Dassault Systèmes SE

Dassault Systèmes SE

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Dassault Systèmes SE (DASTY) Q3 2006 Earnings Call Transcript

Published at 2006-10-26 12:03:41
Executives
Thibault de Tersant - EVP and CFO
Thibault de Tersant
[Audio starts abruptly] which helps this morning, it's an important morning. I think third quarter has been a pretty strong quarter, both on revenue and EPS, as you have seen. Our two acquisitions ABAQUS and MatrixOne have been performing very well and this very comforting, particularly for MatrixOne. The growth drivers that we have, already highlighted to you are in place and are certainly contributing to this performance and we'll end our line later in the presentation. We are concerning our 2006 objectives, in fact we are fine-tuning EPS a little bit to the upside and we are already seeing a very initial view of 2007, which is driven then by macro economy considerations. Our revenue was $282.3 million in third quarter; this is an increase excluding currency of 36% with a 30% growth excluding currency for software and a better performance in services for third quarter. The operating margin was 22.8% which is just 1 point less than last year. So, the two point dilution coming from MatrixOne was in place. But we are able to confirm just 1 point of it. EPS grew by 25% in the third quarter and 21% if you look at the year-to-date results. And in terms of seats, we have been, we have sold 16,975 seats in third quarter, an 8% growth when combining CATIA and SolidWorks. The resulting PLM were quite good, 41% increase in PLM revenue, 112% for ENOVIA, and 20% for SolidWorks which is a very consistent performance. From a geo-standpoint, Europe was our best growth in the quarter, at 48%. This is coming on two or three years of modest performance in Europe of course, but it's something very encouraging. Asia had a growth of 24% and Americas 33%. MatrixOne is the one that I would like to underline for the third quarter. We did deliver EUR26.3 million of revenue for MatrixOne. In dollar, this was a 30% growth, which is a good growth for Matrix's standalone. The cost control was in place. There was no more than 2 points of dilution, so it is exactly as forecasted at the time of the acquisition, and of course we are slightly above the revenue targets. The keys and the integration is going very well. There is already a very good working relationship between the MatrixOne guys and our geography service teams, and so the cost spending opportunities are building up quite rapidly with MatrixOne. And truly, MatrixOne is bringing us new vertical where there are opportunities for CATIA, very clearly, and vice versa, we have many ENOVIA customers, or CATIA customers that have an interest for the business modeling tools, that MatrixOne can offer, or the integration with legacy data or the integration with the supply chain. For many prospective, MatrixOne can be useful in our install-base; there is no doubt about it. The customer dynamic is certainly very positive, and the customers are relieved, and you can see that General Electric has been continuing to buy from MatrixOne. We had very strong quarter in high tech and (inaudible) in semiconductors, Agere, I don't know how to pronounce it, being one of the important wins here, (inaudible) as well. We are building up a good list of customers, and Quicksilver was the most recent. For ABAQUS, we had a good year. We could have celebrated the first anniversary of this acquisition, and the revenue growth was pretty above the target at the time of the acquisition, and certainly today there is no more margin dilution coming from ABAQUS. They have reached average margin -- average approaching margin. So, as forecasted, new ABAQUS does not delete margins anymore. The SIMULIA strategy, we are working on it, and we have no product brand (inaudible) to deliver this simulation infrastructure. Let me review the growth drivers. You know that we have highlighted five main growth drivers and I would like to take you through those five, in order to see they are in place or not, and how they have been delivering for us during the third quarter. So the first will be win new accounts, thanks to each of our brands. Thanks to each of our brand's uniqueness and performance. Here I would like to highlight just two of our brands, and highlight the facts that these brands are helping bolden our industry a vertical segments and also help us by adding applications into existing customers. So, I'll start with an interesting win, with Caterpillar for ABAQUS. Caterpillar is not, and was not, a customer of us, as you may know, but it's a very important customer, so we are very pleased that they selected ABAQUS. J P Kenny is another win from ABAQUS of the new customer in one of these new domains we are very interested in, and they are specialist in off-shore systems as you can see here. And they are very happy with ABAQUS. DELMIA, that may not seem to be a stunning wins of a new customer, as Boeing, but in fact the satellite division of Boeing is not a customer, and so it is no other win than what it appears. And if you look at customer weakness, they have achieved a 20-to-1 ROI by using DELMIA, which is quite significant; and you have here the quote from Mr. Lumpkin "for every dollar we invest in the DELMIA Systems, we get back twenty". Of course he did say that after they had already negotiated the price for the software, which is unfortunate. But this is a type of ROI that DELMIA can deliver, and I think it speaks by itself. Then the second aspect of our strategy, hereafter trying to win with each of our brands, is certainly to upgrade the power of the PLM integration, which helps shorten the development cycle time a great deal. So, I'd like to offer you a couple of wins here, to illustrate this trend, which is a real trend of customers, by all our PLM brands together and Bombardier is a good example. They have selected CATIA and ENOVIA, and they have now been adding DELMIA to it, and because of it they drove very good benefits, I think. The size of the manufacturing plant reduction of 50% is something that I think can be highlighted. This is one of the illustrations of what can be done by using a real PLM solution; sever reduction of the production means that are needed, and also materials. We also have a more natural and known benefits in doing iterations of design ones, the first design have been done, a reduction of 62% here. The engineering calculation time, a reduction of 95%; you can see here the performance of (inaudible) and the time to locate the information, which is also much reduced. There is in the auto supply chain quite a significant potential as well offering PLM. This is one of our active for development. We already know that this (inaudible) of our market share of about 15% inside the supply chain, and 50% inside OEMs. I'd like to take you through the Japanese example. I know that there are some questions about our true ability to convert the automotive supply chain, and objections that in fact they don't need a PLM system in the supply chain or they just need to interface with their generated data. And I think I already answered these questions. But it is also good to see the facts. And the facts are, if you are in the middle of nowhere in standardizing the supply chain in Japan, as you can see in 2002, at the time of version four which was a more difficult system to use. This standardization was not in [use]. Now with version five, we can see the big change, and what you can also see is that the real potential that has been identified; and this is for the processes that we support today, inside OEMs in Japan, for the customers we already have in Japan. We are not trying to pitch you about the potential in the supply chain of customers we don't have today, or in processes we don't cover today. This is for better design, for the OEMs we have already won. And we think very realistically that we have 13,000 seats to convert, which is in fact about twice the number of seats that are in the OEM, for these processes. So this is not a figure that is uncommon, this is the one I though with Version 5 PLM we could reach, and I think the Japanese analogies we have done does confirm it. Expand the use of 3D. These are our third growth driver and here we have two types; the migration from 2D to 3D and the 3D that becomes more [priceable] for more people inside the organization than just the engineering department. So SolidWorks obviously had a good and strong quarter with 20% revenue growth. They sold seats that were an increase of 19%, and they are also about to continue to raise the price of the seats by 4%. One of the reasons why the price per seat of SolidWorks has been raised a little bit is the fact that they have strengthened their PDM solution inside SolidWorks, because they now can support the multi-location, multi-sites aspect today. Now let me show you a short demo. I promise this is not a long one, and we are going to review how this coffee machine can be designed. So, we'll start with a designer, who is not an engineer, we will to the mechanical engineer, and then we look to the marketing department. That's the marketing aspect of it. Now what you see is the real work being done by a designer, in order to find the shapes that he wants to create, and they are being done quite quickly, for this copy machine. He can go back to 2D in order to modify the shape, in a very easy manner. He can verify the quality of the surface, due to continuity; the guy was not an engineer, so he was just modeling shapes like he does here in a very simple manner. He is a good realistic, wondering I think. Then at this stage where you have just modeled external shapes for the coffee machine. Now we are going to go to the mechanical engineer, because there are some mechanical parts in the coffee machine to be fitted. And you will see that functional design helps very quickly create the geometry, and the stiffeners, as you know. This takes forever with a traditional system. It will do all the stiffeners, in functional design we can now create them extremely quickly. Now, we will go to the marketing department, and we are going to import the 3D XML view of this coffee machine, and this will be helpful to create the marketing documentation, animates the website for his coffee machine. Thank you very much, this means my voice is disappearing. Okay, the sales channels; an interesting question. We have -- we already believe that there is a potential in SMB that we are not capturing today, as you know, and we have been working quite a lot on our sales channels. We think that SMB is in fact half of this CRM market. So, we have been working under SolidWorks, sales channel, to increase its capacity, and skills of the people, help them hire good quality skills, within the (inaudible), and they have been working on the PLM channel quite a lot. And I would like to focus on the PLM channel here, and give you two examples. The first example is when we do the channel management on behalf of IBM, that's the example in Germany where we have started actually in the second quarter of 2005, a little bit more than one year ago. What do we do in Germany? We do a lot of sales coaching, for the IBM business partners and help them qualify the opportunities and go where then can win. We do a lot of lead generation for them, help them do it as well, and we work on their sales level, and we will certainly support them quite a lot to improve the efficiency of the sales cycle. I think the result have been good growth in Germany, in SMB. That's new, we were struggling in Germany in SMB market, and had been for three years, and there is now 20 -- above 20% growth in SMB for PLM in Germany. And we also are gathering from business partners, the fact that they are quite pleased by the support we are bringing them, as you can see here with the CENIT quote. As a result of this, we big business partners are on our hypocrisy on software stable, which is very important. The other example is the French example, where we have taken an additional step to achieve to manage it ourselves without IBM. And this is something that we have been implementing in France during the third quarter. What does it mean, in terms of who does what? It means that there is no change in [R&D], we will go to a VAR model for (inaudible), we do the channel management, we are now involved with the level one support and customer transaction management, in order to cash process. And that's the quick summary of it. Is it very profitable to us? No. In fact, the reason we are doing this type of change is mainly to increase the compensation for the business partners, for the VAR. Because what happens here? First of all, there is no immediate full impact because IBM is very important partner. So we pay attention to migrate smoothly the installed base and we do that over a three year timeframe. So, the installed base that is delivering recurring revenue, we don't jump on it, we do it in a very elegant manner and sales manner. We grew from a 50% we were receiving from IBM, that's the usual model, to giving a 35% discount to the VAR. We lose the fees that we were receiving from IBM in order to manage the channel of 10%. So, it's really a five point delta that we use in order to have a better channel management in the Company. But really the tactics here is to increase what's the beauty of the value receiving in order to support PLM sales that are more expensive, and help them invest and develop their skills and staffing. In emerging countries we continue to have a good momentum. Let me just highlight three of them; Russia 45% year-to-date revenue increase; Poland has been also satisfactory at 32%. In those countries there's no impact coming from acquisitions. Really what you see here, you can equate it to organic growth, and 45% in China which is where we went direct. In Russia and CIS countries, we have a growing interest with good attendance at the PLM Forum that we're organizing, more than 500 attendees in the Russian one, just the Russian one. So, there is a real traction in these countries. And finally, the addressable market; how can we expand the addressable market; going from 7 to 11 segments, expanding in the automation market, increasing coverage in engineering systems, and developing supply chain relationship management, and expanding the use of 3D. Let me highlight the increase from 7 to 11 market segments primarily, and to give you an example which is the semiconductor example. This hi-tech market is the second in size for the PLM market first of all. We're not speaking here of a small, tiny market that has to develop, it is the second in size. The demand for semiconductors is continuing to increase fast, you know that even better than me, and what is very important for the semiconductor market is the time to market. Because if there is an 18 month opportunity window for a semiconductor, of course, you lose just the delay of one quarter which is -- can happen, it's frequent, which just kills the product. So, on this busy chart you have the industry model on the left side; how does it work with the OEMs, the chip makers, the tablet makers, and [responders]? And here is what we believe we can bring on the table, with the collaboration tools across supply chain and OEMs, and this is, of course, powered by MatrixOne. It's really multi-side; it's large scale deployment, and real time access to the EDA information, thanks to the connectors to the EDA tools that we have in MatrixOne. The globalization of the asset management, that's the second goal that is important in semiconductors and here what matters, is to completely support the EDA standards, which is what we do. The IP reused, very important in a lot of development cost. IPs reused is enabling the Advanced Catalogues with MatrixOne. What is important is that all these customers that we have been winning in semiconductors, that you can see here at the different levels of the process. For all of them we have one -- so far one or two business processes. But this is a continuous sales process, and we can add business processes and support additional business processes. So, the potential inside all of these customers is in fact very significant. And the opportunity to do repeat sales, in order to cover new business processes, is very significant. Let me give you a couple of wins that are more recent wins. Qualcomm is one of them with 800 users of MatrixOne, and Agere, something, is -- sorry, for the [commutation], is another very important win, where there is a benefit already identified by the customer of 6,000 design hours per year, that have been saved at Agere Systems, thanks to MatrixOne. So, the conclusion in reviewing these different growth drivers, is that I feel more comfortable than ever with the growth objectives that we have shared with you in June, of doubling our revenue between 2005 and 2010, and doubling EPS. I see no reason at this point not to achieve these objectives, based on our strategy, the product sets that we have within our hands, the expansion in market segments, and the work we are been doing on the sales channel. If we go now to a little bit financial detail on our third quarter; our revenue increased by 36% in the third quarter; software revenue increased by 30%, excluding currency; in terms of licenses, we have a CATIA per SolidWorks increase of 8%. The CATIA unit drops by 4% in third quarter. We had a positive unit sales in third quarter of 2005 for CATIA. But all-in-all we are aligned with our objective of growing 3% to 5% the CATIA units in 2006. So, we have ups and downs but I think we are well aligned with the objective that we had set. And SolidWorks has a very consistent 19% increase in the number of licenses in third quarter. From a pricing standpoint, we have stable price on the CATIA side, CATIA Version 5, compared to last year, and a 4% increase for SolidWorks, to be compared to year-to-date 5% increase. So we continue to moderately increase the SolidWorks price (inaudible). From the margin standpoint, this chart is essentially to remind you that we have modified the allocation of level one costs, that are now part of our cost of software. So, this is the restatement that helps you track down our software gross margin, excluding this 1.9 million adjustments that was done in the third quarter. And we are doing this since the beginning of this year, as you know. So even after doing this adjustment there is a little bit of a decrease of the software gross margin, from 96.8% to 95.2%. One of the reasons being the MatrixOne acquisition, where the cost of software coming from third parties is much heavier than for the rest of the Group. Services; 72% increase in services but year-to-date a 34% increase. So, an increase in services that is in line with the software revenue growth. There are here too ups and downs but overall, in services the trend is to grow services at the pace of software. And we also have been able to improve year-to-date margin, as you can see here, by 4 points. So, we had frustrating quarters for services, this one is better. I encourage you to look at year-to-date or even the full year view for services, and the frontline is for us continuing to improve our performance in service and the margins, and all-in-all grow services like we grow software revenue. Financial revenue; there is a decrease in financial net income of 47%. Actually the performance was not bad on this front because, after paying for ABAQUS and MatrixOne there was, of course, a sharp decrease in our cash and more important than 47%. So, the profitability of our cash has been increased, in fact, in 2006. And now, before going to EPS, on the income taxes what we have done during the third quarter is we have enlarged our US tax group. All our US entities were not part of the US tax group before, and we have decided to enlarge it. This is bringing some additional tax benefits, essentially coming from the past; because there were last year some entities that we could not activate, and coming from years before 2006. So, we had a one-time, positive impact of doing this enlargement of the tax group of EUR6.8 million, and this is what we have excluded. The advantage we have excluded in our non-GAAP EPS, because it's a one-time, non-recurring event coming from the past. So, this is how to understand that in US GAAP we have a tax rate of 12%, and 28% in non-GAAP after doing this restatement of the one-time advantage of the tax book. Now our tax rate for the full year remained between -- above 33%. For this full year there is no big change in our tax rate assumption, which is going to be about 33%. So, in the fourth quarter you will see an increase in the tax rate and this becomes extremely technical. But really the tax rate has to be looked at for the full year, and it's going to remain essentially what it was at 33%, with a fourth quarter which may well be about 35%, just to be clear. So, there is a little bit of seasonality here in the tax rate. So, we had a 25% increase in EPS to EUR0.40 in third quarter '06, and part of it is coming from the better tax rate, even at 28% compared to 33% during the third quarter. And that's the advantage that, of course, we are not going to find for the full year. Balance sheet; I really don't have much to say about the balance sheet. The cash flow for the quarter has been very good but also very understandable. We did EUR60 million in net cash from operating activities, increasing from EUR41 million, this is well in line with our non-GAAP net income. So, our cash at the end of the period is EUR455 million less EUR200 million of the borrowing. So, the net cash is EUR255 million. For the full year, 2006, we are confirming essentially our growth rate ex-currency at 27% and since we've fell in love with 27% it's also the same we have for operating margin. We have updated our EPS by EUR0.01 which is the price of our performance in third quarter. You are going to tell me, your performance is EUR0.04; yes, but EUR0.03 will disappear in the somewhat higher tax rate in the fourth quarter. So, the net of it is the EUR0.01 increment that we are recognizing here. And we have updated for the fourth quarter our yen currency exchange rate assumption, to be more realistic at JPY150 per Euro. Our US dollar assumption has not changed at $1.30. Okay, that's the graphic explanation that I was trying to give on EPS. In fact, it is to explain that we are back where we were announcing it one year ago. One year ago we had a EUR1.79, EUR1.81 EPS objective; lots of good visibility one year ago. Were brave, this year following the Company, I don't know. Anyway, this is what we announced. We had a negative impact coming essentially from the yen weakening. If you remember we were at JPY135 per Euro at the time. We had a very modest impact from MatrixOne due to the fact we were able to close earlier. So, we had these six weeks during the second quarter that were not forecasted. And we have been able to increase EPS by EUR0.08 due to activity essentially, better activity. So, we are now back at where we were, at the 12%, 13% increase in EPS for 2006. So now I'll be happy to take your questions.