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Executives

François-José Bordonado - IR

Bernard Charlès - President and CEO

Thibault de Tersant - SEVP and CFO

Analysts

Gunnar Plagge - Citigroup

Michael Briest - UBS

Josep Bori - BNP Paribas

Adam Wood - Morgan Stanley

Dassault Systemes SA (OTCPK:DASTY) Q4 2011 Earnings Call February 9, 2012 9:00 AM ET

François-José Bordonado

Good morning, everyone. I am François-José Bordonado, Investor Relations. 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 Systemes fourth quarter and full year 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.

Dassault Systemes' 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 table 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 reference and our 2011 Half Year Report.

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

Bernard Charlès

Good morning, everyone. This is a special moment, I think, for Dassault Systemes. Let me tell you why before I review the full year results. I think we are announcing four things this morning.

Number one the full year achievement, which as you maybe have noticed already, in our view were excellent. 2010 was a very good year. I think 2011 will mark an excellent year.

Second, we are announcing the fact that we see on horizon beyond PLM. We are the company who invented PLM in June 1999 for those of you who were already following us. In June '99, we did a world tour and we said there is an era after Digital Mock-up in 3D. Digital Mock-up created to replace the physical mock-up. There is an era after that called Product Lifecycle Management. The move of this Digital Mock-up is how the product life will be managed.

I don't think many people at that time thought that Dassault Systemes would be able to create the portfolio of applications that would go far beyond manufacturing industry on certain industries like life sciences, consumer packaged goods on new sectors, even financial services. We have demonstrated over the 10 years that it was possible.

At that time, that announcement, that day just before the internet bubble was the day where we said we think we can reach a market which is twice the size of the market that was reachable to us before. Today, we are announcing that we believe we've what we call a 3D experience platform, and I will explain to you later what it is. We believe we can extend and multiply by almost 2 the market we can serve in the years to go.

The third announcement is the announcement of Netvibes, the acquisition of Netvibes. What is Dassault Systemes doing buying an native internet-borne company, buying a great technology which is used to create web pages and create a dashboard where you can take all RSS feeds information on the net and put them on a computer or mobile or whatever. Why is Dassault Systemes investing money there? We'll explain why. I think you may have still the same question for EXALEAD acquisition that we did 18 months ago.

And the fourth is related to people and leadership. I'm also pleased and we're delighted to announce that we have now someone joining us at the Executive Committee of Dassault Systemes, Monica Menghini. She is here in this room. Monica Menghini is bringing to Dassault Systemes a tremendous knowledge, having created the 20 brands in the world's best marketing company called Procter & Gamble. So she was for nine years at Saatchi & Saatchi, I think the most creative company.

Monica Menghini is going to take the lead to create the value creation process to make sure that our customers can see and understand what kind of value we bring to them and compare what we say versus what they get, which we think is a nice way to create value for the future. Monica will take care of the industries we serve, the solutions we sell, marketing and corporate communication.

How can a leader from Procter & Gamble company can join the most techy, geeky scientist and software company? It can happen when we convince her to join us. And she has been at Dassault Systemes already for four years. She was at Dassault Systemes to help us develop the market in consumer packaged goods, and we've been very successful in approaching those markets. So we want to generalize this approach.

That's it for announcement. Let me go now to the first topic which is related to the 2011 objectives. I think if you look at all parameters: new license growth, 20%; EPS growth, 17%; operating margin expansion, 180 basis points to 30.4% of operating margin.

The integration of our sales force, we spent €650 million buying our own sales force on the IBM team in 2010. It was a lot of money. Many people were thinking that this will dilute, so 2011 is the first full year where we've demonstrated we can transform the way we sell and engage these customers for the full year. We have transferred all IBM contracts to Dassault Systemes contracts, and we have demonstrated to all our customers that we are a good company to be working with and that we don't need anyone between them and us.

Extremely successful and I think I want to mention that, because this integration is going well on the level factor to improve revenue per salespeople I think is still there, as Thibault will tell me when we discuss about investment.

Indirect sales channel has been strengthened. Also, you remember we have three ways to sell around the world in 80-plus countries, direct sales force for large account, value solution and volume solution. Double-digit for each of those channels.

The diversification by geography is also working well. We have 20% growth. Something very essential, which is just what I talked about quality to the industry, industry-vertical diversification in new sectors like energy, construction, business services. And you remember in 2010, we told you that it was in life science, consumer goods and consumer packaged goods where we continue to grow. The industry verticalization and diversification is also fueling this growth.

The last but not least, I think the connection of the different pieces of a very critical technology we have is related to search-based application, EXALEAD-powered apps. Whether it's about system, all products are becoming software, electronics and mechanical products now what we call mechatronics. Social innovation platforms, people can be connected to invent or innovate. All those pieces are creating the significant competitive advantage we believe for the solutions we have.

And last but not least, V6 which was introduced in 2010 really is demonstrating its adoption with more than 1,000 enterprises adopting this platform. So this is the summary of all of this.

So let's review the strategy. First of all, where are we going? Every 10 years, we make a statement about what we will do for the next 10 years. We did it in the '80s. We did it in the '90s. We did it in '99, six months before 2000. And we are doing it this year. What we want to do is Dassault Systemes wants to provide business on people, not only businesses, with 3DEXPERIENCE universe, ways to represent the world in a virtual manner, to imagine sustainable innovation capable of creating a better harmonization between product, nature and life.

If you want to hire people that have passion in the company, you need to have a good purpose. I think this purpose is a good purpose if we want to have the best things in the world. Let me give you an example that proves that we are doing it already.

We do improve safety. When we do safety simulation of car crash, when we do safety simulation of medical instrument, when we do compliancy in life science, when you do certification in air transportation, we contribute to safety and performance already. This is not software. This is science. I believe that the system is more of a science company, delivering software application. So we do that already.

When we do surgery simulation in 3D and evaluate tissue behavior, as we are doing with 200 universities in America, we are improving the way life science can improve people's lives. So that is a purpose.

We are going to the fourth generation of transformation for the industry. We had said in the '80s, instead of having flat drawings, you can use 3D. It's still going on. There is still a lot to do. In the '90s, we said we're having to do with 3 million parts of a plane and we do it without physical prototyping. No one has done it on the planet before, and we did it. And I think this is what we called at that time Digital Mock-Up and it has been adopted by the automotive sector, by many other sectors. And frankly today, there is no way to beat a new mobility system without doing virtual prototyping.

Then in '99, early 2000, we said, well, now you have the right to represent, you have the way to simulate how things will come together, is then a way to see the movie of what is happening? This is PLM. And today, we are saying the next step, the next era, the next horizon after that is why is it that we cannot create a full virtual universe where everything can be validated before you actually spend energy, materials, logistics to do the job. And we call this 3DEXPERIENCE.

But the 3DEXPERIENCE is more than that. We believe today that companies who are the best in the world have found the new ways to connect the offer what they do with the demand or the non-formulated demand, creating new demand. This junction between what people expect and what companies offer we believe is at the center of the innovation process. And that's why EXALEAD, Netvibes are these new platforms. So it's really profound. I insist on it this time, because it happens only every 10 years.

It gives you an idea of what the 3DEXPERIENCE platform is about and can do. So why are we putting all these elements together? Because what we are creating is an integrated platform that can do search what is out in the world, whether it's a shampoo bottle or on a plane, connect the virtual world with the real world, how are the service online are going to influence the way the product works, we call this Virtual+Real. When you use a phone today, the value of the phone is not the physical good. It's the service that goes around it. So the software on the physical good.

Everything will happen the same way in smart mobility, in connectivity of smart products, even computers and the fridge to tell you what is inside. That's what we call the simulation platform. And then of course, the search platform for the information modeling platform. And the social platform, how you connect people so they can share ideas. We have done tests last year, test of cloud sourcing of ideas and concepts. And it works. Social secure networks can create new ways to do innovation.

So this is where the play button is critical. It's show me how it will work. And we can do tests in virtual world that we cannot do in the real world. So that's why we have used this compass as a symbol. It's the secret of V6 platform. It's going to be made available through mobility online cloud on what we call the experience platform.

The strategic elements we have in our hands to make this happen are very simple. We have a great collection of brands, which are very clear. Eight product brands. They have clear promises. Out of the eight, three are new. Five have a few years. Out of the five, three are number one in the world. Two are number two. But they tell you in the next three to five years, the two second in line will become first. So we want to create brands which are well recognized.

DELMIA Digital Manufacturing is number one in total of the software around in the world. ENOVIA is number two. I think we believe we are going to become number one this year. I think next year or a year from now, we will have surpassed whole competitors in this sector, ENOVIA collaborative platform.

SIMULIA is number two. We will take a little bit of moves to make this realistic simulation become number one, but we will become number one. And then the three babies, 3DVIA, 3D for shopping; 3DSwYm Social Innovation online; and EXALEAD search-based application are going extremely well. And I tell you if I had to reinvest on EXALEAD, I would do it again. The year was very good. And we are now putting Netvibes in the family. So we can feed and get access to the entire internet assets.

And then on the industry, what do we serve? We serve mobility, aerospace and defense, shipbuilding, consumer goods, consumer packaged goods, energy, life science, financial services. Believe it or not, we are now working with banks to do the support of the compliancy processes. The techniques are very similar. When you take the box in life science of pharmaceutical product, when you look at what is in the box, the configuration to make this box comply with what is inside, complying with regulation is very complex. It's almost as complex as configuring an airplane. We are the only company that can do that well. So we are going to serve this market.

We have three ways to retail our customers, direct sales force, value selling and volume. At the middle of it is the platform, which is V6, which will become online for the customer or online for the users.

So customers are telling us now discovering those capabilities that it can become front again to innovate. It changed the scope of what they do. We started from doing very specialized work, and now it's becoming a comprehensive platform to connect everyone together. So this is 3DEXPERIENCE, and this is V6 platform, because we believe we can connect education, research, businesses together.

You may have heard about the announcement we have done, for example, in the aeronautic sector in Europe where there is a project called BoostAero, which is a cloud-based hub whereby aerospace companies will be able to use this cloud-based hub to connect and cooperate. The software behind it is the Dassault Systemes V6 platform. So we believe that this can be applied to many sectors, not only to aero, but automotive and many sectors of the industry to make it more competitive. We are also doing apps for the education, for research.

So now we look at why do we think this is the right moment to make this kind of clear statement about the future is because we believe that in the way V6 has been used in 2011, we have gone to a new special milestone whereby customers are looking at the V6 experience platform as something more than V5+1. It is not a new release. It is a completely new approach to do business.

I think when we look at the adoption, while it's a new generation of products, you can see that the total revenue was up 14%, new life science were up 20%, the operating margin at 30.4% on the full year, improving 1.8%. As Thibault mentioned in the call this morning, we have reached the 30% two years ahead of our long-term plan where we committed to do and reach 30% before the end of 2013. EPS growth is up 17%.

So on the product line adoption, double-digit growth for new license for our older brands that we have grew 16%. We had a lot of fun when we computed those numbers, because I think in the last 10 years we always find someone on the market saying that CATIA was at the end of this growth eight years ago. I believe that the CATIA brand is just at the beginning.

Definition of new world, what we have in our world in terms of products and experience, should be virtually designed. So we believe that we have created investment where it creates a long-term growth. ENOVIA collaborative platform up 14%; also, software, including Digital Manufacturing, EXALEAD collaborative software up 18%. So it works up 12% on total revenue of 15%.

So the CATIA leadership is demonstrated. It's by far the de facto in many, many complex industries of complex design. But we are making it simple. You have seen the Natural Sketch and we are going to make it much more affordable for complete product line.

Here is an illustration that gives you an idea about how was mechanical secure system for design is becoming a mechatronic system. This is oscilloscope for the specialists. It's a complex system. There is a lot of software, lot of science inside. So you see the different parts. This is how easy it is now to put them together, almost like a game. When you are on the touchscreen, you just use a finger and put the parts together and they collapse together to assemble. And then you can push the meter button and push the plate, show me how it works.

And then you can experience it. So the experience that go there, it's just not for fun. This is not a game. The equation on the behavior of this equipment as you fly the plane is fully simulated. This is what we call 3DEXPERIENCE, and I think we can predict a lot of things by using this kind of technique. So this is the power of what we call CATIA system on live experience platform.

We have a strong growth, new businesses, Nikon, BMW, Alstom, EADS, Pegatron. Pegatron is a subcontractor of Apple, many other companies in the electronic sector. As you know, the tier-1 suppliers are the one making the work. Most of those companies are marketing companies and they do supply.

SolidWorks, strong, dynamic, 12% growth in revenue, unit growth 14%. We were told 10 years ago that cannibalization will happen. It never happened. I was told that the price would drop 10 years ago. We have continuously increased it. Value is important. And despite the fact that the competitor in this sector sometime offer solution at three or four times less, we win. When we are there, we win.

Next week in San Diego, we will have SolidWorks World where we will probably have more than 6,000 attendees. One day soon, we will have communities that will reach 15,000, 20,000 users. Our total community of SolidWorks is several million users. We serve 1.5 million users and we believe that this continue to expand. So 3D is becoming a new way to do virtual designing in very, very large sectors.

Talking about ENOVIA, which is a way to connect people together to create this platform where you can do instant collaboration which by the way is going to be used by SolidWorks on old products of Dassault Systemes. This is the heart of V6 platform. It's number two in the world, and we believe we will become number one this year. 14% growth. And you see incredible adoption in highly diversified sectors from United Colors of Benetton to s.Oliver apparel company.

We mentioned VF Corp, the world's biggest fashion company owning North Face, Nautica, Lee, Wrangler, they are using our V6. Bell, Bombardier, Skanska, organizing all construction sites, more traditional customers of course like LG, are just examples from last year.

EXALEAD. We invested €145 million in EXALEAD. And if we had to do it, we would do it again. We have grown extremely well with us. Are we a competitor to Google? Absolutely not. We are not interested with that. Search goes far beyond, doing general services to citizens. We want to use search for the enterprise and we want to use specialized search for our partners who want to create special websites which are very dedicated to certain purpose.

SNCF, as you know, is using EXALEAD inside yellow page, (inaudible) banking service can use their internal search base to beat new type of usage on application. And we are also using that inside the companies. Let me give you briefly a few stories which are amazing stories in terms of internal investment.

We for a company created a global spare part management system that can index all information available around the world for the customer, the product on where the spare parts are; something that could not be done before. On this application, we are not selling EXALEAD. We are selling the EXALEAD on its application to use it. Information intelligence for call centers. When you call call centers today, we can look at for the customer exactly what the company knows about this customer, no matter where the information system is around the world.

On information system, we are building an application called E-reputation. So for example, our customers who are very sensitive, like all of them, to the brand reputation on the web, we'll be able to do specific search on the web about what people are saying about their brands. And therefore, use those inputs as a way to better improve the products and solutions.

Abercrombie & Fitch selected EXALEAD. Basically they were using EXALEAD to do counterfeiting analysis, searching. So not only keywords, but in shapes, pictures, videos, sound on the web. We do that already. Protection of the brand from illegitimate websites, they have selected EXALEAD to do all that. So there are a lot of new usage we can do in this sector.

Netvibes acquisition, a few things here. Our friend Freddy Mini here, that is a good home for him and his team. Freddy is based in California in the Silicon Valley. He is completely wired in where many of the web applications are being developed. Why is it that Dassault Systemes is interested to use this technology? So it's technology acquisition. Office in Paris and San Francisco. Why is it? It's because we want to provide our customers whey they do their innovation process ways to have high visibility about what is happening inside and outside. We also need to make our products so cool, easy-to-use that we know that if we use web technique and citizens can use and we can make this web technique usable inside the company, everyone will know how to use them.

So simplicity. That's why we have convinced the team to join us, 33 people. An incredible brand name, Netvibes, known by many, many young generation, 4 million active monthly users, 15,000 developers in the ecosystem creating things around Netvibes, and 250,000 universal web apps.

This application will allow us to display collaborative information on mobile phone, iPad, without having to touch on our whole development. It really creates this junction between what you do outside your company and what you do when you come and work inside the company. So I think it's going to be useful for the 11 industries we serve. Welcome, Freddy. Welcome to all the team.

Related to the revenue by regions, we will notice that Europe was very strong, up 17% total revenue; America, 11%; Asia, 14%. One might say America could be better. It could. What I would say is two things. The fastest area of the world where diversification is going on is in America, touching new sectors. And when you reach new sectors, you sell smaller transaction than when you serve existing sectors. So it takes a little bit of time to beat the snowball. At the same time, we do know that we can do a lot better, and we are going to do better by improving our sales machine there as now we control it.

Asia was also strong at 14%. Of course, the impact of the Japan slowdown effect last year, but overall we are very pleased with the performance. Now let me make a comment about Europe.

I think this shows, and this was driven mainly by Germany, that the adoption of revolutionary technology to create highly sophisticated and simple products can make a nation competitive. It's not a joke. It's reality. And I think the speed of adoption by the different industries and sectors will be a competitive advantage. And that's exactly what we want to play.

Geographically, diversification, here are some comments on the high growth countries whether it's India, Asia-Pac at last, China, Korea, Europe growth very strong, including Poland, Hungary, Romania, Slovakia, Russia, Middle-East, Latin America, these are high growth countries for us. We have increased the sales coverage. We are growing at 20% on the total portion of revenues representing today 14%, having grown plus-1 point compared to 2010 and 4 points as compared to 2008. Great brands. Those brands are going to become world brands.

Then looking at the industry vertical. Software revenue, today the new revenue for the industry is about 23%. That's a raise between existing core and new. When core is going fast, it's a challenge for new industry to go higher. But that's okay. So it represents plus-8% in evolution of the contribution to the total revenue as compared to 2008. Excellent dynamic this year, especially 2011.

In automotive and aerospace, we have new license growing 20%. We have felt our presence in energy sector, in construction and business services. There is a lot of potential there and we have been making sure that I think we know how to replicate. You see here the stack how it's split in the 23% of the total Dassault Systemes revenue. 10% in high tech, consumer goods, life science, energy, construction, business services. So the customer base is growing.

Last year, we acquired 18,000 new enterprises as customers, 18,000 in one single year. Of course, not big, but they will grow. We serve them even more. This is a collection of illustration by industries. Going forward, with the new industry orientation I just talked about under nomination of Monica Menghini, we will explain how much value we create, what kind of customers do we get and what kind of customers are we targeting for each of those industries.

V6 in production, you can see that the ramp-up is still very strong. We have 1,000 enterprises. The largest one has almost 100,000 users. The dynamic is very strong. Pierre Fabre selected this PLM platform for their products, portfolio management, compliancy, raw material evaluation, systems flow. And as you may remember, last year we bought a company called Enguinity. This is formulation. This is the computer-aided design system to understand what is in the bottle, not what the bottle itself, but what is inside. It's called formulation and it's a great move. It was a technology acquisition also. Regulatory documents, certification and so on, this is what they do. It's becoming a very core system for them.

Astrium, this is more typical to the market where we are. As you know, China is now doing this year 20 launch of satellites. So there is a lot of activity in the space area. CATIA, ENOVIA, SIMULIA are really critical for new material usage.

Porsche, I should also mention Tesla. I don't know if you know this company. It's an amazing company. Their market cap is 3 billion. This company has been entering in the automotive sector, creating sport electrical car, creating absolutely innovative design, innovative engineering using the V6 platform. How can a newcomer come in a CapEx-intensive industry where everyone says it's almost impossible to make profit? This is a newcomer coming and saying I'm going to do new profile of products.

I think this is the reality of the new world where we will see new game player entering in existing industry and changing completely the equation of innovation.

With that, I'm sure Thibault has a lot more to tell you before we take your questions.

Thibault de Tersant

Good morning. So we are now reaching the more boring part of the presentation. But I think today you're going to be interested, because there are a few explanations to give on a few figures in these Q4 results. And I'm betting through these explanations, I'm going to remove some stress from you, which is not usual for me.

In terms of revenue growth, you already got the figures. Total year, we grew 14% and 9% in the fourth quarter with good 15% growth for the year in software revenue.

Now, if we look at the new license revenue, which is really the dynamic setting new licenses, they grew 20% in 2011. And I want to remind you that last year, they grew 30%. So it's a 20% growth following a 30% growth and 13% growth in fourth quarter. And I think that's an opportunity for me to stop here and ask the question was Q4 a good quarter.

And I think the answer is that it's a good quarter, because Q4 2010 was an extraordinary quarter, if you remember. So the real question may be also what is the weight of these fourth quarter new licenses as a percentage of the total year new license revenue. And when you do that, you find out that new licenses in fourth quarter represented 33% of total new licenses for the year. And 33% characterizes a good year.

If you look at the right hand of the chart, what you can see is that 2010 was up no more at 34%, but we in fact above the average of between 2006 and 2009, which was 31%. If you want me to mention a very good year for Dassault Systemes, it was 2007, and we are exactly at that level in percentage of the full year. So it was a good quarter.

The second question which can create some stress is SolidWorks topic. We had a 14% growth in units for the full year, but only 1% in revenue recognized in Q4. And here, I think it's interesting because the timing of the sales of new licenses by SolidWorks had a big impact on this result for Q4. We actually had more of the hockey stick in the second half of December than usual. And there is nothing wrong with that, except that these licenses for SolidWorks we'll only recognize them when they are activated by customers. And so there is a delay before activation.

So I think it's more relevant to look at the bookings in this particular case, and the new license bookings in Q4 for SolidWorks were up by 10%. I'm really taking some time on this topic, because I have always been saying that SolidWorks was an advanced indicator for the investment appetite among our customers. And I think that's true.

So there is not a scary a situation with this 1%. That's my message. It is still dynamic of growing new licenses at 10% for SolidWorks. Maybe somewhat smaller than the first half of 2011, but something that is showing still a good dynamic. On the pricing side, we were able to grow our average price by 1% for the full year and also for the fourth quarter; so no erosion whatsoever on this.

The recurring revenue growth was 13% for the year. It grew 6% for the fourth quarter and the level for the fourth quarter was fully satisfactory going up by 2% compared to what we did in the third quarter of 2011.

Services was generally the topic of consternation and embarrassment for both Bernard and myself. In former quarters, we had said that fourth quarter would be profitable and even the second half would be and I can confirm it is the case. We grew services by 11% in Q4 and we arranged a gross margin of 16%, which is of course a much more normal margin for service activity in our field. And because of that, the second half of 2011 is positive at 7%.

Now, the revenue by product line. Very quickly, I will only speak about Q4, because you already got the full year results. CATIA was up 7%, very good dynamic for CATIA. That's a very good dynamic. ENOVIA up 3%; this is another area which requires me to stop and give you an explanation.

ENOVIA is the driver of industry diversification. We are selling to new industries with ENOVIA. And when we sell to a new industry, we may have some functionalities that are required by the customer in order to go in production, or even they can start, but they still require new functionalities. We are less advanced of course in this new industry compared to where we are in automotive and aerospace, and that's normal. That's always the case and the way we have been developing our products, working with customers.

In those cases, we don't recognize the revenue and we defer it until we have delivered these functionalities. And it depends of course on the contract structure. We can defer some residual part of it or fully the contract depends on the magnitude of these new functionalities in the contract.

But for ENOVIA, what I want to mention is that there is always some deferred revenue. But in Q4, this part of deferred revenue was larger by €10 million compared to what it is normally. So if you consider that, the ENOVIA growth for the fourth quarter was in reality a 17% growth. And if you look at the full year with the same deferral, it was a 20% growth for the full year. And that is something that I wanted to share with you, because I know and I agree ENOVIA is one of the indicators of the success in also how do we make consistent our big success with 1,000 customers now using Version 6. And this relatively weak ENOVIA performance has the explanation.

SolidWorks grew by 9% overall. And so total software grew 8% in Q4.

By region, Europe was by far our best growth, 15% in Q4. In this performance, Germany, but also France, had a good growth. There is appetite to invest in France. I don't think it is what we read in newspapers or what we listen from radio stations, but it is the case. So we have some comforting news for you. Asia grew by 6% and Americas was relatively flat. As Bernard said, this can be improved and will be improved. In Asia, I'd like to highlight the growth in China and in Korea, which was quite good in this fourth quarter.

Operating income, another explanation. Well, first of all, let's stop once again and observe we have reached 30.4% operating margin for the year. I have read that our margin was disappointing in Q4. I'm sorry we have delivered in advance of our goal for reaching 30% margin for the year.

In Q4, why is there such an increase of expenses? Total expenses grew by 11% in Q4. So the question for you is of course is it going to be recurring? Is it the new trend for growing expenses? In that case, it's a problem. And the answer is no. It is not a trend. There are two factors impacting expense growth in Q4.

First factor is a good one. It's the fact that we have exceeded what was our sales plan for Q4. And we were based upon our forecast for the year, and you know it was a conservative forecast before. So sales commissions and variable pay are increasing in Q4 to recognize that we have reached the level of the full year objective, which was not the case based on our expectation at the end of Q3.

The second factor is the fact that we have looked at all our current litigations and a few tax risks and tax audits, and we have recognized the reserve for those. Thralls in the U.S. are becoming more aggressive. We have actually every month a thrall trying to challenge IP of some of our products, because they have both old patterns which are extremely questionable patterns. But it's the case that we need to defend against them. And so we have these thrall actions represent.

If you exclude these two elements I just mentioned, our Q4 expenses would have grown between 6% and 7%, very consistent with what you would have believed.

EPS grew by 17% for the year and 5% for the reason I just explained in Q4. Not just that reason, by the way; two reasons, because 5% also needs an explanation to remove your stress. The small margin impact related to the expenses, but the second impact is the tax rate. There is an increase of taxation in the word that is happening. Our tax rate increased in fourth quarter for that reason.

Just in France, as you may know, income tax for companies grew by 5% as a rate for the total 2011 year, and this was recent news. So we have to factor it for the full year in the fourth quarter tax rate.

Finally, I don't have really to remove any stress on that chart. Our cash flow from operations was €451 million in 2011. And so we end with a net financial position which is quite good at €1.151 billion, which gives us the flexibility that is needed by our strategy.

So finally our objectives for 2012. These objectives are also done in order to remove stress for us and for you. It's a compromise between all the dynamic we have been presenting to you today. We've 3D-PLM adoption. We've the broadening of the market with 3DEXPERIENCE. We've the interest of our customers, which continued through Q4 and is visible for 2012 with our product cycle in V6 and our brand, our good channels in place and now the industry organization which is helping us put much more emphasis on industry-by-industry value delivery.

And we are trying to mitigate all of that, because we couldn't be very bullish and we could decide to invest even more if we were just to look at this bullish environment. But there is also the economic environment. And I think we really want to make the assumption in our guidance that there will be a focus on public deficit shrinkage and there will be shortage of credit supply by banks, because they are going to need to comply with the liquidity ratios and the way they're having to do it will be not by issuing shares.

It will be done by shrinking the credit availability. So this will have some impact. I don't know when exactly, but we have factored it in our objectives to grow revenue by 5% to 7% in 2012. So in spite of this, because of all the dynamic, we are declaring 2012 will be a year of growth. And it will be a year of growth for the topline and also for the EPS where we target 3% to 3.1% EPS.

For first quarter, we see essentially the same, 5% to 8% growth in revenue, a relatively stable margin compared to last year, and a 0% to 8% growth in EPS. Why are we staying at 30% operating margin for 2012? For one very simple reason, which is that we want to do acquisitions and we will do. I'm not trying to factor a large one here. But our sweet spot of acquisitions, the mid-size acquisitions. We want to do a few of them, and I don't want to have to go back to you and tell you all we did an acquisition.

So our margin objective is not 30% anymore. It's less than that. So there is a leverage for us in 2012 with all what I've shared with you, but this leverage will be used to compensate the dilution that this already comes from acquisitions which are always diluted. Well, not always, but quite often, because you don't find so frequently mid-size software companies with a 30% operating margin.

And with that, I will stop and I will open now the session to questions.

Question-and-Answer Session

Unidentified Analyst

Can you perhaps first of all on that underlying operating leverage on the 5% to 7% growth that you're forecasting what's the magnitude? And secondly, you've laid out your balance on different scenarios as to what could happen? Were you to exceed your revenue guidance, would you be inclined to spend that away or would that drop through to the bottomline?

Thibault de Tersant

I think that without acquisitions, our margin would expand. It would expand approximately to 31% operating margin, except of course if we are completely at the high end of the guidance where it would expand somewhat more. But in the middle of our guidance, we would deliver a 31% operating margin. So it's 60 basis points in midpoint of guidance.

Now, would we spend everything? It depends. We're not going to do stupid things organically, because we don't want stops and goes. And so I think it has been the way we have been managing, being careful about not spending too much and have then to lay off people when there is a difficulty in the economic environment.

So, yes, if we exceed our revenue range, I would say unfortunately our margin will go up, but it will give us some of freedom to continue external acquisitions.

Unidentified Analyst

And one for Bernard on ENOVIA. You've indicated that by yearend, you expect to be number one. I believe there was an important release of CATIA in Q4. Can you just lay out kind of a roadmap as to what the sort of growth in 2012 of ENOVIA will be? So far, it's been mostly the new industries. But what's the sort of pipeline and what's the kind of customer feedback in terms of the adoption amongst your classical customer base for that?

Bernard Charlès

For classical customer, the adoption of ENOVIA V6 follows in this case the adoption of CATIA going V6, because all future products in the V6 platform require the ENOVIA V6 collaborative platform, which as you may remember was not the case in the V5 architecture. So, yes, the two drivers for the collaborative platform is, as you mentioned, diversification, ENOVIA V6 only, because they don't need a touch and type of set of applications; however, they do portfolio management and other things. And in the so called classical domain, core domain ENOVIA V6 is needed.

At the beginning, when customer discovered that, they were concerned. Now, they are not at all, because what they discovered is that we can significantly simply the operating environment. So the net of your question is the more we sell specialized applications whether it's the CATIA portfolio, the DELMIA portfolio and even highly sophisticated SIMULIA for simulation, we call it SLM, Scientific Lifecycle Management applications, drives the ENOVIA growth.

Unidentified Analyst

Could you please elaborate on the doubling of your addressable markets?

Bernard Charlès

In 10 years, basically changing to scope of what we do has created opportunities to reach all new industry, all new users in those industries and also new type of industry solutions. And we'll tell you much more about that when we do the analyst conference mid of this year. It's already planned. I think we've already updated mid-June where we will go, so the decomposition of the different industries, the different usage. But if I mention that today is first of all because we believe this is going to happen.

Number one, we have enough elements now to show why it will happen. And I will give you a few examples, which will not give you the total computation, but a few concrete examples. But just to give you an idea about what we're speaking about in terms of reachable market. So a few examples.

In the virtual store when you are in the CPG, when you look at retail is becoming a very high domain of interest for many companies, this is something where we weren't doing anything before. We have presented at the last user conference what Carrefour is doing with our system for virtual store on logistical optimization. We also presented how we can do supply chain logistic, what we call visual production solutions. So people know how the production system works around the globe in a visual way.

I can take the example in the design styling in many other sectors. So we can easily say as PLM doubled the size of reachable market when we were doing digital market that we will be able to double the size, and we think that it's going to be $45 billion reachable market over of course a longer term. And the reason why we wanted to preempt, as we did for PLM, the fact that we are going there, so to publish it is to really show the gap we have created even in the way we are implementing V6 today within customers.

And the 2011 implementation of V6 was eye opening for us. Customers are pushing us in areas where we have never been before when they see the capability of the solutions. So what is called reason to believe is there. And we decided that we will make it visible now, because we want to define the new market, define a new way of doing business and be the first to serve it. That's what is behind this announcement.

On the (inaudible) that we did it three times and it does work. I think we are going to do it a fourth time, more in mid of June.

François-José Bordonado

We will take now question from the conference call.

Operator

Our first question today comes from Gunnar Plagge of Citigroup.

Gunnar Plagge - Citigroup

I was wondering whether you could talk about ENOVIA. I know you said building a snowball. And if I look at the V6 number of customer increase and square it to the revenues, it looks really as if 2011 was a year with a lot of customers, but relatively small revenues per customer. Could you give us an idea of what you expect in 2012, how are we building a snowball in the current year?

And then secondly, built into your topline guidance 5% to 7%, your largest segment, automotive, revenues of about 30%. Unit growth assumptions in the automotive market are for this year pretty positive. And I was wondering whether you could elaborate a little bit what your underlying view on demand from automotive customers is in the current year?

Bernard Charlès

ENOVIA is a platform. The V6 is a platform. When a company adopts a new platform, they go through a very progressive roadmap to deploy the platform. There is a phase where we have to demonstrate we are superior to the competition. We can do the job. Then the company will decide to do the new process definition about how they are going to work. So between the time we know we are selected, the time we know we are doing the first pilot on real program and the time you deploy enterprise-wide through the supply chain, the cycle for user exponential growth is not similar to what is the cycle for the deployment of one application.

That's the implicit statement that that you have within your question, but that's the reality on why this snowball takes more time for ENOVIA for traditional applications. But the footprint is much bigger, because the number of users we can serve is significantly bigger. So that's one phenomenon. And I think we see that this year again.

I think we are very confident this year about the adoption, because in the last 18 months, most of the benchmark we have done, we won them, not all of them, but most of them. We are even doing replacement of existing installation where the customer decided for the competitors only three years ago. I think Alstom, which I mentioned today in the announcement, is one of the big example where they went the wrong way four years ago and now they're coming back any saying we are going to go the right way.

They have not installed the products. So if you are investor in Alstom, you should be confident. I suspect because they are going to a very competitive environment. So we see this. So the win back and win rate are very strong. And we have a sympathy building around ENOVIA despite the fact that competitors have been saying that this is a problem we could not solve, and we are making great showcases there.

Related to your last part of the question about the intrinsic growth of the industries and what does it means to us in term of consequences like what you mentioned about the volume for auto, I think we are more sensitive not only to the volume which is produced, but to the product planning. And product plan is very strong. Now, Thibault said it's prudent to be prudent. And I think all we say is prudent to be prudent for a volatile prudent market. So even adding attributes this year that I think we've never been using in the past.

I think it's the way we are going to work. We want to meet the objectives we have set up. It's easier to have good news and we don't want to manage bad news. This is the principle of the company. It has to be known. It has to be visible. We are not going to spend days to think about how we communicate to you coming back and saying we have missed something. I have other things to do. So don't mention that we are going to overachieve, because we want to build a reputation for our company that we deliver or we overachieved. That's the reputation we want to have. And that's same reputation we want to have with our customers. We don't want to be a player for volatility.

People want to gamble. They go and invest in someone else, not in Dassault Systemes. I don't want those shareholders. I want shareholders for a mid-to-long term plan. We are a sales company, long-term plan, have family control. We control with management the company. You know who you are talking to. You know what we say. You know where we grow. You decide. And I want this message to be more clear with those days, because when I see investors taking the profit and then they say why then we put our investment, we want to be a safe place to go. That's why we are saying what we are saying.

If we stack the growth factors, you will come with a growth which is higher than what we are announcing. Yes, it's a good news, but we have to deliver it, we have to do it on. Between the potential of what we can do, we have to take some safety net. And that's why Thibault and I are a good couple in this industry. And we want to stay a good couple to make this statement and this kind of commitment for the future, so I can sleep well, we can sleep well, or you can sleep well if you decide to invest in us.

Operator

Our next question comes from Michael Briest of UBS.

Michael Briest - UBS

In terms of the 1,000 V6 customers today and maybe the 200 of value-added in Q4, can you give a sense of how many are new versus upgrades and how many are in new industries as opposed to traditional? And then, Thibault, just on the tax, you obviously referenced the issues in France. Could you give some comment on 2012 tax rates and also explain the step-up in DSOs in Q4?

Thibault de Tersant

First of all, out of the 200 increase of the V6 customers, a good half of them are new customers and not upgrades. And it is in fact the kind of rate we have experienced with ENOVIA Version 6 so far.

Concerning the tax rate, what we are taking as an assumption for tax rate in 2012 right now in our guidance is 33%. And it assumes an increase in a few tax rates, because I think that it is unfortunately the mood right now. And you have seen the impact in Q4 already of the change in France. But I don't believe France will be the only country increasing taxes. So we have tried to factor what would happen in 2012 the best we can. And of course we are not completely insulated from bad surprises in this field.

Your last point is relative to DSO. Actually, the DSO level is at 87 which is quite high and it hides a good performance on collections. The percentage of overdue in our DSO was reduced compared to last year and so we are actually on a good trend in that regard. So the DSO is higher essentially because of the significance of the deferred revenue in fourth quarter of 2011.

If you look at it compared to the end of 2010, we had a 30% increase in deferred revenue, which is very good news. But of course the more deferred revenue you do, the higher your DSI goes. So have some patience. You will see the DSO going down later on. And in Q4, the increase is completely related to the nice increase in deferred revenue.

Michael Briest - UBS

Meaning that result of deferred revenue DSO will be similar to previous years?

Thibault de Tersant

Exactly.

Unidentified Analyst

Just a question regarding your 2012 revenue guidance. Regarding the maintenance revenue, should we assume that the growth will accelerate in 2012? I estimated around 8% in 2011. So should we assume that it should accelerate? And then what is your implied assumption for new license revenues in 2012? Should it around the mid-single digit?

Thibault de Tersant

We do it in a relatively simple manner. The assumption is the same growth for new license and for recurring, 5% to 7% for both. That is the assumption here. And there is a more acute impact from our assumption on the economic environment on the new license. The new license, if you just look at the dynamic of the market, it should grow faster. And there is a much smaller impact on the recurring of course, but there is some impact that if factored as well.

Unidentified Analyst

I just have two questions. The first one is on the announcement you made on the cloud with SFA, and there is been a lot of talks about change in IBM. So what has happened? What could be the impact in the coming years from those investments? And the second point is coming back to your P&L. G&A cost up about $10 million year-on-year. Is it related to one of course you mentioned or it is something else?

Bernard Charlès

Related to the first thing, it's quite simple, and I will try to give you all the elements so you understand how simple it is despite the noise around the topic. I think it's important for every country to think about secured cloud to increase competitiveness. There is a need for global cloud and there is a need for local cloud, and there is a need for cloud-inside companies.

For example, I took the example of the aerospace hub. Do you think it's reasonable to enable space hub with highly sensitive IP and not have any clue about where the data are. Of course no. So it's clear that not in France, every country on the planet for certain industries will need that their industry IPs are located where they can apply the laws of their countries.

So many people ignore the Patriot Act, which says that if you are showing a service, at any point in time if the administration in America wants to have the data, they can ask and any provider should provide them. That's to be understood. I am not doing politics. I am just explaining what the rules are. Because the rules are such, we believe in our domain where we are so core to the innovation process that if we want cloud to become a competitive advantage, it has to be secured on the laws applying to where the service is issued have to clear. That's one piece.

Now related to the project itself, we are the company who was proposed to the French administration in the context of Request for Proposal for the investment for the future to really be serious about this kind of technology. Now is it an IT project? Absolutely not. This is a way to imagine new type of services for different companies, even citizen administration in such a way that you can provide services at a lower cost, mutualizing in a safe way.

If China is asking us to do an aerospace China hub, we will do it, but we are not going to do an aerospace hub of China in France, because they will tell us, no, you put your cloud here in my country. And we will do it.

So there is nothing abnormal. Dassault Systemes is not going to invest its money on a project if we don't have hope to go from margin higher than 30% over time. When I discover a project is in a structural cost at 40% higher than my own cloud, that we have already done, I say I don't want to put my money there, don't want to put my investors' money, don't want to even the French state's money. So I said no. I cut the project from my side. I say you do whatever you do, but I'm not playing because I don't think it's competitive.

Also what happened is I was asked by the officials do you have another idea. I work on it on and it happened that we met. We run these great media company. And in sweet days, we agree. I have to push for two years or more to try to get the structure, and in sweet days we agreed. I think we are really private companies, both of us, and we go quickly.

So I was so pleased with that, that I was willing to do a project and we're going to propose it to the administration. And if they are interested, they go. Simply said, they have to decide now. We know what we want. We have a great competitive platform. We know how to do it. It can go fast. It has a lot of leveraging terms of improving the competitiveness of the industry and our country.

I think I will do that for our country and doing it right now in Korea, in many other countries. Why should I not do it in my own country? So that's the story. So I think there is a citizen responsibility in an open world. And I think if you have competitive products and competitive solutions, you can do great things, but I've never seen a company succeeding when the cost is too wide. End of the story. It's very simple.

And what we said if you dilute your investment with two projects, we don't go. I have more things to do outside my own country. So that's a condition we set up and we agreed with those conditions with Vivendi, SFR. And I think it's a very good project. Now it's up to the administration to decide where they want to put the money. But I know where I will put it and where I will not put it to respect my investors.

Thibault de Tersant

So the last two questions you asked on our P&L, this cloud project, we of course would not have a controlling interest in it. So it would only impact the net income and EPS lines, and the impact would be very modest. And actually we would not go back to you to adjust our EPS. We would absorb it in our current guidance.

The G&A increase is completely related to these (thralls) activities that I mentioned and also the valuable compensation for achieving our plan for the year. If you exclude those two, the increase in G&A expenses becomes quite in line with the rest of the expenses.

Operator

Our next question will come from Josep Bori of BNP Paribas.

Josep Bori - BNP Paribas

If I may, I'll ask two. One is just a follow-up on the comments you made about the underlying implication terms of license growth in your guidance. You talked about the 7%, but you said it would be a little bit larger if one accounts a challenging microenvironment. Could you give us a sense of how much growth you'll actually remove from that guidance? Or maybe at the overall revenue level of 5% to 7%, what would that be in normalized microenvironment?

And the second question again on the ENOVIA V6 performance, you've already clarified the de facto of deferred revenue. Given that you had one of the strongest quarters in terms of new customers, should we expect an acceleration in software growth in 2012 or that would come towards the end of the year as these customers are being rolled out? And is this signing momentum still solid or you would expect to slow down in signings as you go into this challenging environment?

Bernard Charlès

I would start with the last aspect. I think Thibault said it very well, explaining our guidance for 2012. It's a compromise. We have a good visibility on the pipeline. We're confident about the business, but we have to take factors that I'm not sure we understand all of them. So we take them as factors to be simple.

But I think our conservative approach should not send you the message that we have the pipeline is the opposite. We're confident. And as Thibault said, it's going to be a growth year for us. The question is how much. I know you want to know, but we have to set the base. So that I think we can say on the pipeline.

Thibault de Tersant

I think it essentially answers both questions from Josep Bernard, because the first question is really, if I understood well, about what is the impact of the economic environment on new license growth guidance. And my answer would be that if you take Q4 as the pro forma of the new license growth we are able to achieve and it's even probably a bit shy of it because of the very good and high compare base at the end of 2010. You have a good idea of what we can achieve without factoring in the worsening of the economic environment.

Operator

And our next question will come from Adam Wood of Morgan Stanley.

Adam Wood - Morgan Stanley

Maybe if I could just follow up on Josep's question on the pipeline and the new license growth in the guidance. I think you spoke during December about the strength of pipeline. It seems that's carried through into the start of this year. Could you confirm that's also carried on the other products?

And maybe to ask the question in a different way, on the licenses as opposed to licenses overall, if we were to assume the same close rates in 2012 on the pipe as we had in 2011, could you give us a feel of what the new license growth might be, because it looks as if at the bottom end of your guidance range you're more or less assuming no license growth in 2012?

And then just secondly on ENOVIA, you've talked about becoming number one in that market. I would assume that success in the automotive industry would be one area that would be key to getting that position. Obviously in the German automotive sector, there has been some decisions for an against. Could you maybe just give us an update of where you stand with some of the key decisions in the other German automotive companies? Is there more confidence, less confidence about ENOVIA decisions in that growth of customers?

Bernard Charlès

We are confident about ENOVIA. The pipeline is good and the winning dynamic is good. It's a winning brand. On the gap for what it can do to customer is even increasing. That's what we believe with what we have seen in the 2011 dynamic. So we need to replicate that.

As Thibault said, as you implied, Adam, in your question, we have really to simplify a little bit two class of customers: existing customers where ENOVIA is becoming the infrastructure for collaboration; and new type of market whereby, as Thibault explained carefully this morning, we are winning, but we don't recognize the revenue when there are dependencies of additional development that must be done whether it's life science, CPG or CEG until while we know we've won, while we know we've sold the first orders until the product on the system is going through deployment.

So those are two different kind of approach. But I think the footprint is increasing from that standpoint. Related to the pipeline visibility, I have given you my version. So I'm sure you're interested with Thibault's version on that.

Thibault de Tersant

The pipeline is very healthy. It's a good pipe. But if we were only doing our objectives and plans, based on the pipeline, I think we would have skyrocketing expectations. And we know that the pipe is a very important factor. The second one is to close the business with customers. And this is what can change across what can happen during a year.

Bernard Charlès

Thank you very much for your participation this morning and thank you very much for your support. I'm sure we'll have an interesting year in front of us. Good afternoon and have a good year, all of you.

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