François-José Bordonado - VP, IR
Bernard Charlès - President & CEO
Thibault de Tersant - Senior EVP & CFO
Joseph Burette - BNP Paribas
Dassault Systèmes SA (OTCPK:DASTY) Q1 2012 Earnings Call April 26, 2012 9:00 AM ET
Thank you for standing by and welcome to the Dassault Systèmes 2012 first quarter financial results call. At this time all participants are in a listen-only mode. A short overview will be given followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today. I would now like to hand the conference over to François-José Bordonado, Vice President, Investor Relations. Please go ahead.
Thank you very much. Thank you for joining Bernard Charlès, CEO and Thibault de Tersant, CFO for our 2012 first quarter conference call. We held our webcast and presentation in London earlier today and have placed a presentation on our website. Two brief reminders before we begin.
First Dassault Systèmes financial results are prepared in accordance with IFRS. We have provided supplemental non-IFRS financial information which is explained in the IFRS and non-IFRS reconciliation table included in our earning press release and second some of the comments we will make on this call will contain forward-looking statements which could differ materially from actual results. Please refer to our risk factor in today's press release and in our 2011 Document de referenc. I would now like to turn the call over to Bernard Charlès.
Thank you François-José. Thank you for joining us here on the webcast held this morning. As you saw we had similar pieces of news this morning. First, we reported our financial quarter financial results with new licensees revenue up 18% driving both operating margin expansion of 100 basis points on 13 percentage earnings per share growth. Just two months ago we reported recorded results for 2011 and I am happy to say that we have begun 2012 in a very nice manner.
It is clear from our performance that our growth strategy is very sound and that we’re delivering on it. In February, we outlined with you our purpose as a company to provide businesses on people with holistic 3D experiences to imagine sustainable innovations capable of harmonizing product nature on life.
Indeed with our 3D Experience Platform we are helping companies transform the way they connect designers, engineers and marketers with consumers. Thus more with our software solutions, we can model and stimulate gradually any product in the world and we do this across a number of industries.
Today, we are announcing that we are expanding 3D experiences to nature to be able to model and stimulate the natural world. We’re beginning this effort with the creation of a new brand GEOVIA with the acquisition of Gemcom, our leader in mining industry software solutions. And with our decision to target a new industry, natural resources comprises the mining sector as well as water supply, oil and gas on those related sectors.
I will have more to say shortly. So let me come back to this in a few minutes. The third topic I would like to touch on is our financial outlook. As outlined in our earnings press release, we are upgrading our 2012 financial objectives to take into account the first quarter revenue of our performance and we are updating for currency exchange rates. We remain confident in our business and growth drivers. At the same time we are convinced that retaining our caution with respect to the macroeconomic environment is appropriate.
Turning to our financial result for the first quarter, there are several nice numbers, software growth, operating margin expansion and double-digit earnings growth. But the number one I like to, the best as it gives you a good indication of what customers are thinking is our new license revenue growth of 18% in constant currencies and what was most interesting about the growth is that it came from everywhere, all sales channels, and all geographic regions.
Looking at our performance by brands, illustrates the value of our diversified portfolio. All our major brands had double-digit new licensees revenue growth and in terms of total software growth ENOVIA led the way with 17% growth. SolidWorks did well in the quarter with double-digit growth in both new licensees revenue on recurring revenue, so again demonstrating the relevance of Dassault Systèmes market focus.
Turning to a regional view, Asia had the strongest growth with revenue up 15% in constant currencies led by high growth countries. For Japanese companies the March quarter is their year end and we were pleased to see a good level of activity across our three sales channels. In the Americas, revenue increased 8% in constant currencies. We saw good growth in our professional channel and improving results in our direct sales channels.
Looking at North America, it is a market where we see a lot of potential notably by expanding our business in government high tech, life sciences, financial services and consumer related industries. In Europe we have had two years where it delivered the strongest performance of the group. Entering 2012, our European business again showed a solid level of activity and demonstrated good resiliency in light of macro environment.
Turning to our growth drivers, let's start with our V6 foot print. As we have indicated, we expect that the next three to four years will show increasing adoption of our V6 platform and products coming both on new customers particularly in our growth industries and some customers in our core industries. A perfect example is our progress of our progress’ value. A well known global automatic supplier, ENOVIA V6 is being used to manage its mechatronic data information, targeting to improve world-wide collaboration and enable a single instant view for the 12,000 users online.
Two positive indicators on the final prospect is to support the value of V6 as a key growth driver where ENOVIA’s results, and secondly a number of that we have begun to share is that V6 accounted for about 15% of new licenses revenue in our PLM segment. Of course, this will vary by quarter but a good piece of good data point.
We are now shifting in large measure to this new metric because it gives a more complete picture of the V6 progression across the portfolio. A second component to our growth strategy is broadening our industry coverage on diversification. In our core industries, we continue to extend our presence on our new industries. We are developing our presence on footprint. Looking at the first quarter, we were pleased with the progress made in consumer packaged goods, on consumer goods and we had excellent new licenses revenue growth in automotive again following on two years of a strong dynamic. A customer example is with SIMULIA where we are helping Lenovo in the way of ensuring product quality with respect to its notebooks. It is the keypad pressure that SIMULIA is used to analyze how the keypad will perform overtime on under the conditions.
What is remarkable here is the ability to predict what would be the keystroke feeling for the fingers of the future users. Further demonstration of our growth driver at work is our regional market penetration on diversification. We are driving deeper into geographic markets where we’ve had a long presence and we’re broadening our presence in high growth countries.
As we mentioned in last quarter, every region offers us growth opportunities. You saw that high growth countries reported a 17% increased in software revenue. Here China had an excellent dynamic in addition to Korea and India demonstrated good traction with customers. One of our customers is Hisense Electric, a well known high-tech company on flat screen TV leader in China. It is now using in ENOVIA V6 to ensure data integrity in its ordering process. And as a result, has seen a reduction in development cost of 17%.
And finally, lets look at how we are driving revenue by expanding our user universe to a broader number of departments within the company, whether engineering, R&D, manufacturing, marketing or other executive management functions. Looking at an example in France, PSA were already was a user of ENOVIA, is expanding into a new division adding 400 new users at PSA in its powertrain division. If you look at our footprint there, we are now touching the manufacturing department from the process engineer to the structural workers.
To summarize, I think it is clear that our new licenses revenue performance truly reflects the fact that our software solutions are delivering value. On that, our growth drivers are delivering results.
Now let me tell you more about what we are doing to expand 3D experience to nature. As I stated in my introductory comments, a core part of our purpose is to be able to model on simulate the natural world. We are beginning with the acquisition of Gemcom, the number one provider of software industry solutions for the mining industry as a first step in building out our capabilities, headquartered in Vancouver, Canada. Gemcom had revenues of about US$90 million last year, growing around 25%. The cash purchase price is US$360 million.
Gemcom provides software on services for mining customers to discover, measure, design, plan and manage the mining operations from exploration to production. Its customer base includes the top ten as well as 30 of the top 14 mining companies in the world. It employs base total 360 and as I am sure you saw its geographic presence, broadens ours, through its work with companies in such regions as Australia, Africa, Western Canada, Southern America, Kazakhstan, Magnolia, Indonesia and Russia. Gemcom’s Chief Executive Officer, Rick Moignard, will become the CEO of our new brand, GEOVIA, following completion of the acquisition.
Mining is a key segment within the natural resources industry. For those of you investing in the mining sector, you know it is comprised of large companies including some major companies. The revenue CAGR for the mining industries has been over 20%. We see a major opportunity to bring further innovation to add companies in this sector where there are significant needs around four major concerns. First, how to manage the increasing global demand from natural resources; second, how to improve safety management; three, how to navigate the increasing complexity with respect to regulatory on environmental issues; and fourth, how to manage these major challenges when the available people, resources are scarce. So this is certainly a very attractive industry for us with good growth dynamics on increasing needs for innovative technology.
Working together, we can build on the value Gemcom is providing and expanding relationships with these companies. All in all, we are very excited about the potential of this new brand, new acquisition and expanded industry focus and look forward to welcome our Gemcom colleagues.
At this point, let me turn the call to Thibault.
Thibault de Tersant
Okay, good afternoon and good morning. My comments today are based upon our non-IFRS financial results. In our press release tables, you can find the reconciliation of our non-IFRS-to-IFRS data. For revenue, the IFRS and non-IFRS figures are identical or essentially, so in both 2012 and 2011 first quarters.
As a reminder, revenue growth rates are stated in constant currencies. You will note that we have aligned to a new methodology, retrospectively applying current rates to last year's figure and then comparing the two periods.
Before going into details, let me share my summary review on the quarter from a financial perspective. Overall, we had a very nice start to the year. New business activity was strong and we saw little disturbance on macro events. We benefited from our diversification strategy, first with respect to industries where we had a good dynamic across many of them. Second, we benefited from our broader and deeper reach into regional markets. Our services business similarly had a solid revenue quarter, so both software and services revenues were up double digits.
Now with all this good news, let me balance it a little bit. With respect to our full year objectives, we are updating them for the full amount of the first quarter activity of performance and we are updating our external rate assumptions for the US dollar. Both of this reserve in a 1 percentage point increase in the revenue growth rate and about 10% increase in our earnings per share objectives.
We are not however changing our dollar growth revenue outlook for the remaining nine months period as we continue to see risks in the second half into broader economic environment.
Now let me share a few details. Turning to new licenses revenue, it was a very good performance, up 18% on a strong comparison base. New licenses revenue represented 29% of our total software revenue in the quarter, up from 27% last year at the same time.
And generally, the highest growth came from Asia with good contributions from Europe and the Americas and from a brand perspective we saw very nice results led by ENOVIA.
Turning to recurring software revenue, the performance was largely as expected from activity perspective seeing a strong level of renewals also benefiting from higher new licenses activities as we grow our installed customer base and from our interactivity. We saw a very nice dynamic for SIMULIA, as the start of the year generally gives us some sense of how the year will proceed.
Our services business had a very good start from a revenue perspective with basic activity driving revenue growth of 11%. The gross margin was not such a good story as we came in at a negative 1.2% improving nevertheless compared to the 2011 first quarter. I do expect the positive services gross margin for the full year and we have three quarters to make this happen.
Looking at our operating expenses growth excluding cost of software and services, very largely attract headcount growth. First quarter expenses are lower than what we would have in the remainder of the year, as salary increases generally tale effect near the end of the first quarter. In addition, marketing and other investments, we plan for the calendar year will start during the second quarter.
Turning to our profitability, our figures show the natural leverage in our business with revenues up 10% and operating margin expansion of 100 basis points driving an increase in earnings of 13%. Our tax rate is higher by a couple of points over the year ago quarter, so we are clearly pleased with the double digit growth in earnings.
Turning to our cash flow and balance sheet statements, I would like to make just a few brief comments. First quarter cash flow was €166 million, up 24% on higher earnings and working capital improvements. DSOs were at 90 days, a one day improvement compared with first quarter 2011. And our revenue increased €50 million with the first quarter ahead maintenance and (inaudible) and our net financial position strengthened further.
Three key categories of cash usage include dividends. The Board of Directors is proposing a 30% in the annual cash dividend per share compared to last year. This level represents a 50% increase over the last two years. So if you own our stock, a nice return. Second, we are focused on acquisitions; we are aligned with our strategy as Gemcom illustrates. And third, stock repurchases to offset stock option exercise dilution is the third main use of cash. Bernard?
Bernard has covered the acquisition, so let me just reconfirm that we anticipate that the acquisition will be accretive to our earnings on a non-IFRS basis and neutral to….
Our non-IFRS operating margin. We anticipate completing the acquisition in July.
Thibault de Tersant
Thank you, François.
You are welcome.
Thibault de Tersant
Turning to our financial objectives, let me begin with our second quarter. Here we are setting a revenue growth objective of 7% to 9% in constant currencies and earning per share growth of 6% to 12%. Our outlook is based upon a US dollar exchange rate of $1.36 to Euro and Japanese Yen exchange rate of 115.
For the full year, we are increasing our revenue range objective by 1 percentage point to 6% to 8% growth in constant currencies. Looking in greater detail, we are adding €50 million to revenue with €35 million representing a combination of the first quarter currency benefits compared to our assumptions, as well as a change in our exchange rate assumption for the US dollar for the rest of 2012.
Secondly, activity was higher by €15 million and we are taking this full quarter performance from the first quarter into our revised objectives, so we move ahead of the revenue range of €1.95 billion €1.935 billion for 2012. Similarly, from an earnings perspective, we are moving our EPS range up €0.10 to a range of €3.10 to €3.20. Here, there are several items.
First, a benefit of €0.10 assuming less currency headwinds. Second a €0.05 increase from higher activity in the first quarter and finally we assume €0.05 is absorbed from a higher tax rate and somewhat share count. More specifically as you saw the effective tax rate in the quarter was a little higher than we had anticipated. For the year, we anticipate a tax rate that will be slightly higher than 33%.
And while the operating margin is ahead of last year by a 100 basis points, we still have most of the year ahead of us. So I am keeping our 30% operating margin objective for the full year anticipating the possibility of further acquisitions. So to sum up, looking at our financial objectives, I think we are taking appropriate assumptions. We will add Gemcom to our financial objectives as we approach the closing timeframe which right now is anticipated to take place in July.
Finally I want to take this opportunity to announce that we will be holding our Capital Markets Day on June 15. We have timed it to coincide with other events that maybe bringing you to Paris if you do not work here. Let me now turn the call back to Bernard.
Thank you Thibault to take care of [call]. We are pleased with the start of the year demonstrating the relevance of our software solution and confirming the opportunities of our various markets. We continue to perform well in the PLM market and we are advancing our new 3D Experience strategy purpose as a company as we move forward to model and stimulate our planet. We remain optimistic on our prospects while remaining cautious on the macro environment. Thibault and I would be happy to take any questions now.
Operator, you can start the question.
(Operator Instructions). Your first question comes from Joseph Burette from BNP Paribas. Please ask your question.
Joseph Burette - BNP Paribas
I’ll ask a couple if I may on just on the Gemcom transaction. Obviously you’re going to be integrating this on your platform. Can you give us a sense of how much R&D effort would be required to kind of make the GEOVIA compatible with ENOVIA V6 and more integrated with whole offering. And secondly on this new metric you are providing in terms of V6 new licenses as a percentage PLM new licenses. Could I ask some just a couple of expansions on it. What is the percentage of V6 contributions paid by brand. Is it still mostly ENOVIA as kind of the first brand to go into V6, so there is already a little bit of CATIA in there. And secondly what would be displayed on a maintenance side or maybe on the software side, is it still largely V5 there? Thank you.
Thank you Joseph. Related to the that Gemcom future solutions taking advantage of the [seniortism] of our product portfolio, I think it's too early to say however, because your question is quite precise I will give you a data element. It's not complex provided the ENOVIA open architecture to connect any kind of modeling system to it.
We are doing it with (inaudible) report today on the world. ENOVIA is very open. As you know many ENOVIA V6 customers are using multiple environment not only modeling and stimulation, but many other things, documentation system and so on. And it works very fine for them. So the first step is going to be rather kind of plug in to make sure we can provide value of ENOVIA to whoever those mining companies who want to create global (inaudible) platform.
For the second aspect and probably we will on September 24th of the Mining Expo in Vegas will be showing more to the customers. It’s a huge event, we will be there. Gemcom is there. I think Thibault de Tersant you might want to comment on the similar aspect related to on V6 view?
Thibault de Tersant
Yes, sure. So the new metric is really the one that where we are using for V5 as well you know. It’s this metric where we measure the contribution of V6 in the total new license revenue and it was 15% in first quarter. The highest contribution and by far is ENOVIA and there is the start of a CATIA contribution that is meaningful. And SIMULIA and DELMIA are contributing for relatively minor percentages at this point, but we will be ramping up as their product portfolio for V6 enriching and will be quite complete in less than a year from now. On the recurring of course, the split is that V5 is a much higher percentage of total recurring even you know then the 85%. When we look at new license revenue, I don’t have a precise figure in mind you know, but it is probably still a 95% contribution.
Joseph Burette - BNP Paribas
Just a minor clarification, could you some how quantify the CATIA contribution to the licenses. You said it's beginning to be meaningful but are we talking of something below 10%, that is still at this level?
Thibault de Tersant
To be honest you know I have been looking at the portal, but not brand by brand, but certainly there is a nice tick up in CATIA V6 revenue. It started essentially you know in Q4 of last year and it was increasing in first quarter of this year.
Your next question comes from the line of [Jay Vleeschhouwer] from Griffin.
Thanks this is Jack (inaudible) for Jay with several questions please. First being for 2012, do you expect the BT and Value Solutions to have similar growth or do you expect some differences in relative performance?
Thibault de Tersant
All right well at the present, we believe that BT and VS should experience relatively similar growth rate. And I am speaking first half of this year. In our guidance, however, as you know, we are projecting a more difficult economic environment for the second half and this has more influence on the value setting of revenue because economic environment has in fact more influence on the small and medium businesses.
In 2011, the mainstream 3D segment had a material improvement in its operating margin, would you expect something similar this year?
Thibault de Tersant
No, we are not expecting a similar improvement. It’s going to be an improvement, but it is forecasted as being more modest. But very significant improvement in 2011 as you have noted.
With respect to ENOVIA V6 adoption, two questions. At the Dassault US Customer Conference earlier this week, I have seen there are a number of the larger aerospace customers were content to stay with their current versions for the time being. Could you comment on ENOVIA V6 adoption outside of aerospace and to what extent is ENOVIA V6 being used to manage CATIA V5 environment?
There are a lot of customers using ENOVIA V6 for CATIA V5 and even for CATIA V4. So in aerospace there are key leaders adopting ENOVIA V6 before I talked about outside. Among them Dassault Aviation, Bell Helicopter, which were announced officially and they are more in the aerospace sector.
So the aerospace sector is not behind, you may have seen an American view which was probably Al 80 to the V5 implementation in big scale on successful scale where they are happy with it.
But I think the dynamic of ENOVIA V6 is in diversified market of course, CPG, CG in the energy, but also in manufacturing, auto sector, mobility at large. But I don’t think we can aside of one quarter view, if we take the last 18 months, I think it has been quite consistent across the different sectors.
And lastly, in 2011 France accounted for 11% of revenues and Germany for 16% of revenues. Can you comment on your outlook for each country for this year?
Thibault de Tersant
The dynamics are in these two countries France and Germany, right now the dynamic is in fact still pretty good. I don’t have a forecast you know for 2012 in terms of the contribution of the two countries in Europe, but I can share with you that we have a good dynamic in Europe, in France, in Germany, in UK and in Northern Europe without a doubt.
Operator, do we have another question?
Currently, we have no other questions.
Okay, so thank you very much for participating to this call. But (inaudible) thank you very much for participating to our London Presentation this morning. And of course, we continue to be available for you any special question or discussion you want to have as Thibault said. See you in June for the Analyst Day. With that, have a great day and remember Dassault Systemes now is not from bottle to airplane, it’s from underground to sky.
That does conclude our conference for today. Thank you for participating. You may all disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!