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Executives

Francois-Jose Bordonado

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

Analysts

Michael Briest - UBS Investment Bank, Research Division

Brice Prunas - Exane BNP Paribas, Research Division

Gerardus Vos - Barclays Capital, Research Division

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Amit B. Harchandani - Citigroup Inc, Research Division

Sid Mehra - Morgan Stanley, Research Division

Charles Brennan - Crédit Suisse AG, Research Division

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

Gregory Ramirez - Bryan Garnier & Co Ltd, Research Division

Alexandre Iatrides - Oddo Securities, Research Division

Chandramouli Sriraman - MainFirst Bank AG, Research Division

Derric Marcon - Societe Generale Cross Asset Research

Laurent Daure - Kepler Cheuvreux, Research Division

Susan Anthony - Mirabaud Securities LLP, Research Division

Dassault Systemes SA (OTCPK:DASTY) Preliminary Q3 2013 Results Call October 14, 2013 8:00 AM ET

Operator

Thank you for standing by, and welcome to the Dassault Systèmes Third Quarter 2013 Preliminary Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to François Bordonado, Investor Relations. Please go ahead.

Francois-Jose Bordonado

Thank you, Valerie. Good afternoon, and good morning, ladies and gentlemen. Thank you for joining us for a review of our third quarter preliminary financial results. On the conference call are: Bernard Charles, CEO; and Thibault de Tersant, CFO. Dassault Systèmes financial results are prepared in accordance with IFRS. On this call, our discussion will be limited to non-IFRS financial information in order to make comparison to our financial objectives, which are presented solely on a non-IFRS basis. These figures are before deferred revenue write-downs, amortization of acquired intangibles, share-based compensation expenses and other operating income and expense net and the related tax effects as applicable.

In addition, some of the comments we will make on this call will contain forward-looking statements, which could differ materially from actual results. Please refer to our risk factors in today's press release and in our 2012 Document de référence.

We'll begin with formal comments by Bernard and Thibault, and then we will take your questions. Since the information we are sharing today is preliminary in nature, it is subject to completion of our closing work. We may not be in a position to respond to all your questions at this time, but we'll do our best. Finally, we'll return to our pre-earnings quiet period beginning tomorrow morning, October 15, and we'll have no further comments until we release our full earnings result on October 24, 2013.

I would now like to turn the call over to Bernard Charles.

Bernard Charles

Thank you for joining today's call. We entered last year, 2012, with a cautious view of the macroeconomic environment and we have continued with this view into 2013. We saw the initial signs of its impact on us starting in the second half of last year with small companies in our Professional Channel and then with larger companies.

Moving through 2013, the economic, political and currency backdrops have gotten even more complex, and so companies are changing both the timing and the way they are making purchases, waiting, buying in smaller amounts or choosing rental. We have discussed these factors on our prior calls. While companies are extending their decision-making timeframe, they are, at the same time, signaling their commitment to our software and industry solutions with high renewal rates, driving a good level of growth of our recurring software revenue.

With a financial model that has always offered rental, customers have the opportunity to choose purchase, rental or a combination thereof or even to move back and forth as they desire. So this flexibility has helped us deliver growth in a period that has not been easy to do so. From an operational perspective, we have continued to focus on improving our benchmark -- on benchmarking ourself to best practices in this area. So despite the tough backdrop, we are delivering revenue growth and we are continuing to grow our customer base and relationships.

Looking at our Professional Channel. About half of its licenses come from the addition of new customers and half from its installed base buying additional seats, as well as other products. Similarly, our Value Solution channel continues to expand and add new customers, evidenced in the mix of new licenses revenue each quarter. And in direct sales, important product initiatives are centered on extending our capabilities to serve and to reach more users across the enterprise, as well as developing new relationships in our target industries, what we call diversification industries.

While we are focused on the present, we are spending a significant amount of time in preparing our future growth opportunities. We are in the midst of an enormous amount of work in research and development to deliver what we believe will be a sea-change with our 3DEXPERIENCE platform. As we build our references here, we see strong interest from our Lighthouse program we unveiled in July. I will share more with you here on our earnings date on October 24.

In parallel, we are also preparing our sales infrastructure. Across all channels, we are looking to enhance our industry and product expertise, as well as reinforcing our sales presence in certain regions of the world. And we are growing our indirect channels, so a significant amount of time is being spent to nurture our existing and new partner relationships.

Finally, while the result this quarter were not what we had planned and therefore anticipated, in this somewhat uncertain environment, we remain committed to deliver high value to our customers. We understand the transition to 3DEXPERIENCE can create challenges, so we will continue to strengthen and reinforce our teams to ensure we provide a strong level of support to both achieve our financial objectives and build the future growth plans.

Let me turn the call over to Thibault.

Thibault de Tersant

Our philosophy is to provide the market with a guidance we can reach. This hasn't been the case this quarter, and we apologize for that. we will try to provide you with all the relevant information and clarify the reasons why we have been surprised.

Let me begin by comparing our preliminary financial results to our objectives and focus on the reasons for the shortfall. Third quarter non-IFRS total revenue came in at EUR 496 million compared to our objective of EUR 520 million. Approximately EUR 16 million relates to the slippage of deals and services contracts, EUR 12 million in new licenses and EUR 4 million in services, impacting principally CATIA and ENOVIA. We expect most of the EUR 12 million software deal-related slippages to close in the fourth quarter.

The second portion is actually good news in that we had a number of deals that closed as anticipated. However, the customers selected our rental model rather than upfront purchase model. The net reduction to revenue from this higher mix of rental is estimated at about EUR 8 million. From a growth rate perspective, third quarter revenue increased 4% in constant currencies rather than our expectation of 8% to 9% with the higher rental mix accounting for 1.5 points of the difference.

Reflecting the lower revenue, non-IFRS EPS was EUR 0.88 compared to our objective of EUR 0.92. Looking at our third quarter earnings growth rates, there is an 8 point swing from negative currency effects with non-IFRS EPS of EUR 0.88, representing a decrease of 1%, while in constant currency, it represents an increase of 7% year-over-year.

Within the quarter, we are pleased with several key metrics. Among them, first, recurring software revenue increased about 8% in constant currencies and represented about 77% of total software revenue in the quarter. Renewal rates remained very strong and were well in line with our expectations.

Second, our non-IFRS operating margin came in at 31.6%, comparing favorably with our non-IFRS objective of 31%. We continue to work on increasing our operational efficiencies, so this helped us. More broadly, by improving how we operate, we are able to absorb some of the dilution from new acquisitions that we believe will be integral and important complements to our strategic roadmap.

Turning to the fourth quarter. We have reexamined our forecast, both bottoms-up and tops-down to develop what we anticipate will be the low end of our revenue range, which is EUR 565 million, representing a growth of at least 5% in constant currencies and renewing also with new licenses revenue growth. This leads to a non-IFRS operating margin of about 34% based upon our investment plans and non-IFRS EPS of about EUR 0.97. We have included the assumption of the higher French corporate taxes currently in discussion in calculating our EPS estimate. Actually, the higher French corporate taxes represent half of the difference.

Looking more closely at our revenue construction. The low end incorporates transactions where we see a high likelihood of closures. We have then assumed that a higher proportion of this new business might be concluded as rental transactions rather than as upfront purchases and assumed transaction delays pushing a portion of the pipe to 2014. We then evaluated our quarter-to-quarter expectations for recurring software revenue growth and performed an updated scrub of services revenue. On this very point, fourth quarter recurring revenue last year included EUR 6 million of exceptional items that is coming from prior quarters and compliance. As a result, recurring revenue growth in fourth quarter 2013 will be 2 points less than the normalized growth of recurring of 7% to 8%.

With respect to currencies, our assumptions around our largest currency, euro, dollar and yen were pretty well aligned with how they actually evolved during quarter. At the time, the number of emerging market currencies have weakened significantly, and this has impacted our business results in different geographies, including Australia, India, Brazil and also to some extent, United Kingdom and Canada. So in those countries, we have taken this into account in developing the initial part of our fourth quarter guidance. We thought this was relevant because there is no difference between the current dollar and yen rates assumed in the guidance and actual rates.

Finally, while the financial results this quarter were not what we had anticipated, I want to make it perfectly clear that we remain committed to deliver high value to our customers and shareholders.

At this point, Bernard and I will be very happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Briest of UBS.

Michael Briest - UBS Investment Bank, Research Division

Perhaps you could talk a little bit about the regional picture of the license shortfall and the shift to rental and also whether there were any particular industries that were affected. And I also want to know if you believe that your plans for the cloud-based solutions should be or might be accelerated as a result of this and what investment implications or margin implications that might have.

Bernard Charles

Thibault, any comments on the -- I know we will provide much more detail on October 24. But some highlights maybe right now?

Thibault de Tersant

Certainly. From a regional standpoint, Michael, the delays in transaction were happening in all regions but more focused actually in Asia. And our teams see a lot of opportunities, of course, in Asia. So they feel very confident about closing them. What was new news was the fact that in Asia, we also sold the first switches to rental. Historically, we were not selling many licenses and other rental models in Asia, and this was truly something new in this third quarter. Europe, with 7% growth, was, in fact, less affected. I mean, the rental model, of course, is in place in Europe, but the proportion did not change very significantly in Europe, with some exceptions in Nordic countries of Europe. But all in all, we were concerned about Europe, that the performance in Europe was different, where it was, of course, less good in North America with relatively flat revenues. And in Asia, it was a surprise.

Bernard Charles

Relative to the cloud, of course, what is -- I think from a view [ph] if I was looking at the software component of the cloud, it's very much aligned with the rental model that we have. But of course, the total revenue will be a different structure because when you -- when we offer rental on a cloud, we have also the contribution of the infrastructure, which is provided to the customer. We'll provide more information on October 21. We thought that this will be easy to -- 24th, will be easy to understand. At this point in time, as I mentioned in the call today, we have started our Lighthouse customer, beginning of July this year, so we are 3 months. And I think we have quite interesting news to share with you, but we'll wait next week for that.

Michael Briest - UBS Investment Bank, Research Division

Sorry, Thibault, could you say something about the industries, whether any industry was particularly affected or not?

Thibault de Tersant

Well, in fact, Michael, the view from industries, I'll have more details on the 24th. At the first glance, the delays happened probably more in auto and industrial equipment. But I'll come back with a more extensive picture on the 24th.

Operator

Your next question comes from the line of Brice Prunas of Exane BNP.

Brice Prunas - Exane BNP Paribas, Research Division

I would like to come back on the question of rentals, please. And the first question is if you could remind us the profitability of the rental model that is the traditional license maintenance model. Also about rental, I would like to know, in fact, how much do you think it is going to represent in the medium term in your model. I believe we are now above 20% of recurring sales.

Bernard Charles

And I think rental should not be confused with the maintenance model. Thibault?

Thibault de Tersant

So rental, the model is fairly simple actually. And it means that after 3 years of the license being rented, the amount of revenue that we have received is equivalent to the purchase of the license. And after 3 years, it means that the recurring we get is, in fact, the double of what we would get otherwise with a purchase license. So as you can see, it is certainly a good model, a good business model that we like. And it's the reason why we're not trying to stop it when there is an opportunity to push it to customers. And certainly, the current environment is proving to be a good opportunity to go more to rentals. So there is no doubt. In terms of percentage of recurring, rentals are now at 25% of recurring.

Brice Prunas - Exane BNP Paribas, Research Division

And the medium-term vision, where do you think that could go?

Thibault de Tersant

An important factor will be our cloud offering and things we are going to introduce then truly next year, early next year. It's not so easy to do a complete modeling on that. But for sure, the proportion of rental is going to continue to increase.

Operator

Your next question comes from the line of Gerardus Vos of Barclays.

Gerardus Vos - Barclays Capital, Research Division

Just to get on the kind of rental, like everybody else, could you give us a little bit of a feeling what were the kind of growth rate was? I believe a year ago, in Q3, it was kind of around 14%. And also if there were now a [ph] change in strategy. Are you actively targeting this more perhaps in response to Autodesk, which is pushing this a lot more? And then secondly, just on the kind of margin and the kind of cost base, if you look at the kind of revenues and you apply kind of a normalized kind of gross margin, it looks that you've been able to compress the cost base or the OpEx base quite a bit in the third quarter. Given that all the delay happened towards the end, I was wondering if you kind of shed a little bit of light how you managed to do that and what we perhaps should think about going forward on the kind of normalized OpEx base.

Bernard Charles

Just one comment before I let Thibault provide you with more detail. We have always been promoting the rental. The question is not about that. The question was customer acceptance to take it or not. And often we have seen that for our previous project, they prefer to select the, what we call, PLC, Primary License Charge and then the annual fee. But we have always been promoting it for years since the inception of Dassault Systèmes, as a matter of fact. And we like this model. When it's adopted faster than what we expected, it creates a certain situation like the one today. But it has always been our preferred model. And we think that going forward, it's even something that is well aligned with the cloud approach. And with that being said, Thibault?

Thibault de Tersant

Yes. So the increase in rental was, in fact, relatively similar to the increase in recurring. That's about 8% in this third quarter. The proportion of rentals increased actually in September of third quarter, so had very little impact on the immediate growth in rentals. We have seen with interest that Autodesk is announcing a rental model now for Inventor and some other products. We have no plans to do the same for SOLIDWORKS, which is selling well in the current model. But we have certainly no intentions to start introducing new products in Software as a Service and this will be the way we will continue to expand our portfolio under subscription-based licensing. In terms of our cost base in third quarter, we did a good job with it and we used -- actually hiring in G&A functions and also actually in sales and marketing, and to a lesser extent, in R&D, where we continue to grow staffing. This was all actually in preparation of acquisitions. There is also a component, of course, which is the fact that when the quarter is disappointing as it is, there are less commissions to be paid to salespeople. So there is also an automatic component and we also have variable pay, including most of our salary components. But we were managing truly our cost base willingly since the beginning of the quarter.

Bernard Charles

There was no last-minute cut, basically.

Operator

Your next question comes from the line of Jay Vleeschhouwer of Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Bernard, Thibault, was there anything unusual about the magnitude of the deal slippage? I would have to imagine that for you, like your competitors, it's quite routine for deals to slip from 1 quarter to another. We've seen this many times over the years, though not often with you, of course. Could you comment on whether there was something unusual in that for you now? Secondly, could you comment on the impact of the many industry solutions that you now have in the market in terms of either helping to accelerate business or perhaps even slowing it down in some instances where [ph] customers are evaluating the new solution set that you're offering?

Bernard Charles

Maybe one comment. Our sales force is doing multiple things at the same time, which is probably the unusual situation as compared to the last 14 years since we were coded [ph], which we are really managing now 2 transformations at the same time, the Industry Solution Experience, which in [ph] new industry is providing results. We'll come back on this on October 24. And also the preparation of the cloud approach. This has been put on top of the regular way of doing business.

[Audio Gap]

Probably is also creating -- as I said, in my comments earlier, creating some challenges for the organizations to continue to stay focused to deliver what they have to deliver. And that's probably above all one of the reasons. But I think we have to go through this transformation as we go forward for the next coming quarters. Anything special, Thibault, related to last-minute -- we are used to see that, so it was always planned. I don't know if there are -- the rental is one parameter.

Thibault de Tersant

Yes. The rental, really the new aspect was that it started now to be adopted in Asia. The magnitude of the slippage of transactions, to give you an indication, if we had done the same last week of the quarter as in third quarter of 2012, we would have been exactly on guidance. So yes, this was an unusual slippage. It initially happened in a region where, all in all, they are extremely optimistic with the business prospects. So this is what is a little bit odd with the situation but can also be understood probably by the magnitude of transactions to be done in the region. But yes, there was a slippage at the end of the quarter, which was unusual for us. And it's, in fact, the reason why we are not on guidance.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Do you have enough detail at this point to comment on V6 demand specifically for any of the brands? And are you getting an issue with customers, vis-à-vis could be the pricing or the end-user model that you've introduced with V6? Is that at all an issue in terms of upfront or new demand? And one last clarification, if I may, Thibault, on your comment on automotive, which you said was one of the verticals that was somewhat softer. Would it be fair to say that with non-European automotive that, that was more of the issue?

Thibault de Tersant

So Version 6 is -- I mean, we see more and more interest in projects to be launched in Version 6. It is true that the main use of pricing takes effort to be accepted because it's a change in implementation. I think that our level of pricing is not affected and is, in fact, increasing slightly in terms of average price for our different software, including CATIA. But I agree that in certain situations, the delays at the end of the third quarter were caused by customers willing to reopen a negotiation of pet on us [ph], to say in a different manner. And they tested our nerves and our nerves are quite good. So yes, there is a new business model specific to Version 6. We see a lot of projects and we see sales efforts to really get it accepted by the customer base. That is true. But at the same time, end user is also a way for us to prepare for cloud offerings. And Version 6 has become a system like any other enterprise system, which is better priced and better deployed by customers actually under our end-user system, mechanism, like another enterprise system would be. So it's more in alignment, I think, with enterprise systems than anything else.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. And then the automotive question, please?

Thibault de Tersant

Well, the automotive question...

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

You mentioned earlier in response to an earlier question that automotive was one of the verticals where you had seen some issue in the quarter. And I was trying get a little bit more clarification, whether it was correct to infer that it was non-European automotive, particularly the Americas, perhaps, that was part of that.

Thibault de Tersant

There are pressures also in other verticals like industrial equipment. But I cannot say that automotive is not affected at all. It is, in some areas of suppliers in particular.

Operator

Your next question comes from the line of Amit Harchandani of Citigroup.

Amit B. Harchandani - Citigroup Inc, Research Division

Amit Harchandani, Citigroup. My first question would be maybe around your M&A plans. Given that you have your sales force in the midst of a transition in terms of product portfolio diversification, added to that, you have emerging market volatility and possibly change in customer buying behavior, does that in some way maybe suggest to you to maybe push out your M&A plans a little bit to sort of avoid adding to further complexity to the mix? So that really would be my first question in terms of how are you thinking right now in terms of doing M&A, given what you're seeing in the market today. And my second question would be maybe around GEOVIA and Gemcom. Given its exposure to some of these emerging market economies, how is the business faring in that part of your product portfolio?

Bernard Charles

I think the M&A plan is not cadence with the quarter and we have clarity in what we want to do there. On the -- after any M&A, it takes time to not only integrate as I think is quite direct because we always do that as part of the negotiation when we do agree to come together. But to leverage the total industry solution is always taking time. For the time being, the transformation is really in favor of Industry Solution Experiences, and therefore, the approach to industry solutions, which is, step-by-step, becoming of high-interest for customers, will, in fact, be a facilitator to the M&A we have done or any new that might occur later. So there is no effect on -- from one to the other and as Thibault said, we have increased the operating margin to make sure we have the proper discipline to create soft environment to do this integration. I think of GEOVIA, it's too early. We can come back on this next week. We have not done all the study by plans yet. Thibault, anything you want to, maybe, say around that?

Thibault de Tersant

The only comment is that the environment for mining companies is not very good at the present in terms of CapEx by mining companies. But this will change, of course and is preparing good rebound. At the same time, this was already factored in our guidance. So it's certainly not the GEOVIA surprise that is causing the announcement of today.

Operator

Your next question comes from the line of Adam Wood of Morgan Stanley.

Sid Mehra - Morgan Stanley, Research Division

This is actually Sid Mehra on behalf of Adam Wood. I just have 1 question on the product transition to V6. We've heard before that during the transition to V5, there was some data migration issues for customers. Are you experiencing anything similar with customers currently, and do you believe that that is? And if so, is that resulting in some form of hiatus here with spending?

Bernard Charles

Not really. There is, I think -- the migration of V5 to V6 is actually quite transparent. I think in order -- the basic implementation we have done that has never been a topic for slowing down anything. If there are things that might be slowing down the V6 expansion, they are related more to the new scope of what V6 can cover and, therefore, the time that it takes our customer to transform and simplify their business. But for the data compatibility, we have, I think, we have an outstanding tactic on up to now. And we have a good experience on this with the implementation we have done up to now. So this should not be a risk factor anymore.

Operator

Your next question comes from the line of Charles Brennan of Crédit Suisse.

Charles Brennan - Crédit Suisse AG, Research Division

Unfortunately, I want to go back on the rental issue. Over the past few quarters, we've seen transition away from licenses towards rentals. So I'm just wondering why you called out the EUR 8 million this quarter. Is that EUR 8 million over and above the impact you were budgeting for? Or were you not really budgeting for any particular impact this quarter?

Bernard Charles

One comment I want to say before Thibault give you more detail on the EUR 8 million is that it's true that in the way we communicate now about rental, the light of change in some way on the topic because with the perspective of cloud, what was something that was kind of option for years, by the way, has always been there. I think was even bigger at the time of mainframes, so years ago. There is a new light on the rental model from the fact that people understand that this will be very well aligned with the cloud, just as a remark. So in some way the remarks we do in conferences, customer discussions, partner discussions are all -- are getting a new level of attention, I would say. Even though we have not published yet the terms and conditions for exactly how the rental model will be done for cloud because, of course, you cannot imagine that we will do this by the hours, not even the day. It will be longer period. So there will be a stability in the model but the decisions are not all taken in this area. That's as -- I know it that to say it's creating a new attention or new level of interest in rental.

Charles Brennan - Crédit Suisse AG, Research Division

So the EUR 8 million represents an acceleration over the run rates we've seen for the past couple of quarters, is that the right way to interpret it?

Thibault de Tersant

That's exactly right, yes. EUR 8 million is, in fact, what we did not have in our forecast model. And is in fact, as you said, some supplemental activity of switches to rental compared to the first half.

Charles Brennan - Crédit Suisse AG, Research Division

And you called that out specifically to small- and medium-sized companies. What's the absolute level of license you've got left to that customer base that's at risk of transitioning to a rental model?

Thibault de Tersant

I'm not sure I am following your question. We still have very sizeable, of course, amount of licenses taken by the customers with upfront licenses.

Charles Brennan - Crédit Suisse AG, Research Division

So I guess I'm asking, what's the split of your business between large corporations and SMBs? I would thought the SMB would now be a relatively small proportion of your overall licenses.

Thibault de Tersant

In the revenue, we do. In the revenue, we do. Large accounts represent 45% to 50%. And SMBs represent the other half of the revenue. In terms of new licenses, this proportion is slightly higher for SMB today. It's around 55%.

Operator

Your next question comes from the line of Mohammed Moawalla of Goldman Sachs.

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

Thibault or Bernard, in light of sort of some of the volatility you've seen in the third quarter, are there any other broader organization or -- so sales force or go-to-market changes you envisage making, particularly to try to manage what you saw in the third quarter? And as part of the sort of the bigger transition to multiple industries, what sort of organizational changes do you think mainly can be still made?

Bernard Charles

The structure of the organization is well set up. There is no structural -- not many, many changes to be done. Operationally, in terms of discipline to create offer from Industry Solution Experiences as opposed to product-based transaction, that's the transition in which we are doing now from a pure operation and sales discipline, still requires training. It creates some dilution of attention, I must admit. We knew it on -- as you know, when there are a little bit of tension on the market, focus is key. We don't plan to slow down. We just think that those things need to be done for next year. And we are learning how to keep both the focus on product-based transactions, as well as growing the industry solution transactions. It's coming up, but everyone has not learned yet. That's how we'd say, in simple words, the situation.

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

Okay. And just following up to your point, Thibault, that you expect some of these slipped transaction to close, what visibility do you have around that, around the fourth quarter?

Thibault de Tersant

Well, the visibility is that the sales teams were also surprised that there was a lengthening in decision factor, et cetera. So from their standpoint, this transaction, first of all, didn't go to competitors. And second of all, have budget lines and pricing agreed, even if there are, from time-to-time, some attempts. So they expect them to close. I hesitate to give you a percentage, but when I listen to them, it's certainly around between somewhere between 80% and 100% in Q4.

Operator

Your next question comes from the line of Gregory Ramirez of Bryan Garnier.

Gregory Ramirez - Bryan Garnier & Co Ltd, Research Division

I just have only 1 question. Do you think that some delays that you had in the Americas region was related to the impact of the government shutdown from, say, directly or indirectly?

Bernard Charles

Look at all transactions that [indiscernible].

Thibault de Tersant

Well, certainly, the shutdown does not help. It happened after the close of the quarter, but unusual, it was already a concern from a few of our customers. I cannot be very precise at this point -- on that exact point.

Operator

Your next question comes from the line of Alexandre Iatrides of Oddo.

Alexandre Iatrides - Oddo Securities, Research Division

You talked about delays in decisions. Do you expect to have an acceleration in CATIA V6 due to the functionality? If we retreat from the rental effect, do you see an acceleration in CATIA V6, maybe number of seats or migration with only a question of pricing, or do you also feel difficulties to convince clients to migrate in an, I mean, due to macro or maybe other reasons?

Thibault de Tersant

Alexandre, we see the acceleration in the coming quarters without a doubt. It was not, frankly, a scenario exactly for third quarter but for the coming quarters, yes, it is still absolutely our scenario.

Operator

Your next question comes from the line of Chandra Sriraman of MainFirst.

Chandramouli Sriraman - MainFirst Bank AG, Research Division

I have a couple. So given that rentals are becoming more important, can you just talk -- take us through how different are the attrition rates of customers in these 2 kinds of pricing models? Do you see greater attrition in rentals? I ask this question basically because as I understand that rentals are based on active users. So should we expect greater volatility in your recurring business, say, in the medium term? And the second question I have is now for your Q4 guidance, you have incorporated this accelerated move towards rentals. So should we assume that this is a most secular rate of move in price and something similar for 2014 as well?

Thibault de Tersant

So in terms of attrition rates, historically, rentals attritions had been extremely low for us. In fact, the only example I can point to are the ones where customers are reducing setting. This is really when we see a rental attrition. But where the rental model is quite sticky because when you stop, you truly cannot use the licenses anymore. All in all, if I exclude SOLIDWORKS just for a while, the renewal rate for all our recurring are at 97%, and the rental renewal rate stands at the similar level. In terms of pricing in 2014, we are not planning to change the formula enabling to go from the purchase of a license to rentals. We will keep it and it will also serve as a basis for our subscription model.

Operator

Your next question comes from the line of Derric Marcon of Société Générale.

Derric Marcon - Societe Generale Cross Asset Research

Thibault, let me just have a follow-up on the 97% you mentioned. Does it take into account the flexibility customer will gain through rental licensing model, i.e., when Boeing is using rental, I would imagine that it will adapt the level of CTUs [ph] in correlation or in parallel with the ongoing project development project [ph] they have, that's my first question. My second question, do you believe that you will lock new customer on a 3-year period when it is a question of clouds offering? And my last question, still on the cloud, do you intend to have a multi-tenant architecture for your next product raise [ph]?

Bernard Charles

Okay. Multi-tenant is yes for [indiscernible] 2014 [indiscernible] multi-tenant. I'll give you time, Thibault, to think about the previous question.

Thibault de Tersant

So it is true that for some large accounts, rental is a manner to adapt to a number of engineers deployed. It is the case of few large accounts, and Boeing is an example of those, yes. And so we have known periods in our history of adaptation of number of users, and this is truly absolutely linked to the number of programs to be launched. So we are, right now, actually, I believe, in a curve where Boeing was able to reduce the number of users but they are launching new planes. So I assume that this curve is going to go and invert itself within a couple of quarters. Concerning the upfront payments, it is also true that in some cases, we have customers willing to use CapEx budgets. So we will consider having an ability for an upfront payment also in our software-as-a-service offering But frankly, the subscription with pro-rata revenue recognition is going to be the dominant model in software-as-a-service. And for rentals, we don't do upfront, there are no upfront for rental licenses.

Derric Marcon - Societe Generale Cross Asset Research

But Thibault, in the cloud business, you expect customers will find a 3-year contract for cloud solution?

Thibault de Tersant

Well, we will see. But I certainly don't want to put that completely aside because in some cases, it can help customers, which are trusting the solution to tap into CapEx budgets.

Operator

Your next question comes from the line of Laurent Daure of Kepler.

Laurent Daure - Kepler Cheuvreux, Research Division

I have 2 questions. Now the first is on the comments you made for the fourth quarter and the 5% was minimum that you're expecting. I mean, if you -- if I understand well, you think all the slippage, most of the slippage will be recovered in the fourth quarter, which is about 3 points of worth, if I am right, plus 2 points from acquisitions. So does it mean that basically your worst case for Q4 is a flattish scenario? And the second question is, coming back on the rentals, could you remind us the worst in recent quarters of the rentals?

Thibault de Tersant

Yes. So for Q4, just to be precise, what we are doing is we are trying to provide low end of the guidance, which is why we are also planning further shift to rental model in Q4 and also some slippage because we don't want to surprise you again in Q4. So what we have done to be very specific is we have taken out from our guidance for Q4, and we have reduced it by EUR 5 million for currency effects, and like the rupee and the Australian dollar and the like. And EUR 15 million for slippage and shift to rentals. And we are planning to close some of these transactions of Q3 and majority of them actually in Q4. So what we have done is we have taken the same kind of impact in Q4, applied, of course, to the new business we are planning for Q4, which is larger than Q3 than the one we saw in Q3. And we also did the bottom-up, looking at the deals and what are the deals that we believe are absolutely secure and we arrived at, approximately, at the same figure. And that's why we decided we will not completely open to doubt but we would provide you with the guidance on the low end.

Laurent Daure - Kepler Cheuvreux, Research Division

Okay. And on the rentals growth in the previous quarters?

Thibault de Tersant

The other remark I would like to do on Q4 [indiscernible] is the fact that at 5%, this assumes new licenses revenue growth in Q4 because of the exceptional and recurring that I mentioned during the conference call. So it's not the same dynamic in Q4. As the one we saw in Q3, it is really about new license growth. So I wanted to make that precision.

Operator

Our last question is from the line of Susan Anthony of Mirabaud Securities.

Susan Anthony - Mirabaud Securities LLP, Research Division

Just to be a bit more specific on the delays that you saw, the slippages, were they typically from new customers or from existing customers? Or was it kind of across-the-board?

Bernard Charles

I think it's a mix. We'd say a mix. Thibault, anything specific you want to say about it?

Thibault de Tersant

No. I mean, it is also coming from existing customers. It is majority coming from mid-sized and large customers. And so I think the proportion is the same than in new sales where we see a proportion of about 20% in new customers and 80% in existing customers for this kind of customers.

Susan Anthony - Mirabaud Securities LLP, Research Division

Okay. And is any of that, do you think, to do with difficulty in getting financed or is it just longer -- a process internally or just hesitating because of the economic and political backdrop?

Thibault de Tersant

I think that it's a combination of factors. I believe that in some cases, also shifts to rentals were caused by difficulties with CapEx and financing of CapEx. I think that for the slippage, it's a combination between that consideration, lengthening review cycles inside large accounts and some negotiation factors as well.

Susan Anthony - Mirabaud Securities LLP, Research Division

Okay. And then finally...

Bernard Charles

Usually, we don't -- we never have -- we never give good flexibility for negotiation tactics toward the end of the quarter. It has been a discipline that we have even strengthened for all channel recently and that we don't want to give good -- bad habits to the market.

Susan Anthony - Mirabaud Securities LLP, Research Division

Understood. And then finally, if we could look out or if you could look out to 2014, do you imagine that what we see -- I mean, obviously rentals is going to be an ongoing trend, but do you think that the slippages is something that we should come to expect more of? Or is this -- we can hope a temporary issue, but how do you see that?

Thibault de Tersant

I think that we are going to put a lot of emphasis on slippages. We learned our lesson. And so at this point, I certainly don't want to anticipate that we will see the same behavior in 2014. We are going to put our act together in order to prevent it.

Francois-Jose Bordonado

I think it was our last question.

Bernard Charles

So with that, thank you very much for joining this call at the last minute, unfortunately. And we will talk to each other on October 24. For more details about the landscape for the year, of course. Thank you again and talk to you soon next week.

Operator

That does conclude your conference for today. Thank you for participating. You may now disconnect.

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