Dassault Systèmes SE (PNK:DASTY) Q2 2023 Earnings Call Transcript

Dassault Systèmes SE (PNK:DASTY) Q2 2023 Earnings Call Transcript July 25, 2023

Dassault Systèmes SE reports earnings inline with expectations. Reported EPS is $0.28 EPS, expectations were $0.28.

Operator:

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

Bernard Charles: Thank you very much, Beatrix. Good morning and good afternoon, everyone, and thank you for joining us today. It’s always a pleasure to be with you. We delivered strong second quarter results with broad-based momentum on total revenue, up 8% accelerating by one point from first quarter. Our new business was up double-digit combining the upfront license on the subscription. We see evidence that the acceleration in total revenue will continue in the second half of the year. Turning to profitability. We outperformed our operative with an operating margin of 31%, while continuing to invest in our future growth, of course, increasing headcount by 7%. Our EPS was strong, up 7% in the second quarter or up 15% at constant currency.

Rouven will of course, provide more detail insight into our performance, while Pascal will focus on our business environment. As usual, I would like to provide you with an update on our strategic positioning and highlight this quarter. The transformative journey, we undertook, if you remember, in 2020, transforming from Things to Life. This strategic shift empowers us to significantly amplify our impact on society and, of course, explore new horizons. Since 1981, I have summarized on one page, the Dassault Systèmes journey. And it has always been focused on sustainable innovation of products that are central to our life on core to the development of the society. In parallel, our ambition to harmonize product nature online has led us to develop a new understanding of the relationship between life and nature.

This is why in 2020, we unveiled our ambition to develop the Virtual Twin Experience of humans, a good illustration of that statement from Things to Life. As we look to our next horizon 2040, we will build on this heritage to capitalize mid and the positions to the Virtual Twin Experience for a sustainable world. This aligns with our ambition to foster a human-centric and sustainable economy. Our fundamental belief is that the virtual world not only extend, but also enhances the real world. To make a tangible impact, we have consistently supported the workforce of future release our innovative solutions. In our presentation this morning, we included a row from the hospital Saint-Louis in Paris, demonstrating this idea. With immersive reality, we have created a bridge between the virtual and the real world for their operation.

In this case, it’s the hospital itself. This allows us assist doctors and practitioners in making better informed decision through Virtual Twin Experience. It’s really a video that we will post, it’s a very interesting one, and the link will be posted on the 3ds.com in the financial section. Really, it’s a moving video because it shows exactly how people are now working using the iPad in an immersive environment to really understand what’s going on that is not visible to them. To do that, science plays a pivotal role in our endeavor as it allows us to see the world with new eyes, making the invisible visible. Focusing on the theme of Science metamorphosing the society, we recently held our science in the age of experience on the virtual human Virtual Twin Experience symposium.

This was in Boston a few weeks ago. This brought together an impressive collection of clinician, scientists, researchers, industry players and regulators to explore AI modeling, simulation and research breakthrough, thanks to the Virtual Twins. Now let’s focus on the same theme AI modeling simulation on Virtual Twins. Recently, generative AI captured the attention of the world. At Dassault Systèmes, the truth is that AI has always been part of our DNA for many years, over, I think, 15 years. We started with V5 architecture. This morning, we presented an example of AI-driven therapeutics design. So it’s really generative AI on science. The goal was to develop a new oral antidepressant molecule that met specific criteria, including solubility, no liver toxicity or no adverse effect on the heart.

Additionally, the molecule needed to effectively target the brain dopamine system. Leveraging AI, our software generated millions of potential molecules and with the aid of ModSim, so by using the result of those molecules, doing modeling and simulation, we predicted their ability to meet the criteria, assigning a success score to each of the options. Expert researches then utilized this result to select which molecule should be advanced to the test phasing because, as you know, it’s a very extensive phase. Currently, a short list of safe on effective molecules is ready for real-world lab testing and later on, of course, the different phase of clinical trial. The combination, it shows very clearly that the combination of AI and modeling and simulation proves to be a powerful approach in which AI opens the ramp of possibilities on ModSim, reduce the space of possibilities by doing better assessment of the capabilities.

It makes me think about Google’s AlphaFold that represented in the past, a very strong move forward. And we see now that with AI-based therapeutics design, we also are replicating for therapeutics this kind of breakthrough for our medical treatment. This is very well connected to what you know already, which we call our multi-scale, multi-physic approach to phenomenon. And it’s at the core of our simulation strategy, multiscale, multi-physics framework that we continue to enrich over the years. In the field of biology, we mastered various levels of scale from individual cells to large population cohorts. With our multi-physic capabilities, we cover several medical disciplines such as dermatology, neurology, cardiology, endocrinology and more.

So this Virtual Twin is connecting a representation of those organs, elements and connecting them with the real-world evidence, which we think is creating a new space that we call the medium for experimentation. Virtual Twins expense of humans is about extensively using this approach. So, we have made significant progress in the last three years to create the Virtual Twins of key organs, brain, heart, lungs, living cells, [indiscernible] to name a few of them. These advances are revolutionizing medical practices that we are packaging in industry solutions basically to empower medical practitioner to make more informed decisions, evaluate the practices under implementation before going to surgery with planning, operations, sequencing and comparison arbitration between the different solutions.

We think that it’s a major step toward personalized medical device customization. So our purpose is really in action, we think. In the last three years, it has accelerated. The 3DEXPERIENCE is creating those universes that are connected to the real world, and we believe that it’s a major contribution to harmonize product nature on life. Understanding the importance of life, we believe, is going to be essential, for not only life science also for manufacturing to change the processes, the materials, infrastructure and it’s truly a new perspective for the industry of the 21st century. So, we believe that the foundations that we have that were well communicated at the Capital Market Day and illustrated with the levers for the future, thanks to Pascal and Rouven and team we’ll have the foundation for the next five years plan.

Now let me hand over to Pascal. He will tell you a little bit more about customers and business.

Pascal Daloz: Thank you, Bernard, and hello, everyone. Always a great pleasure to be with you at this time of the year before the summer break. Before to dig too deep into the customer case and the performance by geo by product lines, let me share some observations of what happens during the second quarter. The first one is we saw a renewed focus on the investment in innovation from a customer standpoint. And this positive shift in the market was evidenced in our strong performance driven by the broad-based momentum with both the large enterprises and the mid-market across all the geos, and you will have more data on this topic. The second point is the conversions between the experience economy and the circular economy is really driving a deep transformation across all the sectors.

As businesses and industries continue to evolve, we saw a growing demand from our customers to address the critical issues of sustainability, environmental responsibility, maintaining a competitive edge through the rapid innovation and optimizing operational efficiency at the same time. Now to give you some concrete examples, let’s zoom on the customer case for this quarter. Let’s start with the manufacturing industries. As I was stating circularity is more than just a concept. Our clients recognize the tangible benefit of what we bring to their concrete projects. And we are, I think, driving forward sustainability innovation in manufacturing using AI in the combination with our Virtual Twins to minimize the waste and recycle the raw materials.

And this quarter, we have a great proof point with Unilever, which is almost – you remember, an extension of what we did with PepsiCo, I presented this case a few quarters ago. Unilever has a bold ambition, in fact, to reduce the plastic waste with a target of reducing what they call the virgin plastic by up to 50% by 2025. So in two years from now. And to support this ambition, in fact, they are using the 3DEXPERIENCE platform to drive material efficiency through automated optimization processes, and they are also leveraging the real world evidence and AI in order to optimize and do right the first time. Now turning to Life Sciences. The significant time required to – at the level of upfront cost and production risk involved in the clinical development all provide barrier to innovations in the life sciences industry.

And we aim to help to reduce and breakdown some of those barriers across the sectors to enable greater innovations. Last quarter, Novartis expanding its trust in MEDIDATA and Novartis is a long-standing customer of Medidata, and they are betting for the future on our partnership. Our mission is really to assist them in achieving a remarkable 50% reduction in clinical trial cycle time. But at the same time, they are also standardizing their clinical development on why unified cloud platform. And this is the foundation for them to, at some point of time, connect the dots and manage the drug development life cycles across all the domains from the research and discovery to the manufacturing. So our commitment to Novartis success is stronger than ever, and it’s an evidence by the expanded partnership with a new five-year commitment.

And it’s a five-year commitment to expand the scope, to expand the share of wallet and at the same time to standardize on everything we do. Now let’s move on Infrastructure & Cities. The importance of the clean, safe and sovereign energy has always been mission-critical. And in the recent year, this topic has gained significant attention worldwide, particularly as we transition toward the global carbon-free energy. While we have frequently showcased successes in energy production, this time, I want to emphasize how we can drive innovation in the domain of the grid. And Red Electrica, the sole operator of the Spanish electricity system has adopted the 3DEXPERIENCE platform on the cloud, not only for design, but also to operate the virtual twin of energy network for Spain next-generation Smart Grid.

Operating the virtual twin of their network is obviously ensuring the higher grid availability, while managing different buyers source of energy. And it’s enabling also easy grid connection, which is something extremely important because, I mean, all the different household could become energy producer as you can imagine. We are also supporting them in designing the next generation of reversible hydropower plant for energy storage, which is also extremely important, because the more you move to the renewals, the more you need to find a way to store the energy, and these systems need to be at scale. And in addition, we are also assisting them in managing the construction program for the power line, the substations and the storage facilities.

So this case is a good example of how the 3DEXPERIENCE platform can be used not only to design the network, but also to operate the network. And I’m very proud because it was I mean you can imagine, it was extremely competitive bids. We have all the different traditional players. And with this platform approach, we have been able to be game changer and to convince Red Electrica to standardize against on one platform. Now let’s move to the performance for the quarter, and let’s start with software revenue performance by geography. In Americas, the revenue growth accelerated sequentially to 10%, driven by strong performance mainly in Aerospace and Defense as well as high tech and well supported by life sciences. And the key point is we have seen in Q2, the large deals being back.

In Europe, the momentum with revenue growth of 9% and the region benefited from strength in Germany and France, mainly driven by consumer packaged goods and retail. And believe it or not, the largest transaction we have this quarter is with a large retail company in Europe, and fleet transportation and mobility, which is still core and growing extremely well. And in Asia, the revenue was – growth was up 4%, thanks to the rebound in China with a growth up high single-digits and continued with high double-digit growth in India and strength in mainstream and innovation. Now turning now to the product line performance. Industrial Innovation software revenue saw 7% growth in Q2. Within that, CATIA delivered a double-digit growth in both upfront licenses and subscriptions and thanks to the strong cyber system adoption.

SIMULIA also performed well with the software revenue growing high single-digits during the quarter, and ENOVIA has delivered good subscription results during the period. In Life Sciences, software revenue increased 7%, MEDIDATA delivered high single-digit growth lower than in the previous quarter, driven by mainly an industry-wide reduction in study start when compared to the very high post-COVID level as well as on a very strong baseline effect when you compare to the second quarter last year. But at the same time, as I was explaining with the Novartis case, we experienced a strong performance in the top pharma companies, including several multi-year renewal, Novartis is one of them, but also Gilead is another one, just to name a few. And again, keep in mind that when we renew, we are not renewing on parity, we renew with an extension of what we do and an average is 20%.

So importantly, I think that’s probably the main message on this topic. We plan to return to double-digit growth before the end of the year. And we have the visibility to commit on this. Now mainstream innovations. Software revenue increased 12%, specifically driven by SOLIDWORKS, which has seen a strong double-digit growth with a broad-based expansion across geographies notably in China, where the software revenue increased by 25%, and it’s a notable rebound compared to the minus 22% in the first quarter. At the same time, CENTRIC PLM reported an excellent performance, driven by the consumer packaged goods retail, and we saw a continuing pleasing momentum across all the core business verticals. Now zooming a little bit more on CENTRIC PLM.

I think you know all the solution is used today by over 12,500 brands and has a significant footprint in the market. However, we are convinced that the potential opportunity we see in front of us is much larger. And why so because there are several axis to continue to expand. The first one is the move from fashion and apparel to new markets, including food and beverage, cosmetics, personal care, home and furniture and consumer electronics, just to name a few. The fact that we are also moving from the brands, which are the core today, to the retailers, to the manufacturers and also the consumer, which are more and more part of the loop. And in this quarter, as I was saying – I was telling you, we are – we signed a very important deal with one of the large retailers.

From a solution standpoint, we are also expanding from being the collection management systems to establishing the CENTRIC PLM as a business platform for the consumer industry, serving as a backbone for the e-commerce. And I think if you do the sum, we are convinced we are very well positioned to continue to expand and to execute this strategy to become a global leader in this area. And we believe that CENTRIC PLM has the potential to become at some point of time, USD1 billion businesses. Having said that, it’s my turn to give the floor to Rouven to discuss a little bit more of the financial in details. Rouven, you have the floor.

Rouven Bergmann: Thank you, Pascal, and thank you, Bernard. As you can see, Q2 was a strong quarter. We delivered on all our key objectives encompassing revenue growth, margin and EPS, driven by broad-based strength across pretty much all geographies and a healthy contribution from the large deal activity. As a result, we wrapped up a good first half of the year, which puts us on trajectory to achieve our full year objectives. Before I’m going through the details of the numbers, I want to recall quickly that when we introduced our objectives back in Q2 in April, we highlighted three main drivers, which were the condition to accelerate the growth in the second quarter. The first one was an acceleration in North America; the second continued momentum in Europe; and third, return to mid-single-digit growth in China.

And I want to share with you that all these elements, we delivered not only the expected, but also better results in this quarter. Now let’s turn to our Q2 results in detail. Total revenue and software revenue grew consistently 8%, while services revenue was up 7% at constant currency and in line with our objective. Upfront license revenue was up 6% ahead of the Q2 objectives driven by the rebound in China, very good performance in mainstream innovation with SOLIDWORKS and a healthy contribution from large deals, mainly in Europe and North America. Now related to the performance in China, we highlighted during our Q1 call that we saw evidence of increasing activity in March. And in fact, this trend continued driving 8% growth in China in the second quarter, and we are confident that this progressive trend is further raising the potential for growth in the rest of the year.

Recurring revenue was 9%, subscription revenue is up 13% year-over-year. Together, subscription and upfront license revenue growth was up 10%, highlighting the improving momentum for Q2. For the first six months, the share of recurring revenue increased to 81% of total software revenue. Now this represents an increase of 200 basis points versus last year. While subscription revenue growth for SOLIDWORKS, CENTRIC PLM, CATIA and ENOVIA, together was up over 30% and significantly above the average growth rate this quarter. We experienced a temporary slower growth at MEDIDATA as highlighted by Pascal earlier. To complement, Pascal, I’d like to go – highlight three points to explain what’s driving the MEDIDATA performance in the second quarter as well as for the rest of the year.

First, we have the impact of lower clinical trial starts as observed by global industry data. Second, we have the impact of the COVID mega studies, which phased out during Q2 and Q3 of last year, and the momentum we have with top 50 large pharma customers. Now let’s go through this briefly one-by-one to explain. First, we are seeing a more deliberate investment environment in which CRO is continuing to adjust volumes. Worldwide in the second quarter 2023, according to global industry data, clinical trial starts decreased by around 10%. While study start volumes are under pressure, our win rate remains at a strong level, industry-leading levels at around 75%. Second, when we compare to Q2 last year, we had the benefit of the ending of the MEGA trial, which was started during the pandemic.

And typically, at the end of such complex studies, we are entitled to true up revenue. This creates an unfavorable baseline effect with an impact of approximately three points to the growth rate. We expect a similar effect in Q3 before we are back to double-digit growth in Q4. Third point, we signed several multiyear renewals with top 50 pharma. This is evidenced by the strong total quarter bookings up 17%, which will drive revenue in future periods. And on top, we continue to see strong renewal rates more than 20% above par over the trailing 12 months, and our revenue retention rate remains above 99.5%. So to summarize, the lower subscription revenue growth contribution in MEDIDATA is temporary, and we are confident that growth will rebound towards the end of the year and further into 2024.

Now looking at our strategic growth drivers of 3DEXPERIENCE and Cloud. 3DEXPERIENCE revenue in the first six months grew 5% at constant currency. This reflects a share of 31%. 3DEXPERIENCE addressable software revenue flat year-over-year. This is relative to a strong comparison base last year. As highlighted before, our 3DEXPERIENCE deal road map is strengthening in the second half, so we expect this share to increase in H2. Cloud revenue in the first six months rose 14%, now representing 24% of software revenue, an increase of two points. While MEDIDATA growth contribution was lower this quarter for the reasons mentioned, the growth in 3DEXPERIENCE Cloud remains at a healthy clip. Now let’s review how we perform relative to the objectives, we set for the second quarter.

We reported total revenue of €1.449 billion. And unlike in previous quarters, we had a currency headwind of about 50 basis points, deciding in a negative FX impact of €7 million during the period. Adjusted for this currency impact, total revenue was €5 million higher than the midpoint of our target range due to the outperformance in software revenue by €4 million and in service revenue by €1 million. We reported an operating margin of 31%, 50 basis points above the high end of the range and 80 basis points higher than the midpoint. Better revenue performance and lower OpEx growth together contributed 110 basis points improvement versus the midpoint, partially offset by negative currency impact of 30 basis points. It’s clear from the numbers, we delivered on our profitability targets while continuing to invest.

We added over 300 net new employees during the quarter and over 650 for the first six months. Due to our disciplined investment approach, we are well on track to manage our OpEx growth in 2023, offsetting the carryover effect resulting from the strong hiring last year. This gives us the visibility to continue our focused investments in the second half of the year, to address our long-term opportunity. Now turning to earnings per share. We reported €0.28 as reported at the high end of our objectives range, which was €0.27 to €0.28 and the offset €0.04 of negative FX impact. Turning to cash flow and balance sheet items. Cash and cash equivalents totaled €3.345 billion compared to €2.769 billion at the end of 2022, an increase of €576 million.

At the end of the quarter, our net financial position totaled €352 million, an increase of €579 million versus net financial debt of €227 million at the end of last year. Now let’s look at what is driving our cash position at the end of the second quarter. We generated €1.026 billion operating cash flow year-to-date. This was slightly lower by 2% or €22 million when compared to the first six months of last year. The two main reasons or takeaways to explain. First, we continue to see a good momentum in working capital. In fact, the net change in operating working capital is up 5%, driven mainly by strong collections, evidenced by sequentially improving DSOs. This is partially offset by a slightly unfavorable change in the non-operating working capital due to higher tax payments.

And second, the net income adjusted for noncash items is lower versus last year, because number one, as discussed, we decided to invest at higher levels in 2022 to accelerate top line growth and as a result, we are absorbing the expense carryover effect now in 2023. At the same time, the progressive revenue growth acceleration is taking off. And lastly, the remaining gap is a result of an increase in social charges for share-based compensation due to the higher share price versus last year. Now I refer you to more details on our reconciliation table on cash flow. To sum it up, operating cash flow was mainly used for CapEx of €67 million, a payment of lease liabilities of €42 million and the cash dividend paid in Q2 of €276 million. Lastly, of note, we had a negative FX impact of €56 million year-to-date 2023.

Now let’s turn to our fiscal year 2023 objective. We are maintaining our guidance. The key takeaway is that we 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% at constant currency remains unchanged. In absolute terms, we are offsetting the FX impact of minus €7 million to the year by raising the performance to maintain the range as is of €5.940 billion to €5.919 billion. This assumes that we expect progressive growth acceleration throughout the remainder of the year, driven by an increase in contribution from large deal activity in H2, and mid to high single-digit growth in China, continuing the good Q2 trend. Finally, we reaffirm the operating margin range of 32.3% to 32.6%.

Before moving to the Q3 objective, I would like to emphasize that the unchanged full year revenue guidance assumes that we maintain growth rate at constant currency software revenue 8% to 9%, service revenue of 5% to 7%. We continue to expect recurring revenue growth in the range of 10% to 11%, with strong subscription revenue increasing in the range of 17% to 18%. Following the good trend of Q2 and upfront license revenue, we remain confident for the full year range of 2% to 5%. Now let’s turn to our Q3 objectives. We are targeting total revenue growth of 8% to 10%, with recurring revenue increasing by 10%, driven strong subscription revenue growth of 17% to 19%. We forecasting upfront license revenue growth of 6% to 10%. This reflects an acceleration in subscription revenue growth in Q3 versus Q2.

And this is the reason – this is driven by an increasing share of 3DEXPERIENCE subscription deals in the second half of the year, continued momentum in adopting subscription-based pricing of SOLIDWORKS customer base and strong growth from CENTRIC PLM. As mentioned, and for the reasons outlined before, MEDIDATA is expected to continue mid to high single-digit growth in Q3, before returning to double-digit growth in Q4. For services revenue, we are predicting a normalized 2% to 5% growth. And in terms of profitability, we are forecasting an operating margin of 30.2% to 30.5%, with diluted EPS of €0.26 to €0.27 in Q3. Now for additional information, I refer you to today’s earnings presentation. Now in conclusion, we’ve had a good first half of the year with strong second quarter results.

As you heard, the growth is broad-based and the momentum is improving across all major geographies, driven by strength in industrial and mainstream innovation. We are on track to achieve our objectives for the year, reflecting an acceleration of revenue growth in the second half of the year. Clearly, these results demonstrate our platform strategy is well aligned with the priorities of our clients. We are focused on execution to deliver sustainable growth, and we remain confident in our ability to advance towards our EPS objective of €1.20. And now Bernard, Pascal and I are looking forward to the conversation and your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Jay Vleeschhouwer from Griffin Securities. Please ask the question.

Jay Vleeschhouwer: Thank you. Hello Bernard, Pascal and Rouven. Let me start with a couple of questions. Good morning – good afternoon for you. Let me start with a couple of questions around the sources of recurring revenue by brand. As best we can tell, products like CATIA and SIMULIA, their percentage of total revenue that is recurring is considerably above the corporate average. ENOVIA it seems to be around the corporate average, SOLIDWORKS seems to be around the corporate average. So when you look at the other brands that seem to be below the corporate average percentage of recurring revenue, how are you thinking about increasing that percent for products like DELMIA and the rest in terms of increasing that recurrence? And second question around recurring revenue is – and Pascal, you had talked about this a bit in Paris last month, is can you comment on what you’re seeing in terms of expected next 12 months revenue coming out of backlog?

I know you disclosed that in the annual report, but perhaps you could give us some indications of how that’s trending through the midyear in terms of growth of expected conversion of backlog?

Pascal Daloz: I’ll start with the first part of the question. So there are a few things to be noticed in the recurrent revenue. First of all, the weight of the subscription is going bigger and bigger within right you remember, we used to have 60-40, 60% was coming from maintenance and support, and 40% was coming from subscriptions. And given the acceleration we have seen on subscriptions, and it’s really happening across all the core brands of Dassault Systèmes. SIMULIA is already high, as you know, ENOVIA also, but we see this trend extremely predominant also now happening for CATIA and SOLIDWORKS. SOLIDWORKS, it’s also increasing rapidly. Now you mentioned specifically DELMIA. DELMIA, you are right. We used to have additional upfront license model.

And again, same thing is happening. We see more and more the trends towards subscriptions. Especially for the manufacturing operation management systems, because it’s really an operating cost, if you want. And many, many customers they want not anymore to have a CapEx approach, but to have an OpEx-based approach. And that’s the reason why we see the trend to also happening to DELMIA. If you remember what Rouven said during the Capital Market Day, he was explicit about this. He said the 60-40 mix we shifted to the opposite. 60% will come from the subscription and 40% will come from the maintenance and support for the next five years plan. That’s what I can say. For the next 12 months backlog, again, it’s a difficult thing to touch, because it’s not an indicator.

We are communicating to the market. And to a certain extent, we are following, but with the different parameters and probably the one you expect. Nevertheless, there is one business, which is running this way, which is the MEDIDATA one. And I think it’s probably good also to give this indication, because we are mentioning that the – it’s temporary. The fact that we are single-digit, and we are committed to be back to double-digit growth in Q4. But the more important is this backlog concept is extremely important because the bookings are increasing at almost twice the growth we are reporting right now, which is, to an extent, a good indicator how it will be translated into revenue in 2024. That’s what I can say at this stage, Jay.

Jay Vleeschhouwer: Okay. Thank you for that. Secondly, and this is something of a follow-up from your presentation last month and has to do with, let’s call it, the completeness of your portfolio and how you’re thinking about addressing that. So first of all, in simulation, SIMULIA, you have a very large business probably the second largest in the group. But it also seems to be very narrowly based in terms of percentage of revenue from a particular physics. And the question there is how are you thinking about broadening the multiphysics portfolio for simulation? And secondly, the infrastructure with Citi’s presentation last month was quite interesting, but it’s not clear how complete the portfolio is for that as compared with the quite obvious completeness of the portfolio for transportation and mobility and for life sciences.

So perhaps you could address what are both of those in terms of how you’re thinking about more broadly covering with that from processes and flows and so forth within both of those two large opportunities?

Pascal Daloz: You want to take it, Bernard?

Bernard Charles: Yes, I can do brief. There is – first on the SIMULIA side, which is basically the brand that supports all multi-physic, multiscale. You’re right. The landscape, multiscale, multiphysics gigantic. In fact, in some ways, it does include also system, the system view. More and more people doing simulation wants a system view of their simulation. So, we continue to expand the scope. However, Jay, I would debate the fact that we have a neuro view – a neuro portfolio at this point in time. We cover linear, nonlinear structure. We cover EMAG, we cover flow very well. We cover also very specific solutions related to global optimization. For example, the full interior optimization of the car in terms of ambience, noise, heat or cooling system and so on, which basically are not done by others.

But the road map is a broad road map you’re right. I think we are pleased with the dynamic. And as you know, the platform phenomenon is giving us a lever, whereby very old installation, you have been following our industry for a long time, very old installation, very old solvers are put under question when you go platform, and we see that very visible with all customers who have adopted the platform, they are bringing together with the integrated multiplications. Why? Because it’s extremely fast. They reduce the cycle time with this, and they don’t want to reinvest in building connectors. So I think you will see a sustainable strong growth in this area. And you’re right, we need to continue to expand and expand on the portfolio. Briefly said, on city and infrastructure.

I think we are progressing on the fact to understand that city and infrastructure is not only construction. First, on the construction side, we have a very large project going on. They are limited, but they are very large. I think we mentioned Bouygues and the number of project Bouygues is doing now with our platform are significant. Nuclear project. This is construction. Railway project. But I think what was quite interesting in Pascal’s presentation this morning, and I think you mentioned this just at the call here, is this Red Electrica company, very novel doing a full grid in Spain, €10 billion investment or something like this, so gigantic investment. Creating the virtual twin for to construct the grid, maintain and operate the grid.

And we like – I mean those are new things that in the past and will recognize were only managed with documents. So, we see a lot of opportunities there. Virtual Hospital, which is part of what we call our Med Twin initiative in initiative in Europe to have the passion flow within the hospital. So, we probably are taking this sector from a different approach than just creating software for buildings, touching the real infrastructure. It’s going to take time, but I think we see now new companies coming in with the investment, especially in infrastructure and energy infrastructure. So that in short how we are shaping the strategy forward.

Jay Vleeschhouwer: Okay. And lastly, I think Pascal would be terribly disappointed if I didn’t ask about SOLIDWORKS. So on that I mean…

Bernard Charles: We would be disappointed if you were not the first to ask the question.

Jay Vleeschhouwer: Very good. So would it be correct to infer that the year-over-year new volume growth for SOLIDWORKS was, let’s call it, 11% to between 19,000 and 20,000 over the quarter and up sequentially from Q1? And relatedly, Pascal, are you still expecting that by the end of this year, 3DEXPERIENCE works will have about 6% to 7% penetration of the eligible SOLIDWORKS commercial base?

Pascal Daloz: So I do not have the number in mind precisely, but I have the trend. So in volume for Q1, we’re decreasing by 20% compared to last year. And in Q2, we catch up plus 22% in volume, right, which is also an important topic you mentioned because we have this question about is it in anticipation of the price increase we are doing year-over-year. And we can say it is not. At least it’s some use – the major catch-up is coming from Asia, especially China. And this is where we have seen the volume being back to where it used to be. Now coming back to the WORKS family. I think I’m still on this plan that we will be over 5% of the contribution of the 3DEXPERIENCE WORKS family in the mix in 2023.

Jay Vleeschhouwer: Okay. Well, thank you as always.

Pascal Daloz: Thank you.

Bernard Charles: Thank you.

Operator: We are now going to proceed with our next questions. And the questions come from the line of Michael Briest from UBS. Please ask the question.

Michael Briest: Yes, and good afternoon. A couple of follow-ups. And just in terms of the 2025 ambition of €2 billion in cloud, are you still confident in that given the sort of deceleration that MEDIDATA causes for it? And then on Asia, 4% growth. Obviously, China was strong. You called out India. Maybe you can say something about Japan and Korea? And if there’s any sort of weakness in those other countries, whether that comes back? And as a final one, Rouven, on the stock-based compensation, I think you started the year at €124 million. It’s now €241 million. It’s gone up a lot in the last three months. Can you explain what’s driving that and how we should think about how it will develop in future years? Thanks.

Rouven Bergmann: Sure. I start Pascal.

Pascal Daloz: Yes, please, yes please.

Rouven Bergmann: I start with the cloud question. Stock-based compensation and you said Asia?

Michael Briest: Yes, I think.

Rouven Bergmann: Okay. So starting with the cloud question, Michael, the €2 billion, of course, this is a plan that we have put in place for a long time. And it is very much in action and the one that we’re confident to achieve. As we said, the MEDIDATA performance is temporary. We didn’t talk so much about it, but we signed some significant bookings in the second quarter, which will drive revenue in future periods. And we also have a number of good opportunities in our pipeline. So we are very, very focused and also confident to achieve the €2 billion in 2025. On the stock-based compensation, if you look at the reconciliation between IFRS and non-IFRS, you see also there the difference, specifically in Q2, there’s an increase of €15 million in the stock-based compensation expenses.

And Michael, this is related to two effects. The first one being the Together plan, which is our – the expenses we incurred for the stock plan for our employees that we put in place. It’s a second plan now after the first one that we’ve launched. And you know we have given those shares at a discount of 15% and the costs associated with this plan is about €35 million. And then around €20 million is related – the incremental expense of the new plan that we have put in place, it’s a new LCI that was launched, which has an incremental expense of €20 million in this quarter. So that explains the difference. And of course, the expense to additional quarters, you will have the cost of the new plan included, which was not at the beginning of the year, because at that point in time, the plan was just not approved by the Board.

That’s why we cannot report those expenses, and we don’t forecast or guide on them.

Bernard Charles: Related to Asia and aside of China and India, because we gave the numbers. To summarize it, it’s flattish in Japan for the quarter. And it’s mid-single digit for Korea. And the growth from Korea is coming from subscription specifically, if I remember, it’s higher than 30% growth of subscription in Korea.

Michael Briest: Okay. And Rouven, will that sort of – is the €214 million now the sort of steady state, we should assume or will it grow with revenue in future years?

Rouven Bergmann: Yes. Of course, we will adjust, but I think from a size in terms of the number of shares that were issued, we are fairly consistent with previous years. Of course, the cost of the plan is associated with other factors, too. As you know, we have the new plan contingent on two performance criteria. It’s not only the EPS, it’s also the ESG criteria. So the valuation of this plan had to follow new methodology, which was slightly more expensive. But at the end of the day, it’s the right thing to do. And Mike the development is the same.

Michael Briest: Thank you.

Operator: [Operator Instructions] The questions come from the line of Jason Celino from KeyBanc Capital Markets. Please ask the question.

Jason Celino: Great, thanks for filling me in. On the topic of the large deal activity in North America and Europe, it’s definitely nice to see that return. Maybe first, what sectors are you seeing this large activity and specifically? And maybe where in the pipeline, could that change in terms of strength?

Bernard Charles: Okay and I take it. As I was commenting this morning, I think aerospace is extremely well. You remember, last year was also a good year. So to give you an indicator, it’s a – we are close to 20% growth for the sector. And it’s coming, obviously, from the large lens, but also the supply chain, which is starting to also being equipped. The second thing is transportation and mobility is still a CD market for us, and we have a lot of sizable deals in the pipeline, much more on H2 than we had in H1, and they are spread across Americas and Europe and also Asia. Shipbuilding is also a sector where we have large transactions in the pipeline in Europe and in Asia and also to a certain extent in Americas. And believe it or not, we also have more and more large transactions coming from CPG and retail.

I was mentioning PepsiCo. I mentioned Unilever. You remember, we had P&G. So this domain is starting to be equipped. And now the level of transaction starts to be comparable with what we have done in other industries. And Centric is obviously the one driving this. And last but not least, we are again on the Life Sciences. They are very large customers of two systems. We were mentioning top 50. And we also have large renewal transactions. And you remember, each time we renew, we are also expanding what we do. So if you do the combination, I think we have a good visibility on the pipeline for H2. And it’s diversified from an industry standpoint, which is, I think, the reason why maybe you notice we have a certain level of confidence.

Jason Celino: Yes. No, I think none of those sectors are really surprising, especially consider your core industries. Maybe my follow-up here is, do you think that this large activity you’re seeing is a reflection of just the macro environment being a little better or at least not worse? Or is this competitive wins or for internal execution, curious on how you plan?

Bernard Charles: No, I think I made this comment in my sections. Believe or not, I think we have seen a rebound in the investment cycle for innovation. And it’s happening across the geos and across the sectors. I think since the beginning of the year, the – especially in Asia, in certain countries, the investment cycle was really here to foster the – I would say, the ramp-up of the consumption. But we see more and more the industrial cycle investments to be considered. And I think the level of priority of our projects are extremely high. And that’s the reason why also it’s something which is really different compared at least for the last six weeks. That’s the reason also that what we have this, I would say, back-loaded years, where the largest transaction are a lot more in H2 than H1. And it’s a little bit counterintuitive because you’re right. If you look at the PMI index decreasing, but the reality in our pipeline, we see the opposite way

Jason Celino: Okay. Thank you and I appreciate the color. Thank you.

Bernard Charles: Thank you very much. Is it – was it the last question, yes? Do we close here? Okay. Thank you very much all of you. And we appreciate your participation. And of course, we continue to be there. And Pascal and Rouven are going to have additional roadshow in the next coming days as we should. And for those of you who have not – having not taken your summer break, enjoy your summer break and talk to you soon. Thank you, everyone, for your interest in Dassault Systèmes.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect your lines. Thank you.