Executives
Michele Katz - IR
Bernard Charles - President and CEO
Thibault de Tersant - Senior EVP and CFO
Analysts
Jay Vleeschhouwer - Merrill Lynch
Chris Glinberg - UBS
Neil Steven - Redburns
Rajesh Bala - Credit Suisse
Marc Rode - MainFirst Bank
LawrenceMcLeo - Pictet
Dassault Systemes S.A. (DASTY) Q3 2007 Earnings Call October 30, 2007 10:00 AM ET
Operator
Thank you for standing by, and welcome to the DassaultSystemes Q3 2007 Results Conference Call. At this time, all participants are ina listen-only mode. There will be a presentation, followed by aquestion-and-answer session. (Operator Instructions). I must advise you thatthis conference is being recorded today, Tuesday, 30th October 2007.
I would now like to hand the conference over to your firstspeaker, Michele Katz, U.S. Investor Relations. Please, go ahead.
Michele Katz
Thank you for joining us for a review and discussion of ourthird quarter and year-to-date financial performance. On the conference callare Bernard Charles, our President and Chief Executive Officer and Thibault deTersant, Senior EVP and CFO.
Our financial results are prepared in accordance with U.S.GAAP. In addition, we believe it is helpful to provide you with supplementalnon-GAAP financial information. On this call we will discuss our revenue,operating income, operating margin and EPS on a non-GAAP basis before deferredrevenue write-downs, amortization of acquired intangibles, stock-basedcompensation expense and one-time tax restructuring benefits.
For reconciliations of the differences between these figuresand our U.S. GAAP figures, please see the tables included in our earnings pressrelease, which has been posted on our website www.3ds.com. You will also findin our quarterly presentation information explaining the impact of currencyfluctuations, as well as data related to the reclassification of CosmosWorks tothe Mainstream 3D business segment from our periodical statement.
In addition, on our website is the webcast from this morning'sLondonpresentation.
Some of the comments we will make on this call, either aspart of the prepared remarks or in response to questions, will containforward-looking statements. Actual results could differ materially from thoseprojected in the forward-looking statements. Information about the principalfactors that could cause actual results to differ materially fromforward-looking statements can be found in today's earnings press release andin Item 3 of our 2006 20-F.
And now I would like to turn the call over to BernardCharles.
Bernard Charles
Thank you, Michele. Dassault Systemes had a satisfactorythird quarter performance despite pronounced currency headwinds. We are aboveconstant software revenue growth at 17% in constant currencies, demonstratinggood underlying demand. All our sales channels are contributing to our thirdquarter and year-to-date results. We continue to make solid progress in our PLMValue Channel transformation and SolidWorks had a very good quarter.
We're progressing on our 3DVIA strategic roadmap with twomajor initiatives this quarter. Recently, we acquired Seemage, an innovativestart-up to further our vision of leveraging 3D data for product documentation andother applications. And, jointly with Microsoft we introduced Virtual Earth -3DVIA Shape.
Our growth drivers are in place and delivering results. Ibelieve DS is positioned to further grow its market share in 2007, thanks tothe investments in further strengthening its first class brands and go-to-marketstrategies.
Now, let me turn the call over to Thibault.
Thibault de Tersant
Thank you, Bernard. As my remarks will be based upon ournon-GAAP financial information, let me begin with a brief review of our GAAPand non-GAAP reconciliation figures. For the 2007 third quarter, non-GAAPrevenue excludes deferred revenue write-down of EUR2.2 million. Operatingincome, operating margin and earnings per share exclude the deferred revenuewrite-downs and before amortization expenses of acquired intangibles of EUR13.6million and stock-based compensation expense of EUR5.1 million.
Our third quarter performance was driven by a strongsoftware revenue growth of 17% in constant currencies. Total revenue increased12% in constant currencies. Services decreased about 11% in constant currencies,reflecting the strong base of comparison with the 2006 third quarter whenservices revenues increased 72% in constant currencies. Year-to-date softwarerevenue is up 16% in constant currencies, services are up 12% in constant currenciesand total revenue is up 15% in constant currencies. So, we are clearly trackingto our full year constant currency revenue growth objective.
Operating margin for the quarter was 22.5% and year-to-date,it was 22.7%. Currency had a negative impact of about 50 basis points on ouryear-to-date operating margin.
Regarding the evolution of our operating expenses, I wouldlike to highlight that we do continue to invest in R&D. On the surfaceR&D expenses decreased by 3% in the third quarter in reported figures butincreased in constant currencies. The reported amount, however, reflects ahigher level of reserved tax credits in 2007 compared to 2006.
I would also point out that in looking at our efforts inR&D, it is probably helpful to look at the combined cost of software andR&D expenses.
Looking now at the R&D headcount, it was up 7% thisquarter, confirming our continuing investments. Pre-tax earnings increasedabout 6%, generally tracking revenue growth on a reported basis. Our EPS growthcomparison was impacted by the year ago one-time tax restructuring benefitswhich significantly lowered the 2006 third quarter effective tax rate comparedto the 2007 period.
The effective tax rate in the 2007 third quarter was 32.7%compared to 28% in the 2006 third quarter. As a result, EPS was EUR0.39 in linewith our objectives for the 2007 third quarter but lower than the EUR0.40 inthe year-ago period.
Currency continues to have a strong impact on earnings,estimated at about 11 points of growth in the third quarter and about 10 pointsyear-to-date.
Looking by product line, PLM revenue growth was 10% inconstant currencies in the third quarter, driven by solid CATIA and SIMULIAperformance.
PLM software revenue growth was 16% in constant currencies.ENOVIA's revenue increased 12% in constant currencies in the quarter, taking abreather from the torrid pace of the first half. ENOVIA is on track forachieving a strong fiscal year performance and has been a key contributor tothe 15% constant currency year-to-date PLM growth.
Looking in U.S. dollar, year-to-date we are growing about16%. For the quarter, we are growing about 16% for ENOVIA so I believe we arecontinuing to gain market share in this space.
As we indicated last quarter, commencing with the 2007 thirdquarter Mainstream 3D, now includes both SolidWorks and CosmosWorks.
The purpose of the change was to recognize that the majorityof CosmosWorks products are now sold into the Mainstream 3D market, and so weare realigning the segments accordingly.
We had included in our quarterly presentation the historicaleffects of this change, which have really no effect on growth rate both sides.
SolidWorks on the standalone basis with revenue growth of20% in constant currencies drove strong Mainstream 3D results. In total,Mainstream 3D revenues increased 19% in constant currencies including nowCosmosWorks.
Looking at revenue by geographic region, we saw double-digitsoftware revenue growth in constant currencies as applicable in all regions.Asia led the overall results, with total revenues up 27% in constant currenciesthis quarter, followed by the Americaswith 10% growth in constant currencies and Europewith revenues higher by 5%. Year-to-date, Asia and Americasare tracking closely, with Asia up 24% in constant currencies and the Americasup 22%, also in constant currencies. Europewas up 6%.
Turning to seats growth and pricing for the third quarter.Total CATIA and SolidWorks seats increased 12% to 19,054 seats compared to16,975 last year. CATIA new seats increased 4% to 7,704 and SolidWorks newseats increased 19% to 11,350.
Looking at pricing, CATIA V5 ASP was EUR11,730 versusEUR12,103 in second quarter, showing some minor reorder, which largely reflectsthe variations in transactions and channel mix from quarter-to-quarter.
SolidWorks ASP was EUR4,619 in the third quarter compared toEUR4,702 in the second quarter. Similarly, SolidWorks ASP reflects geographicmixed variations, with pricing itself relatively stable.
Turning now to our business outlook, let me remind you thatour financial objectives are presented on a non-GAAP basis. Based upon ourfinancial performance through the first nine months, and with our third quarterI believe, are in line with our expectations, we are reconfirming our 2007constant currency, non-GAAP revenue objective for growth of about 14% to 15%.We are, however, adjusting our 2007 non-GAAP reported revenue range to about aEUR1.275 billion to EUR1.285 billion, and our non-GAAP earnings per shareobjective to about EUR1.96 to EUR2 to reflect an update of our U.S. dollarexchange rate assumption to $1.45 per Euro versus $1.35 per Euro previously. Weare keeping our exchange rate assumption for the Yen unchanged at JPY1.65 perEuro.
With respect to the fourth quarter, our objectives are for anon-GAAP revenue of EUR370 million to EUR380 million, representing an 11% to14% growth on a constant currency basis. Non-GAAP EPS of our EUR0.76 to EUR0.80with a non-GAAP operating margin of about 36%.
Looking to 2008, our observation is that the currenteconomic environment appears to be somewhat more complex. However, looking atour specific businesses, we continue to see a good dynamic for our softwareapplications. We are introducing our initial constant currency non-GAAP softwarerevenue growth objective of about 12%, and non-GAAP total revenue growthobjective of about 10% in constant currencies for the full year 2008.
Now, let me turn the call back to Bernard. Bernard?
Bernard Charles
Thank you, Thibault. To understand our performance thisquarter, it may be useful to review it by sales channels, as well as to look atour progress in emerging countries. Beginning with our large accounts channel,we see continued good momentum. Here we work with IBM as a preferred partner, withterritory management of large accounts, complemented by the deficit at directbranch sales.
We have been seeing three trends since the beginning of theyear. First, we are broadening our relationship with current customers. Wecontinue to grow in large accounts in the automotive and aerospace industries,including Airbus, Boeing, Ford, Honda, Scania, Sikorsky, for example.
And we are growing the existing accounts throughcross-selling of our brands. This was the case in the third quarter, forexample, with Hydro-Québec's, a CATIA and ENOVIA customer, which has addedSIMULIA. On Yantai Raffles, who is already using CATIA on DELMIA, and is addingENOVIA MatrixOne.
Second, we continue to win in new industries includingconsumer electronics, apparel, shipbuilding, yachting and motorcycles. Inparticular, I would like to highlight the win at LG Electronics, a leadingelectronics company, which has decided to consolidate all product related datainside ENOVIA MatrixOne in order to add one global instance of product dataacross all business units.
Third, looking at emerging countries, we are making goodprogress in building revenues, and more importantly their currencies to help ascatalyst of future growth. We were awarded some large wins in China and India this quarter in automotiveand electronics and shipbuilding.
Foxconn, a leading Chinese electronics company, has selectedCATIA and ENOVIA SmarTeam to improve productivity on collaboration, with OEMvendors. Turning to India,Bharati Shipyard selected CATIA, ENOVIA and DELMIA over all the systems toincrease design quality and productivity. We are also starting to see strongerinterest of Dassault Systemes solutions in Russia.
At the Dassault Systemes PLM user from in the third quarter,we had 15% more participants than the prior year. In our PLM Value Channel, thetransition continues to advance well on our original timetable. At thisjuncture, we are more than half way down in setting up our worldwide businessoperations for the PLM Value Channel. We are very pleased to demonstratereliable operation ramp-up, which creates significant potential for both,growth and efficiency improvements.
With the new addition this past quarter, DS is directlyresponsible for 25 countries, with the remaining 10 countries to transition tothe DS VAR model by early 2008. We have no countries transitioning this duringthe fourth quarter, as we prepare for the Q1 2008 switchovers in Japan and Germany, two of our largestmarkets.
From an execution perspective we are seeing some goodmetrics. For example, the number of qualified leads is increasing. We arestarting to identify and recruit additional new VARs successfully and we arepleased by the increasing level of interest on adoption of our PLM Expresspackages, thus creating noticeable the new dynamic with CATIA.
We are seeing solid revenue performance in the PLM ValueChannel, confirming our first half trend. We have good traction in theautomotive and aerospace supply chains. We are making progress in diversifyinginto new industries and we are pleased by our success at winning new customerand displacing our competitors.
Two companies, I would like to highlight, include Viking, amanufacturer of ultra-premium appliances into consumer goods industry, andOchiai, a leading Japanese manufacturer of conveyors and assembling machinesfor the automotive industry.
Viking, which was an ENOVIA's SmarTeam customer, decided toreplace its existing 3D solution with CATIA to increase design quality andproductivity. Ochiai, which has been using CATIA and ENOVIA SmarTeam, was ableto achieve an 86% reduction in design-change man-hours.
Turing to the SolidWorks channel becoming the professionalchannel for Dassault Systemes. We are seeing a good dynamic in Mainstream 3D,seat growth was up 19% in the third quarter and strong results in Europe andthe America and in most partof Asia outside of Japan.
In Japan,we have a new CEO on Board and he is moving ahead with a number of changes.Some interesting SolidWorks win in the third quarter were Union Metal in theU.S., Kulicke & Soffa in the U.S. and Asia-Pacific on Varian, repeatcustomer adding 200 seats. SolidWorks 2008 was introduced last quarter. Thisnew SolidWorks release has intuitive workflow to allow users to focus on theirdesign and not on the CAT functionalities. It also introduces new un-innovativeways to reuse both 2D and 3D designs.
By reusing and leveraging portion of existing designs,significant time saving can be achieved in completing new designs. Further,SolidWorks 2008 provides many new tools to end users improve their designquality. In sum, SolidWorks continues to be on track for 2007.
Last quarter, we introduced our newest brand 3DVIA where ourstrategy is all about revolutionizing the way companies can share the use3D-based information related to the product development and product lifecyclemanagement.
Our vision is to, while companies leverage the productrelated data, wherever it may reside, on to reuse that data for productdocumentation, technical training, maintenance, customer services, as well asfor marketing and sales as we highlighted in the second quarter with ouralliance with Publicis Groupe.
3D is really the new universal language with 3DVIA, we canextend 3D to new users, businesses and consumers to create new communities with3D as the common language. 3DVIA delivers authoring products that revolutionize3D product publishing. Importantly, it enables high-performance distribution ofcontent through an open web services-based architecture.
Our acquisition of Seemage supports this vision. I wouldlike to warmly welcome the talented team from Seemage.
This past quarter, we made good progress in advancing withour 3DVIA strategic roadmap and continue to focus our research and developmentefforts on developing technologies for next generation online globalcollaboration.
With Microsoft, we recently introduced Microsoft VirtualEarth - 3D Shape. While integrating inside Microsoft Virtual Earth, this onlineapplication enables consumers to create with easy realistic 3D models ofawesome buildings and then share them with others in online communities.
Thibault had discussed 2007 and introduced our 2008 revenuesobjectives. Next quarter, we'll share with you our 2008 financial objectives ingreater detail including discussion on our earnings per share and operatingmargin outlook.
As you have heard on the quarter-to-date, our growth driversare in place and they are delivering results. These growth drivers havedeveloped from understanding and delivering solutions that on some key needs ofour customers. The demand to create more products and more innovative productscontinue to push companies to review and recreate the product developmentprocesses.
At the time, they are being pressured to continue to shortenthe cycle time of new products or missed revenue opportunity to competitors,quality continues to be increasingly important. And therefore optimizingmanufacturing processes is of a critical concern.
And finally, cost reduction always remains an importantobjective and is key in deciding what company will produce, how they willproduce it, and what component they will ask their supplier or strategicpartners to manufacture.
So, in summary, by working closely with all our customersand partners, continuing to pursue our technology road map and expanding ourmarket coverage with all our sales channels, I believe we are well aligned onour road map to 2010.
At this point we would be happy to take any questions youmay have.
Question-and-AnswerSession
Operator
We will now begin the question-and-answer session. (OperatorInstructions) Your first question comes from Jay Vleeschhouwer at MerrillLynch. Please ask your question.
Jay Vleeschhouwer - MerrillLynch
Hi, thanks. Good morning Bernard and good morning Thibault.
Bernard Charles
Good morning Jay.
Jay Vleeschhouwer - MerrillLynch
I would like to ask a few questions regarding the saleschannel and products. First with respect to sales channel, you mentionedBernard, some indications of good metrics across these channels. Could you be alittle bit of specific in terms of describing whether or not the averagereseller productivity, in terms of sales run rates, is now in fact materiallybetter at the business partners, and partners such as INCAT and others , thanwas the case previously under IBM.
Secondly, with respect to the IBM relationship, if you couldclarify something. They retained responsibilities for a large number of majoraccounts. Is there however a provision in the contract that some number ofthose large accounts could be subject to your taking them on in lieu of IBM, ifIBM for those accounts doesn't need any specified performance objectives?
Bernard Charles
Thank you Jay, for the questions. First one, related to theTLM value channel. Yes we do have -- I would like to comment briefly, ourmetrics for 2007 and 2008, and comeback on your question about salesproductivity. We have basically three metrics for this year and next year. Thefirst one which is shared with IBM; is ensure that we don’t have disruption inthe transition, and I think the first three quarters show that this has beenextremely well managed through this alliance. That was a critical part, but Ithink it's clear now that this metric not only will have the results, but wasthe right one to take.
The second, we need to continue to keep it until we are overwith the full transition. The second metric is related to the improved capacityfor the existing recent quarters to invest in the sales capacity moving forward.And as we are preparing 2008, it's becoming obvious that, clearly all the keypartners we have working with are convinced that they must invest movingforward to continue to expand our business, and that's a very good sign.
The third metric we have is the acquisition of new partnersand still to come under umbrella of the PLM value channel. We have been able tosign with several new partners to improve the coverage around the world,especially in South America, specially in emerging growth in China, in India,even in Korea, and that's a critical aspect of the coverage capability because,as you know Jay, we have in the past, suffered from not covering well in ourthe entire supply chain. So, we are making very good progress there,
And when it comes to the sales productivity, my view is verysimple, it has not been measured exactly that way. What we measure is thebusiness partner satisfaction and the commitment to invest. And this is areally very visible now. It doesn't not produce results for the quarter. Butit's going to really be a very good way to build a sustainable growth.
Related to the second question about the alignment of ourcooperation with IBM, the most important thing here is that, IBM has a fullproduct portfolio. This was very critical, because in the past, some of theproducts like DELMIA were sold and the MatrixOne was sold through ourcomplimentary sales force. The fact that there is a clear territory, that IBMhas the mission to work out the total solution, helps to really improve theengagement process.
Related to the provision, you explicitly refer to, I thinkthis is more a question about how are we going to improve the coverage andoptimize our skills on resources with the IBM engagement process. It's clearthat IBM wants to be successful with those customers. It's clear that we willprovide application knowledge whenever it's necessary. But it also clear thatthis market is growing and that we are expecting all our partners to continueto invest.
And from that standpoint, we will continue to measure theinvestments of all partners, including IBM under capacity to grow thatinvestment to really create the revenue growth we need add. That's a normalprocess. There is nothing specific that should be mentioned regarding IBM. It'sa normal process with any partners when a company decides to [instrumentmeasure] its channel which frankly speaking was not the case for us before onthe PLM space.
Jay Vleeschhouwer - MerrillLynch
Okay. And additional question on the channel, and just finishedup on product. What's the status of the plan to use the SolidWorks channel morefor other DS products?
And then finally, on the product side, could you be a littlebit more specific as to the contribution thus far from CATIA PLM Express,that's been available for about a year, is it becoming a meaningful part of theoverall CATIA units?
And with respect to metrics, before you bought them, theirlargest selling module of the several that they have was Engineering Centraland the reason I mentioned that is that they were very closely tied thereforeto CAD data management. And I am wondering if since the acquisition there hasbeen a more diverse mix of their sales, of their modules to suggest that theyare penetrating different kinds of applications and verticals?
Bernard Charles
Regarding the SolidWorks channel, as you may have noticed,it's now going to become the Dassault Systemes professional channel, Jeff hadthis proposal in mind. Clearly, the SolidWorks channel is demonstrating itscapacity to ramp up and sale additional product, keep in mind, what Thibaultmentioned about CosmosWorks. One can say, it's an application, so it works,yes, but in some ways it's an extra application.
Looking at the PDMWorks, also we're very successful there.When we look at what we want to do with Seemage which basically is going tobecome a 3DVIA product. It's going to be also sold through the professionalchannel. So, yes, the answer is more and more of the easy-to-use,easy-to-deploy wide coverage of the -- wide large market coverage type ofproducts will go through the professional channel, which is a way to increasethe value in our resellers [high].
Resellers are looking to continue to grow. They want to haveincreased capabilities and they are doing it well. And clearly, SolidWorks teamhas been putting in place an outstanding channel management system, whichperforms well, and which can scale extremely well. So, yes, the answer, we willcontinue and I have given you examples of when it's going to happen. Seemage3DVIA composer by the way which is going to be the name of the product is goingto be sold through SolidWorks channel.
Regarding the CATIA PLM Express where it has been launched successfully, itmight represent as high as 40% of the new sales. It's extremely successful inthe countries where it has been introduced. It has not been introduced in allcountries around the world because the solution ramp-up and the maturity of themanagement system in all countries were not the same to go from the productcentric environment to a collaborative centric environment, but this is movingextremely well we believe and your comment is very, very true.
It simplifies the acquisition. It simplifies the deploymentand increased the total value. So, we are going to continue to expand thatapproach. It has been announced for DELMIA, PLM Express and it's probably goingto be soon expanded to the SIMULIA,PLM Express environment.
Related to the evolution of the profiling of certaincustomers and modules we sell from the ENOVIA MatrixOne environment, yes,Engineering Central was very focused on that data management. As you know, wehave focused the expansion of ENOVIA MatrixOne in new sectors, verysuccessfully. We have several wins in high-tech electronics apparel, severalsignificant wins in the last 12 months. And I think the win rate when we arecompeting now with some of the older players, in those sectors is 8 win out 10.It's a very successful win rate. So the highest priority for ENOVIA MatrixOneis to PLM is the sectors where I am not because I believe, you know, ourexisting sector, the further integration with the ENOVIA product portfolio willautomatically create the adoption.
Jay Vleeschhouwer - MerrillLynch
Thank you, Bernard.
Bernard Charles
Thank you, Jay.
Operator
Your next question comes from [Chris Glinberg] at UBS.Please ask your question.
Chris Glinberg - UBS
Hi, yeah, thank you. Just a quick one to start with, Iwondered if you could breakout the ISM contribution in the quarter, and anysplit between licenses, maintenance and any services?
Bernard Charles
I think Thibault, this is question for you. I think itsmarginal, but I'll let to you comment.
Thibault de Tersant
Yeah, I think, ISM is too small an acquisition for us tosplit it every quarter. In the third quarter, I can say that the contributionof ISM to total revenue was in the ballpark of 1%.
Chris Glinberg - UBS
Thank you, that's great.
Thibault de Tersant
It was essentially in software.
Chris Glinberg - UBS
Okay, second question. On the Japanese rate for the Q4, Ijust wondered what the impact would be if you actually lowered your Q4 rate tothe average rates that we saw in Q3 of JPY162. I mean could you give any coloraround that?
Bernard Charles
Thibault, you think the question is about the exchange rate,I suspect, about Yen to Euro?
Thibault de Tersant
Our guidance is developed at EUR165, as you know. So is yourquestion, the impact between EUR165 and JPY162 for Q3?
Chris Glinberg - UBS
No, sorry for Q4. I wonder what the impact would be if youhad lowered your guidance to 162?
Bernard Charles
Well, I would like to believe that it can be lowered to 162,but I'm afraid our assumption remains 165. Nonetheless, EUR0.03 from the Yencontribution is something that could be relatively marginal up about EUR1.2million.
Chris Glinberg - UBS
Okay. really last question, I just wanted to get somethingclear. Your overall margin guidance for Q4 was 36%. Am I right in thinking thatthat then implies for the full year, the guided margin is now 26.6%, at the lowend range of your guidance of around 27%. Is that a fair assumption?
Bernard Charles
Well, it's quite normal actually, that would be range foroperating margin like there is a range for revenue, and relatively our fixed costsat this point of the year. So, we are still targeting 27% with the range openedbetween 26.6% and 27%. This is the reason why we are saying about 27%.
Chris Glinberg - UBS
Okay. Thank you very much for that.
Bernard Charles
Thank you, Chris.
Operator
Your next question comes from the [Neil Steven at Redburns].Please ask your question.
Neil Steven -Redburns
Good afternoon. Just a quick piece of clarification; can youjust give us a -- remind us of the guidance for tax rate on a non-GAAP basisfor this year and next year if you could give it to us please?
Bernard Charles
Thibault?
Thibault de Tersant
Yes. Our guidance of tax rate for this year is about 32%.It's somewhere between 32% and 32.5%.
Neil Steven -Redburns
Okay. And for next year, if you've give it?
Thibault de Tersant
And for next year we have not given it yet.
Neil Steven -Redburns
Is there any reasons the prices can be materially greaterthan?
Bernard Charles
No, there is no reason for it to increase.
Neil Steven - Redburns
Thank you very much.
Bernard Charles
Thank you.
Operator
Your next question comes from [Rajesh Bala] at CreditSuisse. Please ask your question.
Rajesh Bala - CreditSuisse
Hi, Rajesh here. Just a quick question on FY'08 operatingmargins. Given the plantation to your own channel should be complete more orless by '08, there should be a margin pick-up because of flow through revenues.Current estimates of 120 basis points of improvement. Any reason why it shouldnot be more than this?
Bernard Charles
I think we've initiated, thank you for the question Rajesh.We've initiated and Thibault you can add any comments you want, but we'veinitiated our guidance early in the process as we do in a year. And I thinkwe're really very cautious and we did because we believe we have a very goodvisibility for 2008 related to what we think we can achieve in terms of revenuegrowth. We have not communicated anything on operating margin improvement, andI think it's too early to talk about that right now, but Thibault, you want toadd something?
Thibault de Tersant
Well, I need to say that we prefer to have completed our2008 planning to size before we give a date on some operating margin.Concerning the channel transition, there will be a progressive improvementcoming from the fact that more and more revenue is going to be driven in thischannel, and that we will not have to grow proportionately the marketing andsales structure.
Rajesh Bala - CreditSuisse
Thank you. So we should expect some leverage from the model,from '08 onwards? But you are just not ready to quantify that. Am I right onthat?
Bernard Charles
That's right. We are not ready to quantify it at this point,yes.
Rajesh Bala - CreditSuisse
Thank you. And just one more question on the servicesrevenue. Services revenue in Q3 declined sequentially by about 15%, any reasonspecifically for this, is it capacity utilization driven or pricing driven?
Bernard Charles
Not, understood well the question. Thibault, have you gotthe question?
Thibault de Tersant
Yeah, I think so.
Bernard Charles
Okay.
Thibault de Tersant
I think the question is about a sequential decline inservices revenue? And in fact there is a pattern for us of declining servicesrevenues in third quarter which is very much associated to the fact that thereare vacations in the U.S. inJuly and in Europe in July and August whichare impacting the level of man days that can be produced in services in thirdquarter.
So, it's a very general pattern which was not addressing lastyear because we had a very big increase [related to we have this] last year. Wehave some catch-up of services revenue, but if you look at our normal patternof services across the different quarters, we are in fact more or less back toa relatively normal pattern for us.
Rajesh Bala - CreditSuisse
Thank you. So, there has been no perceptible softening inprices in market?
Thibault de Tersant
No.
Rajesh Bala - CreditSuisse
Thank you.
Thibault de Tersant
Thank you, Raj.
Operator
Your next question comes from Marc Rode of MainFirst Bank.Please ask your question.
Marc Rode - MainFirstBank
Yeah, thanks very much. A couple of things, one on yourguidance 10% plus and 12% plus for fiscal '08 respectively, can you say to whatextent if any there is external acquisition related percentage points comingin?
And then secondly, as far as you can say, just on thedeferred revenue line say anything we should already factor in anything, that'sjust from the model as already given. I am looking inside out that would behelpful if you could share it?
And then, two final things, one on the availability ENOVIA/MatrixOne the fullintegration, when do you think this will impact revenues more significantlywhen it becomes generally available?
And then lastly, whether you have any updates at least interms of expectations vis-à-vis the Toyota,ENOVIA deal next year? Thanks very much.
Bernard Charles
Thibault, on the guidance first. Thank you Marc for thequestion. Yes?
Thibault de Tersant
Well, on the guidance, we have not factored any newacquisition, you know versus which is already known, which is Seemage, which isagain a start-up with couple of million euros revenues base and some suddenimpacts coming from [ISAM] which is going to be relatively modest and shouldnot exceed one point?
Marc Rode - MainFirstBank
Okay.
Thibault de Tersant
All together.
Bernard Charles
On the deferred revenue, Thibault, you want to, I don'tknow, if you..
Thibault de Tersant
On the deferred revenue, I think, in 2008, it's going to bevery small because it is going to be a Seemage related. So, I think, it'sreally below any -- but our level.
Marc Rode - MainFirstBank
Okay. That was my expectation. I just wanted to double checkwhether I missed anything.
Thibault de Tersant
All right.
Bernard Charles
Okay. And Marc related to the ENOVIA portfolio, two things,first of all, we have already customers taking advantage of the MatrixOnecapabilities to expand the current ENOVIA VPM environment and this has beenvery, very positive for us this year. Year-to-date, we are 40% above in growthfor ENOVIA, so we are really increasing our footprint.
Your question is more specific related to the fullintegration of the product portfolio. It's well known now and visible to somecustomers that it's going to be available in 2008. And as you can imagine someof the customers, which our last customers, they have multi-year plans. Andsome of them are already planning of product introductions we have asked. But Icannot say more at this point in time a side of the fact that when we beat theroadmap with customer such as the name you mentioned, it's a multi-year roadmapand it creates a very, very interesting dynamic for us moving forward toprovide global collaborative environment. So, enough said for the time being,good progress and more to be seen next year.
Marc Rode - MainFirstBank
Okay. That's understood. If I may, just slightly rephrasethe ENOVIA question. I appreciate the time-specific mismatch well understood,but let me say that way, would it be over interpreting things if they stillrespectable but lower growth rate is may be a reflection of people waiting tosome extent for the fully integrated version, too much interpreted intoquarterly numbers?
Bernard Charles
Well, it would be far too much interpretation I think thecurrent dynamic is a very good one. The third quarter is always special. Wehave always special situations, but there is nothing along these lines. The PLMExpress configurations create a dynamic way where basically our offering forPLM is really much more integrated now and when we go through the sales cycle,we don't , less and less we sell card, and then later to [IBM] ourcollaborative environment customer, the trend in the market today is to buy theintegrated solution. I only see an acceleration of that trend moving forward,and it's more a question of building up the roadmap than anything else.
Marc Rode - MainFirstBank
All right. Thanks very much.
Bernard Charles
Thank you very much, Marc.
Operator
(Operator Instructions) Your next question comes from[Lawrence McLeo at Pictet]. Please ask your question.
Lawrence McLeo - Pictet
Yes. Thank you to all for your views at the assetmanagement. I saw under one of the slide you reiterated, you get on for 2010,utility, I want to make sure the -- obviously, on the current exchange rate, Ihave to readjust to the 2000 basis, basically as of today's exchange rate orthe one you are using in the fourth quarter, that's question number one.
And number two, am I going to assume that ultimately most ofthis additional wealth which you expect. Are you roughly speaking $600 millionis coming from the new license and what it means for maintenance and therefore,if could you quantify what you think the distribution would bring, i.e.integrations of the IBM onto your own sales force? Please, thank you.
Bernard Charles
Thibault, the first part on the exchange rate. Thank you Lawrence. I think overall,when we had issued it that time, we have not taken those parameters intoaccount, and it would be difficult to predict what they will be by 2009 or2010. It seems to me that [independent] of exchange rate, we are on a businessoperation trend to make this happen, taking a five years plan as opposed to onequarter exchange rate.
Lawrence McLeo - Pictet
No, fair enough, so basically you base your assumptions on150 to the Euro Dollar and 146 to the Yen, that's what I want to know. Thestarting point was the basis for the business plan; I just want to assume that'scorrect?
Thibault de Tersant
You're right. We consider that it would be constantcurrency.
Lawrence McLeo - Pictet
Okay.
Thibault de Tersant
And that currency would in fact take care of itself becauseof the five year timeframe, but momentary it was a constant currency objective.
Lawrence McLeo - Pictet
Okay. And on the -- obviously, my understanding, but pleasereadjust, my understanding is you think it needs to be readjusting was on thebulk of the goals was coming from new licenses, vastly because of the successof your new product as you described on many occasions, but also because of thereintegration on the IBM, i.e. entering into a smaller or medium size company,which you didn't do as successfully as you -- am I correct in assuming this, becauseultimately in the third it's true that you had new licenses, as such, I knowit's bulkier, its not the regular number or it can be bulky, that was notparticularly great?
Bernard Charles
Well, one comment before you make it, keep in mind that the DassaultSystemes long-term focus is to create a revenue stream, which is a recurringrevenue stream, I guess you mentioned that. And keep in mind the recurringrevenue stream for us is not coming only from previous sales, it's coming fromthe fact that we do license, we do lease software and the case of SIMULIA, forexample, has been very successful, where I think above 80% of the SIMULIAlicense fees is recurring revenue.
Lawrence McLeo - Pictet
I see. So, it doesn't go for new license, it goes straightinto your recurring, is that you mean?
Bernard Charles
But indeed it's new license. It should be counted as newlicense. So, why are we doing that to make it sure, we are doing it becausemoving forward we need to be ready for subscription model because I think weare going to do more and more of online applications. It will be a subscriptionmodel and I think with the current revenue structure, we are extremely wellpositioned to do that. Thibault, any further comments for that?
Thibault de Tersant
No, I think that's the comment you make. Other than that, wecertainly don't expect to grow services faster than software. So, it's verytrue that the bulk of the growth to double, to do the double, plan has to comefrom software, and has to be distributed across recurring, which includes newlicense sales as well and new license platforms revenue.
Lawrence McLeo - Pictet
Okay, thank you.
Bernard Charles
Thank you, Lawrence.
Operator
(Operator Instructions)
There are no further questions at this time.
Bernard Charles
Okay. Thank you very much all of you for keeping thedialogue with us and we appreciate your support and we will talk to you soon atleast for the next quarter. Thank you very much and have a good day.
Operator
That does conclude our conference for today. Thank you forparticipating. You may all disconnect.
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