Dassault Systèmes SE (PNK:DASTY) Q3 2023 Earnings Call Transcript

Dassault Systèmes SE (PNK:DASTY) Q3 2023 Earnings Call Transcript October 25, 2023

Dassault Systèmes SE misses on earnings expectations. Reported EPS is $0.1836 EPS, expectations were $0.29.

Operator: Good day and thank you for standing by. Welcome to Dassault Systèmes' 2023 Third Quarter Earnings Presentation Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Beatrix Martinez. Please go ahead.

Beatrix Martinez: Thank you. Thank you for joining us on our third quarter 2023 earnings conference call with Bernard Charles, Chairman and CEO; Pascal Daloz, Deputy Chief Executive Officer and Chief Operating Officer; and Rouven Bergmann, Chief Financial Officer. Dassault Systèmes results are prepared in accordance with IFRS. The financial figures discussed on this conference call are on a non-IFRS basis with revenue growth rates on a constant currency basis unless otherwise noted. Some of the comments on this call contain forward-looking statements that could differ materially from actual results. Please refer to today's press release and the Risk Factors section of our 2022 universal registration documents. All earnings materials are available on our website and these prepared remarks will be translated short after this call. I would now like hand it over to Bernard Charles. Bernard?

A programmer typing on a laptop, highlighting the cutting edge software engineering solutions provided by the company. Editorial photo for a financial news article. 8k. --ar 16:9

Bernard Charles: Thank you Beatrix. Good morning and good afternoon everyone. Thank you very much for joining us today. It's always a pleasure to be with you. In the third quarter, we outperformed in both revenue and profitability. We delivered a strong acceleration in growth, driven by large deal momentum with software revenue up 12% above the high end of our target branch. In particular, subscription revenue grew 18%, accelerating sequentially. We also delivered above our profitability objective. Objectives with an operating margin of 31%, while continuing to invest in our future growth, increasing count by 5%. Our EPS was consistently strong, up 20% at constant currency. Consequently this strong results position us well to confirm the full year objective, and by the way most probably achieve our current five years plan that was initiated at the end of 2018.

What I would like to convey today is that we find ourselves in a pivotal moment. Profound transformations are currently reshaping every sector of the economy. Our strategic positioning -- unique positioning I should say with the Virtual Twin and the capacity to experience it for everything what, how, and who is really unique. Not only it provides us the opportunity to power our growth for the future, but more importantly, to bring significant value even more to our gigantic customer base. We can assist our clients in [Technical Difficulty] of innovation and [Technical Difficulty]. Rouven will provide more detail inside into our financial performance, while Pascal will update you on how we have executed our vision and provide a business overview by sector domains and geography.

So now Pascal it's your turn.

Pascal Daloz: So let's start with a few comments following the Capital Markets Day. Today our clients are driven by the ambitions to bring about metamorphosis, which is much more than the transitions where they not only embrace the sustainable economy shifting from linear to circular approaches, but also to achieve with fewer resources their goal. We are also focusing on nurturing the experience economy transitioning from product to experiences, characterized by personalization contextualization and automatic updates. This dual forces of sustainability and experience are essential element to our heritage, but also to our ambition the next horizons we just defined for 2040. Within this landscape, the Virtual Twins have center pillars of the company's knowledge and know-how proved to be essential not only delivering the innovation phases, but throughout the entire product life cycle.

Over the last 40 years, our primary focus has been on innovation. Now we are increasingly expanding our focus from innovation to experiences.

-- : The Virtual Twin enable also what we call the human center generative experiences. Each one matters in fact. Human center means empowering humans. Generative means automatically creating based on the data sets and experience refer to the overall interaction and responses of the users. So these human center generative experiences are shifting the value from the physical asset to the software. And our clients today rely on them to establish direct connections with their new customers delivering personalized connected smarter and safer experiences. This is truly the essence of the experience economy. And as an example of these rapid adoption is the development of the software-defined vehicles by the automotive industry and this trend may further accelerate the uptake of Virtual Twin.

At this stage you might be wondering how we are fundamentally different from our competitors. What sets us apart is our capacity to offer a scientific representation of the world's complexity through our science-based Virtual Twin Experiences. When suitable, we combine our modeling and simulation capability with generative artificial intelligence to create human center generative experiences. And this concept is already implemented in the industry. And on the -- you have some examples of this. For example engineers can use the generative experience to explore new materials for the next generation of battery creating a space of possibilities that open up new possibilities. We empower the short-term workers to seamlessly bridge the virtual and the physical work to enhance their experience, fostering synthesis that elevates their capabilities.

And we also assist business people and engineers in making informed business decisions, helping them to navigate the complexity of fluctuating raw material prices. Those are examples. Now let's turn now to our operational highlights for the third quarter. During the third quarter, we saw a significant number of large commercial agreements, notably in the manufacturing sectors. And what is motivating the customers to sign this transaction now is primarily the response to our customers' pressing needs to gain a competitive advantage, maintain profitability, meet regulatory sustainability deadlines and decouple the economic growth from the resource consumption. Now let's see what is happening in each sectors. Our solution are gaining momentum in the manufacturing sector for the reasons mentioned, specifically in Transportation & Mobility, Aerospace & Defense, Home & Lifestyle and Consumer Packaged Goods & Retails.

While we are entering in a less favorable investment cycle in Life Sciences, we firmly believe that the demand for new, efficient and affordable drugs will necessitates a breakthrough innovations. And regarding infrastructure, I've mentioned on several occasions that our virtual twins are relevant for addressing the sector challenges. Our focus now is really on the go-to-market strategy to address the problem of the market fragmentations. And to tackle this, we plan to establish partnership, and I will say a few words about one of them. Now let's see and let's zoom on some specific example. Starting with manufacturing industry, during the quarter, we reached a significant milestone in our partnership with Jaguar Land Rover. We renewed and extended our collaboration for the next five years, aligning with their "Reimagine" strategy, which center on their transformation into what they call the digital-first company.

And this partnership is built on the four key pillars: first, expanding the 3DEXPERIENCE platform usage from a little bit more than 8,000 to a little bit less than 20,000 users. This is also established JLR value network to operate globally within a unified environment. We are also providing a hybrid subscription model, cloud and on-premise to support their flexible cloud migrations. And finally, we are committed to achieving the net zero carbon emission by 2039 with our solutions. The point which is probably new for you is this cloud-native model play -- which is playing a crucial role in their decisions and underscore our leadership also in the cloud market. Now turning next to Life Sciences. As you know, over the last years, we have strategically directed our investment to support the growth of the therapeutic domain but also the domain expertise of the clinical trial.

This brings us differentiation and position us to anticipate the next transformation in the clinical trial through patient-centricity first and generative AI second. One of those domains is really the decentralized clinical trial, which is a primary driver of our growth for Dassault Systèmes, MEDIDATA. And here is a customer example that substantiate my point. AbbVie along probably with Moderna are strong advocates of the decentralized clinical trial at scale, making them references in the field and their commitment to decentralized clinical trials come with three key reasons. Firstly, this approach helps to increase the frequency of the data capture in the clinical trials, thereby providing a more substantial amount of data and measurements.

And this data richness is really the pivotal for informed decisions making and announcing the understanding of the trial outcomes. Secondly, decentralized clinical trials offered the opportunity to gather much more comprehensive contextual information and holistic data. This broadens the perspective and helps to better grasp the factor influencing clinical trial outcomes. This, obviously, improving the data analysis quality. Thirdly, this approach broadens the diversity of patients participating in clinical trials and it's not limiting to the patient available in the specific hospital or site thereby promoting a much more accurate representation of the general population. Now let's move to Infrastructure & Cities. Here is the example of the partnership I was mentioning previously, which enable us to start addressing the highly segmented infrastructure market at scale.

And this is involved WSP. WSP is an interesting company. It's one of the largest engineering firm in Infrastructure. Their headquarters in Canada and they are the industry leaders in the various sectors such as energy, waste, construction and transportation infrastructure. WSP is making a significant investment in Virtual Twins to expand its portfolio and introduce new services for efficiently managing infrastructure projects. So with WSP, we are doing two things. First, we advanced our infrastructure strategy in order for them to be equipped and to basically use the 3DEXPERIENCE platform for all the major infrastructure projects worldwide. And secondly, they want to use the Virtual Twin as a way to develop new services to operate the infrastructure projects when it's done.

So to conclude, I think we are confident that this kind of partnership will really enable us to scale our Virtual Twin in this sector and promoting a greater efficiency and sustainability. Now, let's move to our third quarter results across our geographies. In Europe, we saw an acceleration with a revenue growth of 21%. This growth is broad-based with an increased subscription adoption and is driven by large transportation deals and also large deals in Home & Lifestyle. In the Americas revenue growth was [Technical Difficulty] benefiting from continued momentum from subscriptions. And by sector, there were strong performances in Transportation & Mobility, Aerospace & Defense, Infrastructure, Energy & Materials. And in Asia, there was an improvement with a revenue growth of 5%, thanks to a double-digit growth in India and a solid performance in Japan.

While there was some softness in Korea, China demonstrated resilience with a 6% increase despite more challenging macroeconomic condition in this country. Turning now to the Product Line performance for the third quarter. Industrial Innovation software revenue saw an excellent performance and rose by 18% and now represents 54% of the total software revenue. Our brands benefited from the large 3DEXPERIENCE deal activity with the market share gains demonstrating the unique positioning of Dassault Systèmes. And CATIA, SIMULIA, ENOVIA, DELMIA and NETVIBES show a double-digit growth during this period. In Life Sciences, software revenue rose by 3%. MEDIDATA achieved a mid single-digit growth in the cloud subscription revenue building on a stronger comparison base even stronger this quarter than the last one.

And as previously mentioned, this performance is affected by an industry-wide reduction is start following the post-COVID surge. However, we are seeing substantial growth in the areas like decentralized clinical trial with MEDIDATA Patient Cloud. And this transformative approach is shaping the future of the clinical trial and will compare or balance the value compressions. We really -- I really invite you to learn more about the industry transformation at our upcoming events next -- taking place on November 6, 7 and 8, 2023 in New York City. In the mainstream innovations SOLIDWORKS, we see an increase by 7%. And SOLIDWORKS transition to subscription is really accelerating at the high double-digit rate and the two catalysts behind the shift released the 3DEXPERIENCE cloud-based solutions and options.

Please note that we are navigating this transition with SOLIDWORKS year-to-date growth in the mid to high-single digits. And subscription is now representing a third of the new bookings as well. Additionally, we observed a consistent momentum with CENTRIC PLM driven by the Home & Lifestyle and Consumer Packaged Goods and Retail. And this momentum is notably reflected in an increasing contribution from the large deals. And I think we are well positioned to become a global leader and make this a big impact on these three consumer-driven industries. So, conclusions, the strength of our performance in the core industry together with our diversification across sector and domain position us extremely well to achieve our 2018 2023 objectives of doubling EPS within the five-year period as initially planned.

And our plans are always being ambitious. And we -- and when we craft them we are highly motivated to achieve them. While it may be a little bit premature to claim early success. But our performance for this quarter has put us in a very good position to reach our goal. Furthermore this accomplishment lay a solid foundation for the upcoming financial plan. Now I think it's time for Rouven to say a few words about the Q3 performance and the outlook for Q4. Rouven, you have the floor.

Rouven Bergmann: Thank you, Pascal. And also thank you for joining our call. Good morning and good afternoon. As you heard, clearly, Q3 highlights strong performance and the anticipated acceleration in the second half of 2023 with software revenue up 12% year-on-year above the high end of our objective. This momentum is driven by continued acceleration of subscription revenue growth, up 18% year-over-year reflecting an increasing share of large 3DEXPERIENCE wins. Continued good momentum with SOLIDWORKS adopting the subscription model and strong performance from CENTRIC PLM. These subscription growth drivers are broad-based and evidence across geos and industries. And they give us the confidence that our annual subscription revenue growth will continue to accelerate moving forward.

Despite the temporary lower contribution of MEDIDATA as explained during our last earnings call. For the first nine months, recurring revenue now accounts for 81% of total software revenue, which is up 80 basis points versus last year. To complement the strong software revenue growth, we also saw a rebound in upfront license revenue up 20%. All of the above is reflecting the strength in new business growth and the anticipated acceleration versus the first half of the year. Services revenue was up 2% at constant currency in line with our objective. Following the strong top line performance, we also advanced towards expanding our profitability as evidenced by an operating margin at 31% up 50 basis points year-on-year and EPS at €0.28 all above the objectives.

Consequently, with these strong results in Q3, we confirm our full year objectives. And before moving to our long-term growth drivers, let me briefly share a few remarks highlighting the impact of the large transactions this quarter. The framework is the following: we are expanding our relationships with existing clients as well as winning new ones, which we refer to as value-up and value-wide. From a revenue growth perspective, you see a healthy contribution to in-quarter growth in upfront license revenue, but more importantly, we are building the run rate and momentum in our subscription growth. To this end, we signed several multi-year subscription deals where the customers have the flexibility to adopt our cloud at day one laying the foundation for long-term ratable revenue growth.

Consequently, the increasing share of predictable revenue provides greater visibility and resiliency. Our strategic growth drivers of 3DEXPERIENCE and Cloud are at the center of the shift to our subscription model. 3DEXPERIENCE revenue rose 46% in Q3 at constant currencies. This reflects a share of 40% of 3DEXPERIENCE addressable software revenue, the highest contribution ever. In the first nine months, 3DEXPERIENCE revenue grew 18% to represent 34% of software revenue. Cloud revenue rose 10% in Q3, representing 25% of software revenue. While MEDIDATA's growth contribution was lower this quarter as anticipated, due to the strong comparison base of the growth in 3DEXPERIENCE Cloud remains at a very healthy clip. So we are well positioned to continue to capitalize on our leading position in key industries capturing above-market growth with 3DEXPERIENCE and cloud.

Now, let's review how we performed relative to the objectives we set for the third quarter. To make it simple, we delivered strong results beating all our key objectives. Total revenue was €24 million above the mid and €13 million above the high-end, offsetting a negative currency impact of €12 million. The operating margin was 70 basis points above the midpoint at 31%, net of negative currency impact of 40 basis points and we continue to invest to support our strategic initiatives with a net headcount growth of over 1,100 for the first nine months which is up 5%. Most importantly, this overperformed in Q3 highlights the impact of our expense -- highlighted the impact of the expense carryover which muted the margin performance in the first six months is now behind us and we are back to a normal trend with a year-over-year improvement of 50 basis points.

The strong operating performance of Q3 translates to €0.28 in EPS driving the upside which is the high-end of our objectives. In addition, the contribution of higher financial income was neutralized by negative FX impact. In summary I've been talking with you about our revenue growth acceleration since the beginning of the year. As evidenced by the strong Q3 results, we are delivering against what we said. While I will be addressing the full year outlook in a moment, it is important to highlight that we are trending well within our objective ranges for the first nine months. This further strengthens our confidence in our full year financial plan for revenue and profitability. Now, turning to cash flow and balance sheet items. Cash and cash equivalents totaled €3.368 billion compared to €2.769 billion at the end of 2022, which reflects an increase of €599 million.

At the end of the quarter, our net cash position totaled €378 million, an increase of €605 million versus the net financial debt of €227 million at December 31, 2022. Now, let's look at what's driving our cash position at the end of the third quarter. We generated €1.272 billion operating cash flow year-to-date in line with last year. Net income adjusted for noncash items and the balance of changes in working capital are almost flat year-to-date versus the first nine months of last year. And we expect the operating cash flow to resume to growth in Q4. To sum up, operating cash flow was mainly used for the cash dividend paid in Q2 of €276 million, the net purchase of treasury shares for total of €240 million CapEx of €103 million and repayment of lease liabilities of €63 million.

Lastly, the total FX impact is not significant this year as compared to the first three quarters of last year. Now, let's turn to our fiscal year 2023 objectives. There are two key messages that I want to share with you. First, we are confirming our guidance for revenue and operating margin, while increasing the outlook for EPS to €1.20 at the midpoint of our range, which used to be the high end previously. The second point addresses the notion of risk associated with a back-end loaded year, which some of you expressed. As mentioned before, Q3 highlights the anticipated growth acceleration in the second half and this puts us in a position of strength to derisk our Q4 -- for our Q4 outlook and remove these concerns. As such, we keep the midpoint of our total revenue objectives unchanged, while narrowing the range of total revenue to be now at €5,945 billion to €5,985 billion.

For the margin, we apply the same logic, no change to the midpoint of 32.5%. In fact, we are compensating the FX settlement with a stronger operating performance. This reflects the positive trend of the margin uplift in the second half of the year versus the first six months as mentioned before. To summarize our full year 2024 objectives, we maintain growth rates at constant currency for software revenue at 8% to 9% and total revenue at 8% to 9%. This implies upfront license revenue in the range of 3% to 4% and recurring revenue to be in the range of 10% to 11% with subscription growth unchanged in the range of 16% to 17%. Services revenue is expected at 8% to 9% growth. The operating margin remains at 32.3% to 32.6% with no change to the midpoint.

Before closing let me provide you with a few additional data points that will help to shape your model for Q4. Given the strong operating performance of Q3 we now project software revenue to grow 8% to 10% in Q4. This implies recurring revenue growth in the range of 10% to -- 11% to 13% with subscription revenue increasing in the range of 18% to 23%. We slightly adjust upfront license revenue to be now in the range of minus 1% to plus 3% as we remain confident for the full year on the range of 3% to 4% as mentioned before. These objectives reflect continued momentum in subscription revenue growth from new deals and an increasing contribution from our run rate. Now one additional comment regarding MEDIDATA. We expect growth to reaccelerate in Q4 to achieve double-digit growth for the full year.

In terms of profitability, we expect the operating margin in the range of 35.8% to 36.6% and diluted EPS of €0.35 to €0.37. This reflects a year-over-year improvement of 190 basis points and 10% to 14% growth ex-FX respectively. Of course, for additional information and to review what we've just discussed, please take a look at today's earnings presentation. In conclusion, as evidenced by the strong Q3 results we are on track to achieve our full year plan for revenue and profitability. Q3 performance is broad-based driven by growth in 3DEXPERIENCE closely aligned with the growth strategy as discussed during the Capital Market Day. Our subscription revenue is driving the momentum of the company, while we deliver the productivity gains in the second half as planned.

Finally, the confidence in the full year plan is supported by rebalancing our Q4 growth with a strong Q3 upside. And now Bernard, Pascal and I will be very happy to take your questions.

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