Dassault Systèmes's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Dassault Systemes (DASTY)

Dassault Systèmes SA (OTCPK:DASTY) Q3 2011 Earnings Call October 27, 2011 9:00 AM ET


François-José Bordonado - IR

Bernard Charlès - President & CEO

Thibault de Tersant - Senior EVP & CFO


Gunnar Plagge - Citi

Joseph Burett - Exane BNP Paribus

Michael Briest - UBS

Sébastien Thévoux-Chabuel - Oddo

Jonathan Crozier - WestLB


Thank you for standing by and welcome to the Dassault Systèmes 2011 third 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, Investor Relations. Please go ahead.

François-José Bordonado

Thank you for joining Bernard Charlès, our CEO and Thibault de Tersant, our CFO for a review of our 2011 third quarter and nine months performance and a discussion of our full-year outlook. Dassault Systèmes financial results are prepared in accordance with IFRS. In addition, we have provided supplemental non-IFRS financial information. For an understanding of the differences between the two, please see the reconciliation tables included in our earnings press release.

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 factors in our today's press release and in our 2010 Document de référence and 2011 half-year report. I would now like to turn the call over to Bernard Charlès.

Bernard Charlès

Thank you François. Thank you for joining us today at this conference call. The third quarter revenue performance was particularly gratifying. It turned out to be a quarter with less seasonality than we had expected, with new licenses revenue at the same level as the second quarter and if we look at our revenue growth on a year-over-year basis, we surpassed by a nice margin, the high comparison base to the 2010 third quarter.

Our quarter on year-to-date performances demonstrate that we are benefiting from a good customer appetite for our software solutions, thanks to our strategy of broadening our growth opportunities to more industries, more business processes and more domains, Thibault and I will give you a review today.

Further, we are continue to progress V6 adoption ENOVIA and with multi-brand wins and from a deployment perspective, we have more news to report. More broadly the value of V6 as an integration open platform for both large companies and supply chains is becoming increasingly evident.

Thanks to this factor, we delivered the better-than-expected quarter which has enabled us to increase our full-year financial objectives and to have increased confidence in the year in total. And finally we should become, what should become apparent to you is that Dassault Systèmes is extending itself from engineering to become a critical enterprise system at the heart of our customer innovation and value creation process with their own products.

Turning now to our third quarter financial results. Earnings per share increased 18%. Our operating margin expanded 400 basis points and revenue increased 9% in constant currencies. With respect to revenue, as you may recall we had a 54% growth in new licenses in the year-ago third quarter and an important level of maintenance recoveries leading to a 37% increase in total software revenue.

Briefly turning to results by business segment, it was also a good quarter for both our PLM businesses and for SolidWorks. Within PLM, cash grew 7%, within PLM CATIA grew 7%, ENOVIA 10% and other PLM by 16% thanks to SIMULIA and DELMIA. Our year-to-date PLM results were very well balanced with total PLM software revenue growing by 19% and CATIA, ENOVIA and other PLM all up by the same amount. All these figures are in constant currencies.

So let’s look now at several customer example that demonstrates how our software makes us a core enterprise system for our customers innovation and business transformation.

First, let’s turn to the aerospace sector. At the end of September, Boeing first 787 was delivered to All Nippon Airlines. The 787 is truly a new generation of commercial airplane, a very significant transformation on encompassing many technology on business process breakthroughs.

On the technology side, composite materials went from representing 12% on the Boeing 777 to 50% on the 787. This required changes in design and more advanced realistic simulation to determine how to reduce the weight and what would be the effect on performance and comfort.

The 787 also represented a breakthrough in business processes because of the very significant increase of work being contributed by suppliers as part of a global build going from 21% for the 777 to about 70% in the 787. And with DELMIA and Intercim, Boeing was able to develop completely new manufacturing processes. Our mission with them is now to clearly help to scale up the production system, which we will do for this great successful partnership.

Turning to the customer packaged industry, for a second illustration, let’s look at Amcor, a global leader in the packaging industry with over $12 billion in sales worldwide and 33,000 employees.

While innovation and packaging on sustainable product design go hand-to-hand, its challenge was how to reduce the amount of plastic in its bottles, manufacture them faster on at a lower cost, on a wide variety of design options from its customers.

With three of our solutions, CATIA, ENOVIA and SIMULIA for simulation, Amcor reduced cycle time by 50%, reduced physical prototyping on delivery of lighter containers using less plastic.

The third example in automotive item in Germany, where Volkswagen’s Skoda brand is using DELMIA software to bring new cars on to the global markets quicker, while ensuring top quality on very attractive price points. Thanks to virtual manufacturing, potential manufacturing problems can be resolved at the concept phase, avoiding rework during series production or assembly operations, thereby generating significant cost savings.

My final example is with Exalead, which is being used by the French national railroads, SNCF. Here there are three different projects. The first project enables 120,000 employees to do searches inside a major shared enterprise information system. The second project is internet-based where individuals on the SNCF side, in addition to booking their train tickets can research other travel related information, such as hotels, car rentals, tourism side, for example SNCF’s website, then kind of reach out on search information on 450 website with a scope of 400,000 pages using Exalead search technology.

And finally, Exalead SNCF planner are able to gain instant access doing faster momentums of operation, in order to optimize flows and support decisions.

Turning to SolidWorks, let me share a few key highlights. It was a good quarter with revenue up 11% in constant currencies, seats higher also by 11% on a stable ASP, average seed price. SolidWorks 2012 was released in September, focused on a designer productivity on innovation with over two unread announcements. This new release helps automate the design functions used most often, improved performance on quality for the most more streamlined workflow, on extensive report for collaboration, on theme connectivity for creativity and efficiency.

I would like to bring you up-to-date on ENOVIA. It is both, the foundation of our basic technology on an important driver of our industry diversification on industry integration.

So let’s begin with the value ENOVIA brings to help you clearly see what sets it apart.

First it has a scalable online collaboration platform. This is key as it improves team work among geographically disperse teams, ensuring that everyone is working on the same version of truth, what we call single version of truth. With 3D viewing we have instant collaboration on a global basis. Second, ENOVIA is an open integration platform, connecting towards the enterprise system. EFP, CRM, supply chain on multi cap format. Third, ENOVIA covers a large ranch of critical business processes, program management, system engineering, product development on regulatory compliance and the launch is growing, which brings me to my fourth point about ENOVIA, which is its industry solution approach to ensure that we provide the most value to each individual industry, under which ENOVIA is an innovation platform. It’s enabled innovation in a life-like environment, bringing a better understanding of the product behavior to serve complex challenges and improve communication.

We are seeing a dynamic with ENOVIA. During the third quarter, its software revenue increased 10% in constant currencies over the year-ago quarter where the comparison base was quite high, 64% growth in constant currency. I think it is becoming a preferred collaboration platform. To date, about 20% of the ENOVIA install base has migrated to V6 and in terms of scope, ENOVIA end-user software revenue was about $350 million in a trailing 12 months basis. Brose, a leading automotive supplier headquartered in Germany wanted to expand on standardized design solution to sustain worldwide growth. It will be increasing its use of CATIA & ENOVIA on our selected ENOVIA V6 because of its openness to all CAD data. Our capabilities in System Engineering and Simulation Lifecycle Management were also critical factors in Brose’s decision.

Hoss Intropia in Spain, a selected ENOVIA V6, global collaboration for fashion including our design and development on sourcing on production accelerators. We are also moving in the deployment phase with several full Version 6 project Jaguar Land Rover. They are leveraging our portfolio to manage the end-to-end to product lifecycle including smart product. JLR is rolling out our software at a very high speed, very quickly across the organization and they are already speaking about significant gains in cycle time savings.

For Renault Version 6 PLM is its global collaboration platform. Renault has deployed multiple hundreds of user for collaboration on documentation management platform. They added an important milestone in September going live with V6 3D digital mockup for new engine. This enables real-time worldwide access to configure digital mockup for design co-reviews between their different engineering sites. It will also make the digital mockup available to all stakeholders and guaranteed digital continuity from designs all the way to the showroom.

And Tesla is standardizing on a full V6 as its sole platform. Tesla’s feedback has been that the implementation has been very easy and cost to implement has been lower than in the past. They are benefitting from design feedback on manufacturing earlier in the process and there are suppliers around the world now on one source of tools. ENOVIA is providing business value to a wide range of industries and in term is one of the key brands driving our industrial diversification.

In high tech, among a number of ways we work with them, one example is 12 companies demonstrated their regulatory compliance as we do with Agilent Technologies. In construction, as we have discussed last quarter, we are able to Skanska accelerate its cost forecasting through faster access to information on the right information with ENOVIA and for s.Oliver in apparel, our software has then managed the growing complexity of the business including the ability to respond rapidly and flexibly to new product kinds.

As we make progress with these new verticals, we are also doing so in our core verticals. For example, industrial equipment is our second largest industry at Dassault Systèmes. Although the last two years, our ENOVIA V6 new license revenue growth in industrial equipment has grown from more than 60% as we address our key business process challenges around product complexity, collaboration with worldwide engineering and production centers, and to well our customers as they extend our business to service model where it is critical to track customer product configuration.

One example is MacGregor, the world-leading marine cargo crane manufacturer who selected ENOVIA V6 shipped multi-cargo cranes of long-life on the order of 20 years and more so a key business driver of selecting ENOVIA V6 was to be able to grow its after sales, services opportunities. To do so, it needs to be able to manage on excess of significant amount of product information.

Now let me briefly mention two small but important technology acquisitions. First, today we announce the acquisition of ELSYS based in Belgium. It extends our CATIA V6 portfolio with the capability to address all aspects of the electrical, logical and manufacturing definition from design to manufacturing. We know its technology very well, as we have several customers in common.

Second, several weeks ago we acquired Simulayt to further support our leadership in composite. Our discussion of the Boeing 787 underscores composite as an important area of innovation for companies including mobility and transportation.

Let me turn the call to Thibault at this time.

Thibault de Tersant

Thank you, Bernard. My comments today are based upon our non-IFRS financial results. In our press release tables you can find is a reconciliation of our non-IFRS to IFRS data. For revenue IFRS and non-IFRS are identical for the 2011 third quarter. In the year ago period, the difference was €5 million. As a reminder, revenue figures are in constant currency.

As Bernard indicated, we had a very nice third quarter with a better than anticipated evolution at the top line, a good focus on our expenses and some benefit from a little lower level of taxes than modeled. We’re upgrading our full-year financial objectives to take into account the third quarter results.

As you can see from our press release, we are now targeting a 30% non-IFRS operating margin for the year. So for those of you who have been asking us when, our answer is no. And well, we certainly expect it to be and we will confirm this in February 2012.

Looking at our figures, new licenses increased 7% in the quarter on a strong comparison base basis. For the first nine months, new licenses revenue is up 22%. Recurring revenue increased 10% reflecting a good evolution from rental and from subscription activity.

Year-to-date recurring software revenue is higher by 16%. We’re seeing a nice improvement in our software gross margin. I point this out particularly since I am about to move to services. Here results were mixed. From a revenue perspective, we continue to see a nice level of growth in services reflecting a combination of version 6 and ongoing consulting work with selected customers.

Revenue was up 8% in the quarter and 9% year-to-date. The services margin is moving in the right direction, although still negative at 4.9% this past quarter. We expect that our services margin in the fourth quarter will enable us to show a positive second half 2011 services margin performance.

Moving to the regional review. Europe led with healthy growth in all channels. We had several multi-brand version 6 transactions and a number of deals, so breadth was very good here. In the Americas, we are seeing progress in our SMB channels and in Asia results tracked largely to expectations. If you recall Asia had a very high level of growth in the year-ago quarter with revenue up 53%.

Looking at our year-to-date geographic results, growth is very evenly balanced across our all three regions with Europe up 18%, the Americas higher by 15% and Asia by 17%. And looking specifically at high-growth countries, revenues here were up 23% and represented about 14% of total revenue for the first nine months of 2011.

As these figures show, revenue growth by region can be lumpy in an individual quarter, so year-to-date gives a clearer picture of the progress we are making across the globe. Turning to our profitability, there are three key points I would like to emphasize.

First we delivered a very strong level of operating margin expansion 400 basis points in the quarter, thanks to our revenue growth but also to our infrastructure leverage. Second, thanks to this work on better optimizing our organization we have been able to continue to invest in adding key new resources with staffing growing 7% over the 12 last months. And third our earnings per share growth of 18.5% was very good and reflects a couple of points of currency headwinds.

Looking at our year-to-date profitability figures, you can see that we’re now above our full-year operating margin objectives. With the fourth quarter generally our highest quarter of the year and given revenue skew and relatively-fixed expenses, I have some good news here which I’ll share in a few moments.

Looking at our expenses in greater detail, we continue to pay close attention to them. Particularly as we take some question on the macroeconomic environment. Just a few words on cash flow. It was much improved at €101 million in the third quarter and through the first nine month cash flow from operations was €382 million.

You may have noted that we had a higher level of capital expenditures in the third quarter. This is relative to our new Americas headquarters, just west of Boston and some other additions to our facilities in France and in India where for accounting purposes, our joint venture 3D PLM is now consolidated and the financial position remained strong.

Now, let me review our financial objectives for 2011. We’re upgrading our revenue and earnings objectives as well as our operating margin to reflect the third quarter overall performance. With respect to our full-year revenue growth outlook, we’re increasing it by one point to 12% to 13% in constant currencies. Specifically, we’re raising our reported revenue range at the midpoint by €20 million and to €1.730 billion from €1.710 billion with €11 million coming from higher activity and €9 million from currency. We then tightened the range around the midpoint to reflect one quarter left to the year.

We are also increasing our non-IFRS earning per share objectives at the midpoint by $0.13 with $0.11 coming from the higher third quarter activity and $0.02 from currency. In a similar fashion this brings us to an objective range of €2.85 to €2.90 representing earnings per share growth of 14% to 16%.

Finally, we are also raising our non-IFRS operating margin objective to 30% representing growth of about 140 basis points compared to 2010. Importantly, we are particularly gratified to be reaching our 30% mid term non-IFRS objectives, ahead of what we had initially planned.

With respect to our fourth quarter financial objectives, we are leaving them unchanged. When we set our initial objectives back in February, we had incorporated the potential for some softening of the environment towards the end of the year.

Overall customers continue to invest because they have multiple challenges across product innovation and manufacturing flexibility and we play a very important role in addressing and solving these challenges. At the same time, looking at the environment around us, we have seen several instances where financing availability in particular has an inhibitor causing us some delays or slippage in business from customers here and there.

So, I think our fourth quarter outlook as initially constructed continues to be varied and appropriate.

Let me now turn the call back to Bernard.

Bernard Charlès

Thank you, Thibault. Looking at our business we have made good progress since the start of 2011, and we have strengthened our business further during the third quarter. Our financial results have been favorable as Thibault demonstrated.

Our software is becoming an enterprise system at the heart of our customers’ most critical value creation process of our products. We are expanding our market presence around the world including in faster growing nations, on our V6 values as an open integration platform is becoming well understood propelling our progress with large companies in different industries as well as supply change.

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

Question-and-Answer session


(Operator Instructions) Your first question comes from Marc Geall from Deutsche Bank. Please ask your question.

Bernard Charlès

Operator, let’s move to the next, to Gunnar Plagge please.


Gunnar Plagge from Citi.

Gunnar Plagge - Citi

Thanks for taking my question. I was wondering whether you could speak a little bit more about the CATIA gross momentum in the quarter? To what extent are these maybe catch-up effects from larger customers, and I would be particularly interested in your views about market shares in the automotive and aerospace supply chain going forward. I mean, last time you presented numbers, it was almost three times in market share that you had in OEMs, but this is a supply chain. So do you see momentum in the supply chain and could maybe share some targets with us, where you could see yourself going into 2012, 2013? Thank you.

Bernard Charlès

Well, for the CATIA growth potential, I think that yes, there was a little bit of catch up, you know the math is particularly in the supply chain, because the prices in 2008 and 2009 had an impact on the supply chain. So, they need to recover, but this is just one of many growth drivers, and the other growth drivers for CATIA are clearly the broadening of our CATIA portfolio and the solutions we can offer.

I’ll give you a few examples of that. One is, in system – embedded systems where we know how the new product line inside CATIA to satisfy customers willing to do the full design, but also the simulation and the hardware into loop validation of the embedded systems placed in their products being in aerospace, in automotive, in machinery etcetera.

Let’s take one example is composite designs which is becoming more and more important and the link between designer manufacturing for composite is very critical. So that’s a significant area of product penetration in the CATIA installed based, and the third growth driver for CATIA is very clearly the industry diversification where CATIA is also playing a role in many aspects, in high-tech for example but also in energy. The energy sector is driving a lot of healthy demand for CATIA and there are plenty of examples of that you know and the last one that I recall, I can offer you is the General Electric division in charge of new energy where they designed their windmills with our system.

Gunnar Plagge - Citi

So you would not necessarily expect, I think last time you had a number for aerospace supply chain market share of 12%, automotives to shift this massively medium term?

Bernard Charlès

Of the supply chain, the beauty of what we do and our [warranty] is a very good level of collaboration that can be achieved and the triumph of our customers to a -- collaboration with their supply chain. You know the 787 is one example of what can be achieved with a global collaborative environment for product design. So, for sure, we are going to continue to benefit from a nice trend of standardization in the supply chain.

Thibault de Tersant

We observed just as a last (inaudible), we observed across all industries customer tendencies to unify, to simplify the environment. So they want to unify. We see that as a generic trend across geographies and across industries. So this will be end result [later] of growth for us.


(Operator Instructions) Your next question comes from Joseph Burette from Exane BNP Paribus. Please ask your question.

Joseph Burett - Exane BNP Paribus

Hi there, good afternoon. Thank you very much for taking my questions. Two, if I may. The first one is just on ENOVIA V6, having as it 80 -- was in Q3 after 70 or 50 in the prior two quarters the trend seems to be that of acceleration. However, you have guided cautiously of the overall group performance for Q4. Should we assume you’ll also expect a bit of a moderation in Q4 in terms of ENOVIA V6 signing or maybe this being a new product cycle or maybe able to which time -- better the overall environment?

And the second question is more on the M&A side, when you’ve clearly kind of discussed Mechatronics as a significant driver, and you have done a couple of acquisitions, I recall (inaudible) Elsys in this quarter and your peers [Trimetric] acquired MKS what else is missing in your portfolio to kind of provide a holistic Mechatronics design wave and what size of deals are we talking about here? Thank you.

Bernard Charlès

I guess the cautiousness -- Thibault please step in for the cautiousness of the call, let’s say the upside on three-year perspective. Thibault explained this morning he is really taking the full advantage of the Q3 over performance. I don’t think any of the visibility we provided on full-year should be associated with any conclusion on the pure ENOVIA dynamic. I think those parameters are completely independent. They are not completely independent obviously from a pure assigning, but they are really independent. I think the pipeline is good. I think we have good visibility, and the pipeline is good and there is no balance -- new type of balances between all the design tools, all the manufacturing tools of the collaborative platform.

So there is no conclusion to be taken on the outlook we provide on the full year related to ENOVIA specifically. And of course, we hope to continue the dynamic that you have seen. You want to say something Thibault on that aspect side of that?

Thibault de Tersant

Logically, we should continue to see a good growth and even arguably acceleration on the ENOVIA side, but we balance you know these logical and pipeline factors with some cushion relative to the economic environment for Q4.

Bernard Charlès

Related to the M&A on your wider question Mechatronics, and the realistic approach to Mechatronics. We are years ahead of any of the current solutions available on the market on Mechatronics; we are years ahead. We are building a platform which is a game-changer as compared to any one else.

I will not give you all the details of it, but I would simply say, that we are connecting all elements to make the digital mockup of a product a lifelike digital behavior of the product as it should behave in real life. And all current solutions are document based solutions. We believe what we are doing at Systèmes is deeper than what we have done in the past in terms of moving from 3D to digital mockup which continues to be a real evolution for the industry. So it’s a game changer.

Now, it takes time because the game changer may not show that the customers somewhat are getting it and some will learn how to go there. But what I can say now as one data point and results sharing too much positive information. We have announced a few months ago the partnership with BMW, which was officially announced, BMW accepted it, to announce it. This partnership, is not an add-on to video sizing, we think that the size of the community for system engineering can be bigger than the total size of user communities we have today on the design of the physical characteristics of the product, meaning the shape, the body, the chassis carryon and so on can be bigger. So we are talking about 20% more users, we are talking about more than doubling.

So that’s the game plan. All programs we have, we have this going on Dassault Aviation, we have many, many user program going on. They are highly sensitive, we will not communicate so much because the reality is customers do not want to speak about it. They know it is highly strategic. We will try to do it on big showcases.

Now what is missing? First of all the approach we have as I said is completely is game changer. We are taking the schematics, but it’s for schematics, it’s really to pollute automatically the schematic. So it’s not to do the front-end work, it’s to do the back-end work. Again, more to say here, so I think this breakthrough we have bought with Elsys is second to none and I think we change the way companies are working on the schematics.

There are still other things which are needed but I guess I cannot – I would like to talk to you about but I will not of course because some of those are still potential partners that we want to sign, with as a third party partners or are joining us.

Mechatronics, all products are becoming smart and smarter, so it’s a core difference between our offer and what they want us to offer.


Your next question comes from Michael Briest from UBS. Please ask your question.

Michael Briest - UBS

Yes, good afternoon. Just a couple of questions if I may. On V6, I think Bernard, you said in the presentation 20% of the ENOVIA install base is now up on to V6. Can you give us a picture maybe of those 80 customers in Q3? How many of those are upgrades as opposed to new names coming to you? And also maybe on the CATIA side of things, how much activity have you seen particularly since the Release 12 in Q2 in terms of V6 adoption?

Bernard Charlès

May be Thibault have more detail. I don’t have the number, but what I want to say is the following. The move to V6 is not an upgrade. What is happening is, as you know, what is our ENOVIA install based today? Our ENOVIA install based today is a huge VPM ENOVIA V4 and V5 install base. It’s an install based of MatrixOne which now is becoming the core technology of ENOVIA V6.

When customers are adopting ENOVIA V6, they are in fact putting all of it together. The customer we see adopting ENOVIA V6 now are saying, I want a digital mockup, you have superior solution there no one else can do it. I want to do program management. I want to do portfolio management. I want to do bond management. I want to connect that to manufacturing bond, ERP CRM and I want to do compliances.

So when we go with ENOVIA V6 in most of the case the scope of what we address with the customers is not the initial scope. It is related to the functions I am talking about on it, so the landscape is completely changed, so we got to speak about migration. For example, Bell Helicopter we mentioned that I think last quarter, Bell Helicopter was the replacement of supply source system. It was the replacement of procurement system. It was the connectivity on removing all of the CPDM and replacing them to have really a direct integration between the ERP system and the PLM system and nothing between and I think the nothing between is happening.

So which means that the PLM system is going to be more and more highly integrated, connected with ERP on nothing between. In the past, there was something between which was called PDM. I think that avenue is a dead-end avenue. I mean there is no way for a customer would be high performance companies having the so heterogeneous system.

So whether its Bell, whether its LG Electronics, whether its what we do with Dassault Aviation we are doing an extreme there; Pfizer in pharma, but its always these converging collaborative platform, maybe, I am sorry, it is a little bit too longer, the reality is to scope each type of users is in magnitude order different from what it was in the past. And that’s why we put a lot of attention, quality of the deployment, quality of processes and metals we put in place as well as the quality of the industry solution we provide for each of the industry segments because this is not any more a question of only digital mockup, configured or only BOM, but it’s the overall integration.

Michael Briest - UBS

I can appreciate that. Just trying to get a handle on the safe deal is something which shows that widening scope within the install base or amongst the V6 ENOVIA users, can you give us anything on that?

Bernard Charlès

I don’t know if we have any data Thibault on that right now.

Thibault de Tersant

For sure, the deal type for ENOVIA is growing as soon as we start the free deployment. The average is a little bit more difficult because we’re also in the process of doing more pileups you know and winning new customers. So the average doesn’t tell the full story you know, but when we will go to deployment the deal size we do with ENOVIA version 6 is completely different from a deployment of ENOVIA version 5, but there is a factor of at least three between both.

And on your question on the 80 new ENOVIA customers in Q3, I don’t have a very precise figure, but I know that more than 40% of them were new customers in fact.

Michael Briest - UBS

Could I just follow up with a question on the impact of the P&L of that consolidation you talked about of some of your R&D partners it through a JV. I mean does that change the cost card that you're paying for R&D resources?

Thibault de Tersant

Well yes of course there are two consequences of this consolidation. We started the consolidation as of July 1st, so in Q3 we only see a one quarter effect, you know there is no catch-up of the two former quarters and so let me give you very quickly the two impact.

There is an impact on R&D expenses of about 1 million, it’s a decrease, it’s the fact that we were paying a transfer price with the margin and we are not paying those margins any more. You know, well we are still paying it, but we consolidate at the level of the JV expenses, you know, without the margin.

The second impact is in the balance sheet .We are now recognizing a minority interest because we only own in terms of shares, 42% of the JV, even if we have a controlling interest now. So there is a minority interest that you can identify, you know, P&L.

And, also the last impact you see it in the reconciliation of our valuation of net financial position where you will see an amount of CapEx and a part of it is in fact, it probably comes to the fact that the JV owns two buildings in India. You know so these two buildings we are now recognizing them of course, in our assets and in the quarter there we recognized the CapEx associated with these two buildings, so these are the few impacts that come immediately to my mind.

Michael Briest - UBS

Can I just ask on Geometric, you've taken a stake in them or another partner?

Thibault de Tersant

We just have one partner which is Geometric.

Michael Briest - UBS

So you own 42% of it?

Thibault de Tersant

So the name of the joint venture is 3D PLM and we have done this transaction that we had announced formally which is to consolidate DELMIA R&D lab in India with 3D PLM and extent to that we increased our equity stake into 3D PLM and we also got a controlling interest, so that’s the reason why we now need IFRS to consolidate the joint venture. But again you know in the P&L only two relatively small impact in the quarter, you know 1 million less expenses in R&D and a minority interest.


Your next question comes from Sébastien Thévoux from Oddo. Please ask your question.

Sébastien Thévoux-Chabuel - Oddo

I was just curious if you could share with us some of the early update of SolidWorks in 2012. I know it was released quite recently. But since it is the very first version of SolidWorks with two different modules, one still on Parasolid, then the other one on CGM. Have you seen any split like one-third on CGM, two-third on Parasolid or 5% on CGM and 95% on Parasolid, just to give us a flavor of how the acceptance has been so far among the customer base and then I will have a follow-up. Thank you.

Thibault de Tersant

Sébastien, thank you for the question. Well, SolidWorks 2012 is still for the time being on Parasolid, not for long but still. So there is your question is one of at least early. We’ll talk about it next week. But of course, we’re very confident that the dynamics for new licenses will go extremely quickly to the full compatibility in Version 6. What you probably -- where is this probably coming from is as you know we can connect in SolidWorks 2012 and SolidWorks users can get access to ENOVIA V6 online on the cloud, and you can build very quickly collaborative platforms on the cloud extremely easily. And that’s probably where may be the confusion is coming from. And this is something, it’s too early to say but the SolidWorks 2012 has been extremely welcomed by the users. I think they upload the content and I am confident that it will create and those are very exciting dynamic from next year, because it’s a great software content on progression for intuitive performance and connectivity.

Sébastien Thévoux-Chabuel - Oddo

Okay, thanks and may be quick update on your cloud strategy because on the one hand as you announce the partnership with Amazon, then there is still some partnership with IBM, one another with outscale in the infrastructure sales. I know that you had your own data center slowly ramping up. Maybe there are some specific usage for some specific software attached to some specific partners but if you could just help us understand more precisely how you manage all those partners, it would be helpful.

Bernard Charlès

Yes, of course. Very simply said, the cloud infrastructure is going to be transparent to the customer. And they will not even see which operator is behind our service online, except when we have certain contracts where we are committing for computing of data localization, where there is some constraint sometimes to make sure we can volunteer at the data on service coming, residing in a specific country. And there are projects where this will be required.

So, aside of that aspect, which is basically part of the contract, everything else is transparent. People don’t know where the cloud is coming from. That's one thing. We’ve indeed multiple approaches because we are feeling the learning curve and as you mentioned, we have initiated with Amazon. We’re very please with the Amazon relationship. Of course, IBM is a great partner for us for several years. And you can imagine that this will last, and this partnership with IBM will last and together we can serve customers in a very unique way on the cloud.

And we are also having our own infrastructure for the purpose of learning the process end-to-end. So we know from bottom up on top down, all the details about operational performances. So we can measure and daily provide on the use of cost of ownership and to add the best solution of available. So those are the reason why we have different solutions going on now and we are pleased and we are going to continue to do that as we expand our experience there. It’s a very interesting set of solutions.

Last but not least of course this is transparent, we have developed our own software to manage the transparency so we can maybe allocate resources on the globe in a very transparent way which we believe will be a competitive advantage more to say next year.

François-José Bordonado

We will take one last question. Operator?


Yes, your next question comes from the line of Jonathan Crozier of WestLB. Please go ahead.

Jonathan Crozier - WestLB

Thanks for taking my question. I think this one is for Thibault probably and looking at your cash flow, which of course is a very fine cash flow statement. But I see that in the last three or four quarters there have been very large exercises of stock options and of course very large share repurchases.

Is it the company policy to do share repurchases in order basically to satisfy stock options, because you spent €227 million this year on shares and the number of shares has gone up. So clearly I assume that's what's driving it. If you weren't having share options exercised, would you stop buying shares back?

Bernard Charlès

Thibault will give you some detail about this here. Let me make some comments on the future policy forward. The policy forward is no dilution for the shareholder, zero dilution. Second policy is we stopped stock option and we go with performance share. And so we allocate only when we have repurchased. So it’s very clear, very clean for our shareholders, extremely precise and we have a peer policy for the employees with performance shares. That’s it of the go forward policy which we have implemented this year, and Thibault can give you some comments about this year related to the parameters you are talking about, because this is the result of past policies.

Thibault de Tersant

Yeah, so I see that in the IFRS P&L the stock option expense is actually lower this year, than last year, so that for big reason.

Bernard Charlès

Yeah they would fit too Thibault.

Thibault de Tersant

Right, okay. Everything has been said already.

Jonathan Crozier - WestLB

That was extremely clear, thank you. And can I have just one more question about the balance sheet, you told me a while ago, maybe a year ago, you keep most of your cash in US dollars because that’s where the M&A opportunities are, is that still the case?

Thibault de Tersant

Actually since we spoke it is still the case and majority of the cash is dollar denominated, but we have also implemented worldwide cash pooling such that every night all our cash is centralized. And it is centralized in Euros, but we keep the currency risk in the original currency in which the cash is denominated meaning that we are still linked to dollar for 60% of our cash. But we enjoy the better interest rates in Euros.

Bernard Charlès

Last I will add, is of course when I was giving this very clear strategy about stock option on performance share, I was summarizing what has been decided by the Board because this is a Board decision, but it’s so clear to summarize because it has been very clear in our Board process to clarify this governance so its very easy to summarize now and shareholders can understand exactly what are the rules forward.

So I was speaking as a representative of the Board of course in my only CEO function in this case to expect because I am – Okay. With that, thank you very much. Thank you for participating. Thank you for the great audience this morning at our Paris Analyst Meeting and of course thank you for your interest in the company and we are always here to address your questions in the best possible way. Have a good day and talk to you early next year.


That does conclude this conference for today. Thank you participating. You may all disconnect.

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