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Executives

Bernard Charlès – President and Chief Executive Officer

Thibault de Tersant – Senior EVP, Chief Financial Officer

Analysts

Josep Bori – Exane BNP Paribas

Michael Briest – UBS

Amit Harchandani – Citibank

Dassault Systemes SA (OTCPK:DASTY) Q4 2012 Earnings Call February 7, 2013 5:00 AM ET

Bernard Charlès

Good morning. Very pleased again to – I’m thinking about one year ago at the same time period, we were asking our self how will be the second half of 2012. We were accused to be conservative. At the same time, I think that one year ago at that time it was the right thing to do. And Thibault will tell you that you still need to continue to believe us in the way we project for the future. But let’s start on our full review on 2012.

I think the numbers speak for themselves. Double digit growth in software, EPS is up 15%. We have improved the operating margin. I remember a few years ago, the question of the ceiling – is there a ceiling, is there a limit, that’s 30%. I think we have demonstrated that we could pass that point.

Noticeable is the customer expansion. We have acquired 20,000 new customers enterprise last year, mainly driven by the indirect channel capacity. We reached 10 million users and the diversification is working well on high growth countries up 16% as well as diversification on the vertical segmentation of the market in construction, natural resources, energy, CPG.

So at the end of the day, 2012 was, I think for Dassault Systemes, another milestone year. If you add to that the fact that we have announced that for the next 10, 12 years, we are going to focus our activities in investment, construction development, product portfolio, industry solutions to what we call, the new horizon called 3DEXPERIENCE. This was announced – communicated to the market last year. It happen only every 10 or 12 years. We did that in addition and we are working to talk as we will demonstrate to you through the different facts. So let’s review the strategy.

We – like in ’99 when we announced PLM, in 2012, we announced that the portfolio, the industry solutions will evolve to really address all types of function needed to create 3DEXPERIENCE, so our customers can connect all functions from sales, marketing, product engineering, product production sourcing to realize the product on solution experience, they have to realize for the consumers or customers.

It’s a very ambitious plan. It’s a 10-12 years plan as was Product Lifecycle Management in ’99 but I think we have done what we said we will be doing. We have the architecture for that and I think the very first effect of this statement on this strategy is we believe the reachable market has double structurally in size just by approaching on creating the solutions to serve this kind of needs.

We will illustrate today’s 3DEXPERIENCE in different videos because of course, each time when every 10 years we announce a new horizon people wants to know what it means, what it means for me, how can I do it and you will see some of this illustration today.

We are also working to talk last year, exactly a year ago on February 8. February 8, 2012 we said, okay, this is not a grandiose vision. This is what we are going to do. It’s about creating 3DEXPERIENCE universes to imagine sustainable innovations capable of harmonizing product, nature and life. And a few weeks later, we acquired Gemcom International and we created GEOVIA and we are now, Dassault Systemes, the number one player in the mining sector when it comes to modeling and simulation.

So we are putting the money where the statements are. And you see here three things, product, nature and life, which means that we believe that now, the future of successful product require that everyone creating new products should understand what are the services and the experience they are supposed to provide, what are the impact on the environment and what are the impact on natural resources or on life. So we’ll continue in that direction which gives you the framework about where we’re going to invest in the future.

Now about the 3DEXPERIENCE platform; 3DEXPERIENCE platform for us has a very clear aim. We build a collaborative platform whereby our clients can design, create, test the experience of the things they are going to deliver to the market. So it’s not about product designing, it’s much more. It’s not about product manufacturing, it’s much more. At the end of the day, when those customers that we serve deliver something to the consumers or customers, we want to give them the possibility to evaluate all aspect of the experience they are going to provide to the end customer or consumers they serve.

So it’s a business platform that connects all the roads of the enterprise and this business platform is going to be delivered what we call in the IT jargon on premise which is traditional software packages that you install on servers, online, what we call in the cloud, whether they are private and public. So the symbol of this platform is represented with this compass.

They are four directional center, the social dimension how you connect people on the north side and this is the structure – unstructured way to collaborate program management. You do big construction projects, projects like what we announced, I think south quarter – we’ve met in Russia for nuclear and energy, how do you organize a project when you at risk, how do you organize a project to be on time and look at the number of projects which are not on time in the world. There is something that can be done in this area and there are lot needs.

On the Westside 3D, how do you project, what will be the end result before you actually design it? And this is true for marketing, this is true for product, this is true for sales on stores, for retail, for product packaging, you name them.

On the south side, you have V+R which stands for virtual plus real. How can the virtual world help me understand what is going to happen and predict the behavior performance on characteristics of the products of the solutions that I deliver.

On the east side is information intelligence. It’s big data is how can I observe on the observation of customer reaction, consumer reaction, web information, what people think, need; what are the trends so I can leave you my product portfolio and at the center of it, we have what we call the play button which is show me the experience so I can embark if we want to involve in this product development of new solutions to understand what needs to be done.

So this is going on in action. There will be a lot of new deliveries this year and years to come that illustrates in a very, very pragmatic way what is being done. Clearly the message last year, we touched probably 60,000 people around the world, customers and partners through our road show in different countries. And all customers have really seen that as a very novel innovative approach to serve their business.

We have 10 brands; five of them are number one in the world. You know many of them. They are all positioned on this compass. All of those brands going forward will be using the same consistent platform called the 3DEXPERIENCE platform. And you see here the illustration, from our customer’s perspective, you have the list of industries we cover, 12 of them and you have here great references that I think we have demonstrated throughout the course of 2012 whether its transportation and mobility, aerospace and defense, marine and offshore, industrial equipment, high-tech, you remember our Pegatron, Nokia, NXP (inaudible), consumer goods and packaged goods, Coca Cola now using our NETVIBES technology and many other things.

P&G of course was also presented last year. Life science, big names here. G&G, Olympus for life science equipment, medical sector is a growing sector from the evolution of the equipments that are used there including the platform for collaboration. Energy, very dynamic sector. Posco, this is are Korean steel company, they are adapting our solution to really manage their asset what you call advanced asset life cycle management, this was also presented last year.

Construction engineering, even financial sector now doing what we call the innovation pipeline, and natural resources with BHP and [BLP], those are companies in the mining sector, and we are on plan. The acquisition of Gemcom was done in July, we announced a new brand called GEOVIA in September, it was presented at NexPro, extremely well received by all players and I think they are making their plan.

So, now these are the 12 sectors symbols, on one end so diversification from an industry standpoint and what you see is spiral from the ID to the delivery to consumer. I want to show you a video which was done by one of our client Visteon, and I think this video is they must illustrating how profound the new collaborative process are going to be transformed around the world using the social platform to do the job.

[Video Presentation]

So, I think this illustrates quite well the move from basic collaboration to social collaboration within the enterprise, and we believe that the core of it is easily what we call this 3DEXPERIENCE platform because companies are now connecting with even consumers depending about what they have to do.

So last year, we launched 12 industry solution experiences. In short, these are solutions which are full package, where there is no boundaries between the different products and brands that Dassault Systemes that the system deliver. And it’s really aimed at serving a very precise business school on the offer for the customer, easily the business goal on the return on investment based on those solutions.

12 were announced and made available last year. Of course the effect on last year business is not really busy work, because it takes time to introduce that to the market. But we plan to take advantage of these this year and the years to come and we will continue to deliver new ones.

Let me give you an example, one of the big problem that many companies is what is called, the thunder to win process when you are ask to come for a project and offer our solution, our customers, they need to be able to evaluate present the project, evaluate quickly risk planning, investment, forecast and really provide an offer to our customers, this is true in defense, but it’s true in construction in many, many of our sectors.

It’s very different from doing the planning of the project; it’s really about the risk management and connecting older know-how in their company in such a way that you can evaluate a winning rate for thunder to offer, which is better. This in railway transportation infrastructure, those are typical ways to really work on those questions right now. So let’s look at one of the program, which is, what we call winning program, so it is difficult to try to illustrate to you what experience these about on what industry solution experience is about.

[Video Presentation]

Design and production comes when you have committed for planning on cost. Now all those companies are saying we need to better plan, we need to better evaluate upfront before we engage on the investment. So the move for that assistance, we show the experience is really to address the upfront business needs or the backlog business needs when it comes to sales and marketing. That’s how we are expanding the use of our solutions, and those are illustration here, is solution fastest enabled wind turbine industry solution, anyone doing wind turbine solutions, they need to be able to improve, not only the definition of the program at the beginning, the prediction of the cost or the prediction of the way it’s going to be produce before you actually know how you are going to produce it, including planning and scheduling and that’s part of the expansion of the scopes of capabilities that we can do in the 3D experience platform.

We are putting that in action in the energy sector, in the transportation and mobility sector, but also on that’s pleased with that I saw here, that’s not be cool and I think at the end of this presentation, you will have event for those of you here and beyond the theater your own personal demonstration about a very, very cool thing. We just announced today a great entrepreneur team that was basically former Dassault Systemes employees five years ago went outside Dassault Systemes, created amazing great company, using cloud infrastructure, using the power of 3D to create new what we call social online experience, 3D experience, here is an example.

Usage by anyone for unknown line site, while basically what you can do, you can basically in swing the do your own studies about how you are going to equipped a kitchen, a living room, do a very, very simply flow layout, automatically, we create the 3D, automatically there is no need to design in 3D. We can automatically put all the equipments, find all the solutions, respect all the rules, zero time to design any of those for nature. It comes and it’s created automatically, it’s so easy that I think companies now are finding ways to create online website whereby to sell their products, they want to provide this experience to the end consumer, so they can make a domain about what they need, and how they need to establish that this is for site with a brand name, which is known in France here. All this is online that is on the cloud, it provides a new set of possibilities using 3D as a media to do store planning, retail design centers and creates things that basically in past years with all existing systems would have required a lot of design time.

You see here the interface with touch it’s becoming extremely natural user interface. Look at the grade, this is the startup, look at the grade, the references they have already and this is going to be a part of the expansion of what we call 3D-VR, socialized with 3D experience platform, so you can use it in your life for real experience for people, not only for the business and we believe that by providing that the business will find ways to create sites that are going to be useful for the citizens, all the people, when we are as consumers.

So that’s very, very much good illustration of what 3D experience is about, it’s a great team, starting two people on some volatilization for what they have been doing with 20 R&D people, and the Top Gun young company five years of hard work, you have been profitable, which is not often the case for many startups incredible discipline, and now I think so I decided to join Dassault Systemes, because you wants to conquest the world and wants to sell, we need solution everywhere around the world not only in France. So we believe that this is something that we serve the world or our retailers. Consumers people where we are, what we want to do, setup our own homes and we believe we can really socialize with 3D and create experiences where it will be so easy to use that people will say why is this website flat, I don't want it flat anymore, I want to see a real experience.

So, more to do, more to see this year, but now let's go on under business review customer experience – customer expansion. We acquired 20,000 new customers last year, it's an incredible dynamic, and incredible footprint not only instant footprint, but potential footprint for expansion, and this is really the result of the attention we put on indirection channel, the global efficiency on the quick return on investment. I think this footprint is going to be competitive advantage and I'm sure we gained market share last year from that perspective.

A few with our customers references, China with high-tech, and Taiwan with high-tech, a very, very innovative in the automotive industry design office, they do programs, and they create new product portfolio, using our entire 3DEXPERIENCE platform, like what Tesla the electrical vehicle [depository] for electrical cars Tesla is doing right now with our 3DEXPERIENCE platform.

I think the results we are getting are really very impressive in terms of efficiency, speed and performance. And another example is the expansion at Pratt & Whitney Canada, it’s a huge, huge expansion for us, with the 3DEXPERIENCE platform to connect all elements from ERP sales marketing product for design production with the adoption of the 3DEXPERIENCE platform, it’s a large company with a lot of activities.

Nokia, they are in a big transition, they have a lot of challenges and despite all these challenges they have they just decided to adopt our solution to really think about the way they should be designing on producing smartphones. Its really or so very good dynamic that we have created last year, free scale another example, electronic market is becoming very critical for all types of consumer and customer products, there is more and more chips inside and they need to be able to manage the intellectual property.

User expansion, you see here the curve, I think it’s a very beautiful curve about the solid work’s footprint on the dynamic, and we reached $2 million bar last – at the end of least year and we for SOLIDWORKS only and we reached 10 million user in total for, I think in the last five years we have multiplied by between 5 and 10 of our footprint decimal of fact, was discussing Thibault this morning, I think we were doing 1 billion in 2007 so 5 years ago so in five years we have double our revenue and I think we have probably multiplied or by almost 10 the user base. And you see here the share between Netvibes & Exalead users, what we call design tools users SOLIDWORKS for users on the rest.

Geography, so customer diversification, industry user and expansion, geographic diversification. We are in the fast growing country, we have – our growth was up 16% representing 20% of the total revenue and it’s up to 1% versus the year ago on those high growth countries China, India, Korea, Latin America, Russia. So it seems more, but a lot of dynamic there on with prestigious names in many, many sectors we believe that in China for us not transportation, mobility I/O space, but their construction on engineering as well as in infrastructure going to be key driver for example, as I mentioned the energy sector, which is very dynamic there.

Now if we look at industry verticalization on diversification here are a few elements for you. New industries represent a 24% of the Dassault Systemes revenue up one 1 point as compared to 2011, so we continue to increase the weight of new industries and we continue to strengthen specially in CPG retail, energy, construction, and the natural resources. And you have here the split between transportation and mobility, which represents 29%. Aerospace and defense 13% industrial equipment is becoming significant with 20%. Business services 13% it’s not a smaller number anymore. On what we call [ozone] industries outside that represents 24%. With that Thibau, I give you that floor to come under financial results. Thank you very much.

Thibault de Tersant

Yes, good morning. Total revenue as you know went up by 9%, 8% in fourth quarter but the software revenue was up by 10% for the full year, and by 9% in fourth quarter. The dynamic here offsetting new licenses was 9% growth for the full year, and 3% in fourth quarter. I think that what has to be mentioned here is the dynamic at selling rental licenses, which are embedding of course new license activity. Rentals were up by 20% in fourth quarter and so there has been a significant acceleration of rentals in the second half of 2012. And this acceleration is hiding part of our dynamic of setting new licenses in these indicators. Rentals and maintenance were up by 10% for the full year as you can see here and were up by 12% for Q4.

SOLIDWORKS is underlined here because we always have that SOLIDWORKS is somewhat of an advanced indicator for the economy. And there were a few courses for concern in Q3 and so in fact in fourth quarter, the increase in new units was 13%, which was in a new dynamic in Q4 for SOLIDWORKS. So that is something that I believe is important to highlight.

From an average seat price perspective, there was a decline of 2% for the full year and for the Q4 for SOLIDWORKS, it’s a combination of the fact that Asia was quite – Europe I’m sorry, Europe was less dynamic was SOLIDWORKS and this is very understandable. And so the mix shifted towards more licenses in high growth countries, and more dynamic in the U.S. for SOLIDWORKS. And this geographic mix trending had an influence which was a downward influence on the average price per seat.

Now if we zoom on our product lines, let’s look first of all at CATIA. CATIA, was up by 5% for the full year, and 1% in Q4. The new licenses for CATIA were up by 8% for the full year. But the CATIA rentals were up by 29% in Q4. And it was an acceleration compared to the full year of ten points in fourth quarter. So there is clearly a better dynamic than what appears here. Actually the CATIA new licenses for the full year, or if the licenses which have been rented would have been acquired, would have been up by 10%. And the revenue in Q4 would have been up by 7% or 8%.

ENOVIA, is the same story. It is 7% growth for the full year in total revenue, but relatively flattish in Q4, but ENOVIA also had a 29% increase in rentals in Q4. So likewise ENOVIA new licensees were up in Q4, because of this rentals and the revenue for ENOVIA in Q4 if the licensees, which have been rented would have been sold in purchasing mode, this growth in Q4 would have been much better between 6% and 8%.

Other PLM had very good dynamic for the full year at 22% growth and obviously for Q4 at 34% with particular mentioned to SIMULIA, which had a very good year. DELMIA had a very good fourth quarter, and of course, we also added GEOVIA in the second half. And SOLIDWORKS was up by 12% for the full-year in revenue, 11% in Q4.

Last point to mention here is that our total revenue growth for the year of 9% excluding GEOVIA and the other small acquisitions we made and excluding also the spin-off of Transcat you remember that we did spin-off this business partner activity in Germany, the growth would have been 8% instead of 9% for the full year.

From a geo standpoint, we had a somewhat of further acceleration in the Americas in second half. The full year growth in Americas was 7% and it was 9% in Q4. Latin America had a good quarter in particular. The opposite was true in Europe where our growth for the full year was 8% and stood on 5% in Q4. And in Asia, we had the same performance for full year and Q4 at 14% when this performance was driven by Japan, very significant high bond volatility in Japan and also Korea and China showing good growth.

Services, is our usual topic of consternation, and it sees less of a consternation in 2012 I must say with a 7% increase in revenue in spite of the Trasncat spin-off. So relatively decent and more importantly an improvement in margin by 7 points to 5.7%, which is yes not enough in our eyes, but still I think we can salute the margin improvement.

Operating income was up almost 19% for the full year, and 18% in Q4 with significant improvement in margin 1.6 point improvement in operating margin in Q4 was pretty good. And this of course enabled the increase in EPS of 17% in Q4, 15% for the full year and this in spite of the increase in income taxes as you can see here, we had a 36.1% tax rate in Q4, which is 30 year 4.6% for the full year, which is an increase of 180 basis points in tax rate in 2012 for variety of reasons.

One of my favorite charts now is cash flow from operations and our net financial position, which gives us the required flexibility at this precise point where we are actually – we have redefined our strategy, and we certainly can do acquisitions in order to speed up the realization of this new strategy, but for true operating cash at €566 million is up by 26% compared to 2011, which is a satisfactory result.

Our financial objectives for 2013, for sure as Bernard said, the response of our customers to 3DEXPERIENCE and to our strategy of social industry experience is very good. Of course, the response has to then be translated into revenues, but it is extremely favorable and I think that we are exactly where our customers need help and want to go. The organization of the company was strengthened significantly in 2012 in order to adjust to this new strategy and also something that is worth highlighting is the increasing capacity in our indirect channels and also in our direct channel. But more importantly in the indirect channel, which is quite remarkable in 2012.

So why is the growth target 5% to 7% for 2013 excluding currency impacts? It is because, first of all, I think it's clear that the macroeconomic environment weakened in the second half of 2012 in Europe. That's hard to argue and with few domains, which are sensitive for us like of course the dynamic of the automotive and industrial equipment sectors in Europe in the second half. Also the currency evolution is very adverse, I don't need to comment on the yen evolution and the dollar as well, but the yen is going downward at a very high pace.

Actually in our objectives, we have taken ¥120 per euro as the assumption and this morning the yen is already at ¥127. So we'll need to absorb this extra, I’m not changing the objectives, but we’ll need to absorb this extra weakening of the yen, which is concerning and the dollar I don’t need to tell you where it is.

So the guidance is based on what we see as a trend for Q4 and these currency assumptions extrapolated for the full year 2013. This leads to 5% to 7% growth. The operating margin should be slightly up, we continue to invest organically in order to seize all these opportunities that we see, but in spite of that it should be slightly up. And the EPS because of the tax rate and the currency evolution should increase by 2% to 7%. These objectives don't include the impact of acquisitions that we might do. And as I said before, we believe it is relatively timely for us to do them, but of course cannot predict when exactly we can do them, and which magnitude they would have. So it’s very hard to do what we try to do last year, it's very hard to translate them into the objectives.

That is the summary of the full-year where you – I already mentioned all these figures except that EPS would be in a range of 3.45 to 3.60 and the reported revenue would be €2.60 billion €2.90 billion. For first quarter, we see the same type of revenue growth excluding currency at 5% to 7%. That would be a €470 to €480 million, and operating margin that would be relatively flat compared to last year and an EPS growing between zero and 7% at $0.71 to $0.76. And the currencies we have taken the assumption of the dollar at 140 and the yen at 120 for the full year.

And with that, Bernard and I will be happy to answer any questions – you have questions.

Bernard Charlès

I guess first Bernard, can you talk a bit about that sort of worsening environment you saw in the second half of year and maybe drill into the source specific areas within Europe? Secondly, can you comment around were the pipeline and as you have shift particularly on CATIA and ENOVIA towards the rental model. To what extent is just for customer driven, but also sort of pushed by yourselves and sort of going forward, would you be willing to disclose things like a bookings metric to give us a better sense of the underlying trend of the business?

I have one for Thibault, just around the margin. Can you give us a sense of what to kind of underlying operating leverage is assumed in the guidance versus the additional investments and sort of the FX headwinds that you build-in? Thank you.

Bernard Charlès

Thank you for the question. It should be notice that in the last two years, Europe has been very dynamic when it comes to our business. You should look at the track record in 2011 and 2012 overall. And it was astomously strong with the adoption, growing adoption of our tools across to growing number of sectors.

Also should be notice that in someway on the full year what we asked of last year, but we have seen is Europe was very strong in the first part of the year. America was less strong. And then the opposite happened second half and the possibilities for us, the system in Europe are still significant in the Army groups, global companies, supply chain and I think we are far from having a saturated market in all sectors.

So yes, there is a softening in Europe, and there was an acceleration in U.S. on the second half of 2012. But in some way it has been really this kind of I mean from geography-to-geography. And if you look at Japan for example, was really specifically, especially good last year with the comeback of the Japanese industry. I’m sure that for them by the way the discussion that Thibault had just a moment ago and the currency will be significant factor to help their industries export.

So all-in-all, we continue to see year-after-year balance between industries, balance between geos, which varies from one quarter and there is a one. The pipeline for the full year of this year, the overall visibility is good. As a matter of fact, a year ago, what we said is that the first half of 2012 we were confident and we will not very clear on the second half. It happened that we over performed as compared to what we will planning – that what we plan.

And I think this year the visibility has in some way increased with the rental comment that Thibault did a minute ago, and we will continue to put a lot of attention on subscription model basically, not only the total recurring coming from maintenance, but the subscription model and the rental of licenses.

The second element that, food for total 82, those factors about where things are coming from and what is the business dynamic is that with Industry Solutions, we believe we can increase the value of what we sell in each transaction and we can simplify the way customers will deploy those solutions.

It’s not a question of packaged. It’s not only a question of ready to be used. It's more profound than that. It is the easiness of being able to quantify the savings and the speed at which customers can get return on investment. That's the real goal with Industry Solutions. And I think the lesson learned from last year, we believe that this is something that is a high value for that.

Customers are doing a lot of spending, independently of the valuation of the budget they have. They are deep spending to run their operations. There is a traditional view in the IT sector that everything depends on the incremental increase of the budget increase.

I’m convinced that going forward, this is not going to be the main parameter. I am convinced that going forward the main parameter for customers will be to really look at every year where do they spend, where the spendings are, and if I invest how fast can I get the return on investment.

We are building that dynamic and that know-how in the company. It’s not creating a risk from the way we have been selling. It’s creating opportunities to be more efficient and to have the higher degree of clarity when customer made decisions. It might be a long answer, but this decision process is we think very critical going forward. And I think it’s even by itself a competitive advantage.

Now related to the dynamic for this year, the diversification has increased 1.24% of the total revenue. We did the same in 2011. And if you look at from the last three years, I think it went from 20% to 24%. I think if I look at you Thibault, but I think in the last three years it's almost 1% every year.

Thibault de Tersant

More or less.

Bernard Charlès

More or less for diversification; I don’t think it’s enough. I think we can create new growth from there. We need to reach a critical mass in each of the new industries that we serve from that perspective. So that's the cards we are playing. And The SolidWorks dynamic, to conclude on the last point was a little bit weak third quarter.

We knew why, I think I was clear and I share with you third quarter of last year that it was related to the defocus on adding applications to the channel, electrical and plastic, and I think the team fixed it and demonstrated that they could come back on track for the fourth quarter. I remember at that time, this was considered as a preliminary signal of slowdown. But we have inverted the trend.

So now we like to be prudent, and we prefer that you listen to us to be clear, because we have no time to spend to explain and try to find good reasons why we didn’t met our objectives. So I’m very clear this company for investors, the company where we try to be prudent, commit to say what we plan to do and deliver at least what we said we will do. This is an easier life and we can spend our energy on the right topic, and it’s better for everyone.

So we can turnaround the topic in many ways. All questions will come to the same bottom line for this year of course I know the announcement of first year we talk to you all, but I think we want to build this reputation that we deliver at least what we said, no matter what happened on the market. Okay, so that’s the philosophy and with that I think the boys taking it seriously to make sure we can deliver on plan. I know you’ve the question, you also – do you want to address it?

Thibault de Tersant

The question is the underlying margin. So yes, there is an impact from currency in 2013. At the high end of the guidance without this impact, the margin would go up by one point. And but this is embedding the fact that staffing weathered by 6% in 2012 and we continue to grow up by about the same magnitude in 2013.

Unidentified Analyst

And just following up on bookings question in terms of the shift to rentals. Does this normalize in the second half of the year or will kind of the license remain volatile over the course of the next few quarters?

Bernard Charlès

I think the rental activity was high in fourth quarter. So I don’t think we can take it as what it should be in each of the following quarters, it’s because Q4 is always a more active quarter for us and the proportion of rentals was higher than normal in Q4. I think the growth in rental revenue in 2013 will remain at a good level.

Thibault de Tersant

But I don’t think we can repeat 20% each quarter. And I think the reason for this trend towards rental is too full. On one side, our sales people and our VARs are now offering rentals because they are well compensated when they do it and because they have for the VARs the financial flexibility to do it. I think there is also some reasons coming from customers willing to save CapEx and in these times from time to time prefer to go to rentals. I think it’s the combination of the two which led to this result in Q4.

Unidentified Analyst

Thanks. Can I just come back to ENOVIA, obviously the 6% to 8% that you flagged, Thibault, as a kind of underlying growth if it had come in licenses rather than rentals are lot better than the headline number. But I imagine you are pretty still a little bit disappointed that the growth isn’t accelerating there and it was slow in Q3. Could you maybe talk a little about the dynamic of what’s going on with ENOVIA, what the pipeline for that product looks like? It’s future functionality still kind of hindering your ability to recognize on that. And maybe just move towards industry solutions of accelerating ENOVIA as we go through next year.

And then on the recurring side of the business, Thibault, you talked about the great visibility you have in the outlook statements. You’ve got maintenance increasing as more V6 comes through. You’ve got the rentals obviously doing very well. Could you give us a feel for how much acceleration we should expect on the recurring business overall in 2013 versus the growth we saw in 2012. Thank you.

Thibault de Tersant

So on the ENOVIA side first, I think that the very simple answer to the question is yes. We believe that better growth can be achieved for ENOVIA going forward and that the industry solutions will certainly contribute to it, when they take shape. And that the current method of long deployments at customer sites with heavy customizations are hindering a little bit the ENOVIA growth.

The visibility on recurring is improving with the dynamic of rentals for sure. And so in the guidance to be specific for 2013, there is right now an increasing recurring of 8% to 9% which is factoring – which is relatively close to the performance in 2012, knowing that of course it’s a guidance given at the beginning of the year. And so as Bernard said very well, it’s designed to be met.

Bernard Charlès

We will now give the floor to the webcast. Operator please, do we have questions?

Question-and-Answer Session

Operator

Yes. We will now take our first question from Josep Bori from Exane BNP Paribas. Please go ahead.

Josep Bori – Exane BNP Paribas

Hi, good morning. Thanks for taking my question. If I may I would like to just dig a little bit deeper on this rental topic, apologies for that, but I – just a couple of follow-up questions. First could you give us maybe what is the percentage of your recurring software that today comes from rentals? Maybe you can give that figure for Q4 in fiscal 2012 and where would you see that going in 2013? The second question is what are the key brands contributing to the rentals today? Is it essentially ENOVIA and CATIA or do we have anything else in that space? And then finally, apology if I missed it, but could you give us again that new V6 metric you started to provide in Q1 the V6 contribution to PLM licenses? Thank you very much.

Thibault de Tersant

Good morning, Josep. So the rentals represent 20% of recurring. The key brands SIMULIA is a key brand for rentals, 90% of SIMULIA revenue is purely rental. But it is followed by CATIA, where we have a good proportion of rentals and we have seen a marked improvement in ENOVIA rentals. In fact in Q4, one data points that I’d like to share is that, rentals for CATIA and ENOVIA together were up by 29%.

And the Version 6 metric is that Version 6 in percentage of total revenue in Q4 was 11% which is between two and three points improvement compared to the year ago quarter. I think that’s the one we shared before. That is also when you think of V6 compared to the PLC and from this metric, we were at about 22%, but this metric is a little bit more volatile when rentals are up, the metric is of course a little bit subdued, because most of the new rentals are Version 6.

Operator

We will now take our next question from Michael Briest of UBS. Please go ahead.

Michael Briest – UBS

Thank you. Good morning. In terms of Industry Solution sales can you talk to maybe how much of the business is coming from there, and how many modules you now have bundled on that basis and where you'd like to be at the end of this year? And then in terms of the rental is that impacting deferred income at all, because deferred income was down year on year and quarter on quarter, and I'm wondering if the move from license to rentals is having any effect there or perhaps it was currency. And then finally just on general and admin costs, they were quite low in Q4 and for the year is that something you think can be sustained into 2013? Thanks.

Thibault de Tersant

Thank you, Michael. The industry solution, it will be difficult in the next coming quarters to track to your question here for the following reason. First of all, industry solutions are really as you will notice collection of applications that are put together to support the business process for our customer. That’s the way to engage with the customer. When the customer adopt the industry solutions, they don’t adopt the full scope day 1. They adopt and they start to deploy the industry solutions based on not only the need there, but also in which area do they want to start first. So I think for industry solution to really track, we will have probably to track this every year, but is not relevant to track them every quarter, because it’s just does that mean something.

However, it’s clear that all the engagement – the sales engagement process are built along those lines, once again, because it facilitates customer decisions to understand why should they adopt and what kind of expectation and return for investment on how fast.

So for us it’s a big deal. It’s a big deal for our new sales performance and it’s a big deal for to position Dassault Systemes in new sectors where we are really changing the game. We are changing the game, I don’t know if you noticed, but IDC, Gartner position us as the world leader in CG retail last year, consumer goods and retail. This is a new sector for Dassault Systemes and being position on the top of the metrics was rewarding. It was not based on the numbers, but it was based on the customer feedback after they selected us and why they selected us like if you remember Fossil and many other companies.

So to make this answer short, it’s too early to measure on industry solution, revenue contribution, what is easier to do is the decision process on that standpoint for whole new sales we believe except for volume selling. All are going to be driven by industry solutions.

Last but not least, we increased significantly last year, the number of partners in the value selling environment. On those partners are partners which are in new industries, it’s not the extension of partners who serve existing industries, those are partners with whom we would never dealt before. And now we are on the ramp up of this approach is – on the industry solution has been the reason why they joined us. And we believe that this is very critical to accelerate to continue to sustain the diversification on the value we bring there.

So let’s say – I think what I have say Thibault on the G&A, I think there was two other questions.

Unidentified Company Representative

That’s right, the money market. On the insurance of rentals on deferred revenue is positive in terms, rentals the more we sell rentals, the more deferred revenue where we should have. I know that deferred revenue is down by 7 million in Q4, and I think this deserves a little bit of an explanation.

In this decrease first of all there is the closing rates at the end of Q4, currency movements where which accounts for 20 million. There is also the spinoff of Transcat, where the deferred revenue associated with Transcat was sold. And this is a decrease of – I don’t remember exactly, but I think 8 million. And we also in Q4 decided to move so receivables to doubtful account, and so we moved them out of deferred.

So all-in-all, when you take all of that into account, there was an increase in deferred revenue from an activity standpoint by more than 30 million. So in the balance sheet you will see us more decline, but from activity wise, there was – it is very normal an increase a little bit higher than $13 million.

Continuing the question on the cost base, well, the cost base in Q4 was not bad particularly in G&A. But I think the cost for R&D, cost of services, marketing and sales are at levels that can be taken for your model in 2013. For G&A, the variability comes, first of all, we are working hard on reducing the increasing cost in G&A and with success in 2012. But also there is variability depending on the reserves we have to do for IP claims, which are becoming more and more popular, the trolls claims have an influence on our G&A line, so this is where there is a little bit of variation.

Michael Briest – UBS

Can you say how much the bad debt provision was?

Bernard Charlès

Next question from the room please.

Michael Briest – UBS

Good morning. I have two questions if I may. The first one is related to the revenue made in industry solution, if I take the perimeter effects of Gemcom the 1% increase go to a decrease in terms of revenue. So I have three questions if I may. So the first one is, you said how many industry solutions you're going to have at the end of next year, got 12, I think that publicly in previous meeting of Life Science you said that you're going to launch three industrial solution life science by June. So can we expect that you are going to have a double, so can we expect you are going to have 24 industry solution by the end of 2013?

And then do you incentivise your salesperson on these objectives, so that in other words do you take – do you links bonus of these guys with certain percentage of their sales in your industry solution. My next question is going to by on rental, you explains there is a switch on your customer moving from CapEx to OpEx. I try to see, is there is any vertical in which this phenomenal is the highest. So in other words is the 29% increase that you have in rental, is this linked with your historical rental – vertical which was aeronautics?

Bernard Charlès

Q4 for the question first. About industry solution in 2013, we will continue to rollout the industry solution portfolio. I do not have the exact number in mind, but I think about doubling the portfolio is a good sizing. Those things will be published at customer meeting, so it will be visible to you anyway, so [they don't] secret is just a fact that I do not have the exact number in my mind, but it's going to be in that range.

I would like to just insist on two things for industry solutions. Another element is that it’s very key for partners even more than for our direct sales force, because for our partners on new partners the one who joined us last year and they are lot of time. They need to be able to ramp up their capacity to reach the new customers they are committed to serve, because there are a lot of business, they have to be successful there. That's why the traction there is very good from that standpoint.

Related to the incentives there is very low no need to be industry solution driven from a pure incentive standpoint. We look at more the expansion of the footprint with existing customers, or the acquisition of new customers as the incentive. The sales force is measured on the revenue itself.

Why it’s not necessary to go as far as putting as an incentive on the industry solution? It’s quite straight forward. First, to make the revenue, this is what they have to sell anyway. You cannot just cook or decide what you are going to sell, there’s is a collection of solution to be sold, and there is no other choice, that’s number one.

And number two, really in the engagement process at the end the customer, there is a difference between the purchase order on the deployment on how customers are going to deploy the solutions to actually put them in operation. And so those are the two reasons why it would not be fair and it’s not needed to measure the sales force on the revenue per industry solution them self. This is welcome by everyone. We’re not trying to push something that people don’t want, in fact, they want more of those to simplify on increased value – the value they sell. And the question related to, is it more associated to new sectors, or existing sectors, Thibault do you have any comments on that?

Thibault de Tersant

Sure. Well, the two verticals were – rentals are the most popular, we have space in automotive, so good cost sectors. But we see also some trends towards rental in domains like container goods and retail, so and here and there in energy as well. So – but the bulk of the rentals are in these two verticals automotive and aerospace.

Bernard Charlès

Operator, we’ll take one last question from the webcast.

Operator

We will now take our next question from Amit Harchandani from Citibank. Please go ahead.

Amit Harchandani – Citibank

Good morning, everyone. Amit Harchandani from Citigroup. Thanks for taking my questions. Two if I may. My questions are around the high growth countries. So the first one is, could you please give us an idea of what kind of growth rate for high growth countries do you have embedded within your outlook for 2013, particularly given the V6 licensing dynamic in those countries? And the second one is in addition to the countries that you classify today as high growth which other markets are looking very promising to you and could potentially be candidates to be incorporated as high growth countries in 2013? Thank you.

Bernard Charlès

Certainly. Well we are not actually going country by country when we develop our guidance. But what is absolutely certain is that the high growth countries assumption for 2013 is double-digit and in the mid double-digit figures. But we don’t go as precise as doing one growth rate by country. The promising markets from the geo standpoint, yes, there are a few countries that are growing fast, and they are not today in our indicator. I would mention Australia as one of them. And there are in – Southeast Asia also a few countries like, Indonesia, where there is good growth.

Thibault de Tersant

And we will have 29 industry solution experience by end of 2017, 2029.

Amit Harchandani – Citibank

Quick follow-up if I may, in terms of your days sales outstanding you had a good quarter in Q4, I think this was the lowest level in Q4 in five years to go with strong receivables management in Q3. Is there anything changing structurally in the business that we should be thinking about when we look at DSOs going forward? Thank you.

Bernard Charlès

Yeah, thank you for mentioning. Our efforts in order to keep our DSOs under control, we are certainly paying more attention on DSOs and this is what has become very visible, actually in 2012 as a whole because we have been improving I think in each quarter of 2012 from a DSO standpoint. So our goal is going to maintain the DSOs now at least at the levels of 2012.

Thibault de Tersant

I guess the last question here.

Amit Harchandani – Citibank

Thank you for taking my question. (Inaudible) two if I may. What would be or what might be the number of CATIA customer having adopted the V6 at the end of 2013 and how does it compare to the achievements you had in 2012? And my second question, can you help us to understand, what is the size of the architecture, engineering construction markets? I know that you have announced a new solution to penetrate further this market. So how would you expect this to contribute to revenue in 2013? Thank you.

Bernard Charlès

Thibault, you take the first one.

Thibault de Tersant

Yes. I don’t have a precise count of the number of CATIA version 6 customers at the end of 2013. I wish I could, but it is slightly delicate. But what I can tell you is that in general from the version to another, the migration process takes about 10 years and it started in 2012 for CATIA to version 6.

And it accelerates during the first five years and then it starts decelerating in terms of rhythm. So we will see if we go to the same curve with version 6. For us version 6 is not a migration story. It is really a new architecture powering our industry solutions, and so as people go to customers, they will ask to start by, please customer do migrate to version 6, they ask to present the value of our industry solutions and this implies some migrations but hopefully not a total migration upfront because the way to sell industry solutions is process by process, right. So this is introducing a difference compared to the curves I just mentioned which we observed in the past and frankly we are going to discover with you how it plays exactly.

Bernard Charlès

I like to decide of the AEC market, first we have decided to go on this market because the need for large project management – management of large project is very, very fundamental first reason. The second reason is the need and the demand on the corporation we have established in China and India, basically where the world is under construction.

We announced last year a very strategic corporation on the opening of develop lab in Shanghai where its one of the largest engineering firm in the world, Shanghai Municipality Institute, design engineering and design institute. Would that be pirated privatized, it would become the world largest engineering firm.

We are doing that, it’s a good corporation. We of course own the IP on own all of this. It’s a better system, collection of applications. And this is where why so, is because in these countries they adopt new technology faster than in this sector, faster than in Europe or America.

So our focus is there. It’s difficult to size it, there are a lot of studies, but sizing of this market, there is a lot of studies which are valuable from the on consulting firm. But we’re not doing solutions that have been addressed in the past, we are really building what we call solutions for what we call large project management, which means planning, global collaboration to do the, there are four things, what you EPCO, engineering, procurement, construction and operations.

The leverage of those industry solutions is going to be target not only for infrastructure, roads, bridge, cities, less on buildings, less on buildings, and a lot in energy project, hydro, wind, farms, and even look back in the nuclear to reduce to cost on the risk. So that’s the strategy that we have.

And I think that we are on a good start here, we are very good on Farensius, we manage from Skanska from last year on many users and there have many, many. But I think it’s going to be, it’s difficult to say how much it will represent in 2013 we are building up the Farensius, launched Farensius.

Amit Harchandani – Citibank

Just to for us to clearly understand the partnership with Shanghai, does it mean the digital project, it’s another project throughout here, or you would develop another project on top of what you have already done with [Gerald]?

Bernard Charlès

Okay, so I will be short here. Data project is going to be – is existing on V5 architecture and it’s being engineered for the V6. So yes, what we have done with Gerry is going to be used for the future of the AEC market absolutely. But there is much more on that going on.

What is being done with China and for China is really related to the overall project management capacity, not only the engineering work, but ever seeing the EPCO, including simulation of operation for water supply systems, infrastructure systems, because this is where the needs are right now. There are numbers that could be valuable on this sector, but I think it’s too early for us to communicate them.

I think with that, thank you very much for your presence this morning and for your interest with our company’s performance. And I’m sure we’ll see each other this year and at least for the next quarter I hope, so have a good day.

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