chat. There is a way to hit that Ask a Question button. In the meantime, one more for me. So again, a bit of a big picture question. How important is the 3DEXPERIENCE platform to your customers? So what percentage use it? And then how often is the platform the differentiator which wins you the deal? Or -- I mean, basically, a lot of times you win the deal because you have the best-of-breed product as well. So I don't know maybe it's not easy to always differentiate which one is the winner, but yes.

I like this question a lot, Stacy, because you're right. I mean if you listen carefully, many of our competitor, usually, they put positions the best-of-breed approach versus the platform approach. The reality, you need both. Because in our world, you still need to have the best set of solutions. Otherwise, at some point of time, you are not enabling the people to do things. But in this moment, having the ability to ensure the digital contributor from A to Z, being able to connect all the different stakeholders, being able to mix the real world evidence, all the information coming from the IoT systems with the modeling and simulations. I mean all those things is also a prerequisite for many of our customers. Now to answer to your questions, the vast majority of the large customers we have, I would say, 2/3 of them are embracing the 3DEXPERIENCE platform at large. And they see the benefit of it. For them, I would say the platform have probably more value than the best of breeds. Nevertheless, if you want to convince the users, you still need to have the best of breeds also. For the mainstream market, it's a little bit different, it's almost the opposite. For the vast majority of them, they are still putting more value of the best of breeds. Nevertheless, we see things changing because they -- and this period where people have to work from home has been a rebuild for them because having the ability to give access remotely, connecting all the people, connecting with the customers also with the suppliers has been something critical. And we see more and more of them discovering the value of it, but we are not yet at the same level compared to the large company we have served.

So since we are on the best-of-breed topic, I think Dassault is well known for design, manufacturing, PLM simulation. Are there any areas that you'd like to highlight that you think perhaps, that I didn't just list, that perhaps people underestimate your capabilities or just don't know about them as much?

Well it's a good question also. You're right. I mean the vast majority of people, they know us from the PLM suite. But if you look at what we do, we are much more broader than that. And I would say, if I have to give only one element, which is probably underestimated is the value of the analytics and big data. And a proof of what I'm saying in the -- if I look at the large deal we signed in Q1 in the auto sectors, this piece, we call it the data science topics, will represent more than 1/3 of the deal. So -- and in some cases, for example, what we did [indiscernible] it's more than 1/2 of the deal we signed. So it's really something which is very becoming predominant. And why so? Because if you have a connected car, one of the value is to wrap the information real-time into the systems, extract the insight and reinject the insight into the design, into the tests or into the manufacturing systems. So having one single environment to make it happen is really a key differentiator. And it does not mean it's something which is we are giving for free because we have a collection of applications in order to do it. So to a certain extent, the platform has almost the same capabilities than Palantir's, what they can do.

Yes. Do you think -- I mean that's exactly one of my questions. There are a lot of specialists on data, but not necessarily industry-specific, right? Do you think it's your industry-specific component that wins you the data analytics portion of the deal, especially against some of the guys. You probably have maybe greater data analytics capabilities theoretically, but not as specific to the science that you guys are addressing.

You're right. I mean the vast majority of them are generalists. Because day 1, the difficulty was to put in place the infrastructure, the data lake, all the integrations and start to run the algorithms. But after almost 2 to 3 years, many of our customers, they discover that it's not enough because what are you doing [ after works ], okay? Having the insight is something valuable. But if you cannot have these insights becoming actionable, where is the point? So that's the reason why I think we are having this momentum. A good example is what we do in life sciences with what we call the synthetic control arm. It's a pure analytics and big data approach. But just because we are running the clinical trial with specialized set of applications, we can substitute some of the cohorts being used only to do the control with synthetic cohorts, with synthetic control arms coming from the big data analytics. That's exactly what we can do in many, many set of industry research because we have the vertical applications in order to make it happen. So I think you're right. I see this market shifting from being a horizontal market to a much more vertical market, at least for the industry.

Great. Incoming question from an investor. Why are you so strong with EV start-ups?

There are a few reasons for that. But the #1 thing is if you look at the productivity coming from our software, it's quite impressive. I did a benchmark compared to the previous generation, which is V5 compared to the new generation, which is 3DEXPERIENCE platform, CATIA, for example, or SOLIDWORKS. The ratio of term of productivity is exceeding 50%. So if you are a newcomer, there is a lot of value for you to start with the next generation of tools in order to create the productivity gap. And if you look at the competition, by the way, this is interesting. I claim that the vast majority of them are still not yet at the level of CATIA V5, the previous generation.

Yes. Fair -- yes. No, fair enough. Yes. We have about 1 or 2 minutes left, let's say, 1 minute. Of course, I'm going to ask you a giant question that you could probably speak about for half an hour in a minute. In fact, I'm going to ask 2. Can you, big picture, give us a quick jab through your strategy around cloud and how you see yourself converting to that? And then maybe the final one, any thoughts or movement around M&A?

Okay. So cloud in 1 minute. So the vast majority of the research and development is -- investment is behind us. We have 95% of the solutions available on the cloud. And with the 2022x release coming at the end of the year, we'll have more application available on the cloud that we have on track. This leads to me to give an indication to you guys, and it was my objectives to achieve EUR 2 billion software revenue in 2025, which is 1/3 of the revenue coming from the cloud solutions. Why I think it's achievable? Because in many new sectors, we are starting directly from the cloud. That's true in life sciences. This is true in construction. This is also true in consumer goods, consumer package goods. So for all the new sectors, we start from the cloud. All the newcomers, you are mentioning the EV guys, but the guy developing the drones also or the newcomer in general are starting directly from the cloud. And we are seeing also through the power by strategy, which consists to connect the large install base of CATIA V5 and SOLIDWORKS through the platform running on the cloud also becoming a great contributor to this momentum. That's for the objectives. Now the way we have architected our strategy, we are relying half on what we do on cloud providers, such as Amazon, which is by far the largest one for us. But as you know, we also have our own infrastructure. And I think it's becoming a competitive advantage. Why so? Because the first generation of the cloud infrastructure has been developed for the mass markets, for the retail, for the entertainment, but not really for mission-critical software. The one running the manufacturing plant, the one being used to do the certification of an airplane. So for all those mission-critical software, I think the level of securities, the level of constrain is much higher. And this is the reason why we have this ability to develop specific cloud for one customer or sometimes for a group of customers. And I think it's a huge advantage. And we control the full stack, not only our software and the platform, but everything which is related to the virtualization to the load balancing, all the technology you need to run the cloud. For the M&A, you're right. I mean we are -- the goal is to be deleveraged almost at the end of the year, if not somewhere in the H1 next year. Being deleveraged means being at 1x level of net debt ratio compared to the EBITDA, which basically means we will be able to consider a sizable move. And we have a pipeline in all the 3 sectors we are serving. So it's not only life science, but it's also manufacturing and also city and constructions at large.

Great. No, that's a perfect place to leave it, give us something to look forward to towards the -- maybe towards the end of the year. Pascal, thank you always, as always, for your time today and to everyone listening. Thanks very much.

Thank you.