Release Date: July 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Dassault Systemes SE (DASTF, Financial) reported a 4% revenue growth in constant currency for Q2, reaching approximately EUR1.495 billion.
- Preliminary Q2 EPS came in at EUR0.3, aligning with the company's objectives of EUR0.30 to EUR0.31.
- The company observed an 8% increase in mid-sized transactions around EUR500,000, indicating healthy business activities.
- Operating cash flow for Q2 was in line with projections, showing positive working capital improvements.
- Dassault Systemes SE (DASTF) remains confident about growth opportunities in H2, particularly with the 3DEXPERIENCE platform and Life Sciences sector.
Negative Points
- The company missed its Q2 revenue target by EUR30 million, or 2%, due to delays in customer signings in a complex geopolitical environment.
- Large transactions, particularly in aerospace and defense, were postponed, impacting revenue contributions from North America and Europe.
- Increased volatility in decision-making was observed in the last weeks of the quarter across Europe and the US.
- The company had to adjust its full-year outlook to reflect 6% to 8% total revenue growth, down from initial expectations.
- There is uncertainty regarding the timing of closing a significant mega deal, which could impact future quarters' revenue.
Q & A Highlights
Q: In light of the more difficult environment, have you considered postponing or mitigating the price increases that you had planned to implement globally starting this month? How much of the EUR30 million shortfall is attributable to the mega deal that you mentioned? Could you be more specific about some of the cost and expense actions you may take or have begun to take to limit the expense growth?
A: No, we do not intend to postpone the price increase as it is aligned with inflation and was communicated to the market six months ago. The mega deal alone could have offset the entire EUR30 million miss. Regarding cost and expense actions, we have been cautious since the beginning of the year, selectively managing expenses and rebalancing investments into strategic areas. We will continue this approach to protect EPS without massive cost-cutting.
Q: Could you share how confident you are and what kind of actions you are taking on your sales force to improve the situation and reduce volatility? How confident are you to see some deals already in Q3? Does it mean that maybe we could expect Q3 to not be so low compared to last year?
A: Many of the delays came very late in the quarter, so there was limited time to mitigate them. The vast majority of delays were not due to a lack of execution quality. We are considering specific incentives for salespeople to close mid-sized deals. For Q3, we still believe almost 50% of the delayed deals will close in H2, and we are giving ourselves flexibility to do so at the appropriate time.
Q: Could you touch on whether any other industries have shown similar signs of caution or other parts of the world, particularly Asia? Are you specifically increasing the risk attached to large deals in the pipeline or just taking a broad approach?
A: The majority of delays were in aerospace, defense, and some energy projects due to political decisions. We do not see similar patterns in other industries. From a geographical standpoint, the trend was observed in North America and Europe, not in Asia. The de-risking is based on the experience of volatility in decision-making, particularly in larger transactions.
Q: On the midterm guidance, specifically the 10% revenue growth CAGR, if we take the midpoint of your new guidance for '24, which is 7%, that implies a steep ramp-up in growth from there. Is the 10% still realistic? What gives you confidence in that acceleration?
A: The midpoint of the revised guidance is 7% for the full year, including 9% in H2 and 10-11% in Q4. Our commitment to 10% growth remains. Medidata will return to growth, and we have strategies in place to accelerate growth in Life Sciences. The tax rate improvement in 2024 is due to discrete items, and there is no change in the long-term tax rate for the five-year plan.
Q: Could you give any commentary on the M&A pipeline? Are you focusing on getting Medidata back on track first? What are your main growth levers for Medidata returning to growth in H2?
A: M&A has always been a catalyst for Dassault Systemes, and we are pursuing an active M&A pipeline. For Medidata, we are focused on gaining market share in key segments, increasing renewal value with enterprise customers, and expanding our Patient Cloud platform. We do not intend to discount prices but aim to penetrate Phase 1 and Phase 2 trials more effectively.
Q: How much de-risking have you done in your new guidance to avoid missing targets again in the next two quarters? Was the Q2 miss concentrated in the last two to three weeks of the quarter?
A: We have adjusted the back-end loaded profile of 2024 and expect to convert about 50% of the shifted deals in H2. The Q2 miss was concentrated in the last weeks of the quarter, primarily in subscription deals with a license component. We believe we can catch up some of this in H2.
Q: Could you explain what actions you are taking to improve the situation with your sales force and reduce volatility? How confident are you in seeing some deals close in Q3?
A: The delays came very late in the quarter, so there was limited time to mitigate them. We are considering specific incentives for salespeople to close mid-sized deals. We believe almost 50% of the delayed deals will close in H2, and we are giving ourselves flexibility to do so at the appropriate time.
Q: Could you provide more details on the free cash flow guidance? Is it intact for the year despite the top-line and bottom-line cuts?
A: Q2 operating cash flow was in line with projections, and we expect to grow operating cash flow in the same range as EPS growth. There may be timing effects, but we do not expect a significant change to operating cash flows based on the current outlook.
Q: Could you elaborate on the impact of geopolitical factors on your business, particularly in aerospace and defense? Are there any other industries or regions showing similar caution?
A: The delays were primarily in aerospace, defense, and some energy projects due to political decisions. We do not see similar patterns in other industries. The trend was observed in North America and Europe, not in Asia. The de-risking is based on the experience of volatility in decision-making, particularly in larger transactions.
Q: What are the main growth levers for Medidata returning to growth in H2? Are you considering lowering prices to gain market share?
A: We are focused on gaining market share in key segments, increasing renewal value with enterprise customers, and expanding our Patient Cloud platform. We do not intend to discount prices but aim to penetrate Phase 1 and Phase 2 trials more effectively. We are also expanding our strategy to improve clinical trial success rates and reduce risks.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
