Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Dassault Systèmes 2023 Q1 Earnings Presentation Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Beatrix Martinez. Please go ahead.

Thank you, Adi, and thank you for joining us on our first quarter 2023 earnings conference call with Bernard Charles, Chairman of the Board and Chief Executive Officer; Pascal Daloz, Deputy Chief Executive Officer and Chief Operating Officer; and Rouven Bergmann, Chief Financial Officer. Dassault Systèmes results are prepared in accordance with IFRS. Most of the financial figures discussed on this conference call are on a non-IFRS basis, with revenue growth rates in constant currencies, unless otherwise noted. Some of our comments on this call contain forward-looking statements that could differ materially from actual results. Please refer today's press release and the Risk Factors section of our 2022 Universal Registration Document. All earnings materials are available on our website, and these prepared remarks will be available shortly after this call. I would now like to introduce Bernard Charles.

Thank you, Beatrix. Good morning and good afternoon, everyone. Thank you for joining us today. It's always a pleasure to be with you. It was a solid start to the year. While total revenue was up 7%. Recurring revenue increased 10%, driven by strong subscription revenue growth of 14%. We delivered on our profitability objectives with an operating margin of 31%, while at the same time, continued to invest in our future growth increasing headcount by 8%. We generated record operating cash flow up 24%. We are now fully deleveraged nearly 1 year ahead of schedule. Looking at the remainder of the year, we are on track to achieve our EPS objective of EUR 1.20. As you can see, we are delivering on our financial commitment. Pascal and Rouven will discuss our performance in more detail in a moment. Now just as important, I'd like to talk about advancing our purpose. And now how we continue to create sustainable value for all stakeholders. Our past record for 40 years, we have been empowering clients to overcome challenges, imaging new frontiers and achieve their ambition. This is all possible by revealing the power of the virtual world to improve the real one. Our long-term relationship with customers in many cases, spanning decades are a testament of our deep commitment to clients. Our legacy of success together is the outcome of this cooperation, trust, on game-changing innovation. As a scientific company, we are driven to anticipate the future needs of our customers and innovate well in advance. It's decade we have disrupted the status quo. The virtual twin of the Boeing 777 was one of them. They say we couldn't do it, it was, and it is now a word standard for the industry, the virtual twin of Toyota production system is now a world standard too. Platforming the industry is becoming a word standard. The virtual twin of human body will become a world standard. Life Science are the next inspiration for sustainable innovation. In fact, we are just getting started laying the foundation of our next horizon 2040. We are enabling clients to pioneer or perform metamorphosis across all sectors of the economy. Our heritage as a purpose-driven company. We continue to guide our great ambition to foster human-centric and truly sustainable economy. We will have more to share about this next horizon and looking forward to see you at the Capital Markets Day in June -- this coming June. We spoke about the future, let's come back to the present. Recently, AI has captured the attention of the world. Today, with science-based virtual twin experiences, we are already elevating our customers' IP with machine learning on generative design, not only for large enterprises, but also for the mainstream innovators. Early this year, we held our 3DEXPERIENCE World event bringing together a community of over 7 million designers, entrepreneurs and students. We introduced a whole new approach to the future of design and manufacturing. It was inspiring to see so many start-ups using our technologies for sustainability to remove CO2 from the atmosphere, clean our ocean and power electric vehicles with recycled batteries. This is all made possible by cloud-based 3DEXPERIENCE. With our entire portfolio available on the cloud, we make the power of our technologies available to everyone anywhere anytime. We had a good dynamic with new logos this quarter. Customers from mainstream disruptors to established players across GEOs as well as industries adopting our product on 3D -- on solutions, by the way, on 3DEXPERIENCE cloud to leverage data science collaboration on capture knowledge and knowhow. We are further supporting cloud with our 3DS outscale brand. It's a unified cyber governance to provide experience-as-a-service. We offer 3 levers of trusted cloud dedicated private and international, and we are operating at the highest standards of global security. We have indeed invested significantly to democratize innovation. Now I want to focus on the side of the purpose. The experience economy and the circular economy are converging. Customers see reinventing a sustainable economy as both a challenge and an opportunity to differentiate. We empower customers with a holistic approach to innovation and the ability to seamlessly link value creation with value experienced design and music in store to cover the full experience life cycle. Our early adopters demonstrate the value of experience-based product creation and confirm the importance of expanding product life cycle management to material circularity. In this context, packaging is a critical topic. Customers are turning to Dassault Systèmes to redefine packaging for circularity. We have a good example with PepsiCo. The company is using our technology to reduce raw materials usage and achieve full recyclability. We have this as a real case using the virtual twin experience powered by the platform, the 3DEXPERIENCE platform that offer a unique combination of science, including material science, biology, mechanics, electronics and chemistry, modeling, simulation as well as AI-based data science. We increased adoption of our technology. We can imagine a world where packaging never becomes waste. Indeed, this will be a better world for consumers, fashion and citizens. So I think it's clear we walk the talk. And now I will hand the floor over to Pascal to continue the discussion. Please go ahead, Pascal.

Thank you, Bernard. Hi, everyone. It's great to be with you today. So let's start with a few comments related to the customer. It's clear from our conversations with customers and their business environment remains volatile. But the reality is an opportunity for us, it's an opportunity to increase the agility and their profitability with real-time analysis of the raw materials and part substitutions as well as reshaping the entire value network. This in a context whereby the regulation is also constraining them to do it, which being an example in Europe. Now let's zoom on a few examples for this quarter. Starting with manufacturing industries, in the new visibility, we are driving the electrification, propelling the industry forward with innovation and can only be achieved with our deep-science and platform-based Virtual Twin Experiences. And this quarter, we have a good proof point with Ford, a long-time partner. Ford company is transforming to advance the development of its electric and connected vehicles. And what do they want to do, they want to achieve the agility of a start-up because we are only at the first generation of the electrical car, a new battery, a new generation of battery will come, and this will have an impact. So you need to keep this agility to introduce new things on a regular basis. But at the same time, it's a high-volume production ramp-up constrained because we are in the volume business. It's not anymore a premium business, it's becoming mainstream and look what's happened with Tesla dropping the prices by 20%. I mean this is putting a lot of constraint on many, many OEMs to be able to be efficient from a cost standpoint. And this is where the 3DEXPERIENCE platform is the harm, if you want for them to do it. And as a result, Ford company is standardizing all their EV programs on the 3DEXPERIENCE platform. If we step back a little bit and we look at what's happened in the last 2 decades in the EV space. You remember, we started 10 years ago with the newcomer. And today, we are also helping the large incumbent to evolve and look at the numbers. The top 10 EV newcomers, all of them, they have standardized on 3DEXPERIENCE and the Dassault Systèmes technologies. While 72% of the light vehicles we have designed an engineer with CATIA, 85 of the electric vehicles are developed with 3DEXPERIENCE platform. So we are penetrating much deeper and faster this industry, taking the benefit of this trend. As a result, 70% of the OEM have already adopted the 3DEXPERIENCE platform, and I think we are well positioned to benefit from continued EBIT expansion. So I think it is clear that today, we are the de facto standard in this industry. Now turning to Life Sciences. I think the use of the data and AI is becoming mainstream, in fact. Now there is no one single day where we receive a request to get access to our massive set of data to do a trial design, to do site selections, patient enrollment and also Synthetic Control Arms. And we go a step further because now we are capable to do some kind of synthetic patient, if you want. And we have built algorithms with high accuracy in predicting adverse event. And that's the trend towards the AI. This quarter, Verastem has adopted Medidata AI synthetic control arm to support its rare disease oncology trial. And this is a unique capability in the market not only to accelerate innovation, reduce cost and mitigate the risk profile of the trial, but also to enable research when the control group is difficult to recruit or retain. And this is essential for many of the rare disease to have this capability. And ultimately, I think we are fostering the human-centric approach, ensuring the patients to have access to the most promising treatments. Same thing, if we step back a little bit and we look at the footprint, we have been able to establish in life sciences sector. You notice that we published a press release recently, I don't think that we reached an unprecedented milestone with 13,000 trials and 9 million study participants. I think it's a milestone in a sense where together with all of our customers and partners, we are transforming the life science industry to scale clinical development globally, and this with a continuous flow of innovation over the last 20 years. As a consequence, leveraging this volume of trial, patient and data, MEDIDATA delivers unmatched results in this industry. And keep in mind that in 2022, nearly 75% of the FDA-approved drugs have been developed with MEDIDATA and Dassault Systèmes Solutions. I think we are incredibly thankful to support the 9 million trial participants who choose the clinical trial as part of their healthcare journey with us to advance the human health and also the patient diversity. And this is just a starting point. I mean we are just getting started. Now let's move to Infrastructure & Cities. Water is a precious resource in vitro to sustain, obviously, product nature and life. And the overall consumption of the fresh water is one of the greatest threats on the planets face. You know that in 2025, almost 2/3 of the world population may face water shortages. And if you go on the website, you can read a lot about our urge for water and consumptions whereby Dassault Systèmes is outlining how we are planning to address this challenge. And this quarter, I think we are pleased also to announce that Ecolab is leveraging the 3DEXPERIENCE platform to reformulate its products to use less water and in turn enabling its customers in across many industries and life sciences, transportation and mobility, aerospace to reduce their global water footprint. So again, we are pleased to support Ecolab's effort and foster our purpose. Now let's move to our operational review. And let's start first with the revenue by geographies. In the Americas, the revenue grew 6% benefiting from a strong performance in Life Sciences, High Tech and good results in mainstream innovation. We expect to see an acceleration in Americas throughout the year as we execute against our pipeline. In Europe, we are seeing an incredible momentum with a growth accelerating to 12%. This was driven essentially by a good result in the West and Southern of Europe and also driven by -- from an industry standpoint, by transportation and mobility, aerospace and defense. In Asia, the revenue declined by 3%, impacted by China, down 8%. The operating environment in China was a little bit more challenging than expected in the first 2 months of the quarter. But we start to see the green shoots in March with business activities increasing and materializing in our pipeline with a good momentum. This give us confidence in the potential for sustained recovery over the course of the year and the impact of the China, unfortunately, this quarter was not fully offset by very strong momentum in India with a double-digit growth. That's what we can say from a GEO standpoint. Now let's zoom on our product line performance and start with Industrial Innovation software. The revenue rose 4%, thanks to a double-digit growth in subscriptions, driven by a strong momentum in CATIA and ENOVIA. And this is highlighting the progressive evolution in our core industries towards subscriptions. SIMULIA and NETVIBES are also delivering strong results during this period. And it's a good point because in many of the cases, we are displacing competition. In Life Sciences software, revenue rose 11% driven by MEDIDATA, which continue to experience strong momentum growth with 13%. Turning now to mainstream innovation. Revenue increased 4% and SOLIDWORKS reporting the single-digit growth, offsetting the continued impact from China and against a relatively high comparison base last year. CENTRIC PLM performed well, benefiting from its leading position and successful diversification strategy. Continuing on this topic, I think we can say that CENTRIC PLM today is used by over 12,500 brands and has a significant footprint in the market. However, the opportunity is much larger and we believe CENTRIC PLM are really the potential to become a billion dollar business for Dassault Systèmes. Why so? Because we have multiple access to expand what we do. The first 1 is from an industry standpoint or subsegment industry standpoint, we are addressing fashion and apparel, but we are expanding in new verticals such as food and beverage, cosmetics and personal care, home and furniture and consumer electronics. From a target standpoint, from the customer we want to serve, we are also expanding from the brands, which are really the core, to the retailers, the manufacturers and the consumer tomorrow. From a GEO standpoint, we have reinforced significantly the coverage of CENTRIC PLM, especially in Asia. And from a product standpoint, the CENTRIC PLM solution is really the de facto standard for collection management for fast-moving goods. But this is also becoming the business platform as it serves as a backbone for e-commerce. And with capabilities such as dynamic pricing, which are really critical for e-commerce, CENTRIC PLM is really disrupting this market. So this is the reason why we are convinced that we are well positioned to continue to execute our strategy and to build a global leader and a significant business in the next coming years. Now I think it's time for me to hand over the presentation to Rouven to discuss revenue, profitability and our objective for 2023. Rouven, you have the floor.

Thank you, Pascal. And welcome, and thank you all for joining our call today. We had a solid start of the year as we remained focused on the fundamentals of our business model. Increasing the share of predictable revenue with strong growth in subscription and cloud revenue up 14% and 17%, respectively, while we stayed focused also on delivering on the profitability targets. Total revenue grew 8% as reported and 7% at constant currency, in line with our objectives and relative to a high comparison base. Recurring revenue rose 10% and now represents 84% of software revenue. Adding to these strong fundamentals, we generated a record high cash from operations, up 24% to EUR 783 million. As expected, we are now deleveraged nearly 1 year ahead of schedule. Clearly, this highlights our trusted customer relationships, the value we deliver and our discipline when it comes to spending and capital allocation policy. As you heard from Bernard and Pascal, our long-term structural growth drivers across industries remain strong. As such, we continue to invest hiring more than 300 net new team members in Q1. And at the same time, we are focused on the profitability with diluted earnings per share of EUR 0.28 and an operating margin of 31%, both in line with our target range. Now let's look at our results in more detail. Software revenue rose 6% at constant currency, slightly below the objective. This was due to the lower contribution from upfront license revenue that was down minus 10% year-over-year relative to the low end of the guidance, which was set at minus 7%. This shortfall can be attributed to the lower-than-expected performance in China. As we've discussed, the operating environment there has been difficult over the last several quarters. And to briefly recap, we experienced a soft performance in the second half of 2022 during the lockdown period, with software revenue growth of 3% to 4% and flat license growth. And this was our baseline assumptions that growth would remain muted in Q1 as well in line with this trend, while expecting a progressive recovery throughout the remainder of the year. However, Q1 turned out to be much lower at minus 8% software revenue growth in China. And more specifically, in the first 2 months of the quarter as the economy and production cycles were preparing the restart, investment levels in innovation remains low. This lag contributed about 3 to 4 points to the upfront license decline. Only in March, investments in innovation started to return materializing in our pipeline. While we remain focused, we believe that this progressive trend is raising the potential for recovery and gives us the confidence for the rest of the year. Services revenue was very strong this quarter, up 21%, driven by the completion of milestones and outcome-based services mainly in Life Sciences. More specifically, we are seeing a few biotech customers who are turning to MEDIDATA to deliver end-to-end study build services for the purpose of accelerating the time to start enrolling patients. We continue to shape this offering, we do expect this trend to normalize throughout the year. Recurring software revenue was 10% to 84% of total software revenue, up a strong 310 basis points. As mentioned, this growth is driven by an acceleration in the subscription revenue, up 14% versus 10% at the same time last year. Consequently, the increasing share of predictable revenue provides greater visibility and resiliency. Our strategic growth drivers of 3DEXPERIENCE and cloud are at the center of the shift to subscription. As highlighted by the customer examples that Pascal just talked about, clients, both large incumbents transforming and new entrants disrupting are adopting 3DEXPERIENCE and cloud to leverage the full potential of our technologies to increase agility, scale and accelerate innovation and growth. As such, 3DEXPERIENCE revenue grew 10% at constant currency. This reflects 31% of 3DEXPERIENCE addressable software revenue and is up 1 point relative to last year's performance. Cloud revenue rose 17% at constant currency to 24% of software revenue, an increase of 3 points driven by strong continued momentum of MEDIDATA as well as strong growth in 3DEXPERIENCE and cloud. We're confident that we will continue to capitalize on our leading position in key industries capturing above-market growth with 3DEXPERIENCE and cloud. Now let's review how we performed relative to the objectives we set for the first quarter. Total revenue of EUR 1.434 billion was EUR 3 million higher than the midpoint of our target range. We reported software revenue of EUR 1.288 billion, up 6%, which is EUR 25 million below the midpoint and EUR 10 million below the low end of the guidance. We expect to recoup this gap throughout the remainder of the year, which I will discuss further in the objective section. As mentioned, this shortfall was driven by the decline in software revenue in China which explains the gap to the low end of the software range or 1 point of growth. We reported services revenue above the midpoint by EUR 11 million, which essentially offsets this gap at the total revenue level. We benefited from an FX impact of EUR 17 million during the period. We reported an operating margin of 31%, in line with the objective. And as you can see from the numbers, we delivered on our profitability targets by continuing to invest, adding over 300 net new employees during the quarter. As we look to the remainder of the year, we will continue to take a disciplined and balanced approach to hiring and investing for the future. As such, we expect the overall OpEx increase to slow down, highlighting the fact that we are on track to absorb the cost run rate from 2022 carrying forward to 2023. Now turning to the earnings per share. We reported EUR 0.28 as reported, well aligned with our objective range of EUR 0.27 to EUR 0.28. The non-IFRS tax rate for the quarter of 20.7% is well aligned with our guidance of 21%. Now let me turn to the cash flow and balance sheet items. Cash and cash equivalents totaled EUR 3.468 billion compared to EUR 2.769 billion at the end of 2022, which represents an increase of EUR 699 million. At the end of the quarter, our net financial position totaled EUR 459 million, an increase of EUR 686 million versus a net financial debt of EUR 227 million at December 31 last year. We are now deleveraged nearly 1 year ahead of schedule. Now let's look at what is driving our cash position at the end of the first quarter. Operating cash flow rose 24% to a record high of EUR 783 million. As expected, strong collections in Q1 contributed to a favorable change in operating working capital of EUR 350 million. Operating cash flow was mainly used for CapEx of EUR 33 million and repayment of lease liabilities of EUR 25 million, slightly up versus last year. Lastly, of note, we had a negative FX impact of EUR 44 million during the first quarter. Now let's turn to our fiscal year 2023 objectives. We are maintaining our guidance. The key takeaway is that we are well positioned on a good trajectory to our long-term financial objectives to achieve EUR 1.20 earnings per share. Total revenue growth between 8% to 9% at constant currency remains unchanged and is adjusted in absolute terms for a favorable FX impact by EUR 17 million to a range of EUR 5.940 billion to EUR 5.990 billion. This assumes that we expect a positive impact driven by an increase in contribution from large yields in our pipeline, starting to materialize in Q2. We also expect to return to low to mid-single-digit growth in China throughout the year as more and more investments are directed towards innovation and science. Finally, we reaffirmed the operating margin range of 32.3% to 32.6%. Before moving to the Q2 objectives, I would like to emphasize that the unchanged full year revenue guidance assumes as we maintain growth rates at constant currency for software revenue 8% to 9% and service revenue of 5% to 7%. We continue to expect recurring revenue growth of 10% to 11% with strong subscription revenue increasing in the range of 17% to 18%. And in spite of the lower performance in upfront license revenue in Q1, we remain confident for the full year in the range of 2% to 5%. Now let's turn to our Q2 objectives. We are targeting total revenue growth of 7% to 9% at constant currency, with recurring revenue increasing 9% to 10% driven by strong subscription growth of 16% to 18%. We are forecasting upfront license revenue growth of 0% to 5%. This reflects structurally improving pipeline, assuming 3 main elements: one, an acceleration in North America; two, continued momentum in Europe across key industries; and three, return to mid-single-digit growth in China with the benefit of a lower baseline effect. For services revenue, we are predicting a normalized 6% to 8% growth. And in terms of profitability, we are forecasting the operating margin of 30% to 30.5% and a diluted EPS of EUR 0.27 to EUR 0.28. As usual, for additional information, and to review what we've just discussed, I will refer to today's earnings presentation for more detail. Now in conclusion, we had a solid start to 2023 with well-aligned fundamentals supported by our strategic drivers of 3DEXPERIENCE and cloud. Our first quarter results demonstrate that our technologies have never been more relevant and critical for our clients as strongly evidenced in Europe. We are focused on execution to deliver sustainable growth across all GEOs throughout the year and as such, remain confident in our ability to advance towards our EPS objective of EUR 1.20. In closing, I want to remind you that we are planning our roadshows in London, Paris and later in Q2 in New York and in Boston. Also, I want to highlight and ask you to join us at our Capital Markets Day, where we will discuss our next horizon. This will take place in this coming June at our headquarters in Paris. And now Bernard, Pascal and I are happy to take your questions.

[Operator Instructions] And our first question comes from the line of Jay Vleeschhouwer from Griffin Securities.

Let me start with a nearer-term question. What effect on customer buying behavior might you expect from the price increases you're planning to implement in July. Might there be some anticipatory buying, for instance, in the second quarter before price increase. In addition, perhaps you could talk about your expectations for the CPE and CRE channels for the remainder of the year particularly in light of the various channel margin changes that you're implementing? How might that affect the channel sales productivity? Then a couple of more questions, of course.

Okay. I will start with the first one. So I think the only part of the market, which is usually sensitive to the price increase and doing some anticipation in the mainstream. We saw it last year. So there is 1 impact we could see is probably, you're right, probably in Q2 on the mainstream. That's really where we have anticipated some effects. But for the rest, I think for the vast majority of our contracts are long term. As you may know, we have some close specifically indexing the price increase on certain index. So I think it's already well anticipated. Bernard, you want to say a few words about CPE and CRE or you want me to continue?

Well, I think that -- I don't remember, Jay, if you were at the 3DEXPERIENCE world, but I think we had a high-quality Gian Paolo on the team, Gian Paolo and Manish, CEO of SOLIDWORKS, and very detailed work planning in the past 9 months with key partners were all very positive about looking at how to create value for the clients and how to approach their large install base with the 3DEXPERIENCE as a collaborative infrastructure, and I think they know very well their partners, the clients on the -- it's a mutual joint conclusion that was taken, which I think is a very good practice to basically find ways what we call value path up and value path wide. So I trust it will be accepted as we move on. For the CPE, the jargon that we have, which is really process engagement. I think the challenge is more on the training of the workforce to really understand the specialized roles on solutions that they need to be able to provide to clients. And the second thing, of course, which is -- continues to be an important factor is the learning curve to understand how to sell cloud on platform for the existing customer. But I think the trends are good. The motivation is high on all the current customer contact and discussion with partners are going in the right direction from that standpoint.

Okay. You mentioned the 3DX conference. So one of the interesting bits of data that come out of that conference was that as of the end of last year, only about 3% of the active SOLIDWORKS space or the equivalent of 3% was on 3DEXPERIENCE works, 15,000 licenses, I think the number was. What do you think a realistic 3DX Works adoption rate or penetration rate might be for the end of this year?

For the end of this year. Pascal, I don't know if you want to take...

I think we want to double between 6 to 7.

Okay. Okay. A couple of last things. Your comments Pascal, corroborate...

Keep in mind that the most important for us is the new generation of SOLIDWORKS is to continue to expand the footprint. The footprint meanings to continue to attract new logo. It's not to substitute an existing installed base, which is the first priority. So that's the reason why in the KPI of success for us, the most important is really the ability to continue to expand to reach users and company we were not capable to touch previously, more than substituting the existing installed base. Because at the end, what we are trying to do is an incremental revenue stream. It's not a substitution of the revenue stream, right?

Right. No, I understand. I understand that. So your comment, Pascal, about Ford corroborated the fact of that selection. And my question is to what extent does your guidance for the year for example, for industrial innovation, anticipate additional such selections. For example, among European car companies, is that a factor in the growth expectation for this year?

So you're right. I mean one of the key points for this quarter is we do not have too much less transactions, right? But they are existing in the pipeline, of course. They are much more backloaded than upfront loaded, but to just give a code to what you say, you're right, Jay, I mean, there are a significant number of transactions, especially in transportation and mobility where we have the ability to expand significantly what we do with 3DEXPERIENCE platform. We have some in Germany. We have others in the U.S., right? Including GM, by the way, it's maybe a surprise for you guys, but against electrification and the new battery game is changing the landscape. And this is opening door, which has been closed for certain time, many years for us. So yes, we have a decent number. Not all of them are fully factored in the guidance. Why so? Because as you know, we usually not compromise the value of what we do. So that's the reason why I prefer sometimes to be a little bit short for 1 quarter, but keep the entire value of the deal and the transaction for us.

Okay. I guess a couple of last things. So I have to ask my usual question about SOLIDWORKS units. When we think about the upfront and term licenses together, and given the tough comp versus last year, would it be fair to say that combined new units for SOLIDWORKS were down about 10% or so versus Q1 of last year? And lastly, a completely separate question at the DS conference in Miami last week. There were a couple of very interesting sessions on your cloud business, specifically about migrating customers to the DS cloud. To what extent are you seeing this in your services engagement or services pipeline for that kind of migration work?

Okay. So the first point is I do not have the units in front of me, but to make it simple, overall, the license -- the upfront license is down by 10% for SOLIDWORKS this quarter. And the subscription is up close to more than 30%, 35%. That's the number I have in mind, right? So if you do the sum, from a unit standpoint, I would expect it's slightly below 10%, probably in the range of 8%, right? Again, it's mainly due to China, and it's not a loss. I think I do expect to recover within the year. So could you remember for point of the mix on the license is coming from China. So it would be interesting to compute the number at the end of the year to see if we have been able to recover. But I'm pretty confident we will do it. Now coming back to the -- this migration to the cloud. Yes, I think it's a good point. It's something we are doing at scale for the large customers with our own services capacity, right? But it's something we have to elevate with our resellers. Not all of them, they have the practice to do this kind of migration because it's not a migration per se. It's a different way to rearchitect the systems. So that's -- again, we have the practice. It's very well formalized. We start to deploy it within the channel with the resellers, but the time for them to ramp up and to reskill also their people is taking time. And we have a pretty number, especially in the U.S. you're right. And Jay, thank you for the kind words you sent to us about Bruno. We appreciate.

The next question comes from the line of Laurent Daure from Kepler Cheuvreux.

I do have 3 questions. The first 1 is, if you could give us a brief update on the labor market and how fast you see we're just moderating? My second question will be regarding M&A. We understand that we would spend as much as EUR 10 billion in the next 1 to 2 years potentially. I was just wondering if you were to compete for a very strategic deal, how much of a compromise would you be ready to take? In other words, would you be ready to go for a deal that might be EPS dilutive for 1 year or 2? Or is it something that you would completely exclude? And my last question is on the cloud growth. I think Mike had a question this morning or so on it. It seems like ex MEDIDATA, the growth rate was very strong last year, 70% to 80%, but when I tried to do the math in the first quarter, growth rate seems to be way behind what you had last year. So I'm a bit lost on this and if you could help, that would be very helpful.

Thank you for your question. Let me take Pascal, if you -- on the M&A, M&A is higher. The -- first, we are long term. And I think we have this characteristic of having a strong investor for long term. So we don't look at acquisition truly from -- at first from the dilution effect at all. We look at it from the perspective of how first -- number one, how well does it fit in our ambitious plan for 2040. And as you may remember, we have really widely expanded this ambition with the 3 sectors of the economy, 12 industries, 64 segments. The second thing is really related to our capacity to transform what we buy to create the next generation game changer for the sector or the domain, this acquisition would serve and, of course, the complementarity. If you think the last big move that you mentioned, MEDIDATA, we had BIOVIA before and someone who would have understood this strategy would have understood that we were doing the front-end research on biologic and chemistry and that if we were to do research, we would do development, we would do lab, we would do clinical trial, and we'll do manufacturing plan for biologics. And maybe the life cycle will be even expanded to -- couple it to Medtech, which is really part of our long-term strategy. So something that was perceived as really surprising, may I say so, in fact, was very well architected and prepared for years. So we have many of those topics, of course, in our road map. And the question is more is fitting with those 3 or 4 parameters I mentioned. And after, of course, the capacity for us to make it happen more from a transaction standpoint and people standpoint fitting. Clearly, when it looks -- when -- the story of MEDIDATA shows that we have been able to really leverage it at scale and it's just the beginning. So that's basically the thought process. We will probably come back on that topic at Capital Market Day, but we will not provide a list of candidates for sure, but a framework, which is really with the current situation, which has a lot of good positive things because really it has come down from -- on the way valuations are done. Unfortunately, also the interest rates are higher. But all in all, we will try to do and apply this policy in a consistent way. And I know the new team in charge is going to really fully leverage this long learning curve that we have been practicing. Pascal?

Yes. To your cloud question, and then you had the first question which I wanted to clarify, but I can -- we can do this after my response to the cloud. So well, we can have some, I would call it, seasonality of fluctuation on the cloud growth number. As you know, for large clients, we have private cloud installations. And when we deliver them and we deliver them ahead of schedule, there can always be some catch-up that we recognize at a certain period. And it's correct, in Q1 last year, we had 1 large implementation of a private cloud of a large OEM that's transforming completely to 3DEXPERIENCE cloud. And that had some revenue impact in the first quarter that was not recurring in that way. So the comparison year-over-year has an impact from that, which I would characterize about 3 points. So there's nothing else than that. And the last -- the first question you asked on the market, the market update, which market were you referring to? Can you repeat?

Recruiting if it was -- you still have to pay up to date. So if it was starting to ease massively?

Yes, yes. So I think the good news here is the attrition is coming down significantly. We're below the 2019 levels. We have taken a very disciplined approach to hiring last year, and we continue with that. And so our pipeline is strong and we continue to follow that. And also the other good news is we continue to hire when the entire industry is laying off. And it's the right time to pick the good candidates.

The great profile.

Yes, the great profile, I think it's obvious. It's really good. And this is what we do.

The next question comes from the line of Derric Marcon from SG.

I've got 2, if I may. The first 1 is on the EUR 25 million shortfall on software revenue. Is it fair to assume that your subscription revenue were -- was perfectly in line with the midpoint of the guidance? So on top or in addition to the miss on new license sales, does it mean that support revenue were also slightly below the midpoint you had in mind when you started the quarter? And a follow-up on that, when I look to the acceleration that you expect from subscription revenue in Q2, overall, the recurring revenue are flattish or slightly down in terms of growth compared to Q1. Does it mean here also that support revenue will grow less in Q2 versus Q1? That's my first question. Second question is about M&A. Will you -- or should we assume that you will include future M&A and contribution to EPS in your new 5-year EPS target that you will disclose at the next Capital Market Day?

Derric, thanks for the comprehensive question. I get -- I start on the first 2. So on the software revenue shortfall of EUR 25 million, that is related to the midpoint of the guidance. I just wanted to clarify that point to the low end, we are actually EUR 10 million below. But you're right, it's EUR 25 million to the midpoint. You're also correct in saying that subscription is perfectly in line with the midpoint. So the license miss was, of course, the main contributor to the -- to being below the software. For the support, we assumed around 6% to 7%, we came in at 6%. And also here, that's related to lower performance and contribution from China. So when we say that the software revenue was down in China by minus 8%. For licenses, we are actually down minus 13%. And then you do the math, you see that there is a few millions that we were also below in the support revenue in China, which is related simply to the situation of restarting and catching up. But we believe that we will be able to catch this up throughout the year. We have shown that we do this before, and we have also the discipline to do that. Now as you move forward into Q2, on the subscription line, you're right, for the recurring revenue, we are going to 9% to 10% versus the 10% that we are -- we delivered in the first quarter. I would say it's in line with the first quarter. We continue to see acceleration in subscription, as you rightfully say, versus Q2 of last year. But sequentially, it's actually a little bit lower than the growth that you would -- I mean, sequentially, it's almost in line with Q1. We have seasonality in our subscription revenue. Please keep that in mind. And the support revenue will be around 6% as it was in Q1. So that's what's behind this.

And related to the future long-term plan, if you may, you just have to wait June 9 to get the details. There is no value at this point to disclose what we're going to do.

But let me if I'm wrong...

Remember, the acquisition is part of our model. So has always been. Yes.

Because you were the 1 doing this first in 2018, if I remember well. EUR 1 per share before split was included in the guidance, while MEDIDATA was not closed at that time.

Yes, first, but we have been doing the 5 years plan several times in the last 26 years after the IPO. It served fourth time we do it. So it's part of our practice because we want to associate that [ retention ] to the long-term mindset of the company. And so we'll be back on this on June 9.

The next question comes from the line of Jason Celino from KeyBanc Capital Markets.

Gentlemen, I think you've highlighted in the Americas acceleration in the coming quarters. It sounds like a lot of this confidence is based on your large deal pipeline. But what are you baking in terms of macro in this framework?

Again, the vast majority of the last transaction we are referring to already engaged. They are part of a large transformation program we initiate with many of them. So it's true in Aerospace and Defense, in Life Sciences and also in High Tech, remember, the large -- the giant tech in the U.S. are also our customers. And we have a pretty good visibility on how they are moving forward. So it does not mean we are completely muted. I think we have enough convictions and proof point that it will happen this year.

Okay. Perfect. And then this large deal pipeline, is it mostly renewals? Or it sounds like there might be a few potential competitive deals? I guess, how would you characterize the types of large deal demand that you're seeing?

No, it's a balance between program expansion we already have and also a new certain win back. We have -- the win rate is high. In the U.S., by the way, it's higher than 80%.

Higher than 80% of the win rate. So our challenge is to be there coverage.

And then last quick clarification. I think we've talked at length on the China impact on SOLIDWORKS. I think as -- on an overall license basis, you've mentioned 3 to 4-point impact. But for SOLIDWORKS specifically, how fast would that have grown this quarter ex China?

Mid-single digit.

Your next question comes from the line of Frederic Boulan from Bank of America.

Question is on MEDIDATA and Dynamics with Veeva and then I've got 2 very quick clarification on numbers disclosed during this call. If you can comment, I mean, if you guys are making some claim that they've won a number of top 20 clients for EDC and they're having a good track record in clinical trials. This morning, you showed the slide that you're very dominant 75% of FDA approval. So if you can share with us a little bit your perspective on that claim and your overall competitive position versus Veeva? And then 2 very quick clarification. So on cloud revenue, you said you had a 2% impact or 2 percentage point drag, I think, Rouven, on some of those private loadings. So should we assume that just for that to growth in cloud would have been about 20% in Q1. Is this what you meant? And then secondly, on the China question. Any more color you can share with us around in the percentage of China in your total revenue and license revenue would be very useful.

I'll start with the competitive landscape. So again, I gave the numbers to you because at the end, I want you to ask these questions to Veeva. How many trials do they have and how many patients they have enrolled in their trial, right? Because at the end, that's the footprint, the real footprint. The fact that you can claim you do 1 trial with 1 customer does not mean we are -- you are the standard. So -- and that's the trap you have to be careful not to fall in, right? And especially, we are extremely active on the Phase III. That's also the reason why you have so much new drugs coming on the market, which has been approved following our processes and platforms to make it happen. So again, I encourage you to go on our website to read all the testimonial we have from partners, from sponsors, from biotechs who are basically extremely clear on this. And the last point I will make on this, we are also entering in an interesting phase whereby there are certain customers where Veeva was having a good relationship with them a few years ago, and we are starting to take back them from home. So at maybe -- for example, -- we take -- we rescue some of them also, there are some of them which are opening the door and they have been considered being -- the standard Veeva was considered and being the standard. So what I'm saying is the footprint is touch that I think you have all the information to make your mind. But as far as we are concerned, I think we are relatively confident on the fact that we continue to gain market share, especially on the new trial. We are diversifying with MEDIDATA AI, which is something if you do not have the set of data, you cannot provide such a value. And on the DCT, on the decentralized clinical trial, we are by far the most robust solutions for the market. So the growth engine is really in place. And that's the reason why, by the way, it's time we renew the contracts, we are also uplifting the value of those contracts by almost 20%, 25%.

Now final question on China, Frederic. So you asked the percentage of the total software revenue is approximately 70%. And for the license, this can depend by quarter because it's quite seasonality in the license number. So that is between 15 to 20 months.

And maybe just a follow-up on MEDIDATA. So we had a reasonably soft Q1 in terms of trends versus what MEDIDATA used to deliver in the last few years. Is this temporary? Is this starting to comp some high numbers plus COVID? I mean, how should we think about growth prospects for MEDIDATA going forward?

No, I think the precise number is 13.5% growth, by the way. 14% last quarter. it's -- you have only 1 or 2 trials starting this quarter or the following quarter. This is making -- now it's pretty consistent. And by the way, if you take into account the services part, it's 17% growth, the total MEDIDATA revenue growth. So I think excellent, the numbers are speaking by themselves.

There are no further questions. I would like to hand back for closing remarks.

Okay. Thank you very much again. Thank you for those of you who are already connected with us this morning are connected in London and thank you for being here this afternoon. We will continue to be able to answer your question. We are looking forward to see you June 9, the Dassault Systèmes campus, you're also welcome, of course, at the dinner the day before. will be a very nice dinner on a way to reconnect and discuss about the future commitment of the new team around Pascal Daloz, future CEO of this company because he has to commit for the next 5 years, and I will watch like you how he is performing. Thank you very much and enjoy your day.

This concludes today's conference call. Thank you for participating. You may now disconnect.