Dassault Systèmes SE (DSY) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Dassault Systèmes Preliminary Second Quarter 2024 Results Conference 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, Sandra. Good afternoon and good morning, ladies and gentlemen. Thank you for joining us for a review of our second quarter preliminary financial results. On the conference call are Pascal Daloz, CEO; and Rouven Bergmann, CFO. Dassault Systèmes results are prepared in accordance with IFRS. On this call, our discussion will be limited to non-IFRS financial information in order to make comparisons to our financial objectives, which are presented solely on a non-IFRS basis. All growth figures will be on a constant currency basis. These figures are before deferred revenue write-downs, amortization of acquired intangibles, share-based compensation expenses and other operating income and expense, net and the related tax effects as applicable. In addition, some of the comments we will make on this call will contain forward-looking statements, which could differ materially from actual results. Please refer to our risk factors in today's press release and in our 2023 Document de référence Universal Registration Document. We will begin with formal comments by Pascal and Rouven, and then we'll take your questions. Since the information we are sharing today is preliminary in nature, it is subject to completion of our closing work. We may not be in a position to respond to all your questions at this time, but we will do our best. Finally, we will return to our pre-earnings quiet period beginning this evening and will provide no further comments until we release our comprehensive 2Q results and analysis on July 25. I would like now to turn the call over to Pascal Daloz, Chief Executive Officer.

Thank you, Beatrix. Good morning and good afternoon to everyone, and thank you for taking the time to join us on this call, as you say, to discuss the preliminary second quarter results. Let's get straight to the point. As you saw in our press release this morning, we missed our second quarter by EUR 30 million or 2%, as we experienced delay in customer signing in an increasing complex geopolitical environment. So first, I really want to apologize for that on behalf of the management team. In fact, at the end of the quarter, we saw several large transactions shift out of the quarter. While the Q2 pipeline permitted to deliver our initial guide and the need of our solution remains strong, we have observed cautiousness in the customer decision-making. However, I want to be clear, none of these deals were lost, and they remain active in our road map for the future quarters. So to give you a bit of more color on this, there are a few things I want to share with you. First, these results reflect an increase in scrutiny of large deals in major economy, including one megadeal that have shifted out of the quarter as the scope of the investment is evolving and still in discussion. In terms of industries, Aerospace & Defense was the most impacted in this quarter. And looking at the product lines, MEDIDATA was in line with our objectives as well as SOLIDWORKS. From the perspective of the geos, we saw an increased volatility in the last weeks of the quarter across Europe as well as in the U.S., and we assume that this volatility in decision-making will continue. And as a result, we believe it is prudent to integrate this in our full year outlook. While we are disappointed, we stay extremely confident for the second half, and I remain personally committed to Dassault Systèmes' long track record of delivering results in accordance to our guidance. With that, let me pass the floor to Rouven.

Thank you, Pascal, and also good morning, good afternoon to all of you. Thank you for joining this call. First, I would like to start off by highlighting that these results are still preliminary. And as planned, we will update you with our full financial details during our scheduled earnings release on July 25. So with this preliminary Q2, total revenue was estimated at approximately EUR 1.495 billion or growth of around 4% in constant currency, which compares to our objective of EUR 1.525 billion to EUR 1.555 billion. Preliminary Q2 EPS came in at EUR 0.30, which is in line with the objectives at EUR 0.30 to EUR 0.31. The miss of approximately EUR 30 million in revenue below the guidance includes a positive currency effect of about EUR 10 million. So the impact of currency -- and the impact on currency on the EPS is very marginal. The revenue shortfall is mainly due to some large transactions that shifted at the very end of the quarter, primarily in Aerospace & Defense, as the macroenvironment became increasingly challenging, while we are operating in a complex geopolitical context. Consequently, we saw a lower revenue contribution from large deals in this quarter, particularly in North America and in Europe. At the same time, the number of midsized transactions at around EUR 500,000 was up by 8% in the quarter, which highlights overall healthy and active business activities. All postponed transactions remain active in our pipeline. However, given the unexpected delays and the back-end loaded profile of the year, we believe it is prudent to risk adjust our full year outlook, which now reflects 6% to 8% total revenue growth and is supported by our pipeline. Now let me switch to the bottom line performance. Thanks to the disciplined expense management toward the first 6 months of the year, plus a very healthy financial income and an improved tax rate, we were able to offset the lower revenue at the EPS level. For the year, we will continue to take measures that ensure the operational efficiency of the company. As a result, we now expect EPS in the range of 8% to 11% year-on-year growth. Important to highlight that these measures will not stop us from investing. We continue to invest in targeted areas to fully capitalize on the potential of our 3DEXPERIENCE platform, virtualizing industries across the 3 sectors of the economy. A brief word on the balance sheet items. We saw the anticipated catch-up in operating cash flow in Q2 as a result of positive working capital improvement. As such, operating cash flow is in line with our projections for the first 6 months. Finally, I would like to apologize to our investors at this miss -- for this miss and assure you that we are on top of our operational priorities to deliver H2 objectives as outlined. In fact, we are confident about the growth opportunities presented in H2 from expansions with 3DEXPERIENCE and Life Sciences returning back to growth. Dassault Systèmes' business model is very resilient with a long runway, of course. This is pretty much what we think is important to share with you today. Before I open the call for a brief discussion, again, let me please remind you that our earnings call is confirmed on July 25, 2024. This is as planned, where we will provide you with all the details of our financial presentation. With this, let's go ahead with a brief Q&A.

[Operator Instructions] We will now take the first question, it comes from the line of Jay Vleeschhouwer from Griffin Securities.

Three questions. Number one, in light of the more difficult environment, have you considered postponing or mitigating the price increases that you had planned to implement globally starting this month? Number two, how much of the EUR 30 million shortfall is attributable to the megadeal that you mentioned? And then finally, number three, could you be more specific about some of the cost and expense actions you may take or have begun to take to limit the expense growth?

Okay. Jay, I will take maybe the first 2, and Rouven can take the third question. So no, we do not intend to postpone the price increase. Why so? Because if you remember, our price increase are really aligned with the inflation. And usually, we apply it with delays. So this has been informed -- we informed our resellers, we informed the market almost 6 months ago about it. And there is no reason to basically postpone it. One side comment I could make. Believe me, it's a miss, but we did not compromise on the prices in order also to fill the gap. More than ever, we are committed on the value, and this is important to keep this discipline. The second topic, Jay, the megadeal, you're right to mention it. Only the megadeal by itself could have offset the entire miss for H1. So this has definitively an impact, as you can imagine. Still convinced we will be able to close it. The question, is it in the H2 or early 2025? It's really something which is still open, and that's the reason why we do not want to take a risk by assuming a time line, which is not yet fully defined with the customers. Related to the costs and expense, maybe, Rouven, could give some information.

Yes. Thank you, Jay. In terms of the expense structure and the margin implication, we have been cautious since the beginning of the year to be selective in the expense management and careful. The environment was -- to do that was already clear. Also this has helped us to rebalance investments into areas where we want to double down. And this has been already in place since beginning of the year. And of course, now, we will continue with this to ensure that we create the flexibility and room to make the necessary investments for -- to support our strategic growth areas. We have the visibility for that reason, so it's not something that is -- where we have to now launch a lot of new actions to contain costs. We will continue to be prudent in spend. This is our philosophy. And this will then also help us to protect the earnings per share because it's always a combination of the operational efficiency of the financial income and also maybe some leverage you have on tax provisions. So with this, I think we see, even in -- under the new guidance, which, as you see, is risk adjusted, and the adjustment is in the neighborhood of EUR 120 million for revenue. We are able to offset on the expenses with the operational efficiency to the extent that we can protect the EPS without having to do massive cost-cutting.

If I may, just to clarify that last point. You said EUR 120 million risk revenue adjustment for the year. So that implies EUR 90 million for the second half. Okay. All right.

Well, let me clarify that point quickly, yes. So the EUR 30 million of the miss that I was referring to includes a EUR 10 million of FX impact. So it's -- actually, ex FX, it is EUR 40 million of a miss. I mentioned that in my prepared remarks. And that is to the low end. If we look at it to the midpoint, for the first 6 months, it is around EUR 50-ish million. And so about 40% of the EUR 120 million is associated with the first 6 months and 60% is associated with derisking the H2 plan -- revenue plan. So that's just to clarify how the EUR 120 million is reflected in our full year revenue phasing.

We will now take the next question coming from the line of Laurent Daure from Kepler Cheuvreux.

Yes. I have 2 questions on my side. The first is coming back to your new guidance. I was wondering how much the risk as it is. In other words, what have you done in terms of conversion rate? And what other cautious assumption have you taken in order to avoid a warning again in the next 2 quarters? And my second question is on the Q2 miss, which happened, if I understand well, the last 2 or 3 weeks of the quarter. Was there any upfront deal? Or was there a [ ratable ]? I'm trying to assess why we had such a unperceived impact with something that happened late in the quarter.

Thank you, Laurent. I'll start with your 2 questions. In terms of the risk profile of H2, you are familiar with the guidance. We had a back-end loaded year coming into -- in 2024. So the risk profile of the 2024 as such -- was, as such, right, that it was more back-end loaded, which is essentially the reason why -- good part of the reason why we made the adjustment is to reduce the back-end loaded profile -- to adjust the back-end loaded profile of 2024. So I think we took care of this. We have also said that our H2 pipeline is stronger than H1. This remains to be the case. We have -- the reason why we are here, we saw a number of deals shifting into the second half or into the next quarters. And our cautious assumption for those shifted deals is that we expect to convert about 50% in the second half. I think we can do better than that, but that's the baseline assumption for now and the new guidance. And the last point is we expect and we are confident, as you heard me saying, that MEDIDATA will return to growth in H2, which also contributes to the growth of the second half of the year. Then in regards to the Q2 miss, whether it is license versus subscription, the situation was that in Q2 that the large deals that shifted out of the quarter and that were important for us to close to make the quarterly number, most of them were subscription deals. But on-premise subscription, where you have still the license component that you recognize in the quarter, even though it is recurring year-over-year for multiyear subscriptions, which impacted mostly the subscription line in the second quarter. So we'll see -- when we'll discuss on the 25th the P&L in more detail, we'll see some headwind on the subscription line, which, again, we believe we'll be able to catch up some of it in the second half because of our pipeline in H2.

We will now take the next question coming from the line of Nicolas David from ODDO BHF.

Yes. I have 2, actually. Could you share how confident you are? And first, what kind of action are you taking on your sales force to improve the situation and to reduce volatility? If you think that is something you can do on your side or is it really something based on the market and geopolitical external factors? And how confident are you to seeing some deals already in Q3? And does it mean that maybe we could expect Q3 which will not be so low compared to -- because of the comps, which are quite tough? And second is a clarification regarding the free cash flow. I understand that the operating cash flow in the sense that you had a good Q2, we should understand that even if you had to cut your guidance at top line and such a bottom line level, your cash flow guidance is intact for the year.

I will take the first one, maybe. So Nicolas, the truth is many of this delay came very late in the quarter, so we didn't have time to mitigate them by doing some pull forward from Q3 to Q2. So why I'm saying this? It's because the vast majority is not coming from a lack of quality of execution. We have some. Usually, from one quarter to another one, we have mostly something like 100 transactions representing between EUR 25 million to EUR 30 million, moving from one quarter to another one. This quarter, it was abnormal. It was more than 3x this number. So clearly, there is not too much we can do, if you want, from our sales force. The only things we are considering for certain deals is to put some specific incentive for the salespeople to do the closing for a given quarter. But usually, it's not related to the megadeals. It's really related to the midsized deal, where a collection of them could make a difference. Now coming back to Q3, you're right to remember that last year, we had very good Q3. You remember we signed the JLR contract, and this was having a very positive impact. So I think in the guidance we are giving to you, and Rouven will give probably more detail at the end of the month, but we didn't change our view, which is, again, we still believe almost 50% of the deal which has been delayed will be closed whenever it's Q3 and Q4, and we are still giving the flexibility for us to do it at the appropriate time. So that's, at this stage, what I can tell you. And for the Q3 guidance, please wait only 2 weeks and you will have more guidance from us.

Maybe just to add or address your second question on the free -- on the cash -- operating cash flow, free cash flow. Yes, Q2 was the anticipated effect. So we are on trend. It'll be better than H1 last year for operating cash flow. So there are, as I said, there can always be some moving parts on the working capital line. They're rebalancing in the second quarter, and then we will readjust for the -- for H2 under the new guidance. So you have to give me the time until July 25 to address this point. But as of now, I think that and I see that given the way we can contain the operating performance of the company, offsetting the lower revenue by the -- with lower operating expenses, also down to the net income, we can offset most of it to protect the EPS with still 8% to 11% growth. In the current guidance, at the midpoint, we are between 9% to 10% cost on EPS, if I translate the revenue midpoint to the EPS. We still expect under these conditions that the operating cash flow should be growing in the same range. That's not changed. We have still the potential to improve some working capital changes to make it better. But again, there can be timing effects. So I do not want to promise too much at this point, but I do not expect a big change to the operating cash flow based on the outlook that we provided today.