Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

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

Thank you, Nadia, and thank you for joining our fourth quarter and full year 2023 earnings conference call with Bernard Charles, Executive Chairman; Pascal Daloz, Chief Executive Officer; and Rouven Bergmann, Chief Financial Officer. Dassault Systèmes results are prepared in accordance with IFRS. The financial figures discussed on this conference call are on a non-IFRS basis, with revenue growth rates on a constant currency basis unless otherwise noted. Some of the comments on this call contain forward-looking statements that could differ materially from actual results. Please refer to 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 like now to hand over to Pascal Daloz.

Thank you, Beatrix. Good morning, good afternoon to everyone. Thank you for joining us today, and it's always a pleasure to be with you at this time of the year. Let's start first with the 2023 results. We have delivered the revenue growth of 9%, built momentum in subscription revenue with an increase of 16%, accelerating over the year. We delivered on our profitability objectives, achieving an operating margin of 32.4%, all at the same time by continuing to invest in our future growth with a net hiring of 1,300 people. On top of this, we have achieved an EPS of EUR 1.2, up 12%. If we step a little bit back and beyond this financial achievement, I think this today marks a special moment, and let me share a few key points. Firstly, 2023 reflects the successful delivery of our 2018 to 2023 5-year plan, doubling our EPS to EUR 1.2. And this performance was achieved as originally planned despite pandemic and the geopolitical instability we faced during this period. Secondly, it has provided a very solid platform for us to embark on our new 5-year plan to double EPS again to reach EUR 2.4 in 2028. Thirdly, this moment marked an evolution in our governance and the expansion of our horizons. In other words, today marks the beginning for an exciting new chapter for our companies. First, I'm really honored to take on the role of Chief Executive Officer on January 1, 2024, this year. And I'm very proud to build on the heritage of Bernard Charles. Bernard has been the inspiration behind Dassault Systèmes strategic move, transforming all the industry at large, and he has guided our company from a start-up to a global leader. We have been working together for almost 25 years now. I have learned a lot from Bernard in my different position from strategy to brands to finance to Chief Operating Officer, to Deputy CEO, and I thank him for his trust. I think we share the same vision of virtualizing the world to help customers to harmonize product nature and life, and we are committed to making it happen for all the industry we serve. Bernard is now Dassault Systèmes Executive Chairman. And every day, you can confirm him to energize the company with his amazing talent to imagine and chase the future. Bernard, would you like to say a few words?

Yes. With great pleasure. Thank you, Pascal. Hello, everyone. I have to say, I am super excited with Pascal taking over as Chief Executive Officer. Really it's a well quicker transition on top leadership. I think what we share with Pascal is the obsession to bring continued value to the gigantic customer base that we have since inception. Dassault Systèmes has been built on solid long-lasting foundation on a long-term view while reacting each time as a start-up company when new opportunities emerged. Pascal and his executive team, approach the next decade in the same way I observed making the most of our legacy to expand the company's leadership. Based on my benchmark with Dassault, and Charles Edelstenne it looks like I am on track to follow the foot steps by the way. So what will I do in my new role? As Pascal said, first, as Executive Chairman of the Board of Directors, I will ensure that the executive team enjoys the same freedom to pursue innovative strategies as I add. I will also coach our strategy and research team or share ideas with them. They will decide, of course, and will help develop Dassault Systèmes business on reputation by connecting with global institutions and selected historical customers with whom I have built strong friendly relationship. The trust is there for the long term. So I am happy to continue with Pascal in a dual that I did for 40 years with our founders, Charles Edelstenne. Over the years, my professional journey has been motivated by a constant commitment to inspiring significant transformation in the industry. We did what we say we continue to do so. While it has driven progress in crucial sectors such as health, mobility or even in energy. It now needs to adopt reimagined approach that balance innovation with responsibility towards major on society. We have been and will always be a key player in this industry renaissance, which is needed to make the world more sustainable. Our legacy combining science and industrial knowledge is crucial for the upcoming what we call on what Pascal calls the metamorphosis that we need to enable for all industries to create sustainable innovations. The genes of Dassault Systèmes lies on it ability to translate a dream into reality. We have invented market space and fulfill them and to drive science guided imagination. This is more to be -- there is more even to be invented to advance our mission in the past few years, Pascal and I have worked very hard together to grow the path for a long term, what we call the 2040 horizon. And I am very excited to see the agility of Dassault Systèmes is collection of amazing startups in 1 integrated company to fulfill the dream that now as is fulfilling -- is planning to fulfill with excellent execution. Pascal, thank you again and back to you.

Thank you, Bernard. You're right, 2024 marks an important stage in our strategy as we are introducing what we call the generative economy, which is our next horizon for 2040. In fact, we anticipate that the global economy is entering in a new era as the experience economy and the sustainable economy are converging. And we aim to be the catalyst and the enabler of this new generative economy. For Dassault Systèmes and our customers, this will create new possibilities in terms of market, audience and portfolio just as the 3DEXPERIENCE a decade ago. Remember, in 2022, we stated that product is not longer enough. And we open up the experience economy centered on the usage, of the product usage. We define experience as an extended view of the products taking their context of use into account. In 2020, we went a step further. We declared that industry has to shift from things to life, and we extended the virtual twin experience to leaving organisms, including human being. And this opens up new market for us. In 2024, the time has to come to accelerate this shift to life of the things, and we also need to better the life of things. And this is the driving principle of what we call the generative economy. So what does generative mix? It's not Generative AI is, in fact, what is the method of life, let's call it this way. Imagine a self-healing materials, imagine customers can grow products rather than manufacture them, imagine net positive business model giving as much back to the society as they take. And we see generative as a solution to consumptions. The consumption model is not sustainable because customers cannot afford to consume resources and energy that tend to be scaled or at high price. And we believe that the industry can be the solution to sustainability. It's not only the problem as it provides -- as soon as it provides, in fact, a new balance or it reached a new balance. All the industry will have to go through this metamorphosis and I think we are mission-critical for business to imagine, create, deliver generative experience to their consumer, patient, workers, citizens and the society at large. This mix some of it can only be achieved by leveraging virtual worlds. To improve the real worlds, and we believe that virtualization is a catalyst and the enabler of the generative economy. So now we want to push our virtual twin approach further, and let me give you some examples. When you speak about mobility, it's not only about devices. It's about environment involving passenger vehicles, building, air quality and many, many other things. When we are speaking about concert, it's not just about the sales, it's an effect on an organic process. So all of this, what we have to do is to connect many virtual twin together. And this is what we call universes. Each universe is a combination of family of virtual twin experiences and universes, unit, in fact, unify multiple virtual twins, they unify their stakeholders, they unify the knowledge and the know-how. And unlike the metaverse, I think we do not create a parallel world but unlike the omniverse, our goal is not to create a world of controlling everything. With universes, we unified the real and the virtual to relieve the world of possibilities and generate experiences. So your question at this stage is probably what will be our levers. And I can sum up in only 1 word, what we call the IFWE Loop. The IFWE Loop is our method for building universes. And you remember for 40 years, Dassault Systèmes has powered the spirit of innovation, guiding innovation from design and manufacturing. And today, we are extending this journey into an IFWE Loop by seamlessly connecting the virtual and the real -- with the real world data. And this is opening up new possibilities such as giving life to the things or generating multiple life of things. Giving life to the thing means that we powered by the real world of data, our virtual twins. And to a certain extent, we are transforming these physical objects into non-monitored objects. Imagine the cars monitored and optimize in real time through their virtual counterparts. That's an example. In addition, I think we are also giving possibility for things to have multiple lives as waste become resources for new products. In fact, this is what we call the PLM of the first -- the 21st century. Dassault Systèmes invented the product life cycle in the '80s. Now I think we generate multiple cycle of life of things. In doing so, we aim to leverage the power of the numbers, broaden our value proposal and our audience reaching all business users not only the people in the engineering or in the manufacturing, the consumer, the patient, the citizens at large. And this will be substantively broaden our addressable market and serve as a catalyst for accelerating our top line growth. Let's now move on the successful delivery of the 2018, 2023 5-year plan of doubling EPS and the fundamental transformation that occurred over the past 5 years. First, we doubled our EPS to EUR 1.2 with 2/3 attributed to the organic growth. And again, this performance was achieved in 5 years as originally planned. With regard to the organic growth, the 3DEXPERIENCE Platform revenue has doubled over the period. And for the cloud, the combination of MEDIDATA and the strong organic acceleration has allowed us to increase the revenue from EUR 30 million to EUR 1.2 billion coming from the cloud solutions. Then we have embraced the subscription model and multiplied by 4 the subscription revenue to reach EUR 1.9 billion, creating, I think, a strong base line for the future growth. And finally, we are now fully deleveraged, which is important as we embark our new plans, and it gave us room to maneuver. What we did also during this period is to act as a game changer for key industries. This is probably more important than the financials. Why so because as a result, we either established leadership positions or assume stronger position in promising segments. It's very visible in the EV segment where we have now a stronger presence than we used to have in the traditional thermal vehicles. In Life Sciences, we remember, we had a limited presence. Now we are becoming dominant. And infrastructure and cities, while we are still the challenger. I think we all strong position in a high-growth segments such as nuclear, for example. Now I think it's time to step up in the generative economy, and we are betting on significant transformation in the 3 sectors of the economy for the next 20 years. Starting with manufacturing industry, I think this sector represents a volume of over 14 million company worldwide. And this market is enormous and far from being saturated despite what you can hear from many of our competitors. Just to give you an idea, we have one of the largest installed base, 350,000 company are our customers. And in the manufacturing space, it's 300,000, which almost represent 2% penetration. So I could imagine that we still have a lot stuff to conquest in front of us. The second thing which is, I think, important for you to keep in mind, is by 2030, more than 1.3 billion people will move into the upper class, which is a good thing for the humanity. However, this growth has a downside, which is the environmental impact. And that's the reason why it's an imperative for the manufacturing sector to transform itself to continue offering product and experiences for in an affordable way, why we are preserving the environment at the same time. Now zooming in life sciences and health care. Our mission is really to align with the preciousness of the life itself. With 8 billion people on earth, our goal extends beyond treating illness to sustainable overall health. So in another word, it's moving from cure to care. In the era of the generative economy, I think this is presenting an immense opportunity to forge new partnerships leveraging data science and therapeutic innovations and pioneer groundbreaking medical care experiences addressing complex challenges, such as the chronic disease, the aging populations, the global health issues. And I think we can really redefine this still fragmented market through a game-changing approach. In the infrastructure and cities sectors, the paramount challenge is really the decarbonization, given that these areas currently contribute to 2/3 of the global carbon emissions. As a consequence, sustainability has gained prominence in government and corporate agendas. And I think this is a way to treat to at least accelerate investment in clean energy to foster the innovation in materials to triple the nuclear capacity and also to develop new building techniques poised to enhance the energy efficiency. And we stand ready to contribute significantly to achieving this ambition goal in this sector. To just illustrate this, I have some recent customer case I want to share with you. The first one, we will start with the manufacturing industries, and we resume in transportation and mobility, where our 3DEXPERIENCE platform has gained strong momentum and unconscionably winning market share. In 2023, you remember, we signed significant contracts with Jaguar Land Rover, Renault, Stellantis, Ford, even General Motors, Honda just to name a few. This quarter, I think we are extremely proud to announce that BMW selected the 3DEXPERIENCE platform for its future engineering platform. And it's an important point because we have a long-standing relationship with them, but we will extend contractually speaking, for 10 years. And this is a major success, especially considering that these clients remain in Germany, a pioneer in the enterprise-wide adoption of our 3DEXPERIENCE platform. The net of this is, this strategic move involves a substantial increase in the number of users from 3,000 CATIA V5 users to 17,000 3DEXPERIENCE users over the time. And this number clearly evidenced that we are expanding their engineering platform across multiple disciplines. Another game changers lie in addressing the complexity of the connected autonomous vehicle engineering through cutting-edge virtual twin experience. And remember, it's sometimes something I'm really using to explain how it's different to develop an EV compared to a traditional car, you only have 10% common pieces between the 2. So in addition, I think BMW is aiming also to reduce the engineering to manufacturing cycle time and during the evaluation, and we did a significant evaluation benchmark with almost all the different solutions on the market. And we were able to demonstrate that, for instance, within the chassis development, the cycle time could be dramatically reduced from 4 days to 3 minutes. So it's really creating a buyer to entry, which is high for many of our competitions. But behind this, I think, behind this promising deal from a financial standpoint. It is clearly against the demonstration that we are a game changer. For the software-defined vehicles and the automakers are adopting our 3DEXPERIENCE platform to create personalized experiences. And the value we provide with the platform goes far beyond the collection of functionalities is driven by the key business goals such as the global modular architecture, so smart, safe and connected approach as well as the efficient multi-energy platform. Those are the name of the solutions we are promoting on our market, but they are reflecting the value we bring to this industry. The same phenomenon is starting to happen in the life sciences. And I think we are starting to be a witness of groundbreaking application of the virtual twin in the drug development. And you'll remember, that was the best at the time when we come together with MEDIDATA. A good example of this is what we do with the American biotech company, Biogen. And they have chosen the 3DEXPERIENCE platform on the cloud to develop the new drug for neurological disease. The interesting thing is, in fact, this is involving the modeling and simulating drug delivery to the brain through the injections. And the step includes creating a virtual twin of the brain and the spinal column to understand the drug delivery via cerebral spinal fluid. And to avoid, in fact, preclinical in vivo testing. What we do, we are developing and connecting 2 virtual twins, 1 for the drugs and the other 1 for the brain. And it's enough to validate the effects and not to have to do the pre-clinical testing. So I think it's an amazing example of what the universes I was talking about is, in fact, a reality. Moving to Infrastructure & Cities, a notable win this quarter comes from the steel industry. And still being ubiquitous, it's a prime example of the material with significant environmental impacts. Steel is used in various industries such as construction, automotive, and steel production contribute significantly to the carbon emissions. And this is why H2 Green has chosen us to become the backbone for their steel production, reducing by 95% their CO2 footprint. And this clearly underscores the role of the decarbonization as a driving force for these sectors to adapt our -- to adopt our solutions. So in conclusion, before handing over to Rouven, let me wrap up. We embarked on a new 5 years plan to once again double our EPS by 2028. We are convinced we are strategically well positioned to leverage the vast market creating new opportunities for the future. And we are unique because I think we are combining our scientific approach with industrial know-how and we are also coupling our modeling and simulation technology with Generative AI. And this sets us apart to play a critical role in the generative economy. I think now it's time to focus on Q4 and the full year performance and the outlook for Q1, Rouven, you have the floor.

Thank you, Pascal, and welcome from my side. Thank you for joining us, and good afternoon to the U.S., and -- good afternoon to Europe, and good morning to the U.S. Let me turn the discussion now to our fourth quarter performance across our geos and product plans. Europe had an excellent quarter. And the year -- and also for the year, the 15% and 14% growth, respectively. The growth was broad-based driven across industries and multiple end markets with double-digit growth in Euro West, Euro Central and also in Euro North. Specifically, this quarter in Germany, we saw a strong positive shift in momentum of 3DEXPERIENCE adoption, driven by BMW and Bosch extending our relationships in Q4. In the Americas, revenue in 2023 was up 7% for the year, but Q4 growth was rather muted due to strong baseline comparison. The growth dynamics in the Americas remain resilient and they were evidenced with strong growth in T&M and Aerospace with Ford signing a new 3DEXPERIENCE deal and Lockheed Martin expanding their usage. In 2023, the Americas region shifted past to embrace the subscription model, and in fact, subscription revenue has now surpassed upfront license revenue by a factor of almost 2 on top of MEDIDATA. This is providing a strong basis for future expansions. In Asia, revenue growth was 3% for the year, mainly impacted by the volatility that we experienced in China in the first half of 2023. In the second half, despite continued challenging macroeconomic conditions, growth reaccelerated in China. It is evidenced by an upward trend of 6% growth in Q3 and a strong 14% growth in the fourth quarter. For the year, the growth in China was resilient at 5%, India delivered strong 18% growth in 2023, while Japan and Korea were rather soft. Now let's review our product line performance. Industrial Innovation delivered outstanding results with double-digit growth for the year end in Q4 and is now representing 54% of total software revenue. As evidenced by these strong numbers, 3DEXPERIENCE is delivering the multiplier effect accelerating the growth in CATIA, SIMULIA and DELMIA, which are all up double digit during the period. While our data science business is accelerating to more than 20% growth for the year. In 2023, the subscription revenue surpassed the growth contribution from upfront license revenue for the Industrial Innovation product lines. Within mainstream innovation, we reported 7% growth, and it now represents 24% of total software revenue. I would like to draw your attention here on 2 key drivers. First, to SOLIDWORKS. The business model here is accelerating the shift to subscription and is highlighted by almost triple-digit growth year-over-year. The annual run rate for subscription has now reached $100 million in revenue and at a speed to double again. Second, we are redefining the PLM category for the consumer industries. The momentum of CENTRIC PLM is gaining strength again in Q4, delivering a record 2023. We are now signing large enterprise-level deals. We spoke about ALDI and Decathlon in previous calls. This quarter, we signed multimillion-dollar deals with iconic brands such as Wilson, FILA and Petit Bateau. In Life Science, software revenue rose 6% for the year, which now accounts for 22% of total software revenue. In the quarter, the 2% growth is mainly associated with 2 effects. First, there's a high comparison base and secondly, the slowdown in study staff, as discussed previously. However, important to note, the total revenue of MEDIDATA for the full year 2023 was up 10%. This includes services revenue that is adding about 3 points of growth on top of the software. These are high value-added services related to the design, launch and conduct of studies, including operating decent clinical trials. It's a kind of service as a software model. It's a model which we put in place during COVID to scale mega trials. We continue to support sponsors such as Moderna and partners in this model. Now let's soon to discuss the volume impact of the clinical trial starts. Let's zoom in here a little bit more. And what are the associated market share implications. This should help you to better frame the path of how we will reaccelerate towards double-digit growth in 2025. Overall, since the peak of COVID, volumes in clinical trial starts have declined by about 5% in 2022 and 10% in 2023. Essentially, we are now back on the trend line of 2019 growth, and the COVID bubble is behind us. Important to highlight, in this period of volume compression, we actually gained market share of approximately 1 point on average for new study starts and about 4 points for the large-scale Phase III trials. However, despite these ongoing market share gains, the strong volume reductions in 2022 and 2023, and impacts the overall growth of MEDIDATA, which is visible in the 2023 software revenue number. As we project 2024, we expect volumes to return to normal pre-pandemic growth levels. However, as for the revenue growth, we still need to absorb the volume compression resulting from the COVID bubble because changes in volume of study starts typically convert to revenue with a 6- to 12 months delay. In 2025, this volatility will be behind us, and we are set to return to double-digit cost. We have a strong basis. We are winning market share for Phase II, where science based and we offer the most comprehensive platform to design, launch and conduct advanced clinical trials. On top, we are expanding our share of wallet through AI, decentralized trials and integrated data management within the larger health ecosystem. This positions us clearly as the leader as evidenced by the fact that 75% of novel drugs have been developed with our technology, as you heard from Pascal before. Now let's zoom to mainstream -- to our mainstream opportunity. In 2023, CENTRIC PLM continued its path of establishing its global leadership position. With 120 customer wins in 2023, including the largest 2 deals in its history in 2023 with ALDI and Decathlon, CENTRIC PLM has confirmed its strong diversification, which now goes way beyond fashion and the tariff with strong wins in outdoor and sports, food and beverage, cosmetics and consumer electronics. By expanding from brands to retailers, it has also opened the path to future expansion with sports communities. As you can see, we are well positioned to continue to execute on our strategy of building a significant growth opportunity. CENTRIC PLM is not just collection management. We're expanding to a business platform that serves as a backbone of e-commerce. Consequently, the growth potential for CENTRIC PLM is significant with a path of creating a $1 billion-plus business in a new category of PLM. Now let's review the financials for the company of the quarter and the full year. We delivered on all our financial targets in 2023. Total revenue grew 9% and EPS 12% and which shows the anticipated acceleration in the second half. It is evidenced by Q4 recurring revenue up 12%, driven by the strong momentum in subscription revenue of 22% in the period. These results underscore our commitment to evolve our business model towards subscription, aiming to increase the share of predictable revenue. In fact, subscription revenue now accounts for 44% of the total recurring revenue up 3 points, and we expect this share to continue to increase at this rate, as discussed during our Capital Market Day. It also reflects that we are focused on executing our strategy to expand the value of 3DEXPERIENCE as a platform for innovation and business, applying the subscription model. In 2023, we saw this trend accelerating led by an increasing share of large 3DEXPERIENCE wins with broad-based adoption across geos and industries as well as an acceleration of the transition to subscription at SOLIDWORKS. Consequently, recurring revenue for the full year now accounts for 80% of total software revenue, increasing the share of predictable revenue from 78% last year. Upfront license revenue was 2% for the year, highlighting that the subscription transition is progressing fast and versus a strong comparison base of 2022. Together, upfront license and subscription are up double digit, 11% versus last year, reflecting a solid organic growth. Services revenue was in line with the overall trend, up 10% versus last year. Throughout 2023, we focus on improving our profitability. And we finished strong in Q4 with an operating margin of 35.9%, up strong 160 basis points ex-FX year-on-year and our EPS was $0.36 and represents an increase of 40% year-on-year. As a result, we delivered an operating margin of 32.4%, which highlights the disciplined resource management throughout the year, which was most importantly -- which most importantly will continue to provide the flexibility for future investments, and we will be able to do that without costly restructuring plans. As for EPS, Pascal highlighted the 2018 to 2023 plan achievement earlier this morning, doubling EPS to EUR 1.20 compared to 2018. Now let's review briefly our performance related to our objectives in 2023. Total revenue was in line with our guidance. It was slightly below the midpoint by EUR 3 million, excluding the impact of currency of EUR 10 million. Lower software revenue was offset by higher growth in services. Operating margin was 32.4% at the midpoint, excluding the impact from currency. More importantly, we continue to invest to support our strategic initiatives with a net headcount growth of 1,300 for the full year. And this sets a strong basis for continued margin improvement in the future. As mentioned earlier, we achieved EUR 1.20 EPS, which reflects solid operating performance and a good financial income in Q4. So to summarize, the financial model of Dassault Systèmes is working well, and the transition to subscription and cloud is well underway and set to further accelerate in line with our 5-year plan. Now to the growth drivers. As highlighted, we are accelerating our path to subscription revenue. And hence, this provides greater visibility and resiliency. 3DEXPERIENCE revenue rose 21% in Q4 at constant currency. This marks a new all-time record with the share of 3DEXPERIENCE revenue at 42% of the eligible software revenue. For the full year, 3DEXPERIENCE revenue grew 19%, representing a share of 36%. Over 2/3 of the growth is driven by deals larger than EUR 3 million. And this is highlighting the strong value potential in our installed base. Cloud revenue grew 12% in 2023. As anticipated, while MEDIDATA growth contribution remained lower this quarter, 3DEXPERIENCE Cloud continued with a fast growth in Q4, building a run rate of reaching now over EUR 200 million. The growth in 3DEXPERIENCE Cloud reflects a strong contribution in new customer wins. Cloud is now representing 24% of our full year software revenue. And as you can hear from us, we are confident that we will further capitalize on the momentum of our growth drivers to continue to capture market share in 2024 and beyond. Now let's switch to the cash flow and balance sheet items. Cash and cash equivalents totaled EUR 3.568 billion compared to EUR 2.769 billion at the end of 2022, reflecting an increase of EUR 799 million. At the end of the quarter, our net cash position totaled EUR 578 million, an increase of EUR 803 million versus net financial debt of EUR 227 million on December 31, 2022. This clearly highlights a disciplined and efficient capital allocation and a strong path to deleverage since the acquisition of MEDIDATA. Now let's look at what is driving our cash position at the end of the fourth quarter. We generated EUR 1.565 billion operating cash flow for the full year, an increase of 3% versus last year. The changes in operating working capital reflects the growth in business and timing of invoicing, which we will expect to catch up in 2024. For the nonoperating working capital was slightly less favorable due to the timing of cash tax payments and one-off effects related to cash tax payments. This will have a reverse positive effect in the next years. To sum up, operating cash flow was mainly used for the cash dividend paid in Q2 of EUR 276 million, the net purchase of treasury shares totaling EUR 162 million, investment in CapEx of EUR 134 million and the repayment of lease liabilities of EUR 89 million. Lastly, to note, total FX impact was about EUR 68 million versus last year higher. Now with this, let's turn to our fiscal year 2024 outlook. For the full year 2024, we initiate our objectives with a growth rate of 8% to 10% for both software revenue and total revenue. This reflects an acceleration of subscription revenue growth at 17% to 19%. As you see evidence in our 2023 performance, the shift to subscription is broad-based. And we are -- and is well aligned with the growth drivers that we have put in place. Of first, value up, it's leveraging the 3DEXPERIENCE platform and large transformational deal activity, which returned strongly in 2022 -- 2023, with JLR, Ford, BMW as examples, and is on our pipeline to continue in 2024. CENTRIC PLM, based on a powerful diversification and platform expansion strategy, which is set to continue at high double-digit growth rates. And lastly, we're taking into account in our guidance the temporary slower contribution from our Life Sciences business. Precisely, we expect the software revenue contribution for MEDIDATA to be low single digit to flat before returning to double-digit growth in 2025. Consequently, we will continue to take market share and expand to virtualize the entire drug life cycle, as highlighted by the Biogen and Amgen cases of 2023. On this basis, we expect double-digit growth of our recurring revenue in 2024 in the range of 10% to 11%. We expect our upfront license revenue to be in the range of minus 1% to plus 3%, and services revenue growth is expected at 9% to 10%, in line with our business growth overall. We further expect the full year operating margin to be in the range of 32.5% to 32.8%, a year-over-year improvement of 30 to 50 basis points ex-FX reflecting continued disciplined OpEx policy while investing to sustain our growth ambition. Essentially, with this outlook, we are returning to the level of the 2022 operating margin level, ex-FX. Considering the above, we target our diluted EPS to grow between 10% to 12% ex-FX. Now for Q1, let me provide you some additional insights that will help you to model the starting point. We target growth at constant currency between 7% to 8%, assuming subscription cost of 14% to 15% and upfront license revenue between minus 3% to plus 2% growth. In terms of profitability, we expect the operating margin to be in the range of 30.6% to 30.7%, improving marginally year-over-year and the double-digit growth of our diluted EPS of $0.29 to $0.30. For additional information and to review what we've just discussed, I'll refer you to today's earnings presentation. Now to conclude, we have achieved all our key financial objectives in 2023. Our strategy is working, demonstrated by the momentum in subscription revenue growth and the margin acceleration. It is putting us back on track to deliver consistent cash flow and operating leverage in the years to come. And in 2024, we will continue to focus our investments in executing our strategy to sustain strong revenue and EPS growth. This is what we are committed to deliver, and it is reflected in our next 5-year financial objective. So with this, I would like to thank you again for joining us this afternoon in Europe and this morning in the U.S. And now Bernard, Pascal and I are looking forward to take your questions.

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

Starting with 3DEX, you did about 36% of eligible revenue for the year, 42% for the quarter. How are you thinking about the proportionate contribution of 3DEX for this year? Do you think you might get closer to half, if not more, of eligible revenue in '24, perhaps by 2025? Secondly, one of the things that I think Dassault could speak of that would be very helpful is your expectations for your various channels this year, CSC, CPE and CRE? And any margin or other evolutions that you are factoring in? And then finally, of course, I should ask my usual questions on SOLIDWORKS. If you -- finally, in 2023, surpassed the prior record of annual unit volume for WORKS and how the 3DEX WORKS adoption rate ended up for the year.

Rouven, you wanted to start please. The first one.

Thank you. Yes, definitely. Thanks, Pascal. Thanks. Jay, for the question. So to clarify, maybe quickly the eligible revenue, the share of revenue on 3DEXPERIENCE for the full year is 36%. When it's up 3 points year-over-year, it was 33% in 2022. So we've advanced strongly for Q4, it's over 40%. And here, it's growing 5 points year-over-year based on 21%, 20-ish percent cost overall. So I think right now, we are on the trajectory of increasing the share between 3 to 5 points per year. We see -- as I said before, when you look into our pipeline for 2024 and reflect on what we saw in 2023, you compare the 2 starting points coming into the year, last year versus this year, we definitely see the momentum picking up on our installed base, adopting the 3DEXPERIENCE platform, multi-domain. And that's why the value of transactions is so much up that 2/3 of our 3DEXPERIENCE revenue growth comes from deals larger than EUR 3 million from our installed base. So we can do the math of when we will be at 50%, but we are building a strong track record of accelerating this adoption so that over the next few years, we'll reach the 50%. I think we are at the rate of 3% to 5% -- 3 to 5 points of growth per year. We will approach 40% in 2024. And then probably either 2 to 3 years, 2 to 2.5 years to get to 50%. That's the normal rate. If we don't get to the next inflection point, which is possible. That we can further accelerate. But if we stay on the current trend, which is between 3 to 5 points, that's what it would suggest. Of course, possible to further accelerate.

The second question, Jay, was related to the perspective for 2024 per engagement model. One way to answer to this question is to look at 2023. The vast majority of the growth was coming from the direct sales in 2023, I mean, growing at double digits. And it's really the result of the contribution of the last transaction we signed and the penetration of the 3DEXPERIENCE platform within the installed base. Another way also to make the comment, if I was looking the new sales whenever it's new subscriptions or new license for the direct sales. The vast majority now is related to 3DEXPERIENCE platform. I mean, it's exceeding 60%, which is not the case yet for the interaction. So last year, the -- what we call the customer process was growing at 7%. And the main stream, I mean, the SOLIDWORKS, the role, we call it the role, but the major resellers networks for SOLIDWORKS, they were growing at a little bit more than 5%. We do expect a much more balanced growth in 2024. At least, we are expecting more contributions from the WORKS, networks. And we have certain confident with this because when I was looking the opening pipeline. We are in a much better position compared to last year. And if you remember, last year, we were impacted by the slow start, if not the decrease, especially in China. And as you know, we have a certain exposure with SOLIDWORKS, on the license model in SOLIDWORKS. And this year, we are in a much better position. So in the range of the 8% to 9% growth, which is the guidance Rouven gave, at least, we do expect to be more balanced in 2021 compared to what we have. Now coming back to the SOLIDWORKS things. By the way, I didn't check the numbers -- I mean, the number of seats. I don't know if, Rouven, you have it close to you. But the point I could share with you Jay is the following. I think the growth of the subscription part of SOLIDWORKS, which is also linked to the WORKS family and also the cloud is growing at triple digits. And we are close now to be -- at EUR 200 million, which is exceeding, I would say, the 10% mark of the total revenue coming from SOLIDWORKS. That's a way to plan the dynamics. And I think we are on a good track. And Beatrix has time to check. So this year, we did a little bit more than 80,000 new licenses or new seats, let's call it this way, whether it's subscription or upfront with SOLIDWORKS, which is the ratio I have in mind. Usually, we do a little bit more than 20,000 per quarter. Jay, I was expecting a question related to ANSYS and Synopsys.

Well, go ahead.

No, no, no. But I know it's one of your favorite topic. Maybe a few comments anyway. I just want to make the statement that neither ANSYS and Synopsys were a target for us, right? For different reasons. One is because ANSYS with SIMULIA, we have a significant overlap, and we are competing end-to-end. And I think we have differentiation. I do appreciate it's a good company and what they do is also relevant for the market. But I think we are following a different path. And Synopsys is really dedicated to the EDA. And you know it's still my strategy to partner more than to basically expand inorganically to this space. Now my take, besides the price and the valuation which is extremely high, of course 13.5x the revenue and EUR 90 billion in cash on top of EUR 70 billion in shares -- billion. I think it's a lot of money. Given that the combined company cash flow will be a little bit less than EUR 3 billion. So it's a significant number of years before to reimburse. But nevertheless, I think the rationale behind this deal is really to reinforce the Synopsys focus on the summit industry, more than the capacity for the 2 of them to expand outside of this. And the reason is it's because the semi industry is evolving to a new generation, which is what they call the multi-die, which is not anymore delivers of siliceous, it's delivers of siliceous in conjunction with an assembly of different micro components, we call it the MEMS. And this is changing a lot of the design process, but also the assembly process. The design because you have to do multiphysics simulations. And I think that's probably the purpose of the combination of the 2. And from a manufacturing standpoint, is I mean it's not anymore a layering system. It's becoming an assembly system, which is the reason why, by the way, we have significant market share in this industry by doing the assembly design, if you want, of the manufacturing processes for this industry. So the net of this for us is, I think this is creating an ability to continue to expand where ANSYS is strong because the key focus will be really on the semi more than something else. That is my new work, Jay.

Now we're going to take our next question. And the next question comes from the line of Frederic Boulan from Bank of America.

If I can ask possibly 2. Firstly, on the free cash flow dynamics. If we look at free cash flow post CapEx and lease this year, you generated a bit more than EUR 1,300 million. That's about 83% of net income. How do you think about conversion going forward? In particular, working capital negative EUR 129 million. How should we think about that in the coming years? And you mentioned as well, Rouven, the reversal of cash tax impact. So can you discuss how negative that was this year and what we should expect going forward? And then if possible, on the M&A topic that you kind of opened up about just now, maybe if you could give us an update on your pipeline and priorities for the coming years.

Thank you, Frederic. Thank you for the questions. So on the cash, the situation is the following. 2023 reflects an operating cash flow, which is in line with the operating income growth, which is between 2% to 3%. 2% operating income, ex-FX growth. Remember, coming into the year 2023, we had to absorb a lot of expense carryover from the catch-up we had to do post COVID. We have done this successfully. We accelerated the operating margin, the operating income in the back half of 2023. And hence, we drove also positive operating cash flow in Q4 from an operating and net income standpoint. Of course, the working capital is a separate story, and I'll come to this in a moment. So I think overall, very aligned operating income caused with operating cash flow growth. Now what do I expect going forward because you started with the conversion rate. I expect CapEx to be in line with the CapEx and business costs we have. I do not foresee much change on lease properties. And on operating income, we expect to grow next year 10%, and we expect that 10% also reflected in the operating cash flow growth. So there is an expansion to be expected. Now to the operating working capital and nonoperating working capital. On the operating side, in fact, the trade receivables they were increasing less this year than last year. And that's because we had solid collections in 2023. The DSOs are flat. Where we have -- on the operating side, some fluctuation of variability is in the contract liabilities and the deferred revenue, where the timing of invoicing and the timing of renewals had an adverse effect in 2023, and that will rebound in 2024. And that's at the tune of approximately, I would say, EUR 60 million to EUR 80 million, around EUR 80 million of negative impact in 2023, which just for that effect isolated reversals in 2024. Of course, there can be other effects on top. We'll discuss that when we are in 2024. On the cash tax part of the nonoperating working capital, there are 2 effects. Mainly, it's the cash tax payments in the United States and in France that have to be made in advance. And they have been quite elevated in the U.S. because of this fee structure. And that together France and the U.S., again, is an impact of about EUR 70 million in 2023. Now we also had prepayments of cash tax in 2022, but at a much lower level. So there is an unfavorable comparison year-over-year. And then there was a second effect on SOLIDWORKS. We decided in 2023 to simplify the business structure of SOLIDWORKS and implement the SOLIDWORKS business, which was run globally from the United States to the local countries and entities and transfer the IP to all the distribution entities. And there was a cash tax payment required in the U.S. for this asset transfer, which we will recover over years from the local entity. So there's a timing delay of this to net. But there's a lot of positive advantages from a business standpoint and operational standpoint related to this. And that was an impact of about EUR 25 million. So I think this gives you all the details. We have a detailed reconciliation in our tables that we disclosed this morning. You'll see these effects listed there. So we are fairly confident on the cash side to see an expansion. There's nothing abnormal and now timing can vary -- effects can vary from time to time and year-over-year.

I think my answer for the M&A would be probably shorter, Rouven. No, I think we have leverage. We are generating at a minimum, EUR 1.5 billion cash every year. That's the minimum and we will continue to grow. And if you look at over the period, I think we are much more close to EUR 2 billion than EUR 1.5 billion. So in the next 5 years, most of the cash we are generating will be reinvested. You know our policy is a minimum of to serve. So clearly, we are creating the conditions for the move. Related to the pipeline, we have a pipeline. Right now, the pipeline at least short term, is much more based on the bolt-on than the large transactions. But nevertheless, I think for -- in all the different sectors, I was mentioning whatever is the manufacturing, the life sciences and infrastructure and cities, we have clearly notified targets. And we are giving the time for us to build the right case because at the end, for us, it's a way not to fulfill the plan we just defined. It's a way to create the formation to continue to expand our addressable market and more importantly, to create value on top of it. And if I look at the recent movement, the recent merger of the recent acquisitions, they are still trading on a very high multiple. Despite the quality of the company, I mean. But more than 10x the revenue. I think the business case, the investment case is not an easy one. That's what I can say. Thank you, Frederic.

And now we will take our last question for today, and the question comes from the line of Adam Wood from Morgan Stanley.

Pascal, Rouven, this is actually George Webb from Morgan Stanley side. Just a couple on long one, very short. Just on MEDIDATA. I appreciate there's a few different types of end customer big pharma clinical research organizations and biotechs and perhaps also some differences in the revenue model or the products in there between what's perhaps more impacted by trial numbers and some which are more trial based. Can you just help us with a simple way to think about the exposure to the different types of end customers you have at MEDIDATA? And which areas or which customers are more and less exposed to those trial numbers. And then the short question, just a small technical one. When we look at the EUR 40 million of net other operating expense in Q4, what does that refer to, please?

I can start with this one. This is related to an impairment of -- and you will see that in our URD that we publish. It's an impairment related to the brand, GEOVIA, where the business outlook has changed, mainly related to the discontinuation of the business in Russia. And in addition, the -- with ESG, we have restructured our portfolio and we discontinued part of it. So that's what's driving this impairment at GEOVIA and that was EUR 36 million, I think, to be precise. And that will be disclosed in the Euro deals to be filed. Now coming back to your question on MEDIDATA and the different business segments. I start and Pascal, if you have things to add, please. And thank you for the opportunity to clarify this. So you're right, there are various segments that have different economics and different duration in terms of contracts. If you look at -- start with our sponsors, the pharma companies, which are the large enterprise. Pharma companies, they typically have 5 years contracts with us. They are fixed their subscription contracts on top they might have services engagements, which is essentially a standard. We support them in study conduct services where we build studies for those pharma companies. And here, we provide the infrastructure, to be clear, where we are contracting directly with the pharma companies. That's an important element. If we go on to the mid-market and smaller biotech, the contract directions could be shorter between 3 years because their visibility is probably less than a big pharma company that has a large portfolio. But also here, it's a committed contract, subscription based and everything ratable in terms of revenue recognition and less. And there's no volatility to changes in volume during the contract period. Of course, at the end, when you are renewing, there can be variation. However, our track record is that we increase the contract value, annualized contract value at the time of renewal, but at an average of 20%, 22%. And that we have done over a long decade over multiple decades. Now to the CROs and the single study business. This is where we are working with CROs to address the single study market. So where there are individual trials that are started typically by small biotech firms, where they are looking for various CROs to run those clinical trials and then together with the CRO, MEDIDATA or Dassault Systèmes offers the infrastructure, typically raise plus, plus, plus products depending on the clinical requirement. And here, of course, we are exposed to volumes. In these single trials, they had a strong increase during the COVID surge because there was a strong level of investment of biotechs starting new clinical trials. And of this market growing, we probably captured 80% of that growth during this period. And traditionally, our -- the mix of revenue between the sponsors where we have subscription contracts, be it at the top end with large pharma and mid-market versus CROs traditionally has been a mix of 30-70. So 30% CRO volume business, 70% subscription-based multiyear with mid-market or large pharma companies. And during the COVID surge, this ratio has shifted to 40-60. And now as we are in the upswing of that cycle with volume, we are going back to 30-70. So to summarize, we have a solid visibility and strong track record of increasing contract value with the pharma companies where we have a duration of 3 to 5 years contract. And with CROs, we have more volatility because we are bidding for single studies. It has the advantage that if the market is positive, we can capture a lot of cost. We can equip a lot of biotechs with our technology. And based on that, we have many cases where these biotech firms later on expanded to an enterprise subscription contract, multiyear. And Moderna is, for example, an example of that. Early on, pre-COVID, they were running single trials. And before they then work with us on an enterprise contract and we know the story. So this is how it works. I mean that's where -- these are the main building blocks.

I think it's time to conclude. I really want to thank all of you participating to this call. I look forward to seeing you for Q1 results. And in the meantime, I think Rouven, you will be on the road. He'll meet with some of you and hopefully all of you, and I wish you a good end of week. See you soon.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.