Thank you for standing by. Welcome to today's Dassault Systèmes Q2 2019 earnings investors conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Wednesday, the 24th of July, 2019. I would now like to hand the conference over to our speaker today, François-José Bordonado. Thank you. Please go ahead, sir.
Thank you, Sherry. Thank you for joining us on our earnings conference call with Bernard Charlès, Vice Chairman and CEO, and Pascal Daloz, Executive VP, CFO, and Corporate Strategy Officer. Dassault Systèmes results are prepared in accordance with IFRS. Most of the financial figures on this conference call are presented on a non-IFRS basis, with revenue growth rates in constant currencies, unless otherwise noted. Some of our comments on this call will contain forward-looking statements that could differ materially from actual results. Please refer to today's press release and to the risk factors section of our 2018 document, "Reference." All earnings materials are available on our website, and these prepared remarks will be available shortly after this call also. I would like now to introduce Bernard Charlès.
Thank you for joining us today. When we unveiled our new expanded purpose in 2012, and then our 3DEXPERIENCE platform in 2014, we saw the possibility. Now we see the realities. Coming all together as industries, companies, and users embrace the 3DEXPERIENCE platform, on the immense value of the virtual world and real world to work together. As our progress during this year's first half demonstrates, we are focused on addressing three centers of gravity: customer-centric, citizen-centric, patient-centric experiences. All three are well-aligned with our purpose, as Dassault Systèmes wants to provide people and business with 3DEXPERIENCE universe to imagine sustainable innovation capable of harmonizing product, nature, and life. Let's look at our scorecard at mid-year 2019. Within the backdrop of a more volatile global environment, our revenues and earnings came in at the high end of our Q2 financial objectives.
Key details include a record quarter for 3DEXPERIENCE, and a strong first half. Our software growth for the first part of the year was well-balanced across our core and diversification industries, with double-digit growth for both. Since 2012, we have shared our expectations that one day, life science would become a core industry for Dassault Systèmes. With the completion of the Medidata solutions acquisition subject to regulatory and shareholder approvals, that day is just a few months away of freeing. Therefore, looking at our progress, I think it is a solid scorecard. Importantly, we are preparing the future. Thanks to the enormous talents at Dassault Systèmes, we are working to advance the company, but equally important, our impact on the world. The core to our progress and opportunities for the future is the 3DEXPERIENCE platform. The challenges for all major industries are very significant.
Without a platform to help them connect all possible contributors, they will not be able to maximize their innovation and performance. This is true for industries, and it is also true for cities, and in health for patient care. Let me begin with industries, with our largest industry, transportation and mobility, to provide you with some examples. Thanks to our platform strategy, PSA has selected us as their preferred digital partner for transportation and across all provider, 8,000 of them. Their digital transformation started with V6, was upgraded to 3DEXPERIENCE, started as one of the first customer to adopt our platform, and we were absolutely impressed to see the transformation of a money-losing company to an extremely cash-rich company. This shows the power of innovation.
The Guangzhou Automobile Group, GAC, from China, with five global R&D centers, both in China and the U.S., has decided to move to the 3DEXPERIENCE platform too, using our Powered by functionalities. With the platform, they will be able to increase their R&D efficiency and collaboration across more than 4,500 users. Renault Group, a large 3DEXPERIENCE platform user since day one, is now adding 3DEXPERIENCE on the cloud for its in-house innovation laboratory for disruptive mobility solutions for urban areas. Just a few words on the aerospace sector, where there is a significant innovation underway in a number of areas on where the 3DEXPERIENCE platform is becoming mainstream. Safran Electronics is using the 3DEXPERIENCE platform to support their digital transformation and master the configuration management process of integrating software, electronics, and physical aspect of their products through its life cycle.
Dassault Aviation, our sister company, has expanded its use of 3DEXPERIENCE platform with not only ENOVIA, but big data analytics on cockpits, EXALEAD, and NETVIBES, to leverage AI on big data to improve fleet management as well as new category of services for their equipment as it regards to the service with their clients. An American startup, Boom, is designing a supersonic passenger car. Passenger jet, sorry. A SOLIDWORKS customer indeed moving to the 3DEXPERIENCE. It would be fast for a car, supersonic. SOLIDWORKS customer, Boom, has decided to move to the 3DEXPERIENCE platform to support their ambitious effort from concept design through manufacturing. Moving to high tech. This industry face a number of challenges as it broadens its reach into every part of our lives, from wearable devices to connected experience, including smart products.
The product cycle are very fast, but are backed by years of intensive research, which is often less visible. High tech must deal with an entire range of issues around safety, health, compliancy, and, of course, security. We are working with Bosch Car Multimedia, who has adopted the 3DEXPERIENCE platform on our model-based systems engineering approach to test and validate their digital models. Fuji Xerox, a joint venture, is using our SIMULIA electromagnetic studio called CST Studio Suite to virtually simulate electromagnetic compatibility before constructing physical prototypes. Now, let's move briefly to our work addressing constructions, cities, and territories. With reports of 70% of the global population to be in urban environments, the city that will survive and thrive in these decades ahead will be those that are focused on improving the experience of its citizens. In this morning's presentation in Paris, we highlighted one of our architecture clients.
The firm is using 3DEXPERIENCE platform to help Hong Kong entities analyze how to improve walkability of citizens' experience through pedestrian flow simulation with a complete digital model of the city. Addressing the workforce of the future, highly ranked Southern California Institute of Architecture is an incubator for a new generation of problem solvers redefining architecture, looking out on other industries in other areas, and using the 3DEXPERIENCE platform to create new approaches on rethinking solutions to problems. Moving to life sciences, beginning with the proposed acquisition of Medidata Solutions. We held a detailed joint call on the day of our announcement on June 12th. Medidata is a leader in the digital transformation of the life sciences industry for clinical development, commercial, and real world data intelligence.
This acquisition reinforces our position as a science-based company by providing the life science industry with an integrated business experience platform for an end-to-end approach to research on discovery, development, clinical testing, manufacturing, and commercializations of new therapeutics from small to large molecules, and of course, health technologies and practices. Demonstrating our further support for passion-centric experiences in life science is BioSerenity, a startup who has been part of our 3DEXPERIENCE Lab. It is developing wearable medical devices and digital point-of-care solutions that leverage textile innovation and artificial intelligence. Importantly, its products enable passion-centric care to move from the hospital or clinic to the home with online telehealth services. These devices could also be used in clinical trials, of course.
Well, illustrating the role of modeling and simulation in life science for practitioners is our Living Heart Project, the first commercial and personalizable model of the human heart now available to anyone on the 3DEXPERIENCE platform in the cloud. Today, at our North American headquarters in Boston, we are holding the fifth annual meeting of the Living Heart Project community with representatives from industry, research, clinical practice, as well as regulatory agencies. We are also pleased to announce that the U.S. Food and Drug Administration has signed a five years expansion to the Living Heart Project collaboration on project to use a 3DEXPERIENCE platform on the living heart as a virtual patient population to reduce the time, cost, and regulatory burden on human and animal testing.
The role of life science is a critical enabler for global innovation, was further underlined by the release this morning of the annual Global Innovation Index with the theme this year focused on medical innovation landscape over the next decade. This study illustrates how critical is the life science industry's continued transformation towards passion-centric experience. With that, Pascal, you have the floor.
Thank you, Bernard. Hello, and thanks to all for joining us today. I think our first half business and financial performance very well illustrates our key growth driver at work. They have helped position us very well with respect to the completion of our five years plan to double EPS to about EUR 3.5 in year 2019. More importantly, they are demonstrating that the principal components of our year 2023 plan are well in place and animating our results with a 3DEXPERIENCE platform, strengthening organic growth, our industry diversifications, and our addressable market expansions. Reviewing briefly our results, we came in at the high end of revenues, software, and ahead on EPS based on a strong operational performance. Both revenue and earnings per share were up double-digit in Q3 as well as H1.
Importantly, 3DEXPERIENCE traction is continuing to increase and in turn representing a great portion of our software and license revenue. For Q2, 3DEXPERIENCE software revenue increased 52%, bringing first half growth to 40%. 3DEXPERIENCE licenses revenue growth was up even higher for both periods. On a regional basis, America software increased 16% in H1, led by our direct sales channel. We had a number of 3DEXPERIENCE win from aerospace to energy to consumer goods, strong recurring revenue growth, as well as the benefit from the acquisitions. In Europe, software revenue grew 11% for H1, with Q2 up 13%. The strongest performance were in Northern and Southern Europe, as well as Western Europe. We had a number of large 3DEXPERIENCE deals in automotive, aerospace, and industrial equipment. In Asia, software revenue was higher by nine% for Q2 and H1, with a mixed performance.
Growth was very good in China and India. From a channel perspective, both value solution and professional channel had a strong growth in license as well as recurrent software revenue. Zooming in on brands, CATIA software revenue increased 12% in Q2 and 9% for H1, with licenses revenue up double digits in both periods. CATIA is now a key driver of our 3DEXPERIENCE software revenue growth. ENOVIA grew 9% in Q2 and was up 14% in H1 on a double-digit license growth as well, reflecting the high level of 3DEXPERIENCE activities for the first half of the year. SOLIDWORKS is seeing a moderation of its growth on mixed results from license activities with strong growth in Asia and a more difficult comparison in Europe and in the Americas.
Recurring software revenue performance continues to demonstrate very stable renewal rates. Overall, its software revenue growth was 4% in Q2 as well as H1. Other software increased 20% in Q2 and 21% in H1, led by a very good dynamic in manufacturing with our DELMIA brand and a solid performance in simulations with SIMULIA. Moving to our financial performance, a key part of our year 2023 five years plan is the progressive improvement of our organic revenue and software growth towards high single digits. Looking at our total revenue and software revenue, they both grew 9% in H1. For the full year, we would expect this to be a little lower. All in all, several hundred basic points improvement over year 2018 and year 2017.
On an organic basis, license and other software revenue increased 7% in Q2 and 8% in H1, well supported by CATIA, ENOVIA, and DELMIA amongst key brands. Recurring software revenue increased 9% on an organic basis for both Q2 and H1, with subscription growth led by CATIA and ENOVIA. We saw solid performances across most of brands with respect to support revenue growth. On an organic basis, services revenue increased 15% in Q2 and 12% in H1, with a strong growth in 3DEXPERIENCE-related services activity, in our manufacturing and global operation as well, and in a digital marketing with a significant improvement by 3DEXCITE. A key takeaway on services is as a forward indicator and opportunity enabler. As we help our clients deploy 3DEXPERIENCE platform, once in place, it leads to follow-on orders.
A key priority for us and for our services partner is to ensure that it's well-planned implementations and timely roll-outs with the scope of the transformation and visions. In addition to a good top-line performance, I think we are also delivering well in terms of our profitability. For H1, our operating margin stood at 31.8%, ahead of last year by 140 basis points. We had an organic improvement of 220 basis points, more than offsetting an estimated 120 basis points of the acquisition dilution. For the first half, currency had a 40 basis points benefit to the operating margin. EPS increased 19% in Q2 and 20% in H1, reflecting revenue growth, operating margin, and currency benefits. The non-IFRS effective tax rates were up slightly for both periods compared to the year-ago time frames.
Takeaway here is that our business and operating performance drove double-digit non-IFRS EPS growth for both Q2 and H1. Our net operating cash flow was up sharply in H1, increasing 38% to EUR 894 million. The three principal contributors were growth in net income and non-cash items, account receivable management, and a lower tax down payment in 2019, where we now benefit from a U.S. tax change on the foreign-driven intangible asset enacted in 2018. For the full year, we anticipate strong growth in the net operating cash flow, moderating, however, from the H1 growth rates. Unearned revenue, now called contract liabilities, total for EUR 1,002 million at June 30th. This represents an increase of 8% at constant currency and perimeters impacts. Before moving to our financial objectives, let me give a brief update on the proposed acquisition of Medidata.
First, now from a timing perspective, since the announcement on June 12th, we have now received antitrust clearance in the U.S. as well as Germany. We continue to work constructively with regulators to obtain all the required regulatory approvals. The SEC has approved the Medidata prospectus. Medidata shareholders meeting to vote on the approval of the mergers has been scheduled for August 16th. We are expecting to finalize the transaction in the third or fourth quarter if all the conditions to closing are completed by then. Second, if the transaction has been completed by our third quarter earnings, we will add Medidata to our financial objectives for Q4 and year 2019. In our Q2 presentations, we have a chart on the transaction summary, including our financial plan, on the financing plan. There are no changes to what we shared with you on June 12th in that regard.
Finally, please save the date, November 13th, for a half-day deep dive meeting on our life sciences strategy, offer, and growth outlook. We plan to host the event in New York, N.Y. at the same time that Medidata will have their user conference. Let's move briefly to our guidance, beginning with the full year 2019. We are confirming that our total revenue growth objective of 10%-11% at constant currency. We are upgrading our reported revenue range for the better evolution of currency in Q2 of EUR 20 million and update our exchange rate assumption for Q3, bringing a EUR 15 million increase. We are moving the midpoint of our reported revenue range higher by EUR 35 million. We are also upgrading our EPS by EUR 0.05 at the midpoint. Our total revenue range is now EUR 3.88 billion to EUR 3.91 billion.
Our EPS range is EUR 3.45-EUR 3.50. Our operating margins target tightens to about 32.5% from 32%-32.5%. We now estimate an underlying improvement of about 100 basis points exclusive of IFRS 16 and currency, up from our prior estimate to about 80 basis points. Fitting from a more favorable software mix with a higher contribution from the recurring software. For Q3, we are targeting a revenue range of about EUR 890 million-EUR 905 million, an operating margin of about 20%-30%, and an EPS range of about EUR 0.70-EUR 0.74. Our revenue range embeds a licensed growth rate of 8%-12%, and a recurring software revenue growth rate of 9%-11%. Finally, just a further reminder that our Q3 and full-year financial objectives are presented on a non-IFRS basis with a revenue growth rate at constant currency.
For the purpose of our guidances, we are using a $1.15 rate per EUR 1 exchange rate in Q3, and then a $1.20 rate for Q4. For the Japanese yen, JPY 130 rate per EUR 1 exchange rate before hedging for H2. To conclude, from a business perspective, our platform strategy is a game changer for customer-centric, citizen-centric, and patient-centric experiences. 3DEXPERIENCE is a significant contributor to our direct sales, in progressing moving forward in our indirect channels. From a financials perspective, based on the first half results and our outlook, we are well-positioned to meet our five-year goal of doubling our non-IFRS earning per share to about EUR 3.5 for 2019. As we look to the future, we are taking major steps to prepare our runway for growth over the next decade.
We will now be happy to take your questions. Thank you for your participation on this call and our earliest webcasted meeting held in Paris. Sherry, can we have the questions, please?
Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Thank you. We have several questions now. Our first question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is now open, sir. Please ask your question.
Thank you. Good morning, Bernard. Good morning, Pascal.
Morning, Jay.
Good morning. I have a number of questions. Let me start with SOLIDWORKS, since we are a bit concerned about the comment you made regarding weakening the license growth. Are you anticipating taking steps to stimulate growth, perhaps as we've seen in the past with respect to promotional or other kinds of activity? Also, at SOLIDWORKS World earlier this year, DS communicated to the channel, an objective of evolving your sales focus to what you called at the time, solution-focused selling and industry-aware selling, among other objectives. Could you comment on whether any of those new modes of selling or focus are having an impact on the business? A couple of additional questions.
The SOLIDWORKS channel is going through a significant upgrade, if I may say so. What we see being the evolving customer demand is, wants to take advantage of DELMIAWorks that was announced at the beginning of the year, following the acquisition in last January 2019, of IQMS. Basically most of the SOLIDWORKS users in the world and company are producing things, so being able to provide to them MES on ERP functions in a very affordable way, requires a channel transition to elevate their capacity and knowledge to cover that. The second elevation possibility for our plan for the channel is really related to the platform itself, using the collaborative business innovation and the what we call Powered by in our jargon, basically to provide with desktop SOLIDWORKS, all new collection of services online for collaboration, and this is going on.
Of course, with that comes with pretty nice results. On signs this quarter, the SIMULIAworks, which is the capacity for SOLIDWORKS users to really have online services for simulation. They like it very much because for some of them, it's too complex to use current legacy or even competitor solution. We believe that going with a cloud set of services. Last but not least, also more and more of them are expecting native cloud mobility applications. We had excellent feedback on a product called EASE Design, and by the way, when 2020 X will be released in a few weeks, it will be called 3D Creator, which is web-based mobile way to create 3D. The reason why I go through this list, Jay, is because partners, and we held a major partner summit a few weeks ago in Paris, worldwide summit.
They are all looking for how to orchestrate their double-digit growth for the next 20 years, basically, as they enjoyed the double-digit growth in the last 20 years selling almost only SOLIDWORKS. All this is going on as we speak. It creates this disturbance.
It creates the stretched use of the capacity on training program. I think it's the right thing to do. It's specifically the right thing to do at this point in time because we know that the timing for platform move is there. That basically what we observe as being the main reasons. Today, the main reason is not because customer prefer to select some other solutions. That's not the case. We still are a preferred solution globally in all countries. To tell you a little bit more, we think also that we have reached a very high level of piracy that we need to progressively resolve with new provisioning of the licenses. We'll come back on that topic. All in all, channel is busy. The executive team is very focused.
They like the new excitement it creates beyond SOLIDWORKS and with the power of the platform on expansion. We need to make this happen across the world.
Thank you for that. Pascal, let me turn to you. At the end of your prepared remarks, you spoke of preparing the company for the next year's growth. I'd like to ask you about certain internal investments you are making. As you probably know, we track your headcount very closely or your plans to increase headcount. There's some really interesting trends going on over the last six to 12 months, specifically, at DS, there has been a material increase in your number of openings that you're looking to fill in Asia. After years of almost under-investing in headcount in Asia, you're now significantly ramped up in that respect. Your job openings there are even more than in the Americas.
When we look at it by brand, the number of openings connected to DELMIA are significantly higher and, in fact, even higher than the openings for ENOVIA, SIMULIA, and SOLIDWORKS. Maybe you could talk about those trends and what your expectations are or ambitions are with vis-a-vis headcount. Then, second or last question, you mentioned partnering, Bernard. I assume you meant the SOLIDWORKS and BT channel partners. Let me ask you a broader question regarding partnering, given the trends in the industry. I recall about a dozen years ago at ECF in Paris, you talked about your partnership at that time with Microsoft, which we've not heard very much about in the intervening dozen or so years. Yet, Microsoft has clearly shown a significant increase in interest on their part in your world, in manufacturing and industry.
They speak of multiple use cases around their cloud business for intelligent supply chain, connected product innovation, and so forth. Some really interesting ambitions there. Perhaps this is a speculative question, but maybe update us on how you see yourselves working more closely with them, given the obvious interest they have in your world and the kind of technologies you have.
Hey, Jay. The first question related to the opening positions we have. You are right. I recognize you surveying our website. I have to confess that we are giving more visibility on the opening position on the sales and services side and what we do for research and development. Clearly, be careful when you do this because you only have one facet of what we do in terms of investment and where we are putting the resources. Now, coming back to your questions. On the services and sales side, clearly, it's well-aligned with where the growth is coming from. Right now, as you pointed out, the manufacturing space at large is growing very well for us on both sales and services, and this is the reason why you see many DELMIA position being opened.
Now, if I project myself a little bit, on a long range, I think for the next five years, we will ask to have more sales productivity, compared to what we did in the past. We will invest more in research and development given the broad scope of what we do. That's some indicators I want you to take into account when you will build your model, because clearly, if you check the balance in the last decades, we have invested a lot to structure the go-to-market. Since the acquisition of IBM, in fact, the IBM sales force, we will continue to reinforce, but not at the same pace. The cloud, all the new mobile edge computing solutions we are developing are requesting investment on research and development, and we will continue to fuel the engine with the appropriate resources.
Related to the partnering with Microsoft, we have enjoyed a great partnership on the desktop, Windows on the servers. There are a lot of customers who are still using this environment. When it comes to the evolution with cloud, our priority really on with very strong support from the clients are with Amazon as well as with our own cloud called 3DS OUTSCALE, when we provide private cloud, private public on dedicated cloud, which are very core for many of our customers. That's today the choice. We don't notice any specific customer attention on the Microsoft environment in the manufacturing sector. They have a lot of legacy existing environment, when it comes to mobility, the side of point solutions, I think the 3DEXPERIENCE platform contains integrated services for collaborative innovation, which are extremely well received by clients, and the numbers shows it.
Now there are, of course, certain services that are used, but that's all what I can say at this time.
All right. Very well. By the way, the supersonic car you mentioned, Bernard, sounds intriguing. I think it would be very popular here in New York.
I apologize. Of course, it was a plane, and I was embarrassed with that mistake. Maybe it's a secret dream.
Well, I hope it wasn't in red.
Thank you for this remark.
Thanks.
Next question, please.
Thank you. Yes, sir. Our next question comes from the line of Nicolas David from Oddo. Your line is now open. Please ask your question.
Yes. Hi. Hi, Bernard. Hi, Pascal. Thank you for taking my question. Actually, I have two, if I may. The first one is, could you give us, please, more detail regarding what drove actually the strength of CATIA in Q2. Basically, which sectors and what kind of deal? Was it just the natural migration of the V5, or is it more larger transformation deals with, I would say a steep ramp-up? I have a follow-up.
The vast majority of the growth for CATIA is coming from the 3DEXPERIENCE version of CATIA. I gave some numbers this morning, but I just want you to keep in mind that more than 50% of the new license for CATIA through our direct sales force is on 3DEXPERIENCE, and now close to 20% for the indirect channels. Clearly, it's a threshold. Answering your question from a sector standpoint, the vast majority is coming from the auto sector as well as the aerospace sectors and industrial equipment. The traditional CATIA V5 install base. The point is the following. Most of our customers have embraced 3DEXPERIENCE platform with the collection of roles, most of them being ENOVIA role at the beginning.
Now with the new generation of EV car, with the new robotic systems for the industrial equipments, they discover the power of CATIA 3DEXPERIENCE because the scope of what CATIA 3DEXPERIENCE is capable to do is much broader than the CATIA V5. This is the reason why the traction is significant for this quarter and for H1.
Okay.
CATIA Cyber is very important just because CATIA Cyber is about integrating, as Pascal said, software electronics on mechanical hydraulics on multi-discipline. That's very uniquely positioned. I think there is no competitor that can do this level of integration. You see it in drones, in smart systems, on future intelligent systems.
Thank you for that. My follow-up would be on the rental model adoption, because I think this morning you mentioned, I think an acceleration, not only in the U.S., maybe beyond the Boeing ramp-up. Was it really material, and is it something you see really because of the cloud, or is it because some client decided to choose the rental model on the traditional on-premise license? Also, do you see this acceleration going on for the next quarter? Could it be slightly cannibalizing the traditional license model, and maybe this is why you shaved slightly your license guidance for H2? I don't know. Maybe more color on that would be helpful.
Okay. The rental model has been largely adopted by the aerospace sectors at large. As you know, for the flexibility, it's not new. Given the good dynamics of the aerospace sector, this is a good explanation about the good momentum we have on the subscriptions standpoint. The second trigger is really the simulations activities or the simulations business, which is also having a good momentum, and those are good drivers for the subscription. The cloud is coming in addition to that, definitively the cloud is adding some points. I will not explain 100% of the growth with only the cloud. The second question was related to what, Nicolas?
Yeah, it was about, do you expect this acceleration of rental model maybe cannibalizing a bit your traditional license business? Maybe it could explain why you cut very slightly your.
No
license, your guidance for H2.
In fact, for H2, I made this adjustment. You are right, in the previous guidance, I was giving a range for the license between 10-12, and I narrowed the range from 9-11. At the same time, I am adjusting the guidance on the recurrence part on the high end, which is 10% growth. If you do the math, it is nothing more than almost EUR 10 million between the two. The EUR 10 million, if you do the computations, because I do not want to disappoint you guys, on the SOLIDWORKS growth, you remember I guide the market by saying the growth will be between 5%-10%. Just because now we have the first half being much more close to 5%, I took this into account in the new license. That is the point.
Okay.
For me, it's for me a way to de-risk, if you want. The reality, the contribution on software side is still the same, and there is no real cannibalizations between the two. You have the explanation.
Okay, that's very clear. By the way, congrats for the very strong results. Thank you.
Thank you, Nicolas.
Thank you.
Thank you. Our next question comes from the line of Gal Munda from Berenberg Capital. Your line is now open. Please ask your question.
Hi, guys. Thanks for taking my question. The first one, I'd just like to expand a bit on the subscription. Like we said in the morning, Pascal, you mentioned the subscription is the future. That statement, can you just kind of tell us your plans for subscription, for if subscription is the future? Would you accelerate the business model transition in the future? What would be the rough timeline? We know that some of your American peers have done so over the last couple of years. Is that something that's on horizon? I'll have a quick follow-up for Pascal.
Of course, the subscription is the future as it relates to cloud and mobility. Also it is as it relates to what we call social collaborative platforms, where you are very inclusive to all members of companies on supply chain and so on. That's a logical evolution. At the time you have a mix between the platforms on desktop applications, you are by default with subscription. When it comes to the entire SOLIDWORKS install base, the plan is to have all the users using the 3DEXPERIENCE Powered by on the cloud for collaboration, sharing. I would say very similar to what Adobe did for their software solutions. It's a logical nature of the evolution of the business model. Then when customers discover that the same functionalities can be web-based or desktop, it also come automatically as a subscription model.
What Pascal mentioned this morning is that subscription doesn't mean that all months or years are equal. As you know, we have created models that customer likes very much. I think you mentioned, Pascal, this morning, Schindler, where there is a kind of significant upfront, and then followed by a subscription fee. Clearly, customer likes this model. They think it provide them flexibility. That's what I meant this morning, and I think it's the right way to go.
As a follow-up, just two quick ones. The first one is considering if we assume that Medidata closes in, let's say, Q3, Q4, what does that mean for your M&A strategy over the next, let's say, three, four years? Does that mean that you could take a break, effectively make sure that you integrate it on the platform and that you can execute on that? Would you potentially consider more deals maybe in some other spaces? You've talked about construction for a while, maybe that's an opportunity for you. How do you see that? Lastly, the question is just for Pascal on IFRS 16. Can you just give us an indication what the impact was in H1 and in Q2 from IFRS 16 on your income statement? Thank you.
Quickly on the M&A, we had always a very selective and precise strategy for our M&A. We did a lot of small, mid-size acquisitions, as you well know, and even the small that we don't necessarily announce, which are very sensitive.
Few tens of millions or below EUR 100 million, which are very technology and IP sensitive. We do plan to continue that policy. It happened that Medidata, of course, is the biggest ever. The modeling we have done with the companies to make sure we keep the freedom to continue to do what we were doing before on that side. Why so? Because we have a very strong focus on brand excellence, whether it's CATIA, SOLIDWORKS, DELMIA, SIMULIA, EXALEAD for big data AI with NETVIBES for cockpits or ENOVIA or now the CATIA Cyber Systems. We have very focused acquisition policy. The Medidata situation, based on the past track record, will not change this much. As you know, our leadership team are very focused on brand landmarks, brand leadership, and they have a strong autonomy to make the right steps to win. No real change there.
It happened that clearly for life science, it's the step 3 is big. Step 1 was BioIntelligence. That was successful research program in France and Europe with seven industry players. Accelrys becoming BIOVIA, which was also a very good move. Now the third move connecting research development production on clinical trial as it goes through the approval process. Yes, it's a big one. It's really focused on life science. That's basically the policy.
Thank you.
On the IFRS 16, you remember the impact for the full year at the EBIT level is EUR 0.3. To be more precise, it's an improvement of the operating margin of EUR 11 million and a decrease of the financial revenue of EUR 13 million. If you want to speak per quarter, it's almost equal.
Okay. That's really helpful. Thank you so much, guys. I appreciate it. Thanks for answering my questions.
Thanks.
We'll take a last question.
Okay. Thank you, sir. Our last question comes from the line of Amit Harchandani from Citigroup. Your line is now open. Please ask your question.
Thank you. Good afternoon, all. Amit Harchandani from Citi, I just had a couple of follow-on questions, if I may. Firstly, to begin with, I think when talking about the regions and geographies in the morning call, you touched upon Central Europe or Germany growing a bit softer. I was just wondering if you could expand a bit more on what was that. Is it just a one-off for this quarter, or is there more to it that needs to happen in Germany? Whether that's a function of competitive dynamics with one of your closest competitors over there. I have a follow-on question.
We have excellent dynamic in Germany, Mittelstand on Cyber Systems and in multiple industries. I don't know what you are hearing from the competitive landscape, but I would be surprised. We have won almost all the new generation of PDM, PLM selection process in different groups. We have mentioned also the Audi Cyber Systems and many others. The dynamic is, in terms of positioning, competitive positioning, which I understand is your question, is very strong in Germany in favor of Dassault Systèmes. I will also notice that as Pascal mentioned this morning, for the PLM decisions, out of 31 decision against our German competitor, 26 of them were won by Dassault Systèmes out of 31. When it comes to PDM competition against our Boston-based competitor, out of 10.
Eleven
out of 11, 10 were won by us. I don't even count on that, the Centric PLM displacement of the PDM in the apparel sector, where there is a tremendous success of Centric PLM in the last 12 months on this. I think that those numbers speak for themselves. We don't announce all the wins, but there might be a lot of wrong statement on the market, I don't know.
Thanks, Bernard. The reason that was my understanding as well, and which is why I was a bit puzzled when I saw the softer growth in Germany. I was wondering if there was anything related to that.
Which I missed the point. You said what? I can't hear you.
No, I was just trying to say that when I was looking through the commentary earlier on the previous call with regards to growth in Germany.
I think it was a bit slower than, I think you called out Northern Europe, and you called out strength in Southern Europe.
Yeah.
I was just trying to think of whether that was just a one-off in the quarter or there was something else that maybe I would have missed from my side.
To complement what Bernard said. The market is relatively soft in Germany for the time being. It's not coming from the competitive situations. On this, I can prove. If we look at the pipelines, we have big transactions coming from Germany. I would say it's much more the timeframe whereby people were questioning their investments, and especially in the auto sectors, and especially in the supply chain, I should say, to be more precise. That's why we insisted this morning on the incredible dynamic in China on the auto sector, because they are investing massively for new generation of technology. I think this will be, as we did, of course, with Tesla and others, I think that will probably create new challenges for traditional players to rethink about how to insert faster innovation in their product portfolio.
That's very helpful. I think that clarifies it. Secondly, if I may, you've talked about how your revenue streams are evolving, contribution from subscription changing over time, some pickup in cloud. Then we always talk about the go-to market between direct and indirect for the different products. Could you maybe remind us or help us understand, as things stand today, if in terms of your various products, to what extent is each being driven by direct and indirect, and has anything changed given the shift towards subscription that we need to be aware of?
There is no specific transition from one to the other. The direct sales force is focused on what we call business transformation with large clients. We have a second way of engaging with clients, which is value solutions. Basically, those clients buy the platform and the process on roles, what we call process on roles. They don't buy capabilities anymore. They buy the possibility to do the new jobs for their workforce. We call this process on roles. For the volume transaction base, the former PC channel, SOLIDWORKS channel, is evolving to a more industry sensitive with industry roles, and this is Powered by the 3DEXPERIENCE platform on mobility on the cloud. Basically, what is happening is each of those three nature of engagements are decided based on where the customer is in terms of which value they want to get.
From that standpoint, driving all this from the platform standpoint will help to edge who of the best partner should be fulfilling the customer needs. That's how we are creating a built-in omni-channel approach for the best engagement for the clients. There is more to say on this. It's very clear from an engagement system. That's how Boom Supersonic was a SOLIDWORKS for the prototype and became full 3DEXPERIENCE for the new product that they will produce. That's how also companies doing robotics, I don't know if you have announced them, are also using the 3DEXPERIENCE platform in conjunction with SOLIDWORKS Desktop. That new flexibility is really highly appreciated by the clients.
Thank you for the details, Bernard. Thank you.
You're welcome. We'll take one very last question. Michael?
Okay. Thank you, sir. Yes, Michael Briest from UBS, your line is now open. Kindly ask your question, sir.
Thank you. Thank you for squeezing me in at the end, François. A couple from me. Just, Pascal, on SOLIDWORKS, you talked about a weaker license growth. Can you say whether units actually grew or shrank in the quarter? Then just looking at the guidance for the year, particularly Q4 implies quite a big slowdown, and I know there are difficult comparatives there, both on ENOVIA and SOLIDWORKS. Is that something you're mindful of, or is there perhaps also an element of macro caution you're factoring in? Thank you.
Okay. In terms of units, I think we were flat compared to last year, okay, for SOLIDWORKS. Again, remember, last year was an exceptional quarter on this front. Coming back to your second comments related to Q4, I just want you to remind one thing. Last year, we overachieved by EUR 20 million. If you take the high end of the guidance I gave last year, it was an overachievement almost higher than EUR 10 million. If you
Rebase, if you want, accordingly by taking the EUR 10 million off, you will see that the growth we are targeting is decent. At the end, Michael, the most important for me is to deliver the commitment Thibault took five years ago to EUR 3.5, where most of you have doubt, a year ago, we will be capable to deliver. That's the goal.
Doubling the EPS in five years.
Understood. Bernard, just one for you. You mentioned piracy a couple of times this afternoon and this morning. Have you got any sense of the quantum of the piracy issue, and is this a SOLIDWORKS issue? Is it more broad in the portfolio?
It goes across all portfolio. We will have progressively to clean that, and we do it in a professional way. At the end, we want to make sure that customer is okay with the way we proceed. Up to now, it has been a very good acceptance, but we need to expand.
Okay. Thank you very much.
Thank you. Welcome. Thank you very much for all of you, some of you were this morning in Paris or this afternoon here. Of course, we stay connected to address any of the questions you might want us to address. I think we have now a new date.
Yes.
Two new dates, in fact. We have, of course, the third quarter coming.
We have Science in the Age of Experience in Boston in mid-October. We have, potentially, if we have been able to close the transaction with Medidata, this half a day strategic session with you guys the 13th of November in New York. I hope most of you will be able to attend. Thank you.
Thank you very much, and have a good day.
Thank you. This does close our conference for today. Thank you all for participating. You may now disconnect.