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Edited Transcript of DSY.PA earnings conference call or presentation 23-Apr-20 1:00pm GMT

Q1 2020 Dassault Systemes SE Earnings Call - Afternoon Session

Vélizy Villacoublay cedex May 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Dassault Systemes SE earnings conference call or presentation Thursday, April 23, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernard S. Charlès

Dassault Systèmes SE - Vice Chairman & CEO

* François-José Bordonado

Dassault Systèmes SE - Vice-President of IR

* Pascal Daloz

Dassault Systèmes SE - COO & CFO

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Conference Call Participants

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* Andrew Lodovico DeGasperi

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* James Arthur Goodman

Barclays Bank PLC, Research Division - Research Analyst

* Jason Vincent Celino

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Jay Vleeschhouwer

Griffin Securities, Inc., Research Division - MD of Software Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to today's Dassault Systèmes first quarter earnings conference call. (Operator Instructions)

And I would now like to hand the conference over to your first speaker today, Mr. François Bordonado. Please go ahead, sir.

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [2]

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Thank you. Thank you for joining us on our first quarter earnings conference call with Bernard Charlès, Vice Chairman and CEO; and Pascal Daloz, EVP, Chief Operating Officer and CFO. In this very special context, I hope that you and your family are doing well.

Please note that Dassault Systèmes results are prepared in accordance with IFRS. Most of the financial figures on this conference call are presented on a non-IFRS basis with revenue growth rate in constant currency, unless otherwise noted.

Some of our comments on this call will contain forward-looking statements that could differ materially from actual results. Please refer to today's press release and to the Risk Factors section of our 2019 document d'enregistrement universel, our regulatory annual report, if you prefer. All earnings materials are available on our website, and these prepared remarks will be available shortly after this call also.

I would now like to introduce Bernard Charlès.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [3]

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Thank you, François-José. We appreciate your interest and attention during this difficult global juncture, and we hope you and your families are keeping safe.

To begin today, I would like to share our perspective with you. Pascal will cover in depth our financial performance and framework for the year.

Each quarter, I keep coming back to our purpose resonate. It's at the heart of what drives our passion, the virtual world improves and extends the real world. We need to place it front and center as business, government, health care systems around the globe are models of the future. The crisis gives clear meaning to what we do. Our DNA of science, engineering and model-based data analytics is there. Post crisis, the world will not be like before, I think. And I believe we will see an acceleration of industry transformation with deep orientation towards sustainability and resilience and a deeper appreciation indeed of the power of the virtual twin experience in modeling and simulating, predicting for design, functions, manufacturing, supply chain and last-mile services across all sectors. And all this will need to be done within a broader framework, of course.

All our brands are supporting our efforts in life science. And as I will briefly highlight, our brands are able to be the catalysts to help the world better understand the unknown of this novel coronavirus. In addition, we are also accelerating new product introductions at Medidata. As you may have seen this -- with this morning announcement, I believe that MyMedidata could at some point in time become a true patient journey.

From an operational framework for 2020, we are maintaining or even strengthening our workforce on investing in our people, both in training selective hiring and redirecting the workforce for highest value. Ensuring the success of Medidata acquisition is, of course, part of the 2020 program. Life science is now close to 20% of our software revenue, our second-largest industry. We are continuing in research and development to strengthen our industry and domain leadership and closely supporting our customers. We love our customers. And we are working to accelerate the adoption of our 3DEXPERIENCE portfolio on the cloud with different type of models. The [2021x] (corrected by company after the call) release is, from that standpoint, a major milestone as it is a natively aesthetic cloud environment.

Finally, we have set a 2020 financial framework, thanks to Pascal's leadership, with the objective of maintaining our 2020 earnings per share stable with 2019, thanks to the 3 critical factors: the resilience of our model with the recurring revenue, a continued strong level of operating profitability and a thoughtful saving plan, enabling investing for the future.

With science at the heart of Dassault Systèmes, let me briefly share how our solutions are helping companies reveal the invisible and the unknowns surrounding this pandemic. First, with BIOVIA to enable the structural modeling of the SARS-CoV-2 S protein in order to help accelerate new drug developments. With SIMULIA, we are able to simulate the viral dispersion in ventilation systems of complex installation, including hospitals, to prevent contamination. More broadly, a number of companies have newly designed medical product underway to help combat the global pandemic using SIMULIA as well as CATIA and SOLIDWORKS.

Medidata solutions are being used in an estimated 60% of commercial COVID-19 clinical trial underway around the globe. Also, due to the COVID-19, Medidata accelerated its planned launch of MyMedidata platform, an advanced intuitive platform, to enable patients to participate in clinical trials for new medicines and vaccines. This first release of MyMedidata includes a research-based COVID-19 symptom tracker designed to support research, studies and advanced scientific understanding of the virus. It will be made available to Medidata customers free of charge.

PPD, a leading global CRO, and Medidata announced a multiyear collaboration to accelerate pharmaceutical and medical device trials with next-generation data analytics and predictive modeling. The agreement is designed to address some of the most persistent problems that impeded the clinical development process with the objectives of building solutions to enhance clinical research trial designs, optimize sight on investigator selections and leverage real-time insights for agile trial execution.

Our 3DEXPERIENCE Lab has created an open COVID community worldwide. Designers, engineers and manufacturers can play a critical role in combating COVID-19 pandemic, leveraging collective intelligence to source, qualify, design, share, engineer and manufacture rapid solution during the pandemic.

Finally, we are also enlisting our 3DEXPERIENCE education cloud to help enable training for the workforce of the future, critically important to advancing the talents that will be needed in the coming decades. And as a side note, I will mention that we will do new programs like in 2008 for the people who lost their jobs to help them have access to our software.

Critical to managing through the pandemic's likely disruptions until a vaccine is in place, businesses can continue with a number of critical functions while working from home, thanks to the native architecture of the 3DEXPERIENCE. It's a cloud-native architecture. Clients with on-premise licenses have asked for cloud licenses, and we can provide on-premise licenses to work from home, too. We are providing 24/7 assistance to our customers and our partners.

This month, we are making available 3DEXPERIENCE release, what is called 2021x, on the cloud, of course, and it will come a little bit later on-premise. We have spoken to you about the platform as a system of operation and as a business model with the marketplace. This release is so powerful and complete that the 3DEXPERIENCE platform is going to become our own channel, connecting us directly with users and clients and inclusive to the partnership we have with our partners. Our salespeople can present their complete portfolio with a demo from their smartphones or mobile device. And the demo is not a demo, it's simply the use of the platform itself. With the 3DEXPERIENCE platform, you have a number of capabilities normally delivered by individual software companies enabling collaborative innovation, connecting people, ideas, project, task processes. Many of the fragmented toys that are visible today are integrated in this platform.

The virtual world improves and extends the real world. Now let me illustrate that. We are addressing key industry trends with the new approach -- with new approaches likely to accelerate as we move through and exit the health crisis, hopefully, sooner than later. In life science, we are combining Medidata's clinical testing and data analytics capabilities. They recently announced a partnership with Celsion to create synthetic control arm for an important clinical trial in advanced ovarian cancer patients. Based on the potential demonstrated by the SCA, synthetic control arm, in the Phase Ib that was presented to FDA in March of last year, Celsion plans to use the synthetic control as part of a breakthrough therapy submission to FDA. Medidata is in a unique position to create fit-for-purpose synthetic controls because of access to a pool of more than 6 million anonymized patients from nearly 20,000 previous clinical trial over the past years.

Changing topic and speaking about infrastructure and cities, we have long advocated bringing construction forward and applying the knowledge for advanced manufacturing in construction. The COVID-19 crisis revealed the value, time, quality, affordability, sustainability of modular construction. In that regard, we announced that we are working with the Aden Group to collaborate to develop in China, smart and connected turnkey hospital solutions in the fight against COVID-19.

I would like to conclude by a final example in consumer packaged goods. I'm sure most of us think about finding fresh or frozen foods or household goods at the grocery store, we just expected this item to be there. But in fact, it is indeed quite complex with a sudden adjustment to demand as we see during the health crisis. All critical constraints of business can be modeled in the virtual twin experience of the supply chain. The 3DEXPERIENCE platform generates optimized recommendation in terms of sourcing strategy, production planning, transportation cost reduction while protecting the service level to customers and consumers, and this provides new agility.

Let me turn the call over to Pascal now.

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [4]

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Thank you, Bernard. Hello to everyone.

We have a lot to cover, so let me proceed. The global health emergency, which under fall during the first quarter, underscore the power of 3DEXPERIENCE platform to run our business from anywhere and to engage digitally with our customers as well as our partners. With only 11 offices open amongst 187, this gives you a good picture of where we stand in Q2.

Moving to our financial results. First quarter revenue reached EUR 1.14 billion, increasing 17% in constant currencies. We came in at about 2.5% below the low end of our guidance range. With the pandemic spreading across Asia and then into Europe while arriving later to Americas, these 2 regions saw the strongest impact on new licenses activities and certain industries, such as transportation and mobility and industrial equipment, were more than affected.

3DEXPERIENCE software revenue is essentially flat year-over-year, also from a mix perspective, stable at 20% of the related software revenue. At the same time, we benefited from life science, now our second-largest industry, as well as the resilience of our financial model with recurring software revenue coming in at the high end of our 28% to 30% guidance range. With a good cost control, we also delivered our operating margin and earning per share near or at the high end of our range with a strong level of cash flow generations from operation.

Now I would like to begin the detailed review with some perspective on our key 3 strategic sectors. Manufacturing industry represent about 70% of our total software revenue. And in Q1, aerospace and defense had a solid performance with key add-ons business with large clients and deployment rollouts. We also saw a good performance in consumer packaged goods retail. However, in transportation and mobility, we had already been under pressure for suppliers starting in H2 last year, and we were joined by OEMs this quarter. Despite this, amongst our largest transaction in the quarter were in transportation and mobility in Asia and in the Americas as well. DELMIA Quintiq continued to gain traction with a recent win with Nextlogic for port management in Rotterdam.

The life science and health care sector now accounts for about 20% of our total software. And here, we benefited from software revenue up double digits. Hyundai Pharm adopted Medidata with an integrating solution with both electronic data capture and electronic trial master file. And this is an interesting case because this -- one of the few case where we are facing Viva, and this was a win against them.

In infrastructure and cities, representing about 10% of our business, we also had a double-digit growth from energy and material, but on a low comparison base. With current health crisis, a number of transactions were postponed.

Moving to our regional review with the addition of Medidata, the Americas represented 39% of total software revenue; Europe, 37%; and Asia, 24%. While we call out in Feb the health crisis in China, over the course of the first quarter, a large part of Asia went into a -- on lockdown. Within this environment, overall software grew 7% in Asia with software on an organic basis decreasing 1%. Licenses revenue decreased just under 20% with uniformly good growth for support revenues. Toward the end of the quarter, we saw a pickup in activity with large accounts in China, especially in transportation and mobility and high tech. Entering Q2, everyone has read that moving about continue to be restricted to various degrees. So we expect Q2 to be a soft quarter for Asia compared to Q1.

Further, in other parts of the world under mitigation restrictions, we would expect improvement in business activities in China and elsewhere in Asia to be closely linked with the rest of the world. In Europe, software revenue increased 2% with a sharper impact on new license activity based on the shutdowns starting in March. On an organic basis, the decrease was 5%. In the Americas, the impact from the health crisis came later in the quarter. Overall software revenue increased 46% and on an organic basis, increased by 4%. With Medidata large presence and the mix of sales generally, recurring software is highest in these regions compared to the overall level of 83% in Q1. One example illustrating a growth driver for us in Asia is Medidata. We are working with the leading CROs, contract research organization, in China where it has been -- it has expanded this partnership with Medidata.

Moving to our software revenue by type and product lines. In total, our software revenue increased 17%. Life science software revenue was up very substantially with the addition of Medidata and representing 19% of the total software. And looking at Medidata as a stand-alone basis, its software revenue increased 13%, well in line with the plan, delivering a solid performance in the quarter, passing the 1,500 customer mark and achieving several important competitive displacement, especially against Viva and Oracle. Mainstream innovation software revenue increased 2% and represented 22% of total software. Industrial innovation software revenue decreased 1% with ENOVIA decreasing 11% and in contrast, DELMIA benefited from deployments underway.

The global health crisis led to a significant disruption of the new licensing activity with related revenue decreasing 20% overall. Overall, mainstream innovation saw a lower impact in Q1, thanks to SOLIDWORKS, with a stronger impact on brands, such as Centric PLM in home and lifestyle, due to the large exposure of them with the Chinese market as well as the Chinese supply chain. In contrast, industrial innovation was more than affected given the high SKU to the end of the March quarter for direct sales and enterprise-type decisions such as those involving ENOVIA.

Our recurring software represented 83% of the total software in the first quarter. Recurring software revenue grew 30% in total, reflecting presently the addition of Medidata. Overall, organic recurring software increased 5%.

Services. Services revenue in Q1 increased 14% to EUR 121 million, reflecting the addition of Medidata. On an organic basis, the growth was 1%, impacted by lower new licenses activity as well as services work that was interrupted due to the restrictions, such as manufacturing closure, while portion of the services work was able to be done remotely. The services margin reflecting lower utilizations due to the health restriction on travel.

Moving to operating profitability and margin. For Q1, our non-IFRS operating profit increased 6% to EUR 336 million. Our operating margin of 29.2% came in near the high end of our objective range of 28.5% to 29.5%. In comparison to our guidance, while recent acquisitions, such as Centric and IQMS, were slightly below our expectations, improved profitability on the core business and to a lesser extent, currency and Medidata helped mitigate the impact of the shutdowns on license and service revenue.

EPS. EPS increased 9% to EUR 0.95, and we came in at the high end of our guidance with EUR 0.02 benefits from a lower effective tax rate benefiting from an improved geo mix impact and EUR 0.03 from currency and as well with the lower cost helping to offset, in a large measure, the loss of revenue due to the impact of the global health crisis.

Moving to the cash flow and balance sheet. Our operating cash flow in Q1 was EUR 458 million, a strong level overall. In comparison to Q1 last year, it was lower by 6% with 2 items: incomes payables, tax payables and accrued compensations linked to Medidata having the largest impact. Other key items, such as contract liability, were up about 5% in constant currency and perimeters. And the DSO were stable on a constant perimeter basis. With respect to our cash dividends, the Board of Directors is proposing an increase of 8% in the annual dividends to EUR 0.70 per share with respect to the fiscal year, year 2019.

Now let's move to our 2020 financial outlook. As I introduced at the beginning of my remarks, how does one approach financial objective within this context of the global pandemic? Within this reality, we have set a framework for what is important to us. And the quick question is, how do we want to finish 2020? So to be clear, our goal is to achieve a stable non-IFRS earning per share for 2020 in comparison to 2019. We are assuming that there will be significant reductions in global GDP with a restriction on the number of industry we serve, with the most dramatic impact in Q2, consistent with what most of the economists are estimating. There may be some timing differentials amongst geos. But globally, we would expect that to be the case. Our planning frameworks assume a progressive recovery in Q3 and Q4 based upon the current governmental plans and also the progress in development of therapeutics for COVID-19 and encouraging information on vaccine development.

Looking at the new license revenue. In the first quarter, new licenses software decreased 20% in total. Entering the quarter, we had an estimated of minus 5% to flat evolution based upon the 2019 Q1 high-comparison base and specifics, hence, market softness. Looking forward, we are estimating Q2 new license revenue to decrease in the range of minus 31% to minus 28% and for H2 to decrease between minus 14% to minus 11% at constant currencies.

With respect to non-IFRS recurring software revenue, overall, we would expect it to maintain a solid resiliency while reflecting lower new license activity and some increased attritions leading to the growth of the recurring revenue in the range of 26% to 27% in constant currency for 2020. On a sequential quarterly basis, we would expect a progressive lowering of the organic support revenue growth as we saw in 29 (sic) [2019].

From an operating margin perspective, we are targeting to offset about half of the revenue gap from the health crisis as, together with our other expectations, would enable us to reach a stable EPS. This framework brings us to a non-IFRS operating margin target for planning purpose of about 29.5%. To be clear, we are investing for the future and we do not plan any workforce reductions. This investment include ensuring we retain our sales resources as they will otherwise be more impacting given their compensation structure.

We are updating our estimated non-IFRS effective tax rate, lowering it about 25.2% from 26% previously, updating it to reflect our geo mix for tax purposes with a large share from United States. The final point is that we are maintaining our exchange rate assumptions unchanged for Q2 to Q4. We have provided in the earning presentation on our website several charts summarizing the changes from our initial guidance prior to the global pandemic.

Now let me summarize what we are targeting based upon the framework I have shared with you. Our revenue growth range is now 12% to 13% in constant currency with the midpoint of our range now at EUR 4.525 billion from EUR 4.865 billion previously. For your information, in Q1, currency had a positive impact of EUR 30 million, offset by a negative impact from the health crisis of at least EUR 46 million at the midpoint of Q1 revenue range. Adding together, the expected Q2 and Q4 impact bring us to a total estimated reduction in revenue on the order of EUR 370 million. Looking at the impact of the health crisis by revenue, we expect new license revenue move from 5% to 10% to a decrease of 17% to 20% and an impact of about EUR 255 million. For our recurring software revenue, we are assuming about 1.5 points of growth reductions, bringing it to 26% to 27%, about EUR 55 million impact. And for the services, growth of 5% to 7% from about 19%, an impact of about EUR 60 million.

Finally, let me share some details of our saving plans with a target of about EUR 170 million. We captured EUR 35 million in Q1. This was offset in part by the currency headwinds of EUR 20 million. But for Q2 and Q4, we are estimating saving of EUR 135 million coming from improved personnel utilizations, redirections of some of the core activities, reducing outside costs and selective hirings, also containing the travel and event-related savings as well as other costs such as third party or royalties.

We respect our non-IFRS EPS, the midpoint of our objective frameworks moved to EUR 3.69 per share from EUR 4.17. About EUR 0.58 come from -- comes off, sorry, from the disruption to business from health crisis. On the positive side, Q1 currency uplift of 3% and for the rest of the year, an estimated 7% -- EUR 0.07, sorry, benefit from tax and minority interest adjustment. For detail with respect to Q2 and the full year, please refer to Q1 earnings press release and presentation in the IR sections on our website.

Before opening the Q&A session, let me share several key investor relation activity we're going to do in the coming weeks. First, we will be participating to a number of virtual road shows and conferences over the next 2 months, reaching investors in Europe, North America and Asia. And of course, there are a number of call on the calendars, as always, with the Investor Relation teams. So if you have not been contacted and you would like to attend one of the virtual events, please feel free to send an e-mail to our Investor Relations.

Second, due to the health crisis, we will be holding our annual meeting behind closed doors. The date is still the same, May 26. Within today's earning press release, we have information for shareholders for connecting to the live event.

So with respect to our Capital Market Day, which we had expected to hold in Paris in June 12, we have decided to move it to the fall, targeting November 17. With the Investor Relation events on the calendar, I believe we have a high level of communication activities with shareholders and the analysts. We hope you understand that the best use of our time at this stage of the pandemic is to manage the business. And looking ahead to the fall, the Capital Market Day will be used at the occasions to review our long-term objectives.

Bernard and I now would like to answer to your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of James Goodman.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [2]

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If I could start with a question, just if you could provide us any insight additionally into the structure of the large multiyear deals we've been discussing for the past quarters. You made some comments I think on this morning's call around how a potentially lower ramp I think Boeing wouldn't be in your guidance. But I wondered if you could just help us a little bit with anything that tells us how resilient these contracts are to any sort of renegotiation or usage step downs, I think that would be very helpful for modeling.

And just secondly, on the share-based compensation expense, we've discussed the step-up that's taken as a consequence of the Medidata acquisition, and I recall there are some differences in the policy. I think I'm right in saying you've materially reduced the share-based payment guidance for this year. So I'm interested in whether that's a reduction in the core Dassault side given the revised outlook or whether you've lowered the Medidata share-based comp.

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [3]

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For the multiyears, most of them are contractually due, which is usually the way we engage. So to a certain extent, we have good protections against any potential reductions given the situation. Having said that, as I stated clearly this morning, some of our customers are already in a difficult situation and we are trying to find a way to ease their situations. But the key points in many, many cases, and you can take Boeing as a good example because I clearly expressed the situation this morning, in fact, they have to produce the airplanes. So what we do is core for them. So whatever is happening, to a certain extent, the situation is, at the end, accelerating the deployment of our projects because it's a way for many industries, many of our customers to restart. And what we do also, when sometimes our customers are closing their facilities, we use this time as a way to upgrade their system to the latest versions.

So the net of what I'm saying is, if you look at our contracts, if you look at our services, meaning what we bring through the license, all of our customers, they can continue to work. For the one having their people at home, we gave the authorization to use the license from home. So we have developed a complete program in order to help them to continue to work to ensure the business continuity. And when they are facing real financial problems, the way to discuss usually is related to the payments, the term payments more than the discount of the reductions on the bill. That's what I can say at this stage.

Related to the compensations, I mean, as I explained this morning, what we did at the time of the closing, the vast majority of the long-term incentive plan due to Medidata, we converted it into Dassault Systèmes shares, keeping the same vesting periods, which basically means the management team and many managers will have some vesting in 2020, 2021 and also 2023. So what we did, given the situations, we did some share buyback at the beginning of the quarter in order to cover the -- those plan and being able to distribute properly the shares. That's the only thing we did in the first weeks of the quarters.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [4]

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Okay. I didn't see that this morning. So that accounts for the reduction in the full year, making sure there's payment compensation. Okay.

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Operator [5]

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Our next question comes from the line of Jay Vleeschhouwer.

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Jay Vleeschhouwer, Griffin Securities, Inc., Research Division - MD of Software Research [6]

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Bernard and Pascal, hope you're well. A few things from me. Let me ask two related financial and structural questions. Number one, I appreciate the magnitude of your recurring revenue and the resilience that you noted. However, according to the Doc de réf, you entered 2020 with revenues that you knew were going to come off the balance sheet of about EUR 780 million, which, at the time, was less than 20% of your estimated revenue for 2020, a lower percentage of visibility, in that respect, than your principal competitors have in their models. So my question there is, what can you do structurally to increase that degree of visibility or proportion of estimated revenue coming out of what we now call RPO or backlog?

And then similarly, Bernard, you talked about the inevitability of transformation, the world will now be different and how you, yourselves, are going to accelerate your cloud deployments. Could you talk about perhaps any larger ambitions you may have as a company vis-à-vis cloud? That is, do you see yourselves being more of a cloud services platform beyond just 3DX and supporting your own DS brands with your own cloud infrastructure? Do you see yourselves becoming a wider or larger provider in that respect?

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [7]

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So, Jay. So to answer to the first question, if you look at the numbers you are referring to, the vast majority are coming from the subscriptions. And the more we move to the subscription-based model, the more the backlog will be a key indicator for us. Until now, the vast majority is coming, as you know, from SIMULIA as well as Medidata. And for both of them, if I look at the coverage within the year, if I look at the backlog we have for the year and the revenue we have to do, usually, the backlog is covering more than 90 -- between 90% and 92%, which is usually what you have seen -- what you are seeing in this case. And again, I'm talking about only the yearly backlog. I'm not talking about the multiyear backlog. So my answer to your question is the more we move to subscription, to a certain extent, the better it is on this side.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [8]

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Related to the cloud ambition, it's basically -- there are multiple facets of cloud because we do plan to provide also highly dedicated cloud for specialized things with very large customers. So in that context, however, it's not going to be only IAS and BAS. It's going to be the platform for business or operation. What is happening is that the 3DEXPERIENCE platform is very different this year than what it was even 2 years ago, 3 years ago. There are customers now managing their businesses with it. We, ourselves, are now using the platform for the entire end-to-end, what we call, IFwe loop, which means delivery, interaction, customer relationship and service and selling to our clients with our partners. So it's really a business platform from that standpoint.

But we don't plan to say what we don't plan to do. We don't plan to provide just a basic cloud infrastructure without the value of the collaborative process in 2 ways, industry processes, what we call collaborative industry innovation and collaborative business innovation. However, we see more and more clients asking us to do the infrastructure for them about business innovation, not only industry innovation.

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Jay Vleeschhouwer, Griffin Securities, Inc., Research Division - MD of Software Research [9]

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Okay. Turning to SOLIDWORKS, the company has identified about 6 priorities for the SOLIDWORKS business. Would it be fair to say that proliferating 3DEX in the SOLIDWORKS space, starting with the 3 new configurations coming in July, as you talked about SOLIDWORKS World, are your highest priority of those 6? And if so, what then would be -- perhaps, how would you rank the next priorities among your list? And then a short-term question. Would it be correct to calculate that new SOLIDWORKS licenses in the quarter were down about 20% year-over-year?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [10]

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Related to the priorities with SOLIDWORKS, first, we have, as you know, Jay, extremely vibrant community with SOLIDWORKS. They do a lot with it. They love the product. They love the desktop version. Our priority is to make sure that the SOLIDWORKS experience is available through a web browser. And Gian Paolo is very clear. He said that he wants ultimately all SOLIDWORKS capabilities through a browser on the cloud through a mobile device. This is happening. So this is the priority #1, to expand the SOLIDWORKS territory with mobile browser-based access not depending on Windows only.

The second one is really related to the collaborative environment of it. Many SOLIDWORKS customers are using Dropbox or even Slack, all those kind of things. They are not integrated. They put their data at risk. And -- for $37.5 per user per month, we can provide -- which, by the way, is less than what they would pay if they sum up all the toys they are using, they can have an integrated secure environment, and they love it. I think the SOLIDWORKS community has not seen it enough yet. But those who have discovered it love it and consider it's a very, very high value.

And then the third is really to expand with new portfolio because we believe that, for example, DELMIAWORKS on simulation works or project works. ENOVIAworks are so important for them. It's a new discovery. It's the next 20 years of growth paths in value for those SOLIDWORKS lovers, and those are basically the core focus area that Manish and Gian Paolo and team are working on right now with, of course, the team from DELMIAWORKS.

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [11]

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Jay, related to the questions of the flattening growth for SOLIDWORKS compared to last year, for the new license, it's not minus 20%, it's minus 11%. And the recurring revenue was relatively good this quarter. So that's the reason why at the end, we are landing with 3% growth. And if you look at the details, the vast majority of the decrease is coming from Asia, especially China and Korea, and the South part of Europe. That's where we are.

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Jay Vleeschhouwer, Griffin Securities, Inc., Research Division - MD of Software Research [12]

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Okay. And then finally, if I may. Your cost-saving initiatives internally have been apparent for the last month or 2. When we look at the reduction over the last couple of months in the DS numbers of openings, which, as you know, Pascal, we look at closely, we talk about. However, on the Medidata side, it looks like the number of open positions has been steadily increasing for the last number of months, particularly for what they call technology and analytics and client services. The question is, would you have been doing that anyway, opening up that aperture of hiring for Medidata anyway? Or has that been accelerated because of the current situation?

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [13]

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I mean it's -- there are 2 ways to answer to your questions. Point #1, we are -- as I say, we are investing in the domain where the business is steady, and Medidata is definitely one of them. So that's the reason why you have many open positions still at Medidata. On the other hand, we are -- I am controlling relatively strictly the net hiring to be equal at the end of the year compared to where we are at the beginning of March. And beginning of March, if you look at the number of people overall at Dassault Systèmes, compared to last year, we are 3% higher. And I will keep this number just the way it is. And the way I am planning to do it is by managing the hiring process in conjunction with the attrition. That's the way I'm planning to do it.

In some domain, I would expect to redirect some of Dassault Systèmes people into the Medidata activities. But I cannot do it for all the different open positions in Medidata because it's an industry knowledge, also we need to develop within Dassault Systèmes. And some of our people do not have the domain expertise, neither the industry knowledge. So that's the reason why I cannot fulfill all these positions only with Dassault Systèmes people.

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Operator [14]

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Our next question comes from the line of Jason Celino.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [15]

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Can you hear me okay?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [16]

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Yes. We can hear you now.

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [17]

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Yes.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [18]

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Bernard, your comment about customers asking for cloud licenses to work from home, for what products did you hear this feedback from the most? And are there any programs or initiatives that you're implementing to help with that?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [19]

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It's mainly for the collaborative process. We have basically 2 types of customers, those who have, for security reasons, limits in their VPN infrastructure. In fact, unfortunately, we saw many customers having weak VPN infrastructure to ensure security of the data and process that they do. So what they do basically is that they complement with a non-VPN infrastructure to collaborate on less-sensitive environment. That's one category.

The second category are those who are having the right infrastructure, if I may say so, from a protection standpoint, security standpoint. They really use what we call in our jargon, the power buy, which means to -- they upload on the cloud in a secured way the data that they need to work on from home or from mobile situation. And I think it's providing very good result. As a matter of fact, we think that this method is going to be accelerated in the months to come.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [20]

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And one question for Pascal. If licenses were down 20% for the quarter, what product areas did you see the greatest level of declines?

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [21]

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I would say all the product being related to large enterprise deals, and the product line being the most affected has been ENOVIA on this front.

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Operator [22]

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Our next question comes from the line of Andrew DeGasperi.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [23]

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I just I have two quick ones. Can you hear me?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [24]

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Yes. We can hear you well, Andrew.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [25]

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Okay. First, I just wanted to make sure if I understood correctly with the call this morning, the small and mid market, the lower mid markets of your products. I understand you gave us some percentages on what you think that is from a recurring revenue standpoint. But I just wanted to broadly understand how that's been performing in March and, so far, in April. How do you think that pans out for the rest of the year? Because I feel a lot of your comments were on the large enterprise side. And I just want to understand mostly how the small businesses are doing with that.

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [26]

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So I think, Andrew, I have been relatively explicit this morning because I said that in my guidance, I took some cautiousness for what we call the mainstream markets related to the maintenance and support, increasing the churn by 1 point. And two, what I also said in the recurring revenue, you have the subscriptions part. And the vast majority of the subscriptions is coming from the large companies, more than the mainstream market. And for those, I would say, you have on the subscriptions, you have almost 20% of the revenue coming from the increase, to a certain extent, of the existing subscriptions. And this one will follow the same pattern than the new license. And for the remaining piece, we expect this to be renewed maybe with some delay in term of payments, but I do not expect them to cancel the renewal. That's what I said.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [27]

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Got it. And then on the simulation products, SIMULIA specifically, and also on the manufacturing side, how has that been performing? Have you seen an uptick since people might be moving from physical to virtual prototyping?

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Pascal Daloz, Dassault Systèmes SE - COO & CFO [28]

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The simulations business, in fact, to answer to your questions, we have to go by verticals. So in many industry, except the auto sectors and the industrial equipment, the simulation business is steady in term of new growth, whatever it's the license or subscriptions. But for the 2 core industry, I've just mentioned, it was under pressure for this quarter.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [29]

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With that, we conclude this call. And thank you very much for your interest and participation. And of course, Pascal mentioned that there will be virtual for those, and we are always there for you if you have any further questions. Thank you very much and take care because we are not over with the virus. Bye-bye now.

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Operator [30]

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Okay. That does conclude our conference for today. Thank you for participating. You may all disconnect.