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Executives

François-José 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

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Charles Brennan - Crédit Suisse AG, Research Division

Derric Marcon - Societe Generale Cross Asset Research

Michael Briest - UBS Investment Bank, Research Division

Brice Prunas - Exane BNP Paribas, Research Division

Amit B. Harchandani - Citigroup Inc, Research Division

Dassault Systemes SA (OTCPK:DASTY) Q3 2013 Earnings Call October 24, 2013 9:00 AM ET

Operator

Thank you for standing by, and welcome to the Dassault Systèmes Third Quarter 2013 Financial Results 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.

François-José Bordonado

[French] Thank you for joining Bernard Charlès, CEO; and Thibault de Tersant, CFO, for our 2013 third quarter conference call. We held our webcast presentation in London earlier today and have placed the presentation on our website.

Several brief reminders before we begin. Dassault Systèmes' financial results are prepared in accordance with IFRS. We have provided supplemental non-IFRS financial information, which will explain the reconciliation tables included in our earnings press release. Some of the comment we'll 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 referrals. Before today, revenue growth figure are in constant currencies, unless otherwise noted.

I would now like to turn the floor over to Bernard Charlès.

Bernard Charles

Thank you, François-José. Thank you for joining today's call. This morning, we issued our earnings press release, confirming the information we shared with you last week, at the time of our preliminary result on call -- released on call.

Third quarter revenue on earnings came in below objectives on a sudden shift in timing of the closures in the last days of the quarter. Our revenue increased 4%, reflecting deal flippage, higher shift to rental and lower services. The common trait of all 3 of these components is macro uncertainty, leading to an environment where companies are taking more time to make new investments, extending the time to close transactions.

Within this environment, we delivered solid recurring revenue results, up 8% and representing 77% of total software revenue. And we delivered a strong operating margin performance well in line with our objectives.

Turning to our business. We are firmly convinced that our strategy will drive a doubling of our addressable market, and the prediction of our cloud industry solution experiences represent a very significant step forward in terms of user experience, speed and easy to get started. I'm quite pleased by the excellent feedback we are receiving from our clients.

Turning to original review. The first observation I would share is that Asia had a surprising reversal in the third quarter, with revenue up only 2% compared to the growth in the first half of 11%. We saw negative new licenses revenue growth. We're also impacted by weakness in emerging markets currencies within Asia. South Korea delivered the strongest performance, and Japan was stable.

Looking beyond the currency value, Asia represents a large opportunity for us and we have made significant progress growing our presence. For instance, in China, we are expanding our field capacity there, both on a direct basis and indirect through partners. Year-to-date, revenues in Asia are higher by 8% in constant currencies.

High-growth countries, which are an important part of the story in Asia in particular, experienced a sharp quarter-to-quarter slow down, with revenue increasing 1% in the second quarter, while year-to-date, the growth is about 13%.

In the Americas, the total revenue increased 1% in constant currency on lower new licenses and services. Latin Americas have shown a strong performance, both in third quarter and year-to-date. So the 9 months, Americas' revenue is higher by 5%.

In Europe, revenue increased 7%. Results were largely, as expected, reflecting both the macro environment and seasonality. Germany and U.K. delivered a solid performance on a comparative basis. We also saw improvement in Southern Europe. Revenue results were driven by strong year-over-year growth in recurring software revenue. Of the 3 regions, Europe has demonstrated the strongest evolution of recurring software revenue. Year-to-date, revenue in Europe grew 5%.

Our software revenue in the third quarter increased 4%, with transaction slippage at the end of the quarter affecting most brands. Our PLM brands grew 3%, CATIA and ENOVIA results were more affected with some purchasing moving forward, but in the form of a rental revenue. SIMULIA has continued to deliver good growth, with the large majority of its software revenue coming in to usage model. DELMIA benefited from the addition of appraisal [ph] where their first quarter of integration went largely as anticipated.

The mining sector is under significant pressure, and so GEOVIA's results reflect this, as we discussed last quarter. While new solutions are in process, they will benefit the future. SOLIDWORKS software revenue grew 6%, led by recurring software on a slight increase in new licenses revenue. Unit volume was lower by 6%. It is a clear indicator of the macro environment with the shortest sales cycle of the group.

Our work with clients clearly illustrates the significant business value being delivered with the use of our software applications, business platform and industry solution experiences. For example, to be able to deliver the A350 program on target and on time, Airbus is using our design simulation manufacturing software on a single platform so that employees and partners are collaborating in realtime altogether.

IBA's medical devices are helping doctors treat cancer. Our industry solution experience, called Licensed to Cure, addresses several key business issues for IBA, beginning first with cycle time reduction, regulatory compliance and accelerating innovation by adding all parties collaborating together. For the industrial equipment manufacturer, MeadWestvaco, they are using our single source of speed on perfect packaging industry solution experiences to help them create superior packaging and differentiate their products from competitors.

celio*, a leading men's manufacturer headquartered in France, with stores around the globe, is using our solution called My Store industry solution experience, enabling them to ensure a consistent brand experience, improved merchandising and realize an improved return on their merchandising efforts in terms of sales.

And finally, Lotus Formula 1 is able to improve operational efficiency and drive performance enhancements in shorter period of time. These 3 examples demonstrate how our software is integral to help companies well address their key business requirements: Operating on innovating globally while protecting one's intellectual property, ensuring our documenting regulatory compliance, driving cost effectiveness while also delivering excellent quality, propagating best practices across the global manufacturing while retaining local flexibility and most importantly, creating unique experience for their end customers with their products.

In July, we introduced our groundbreaking new user experience on our first cloud portfolio offering to select customers with our 3DEXPERIENCE release 2014. Our key objectives are to provide to the market a unique new user experience with a single access point to all Dassault Systemes applications, a unique visual experience and a streamlined user interface. We also want to offer this new platform on the cloud, in addition, of course, to on-premise, to simplify administration on users' access. Our IFWE Compass is much more than simply a software navigational interface. It gives our customers a holistic, inclusive and unified view of the business and ecosystem to create better experiences for their end consumers.

The feedback from customers and resellers are -- has been excellent. So let me share several of their comments. Shop in the AEC space was amazed by how intuitive and easy it was for users to set up their personal dashboards in seconds. Importantly, thanks to our Compass, users have single access to both the management of the project.

On the auto field, truly unique and unprecedented [ph] in the architecture engineering and construction sector. Tesla Motors is clearly seeing the value of 3DEXPERIENCE on the cloud to work closely with key suppliers in design collaboration, sharing together while also protecting the security of data. This is -- the reseller in Germany is seeing the ease coming from simplified administration on user access.

So we are very pleased with the progress and look forward to sharing more with you when we release fourth quarter earnings in February.

Let me now turn the call over to Thibault.

Thibault de Tersant

Good afternoon, and good morning to all of you. As we discussed during our preliminary release conference call last week, our third quarter financial results came in below our objective, largely reflecting the macro uncertainty, leading customers to extend the timeframe from new investment decisions.

Revenue increased 4% in constant currencies compared to our objective of 8% to 9%. Deal slippage accounted for about 2.5 points of the revenue gap, and a higher-than-expected shift to rental accounted for about 1.5 points of the difference. At the same time, we saw good growth in recurring software, which represents the largest portion of our revenue. Specifically, recurring software revenue increased 8% on strong growth in both maintenance and rental licensing. Renewal rates on maintenance and -- are very high, with continued low attrition.

The non-IFRS operating margin was 31.6%, comparing favorably with our objective of about 31%. Our cash flow and balance sheet continued to show strength. Net operating cash flow this quarter does require a short explanation, but to be clear, this continues to reflect our strong operating profitability. Finally, as we announced this morning, we have completed the spinoff of Inceptra, our last business partner activity conducted with investor [ph] systems, enabling us to focus 100% of our attention on our value solution channel partners.

Now, let's move to some further details of the quarter. New licenses revenue decreased 10%. The deal slippage of EUR 12 million was comprised of about 50 transactions across all brands. We expect the majority of the transactions to close in fourth quarter. The second component of the new licenses shortfall is actually good news in that we have a number of deals that closed. However, they were completed and [ph] a rental model rather than upfront purchase model. The net reduction to new licenses revenue from this higher mix of rental was EUR 8 million.

Moving to services. Revenue totaled EUR 44 million and increased 5%. Revenue was about EUR 4 million lower than we had anticipated and was a part of the revenue shortfall. At the same time, the gross margin for services improved to 14.3% compared to 8.3% in the year ago quarter, with the improvement linked to 2 factors: Rightsizing of our services team and the favorable mix of projects in terms of improved profitability management.

Staying on the topic of profitability, let me review our overall operating performance in the third quarter. While non-IFRS operating income decreased slightly, our operating profitability was on target with a non-IFRS operating margin of 31.6% as we were focused on closing -- on closely managing expense growth to offset dilution from acquisitions.

Reflecting our revenue results and strong currency headwind, non-IFRS EPS was EUR 0.88 compared to our objective of EUR 0.92. There is a negative impact from currency of about 8 points with non-IFRS EPS decreasing 1% as reported. On a year-to-date basis, non-IFRS operating income increased 2% to EUR 455 million and non-IFRS EPS increased 5% as reported to EUR 2.48 and yielding [ph] 5 points of currency headwinds.

Now, let's move to a discussion of our cash flow. As I mentioned, at the onset of my remarks, net operating cash flow continues to be strong. The comparison this quarter simply reflects timing differences and they relate mainly to taxes. Net income adjusted for noncash items was EUR 136 million, representing an increase of 13%, compared to EUR 120 million in the 2012 third quarter.

Net operating cash flow was EUR 75 million. Compared to the year-ago period, it was lower by about EUR 40 million and EUR 39 million of this EUR 40 million is explained by the variation in income taxes payable within working capital. The components include utilization of tax credit in 2012 and higher tax payments, installments in 2013 based upon the higher taxable income in 2012 compared to 2011. In the presentation, we have provided the detail to the working capital variation of our cash flow statements.

Turning to the balance sheet. Unearned revenue at September 30 totaled EUR 478 million, growing 5% year-over-year, excluding currency effects.

Now, let me spend a few minutes on our fourth quarter and full year financial objectives. Last week, with our preliminary earnings release, we set the lower end of our fourth quarter revenue at EUR 555 million, the first developed incorporating transactions where we see a high likelihood of closure and reflects the assumptions of a higher proportion of new business in the form of rental and transaction delays, pushing a portion of the type to 2014 just as we experienced in the third quarter. So we keep our growth assumptions at the low end and we adjust it to reflect the Inceptra spinoff, which we are announcing today, and the change in our U.S. dollar exchange rates to $1.40 from $1.35 formally to reflect the weakening in the last several days, which happened. And this, altogether with Inceptra, has a EUR 10 million impact.

The revenue range in total for the fourth quarter is EUR 555 million to EUR 575 million, representing growth in revenue of 4% to 7% in constant currency. Compared to our book of the fourth quarter that we gave in July, where essentially taking away about EUR 30 million of revenue. We are anticipating new licenses revenue growth in this revenue range. As a reminder, recurring revenue is expected to grow about 5% or so in the fourth quarter, reflecting EUR 6 million of exceptional items in the 2012 fourth quarter coming from prior quarters and also from compliance, as I mentioned last week.

Looking at profitability, there is no change to the low end non-IFRS EPS figure we gave of EUR 0.97. In the full range, it's EUR 0.97 to EUR 1.02 in the fourth quarter. We have included higher French corporate taxes in calculating our EPS estimate. And we retain the fourth quarter non-IFRS operating margin of about 34% to 35% based upon our investment plans.

Now, with respect to the full year, let me summarize the evolution compared to our July update. We have also provided a bridge which you can view in our quarterly presentation. For 2013, our revenue growth objective in constant currencies is now 5% to 6% growth, with a reported revenue range of EUR 2,060,000,000 to EUR 2,080,000,000, reflecting our current exchange rate assumptions. Stable non-IFRS approaching margin between 31% and 32%, and non-IFRS earnings per share of EUR 3.45 to EUR 3.50. On a reported basis, this EPS range represents growth of 2% to 4%, with currency headwinds estimated at about 4 points or so.

Reconciling our revenue and EPS objectives to what we shared in July, from a revenue perspective, the reduction comes from a EUR 37 million impact from lengthening of cycles and a higher shift to rentals and a EUR 12 million currency impact explained by the weakening of emerging market currency and of the U.S. dollar, and a perimeter impact of EUR 4 million which is related to the Inceptra spinoff.

From an earnings perspective, the decrease comes from 3 principal items: A EUR 0.09 impact from activity, a EUR 0.03 impact from higher French taxes and similar impact of EUR 0.03 from currency. The share count and the Inceptra offset each other. From a currency exchange rate perspective, our fourth quarter assumed a U.S. dollar exchange rate of $1.40 per euro and JPY 130 per euro. For the full year, these figures are $1.34 per euro and JPY 128 per euro.

Let me now turn the call back to Bernard.

Bernard Charles

Thank you, Thibault. While still enjoying growth overall, the result of the quarter, as I indicated last week, was not the result we had expected to show and anticipated up to the very last days of the third quarter.

Certainly, the environment is complex and despite our caution in place since many years now, these sudden shifts were not possible to anticipate. But on balance, I think we are continuing to progress. And what is clear is that we are: Number one, building our presence on market leadership across a wider geographic field; two, continuing to penetrate further the industries we serve, including expanding the users we touch within company; three, preparing our future in research and development and in sales and marketing; four, we see a significant market opportunity in front of us with our 3DEXPERIENCE strategy and business platform, business experience platform and industry solution experience, and we see an expansion of how our customers can work on premise and under cloud with our upcoming 3DEXPERIENCE release 2014x, being introduced early next year and will be the first time we will introduce the cloud industry solution experience.

Thibault and I would be happy now to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jay Vleeschhouwer.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Griffin Securities in New York. Thibault, I'd like to ask about your expectation that new license revenues will resume growth in the fourth quarter. It looks as though you would need to have a sequential increase in the third quarter of about EUR 65 million on as-reported basis, in IFRS terms. Now, if we go back over the previous 3 years, 2010 through 2012, the average sequential increase from third to fourth quarter was only about EUR 46 million or so. So could you talk about the components of your expectation that you will see the necessary amount of sequential increase in new license revenues for the fourth quarter? In addition, you've mentioned previously, on last week's call, for example, that rentals now account for about 25% of your recurring revenue. By our arithmetic, if you exclude SOLIDWORKS, then all remaining businesses would have about 30% of recurring revenue or more coming from rentals. Could you foresee that the non-SOLIDWORKS rental business could progress towards perhaps a plurality or even majority of your recurring revenue?

Bernard Charles

There a few questions here.

Thibault de Tersant

Yes. So Jay, I think that, first of all, the new licenses revenue that we see for Q4 is certainly based on a sequential increase which is significant. At the same time, that's not the way we develop our forecast. We develop it by looking at the type of business, the transactions that are likely to close. And what I took for Q4 is essentially the same shift to rental and slippage in absolute figures as what one -- the one we saw in Q3. So essentially, the EUR 10 million to EUR 15 million that was taken away from the Q4 objective, if you add transactions that we expect to close coming from Q3, is truly EUR 20 million to EUR 25 million cautioned. So it has been done from that perspective and from the perspective of environment that we have been analyzing in detail. So if the macro backdrop remains essentially what it was in Q3, that's truly what we see. We see a growth in new license revenue. In doing the computation, be careful about the rentals because the rental growth in Q4 is going to be less than in Q3 because Q4 2012 was including some exceptional one-time compliance fee and also some purchase orders pushed from Q3 of last year to Q4. So the recurring growth, we don't need the 5% in Q4 for that reason. On rentals, let me clarify here what we saw. In third quarter, what we saw was a jump to a level where 1/4 of new licenses, second in our value-selling channel, were under rental. And the pattern before that, if you look 2012, first quarter, even up to 2013, we were at about 8%, so it went from 8% to 25%. And that was the shift that I indicated. The rentals represent 22% overall recurring revenue and that's essentially the true data point I think that has to be brought in mind.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. Bernard, a couple of product opportunity questions for you. You have been introducing a number of industry solutions, and will expect to introduce some more. Your closest competitor in high-end PLM -- it seems PLM has been doing something very similar with introductions themselves this year and more to come, they say, in 2014. Could you talk about the new competitive dynamics around the respective industry solutions, yours versus theirs. And as well on the product side, you've spoken of the opportunity in systems engineering, particularly for CATIA over the last number of years. Could you talk about how that's progressing or the opportunity for you there, particularly in automotive markets, aside from BMW, let's say, which apparently has already done some of that with you?

Bernard Charles

Thank you, Jay. The industry solution experience that we build covers, number one, a wide scope of industries, and within each industry, a wide scope of the roles and function involved in -- coming -- starting from consumer insight to our customer insight to product definition, design, simulation, production, even providing marketing information for the sales process. So clearly, the intent we have with industry solutions is to leverage the very large product portfolio or application portfolio we have, which, I think, as compared to any competitor on the market, is by far the most comprehensive and best integrated set of apps. That's a big differentiator, and we see it playing a role in each of the industries we serve on different factors, and I will take briefly a few of them. In aerospace, it's clear that we continue to increase our market share there, no matter which kind of competitors will you take, not only on the footprint with new players, new programs or within existing programs, but the scope of what we do. More to say, but I think you are already aware of what is going on there. In automotive, the dynamic is the same. You will refer nicely to the system approach that we are having, which calls for, really, the modeling of requirement connected to the functions you want to serve, on how you want to put mechatronics system together and to make it sure no one integrated at the level of what we do and the dynamic there goes in engine program; in, of course, total vehicle program; but also in creating new experiences, and I'll give you one example of what it is. On retail [ph] gate, for example, which has been an interesting experience as for them as a supplier, all of the things at mechatronics system now and as you know, we are the only one to be able to produce the AUTOSAR-compatible format for this sector, whereby we can generate the product, will be put on the vehicle itself. So it's highly sensitive, every single player in -- of our customers are really asking us to be very cautious about not speaking about the programs we do with them. But I will tell you, with most of them, we have programs in place to do the mechatronics integration, most of them. The AUTOSAR is something which is quite complex, and we have done all the acquisitions with our modeling technology to do that. Now if you go to shipbuilding, the same dynamic is happening. If you go to energy sector, we have announced, since the beginning of this year, significant wins in this area. You can think about [indiscernible] that was announced a few months ago, and then there's our nuclear win, hydro in China and also similar things in India. Now, those were not concluded last quarter, but there are wins during the year. And when you look at retail, consumer goods and consumer packaged goods, I think we have solutions there that no one else can offer yet. And so the traction is there. I think the initial transaction in new sectors are smaller. They will expand. We announced, I think, this year, O'STIN in Russia, for example. O'STIN is a big apparel company in Russia, and there are many reserves in which we are really developing celio* this quarter. It's a big, 1,000 store or something like this. So this is the industry dynamic going on. It's clear today that our sales force is not fully ready for industry solutions, selling and implementation. And that there are still many areas of the world where we still do application and product focus. With the 3DEXPERIENCE platform, as a platform of the cloud coming, this is becoming so easy, first of all, to showcase; second, to try. And we are talking about real things that we did see in July. We saw a large number of customers around the world, including SOLIDWORKS customers, where this platform is showing that I'm bringing something that no one else has. So I am confident and it's a little bit delicate for us to push too much in this area right now because it's clear that we were disappointed with Q3. But if I look at it in a bigger scope of the dynamic of the market, I believe that the reachable and potential market we have in front of us is significant and the acceleration of simplicity with cloud, but also simplicity with the IFWE Compass of this unified user interface, which, by the way, is the same online as it is on-premise, is bringing huge value for the company's reserve, on creating affordability for users we -- usually like in marketing and sales, where they're not used to use our software. So we'll see that at the end of the year, in February, when we talk to you. I think we will have a good view of the market share wins, but the dynamic is positive. And in fact, look at SOLIDWORKS, the same dynamic against the current solutions you know. So we are -- I am very positive, Jay, on the dynamic -- on the simplification that we bring to the market.

Operator

Our next question comes from the line of Charles Brennan.

Charles Brennan - Crédit Suisse AG, Research Division

It's Charlie Brennan here from Credit Suisse. I've got 3, actually. The first one is just on your confidence of returning to license growth in the fourth quarter. And it feels like organic license growth has been negative for the first 9 months of the year. So I'm just wondering, what gives you confidence so that it returns to growth in the fourth quarter? And perhaps you could remind us of what Apriso adds to the fourth quarter, maybe that's the missing component? The second one is just on operating profit margin. You said that you cut costs ahead of an expected dilutive acquisition. I was wondering if you could remind us what's in your fourth quarter margin guidance? Are you assuming margin dilution from that acquisition comes in the quarter or not? And the third one is just on the unearned revenues. It looks like there's been about a 10% impact from FX during the quarter. This seems far bigger than what I would have expected. Can you just remind us of the currency breakdown of your unearned revenues?

Bernard Charles

Thibault, you have the floor.

Thibault de Tersant

So the only difficult question is the first. Because I don't know how to say it in a different manner than, we took the fight for Q4 and we applied essentially the closure rate we saw for Q3 to this Q4 fight. So that's the big assumption. The big assumption is, the environment is not going to deteriorate further than what it was in Q3. But if it doesn't, it's really the business that we see available to be conducted.

Charles Brennan - Crédit Suisse AG, Research Division

Sorry, the Apriso contribution, what should we be modeling there?

Thibault de Tersant

I'm answering your questions, don't worry. So Apriso contribution in new license terms is about 3 million per quarter. It was in Q3. So it is slightly helpful, but it's mainly an organic story if we really want to deliver the growth that we have in the guidance right now. The operating margin target is 34% to 35% for Q4. But this is not embedding an acquisition, because it's always so difficult to predict the timing of the acquisitions that when I tried to do that in the past, I was always mistaken. So the acquisitions will go and address our top line but also bottom line target. And then the revenue, it's -- yes, I know, it's a significant impact, but that's the one...

Charles Brennan - Crédit Suisse AG, Research Division

What's the currency breakdown so I can try and model it for the future?

Thibault de Tersant

So I don't have it all in mind, to tell you to truth. But what you'd first need to bear in mind is that for unearned, it is the closing rate that has to be used to compute the current impact. So we did the full computation rate, currency-by-currency, and we arrived at the 5% growth x FX for unearned revenue. I can come back to you, if you want more details on that computation, that's fine. But it was done very precisely by our system.

Operator

And our next question comes from the line of Derric Marcon.

Derric Marcon - Societe Generale Cross Asset Research

I've got 4 questions, if I may. The first one, really simple. Was SOLIDWORKS' average price per seat affected by any business mix in Q3, i.e., I mean, for example, lower revenue coming from China? My second one, can you share with us any statistic or first outcome you have on your hand about the adoption by SOLIDWORKS customer installed base of existing cloud products. I mean, n!Fuze, for example, just to have an idea of how successful you are with existing cloud product and just, we'll probably extrapolate that to a mechanical conceptual module of SOLIDWORKS. My third question, can you share with us or can you give us more granularity about what did happen in the U.S. in Q3? Because it was a sudden slowdown compared to what you had for the previous quarters. So I'm wondering if you can share more details on which brand did not perform like you were expecting or any reasons, specific reasons, for this slower growth in Q3? And the last question, with the new balance of your business between upfront license and rental license model, do you expect your recurring revenue to grow above new license again next year or beyond?

Bernard Charles

So for SOLIDWORKS, I think the -- what -- the actions we took at the beginning of this year led to a 6% increase in the price per seat for SOLIDWORKS. So in Q3, the business mix added 2.5 points essentially to that evolution of the ASP for SOLIDWORKS. The second aspect of that, we -- you might see that we have -- the initial cloud we did was essentially to connect SOLIDWORKS user and themselves. What has happened is that the current scenario for our SOLIDWORKS users is they can -- they used extremely well e-drawing on the capabilities we have so they can collaborate extremely easily around the world, even between small teams of SOLIDWORKS users. So when we really noticed that, we did accelerate the 3DEXPERIENCE platform usage for SOLIDWORKS because it brings much more than pure collaborative data actions. It brings social, it brings search, tagging, many other features. And more importantly, it brings a new app, a new application, that mainly SOLIDWORKS users have been dreaming to have. So we provided the sequences of product release. We decided with the SOLIDWORKS R&D team and the SOLIDWORKS brand managers that accelerating 3DEXPERIENCE was better than expanding on the existing solutions. So in short, early next year, which is in the -- 2 months from now, basically, we're going to roll out the entire 3DEXPERIENCE both for all types of application, including SOLIDWORKS connectivity and SOLIDWORKS mechanical conceptual. So that's a change in priority along the year that has been done, which I think is for the good because the feedback we have on SOLIDWORKS seminar today are very good on that avenue. Third question, Thibault, was?

Thibault de Tersant

It was...

Bernard Charles

Q3...

Thibault de Tersant

What happened in the U.S. in Q3. What happened is in fact, first of all, the weakening in Q3 compared to the first half in the U.S., this was quite general. And probably a little bit more acute on CATIA and ENOVIA. I think it's a mixture of lengthening of decisions related to the whole factor, including some concerns at the macro level. And to be complete, some execution problems in our sales force, and the fact that we are still, in the U.S., in a strengthening of the sales force, but still changing salespeople. So that was a factor. In terms of the new balance and the recurring for next year, I'm not providing a guidance for next year at this point, Derric, you understand that. So your question is very acute, but if I answer it, I'm going to provide a guidance.

Derric Marcon - Societe Generale Cross Asset Research

But it was, generally speaking, i.e. do you see your business model now doing much more geared to rental revenue and in that case, it wouldn't make sense to assume it will -- that recurring revenue will post higher growth than pure new license revenue?

Bernard Charles

Okay. So on that front, what is -- what has happened in the recent quarter and mainly in third quarter, is only, and I -- were in my words, only a shift in our Value Solutions channel. Where -- what was typically taken as rental in the past quarters, which was about 8% of the new business, went to 25%. But it's -- we're only speaking about the Value Solutions channel here, which represents 1/4 of our business. Rentals are below there. They are composed of SIMULIA, which is continuing on a growth trajectory, and large accounts, which are unique and has been for many years, because they have been under it for many years, using it to absorb peaks and valleys in utilization and testing and launch of new programs, particularly in aerospace. So the weight of these new rentals in the Value Solutions channel are still relatively small in the total recurring business that we do. And for that reason, I don't believe -- it's also going to depend of course, upon our dynamic of new business next year, right? But I don't believe recurring is going to grow faster than new licenses next year.

Operator

Our next question comes from the line of Michael Briest.

Michael Briest - UBS Investment Bank, Research Division

Michael Briest at UBS. Thibault, if we go back to your comments on Apriso there. I think when you bought the business, you guided for about EUR 20 million of sales in the second half. As a software business, I would expect Q4 licenses to be higher than Q3. So why did you say that it'd be about 3 million in the fourth quarter? I was expecting EUR 12 million potential, maybe EUR 5 million or EUR 6 million of licenses? And then in terms of the services business, you obviously talked about EUR 6 million of slippage. The business had a very decent margin, I thought, for Q3 given that there was that slippage, and it would have implied over 20% growth year-on-year if you had delivered the EUR 6 million extra. Why would the services have been so strong relative to previous quarters?

Bernard Charles

So, Michael, actually your 2 points are related. Because on your point on Apriso, Apriso is doing a lot of services. 35% to 40% of Apriso revenues are services because Apriso takes responsibility for the first 1, 2 or 3 plans which are deployed with their solution before giving it for further deployment to system integrators. So for that reason, the proportion of services in their total revenue is more significant than the one we have for the remainder of the business. So of the EUR 20 million -- of the EUR 20 million, only EUR 12 million are in license. And not in licenses, in software, I am sorry, okay? Which makes the portion of new licensees between EUR 3 million and EUR 7 million. And the slippage of transactions for the impact on services was EUR 4 million. And this is the one that I indicated, it's just 4 million in Q3.

Michael Briest - UBS Investment Bank, Research Division

That's still quite a large amount and the margin in services are very good. Presumably if you were weak on utilization because if it weren't built out, it would show up in margins.

Thibault de Tersant

Yes. But if you remember well, we have been carrying this issue on services margin for a long time. So we started to cure it well. And so, yes, I was disappointed by the shortage in revenue. But certainly, the margin we do now on our new service engagements is much better than what it was. And the lump sum engagements we do are better computed, so this resulted in a better margin for services.

Michael Briest - UBS Investment Bank, Research Division

Okay. And just to clarify then, so for Q4, you might see a stronger license of EUR 3 million, more like EUR 7 million from Apriso?

Thibault de Tersant

The EUR 7 million for the second half. So for the fourth quarter, we can expect between EUR 3 million and EUR 4 million in new license from Apriso.

Michael Briest - UBS Investment Bank, Research Division

I mean, when you bought it, it was a high growth business, $50 million of revenues, 2/3 software. It doesn't seem to be delivering particularly on plan and I guess after Gemcom, you've now done 2 large acquisitions, which that seem to be performing. What would you say about that?

Thibault de Tersant

Michael, you want me to explain the relationship between what I indicated in new license business and the EUR 20 million for the second half, okay?

Michael Briest - UBS Investment Bank, Research Division

Yes.

Thibault de Tersant

So this is what I'm doing, right? I'm saying to you that of the EUR 20 million, 40% are services, which is EUR 8 million. Software is EUR 12 million. Roughly, a little bit less than half of it is in recurring because they do meant a lot like everyone else. And so the remainder is between EUR 6 million and EUR 7 million, right? So we'll try to do better at the business, which is performing well and is growing.

Bernard Charles

It's on plan.

Thibault de Tersant

And it's on plan right now.

Michael Briest - UBS Investment Bank, Research Division

But I thought in today's -- this morning, you said acquisition, that is 1.5% of sales, which is EUR 7 million or EUR 8 million. So, if that includes the services, that includes the maintenance, you said 3 was license, to get from EUR 7 million or EUR 8 million to EUR 20 million, I've got to have EUR 12 million for Q4, which means more licenses, presumably.

Thibault de Tersant

No. I think I was explaining the impact of acquisitions and our software revenue, Michael, this morning, as being the total impact of 1.5 points in Q3, right? So I think that's completely consistent.

Michael Briest - UBS Investment Bank, Research Division

Yes. But that's maintenance, then license. So are you saying Apriso in total is about 10 million and would be about the same in Q4, including services?

Thibault de Tersant

No, but acquisitions are not just Apriso, right? There are some several -- some smaller other acquisitions. So I guess, I'm not seeing your point.

Michael Briest - UBS Investment Bank, Research Division

Well, I was just expecting Apriso to do more than EUR 3 million licenses in Q4 because it's -- as a software business Q4 is going to be a bigger quarter than Q3, just a view.

Thibault de Tersant

No. For sure, we are expecting that they are going to do EUR 4 million or EUR 5 million. Now, you ask me what is today in the guidance, my answer is EUR 4 million.

Bernard Charles

And we are in plan for Apriso as to now, Michael.

Operator

Our next question comes from the line of Brice Prunas.

Brice Prunas - Exane BNP Paribas, Research Division

This is Brice Prunas from Exane BNP. Two, if I may. Looking at the medium term and beyond the retail we have seen in Q3, are you still confident to reiterate your medium-term ambition of a double-digit top line growth as an average starting next year? And my second question is coming back on the cloud strategy on SOLIDWORKS. I would like to understand how you will manage to get for your cloud ramp up and at the same time to keep onboard your very well-managed network of resellers?

Bernard Charles

Thibault, midterm?

Thibault de Tersant

Yes. So, first of all, is our strategy about going to double-digit growth in revenue, midterm? Absolutely, yes. And we have certainly all the initiatives in place right now in order to reach that goal. Is it possible next year? Well, that's certainly a question mark, but I would say it's a stretch today. But I will -- we will get back to you with the guidance for next year when we release our fourth quarter. But are we confident we are going to join the double-digit revenue growth? Absolutely, yes.

Bernard Charles

Regarding your second question about the cloud strategy with SOLIDWORKS products. I think there is an implicit, maybe, point here. We do plan to extensively use the SOLIDWORKS reseller the same way we've been using it up to now, even for cloud delivery-based solution -- cloud-based delivery solution. And everything is not finalized yet, but what we can tell you today is that we are not going to bypass resellers. We are going to find a solution with them which is very good incentive for them to really promote as much as they have been doing well with apps on the personal computer to deliver apps soon to come, and in terms of fee for them to really incent them to be successful there. And last but not least, we have -- they see a lot of opportunities to do additional service to connect to the cloud to just the price they serve with widgets on many other techniques that we have on this open platform, which is I think very compelling for them. So we see that as a stimulus for -- significant stimulus for our reseller network to even expand the solutions that sell around our initially -- initial process around SOLIDWORKS brand. So there is nothing on the cloud that will go against it. Same, by the way, I could say -- likely to say, for their valued channel solution.

We'll take the last question. Operator?

Operator

Our next question comes from the line of Amit Harchandani.

Amit B. Harchandani - Citigroup Inc, Research Division

Amit Harchandani from Citigroup. Just actually a quick follow-up on the comment made in the call in the morning, I think, by Bernard. With regards to your recent visit to India and China, Bernard, I think you said that executives told you they were more concerned than they were in 2008, which surprised you. I was just wondering if you could share with us the reason why they thought they would be more worried now than in 2008? And if at that, we should? Because as we look towards 2014, would you expect these 2 geographies to get off to a softer start in the first half of 2014?

Bernard Charles

I think that what I just shared with you is what I've heard, but at the same time I asked them a second question which was specifically in India. I asked them, do you think we are bottomed? That we are bottomed and that -- and they said, yes, too. So I think the feeling I got from their inputs and I think they are great executive leading their businesses, is that they think the situation has bottomed and that they think that the bat to grow is in front of them. So that's the India situation. Of course, you have election in India, too, which -- but I think that on -- that might be a slowdown for government contract. We don't do much in the government activities from our side. It's more on the business side. So on -- diversification is going well in India, too. So I just wanted to report that as a way to connect those remarks to our view of Q3, at the same time, I think their comments goes in a more positive way as it relates to quarters going forward.

Amit B. Harchandani - Citigroup Inc, Research Division

That's helpful, Bernard, because we have heard similar comments from a couple of the other peers. I was just trying to correlate that. And maybe as quick follow-up. In terms of the weakness or rather the softness that we saw in Q3 and the caution for Q4, are there any particular vertical that came as a surprise to you? I mean, for example, mining was very flat and to a certain degree, I guess, anticipated by you as well. But any other verticals wherein you were surprised by the degree of caution or softness that you saw, either in Q3 or being factored into your guidance for Q4?

Bernard Charles

The one that comes to my mind is the high-tech sector. But usually every quarter, geo is compensating others -- or brands are compensating others. So, for example, Amit mentioned GEOVIA, but we have been in the past having weak quarter for a certain brand, but the other brands was compensating. Or having a channel slowing down and the 2 other channels compensating. I think in third quarter, it happened that, I think, in some way, the sensitive slowdown was kind of equally spread between brands and channel on geos. So that's the takeaway that I think we have on the running curve of Q4 -- Q3. On Q4, we have taken decisions to really be more sensitive to track each transaction to make sure that any difficulties that could happen, so the discussion of the customer could be resolved upfront. One of the things that happened with customers when you are -- when they are -- the hesitation, is that you find someone showing up that need to sign that no one was aware of. So we have made sure that all our safe team understand that all individuals should be removed upfront and don't wait the last minute to remove them. Frankly speaking, would we have done that Q3? We probably would not have been in the same situation. But that's the way it is. It's a learning moment. So we're going to take advantage of it.

Operator

We appear to have no further questions. So I hand the conference back to you.

Bernard Charles

Thank you very much to all of you participating, first, to the [indiscernible] presentation this morning, and then this afternoon to the call. And, of course, you all know, we are here to address your questions and make sure we continue to have the best possible visibility and provide the best information and best quality to all of you. Thanks again for following the company and have a great day. And talk to you early next year.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines.

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