Dassault Systèmes SE
Q2 2021 Earnings Call Transcript
Published:
- Operator:
- Good day and thank you for standing by. Welcome to Dassault Systèmes 2021 Q1 (sic) Earnings Investors Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded Tuesday 27th, July 2021. I would now like to hand the conference over to the speaker today. Francois Bordonado, Investor Relations. Please go ahead.
- Francois Bordonado:
- Thank you. Nadia. Thank you for joining us on our second quarter 2021 earnings conference call with Bernard Charles, Vice Chairman and CEO; and Pascal Daloz, Chief Operating Officer and CFO.
- Bernard Charles:
- Good morning and good afternoon to everyone. Thank you for joining us today. We delivered a strong second quarter driven by robust demand across sectors and geographies. Sector revenue increased 15% at the high end of our guidance. License revenue grew 38%, recurring software revenue grows 10% and represented 79% of total software sales. Earnings per share rose 35% percent including currency impact, 45% in constant currencies thanks to strong revenue growth on higher profitability. 3D EXPERIENCE drove important wins across large accounts resulting in revenue growth of 26% licenses were also up sharply indeed. This reflect our compelling value proposition, substantiates new era imperatives for clients. We raised our full-year guidance, capturing the earnings upside from the second quarter. Pascal will discuss the financials in more detail. Now I would like to share some observations on the economy on some updates on our business. As we emerge in a post-pandemic world, companies and individuals are awakening to a new era. They are the new vision of the world, I think. They are redefining the parameters of future leadership first. They are looking to virtualization, going beyond digitalization of industries and the economy as mission-critical. Second, there is a significant orientation towards sustainability in innovation for Dassault Systèmes and our clients across all sectors, all industries of the economy we serve. Third, inclusiveness is an essential feature of new technologies as well as for open innovation. Dassault Systèmes virtual twin experience powered by our 3DEXPERIENCE platform is truly a game changer for addressing these new era imperatives. By bringing together unparalleled much seen on AI data technology, we empower our clients with real-world dividends across sectors and experiences to imagine new solutions and foster scientific breakthroughs across all sectors of the industry. Inclusiveness is also paramount. The cloud is a powerful environment that democratizes accessibility as well as mobility, enabling everyone to leverage the experience infrastructure to deliver impactful innovation.
- Pascal Daloz:
- Thank you, Bernard. Good morning, good afternoon to all of you, and thank you for joining us today. So let’s zoom on the financial performance. I think we delivered a strong second quarter results, thanks to the broad-based growth across regions as well as product lines. Total revenue increased 14% year-over-year to EUR1.16 billion at the top of our 12% to 14% range. Software revenue and its component also came in at the high end of our objectives, with our organic software revenue growth of 15% to deliver EUR1.1 billion. License and other revenue rose 38% to EUR223 million during the quarter. And looking at the first half, we are now back to 2019 level. I think this is something very important. Subscription and support revenue increased 10% year-over-year driven by subscription growth of 18%. To be noticed that if you exclude MEDIDATA, the subscription growth is around 12%. So it is not only due to the good momentum of MEDIDATA, which leads to a recurrent revenue, representing 79% of the software revenue.
- Operator:
- And your first question comes from the line of James Goodman from Barclays.
- James Goodman:
- Firstly, just on China and the encouraging performance there. You called out 24% growth. Just wondered if you could go into a bit more detail there on the strength, any notable sort of industry or product strength because actually would have expected the comp in China to be toughening a little bit ahead of the rest of the business given the sort of earlier recovery from COVID. So that would be helpful. And then just secondly, on the margin, you called out the 1.4 percentage point outperformance on the OpEx. And I appreciate your comments around attrition and the continuation of what we discussed at Q1. But purely, just looking at the outperformance in the quarter versus the objectives, can you just clarify that, please? What was the key additional tailwind? Was that the attrition sort of remaining higher than you expected or was it the gross hiring not coming back or just lower travel wasn’t clear on literally this quarter’s performance?
- Bernard Charles:
- Thank you, James. Maybe Pascal, you put some color on the first topic of China and you reline whatever you want on that topic on the margin. So China, I recently had many conversations with top executive from China and different sectors. They are very, very focused now on orienting the innovation towards sustainability. It is part of the program. It was announced a few weeks ago. They have announced the date for what they call the CO2 peak and then the zero to the point. And I think it is a very strong indication across all sectors, mobility, industry at large but also, of course, energy with new on infrastructure as well as construction. We have a good footprint on an excellent team in China. We continue to expand our partner network. And basically, I think when it comes to manufacturing, we are well positioned and going well as well as in High Tech that was mentioned today, by the way, on many more customers. And we were surprised that Pascal mentioned it. We are surprised by the dynamic of adoption of cloud. We are highly respected for our client - local cloud, we can operate in and provide the service in China for Chinese companies. So overall, a good dynamic Pascal, you might want to comment specifically some industries?
- Pascal Daloz:
- Yes. So James, you are right. I mean, if we improved by 1.4 the margins coming from the OpEx effects. But the easiest way to modelize it and to understand it is half of the gain is coming from the marketing spend and the travel restrictions because we are traveling nationally, but we do not have yet back internationally and this is representing almost half of the gain. And the second half is coming from the headcount. We did a great job in terms of hiring because compared to Q1, we almost doubled the number of people we hired this quarter to exceed 800 people. However, the attrition was relatively high this quarter, and it is normal again. It is consistent with what we have seen in ‘19 because Q2, it is a time where usually we are paying the bonus to the people and the people willing to leave. Usually, they are waiting this time to do it. Nevertheless, if we project for the second half of the year, we do expect to have 0.7% improvement in terms of operating margin for H2. Why so, because related to the marketing and travel, we expect to do better or to do more at least. And the assumption we took is almost between 50% to 60% of what usually we are spending in the normal year. That is what we expect for just half. And in terms of headcount, obviously, we have increased the capacity in terms of hiring, and we do expect to hire between 900 to maybe 1,000 people and contain at the same time, the attrition to other well, which is close to 500. So if you combine all those things, you will land to the 0.7 improvement of operating margin we are expecting for H2.
- James Goodman:
- Got it. Appreciate it.
- Bernard Charles:
- Maybe to strengthen one of Pascal’s point. In marketing, you have multiple elements. Of course, the events our core cost line when we do big events with large customers. But we continue to invest in marketing online, of course, on creating lead generation needless to say, of course, we continue to invest there. And the second thing that Pascal mentioned last time is we have continued to increase R&D last year and this year. We think it is an important base to prepare 2022
- Operator:
- And your next question comes from the line of Jay Vleeschhouwer from Griffin Securities.
- Jay Vleeschhouwer:
- Pascal, let me start with you on headcount and the hiring that you spoke of in detail on the Q1 call and now again. What is interesting to note is that as of the end of the quarter, you had a record number of job openings and our data goes back about a decade - and so that would seem to corroborate what you were just saying. But what is interesting to note is that within that number, you have a record number of sales openings which is over one-third of your total open positions. Could you talk about - assuming you can bring the people on how you are thinking about deploying that additional capacity in terms of, let’s say, what you used to call it your BT channel or to perhaps inside sales or just help us understand the deployment strategy vis-a-vis your sales capacity? And then my usual list of follow-up questions.
- Pascal Daloz:
- So Jay, your analysis is right. I mean you are right. The sales opening position is almost 1/3 of the opening position we have. And why so there are a few reasons. First of all, we still have some sub-segment of industry we are not covering properly. For example, if I look at the space industry, we can do much better compared to what we do today, and we are seeing a lot of traction coming from there, not only from the newcomers, you know the guy willing to conquer the space the new travel agency, if you want. But the one willing to develop a new category of launcher for the satellite and other things. And so among the third, I would say probably 20% of this number is really to fill some gaps we have in terms of sub-segment coverage. Then after we lost some of the salespeople with the attrition, especially in the U.S. So we also have to reenergize or to give more capacity, again, especially in North America, where I think we could do much better in terms of sales capacity. And last but not least, your point is also excellent, Jay. We are investing in online sales. This is what Bernard presented last time. We are calling it. It is a general approach. We call it distributed direct distributed model, whereby not only we are contacting all the large installed base we have in order to detect the new opportunity. But also we have the capacity to do some online transactions. And this revenue stream is still marginal, I would say, right now, but we see more and more traction coming from there. And it is not only for the midsized market or the small startups, if you want. We are also using this approach for the highly specialized products where sometimes you need to be an expert in order to get in touch with the right person. And the general salespeople maybe can miss this kind of opportunities. So it is a mix in order to complement the coverage we have. And I think we are preparing relatively, as Bernard said, well, 2022 because all the investment we are doing from a sales standpoint is really for 2022.
- Jay Vleeschhouwer:
- Okay. With regard to SOLIDWORKS, a couple of things. Just looking backwards first at second quarter, it looks, by my calculation as though your new license volume for SOLIDWORKS CAD software was just about back to where it was second quarter of 2019. Obviously, you had a large decline in Q2 of last year, but looks like your new business this year, Q2 was just over 19,000 units, just about back to where you were two years ago. And then looking ahead, more broadly, you noted that SOLIDWORKS has a user base of over one million, which is true. That is how many licenses you have sold. But you do have a very large dormant base, over 400,000 licenses that are no longer on maintenance. And that is larger than anyone else’s active base. And my question there is, what programs do you have in place to perhaps try to reactivate part of that base with 3DX works itself perhaps be some kind of a catalyst to reactivate that dormant part of the solid work space.
- Bernard Charles:
- Pascal, you want to make a comment on the new license?
- Pascal Daloz:
- Yes. So your calculation is right. It is a little bit over than 19,000 units in terms of volume. However, to be noticed that the mix is much better because right now, we are still selling SOLIDWORKS stand-alone, but the vast majority of the roles are gathering a piece of simulation, a piece of product data management and more and more manufacturing also. So if you look at the average selling price is much better. So that is where the growth is coming from.
- Bernard Charles:
- Related to the overall SOLIDWORKS instant base. SOLIDWORKS is a very robust, stable desktop-based solution. And clearly, the 3DEXPERIENCE is bringing to the fairly large installed base, a lot, integrated simulation, basic DM or advance PDM and PLA, whatever the customer choice is. And we clearly, to your question, Jay, what do we do to elevate the value we bring to those clients it is very clear. It is the expansion of our portfolio on the use of the platform to establish a collaborative, inclusive, mobile, cloud-based environment, in which the desktop powerful SOLIDWORKS continues to be what they like to use. So we will see as we move in the next 18 to 24 months, an ongoing dynamic in the expansion of the portfolio for mainstream. This is why we call it mainstream, as Pascal said, it is not only counting the licenses. It is about looking at the revenue growth. in total of the mainstream. And basically, this is the program which is put in place, which also requires that we provide the right training content and engagement with our SOLIDWORKS former SOLIDWORKS partners. We call them role partners now with role engagement because we want to expand the scope of the role they can sell. It is very well received. Those programs are very well received. They are there are clients, they are partners who are very successful. Others who are not there yet, and our challenge is to make this much more efficient on a global basis. The notice that we have an incredible dynamic in China for a cloud-based solution is a strong signal for mainstream market.
- Jay Vleeschhouwer:
- Okay. Finally, within industrial innovation, there seems to be a very interesting dynamic, which is to say based on the current trajectory, at least in our math, it would appear that ENOVIA new license software revenue could surpass CATIA new license revenue perhaps starting in 2022. So the question is, do you think that is a correct anticipation in terms of ENOVIA’s becoming larger like that in terms of new business? And to the extent that ENOVIA has a much higher services-related component, like PLM always versus CAD, would there be any margin implications for you if, in fact, were to become larger, vis-a-vis, new business than CATIA?
- Bernard Charles:
- One comment before Pascal put some data metrics on it. We are doing a lot to have ENOVIA ready-to-use roles and processes available and easy to deploy without service. This is a big progress, which is going on. For example, project management is well adopted as a power are now part of both the connection between and ENOVIA. So of the shelf set of business applications, which basically encompass with the ENOVIA brand are very key for the future. Of course, for large companies, when they need to do highly sophisticated PLM implementation. But more and more, we do what we call parametric PLM which reduces significantly the cost for customization and we will continue that. The example that is a benchmark in our company is from that standpoint, Centric PLM, where they have an amazing configuration engine to adapt centric control to the customer needs in a very efficient way. So that is the context on the direction we are going, which provides traction. Pascal?
- Pascal Daloz:
- Yes. So Jay, if you look at the absolute number, I would say, CATIA incremental revenue is still two times bigger than the ENOVIA one. So the line could cross at some point of time, but definitively not in the next two to three years. And keep in mind that CATIA is growing at 9% in this quarter, total revenue. So the dynamic in terms of new licenses is not over. And especially thanks to CATIA cyber systems, this new generation of CATIA to design embedded system of systems. You have so many electronics in almost all the industry we are touching at least the manufacturing one that it is an avenue for CATIA to continue to expand. And I took some carmakers, for example, and I was looking at how many people we can equip compared to the traditional mechanical cat guide is as much as the installed base we have. So to a certain extent, CATIA can double by only doing and covering all the different needs of this new category of users we have in many, many of our clients. To complement what Bernard said also on the services side for ENOVIA, Keep in mind that in the vast majority of the case, which almost is two-third of the cases, we are engaging with CSI with ENOVIA. And our strategy has always been to leverage the ecosystem for the services piece surrounding. So I think this is also the reason why, from a margin standpoint, we are relatively protected, I would say.
- Operator:
- And your next question comes from the line of Johannes Schaller from Deutsche Bank.
- Johannes Schaller:
- Congratulations on the good results. Firstly, maybe on 3DEXPERIENCE, in the context of MEDIDATA, you called out Viva, I mean can you maybe for 3DEXPERIENCE where you clearly see accelerating momentum? Talk a little bit about who you are displacing here, how many of the contracts you are winning are actually displacing competitors and in what areas? And then maybe which competitor, that would be quite helpful. And then just on the margin commentary you made going into the second half. I would assume that the travel costs and marketing costs should then probably go up again a little bit next year, the other half that you saved during COVID comes back. And then obviously, you have the hiring I know it is early days, but as we look into next year, should we then really expect a slower year in terms of margin progress or are there other positive factors that could help you here?
- Bernard Charles:
- Pascal, I think you commented the winning dynamic with 3DEXPERIENCE last quarter. Maybe you can formulate what you said, clearly, again, Siemens PTC with So the dynamic is very strong.
- Pascal Daloz:
- So the three competitors we are competing with in the, I would say, in most of the cases with 3DEXPERIENCE platform, we Siemens Teamcenter SAP PLM even if SAP decided to exit from this market, but you still have an installed base and PTC Windchill. So if I look at the winning rate against Siemens, it is still higher than 80%. And if you look at what we did in aerospace, whatever it is in the OEM and also the supply chain, clearly, we have been able to almost replace cements in all the places. In the auto sector, you still have some Siemens presence. However, I think with the newcomers, all of them, they are equipped with 3DEXPERIENCE platform, the Tesla of the world, the Rivian of the world, all those new guys and they have standardized on 3DEXPERIENCE platform and this is accelerating what we do. And so that is for Siemens. ECP, we are against winning all the case against them because they are exiting of this market anyway. And PTC wind chills the last time I checked, we were having a winning rate, which was exceeding 85%. So clearly, the vast majority of the case we are much stronger, much better. And one of the reason is against - none of them, they have a platform. What they have is a PDM systems. And there is a big difference between a platform and the PDM. The platform, all your applications are notably developed on top of. So you have a consistent experience. You have a consistent resources share between all the different roles and applications. And in terms of capacity, - Not only it is a platform to do modeling and simulations, but it is also the same platform to do the analytics and the artificial intelligence. If you take all the competitors I just mentioned, usually, if they have something, but at least they have, if not two, sometimes three different platforms or three different technology in order to make the same thing. So that is the reason why we are - we have such a winning rate. Now coming back to the margin and the question is for next year. And thank you for asking these questions. Because you are right, I mean achieving 33% operating margin in 2021. It is not something I do expect to achieve in 2022 because we will have to invest. We spoke about it, not only on the sales side, on the marketing side. We need to continue to expand what we do from a research and development. So it is probably early to give you a guidance but let’s say, it is probably between 31.5% and 32%.
- Johannes Schaller:
- That is great. That is very helpful. Maybe just a quick follow-up on what you said on automotive. Given we are seeing all these newcomers going for 3DEXPERIENCE, where the traditional players a bit more - maybe a bit more look warmer or it is still hesitant. Do you see the guys like Tesla and others using 3DEXPERIENCE already having an impact on the supply chain on the Tier 1s that these guys are more willing to switch over?
- Bernard Charles:
- I must say on comment, I must say that even when we have a very good penetration in Tier 1, specifically in Germany, but in many Tier 1, Japan also China. And even if the OEM is still on legacy, we have a lot of very, very influential Tier one which are already on the 3DEXPERIENCE platform. And in fact, they are really promoting the 3DEXPERIENCE platform based on the value they see. So on the Tier 1, overall, the dynamic is very positive. And it started a long time ago. We have many names in Germany in mind and also in France,
- Pascal Daloz:
- And to complement what Bernard is saying, the new EV guys are also driving a new value network. It is not only the traditional suppliers, but also you have new suppliers like the battery makers, for example. And this was also an opportunity for us to expand outside of the traditional Tier one and Tier two suppliers you know. And the significant presence we have. Keep in mind that we are accounting almost 800 new EV or autonomous car programs worldwide. - and more than 80% of them are equipped with 3DEXPERIENCE platform. So to a certain extent, it is a huge driving force to have the supply chain on the battery on the power management systems - on the new materials also because those cars are requesting new materials. We are driving this along the 3DEXPERIENCE platform.
- Operator:
- And your next question comes from the line of Jason Celino from KeyBanc Capital Markets.
- Francois Bordonado:
- This is a last question. Please go on Jason.
- Jason Celino:
- Maybe for the essence of time, I will just ask one then. When we look at the implied guidance for new license growth for Q4, it looks conservative. Maybe can you give some reasons as to why Q4 new license may further decelerate from Q3?
- Pascal Daloz:
- So I will take this one, Bernard. And maybe you will have an opportunity to ask another question. Because this one is relatively easy, if you look at the new license, Q4 is almost twice the size of Q3. So it is easy to conclude that it cannot be exactly the same percentage because the absolute number is not the same. So that is the reason. And if you remember, the Q4 last year was also much better than the Q3. So that is the two reasons why you could have the feeling that we are conservative or - But trust me, I’m not and I will be glad to deliver my commitment to you guys.
- Jason Celino:
- Okay. Great. Well, another quick one then. I’m surprised to hear China is one of the stronger regions adopting 3DEXPERIENCE works. Good to see, but historically, China’s favored these perpetual licenses versus cloud or subscription, I guess, what do you think is mainly driving that so early?
- Bernard Charles:
- Well, I think things are changing in China. And we think that there are lot of licenses which also around the world, I would say, not to mention specifically China around the world, and we discussed that we officials are not paid. They are basically copied licenses I think the trend to have to have this online is a good trend. They like it, and I think it will change the situation. That is the way I would articulate the future in terms of higher consistency between the use of our products and solutions and the value we get from it. Okay.
- Operator:
- Your next question comes from the line of Stefan Slowinski from Exane BNP Pariba.
- Bernard Charles:
- This will be our very last question.
- Stefan Slowinski:
- And most of the questions have been asked. Just a couple of final one, just to clarify on my numbers. MEDIDATA, a great acceleration in growth, 20% in Q1, 25% in Q2. Pascal, I believe you said you still see only 16% growth for MEDIDATA this year, that implies, if I’m correct, just maybe 10% growth in the second half of the year, and potentially a sequential slowdown in absolute revenues Q3 over Q2. So I guess my question is the same as the previous question, which is, doesn’t that look conservative? And why is it that we would see that slowdown in growth in a subscription business model when you would expect maybe those levels of growth to continue. That is the first one. And the second one is associated with that, which is just the question on recurring software revenues, ex MEDIDATA. I believe in Q1, you gave that number and said it was 4% on my calculations that is improved in Q2, maybe to 6% or 7%. Just wondering if you can confirm that and presumably, you see that potentially still progressing to high single digits next year.
- Pascal Daloz:
- Okay. So I will start with MEDIDATA. Yes, I mean if you do the math, you are right. Except you missed something very important because you are remembering the performance of Q1 and Q2 this year, but you should also remember the performance of last year. And last year. And last year, the performance of MEDIDATA was around 13% and we landed at the end to 18%. So there is almost five points difference between the Q1 and the Q4. So you could have said that the base of comparison is not exactly the same. And that is the reason why I do not expect to maintain this 25% growth for H2. That is the only reason, Stefan. Now is the MEDIDATA capable to do slightly better? To a certain extent, but I already add EUR10 million into the guidance. And keep in mind that the bookings - the commercial activity we have right now will have an impact not this year, but next year. So I believe we are still having good commercial activities and the bookings are still growing at 20%. The impact is much more for next year than the second half of the year. That is the reason why I would say between 16% to 17%, but you should not go higher than 17%. That is the point. The recurring revenue, your calculation is right. That is exactly the point. So we have an acceleration, which is coming specifically from the subscriptions. I told you the subscription is growing 18%. And if you exclude MEDIDATA, it is growing at 12%. So this is having several additional points of growth. I do expect this growth this growth to be sustainable at least for H2. For 2022, it is too early to say, because the growth is specifically coming from simulations and as you may know, and also some subscriptions, we have some project-based transactions and I need to compute when the time of the project is supposed to end before to give you the answer.
- Stefan Slowinski:
- Great. And just to confirm that MEDIDATA growth 16% to 17% is for the full-year, right, not for H2?
- Pascal Daloz:
- Yes, yes, of course, for the full-year.
- Stefan Slowinski:
- Okay. Great thank you for the precision. Thank you very much.
- Bernard Charles:
- I think with that, it was the last question. Thank you very much for participating to this conference call. And as always, we will be delighted to address any further questions with you. So in case you do not have any more questions, let’s see each other in October hopefully for a great Q3. Have a great day and enjoy your summer vacation if this is the case. Otherwise, all the best to all of you. Thank you very much and bye-bye now.
- Operator:
- This concludes today’s conference call. Thank you for participating. You may now disconnect. Thank you.
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