Dassault Systemes' CEO Discusses Q2 2012 Results - Earnings Call Transcript

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Dassault Systemes S.A. (OTCPK:DASTY) Q2 2012 Earnings Call July 26, 2012 4:30 AM ET


François Bordonado – IR

Bernard Charlès – President and CEO

Thibault de Tersant – SVP and CFO


Grégory Ramirez – Bryan Garnier

Josep Bori – BNP Paribas

Amit Harchandani – Citigroup

Mohammed Moawalla – Goldman Sachs

Marc Geall – Deutsche Bank

Michael Briest – UBS

François Bordonado

Good morning, everyone. I’m François Bordonado, Dassault Systèmes Investor Relations. From the company, we have Bernard Charlès, our President and Chief Executive Officer; and Thibault de Tersant, our Senior Executive Vice President and Chief Financial Officer. I would like to welcome you to Dassault Systèmes Second Quarter and First Half 2012 Earnings Presentation, which is also being webcasted.

At the end of the presentation, we’ll take questions from the audience and from participants on the webcast call. Later today, we’ll also hold a conference call. 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 table included in our press release.

Some of the comments we’ll make during today’s presentation will contain forward-looking statements which could differ materially from actual results. Please refer to our risk factors in our 2011 Document de Reference.

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

Bernard Charlès

Good morning. Thank you, merci, François-José. Good morning. Thank you for participating to this analyst meeting. There is an interesting news flow. The impression I have each time we have this interesting quarterly days is I’m speaking about the past, as we are already wired for the future. Q2 was a good strong quarter. As you most probably have already seen on the announcement, we have strong organic growth, double digit.

On February 9, 2012, we framed for you where we see the future in terms of our long-term vision for 2021. There is a tendency often in this market to forget the long term. So I want to refer to February 9, 2012 to say that what we formulated there at that time was equivalent to the way we formulated PLM in June 1999.

And therefore, the 3DEXPERIENCE platform, which is at the very heart of what we are doing for the next 10 years, is a very critical element, not necessary on your financial model. It’s too early to say. But on the trends in terms of how are we, again, going to transform the way companies are engineering, creating, managing innovation on production systems around the globe, no matter if you do physical goods products or even now, today, natural resources. So I will come back on that.

So the awareness of the campaign which we are doing for the first time ever in 30 years is a very, very interesting one. It provides visibility which is high, not really in the level of awareness yet, but the level of visibility that behind the world-class brands that we have with CATIA, DELMIA, ENOVIA, SIMULIA. There is a company in these companies called Dassault Systèmes.

For investor, it might be an obvious remark. But you will be surprised to know how many users are still – they don’t know our products, that they don’t know necessary that Dassault Systèmes is the company producing those products. So we still have a long way to go, but I think we are making progress here.

I’m also very pleased, of course, with the incredible fast-track process we have been following for the acquisition of Gemcom, the world leader in mining for modeling and simulation. I’m coming from Australia. I visited mines. It’s very different from the way you produce airplanes, obviously. But there is a lot of potential there and it’s a huge, huge GDP contribution, I think is $1.8 trillion GDP for mining in the world and it’s about natural resources.

We are updating our financial objective for the full year. Hopefully, we will reach the €2 billion and that’s a nice milestone, at least, to look at, a nice rounded number, as Thibault would say.

So let’s review the business, the Q2 performance. As you will notice, the gross excluding exchange rate is up 10%, with new license up 9%. As you will notice, a large proportion of new licenses are rental licenses. We like this model. We support this model. We promote this model. It provides flexibility. It provides long-term visibility. And, as you know, we have very, very stable customers there.

And the point is, it prepares ourself very well for online, subscription-based, cloud-based set of solutions where the model will be consistent with that and we – it provides a good visibility. The EPS also is going up nicely, up 19%. You know the leveraging factor. I think it’s visible here. So for the full year – the first half, up 10% ex exchange rate. For the growth of the revenue on – for the EPS, up 15%.

Now if you look at where this is coming from, from a product line standpoint, I think it’s a good quarter for both PLM product lines as well as SOLIDWORKS, with an excellent PLM growth at 9% year-to-date on for the quarter, ENOVIA up 9% on the quarter, 13% for the first half.

Also PLM, which means SIMULIA digital manufacturing on the new baby brands, up 13%, SOLIDWORKS is up 15% for a total aggregate of 11%. So we are very pleased with SOLIDWORKS, while we really continue to put a lot of attention to really continue to expand this provisional channel to be really truly a volume channel. So it’s a good indicator. Nothing in terms of visibility going forward.

V6, the new license of the V6 architecture represents 19%. At this point in time, the most important thing for us with the V6 architecture on the 3DEXPERIENCE platform is to build a very unique showcase with customers. We do know how to replicate. What we want to show is the level of capacity on capabilities that V6 provides and I think we have remarkable wins on that area.

As you know, when we go with the next generation architecture, the initial installations are relatively small. And then they continue to grow as the number of deployment projects are expanding, greater wins in aerospace and defense, in high-tech.

Some of you track who track the competitive landscape might remember the famous domino effect claimed by one of the competitor. They were saying that the domino effect was going to be negative for Dassault Systèmes. We have exactly inverted the domino effect the other way around on taking back our customers. I will not say more, but I’m getting fun with this situation and this was a statement that was on I think, two years or three years ago.

High-tech energy process on utilities, life science, consumer packaged goods on retail, extremely good showcase there. On repeated deals on expansion, for the one we have started – which we have started with Renault, Jaguar Land Rover, Alstom, LG Electronics for existing V6 installation. Snecma selected really DELMIA V6. It’s really – DELMIA is more than a niche application now, it’s becoming a digital production system.

As you can see here on this chart, we are unifying the global collaborative environment to improve the production capacity. End-to-end manufacturing engineering process, it’s a large installation and I think it will deploy across all areas or divisions later, single source manufacturing data.

I mean, manufacturing performance is becoming very important those days in terms of not only being able to do right first time in one location of the world, but being able to do right first time anywhere where you decide to produce. It’s not easy for companies to replicate high quality production from one country to another one.

And one of the observation that you might have seen is the growth in Europe of 19%. I believe it’s driven essentially by the fact that companies have understood that not only our software can be used to optimize things, but will be used to replicate high-quality production and engineering processes in different countries of the world and to reuse this capacity appropriately.

Fujitsu, a very, very interesting showcase also. The customer wants to really increase speed to market. And with the increased product complexity, they want to really manage this end-to-end. So I think we have great achievement. They have replaced certain application just using the ENOVIA V6 application set. And they will continue to reduce their internal application, reduce complexity and improve the way they do collaboration.

The results are significant when you see improvement of 30%, 40% in terms of requirement management, understanding what their customers are looking for. Those are significant factors. So I believe in industries at large, there is still a lot of waste due to things which are not done right the first time.

You would be astonished. We talk about cost reduction. We talk about the improvement of things. Newspaper talk about all those questions. The waste due to things which are not done right the first time are significant still. And that’s what we want to attack with the virtual world, the virtual universe. There is a lot to do there, because it’s not easy to transform those companies. And I think that’s basically where Dassault Systèmes can play a big role.

POSCO, an interesting showcase. This is a leading steel company in Korea, $60 billion revenue in 2011. They have decided to adopt our solution for what we call advanced asset life cycle management. They have a huge investment, CapEx-intensive industry. They have to manage their infrastructure properly. And as you can notice, they are adopting ENOVIA, DELMIA, 3DVIA, SIMULIA for to create a global single virtual universe, so they understand what their production systems are about.

It’s a first of a kind in this kind of industry. There are lot of large companies which are, we believe, underequipped there and we think we can really use this case now as a way to show to others where they could go and how they could use not only PLM, but the 3DEXPERIENCE platform.

We continue to do significant progress with SIMULIA to really, really reduce the number of physical testing. As you know, physical testing assume that you have done the product once and that the product is as close as possible to the one you are going to deliver, because otherwise, you cannot test it. But if it’s as close as possible to the one you are going to deliver, it’s already very late in the cycle, which means that if there are errors, it’s going to cost you a lot of money. So doing the virtual testing is about doing test before you actually physically realize the first prototype.

So we continue to expand with SIMULIA. In fact, there are stellar results this quarter. And we believe that we will continue to invest organically, and in terms of footprint integrating new type of solutions in the world of simulation at large.

Now, the advertising campaign and we used to speak often about marketing, but I think it’s a global program. We are targeting executives who are serving the 12 industries we serve. Many of them are not aware that we serve their industries. We have been discussing with engineering, manufacturing teams and but necessary, with the decision makers in accepting the core industries we have been serving for so many years.

But in the new industries, we want to increase the awareness about what 3DEXPERIENCE is about. And we have created an advertising campaign. As you remember, Monica Menghini was with us on February 9. She is coming from P&G. She has already taken a top position in Dassault Systèmes in the Executive Committee on driving this program in a big way, not only for all industries marketing, field marketing, but also to really rethink about what we call price to value.

What is the value I create for you? Therefore, what should be the price of our solutions, because we think that sometime, our solutions are underpriced. And this should be more associated to the value we create to the customers.

So we – this is a start, with TV, press, some trade online, airports. I think it’s – I think we are in 40 major airports where businesses are done in the world. This If We campaign has been recognized as something unique. We don’t push the products at all. We don’t even refer to products. We refer to what would be possible if we were able to work together to create virtual universe that will help to better predict what can happen.

Here are some illustrations of each of the industries. I think they are high-quality. It’s not tech. it’s about the real end value. This is for packaging. And you see here a collection of publications as well referring to these ads. We got incredible partner and customer feedback, amazing customer and partner feedback, astonishing. We even got a call from executives saying, we don’t know you, can you come and explain? So it has triggered, at least to us, the right question.

And here are some illustration. I was flying through New York a few days ago. I saw that. I was really astonished to see the effect. And if you compare what we are doing to the tech industry, I think it has nothing to do with the tech industry. In fact, it’s closer to other industries when you notice how it’s done. And because we want to focus on the end value of it, not the technical reasons for the products.

About Gemcom, congratulations to Thibault and the team. They got the approval ahead of schedule, 20 days ahead of schedule. I think the Kazakhstan was the last country to give us their approval. I was not aware that we will need a Kazakhstan approval for this acquisition. €252 million in cash in Europe. It’s a very good company, highly professional. It’s very close to their customers, excellent technology, highly profitable. And I think that they are leaders in their sector, it’s mining. There is a lot to do there. When you go and visit the sites, the modeling and simulation of what is underground is just at the beginning.

And when you look at the CapEx, the investment done by those huge players around the world, I think we have 30 of the 40 biggest player in the world already, but in kind of small installations and I think they need collaboration. They need global connection of their expertise around the world.

And for the time being, they are using our solutions, which are called Soft Pack, GEMS, Minex. Minex is for gold mines. They are used as toolkit, as cutter was used 30 years ago to creates shapes for car, or shapes for an airplane. So there is a lot of potential. The team is motivated. And I must say that we are in a good start.

We will create GEOVIA. We are not going to keep the name Gemcom. And I think the word GEO speaks for itself. We do want to high precision our presentation of the entire planet. We will have sub-meter precision definition of the planet, because it has to be used for urbanization, energy distribution, infrastructure. And not only mining, but for everything else.

And I think this is part of the program to really address the natural resources, but also different other resources, as it is. So we focus on simulation for predictability, efficiency, safety, sustainability, of course. And we’d probably extend this kind of technology to address not only the mines, but also the water on oil and gas.

In oil and gas, we are already strong with SIMULIA. We are not strong in modeling, but strong with SIMULIA for simulation, probably the most advanced simulation I’ve done in oil and gas. So I think, it’s underequipped in terms of digital process and this is the card we are going to play to integrate on users’ 3D platform for that.

We are also going to – for example, you create an EV. What is the pattern? You need to be able to do bill of energy. You need to be able to understand how your vehicle is going to behave for a certain journey. So for that, you need to understand and simulate energy consumption, how much energy you can recuperate when you stop the car or the vehicle, how many energy you’re going to consume when you accelerate. All this bill of energy requires a better understanding of the infrastructure.

We are doing those kind of things today in pilot programs. So this is not 20 years from now or even five years from now. I used to say that in the E8 BMW pilot program, we simulated the transport – the journey of this car from Munich to another city in an extremely accurate way to have the full bill of energy on system of the car from point A to point B, taking into account all aspect of the traffic.

So the system view of looking at the future of mobility on smart mobility transportation is going to be critical and that’s what we and everyone, I think, at Dassault Systèmes to be able to do that. Anyway, to come back to GEOVIA, that’s why the effect is not only for natural resources, it’s going to be used for all those things. And I think this is a beautiful baby. Rick Moignard is the CEO – was the CEO of Gemcom and will be the CEO of this new brand.

New license revenue was year-to-date up 13%, as you have seen. You have the quarter here under periodic license was up 9% excluding exchange rate and you have the quarter. So rental is up 20% year-over-year and the catch-up payment is adding three points to the recurring revenue.

So now by region, America was flat Q2, 4% year-to-date. It’s disappointing, I think. But I think we are going to fix that. Not more to say today, but I am very confident that we are going to continue to adjust the organization to take advantage of the potential we have there.

Europe is very strong, as you notice, 19%; 14% year-to-date. Asia is – we see Korea dynamic being very positive, as well as Japan. I think there are cyclical events in China and India. For us, there is no fundamental concern at all. We’re at the beginning of the development of those markets and it’s up to us to be the proper infrastructure. We are hiring great professional on putting the systems in place to scale.

Service is improving in margin, so as Thibault committed, I think, last time, many times ago, we are improving the margin and putting a better discipline to really track our contracts there. And I think in this area also with a partnership with new system integrators, we can improve the overall situation.

Operating income is year-to-date up almost 20%, Q2 22.3%. On the EPS, you have seen it already in the publication, is up almost 19% for the second quarter; year-to-date, 15%. Am I doing what you should be doing, Thibault, here?

Thibault de Tersant

Yes, you are.

Bernard Charlès

Okay. I apologize. I was so excited.

Thibault de Tersant

I’ll take over.

Bernard Charlès

So because when I saw the cash situation, I said, this cannot be my topic. So you can rewind the tape if you want and do whatever you want to do. I’m sorry for that.

Thibault de Tersant

Good morning. So I like the chart. So I don’t have a problem to start with this one. It is certainly a good operating cash flow that we experienced in second quarter at €188 million to be compared to €148 million in the year-ago quarter.

And when you look at it, the change in our cash position, in addition to this, increasing the cash flow with a very nice change, as you may have seen already in the working capital, we also had a few stock option exercises. And the currency also played a positive role.

We did not have so many capital expenditures during the quarter. But we did share repurchases up to €72 million. And, of course, we paid a €87 million dividend, which was an increase of 30% compared to last year, actually. In two years, we have increased our cash dividends by 50%. So we ended with a net financial position close to €1.400 billion. I know I’m getting questions when I say that, but it is the case.

So what are we doing with our objectives? We are upgrading for 2012 to reflect the over-performance of the second quarter. We are also adjusting slightly our third quarter because of the good dynamic of the second quarter. We believe that even if the economic environment remains volatile, there is no question about it, with such a good dynamic in second quarter, we are going to do better than anticipated in the third quarter.

We are also including Gemcom, I’ll come back to that. We’re excluding the spinoff of Transcat, our VAR operations in Germany. You know that we certainly don’t want to remain ourselves VAR in this channel, the value-setting indirect channel that we manage ourselves.

It is, of course, an activity that we had developed when the indirect channel was managed by IBM, so there was no problem in us playing a role in an IBM channel. But today, even if we manage these activities in a very fair manner towards the other VARs that we have, we don’t believe it’s a strategic activity for us to keep.

And in fact, when we did a spinoff in France of this VAR activity, which is called KEONYS, we experienced very good results after that. So we expect that Transcat in Germany is also going to offer good results going forward.

We also factored the tax situation. Based on the measures that have been voted, we have to absorb between €7 million and €8 million in 2012 in France in a combination of social charges and tax items and this has been factored in the guidance.

So here is the bridge. So the bridge from a revenue standpoint, as you can see, we are actually adding €42 million coming from the currency impact, €8 million from the pure second quarter activity, €5 million for the third quarter activity. We are adding €35 million for Gemcom. This is really based on a 15% growth compared to the year-ago second half of Gemcom, so a very good revenue growth dynamic for Gemcom.

We are taking out €10 million for this second half for Transcat and we are now targeting €2 billion, a range of €1.990 billion to €2.010 billion and – but it’s really €2 billion and we think it’s very realistic, because in this guidance, we have kept our caution limited to fourth quarter. You know that we started our 2012 objectives with a prudent second half and we are certainly keeping this stance for the fourth quarter, not because we are certain it’s going to be bad, but simply because we don’t want to be and we don’t want you to be surprised by an evolution in the economic backdrop for fourth quarter.

From an EPS standpoint, in fact, what we are doing is we are adding €0.10 to our EPS, so there is a bridge here, where you can see that we have a positive currency impact and an activity impact which is positive. There is a tax share impact, which is negative, and we are adding Gemcom and Transcat has a negative impact on EPS, because our VARs are profitable. And so when we are taking out Transcat, we are taking out some margin and, therefore, some EPS. So we are now targeting at the mid-point €3.25 in EPS and we are targeting a range in growth in EPS of 10% to 13% in 2012.

And you can see here that now, third quarter is not so bad anymore, because we are targeting 8% to 10% increase in revenue. And yes, there is a little bit of Gemcom activity embedded in it, but just at the level of two points. We are also targeting a good operating margin, 31% to 32% and an EPS at €0.78 to €0.82 for the third quarter. And of course, 2012, we already reviewed it.

The last point I’d like to highlight is that because I know that you are going to work on your models, and – the last point I’d like to highlight is the fact that when you look at the recurring revenue in second quarter, the recurring revenue is made of three factors, if you want.

One factor is our normal maintenance growth. the second factor is a catch-up in maintenance coming from the first quarter, because our big renewal period for maintenance is the first quarter and so there is always a little bit of slippage of purchase orders at the end of first quarter. And in that case, we don’t recognize the revenue when we don’t have the purchase order. So there is in the growth in recurring in second quarter, three points are coming from this first quarter to second quarter slippage.

So there is a non-recurring element in our recurring revenue in second quarter at the level of 3%. And there is a nice increase in rentals, like Bernard highlighted. 21% increase in rentals. And rentals, of course, you can count on them for the future, there is very high renewal of rentals. But the point here is that these rentals, they also contribute to our activity. Rentals increase are, in fact, made of new licensees installed at customer accounts.

So, for this second quarter, the full story of our dynamic at selling new licenses is not visible completely in the new license revenue growth of 9%. You need to understand that you don’t get to a 21% increase in rental revenue without new licenses being installed at customer accounts. And therefore, the dynamic in fact in our new business is very good in second quarter and is, in fact, continuing the dynamic that we had seen in the first quarter.

So these are the few elements mentioning the guidance that I wanted to highlight. And I think now, we are going to answer your questions.

Question-and-Answer Session

François Bordonado

We’ll start with questions from the room and later, from the webcast.

Unidentified Analyst

Good morning. Could you come back on two points? First the U.S. situation, accounts have been lagging for a while now. And then the performance of ENOVIA in Q2 which is maybe a bit below Q1. Just explain if it’s around type of how the revenue will be recognized in the future?

Bernard Charlès

I think for U.S. – first of all, it’s not U.S., it’s Americas. So you have North America and South America. And I think we are really expanding the infrastructure properly. We made the statement clear a few quarters ago that it was really under-equipped there. We are hiring and getting a lot of partners for the PLM solution. So I’m confident that we’ll make this work right.

Today, if you look at the percentage of revenue we do in America versus the GDP, and you pro rata this versus the GDP around the world, we have a lot of possibilities for our growth.

The diversification is very key in America. We have outstanding references in life science, energy, but we are at the beginning of those installations, CPG, high tech. We are at the beginning in terms of the size of the installations are smaller than any of the manufacturing. So it’s not an area of concern. It’s an area of opportunity.

Now, related to ENOVIA, the win rate of new customers shows that we are gaining market share. It takes time to create large installations. Some are already large and as you notice, with the V6 architecture, the 3DEXPERIENCE platform, ENOVIA is an essential element of the collaboration, the infrastructure.

I think from a price to value standpoint on ENOVIA, we have been selling the basic capabilities of ENOVIA, what is so-called a collaborative environment. There are a lot of application is in ENOVIA, if you remember the CATIA story. Initially, we sold the basic CATIA functionalities. But if – the last 20 years, you have seen an ongoing growth of the CATIA revenue in total, probably astonishing for many of the observer. It’s because we have high value applications. We are developing the same thing on ENOVIA, high value applications.

It takes time to make them visible to customers and to show to customers that it’s a competitive advantage to adopt those high value applications. There is nothing to look there that should be considered as a risk parameter. It’s more a question for us on managing the speed of growth and how we deploy this ASP, average license price per user, as we go on. Those are the trends.

Today, ENOVIA is probably the major factor with SIMULIA to win in new industries. And I think the diversification shows that the footprint we are taking there is good.

Unidentified Analyst

Maybe a question for Thibault on this three points of catch-up maintenance. It is a bit unusual to have this slippage of purchase orders. Is it related to this lengthening sales cycle, this uncertainty that you have seen the U.S. during your Q2, because it is clearly the first time we have seen such a slippage? And I’ve got a follow up.

Thibault de Tersant

Yeah, it’s not completely unusual, because again, in first quarter, there are a lot of renewals and some of them have to take place relatively at the end of the quarter. It’s really based on the date at which customers have to renew, so there is always a little bit of this slippage. But here I want to indicate it simply to make sure because of the nice increase in recurring in the second quarter, that we don’t get carried away in planning for the future recurring in third and fourth quarters. That’s all.

I think the processes we have for the renewals, we also have been working on them and they are now pretty good. So there’s nothing sinister in this slippage. And if you look at the renewal rates for recurring, in PLM in the first half, we are now reaching 98%, so it’s a very high level.

Bernard Charlès

And I would add that we are very respectful of our customers. We don’t turn down the license if there is a little gap between the time they should be paying for the renewal and the time we get the purchase order. I think we have a good reputation in the industry to not let our customer down. So we don’t use, at all, this kind of pressure to make sure that we don’t put their installation at risk.

Unidentified Analyst

And on the good performance on rentals, incapacity used to be on CATIA mainly, and a bit of ENOVIA with PLM, is still the case for this quarter or have you applied the same kind of pricing options for DELMIA and maybe a few other of your brands?

Thibault de Tersant

Actually, the rentals increased. You find them in essentially four brands in second quarter, CATIA, ENOVIA, SIMULIA, but that’s usual, and DELMIA to some extent as well.

Unidentified Analyst

And the very final one. You have highlighted two DELMIA wins, and since the acquisition of Intercim, I would guess that the competitive dynamics has changed for you. It’s not you versus Technomatics anymore. You are playing against new, smaller vendors like Aprizio and a few other. Could you maybe elaborate a bit on that part of your credit portfolio which is neglected most of the time, but which has certainly a lot of potential and which could be a big differentiator, just like ENOVIA and the DELMIA – SIMULIA, as you have just said five minutes ago.

Bernard Charlès

Yes, Thibault and I are convinced there is a lot of potential there. It takes more time than what we thought initially in the digital manufacturing. I think the industry solution approach that we are having is – will facilitate this in short. Up to now, in the manufacturing, we have been selling capabilities to optimize something, whether you want to optimize a robot station, an assembly line, whether it’s automotive or airplanes assembly.

It’s a kind of very technical-oriented set of solutions – set of products. What we want to offer now, what we are building is a total solution. For example, your customer, your cycle time to assemble an airplane is that much. We believe that digital manufacturing solution for aerospace you can reduce that to this level.

I think for people in manufacturing, they need those kind of KPIs, key performance indicator. So the solution approach we have set up at the beginning of the year, at the end of last year, by industries to look at what are the solutions for each of the industries whereby we can associate the value, the performance value to it, is changing a lot the way we sell at Dassault Systèmes.

And we start to see good result there already, even in managing discount. I think we are on a very new track here to reduce the discount by showing the value. And this will apply to manufacturing. So we hope that this will be a way to take advantage of the potential we have in this product line; still to be seen.

Grégory Ramirez – Bryan Garnier

Yes. Good morning. Gregory Ramirez, Bryan Garnier. Two questions, if I may. First of all, could you update us on the progress you’ve made on the value-based channel reorganization? And the second one is, have you noticed any increase in the number of customers deciding to suspend their recurring licenses, particularly in Europe, due to restructurings or lack of financing?

Bernard Charlès

Maybe I will take the first question and, Thibault, you take the second one. Thank you for asking more visibility on the value channel. The value channel is the star of the first half of 2012. We have three channels for sales; direct engaged one with large customers; value channel which means partner selling value solutions for PLM and 3DEXPERIENCE; and then the volume channel, called professional channel.

They overall achieved on their sales plan. It’s quite consistent around the globe and the number of partners who wants to join us to serve new industries is really evolving significantly. When a partner is joining, they will not provide immediate revenue – incremental revenue, but they are putting their infrastructure in place. So it’s a highly profitable channel. It’s a highly efficient channel. They are overachieving and I think that it’s going to be a very critical parameter for future growth.

Thibault de Tersant

On the recurring question, Gregory, in fact, no. In Europe, we are not seeing any increase in terminations. In fact, the renewal rate has improved in first half of 2012.

François Bordonado

We’ll take now question from the webcast. Operator?


First question comes from Josep Bori of BNP Paribas. Please go ahead.

Josep Bori – BNP Paribas

Hi, good morning. Thank you for taking my questions. If I may, I’d like to just dig a little bit deeper again on the topic of the recurring software. Just a couple of questions on that. This rentals increase, was this more the traditional subscription agreement with a large OEM or if there was some of the ENOVIA V6 rollout maybe coming into the picture here?

And if I think about the kind of this rentals revenue here, how big are they as a part of the recurring revenue? What is the kind of typical run rate there or is – in this quarter, maybe you could share, of the €30 million of incremental recurring revenues, how much of that was due to the rentals?

And then more on a kind of a bigger picture question. If more of your customers decided to consume your product on a rental basis, will you consider providing us with some regular disclosure of rentals, so we can properly assess the performance of the business? I mean, for instance in Q2, if those extra rentals had been traditional on-premise licenses, how much would have been that in terms of traditional license revenue? Thank you very much.

Bernard Charlès


Thibault de Tersant

Okay. Just try to – so let me get prepared for this full disclosure on our income statement. We don’t have anything to hide. So first of all, not only large customers, but also mid-sized customers have been taking some rentals. So we have seen the increase in rentals in both our BT for direct accounts channel and our value selling channel.

In the value selling channel, it’s a new event. And it’s because our VARs are now financially more stable and so they can afford to sell rental licenses. Before, they were very reluctant to do that because they needed to get the margin, the discount on the license immediately to finance the sales effort. Now, they see that an increase in recurring is a good thing. And they have now a healthier financial structure, so they can afford it. So we see the evolution in the two channels.

In large accounts, there was clearly an increase in license installations, like I pointed out, and this benefited the four brands I had mentioned. So it’s not so easy to exactly compute what would have been the increase in new license revenue in the second quarter if those had not been taken in rental. But I tried to do this computation myself. So and when I did it, I got to actually about a 20% increase in new license activity in second quarter. So this is probably not so wrong, although it’s my computation.

And finally, you asked a question on the magnitude of rentals in our recurring and the magnitude of rentals in the recurring is, in fact, close to 25% of the total of recurring.

François Bordonado

Next question?

Josep Bori – BNP Paribas

Thank you very much. What about regarding the potential disclosure going forward in terms of rentals? Is that – what you disclosed today more of a one off or you’re going to be giving us more growth rates going forward?

Thibault de Tersant

We’ll see, Josep. If rentals continue to introduce a significant element in new business activity, we’ll find a way to highlight the new business activity embedded into rentals.

Josep Bori – BNP Paribas

Thank you very much.

François Bordonado



A question comes from Amit Harchandani of Citigroup. Please go ahead.

Amit Harchandani – Citigroup

Good morning. Thanks for taking my question. I would like to know a bit more about your CATIA performance during the quarter. You talked about double-digit license growth. Could you maybe give us some more details around the drivers behind this growth, i.e. the contribution from emerging markets versus developed markets, and again, within developed markets potentially in terms of new seats as well as opportunities from system engineering and composite modules?

And as a follow-up, could you tell us how your business is being impacted by a potential slowdown in the automotive end market? Thank you.

Bernard Charlès

The CATIA brand is going to be our first brand reaching the $1 billion line as a brand. It’s a wide product portfolio – in dollar. It’s a wide product portfolio. It covers a lot of industry processes. And for example, when you see adoption of composites and the composite product chain in airplanes, cars, future cars, it would not be possible to do it without our solutions. It’s just not possible.

So I think the growth is coming from the specialized applications. It’s not only coming from the fact that you can do a 3D design of a part. And that’s exactly what the promise of CATIA is about. So the major driver is the value of the new, what we used to call specialized applications that we are now connecting together to create these specialized business processes when it comes to new materials. If you take, for example, the windmill composites. I don’t think any company can do a windmill composite blade without our system those days. Extremely complex the elimination process, you need to simulate, you need to do shapes which are appropriate.

So this is the driver. It’s a long-term driver. The evolution of materials in the industries are going to impact in a big way capabilities of companies to re-engineer and re-design and change the manufacturing process. So we don’t see this just as one special moment, but as a long-term trend, specialized application.

You’ll notice in your question the system aspect, what we call mechatronic. We talked about it a few quarters ago. This is another big avenue for integration of mechatronics, mechanical-electronics on on-board software. This is what the CATIA system approach is doing. So this is where the growth is coming from and we believe that it’s a growth that generates for CATIA a total accessible market which is much bigger than what we estimated a few years ago.

Thibault de Tersant

The other element of your question was the dynamic in automotive. Do we see a slowdown in automotive? And actually, we don’t. We don’t. Automotive customers have today miniature engines to renew their car models and so it’s a very dynamic industry vertical for us.

Bernard Charlès

They are three trends there, EVs, electrical vehicles, therefore, mechatronics, new materials. Not the body in white, but the body in black composite. And global, how can I use engineering resources around the globe to create product lines which are suitable with each market segment, on market geographies?

So global collaboration. So it’s shifting from pure speed of doing things to how I can better reuse my resources, reuse the component and reuse technology around the globe, whether it’s engineering or production. That’s why we see that trend, and it’s exactly aligned with why the 3D platform is done for, 3DEXPERIENCE platform is done for.

François Bordonado

Next question, please, operator.


Now, we’ll take a question from Mohammed Moawalla of Goldman Sachs. Please go ahead.

Mohammed Moawalla – Goldman Sachs

Yes, thank you. Bernard, can you talk a bit about where you are with the sales force productivity, particularly as you aligned your go-to-market model across the 12 industries, and how you expect that to develop over the course of this year and into next year?

Bernard Charlès

As we announced at the end of last year, we had reached a limit in the way we go to market with the number of industries we were serving by selling products to those industries. Therefore, we have decided to build portfolios of industry solutions. For example, how do I do airplane assembly with moving lines? We are making big progress. We have introduced in the last six months, I think about 10 or something like this, 10 to 15, I don’t know remember exactly the number, industry solutions. They are just being introduced.

What we observed right now is that whether you take large account with direct sales force or mid-sized companies with the value channel, it’s easier for the sales team to engage with the customer on the value of the solution than it was with the value of each of the individual products. This is, I think, an established fact. At least, our track record is good and Thibault was doing some analysis the other day and demonstrated that in a good way. So we believe that.

The second thing is that as I mentioned earlier, it does reduce the discount factor. Because usually, when you have a long catalog of things, customer will do their handpicking of modules. And when you provide a solution, they would say, okay, this is the solution I want. This is what solution I want to develop.

So I think the factors are all confirming that this strategy is the right one. You are not going to see the full effect of that in one year, it’s going to take some time. But I have no doubts that this is a real value for the sales productivity and we already see it when we measure it case by case.

How long will it take? It’s probably going to be a three years’ program. But at the same time, the size of the contract we can expect are going to be much bigger. Whether it’s mid-sized companies or big-sized companies, we clearly see now the potential for multi-year contracts growing, because the value that we can articulate is – it’s much more tangible. So we are on a good start with the industry solutions.

Mohammed Moawalla – Goldman Sachs

Great. And just one for Thibault, if we take your guidance and infer from the third quarter guidance from the full year, you’re assuming kind of minimal growth in the fourth quarter. Is this just your view around sort of the volatile environment? Or is there anything specific with regards to the pipeline and how that is shaped and how the deals are going to close?

Thibault de Tersant

Yeah. Thank you for asking that question. Actually, the pipe is very good. The dynamic in first half is very good and there is nothing, I mean, today that is visible in our second half pipe. So it’s completely unrelated to the activity that we see. It’s simply the fact that I still remember years of crisis where things were changing quite quickly. And I think that in the current economic environment, this is something that could happen. I’m not sure it’s going to happen. We’d all be celebrating if it doesn’t. But if it would happen, then we would still be able to deliver, I believe, what we have in the guidance.

And so I think it’s the way for us to manage the company in the right manner, to be prudent planning for what could happen in the economic backdrop and for you as well, of course.

Bernard Charlès

It’s prudent to be prudent, Thibault, I think.

Thibault de Tersant

Yeah. I know everybody’s joking about my famous question, but I think it is of value.

Mohammed Moawalla – Goldman Sachs

Okay, thank you.

François Bordonado

Operator, next question, please.


Our next question comes from Marc Geall of Deutsche Bank. Please go ahead.

Marc Geall – Deutsche Bank

Hi, good morning. Thanks for taking my question, gentlemen. I had a couple of questions, if I may. The first really relates to the increase in sales and marketing costs. It was up almost 30% year-on-year, yet head count was up 3%. Just wanting to understand really what drove that and whether that’s a change we should see going forward?

And secondly, just on the V6 contribution and the strong performance there in terms of sort of 19% contribution, can you sort of talk a little bit about how that splits across the different brands? Are we seeing, let’s say, a high proportion of ENOVIA in stores being V6 rather than CATIA, or are you also getting some good pull-through on CATIA in some of the other brands as well?

Thibault de Tersant

So, sales and marketing, first of all, sales and marketing increasing expenses is completely related to the advertising campaign that we have presented, we have just presented here. And if you remember, we had warned about its impact on the second quarter expenses when we released the first quarter. So it’s a €13 million impact on second quarter.

And by the way, for complete disclosure, we’ll still have another session of the campaign across third and fourth quarter in September and October but less important, half in size and cost. So if you exclude this, what you see is that in fact our expenses, total expenses tracked completely head count growth at slightly below 5% and it is the same in sales and marketing, we are working on productivity but the increase is staffing is modest in sales and marketing at this point because we continue to increase in productivity.

Bernard Charlès

On indirect.

Thibault de Tersant

And of course indirect where there is a leverage impact and you had a second question but I’m afraid I forgot.

Marc Geall – Deutsche Bank

It has to do with the 19% of new licenses being V6 I just wanted to understand how that splits across the different brands, are we seeing sort of a high proportion of that in ENOVIA or is it quite well split across the different brands?

Thibault de Tersant

So the highest proportion or version six is of course ENOVIA where it is much higher, 19%. We are now starting to have a contribution from CATIA but it’s much lower than 19% in the neighborhood of one-third of that because we are now starting with complete CATIA version six offering. It’s been in place since the end of last year essentially. And we are just starting with DELMIA and SIMULIA so a lot of potential in front of us of course with version six.

Bernard Charlès

And you will notice also that we continue to provide significant development on the version five product family, we call it the Version 5-6. And the reason for that is first of all it’s an extremely competitive set of solutions. And the fact that we continue to develop the dynamic and insert technology on the existing product line. We consider it’s a very strong competitive advantage. Also to expand the footprint in existing installations and to prepare the future to facilitate customer transition to the 3D expand platform and we will continue to do R&D under V6, V5 platform.

So we are not a company doing software upgrades. Many software companies are doing software upgrades even if you look at Microsoft. That’s not the way we do things. They are programs which are going to be on V5 which are going to be programmed running until 2030 or 2035 in the world. So we continue to develop those product lines and they are extremely competitive today. So there is no reason to just go back to the customer and say there is a new version. Take it. They will take it when they believe for their business is supposed to transition on the transformation they have to do.

Marc Geall – Deutsche Bank

And one housekeeping Thibault if I may. The last available Gemcom financials I could find had licenses at about 49%, 50% of total maintenance sort of about a third services and other the remainder. I mean should we model that type of split 50% for license and 33% for maintenance?

Thibault de Tersant

Yeah. It’s close to that. I think maintenance is slightly below 50%. There’s a good dynamic in setting new licenses for Gemcom. It’s a booming industry.

Marc Geall – Deutsche Bank

Okay. Thank you.

François Bordonado

Last question from the webcast and then we’ll check if we have no more question in the room, operator?


We will now take a question from Michael Briest of UBS. Please go ahead.

Michael Briest – UBS

Thank you, good morning. In terms of the spin-off of Transcat, can you say is that end towards leading the business and what that means the management or the – keeping its role within Dassault? And then just in terms of the regional performance, Europe was very strong, is there any difference in the profile of customers taking rental? Is that something that’s more U.S. than Europe or where there any large deals in Europe that contributed to that strong performance? Thanks.

Bernard Charlès

I mean, I’ll take the first question. If you recall before, we took over the indirect channel from IBM a few years ago. We had to setup conditions to be in a position to take over the control of our channel. How we did it at that time? We started to buy resellers to make the message clear that we would not give up and that our long-term strategy was to take over our indirect channel. Because at the time where you have a great partner like this beautiful company called IBM, making so much profit with our software, it’s difficult to convince then to let us go with our own sales force.

So it happened for those of you who are following us for many years that many of the transaction we did at that time, where a transaction to buy resellers, to build up our direct sales force. Of course, the strategy has worked because we have convinced our partner that it was time to sell us, our own sales force. And that we would engage directly with the customer. So you know it. That has happened two years ago.

So now it’s time to spin off, but it was at that time was necessary. We have done it already with Keonys as Thibault said, and we will continue to do that with the small organizations which are truly doing business like exactly a business partner.

So it’s a logical step. It was planned six years ago. It has been carefully orchestrated and we are just making sure that the alignment now on the three channels, direct sales force, indirect sales force and volume channel, are being cleaned and that those companies are successful.

What is shows also is that when we spin off Transcat, we can demonstrate that this kind of reseller can do at least 10% operating margin which is very good as reseller or in the software industry but which is not so compatible with Dassault Systèmes business model as you may notice.

So it’s a normal course of action the day we bought those companies, we knew we would one day go back to spin them off. That’s what exactly is happening on this best process that we should be doing. They will be fully dedicated to Dassault Systèmes. They are going to run their own destiny. They are profitable. They want to conquest new type of industries.

And as a matter of fact, you may have noticed also in the announcement and one of our senior executives is in fact the key actor because he is becoming not only the owner but the executive, the CEO of that company. Etienne Droit, who is going to there to develop the business and we think that it’s the right way to provide your – so career transition to the people. So I think all elements are aligned and this is something which I think is a good business discipline.

Thibault de Tersant

On Europe, on your question on Europe, there was no mega deal in Europe. In fact, there was no mega deal worldwide. But I think in Europe, the largest transaction I call it in second quarter was about €4 million. So there is nothing here that would imply a particular volatility. I’m checking...

Michael Briest – UBS

I was going to ask is who’s replacing Etienne?

Bernard Charlès

The announcement is clear on that, it’s Philippe Laufer. Philippe Laufer is becoming the CEO of CATIA. In fact he should have been named CEO before because if CATIA is what is CATIA today, is s Philippe has been developing it for the last 20 years. So he’s highly respected with customers, highly respected with partners and one could say why it was not this the case three years ago but it’s another story.

François Bordonado

The floor is yours.

Bernard Charlès

Okay. Thank you very much for participating today’s meeting. Once again, thank you for your interest in the company and we’ll hopefully deliver what we said. Have a good day and good summer vacation for those of you.

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