Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Hi, everyone. We have the pleasure to have Rouven Bergmann with us today. Rouven is the Executive Vice President and Chief Financial Officer of Dassault Systèmes, known to a lot of people here in this room as he was the CFO of MEDIDATA before, and he was instrumental in the integration of MEDIDATA within Dassault Systèmes. So we are very pleased to have him today.

I will start with a few questions, and then I will take questions from the audience. So Rouven, talking about the demand environment, can you talk about what you see in the market by industry vertical? And maybe give some color on your pipeline by vertical.

Sure. Good morning -- late good morning to everybody. I hope you enjoy the conference. Yes. From a demand perspective, of course, start into the year 2022 was in a way disruptive for all the reasons we are aware of. But I must say, if I look across our segments, the various industries, we have a very balanced portfolio. We serve all the big markets and sectors. What our customers, in general, before I go maybe more deeply through the industries, are looking for is they're looking for simplification and a platform to operate their business and something that really helps them to transition. They think decades ahead. And I think Dassault Systèmes is very well positioned with our strategy, our platform approach to really help our clients to overcome siloed operations, right, to connect the dots to really bring together the design of a product with the simulation, the execution, the end customers, right, in one common environment. That's our strategy. That's how we are helping to transform the incumbents, but also that's where all the newcomers are looking to us and coming to us to operate their business on. And if I look at the sectors at large, in Transportation & Mobility, we all know what's going on there. Everyone is rushing to becoming -- to change from the traditional combustion engine to electrify the car. But that's not enough, right? A lot of our customers are thinking about -- they're putting sustainability first. They think about the usage of the car, the entire life cycle. It affects -- impacts the materials, the design -- not only design, but also the material science of the cars. And so it's a real wholesale transformation and discussion we have. So it's not that we're just traditionally on the design side with CATIA, now we are going downstream into the execution and the manufacturing as well as into the consumption. So we really cover the entire life cycle. And maybe some of you have taken note of the recent press release we had with Renault where we actually are not only creating a virtual twin of the car, we are creating a virtual twin of the entire company. That's just one example. In Life Sciences, the momentum continues. We know that through COVID, there was a significant uptick in research and development and clinical trials at large, but some of the technologies that became so relevant to manage through the transition are here to stay. Like when we talk about the decentralization, the need to collect data from patients, whether they're inside a clinic or outside, that becomes an imperative. It's a must to have. Data science and AI is what really accelerates evidence generation. So if you don't have a data-centric approach, you're not able to meet the time lines and come to gain the competitive advantages. So we support our clients through this cycle as well. In aero, we see tremendous demand for newcomers as well as the large ones like Airbus and Boeing that are all looking to accelerate their pipelines, their supply chains because there is a lack of supply, right, that needs to be fulfilled. Industrial Equipment is an industry that we've been serving for decades, and it's -- I would say it's the -- it's one of the backbones or one of the largest industries we serve. All the -- from small to larger industrial equipment companies, either they are strong SOLIDWORKS clients. They're investing. They're expanding. It's global, whether it's in the U.S., in Europe and China. So we see very good market dynamics there, too. In the construction side, we see that's a new field for us, where we are newcomers. But here, really, for us, it's about creating the references and changing the way things are done and leading with sustainability. So that's something that is very dynamic, too. So if I look and step back, from an industry standpoint, given our broad portfolio and diversification, I think we are extremely well positioned even in times of volatility. So we feel confident about our outlook for the year. We had very good numbers in Q1. We gave, I think, a very confident outlook for Q2. And despite the volatility, we see good end market dynamics.

Great. Can you talk about your mid- to long-term strategy for Life Sciences & Healthcare, Infrastructure & Cities and Manufacturing Industries, and to be a bit more specific, how MEDIDATA and BIOVIA are coming together?

Sure, sure. So let's start with Life Sciences. For Life Sciences, it's pretty -- I think it's very simple. There are 3 big themes that I believe are going to change the industry and in Healthcare as well. It's getting access to the system, right? And so Life Sciences, in -- for how we serve the Life Sciences industry, it's also providing access to clinical trials for patients. And here, it's about decentralizing the infrastructure to not only serve patients in sites but also serve patients at their home. And therefore, you need to have a connected system that patients either have on their phones. They're getting smarter, [ sends us stay where ] the way to communicate and collaborate. So you really expand the sites anywhere where patients are. And with this, you lower the barriers of entry, which is very critical. So that's one key theme in this -- in the Healthcare & Life Sciences market. The second is data. I think the company who has best access to data and the ability to analyze the data and put the right pieces together has a competitive advantage. And here, we are very uniquely positioned because we have 28,000 clinical trials with proprietary data assets that we can bring together across sponsors over the last 2 decades that we have collected. And that's unprecedented. No one can rebuild that easily, right? Everything is possible, but I would make the argument, it's not going to happen in the next 5 to 10 years. So the ability to put that data and these insights to work to accelerate evidence generation through synthetic control arms or through a very targeted patient selection, which is very critical for precision medicine where it's all about finding the right patients and having access to the data, it's make or break. And then having a broad platform approach, right, where you collect, connect, research, clinical testing. So when you test molecules and new treatments with patients and humans, you have to manufacture them at scale. And then you have the challenge to commercialize and accelerate the time to revenue, right, the time to return on investment. So we have all these assets to bring together. And that's, I think, why we are uniquely positioned to serve this industry in a decade of transformation. We have great examples. Moderna, I think, is leading the chart in pretty much any dimension. How they think about life sciences, it's -- yes, it's a life sciences company, but it's a technology company at the same time, right? And I think that shows where things are going. In industrial and manufacturing, to us, the strategy is all around the 3DEXPERIENCE platform. That's the way to simplify and bring all the parts and disciplines together. And it's a very big strategic advantage. We started to develop the 3DEXPERIENCE platform more than 10 years ago. And I think now we are in a position where we don't only talk about the design. We talk about the model. We talk about simulation. We talk about virtual twins of everything. And we can deliver this at scale. And now what's really interesting is we're bringing the real-world data to the models and the design to really create this continuum and circular economy to not only think about what's the best possible design, but also for whatever product or process, but how will this evolve in the real world, right? And that's for sustainability criteria is so critical because you really have to think about the entire life cycle and usage of your equipment, your products, your services, your processes. And we are really at the beginning of this. So 3DEXPERIENCE is much more, right, than maybe what many people think it is. It's an extension of CATIA V5. Yes, but that's only a small part of it. And then to Infrastructure & Cities, we feel very strong about this vertical and know that we are very early on in adopting and bringing our technology to use there. As I said, we are building references. We are thinking about the go-to-market of this industry, right, and how we are actually approaching this, how we are commercializing, what's our commercialization strategy. It's -- we think about outcome-oriented business models here because we want to be a part of the result, right, of the value we create in large-scale projects, and that's where it's really becoming interesting for us. So we are not rushing. We really want to make sure we make the right steps here. And the sustainability topic is really accelerating all the change, right? So that's our -- that's what we're doing.

Talking about big changes, you have a EUR 2 billion target for cloud.

Yes.

And you have also a cloud provider internally called OUTSCALE.

Yes.

Can you talk about the dynamic of cloud migration, clients and the usage of your internal solution?

Yes. Happy to, happy to. So maybe I'll start off with -- you're right, our target by 2025 is to have EUR 2 billion of our software revenue coming from cloud subscriptions, which is 1/3 of software revenue. Today, we actually -- at the end of last year, we were at EUR 850 million already. So a significant portion of our revenue comes from cloud today. It's growing over 20%, and it's broad-based. Of course, it's led by MEDIDATA and Life Sciences at large, but we see the really large opportunity for us is to transform the mainstream market that today service SOLIDWORKS to expand it towards the WORKS family and really bring -- really empower the mid-market to use our platform in the cloud. That's the strategy. So what we're doing is not replacing the SOLIDWORKS installed base. It's really expanding our SOLIDWORKS installed base in the cloud by enabling not just to do the design, but also the simulation, collaboration and the downstream execution, right, on our system. That's the opportunity in the mainstream market where we have -- today, it's already a $1 billion business. It is -- we're winning 25,000 customers yearly, 20,000 to 25,000 customers in this market. So there is tremendous amount of activity that allows us to really strategically grow. And then at the third point, I would say with our traditional client base, they are coming to us to develop the road maps and the strategy to transition towards cloud and how can they transform their business models. It's -- again, I come back to Renault. It's a great story for us, but -- so is Boeing, so is Airbus. So I can mention a number of large clients. They are all defining their cloud plans with us to equip their designers, their engineers to become more agile and really connect also to the real world. That's our strategy. We have a number of reference customers that are starting from scratch in the cloud. So many of the newcomers are cloud-born, so to say. They're not going through a transformation. They're starting in the cloud. So I think there's no barriers to entry, right, to use our cloud operations. We have OUTSCALE as a common infrastructure and technology to power the application, I think, which is a big competitive advantage to own the infrastructure layer because we control the cost. We don't need to worry about the margins that the big hyperscalers are taking on. It's -- we deliver this everything in one. And this gives us a tremendous amount of control, and that's also why we are confident about our margin profile, right, as the share of cloud is increasing, right, because there's not a difference for us between whether it's on-premise or cloud.

Talking about margins, you -- obviously, you are improving margins year after year. What are the drivers of that? And how are you going to deliver that?

Yes. As you know, I mean, our business model is -- so first of all, we are investing into the future. We are future-oriented, forward-oriented. And our investment strategy is very well aligned with where we are going. And that's been consistent, right? So we -- there's no -- nothing like, okay, so Dassault Systèmes has to catch up on one or the other element, right? That's not the case. We are very consistent in the way we think about our investment strategy and our capital deployment. And to that part, we also have been -- we're very successful in targeting and integrating acquisitions. We have done transformational acquisitions like the MEDIDATA acquisitions, but we do a lot of bolt-on acquisitions where we hire -- we do acqui-hires -- hire critical domain knowledge and technology that's relevant for our customers and that we can bring on to the platform and scale. And for that, it's important as we think forward that we are committed to our margins, while at the same point in time, we are -- don't want to be constrained on our M&A strategy because the M&A targets, of course, are not operating at the margin level of what the entire company is operating. And so we always need to be able to manage -- make the right investments and see the productivity and return on investment from a margin standpoint of these acquisitions. And we have done this very successfully. The MEDIDATA plan, we're actually ahead of this. We are improving the margins between 200 to 300 basis points per year since the acquisition. We are -- we gave an update on our operating margin target in our Q1 earnings to be now around 34.5% for the year, which is 60 basis points improvement compared to where we started. So -- and that was in part because of the margin improvements we saw in services as well as MEDIDATA, but we also had some lower OpEx in terms of discretionary spend that we factored into the full year. So -- but that does not compromise any of the hiring targets we have. So we are on track with our hiring targets and hiring plans. We hired over 400 people in the first quarter, net increase. So we hired many more, but the net increase was 400. And we are planning to hire between 1,200 to 1,400 to 1,500 people net growth per year organically. So that's what we are committed to do to continue to scale the company and support the growth that we have in front of us, while at the same time, we keep our margin promise, integrating acquisitions and see where it makes sense for us to improve the margin, but certainly not compromise the margin on the long term.

And do you see any wage inflation in your sector with the people that you're hiring?

Yes, yes. Of course. I mean you have to be market-driven, right? We have to -- we want the best engineers. We want to be attracting the best talent, but we look at this on a global basis. So we are not just dependent on one market. We are a global company. We are headquartered in Europe in Paris. We have a large lab here in Waltham in Boston, right? We have the big presence in New York. We're everywhere in the world. We have a large, very successful development center in India in Pune, which has been, I would say, a bedrock of our R&D operation to scale. So this gives us a lot of flexibility to also deal with wage inflation. We're very focused in hiring young talent and engineers that have a long career inside Dassault Systèmes. That also helps to offset some of the wage inflations that you maybe seeing more at the senior level. So you can play with all those levers. On average -- we said we have increased our wages on an average of about 5% starting the year. We'll see that kicking in, in April as this becomes effective. So it's -- but that's how -- that's what the situation is right now. And of course, we are -- if things need to be adjusted, we'll look at it, and we'll make a decision.

And what is -- Rouven, what is your ability to pass higher costs on to your clients? And how much of your top line growth is actually coming from pricing increase?

Yes. So the ability to increase prices, really, first and foremost, comes from the -- our ability to price for value, right? I think that's always a better conversation with clients. If we convince on the value story, we are able to constantly price, right, at a level where we feel our contribution is, and that's something that we are focused on. But of course, we are protected with the typical CPI protection when we go through renewal cycles, which gives us a lever to increase the prices on an annual basis. Of course, we have adjusted the prices for services -- service organization because they are one-to-one linked to the compensation of the consultants and our people. And we have -- a large part of our revenue, as you know, comes from the resellers, right? So we have to have the ability to adjust prices through the channel, which we also do on an annual basis, an adjustment. And this -- but this typically takes -- can take up to 6 months before it becomes effective because it has to go through the partner channel. But also that was initiated at the end of last year and will become effective the second quarter and third quarter of this year. So we are protected in the way we go to market and the way we operate our business.

Okay. Coming back to the 3DEXPERIENCE, okay, because it's a concept. It's a great platform. Can you talk about the differentiation points and how important it is for your clients? I mean you talked about best-of-breed and so on. Can you elaborate on this so people understand what 3DEXPERIENCE brings to the clients?

Yes. I think the best way to talk about it is if you -- we have 2 -- I would say we have 2 kinds of clients, right? We have the ones that have been decade-long users of Dassault Systèmes and CATIA, for example. For them, of course, we are not going to replace CATIA. They are looking for ways to extend it, and that's why we are able to offer the 3DEXPERIENCE platform and connect it to CATIA. And so that allows them to really capitalize on all the investments our clients have been doing, right? But then it opens up many more capabilities than just design. It connects to simulation, collaboration and real-world data to manufacturing. And so you really create a platform, right, to extend what you already have to where you want to go. And I think that's really important because the last thing that you want to introduce is disruption. You really want to have a transition to the cloud, a transition to unification. And that's what we are doing with our large automotive customers, for example, and also gives them an ability to connect to their supply chains, which is very critical in terms of simplification and in-time planning, right, and operations. So that's one use case, right, where you are -- where we essentially are positioned in the 3DEXPERIENCE platform to -- for large-scale transformation. And that really brings all the other capabilities of Dassault Systèmes that I mentioned before like simulation, like manufacturing, collaboration with ENOVIA. All of those things are on the table immediately, and it gives us an edge really to unify and increase our footprint against some other competitors, right, who are coming with their point solutions that we are trying to really -- in a platform approach really extend end-to-end our capabilities. The other, I would say, driver is we have a lot of our customers are starting with the 3DEXPERIENCE platform from scratch, right? If you talk about newcomers -- I mean Tesla is not a newcomer, but they -- that's how they started, with 3DEXPERIENCE. Rivian is another one. In aero, it's Joby, right, and those that are going -- are innovating around vertical takeoff. So they are starting with 3DEXPERIENCE from the beginning. There's no transformation required because that is their software for innovation, for design, for managing the quality and manufacturing in their entire life cycle. So that's the 2 ways we can -- I think that's the 2 patterns that I see, right? And then we have the large mainstream market, as I said before, which is the SOLIDWORKS installed base that we are now empowering to become 3DEXPERIENCE as well. And lots of our SOLIDWORKS customers, they use competitor -- competitive products in simulation. And our opinion is the best -- is to use not only the design software from Dassault Systèmes, but also simulation and manufacturing, right? And we enable that through our platform approach. So the platform is really the ability to connect the dots, right, and the different disciplines and really bring all our brands together into a common infrastructure.

Great. We have 8 minutes left. I don't know if there are any questions in the room. I have one from -- on the screen from Andy [indiscernible]. Do you expect margin volatility quarter-over-quarter from now until end of the year? Are you seeing any customers slowing down their EV transition as a result of recent spike in commodity prices?

I think most of the engagements we have, they are so long-term-oriented. There can be quarter-to-quarter fluctuations, but those quarter-to-quarter fluctuations we always have. But we've been talking a lot about disruptions in the supply chain and the supply problem, less than a demand problem. And our customers are focused on reengineering their supply chains to become more resilient and agile, and that's where these investments are going, right? It's -- that's maybe why we have seen less dependency on that. Nevertheless, we all know the situation in China where, due to the lockdown, it's very hard to visit clients and have the important conversations. So there can be some slowdown and some disruption from that. But I would say they are more temporarily in nature than they are systematic at this point. We really see that a lot of transformation to become more resilient, focus on sustainability, connecting the practice of design with the usage of your products or services, and that's where our platform approach comes in. And that's -- these projects are of highest priority.

Great. Maybe you can also talk about a project you're very proud of, right? I mean Dassault, in particular, through the acquisition of MEDIDATA, but not only, has created innovative tools to help society, right, and help human beings. To bring that into perspective or put that into perspective, can you talk about a life project, which is quite visionary and will help human beings going forward?

Yes. We're a very ambitious company. When we talk about virtual twins, you know the story about the virtual twin of the airplane, the virtual twin of a car. Now we talk about the virtual twin of a human heart and brain. So we do not stop in our imagination and how we work with research institutes and students to put our technology to the biggest problems of humanity. That's really a core purpose, what drives us forward and what we are committed to do. So we are very proud of the virtual heart project, for example, but we're also very proud of what the MEDIDATA team is doing around creating synthetic control arms and synthetic patient groups to accelerate clinical development and ensure that patients who are enrolling in clinical trials who are looking for treatments that help them and not end up in a control arm, right, where they know what the outcome already is. So we help patients to really receive the real treatment by using synthetic control groups to really augment and enhance the design of clinical trials. So this is really real, and this is not something that's in the future. That's what we do today. And it's really inspiring. I think there was a question or no, there was just 5 minutes warning. I see.

And so you have been CFO of Dassault Systèmes. You've been appointed in January.

Yes.

It's your first attendance to this conference. Can you share some thoughts on the trajectory that Dassault is taking and your first impressions as CFO of the business?

Yes. As I said, Dassault Systèmes is an extremely ambitious company. We are -- I would characterize as -- we operate at the intersection of technology and science. We not only hire engineers. We -- for computer scientists, but also scientists in biology and material science, in engineering because we are -- we really think about these problems holistically. And domain knowledge is very, very critical to us. So it's great to be in a company whose purpose is so closely aligned with our customers' purpose and mission and who is really committed to the long game, right? That's one of the key messages, I think, that's important for investors is that our vision is very long-term-oriented. Of course, at the same point in time, we are disciplined in the way we allocate our capital and the way we think about execution. It's very important to us to be disciplined, but it's also, at the same point in time, very critical to take a long-term perspective on solving problems. So from that perspective, I think it's a great place to be as a CFO. I had the opportunity to work with the senior management team at Dassault Systèmes from the perspective of MEDIDATA for 2 years. So the company is not new to me in that sense. It's -- I had like 2 years of being part of it before the appointment started. So I know everybody already for quite some time. And we have ambitious goals in Life Sciences so -- and in Healthcare in total, right? That is really something we accelerated through this acquisition and, I think, changed the profile of the company, right? If you look at our competitors that we like to be compared to, none of those competitors has any comparable footprint in Life Sciences & Healthcare as Dassault Systèmes has. And I think that's a really, really strong competitive advantage that we think about the capabilities of 3DEXPERIENCE and simulation and design and virtual twins, not just in the traditional industries, but also in Life Sciences & Healthcare. So -- and that's, I think -- bringing all these aspects together is extremely exciting for me to be part of this journey and contribute to this over the next years.

Terrific. If there are no other questions in the room, I would like to thank you, Rouven, for this conference, and wish you the best. Thank you so much.

Thank you.