Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Great. Well, let's get started with the session this afternoon. For those who don't know me, I'm Adam Wood. I look after European tech at Morgan Stanley. I'm very pleased to have Rouven Bergmann, the CFO of Dassault Systèmes. Rouven, thank you very much for joining us in San Francisco. Great to have you back at a live in-person conference.

Yes, it's great to be here. Thank you. Welcome, everyone from my side as well.

I'm just wondering, do we have a disclosure form that needs to be read out? Okay. I think everyone knows the disclosures are on the Morgan Stanley website. So please look there if anyone wants to go see that.

Maybe let me start off now. Obviously, we were excited going into the year about the growth prospects and the opportunities, but some of the global events have overtaken things and -- with the conflict in Russia and Ukraine. I wonder if we could just maybe address that to start off with. And I guess the things that investors are asking us are kind of twofold. The first one is, could you help us out a little bit with exposure to the region? And then could you help us out a little bit with -- and I know it's difficult because you haven't closed the quarter yet, but do you see any risks of changing in behavior where customers are starting to kind of think about postponing or delaying decisions because of the challenges that brings?

Good question to start.

Sorry, we'll get the difficult one out of the way and then we can move on to totally more interesting and better things.

Yes. No. So first of all, you're right, the last 2 weeks have been really tough when you think about all the humanitarian -- the humanitarian crisis and the present situation. We've been spending the last 2 weeks really to figure out how we can help the people in the region. And first of all, I looked at this as a crisis of humanity and people. And of course, we have customers in Russia. So our business is impacted to that extent as well, but it's less than 0.5% of our total revenue. So it's not really material or large from that perspective. You talked about the larger trends. When we were coming from 2021 into 2022 to provide our financial guidance for this year, we really saw very robust trends coming out of 2021 to continue to thrive into 2022, certainly in our major markets. And we can talk about those later a little bit. I still believe that those trends are strong to continue. I think we'll have more clarity at the end of this quarter. Even though Q1, I do not expect that there will be much of an impact. The question will be more about the second -- the remainder of the year. And I think we'll be able to talk about this at the right time. But right now, we've been really focused on supporting the people, our teams, to take the right actions. And I think we've made a lot of progress to make sure that all of our people and all the teams in the region are well informed about what we are going to do.

And as you say, that's the most important thing -- you've got employees on the ground -- supporting them, making sure they're okay. And have you already stopped selling new product?

Yes. So all the new sales and new projects are suspended. There are, of course, the sanctions have been implemented from day 1. It's quite an -- it's a lot of work because the sanctions are issued by the European Union as well as by the United States. And so they're not consistent necessarily, so they really have to be put into action. But essentially, all new businesses stopped. Everything that's ongoing is being reviewed along all the sanction criteria that are strictly enforced and implemented. That's very clear.

That's perfect. That's very helpful. Maybe moving on from that subject to the platform. I think one of the most interesting things about the Dassault Systèmes story is this opportunity the business has to go from a more product-centric company to a more platform-centric company. And we've seen this as one of the biggest opportunities in tech. Could you talk a little bit about the success you've had with the 3DEXPERIENCE platform across different industries? And then maybe talk about it when you get it into customers, what does that do in terms of the deal sizes that you're driving with those customers? How does it drive adoption of competitors that see people adopting?

No. Adam, that's a great question. I think the 3DEXPERIENCE platform is a centerpiece of our strategy, and that's across domains and industries. And really, what our large customers as well as small customers -- so the direct as well as indirect business. Of course, the penetration between the 2 segments is very different. So in the indirect business, the penetration of 3DEXPERIENCE is still very low. And it's really our job of enabling our partner ecosystem to drive the execution. And I'm sure we'll talk about that in a few minutes as well. But when you look at our large and direct customer base, really what our customers need to transform and address the challenges for future growth, they need an integrated data model and an integrated system of solutions to really drive consistency from design to simulation. So modeling and simulation into execution across collaboration, simulation and manufacturing. And this is really what the platform enables. So we're coming away from selling and offering point solutions into an integrated platform with an integrated data model. Why is this important? Because the future for us, and that's what the customers who have embarked into this journey with us really see is to create digital twins of experiences of end users, but also digital twins of processes. It could be an assembly. It could be products like a car. We were the first ones to create a digital twin of an airplane take off to simulate that. So to be able to do that, you really need to bring the virtual world, the virtual experience and the real world together. So real-world data becomes a real important aspect. And the way to enable that, our customer, is through a platform-based approach. And that, of course, creates multiple opportunities for us as entry points sometimes. We have a large V5 CATIA installed base, as you know. So our strategy is to transition that to a 3DEXPERIENCE installed base. And then further downstream is to really drive consistent execution because of the design process becomes a closed loop. So your design is not for 1 version, and then you wait until the next version to start the design again, the design becomes an ongoing process as you optimize the experience for your end customer. And then the other real important driver of the 3DEXPERIENCE adoption is sustainability because the real game changer in driving and reducing your carbon footprint, your greenhouse gas emissions, is to really think about the utilization of your product, the materials used for your products, the energy consumption. And so we have to factor that into the design of your materials and products and configuration as you gather more information. So that's another really important driver of 3DEXPERIENCE adoption, which I think Renault is a great example. They have transformed -- what we have discussed and sold to Renault is not the vision of rethinking the engineering of the car. It's about rethinking the usage of the car. And create a virtual model, a digital twin of the user of the car and how the consumption and usability of the car is going to change over time. So these are really exciting times for us, that the platform enables us. And this is far beyond what would be possible if we were focusing on migrating V5 to V6. I think it's really important for investors to understand that the opportunity is much larger because whenever we transition from the V5 to 3DEXPERIENCE, there is a 1 to 2x uplift. And then if we add other modules and solutions, we continue to drive our value up strategy by extending more solutions and this is increasing our revenue base.

So the way to think about it is this is really -- in the way that Salesforce is a platform around the customer and marketing, SAP around finance, you want to be the platform around the product. How that's -- the idea, the testing and the manufacturing...

From the design to the execution and the usage. I think the connection to the end user becomes more and more critical. And how is that happening through real-world data. And you see the design process through the user data. And you make the product better, you make it more sustainable, you create better experiences. And this is in our core industries, in transportation mobility. It's in aerospace as well as in consumer oriented. I mean the IKEA HomeByMe solution is a great example of enabling end users. Our Centric PLM in the fashion and lifestyle industry, same. You want to understand how users are -- what are their choices in terms of what materials they like. And you bring that back into the design process. So it happens everywhere, and it's enabled through our platform. So we're really excited about the platform opportunity and the potential it creates for us to grow.

And could you talk a little bit -- you alluded maybe -- with the large customers where you're seeing the bigger penetration? You talked about 1 to 2x increases. Any examples you can give us around the uplift you get with these customers when they go fully 3DEXPERIENCE and you've done a reasonable set of cross-selling into that customer?

I mean, it depends from customer to customer. I think it's -- the 1 to 2x uplift for 3DEXPERIENCE implementation typically includes collaboration. If we then go further downstream to manufacturing, there's another turn. I think the DELMIA portfolio is massively value generation for our customers because here they bring essentially from the design -- from the model -- design and simulation into the real manufacturing and the optimization of the supply chain as well as the optimization of our resource allocation, in terms of utilization of your production sites. So that becomes core, too close to loop. And there can be easily another turn of another uplift. So it creates multiple opportunities for us to land and expand and grow.

And you spoke a little bit about there's a bit of a difference in the penetration between large enterprise and SMBs. And I guess that's partly a distribution thing for you, you're going direct to the big customers; it's partners to the mid-market. What are the challenges? Is the direct sales force now kind of done, they're trained and executing? Where are you and what you need to do in the channel to get them to the same level as the direct sales force?

Yes, you're right. You're right. I mean the partner model -- we have a very -- if I look at our SOLIDWORKS partner ecosystem, we have 1 million SOLIDWORKS users. It's a massive installed base, a super successful business. We are winning 25,000 new customers every year. So we are very, very proud. But the way we do the sale, the partners are very much trained to sell the typical desktop version. And it's a great application. But in the future, we want to accelerate the growth, and we are doing this by selling -- by pushing more towards the cloud solution of SOLIDWORKS, SOLIDWORKS 3DEXPERIENCE and then the WORKS family because gives us the ability to add more capabilities: modeling, simulation, collaboration, manufacturing. And the penetration for those downstream applications is very, very low in the mass market. But many of those engineers are using competitive applications. And we want to make it much easier for them to use the SOLIDWORKS family because they are a user of our design software already. And we believe that this is a massive opportunity for us. I know we've been talking about this for some time, so it's not new to investors. But we really think that 2022 is an important year for us to make progress in enabling that partner ecosystem. We've changed the incentives. I think we are -- we've come a long way and believe that over the next 1 to 2 years, this will show more momentum.

That's really helpful. You spoke about where you get the extra turns of uplift on revenues into customers and you talked about this move into the manufacturing world. And to me, there's always been a distinction for Dassault that there's the virtual world where you've been incredibly strong, where everything is still virtually in the computer of the product. And then there's the real world where we're actually executing manufacturing live on the factory floor. And the last few years, you've really made the big move, partly through acquisition, to get yourself into that space. And I think Boeing is a big customer that's adopted there. Could you tell us what the thinking was in terms of going of moving into that real world, and how you see the competition in that space? Because it moves you away from the traditional modeling players into people like SAP and Siemens that compete very much on the factory floor.

True. I mean it comes back to what I said before. I think that the part -- the reason why we can play in this market right now is -- and we are confident is because of our platform. Because we've really natively integrated the manufacturing capabilities into the platform. And DELMIA has a really, really strong product portfolio to tackle one of those -- to tackle these challenges. Great example in the transportation, in one of our large customers, BMW. We had a press release a few quarters ago about the DELMIA Quintiq adoption in the electric vehicle segment of BMW. BMW's challenge at this point in time was it's a new market for them. Now it affects all their production series cars. It's really going high scale. There is a new supply chain that needs to be optimized. And the demand is massive. So the supply really is the problem, not the demand. So you need to find ways to much better optimize and be much more sophisticated in your production cycle and in the way you manage the entire assembly line. And the ability to simulate that, to optimize it and then push it through to the suppliers, that's one of the core capabilities that the DELMIA product portfolio brings. And you combine that with the combination to the design software, it really closes the loop between the design and the execution. And I think that's one of the first examples we have seen. And it's our -- it's always been our strategy. We look for references, we execute them and then we use them as templates to go to next and the next and the next. So it's absolutely key to our strategy. But that really gives us a very different position when compared to SAP and others is that we come from the design and the simulation and now we go to the execution. So we are able to bring together the design and model to the real world and execution. And now we combine it with real-world data to really also measure the usage and the experience of the end customer and we close the loop.

That's very clear. So we talked quite a bit about the platform, probably more in your traditional industries of automotive, aerospace and those. You also want to be a much bigger player around the architecture, engineering, construction space. I think we can see that -- I love the statistics that people come up with around wastage in car plants, maybe .5%; on a construction project, it might be 30%. So it's an incredibly inefficient industry. But you don't have the penetration there on the design side. How do you go into those customers? Do you lead with the platform? What are you doing in that AEC space to drive your penetration?

Yes, you're right. It's a fascinating area, and it's -- as you said, on the -- it is lagging digitization and really the ability to connect and close the loop. I think there's a lot of different players that focus on different points. But not really solving the -- logistically, the problem. We believe that the virtual twin approach for buildings, how to operate a building, but also how to design a building will become very critical. As I said before, the real-world data in terms of measuring the footprint of a building and how to really bring that to optimize utilization. Now we talk about increasing energy costs. So utilization becomes absolutely critical. Smart metering. All of those aspects really have to be brought together into a model-based approach. I think that's where our strength sits. You're right. I think we have the tools and the systems to be a relevant player in this market. We announced a great partnership with Bouygues Construction, which gives us a lot of real evidence on working with a leading player. That's again a reference model approach. And what we now have to figure out is how do we scale these efforts through a go-to-market where we can really address the opportunities. Because this is not as organized as in our typical industries. I mean construction projects, they happen everywhere. And some of them are private, some of them are public. It's a very different go-to-market and it's a very different business model. Certainly, not as close to what we've been successful in the past. So the real next step for us to figure out how do we partner and the right go-to-market setup and how do we increase our participation.

And in the past, I mean, I would argue that Dassault has used M&A as a way to solve quite an army of problems. Could that be a solution in this industry? Or do you want to do it organically?

No. I think the partner approach, first of all, is the first strategy to think about, partnering models. But M&A is always an option for us. As you said, it's been what we've been doing successfully in the past. I think the stakes are very high in this industry because it's not about replicating what exists. It's really about enabling the future. And so the bar is very high to find a target that really would strategically make sense at this point. So we really invest into partnerships, our own ability with our industry team, but are also very active in screening the market and potential targets and try to go very innovative new ways instead of thinking about one of the incumbents, I think I [ can say so much. ]

That's very clear. Let's maybe talk about the third leg of the industry strategy and talk about Medidata, which is obviously the business that you joined Dassault through. So Medidata was best known for clinical trial management and specifically their electronic data capture. But I guess the plan as you bring Medidata into Dassault is a lot bigger than this. And I kind of thought about it on 2 levels. There was the broadening that was already happening within the Medidata business. And then there's what Dassault brings to even enlarge that further. So maybe could you talk about that first stage of how Medidata was expanding out from simple management of clinical trials and what the opportunity is in that?

Yes. Absolutely. The strength of the company has always been the vision to look at the clinical process end to end. Yes, We had the electronic data capture system, as I would say, the gold standard of data capture in clinical trials. But the vision has always been much broader from the identification of the right patients for the trial, all the way to the submission of the data. And I think as it exists in other industries as well, the challenge always is that there are different practices in different companies, and how can you streamline that in the platform. And there are always areas that are transitioning faster than others. But the vision has always been there. I think what really has been an absolute strength, and I think that's what the founders have seen a long time, a decade before, is the value of the data. Because all the data that's been captured with the Medidata Clinical Cloud, we have the ability to reuse this data and reorganize it, run algorithms through the data. Of course, we deidentify the data. We have to aggregate the data. But we can then bring these data insights back to our customers to help them to advance evidence generation in clinical trials. So this is really -- you come from a system of record down to the science and you talk to the scientists of your customers about optimizing the design of a clinical trial, but also how can you advance evidence generation, for example, through Synthetic Control Arms. And that's where the regulators come in. So you do that on a scientific level, you bring the regulators in like the FDA, to get them comfortable with this approach. You work with the leading pharmaceutical companies who have the vision to go down this path. And you can really create something that's extremely unique. So this has -- this was in the making and in the planning and in execution prior to the Dassault Systèmes acquisition. Now the Dassault Systèmes acquisition brings to us a level of scale and discipline and the large organization that helps us to execute this at a larger level, this vision and strategy. But those things existed in the past. The other dimension is the ability to connect to patients. So patient-centric applications, patient cloud. For example, a great proof point is the Moderna trial through the COVID vaccine, where we were a partner or are a partner to Moderna to scale the recruitment of over 60,000 patients within months, which would have taken years with a prior approach. So this -- again, this vision of connecting the patient home to the research project instead of having the clinical site at the center is also something that existed in the vision and in the planning and in the product already prior to the acquisition. Now we're executing that at scale. The 3DX acquisition brought in addition, the BIOVIA portfolio. So the ability to really organize, structure the research process around multiple labs, lab information, but also the collaborative science to organize and scale research organizations. That's whereby BIOVIA brings a lot of -- very robust and strong systems that we are now combining and attaching to the Medidata sales force to really address the mid-market of our customer base, where I think these types of solutions are creating a lot of value, as well as in precision medicine, where we have a lot of also smaller customers who are really advanced. And the ability to -- because research and development is really coming together in these projects because you are -- you're creating essentially treatments for individual people. And so the research activity and the development activity is really a step-by-step process. It's not possible to have that separated in a different organization like a large pharma organization is organized today. We need to bring this together. And that's what the combination of BIOVIA and Medidata really allows us to do. So it changes our value proposition. It also changes the value proposition of BIOVIA and as well as of Medidata. And it opens new opportunities. We've created an integrated go-to-market for life sciences to address that opportunity more holistically.

We've got a few minutes left. I'll give the opportunity to any questions from the floor. Otherwise, I'll carry on. So maybe let me ask a quick follow-up on the Medidata opportunity. In the same way that you described that we can go from 1 to 2 with a platform, then if we sell the manufacturing portfolio and go to 2 to 3, is there a way to think about what you can do in the Medidata portfolio in terms of what you have put together?

Yes, of course. Of course yes, I mean there's only a very few customers who just run an EDC -- electronic data capture system. Today, they have 4 or 5 solutions together on our platform. And that already is an uplift of at least 2. So compared to when I think 5 years back, so that step has already been well underway. Then when we add the Patient Cloud capabilities, it really is a next -- really significant uplift of another turn. Because the core thing with patients, it's -- because we can do this also very efficiently because we have the regulatory compliant back-end system. So -- and the -- there are competitors, but they don't combine the front end and the back end. There's some new companies and lots of private equity or venture capital going into this business because there's a lot of value to be created to reduce the barriers of entries for patients into this system. So you want to communicate directly. But then you need to make sure that the data that you're generating gets to the right place. So that's a big opportunity. The data science opportunity for Medidata AI and the Synthetic Control Arm opportunity is another significant opportunity, but we monetize this differently. It's more outcome-based, and it's also more on a single trial basis. So we really have to evaluate the value of a single engagement and the data we can bring and the value we create. So there has not been an enterprise contract. It's really a single project that's then attached to an enterprise contract. So there are multiple ways for us to continue to grow. I mean we've been -- 2021 was a year of a growth acceleration for Medidata, right beyond the 15% that we've targeted. And so the business is in very good shape, very competitive. Win rates are very strong. And I think the differentiation really is through the end-to-end platform, the patient centricity as well as the ability to use very unique insights because of the data assets and the AI capabilities.

That's very clear. We're bumping up against time, maybe 1 very small -- or maybe not. Just on the shift to cloud, how much of the portfolio now is available? This is a big question we get on companies that are running on-premise models. Are you comfortable with where the portfolio is in terms of being able to be cloud delivered?

So the portfolio is not the limiting factor here. We have all our solutions in the cloud available as well as on-premise. We are moving progressively towards the cloud. We talked about Mainstream. I think that's the biggest opportunity with the SOLIDWORKS family and 3DEXPERIENCE in the cloud for that market. And we see great proof points in our industrial large enterprise segment. I talked about Renault as an example, IKEA, but also a lot of the newer players in the auto sector, like Rivian and Tesla, they all operate in the cloud with our solutions. So for us, the cloud is a way to create value for our clients and move them progressively to the cloud, knowing that a lot of our customers have significant installed bases with very mission-critical systems that have to be certified as well because they work in regulated industries with high levels of certification for new products. So the cloud for us is an enabler of growth. We're not using the cloud to replicate what already exists. We look at the cloud as an opportunity to accelerate our growth and expand our reach.

Perfect. Well, run out of time there. There's another page just full of questions here, but I really want to thank you again for joining us for the conversation.

Thank you, Adam. It was great. Thank you so much.

Thank you.