Dassault Systemes S.A. (ADR) (DASTY.PK) Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Dassault Systemes (DASTY)

Dassault Systemes S.A. (ADR) (OTCPK:DASTY)

Q2 2013 Earnings Call

July 25, 2013 4:30 am ET


Bernard Charles - Chief Executive Officer, President, Director, Member of Scientific Committee, Chairman of Dassault Systemes SolidWorks Corp, Chairman of Dassault Systemes Simulia Corp, Chairman of Dassault Systemes Delmia Corp, Chairman of Dassault Systemes Corp and President of Dassault Systemes Holding Canada Inc

Thibault de Tersant - Chief Financial Officer, Senior Executive Vice President, Director, President of Dassault Systèmes Europe Sas and President of Dassault Systèmes Holdco Sas


Laurent Daure - Kepler Cheuvreux, Research Division

Michael Briest - UBS Investment Bank, Research Division

Adam Wood - Morgan Stanley, Research Division

Pierre-Henri Louvel

Mohammed E. Moawalla - Goldman Sachs Group Inc., Research Division

Neil Steer - Redburn Partners LLP, Research Division

Charles Brennan - Crédit Suisse AG, Research Division

Unknown Executive

The second quarter and first half earnings presentation, which is also being webcasted. At the end of the presentation, we'll take questions from the audience and from participants on the webcasted call. Later today, we will also hold a conference call.

Dassault Systèmes financial results are prepared in accordance with IFRS. In addition, we have provided with supplemental non-IFRS financial information. For an understanding of the differences between the 2, please see the reconciliation tables included in our press release.

Some of the comments we'll make during today's presentation will contain forward-looking statements, which could differ materially from actual results. Please refer to our Risk Factor in our 2012 Document de référence.

Let me now introduce Bernard Charles, President and Chief Executive Officer.

Bernard Charles

[French] Good morning to everyone. Good afternoon. So this is an interesting midyear status. So a lot of things are going on at Dassault Systèmes, not only we have to execute and reach our plan, but we are preparing, as you may have noticed this morning, the introduction of our very significant breakthrough architecture with the Version 6 Release 2014, which has been mentioned in the press release, for which we are -- we have started a few days ago to do customer introduction, and it's a very special moment because we believe it's a significant evolution of our total portfolio when it comes to the use of cloud for design collaboration, modeling simulation and production.

Anyway, let's start first with the Q2 and the H1 results. New license revenue returned to growth in Q2. Even if it's a small growth, it's a growth. And you may notice that the strengthening of Asia is very strong, and I will make -- give you some more insight about that.

A very strong dynamic with DELMIA, both on the execution standpoint and the customer adoption, as well as, of course, with the acquisition of Apriso, our very firm approach to serve the manufacturing operation management, simply said, automation of the shop floor.

The introduction, as I said, about the Version 6 Release 2014 and 2014x will come at the end of the year. This is to prepare 2014 on business with the 3DEXPERIENCE. And we are also upgrading, and Thibault will give you more detail about that, the full year objectives.

So let's start with this business review. As you notice, the new license is up 4% for the Q2. They operate on 1% for the year-to-date 2013. Operating margin is -- also has improved at 30%, and the -- with a growth of 0.8%. And the EPS is up 9%. So I think we've been able to manage well, the cost on investment, as it relates to the revenue growth.

On the regional aspect, we continue to transform the -- our channels in America. We were on a good start last year, and I think we confirmed that the recovery in America is there. It's very interesting to note that I see a lot of comments about the job creations on Sony in America. But when it comes to manufacturing, it's really not about job creations. It's about automation. There is insourcing of manufacturing in America with significant automation of manufacturing plants. We see it and we believe that this is not temporary. It's really a strategy that I think will really be a driver of growth -- for growth for us, longer term. So up 6% for Q2, 7% year-to-date in America. Europe is, Q2, up 2%, 4% year-to-date. It has to be noticed that Europe was very, very strong last year. The base effect is -- I think it was 19%, 1-9, so it was a significant base effect for last year. And 13% growth in Asia, which makes it a total of 6% growth for the Q2, 7% year-to-date.

If you look at now from a product line standpoint, CATIA is flat this quarter; ENOVIA is up 1%; also up, PLM, 24%. It shows that the diversification of the product portfolio is paying off. SOLIDWORKS is up 6%. In other PLM, you have many other brands. You have, of course, DELMIA, you have SIMULIA and you have all new categories of software application for what we call software collaboration. So I think this will become a visible. And of course, GEOVIA is part of that, too. So strong DELMIA quarter. The positive impact, of course, up there, GEOVIA. And if you exclude the Gemcom effect, as well as the spin-off of Transcat, their growth is about set 5% on H1, excluding exchange rate.

So let's review quickly Asia. The dynamic is double-digit new license revenue growth in all 5 regions: Japan, Korea, China, India and AP South. It was noticed that on microeconomic level, there were some concern about China. We don't see that on our side. We think that the Chinese companies are building up their brands, their product portfolio, and they will continue to invest. Strong dynamic also in Korea and strong dynamic in Japan. Japan was -- saw a slow path 2 years ago. Last year, it came back to growth, and I think this growth is continuing essentially for us because of the diversification. We were very focused on many industries in Japan, and we are expanding in high-tech electronics on energy. On India, continue to be a huge, huge market, as well as China, of course. AP South, so Malaysia, Indonesia are also very dynamic. I think we are at the beginning here with a good team and a good structure to reach and serve those markets.

A few illustration of adoption of our platform. Aisin Seiki, they're adopting the platform and the -- it's a leading auto supplier, headquartered in Japan. We see now the Japanese integration across multiple industry is happening, electronic converging with every industry to do what we call mechatronics project on programs. It's the case of Toshiba and Panasonic and many others. And I think when you look at smart mobility and other trends which are happening in spot transportation, smart energy, smart city, their framework of the industry is evolving. And I think it will evolve faster in the years to come. That's why the V6 platform with the system approach is very essential from that standpoint.

In China, significant wins. And when I say significant, it's significant in terms of size. Qoros, it's a new brand in China for automotive sector. They were in Geneva presenting their first product lines. Usually, in the past, those Chinese players for automotive have been doing joint venture. I think we now see consolidation of China-centric brands, and they want even to sell your cars outside. Aviation of China, AVIC, Envision and Pegatron. Pegatron is a big player in the high tech. This is replacement of many of the competitor's solution. They are going to the PLM platform and the collaborative platform. The key topic for them is to integrate consumer insights with product innovation, simulation and production.

I could -- I mentioned a few quarters ago, the trends at Foxconn, 1 million people in the company. They want to automate, reduce the number of people and go through massive automation of their production line, which requires, of course, simulation from not only design but production.

So we are in a very good position in China. Let's start at the beginning. We have a strong team, 500 people, with our partners. And we believe that there is a long way to go still, and the potential for energy smart competition, smart city is there.

This is Qoros. It's really a very, very dynamic portfolio. They are creating their own design offices, their own production plants, and they are really thinking about the way they should provide product portfolio, which are suitable with the Chinese market. So they are using CATIA applications, ENOVIA applications on their entire platform for configuration from early design to selling.

A few comments about DELMIA. As I said, first of all, DELMIA is retail manufacturing. It covers the work that you have to do for what we call the engineering of the manufacturing process, how will you produce or make things, how will you supply and how do you run the shop floor. Now -- especially now with the Apriso. So there is a high potential. It has been -- it is still a very, what we call, legacy market. And a lot of old software are used there in those activities up to now. So it's less advanced than the design side of the world. But it's going there, and we are transforming this sector. And I will give you more comments with the Apriso.

So we see the effect of accelerating a ramp-up, synchronization of production around multiple sites, reducing cost inventory and rework, of course, improving quality. And as you can see, we had a significant growth about -- almost 70%. And the production systems are still using old technology, so we can do a lot. On ERP, it has not been doing good there. There is a certain impression, which is surprising to us, is that people think ERP is used there. It is not used really in production. So we have great references: Boeing, Bell, Safran, Renault, MEYER WERFT, POSCO. POSCO, still one of the top steel manufacturer in the world. On the steel, production systems are quite complex in terms of manufacturing process, less on the design, more on their process.

Michelin, where we are really doing the modeling of the entire flow between manufacturing sites, including the transformation of their products. So I think in this world of the make, we are now applying the technique we did in the world of the design. So here, for Michelin, it's about improving agility, resource utilization, the flow of goods around the planet, because they have many, many plants and looking at how the global production system should always provide fulfillment on the demand. They want to be 100% fulfilling the demand, no matter how the sh*t is happening in the selling tires around the world. So they are using the DELMIA platform. And of course, it's the -- that platform is now based with V6 on the 3DEXPERIENCE platform.

About Apriso, we did the closing first day of July. This is, we think, a very critical market space. I can give you very simple example. Most of the software used in manufacturing plants in the world, in -- on the shop floor are legacy software, very old software. 75% of the plants in the world are using old software. So we think there is a big opportunity there. And it's about doing the modeling of the operation and simulation, so you can then run the plant.

I think there is -- there are -- we have a lot of great customers already. The team is a very good team. They are based in Long Beach, California and also doing development in Europe. And it's a very good complementary solution to the existing DELMIA solutions.

Here are some illustration. This sector is called Manufacturing Operations Management. I think it's named well. The revenue was $50 million in 2012 for Apriso: 65% software, 35% services on the front end of the service, not on the back end. They use system integrators on the back end, which is, we think, very good. The -- between 2008 and '12, the average revenue growth was about 15%. It was privately held company, headquartered in Long Beach, 280 employees. You see here great references: L’Oréal, Essilor, Luxottica, Amcor. If you remember, we won Amcor for the packaging with ENOVIA a few months ago -- a few quarters ago. 90 plant, 9-0 plants of Valeo are running Apriso around the globe; Volvo, Lear, Johnson & Johnson, Sony [ph], Panasonic.

So it's CG, CPG discrete manufacturing, but also a big way to diversify. We have been using -- acquiring Intercim. 2 years ago, Intercim is used in -- to do the same thing, but for aerospace. Intercim was very focused on aerospace final assembly. This is really focused on volume production. So it's flexible, very light, easy to deploy. It's global. In the case of L'Oreal, it's used to synchronize the production start across multiple plants at the same time. So as you remember, we are working a lot with P&G. If you look at companies like Coca-Cola, they have 18 -- they have 1,800 plants around the globe. So they are not customer yet, but I think those plants really need to adopt new type of technology, and operating those plants becomes a significant factor, especially when you do global product launch. How do you synchronize the launch of production in multiple plants? This is what Apriso is doing.

So we close July 1, the price is $205 million plus the net cash position. And the impact on the 2013 revenue is going to be EUR 20 million with positive impact on EPS. There is a video, so please look at the video.


Bernard Charles

If you've been on our website, 3ds.com, you can see the videos. They are very explicit, all customer reference you sees -- you see there are Apriso customer references. They are not to be. They are existing one. So you can see that it's about life science, consumer goods, consumable package, high-volume production. And it's really something that we believe is very interesting move for us and consistent with the strategy we have set up to do digital continuity between design to production and delivery.

SFE acquisition was announced today, a German company. It's a very technology-oriented acquisition to do body conceptual engineering and performance evaluation. It's a way to automate the process, to optimize a full shell of a body for transportation, and it will be used for many other things. It's a very, very unique technology. I think it's not available anywhere else. And as a matter of fact, our competitor, Siemens, is using it. So I'm delighted with that. 50 people in Germany. By the way, the German industry has developed a lot of very interesting software company. I think they have a fiscal incentive to do that, but we've never been France. So we will see more of those moves happening.

And I think this company joined us because they wanted to join us. We made the offer because they came to us and they said, "We want to be part of Dassault Systèmes." I think we have created a reputation in terms of long-term stable value for the people, where they said, "If we want to conquest the world, we follow our solution. We need to be part of a bigger group." I think it's a good sign. Most of the acquisition we have done in the last 18 months have been done that way. The team, the management said, "We want to join you. We want to be part of this 3DEXPERIENCE journey. You have done digital mock-up, you have done 3D, you have done PLM. The next step, we want to be with you." So we are announcing the transportation and mobility solution experience, but it will be used in many other sectors. It's too early to speak about it, and it's about accelerating and automating the concept phase and short-term, of course, cycle time and increased quality. You see here prestigious names: General Motors, Mercedes Benz, Chrysler, BMW, Fiat, Porsche. There are many others.

What about V6 deployment? I think we are getting great success with the deployment of the entire V6 product portfolio. This is Bell Helicopter. They have removed, if I remember well, about 400 legacy applications. They're replacing the entire collaborative platform at Bell with our ENOVIA portfolio and CATIA portfolio. So the mood now for most of this industry -- large industrial groups is to simplify the number of software applications they use to create the digital continuity from consumer insight to customer delivery. So it's about sourcing, costing, even planning the budget allocation when it comes to development. It's an outstanding showcase, and I think we will replicate that.

The V6 license revenue represent 24 -- 21% of the new licenses, and we see an acceleration in the migration to V6. And also, an example here is extremely complex machine, I think the Metso machine for Metso Pulp, Paper & Power, adopting this 3DEXPERIENCE platform. Those are extremely, extremely complex systems. And it's heavy industry. They create high-value systems. And the adoption of the PLM and the 3DEXPERIENCE platform, I think, is a real value to -- for them to develop their global business. So those are interesting showcase because it goes far beyond the traditional work we have been doing.

Smith & Nephew, U.S., U.K., they are doing medical equipment. As you know, we are -- already referred Medtronic and many others, Johnson & Johnson and many others. There is a lot of things going on in the life science. We have developed a solution called Licensed to Cure for medical device. License to Cure for medical device means how can you control, simulate, trace and track everything that happened from design to delivery of this medical equipment, so you can grant equality, traceability and compliancy with regulation. So once again, it's really the holistic approach for this digital continuity.

In life science, it's more about the equipment right now, but I think we will expand significantly in that sector. There is a lot of regulatory submission information that you need to track and prove. The concept of who this is, is essential here, and they need to harmonize and provide packages of information to the regulator that helps to prove that they have taken all the appropriate -- put in place all the appropriate quality and rules in place to comply with the different country standards, by the way. So they are using 3DEXPERIENCE platform on this industry solution. It's a good example because I don't talk about CAD. I don't talk about product configuration. We have a solution that goes from the initial customer specs to the delivery with one single solution.

Zhengzhou Yutong, this is -- in transportation mobility. They are also adopting in China. They are also adopting the 3DEXPERIENCE platform to develop, to do the business management process. You remember we said that our next step is to expand the design, production and simulation to business modeling and simulation for the development of products and production of products. This is what we call 3DEXPERIENCE platform, a business experience platform. And in cost tracking, cross planning are now part of this platform. It's going to be fun. But our biggest competitor is Excel, which is funny, because most -- the most expensive program in the world are managed with Excel without configuration, which is for me to reveal still.

We are introducing, as I said, the 2014. This is a big step because the collection of application is going to be available on the cloud. We have started with customers in New York a few days ago. Our cloud is in Europe. And I can tell you that the response time are equivalent to what would be the response time if the cloud were in U.S. So this is, for our industry, a very significant evolution when it comes to speed to install, speed to learn, speed to use.

Today, the cycle time for a customer to set up an environ for global collaboration and design and production is at least, at minimum, 6 months, 6 to 8 months. So at least, you need to have the hardware, the servers, the network. You need to buy customized set-up demonstration. You could look at in your own companies, even for finance, how long it takes to update the systems. Now having this online, it's a question of minutes. You subscribe and you start to use it. So it's a groundbreaking user interface. I think we have a video, and we have announced this.

Why are we doing the 3DEXPERIENCE platform? Because we want to integrate the business dimension with the engineering simulation and production. We're changing the boundaries of what we do, and I think it's a very fun moment for the company to be doing that. I've already talked about that. We have announced last year, in February, the new horizons, 3DEXPERIENCE platform. We have explained the industry solution delivery. We have delivered 15 solution last year, what are called industry solutions, and now we are developing. We are deploying the platform and making it available both on cloud and on premise. And the objective here is for customers not only to do design but simulate the way, what they do, will be used by the final consumer or the final user.

We believe that this is getting a lot of attention and traction. I believe -- and if you are in the experience economy, you need an experience platform. It's not about form and features anymore. It's about what kind of experience do you deliver. I think this analogy with what happened with the coffee between commodity, products, service and experience is a good analogy. Product is not enough.

If you have seen the Ford ad recently in America, the Ford ad is about hand-free tailgate. You see a consumer coming at the back of the car with bags in their hand, they put their foot under their -- under the bumper, and the tailgates open. This is an experience. It's not a feature. How do you do that? You need to design the full experience, you need to design the mechanical aspect, the electronic aspect and the software aspect that will make this happen. And when you are electronics, software, mechanical and you create this experience, you don't put a feature on a car, you create a value that will give value like what you have with your iPhones or smartphones. It's not about feature. It's about the experience you provide.

So that's in short. So we are moving now, with the 3DEXPERIENCE platform from: managing the technical complexity to creating the business value associated with the technical problem; separating the application transition, creating an integrating environment that integrate cost, value creation and the way you produce it; something that was very techy-oriented. You're a designer, you're a manufacture, you are specialist of simulation, and now you create a full experience so it can be use even by marketing and sales; on premise and the cloud; on a platform that can help third-party to develop it.

I think in Dassault Systèmes history, when you look at the 18 last -- last 18 months, new horizon, new technology, new type of user experience and user interface, moving from on premise to on premise and cloud is very interesting. It's being applied to all brands, every single application we do, including SOLIDWORKS. You see them in the platform here. We'll have more to say in the future about that. And, of course, it can be used to create dashboards, which are also available from iPad or whatever mobility device. I think there's a little video.


Bernard Charles

I think with this little video, as we are introducing the -- all the product collection, you have seen that all those are screen copies. You have even seen that are in Chinese for some of them, which means that they are being implemented in China. And you also noticed, probably, that it's much easier to understand why we bought Exalead, why we bought Netvibes, why we are doing the Big Data indexing. Because at the end of the day, to make those kind of decisions, you need to be able to connect with all legacy systems, which are in companies.

So it's creating a real excitement in the user community. We are very careful in terms of how we're going to introduce that from now on. It started early July. We have selected customer that will be using it between now and year end to make sure we reach the level of completeness. Because this is, for us, a system, I think a big deal, because it provides a new landscape to which new type of customers, new type of users in a different way at the fastest speed, especially with the cloud.

So with that, I leave the floor to Thibault to give you more detail about the financial data.

Thibault de Tersant

Good morning. So let's start with the software revenue growth. To be very clear with you, this is not the type of growth that we are particularly happy about, but it is good enough for us to gain market share compared to our competitors in the current market conditions. And it is showing something that is very important to validate our base assumption, which is an assumption of acceleration of new business in the second half of the year. Because in the second quarter, yes, it is a small growth in new licenses, 4%, but it is growth and it means progress compared to first quarter of the year. So this is combined, of course, with our analysis of the opportunities we have in the pipe, helpful to do what I will do later on in the presentation, which is to reconfirm our second half.

The recurring is something that needs a couple of comments. You -- what you need to bear in mind before declaring that 6% increase in recurring is very bad is the fact that 1 year ago, in the first quarter of 2012, a few purchase orders of recurring slipped to the second quarter. And I indicated that, if you remember, 1 year ago, not in the same room, it was not the same room, but more or less it's the same assembly, and that -- they did represent 3 points of growth. So this is what you need to bear in mind. So the 6% in this quarter without this onetime impact of slippage 1 year ago would have been between 8% and 9%, which is much more consistent with what we expected to be and what is our normalized expected recurring growth for this year actually. And the first half is, of course, a better representation of that at 9%.

SOLIDWORKS is still our advanced indicator on the status of appetite to invest from small companies. That's the way I really need to present it. And you can see that there is a decline in new license activity for SOLIDWORKS of 3% in second quarter. At the same time, it's a very solid product, sorry for the joke, and because of that, we're able to let the prices increase. And so we have an ASP increase of 7% in the second quarter, which, of course, is very helpful for us to deliver the 6% growth we did deliver for SOLIDWORKS.

Services were better, so I'm pleased. There is one quarter where, Bernard and myself, we don't need to apologize for services or apologize less, really, because we grew by 9% for our service activity in the second quarter, and more importantly, the margin went up to an 11% level, which we had not seen for some time. So I don't want to declare success, but I think we are curing our services progressively. When I say curing, it's more the fact that, actually, customer implementations are successful and level of activity from services can be handed over to third parties, with our services focusing on more value-added activities.

Operating income and operating margin were up and the margin, in particular, was at 30%, which is an 80 basis point improvement compared to last year and, frankly, was based on the attention to costs in all areas. At the same time, our staffing increased by 6% compared to last year. So this is not coming from restructuring and cuts in headcount. Headcount increased by 6%, but at the same time, we were able to manage our expenses very carefully.

On the cash position. So the cash flow -- in fact, the cash flow is very good. The second quarter of cash flow was EUR 168 million, and for the year -- for the first half, it was EUR 353 million. So for the first half, it's equivalent to last year. For the second quarter, people can tell you that, oh, it's less good than 1 year ago, and that is true. One year ago, the cash flow from operations was EUR 188 million, EUR 20 million more. But frankly, the cash conversion we got in this quarter is still very good, and the variation is the working capital variation in reality.

The working capital is still producing operating cash flows, but at a lesser level than 1 year ago, where it was extremely good at EUR 77 million, and the real reason is the fact that we continue to reduce our receivables. You probably will see in the packet, our DSO improved by 7 days compared to last year. So we really worked on receivables quite well. But 1 year ago, we had truly been able to reduce quite a lot receivables. And this year, we reduced them less. It's as simple as that. We reduced our receivables by EUR 20 million, essentially, in this second quarter, and we had reduced them by EUR 47 million 1 year ago, if I remember well. So that's the cause for this variation in cash flow from operations. But again, I don't apologize for the level of cash flow.

And so the cash position, as you can see, is -- net cash position, quite good, almost EUR 1.6 billion. We have also borrowed EUR 350 million from banks at very good conditions. And so we have now close to EUR 2 billion in order to finance the acquisitions that we need to do and which are tied with our 3DEXPERIENCE targeted market and strategies.

And now the objectives for this year. Well, in fact, it's relatively simple. We are just confirming the acceleration in new licenses that we announced at the beginning of this year for the second half, and you will see that it is a significant acceleration that we see. We should get pretty close to double-digit new license growth for the second half with a particularly good fourth quarter. So I don't like promises for fourth quarter, but the level of opportunities is very significant actually in our pipe for fourth quarter.

The EPS we are also upgrading. And in fact, Apriso addition is bringing EUR 0.02 into the EPS and the other EUR 0.07 are coming from a combination of currency exchange rate in second quarter activity and little bit of tax, because we have a few reserves for tax and that will have to be released in the second half of this year, FIN 48 for the specialists.

In terms of currency, we -- at the beginning of the year, we were cautious, I'm sorry to say so, for the dollar exchange rate at $1.40. So we are adjusting now to $1.35 for the second half, which is probably closer to what will happen. And we also adjust for the yen in a more bitter way because we were at the JPY 125 per euro at the beginning of the year, and we are now adjusting at JPY 130 for the second half. So frankly, I certainly hope, the yen is not going to continue to decrease in the second half. 30% is already quite significant. And we are able to absorb a good portion of it this year, thanks to our hedging policy, and we are continuing some rebound in order to hedge for next year.

So in terms of revenue growth, we are now targeting 7% to 8% for the year and 6% to 9% for EPS growth. The bridge is really what I just commented. So you can see on it that from the revenue standpoint, we have added the FX impact in the second quarter, our dollar at $1.40 and we're adding Apriso for EUR 20 million in the second half. And this is what we do for the revenue in reality. And for EPS, you can see that FX in second quarter bolt a little bit. In terms of activity, we'll see also some good impact on EPS, tax rate and the Apriso acquisition. So that's how you can rebuild this EUR 0.09 of EPS that we are adding to our objectives.

And for third quarter, we see a growth of 8% to 9%, an operating margin at 31%, EPS at EUR 0.92. It was very good, the EPS, last year, because we had a positive currency impact, which was very significant last year, and we have, of course, a negative currency impact this year. So the EPS variation -- you need to bear in mind that second quarter -- third quarter of last year was benefiting from currency quite a bit.

And for the year, I think commented them quite a lot. The margin we target is, more or less, a stable margin compared to 2012. We were saying that before, too, but we were writing down 32%. So when I look at that again, I said, "Okay, but stable is not exactly 32% because it was 31.6% last year." And of course, Apriso is very good from all perspectives with one small exception, which is margin, because they are not yet at Dassault Systèmes kind of margin. And so there is an impact of margin dilution nuance. It's probably more acute in the first quarter of integration as always, which also explains the margin in the third quarter that you see here. But all in all, I think, even with Apriso, the ability for us to keep margin unchanged compared to last year is not bad at all.

And I think with that, Bernard and I will answer your questions, if you still have questions.

Question-and-Answer Session

Laurent Daure - Kepler Cheuvreux, Research Division

This is Laurent Daure from Kepler Cheuvreux here. Two questions on my side. I'd like to come back on your comments on the license growth coming to us double digits in the second part of the year. Can we have a little bit more color why you expect the improvement in terms of product or regions? That's the first point. And the second one is on the rental spot in recent quarters, you had a strong boost in rentals. Is it continuing in the second quarter and for the rest of the year and the kind of impact it's having on licenses and maintenance?

Thibault de Tersant

Yes, of course. So, Laurent, in the -- what we see is we see the continuation of good dynamic in this year. We see the continuation of the good dynamic in what -- in the BRIC countries, where we did very nice growth in the first half, 20% in total software revenue in the BRIC countries in the first half. We also see that we -- our dynamic in Americas should remain the same as in first half, and we see some better activity in Europe in the second half. So we don't see at all a deceleration in Asia for us. In terms of software, in Americas, actually, the situation is quite dynamic. We did a double-digit new license growth in software in America in the first half. So that's part of it. And we believe we should do slightly better in Europe. So in fact, the variation is really some better performance in new licenses in Europe, but with all these 2 good dynamics or 3 good dynamics in BRIC, in Asia and in Americas continue to deliver. In terms of rentals, that's not difficult to credit. Suppliers continue to buy rentals. We see the proportion of rentals going up in our value-selling channel for suppliers. We see the renewals of rentals happening very well this year. The activity of rentals in large accounts is more volatile because they use it as a manner to accommodate peaks and valleys in load. So rentals dynamic was less good in first half of this year, and it's not particularly easy to predict, quite frankly, for the second half. You -- it's growing. It's going to continue to grow. But at which pace exactly, this is, in fact, more delicate to predict because of the large accounts activity, which is related to industrial programs that they do.

Bernard Charles

We'll take a question from the conference call, operator?

Michael Briest - UBS Investment Bank, Research Division

Bernard, can you give us a bit more detail on the cloud offerings, how they're going to be sold, how the pricing may be differs from the on premise? And I guess the functionality -- presumably, you can't get everything on premise into the cloud offering. So how are you going to develop that over time? And then in terms of SOLIDWORKS, as you said, Thibault, it's sort of an early indicator, where do you see units going in Q3 or the second half?

Bernard Charles

Thank you very much for the question. For the type of market we serve, the consistency between what is called on premise solution on the cloud solution is essential. So therefore, the V6 architecture on what we are now delivering with 2014 and 2014x, I think it's a very noble architecture from that standpoint, which means that the solutions which are known by your customer installed inside can work the same way being run on the cloud. It's extremely -- customers are astonished. And they are astonished because we don't do light applications. When you do cars, machines, planes, it's high volume of data. And we're -- I think we have been able to create an architecture that provides response time, where, basically, you almost don't notice that the cloud is in Europe and you are in Korea. So none of our competitors have been able to do that, none of them, even for a very light solution. So the short answer is the application runs, of course, on the PC or the workstation, but you have a seamless navigation on the cloud resources as needed. And therefore, the pricing and the licensing will be very consistent with pricing and licensing that you are familiar with for the on premise. We'll probably learn new ways to provide delivery system that makes it a little bit more flexible, but we do that on the learning. But someone using the software will pay the same price, whether it's on premise or on cloud. Last, but not least, it applies also to SOLIDWORKS, which means that if a SOLIDWORKS user wants to communicate and exchange with a -- another SOLIDWORKS user, you just do, like on your iPhone, iCloud. So for us, you do 3D cloud, and there's nothing else to do when you are just connected. And before, the process was very complex because you have to send files or you had to put a PDM system in place that will communicate between PDM to PDM system, Product Data Management system to Product Data Management system. So it is, for the type of usage in engineering, manufacturing, design and so on are significant, it's really good. It's a good -- it's a -- it's a great time to be in Dassault Systèmes. It's a great time to win Dassault Systèmes. You are seeing many things on the Internet with like, say, website for transactions. So now, it's about creating products and doing design. It's a special moment. So all consistent, in short.

Thibault de Tersant

Michael, concerning your question on SOLIDWORKS, we don't see much change, much improvement actually in the SOLIDWORKS unit dynamic for the second half. The reality is that the improvement we see is very much linked to the fact that customers are keen to get applications, quick return on investment. The theme of 3DEXPERIENCE is attracting a lot of attention and with good answers. Version 6 migrations are also, of course, going to enter into play. And so these are the things that are going to improve new business growth for Dassault Systèmes as a whole. But SOLIDWORKS, we'll only start benefiting from this themes next year, but not this year. So for that reason, I don't think we need to count on much new license growth for SOLIDWORKS in the second half.


We will now take our next question from Adam Wood of Morgan Stanley.

Adam Wood - Morgan Stanley, Research Division

It's on DELMIA, actually, please. Obviously, there's been a little bit of a stop/start product over the last few years. It looks, over the last few quarters, as if we've seen good acceleration of growth and, obviously, very strong numbers in the second quarter. Could you just give us a little feel, is that kind of big one-off deal that maybe can't be repeated, or do you actually see a lot more interest in the installed base for that product now? And if so, how sustainable do you think growth is going forward? And can you maybe remind us a little bit of the available market for that product in total?

Bernard Charles

Thank you, Adam. You're right, we saw in the past years start/stop on the digital manufacturing. I think there are many factors related to that. The market maturity around the globe to really adopt digital platform for the make of the production were far less mature than what has been happening on the design side. This is changing. I think it's changing because of new ways to produce things. And there are many, many changes going on there, simplification of production systems, making them smaller, more like a network of capacity and also the globalization of the manufacturing economy per se. So I believe that -- and -- refer Thibault, we believe that from a strategic standpoint, the time has come to really provide new platforms for digital manufacturing. Apriso, when you look at their track record in the last years, they only reveal themself in the last 3 or 4 years. Before that, they were doing good things, but they were sold one by one. And now, when company says, all my manufacturing plants are going to use the same, consistent way to ramp up, produce and run, I think it's a sign. So I think it's a long-term opportunity. The market sizing has been considered as a niche market sizing, between 1 billion and 2 billion total market TAM, total accessible market. I think it's bigger than that. But we come back to this, on this topic, probably at the Analyst Meeting mid of next year, when we have built up the references we need to build up. And last, before, digital manufacturing was concentrating on highly complex goods, and now it's concentrating on simplicity, agility and speed. I think the example of what we have seen in L’Oréal with 9 plants are using simultaneous launch for shampoo bottles or these kind of things, like P&G is a proof that those techniques are applied in new sectors, same in life science. Anyway, so, Adam, we believe that there is a lot to do there. And once again, many of those software, which are used today, are very old software, legacy software. So I think they will need to go to next generation.

Unknown Executive

We'll take now one question from the room. Pierre-Henri?

Pierre-Henri Louvel

Pierre-Henri Louvel, Caisse des dépôts. I have 2 question, if I may. The first one is related to the -- since 18 months, we invested heavily in the launch of new industry solution. So can you share with us what the amount of revenue do you take from this new solution? And how speedily you think that is going to be in terms of revenue growth for next year? The second item is more linked to cloud and your new announcement. I'm interested toward the feeling of your customers, how do you -- how do they take the cloud? My concern is for the whole industry, the risk is lower revenue from the software, and that is from the software view. So do you think that your customer take the cloud in order to take additional investment or additional application? So it means that the software revenue for the whole industry is stable. Or do you think that within the current economic environment that they take the cloud in order to lower their CapEx?

Bernard Charles

Industry solution. The industry solution approach is related to the -- it's connect -- very connected with 3DEXPERIENCE platform, one parameter. Second parameter, it is driven more by new industries, not existing industries. Existing industries, they have been saying, "I buy the design tools. I buy the PLM tool. I buy the simulation tool." I think I'm referring to auto or IRO, for example, but this is changing. But in new industries, they don't care about the PCs. They want the process, in some ways, similar to what you have with the business systems that they have been adopting in the past. So that has accelerated our diversification. We have very good results on the total value we sell per transaction. So the leverage is the higher value, less discount in the negotiation, because it's easier to relate the value -- the price to the value we bring. So we're going to continue on accelerate. By end of this year, starting 2014, we'll have 36 industry solution experiences. They are very broad, like I just give you one example. You can go on our site. It's very -- I think it's very interesting for me. You need to go there. You have one which is, for example, 0 default target [Target Zero Defect] for a vehicle. So you can imagine it's a very broad solution. So -- and it facilitates the sales interaction and the real value. So that's one piece. We continue, we expand the portfolio, and we make it right by verifying the customers that they then understand why the price is done the way it's done. On the cloud, I only see opportunities, and it's a big one. Why so? Because today, it's quite complex to work in a global manner. We're not doing emails. And even in emails, you send the thing to somewhere, to someone and then the guys try to connect those information. Cloud brings a really new level of easiness to collaborate. Our software is done for collaboration. So for us, it's a big deal because, all of a sudden, we have the best-ever IT infrastructure we dreamed of, which has reached a level of performance and throughput suitable with the kind of object we manipulate. It was not the case before. It was very difficult to do before. When you do transaction, it's a small volume. We do a lot of them. But we do large volume, and we have demonstrated, like, for example, for Renault, for the platform that they have in Guyancourt, which is -- Guyancourt is nearby Paris here. When they are connected to a user in Brazil or connected to a user in Russia, connected to the Russia -- or a user in Korea, they have almost the same response time. There is a very little elapse time. And this is for design, of course. So now on the pricing, this is same pricing. But it creates so much, and the experience is so much easier that we believe that for many project, which are not sensitive, like the France project, like highly sensitive programs, of course, that cloud will be the preferred way for -- now the criteria for us is very clear. You might question the CapEx that it implies. But the reality is how fast can you provision resources based on the demand from customer. If you have the contract, you can provision. And we have demonstrated that on our own cloud experience, we can have only a few weeks gap between the demand to provide large resources and the capacity to deliver them. And last, but not least, we also, of course, our support external operators. Amazon was announced. We've probably at -- we'll have a second operator. We have done our own cloud, and the cost to run is highly efficient. So it's plus. It's not replacement. It's plus, and it's simplicity. So we'll see -- but in the next 6 months, we are -- I hope you feel that I'm very excited, because the initial customer experience is just -- they are astonished. They are really astonished with how much they can do that was not possible before. So it's not just -- it's not a new operating system. It's a new way to do -- to work. It's a new way to communicate, a new way to -- so I think, once again, this is the right moment to be at Dassault Systèmes.

Unknown Executive

Next question will come from the call operator.


Moawalla of Goldman Sachs.

Mohammed E. Moawalla - Goldman Sachs Group Inc., Research Division

I'm wondering if you could just comment on ENOVIA and what you're seeing there. I know the growth had stuttered in the prior couple of quarters, but we saw 6% growth again in Q2. And the acceleration that you expect in licenses in the second half, what sort of acceleration do you anticipate from ENOVIA there?

Bernard Charles

Just one -- a few comments, and, Thibault, you will take over, if it's okay. With the evolution of the 3DEXPERIENCE platform, this -- the ENOVIA portfolio is changing a lot. In the previous world, the ENOVIA portfolio was, and still will be, is used to connect the different design data together and the processes together, so-called PLM and PDM capabilities. In the new world of 3DEXPERIENCE platform, it's built in. It's always there. So it will be on the ENOVIA application are becoming program management, project management, compliances for life science, quality tracking. So it is becoming, as opposed to an infrastructure, a collection of application high-value portfolio. That simply said, what is the shift which is happening? So the profile of revenue that we had from the past will evolve going forward with the V6 online -- the V6 on the cloud. So that's just for the background. So we have hybrid revenue contribution right now coming from the 2 sources as this is evolving with the customer profile. Related to H2, Thibault, you want to say something now?

Thibault de Tersant

Well, I know we are very precise. But now, brand by brand, H2 performance is a little bit more of a challenge for me, to tell you the truth. However, what I can say is that we should see an acceleration of business for ENOVIA in the second half.


We will now take our next question from Neil Steer of Redburn.

Neil Steer - Redburn Partners LLP, Research Division

It's just a quick one for Thibault. Thibault, when you were finishing off your commentary on the net financial position, you obviously mentioned the EUR 1.6 billion or thereabouts of cash at the end of June. And with the borrowing facilities, you then went on and made the comment that you have EUR 2 billion of cash, and you used the phrase "for acquisitions you need to do tied to your strategy." And obviously, you've not shied away from doing deals in the past. But I'm just wondering, to what degree you're flagging an acceleration in the acquisition strategy of the business over the next couple of years?

Bernard Charles

The scope we can cover with the industry solution has changed a lot in the past months with the diversification and the possibility to integrate different business experience together. You -- I think the video you have seen today speaks for itself. In the past, people are -- were tracking program, project with little application or great application like Excel, but it does not integrate the cost and the tracking of the cost well and many other, like project management and so on. And so we are integrating all that. If you look carefully in the compass, you have the social and people connection, you have 3D, imagination, design, you have the simulation and you have, on the east side, information intelligence. It's clear that everything is there. So if you take 2 views, you take industry and you take that compass, you can predict our moves. They are very clear: technology, themes, consistency to be the world leader as a 3DEXPERIENCE company. The economy is going experience economy. People who are adding features in their cars are not successful. You need less feature, you need better experience, you need smart mobility. People who are doing the same thing in energy centers, of distribution of energy, end up making more money. The world is changing with the experience economy. And that's what Dassault Systèmes is going to do for the next 10 years. So we're going to use well our cash to make sure we put all those PCs together. And the horizon was communicated, I think, on February 9, 2012. We're going to stick to it like mad for the next 10, 15 years. And we are going to make it happen, collecting everything that needs to be collected and integrating everything that they need to be collected to become this 3DEXPERIENCE company. I don't think Thibault has anything to add to that, because the road map is that roadmap, and what we have to find out the targets, which are not anymore targets which are traditional targets. There are probably -- many of them is unknown start-ups or existing companies but who have decided to change and refocus their strategies. So you have seen what the most we have done recently in the last 2 years, Exalead, Netvibes. Who would have said that we would've bought Netvibes? But you know, when we introduced the 3DEXPERIENCE platform, everyone is saying that they are going to build up this business dashboard so that it can track the cost and allocate the budget. So it's fine for me to replace Excel files.

Thibault de Tersant

In fact, I have something to add.

Bernard Charles

Please do.

Thibault de Tersant

What I will add is that with the 3DEXPERIENCE market we are targeting with our strategy, there is an attraction for these targets. They see how we can fit, and so -- I mean, the job of convincing the target is becoming easier. They also see that we have a management organization by brand. And so they can see how they fit and how they are not completely lost in a big vessel. For us, it's not big, the systems, but maybe for some targets, it could seem big. So they are not lost in a global organization. And so this is helpful, it doesn't mean we don't have debates on valuation, but it is helpful.


We will now take our next question from Charles Brennan of Credit Suisse.

Charles Brennan - Crédit Suisse AG, Research Division

Great. It's actually 2 questions on acquisitions, if I could. Firstly, the 2-point contribution from acquisitions in the period, can you just give us some granularity there? I think according to the accounts, Transcat was always recorded as services. So I assume that 2% is Gemcom. That makes it a pretty disappointing Gemcom number. The mining industry is obviously not a great place to be, so maybe it has been disappointing. Secondly, why is the Apriso contribution so small at EUR 20 million? If the starting point is annual run rate of EUR 50 million, I would've thought this business would grow in 2013, and most businesses in this space tend to be second-half weighted.

Thibault de Tersant

So first of all, Transcat was not only services. Transcat was really about distributing our software and so was actually representing a portion of software price. So all in all -- and Transcat were also carrying a few applications that they have developed themselves. So the transcript revenue was, in fact, slightly -- majority of it was volumes software and not in services. So I think you need to rectify your computation, bearing that in mind. The Apriso was $50 million revenue. And here, what we are adding are EUR 20 million for the second half. Just to make sure there is no confusion. And Apriso is not -- is less, actually, loaded in the second half than other businesses. In manufacturing, it seems they don't like the trick of waiting until the last week of the year. They do that, not less, because they still need to run manufacturing operations. So it's more balanced between first half and second half. So I think it's -- EUR 20 million is a fair estimate of what we can deliver with Apriso, with always my concern that the transaction can be stabilized a little bit the first quarter of integration, but not more than that.

Bernard Charles

And I think it's prudent to be prudent in the first 6 months when we do this kind of integration. Your remark on the Gemcom, and apparently, of course, taking into account what Thibault said to not underestimate, we've also done with the GEOVIA -- Gemcom became GEOVIA, because today, it's an application that sits outside the traditional infrastructure we have, the next-generation infrastructure we have. It will take time for us to put this application on the 3DEXPERIENCE platform. It's going to take about 18 to -- 18 months to 2 years, at least. On the -- so we need to make this right. And I think if we do it right, the BHPs of the world and all those customers, they will discover the value of collaboration. Because today, they don't do any of that. Today, you have to go on the mine site to understand what is happening. They have no view. They have no clue what is happening on the white -- on the mine site. But tomorrow, it will be automated, it will be with a dashboard that provide really the way the mine is operated. And today, the only thing they look at is the volume and the cost. That's the reality of certain of those sectors, which are really behind in terms of the utilization of their processes. So we still are as convinced as day one, that there is a great business to do there, but it takes time to put the right infrastructure in place so they can use it.

I think with that, we are concluding this presentation. Thank you very much for participating to this, and thank you very much for your interest in Dassault Systèmes.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!