Thank you for standing by, welcome to the Dassault Systèmes First Quarter 2019 Financial Results call. At this time, all participants are in a listen-only mode. A short overview will be given, followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today. I would now like to hand the conference over to François-José Bordonado, Vice President, Investor Relations. Please go ahead.
Thank you, Serena. Thank you for joining us on our earnings conference call with Bernard Charlès, Vice Chairman and CEO, and Pascal Daloz, Executive Vice President, CFO, and Corporate Strategy Officer. Dassault Systèmes results are prepared in accordance with IFRS. We adopted IFRS 15 in 2018, so all comparative information is presented under IFRS 15. In addition, we adopted the new IFRS 16 lease standard as of January 1st, 2019. Most of the financial figures on this conference call are presented on a non-IFRS basis, with revenue growth rate 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 material are available on our website, these prepared remarks will be available shortly after this call.
I would like now to introduce Bernard Charlès.
Thank you for joining us. As you have seen this morning, we delivered a quarter well in line with our financial guidance, with double-digit revenue, software and earnings per share growth. We are reconfirming our full-year objectives and upgrading for currency, as Pascal will discuss later. We are seeing strong momentum with the 3DEXPERIENCE platform, having reached a key inflection point last year. We have major new wins and are expanding our 3DEXPERIENCE business with clients, with some examples I will share with you shortly. With the platform, we see a change taking place with clients. Today, more companies view us as a strategic partner to help them transform. The power of the 3DEXPERIENCE digital platform as an enabler for today's Industry Renaissance is truly visible.
We will discuss opportunities in several different industries as well as our new global software partnership agreement with ABB, who is also adopting our 3DEXPERIENCE platform. With our capabilities on offer, we have a unique opportunity to change the game and become a leader in target industries, including life sciences, energy, and materials, as well as home and lifestyle. Let me begin with the life science industry, demonstrating our purpose in action. We have now developed a comprehensive offer to address the transformation underway in this vertical. As drugs and therapeutics shift to the world of biological drugs, meaning large molecules, representing an estimated 50% of the pharma R&D pipelines currently. The industry is moving to a world of personalized health, with such products as combination products, delivering medicines through wearable devices, enabling treatment delivery within a home environment.
In that regard, this quarter, we unveiled to pharmaceutical clients a prototype product, Iaso, named after the Greek goddess of recovery. As a showcase for lifecycle of combination product in oncology. From upstream thinking on innovation through commercialization, this prototype demonstrates the value that Dassault Systèmes and the 3DEXPERIENCE platform, as well as industry solutions, can deliver to stakeholders facing the challenge of bringing these critical combination products to market to transform the patient experience. Congratulations to the life science industry team, working with all our brands on leveraging the 3DEXPERIENCE Marketplace for 3D printing services. Let me shift to the industrial equipment industry, which is going through another major transformation, moving from product to experience delivery, from mass customizations to mass personalization, and from disconnected to intelligent systems. We believe a platform approach enables the real and virtual worlds to inform and reinforce each other.
Our 3DEXPERIENCE virtual twin, what you can read as the virtual or the digital twin in the daily press, is very well positioned to do so, as we are working in both worlds and with an offer covering all key domains. Schindler, who adopted the 3DEXPERIENCE platform for its escalators business, is now expanding this to its elevator business. They are using the 3DEXPERIENCE platform on the cloud for digital twin creation, experiencing that twin, digital transformation of the company, and to connect the dots across their extended enterprise. Claas, an agricultural equipment company, a world leader, has adopted a single digital platform for all disciplines, providing rapid access to the company's extensive knowledge and know-how, facilitating high visibility collaboration to enable intelligent innovation across multiple countries and cultures. With ABB, we announced a wide-spanning global partnership.
ABB is adopting the 3DEXPERIENCE platform to model and simulate its solutions before delivering them to its own customers. Home and lifestyle is another industry where we are positioned to be game changer. Today, more than 850 brands are using CENTRIC PLM. It is clearly developing a unique market leadership position. CENTRIC PLM is helping customers achieve faster time to market, translating into revenue increase of 5%-10%, lowering inventory costs, as well as improving efficiency, translating, for instance, into logistics cost savings on the order of 10%-15%. Just a few words on our Design in the Age of Experience conference held in Milano a few weeks ago. As you may know, Milano Design Week is similar for design to what the Fashion Week is about.
There is truly a new age for design, a new global community of innovators using 3D and 3D design to bring emotion, to bring better adaption to usage, a true, so to speak, 3D experience for all. I believe we are extremely well-positioned to address this global community. Moving now to energy and materials, I would like to focus on mining, where we had a major announcement this morning. It's clear that mining companies are seeking transformative change to sustain profitability under social license to operate. Some companies have started to deploy tactical innovations, including automation, virtual reality, drones, and the Internet of Things. There have been improvements realized in verticals such as resource modeling, short-term scheduling, and fleet management. However, there is more the industry needs to do to truly transform itself.
BHP, a major global resources company, and the largest mining company in the world, is leading this effort. We are very happy to announce that we have entered into a long-term strategic partnership with BHP to leverage the application of digital technologies, bringing the best practices from other industries as appropriate to mining. Combining the experience on resources of each company, the ambition is to unlock value by applying of geoscience and resource engineering. The partnership intends to create a new level of understanding of resource and operational potential, underpinned by both companies' commitments to safety as well as sustainability. Before passing the presentation to Pascal, let me recap the highlights of our performance in the quarter. Our revenue results came in the high end of our objectives. Software revenue increased double digits in seven out of the 11 industries we cover.
All three core on several of our diversification industries, including high tech, life science, and Home & Lifestyle included. On a regional basis, we saw strengths in all three regions, led by 3DEXPERIENCE on large wins in newer brands, as well as newer brands as well. We are benefiting from our geo-diversification as we continue to build out our market presence in key geographies. Several notable geos in the quarter were China, Southern Europe, and North America. 3DEXPERIENCE software revenue increased 26%. 3DEXPERIENCE licenses revenue increased 25% and represented 40% of related licenses in the quarter. We have new major wins on important follow-on orders with companies in transportation and mobility, industrial equipment, as well as energy and materials. In addition, our Power'BY strategy is bringing significant value to our clients to integrate legacy. Pascal, you have the floor now.
Thank you, Bernard. Hello, thanks to all for joining us. With the financial overview with Bernard, let me now share further business and financial details. Looking at our performance, there are two key points I would like to underscore. First, our financial results were well-aligned with our guidance. Both total revenue and software revenue came in at the high end of our constant currency growth range. We saw a strong performance for recurring revenue at [20 above] of our target range, with licenses software at the lower end of our target. In combination with our operating expense, performance and currency evolutions, EPS increased 21% to EUR 0.87, ahead of our EUR 0.78 to EUR 0.82 objectives.
My second point, if you look at our revenue components, our results are coming from a broad-based growth, with licenses revenue up 9% organically, and recurring software revenue up 8% on an organic basis. Moving to our software revenue growth by regions and at constant currency, Americas software was higher by 18%, reflecting acquisitions, large deals in our direct sales channel, and a strong recurring revenue performance across all channels. On both reported and organic basis, the Americas had the highest growth in the quarter. From a geo perspective, North America had a strong start. In Europe, software revenue increased 10% with large deal activity in multiple geos, including South, Central, and Northern Europe. In Asia, software revenue grew 8%, led by China and Asia Pacific, both up double digits. We had a good growth in Asia in all geos in terms of recurring software.
Zooming in on our brands, CATIA software increased 6% in the quarter to EUR 271 million. Its strongest performance was in North America this past quarter. In general, CATIA had a strong increase in 3DEXPERIENCE software revenue growth. Following on a huge fourth quarter, ENOVIA delivered a very strong first quarter, with software revenue growing 19%, led by a strong growth in 3DEXPERIENCE software. ENOVIA had a number of large deals in Europe, in Americas, and Asia. The top deals include transportation and mobility with excellent traction, as well as high tech and industrial equipment, among others. SOLIDWORKS software revenue increased 5%. On a regional basis, we saw a very good dynamic in Asia.
From a channel perspective, with the launch of 3DEXPERIENCE Works, a new business application family on our platform, we expect to spend a good deal of time on planning and training with professional solution channel, given the significant opportunity to bring the power of the platform and the portfolio to mainstream market. All in all, we anticipate a solid year of growth for SOLIDWORKS, with its software revenue increasing between 5% and 10% in year 2019. Other software increased 22% in the first quarter. The largest domains are simulation with SIMULIA, followed by manufacturing with DELMIA, and PLM for fashion with CENTRIC PLM. SIMULIA had a good set of results, including a high single-digit growth on an organic basis, and we saw a solid performance for CENTRIC PLM. Just a few comments on DELMIA. We call it the Make It Happen brand, which now includes Quintiq.
DELMIA enables global industrial operations to design and test the manufacturability of products in a simulated and virtual environment, optimize the supply chains and factory to meet objectives, and to operate the factories, warehouse, and distributions to manage and fulfill customer demands. As part of the Industry Renaissance, global industrial operations are front and center and a core area of investment by company now. We have been making significant investment in these domains over the last four years, and now this is visible in DELMIA results, where software revenue increased 25% in constant currency on an organic basis. To be clear, this is before adding the revenue from DELMIAWorks, which we acquired in January. As I mentioned, we have now added Quintiq to DELMIA brand portfolio, but we track its financials separately. Its software revenue increased very substantially, +78%, in this quarter.
In total, we saw a good traction in multiple core industry as well as in Marine & Offshore this past quarter for DELMIA. A client example we have in today's presentation is Eurostar, who selected DELMIA Quintiq applications powered by 3DEXPERIENCE platform. With our software, Eurostar will be able to optimize its resources, including its train drivers, managers, and control staff, and maintenance planning to increase frequency while complying with complex rules and legal regulations. Moving to our software performance by industry, we had double-digit growth in seven of our 11 industries, including all the three of core industries, Aerospace and Defense, Transportation and Mobility, and Industrial Equipment. In our diversification verticals, we had double-digit software growth in High Tech, Life Sciences, Marine and Offshore, and Home and Lifestyle.
Commencing this year, we have regrouped several of our target diversification industry based upon natural synergies and a refinement of our focus, notably in our Home and Lifestyle, Energy and Materials, and Construction, Cities & Territories. We have now show 11 industry group versus 12 previously. In the first quarter, total revenue increased 13% on a good performance for both software, representing 89% of the total revenue, up 12%, and services also up double digits. On an organic basis, both total revenue and software revenue grew 8%. Looking at the component of the software revenue, license and other software revenue increased 15%. On an organic basis, the growth was 9%, with notable performances in Transportation and Mobility, Industrial Equipment, and High Tech. Recurring software revenue increased 11% on a double-digit subscriptions and support growth and represented 75% of the total software revenue.
On an organic basis, recurring software revenue increased 8%, well aligned with our plan for the year to show further progressive and strengthening of our organic recurring revenue. Moving to services performance, growth continues to be led by 3DEXPERIENCE implementation and activities. On an organic basis, services revenue increased 9% for this quarter. Let's zoom on our operating performance. In the first quarter, our operating profit increased 22% to EUR 316 million. In turn, our operating margin was 32.8% ahead of our guidance of about 31%-31.5%. This reflects both a more favorable currency but also a better activities, higher revenues, as well as some slower hiring. In comparisons to the year-ago quarter, the 440 basis point improvements came largely from organic improvement of 210 basis points, more than offsetting 120 basis points of the acquisition dilution.
Currency was a positive contributor in this amount of 50 basis points. As a reminder, for the full year, we are targeting to improve our underlying operating margin by about 80 basis points, exclusive of any benefits from IFRS 16. EPS increased 21% as reported and 13% at constant currency, reflecting revenue growth and operating management. The tax rate increased about 90 basis points, up to 29.7% versus 28.8% in a year-ago quarter. Our net operating cash flow increased 20% to EUR 489 million, reflecting the strong growth in net income, non-cash items, as well as the working capital improvements. Unearned revenue, now called contract liability, total EUR 1.01 billion at March 30th. This represents an increase of 10% at constant currency and perimeters impact. Let's move briefly to our guidance, beginning with the full year 2019.
First, we are confirming our total revenue objective for growth of 10%-11% at constant currency. Second, we are upgrading our reported figures for a better evolution of the currency in Q1 and an update of our exchange rate assumptions for Q2. As a result, we are moving the midpoints of our reporting revenue range higher by EUR 35 million, EUR 19 million come from Q1, and an estimated EUR 16 million for Q2. Third, we are also upgrading our EPS by EUR 0.05 at the midpoint. As a result, our total revenue range is now EUR 3,845,000,000 -EUR 3,875,000,000 , and our EPS range is EUR 3.4-EUR 3.45. Our operating margin remained the same, targeting 32%-32.5%, and reflects an underlying improvement of about 80 basis points exclusive of IFRS 16 and currency.
In total, we expect a similar performance to 2018 from a revenue perspective, with a higher contribution from recurring software revenue, bringing increased visibility and predictability. More specifically, we see steady growth on an organic basis thanks to an estimated 100-200 basis point increase in the organic recurring software revenue growth to about 7%-8% for 2019, from 6% in 2018. By the way, this represents a 200-300 basis point improvement from 5% in 2016. For Q2, we are targeting a revenue range of about EUR 920 million-EUR 940 million, and an operating margin of about 29.5%, and an EPS of about EUR 0.74-EUR 0.77. Our revenue range embeds a license growth rate range of 11%-14%, and a recurring software revenue growth rate of 9%-11%.
With respect to recurring revenue, let me just remind you that the sequential basis, reflecting IFRS 15, recurring revenue in Q2 would be lower than Q1. Finally, just for further reminder that our Q2 and the full year financial objectives are presented on a non-IFRS basis with revenue growth rate at constant currency. For purpose of our guidance, we are using a 1.15 U.S. dollar rate per one euro exchange rate in Q2, then a 1.20 rate for Q3 and Q4. For the Japanese yen, 130 rate per one euro exchange rate before hedging for all three quarters. Before taking your questions, I wanted to share that our Investor Relations activity this quarter will include attendance at the J.P. Morgan conference in mid-May in Boston, the Exane BNP Paribas CEO Conference in June in Paris, and several road shows, including one in Germany.
I will be attending these events with member of the Investor Relations team. To summarize, the first quarter well illustrated the good dynamics of our key growth drivers and position well for the future. We will now be happy to take your questions, thank you for your participation on this call and our earlier webcasted meeting held in London. Serena, we can take question now.
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. Please stand by while we compile the Q&A queue, as this will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Jay Vleeschhouwer. Please ask your question.
Thank you. Hello, Bernard. Hello, Pascal.
Hey.
Bernard, on the call a quarter ago, you may remember that we talked about your manufacturing software business. I'd like to ask about that again, particularly given how important IQMS was at SOLIDWORKS World a couple of months ago. At that conference, management was highlighting the plan to enable your channel to represent or absorb IQMS, I'd like to ask how that's proceeding. Perhaps for the longer term, my understanding is that DS has an ambition for IQMS to grow to perhaps as much as a half billion dollar business by some time, let's say the middle of the next decade, which would be a considerable multiple over the current level of revenues for that business. What has to happen over the next six, seven, eight years, to grow IQMS or now DELMIAWorks to that scale?
Good morning, Jay. Thank you. You're right. First of all, we continue to a very successful dynamic of the overall manufacturing product line. Across the board, all sectors, large clients, mid-size, and now of course, the new focus with mainstream ERP, as you are referring to, it was announced at SOLIDWORKS World a couple of months ago with DELMIAWorks. We are on a good start. The IQMS, now DELMIAWorks, was mostly direct. They had some partners, however, that were doing quite well. We are expanding those partners with a selection of the current SOLIDWORKS resellers, who are one, or were already selling supplemental software or who are willing to invest. This ramp-up is taking time. The IQMS team knows how to do it because they did it for several partners before.
I think also what I must say, the team that you know, Ken Clayton, Paul Adams, who are really from the professional solutions standpoint, are highly committed because they see the value for their clients. Things are going properly. We are in the scope of what Q1 was targeting for our
DELMIAWorks, IQMS now, the former IQMS. We hope that, before we run this indirect piece, we'll supplement the revenue growth in a visible manner, which is not the case today, but should be the case before we land. The ambition to be a half a billion EUR brand is really a possible ambition. We have no doubts about it. It's more the execution now to leverage both direct and indirect. Too soon, Jay. Keep you informed as we make progress there.
Thank you for that. Also, during the quarter, there was a customer conference, as you know, DS customer conference in New Orleans, at which there were a number of interesting presentations on Power'BY. My question there is, can you specifically attribute the new growth or the better growth in the V6 new license business to Power'BY? I mean, is that in fact a significant driver to the momentum you're seeing there, or are there other factors?
Yes and no. First of all, Power'BY is a very good way to position the 3DEXPERIENCE platform for existing SOLIDWORKS or CATIA V5, or even Legacy CAD. It's working, we have connectors with the different CAD systems that you know on the market. It's working beautifully. However, related to your question about the 3DEXPERIENCE revenue, most of it is coming from the native industry solutions implementation on 3DEXPERIENCE, not from the Power'BY on legacy design environment.
Okay. Just a couple last ones then from me. As part of your guidance for 2019, to what extent have you included a contribution or meaningful contribution from one or both of either the new xApps or the marketplaces?
You are referring to xDesign on [xDesigner] on xShape?
Yes.
I think this year is more a market introduction. Pascal, you want to say more?
To go straight to the answer, Jay, I did not take into account the numbers in the guidance.
Okay. Very good. Thank you.
Thank you.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from the line of Jason Celino. Please ask your question.
Hi. Thanks for taking my question. I had a couple this morning. I guess the first one is around your BHP strategic partnership announcement. As we kind of think about the Boeing deal that you also did and the Airbus deal, I mean, how does this compare in terms of size?
Okay. Hi, Jason, and welcome. Glad to have you in this call.
Thank you.
Against the BHP, it's a long-term partnership, so the contract is for 10 years.
I think you actually broke up a little bit there. Could you maybe say that again?
It's 10 years for the contract, 5 years for the financial commitment, and every year we are talking about tens of millions EUR. This is for the existing commitment. On top of this, we have developed a business model, which is an interesting one. We license per mine. Meaning that if we are being able to equip all the different mine inside BHP, this contract could be equivalent to what we do with Boeing.
Okay. Very nice. I guess, was BHP an existing customer or is this kind of a new one?
Well, it was an existing one, but on a point solution. You remember when we acquired a company called Gemcom, doing a product called Surpac, which is very specialized, which became, by the way, GEOVIA. This is what is GEOVIA now, for geophysical and geoscience. They were a very small customer, basically. The question here is much more about the 3DEXPERIENCE platform to connect the dots for all operations.
No, that's good. Then, related to your ABB partnership, it's a very interesting partnership. I mean, can you maybe talk about how it came together and maybe what the go-to-market strategy is?
The ABB relationship, it's a long-lasting partnership. They use many of our solutions already in different divisions. That's one aspect. Second aspect, we see each other serving common customers. There are a lot of Dassault Systèmes customers using ABB machine equipment, robots, and even automation system. The partnership is built on a very strong, high quality set of relationship. Also with the ambition to have ABB becoming the industrial integrator of many of the solutions we already deliver to our clients. What we want to demonstrate, basically, with the ABB partnership, is that horizontal integration, I call this horizontal integration, is more powerful than vertical integration. It has been very well received by clients around the world. In fact, other players in that sectors are now contemplating to connect further with our 3DEXPERIENCE platform. I could name KUKA, I could name TPEC.
TPEC is the huge division of Toyota Motor Company, doing huge robotic installation on an assembly line. They are contemplating to connect much more in the same way. I think it's a significant way to demonstrate that some of the also approach used by other industrial firms to do vertical integration might not be the best way to do things.
No, thank you for the color. Last question related to the strength in China and Asia. It looks like Asia and APAC, Asia Pacific, might have done better. Maybe can you talk about the environment in the other parts of Asia?
Well, Asia is very diversified. You have AP South, then you have India, China, India, Korea, and Japan. That's the way we split that area of the world. Overall, the dynamic and the visibility is very good. We have a lot of activities in both Japan, India, and China. You should not look at one quarter. The perspective is a very good perspective for double-digit growth.
Okay, great. Thank you for the color.
Yeah. Thank you very much, Jason.
Once again, if you wish to ask a question, please press star one on your telephone. If you wish to cancel your request, please press the hash key. To ask a question, star one.
I think I want to thank you everyone today for participating this morning in London through the connection or with your presence, and also this afternoon here at this phone call. Of course, we are always here for you to address your questions. Do not push the rumors too fast. It's not needed. Thank you very much, and talk to you soon.
This does conclude our conference for today. Thank you for participating. You may all disconnect.