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Good morning, everyone. I am François Bordonado from DS -- Dassault Systèmes Investor Relations team. From the company, we have Bernard Charlès, our Vice Chairman, Chief Executive Officer; and Pascal Daloz, Executive Vice President, Chief Financial Officer and Chief Strategy Officer.I would like to welcome you to Dassault Systèmes' second quarter 2018 earnings presentation, which is also being webcasted. At the end of the presentation, we will take questions from the audience and from participants on the webcasted call. Later today, we will also hold a conference call.Dassault Systèmes' financial results are prepared in accordance with IFRS. During 2018, the first year of implementation of IFRS 15, we are providing IFRS financial information on both an IFRS 15 and IAS 18 basis. All figures and comparisons during the presentation are under IAS 18 and are on a non-IFRS basis, with revenue growth figures in constant currencies unless otherwise noted. We have provided supplemental IFRS 15 and IAS 18 non-IFRS financial information, and IFRS and non-IFRS reconciliation schedules are in our earnings press release.I know this transition here will be little bit complex in terms of reporting. Some of the 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 2017 Document de référence.Let me now introduce Bernard Charlès, our Vice Chairman and Chief Executive Officer.
Good morning. Thank you for participating to this event. I think we are seeing in second quarter the confirmation of what was presented in the first quarter. And from that standpoint, the dynamic continues to be a very good one, so I am going to share some insight about that with Pascal.So what are the takeaways of the announcement today? First of all, the organic growth of the license revenue is up 10%, excluding exchange rate. And as you can see, the 3DEXPERIENCE platform is on a very strong dynamic, 27% growth, with double-digit growth on multiple brands, CATIA, SOLIDWORKS, ENOVIA, SIMULIA, DELMIA and GEOVIA. So I think it shows quite well spread source of revenue.To be noticed, high-growth countries is at 21% on core industries, T&M, Transportation & Mobility, CPG, Marine & Offshore, AEC, Natural Resources also double-digit growth. So those are for the numbers.If you look at the implementation of the strategy, clearly, the 3DEXPERIENCE platform is becoming more and more recognized as a platform for our clients to build a platform business. We'll come back every quarter on that topic because we believe it's a very significant differentiator and it's a possibility not offered by any of the other competitors. Once again, to provide to our clients business platforms not only for innovation, but to create new business models. Therefore, they can change their own business models to serve their clients. There are many illustration of that, that we will come back on it.The industry expansion on diversification, fashion, retail, consumer goods, we are pleased to confirm today the acquisition of 63%, I think, of the shares of Centric Software, which we will call Centric PLM. And there are 2 names for the company, the company name and the offer -- the name of the offer. And as you do understand, we want to position the offer brand name in a clear way under Dassault Systèmes brand portfolio.So that's a very, very good move. And if you remember, the acquisition of the remaining shares will be done year 2 or year 3. Pascal will come back on those conditions.And the acquisition of No Magic was also closed this quarter. This is a very specific technology, but a very important one for cyber system. Cyber system is not only about defense. Cyber systems is what you find for autonomous vehicles, drones, smart equipment. They are becoming cyber systems, which means governed by software and electronics. And we want to be the reference platform for that sector, and No Magic is a move to accelerate that positioning. So we are confirming -- reconfirming the full year plan and adding the revenue contributing from No Magic, Centric Software. And we are also upgrading the EPS in accordance to the currency upside that you will see in a moment in the Q2, and thanks to the lower tax, improved EPS in the second quarter.So strategy at work. I think there is something happening in the world industry, which is far beyond digitalization of the industry in every sectors we serve, and that phenomenon is extremely significant and visible. Here are the points that should be taken into consideration. If you look at the Aerospace sector, they are going through digitalization process, which is very different from what was done in the past century. It's about redefining the offer and the way they provide solutions to airline operators.If you look at the space sector, delivery is with drones. New type of air mobilities, new type of electrical uplinks. They are creating those new companies, new categories of products for new categories of consumers. That has not been seen for a long time in the industries. And it's happening in every industry. You see an image of a modular vehicle that will be used for commercial deliveries within cities. It's a kind of LEGO vehicle. Think about it. You see those companies now being funded, being developed, providing these new categories of products, never have done before. So this move to redefine, what we call, industries, whether it's health care, architecture, construction, cities, apparel and luxury, infrastructure, we are the catalyst and [ DNA ] provide Dassault Systèmes to make this happen. And there are less and less competitors to provide a proper solution to this sector. I call this the industry renaissance. It's the capacity to connect disciplines, which have never been connected together. And we are communicating that to the world this year in all forums that we host across the different geos of the world. And we are in mid-year, and I can tell you it has been extremely well understood, accepted by our clients going through the worldwide tour we need in the first half of this year. And we are going to continue to do that in India and in other countries, China, and other countries between now and year-end.Digitalization started several years ago. Today, digitalization is touching everything, including retail, including the way you buy, you sell. And the next is the way you produce things. This is an example of 3D printing. So to do so, we have created a platform, which is uniquely positioned to operate highly sophisticated industry solutions, and to help clients to build new business models for the service they want to deliver. We call this 3DEXPERIENCE to run industry solution, and 3DEXPERIENCE to trade and do supply value network, sell and buy on the same platform, and the cloud can do both.Here are the significant programs around the globe, which are aimed at redefining those countries' industry policies. And you will see a video that illustrate that very well in one of the country, but it's happening in all those countries around the world. And we are setting up competency centers, innovation centers, financed by government or industry consortium to showcase those new possibilities. And the number of programs here are significant. By the way, all the programs, which are represented here, we are part of those programs. You have 2 pictures here. One is illustrating the innovation center in the middle of Beijing, China. It's a building, 4-floor building. In every floor, you have demonstrations on actual use of 3DEXPERIENCE in action for different industries. And it's aimed at opening the eyes of the different industry sectors to understand what is possible. Quite impressive. It was opened second quarter, and it's not on our own investment. It's industry consortium. We invested in the building, the infrastructure and everything, and we power everything, we power software.On the right, you have another very important next-generation center for the future of Aerospace. And this is the Aerospace 3DEXPERIENCE innovation center in the center of America. This was the result of the Obama plan, $500 million investment. And you are going to see this video in a minute.[Presentation]
In fact what you have seen in retail and those sectors of the economy, transport and so on, is going to happen in the industry. And of course, when we announced on February 9, 2012, the 3DEXPERIENCE strategy and the approach, it was aimed at doing that, but now we see it in action and this center is really demonstrating today that a 3 years long program can be reduced to 90 days. So don't be surprised. In every intensive, extensive capital investment programs, we can see now start-up coming in and changing the rules of the game. You see that in Transportation & Mobility, Aerospace. Never seen before, never seen over the last 6 years.The performance from the revenue standpoint, you have all the numbers here. The license growth, excluding exchange revenue, is 10%. And the key decisions this quarter are Scania, Turkish Aerospace, Land Rover, ExxonMobil, huge program, and I will talk about that, EDF, Bridgestone. And as you can see, the experience license revenue -- the 3DEXPERIENCE license revenue is up 27% excluding exchange rate.Now how can the 3DEXPERIENCE platform be used for capital project management and capital asset management? You'll remember, at the beginning of this year, I was quite provocative. I said we have decided to win in the AEC, architecture, engineering and construction, market. We have decided and we are going to do it. So we are winning in big programs for cities' infrastructure on very capital-intensive programs. Those programs that you have seen -- you see here, engineering, procurement and construction programs are all very large programs. They are not digitized yet. They use drawing systems. They use very old Excel-based quantity management systems. And we are using the platform to change those industries in a big way. This is another example.[Presentation]
So why not creating large infrastructure projects, which cost millions of dollars around the world like [indiscernible]. That's the offer and that's what we are doing right now. We had the World Cities Summit in -- 2 weeks ago in Singapore. 37,000 people came there. The showcase was the Dassault Systèmes Experience platform for the Singapore city-state, and the illustration that it could help manage the evolution of the city itself, including the quality of the services.Few weeks ago, you saw the press release on what we announced with Jean-Bernard Lévy from EDF and with Paul Hermelin from Capgemini, with -- we were selected as the platform to transform the nuclear energy sector. You can understand that those sectors are long-term conditional energy sectors. You have to think that nuclear is going to last at least 1 century. It's a transitional energy, but not for presidency cycle, but for century cycle between renewal and between transition of those projects, including, of course, the quality of operation and safety of things. We are becoming the standard in the nuclear and energy sector from that standpoint.Another illustration that is announced today is ExxonMobil, where they are having huge infrastructure around the world and want to use the data analytics to manage facilities and do the -- reduce the cost of engineering, upstream, downstream business units, full asset management, workflow management process, digitalization of all those installations and, of course, 3D model for equipment replacement and maintenance.So those are very good illustrations. But why the platform has moved from being a tool for engineering, production -- design engineering and production to a business platform to connect all actors in terms of activities that they have to do to be optimized to serve the companies or the clients they are serving?ON the SOLIDWORKS' side, the question is very simple. How the 3DEXPERIENCE platform is bringing value to users who love SOLIDWORKS as a design tool and want to discover the value of having cloud services online? And we are going to, in the second half of 2018, introducing on the market the connection between SOLIDWORKS and 3DEXPERIENCE to provide collaborative services, PLM services, all on cloud, nothing to be installed for the SOLIDWORKS users. As well as, of course, opening to them the possibility of marketplaces. What does it mean? You have done a design on SOLIDWORKS. One click away, you can produce your part anywhere around the planet, and you can have an immediate evaluation of the cost to produce it.Whether it's laser cutting, 3-axis, 5-axis machine, or 3D additive layer manufacturing, whether it's metallic printing or plastic or any kind of material science, you can do that for human processes. An example is the start-up called Biomodex, a French start-up, who is using that platform to really produce processes for humans, so a surgeon can evaluate the practices they are going to apply before they actually go in the surgery room. Those are very precise illustration of the power of the platform on the cloud to provide new ways to deliver services to those industries.Centric Software acquisition. This is a very cool, exciting one. Beautiful pictures, of course, in the world of luxury and apparel. And they have the best logos. They have Louis Vuitton, they have Gucci. Many, many of the best logos of the world are already their clients. It's a start-up company, EUR 61 million revenue. They grow about 50% a year, that's why they didn't wanted to sell us 100% of the shares, I guess. They said that you get 63%, and the rest we want to get upside in year 2 and year 3. That's fair, it's okay. It's -- and we put the proper criteria, so we will -- if they are successful, we will be happy to pay for the remaining 47% -- 37% in year 2 or year 3. They are based in California. Chris, the Founder, is a good friend of mine for 20 years. I've been trying to buy his companies, other companies, for the last 20 years and never made it. But this time, we came to an agreement. And so this is creating a standard for this industry, which is very fast-growing industry, too.So the positioning is very clear in the Dassault Systèmes, branding system. It's Centric PLM. It focuses on consumer goods and retail, and they have their own direct sales force. All customers we contacted are extremely pleased with that decision. In fact, many of the big players, like H&M said, well, 2 years or 3 years ago, we refused to buy this solution because the company was too small. Now being part of Dassault Systèmes, we feel safe for the future. It's not a pre-announcement, just customer testimony. What do they do? Okay, everything which is related to companies doing collections, spring collections, summer collection, autumn collection. How do you organize yourself to have a collection ready on time when you source textile on different pieces around the globe and you want all this to be coordinated globally in less than 4 or 5 months? That's what they do. It's a PLM fully adapted to source, create, design, engineer, manufacture, prepare the data for marketing and sales and comply with different countries, you know size of Asian profile, will it be different from European profile. It's extremely complex. This is what they do and they do it extremely well, so we are very pleased to have now this solution in the portfolio.And the last comment I want to do in terms of acquisition, it's a very, very strategic acquisition. It's No Magic, but it's magic. The name is No Magic, but it's really magic. Because it's a technology that helps you -- will help our customer do extremely smart, highly integrated products that contains physical parts, electronics and software. Because everything is becoming an integration of software, electronics and mechanical systems for what we call smart things, like autonomous vehicles, drones, airplanes and so on. We call this the cyber physical systems. We want to be the world leader there, and No Magic is the reference. It's used by the DoD, Department of Defense of America; DoE, Department of Energy, everywhere in their applications and it's going to be part of the portfolio. So the cyber physical system is a major extension of our portfolio. No Magic is now part of the Dassault Systèmes, and we plan to leverage that.With that, I give the floor to Pascal. He will tell you what are the impacts of those acquisitions and also give you an update about what's the full year program. Pascal, you have the floor.
Thank you, Bernard. So welcome to all of you. Always a good pleasure to be with you at that time.So to follow up what Bernard said, we are -- I mean, you remember Centric Software. It's a 2-step acquisition. So we just acquired 63% of Centric Software. The payment, we did the closing yesterday, in fact, last night, to be more precise. The payment in cash is around $350 million. And keep in mind that with -- as part of this price, you also have an advanced payment for the shareholders, keeping their shares. So it's not only the price of the 63%, it's also an advance payment. We will buy the remaining piece in the '20 and '21. And the price will depend, in fact, on the revenue growth and profitability in '19 and '20. And we will do an average from the 2 years. And the multiple will be in the range of 3 to 6x, the '19 and the '20 revenue. So this is for Centric. And we expect this acquisition to be slightly dilutive for the full year. And the main reason is the following: In fact, the 2 largest quarters for them are July and January. And unfortunately, we are closing this acquisition the 24th of July, so we will have not too much that we will have in our book for the third quarter. And January will be in '19, not in '18. So this is basically the reason why this acquisition is slightly dilutive, and we have, obviously, the cost.For No Magic, we did -- we completed the acquisition on June 20. The revenue we will integrate on the second half of the year is EUR 6 million, with neutral effect on the earnings. And 170 employees will join -- are joining, in fact, Dassault Systèmes this month. So this is for basically the acquisition and how you have to deal with it. If we zoom on the Q2 and H1, I think, in general, it's a good start for the year. We told you this last time, but here we have the confirmation. And it's a good start because not only we are delivering what we committed to do, but also this is putting us in a good position to deliver strong earning growth for the full year. And in fact, if you look at Q2 and Q1, the tract, it shows very pretty closely. And it's a good demonstration that basically Q2 is almost in the same momentum than Q1.So to zoom on it. The top line growth is 8%, with revenue at 400 -- sorry, EUR 840.3 million. And operating margin at 30.2%, with a margin expansion of 0.1 point for Q2 and 0.5 points for this first semester. And an EPS for Q2 at EUR 0.72 plus 16%, and if you exclude the currency effect plus 22%. And it's a combination of basically this margin expansion and lower tax -- income tax and also some good financial results.Now if we zoom a little bit more on the revenue per regions. I think the good news is coming from Asia. And you remember last year, we had some -- I would say, we were behind a little bit in China. So now, we have the proof that we not only recovered the situations, but we are demonstrating good dynamics. And this good dynamic in Asia is across all the different countries, from China, Japan, South Korea, India and AP South. So all of them, they have a double digit growth for the first semester as well as the Q2.So we also had a good momentum in Americas, 9% for the semesters, 7% for this quarter. Keep in mind that last year, we had a very good quarter, the Q2 quarter was very good. So clearly, we had some base effects of the second quarter.So Europe is still at 6%, consistent with the first quarter. And in fact, if you zoom a little bit, Europe is almost split in 2 different parts. You have the South of Europe driving the growth with a double-digit growth as well as the East part with Russia. And we have much more modest growth in, what we call, Euro S: France, Germany and Euro North, which is basically Great Britain and the Nordics. So this is for the regions.For brand, the good news is you take all the major brand we have: CATIA, ENOVIA and SOLIDWORKS, and all of them, they have a double-digit growth in terms of license, [ excluding ] the currency effect. So for CATIA, it's across all the different regions, so it's relatively consistent. For ENOVIA, the double-digit growth is coming from the diversified industry as well as the car industry, so it's a solid one. And for SOLIDWORKS, it's, as I said, it's almost all the regions of the world. And if you remember, last year, we had a very good year with SOLIDWORKS. And that we come back to this specifically for the Q3.Other software are also growing well, plus 13% for the first semester, 11% for the second quarter. And the growth is driven by DELMIA, SIMULIA as well as GEOVIA, and that we'll make a zoom on DELMIA afterwards. So overall, the growth for the software, 9%, aligned with the expectations, and, again, consistent with the full year.The proof of basically the strategy we have developed with industry solutions is this one, Safran Electronics & Defense. And I like it because if you remember, we are telling you on a regular basis that when we approach our customers with an industry solutions and [ meet ups ] and offers, we are dragging basically all the different solutions, all the different applications, all the different brands together. And in this specific case, Safran, they bought from us few solutions, Business Operation Excellence, Codesign to target, Smarter and Faster and Lighter. Those are 3 well known industry solutions for the Aerospace sectors. And automatically, they are basically part of this value proposal, you have CATIA, DELMIA, ENOVIA, EXALEAD and also SIMULIA. So it's a good test case and proof point that basically when we enter with industry solutions, the sum of the parts is much bigger than the part itself.So quick zoom for this quarter and this first semester is DELMIA. And why I want to zoom on it for a few reasons. You remember last year when we spoke about the Boeing win, we told you that it would have been almost, I mean, difficult to make this win without having the strong value proposal in the -- for the manufacturing space because this is where this industry was basically facing the major challenge. And we -- I think over the time with DELMIA, combining the digital manufacturing, the manufacturing execution capabilities in conjunction also with scheduling and the planning coming from Quintiq, we have built, I think, a unique value proposal. And here, you have the proof. I mean, for the first half, the organic growth for DELMIA is plus 17%. And it's driven by almost all the industry, but especially the car industries wherever the tires, the automakers, including the new insurance, by the way, Faraday Future, for example, this quarter, and also the Aerospace & Defense.And the proof point of this is Bridgestone. So you know very well this company. They are developing the rubbers and the tires. We won them in the States last year. And here, it's basically the European parts having decided to adopt to those solutions, but they have decided to adopt not only the DELMIA manufacturing execution system, but also the Quintiq parts. So it's basically the scheduling and the optimization in conjunction with the manufacturing executions systems. And for this win, we had almost all the traditional players, the competitors in front of us. And we have been able to displace them because what we have is unique on the market.Let's zoom a little bit more on the financials. So the software revenue growth for the second quarter is plus 9% excluding the currency effect in line for the first semester. And it's an organic growth of 6%, which is consistent with our guidance we gave to you for the full year.If I zoom a little bit more, and I do the split between the license and the subscriptions, so the license is growing at 8% for the second quarter, 10% for the first half, and it's an organic growth. There's no contribution from the M&A or the license. On the subscriptions, the growth is establishing at 9% consistent for between Q2 and H1. And it's a good demonstration of the good renewal rates we have with our customers. And the organic growth is 6%, the rest is coming from the acquisition we did last year, Exa Corporation.The services revenue is improving. We are still behind our expectation, and we are EUR 6 million behind what we intend to do. But nevertheless, it's a slight improvement compared to the Q1. And the main reason are always basically the same, there are 2 key transitions. One is, we had this 3DEXCITE -- this acquisition we did a few years ago. They are acting like a digital agency, and we are transitioning their business model towards the technology approach, which is much more software-centric and this has definitively an impact on the services growth. And so second reason is, we are more and more transitioning the services activities to system integrators. And you saw in Bernard's presentations, we are talking about EDF. It's a joint approach with Capgemini, ExxonMobil. It's a joint approach with Accenture. So basically, this joint approach and joint sales with large system integrators is gaining more and more attraction. And it's key for us because it's a way to scale.The good news in services anyway is we have -- we are facing a double-digit growth in all the services related to the 3DEXPERIENCE, so this is basically the key point.On the operating margin standpoint. So here are the points. An organic improvement of 1.6%, which is significant, in fact, and sufficient to absorb the currency effect minus 0.5% -- minus 0.7%, and the acquisition effect, dilution coming from Exa, minus 0.4%, for an average margin for the first half of 28.7% compared to 28.2% last year.This, obviously, is reflecting automatically in the EPS. We have an EPS growth of 16%, 22% if you exclude the currency effect. And as I told you, it's a combination of not only this margin expansion, but also some tax benefit because we -- compared to last year, the tax rate has been decreased from 33.3% to 28.3%, so it's a significant improvement, and this is reflecting automatically in the EPS. So EUR 0.72 compared to EUR 0.62 last year, so EUR 0.10 in addition.On the cash flow, it's a record because EUR 645 million cash flow for the first half of the year, an increase of 9% compared to last year. And it's really driven by the operating -- by the activities. A few comments anyway. On the acquisition side, you have EUR 79 million cash out. It's not only the No Magic acquisition. No Magic is part of it, but also we acquired the remaining shares from 3D PLM for EUR 26 million. So the EUR 26 million is coming from other things. And we have also some complements in term of price for small acquisition we did last year, Exa and others.If we zoom a little bit more on the details. I think there is one point I want to draw your attention is basically this increase in unearned revenue, and you see positive changes compared to last year. It's plus 8% at the -- if you exclude the currency effect compared to 6% organic growth. So why I am telling you this because, in fact, it's a proof that we had good business condition, I would say at the very end of the quarter. This is a reason why you have this unearned revenue increasing.The second point is this changes -- this minus EUR 50 million on the decrease in income tax payable. There are 2 effects. One is lower tax charges in the U.S. for year 2018. The variations is having an impact. The second one is higher tax income we have to pay in Q2, and it was the '17 tax income we have to cash out on this quarter.If I zoom on the objective for the full year. I think you will see it's a good momentum. We are increasing the revenue by EUR 55 million. And here, you have the split, EUR 21 million is coming from capital gain, minus EUR 14 million coming from the contract performance of the services, but largely offset by a much better performance on the software side, plus EUR 15 million. And the contribution of No Magic and Centric Software, EUR 33 million for the full year at the revenue level. The net of this is we are adding 1 point growth on the revenue side compared to the previous guidance.On the EPS variations, it's plus EUR 0.12 overall. And the range is between EUR 2.95 to EUR 3. And here, you have the split, EUR 0.03 is coming from the currency impact positively, $0.06 -- $0.07 is coming from the activities and EUR 0.03 coming from the tax rate improvement. And you have slight dilutions coming from Centric Software of EUR 0.01. And overall, we are gaining in terms of growth 4 points compared to the previous guidance.This range is also interesting to notice that if we achieve the high end of the guidance of EUR 3 and we are confident, we will be in a very good position to achieve the targets we gave to you for '19. Because you remember, 5 years ago, Thibault stated in front of you and he said we are going to reach EUR 3.5 in '19. And if we are landing at EUR 3, we are in, I'll say, a very good position to achieve and deliver it. It's too early to declare the success, but I think we are in a good position.Zooming on the objective for the full year. Let me make some comments. On the revenue side for the full year, the revenue is now between EUR 3,410,000,000 and EUR 3,444,000,000. And if I split the growth, between 9% to 10% is coming from the software; 9% to 11% from the license; and 9% from the recurring. So it's pretty consistent. On the operating margin level, we are planning to achieve between 31.5% and 31% (sic) [ 31% and 31.5% ] operating margin. And here, you have the detail. The acquisition dilution is around 1 point. In fact, half is coming from Exa and the rest is coming from the new acquisitions. And you have 3 -- 0.3 points coming from the currency. The tax rate at 29.1% for the full year and an EPS growth of 10% to 12%, and excluding the currency effect 15% to 17%, so it's good thing. We are not changing the currency rate for the second half, still 1.2 and 135 for the yen and the dollar (sic) [ dollar and the yen ].If I zoom on Q3, and this will be my last comment, François, to be on time. The revenue is planned to -- we are giving the guidance between EUR 805 million and EUR 825 million. For growth, excluding the currency effect, between 8% to 11%. And if I spit this growth between software license and recurring, you have the detail, 9% to 10% for the software, 6% to 9% for the license. And the reason why I'm giving a larger range is because you remember last year, we had the fantastic quarter for SOLIDWORKS with 16% growth for the software and more than 30% growth for the license. So we had a base effect and I want to take this into account. The recurring is really pretty stable and, again, is a good demonstration of our ability to manage renewal rates.On the operating margin, a few comments also. We are giving the range of 29% to 30%. And here, you have the details. So the acquisition, we'll have a dilution of 1.5. And again, same story. You have -- half is coming from Exa and the rest is coming from new acquisitions we are doing. And the reason why we are giving an operating margin with a range of minus 3 to minus 2 points is because we have to catch up some investment. So we are relatively late in the marketing spending compared to last year, and we want to accelerate the -- our marketing program on the second half of the year in order to fulfill the growth for '19.And also, we have to catch up the hiring because you have seen we have significant organic improvements on the EBIT level for the first half and the reason is because we are a little bit late in terms of hiring. So we want to catch up. Same story, because we want to be ready and fully in operation for '19 and it's the time to do it. The EPS between EUR 0.64 and EUR 0.68 and EPS growth between 0% to 6%. Again, consistent for the full year. And I think it's -- those are good objectives and it's not only a reconfirmation of what we told you, it's updating because we are taking into account the new acquisitions. But also we are upgrading because we have this vast improvement and some financial contributions. So ready to deliver a strong earning growth for the full year.That's it. Bernard and I will be ready to take all the question you have.
So after just this one, we'll start with conference call.
Our first question comes from Stacy Pollard from JPMorgan.
Three questions from me, please. First, 3DEXPERIENCE seems to be gaining attraction. Do you think it is the platform that is key for you moving into new verticals? Or is it more about industry specific functionality? Second question, some of your competitors are pushing more cloud products. Can you talk about what you're experiencing there? I know you mentioned SOLIDWORKS and marketplace. Perhaps you can discuss cloud trends across other product areas too? And third, services was still weak in Q2. I thought 3DEXPERIENCE would be heavier on services, but are you saying that the use of third-party systems integrators is offsetting that? And really, how should we think about the mid-term growth for services revenues?
Thank you very much. The question -- first question about 3DEXPERIENCE on the stimulating factor for clients' decision. I think it's both the industry solution performance because it simplifies the process in a big way and provide integration that they had to do themself before and cost them a lot of money, because basically, when you buy multiple pieces you have to put them together to do, what we call, digital continuity. That's a given for -- with our industry solutions. A few example of that very briefly, when the new design and engineering process are changing for additive layer manufacturing because it does integrate design on simulation, for example. And if you do not have a deep integration, you cannot do it. On -- in every industries, you will find the similar reasons to select solutions versus capabilities, isolated capabilities. Now the platform effect is both an accelerator on a process that is in some way slowing down what could be our full -- our growth, because adopting the platform for large companies has to be orchestrated. But there is no doubt that most of the decisions, which are done today with -- by our customers are driven by the platform aspect. Why? Because first, they have a lot of legacy software, those companies. That means homegrown development that they want to remove because it cost them a lot to maintain. They want to replace them by ready-to-use solutions, and we see that trend going across all industries. The second remark about the platform is the fact that they know they have the freedom to use the software as we say on-premise or use the software or use the cloud whenever they want. And the cloud is especially interesting for the suppliers or for very dedicated specialized project, which leads me to the second question about the cloud. Yes, we are very familiar with the fact that competitors' landscape are promoting what they do in cloud. I think our solution is simply superior, by far. Why? Because we are the only companies to provide the same platform whether you put it on-premise, meaning inside your IT infrastructure, or use it on the cloud, public or private. So no one else provides -- no one else in our sector provides that. And this is a strategic advantage for clients. And there is another reason, the platform is also the same platform for trading what we call the marketplace. So no doubt that the platform is significant catalyst and an enabler for the digital transformation. The third question, I will leave it to Pascal related to the service. I just want to notice that this quarter, we announced and we made it visible that the cooperation with Accenture and with Capgemini, Capgemini with -- for all the nuclear ecosystem integration. And with Accenture, with BWIG on others around the world are bringing very good results, and we want to expand that. Pascal?
So Stacy, to answer to your 2 questions. The first one, I already gave some answers because if you have seen my slide, we are expecting compared to the previous guidance, minus EUR 40 million on the services side. So in terms of growth, it's a range between 5% to 10%, 11%, depending on where we sit. But nevertheless, we see some improvement on the 3DEXCITE side, we have been penalized in first half of the year by General Motors because it's a larger customer for 3DEXCITE in the U.S, and they were relatively late in their ordering for the services for the first half and we'll catch up. And also, we have seen more and more our services tractions from Boeing as well. So basically the situation is improving, I still want to be cautious, because I think having delivering better software growth, I think it's probably more important for you. Credited to the system integrators. You remember right now, when I computed the number in average for the direct sales, you have 6% of the revenue being sourced through the system integrators. And we are improving, in fact, because few years ago, we were close to 2% to 3%. And our goal is to be at 10% next year. So this is improving. But do not expect that more than 10% from the lead will come from that. I mean, we are basically the lead generators. Where there is a significant changes, right now, you have 30% of the engagements, which are joint engagement with larger system integrators, like Capgemini, Accenture, Deloitte. And we expect that for the direct engagements, this number will reach 50% in the coming years.
Our next question comes from Adam Wood from Morgan Stanley.
I've got 2, please. Just first of all on the license trajectory through this year. We've seen a slowdown in the new license growth from 2Q versus 1Q, and you're guiding again to slow down in the third quarter versus the second quarter. We need a pretty big pickup into the fourth quarter to get your full year guide. Can you just talk a little bit through why you have the confidence that, that's going to happen in terms of the pipeline and the business you're seeing. And maybe also just clarify the 9% to 11% guide for the year. And how much of that is organic, particularly how much does Centric contribute to that to gauge 9% to 11%? And then secondly, just looking at these deals that are coming outside of the traditional areas, so the deals of Exxon, ADF, Bouygue. Could you may be give us a little bit more of a feel to how much pure design software is being sold in those contracts versus how much is the platform and the other applications. And if there is not very much design in that today, what's the opportunity to backfill that over time as those companies adopt the platform and start using it?
Pascal, new license growth?
Yes. So first of all, Adam, I want to come back to your point because you are challenging a little bit the license growth for Q2. And frankly speaking, 8% organic growth, 10% for the first semester, I think it's not so bad, as you said. And compared to the consensus, we are 2 million below the high end. So I just want this to be clear that the momentum is relatively good. I also gave to you some very important messages. When I was commenting the cash flow, I say you should pay attention to the unearned revenue. And you are seeing the EUR 9 million positive increase. So this is nothing more than the revenue we have to recognize in the coming months because the more we are engaging on the large projects, the more also we have some time from dependency on the services we have to fulfill. And by the way, this is the reason why we are partnering more and more with system integrators to have this capability -- this capacity and this capability to scale. Now coming back for the full year. The license growth is at 9% to 11%, which is a good growth. And the contribution of the different acquisitions, I say, EUR 6 million for No Magic and EUR 27 million for Centric Software. And if I remember well, you should -- for No Magic, you should take half, which is basically the recurrent part, and for Centric, it is 2/3 of the numbers are new license. I think with this, you will be able to compute very precisely, the performance on the new license.
Related to new contract with the platform versus the design part. Thank you, Adam for mentioning in your question that, of course, all those decisions are platform decisions, which basically does not contain design tools yet, will ultimately. But at this point in time, what do they do with ExxonMobil? They use the platform to build the single source of truth of all the digital data they have for project or asset management and create the digital data twin, not the design twin, but making sure they can capture all data for project and program organization in a consistent way so that they can manage all suppliers and actors, which are involved in that process. That does represent significant upside because you can imagine that for all future particular projects, they will use the same platform. And then we'll ask their providers, engineering firms or design firms to use our design tools or simulation tools to do so. Same case with ADF, I was looking at the news this morning just as we were presenting about the [ Flamewheel ] project being postponed for the commissioning. But you have to know that we started with ADF about 16 months ago to help them use the platform to collect all data for their commissioning, which is basically the certification process before you open a new start nuclear reactor, and it has been a major help, and it was started only 16 months ago, which basically provides higher quality of data integrated. Obviously, more should be done and I am convinced and Jean-Bernard Lévy mentioned that he -- indeed for the multibillion contract with Hinkley Point U.K., which will be the first project where everything will be integrated upfront, which we believe is going to be a significant improving factor for productivity on large program management, specifically with massive investments, which it does represent. So that's a side note, but it's a good concrete example. But why platforms are now required to really transform these very capital-intensive projects? Because it's billions over many years and digital experiencing of the twin to plan, track and realize the project on-time is becoming differentiator.
Our next question comes from John King from Merrill Lynch.
I've got 2, if that's okay. So first one was maybe, Pascal, to come back on the trajectory recurring revenue growth. Now I may not quite have the acquisition contribution exactly correct, but it seems like still the recurring is growing. I think you said 6% in Q2 and the guidance implies no real acceleration. I'm just wondering why that is. We've obviously seen a little bit of betterment license momentum. I suppose we're going to have that ramping up next year. But maybe if you could just talk about where you expect or when you expect to see the recurring line accelerate? Because I assume that's going to be fairly key to bring the overall acceleration, or is that simply a question of when Boeing goes live or perhaps do we see any underlying improvement over and above that? And then the second question. You've got a couple of rollouts going now with some major customers for 3DEXPERIENCE, Jaguar Land Rover springs to mind as well as Boeing and I suppose Scania. Perhaps if you could just give us an update in general how those are progressing. Any learnings that you're getting as you roll out the product not for the first time but in a major way to 3 or 4 big customers all at once?
Pascal, I'm taking the first one for the recurring revenue. So first of all, the recurring is growing at 9%. And as I told you, it's consistent for the first half. Between the first half, the Q2 and also the full year. So it's pretty stable and it's pretty predictable. The organic growth is, as you say, 6%. And if you look at the different constituents between the ALC -- I mean, the management and supports and the rental, I see we are still having a good momentum on the rental side, because you remember, Exa, it's a rental model. So the acquisition we did last year, it's pure rental. And we are enjoying, in fact, the more than 20% growth on the rental piece coming from these points. So I think the fundamental for the recurring is really strong. Now coming back to your point, you are right. I mean, the more we are deploying inside Boeing, the more contribution you're going to have on the recurrent part of the revenue. And the deployment is starting to be material for '19 and this is the reason why also we are pretty confident for next year.
Well, relative to the very large rollout plan, I think it's underway. It's very interesting to see that some of the big decisions that have been visible to the market. In fact we are even starting deployment outside the scope of the initial intent on the customer because they have discovered that the EXPERIENCE platform can be used for other things they were not planning to do with. I have an example in mind is we, as Pascal implied, the effect of the Boeing deployment is not visible basically this year except that we are doing deployment in areas where that we have not planned initially, like traffic management inside the plant with robots on extremely smart equipment. That's the case for many clients. They are discovering the platform is a business platform, not only serving engineering, design, simulation and production, but really to create a business modeling to improve their business performance basically. And we like that because at the end, it's a significant expansion of the footprint. The same happened, by the way, on the cloud. We are quite pleased with the dynamic of the cloud. It's not so visible in numbers because this is pure subscription. But if we were a startup, we would make it a big deal. We would present this cloud dynamic as an extremely promising business environment. The customers are very pleased with our 3DEXPERIENCE on the cloud. They are doing real project with it, whether car, drones, planes even, and other projects and high-tech projects. So you have to keep in mind that our -- just to close the loop here, the -- we have a high level of recurring revenue, which is what Pascal mentioned, the predictability of our business model. So the evolution to cloud unlike all our competitors, for us is not disruptive, it is additional, and it's consistent with the current business model we have for the company. We continued to push very hard YLC model even for companies buying software inside their infrastructure, because we prefer to have this annual revenue flow than just having an upfront payment. And we are doing that especially. Exa is a good example. SIMULIA basically, you should SIMULIA forget Exa. You use PowerFLOW for simulation. And we've continued to put that model because we believe it's very aligned with the future of fully subscription-based model.
Our next question comes from Mohammed Moawalla from Goldman Sachs.
I just wanted to draw back into some of the unearned revenue you referred to, Pascal. So again, as we start to think about that quarterly cadence in license growth in the back of the year, can you sort of again quantify how much of that sort of -- is all the EUR 9 million essentially already recognized? And if I can call it slippage, what was the reasoning? Was it macro? Or are there still some sort of smaller teething issues in terms of the sales force execution that need to be ironed out? And then if you can just give us some update on sort of pipeline and sort of visibility in that back half as we think about that sort of license growth trajectory? And then I wanted to just come back secondly on the 2019 EUR 3.50 guidance that you have. Do you think that -- do you need to do sort of significant number of more acquisitions? Or do you think that given the trajectory you're on now, that can be achieved sort of largely through, sort of, organic growth from this point onwards?
I am going to take the 2 questions. So thank you, Mo, for your questions. The first answer is related to the EUR 9 million you have seen in the unearned revenue. Most of them are coming from the fact that you know, we -- the more we have large deployments, the more it's services incentive. And basically, we have to fulfill the services before to recognize a revenue. So having said that, we expect that the vast majority of that will be recognized in H2. This is an answer, I think to your first question. Coming back to the second question, which is the EUR 3 target for this year and are we in a good position to deliver this EUR 3.50 without acquisitions? I think if you apply the growth we have, the organic growth on the EPS for this year and you apply to EUR 3, you will see that we are landing at EUR 3.50. So if I'm able -- if we are able to continue to fulfill the same momentum and we are convinced we are capable to do it without having significant acquisition, we can basically fulfill the target. Now having said that, you know that in our model, we continue to -- I mean, doing acquisition is part of the model because we are expanding our footprint. We are expanding our addressable market on a regular basis. And with more than EUR 700 million cash flow per year, I mean, 2/3 being reinvested to expand what we do. I think you could also take into account that we will, in a way, continue to do acquisitions without having to do it only to fulfill the commitment to the EUR 3.50.
So in short, Thibault made a commitment and you are delivering.
He did most of the job.
But the point on the acquisition, just if I may add something, is we are not going to plan to do acquisition just for the sake of meeting the EPS target. We do acquisition because we think the expanded footprint and the potential, the reachable market. The discipline we have been following in the last 20 years, we will continue to keep it. But it's needless to say, we have a lot of opportunities and we are tracking them carefully to really do smart moves like what we believe is announced today with Centric PLM on No Magic because we think they have significant potential to access to new diversification, accelerate the diversification and fulfill needs that are not fulfilled by other players, basically. So we'll keep going doing that.
We'll take one question from the room and the last question from the call for you, Michael.
This is Laurent Daure from Kepler Cheuvreux. A couple of question. The first is on your services margin, the gross margin is down from last year. I was wondering if it has to do with some overruns or is it utilization rate? Or any kind of reorganization that is waiting on the profit of the services? The second one is, sorry to come back on your [ Q3 ] license target. But if I take the M&A impact and your confidence related to the unearned revenue at the end of Q2, your guidance seems to be extremely cautious, even more cautious than Thibault, in fact. I mean are you trying to win as a prize for him because the organic growth is not very, very strong. So any granularity on that would be extremely useful. And my last question is back, I think it was 6 months back. You were saying, you were planning to expand rapidly in architecture and construction. And you talked a lot, but you have not made any M&A. So is it something that is still in your plans? Or have you changed mind and basically organic growth will be enough in that field?
Well, I will just do cosmetic comment. Thank you for -- I think my dream is to have Pascal building reputation, which will be even as high as Thibault did. And I am confident he is -- would do it and make sure we -- what we say we deliver. So trust you for that. But don't expect, don't calibrate by assuming that he is playing low. Wait 1 or 2 years. That's just for this. We want to make sure we deliver on what we said, and we are doing because otherwise it creates unnecessary stress for all of you and for all of us. So it's not good. I don't see the value of doing that. So that's a good discipline. Now we are -- we can always be exposed to good news and we shouldn't be blamed to be exposed to good news, too. So but we will be consistent with what has been the track record over the past many years on that standpoint. I prefer no speculation on that side. Pascal, you want to?
So on the services margin, the point is coming from the utilization rate, especially for 3DEXCITE. And also a little bit for Quintiq because we have a lot of volatility. And for this quarter, the utilization rate is slightly below our expectation for Quintiq, so this is the explanation.
On architecture, on construction, things are moving in the right direction. The question related to the M&A, that's -- at this point in time, there is not much to say, basically. We believe that this sector is very much behind in terms of digitalization. And there is a game-changer need in that sector. The sector is not productive. The sector is changing in Asia, China especially, big way more than in Europe and U.S. If you look at the -- globally with billions of investment, it's difficult for me to still understand why things are not simulated before. But it's a story by itself. But other countries are going to do it. The World Cities Summit was an amazing showcase for us to reveal that the future of construction is about looking at the city from a system standpoint, not the building itself, but the city and territories will drive the way the infrastructure is built, not the other way around. And today, in most cities, especially in Europe and U.S., it's the sum of little things and they don't match at the end to provide the proper level of services for the [ citizen ] for economical performance or even quality of living. So there is a problem. But I think India has understood it, China understood it. South AP also with the showcase for Singapore. So we are really approaching architecture engineering on construction, whether it's large project like [ Energy ] or entire city by themselves in a very different way from what has been done. We will do -- we will do the proper investment, but I don't want to buy -- we don't want to buy old technology. And most of the players are having very old technology. So yes, news flow probably but very selective. I'm keeping the same philosophy, the one we have been setting up for the past years in all those sectors.
And last question related to the Q3 license. There are one point I want you to take into account is remember I told you that July is one of the largest months for Centric Software. And in fact, to be more precise, it's representing 55% of the revenue for the quarter. So to make a long story a short one, in Q3, we will recognize only 45% of the revenue of Centric. And we are going to have to sell [ at the ] cost for the reason, I just mentioned. So this is the reason why basically the contribution of the acquisition is not, I mean, so important. And the second point is I really want to emphasize the fact that last year, for SOLIDWORKS, the Q3 was really something, I mean, difficult to reproduce, I would say.
Very high?
Very high. So achieving 30% growth on the new license. It's not something we will be able to do it. And this is the reason why also I'm taking some cautiousness related to the base effect, in fact.
We'll take another question from the webcast. And after -- that will be you, Michael and after, Charlie Brennan. Please go on.
Our next question comes from Michael Briest from UBS.
A couple from me as well. If we can go back to the Centric acquisition, Pascal, I think in the original press release, there was talk about a 4 to 6x sales multiple being paid. And it's now 3 to 6x. Is that just some clarification? And just to understand growth rate that there and your comments just about the seasonality. If I take the EUR 27 million you are expecting for the 5 months and annualize that, I'm coming out to about just under [ $80 ] million, which would suggest about 30% growth. What should we put in for a 12-month run rate at Centric? And then Bernard, for you, sort of Central Europe, France, Germany, U.K., Nordics not particularly strong. There's also comment about the back-end loaded quarter. I'm just curious what your customers are making of the tariff discussions? And whether that's having any effect on their willingness to purchase. And if that's maybe coloring on your expectations for Q3 or if you have not really factored anything in for risks around tariff talks and uncertainty there.
Thank you very much. Pascal, I'm taking the first two. You take the last one. So relative to Centric Software, you are right. And you have a good memory, Michael. We said the multiple will be between 4x to 6x. And the reason is, if you remember, we gave to you a range of the percentage of the share we would acquire in the first step. And we gave to you between 58% to 69%. Now we have the precise number, it's 63%. And in fact, this is helping us to have, I would say, a better multiple. This is the reason, if you do the computation and the calculations, in fact, the 4x was based on the 58% of the shares we will acquire with the first step. Related to the seasonality, as I told you, you could expect EUR 27 million revenue coming from Centric on the second half of the year. Now on the 12-month basis, the growth is still significant. I mean, we are targeting 50% growth. But you have to exclude basically July and January because their fiscal year has ended end of January. And those 2 quarters, those 2 months represent 55% of the 2 largest quarter.
On the question related to, I mean, the tariff discussion. We don't see a debate -- I mean, not even a discussion, it's a debate. We don't see any specific customer decision being influenced with that for the business we do with them. If you think about the future of transportation on mobility, all companies are investing massively on many new technology and set of services whether it's about autonomy, smart vehicle, electrification. I don't think those investment will be influenced by the big discussions going on. The volume of the car on the portfolio might change, but they need to develop next-generation of solutions, all of them. Why? Because there are so many newcomers in this extremely capital-intensive industries, even in Aerospace. In the Aerospace sector, we have a different situation. If the current players cannot keep up delivering, they have huge backlogs. They need to modernize their production efficiency and supply chain efficiency. In fact, most of the sector today is at risk with supplier not being able to provide what they need to provide to deliver the planes, which are in the backlog. It's a good problem to have as long as you can solve it. But we want to help them solve those problems. So those are the reality for those sectors, which are very gigantic sector. And then you have the new players who are coming with new categories of solutions. And those are adopting our platform, many of them on the cloud directly. They don't use the old techniques. So those are just elements of proof points that despite the big debates on tariff and other questions, the industry at large in all sectors we serve is going through a significant recalibration about what they do, how they do, how they produce and how they sell. And those players who are not going to transform digitally their companies will not be competitive. So I think that's the highest driver for us on the midterm, long-term and even short-term activities. So no direct effect.
We'll take one very last question, Charlie?
The last question comes from Charles Brennan from Crédit Suisse.
Just 2 very quick questions, if I can. The first, just a quick clarification. Pascal, you gave us a breakdown of Centric and No Magic between license and recurring. I was wondering if you could reiterate that as I missed your comments on the call. And secondly, a broader question. You've had some great success signing up some major customers, whether it's Boeing or ADF or Exxon. It feels like they've got the potential to drive faster growth than you're currently reported thing. I appreciate those bigger deals take time to ramp up and recognize. Are there any metrics you can give us around an uninvoiced backlog that might give us some comfort on the outlook for the next couple of years?
So coming back to your question, Charlie. For No Magic, I gave to you EUR 6 million revenue for the second half of the year, and 20% of them are services. The rest is coming from the software. And the split between the recurrent part and the license is almost 50-50. For Centric Software, the EUR 27 million, 40% are from the services activity. So 60% from the license. And then after the 1/3 is the recurrent part and 2/3 are coming from the new license. I think with this, you have all the details.
Charlie, you're right. With major deals on -- those large scale potential. And you're also right on the fact that we mentioned it each time when we announced those big decisions, first of all, it's a preemptive -- it's great news. At the same time, it will be taking time to deploy for those clients. I think it's, at this point in time, for the 3DEXPERIENCE platform is too early to try to build reliable model. I think in the next 18 months, we will have more visibilities based on track record. But today, it's too early even for us to build. We have an incredible visibility, but the speed at which the deployment are operating, we need still to build a track record for that. So I think the next 12 to 16 months, we'll provide higher visibility. It's not the fact that we don't want to share something with you. It's the fact that I don't think today, it's reliable enough. But overall, up to now, we are delivering what we said, I think that's the most important point. But we are never -- we are always at risk of having good news, but I prefer that risk. Not the risk of a bad news, of course.Thank you very much, and thank you for participating this morning. Thank you for your great questions, which shows that you are really having a lot of insight about what we do, and we are very excited about the future. This is industry renaissance. This is not just a little bit of digitalization of what was the 20th century. We are building up the 21st century industry around the world, and it's more exciting than ever. I hope to be able to work as long as Mr. de Tersant, is my benchmark 93, so I have some time ahead. Thank you very much, and enjoy your day.
Thank you.