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Edited Transcript of DSY.PA earnings conference call or presentation 24-Oct-19 7:30am GMT

Q3 2019 Dassault Systemes SE Earnings Presentation

Vélizy Villacoublay cedex Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Dassault Systemes SE earnings conference call or presentation Thursday, October 24, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernard S. Charlès

Dassault Systèmes SE - Vice Chairman & CEO

* François-José Bordonado

Dassault Systèmes SE - Vice-President of IR

* Pascal Daloz

Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer

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Conference Call Participants

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* Adam Dennis Wood

Morgan Stanley, Research Division - European Technology Equity Analyst

* Alexander William Tout

Deutsche Bank AG, Research Division - Research Analyst

* Charles Brennan

Crédit Suisse AG, Research Division - Research Analyst

* James Arthur Goodman

Barclays Bank PLC, Research Division - Research Analyst

* John Peter King

BofA Merrill Lynch, Research Division - Research Analyst

* Julian Alexander Serafini

Jefferies LLC, Research Division - Equity Analyst

* Michael Briest

UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research

* Mohammed Essaji Moawalla

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Nicolas David

ODDO BHF Corporate & Markets, Research Division - Analyst

* Stacy Elizabeth Pollard

JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research

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Presentation

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [1]

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investor relations. From the company, we have Bernard Charlès, our Vice Chairman, Chief Executive Officer; and Pascal Daloz, Chief Financial and Chief Strategy Officer.

I would like to welcome you to Dassault Systèmes' third quarter 2019 earnings presentation meeting, which is also being webcasted. At the end of the presentation, we will take questions from the audience and from participants on the webcasted called. Later today, we will also hold a conference call.

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 1, 2019. 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. For an understanding of the differences between the IFRS and non-IFRS, please see the reconciliation tables included in our press release.

Some of the comments we'll make during today's presentation will contain forward-looking statements, which could differ materially from actual results. Please refer to our risk factors in our 2018 Document référence.

Let me know introduce Bernard Charlès.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [2]

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Thank you, François-José. Good morning to everyone.

There are sometimes good nights and things coming together. I mean, last night, we finally got the CFIUS approval for Medidata. So we are pleased with that. So it fits very well in terms of timing to prepare the next year planning. So that's good news. We will be able to reveal much more at the next analyst meeting, of course, but let's talk about Q3 here. What you will notice is a good progression of the revenue. The news flow this quarter is very important and should not be looked at from a quarter relevancy but from a midterm, long-term decision process. And I will come back to that with some of the major decision from customers.

Revenue is up 12%. Organic gross revenue is up 9%. And the software revenue for the 3DEXPERIENCE is up 22 -- 32%, sorry. As well as double-digit growth in Aerospace; Marine & Offshore; and Home & Lifestyle, connecting that to Centric PLM.

And so we are on track, I think, for the 2014-2019 5-year plan to deliver EUR 3.5 of EPS, doubling the EPS, as we said. So the planning was good. The Medidata acquisition will be closed in the next coming days. Thank you, Rouven and team, to be here, representatives of Medidata. We'll have time to celebrate in a few weeks from now. And we are adding, as Pascal will provide you more details, we are adding 2 months activity of Medidata for the full year plan of Dassault Systèmes.

So from a purpose standpoint, I think we are right at the middle of what it means: "Harmonizing product, nature and life" means that we need to do more in Life Sciences. From the impact on our platform application for industry development, I think there is a very strong dynamic from both very large-scale companies as well as very small companies. And I will try to illustrate some of this going on, thanks to the cloud and also the financial model, the business model, with recurring revenue and subscription. And then, when you think about the kind of product and service we deliver now, I think it's good to keep in mind that, moving forward with the portfolio, we are becoming customer centric, of course, for manufacturing companies developing customer experience to their own customers; citizen centric, with platform for cities; and passion centric, for the health environment.

So those are the highlights for what could be relevant in terms of announcement for this quarter. You are familiar with our purpose. I will not go through all the details now, but I think there is a formidable reason to believe that the bioscience and life science is becoming the next core sector for Dassault Systèmes with Medidata and the BIOVIA dynamic, by the way, that I will also mention.

Transportation & Mobility. There was - based on the news flow of volume production going down, on being slow in the Transportation & Mobility sector - there are some concerns about that sector for itself. Please remember that most of the players in the world have announced a massive reorganization of their portfolio, whether it's about electrification. I'm thinking about Audi, a few weeks ago, that said that by 2025 - which is, for product development, today when you think about 2025 delivered - they want to have half of their portfolio being electrified, whether hybrid or -- and also connected. So the dynamic in terms of product portfolio, number of programs under development, is very strong, whether you look at connectivity, electrical certification and technology; whether you look at the stratification and compliance program; or you look at, of course, the battery technology per se; as well as the new architecture for vehicles because the vehicles with electrification do not have the same architecture as vehicle with traditional engines; and the flexibility of on-demand systems. Plants in manufacturing, auto sectors are going to see significant, new type of digitalization because you don't produce those car in the same way. I was pleased to see that this is now in the green, which is I've worked a lot with them for many years, past years. So those are the key trends you see here then.

That news from Toyota is, I think, a significant news because it's the platformization of their entire product development production and service. So we are not communicating about a purchase order here. We are communicating about a significant decision for the sector. And as we have communicated, Toyota has made a decision to use our platform for the entire life cycle, using platform-based processes, as opposed to PDM-based product development, in order to transform the way their company is working. This was a long-expected decision. We have worked a lot with them in the last 2 years. I think it will have a significant influence for the Japanese industry and a major influence for the entire auto sector.

On the other extreme, as you may remember if you really track, look at the log of all the wins we have with the new startups in the e-mobility, we have almost won all of them. And they are doing real things on the cloud with our solutions. Spark is a good example, Spark Racing, where they are really redesigning and creating new type of vehicle. And this is for Formula E racing, but they are also demonstrating how the electrical technology will evolve for regular cars. And there is a quite interesting video, I think, just here that I want you to watch.

(presentation)

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [3]

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Affordability, speed and capacity to change full architecture and integration between electronic software and new material science for this kind of technology or this kind of startups: I think this will have a big impact for big players, and we see it with many of them already. So the platform phenomenon is a real phenomenon.

In Aerospace, the same phenomenon is happening: production rate, of course, and the capacity to expand on that aspect; the management of complexity; and a new type of innovation; as well as service to airlines. And I think that Boeing demonstrated the adoption of the 3DEXPERIENCE platform. It's going on. Airbus made the same decision. And I think in the Defense sector the decision by Lockheed Martin to really transform for the next generation of secret programs is, for us, a very significant event. Those are extreme technology companies doing extreme vehicles. And many of them are really so special, but the platform adoption is really not, again, an instant revenue generation but a major decision for the future of this sector.

SATS, another example with 3DEXPERIENCE on the cloud. They are really using the full digital virtual twin experience for kitchen on really food systems. And we are doing forecasting of ingredients. And it's quite big companies, and they are providing services to the airports and big infrastructure. So the value here is how can you use a platform to create a full digital twin experience of your operation and optimize them through the platform consistency. It's a great showcase. I think this customer is really making the difference.

Consumer Packaged Goods. This time, we look at this. I know that I have been observing the performance in the sector. We, of course, always look at our customers' performance to look at where are things and the trends and what they need. So in that sector of CPG or fast-moving consumer goods, a lot of transformation is happening, especially with the sensitivity of green consumer behavior, which are impacting massively packaging and recycling. And the trends are quite obvious because they have an impact on not only the product packaging, labeling definition or material usage but also an impact on the production systems. So how do you make those happen with new materials? And here L'Occitane is a good example of that. They are facing many challenges, transformation of the production system, the new customer behavior I've talked to you about, margin pressure that's true for almost all sectors. Regulation and compliances is increasing from that standpoint, as well as of course new ways to deliver. And L'Occitane is a good example of that here, and you see what we are doing for their production system.

And Home & Lifestyle. You remember the acquisition of Centric PLM. We don't own 100% of it yet. This should happen in the next 18 months, 2 years. The dynamic is remarkable in terms of new brand acquisition. We are quite impressed with that. And the relationship is excellent with the team, and they are really leading on their market. I think it speaks for itself when you look at the number of logos. And the footprint they are taking here are the incredible dynamic in terms of branding adoption. The portfolio of Centric PLM is expanding from organization of their product collection, timing, sourcing but also on the capacity for collaborative negotiation process happening between the commercial aspect of it and the collection development. More to be discussed when we will do the full year review. So in that sector, where are the impact from a business value standpoint? It's really to increase the performance, reduce inventory and reduce the cost of logistics.

Now if I go on and move on another sector, where we said that we will redefine the standard, is the construction sector. I believe that we are making significant wins in that sector, what we call territory, infrastructure and construction, because this sector is far behind in terms of digitalization. And it's about project management. It's about the right way to do modeling simulation of construction before you actually do it. A big showcase here -- and construction, I think, in my mind, so much is happening in China. We are focusing in China. We are focusing in India. And we are focusing in projects around the world but in some way less in developed countries and much more in developing countries.

This is CRDC. They are doing the entire infrastructure with the 3DEXPERIENCE platform. Watch this video that illustrates well what they do.

(presentation)

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [4]

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A short summary of what was never done before. This is in the construction sector, huge CapEx, huge OpEx for predictive maintenance of the installation later on in the life cycle. And we are redefining the beam standard in China for China. And I believe that new beam standard, which is 3D centric, will have an effect on the rest of the world.

Another example here, is a lot of architects now are seeing the value of cloud-based. Before, they were using very simple local software. You know the names and the brand names. And the fact that they can have platform-based, mobile, is a big difference for them. Here is another showcase of an architect using the 3DEXPERIENCE platform.

(presentation)

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [5]

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So we are expanding, in short, this, the leadership in this market from 2 extremes: architects redefining the way they work with their supply; and extremely large complex program, like infrastructure on section of cities, and more to come in this area, or railways. So those are 2 extremes coming together. In the middle, today, there is a very conservative industry, and we believe that the platform phenomena will change the game here too.

So it's a quite good, fun time to see all these happening. And the potential is significant from that standpoint.

On Life Sciences, briefly. The different challenges are well formulated today about whether it's personalized health; capitalization of knowledge and know-how for not only education but improved practices; total quality; and the safety; and of course, the development, especially in biologics; and the connection between R, D - research, development - and manufacturing. Biologics, the complexity of the large molecules is to produce them in a reliable way. And of course, closing the loop with the upcoming connection with Medidata for clinical trials. So you can imagine that a platform is more than digital continuity. It's about connecting all those dots to do a comprehensive assessment and targeting and delivering solutions which are relevant to the disease that they are targeting to solve.

This is an illustration here with a company called IRBM on where they are basically doing research using the BIOVIA solution with the 3DEXPERIENCE platform with a solution that we call ONE Lab. And the ONE Lab platform is used there to increase speed and efficiency, to improve compliance on quality and the proof points that they can follow the right processes. Of course, task execution, standardization, training and tracking of what people are doing in those processes. And we are reducing massively the customized software they have been using in the past. It's a good trend and it's something that will not stop in that sector. It's at the beginning of a new phase. It's more than document-based. It's platform simulation-based process tracking.

GC Pharma, same approach here from research to manufacturing; with the same objectives: speed, quality, time to market and compliancy and putting the collaborative process at the heart of what they do. And this is again the ONE Lab, Designed to Cure solution. As you notice, we are now naming the solutions for what they do and not for the functionality they have, so the value versus the capabilities.

Medidata acquisition. Pascal will give you more information. And whether or not we would -- have got the CFIUS last night, we knew it was coming. It was a clerical process that was a little bit longer. So, funny to see someone in vacation so you cannot get the signing, so it can happen in America. But this acquisition now is going to be closed in a few days. And Pascal will tell you more, but the positioning of what we are doing together is very clear. And I think it's represented here in a very, hopefully, useful and comprehensive way for you.

In the health care and pharma sector, it's about 20 to 30 year behind other sectors of the industry from digitalization. Most of what is done up to now is digital documents. It's not digital production, digital research or digital development. It's digital document everywhere, at best. We want to change that, as we did when we did the digital airplane, digital car, digital train. And all this which is to create a platform where, from research, discovery, to preclinical development, clinical testing, validation and manufacturing process, compliancy and safety, up to the commercialization, we not only have a digital continuity of documents but we have real digital experience that are the proof points that what is being invented, developed and produced is targeting the right results from a health care and practices and results.

So the blue things are what we have been focusing in the last 14 years with biointelligence then the Accelrys acquisition and the creation of BIOVIA. In those transformations, it does not go fast. It's a slow process, especially when you touch research and development, but we are there and there is no other competitor. By the way, to have also competitors, you need science-based platforms that understand organic and nonorganic modeling and simulation. There is no other platform on the market for that. That's the blue part. The beautiful aspect of what Medidata has been doing as a world leader in clinical trial is connecting the pieces that were not there, which is the [confrontation] between virtual and real which is happening at the time of clinical trials. So there is no overlap, 0 overlap. It's high complementarity, and I believe that this is going to be something which is going to be perceived. And we already know that customers are welcoming this. We have positive feedback from their side, from our side; and that's a quite interesting thing.

So the brand is very well positioned. It says what it is, Medidata. It's intensive data for medical sector and biologics. So in our famous compass orientation, to not lose the orientation: When you look at us, it's on the east side which is the power of information intelligence, which is the case for clinical trial. It's clear on our industry core and focus from the framework we did. And it's also very key from the way we reach on the market, looking at the number of companies in medical device, med tech and as well as, of course, the companies in the pharma sector. So this is, I think, a move that -- first of all, we love it. I think we mutually love it. We think there is something to be done here. And we think that the current landscape has been underserved, and doing it together, we can do something different.

With that, I think I'll give the floor to Pascal to give you more illustration about the aspect of financial results.

Pascal, you have the floor -- and more of the strategy too.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [6]

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Thank you, Bernard. Good morning to all of you.

So let's start with the business review first for Q3.

So I will qualify Q3 as a solid quarter because, if you look at the number, 10% growth for the total revenue, an improvement of the operating margin by 140 basis point and 20% growth for the EPS, and delivering the -- in fact, the higher range of the target for the EPS and probably EUR 0.02 to EUR 0.03 more than the consensus. Why it's a solid quarter: because the growth drivers are in place, 9% growth for the software. And it's mainly driven by the 3DEXPERIENCE platform. And I put the number for Q3 and the year-to-date. So you see 19% growth for the Q3 and 32% growth since the beginning of the year. And a total software for 3DEXPERIENCE platform. And if we zoom on license, 21% growth for this quarter and 40% growth since the beginning of the year. And now the 3DEXPERIENCE platform is representing 70 -- 27%, sorry, of the total software revenue and 43% of total license revenue. So clearly the 3DEXPERIENCE platform being the cornerstone of the strategy, these indicators, these KPIs, in fact, is well in place. And the momentum is very good.

The second message on the software growth, you notice it. The recurring revenues accelerated; if you compare to last year, is more than 3 points. And the organic growth for the recurrent revenue is exceeding 10% this quarter. So there is maybe some business model changing. We'll see if the trends continue because, if you look at the -- since the beginning of year, the growth of the recurring revenue is to a certain extent a little bit more steady than the license. And this growth, and I will give you more detail afterwards, it's not only the result of the good support and maintenance activities, but it's also because the subscription is accelerating as well. In Q3, the subscription is close to 20% year-over-year.

The last point is, yes, we are seeing some volatility on the license, and you see it. It's 2% growth for this quarter, 9% for the full year. So it's still good for the full year, but for this quarter we have seen some volatility, and this volatility is coming from deal slippage. In fact, the last 3 weeks of the quarter, we have seen a number of deal shifting from Q3 to Q4. Surprisingly and to a certain extent, I was surprised because it's not in the auto sector. I remember telling you that we were cautious with the auto sectors and especially the supply chain, but this volatility was coming from Aerospace, Life Sciences and shipbuilding, where you see with Bernard's presentations this is where the business is going very well.

So if we zoom on the regions, what can we see? So Americas is growing 19%, 17% since the beginning of the year. And in Americas all the drivers are really delivering in fact. They are signing the large deal. We have seen Lockheed Martin for this quarter. The recurring revenue is accelerating, mainly driven by the simulations. And we have some contribution of the recent acquisition we did, IQMS last year and Centric as well, but nevertheless, from an organic standpoint the growth for this quarter is 14% for Americas.

Europe, growing at 5%, 9% since the beginning of the year. And Europe, to a certain extent you can slice in 2 pieces. You have a good performance in France, the Nordics, including U.K. and the South part of Europe, where the growth is exceeding 10%. In fact, to be more precise, it's 14% for the South part, 11% for the North part and 9% for France. And then to a certain extent the counter-performance is coming from Germany. So it's not new. We already have seen it in Q2, but it's still the case in Q3.

Asia, 4% growth for this quarter, 7% growth for the full year; and almost the same story. China continued to deliver, as well as Japan, with 10% growth for this quarter. Since the beginning of the year, for China we are exceeding 15% growth. But this growth is partially offset by some weak results in Korea and India being largely impacted by the supply chain in the auto sectors.

If we move to the product line. CATIA is growing at 5% this quarter compared to 8% since the beginning of the year and, you'll remember, 9% for the first half. And this quarter, CATIA has been impacted by this volatility in the auto supply chain sectors. That's the reason why you have seen this growth, but keep in mind that the growth for CATIA is still steady in the larger OEMs because, as Bernard pointed it, we still need to electrify their cars and you cannot do this with CATIA V5. You need CATIA V6 to make it happen. And we see a good performance in what we call CATIA cyber, all the set of applications dedicated to design the embedded systems and also the system of systems, including No Magic, an acquisition we did recently.

And ENOVIA growing at 3%, 10% since the beginning of the year. You remember the ENOVIA performance is intrinsically linked to the size of the transactions. So Q3 is probably qualified by the fact that we do not have too much transactions. We have a bunch of mid-sized transactions. And this is the reason why you have this 3%, but overall the trend is still good for ENOVIA. And we continue to win market share.

SOLIDWORKS, 5% since the beginning of the year, 7%. So I think it's a good sign. You remember we had this discussion for the first semester, SOLIDWORKS growing at 4%. And I told you that I was still confident that, on the second half of the year, we could reach the second 8%. So this is a proof. The growth is coming mainly from Asia and where we see a double-digit growth for SOLIDWORKS, but we have seen some improvement in Europe and America, where we start to be back on growth.

The other line, we call it other software, growing very nicely at 17% for this quarter, 19% since the beginning of the year. And you have a double-digit growth for SIMULIA as well as DELMIA, so clearly the momentum with simulations and the momentum in the manufacturing at large is still very good. And simulations contribute a lot to the improvement of the ways the subscriptions turn.

If I zoom on SOLIDWORKS because it was one of the question you had last quarter. I just want to remind you that for SOLIDWORKS the potential for the growth is still there. With SOLIDWORKS we are targeting 1.5 million company, okay? Today, the market share is 22%. So we are reaching 1 million commercial license with SOLIDWORKS, but you still have 40% of the market still using 2D. Every year, you have between 3% to 4% of this market migrating from 2D to 3D, and on this we have roughly a 50% market share, and in average, a company moving from 2D to 3D, they have 4 seats. So every year, we have 40,000 new license coming from the migration from the 2D to 3D. On the other part, you have 60% of these 1.5 million companies using the 3D systems, and we are gaining market share. In fact, with SOLIDWORKS we are gaining market share. Again, on the competitors, we are gaining roughly 1 point every year. So 20,000 new license are coming from there. And the remaining, which is roughly 20,000 license, it's coming from the large installed base we have, extending their usage. So my point to you is the potential for growth is still there, and you have the details.

There is a second lever for SOLIDWORKS. In '19, we will reach 1 million commercial licenses in production. I'm excluding the education side and the academics, where you could probably have 2 million additional. For those guys, there is a lot of value to connect them with 3DEXPERIENCE platform, and this is the plan for next year because this will automatically bring an additional value to them. Today, if you look at those guys, they are using sometime Dropbox, some community things, some chat systems. All those basics capabilities are inside the platform, available and CADware, meaning that's it's embedded into the systems. Plus, as soon as you deploy the platform, we have the leverage to sell to them the additional new category of products we have developed for these markets. You'll remember DELMIAWORKS, the IQMS acquisitions we did a few months ago to expand the scope in the manufacturing side. The simulation is becoming critical also for this mid-size company. And the fact that we have the computing powers available on the cloud, the fact that we could have the marketplace to get access to specialists to help them to do the simulations is opening these sectors. And for sure, the product life cycle capabilities provided by ENOVIA.

So we have 2 legs to continue to sustain the growth for SOLIDWORKS. So this is, I think, still valid growth drivers for the future for Dassault Systèmes.

The manufacturing. I just want to highlight this win because, if you remember, I heard some rumor related to Ericsson's, but here you have the proof. Those guys, they continue to expand with us. And why so? Because 5G is a big opportunity for Ericsson's, as you know, but there is a window for them to take this market. And the type of equipment they are developing are highly configurable because it's a mix between software, hardware and services. And it's not a volume production. I mean it's a mid-size series they have to produce, so the ability to reconfigure their production systems accordingly is super critical. And this is the reason why they have decided to deploy all their manufacturing solutions with us.

If we zoom to the financial highlights for this quarter, to go quickly.

So you have seen total growth in terms of total revenue, 10%, 12% since the beginning of the year. From an organic standpoint, the organic growth, for this quarter it's 8%, 9% since the beginning of the year. And if we zoom on the software, the growth 9% for the Q3 and 11% since the beginning of the year. And it's 7% organic for the total software for Q3 and 9% since the beginning -- 8%, sorry, since the beginning of the year.

If we split the revenue, the software revenue, into 2 different pieces. The license is growing at 2% for this quarter. From an organic standpoint, it's minus 1%, and it's related to the volatility I just explained to you. To give you an order of magnitude: We had almost 10 deals representing EUR 20 million switching from Q3 to Q4. And we had also an additional 10 deals representing almost EUR 10 million we were expecting to close. So this gives you an order of magnitude of the volatility. I'm still expecting to close them in Q4. And by the way, we've put some incentives to be able to close them before end of November.

But the key point is related to the subscriptions. You see 10% organic growth for the total recurring software, 9% since the beginning of the year and 17% for the subscription. So clearly you have the details about the fact that the subscriptions, the recurrent parts, is really growing nicely for us. And maybe the business model is changing. So we have -- probably it's too early to say it - we have to see a little bit how it will continue to evolve in the next quarters, but for sure, Medidata will add a significant subscription contributions to the model. And we will exceed 80% of the recurrent revenue in the coming years.

On the EPS side, 20% growth and -- sorry. The services. I was willing to jump directly to the EPS.

So the services activity is really steady, 21% growth for this quarter. And you remember last year, when we were suffering in services because we had to do the setup to be able to deploy all the large transaction we signed in the last 18 months. Now the team is in place. The structure is in place, and you see the benefits because the growth since the beginning of the year is 23%. And you also see the improvement on the gross margin because we are gaining -- we are almost doubling the gross margin on the services side compared to last year.

The operating margin, 140 basis points improvements. 200 is coming from the organic side. So -- and it's the result of the mix. The more you have recurrent revenue, the more leverage you have on the operating margin. 100% -- 100 basis point coming from the dilution of the acquisitions, specifically Centric and IQMS. And you have a contribution, a positive contribution, of 40 basis points from the currency for this quarter, which lead to the EPS growth, 20% for the quarter, 19% since the beginning of the year. And it's a direct consequence of the top line growth and the improvement on the operating side.

For the cash flow. And as you know, now the cash flow is becoming critical given the fact that we have the debt. So we are exceeding the EUR 1 billion for the 9 months. And the growth is 33 -- 34% since the beginning of the year, so clearly we are doing in 9 months what we did in a year last year. And the cash flow growth is really driven by the net income and our ability to manage working capital. So you have the details and you will see it's relatively explicit.

Coming to the financial costs. I am sharing this with you because this will help you to modelize Q4 and also year 2020. So you have the detail for the bonds and especially the borrowing rate and the maturity. So you could expect to have EUR 9 million costs for year 2019, for Q4; and EUR 41 million for 2020. So we think, I think you have the details and you will be able to do the modelization properly.

If we move to the guidance.

So here is the key messages. So before adding Medidata, we confirm our growth objective to 10% to 11% growth for the full year. We are updating the revenue and the EPS, taking into account the exchange rates, and you have the details. And after, we are adding Medidata. And just because we received the CFIUS confirmation last night, I took as an assumptions that we will be able to close before October 31 or at least, at the latest, at the end of the month, meaning we'll have 2 months contributions of Medidata for Q4. And here you have the details.

So if you take the previous guidance, you have the Q3 and the Q4 currency effects. It's EUR 42 million additional revenue. And you have the guidance. To take into account the volatility, I have slightly enlarged the range. So you'll remember we used to communicate with a EUR 30 million range. Here I put EUR 40 million. I do not have the feeling that I'm cheating. Why so? Because you remember, when we were EUR 1 billion revenue, we were already having a range of EUR 30 million. Now at EUR 1 billion this is what we do in -- within a quarter, so I think it's appropriate to start to enlarge a little bit the range. And then you have the contribution of Medidata for 2 months. It's 103 million in euro, not in USD. And we are leading to this new guidance which is EUR 4.015 billion to EUR 4.055 billion for year 2019's.

On the EPS side, the same exercise. The currency effect is adding EUR 0.05, so now the guidance is EUR 3.50 to EUR 3.55 without Medidata, meaning that we are delivering the 5 years plan without Medidata. And this is the lower range. The EUR 3.50 is now becoming the lower range of the guidance. And Medidata will have the EUR 0.02 for Q4 and for the full year, so now the new guidance is between 3.53 to -- sorry, yes, EUR 3.53 (sic) [EUR 3.52] to EUR 3.57.

So with this, you have the details. So I already commented the revenue side for the full year. In term of EBIT margin, we are expecting to reach 32%, so pretty stable compared to last year. And you have the detail about the organic improvement. The tax rate will be relatively consistent since the beginning of the year. And you have the EPS growing at 13% to 14%.

For Q4, the range will be on the revenue side between EUR 1.172 billion to EUR 1.212 billion. And you have the details between the software, license and the recurring parts. Obviously, in the recurring you have the contribution of Medidata. So this is the reason why we are almost doubling the performance of the recurring. The license, I took into account this volatility, and this is a reason why you have on the lower range the fact that we could expect to be flat compared to last year, but I remind you that last year was -- the Q4 was an outstanding quarter from a license standpoint because we signed a lot of big deals. And I'm still expecting, anyway, given the pipeline we have, given also the deals shifting from Q3 to Q4 and -- the ability to overperform compared to last year by 5% on the new license, which means a software growth of between 15% to 19%.

EBIT margin, 32 to -- 33%, sorry, to 33.5%. The dilutions coming from Medidata is around 2 points, which means an EPS of EUR 1.05 to EUR 1.10.

With this, I think you have a pretty good view about the quarter, the details, the business momentum, the guidance. And I invite you to attend the life science day at November 13 to have all the details about our strategy in the Life Sciences and what's next between the combination of Medidata and Dassault Systèmes.

Thank you.

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [7]

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We are ready to take questions. Let's start with the room.

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Questions and Answers

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [1]

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It's Adam Wood from Morgan Stanley. Could I ask a couple, please? Maybe just first of all, you brought up the topic of SOLIDWORKS, so maybe if we could dig a little bit into that. And I wanted to discuss, first of all, on the technology side, when you're delivering SOLIDWORKS as a cloud solution to customers, is that a native cloud solution of SOLIDWORKS that you're delivering? On the kernel shift, is that now complete? And how does the data compatibility work from the older versions of SOLIDWORKS to ones that are going to be on the newer kernel? And kind of where are you with the platform shift they're enabling? You talked about next year when we actually have that platform availability and the cross-sell of other products. And then maybe linked to that, PTC is obviously making one of a big move overnight buying Onshape. They're discussing the disruption they can bring in that sector. Could you maybe just describe a little bit how you see that being different to your own purchase of SOLIDWORKS many years ago that went on to disrupt that market significantly and why it's going to be more or less difficult for them to do the same thing? And then just secondly, on the fourth quarter guidance, it's a pretty big slowdown organically from what we've seen year-to-date. Could you maybe just give us a little feel, is that natural conservatism? Or is that seeing a really big shift in the environment and the macro? And I suppose really it's less important for Q4 but more important when we look to 2020 because this is the first tough quarter from a comp basis that you're facing. Obviously you've got tough comps for most of 2020. Should that be a concern for us?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [2]

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Thank you, Adam. The -- yes, on the first question, related to the portfolio of and evolution of SOLIDWORKS, simply said, we offer 3 things. First of all, the SOLIDWORKS desktop installed base is gigantic. It's almost a world standard for mechanical desktop. So what do we offer to them? Solution number one, you can use the platform on the cloud to power what you have. So you -- what we call collaborative innovation on the cloud. You connect the desktop to the cloud and you can do collaborative process, solution number one. Solution number two is what exists for CATIA with 3DEXPERIENCE, native common kernel, as you mentioned. As you follow us carefully, there is an evolution. On longer term, we -- midterm, we will support both Parasolid and the CATIA kernel for SOLIDWORKS usage. So solution number two is a tighter connection with the cloud platform so you can do simulation online. You can do manufacturing online and supplement what SOLIDWORKS does. That exists too. Solution number two -- three, which exists and is in its market in production is browser-based, native-designed tools à la SOLIDWORKS experience on the platform. We call it 3D Creator. It was called xDesign in the beta testing in the last 12 months. So this is exactly head to head with Onshape. To make it simple: I think for Onshape it's too late. We have far more licenses even on a browser today than what they can refer to. And we will see. I mean I love race. I love Formula One. I love race and I love sport. This is going to be a sporty win, but I think, simply said, it's too late. We are already there. And the compatibility that we offer between those 3 things, desktop, the power of the 3DEXPERIENCE with all the solutions we have for enterprises, the position we have with million of users already in education, FabLabs -- I remind you that for the MIT Fab Foundation the software standard is Dassault Systèmes 3DEXPERIENCE and SOLIDWORKS, nothing else. And this is going to be 5,000 touch points across the world of FabLabs with the MIT program. So this will be a good trial, but I'm very confident that it should have been done before. Too late.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [3]

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And coming back to your second questions, Adam. No. I think I took some cautiousness. And I say it explicitly because, remember, I met with you guys almost a month ago and I was pretty confident on the pipeline for Q3, but we see this volatility. And I want to take into account this volatility, and this is a reason why maybe you can perceive the Q4 numbers being a little bit shy. But I think it's much better to deliver than to miss. The second point is, at the end, the commitment we took in front of you was to deliver the EUR 3.50. And we took this commitment 5 years ago, and now I'm telling you that the lower range of my guidance is to deliver EUR 3.50. And I remember, 9 months ago, 8 months ago, some of you were still having doubt about our ability to deliver it, including you, Adam. So I think...

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [4]

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We have said doubts...

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [5]

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We'll work on the doubts too. We listen to you. So I think you have -- the pipe is good for Q4. It's probably the questions behind this. So the pipe is good. We have large transactions in the pipe in almost all the different sectors, including the auto sector. The China contribution is still also outstanding. So if you look at what has been the growth drivers since the beginning of the year's, we all have those growth drivers in the pipeline for Q4.

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Mohammed Essaji Moawalla, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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It's Mohammed Moawalla from Goldman Sachs. Perhaps you want to drill into the recurring dynamics because that is now starting to accelerate. To what extent -- you talked about subscription growth accelerating. And how do you see the resilience and more importantly the growth of this as you move into next year? And is there also a sort of a structural shift away from license purchasing to recurring that you think could be more pronounced as we move next year? And the extent to which you obviously signed up a lot of big customers with big, big contracts, how is that sort of coming through? So as you look into next year, I don't know if there's a bookings metric or something you can give us that this could be kind of underpinning at least your kind of expectations for the next year. And then second question, Bernard, is when you signed Boeing we've obviously then seen these network effects with obviously Lockheed today but Airbus, et cetera. So in the auto sector, obviously, Toyota is quite a sort of significant development. How do you sort of see those sort of network effects? You talk about Japanese autos, but more broadly for you in terms of sort of pushing the platform too.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [7]

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Okay. Thank you, Mo, for these question. I will let Pascal provide insight on the first question. I just want to make one comment. Pascal and I and the team, we -- and you are aware of that. We are working very hard to clarify the way we should present our results going forward, not now but in the beginning of -- when we initiate the next program in early 2020, for 3 reasons which are embedded in your question. First, there is an obvious reason, which is the event of Medidata, and the fact that we have been reporting on CATIA, SOLIDWORKS. Should we present it in a different way with industry view? So that's one factor, all right? The second factor is exactly to your point, the evolution of the nature of the subscription model with Medidata again but with also cloud and even the nature of contract with large clients when they want to do the network effect with supply. And they want to say "why should I not acquire the entire platform for my entire ecosystem," and then it creates a new way to engage with them. So we have made the decision. And it's not a big reveal but that we will adjust that way of presenting the results to provide you with the proper visibility to address those questions which are really implying the view of booking versus evolution of recurring. So -- but we think this is a good news. This is a good news because it shows the way we are transforming the business model of the company, and we are very comfortable doing that. That's the background. So we are just -- it's -- will be easier to discuss that in February than now. I will let Pascal give some comments, and I will come back on the second question.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [8]

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So Mo, it's probably a little bit early to give you guidance for 2020. Let's finish first the year, but nevertheless you'll remember in the recurrent revenue you can slice into different pieces. You have the maintenance and support representing 2/3, and 1/3 is coming from the subscriptions. So the subscription is growing for this quarter at 17%, so clearly you -- high double digit. And the contribution is the simulation, because the vast majority of the simulation is under software license. The cloud, as Bernard said, the network effects of the supply chain -- and also we see more and more large customer using the specialized application with the subscription model. I was mentioning products like No Magic now being part of CATIA. You have a bunch of customers willing to go on subscription for this kind of applications. So those are the reason why the subscription is taking off to a certain extent or accelerating. Next year, you remember, Boeing is accelerating the deployments, so I'm still expecting to have a few percentage coming from there. On the Support & maintenance side, the lever is in the mix. 3DEXPERIENCE platform represent 27% of the total software revenue, but you remember the maintenance rate between 3DEXPERIENCE platform and V5 is an improvement from 18% to 21%. So the more mix we have, the more contribution we have from -- the 3DEXPERIENCE platform, sorry, the more levers we have also to accelerate this growth. I am still seeing the 3DEXPERIENCE platform continue to grow next year due to the large deployments. So the 3 points you have seen this year, I'm pretty confident those 3 points will not disappear.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [9]

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To the second question of the network effect. I think we have a -- I have -- we have discovered an interesting market dynamic. There is a lot of new startups in each of the sectors which we consider as our core sectors. You have a lot of players in e-mobility. You have seen latest announcement for even air electrical mobility. We are extremely successful with cloud on the experience platform. In fact, the experience platform [is identified for] almost all of them. So that's one piece. In the middle of that, you have the Tier 2 -- what we call Tier 2 and Tier 3 suppliers of big OEMs. And they have been adopting a good dynamic for 3DEXPERIENCE. The slowest piece, which you know, are related to the OEM transformation itself. So that's why we -- and that's, by the way, across all large sectors. That's why we insist today on the relevancy of those decisions which are made, because it is not the purchase order. It's the decision effect of those players. They are -- most of them on the whole -- the one we have referred to, they have a big influence on the market. So I believe that newcomers Tier 2, Tier 1; and the connection with OEMs; and the OEMs adopting a platform approach provides long-term -- mid-term and long-term visibility for the snowball effect. And I think that's why with Pascal we need to structure the way we report for the next 5 years before more but in a way that reveal that in a more accurate way which is not done today.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [10]

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John King from Bank of America. Just a couple of questions. Actually, a follow-up on the last point. Just with the Toyota deal, can you go into a little bit more detail as to what's changing there? Is it about them taking a new version? Is there any competitive displacement or new scope? Or is it more a case of, I guess, the higher pricing that you would charge for the 3DEXPERIENCE applications? And then perhaps just one question for Pascal on the cash flow has obviously been very, very impressive this year. Maybe just a couple of thoughts about what we can expect for the full year, because obviously it's running well ahead of net income right now. So how sustainable is that? Or should we expect some weakness in Q4 to compensate?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [11]

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Thank you for the question about Toyota. It's not an update of software. It's not even necessary replacement of existing solution. It's a full transformation of the way the company is working. Many of those big players still have incredible legacy of software. I think, for those of you who are following the banking: Many banks are running infrastructure which are 40 years old, but you have to know that with these big OEMs the legacy for what they were calling the BOM management, the -- those are very old system. In the case of Toyota, without revealing too many secrets, we are replacing 2 gigantic database systems that are managing their data flow across the group and the plants. So it's a new -- in fact we -- in our communication we say "power by" because it's to make sure that we express that it's not even the replacement of V5. It's the expansion of the entire backbone in an area we have never been and, by the way, none of the players have been, none of the players on the market today have been, except the old infrastructure from IBM and Oracle, but really what I call database-oriented system. And we are replacing all those systems. Most of the OEMs today are in that situation. So it's a big footprint expansion. And that footprint expansion is creating the very positive context for the adoption of the industry solutions in a second step. Same thing at Boeing. You'll remember it was called DCAC/MRM, a strange name for something that was a huge legacy data environment for what -- their production systems that we are replacing. So it's expanded footprint. We mentioned 40,000 users, but ultimately it's going to touch almost everyone in the company. So this is where we see the real lever. And of course, it's changed the rules for production systems. And as you know, the manufacturing engineering at Toyota is very powerful. In fact it's the core of Toyota, and they are adopting that approach.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [12]

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Okay. And maybe I will add a few words because I know that you want [me to do so ultimately]. So it's 40,000 people that we're going to have to equip over the next 5 years. So the project is supposed to finish in year 2023 and it's divided by slice equally. So it's per year, and it's EUR 1,000 per seat. So it should be easy for you to compute the number.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [13]

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Coming back to the question on the -- and this is [results counting]. This is a "powered by" only. It is "powered by." You must understand that this is not the replacement of CATIA or the replacement of the application for DELMIA or the replacement for SIMULIA and all those things which will come on top of that. So we are talking about contract that should be similar to the Boeing size ultimately for different companies of that size.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [14]

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For the cash flow for the full year. Again if you look at the contributions, the levers, it's mainly coming from the net income. And the net income, with the guidance I gave to you, you should be able to compute it. So we have some improvements on an organic standpoints. And the DSO. You saw our DSO moving -- it used to peak at exceeding 80 days, and now we are back to 77, if I remember well. And we expect to stabilize this a little bit because this, I will say, improvement of the DSO is coming from the fact that, the recent acquisition, we are putting the disciplines. And they didn't have this ability previously. And also there is something which you have to take into account. Depending the country, you have payment terms which are slightly different, the best being the German, for sure; and the worst, the Chinese. So the more growth you have coming from China and the less growth you have coming from Germany could slightly impact DSO, but yes, you could expect to have a trend which is similar.

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [15]

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We'll take one last question, for the moment, from the room, and then we'll take it from the call.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [16]

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Yes. It's James Goodman from Barclays. So my first question was just around the clear optimism you have on the construction industry actually. And the way in which you describe that is something with a fundamentally different approach to some of the vendors that we follow in that space, so I was just curious whether you think that you have the full product set to address that market in the way in which you want to, whether there's sort of disproportionate multiyear organic investment that needs to go into that or whether there will be acquisitions considered in due course? And the follow-up question just on the quarter is just the inclusion of Medidata. The number was slightly lower than what I anticipated for the quarter, particularly given phasing, so maybe if you could just comment whether there's any conservatism baked into that or anything we should consider in terms of the final quarter from a Medidata perspective.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [17]

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You are right on the fact that construction is going through a significant transition. It's a conservative sector. And the showcase we have now, the touch points we have now are showing that our solutions are rather complete if you transform your process to leverage them. In concrete terms, in the architecture, we presented last time. We presented the Zaha Hadid showcase, the Arup showcase. Now there are other customer here. Those -- they are doing gigantic programs. In the case of Zaha Hadid, it's this new, gigantic airport in China. And it's not only about the shape of the airport. It's the entire flow and construction infrastructure. It has -- it is having an effect on the engineering, on procurement, on construction of those gigantic infrastructure and buildings. Same as CRDC. What you show is not a video just to represent this. All -- every details of this infrastructure are done with our platform. However, the solution can provide this kind of very significant outcome performance in cycle, cost reduction and project management, like what we did with McDermott, by the way, in oil and gas, as long as you transform the business processes. So I think the biggest slowing factor for market adoption is going to be related to the capacity for those players to transform themselves, which we don't plan to do from the past. We don't plan to buy old things, to be very explicit. In some way, 30 years ago, the same exact thing happened in manufacturing. When Boeing decided to do 777 with 3D Master, it was not drawing production. It was 3D Master. Then it went to BMW. It went to all the other actors outside aerospace. I -- we want to replicate that. So yes, there will be extension. There will be investment that we will need to continue to do but in the new way of doing business, not in the old way. So don't be concerned about any move acquiring legacy things in this area. It's more doing things that which have not been done before.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [18]

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On Medidata, yes, we, Rouven and I -- Rouven is the CFO and the COO of Medidata. He's in the room, so maybe you can ask the question directly to him, but we took some cautiousness because, when you are integrating 2 company, usually you are creating some defocus. And we want to be sure that we will not be penalized by that. And now there is one indicator I could share with you because Medidata will not [produce already in the] Q3 numbers. The incremental annual contract value, which is really the key indicator for them, grew at 15% in Q3, which is a good sign of the quality of the business.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [19]

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It will be bad to start on a wrong ambience. We want the ambience to be positive going forward.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [20]

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It's Charlie Brennan here from Crédit Suisse. Can I just ask 2 clarifications around topics that have already been discussed today? Firstly, it sounds like at the margin there's been some switch from traditional license to subscription. Are you able to quantify that for us? And do we need to think about that when we start to do our modeling for 2020? I know you typically want to aspire for 10% license growth, but do we need to think about that structural dynamic when we think about 2020? And then secondly, you're signing up more and more of these large multiyear platform deals. I'm assuming that starts to give you, to Mo's point, an order book and some future license visibility. Are you able to give us a sense of how much of your typical cost of your license is coming from in-quarter deals versus some of these multiyear deals that you have signed in prior quarters?

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [21]

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Okay. So a lot of question in 2. We -- it's not an easy exercise to do what you are asking, but we try to do it. So theoretically speaking, if you do the math, 1 point in YLC equal at least 4 to 5 points...

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Unidentified Company Representative [22]

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Subscription.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [23]

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Subscription, sorry, equals at least 4 to 5 points in new license, if you do the math, okay? But the more important, we try to modelize the acceleration of the YLC -- of the subscription for this year and what is the equivalent of the new license or what would have been the equivalent of the new license. So we did this exercise. It's not pure. It has not been audited, so clearly, take it as a -- as much more a way to understand the phenomenon. So we are convinced that it's an equivalent of 6 points of new license.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [24]

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In Q3, or year-to-date?

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [25]

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Year-to-date. No, no, year-to-date. Because again the difficulty is, the growth from 1 quarter to another one, you should not count twice. So we did the same for the first 9 months. Okay. The second questions you ask, again it's I understand it's difficult for you to do the modeling on this because you have no clue about the renewal dates. You don't know the size. You have no view on the incremental size of the subscriptions, but the multiyears, with the new IFRS constrain, we have put strict rules to the sales force. We do not want them. Because it's maybe good for 1 year, but you pay the full price the year after because you recognize almost 2/3 the year of the signing. So to avoid to be in these situations, we have put a very strict discipline with the salespeople. We say, "Guys, we want to have multiyears, but we want to be in the positions to do it on a yearly basis," not to have to artificially infuse growth within a year and then pays the full price the year after.

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [26]

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Okay. We'll move to the call. Brian, do we have questions on the call, Brian, operator?

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Operator [27]

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Yes, sir. Your first question is from Julian Serafini from Jefferies.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [28]

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Just one question on the deal slippage. I think, Pascal, you had mentioned putting in place incentives to get deals closed by November, a week away. So can you give more details on what incentives are you talking about? Is this more commission for the sales representatives? Is this discounting? Can you explain that a little more, please?

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [29]

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Oh, it's only commission. And it has the rules, and Bernard can confirm, when the customer is not signing in a given quarter, we increase the price. And it's not...

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [30]

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And that's...

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [31]

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It's not related. So it's only commission.

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Operator [32]

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Your next question is from Nicolas David from ODDO BHF.

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Nicolas David, ODDO BHF Corporate & Markets, Research Division - Analyst [33]

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Actually I have 2 regarding profitability. Regarding your Q4 guidance, it implies profitability which is down between 100 and 150 bps excluding Medidata. I understand that you have the subscription migration, which is not helping, but do you have something else also which is weighting on your margin guidance? And my second question is more structural one and also guiding profitability and the subscription ramp-up and the cloud ramp-up actually. I mean, could you share with us -- your profitably or growth margin level (inaudible) deliver on your cloud revenue and EBITDA more or less in line with what you can do in on premises. And -- or should we expect a kind of dilution the]?

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [34]

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Okay. So I will start with the second part of your question. So the profitability is equal, wherever it's on premise or on the cloud. It's easy. And the second -- the first question you asked me related to the profitability for Q4. In fact, you'll remember we were late in the hiring since the beginning of the year. And in fact, after starting September and especially in Q3, we hire a lot of people, especially in research and development. The reason is because during the summer you have all the internships. And it's a good way for us to test new candidates and to select them. And usually, we are hiring them in within -- between September and October, so in Q4 you have the full effect of this. And this is the reason.

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Nicolas David, ODDO BHF Corporate & Markets, Research Division - Analyst [35]

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Okay, yes. And if I can just follow up on the subscription and cloud margin. Do you plan like a lot of Tech companies to maybe capitalize on costs in order to smooth a bit the potential impacts of your -- of the delay of revenue on your profitability, like sales commission costs and so on?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [36]

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So we are not doing it. Clearly, I already answered to this question. And by the way, it's one of the discussion we had with Medidata because we would expense all the R&D costs day 1. And for the sales commissions, as far as we are concerned, Dassault Systèmes, we are not doing it. Medidata, they are doing it. And we have to take into account the way we want to treat it for then -- for 2020.

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Operator [37]

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And your next question, from Alex Tout from Deutsche Bank.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [38]

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Yes. Could you just, I don't know if it's -- if you mentioned this, quantify the impact on licenses from Lockheed and Toyota in the quarter and kind of the cadence that you expect around license or whether that -- those are majority subscription deals looking forward? And then secondly, I see that the inorganic contribution this quarter to licenses was quite a lot less than last quarter, 3% this quarter versus 5% last quarter, but I recall you saying that July is a very large month for Centric normally. And you have the impacts from IQMS, so is there something that I'm missing there? Why has that contribution inorganic fallen so much in the third quarter?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [39]

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Okay, so I will answer to the second questions. Remember the date when we acquired Centric. It's almost a year, so next quarter, it will become organic, okay? So this is what we did. We did a pro rata temporis for the quarter. And this is the reason why the contributions of the external growth seems a little bit below. That's the reason. Now coming back to Toyota. I think I already answered to the questions...

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [40]

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The question was for Lockheed and...

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [41]

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[And for the Lockheed] questions. And Lockheed: Lockheed, it's a large deal. It's close to EUR 10 million license. So it's a license deal. It's not just subscription deals, as well as for Toyota. And you could expect to have the subscription part of these deals over the next few years. And again, the fact that Lockheed has decided to deploy the 3DEXPERIENCE platform means, and obviously, we have other opportunity with them. This is a very beginning of -- it's only on one secret program. So it's they have a lot of programs.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [42]

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Great. So just to be clear: The license portion of those deals did fall in Q3 and it was around about EUR 20 million.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [43]

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No, no, no.

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [44]

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No, not at all.

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [45]

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Not at all.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [46]

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Okay. So when did it fall?

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Unidentified Company Representative [47]

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(inaudible).

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [48]

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Yes. I already answered to the question. So it's EUR 10 million in Q3.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [49]

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Right. From -- just from Lockheed, or from Lockheed and Toyota?

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [50]

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No, for Lockheed. Toyota, you have no revenue in Q3.

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [51]

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We will take one last question from the call. And after that, we'll

(technical difficulty)

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Operator [52]

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Your next question comes from the line of Stacy Pollard from JPMorgan.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [53]

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I've dropped out of the call a few times by accident, so I hope this hasn't already been asked or answered, but just a quick one. What is -- maybe 2. Long-term opportunity in automotive. How well penetrated is 3DEXPERIENCE across the various OEMs and supply chain, and how much do you think you have to go? And then second question: Do we need to -- and I think this was touched on a little bit, but I ended up dropping off, just the question about margin evolution as we look at the shift from -- sort of towards cloud and subscriptions versus license. How do we need to think about that in the coming years in terms of organic margin?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [54]

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Thank you for the question. On the auto sector, I believe that the midterm, long term is bigger than everything we have done from the past 30 years because the platform effect is all the new things we are doing are domains that we have not covered yet in the past. The "powered by" for Toyota is a good example. It's a massive change in their infrastructure of legacy. And on top of that, you have all the modernization of what could be simplified by saying the V5 portfolio going V6 portfolio on the platform, the 3DEXPERIENCE platform. So the potential, in short, for the auto sector is very, very large. It's more dependent on the speed at which they transformed their legacy environment, but I think the Toyota decision has -- the order that we have communicated shows that they are not acting like in the banking sector using 40 years old software. They are going through this new, next-generation platform-based infrastructure. So you should not be concerned about the potential...

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Unidentified Company Representative [55]

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(inaudible).

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [56]

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Yes, but question is about the speed. But for the potential, it's there.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [57]

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Related to the EBIT margin going forward, again it is probably early -- a bit early to speak about 2020, but you have to take into account the 2 mechanisms, including the dilutions coming from Medidata. So at this stage, what I can say to you, we will not be below 30%.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [58]

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I guess that's a start. And again, any sense of -- you talked about the percentage point difference in license, 1 versus 4 to 5, subs versus license. Any way to put -- quantify that around margins? Or maybe too early.

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [59]

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Remember, Stacy, the margin is the same whatever it's subscriptions or a cloud or an on premise...

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François-José Bordonado, Dassault Systèmes SE - Vice-President of IR [60]

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We will take the last question from the room. Michael?

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [61]

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Michael Briest at UBS. 2 from me, I'm afraid, as well. Just firstly, on the subscription business. I mean, the guidance for Q4 for a business which is twice as large as license, you've got the same range. That's 25% to 28% versus 0% to 5%. Just in terms of how you book the subscription revenues, it's not always ratable, is it? Sometimes, you will book some of it, if you like, upfront, splitting the revenues between a recurring element and a sort of instantly recognized piece. Is that right?

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Pascal Daloz, Dassault Systèmes SE - Executive VP, CFO & Corporate Strategy Officer [62]

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No. Again, with the new accounting rules, you have to recognize upfront an equivalent of the license and during the quarter when you do the renewal or the signing. But it's natural for the full year. There is no discrepancy, except if you sign multiyear contracts and you've commit your customers with that. I've been very explicit about it. The rules for our salespeople is fine to have multiyears contracts, but we do not want to have these accounting mechanisms whereby we're going to recognize 2/3 of the subscription within a year and then pay the price the 2 or 3 years after. So the numbers are clean, Michael.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [63]

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No. And I wasn't saying -- it's just I wanted to clarify the treatment but not just on the macro environment. Obviously there was -- where these deals slipped quite late in the quarter, it seemed to be in multiple sectors and countries. How do you feel about the world today and your sort of outlook into 2020? Not talking guidance terms, but what's going to drive an improvement, if you like, relative to what we saw in September?

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Bernard S. Charlès, Dassault Systèmes SE - Vice Chairman & CEO [64]

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As Pascal said, I think we have a very good visibility for the Q4. And the news flow about those deals and those decisions, I think, will create, but it's too early to speak about it, a quite good visibility for 2020. Yes, we see, like you, the news flow from the global economy about tension in different sectors and so on. The reality is in the sectors that we have commented more specifically today, auto and aerospace, we want to simply share with you the fact that for us we clearly see growth in 2020 and we are comfortable with the dynamic. And that's why we insisted on those deals. Because we do recognize your concerns from this sector news flow. This morning, in interview I mentioned that keep in mind that, all those players, they have to redefine their portfolio for the next 5 years. And it's a lot of work and they need new type of solutions, and they need to simplify their R&D development process. And vehicle architecture, mobility architecture are changing rather quickly. So it's not just like doing a new model here, which we think is where we can help them in a big way. So more to be discussed in early next year, where we want to really set the new 5 years plan. You have already some inputs about it. And I think, mid-November, we will give you the specific program for health care and life science, 2 weeks from now.

With that, thank you very much. Thank you for your participation. And we are having fun even though the economy is tough, which is the most important things in life.