Dassault Systemes SE

PAR:DSY

Earnings Call Transcript 2023-Q1

[Beatrix Martinez, Vice President Investor Relations.]

Good morning everyone. This is Beatrix Martinez speaking, Dassault Systèmes’ Investor Relations. From the company we have Bernard Charles, Chairman and CEO; Pascal Daloz, Deputy CEO and COO; and Rouven Bergmann, CFO. I would like to welcome you to Dassault Systèmes’ First Quarter 2023 Webcast Presentation.

At the end of the presentation, we will take questions from participants. Later today, we will also hold a conference call. Dassault Systèmes results are prepared in accordance with IFRS. Most of the financial figures discussed on this conference call are on a non-IFRS basis, with revenue growth rates in constant currencies unless otherwise noted.

For an understanding of the differences between the IFRS and the non-IFRS, please see the reconciliation tables included in our press release. Some of our comments we will make during today's presentation will contain forward-looking statements, which could differ materially from actual results. Please refer to our Risk Factors in our 2022, "Document d'enregistrement universel" published on March 17th.

I will now hand over to Bernard Charles.

[Bernard Charles]

Good morning everyone, and thank you for joining this call that we are going to share with the Pascal and Rouven. The first quarter is, we qualified as solid. We could debate about the term, depending about how you want to look at it, but the revenue was up 10%, the recurring revenue.

Subscription was up 14%, and that we want to continue to increase that part of it. The 3DEXPERIENCE was up 10%, on cloud, up 17%, which by the way its connected to the subscription model.

The cash was strong at 24%, and as you could notice, after three years we have reimbursed all our debt, or at least we are cash positive after this significant move with MEDIDATA, which I think was the right thing to do.

Operating margin at 31%, and we continue to invest, remember, we invested last year, towards the end of the year two, and we continue to invest with headcount, up 8%. Its in some way counter circle with the tech sector, but we think it's a proof point that we believe that we have opportunity set forward.

The beginning of the year in China was slow. We have seen a better March. I think the post-COVID was a little bit complicated there, but the market is a big market. Financial objective are here, reconfirm for the full year with total revenue growth at 8% to 9%, EPS on-track to achieve our five years plan at the €1.2 which was 6, five years ago, and as you remember the division by five.

Our ambition is to continue, and we are confirming that with the showcase we have for the first quarter on full year. Game-changer innovation, I think the industry of the 21st Century is going to be at one from the previous century.

The customer relationship is very high in terms of trust, in terms of cooperation, and in terms of fire long-term engagement. Our mission, we'll come back. I will not cover that much, because we've save the Capital Market Day in June. We come back on that topic and we will of course reflect on the key objective for the next five years plan with the new team on board. So that's the highlight for the Q1.

I think just as a teasing for the CMD, we are well prepared for the next five years. We have clear vision on a pragmatic approach to really take a note on what's happening. The extensive use of virtual twin experience in every markets we serve, whether its physical goods, production system, Life Science, infrastructure.

There are equally maturity, but I think this is really solid foundation where we are continuing to differentiate. So, if you look at the over perspective of what we did 3D, Digital Mock UP, lifecycle management then putting the platform in place to create experiences under virtual twin of now life, I think it's a very well architected environment for the long-term achievement for Dassault Systemes.

A quick video that will illustrate the progress to really realized the virtual twin of human from the cell to the [Indiscernible].

[Video Presentation]

[Indiscernible] on to the new team. Soon Pascal to be the CEO, is that if were to do an IPO those days, we have extremely strong story for the future. So the question for, this is why Dassault Systemes is long-term. As everyone should remember, we are family-controlled company. And that's an important thing, because we can see put a lot of energy to the prepare the future.

And I think this is a spirit in which we are going to prepare the CMD to really the Capital Markets Day in June, to really provide soundable perspective about why those levers are there.

It's a new world for design, the 3DEXPERIENCE world. It's also a new world to make things, not only production with robot. The experience from the 3DEXPERIENCE world which was very successful. We presented how the system will auto generate part from specification using AI-based technology.

If it works at scale, we are going to have large customer test coming in the mid of the year. So what you have seen with AI using text analytics on a new user interface for people in front of a screen, we are trying it to design, the design work on the evaluation of experiences both for sustainability, how to change material quality, material characteristics.

And there are few great stories about that, that Pascal will talk about soon talking about customer. So this idea that in the future of design, the future of production, AI will play a big role. We are already there. AI has been using the five for generative design for cars and planes, and we are continuing to expand that, and explain to customers what we've never revealed of what is inside the system.

But we have a very, very deep understanding about the current techniques to apply AI By the way, Natural Intelligence is still useful. So we at AI on NI, Natural Intelligence. So, don't forget NI, don't forget NI. Algorithm are still good. An incredible dynamic. And this way, I told the team in charge now.

If you think about the footprint on the number of new logos we're touching with cloud, it's a new exciting world. We have very small customers on cloud. We have also very large customers. But a lot of smaller customers, and it's an exciting moment to see how innovation is happening with very small companies. Companies with one or two license growing.

Remember the story that we talk to you about the 60 months ago, doing that you are farming in Seattle, starting with two users. They have now more than 100 users. So nobody would've expected us there. Cloud enables us to reach those. This is why, I think the landscape and the nature of those logos you will have the print, for some of you having the time to just look at what those logos are doing, you would be surprised with many of them not expecting Dassault Systèmes to be there.

And I think that's a new world. Because it's not about design. It's about how can I do the virtual twin, so I can improve my business, whether it applies to the what the offer, to the how I do my business, and even who is doing it my supply chain. More to be discuss in June.

You have to really understand that our scope is changing, not only changing from physical things and a plane is a thing to life, but also in terms of where virtual twin can be used. We have been in this, IFWE Loop. We call it the IFWE Loop.

On the left side of this loop, which is innovation. The right side is about experience in use, profiling how a vehicle is used by a consumer, so you can improve the vehicle. We have the data for that now, and it will change everything.

Profiling the physical products in use is changing the way innovation is going to happen in the future, and we solve a lot of problem for companies like Tesla and Ozark [ph], looking at the data for their vehicle in operation. And this is happening for airplane, this is happening for train, this is happening for many, many other. We call this the spiral of experimentation.

So you have one side, the spiral of innovation, the spiral of experimentation, and IFWE Loop is the very nature of transforming how you engineer the next products. Very important when you do energy management for a vehicle, for example, if you don't know the profile of usage, it's very difficult to do optimization of it.

So, it creates a new landscape for solutions, which are really being implemented with certain customers. One or two remarks on customer, I think what the PepsiCo decision is. very interesting decision. The reduction of raw material usage is massive, two-third, as well as packaging efficiency with recycle ability expanding. All companies on the planet have these challenges, and without simulation, it's very difficult to do it.

So I think it's a good illustration of how the trends on the footprint of Dassault Systemes in different industries can play beyond removing errors, reducing engineering change, or improving capacity to produce. It's about connecting two things. The experience economy, the sustainable economy, and doing a synthesis of the two. I think this is our purpose.

With that, I give the floor to Pascal, which is clear you all know. I'm looking forward to have been telling me when he wants to be the CEO. I negotiated Deputy CEO. He accepted this year. So I hope that, he will soon say, okay, remove deputy. So I will have ask to address all the topics. Pascal, you have the floor.

[Pascal Daloz]

Thank you, Bernard. Thank you. Hello everyone. Good morning. And it's always a pleasure to be with you in London at this time of the year. Let's start with some operational highlights, and with the tone of the conversation we have with customers right now.

For many of them, it remains volatile, let's say, their business environment, but the reality it's an opportunity for us. Why so? Because the need to increase the agility, the profitability and they are turning to us to get the solutions to do real-time analysis of the raw material, the part substitutions, as well as reshaping their entire value network.

In a context also where the regulations like REACH for example, is imposing a lot of on them. So let's zoom on a few examples this quarter. Let's start with the manufacturing industry and the mobility.

As you may know, we are driving most of the electrification of the car. Ford, it's a long time partner with us. But they have decided to standardize all their, they call it eMobility, which is the EV plus the connected car and they are standardizing on 3DEXPERIENCE platform.

Why so? Because the game is changing. On one hand you have the new generation of battery coming. We are not taking anymore about the lithiums, but the sodium is coming and we could expect to have a general three, four. So you need to have the agility of a startup in order to introduce the innovations. But at the same time, it's becoming a volume based business.

And you have seen Tesla dropping the prices by almost 20%. By doing so, they have put many of car makers out of the markets. It's not anymore premium, it's becoming mainstream. So, if you need to have the ability to do both at the same times. And this is the reason why the 3DEXPERIENCE platform is the choice for many of them, if not all of them. So that's the reason why Ford took these decisions. And again, we continue to diversify.

Now, if we step back and we look at what's happened overall in this sector, which is interesting. So you remember we started ten years ago with all the newcomers and look at them. All of them, they have standardized on 3DEXPERIENCE platform or CATIA or SOLIDWORKS, all of them, the top tens, all of them, they are equipped with our solutions, and we started against more than ten years ago.

If you look at the OEMs, that's an interesting things also. 72% of the car has been engineered with CATIA for the last decade. If you look at the new EV cars, it's 85% of them, which basically means we have more penetrations with 3DEXPERIENCE platform on the EV segments than we used to have on a traditional car.

And 70% of the OEMs are already equipped with 3DEXPERIENCE platform, which is for the launch pad to continue to expand, because you remember, by doing so we almost double the revenue we do with them. So I think no one will argue one sec that we are the de facto standard in this industry.

Now, if we move to Life Sciences, it's also an interesting thing. The use of the data in AI is becoming also mainstream. There is no one single day where we are not receiving a call from sponsors, whatever it's biotech of large pharma, asking us to get access to the set of data we have in order to do synthetic control arms or to use this as a way to improve the design of the trial, also to select the site. So there are many, many different use cases we have developed on top of it.

We are also developing in parallel what we call the synthetic patients, which is nothing more than building algorithms with very high accuracy in order to predict adverse events without having to test physically the products. And VERASTEM is again a good example of this. They are selecting the Synthetic Control Arm for rare disease in oncology.

And again, why it's important? You have the traditional benefit of it, which is to maximize, to accelerate innovations, to reduce the cost and to mitigate the risk profile of the trials. But the more important is, as you may know, for rare disease it's extremely difficult to enroll patients. It's very, very, very difficult.

And for many of them, if you give the Standard of Care to a certain extent, you are not delivering the promise, which is to come with innovative therapeutics on the market. So using this synthetic control is really a way to ensure the patients have access to the most promising treatments. That's what is behind of this.

Same thing, if we step back and we look at the footprint on the market. We just issued a press release few weeks ago, about 30,000 clinical trial and 9 million participant industrials having used our solutions. It's really a milestone for the industry. It's really a milestone.

Whatever the competition is claiming, they are only touching a fraction of the footprint we have established on the market. It has been done. Obviously not -- we are not alone. We did it with all the customers and the partners. But I think it's the demonstration that our ability to come on a regular basis with the flow of innovation and we are really the one virtualizing these industries.

And the proof of what I'm saying is look, 75 of the new drugs approved last year has been developed with MEDIDATA and BIOVIA, 75%. So again, no one will argue that we are also the de facto standard in this industry.

And I want to take the opportunity also to thank the 9 million trial participants. Because I think they are helping us to advance the journey and also the patient diversity, which is a big topic for the trial.

Now, if we move to infrastructures and cities. When we are saying to you we are purpose driven company, it's not only for the marketing or for to only have a nice story to tell. Here is a proof. By the way, if you have two minutes, go on our website and look at what we -- we have a different commitment we took.

One of them is act for water and consumptions. You will see it's very interesting. You have all the program we have launched in order to basically treat the water as a precious resources.

And why it's a precious resources? Because that in 2025 almost two-thirds of the populations will may face water shortages already. And one way to contribute to this is for example, this example. Ecolab, it's a company developing water treatments if you want, detergents.

And in fact, what they do, they are using all of our solution, especially the deep science solutions, in order to reformulate their products to consume less water. At the same time they are managing the different regulatory, which is a big constraint globally. And obviously they are fostering the collaboration across multiple entire lifecycle products.

Why so? Because they serve many, many industries. Those detergents are used by the Life Sciences, by the aerospace, transportation and mobility, the food and beverage as well. And being capable to touch those companies, it's really a way to have an impact on society. So against an example.

Now, if we zoom on the operational performance and the few comments we can do. Let's start with Americas. Americas is growing 6%. The good result is coming ready from the Mainstream. I think you remember the Mainstream was flattish the second half of the year. Now we start to see the rebound.

And we are also seeing good momentum in the pipeline, specifically in Life Sciences, aerospace and high-tech. And you should not be surprised by the way to see high-tech and Life Sciences contributing more and more to the pipeline. Why so? Because they are the ones spending the most in research and development anyway.

But I think we knew we had a good Q4. In Americas, we were expecting to have a slow start in Americas, and we do expect to have an acceleration in the coming quarters. Europe, extremely resilient, as you can see, plus 12. It's really coming from the large engagement we have with many companies in Europe, especially in France and the south part of Europe, and it's driven by transportation, mobility and aerospace. And clearly we are extremely proud of what we have been able to accomplish, in a region of the world where almost the industry is facing most of the problem.

Asia, minus three. And then it's really, as Bernard stated in the opening comment, it's really coming from China. China is down 8%. And you remember last year it was growing at 20%. So the base comparison is not helping. But we have good reasons to believe that we will have the rebound starting Q2. Why so? Because we saw in March, an accelerations and the pipeline is relatively strong. So I think we have confidence that we will be able to catch up.

India is growing double digits, and it's an interesting country by the way. We are seeing more and more investments flowing into India. And to a certain extent in the geopolitics environment, they are the one benefiting from the situation right now. And as you may know, we have a significant footprint in India. So, I think we are extremely pleased with the result we have been able to achieve.

Looking from a product line standpoint, let's start with industrial innovations, which is still the core of what we do, plus 4%. Here there are two messages. The first one, the subscriptions is hub double digit for CATIA and ENOVIA, which basically means progressively our core industry are moving to subscriptions.

The second takeaway is SIMULIA and NETVIBES, are growing double digits. I mean it's a good performance for this quarter. And it's important, because this is a domain where we are still facing competitions. And now you have the proof that we are still winning against them.

Life Sciences software, plus 11, driven by MEDIDATA, up 13%. So again, we continue to deliver with MEDIDATA and the pipeline is good. Mainstream innovation, plus four. So the SOLIDWORKS is up, single digits. Again, we had a strong base comparisons, because last year, and Q1 was growing at more than 10%. And this is where most of the impact in China is visible.

However, I think we have more and more traction from CENTRIC PLM. And why so? Because I think we start to leverage not only the leadership position we have established, but also the diversification strategy. And let me give you some highlights on this.

So first of all, it's a 12,500 burns which are already equipped, which is by far the largest footprint on the market. And we are convinced. If you do the market size, this business could reach a billion at some point of time.

Why so? Because we are expanding from the fashion and apparel to new markets such as food and beverage, cosmetic and personal care, home and furniture, consumer electronics, those are sizable markets we can touch with the core modules they have developed, which is the collection management.

For all the fast moving goods, I think CENTRIC PLM is the standard now on the market. We are also expanding from -- usually we used to target the brands, and now we are expanding also to the retailers and to the manufacturers and the consumer tomorrow, we can touch with it. That's the second axis to diversify.

From a geo standpoint, since the acquisition we have reinforced significantly the footprint of centric in Asia, especially China also where they just started when we merged with them. And from a product standpoint, I think it's important. The collection management is really the core, but more and more we see customers using them as the business platform.

And why? Because this is becoming the backbone for the ecommerce. If you have the product referentials, if you know how to put dynamic pricing in it and you remember we did some acquisitions into it. You are becoming the foundation for many ecommerce activity and this is how we are expanding with Centric. So again, Centric will contribute also to accelerate the growth this year, starting Q2, right?

So I think it's time for me to hand over to Rouven to give more flavor on the revenue, the profitability and the 2023 objectives. Thank you.

[Rouven Bergmann, Chief Financial Officer]

Good morning everybody, and thank you also from my side for joining our call and today's meeting. As you heard from Bernard and Pascal, we had a solid start to the year. We had a solid Q1 performance as you remained focused on the fundamentals of our business model, which is increasing the share of predictable revenue with strong growth in subscription and cloud, up 14% and 17% respectively, while at the same point delivering on our profitability objectives.

The total revenue grew 8% as reported, and 7% at constant currency, and is in line with our objectives. And it's also relative to a high comparison base of Q1 last year. Recurring revenue was up 10% and now represents 84%, 84% of software revenue. And now adding to the strong fundamentals, we generate that this quarter, a record high in cash from operations, which is up 24% to now 7%, it was actually up €783 million.

And as expected, we are now deleveraged nearly one year ahead of the schedule. And clearly this highlights our trusted customer relationships, the value we deliver and the discipline as well when it comes to spending in our capital allocation policy. And as you heard from Bernard and Pascal, our long-term structural growth drivers across the industries, they remain intact and strong.

As such, we continue to invest in hiring. We added more than 300 net new employees in the first quarter. While as I mentioned, we continue to deliver on our profitability objectives with diluted earnings per share up €0.28 and the operating margin at 31%, both in line with our objectives.

Now let's look at our results in a little bit more detail. First, for software revenue, where we are up 6% at constant currency, slightly below the objective range. And this was due to the lower contribution from upfront licenses, which was down minus 10%, remember, this is compared to already at a guidance at the low end of minus 7%. Now this shortfall between minus 7% and minus 10% can be fully attributed to the lower than expected performance we experienced in China.

As you've discussed over the previous quarters, the operating environment there has been difficult over several quarters. And to recap, we experienced a soft performance in the second half of 2022 during the lockdown period, where software revenue growth was around 3% to 4% and the license revenue was about flattish over that timeframe.

And this was our baseline assumption that the growth in China would remain muted in Q1 in line with this trend. While we were expecting and are expecting a progressive recovery throughout the remainder of the year.

Now, Q1 turned out to be much lower at minus 8% and softer revenue growth in China. And more specifically in the first two months of the year, first two months of the quarter, as the economy and the production cycles were preparing the restart, the investment levels in innovation and science remained rather muted and low. And this lag contributed the three to four points of growth to the license miss.

Only in March, investments in innovation started to return materializing in our pipeline. And while we remain focused, we believe that this progressive trend is raising the potential and is giving us the confidence to the recovery and the rest of the year in China.

Now on to service revenue, which was a strong quarter, up 21% and it was driven by the completion of milestones, as well as service based, outcome based, service engagements mainly in Life Sciences. In here, we're seeing a few biotechs who are turning to MEDIDATA to deliver end-to-end study build services with the purpose of accelerating the patient enrollment and the time to market. And while we continue to shape this offering, we do expect the trend for professional services to normalize throughout the rest of the year.

As mentioned, recurring revenue rose 10% to 84% of total software revenue and this is up a strong 310 basis points year-over-year. And also, as mentioned, this growth was driven by good and strong acceleration in subscription revenue, up 14% versus 10% a year ago.

So consequently, the increasing share of predictable revenue provides us greater visibility and resiliency. And our strategic growth drivers of 3DEXPERIENCE and cloud are at the center of the shift to the subscription acceleration.

And as highlighted by the customer examples presented by Pascal, clients both incumbents, transforming a new entrance disrupting are adopting 3DEXPERIENCE and cloud, and they're leveraging the full potential of our technology to increase agility, scale and accelerate innovation and growth.

So 3DEXPERIENCE revenue grew 10% at constant currency and it now reflects 31% of 3DEXPERIENCE address with software revenue, which is up one point relative to last year and the cloud revenue rose 17% at constant currency to now 24% of software revenue, which represents an increase of three points. And we are confident that we will continue to capitalize on our leading position in key industries and capturing above market growth with 3DEXPERIENCE and cloud.

I should have moved the slide. So now let's turn to how we performed relative to the objectives we set for the first quarter. The total revenue of €1.434 billon was €3 million higher than the midpoint of our target range. We reported software revenue of €1.288 billion, which is up 6% and €25 million below the midpoint and €10 million below the low end of the guidance. We expect to recapture this gap through the remainder of the year. And I will discuss this further in the objective section.

As mentioned, the shortfall -- this shortfall was driven by the decline in software revenue in China, which explains the gap to the low end of the software revenue range or 1 point of growth.

We reported service revenue above the midpoint by €11 million, which essentially offsets the gap at the total revenue level. We benefited from an FX impact of €17 million during the period. We reported an operating margin of 31% in line with the objective.

And it is clear from the numbers, we delivered on our profitability objectives, while we continue to invest in hiring during the quarter. And as we look to the remainder of the year, we will continue to take a disciplined and balanced approach as we continue to invest for the future.

As such, we also expect the overall OpEx increase to slow down highlighting the fact that we are on track to absorb the cost run rate from 2022 carrying forward into 2023. Now turning to earnings per share. We reported €0.28 as reported well aligned with our objective range of €0.27 to €0.28. The non-IFRS tax rate for the quarter was 20.7% and is also well aligned with our guidance of 21%.

Now turning to cash flow and balance sheet items. As you see, cash and cash equivalents were strong. They totaled €3.468 billion compared to €2.769 billion at the end of 2022, which represents an increase of €699 million.

At the end of the quarter, our net financial position totaled €459 million, which is an increase of €686 million versus a net financial debt of €227 million at December 31st last year.

We are now deleveraged, nearly one year ahead of schedule. Now let's look at what is driving our cash position at the end of the first quarter. The operating cash flow increased 24% to €783 million, and this is a record result.

And as expected, strong collections in Q1 contributed to a favorable change in operating working capital of €350 million, and the operating cash flow was mainly used for CapEx of €33 million and the repayment of lease liabilities of €25 million, which is slightly up versus last year. Lastly of note, we had a negative FX impact of €44 million during the first quarter.

Now let's turn to our fiscal year 2023 objectives. We are maintaining our guidance. That's the key takeaway and we are well-positioned and are on a good trajectory to achieve our long-term financial objective of €1.20 earnings per share.

Total revenue growth between 8% to 9% and constant currency remains unchanged. And it's adjusted in absolute terms only for the favorable FX impact, which is €17 million to a range now of €5.940 billion to €5.990 billion.

And this, as I mentioned before, assumes that we expect a positive impact driven by an increase in contribution from large deals in our pipeline starting to materialize in Q2. We also expect to return to low mid-single digit growth in China. And also throughout the year further progression as more and more investments are directed towards innovation and science. And finally, we reaffirm our operating margin range of 32.3% to 32.6%.

Before I move to the Q2 objectives, I would like to emphasize that the unchanged full year revenue guidance assumes that we maintain our growth rate at constant currency for software revenue at 8% to 9% and service revenue of 5% to 7%.

We also continue to expect recurring revenue growth of 10% to 11%. With strong subscription revenue increasing in the range of 17% to 18%. And in spite of the lower performance in upfront license revenue in Q1, we remain confident for the full year on the range of 2% to 5%.

Now let's turn to our Q2 objectives. We are targeting total revenue growth of 7% to 9% at constant currency with recurring revenue increasing 9% to 10%. And this is driven by strong subscription growth of 16% to 18%. We are forecasting upfront license revenue growth of 0% to 5% for the quarter.

This reflects structurally improving pipeline, assuming three elements. One, an acceleration in North America. Two, continued momentum in Europe across key industries.

And three, return to mid single digit growth in China with the benefit of a lower baseline effect. For services revenue, we are predicting a normalized 6% to 8% growth. In terms of profitability, we're forecasting operating margin of 30% to 30.5%, and diluted EPS of €0.27 to €0.28.

Now let me conclude. We had a solid start to 2023 with well aligned fundamentals supported by our strategic growth drivers of 3DEXPERIENCE and cloud. Our first quarter results demonstrate that our technologies have never been more relevant and critical for our clients as strongly evidenced in Europe.

We are focused on execution to deliver sustainable growth across geographies throughout the year and as such, we remain confident in our ability to advance towards our EPS objective of €1.20.

In closing, we are planning road shows in London, Paris, and later in Q2, New York as well as Boston. I also want to remind you to join us for our Capital Market Day where we will discuss the next horizon. It will take place this coming June at our headquarters in Paris.

And now, I'd like Bernard, Pascal and I are happy to take your questions. Thank you.

[Beatrix Martinez, Vice President Investor Relations.]

Thank you, Rouven. We'll start with a question from the room.

[Unidentified Analyst]

Great. Hi, Bernard, Pascal, Rouven. Just you talked about some of the factors underpinning your confidence around, so the second half you'll kind of alluded to some sort of larger transactions in the pipeline. Maybe if you could sort of talk to how you've kind of qualified the pipeline, is anything different you have done given obviously what you sort of observed in China.

And to the extent that you can comment on the discussions with customers around some of those larger standardization deals. These have obviously been fluctuating a bit, but it seems that sort of spending and spending around digitization is still pretty resilient. So, what's your kind of view around the drivers of some of those standardization deals, and if there's an e that you can point to?

The second one was just on the comment that obviously you've delevered sooner than expected. Perhaps you can kind of remind us around your kind of strategic priorities. I know that you're kind of looking at multiple fronts, and in terms of the discussions you're having with sort of sellers is valuation, no longer an issue? Has there been a correction and what are the kind of stumbling blocks or the challenges around perhaps executing on the M&A pipeline? Thank you.

[Bernard Charles]

Pascal, maybe on a customer conversation. Just for – thank you for the question. Clearly, as you said, all government meeting we have with large customers, they – it's under agenda. It's priority number one for them. Because they need to find new answers to supply chain moving to value chain. They need find new answers for material substitution. Those are relative today in Europe, it's REACH. We should not underestimate those kind of challenges for their clients. The nature of the portfolio themselves, electrification becoming an obvious case.

People have light understanding of it 5 years ago, today It's a reality. But also in infrastructure, more modular construction. Of course, the huge challenge of energy sector. So the conversation. If I look at 40 years perspective, I think it has never been at the highest level as of today in terms of topic on the CEO's agenda. Before it was or the VP of R&D or the VP of Manufacturing, it is becoming a CEO topic. It's not related to change EPT [ph]. It's related to how to transform their business. So I think, the Chairman, Pascal wants me spend more time with those top guys. I love it. As you do know after years. But it's – your question is a very important one. Because the ownership of the topic is evolving those days. It's not anymore the CIO, for at least what we do. Pipeline, Pascal, you are a specialist.

[Pascal Daloz]

So when we started the year, we told you that the pipeline anyway was backloaded, especially in the U.S., where as you may know most of the last transaction are coming from. So just reconfirm that's the case. Given China, I think we have much better visibility and there are multiple factor. One of them is, as Rouven was saying, the priority for China was really to relaunch the manufacturing capacity in order to serve the consumer market. Now we start to see innovations and industrial investments being the topic for many of our customers. That's point number one.

Point number two, for many state owned company who are also large customer for us. They were waiting the reelection before to take any very deep decision or engaged having a huge engagement and commitment for the future. So those are behind us. And I think we are good visibility on many, many transactions, which are sizable and we make the difference and earnings gains. The differences we have on the license, it's almost 10 million plus. Will be easy to recover. I think we have enough visibility to tell you that it will be done. Related to the priority for the M&A. Again, let's say this way, we never fail, because we were not capable to converge on the valuations in the discussion we had in the past. Why so? Because if you have a good strategic framework, if the people want people, the founders or the managers wants to do it, we always find a common ground.

So – but when the company is for sale, it's also because the management just start to feel the limit of what they do, right? And for some of them, they need to feel the pressure before to take the decisions to take another road. So, to a certain extent, the current situation is helping us much more on this side than the PEO valuation side. Let's see this way. That's what I can say. From a priority standpoint, remember, the framework for the M&A has been architected along three legs. One is to complement the domain of expertise, and we still have somewhere we could reinforce, supply chain, for example, it's one of them.

Continue to expand from an industry standpoint. I was mentioning that Centric is becoming a platform to address the consumer market at large and there are many things we can build around it. And we will continue to do this. And Bernard, shared with you the Loop. We spend 40 years to focus on the innovation cycle. We want now to be a significant player in the product in use. And I think this is opening also new thought process on our side to consider different type of targets. That's what I can say at this stage.

[Adam Wood, Morgan Stanley]

Great. Thanks. That's Adam Wood from Morgan Stanley. Good morning everybody. Just maybe a quick follow-up to most question. You mentioned big deals quite a lot in the comments. Is there unusual reliance on big deals in the pipeline? Or is it just a normal kind of exposure? That was the first one. SOLIDWORKS, it feels like that's been running a little bit slower for a few quarters. And I guess you've commented on Centric being strong. So would suggest SOLIDWORKS is a bit weaker. The pickup there is that macro dependent, your partner training dependent, China's dependent just help us on why we should see acceleration on that side? And maybe finally, just to come back on that point around the product and use side, in terms of collecting the data and then feeding it into the platform to be able to inform what you do on the design side? Is that is that a partnership? We've always had the discussion around IoT and being able to collect data. Is that something that you feel now is more central to you're still very comfortable to partner for that to be able to collect that data and get it into the platform? Thank you.

[Pascal Daloz]

So, I'll start with the last deal and maybe Rouven, you can speak about SOLIDWORKS, if you want?

[Rouven Bergmann, Chief Financial Officer]

Sure.

[Pascal Daloz]

Though the last deals, I think we had a good Q4, right? And as you know, when we have a good Q4 is usually because we close large transactions. And we did most of them, especially in the U.S. in Q4. So we knew when we came to you with the guidance that Q1 will be light in terms of significant transactions. Significant means for us 10 million [ph], right? That's what it means. Nevertheless, if I look at the pipeline's in 2023, compared to 2022, the mix is equivalent. I mean, there is no discrepancy between the size of this compared to what we have seen in 2022. Obviously, it's much better than what we used to have in 2020, at the time of the COVID.

And it is true across all the region of the world. I mean, it's - the last transaction, not only your new logo, right, there are also significant customers continuing to deploy. And I was mentioning for this just we are just opening, right. The fact that the adopting the 3DEXPERIENCE means ultimately they will connect not only the design, but the simulation, the manufacturing. And it's not only for the product design, for the vehicle design, it's also for the battery designs, and the gigafactory topic will be also on the agenda. So to a certain extent, this is a route to call to expand significantly. And this is how we fulfill the machine with a large pipe, with a large transaction. SOLIDWORKS?

[Rouven Bergmann, Chief Financial Officer]

Yes. Thank you. On the SOLIDWORKS side, you're right, Adam. SOLIDWORKS has had an impact on the market overall 2022. And we were referring to that there's a connection. But the good news is, in the first quarter, we saw actually a very good uptick in our pipeline and performance in March. So, we expect the SOLIDWORKS contribution and growth to progressively increased throughout the year. And please also keep in mind that Q1 last year, it was a very, very strong quarter. And so the comparison was tough. Nevertheless, we delivered growth in SOLIDWORKS. And that's because the momentum picked up in March and we expect the trend to be positive to continue in Q2.

[Bernard Charles]

Coming back to the under the umbrella of IoT. In fact, a lot of our existing customers have collected massive data that they have never used. I think few real example in, I was presented for example. They have all the records, all different. They basically never used it. We did an amazing program with [Indiscernible] to really reveals through NETVIBES AI data science, the ells of each engine and it works very well. So the first message is there is a big discussion on IoT, but there are a lot of data which are not being used. The same goes with airplane, as like massive data related to the maintenance of the airplane, different characteristics of parts evolution.

Now, we see customers coming back to us and saying, can you help integrate those excel files, those data records in a way where they can be projected against the virtual twin of the plane, the engine or something else. We have done it. It's a real showcase. We have a big showcase also in equipment availability, especially in AMD. We have a big program on that to do predictive maintenance. It has been a topic on the agenda, but very little has been done in the reality of things. And if you look at EVs, some new cars, they are connected, there is much more records, before they were basically no records, you could not basically load the data that you had in your car. But now it's going the other way around and it provides a completely different view to the way things have been engineered and produced.

So, I think IoT isolated will not solve the problem. We can solve the problem. And that's why the EXPERIENCE platform, being able to massively connect the dots, we call these connect the dots. We did it for Herno [ph]. We did it for Gulfstream. We did it for when I say we did it, we did it already in operation for Jaguar Land Rover, we did it for despoliation. So, we have enough proof points now. And we need, as Pascal implied, we need to set up the evolution of our sales team to really engage on that side, because those are different decision makers. Related to IoT, not to take too much time on this. But it's this spiral of experimentation is a very cool one, I think it's a bigger market than the one we have been serving up to now personally.

And when you think about clinical trial, it's on the right side not the left. It's because we observe what's happening to people. You create AI to reveal what is not observed by human. And you conclude about the positive, the value on the risk to really do precision medicine. So MEDIDATA is a proof point at scale, that in those two spiral, the one on the right side related to real life experimentation, it's called real world evidence. So we are not taking an IoT approach, we are taking your real world evidence approach. We're applying biologics to physical. Yes for cooperation, of course.

[Unidentified Analyst]

Good morning. Fred at America. If we can get a quick update on cloud demand, appetite some customers, attractions you're seeing on 3DEX, what type of upsell metrics we can discuss. And then back in Q3, you said some of the impact on licenses were due to some customers, shifting subscription contracts is something we've seen to the green in Q1 and what do we expect for the rest of the year? Thank you.

[Bernard Charles]

Okay. So the cloud for us, you'll remember, it's more than ever, it's a way to expand the footprint. In our strategy, what we call the value up and the value wide. But value up is really how we increase the total value of the solutions. And the value wide is how we continue to conquest new domains, new users we cannot reach with the current system we have in place. And I think the real value for the cloud is this. Is come with a new proposal. You reach new users, you are not able to equip with the traditional way. That's the primary objective for us.

So this is a reason why, we think on the management side, we spend more attention on how many new logo we continue to win. What is the usage of those solution on the cloud? How many content, how many activities they do, which are the real KPI we are tracking. Why? Because if this is happening, the revenue will follow, right? That's the right sequence. Now, having said that, from an industry standpoint, it's easier to start when we do not have a legacy. So for all the new industry, wherever its licensees, the consumer goods, consumer packaged goods to certain, infrastructures and cities, construction falls through, we start day one with cloud. That's point number one.

Point number two. For all the industry which are project based, it's extremely relevant to use the cloud. Because this is giving the people the flexibility, the project is starting, but at the end the truth they will have another project. And to a certain extent you can see the trial like this, there is a start and there is a end. So this flexibility to connect different people each time is extremely valuable for those industries. So clearly Life Sciences construction is one of them. The design offices are also the one adopting magically the cloud. All the startups. Right? Whatever is a sector, I mean, they start with the cloud. Time-to-time, believe it or not, we have to shift from the cloud to on-prem. For angulations, and compliancy reasons, for example, if you develop systems could fly and transport people, at some point of time, you need a certification. And you need to certify not only the object, but the tools, the processes, the people, the entire systems. And if you come with the cloud with the regular updates, this is becoming so much trouble, because you need to freeze for certain times the entire systems to get the certifications.

So why am I taking this as an anecdote, because we started with a very innovative company, adopting the cloud for all the reason you know, but when you start to scale, when you start to become industrial, you have to -- you face different set of constraints. And the ability to again, offer, the mixed environment is extremely valuable for many of our customers. The last comment I can make on the cloud, we start to -- now we, for the vast majority of our large customers, they have a roadmap to move to the cloud. Right? Obviously, it's not something they can do overnight. It's five to 10 years roadmap. And we are one of the players, I mean, helping them to craft this roadmap, and to make it happen. I mean, Herno is a good case. They had a huge legacy here on our systems, and we are moving them to the cloud. We started with some programs. We started with some specific use cases, again, and progressively, everything is moving smoothly. So, I think, what is probably behind your questions, are we on-track to deliver the commitment we have to have the two billions revenue? I think we are.

[Unidentified Analyst]

Second question was about subscription in Q1?

[Pascal Daloz]

No. I think, again, it's a views that the subscription is going faster than the license. But it's not a repurpose of an existing installed base, we are moving to subscriptions. It's much more new program, new projects or extension of an existing programs which are moving to subscriptions. You have different -- I mean, there are differences from a geo to another one. It's becoming almost a standard in the U.S. The vast majority of the new programs and new projects are subscription based. It's balanced in Europe. And in Asia, it's an exception for the vast majority of the countries. So this is where we are. Again, it's not something dictated by the customer. Because we still have many industries willing to keep CapEx based approach. And that's the reason why I can claim that the license, the upfront license model will not disappear completely.

Remember, it used to be 30% of the total revenue. Now it's 16%. And we are pretty convinced we will land at around 10%, right? And not go below 10%, at least for certain time. That's what I can say.

[Charlie Brennan, Jefferies]

It's Charlie Brennan here from Jefferies. Just two questions from me. Firstly, a high level one. It feels like you spent more time talking about the medium term positioning today than maybe in normal presentations. If I'm being critical, you've maybe underperformed the growth potential that it feels like there is in Dassault. So what do you think the gating factor is to get Dassault back to sustainable double digit growth? Is there some license to subscription dilution? Is it possible that market shares can be too high? If you've got an 85% market share, does that limit your growth? Do you need to invest more in sales? Do you need to lower your margins to capture? What's the high level driver to get this business to sustainable double digit growth?

And then secondly, just a modeling question. You did 14% subscription growth in Q1 Looks like you're targeting 17% in Q2. We're used to subscriptions driving, recurring revenues, getting a three point acceleration in growth in a recurring revenue business is quite challenging. Is there more point in time revenue recognition coming into that business model?

[Rouven Bergmann, Chief Financial Officer]

Okay. So we start with the first question. It's a valid question, by the way. I accept it.

But remember, it's only Q1. I think the question will be valid at the end of the year, if I met last year, I remember in Q3, you ask almost the same questions. And finally, we'll end it properly. So if you look at the fundamentals of the business, we are not constrained by the size of the market, right? It's obvious. It's already 100 billions. And with the extension we do as well, now we're stating, we will, it's a factor of the multiplications.

We are not constrained also, by the penetration of our installed base. We still have a lot of to do. And I have many proof points I shared with you over the last few quarter where in, for example, transportation and mobility in larger con, you were convinced we were set, and we have been able to grow the size. We are not yet also constrained on the ability to cover the market. I think having direct sales approach and an indirect sales approach is giving a lot of room to foster the coverage of the market. So, if you look at all those things, frankly, speaking, there is no limitations.

Now, the competition. And I'm glad that you come back to this topic. Because again, I saw some research coming or whatever, it's by the way, coming from the financial industry, also from the specialists, where I think they have often to compute the numbers. And why so? Because I think the definition of the market is not the same. That's probably where the trick is coming. But I can guarantee to you that the winning rates we are facing in all the product line we have in all the verticals, is exceeding 80%. I mean, it's something we are monitoring, precisely. And that's really the case. So there may be some domain or sub segment of the market, we are not covering properly. That's probably the reason why others continue to expand. But the competitiveness is not at stake.

But I think execution, execution. That's where we are focusing right now. And, and to a certain extent, I like having, let's say, a year, which is back loaded, because this is putting a lot of pressure on the quality of the executions, if you want to deliver at the end of the year. That's my duty. I am accountable for that. And I think the management team knows it. And this is clearly the focus. Now, why we are speaking about much more than the midterm, we have the capital market day coming. And usually, we know that if we come with the story, only one, it's not enough, we have to repeat. And they are now starting to tease it right. That's what he's doing.

[Pascal Daloz]

Okay. And to your question on the subscription growth. I think first, to make sure to clarify everything that is one time related is not part of the subscription revenue line item, right? It's in software and other license and other revenue. So the upfront component moves to the license and other components. And when you think about the acceleration and recurring, it's always a function of the timing of renewals of existing transactions as well as new transaction. We renewed in Q1, that will have an impact to Q2. And you also have sizable transactions in Q2 that are incremental and new. But that's where the acceleration is coming.

[Michael Briest, UBS]

Michael Briest to UBS, just two quick ones. So on the cloud growth of 17% obsess deceleration, Pascal you said you're going to hit the 2 billion, you need to grow over 20%. So can you talk about the dynamics of when that will accelerate, and maybe specifically on metadata, two quarters at 13% growth the midterm ambition is 13 to 15. Can we get back into the to the upper end of that corridor any time soon? And then maybe just a sort of preamble to the CMD. I remember, Tebow [ph] a few years ago had a slide showing the lifetime value equivalence between license subscription, cloud, can you just refresh where we are on maybe a three-year value, if you like between them, as prices have moved around? Thanks.

[Pascal Daloz]

Okay. So you're right, to achieve the two billions, the CAGR should be at 20%. But you have some, from quarter to, to another one, you have some volatility anyway, I mean, you have some seasonality to peak also. Now, if you look at the performance, where I'm very pleased, if we are growing at 17%, and MEDIDATA is growing to be precise at 13.5, right, means that the rest is growing much faster. And to a certain extent, the most important for us is the growth of the rest. So, I'm very pleased with the traction we have with ENOVIA. I mean, ENOVIA is really moving to the cloud, subscription and cloud at the same time. And why so? Because again, it's a way for us to reach people which are not equipped, not having a deep usage of old set of application we do. I mean, sometimes we have some casual users, we need to connect into the product lifecycle, and we have a collection of application for that.

CATIA is also moving to the cloud. Definitively with all the newcomers. And the Tesla of the world, the BIOD [ph] of the world, they used to be smaller 10 years ago. Now, they have large deep engineering departments, and many of them are on the cloud. And now, we start to see all sorts of traction coming from this front. So, clearly, most is coming from the newcomers and also the transition of some large customers we are orchestrating over the site. MEDIDATA, I think, again, the performance of MEDIDATA is coming from different things, the number of trials, right. So the number of trial is still growing. We do not have any more of the extra growth coming from the COVID. But nevertheless, the trend is still at 6% to 7%, which is good, and we are capturing most of it, which is probably the most important.

The second thing is the ability to expand outside of the core product, which is Rave. And the two flagship product for us are really AI on one hand and patient cloud on the other hand, and both are becoming mainstream. I mean if you look at the attach rate is extremely high. And the third piece is the renewals. So the renewal is extremely important, because for the large enterprise the wait works. Usually we have contract for multiple years. And the renewal is the time to do the uplift the value up. Last year, we didn't have too much renewal. This year, we have a lot of renewal, which gives us the ability and in average, when we do have a renewal, the uplift is around 20% to 25%. So, by doing so, to a certain extent, we are fulfilling the bookings. And you will start to see also the benefit of hitting the MEDIDATA performance.

The last point is you know the Life Sciences, revenue is not only related to MEDIDATA. The other part is also starting to take significant piece. BIOVIA, I think we are starting to reach the end of the transition to subscriptions. So, and the pipeline is good for BIOVIA. We are not yet at the level of the transaction we want. We are still small and mid sized transactions. It's probably due to the nature of the market itself. However, we have large transactions coming from DELMIA and ENOVIA in this field. And this is very important for the future. And again, remember when we did the acquisition of MEDIDATA, it was not to add the coexistence of the business. is to link with the rest of what we do. And now, I have been engaged personally with at least many discussions where this is the topic. This is really the topic.

And why it's too big? It's because believe it or not this industry the process is broken. I mean, there's so many, many piece of software they are using in order to connect and spend their life to connect them in order to have workflows. And now, they have understand the difference between the workflows and the single source of truth. So, and this is happening, this is really happening. So, pretty confident for MEDIDATA for sure, and the Life Science at large.

[Rouven Bergmann, Chief Financial Officer]

And Michael to the lifetime value. I think the theory would suggest that the breakeven point is somewhere between three to four years. The reality though, is, in our situation, where, as I said before, the shift of subscription is really happening to the 3DEXPERIENCE adoption. And that is a multiplier of these sites in terms of value of opportunity, that in many, many cases, these sizes are actually increasing, and much larger as you're moving to subscription 3DEXPERIENCE based compared to a traditional license transaction, right, our client who was using V5 before. So, we've made a lot of progress on this transition. We have talked about all the customers today are 3DEXPERIENCE base. And so, we see that acceleration in terms of the value of opportunity and potential.

So yes, our standard pricing models have the breakeven between year three and year four. But the reality is that we are exceeding that, in most of the cases, because we're able to expand from a value proposition and an adoption standpoint. And another example, for MEDIDATA for example, when you compare it to is already established SaaS cloud opportunity, for most of the enterprise contracts that we renew, as Pascal was saying before, on average, we are increasing the rate compared to the baseline by 25%. We just renewed with a top -- five top 10 Life Sciences sponsor. And we have almost doubled the deal size, because we were able to value up significantly. So that's really the strategy is to bring, adopt and expand to more users, expand along our platform, and with this drive higher contribution to growth outside, I would say, the traditional breakeven model.

[Michael Briest, UBS]

And cloud relative to license?

[Rouven Bergmann, Chief Financial Officer]

Yes, cloud relative license. It really depends on the deployment, right, and assignment. But typically, that was just three to four years on the like-for-like basis.

[Bernard Charles]

And the effect is that you say, for 3DEXPERIENCE is a minimum of two times. And with the cloud is 1.5 times. So if you move to 3DEXPERIENCE platform on the cloud, and subscriptions, right, you have the benefit of the three levers if you want. That's the strategy.

[Beatrix Martinez, Vice President Investor Relations.]

We'll now take one or two questions from the call.

[Operator]

[Operator Instructions] We will take our first question. The first question comes from the line of James Goodman from Barclays. Please go ahead. Your line is open.

[James Goodman, Barclays]

Good morning. Thank you very much for taking my questions. Just on the discussion around China and Asia. I mean, I wasn't entirely clear. I mean, Asia, I think is about 10 points, slower growth than Q4, I might be off a bit on the China waiting within that, but it looks like there was some broader weakness across APAC. So maybe you could clarify and just within China, I mean, the discussion we've been having for a few quarters has been almost exclusively around the SOLIDWORKS distribution in China. Was it a broader product issue this time around? And then the other question is, if could you just give a quick update on the adoption around the WORKS family, which we'll talk more about it at the CMD. But any color on the adoption there and around 3D Creative perhaps would be would be helpful? Thank you.

[Rouven Bergmann, Chief Financial Officer]

Okay. James, thank you for your question. I addressed the first one on the round APAC. Just to clarify, first of all on the numbers and then I go one step further. So APAC, as you as Pascal presented was down minus 3%.in software. China was in this minus 8% in software. I remember in Q1 last year, China was up 20%. So it was on a difficult comparative basis. Nevertheless, for the reasons that we've discussed, right, starting the production, accelerating the consumer cycle, it took a little bit longer to re-accelerate the investment into innovation, that is the backdrop of the lower performance in China that we see progressively improving. Now, about broader Asia, we refer to the very strong double digit performance in India and the growing pipeline we see there, it's a market that is very, very promising to us with lots of customer conversation, and we see the growth to continue. So we're very optimistic on this market. Japan and Korea were more flat year-over-year, but also compared to a stronger Q1 of last year. So, in essence, right, the minus 3% in Asia, is due to the myth in China. And we expect Asia to return back to mid single digit growth. When we return to growth in China, which we're confident to see start in Q2.

[Bernard Charles]

Regarding the WORKS family, we continue to expand the portfolio with simulation, manufacturing. Remember the IQMS acquisition are now making it work. As well as providing web browser based solutions. There are more and more startups are using browser based laptop, not laptop, tablet to do design and I think it's working very well. So, I think the biggest challenge with the WORKS family is, this really excellent WORKS family is to train, the resellers were being used to sell PC based desktop application called SOLIDWORKS to really have them being trained to sell the platform for collaboration on sell the platform as a way to expand. This is probably in the next coming quarters the biggest topic of attention.

We have proof points that certain resellers have done this transition extremely well. And we have also proof points that there are new resellers that we have hired while doing only cloud-based suite the expanded WORKS selling with efficiency. It's a transition for, as Pascal said, or the speed of execution to create the double digit growth there. But I'm confident it will happen.

[James Goodman, Barclays]

Great. Thank you.

[Beatrix Martinez, Vice President Investor Relations.]

I guess, we have finish here. We have a call this afternoon to take some further questions.

[Bernard Charles]

Thank you very much for all of you participating here in London. All of you are connected and we have the call as always. We are excited this afternoon. We are always here to answer your questions. Thank you very much and see you if not this afternoon, at the CMD in June, June 9th at the campus on the dinner before. Don't forget the dinner. Thank you very much. Have a good day.