Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

So I can maybe quickly introduce myself. And so as you said, CATIA has been the flagship brand for Dassault Systèmes. So Dassault Systèmes is doing -- it's a EUR 6 billion revenue company. So roughly CATIA is doing EUR 1 billion to EUR 2 billion. It's the historical emblematic brand of the system because that was the one that was created in 1981 as a spinoff of Dassault Systèmes. And until '95, it was the only brand of Dassault Systèmes. And it's still very, very core because this is the one that is basically being used by aerospace, automotive, infrastructure, construction company to model the virtual twin. And the main driver of companies to use our product is to innovate, reduce lead time, reduce costs. And the main market we are serving is automotive 50%, then aerospace, industry equipment and then a lot of diversification across other sectors like infrastructure and construction or life science, medtech device.

Great. So while we're fixing the slides -- I mean, so maybe to start about some of the -- you kind of have traditional end markets. I think mobility, we've had some -- I mean every quarter you announce a significant OEM win. Maybe you can share with us what's driving that renewed momentum in an end market that's actually quite challenging in terms of trends. Is there a specific technological cycle that companies are willing to jump after? Or is it something more specific? So would it be good to understand a little bit what's driving that momentum.

So actually, if we start with automotive, they were -- they are internal drivers, which is mainly about their competitiveness and the trends in their market and there are -- and they are a second driver, which is how to make them quicker and reducing the overall cost of development. In the first one, you know that for many years already, automotive is in -- having the challenge to getting more and more electrified vehicles, which means new powertrain with e-motors, battery. And this is not about creating a new battery or a new motor. This is reinventing completely the way the car is being architect. And so it requires a lot of new modeling, new experimentation, new innovation. So this has triggered a lot of needs in terms of number of engineers, number of capability to invent to do next innovation. And at the same time, there is new competition for those players. New competitors in China, new entrants like Tesla, but also Nio, Rivian, so car company, which did not exist a few years ago. And those companies, they start from a blank sheet of paper. So it's -- in somehow it's a challenge for them because they're entering a new market. But they go directly EV. They go directly with new kind of tools because they don't have the -- this legacy that they need, they really start from a blank sheet of paper again. So it's much easier for them to be more agile. So because of this new competition, every single carmaker, they need to adapt, be more agile and invest a lot in R&D to do this next innovation.

The slide deck is back. Anything in particular you want to flag, I mean, on that, just -- go for it.

Yes. So I'll go -- because I have a few slides that can help you to really visualize what we mean by the market we serve. So first of all, you see 2 pictures here on my slide, which is a 3D modeling of an aircraft and the system view, that's really a good summary about where we go with CATIA. We think that the next big innovation advantage that we can provide to the market is to couple these 2 views because it's not anymore -- like in the past, having to assemble a few components which are mainly mechanical. Cars and aircraft are highly complex products, which bridge mechanical, electronic software, and you need a system you want to bet. Let me go here to pass the slide. So you -- that's not only about CATIA, that's about the overall evolution of our strategy. As I said, we -- in the '90s, we made the revolution of making the full digital aircraft, full digital car. But the company has evolved on being able not only to address aircraft automotive, but complex infrastructure or even life sciences. And for the future, we talk about virtual win and generative economy. And I would like to diversify a little bit what we mean by this. So in our installed base in terms of number, 25 million users for Dassault Systèmes, 1 million for CATIA. And the sectors we are serving are manufacturing, infrastructure and life science. And for CATIA itself, we were mainly born into the manufacturing sector, so that's the most of it. But you will see that we diversify a lot on life science and infrastructure. A few numbers about CATIA, 1 billion to 2 billion, pretty well balanced across geographies and sectors. Big growth on 3DEXPERIENCE platform, which is the latest version of CATIA, and a strong growth on cloud. You will see that cloud is definitively an accelerator of growth for our sectors. So just to give you an example, in the manufacturing sector, there is a big movement to electrification. It give us a clear advantage because 85% of the electric vehicles today are -- have been developed, modern, simulated with our solution. In the Life Science, which is morphed with MEDIDATA, 70% of novel drugs is being developed with our solution. And one thing that is less known, but on complex infrastructure, like nuclear plants, for instance, most of the new small and modular reactors today are actually being developed with CATIA. So there is a huge growth in the 3 sectors. The goal is to make virtual and real. And we are in London. I know if you show that in Piccadilly Circus, but we are kind of -- we are a B2B company. So a consumer that don't know us very much, so we try to leverage some advertising campaign because we are really at the heart of every single product innovation, but it's not really known, right? Because our software is being used by the Tesla of the world, the Boeing of the world, and the end consumer does not know that. So more and more, and this is what we did in the Piccadilly Circus a few weeks ago. We try to demystify what we do, and what we do is virtualization of the product innovation. Now what does it mean? It means that what we provide is solution, you actually see them in action here, whereby engineers, they have the freedom to create any possibility on new innovation, whether it's about cars, airplanes. And initially, it was just about a few engineers, which are expert on the product, but more and more we diversify. With CATIA in the cloud now, we have a new population of casual users that can utilize the CATIA power, but without having this complexity of using the product like in the past. So in terms of growth, there is a huge trigger using that. So the type of change we are trying to solve with industry are also completely different. In the '90s, Boeing, they were trying to do the 777 fully digitally. Now the kind of challenges we have to address are a bit different. For example, when we talk about automotive clients, we talk about software-defined vehicles, which is mainly due to the software complexity in cars, the millions of line of codes that you have in a car right now. Same for mobility experience. So every time we have some new KPIs, for example, we are working with Renault, BMW, Porsche, Valeo. And just to give you some precise number. [ Renault ], they said on the latest car program with our solution, they reduce the time it takes to design the car by 1 year. So today, it takes 4 years, now it takes 3 years. Also, they try to solve the issue like compliance issues, cybersecurity. You may be saw that some German carmaker, they had delaying their car program launch just because the car was not able to pass the cybersecurity test. So if you are not able to use the type of solution we have to certify your car, like you certify airplane, is not going to work. Same for mobility experience, lead time reduction, cost reduction, this is what we do with Honda, Tesla, Bosch or [indiscernible]. Multiscale defense program. So for example, in the U.K., we are working with BAE, which partner with Leonardo, Mitsubishi in Japan to do the next fighter. So this very large multiscale defense program, you need a collaborative platform and very innovative tool to make it happen. And same in Infrastructure and city, we are working with Bouygues for buildings, Verkor for battery manufacturing, Naarea for small and modular reactors to do new infrastructure virtual twin. So CATIA is now being much more diversified in many new areas of solutions. So when we talk about the virtual twin, what do we mean? We mean modeling a virtual product. So we need to model it to simulate it. Also, data is very important. The more you are going to get structured data, the more you are going to be faster and to leverage artificial intelligence. So data is very -- an essential part of our strategy and of course, with collaboration. So let me give you a few examples. So first of all, we have a definitive advantage because it takes time to put -- to develop a software to do 3D design. We do that for more than 40 years. If you -- to tell you about it a little bit differently, if today you create a new company and you want to do an aircraft or a car, as soon as you start to do electrical or composites or things complex like this, there is only 2 software in the world, that is CATIA and one of the competitor. If you do less complex products, maybe you have 4 to 5 competitors. So there is a very few players that have invested long term during 4 years in science in order to be able to do that modeling. Let me show you some pragmatic example. With Bosch, we said we want to use CATIA to do the cockpit of the future. So what you see on the screen is a very pragmatic example about the way automotive clients are using our solution. So here you see the -- it looks like a movie, you go, you see the car, you open the door, you are going to be able to enter into the cockpit. But actually, it's not a movie. It's not visualization. This is the true real-time simulation of the cockpit behavior. So the only way to do that is to master 3D modeling, to master system modeling. And we are the only one capable to do that. And this is why we decided to invest into 3D and system to do that kind of project with Bosch. Another example is battery. So the same way you saw the modeling in 3D of the cockpit, you could think about the same on battery. So for example, you need to model the battery in 3D, and you need to model the behavior of the battery with systems. Why simulating the battery? Because you want to know the aging of the battery. You want to know if you charge every week 10 times, your battery pack into the car, how long is going to be the battery in terms of your -- so to plan your warranty costs. So again, this is highly complex physics phenomena that we are the only one to be able to do. Another example, completely outside of automotive. If you think about a very complex energy plant, whether it's thermal energy, nuclear energy, these are heavy capital projects with millions of parts where you have a detailed planning activity, where you have a lot of associated risk with huge capital investment. Now the same way here, you can use CATIA and the platform in order not only to do 3D modeling, but to actually model risk. So you can anticipate the kind of risk you're going to have on the project to make better anticipation of it and win a lot of times, costs by securing your project. So you see that this concept of virtual twin is being used in many industry aerospace, automotive, infrastructure. Now in the future, new techniques will come with artificial intelligence. So I don't know who use ChatGPT today in the room? Who is using ChatGPT every day, right? You see already the power you can have on text or images. Now think about the same power on 3D. Think about engineers to borrow in order to use our software the way they use today, they're going to just ask question to CATIA, okay, please design me the next car, designed to be the next battery for my electric car. Please design a new aircraft for me. This is the way it will look like. Here is an example here that you want to create a new vehicle architecture for the U.S. market for 5 passenger, so you're going to chat with CATIA, you're going to get some answer, and you're going to be able to interact between the chat and 3D, which means that, ultimately, you can just get a complete interaction with the system with voice. So what does it mean? It means that for experts, for engineering experts, it gives a lot of new possibility. And even it gives the possibility for casual users to use CATIA, which was [ lesser ] for expert today. So it's a world new growth expansion for us. And when it comes to AI, we used to say data is a new oil. Data -- this is -- here, you see a collection of example of virtual data, which has been built by our clients. So if we -- if one day we can give our clients the capacity to leverage this data with artificial intelligence, they're going to be a lot of new innovation possible in order to speed up what they do. For instance, here is another example where you take a carmaker, like we take here 9 models from a French carmaker, PSA. Most of these data, they were designed in multiple different systems. So there's a lot of unstructured data. Now with artificial intelligence, we can think about putting additional information on data, structure them with ontologies and building knowledge and know-how. So this is the way we can help every single client to differentiate from other by giving them the capacity to structure the data and automate a lot of non-value engineering task and to speed up the lead time. So getting lead time faster, reducing cost of engineering, bringing a lot of new possibility for engineers. So what about adoption? If you look at the auto sector, which is sector #1, we are gaining market share. So if you were at one of our recent conference, you know already JLR, Tesla, Scania, Honda, Renault, they are already adopted the platform. In January, BMW announced that they completely transitioned to CATIA 3DEXPERIENCE. In April, Volvo Cars announced that they are going to completely transition to 3DEXPERIENCE CATIA. And this morning, you've heard -- maybe you saw the PR of Valeo. So it's important because in the auto most of the time the OEM goes first and then you have the supplier. And I think having Valeo to declare this morning that they are going to go to the latest version of CATIA, it's a strong signal to the complete supply chain that they are going to move. And you see the kind of KPIs here. For example, [ Olivér Kalmár from Renault ], he said, adopting the new version of CATIA for advanced driver simulation and modeling, it takes a 50% reduction of costs for the physical prototype. So it's -- there is a huge advantage, a huge benefit. If I switch to aerospace, Boeing, Airbus, Dassault Aviation, Lockheed Martin, there is a massive adoption of the platform. And more and more, there is a big trend towards cloud. Cloud is giving them the possibility to get faster adoption, better agility. And so for example, Dassault Aviation, they announced that they are doing -- to do their next defense program on the cloud. And this, again, if you're interested into AOI benefits of why our clients are adopting our solutions, this is a kind of AOI here. For example, there is a paper that was done by Lockheed Martin on the adoption of CATIA System, and they said that over 5 years, investing $1 in the system will generate $3.6 of savings over 5 years. So there is a huge benefits associated to the adoption of our solution. And as we said, this is going around the 3 sectors. Now just to understand our diversification strategy, the need of 3D modeling for many years was more on the manufacturing sector, right? Because in life science, you get some time less 3D need. And in infrastructure, it's mainly one-off [ towards surge ]. But now we do systems, CATIA systems. You remember maybe we acquired CATIA Magic in 2017. And now CATIA system is 20% of my business. And this 20% of my business is growing 30% every year. And the reason why is that system is everywhere. There is the same system needs for manufacturing sector, life science and 3D infrastructure. So that's a huge rely of -- let's say, huge level of growth. And that were the few illustration I wanted to do just to set the stage.

Perfect. Thank you very much, Olivier. So maybe to follow up on some of the charts you showed. Starting with EV, I mean, on the OEM side. So we talked about -- you mentioned some of the wins. EVs, 80%, 85% share, so very strong traction historically. Can you discuss a little bit what's next in terms of demand on the EV side, trends we're seeing? I mean we have China pushing very hard. Maybe in the U.S., some of the start-ups we started to work with. I mean the environment is a bit different for them. So would be good to start with that.

I think at the moment, the big driver for electrification is coming from the traditional player. Because we had -- in the last 10 years, we worked a lot with new companies, new entrants like Tesla, like NIO, like Rivian. And I saw recently that really big carmakers are trying to catch up, and they realized that it's not just about adapting current vehicle architecture on -- to fit the battery on a motor, so they are working on native EV architecture. And to work on EV architecture, there is a lot of works to be done in order to evaluate new alternatives. So at the moment, this is why BMW, Volvo Cars, they wanted to switch to the next session. We work also -- we cannot disclose the name, but we are working also with a big Japanese carmaker on that. So traditional carmakers are trying to catch up to get to the later version, to leverage the platform, to do this new study around electrification and also ADAS, advanced driver assistance system, autonomous driving.

Great. Maybe moving at a higher level in terms of CATIA overall, so you shared some numbers in terms of growth last few years. So we're talking high 9%, 10% growth. Can you split a little bit the building blocks between upselling of existing customers, pricing, price increases you do on the existing base and new customers.

Yes. So the price increase is more or less visible more on the maintenance. We do -- out of the EUR 1 billion to EUR 2 billion, we do EUR 750 million on the maintenance because most of our revenue until now were a perpetual license. We move now more and more on subscription, but most of it was perpetual. So we still have a big revenue share on maintenance and the price increase, we won 1 point last year with the price increase. And all the rest is coming from growth, so new clients, but also one of the -- 2 big levers for growth where the transition to the platform to the latest version. And we made a global analysis that when we move a client from CATIA V5 to the latest version, overall for the account, over the years, we doubled the yearly revenue on this account. Why? Because we have new specific products on the latest 3DEXPERIENCE CATIA. At least, we get additional users expansion. And also, we leverage the connection with other brands. So it's really an opportunity to scale and to value up on this account. This is number one. And the second one is system. For example, in the announcement of Valeo this morning, everything was not detailed in the press release, but you get the platform adoption for the 15,000 users. But we also Volvo -- Valeo decided to move away from their legacy system architect solutions to fully standardize on CATIA Magic.

Great. And so you mentioned that move from V5 to the platform, I mean where are we on that journey in terms of cohort that have still on the V5 systems into new flavors? And are you seeing any kind of change in that dynamic or any acceleration in particular or it's a pretty steady state?

So we introduced the platform in 2012, a while ago. And right now, we -- if you look at new license, new business, almost half of it is platform-based. So on the latest CATIA, the 3DEXPERIENCE. And in terms of overall installed base, I think we still have 75% of our installed base to migrate. So this is a huge opportunity in front of us. So this is why -- and this is accelerating. I mean, BMW and Volvo Cars, for instance, just decided this year, this is a very strong signal in the market that now -- most of the OEMs, they decided to move to safe on platform, is going to have an effect on the supply chain like Valeo. So progressively it's going to have an effect on Tier 1, Tier 2, Tier 3 to -- so it's accelerating.

And specifically on OEMs. So when we look at those announcements from JLR and Volvo, et cetera, BMW, is this something that most OEMs are in the process of doing? I mean, I know Renault has moved to cloud already fully, but how is the picture looking like at a high level in the OEM space?

So it really depends on the -- because the main earner that we have because everybody wants to move, but there is still a lot of customized system. So the one we are successful to migrate are the one who can move to a standardized use of our software to move them to the platform. For new companies like Tesla or Rivian was easy because they start from a blank sheet of paper. So they have no customized system. Now customized system was a differentiating point a while ago, now it's a big problem because it's a hurdle for capacity of moving to -- so this is why it takes time. It's -- but the pattern now is really to move to standardization and to cloud, which provide a better ability than to adapt the use of the platform and the solution depending of the care program and...

Maybe a good segue way into the cloud side. So do you want to spend a minute on where you are in terms of cloud adoption? Where are we on that journey? I mean, you talked about subscription. Maybe we start with subscription, which is more contractual side. And then from an infrastructure perspective, PLM customers have been notoriously very slow and caution into that migration for security reasons, et cetera. I mean, do you think this is changing. The fact that a lot of AI innovation will be mostly cloud-based. I mean is this driving a change in mindset?

Yes, there is a big change in terms of mindset. First of all, 5 years ago, I thought there were still a big pushback by IT because the data are so sensitive, so they didn't want to get their data in the cloud. Now they realize that cloud might be even more secure than on-prem. And we see a big player moving to cloud, taking advantage, quicker adoption, quicker agility, getting the latest version of CATIA on a regular basis every 2 months. But we are only at the beginning because the portion of my installed base on cloud is still tiny because it just started. But now I think we no longer had the barrier like we had in the past. Our cloud is -- SaaS is certified. We have several versions. We provide public cloud, secure cloud capability. For those who have very special needs in terms of timing of deployment, they can use private cloud and even defense companies like people who are doing fighters or tank -- or in the U.S., and in France, we already have many defense clients going cloud as well. So in the mindset of IT organization is no longer a barrier about data sensitivity. So now we are coming back to the main hurdle, which is how they can go and decustomize their environment because they need to go a standard tool before moving to cloud. But just to give you some kind of metrics in -- if you look at -- it's not just CATIA, by the way, but when you look at PLM, in general, the dynamic of moving from one release to another one is, I would say, average every year, one release every year. And sometimes, it takes even longer because the system is so much customized that it takes some time. Now with Renault, we are fully on cloud, and we get a new version every 8 weeks. So every 8 weeks, over the weekend, we do the work that it took 1 year before. So it gives a massive advantage to a company like Renault, because they can get their designer using the latest solution right when it is developed. So it's a huge change. And a big opportunity because, as we said, in terms of installed base, this is still slow. And by the way, you mentioned subscription. So we do subscription also on cloud or on cloud. There is also a big trend towards subscription. More and more clients looking at leveraging OpEx versus CapEx, giving them more flexibility to have a remix of products. So there is also a big trend towards subscription, which is an advantage for us because over the time it means we can slightly improve the growth every year, thanks to subscription.

Great. I'll ask the next one and then we'll open for questions. Maybe a word on the -- some of the drivers of growth. I mean you mentioned cybersystems, ModSim, so what kind of excites you in terms of next set of level growth of the business on a 5 to 10-year view?

So I mean you were right to summarize the 2 big growth drivers, modeling, estimation, generative design in one side and system on the other side. On the capacity to do modeling and simulation at the same time, what we call ModSim is going to be a way to summarize it is generative AI. There is not a single company not going to us asking, okay, how about artificial intelligence. So you saw my video, right, is giving you the kind of possibility we can have to do next-generation CATIA, next-generation modeling with AI. It's going to take some time, but I think that it's a real evolution because right now we already introduced a lot of technology for generative design, parametric design, modeling and simulation. But somehow the limit is always the capacity of the company to use the technology. And with AI, we can give one new dynamic, making it more simple, easier to democratize, easier to be used by many other users, not just by experts. So it's -- it could be having a big impact on our growth. And many -- one of the question I have every time is how it's going to impact our installed base. I don't think -- I don't know what I don't know, but I don't think it will impact so much the number of users. Most of the AI capability we are going to introduce is more to empower engineers to do better design, quicker, faster. And sometimes, instead of just reducing cycle time or reducing cost, it's also within the same time, within the same budget, being capable with generative AI to test much more alternatives. So giving the capacity for a car company, for an aerospace company, for a medical device company to be much quicker on providing new innovation. That's the first aspect. So on this, we have a dedicated -- we have a new dedicated teams fully focusing on artificial intelligence and is going to rapidly impact our portfolio. That's for the ModSim generative design. Then system. So system, we are not -- this is not the same starting point. On my EUR 1 billion to EUR 2 billion, I'm doing EUR 200 million on system. But this EUR 200 million we're -- EUR 20 million 5 years ago. So it's growing fast, 30% every year. And again, 2 reasons. First, driver is product complexity. I mean you -- the number of line of code for software, the complexity of electronics is such that you cannot design these new products without system capability. And this is why we bought CATIA Magic. And this is why a company like Valeo this morning, they are adopting that -- so product complexity. The second driver, again, I told you that already, compliance. There are new [ functions on board ]. You go functional safety, engineers, they are getting back to you, how can I be compliant with ISO 26262, okay? You go cybersecurity, okay, how can be compliant with ISO 2143? So these are very complex norms where if you're not capable to comply, you are going to get product launch delay or issue. So the only way to be compliant is to adopt a strict new process and the tools to do that are system engineering tools like CATIA Magic. So big growth related to this complex -- complexity and compliance.

Great. I think we're running of time. Questions from the audience. Otherwise, we'll -- Olivier, we'll leave it there. Thank you very much Olivier for spending time with us. Thank you.

Thank you very much.