Dassault Systèmes SE
Q1 2021 Earnings Call Transcript

Published: 29 Apr 2021

[Operator:]

Good afternoon. Thank you for standing by and welcome to the Dassault Systèmes 2021 Q1 Earnings Investors Call. At this time, all participants are in listen-only mode. After the seeker presentation, there will be a question and answer session. I would now like to hand the conference over to our first speaker today. Francois Bordonado. Please go ahead.

[Francois Bordonado:]

Thank you. Shane. Thank you for joining us on our First Quarter Earnings Conference Call with Bernard Charles, Vice Chairman and CEO; and Pascal Daloz, Chief Operating Officer and CFO. Dassault Systèmes results are prepared in accordance with IFRS.

[Bernard Charles:]

Thank you for joining. Good morning and good afternoon to all of you. Before moving to my former presentation, I would like to share a few words on the COVID-19 as crisis. If a number of countries are in somewhat in the first COVID-19 situation, this is not the case everywhere, especially in India where we are worried about our colleagues, clients and partners. I offer them our most sincere sympathies on thoughts. Moving to the presentation, let me share some observations. We are in a very profound period in human history. The entire world has now experienced lockdowns. We've had restrictions affecting our normal family, work, leisure, or social activities for more than one year. For some, there has been human tragedy resulting directly and indirectly from the pandemic. The health crisis has forced companies, industries and governments to adjust to these new circumstances on each of us individually. On acting together, we can have a positive impact. With the real world, and in the function to some degree we have to turn more the virtual to the real world be improved. Dassault Systèmes as a result of that has a big play in this area. This time frame on shared experience brought a new perspective on the future. What does it mean? We are entering a new accelerated period of innovation. I'm not alone in thinking this. It is very clear from discussion with our top clients and partners that industries are entering a new cycle. New cycle of innovation driven by sustainability on truly characterized by the occupation on the human centric approach. Most companies wants to move faster. Change is going to happen on a remarkable timetable. Further innovation as a much broader definition. We speak about new products you used on new experiences on less impact on the planet. Science-based innovation, modeling and simulation coupled with real world evidence, the data is game-changer. This accelerated pace of innovation is required in the industry sector of the global economy we are addressing manufacturing Life Science on healthcare, as well as infrastructure on cities can only be achieved by continued platformization, virtualization of the industry with our 3D EXPERIENCE platform. Coupling, modeling, simulation on extensive data science capability. We are very well-positioned to help customers reset the value chain sums to a wide platform adaption within the ecosystem.

[Pascal Daloz:]

Thank you, Bernard. Thank you to all of you for joining us today. Let's start with the financial performance, first. So total revenue increased 8% at the high end of our six to eight branch at EUR1.174 billion. Software revenue growth of 10% came in above our range of 7% to 9%. From a profitability standpoint, lower than planning expenses combined with the high-end of the guidance for the revenue led to a significant outperformance at the operating margin and EPS level. In fact, our operating margin came in at 33.9%, we assumed the midpoint of our guidance at 30.7%. Results; in fact, the revenue results contribute to 70 basis points on the upside and the lower operating expenses to 250 basis points. Finally, EPS came in at EUR1.14, growth of 20% versus our guidance of 3% to 8%. Let's zoom on the components of the revenue. First, license and other software increased 25% versus our guide of 0% to 5%. About 5 point of this growth came from a capex preference coming from our customers, of course, and the other contributions to the upside came from results in strong performance in China in civil works , as well as large 3D EXPERIENCE transaction, especially in transportation and mobility. Subscription and support revenue increased 7% versus our guide to 8% to 10%. And during the quarter about one point of the activity, the recurring revenue growth outlook moved through a capex purchase. However, subscription revenue increased double-digit and the churn is really consistent with what we have seen last year and early this year. With respect to services; we were able to improve our gross margin to 12.1% from 2.9% last year, thanks to all the work we completed over the last 12 months. Despite a revenue decrease of 9% compared to our range of minus 2% to plus 2% due to the extended lockdown, in fact, in many countries. Moving to a regional software review. In Asia, first; software revenue increased 10% in Q1. China was by far the best performing geo, up sharply reflecting strong growth across all the engagement models. It had the highest growth, both for software licenses as well as for the recurring software revenue. Korea saw the beginning of a recovery and we had key wins for our 3D EXPERIENCE platform in both, China and Korea. In Japan -- in Japan, sorry, we also saw a strong performance in our indirect engagement model, and all our major 3D EXPERIENCE engagements are proceeding as planned, such as the Toyota, today we are equipping 18,000 people, and the has been deployed to 14 programs. In India, despite the very difficult situation and environment today, we saw some year-over-year improvement and for that I should thank the team, we did it. In Europe, we are still seeing a mixed environment with software revenue up 6% in total. Northern and Southern Europe, we have the best performing geo and improved activity in transportation and mobility, both with large mobility players as well as utility players. In America, software revenue increased 14% with a strong growth in Life Sciences and in transportation and mobility.

[Operator:]

Thank you. First question comes from the line of James Goodman calling from Barclays. Please go ahead. Your line is open.

[James Goodman:]

Good afternoon. Thank you very much for taking my questions. Firstly, on MEDIDATA, another outstanding quarter, plus 20%, same as Q4. Just wanted to come back to the guidance for the full year. I think last time we spoke, you guided to 14% this year for MEDIDATA. So, I wondered where are your expectation was now for the business? Secondly, on M&A, I think you've made some comments earlier this year about stepping back perhaps towards another large deal, clearly MEDIDATA has been a big success, you probably down to hardly any debt end of next year. So, I wonder if you could make comment there on your M&A strategy? Finally, clarification actually on topic that you discussed this morning and again, just now in terms of this preference for CapEx versus recurring that you're seeing in your customer base, is that specific clients within auto which are taking license rather than recurring deals or are you talking more to sort of coincidentally you're seeing more demand for license in some industries and slightly less so recurring and others? Thank you very much.

[Francois Bordonado:]

You'll notice that I had EUR20 million software revenue in the guidance. So, I think, I'm already capitalizing on the good momentum with MEDIDATA. Now, you have to take into account that you are right. I mean, we had a good performance in W4. We continue to have a good performance in Q1, but the base will not help on this one type of the year. So that's the reason why I would say 15% is probably the right way to land.

[Bernard Charles:]

M&A, I think, it's so many things we need to do. We discuss that later. I think there is no comment at this point in time in CapEx, Pascal?

[Pascal Daloz:]

Yes, I would say it's maybe you consider more than that's basically the customer we have engaged this quarter of the one having a preference for the CapEx. I do see a strong pattern. Except that last year, it was almost the opposite. The vast majority of the people willing to invest just to be secure. The vast majority of them, they had a preference for the subscriptions. Because it was a way to grow without having too much commitment. Now, the fact that they have been selective in their investment, they are racing their strategy. I think for some of them, it makes more sense to be CapEx based and this is what we are seeing. To a certain extent, we will have much more rebalance compared to last year. That's my only message.

[James Goodman:]

That clarifies a lot. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Jay Vleeschhouwer, calling from Griffin Securities. Please go ahead, your line is open.

[Jay Vleeschhouwer:]

Thank you. Hello, Bernard. Hello, Pascal. I think you'll be both pleased to know I have only five or six questions this morning. So, Pascal, you alluded to your headcount and your hiring and a year ago, you made the commitment to keep DS's headcount flat in 2020, which you did. For a number of months Dassault had the smallest number of openings within your peer group, all of your competitors had also cut for the most part, but you have fewer than they. Now, as it turns out, you have the most number of openings within your peer group. So, a pretty steep recovery there, including themselves. The question is, how do you think about your additional headcount, vis-à-vis your margin assumptions, if you were to add every one of your current openings, do you absorb that within your current margin outlook?

[Pascal Daloz:]

Yes, the way we have developed it, Jay, is relatively simple. If you do the math in terms of attrition, we are talking about a little bit less than 500 people a quarter. It was the most highest last year. At the same times, we are hiring in average between 600 to 700 people. So, we need to obliviously improve the situations and our goal is to hire much more close to 800 people per quarter. If you do reverse engineering of your printing machine, you will find that approximately, that's the order of magnitude of the number of people we are talking about.

[Jay Vleeschhouwer:]

Okay, thank you. Secondly, with respect to cloud, thank you for sharing the percentage of revenue. But the question has to do with your cloud capacity. When we spoke about this last summer, you committed to your vertically integrated approach to DS cloud. My question is, how has your cloud services provisioning or capacity evolved over the last six to 12 months? How much larger is your capacity? How do you see that capacity evolving over the next one or two years to sustain the growth you foresee in cloud services revenue?

[Pascal Daloz:]

First of all, the strategy we have adopted is working. It's not a limiting factor right now. As you know, we have a balance between an external operator on our own cloud. We just open our new cloud infrastructure in Japan. We probably will have different kind of solutions for China, but things are also progressing to be your local operator in China for the Chinese customers. So, I think the secondary market we do at this point in time, we are we are quite agile in setting up dedicated center. I think it's a fast path process and we continue to keep the flexibility and elasticity of using commercial cloud too in case a customer needs our solution and will not be ready to provision them or on our own cloud, we can we can start with our commercial cloud and then migrate to our own transparently without even them noticing it. So, it's a highly flexible environment. We mastered it well. I think for cybersecurity, we think we have an interesting case here as well as for pilot cloud. So we want to be seen as a customer demand evolve with the specificity that we are with our own customers, because they do very sensitive things with our system.

[Jay Vleeschhouwer:]

On SOLIDWORKS and relatedly, 3DX Works. First, SOLIDWORKS had what appeared to be its first up quarter in licenses in 9 quarters. So that was consistent with what we had expected. You'll have easy comps for the rest of this year. But looking past 2021, what do you think is the sustainable growth rate for SOLIDWORKS's new licenses? Then relatedly on 3DX Works, my understanding is that last year, which was just a few months of availability, 3DX Works or XCEL cloud revenues were less than $10 million. When do you think this might become $100 million or more business? Could that be as soon as this year or do you think that's more likely next year or beyond?

[Pascal Daloz:]

The dynamic for SOLIDWORKS, clearly double-digit growth is sustainable. There is no doubt about it. The proof of what I'm seeing, if you look at the performance for this quarter, only in volume, you have a double-digit growth in terms of units. Now taking into account that the fact that with works the did we are also increasing the value.

[Bernard Charles:]

And the dynamic for WORK family is to supplement with cloud-only; so simulation is cloud-only, our Project management is cloud only, our -- the future of their networks is cloud-only. So as we expand the portfolio around SOLIDWORKS with cloud-only, we can -- we provide two great levels of opportunities for clients. First, a true collaborative native cloud environment fully mobile through web browser, which we think is high performance and keeping for the vivid community of desktop users, what they like taking advantage of the cloud for things which are complex to do on a desktop like simulation. Many of them are now migrating from legacy competitor solutions to our SIMULIA Solution, because it's extremely well integrated and that has been a good factor that I'm sure, John Paolo mentioned that at the 3D EXPERIENCE Works. We don't see it slowing down but it's the other way around. So our future portfolio is cloud.

[Jay Vleeschhouwer:]

Lastly, Bernard, on the fourth quarter call, you made some very interesting comments with regard to your internal or cross-segment initiatives, particularly as it relates to life sciences with DELMIA for example our manufacturing and SIMULIA? Do you have an update on that particular cross segment work that's going on? And are there any other examples you can give? Not necessarily related only to the Life Sciences where you're coordinating internally among your various segments.

[Francois Bordonado:]

Well clearly, it's happening on Life Science for manufacturing systems and we are pleased with that. It's happening in construction. We showcase which is cloud only, mobile only, zero code development. It's all parameterization on what we call methods on business experience on top of the platform. We do construction lean -- lean construction and the lean construction is a derivative of a business experience from our lean manufacturing on extremely successful for construction site. So, we have more and more of those good examples and also example for construction project setup. When you have 40-60 supplier all connected online on the platform, native mode, I think this is unprecedented in this industry because even the current player don't offer native cloud at this scale. That's why we said that we easily range 15,000 users in a short time period. Which, by the way, we took the opportunity to provide a DAAS site based on this 3D EXPERIENCE platform to replace AutoCAD LT, which is quite interesting. On why is that, not because only of the upside, but because platform phenomenon. So, everything is connected on a consistent data environment for the working people on the field. So, I think this is significant illustration. Analytics, same thing, when you do cost analytics in different sectors, it can be shared across both economy sector of the economy as well as industries. When you do supply management, same thing. So, it's only about doing a business experience that speaks the language of the people, but the infrastructure on the services while data science and data analytics are the same.

[Jay Vleeschhouwer:]

Thank you very much.

[Francois Bordonado:]

You're welcome.

[Bernard Charles:]

You're welcome, Jay.

[Operator:]

Thank you. Your next question comes from the line of Jason Celino calling from KeyBanc Capital Markets. Please, go ahead. Your line is open.

[Jason Celino:]

Hello. Strengthen SIMULIA, this is a segment we don't hear from much, but is the strength more on that SIMULIA works side, or is it more broad based? And then secondly, as you strengthen transportation mobility, or is it also on other sectors?

[Francois Bordonado:]

On the SIMULIA work, if I understand well the question, a lot of SOLIDWORKS customers have been using legacy system on their PCs, basically on their desktop. It's complex. So the number of users and has not been what it should be -- the number of simulation users. They are discovering cloud-based simulation. They love it. I think Gian Paolo presented it with Manish very well at the 3D EXPERIENCE world online a few weeks ago. So, we believe that for the type of SOLIDWORKS community, cloud simulation as well as manufacturing -- and by the way DELMIA works as well as project management, all these will become cloud native and that people are replacing. We have I think 14 partners today. We've been selling and those are competitor solutions that I will not name and they decided to stop to sell these competitor solution on to really replace it by the native cloud solution. So, the dynamic is a positive dynamic. I think this is a high value for them in terms of simplicity, adaption, on ease of use. The second part of your question, was it related to TNN? Pascal, you want to make a comment about that ?

[Jason Celino:]

I guess the first part of my question was more about the prepared remarks personally. I think it was mentioned that it was strong in the quarter. Was it for the standalone business? Or was the comment more related to the 3D EXPERIENCE works part of it?

[Pascal Daloz:]

The SIMULIA growth is coming from both side. So, we still have the larger bank install base, we have consumed our additional capacity. But also we have more and more customers using our integrated solution in terms of simulations. Because there is a lot of value to have all those supplication, those roles, being integrated with the platform, because it's a way to do multi-physics, multi-scale simulation, which is difficult to do if you do not have it. So, transportation and mobility, aerospace and defense industrial equipments licensees as well; this is where we have seen the traction and med tech also. So, it's really all actively broad where possibly where the growth was coming from.

[Jason Celino:]

Great. And then my second question for Pascal. Last quarter, you outlined how recovery might be more gradual, or at least that's what you were building in to your guidance? But the license performance for Q1 and the guidance for Q2 suggests it might be more of a pronounced bounce back. Any update to your framework here?

[Pascal Daloz:]

Oh, you noticed that I didn't change the revenue targets, even if the mix has more software in it. And why so? Because there is something we were not expecting, frankly speaking. Usually, the last transaction are happening in Q4. And we saw big transaction happening in Q1, especially in transportation and mobility. I will not say it's unusual, but it's rare. And when I look at the pipeline, the pipeline didn't grow significantly, compared to last time we spoke. So that's the reason why I think we are doing some pull-forward which is good because we are securing to a certain extent the guidance. We are de-risking the guidance for the full year. But at this stage, we are still in Q1, we will not look for what to improve the revenue target, to be clear.

[Jason Celino:]

Okay, excellent. No, that is actually quite helpful. Thank you.

[Pascal Daloz:]

You're welcome.

[Operator:]

Thank you. Your next question comes from the line as Michael Briest calling from UBS. Please, go ahead. Your line is open.

[Michael Briest:]

Thanks. Good afternoon. A couple of follow ups from me. Just on the cost side of things. Pascal, obviously very good performance in Q1 and certainly Q2 partly because of the hiring situation. How should we think about margin progression next year and out to 2024? Are the savings this year sustainable? Or does it sort of dampen the level of margin expansion we should get next year? And then just in terms of the recurring revenues. Helpful to get that 17% for 2020 of cloud revenues. I think that means it's 21% of recurring revenues. So, what's the breakdown of the rest of recurring between maintenance and subscription? So we can get a feel for what's driving each of those.

[Pascal Daloz:]

Okay, so let's start with the first question on the margin, Michael. No, I think you know, we took some actions to contain the spending last year because we are facing the pandemic. Our model is requesting to invest especially if you look at the broad scope of things we do. There is no reason for us to push the margin at a higher level. So clearly, next year you should consider that when we will come back to the nominal margin we used to have and -- and we still have some improvement expecting from MEDIDATA, because you know, we have this plan to gain almost 2 points EBIT margin every year over the next two years -- additional two years. So, that's really what's going to drive the margin. Related to the recurring revenue, it's why it's not because I want to hide something. I do not want to give you the precise split. It's because you try to sometimes do complex kind of predictions, because at the end, what is the most important, which is the level of recurring revenue we have. Whether it's coming from the maintenance or the subscriptions. Because if it is really recurrent, you will have almost the same level next year and you do as you could expect to have some growth. So nevertheless, what I could say to you is in the past, we used to serve coming from the maintenance and support and what oneself coming from, subscriptions and things, the acquisitions of MIDIDATA, we are much more close to 60-40.

[Michael Briest:]

Okay. Thank you.

[Bernard Charles:]

Thank you.

[Pascal Daloz:]

You're welcome.

[Operator:]

Thank you.

[Francois Bordonado:]

We'll take the last question.

[Operator:]

Okay. And your last question comes from the line of . Please go ahead. Your line is open.

[Unidentified Analyst:]

Yes, thank you. Good afternoon. Three short questions from me. The first is on the Life Science business. I understand MIDIDATA is still driving the worse , but the other activity seems to be heading toward a better trend. Do you expect over the medium term too much? The MIDIDATA growth from the other healthcare activity? That's the first one. The second one, it's just a clarification. The services revenue of the first quarter. Do o the address reflect the law licenses of last year? Or do you still have issues to bill like your last year with Boeing? And my final question is on the second half margins, which implicitly, going to be down year-on-year. So, I was just wondering what kind of hypotheses you were building the model on top of the competition? Do you expect travel already to come back and marketing to be spent more aggressively? Any granularity on that would be useful. Thank you.

[Pascal Daloz:]

Okay, so let's start with your first question. Are we willing to have all the other client we have in Life Sciences converging with the performance of MIDIDATA? The answer is yes. Now, you have to take into account, it's a different model for BIOVIA. The beauty with MIDIDATA is really related to the number of clinical trials. For BIOVIA, it's going to be different. It's really audited to the number of new research projects they are doing, which is to some extent not having the same dynamicity. Nevertheless, what we are doing right now, we are against migrating as much as we can BIOVIA to subscriptions and to the cloud because we want to have a consistent way to engage. We want to have to some extent, one contractual framework with all the customers we have. And we could expect that the two will align because we will maybe not split on the long run. The revenue between MIDITA and BIOVIA, it will be through the solution and solutions combining the two. That's what I can say. On the services side, thank you for the question because you're right, I should have been probably more explicit about this. So definitively, the free services we did last year for some of our largest clients is not something we are doing in 2021 for sure. So the gap, the EUR10 million gap is only coming from the fact that some of our warehouse services, activities cannot be completed, because this has to be done on site. And just because we still have customers not opening their site, it's not something we can do. That's as simple as that. And as you may know, when you miss a services activity, it's difficult to recover over the year. Because we have a limited capacity. Nevertheless, I think you notice that we did great to re-profile our services organization in order to deliver the margin and to have a much better utilization rate. And the fact that we have been able to move from 3% to 12% margin needs dedicated proof of what I'm saying. Related to the H2 margin, yes, you are right. You could assume that the margin will be done compared to last year, but I just want to remind you that last year, we almost cut all the spending. We frayed the hiring and the growth will come on both sides. As I was explaining previously, I will accelerate the hiring because we need to reinforce some of the organizations in order to have the muscle to continue to physically to do what we do and especially to prepare in the proper way 2022. And the second thing is, the more countries are confining, the more the travel will start again and also the marketing and events will start again. So that's really what is factored into the guidance for H2.

[Unidentified Analyst:]

Okay, great. Very clear. Thank you, Pascal.

[Pascal Daloz:]

You're welcome.

[Bernard Charles:]

With that, thank you very much for participating to this call. We are always here for you. Don't hesitate to call us for any further question. Thank you very much again and hope to talk to you soon. Have a great day.

[Operator:]

Thank you. That concludes today's conference call. Thank you for participating. You may all disconnect.