Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Team Dassault, thank you for joining us and supporting our conference every year.

It's a pleasure, Amit. It's a pleasure.

It's a pleasure to be with you.

Good day, everybody.

So let's, I guess, start this session by providing the audience with some context. Gian Paolo, firstly, I guess could you maybe tell us a bit about yourself and your journey to your current role at Dassault?

Thank you, Amit. Very quickly, I'd like also to introduce here my colleague, Manish Kumar, who is Vice President of SOLIDWORKS Research and Development, who is assisting us today during the Q&A. I started my journey -- I'm a mechanical engineer. I started my journey in the '80s, so I've seen, in a way, the dawn of computer science in the engineering field. Moved to the U.S. in the '90s, I was working in Computervision. Then I moved to California. As a Californian, you have to do a start-up type of experience. I did a couple of them. At that time, I started working with Dassault Systèmes in the late '90s. So I've been partnering with Dassault Systèmes since then for more than 20 years. I joined officially as an employee at Dassault Systèmes in 2011, at the time, as the Head of Research and Development. And in 2015, I became CEO of SOLIDWORKS.

Thank you for that quick overview. Gian Paolo, clearly, you've traveled around a fair bit.

Yes.

I guess, secondly, for the benefit of those who may be less familiar with Dassault, can you outline exactly what is SOLIDWORKS? And how does that business fit in within the wider Dassault portfolio?

Yes. Thank you, Amit. SOLIDWORKS was founded in '95 here in Boston by a former Computervision employee. Actually, we were colleagues at the time. And in '97, it was acquired by Dassault Systèmes. So basically, Dassault Systèmes has overseen the entire growth of SOLIDWORKS in the last more than 20 years. We are present in all the economic sectors that right now Dassault is a leader of. Dassault Systèmes is active in 3 sectors. One is the manufacturing sectors, the traditional sector where we definitely have a large market share and definitely the leadership. Life science sector, that we entered in high gear recently with the acquisition of Medidata, Dassault Systèmes. SOLIDWORKS here is present in the medical devices industry. We have a larger share of manufacturer of medical devices of all sizes and especially in the start-up environment that is very vibrant especially in this area of the world. And also the third sector is infrastructure and cities. SOLIDWORKS is very active there as well especially on the equipment side of the industry. So basically, everything that you see in a building like this from lighting, doors, MEP equipment is designed mostly with our -- with SOLIDWORKS software. So we are present in all the 3 sectors. And as for the product lines, you know Dassault Systèmes has 3 public lines. One is industrial innovation with brands -- historical brands like CATIA, DELMIA, SIMULIA and ENOVIA. Then there is the life science product line. And then there is the mainstream innovation product line. We are leading the mainstream innovation product line together with a young company-centric software sister brand. And SOLIDWORKS is basically right now more than 90% of the revenues of that product line. We as SOLIDWORKS specialize in design. Design is our root, our fundamental DNA. But recently, we are expanding our horizon to cover 5 domains. So from design all the way into manufacturing governance, which is also data management simulation, including also sales and marketing. So our roots are design. Designers all over the world uses SOLIDWORKS. But our people presently, especially with our being part of the 3DEXPERIENCE platform strategy, we are expanding the breadth of our portfolio and of our basically footprint in our store base.

Thank you for the overview, Gian Paolo. And then we'll definitely talk a lot more about SOLIDWORKS later in this session. But at this junction, maybe if I could also bring in François-José and [ Kelly ] into the discussion, please. So François-José, Dassault's Q2 press release talked about the current business environment and profitability trends persisting into the second half of the year. Could you maybe give us an update on the near-term demand trends so far in Q3?

It's probably a bit early because, as you know, that's always in the last days of the last month of the quarter that the main -- generally, the main contracts are signed. I mean, however, we don't see at this stage different trends compared with what we have announced in Q2. We still see the attrition we have seen in Q2 for our people. We're increasing our hiring capacity to continue to invest in R&D, to invest in sales development. And at this stage, we see no specific difference in terms of trend compared with our Q2 announcement and Q3 guidance.

Got it, François-José. And maybe you touched upon head count dynamics and attrition and sort of you continuing to sort of work on those hiring plans. Maybe, [ Kelly ], if I could just bring you in into the discussion as well. Firstly, is there anything you would like to comment from your side in addition to what François-José has said on head count and attrition? And secondly, I actually have a follow-up question on margins for you.

Sure. Thank you, Amit. It's a good question. As you mentioned, it's a topic we've been discussing. And maybe for a little bit of context, I'll remind everyone, in the first half, our head count was stable year-over-year. It was up 5% within R&D. And on an overall basis, what happened, our hiring was offset by attrition that was higher than what we had anticipated in our internal financial plan but in line with 2019 levels. So as François mentioned, we adjusted by increasing our hiring capacity to accommodate 900 to 1,000 people per quarter, and we've taken some actions to contain attrition. Our objective is to accelerate to net gains in head count in the coming quarters. And so to answer your question, Amit, our efforts both on the attrition side and on the hiring side are on track to deliver in that regard. I guess the only other thing that I'll mention since I know the question had been raised is that over a long time horizon, we're very confident in our ability to attract top talent. And I'll mention maybe just a couple of points that we feel are compelling to potential new team members. The first is around innovation. So Dassault Systèmes has a proven track record of delivering forward-looking, game-changing innovation. And we -- actually, our 3DEXPERIENCE platform is a great example, recognizing that our applications would need to be on a common architecture and launching that in 2014. Challenging ourselves to create the Virtual Twin Experience in 2020 is also another example. So that ability to innovate should be relatively attractive. Additionally, the second point is around culture. Dassault Systèmes introduced our mission to harmonize products, nature and life well over a decade ago. So again, having the ability to innovate within the context of a truly mission-driven culture, we believe we're very well positioned to attract, again, premier talent over the long term.

[ Kelly ], that's helpful, which naturally leads me on to the next question, which is what does that mean for margins. How are you thinking about the overall cost base setup shaping up, say, as we look towards Q3 and Q4?

Yes, it's a good follow-up, Amit, because, again, that's something else we've been highlighting. So -- and again, for some context, in the second quarter, we reported margins of 32 -- operating margins of 32.2%. The overperformance of 250 basis points relative to the midpoint of our guidance was driven in part by the head count tailwinds we just talked about. And then it was also driven by travel and marketing expenses being a bit lower due to the pandemic. So what we've said is that as we increase our hiring to achieve net gains in head count, as we see those tailwinds related to travel and marketing expenses kind of dissipate, we have given some guidance for the third quarter margins of 28.7% to 29.6%; and for the full year, 32.7% to 33.1%. And so costs seem to be shaping up the way that we have forecast, and we're confident in our ability to deliver within those guidelines.

Got it. And maybe later in the session, if you get a chance to come back to those dynamics, we'll do so. But now I guess, turning back over to you, Gian Paolo, to dig a little bit deeper into SOLIDWORKS. I mean one of the questions -- well, I guess, one of the points which I heard when I started looking at Dassault back in 2008, 2009 was that SOLIDWORKS is seen as a leading indicator for the wider group. And I sense that, that perception still persists to some degree today. Would you agree with that and help us understand why is SOLIDWORKS seen as a leading indicator for the group?

I would agree. I would agree. I think this is a correct characterization. There are a few reasons for this. So first of all, our customer, client base is very large. We put together more than 350,000 clients in our lifetime, and the majority of them are very active. So in a way, SOLIDWORKS is a way to have good parts on the economy. It's a voting machine, if you will. So the purchasing actions of our client base is following close some indicators like the manufacturing index -- the leading manufacturing index. It's also because of the nature of our business and mostly small and medium companies, the sales cycles are relatively short, so our days or weeks. So we are -- we see we have a sense very rapidly on where the market in our space is going. Also, the small, medium business are known for being very agile. They need to adapt very, very quickly. And that's also another why we aware where SOLIDWORKS goes, probably the wind in manufacturing is going. Another important thing is that we are very active in the start-up space. So we have a very important program. We have about 700 new start-up obligations a month, so we have start-ups in the thousands. And it is a very successful program. You have to understand that more than 30% of the start-ups that enter our program become fully viable and profitable commercial enterprises, and then they become quite important and regular clients. But in a way, the start-up environment, again, is pointing towards the new trend. We have a very large number of start-ups, for instance, in the medical devices sector or in the green economy sector. And the pace of introduction and success of these new companies is, again, a good indicator where the economy is going and how Dassault Systèmes is always able to serve this particular sector. We have very success -- some of those companies are very successful. One example, for instance, is a company called Spyce. That was a restaurant robotic automation that was recently acquired by sweetgreen. A company called Nimbo robotics, another warehouse automation company that recently raised more than $50 million in funding. Another one is in the medical sector is [ ZenBio ]. It's a company that has the vision to create artificial blood. Another one is Boom Supersonic, which is a company that wants to bring back in the commercial aviation the supersonic flights at the more affordable and sustainable framework of cost and consumption and [ evolution ]. Right now, it's evaluated at more than 1 billion. All these companies enter our ecosystem and was a clear indication of where the economy -- the manufacturing sector was going.

You touched upon your installed base. You talked about start-ups. You talked about how some of them have grown over the years. I mean the way we see it, your installed base, if I'm not wrong, today stands at more than 1 million users. And I was trying to better understand what -- how do you think about that installed base in terms of what is the proportion of active customers or the ones who are contributing to your top line. How do we sort of better understand the monetization or the revenue opportunity coming out of this installed base?

Yes, that is a very important question, and it's very important for the growth dynamic of SOLIDWORKS. Your numbers are accurate. We have more than 1 million seats sold. I already mentioned that we have more than 1/3 of 1 million clients. We add about 20,000 new logos every year, so the new part of our business is very relevant. Approximately 60% of our bookings come from existing clients, but it's from renewal but -- renewal, maintenance from existing clients, of course. But the new part of the business, which is 40% of our bookings, more than half of that comes from completely new clients. So yes, we have a very, very large base active. I would say more than 60% of the client base is active. We have renewal rate in more than 90% renewal rate, which, again, is not mandatory. We -- right now, maintenance is optional. So we have a traditional business model. We sell petrol licenses, and we also often maintenance. More than 90% of our clients year-after-year renew the maintenance program. In a way, we already have a subscription business, something that our -- some of our competitors did not have. Also, of course, I want to highlight the fact that we are also transitioning with adoption and the introduction of the cloud, the new Software-as-a-Service business that is pure subscription-based. The reason why there is so high maintenance licensing being paid is because we have continuous stream of innovation. Our clients understand that the value of staying connected with us through maintenance service because they have a continuous improvement of software. They have a new -- they have new announcements every year in the hundreds, okay, and stay connected with our very large distributors and resellers, value-added resellers that literally add a lot of values in terms of consultancy and training and the support that our clients value a lot. We also have a very successful education program. You have to understand that more than 80% of the top educational engineering institutions in the world teach Abaqus and SOLIDWORKS as part of their curriculum. And not only that, they use SOLIDWORKS in their research labs. And they value the certification that we offer because students -- when the students get out of the university with a university diploma and SOLIDWORKS certification, they are more likely to find their dream job. So all these factors contributed to a continuing growth and being some sort of loyalty in our installed base that is also perceived in the many events that we are rather doing there. In particular, we have an annual event that's called 3DEXPERIENCE World that has been the largest gathering of mechanical engineers and design enthusiasts in the world. We have people showing up in person in the 6,000, 7,000. And in the last -- last year, we did it only virtually. We had more than 30,000 participants. The next year, we will go back with in presence -- an in-person event. And we will also do it hybrid. There will be a simultaneous streaming. So all these things conjoin for a sustaining expansion of our client and user base. Right now, we are about 40% of the market share, and we continue -- we are expanding, and we intend to continue our expansion of this footprint.

Gian Paolo, that's real good color on the installed base. And actually, I want to dig a bit further into -- you made some very interesting points over the course of your response. So -- and maybe I could use the Dassault framework of VALUE UP and VALUE WIDE. So firstly, how do you think about the ASPs and the deal sizes shaping up? And here, I want to give an investor question that's come in, is help us understand what COVID-19 has done to the growth trajectory in terms of ASPs and in terms of deal sizes.

Our ASP has been constant. Actually, we did not and will not change our price structure in decades literally. So it has been pretty constant. What is growing is the deal size, okay, for 2 reasons. One is that we are also building up a good, strong relationship with larger companies that need a larger involvement, that are making bookings with the deal size that is large. And we are also embracing this type of customers that right now are about less than the large companies in our space, basically more than 200 employees, that are right now about less than 10% of our installed base but -- actually, our client base, but bring in almost 50% of the revenues and growing. So this is one aspect of what we are doing. And going back to your point of VALUE UP and VALUE WIDE, we are in a time where we are really focusing a lot on both aspects of growth because we are expanding our portfolio in the way that never happened before. So it was -- today, it's more than $1 billion bookings. And 80% of it is in our original root, which is design, okay? But of course, the model design is not based on jobs anymore, this is also a megatrend that we are leading in a way. Today, to have a successful design, we have to have integrated and successful simulation and manufacturing. You have to support the good market of your clients and so on. So this is a way to value up in our very large installed base. As I said, more than 350,000 clients, a large majority of them are still active. And all these clients have new needs because there is this megatrend of Industry 4.0. We call it the Industry Renaissance, where they need to fully digitalize their workflows, and they need to achieve digital continuity. This is a huge opportunity to VALUE UP. We have been offering high-quality design solutions for the best part of our existence. But right now, we have expanded our portfolio to 4 more domains. So in addition to design, we are now specializing in the simulation. And simulation is becoming increasingly important because one of the fundamental trends in design is that people have been focused on optimizing the shape creation, right, moving from 2D to 3D. This has been the trend over the last 20, 25 years. Right now, the need to characterize -- digitally characterize the function, this is a huge trend. One way to do it is to adopt -- massively adopt simulation technology. So this is one of the domains that we started already many years ago. We were the first -- one of the first brand -- design brand that said, well, actually, in addition to a design system on the fingertips of every designer, we also wanted to empower each designer to use easily high-end simulation capabilities. And we are -- we achieved that with a line of simulation. But right now we are expanding it to areas that are more complex like nonlinear and multiphysics. Today, engineers not only want to easily and quickly have define any aspect of the geometry of the materials of the products, but they want to understand digitally the behavior in all circumstances. It's not only stress and strain but how they behave under heat conditions, under fluid flow and so on, aerodynamics for any type of -- or even magnetic field, right, because all the tools or devices today are connected, and this type of simulation is very, very important. So we are very, very aggressively pursuing leadership in the simulation space. The opportunity is huge in our space because the attachment rate right now is about 15% of simulation per [ CaTSiT ], okay? So we definitely want to bring it up to -- we initially bring it up to 50% or more because simulation is also key to another transformative technology using generative design. So it goes in the -- it's a section of automation that we speak at length about this. But in addition to that, we are adding a manufacturing domain. So there was an acquisition, a company called IQMS, which specializes in MES, which is manufacturing execution systems; and ERP, enterprise resource processes and management. We never sold in our store base these capabilities. Now we are able to do it. In addition to that, we are proposing a new generation of governance tools or data management tools, PLM tools that are very scalable from data management all the way into supply chain management, the quality management, compliance and regulatory process approval, very important for the medical sector, all in the cloud.

That's very helpful, Gian Paolo. No, I think that's great. I'm just mindful of the time and the questions.

Okay.

And I think we need to pick up pace. As I said, very quickly, any comments on what COVID-19 has done structurally for your demand? And has anything materially accelerated, you believe?

Yes, we believe so because, first of all, 2020 was a year of big challenges, but we do. We were able to end the year with the growth of our bookings and revenues. And in 2021, we see the size of double-digit acceleration. Actually, Q2 was 23% growth. The reason is simple, in my opinion. Yes, COVID in a way helped that. Why? Because companies of any size realized the importance of resilience and flexibility. So we had our clients that had to change their business model and also their objectives very rapidly also to help fend off the crisis, for instance, converting entire warehouses from producing devices of the [ gyn ] to producing kits for COVID tests. We have literally a client that in a few weeks was able to do this. You cannot do these type of things if you don't have a flexible type of infrastructure and if you don't have very efficient systems. And what we offer to the market is a compressive solution from -- again, from design all the way into manufacturing and sales and marketing. So the need of agility, the need of resilience, the need to organize -- to be able to organize the workforce at any time, anywhere, on any device, people overnight, as you know, and to work from home, we had thousands of clients who do that. We have to provide our own ability to set up extranet tools and so on. Companies were not used to that. They were used to employees coming into the office and using the Internet with security and so on. Now our technology extends the security to anywhere in the world. And this flexibility is highly appreciated and resilient -- creates resilience. And therefore, there is a lot of attention to our 3DEXPERIENCE WORKS portfolio, which is designed exactly to provide agility, resilience and collaboration capabilities without the physical constraints of a workplace or a specific data warehouse.

I guess moving on, I was hoping to touch up on competition and then cloud, but I'll just merge those topics in the interest of time. So in terms of competition, you talked about 40% market share. You talked about sort of the value-add that you have. You also talked about your pricing not changing much. But what are you seeing in terms of discounting from competition? Are you seeing any kind of aggressive pricing behavior? And then I want to lead that into what's happening on the cloud side.

Yes, we see a lot of pricing competition. But more than pricing, I think, is a fight for value, okay? And I believe we still have the upper end is, again, because we see -- in everywhere, we see our competitors trying to undermine with a lower price structure, which is, by the way, it is not very much sustainable. On the other hand, we prefer to offer a high value. And for companies in the manufacturing sector, the return on the investment is easily computable. So I mean cheap software doesn't help your go-to-market, doesn't help your quality, okay? It doesn't help your innovation. So yes, we do see competitors with prices that are lower than what we do, but this does not translate in a pressure in that direction. We are more focused on the value side of the equation. We maintain a very large R&D organization and thought leadership very important. And again, small, medium business are -- for them, innovation is extremely important. And quite frankly, the cost of software is negligible if compared to the importance and the value added of innovation. For companies of our size, small, medium companies, I would say it is vital. In terms of competition, yes, I would just also add the one thing that right now, it seems like the song of the platform is spreading in the manufacturing world. What we have been singing the song since 10 years. And the importance of integration, full integration and common data model, in order to truly achieve digital continuity is something that we already have in our pocket because we've been investing in this in the last 15 years. Now this is instead -- I mean our competitors have been joining the chorus in the last couple of years, I would say, spending enormous amount of money to secure the technology. But what is not happening is the integration in the common data model. And this creates for us, I would say, a significant competitive advantage.

That's very helpful. And actually, you talked about competition. And as I said, I want to segue into the cloud here. Dassault has this target of more than $2 billion from cloud by 2025. Help us understand how SOLIDWORKS contributes to that overall target? And also, how do you think of, for example, offerings from the likes of PTC and Autodesk, which continue to talk a lot more about their own cloud credentials?

Yes. Yes. So the Dassault Systèmes ambition has been communicated, as you said. And our contribution will be in the range of 20%, 30%, which is in line to our current contribution to overall Dassault Systèmes revenues, which is today about 22%, 23%. So it is in line with that. I have to tell you that our mission, our 3DEXPERIENCE WORKS portfolio is 100% cloud, so we are really transitioning and dedicated and focused on the fill transition on the cloud technologies. Why? Because cloud is significantly convenient for small, medium businesses because, basically, it will reduce your cost of infrastructure and to increase the agility and the speed to set up and use what you need. Also the scalability of the cloud is [ flexibility ]. So every time we need a new capability, we just add an application, you are in business in a few minutes. So this is extremely important for our clients as well. Also, our structure is very modular. So you buy only what you need, and you use it for as long as you need it, so a lot of flexibility. And we are fully dedicated in this part. Our competitors, you mentioned the 2 big competitors, which are Autodesk and PTC. They are very successful companies. May I say, however, that their vision has been quite different. So first of all, they moved -- they first moved to a new business model, to a subscription business model, without really moving into this direction from a technological point of view. So the technology innovation has not been the first and foremost in their business transformation. They started talking about the platform, a unified platform and an integrated set of solutions only recently. For instance, PTC acquired Onshape and acquired Arena Solutions. But this happened in the last 2 years at its cost of more than $1 billion. Autodesk acquired a small company called Upchain, which is -- which specializes in PLM in the cloud and whose claim to fame, who said their largest installed base was SOLIDWORKS customers. So I think this is a space that we are claiming. But our solutions are -- we are ready for the transformation into a platform because we have been preparing for more than 10 years. Now our competitors talk about the platform, notably PTC with the Atlas platform, but they started talking about it last year. I can tell you that the work to integrate, to really make a platform effective in the speed of digital continuity, it's a decade-long work and requires a lot of investment. We have passed that because we have seen this direction very early, and we did a lot of investments with our extensive R&D capability. In addition to that, if you look at the completeness of the portfolio, I don't think any competitor right now can really cover from design to manufacturing through simulation with the full ownership and leadership in those categories. We are the only company that has so strong -- its product is so strong in simulation, and we own the type of technology, the best solvers in the world. Abaqus is very well noted. Our competitors will try to solve this problem through partnerships, but partnerships are volatile. So...

Got it. As we are probably coming towards the end of this session, maybe to round off with a couple of big-picture sort of broader questions, if I may, given that you are not only involved in SOLIDWORKS but also in the overall strategy of the firm, as we pivot to the cloud, how do you think about your relationship with the hyperscalers? Because it's a very interesting problem facing some of the traditional software companies as they continue to pivot to the cloud, so if you could talk initially about your relationship with them, sort of the big hyperscalers, as it comes to owning the customer.

Yes. Yes, that is a very important -- this is a very important point, Amit. I can tell you that our relationship with hyperscalers is very strong and very good. However, we priced our independence. So we don't rely on any of them to deliver our technology. We own the full stack to the point that, as you know, we have invested in Outscale, which is a company that is able to provide data centers with specific characteristics anywhere in the world. They're very nimble, very agile, can set up a data center in weeks in very limited spaces. And we have the stability. We can definitely deploy on AWS. We can deploy on Huawei. We can deploy on Google. We can deploy on Azure. We can deploy on any type of infrastructure because we own the entire stack of technology. I believe that this gives us a unique competitive advantage for several reasons. So first of all, our strategy is uniquely dictated by us, okay? We are not depending on a third party. As strong and prestigious as it may be, we don't depend on that. Nobody else can say that. In addition to that, we also can guarantee to our clients where their data is, okay? And that integrity and intellectual property characterization is extremely important for many of our clients. And we can say that we can deploy our technology anywhere in the world in the most appropriate setup but that is convenient for our clients, all the way into our own infrastructure that is called Outscale. Of course, it is not our intention to compete with the hyperscalers. No, that is not our model. Our model is to maintain our independence because it gives us agility and a lot of flexibility in our strategy.

Got it. And I guess just to conclude, I know we can never do justice to a question like this in 2 minutes that we have, 2 or 3 minutes, but Bernard Charles has talked about sustainability and inclusion at Dassault. Help us understand how are you fostering that culture within the firm? And how, for example, compensation for senior and top management is being linked to the sustainability and inclusion objectives at Dassault?

Yes. Yes, I can vouch -- I can definitely vouch for what Bernard said, that sustainability has become a business imperative. We are one of the few companies in the world that has been approved by the Science Based Targets initiative, which is a very difficult to -- it's very difficult to achieve their criteria. So I think there is less than 1,000 companies all over the world, and we are among them. We have promised that we will be net 0 by '24. And we want to do this in an innovative way, I would say, in the Dassault way. So not only -- not simply by acquiring carbon offsets, so we really -- are really very serious in what they call footprint versus handprint. And we have a large focus on both reducing the footprint but expanding the handprint. And we are going to do this is, for instance, to invest heavily in components that will make the difference, in the green energy, new materials recyclable, new automation, new ways to manage and also measure the impact of the products throughout their life cycle. We are introducing -- we were the first, by the way -- so we were the first to introduce a concept of measuring the carbon footprint and also the ecological footprint many, many years ago, when these topics were not yet part of the corporate language. And so I think we intended to do so. In terms of sustainability also, we are -- so they include -- sustainability includes also the concept of inclusion. So today, we have about 40% of the executive level are women, and 30% of people manager are women. And we wanted to expand this footprint, and we are on track to achieve that. And actually, we all have incentives to be inclusive and make sure that our behavior is in line with this cause of sustainability.

All right. I guess with this, well, we are out of time. We are slightly ahead of time. But on behalf of Citi and its clients, thanks for joining us, Gian Paolo and team Dassault. Best wishes to you for the rest of the conference. Ladies and gentlemen, this concludes the session on Dassault.

Thank you very much.

Thank you, Amit.

Thank you.