Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

François-José Bordonado - IR

Bernard Charlès - President & CEO

Thibault de Tersant - Senior EVP & CFO

Analysts

Antonin Baudry - HSBC

Michael Briest - UBS

Gregory Ramirez - Bryan Garnier & Co

Joseph Burette - Exane BNP Paribas

Dassault Systèmes SA (OTCPK:DASTY) Q3 2011 Earnings Call October 27, 2011 3:00 AM ET

Operator

François-José Bordonado

Good morning everyone. I am François-José Bordonado, Investor Relations of Dassault Systèmes. From the company we have Bernard Charlès, our President and Chief Executive Officer and Thibault de Tersant, our Senior Executive Vice President and Chief Financial Officer. I would like to welcome you to Dassault Systèmes third quarter and nine months 2011 presentation which is also being webcasted.

At the end of the presentation, we will take questions from the audience and from participants on the webcasted call. Later today, we will also hold a conference call. For those participating in the webcast, the presentation will include video and for the first time you will be able to see these free videos which are in our presentation.

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

Some of the comments we will make during today’s presentation will contain forward-looking statements, which could differ materially from actual results. Please refer to our risk factors in our fourth quarter press release and in our 2010 Document de référence.

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

Bernard Charlès

Good morning. I am sure you have looked at old numbers and the way they are being published today. It was indeed a good quarter. So let's review. First of all the growth in EPS is very strong. As you notice, plus 18%. I look at this as a way to measure the efficiency of the company. On the new license growth is at 7% strong because you have to keep in mind that the third quarter last year was extremely strong. I think new license was something about 50% growth, so it’s a strong base of comparison. Year-to-date 22%, so those are the two messages here on this related to the quarter on the year-to-date situation.

Let’s look at the business review now. On the product line, CATIA is of up 7%, again remember the base comparison for Q3 2010. ENOVIA, plus 10%, other PLM 16%, so it works at 11%. It’s a good quarter for PLM on SolidWorks, so above our expectation. I believe that this is motivated by the transformation we help customers to do and we talk about this in a minute.

I think, so a lot of things have been said about this program the Boeing 787, was late, complex. Nevertheless I think it’s an airplane of the 21 century. New materials, new production system, new global engineering. It took more time, but I want to mention my total solidarity with the Boeing company. I think they have done an amazing job, an amazing job something no one else has done. And I believe they are setting the stage for what global collaborative environment is about.

And for us, the game is not over because they have a backlog of orders, which is so huge that we’re going to play a significant role to help them ramp up the production capacity. On the new techniques that we’re putting together in the digital world for simulating the production, I will not go through all the details, but what we call moving lines to really do things for airplane set up, never have been done is really something which is setting the benchmark for the entire industry in aerospace.

So new materials, new simulation, new ways to do production systems and a global collaborative environment which was announced a few years ago, in fact has worked extremely well. So it is a proof that the structure of many industries are still underway to be transformed because the way to connect with the ecosystem and partners is changing. So that’s the takeaway and you see here the evolution composite, 50% of composites.

You know composites very good materials. But you have to know how they behave. So without simulation you cannot do composite and without design, virtual design tools it is impossible to do it. So we are moving from being a platform to improve to do the job faster, to being a platform whereby it is indispensable, without it you just cannot do the job and I think this is something that we create an interesting traction for the future.

Another example of customer we want to take this quarter is Amcor. They are doing this packaging, bottling, plastic bottling and so on. You can notice first of all, I take this example because I think Dassault Systèmes, you have to think about what we are doing today. It is a collaborative platform that goes from shampoo bottles to airplane.

So the span of products whereby our solution can be used is becoming bigger than ever. I think we can touch now the 11 industries we have been speaking about in the past presentation of our strategy. Amcor using our solution, they have reduced the cycle time by 50%, reduced physical prototyping, massively reduced use of raw materials. Of course there is lot of discussion in those days about the economy, about the dynamic of the situation in the financial sector. The reality is raw material is a real issue for the world in terms of optimizing and improving the way to use raw materials as you probably have seen, looking at the numbers from other companies. So that’s tangible results. It is shows that PLM, Product Life Cycle Management not only is used for complex, management of the complexity but it can be used also to optimize the use of materials and really go toward eco design.

We continue to expand in manufacturing, you remember that we bought Intercim a few months ago. Intercim in short, software to run the manufacturing process. DELMIA is the brand name that contains all those products. DELMIA is the brand name for our brand for digital manufacturing as opposed to digital design and we are in Volkswagen Group continued to make significant progress and you have noticed that the recently the Volkswagen Group announced a huge investment in R&D and product development for the future which we think is a good illustration that the market even in the core industry is still growing in a significant way.

So vehicle manufacturing is key and I think that the selectivity of our customers’ investment to really analyze when they can save money, where they can save money and where they should invest right is going to be higher in the months to come, which we believe we can take advantage of.

Another example is Exalead. You remember we bought this company a year go, it was an investment of something like €140 million. So most of our investors were saying, are you spending the money properly? I think we are. I think the dynamic of Exalead to build what we call search-based application is going well. We don’t want to sell toolkit, we want to sell solutions. It is an example, SNCF, well known here in France, of course, we are really three different projects, where we’re getting great results.

You know infrastructure to help employees find out the proper information and there are a 120,000 users, so it’s not a small community. Vertical search, so people single point of contact to find out information on their own. Numerous websites, it’s becoming complex, so many information available and how can provide a single view of it. Logistical maintenance of operation is another excellent application, where basically we help improve logistic on maintenance.

So this an example of where we want to go, Dassault Systèmes is not going to sell toolkit, we’re going to use Exalead to build collection of applications that we serve industries.

Indeed, what we called entry design or mainstream design, SolidWorks has been enjoying a nice dynamic with 11% growth in the third quarter in terms of number of seat and we still continue to increase the average seat price. That’s an important factor because it shows the competitiveness of the product. So the average seat or license price is a key factor especially when competitors are providing offers at not 20% less, half of it, or a third of the price, and we continue I think to gain market share against some of those competitors.

On the Solidworks is an entry point to take a footprint in fast developing economies where tomorrow they will adopt PML. You see industrial equipment, we are announcing a new version of Solidworks which is really a very cool user interface, and this is a short video that illustrates the ease of use.

One of the challenges is user interface to be so intuitive that people who are used to look at drawings can easily go to 3D, that's what you see.

[Video Presentation]

…platform how to connect people, how to make them work together, that’s ENOVIA. So, the business value I mentioned Amcor I could mention Guess, the apparel [Abuchi] I could mention Benetton. All those have been customer we’ve announced. So whether it’s shampoo bottle, apparel or so on the core of the platform for everything we do is called collaborative platform on the brand name is Easy NOVIA.

What it does connect people, help people to communicate on innovate together. We believe we have one of the best solutions for very large scale global implementation, how do you connect around the world to people. When you do sourcing for apparel sector, HNM is a customer, you have users from around the globe connected. So its Caliber is open. We can integrate any type of data even if a data coming from ERP system whether its Oracle, SAP whatever, we can support a wide variety of business processes from sourcing supply chain design metals and of course we adapt the product line to different industries. We serve healthcare, Pfizer is our customer Abbott is our customer. They are using our system for complaints.

Same in the auto sector on you can name the reason why I insist on ENOVIA is because of few years ago we were told that only the big players will win in collaborative platform.

Today, recurring revenue which is almost 350 million in US revenue, I think we have demonstrated that we can win we while the big player are That’s very exciting, because I think it creates a dynamic for the future to really change the game in terms of what that subsystem is doing and where we can go.

We have today reached a number of eight enterprises -- large enterprises using our collaborative platform, the biggest one as a community of 120,000 users on ENOVIA infrastructure. So we are not talking about small communities. So, and this is about version 6 which is V6. So the dynamic is strong on, as you know even for 10% growth in Q3 on the base of 64% growth last year its still a good growth. Its becoming the preferred platform and I think this is positioning Dassault Systèmes as a player in three enterprise software not only specialized software.

Supply chain, connectivity, more and more what we observe is the need to connect all suppliers together or to strengthen the performance of the vehicle enterprise. This is where ENOVIA is useful. This is a context of a good supplier or varying system suppliers in Germany, Brazil do decide kind of equipment you will see here on the picture, seats and doors. And they have been making the decision for their enterprise collaboration while they were not even using only our card system but using also design systems.

So we are really making it clear to everyone that we can built infrastructure which can be opened to any data format. And it is still open to integrate even our competitors information because we think if we embrace well the competitor we can basically replace them in the future because of this superiority of our products.

Hoss Intropia selected also this is apparel. Apparel is also great because you also have very nice pictures. It’s not about -- very exciting to see these nice pictures. They do soft goods on our goods, soft goods textile on our goods of course the also is important and they use this for sourcing to streamline the global sourcing of materials and of course if they do this company is doing woman’s fashion clothing, accessory and shoes.

And the challenge was to go from sketch to production with digital continuity. Initial sketch when you do, on how do you basically produce the product line in the collection. So ENOVIA is the global platform for that.

Few (inaudible) in more traditional domains. Jaguar Automobile, as you know its not the biggest auto suppliers in the world but they are going to significant transformation since they are owned now by a conglomerate group Tata Motor which by ways is a great customer product system. Mr. Ratan Tata is himself a good friend. They are really transforming the product development system and I think this is a good illustration that even the small players can be very competitive.

They are using ever since and they have adopted version 6 after 18 months of evaluation. It was in interesting stressful process where we finally won’t ever think.from design collaboration, production, simulation and even showroom. I was in India last two weeks and I discovered really the Indian industry is working up on they highly adopting next generation tools in a critical way. They are even now thinking about virtual showrooms whereby you can on the net look and evaluate products on the screen before you even go to the physical showroom we are doing that with Mahindra and Mahindra of India. So that’s the part of what the Dassault Systèmes can do connect all the dust from the initial ideas to develop a product to the delivery of the product and even providing help to sell it.

On, this video will not be on internet. We have the right to use it in the presentation but we cannot leave it on Internet. Renault is going through an incredible transformation and we are the catalyst of this transformation. We are very proud to be the catalyst of that transformation that you know what you see here in this little -- it’s little enough so people -- competitors cannot understand exactly what is going on, but the reality here is you have two design sites around the globe, real time doing collaborative design real time and even doing style the use.

It is possible today to do real time design around the globe throughout Internet and we’ll demonstrate it -- demonstrating this capability is here. It has to be configured, as you know, the car is not one car, it’s a collection of configuration and those are which means a lot of functions. And you need to be able to make the design in such away that the options would be compatible between themselves. It’s a very complex process on being able to see exactly what is happening is the significant value for them. So the globalization of R&D even if you mid tier or small company for research and development is something, which I believe, is an opportunity to do more business for the big and small companies. Digital continuity is the motto for Reanult. They don’t want to break the continuity of design from the idea to the customer delivery.

Tesla, a newcomer, who would say that in a huge CapEx intensive industry newcomer can come and I was looking at the Tesla Motor market cap deals the other day, they are doing electrical EV. They are almost, they are worth $3 billion already, $3 billion or $4 billion, I was shocked you know, who would say that a newcomer can come and say, I am going to design new cars. I have never been doing that, but I am going to do it and by the way it’s going to be good systems. They are using our system for that and here is a little video that shows you, give you a testimony.

[Video Presentation]

Big business on that which I think is a good illustration that this is not only for big companies, but for innovative companies no matter where they are. And I think it’s also a nice car to drive. It goes fast. So the key benefit is really related to these global collaborations and the performance and I think this company is a very interesting company to watch.

So diversification is happening, some very quick example, Agilent Technology, in the high-tech, Skanska, construction using the collaborative platform to plan the project manage information for the project; s.Oliver in the apparel sector are doing very, very interesting things.

But we also continue to serve the existing industry; it’s interesting to notice that industrial equipment is a huge market; that is a lot of industrial equipment companies around the world. The manufacturing machinery represents 60% of this sector, the fabricated metal product 20%, heavy mobile machinery 10% and installed equipment 5%. So those are complex system, smarter-on-smarter, they’ll help improve productivity and production, reduce cost, really also create a new factor of labor to really manage the balance between the cost of labor versus the automation. And I think it is some thing that is happening even in fast developing countries where they discover now that delivery cost not enough to be competitive. The quality of the processes will require automation, automation require simulation in the digital world.

So we are doing a lot of progress there. All those systems are becoming smart; what we call Mechatronics; mechanical on electronics, software inside and this complexity calls for collaborative vehicle platform so complexity, management of collaboration serve the objective. Another interesting objective which by the way is the same for trains; those companies are facing the following challenge; when a customer has a request, what we call request for information, you have only a few months or few weeks top provide an answer. The answer you have to provide has to be flexible enough to fulfill the demand and you have to basically bet on the price; what will be the cost? What we call the speed from thunder to wind. When do you do the proposal, how fast can you do it, how credible it is?

And what I notice today around the globe is our customers are using our solutions to provide virtual proof that what they commit to deliver to the customer is possible. It’s even happening in China, by the way. I am going to prove to you so the virtual world that what I commit to do and delivery by that date is possible, what they call thunder to wind.

Global competition of course in this context is very key and of course those companies wants to provide service. They want to only to deliver the product, but they want to provide maintenance operation support online.

Compliancy, a lot to say about compliancy. Compliancy is about being to understand the rules for reach for example, hazardous material or the compliances if you are in the pharma sector. Do you comply with the rules? Or in the food sector, do you comply with all information you should publish. This is a complex process. We do cover those kind of functions with ENOVIA. So we are strong in this sector; it’s a growing sector. It represents 20% of our revenues, second largest industry, highly diversified and we’re leveraging our install base in this area.

Here is an illustration, MacGregor. I think it’s a an interesting illustration so lets see the – I guess it was a video, may be I clicked on the wrong one. Here is the video.

[Video Presentation]

Not so complex product, they want to play global role and sell everywhere and support the product everywhere. I think it’s a good showcase that even in developed economies we can take advantage if the competitiveness of product creation and product realization is there to develop the business.

We announced today, the acquisition of a small company called Elsys. In short, what is it? It’s a great company, very small one, great technology as you will remember we don’t want to buy market share, I am not interested to buy market share, we want to buy and get the best talents and the best technology. That’s the policy for Dassault Systèmes S.A. M&A.

This technology, this team has created a technology for what is called Schematics. Basically, Electrical Schematics which is so unique and they have already great customers that we made the decision to come together. They are very motivated. And the idea behind is of course not only to integrate, but to provide an approach whereby all of these complex electrical schema will be produced automatically as opposed to be manually designed.

So, it’s a great company, great team and I think we can take advantage of it. We also announced a few weeks ago the acquisition of a [Avery Spot], four people, think about it, four people. But those four guys have developed a technology for composite, which is second to none. You have to know that we follow more than 3000 targets around the world, 3000 targets.

Where are the spot technology? Where do we find the right talents? At what time do we buy them? Because this is what we believe Dassault Systèmes strategy is about creating such gap that no one else can do the job. This is where this company is not about software, it’s about science. To do composite, you have to know how to simulate it and that's what we do, we first simulate.

I will let Thibault speak about the numbers, the take away ease. We don't want anymore to restrict ourselves to design. We want to do design production, collaboration, project management and we believe that with the size we have reached, the way to go forward is to really be able to play on the full footprint of the entire product lifecycle from connecting to consumer or the customer, with the provider, doing the design, the engineering, the sourcing, the production, and providing vehicle showroom to deliver and support the product. So I think, we are limited by our imagination and we have to continue to use that dynamic to, I guess, continue to get the proper results, as a result of the value creation to our customers. Thibault?

Thibault de Tersant

So that’s the section without imagination. And I’ll go quickly as for it. As you have seen, our license review grew compared to very, very good third quarter of last year in 2010. We are showing a 7% increasing in the new license review and what is probably worthwhile to highlight is the 10% increase in recurring revenue because that’s a quite dynamic level of recurring revenue and in it is embedded a nice increase in rental licenses, that I think should be noted.

I would also like to highlight our gross margin in software, which in fact improved this year, year-to-date, and also in third quarter at a level of 95.3%. And the reason I’m highlighting it is that on the next chart I am going to show you our gross margin for services, which is minus 5%. So in Q3, we are facing a small loss in services, although the loss shrank compared to second quarter, at least there is this point to highlight we are growing services revenue by 8%, and I think that in Q4 certainly we will be showing a positive margin and probably also for the full second half, but clearly services is an area where we having to continue to focus our efforts next year as well.

By geography, we grew 7% in Americas, 15% in Europe. That’s quite good. For the old problem in Europe, 15% is showing actually a quite good dynamic of investment in Europe. And in Asia, 3%, could seem disappointing but one has to bear in mind that our total revenue growth in Asia last year was 53%. So, that was not a very easy compare point.

From the margin perspective, this is a rewarding quarter. We progressed by 400 basis points in Q3 to 32% operating margin, probably the best for the third quarter in 11 years for us. And this had drove combined with top line growth and an 18.5% increase in EPS.

What I want to say is that we are doing that without stopping to invest in our business. We, in fact, continued to grow our staffing, and particularly also the R&D staffing. The R&D staffing grew by 7.5% year-to-year and the total staff for the company grew by 7%, it will be place year-to-year. So, we’re not trying to simply increase the margin by disinvesting in our business. On the contrary, as Bernard highlighted, we had many attractive diversifications and new challenges to satisfy our customers ahead of us and so we continued to fuel these initiatives with increasing staffing. Simply what we are able to do is to leverage our infrastructure. I had mentioned before that we are co-locating R&D laboratories, and so we are saving in communication lines and in IT and in management and we are also taking now advantage of the business infrastructure we have developed after the IBM acquisition to support our direct sales world wide and this infrastructure is now in place and doesn’t have to grow at all in proportion of revenue.

This is a chart I like because at the end of the day we have figures in IFRS, we have figures in non-IFRS. It’s becoming complex maybe, but there is something that does lie. It is the cash flow and the cash flow in third quarter of $101 million, is I believe, showing the exact strength of our business in Q3.

Year-to-date, we had the cash flow from operations of $382 million, growing by 20% compared to a cash flow of $317 million in 2010. So what do we do with our financial position besides the good level of cash flow? We had a few CapEx linked for half of them to our new headquarters in, for Americas, in Boston, where we had a grand opening of them just a couple of weeks ago and we also did share repurchases in order to fight the dilution coming from stock option exercises linked to the fact that few significant stock options plans are hedged the end of their life during the year.

So we ended third quarter of 2011 with a net financial position of essentially €1.40 billion excluding our debt. So based on this results and the pretty good dynamic, we continue to see, you know, because all in all, what you have to bear in mind is that in Q3, we did the total revenue in Q3, which was slightly above second quarter. That is very rare in Dassault Systèmes history because in general, Q3 is lower than second quarter and why is it lower. It’s lower because like U.S. people will say, because of a rich vacation in Europe and I think it’s debatable topic, but certainly August has an entrance on the total revenue in Q3, and so to be at the same level or even a little bit higher in Q3 tells you the dynamic, which is positive.

So based on that, we are, in fact, bringing the complete outperformance of Q3 compared to our formal guidance into the total year objective. So we, of course, take into account the foreign currency positive impact compared to our guidance of 9 million and the better activity of 11 million compared to the high end of our guidance.

We’re now targeting 12% to 13% excluding currency and the revenue as a result with a range between €1.725 billion and €1.735 billion and for EPS, we are essentially adding $0.13 into our former objective and now we are targeting $2.85 to $2.90 in EPS which is a 14% to 16% increase in EPS. We are very consistent with our long-term objective of growing EPS at 15% per year and I would like to add that we do that in spite of currency headwinds, you know the dollar weakened compared to last year and this has of course significant influence on EPS growth. So without currency headwind, our EPS growth would be even better.

The last point, two last points I would like to highlight is that besides this 12% to 13% growth in revenue, new license growth inside this result is going to grow at about 15%. We had an objective of growing it at double digits, so 15% is slightly better and our operating margin for the year is going to be at 30%.

I know I cannot say how many questions I got on when are we going to reach 30% you know it’s kind of holy grail it seems for us. And I was trying to prudently say that we would reach this goal certainly in 2013 and so I think that based on what we have been doing so far, we can reach it now as soon as this year.

EPS will grow at 14% to 16% as I said before. And so you will find in the presentation the detail. Q4 is left unchanged. So the Q4 you see here is exactly the one we had set when we released our first objectives for the year in February and because in February we were actually planning for the continued deterioration of the economic environment.

So the Q4 today is in fact exactly the one we had planned at the beginning and it is calling for a relatively flat new license revenue and a small EPS improvement, but to Q4 which lead us to the good year that I have just announced and I feel that we’re relatively safe of course with this type of objective for Q4, but the economic environment is evolving quickly and so I don’t think you want us to take any risk in guiding for Q4.

So far our pipe is good. We have not seen many impact on our transactions, but we have seen here and there customers that we are not able to find the financing to do the investments that they wanted to do and I don’t know how this time will revolve you know, so this is very much linked to the possible increased scarcity in bank financing that I don’t regret the Q4 as we have did set it at the beginning of the year. And I think now Ben and I will be happy to answer your questions.

Question-and-Answer Session

Antonin Baudry - HSBC

[Foreign Language]

Bernard Charlès

Should I answer in English? Thank you very much for your comment. Thibault has an incredible elegance to answer those kind of questions. So I will leave him the floor in one second. First of all I think it is too early for 2012. As you know we’ve very precise habits. We only talk about 2012 when we made the wrap up of the previous year, so it is going to be in February. Nevertheless as Thibault said I think the, we will take maybe make three comments.

The pipeline is good as Thibault said, also you know that we have a significant recurring revenue which provide a visibility for next year which is significant and you might notice that this recurring revenue has even increased in a big way last quarter. Related to the use of our cash we are very conservative. We have demonstrated we can do moves which are creative moves, very precise quickly. I think it was good to move quickly on buyback our sales force on IBM.

That’s done now, there is a lot of work we have to do to continue to leverage this infrastructure we have built. And we are going to do that to your question about synergies and improvement of what we can still do in leveraging what we have. We can leverage a lot, improve the way we reach customers, improve the way we provide total solutions.

So this is clearly on the agenda for next year. Related to the remark that Thibault did about the financing for our customers. I have to mention that we have a very strong partnership with IBM and we communicated about it specially last year as we changed the index about who was doing what and the partnership with IBM is very strong and continue to be very unique. It goes in five directions and partnership for total solution delivery consulting on services, partnership on technology side.

IBM provides great infrastructure, we do use their infrastructure to provide solution to our customers, selling jointly we do sell our solution. They do sell their solution, but we come jointly with the customer.

It is the heritage of thirty years of work together, so we have something unique and the last, but not least IBM is also has accepted to be our financing arm for our customers and that’s not a small advantage because they have an incredible capacity in that area and we probably are the only company of their partners who have partnership with them whereby they can play with what they call IBM Global Finance, in this role of financing our customers.

So I think that’s something we set up 80 months ago. It was a logical situation when they were selling our solution, but we’ve been able to get an agreement with them to do it even after we set up the new alliance. So this partnership is great and the new CEO is also a strong supporter which is something I like. Thibault, you want to add something?

Thibault de Tersant

Well, on the financing aspect, I don’t think it’s a very attractive solution for a company like Dassault Systèmes because first of all, it’s a complete new job to finance customers. Second of all, if we do it ourselves, this really means that revenue from these transactions can only be recognized when the cash is finally paid by customers. So that’s a significant delaying in recognizing the revenue and finally because of our cash, we believe, we kind of actually get a better return from it through investments rather than customer funding.

So as Bernard said, our first objective will be to continue to develop this partnership with firms in charge of doing leasing for software and IBM certainly is our number one partner in this field and something that we want to leverage.

Bernard Charlès

There’s a question, is there a question here?

Antonin Baudry - HSBC

I guess there was another part of the question I want to know, about the 30% operating margin because in the past, Thibault, you said that it was a goal that needs to be reached. Now that that has been the case, do you still consider that above 30% it’s much better to re-invest everything you have in terms of resources, in new initiatives, in new growth areas? Or since you have some kind of advanced versus 2012 or 2013 objective of reaching 30%, you can give some delay -- you could give some leeway on the upside for the operating margin?

Bernard Charlès

I think operating margin is not a goal by itself, it’s a result. It’s a result of efficiency. There is a lot of opportunities to expand our market and we don’t want to miss that. We have to do it in an efficient way and your question is not a financial question, it’s a strategy question. And it’s clear that when we do acquisition today each time they are dilutive, is difficult to find a company to buy that is above 30% operating margin.

So the question for us is how fast can we make it [negative], how many quarters or how many years. And I think the scope we have now to serve 11 industries, we have the opportunity as Thibault said to invest, but we have a certain DNA. We like high performance in the way we do things, and we are pleased to hit the 30% transparent roof two years ahead of what we said, not one year, two years ahead of what we said. Please recognize its two years because officially we said 2013. Internally I can you tell you now our plan was 2012, but externally we said 2013.

And we will -- there is no reason why we should come back on that aspect now quality to where is it going to come? I think we discussed that when we discussed about 2012. As you know we have 10 years plan, plus three years plan, plus six years plan in that order and we put every precise process to try to make our plans. We will have analysis meeting in June next year. We’ll discuss about longer-term between now and then. Its not much we want to communicate.

So even if you look at Thibault, I think he will not communicate more.

And a very quick follow-up. Since the Services business division seems to be struggling still, we can imagine that it’s still related to the same kind of projects at the same kind of clients. And I know that those projects were very ambitious, very complex, but since they were the very first ones, how can we be sure that next year new large projects with other clients on V6 will not go through the same kind of struggles?

I know that you will try to draw the lessons from what is happening currently, but you are quite still new in managing those very large projects. So, should we expect the Services margin to keep pretty low next year, even if it will be in the black or else its what it used to be, maybe two, three or four years back?

I am sure Thibault will give you more insight. Our priority now is to make sure -- we are at a phase where we are introducing clearly the next generation platform called V6. We believe that this is years ahead of any of the competitors, not one or two several years ahead. We have to demonstrate that customers are getting the results. I think the project we have done under the dynamic of V6 today proves that the benefit is there.

The next step for us it leverage our partnership with large system integrators whether its IBM, all the systems integrators I don’t want to mention them now because you have seen some announcements locally here and there with Capgemini, but for sure we will work more with Accenture. We will do work with big players because they are doing jobs we are not interested to do. Those players become excited with our solution because they see that there is real lever so, over the years do we see the extension of our partnership with very large system integrators so they can do the job we don’t want to do because we think we have something else to do.

Relating to the our own small service organization I think we can improve it with a better discipline to do it. We will be always to a certain percentage or after (inaudible) we don’t to expand that, are not the service company. But we need to do a little bit of it so we can demonstrate to the users that there is good thing to do in this area. So I think we can improve it and I am sure Thibault is putting the process in place. So that it can be improved in terms of risk management, but it’s a small part of our revenue. Want to add something to it?

Bernard Charlès

We will now take one question from the webcast. Adam (inaudible).

Operator

Thank you. We will take our first question from Adam Wood. Please go ahead.

Adam Wood

Hi. Good morning Bernard, good morning Thibault. Just two questions, if I could. Just first of all on the cost base. The cost base year-on-year looks to be relatively flat. I know you've kind of talked about the increase you made in staffing, but could you maybe give us a feel for how much more leverage there is on that cost base, where that would need to move?

And as we look into 2012, maybe what the annualized increase in costs would be from what you've already done in '11 and what the initial plans are on costs for 2012 given the staffing versus leverage there’s still in the business?

And then just coming onto the rental licenses versus upfront licenses, I think you highlighted, Thibault, when you were -- during the presentation that the rental licenses were relatively strong. Is there any way you could help us understand how that might have impacted the new license? Because obviously there's a mix impact there in how the licenses come in and some people might be a little bit disappointed by the new versus what's come in on rental. Could you give us any figures that this could show how that's split up please?

Thibault de Tersant

Hey, good morning Adam. The customer base -- you have seen in 2011 has been driven, again, you know by these infrastructure savings and the savings of our business infrastructure, of our IT infrastructure and under good occasions we have done this. Of course as an end but we continue to work in co-ordination in putting people together. So there will another – in a single step but not immediate because today we have essentially taken advantage of our work in 2010 and first half 2011.

Yes, we continue, I mean, by definition a software model is a leverage model so there is no secret about that, and we still have areas where we continue to and can continue to improve. We mention the services you know I think. I confirmed that’s an area of leverage.

We spoke about sales productivity. It’s an area where we are going to continue to see an improvement in sales productivity. The question becomes more complex when you want to make the link between these comments on leverage and deliver our operating margin because an operating margin depends on many other decisions as Bernard said, and particularly our decisions in terms of investment organic and to the extent all investments. But if we stop to question at the leverage point, the answer is yes, we continue to have leverage.

Continuing your second question on the rental licensees, yes, we have been selling a growing number of rental licenses in the past 12 months, and this is producing results, of course, of the recurring revenue line level. I don’t have a very precise figure of the number of the new rental licenses in Q3, to offer you but I think it’s a safe assumption to say that they probably represent a growth of between 2% and 3% in rental licenses.

What I mean is that the new license revenue growth you have seen, if we had not grown in rental licenses the 7% would probably have become between 9% and 10% so there is an impact.

François-José Bordonado

We’ll take another question from the webcast. Michael?

Operator

We will take the next question from Michael Briest with UBS. Please go ahead.

Michael Briest - UBS

I noticed on slide 59 Thibault, it shows that the revenues were €14 million ahead of plan, clearly good. But the costs were €10 million below plan. I think everyone views your Q4 market guidance as quite cautious. It's specifically €10 million of costs that are shifting from Q3 into Q4?

And then secondly, could you give an update on Japan’s performance in the quarter and your expectations for Q4, whether that will come back? I think you've talked of that earlier? Thanks.

Thibault de Tersant

Yes Michael, you are absolutely right. Compared to our guidance, our total expenses and cost for Q3 was below our guidance by $10 million in Q3 and that was certainly coming from the work on infrastructure I mentioned, but it is also coming from a little bit of lag in hiring and so this will be a caught in Q4 to some extent. So our expense guidance for Q4 is I would say set, there is nothing excessive, a good cushion in it, you know its just normally set. I cannot hide, we’re always planning to be prudent, but I very much doubt that there is another €10 million cushion in our expense guidance for Q4.

And as you know, Q4 expenses are higher than Q3, because Q4 is a larger quarter from a revenue standpoint, so this has influence on incentives, sales commissions and variable pay in general. So for that reason and also because its not a Holiday Season in Q4, expenses are higher in Q4.

On Japan, the color on Japan, is essentially as we said, when we released the second quarter of this year, there is an impact for us in Japan I know that some of us are not on facing impact, but for us there is some impact in Japan and this is very much linked to the fact that we have customers in regions where the earthquake has been doing damages. So its very much centered on a few portions of our business you know, but yes there is some impact.

The performance in Asia however is more driven by the very high compare base with 53% increase in revenue in Q3 2010, much more by this high compare base then by just the impact of the earthquake in Japan however.

Gregory Ramirez - Bryan Garnier & Co

Hi good morning. Gregory Ramirez, Bryan Garnier, I have two questions on my side. First of all, do you think that the strong performance in Q3 was related to maybe a different spread of the revenues throughout the quarter? Have you got the same seasonality as for may be last year, between July, August and September?

The underlying questions behind that is have you got some customers which have brought forward some deals, because maybe they doubt that they could have the same R&D budgets for next year?

And the second question is regarding your – what you said about customers starting to struggle to get some financing for their projects. Have you got maybe more details on that? Is it more related to the automotive industry, maybe more related to Europe? Could you elaborate on that?

Bernard Charlès

I don’t think there is any effect related to customers pulling ahead of planned investment because they think budget will be cut later on. I don’t think we have seen this kind customer behavior, so there is no kind of virtual growth that would be due to that. I think it has been a normal, healthy, good discipline in terms of how we reach customer and when do we offer and how we work with them. So I don’t think there is anything special hiding there.

When we are conservative, we need to find good reason to explain why we are so conservative. As Thibault said at the beginning of the year, its prudent to be prudent and when we have good numbers, we want to be continue to be prudent to be prudent, because there is a level of uncertainty.

So you have us sharing with you two things which are almost in opposite. Yeah there are good reason to be concerned and those are opposite which is yes there is a good pipeline and we have good visibility forward not only for one quarter, but for the years to come. So this is basically what is plying in your question.

We have to balance what we tell you based on what we know and based on what can happen and what we are sharing with you are certain factors up to your interpretation. My view for the future is its not a saturated market. We are expanding in diversification. I would say, if I have to put a weight between the economy on our own factors it’s 50-50. What I repeat relentlessly, continuously to my team is, hey guys, there is a weather outside which is one thing.

But there is also the way you equip yourself to go through the weather, whether it’s raining or sunny or whatever; I think its 50-50. There is economical condition and that is what we do and that’s our system to continue to fuel the growth, which customers find opportunities because the economy is not stopping and my excitement is really should be moderated, and Thibault is excellent in doing that. That’s why we do a good teamwork I think, but the opportunities we see I don’t think has never been as big as they are today.

So that’s the balance and I can understand you want to know more from us. I don’t know if we can tell you more, there is two things; diversifications going; the size of the deal transaction is going up. ASP is on a good side, pipeline is on a good side, we want to do more for more industries and we demonstrated that this is not the statement we are doing it. And at the same time, there are also economical factor. So that’s I think, the summary.

We want to do what we said. I think we are in a good position to do what we said for this year. And we will set up the agenda in February for 2012 as we every year do and I think I don’t want to speak more about 2012, but I can tell you that in terms of product plan, partnership, customer expansion, we have a lot of opportunities, we do not want to miss and the fact that we have those opportunities it does not mean we’ve closed the deals. But it means that I think we are in a professional way working to continue to gain market share and be in a stronger position.

So the bottom shelf of Dassault Systèmes is the potential and we have to go and execute with high-quality and high-performance. That’s the summary, I don’t know if Thibault if you want to add something to that? You can I know.

Thibault de Tersant

No, not really, not really. I think it’s a good summary.

Gregory Ramirez - Bryan Garnier & Co

And regarding the lack of financing in the industry?

Bernard Charlès

What I noticed the customer spending are still high. What I noticed also is there is a lot of waste. There is a lot of waste in this world. It’s amazing. How many waste? It is more than anyone can think. Since I am not done right first time, projects are not organized well. Now, I have great customers. So I am not going to blame them and I love them, but the waste is huge. Eco-design start with removing the waste. With our digital world, we can remove waste. We can do things for a start. Its unknown, please write about it. Write about it because it’s unknown yet. But it’s possible. So even before you even think about new investment, I see customers now putting very clear discipline to remove waste, and to do that we are the right partner because the world of simulation and the world of digital design is the best way to predict the future and to design the future right. That's the game plan right now.

I am delighted to see that customers are getting more and more of this very precise view that there are certain spending for software, which are absolutely useless. I think they should cut and they should be more selective in what are those software which are very critical for the performance. And I believe we are in that category. And you know what, I think India and China are getting it. India and China are getting it because they want to go to the next step. They want to build innovation inside their countries and on BRICS at large. So that’s the dynamic, but, of course, you never know how the attitude to really be conservative in investment on the selective aspect but I can tell you this is changing and this is very different from 2008. 2008 was more, you know, panic cold and you reduced cost, but now I think there is a higher degree of selectivity in the way. That’s what we need to continue to promote from our side. Financing is only one aspect of that.

Gregory Ramirez - Bryan Garnier & Co

Hello, two questions. First, one on to find out if you could elaborate on drivers and leverage, you have to grow into new verticals, several slides on the apparel, on the high-tech, maybe if you could talked about that and the topic of improving sales productivity and is this in your mind more of “Farming”, existing in accounts some more “hunting” and finding new clients, how do you think about sales productivity improvements?

François-José Bordonado

On the diversification, we continued to progress very well. This quarter we were particularly noticed in energy sector and energy sector was specially strong and I think it’s a huge. There a lot of needs for that, you know, in green energy but also smart network asset management, many, many things to do, as well as security. We can use our software today to improve security of existing installation. So

We can use our software today to improve security of existing installation. So, this attention to diversity is not farming, it’s hunting by definition. We’re hunting on when we starting those new customer, these new industries, it takes time before you build your showcase. You build a small showcase with maybe a 100 users and then you grow from there. I think we are in a position to really replicate many of the showcase we’ve been doing in the last two to three years. So, it’s up to us to execute on that. Farming is not exactly farming. The scope of what we sell is becoming huge. On what we want to do is expand the number of users where we are, you can call it farming but at the same time it’s about providing solution to people in sales, marketing and so on. Anyway, so those two factors that you mentioned in your question are our factors of growth; diversification and exemption of in terms of type of users.

Operator

Joseph Burette from Exane BNP Paribas, your line is now open.

Joseph Burette - Exane BNP Paribas

Thank you very much for the Thibault and the rest of the team. Just a couple of questions if I may. The first one is just thinking a little debate on [OEM] listings opportunity, could you give us a sense, of the 800 customers you have today, how well ahead are they in terms of their roll-out plans? In a way, what percentage of the (inaudible) go about so far? And also, if you could clarify, I'm not sure I fully understood the comment in the prepared remark. I think you said that the biggest ENOVIA V6 customer has roughly 120,000 users in the community. Did I get this right? And the second question I had was, in terms of the aerospace and automotive customers, I look at those verticals are quite sensitive to an economic recession. But we recently saw strong numbers, without a decrease from Boeing, Northrop, also strong Lockheed numbers, you mentioned on audio/video press release today. Are we out of the woods with those verticals?

Bernard Charlès

I will start with the last aspect first. No, we are not out of the woods with those verticals. When you look at all those companies product portfolio where they have committed to deliver, what is happening with electrical vehicle, with few eco-design, new materials, I think the front-end engineering and the way to do to globalization of their engineering work and manufacturing is not at the end. It’s at the beginning of the new environment, I think, for those industries. A few years, when no one was speaking about where they are doing, how they are doing the globalization of the engineering, of course they have many, many challenges but the reality is they need more and more of our software. So I don’t think we’re at the end. We are really establishing new basis for operation. Related to the aspect of -- we usually speak about ENOVIA customers where not when we have got the purchase order, but when really the project is underway, whether it’s deployed or it is being deployed. So those installations are higher, some of them are already very huge. I think the biggest one in terms of data volume to give you an idea is customer where they are managing something like a 400 million object across 30 R&D lab around the globe in one single version of [Truce] using ENOVIA V6. So, I say that because sometimes competitors have the tendency to say that our products are still at the beginning of the maturity. I think we have installations which are bigger than any one else on managing data volume, which are absolutely huge. So it works and we are very conservative in the way we communicate, very conservative. We communicate with only when solution are started to be in production or are under the deployment process, not before.

Bernard Charlès

I think with that we complete this session, Francois-Jose, do we?

François-José Bordonado

Okay, thank you very much for your great questions for following us and we hope that you will have fun looking at the great stories we can give you. Have a good day.

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.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: Dassault Systèmes's CEO Discusses Presentation - Earnings Call Transcript
This Transcript
All Transcripts