Dassault Systèmes SE (DSY) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Dassault Systèmes 2026 Q3 Earnings Presentation Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Marie Dumas, Head of Investor Relations at Dassault Systèmes. Please go ahead.

Good morning, good afternoon, and thank you for joining. I'm with Pascal Daloz, Chief Executive Officer and Chairman of Dassault Systèmes; and Rouven Bergmann, Chief Financial Officer, to discuss our third quarter 2026 results. Dassault Systèmes results are prepared in accordance with IFRS, and the financial figures discussed on this conference call are on a non-IFRS basis with revenue growth rate at constant currency, 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 2025 Universal Registration document. All learning materials are available on our website, and these prepared remarks will be available shortly after this call. I would like now to hand over to Pascal.

Good morning or good afternoon to all of you, and thank you again for joining us today. Before Rouven takes you through the numbers, I really want to start with the big picture. It's about what we are building and why it matters for the rest and for the next era of the industry. At the start of the year, we call 2026 a foundational year. Foundation year means it's not a year of waiting, it's obviously a year of building, exploring new product categories, building an AI-native platform and deepening the partnerships with our customers and partners, all in services for the next phase of growth. And this is the role of our virtual twins, an industry world model to ground AI in science and in the behavior of the physical world. And this is why the 3DEXPERIENCE is evolving into an agentic platform. So intelligence can be moved from generating ideas to helping deliver trusted outcomes for our customers. Now let's start with the Q3 performance because execution matters. So first, I think we delivered strong executions at the high end of our objectives. With total revenue grew 5%, software up 5%, 3DEXPERIENCE plus 25$, the cloud grew 14% and the EPS reached $0.32, up 8%. And I think this performance gave us even more confidence for the full year. So we are raising our full year objectives with a revenue growth, which is now expecting to be between 4% to 5%, up from 3% to 5%, and EPS growth which is now expected to be between 6% to 7%, up from 3% to 6%. Aris is obviously part of the updated outlook. And again, Rouven will walk through the assumptions and the financial details. I think there are 3 priorities which are driving this progress. The first one is we are really helping existing customers to transform their businesses and to turn industries pressure into opportunities, and it's extremely visible with the 3DEXPERIENCE platform and the cloud, which continued to perform strongly this quarter with new customer wins and broad-based performance across industries and countries. The second one, I think we are taking a major step forward in Life Sciences with the addition of ArisGlobal into the portfolio. And why this is an important one because this is helping us to build toward the Unify AE native platform, which is changing the game. And to make this happen, we are putting a dedicated leadership in place. The third one is we are expanding 3D UNIV+RSES to turn AI advances into practical industrial values. And we see this every day in our work with customers and we shared a few great examples at GTC Berlin last week. So I think our strategy is clear, deliver today and build for the next wave, but more importantly, to connect the 2. So let's start with some highlights for the quarter. The first one is China, where we are seeing a strong momentum across hi-tech, industrial equipment and automotive the next step for many of those industries is to move to industrialize this innovation and bring them to the global markets. We see this similar shift in robotics, pharmaceutical, aerospace, where the complexity is increasing and the ability to connect the discipline matters more than ever. Take Comac, as an example, the China leading commercial aircraft manufacturers. Its ambition is to bring its first large wide-body aircraft to the global market. And to make this happen, Comac needs to industrialize the program, secure the certifications and get ready to bring the aircraft to the market, both in China and internationally. And that's the key because global market needs to be part of the plan from day one, not something you think or you had later on. I think with 3DEXPERIENCE, we are bringing design system engineering, simulation and manufacturing planning together in wide, unified environment. And this is giving everyone a shared view of the program. And with the model by system engineering teams, I mean we are really giving them the ability to tackle the complexity early on when changes are easier, less costly to make, and decision can have the biggest impact. That's how we are helping our customers to manage complex program and to turn their global ambition into reality. Now at this have a look at Life Sciences, where I think we start to see some positive signs. The first one is pharma and biotech are picking up. You have seen with me, I mean, CROs are reporting better results, and we see more and more major partners and players moving forward with their key trials. We are also seeing things improving quarter-over-quarter at MEDIDATA, MEDIDATA is flat this quarter, and we expect the return to growth in Q4 Another encouraging sign is that the customer increasing seeing the value of the one platform approach. We saw this with worldwide clinical trial in Q1. We are seeing this also with a new customers something similar with Everest. And the idea is pretty simple: instead of using different tools for every trial, we give CRO one platform to manage their clinical operations. And the benefits are very clear: teams can work much more efficiently; they can have better insight from the clinical data and ultimately improve profitability. Now let's turn to our diversification industries, which grew at a double-digit rate this quarter. We are seeing a particular strong momentum in high tech, especially around the AI infrastructure. For the ones who are following us for a long time, you know we have built a lot of expertise in the nuclear domain, which is one of the most complex system to engineer and we are now putting this expertise to work in another equally demanding area, which is the AI factory because an AI factory is much more than a room full of GPUs. You need the compute, the networking, the power, the cooling, the software, and all of this needs to work together. And when you change one and men, it could affect everything else. So you need to think about the whole system from day one and be ready to adapt as things are evolving over the time. That's exactly what we are working on with Vertiv, a leader in the clinical the design, the simulations, how they will be deployed is one single solution. And the goal is pretty obvious. We spend so many, many investments into this space that the AI infrastructure needs to be up and running faster and reduce the time to the first token. That brings us back to the bigger picture, which is AI infrastructure become more complex. And I think we could apply the same system level engineering expertise we have developed in some of the world's demanding -- most demanding industries. In July, we made the 3DEXPERIENCE platform agentic and introduced a virtual companion with specific skills. Why this is important? Because it's a way for those agents to work alongside people. So we are exploring this with early adopters across industries around the world from the AI native startups to some of the biggest global players. So far, we have around 100 strategic customers partnership engaged today, and we are working with them to deeply and to fine-tune all the new use cases. Now the focus is really on taking this early success to the next level. And starting 2027, the plan will be to scale up moving from promising use cases to solutions that can be deployed and more broadly and repeatedly across our customers. Now let's make this much more concrete with 2 examples we shared at GTC Berlin last week. Let's start with [indiscernible]. There, virtual companions help engineering team to streamline their workflow and get things done much more efficiently. So Aura act as a coordinators, it bring action plans together assigned the task and keep the work moving. And when more specialized engineering expertise is needed, Aura is calling automatically, LEO, our engineering vital companion to explore the design options. So the real value is not just automating tasks, it's getting different skills to work together with industrial knowledge and new mine oversights built in from the start. Now let's move to another example, which is how you move from engineering workflows to the factory flows. And it's something we have done with humanoid robots from agile robots and in the context of one of the manufacturing facility of Audi. In this case, we use our industry world model to create the virtual twin of our other factories. And you know the robot they have their own vital twin, too, so which means the allows the teams to explore how they behave in the virtual environment that reflects the real physics. And this is where getting in my view, very interesting. Before deploying robots in the real factory, teams can test different scenarios, check the safety, assess the cycle times and see how production throughput might be affected. And that's really the common spread between the 2 examples I've just shared with you is we can now explore, learn and validate in the virtual world before taking any action in the physical one when you are embarking AI in all the physical products. So in manufacturing, we'll call this physical AI. But in Life Sciences, we call it biological AI, so moving to Life Sciences, they are also something very interesting. Too often, what we learned from the real work does not flow back quickly enough to inform the next discovery -- the next scientific discovery. And to closing this gap, I think it's one of the biggest opportunity we see in Life Sciences. This quarter, I think we took an important step in that direction with the completion of the acquisition of ArisGlobal. But I think it's much more than only adding drug safety capabilities. It's about connecting the entire pharmaceutical journey for molecule to patients and then bringing what we learn from the patient, from the real world back to science. So our ambition is to make that connection possible on one intelligence AI native platforms, helping life sciences company to bring everything together and turn the real world insight into the next wave of scientific progress. To make that ambition real, we are also putting a new operating model in place. We are bringing together the expertise from the discovery, the lab, the clinical developments, the manufacturing, the regulatory compliances and the real world safety and soon, the medical practice. And I think we are unifying these capabilities within our 3DEXPERIENCE offer and streamlined how we go to market. And the goal is straightforward, one coordinated organization a more integrated offer, a simpler way for our customers to access the solution they need. I'm also pleased to welcome Dr. Ashwini Zenooz to Dassault Systèmes as an Executive Vice President, being part of the Excom of Dassault Systèmes and also the CEO of Life Sciences and Health Care. Ash is a physician and a technology entrepreneur with a strong experience in the digital health and AI. And what makes her background particularly valuable is that she brings together the 2 worlds: medicine on one hand and the technology on the other hand. And that's exactly the combination we need to bring our ambitions to life. Overall will be to lead the strategy and to bring MEDIDATA, BIOVIA and ArisGlobal together in one AI-native platform, against coking molecules, patients under real-world outcome and back into science. She will lead the Life Science, Health Care as one business with a clear focus on science-driven innovation, operational excellence as well and building even stronger relationships with our customers and partners. And for those joining us at the Capital Market Day, you will have a chance to meet Ash in person and hear more about our visions for the business. So we look forward to sharing more with you at our Capital Market Day in Paris on November 17. And before to hand over to Rouven, let me sum up the key messages. The first one, I think we are making good progress on our priorities, and this is giving us confidence in our updated full year objectives. The second one is we are moving from AI road map to the real world adoptions, and I think we are taking an important step forward in Life Sciences. With that, Rouven, the floor is yours.

Thank you, Pascal, and also good morning to all of you joining us from the U.S., and good afternoon for the rest of the world. Thank you for connecting and joining our call today. As you heard, we entered the final stretch of the year with momentum. Our focus remains squarely on executing our growth model and delivering on our objectives. The ARR is up 6% and as you can see, the transition to subscription cloud and suite experience is creating a durable growth of our recurring base. Revenue grew 5% at the top end of our objectives, the operating margin expanded by 150 basis points to 31.6%, and this is well above our objectives for the quarter, while the operating profit rose 10% year-on-year. Strong profitability is converting into cash. Cash conversion reached 111% year-to-date, and it's driving EPS growth of 8% and operating cash flow growth of 20% year-to-date ex FX. In short, we are stepping up execution as we head into the close of the year. Now looking at the details of the financials for the quarter. Total revenue reached EUR 1.552 billion. It's up 5% with subscription revenue growing at 6%, while licenses are growing 14%. The license growth mainly reflects robust performance in China and also compares to a low baseline versus last year. Consistent growth in subscription revenue 6% in the quarter as well as year-to-date highlights the progress in our business model transition. This quarter, we are reaching an important milestone because subscription revenue now represents 50% of our recurring revenue. Finally, service revenue was up 7%. This top line leverage and continued operating discipline translated into an uplift of 10% operating profit with the operating margin of 31.6%, which is 150 basis points better than last year ex-FX. EPS was $0.32, growing at 8% ex FX. Year-to-date, that brings us to EUR 4.617 billion in total revenue, growing at a rate of 4% and solid expansion of the operating margin by 80 basis points to 30.6%. EPS reached $0.93, up a healthy 7% ex FX year-to-date. In summary, third quarter revenue reached the top end of our expectations while the operating margin and EPS surpassed them. Now looking more closely at our recurring revenue growth. In the quarter, we added EUR 62 million in annualized contract value when compared to Q2. This brings the total ARR to EUR 4.55 billion or growth of 6%. The subscription annual run rate continues to accelerate quarter-on-quarter towards mid-teens, driving the underlying annual run rate growth. Importantly, as of Q3, the subscription annual run rate now accounts for half of the annual run rate, and it's up from 46% at that time of Q3 last year. So over the last 4 quarters, we improved the subscription ARR share on total ARR by 1 point per quarter. This is an important milestone as it is shifting our business model further towards growth acceleration. Equally, we saw continued growth in cloud bookings and the contribution from multiyear subscription deals with higher total contract values. In fact, the net increase was driven by strong SaaS growth, subscription and cloud in our core industrial business also with Centric and MEDIDATA generating sequential growth. The top 15 deals accounted for 80% of the net increase in subscription annual run rate. Now turning to our growth drivers. 3DEXPERIENCE rose 25% and cloud 14% in the quarter. 3DEXPERIENCE cloud grew 46%. Growth in 3DEXPERIENCE and Cloud reflects customers' increasing focus on transforming their operations and preparing for industrial AI at scale. With AI, we are virtualizing the real world's leveraging virtual twins to provide intelligence to engineers, scientists and business users. Our agentic platform lays the foundation to scale AI with virtual companions. And this quarter, clients such as ADF, Mahindra Mahindra, Eaton and Bravia, Honda, Vertiv, among others, highlight this momentum. Now turning to the geos. Looking at our geographies, Asia was excellent, up 12%, Europe was resilient, growing at 9%. And while Americas executed well, it was down minus 3% due to a tough year-over-year comparison. In more detail, starting with Asia. Strong growth was port-based across the region, supported by an excellent performance in China. We saw good momentum in Aerospace, including the Comac deal as highlighted by Pascal and important wins in high tech. In Europe, healthy growth was driven by renewals in the U.K. and France despite softer performance in Central and Southern Europe. By industries, the performance was broad-based, supported by good momentum in 3DEXPERIENCE and subscription costs. In the Americas, we saw negative growth, minus 3% as a result of tough comps when compared to prior year quarter. On the positive side, Life Sciences is improving, while home and lifestyle, high tech and industrial equipment are growing well. Our growth drivers performed well with strong growth in cloud in the Americas. Important to highlight is also that we are advancing fast with strategic clients, creating concrete plans to adopt Gen7. Vertiv is an excellent example highlighting our Gen7 portfolio and how we are expanding our reach in building sustainable AI factory infrastructure. Overall, the Americas is a bit more back-end loaded this year than other geographies. Moving to our performance by product line. Industrial Innovation grew a healthy 5% despite a strong comparison base. And the growth was driven by solid performance in Suite Experience & Cloud with Innovia leading the momentum. Competitive wins across both core and diversification industries highlight the strength of our integrated platform and sustained competitive win rates across our solutions. Mainstream innovation was up 8% and it continued its momentum with Centric and SOLIDWORKS. SOLIDWORKS performance was broad-based across geos, with unit growth up double digit. The traction on AI is solid with over 40 use cases, and this is driving the move to subscription from cut to simulation and manufacturing. Centric delivered another strong performance in Q3 with several significant wins, including a global leader in sports merchandising and licensing as well as a significant U.S. fashion and outdoor brand. This reinforces our confidence in the business to remain at the forefront of consumer-driven transformation across several verticals such as food and beverage, retail and sports apparel and it's augmented by Centric's end-to-end platform and AI. Now to Life Sciences. As you heard from Pascal, the performance improved. We're up 1% and we reached 2 milestones. First, MEDIDATA improved sequentially, and it was flat year-over-year. It is on track to deliver growth from Q4 onwards. The shift to the enterprise platform business model is underway and we are replicating the deals we signed with WCT in Q1, also now in Q3, where we signed a significant expansion with Everest. Overall, we are expanding our platform -- we are expanding our pipeline of transformational platform agreements across 0 partners, mid-market and enterprise clients. And this is resulting in a positive impact on renewals and bookings growth over the last quarters. Now from a solution perspective, Patient Cloud and study experience are the fastest-growing categories with AI delivering tangible gains for our customers. Now second, we completed the ArisGlobal acquisition in the second half of September. ArisGlobal revenue will be reported as part of the Life Sciences product line going forward. the revenue contribution in Q3 was not material. And one more point with Pascal, I share the excitement to have Ashwini Zenooz join and lead our teams across life sciences, and I look forward to working with her to reveal and deliver the full potential of our business in this new chapter that we are now starting. Now turning to our cash performance. We generated strong operating cash flow year-to-date EUR 1.567 billion, up 20% ex FX and 18% as reported. This was driven by strong operating performance with higher billing activities and good cash collection. In the third quarter, cash flow from operations was up over 7%. And on a strong operating result and continued focus on working capital management. Now year-to-date, our cash flow was up 25% ex FX. Our free cash flow was up 25% ex FX year-to-date at EUR 1.388 billion, and it's driven by strong operating cash flow performance. Now all of this results in cash conversion at 111% year-to-date, which is well ahead of last year. To complete this picture, cash and cash equivalents reached EUR 3.814 billion at the end of September '26, year-to-date operating cash flow has already funded the EUR 1.5 billion ArisGlobal acquisition, leaving cash and cash equivalents broadly unchanged. This also includes the repayment of our EUR 0.9 billion bond, which was due in September. Our net cash position of EUR 1.49 billion provides the financial flexibility to invest selectively in our long-term growth and value creation levels going forward. Now let me turn to our full year objectives. First, I would like to take a step back. Since the start of the year, we have progressively increased top line growth rates from 3% in Q1 to 4% in Q2 and now 5% in the third quarter. This consistent improvement in year-to-date performance. Now in combination with better visibility as we enter Q4, gives us room to narrow our full year guidance range from which was previously EUR 120 million to now EUR 60 million, while we are integrating ArisGlobal. So what does it mean for the guidance range? For the full year, we update our revenue outlook from 3% to 5% to now 4% to 5% revenue growth. The new range of EUR 6.99 billion to EUR 6.459 billion, reflects an increase of EUR 103 million to the low and an increase of EUR 43 million to the high end of the previous range. With this, our midpoint is increasing by EUR 73 million, which documents our confidence in our 2026 outlook. Reflecting this positive momentum, we are raising the operating margin outlook and now reflecting a range of 32.5% to 32.7% versus 32.2% to 32.6% prior. And finally, we lift up our EPS objectives to now 6% to 7% growth versus 3% to 6% previously or an EPS of EUR 1.35 to EUR 1.36. Now for the fourth quarter, we expect revenue growth of 5% to 8%, and this includes a 2-point contribution from ArisGlobal. We expect operating margin in the range of 37.2% to 37.8% and EPS at EUR 0.42 to EUR 0.43, up 3% to 7% ex FX. For the exchange rates, Q4 now -- the Q4 guidance now assumes $1.14 per EUR 1 and JPY 170 per EUR 1 and a tax rate of 17.4%. Hence, combining the anticipated growth in Q4, with the quarterly progression that we have achieved throughout the first 9 months of the year, 2026 reflects a healthy balance and growth acceleration throughout the year. Now let me summarize. We continue to execute on our growth strategy. We're delivering a sequential improvement quarter-over-quarter. Our growth drivers show that the strategy is in place and it's working. The shift to subscription is well underway. 3DEXPERIENCE and cloud growth are accelerating. And now we enter into the fourth quarter 2026, and we look ahead, and as we look ahead, our focus remains on execution, advancing our growth drivers, accelerating AI and shaping our life sciences business to deliver sustainable growth going forward. We continue to expand the margins. We improved cash convergence to generate consistent long-term value for our clients, the company and our shareholders. And this will be at the center of our upcoming Capital Market Day. Thank you. And now Pascal and I look forward to take your questions.

[Operator Instructions] We are now going to take our first question. And this one comes from Jay Vleeschhouwer from Giffin Securities.

Good afternoon. That was close. So Pascal, you've referred to 2026 as the year of execution and in the press release for Q3, you noted the execution with regard to financial results, the question is from here, looking ahead, what do you think are the remaining most important or most challenging executables, not just with respect to Q4. But going ahead in any respect, financial, technical channel or otherwise, what would you list as the ongoing critical executables? And then secondly, at the corporate level, you referred to the new organization for life sciences and health care, I can see the logic of combining those entities. But the remainder of DS is still a relatively complex organization. Would you see any logic in some kind of consolidation elsewhere in DS, not just in the Life Sciences area?

Okay. Thank you, Jay. And again, thank you for those 2 great questions Related to the first question, which is the priority for the execution. If we step back a little bit, you remember last year, what was the key point. First one was Centric. You remember, we had basically the pressure on Centric last year. I think it's fixed. You see consistently for the last 3 quarters, we are executing well. We continue to perform the visibility there. The leadership is in place, and now we can capitalize on this to continue to scale. . The second thing was Life Science. And you have seen, we say it, H1, we will be under pressure, but H2, we will be back to growth. We are flat this quarter. We're going to grow next quarter. Rouven gave the indication this morning around 2 to us. And we should now add on top of this, the contribution from ArisGlobal, which is against creating a new dynamic because with this -- with the pipeline and the bookings we have created over the last few months, the 9 months, I think we have a much better visibility to enter 2027, and we can already tell you that we're going to grow next year. We know it. Still things to do because from an execution standpoint, we have to integrate all the pieces and we need to scale because the platform gains is at scale, and that's the reason why we are also coming with this new way, new operating model. The third element is the channel. Because if you look at the performance over the last few quarters, I think we are delivering well with CRE, and you can see -- you see the consistency between the growth quarter after quarter. But this is not yet the case for the CPE partners. So that's still something we need to focus on and to fix it. One of the reason is very simple, and I say many times, the big difference between the 2 channels is very obvious. One is selling basically a very productized products. The second one is basically managing the entire offer. And it's difficult to find one partner who has the experience like large system integrators to do the integration piece of the platform. You need to also have the cloud expertise like an hyperscaler because you need to define the cloud architecture to connect everything we do. You need to be also in engineering services to understand all the domain expertise we have from simulations, manufacturing, designs. And obviously, you need also to have the sales capacity. So if you look at this, it's extremely difficult to have 1 partner having all the skills, and it's leading the way in everything we do. And now with AI, on top of this, we are introducing another level of complexity. So here is the point. I think it's not only one partner, it's an ecosystem of partner we have to rebuild in order to go to market with high efficiency. And this is really a domain where I think the execution is still in front of us. The last piece on the execution is obviously the adoption of the AI strategy. We just released in June the agentic platform with the companions with the skills to use almost half of the portfolio of application we have. We have engaged with hundred-plus customers around the world to design and to define both interesting use cases. Now we need to scale with this. And that will be a clear execution point for 2027. With this, I think you have a pretty good understanding of what is high in my agenda, Jay, and where I will focus in the coming months. Coming back to the second part of the question, which is the organization. Yes, you are right and wrong at the same time. You are right because you're right, we have different brands, different industries, different channels and to orchestrate these metrics, it's complex. However, there is a very tight integrations between everything we do because by design, this has been -- imagine an engineer to work together. So the question is not too much the complexity of the organization. It's much more the agility and the accountability of the organization to deliver. And this is where I think there are still room for improvement. Life sciences and health care is a little bit different because if you look at most of geos we have, they are well equipped to address the manufacturing industries, but they do not have the scalability to address the life sciences and health care. And that's the reason why we need to come with an integrated model. So integrating means on the offer for sure, but also on the go-to-market, on the post market introduction also support services, customer success, right? And this is how we are redefining the things. The last comment I will make on the life sciences and health care is also many of the assets are coming through acquisitions, and we have duplications between the different organizations. It's obvious, for example, if you look at the general function like finance, like human resources, like, where I think there is a lot of value to consolidate it in the appropriate way. But also it's becoming critical for the AI native platform because our agents, our virtual companion, they need to cross all the domain expertise. They are not dedicated to one domain per se. So that's what we do. If we are super successful with this way of approaching it, maybe it will open maybe a different thinking process for the rest. But let's focus on this one to make the life sciences and health care works the way we want.

Okay. One quick follow-up, if I may. A quarter ago, you made some interesting comments with regard to competitive displacement as a new phenomenon in the industry. I'm not sure we recall what you said. The question is, was there any of that in Q3? Or is there anything of that kind in your pipeline that would constitute a displacement?

Yes. It's still a topic. And there are good reasons for this. One is the consolidation of the market going on. For example, the move of PTC, which neither will definitively question some of the positions PTC has, and in front of this, I think we have not only a relevant offer, but we have a muscle in order to change certain position. That's one axis, the consolidations, which is going on. The second one is really the AI native solution, which is also a game changer. We have seen and for example, Mahindra Mahindra was a good example. You remember, it was Siemens shop almost on everything, and tight integration, the native integration of AI within our platform in conjunction with the new generation of design solution has been basically the triggering events for them to shift. So we have notified also certain basic targets in order to make this happen. That's really where we see the 2 driving force to lead basically the displacement of certain long position, which has been being over the time.

[Operator Instructions] Our next question comes from the line of Jason Celino from KeyBanc Capital Markets.

Rouven, I think you mentioned that in the Americas is setting up to be a little more back-end loaded. I don't know if that comment was for Q4 specifically. But maybe can you speak to if this is just renewal activity or this is just the way the deals are shaping up? I understand that the Q3 performance was affected by the difficult compares. So I'm just trying to understand how the business environment looks there are some events in North America that are happening that may delay deals such as the election potentially. So just curious on your comment there.