Dassault Systemes Sa Adr

Hello, and welcome to Decimal Systems 2025 Q2 and a half years earning presentation. My name is George. I'll be your coordinator for today's event. Please note that this conference is being recorded, and for the duration of the call, your lines will be the listen-only mode. However, you'll have the opportunity to ask questions toward the end of the presentation, and this will be done by pressing star 1 on your tablet keypad to register your questions. If you require assistance at any point, please press star zero, and you will be connected to an operator. And I kind of call over to your host today, Ms. Beateke Mertinets, to begin today's conference. Please go ahead, ma'am.

Thank you, George. And thank you for joining our second quarter and first half 2025 earnings conference call with Pascal Dalouze, Chief Executive Officer, and Hovind Berkman, Chief Financial Officer. Best system results are prepared in accordance with IFRS. The financial figures discussed on this conference call are on a non-IFRS basis with revenue growth rates on a constant currency basis unless otherwise noted. Some of the comments on this call contain forward-looking statements that could differ materially from actual results. Please refer to today's press release and the risk factors section of our 2024 Universal Registration Document. All earnings materials are available on our website, and these prepared remarks will be available shortly after this call. I would now like to hand over to Pascal Delos.

Pascal Delos Thank you, Beatrix. Good morning for our friend from the U.S., or good afternoon for the others. Always a great moment to be with you at this time of the year to work through our second quarter and first half results. So let's get right into it. We had a solid Q2, well aligned with the revenue growth pickup compared to Q1, driven by strong performance in both subscriptions and 3D experience. Some quick highlights. Total and software revenue grew 6%. Subscription revenue was up 10%, 3D experience grew 20%, and EPS came in at 30 cents. Given this solid performance, I think we are keeping our full year 2025 guidance unchanged, meaning revenue growth between 6% to 8% and EPS growth between 7% to 10% XFX. Before I hand it over to Ruben for the financial deep dive and outlook, I want to quickly call out three big takeaways for the quarter. First, more than ever, our customers are facing more complexity, whether it's scaling up, driving innovations, managing costs, or rebalancing activities from one country to another one due to the tariffs. and our platform is increasingly at the center of how they are navigating change. Second, we are seeing resilience in transportation and mobility, and a strong momentum in fast-growing areas such as space, defense, energy, and AI-driven cloud infrastructure. This kind of diversification makes us stronger and open new doors for the future. Third, AI is already creating a new growth path. This quarter alone, we saw real traction in two areas. The first one, the regulatory compliance. The second one, the software-defined productions. We will come back on these two topics. The point is we are not just talking about AI. We are making a difference, and this is a reality. So let's With that, zoom on what's happening across the different sectors we saw. Starting with manufacturing, the first half of the year confirmed the resilience of transportation and mobility industrial equipment. Mid-single G growth in transportation and mobility was led by France, Germany, and Japan, as well as the expansion with the battery manufacturers, specifically in China and India. We are helping them to scale up their gigafactory We are also seeing those manufacturers rethinking their global strategy with tariffs in play. And that's a space where we are really well positioned, helping them to move faster, to make better decisions across the supply and demand. Speaking about aerospace and defense, we had a strong start too, up 15% year-to-date. with a great momentum coming out of the Paris Airshow happened a few weeks ago. The pressure is on multiple fronts, but to ramp up the production, to move to the next-gen aircrafts, diminishing the CO2 emission, and developing a strong new space model almost everywhere in the world. And we are right there helping them to make it happen. iTech is also growing steadily with a high double digit for the semester, thanks to the work in multiple areas, such as the electromagnetic simulation for consumer electronics, the productivity solution for the semi-manufacturing, and more sustainable infrastructure for the cloud data center. If we zoom on life science, life sciences is still feeling the effect of the market contraction in clinical trials. But we are seeing a big shift. Investment is moving from research and development and clinical into manufacturing and supply, partially due to the global trade pressure. And that's really play our strengths. There is a rising demand for platforms that connect the research and development directly to the manufacturing, what we call connecting the lab to the fab. And our PLM portfolio is growing nicely as a result up to the mid-teens for the first half. In infrastructure, there is a clear trend towards sovereignty infrastructure all over the world. And we are leaning into that opportunity. The energy transition, especially nuclear, is still a top priority for us. But the sovereignty now goes far beyond energy. It includes defense. cybersecurity, and more recently, the AI capabilities for the national data centers. And we are really accelerating our expansion in those segments of the industry. Now, let's look at some key wins for the quarter. And let me give you some concrete examples of what I just described. We recently signed a strategic partnership with Thales Alinea Space, a joint venture between Thales and Leonardo. And they are right at the center of Europe's effort to build sovereign space capability. Why this is an important point? Because we discover with the war in Ukraine that we had dependency in Europe on non-European satellite systems such as Starlink for critical communications. And now Europe is moving fast to fill this gap. And to do this, we have to build our own low-orbit constellations for the defense and the government use. So, TALF and EOSpace is scaling big times. They used to produce a few thousand satellites. Now, they are producing 100 per year. So, to do so, they have chosen the 3D experience to help them to do it, not only for the design, for the simulations and the validations, but also to operate the complex space simulation at speed. I think this is really a strong vote of confidence in us in how we can help Europe or the European player to build its technology independence. Moving in life sciences, as I mentioned earlier, our PLM portfolio is a strong vote for others. And here is another good story coming from Asia Pacific. Neon Codon, Maybe you know this company. They are the leader in cardiovascular diagnostic systems. They selected a few years ago the 3D experiments over Siemens to drive more specifically the product development. They are now expanding into manufacturing with a clear focus on quality by design. That means better traceability, better quality, and a full compliance and everything with only one platform. Now, let's shift to infrastructure. I think for the one following us, you know that we are a challenger in this space, but we are building the leadership on some of the most complex, high-valued systems, the nuclear plants, the rails, infrastructure, and more recently, as I was mentioning, the data centers. This is a big space, a $650 billion U.S. dollar market. growing at 15% annually. But this is not without challenges. The biggest one, as you know, is the AI boom is driving massive infrastructure demands, but the energy cost is such that we cannot afford it the way it is right now. Just to give you an example, to support AI at scale in the U.S., only in the U.S., it will require nearly 100 new nuclear plants and almost none are being built today. So this is the reason why we are coming to these discussions, because with our system approach, we are helping the different stakeholders, hyperscalers, colocation providers, and more and more enterprises to design a more sustainable infrastructure to run it much more efficiently by reducing the emissions, the energy use, and also the water consumption for the cooling system. And I think we are extremely well positioned to lead in this critical growth area. Now let's talk about AI, and specifically the regulatory compliance. This is quickly becoming one of the biggest bottlenecks in highly regulated industry. And with what is happening around the world with the de-globalizations, it's even worse. But for us, if we see the positive side, it's $100 billion opportunity, almost doubling every five years. Do you know, if I'm just taking some concrete example, that for an aircraft certification, it can take three to five years and involve more than 100,000 requirements to be fixed and to be fulfilled, only for one certification authority. It's almost the same in the pharma. If you, the pharma submissions, the drug submissions can be over more than 100,000 pages. And each delay, each day you have a delay, it costs more than $1 million. And I think the industry who has pushed this at the maximum of the extreme is the banking industry. You know, you have these constant updates. And just last year, it's $14 billion in fines just only in the U.S. So with the AI-powered virtual twin, I think we are turning this compliance into strategic advantages by transforming all the massive documents you have, the millions of pages you have to read and to understand and to do the interpretations into a dynamic knowledge and automatically verify the design. So it's really compliant by design. So what used to take months now takes minutes. What used to slow down now is helping you to move faster. And I think the compliance is going from a cost center to a competitive edge, and we are building the solutions to make it possible. You know that we have already launched our first AI roles and our virtual companions, but more will come soon. Now, lastly, let me touch on one recent acquisition. In Q2, we acquired Ascon QV technology. It's a startup in the factory automation based in Germany, the nation of automation. They work with major players such as BMW and others, and their software is now part of the Delmere brand, making our manufacturing offer even stronger. What do they do? you know they serve the factory automation. And it's a large market dominated by hardware players. And in fact, it's almost 90% of the 13 billion markets. The flip side of this, to program those hardware, those PLCs, you need an army of professional services to do it. This is going to change with AI. And we believe the software will drive two-thirds of the value in the coming years. I think with the rise of what we call the software-defined products, we are seeing more and more in the industry the need to have what we call the software-defined production systems, flexible, cost-effective, and fully traceable. And I think we are building that future with our of production system. To close things out, there are a few comments I want to make. First, we are operating in a world of growing complexity, and this is exactly where we had value. We had value for all the industry on these specific things. Whatever the complexity is coming from the geopolitics, from the innovations, from the breakthrough technology which are shinding the games, I mean, we know how to handle this complexity and to make it manageable. Our 3D experience platform really helps our customers to move faster, work smarter with the others, and adapt with confidence. And I think over the time, we are creating deep and long-term value for our customers, and it's, at the end, we are just getting started. So thank you for your participation and your consideration, and now over to you, Ruben, for more on our financial and guidance.

Thanks, Pascal, and welcome to our call from my side. Thank you for joining us. Q2 was a solid quarter. As you heard, it was well aligned with our objectives. And what I'm particularly pleased about is the very resilient performance across our manufacturing industries, mainly driven by the outstanding results driven by our brands Simulia, Inovia, and Catia. And regarding the operational efficiency, we continue to focus our investments on capturing long-term value while protecting the earnings per share. As you just heard, in this quarter, we acquired Ascon, an innovative startup with a mission to make software-defined manufacturing industrial-scale ready. We see the worlds of software-defined products and software-defined manufacturing coming together. It's an exciting moment for us as it positions us in a very strategic market with AI and manufacturing automation. Now, let me take now the time to review our performance of Q2 in the first six months. In Q2, the total revenue and software revenue were both up 6%, excluding FX, and it was driven by subscription revenue growing at a rate of 10%. The engine of growth remains the very positive momentum in 3D experience, up 20% in the quarter. We had a good quarter in upfront license revenue, which was up 5% due to strong growth in China and multi-year subscription contracts. The operating margin was 29.3%. It was impacted by 50 basis points of negative currency headwinds when compared to last year. Additionally, when excluding the dilutive impact from acquisitions. The operating margin was up 10 basis points. EPS was 30 cents, up 4% excluding currency year over year. Looking at the first six months, total revenue was 3,096,000,000, up 5%. The service revenue was lower in H1. However, we expect Q2 improvements to continue into H2 in line with our full year objectives. Now to conclude this part, I want to highlight the progress and the shift of our business model and the lifetime value reflected in our recurring revenue base, which you see growing at 7%, driven by subscription revenue up a strong 13% year-to-date. The recurring revenue now represents 83% of software revenue, and this is what provides increasing visibility as our client base continuously expands the trusted long-term relationships. Now turning to our growth drivers. In Q2, we saw very good 3D experience revenue, up 20%. And as a result, the share of software revenue is now representing 41%, up five points. New 3D experience years in the quarter show a healthy distribution across many industries, such as high-tech, auto, aero, and defense. This highlights the growth potential of 3D experience in cloud and comes at an increasingly critical time for our customers who need to transform their business model, leveraging GenAI. Cloud revenue grew 6% in the quarter and 7% year-to-date. In 3DEXPERIENCE Cloud, we saw a 26% growth in H1, driven by strong customer adoption of our cloud solutions. And we are encouraged by the early adopters testing our AI use case. Now let me briefly review the Q2 results versus our objectives for the quarter. Total revenue came in at 1,523,000,000 in the quarter, which was 12 million higher than the midpoint of our guidance in constant currency. However, the currencies did move more than what we expected in the quarter, resulting in a negative headwind of 38 million. Operating margin was 29.3. It was below the guidance midpoint, mainly due to a negative currency effect of 30 basis points. Operating income in Q2 was up 5%, excluding currency, with an OPEX growth of 6%. Now looking into H2, we expect to maintain a similar expense run rate as we will make focused investments to support our growth. EPS was 30 cents within the guidance range, thanks to a solid operating performance and a slightly better financial income, while the tax rate at 18% was in line with our projections for the quarter. Now let's focus on our geos and product lines. Europe was up 10% in Q2, and it was led by the strong performance in France and in southern Europe. We saw good growth across the multiple end markets, such as automobile and aerospace and defense, as well as high-tech. Subscriptions provided a very strong tailwind in the quarter. The Americas rose 2% in Q2, with good performance in industrial equipment and high-tech, which was both up double-digit, and it was also very resilient growth in aerospace and defense over the first six months. Asia was up 6% in the quarter, and it was led by strong double-digit growth in China. It was driven by high-tech industrial equipment and a solid performance in the transportation and mobility market. Meanwhile, India and Korea showed resilient performance up mid-single digits in the first six months. Now let's go through the performance by product lines. Industrial innovation software revenue had a very good quarter, growing 9%. As mentioned, it was led by the strong growth in our brands Simulia, Catia, and Inovia. For life sciences, the growth was flat in the second quarter, with metadata continuing to be impacted by a weaker CRO segment. While the enterprise segment was performing well at the mid-singed digit growth, the mid-market was resilient despite lower clinical trial volumes. Conversely, we see an increasing momentum when it comes to the shift from lab to manufacturing and supply. As Pascal mentioned, when combining the revenue driven by our 3D experience solutions in the life sciences industry, we see growth in the mid-teens at a revenue run rate of 200 million plus. And again, this quarter, we had several wins, such as Amgen, Vertex, Corecept, and Neon Coden in MedTech, where we are winning with the 3D experience platform. Now, an additional comment on MediData. We're confident on our momentum as large pharma, as evidenced by the good renewals over the last quarters, and also our pipeline that's building ahead. With regards to the clinical trial market, the volumes have stabilized. However, the market has continued to shift towards smaller trials and a lower share of Phase III. At the same time, Medidata maintained market share globally, and with RAISE Light, we are more competitive in price-sensitive domains and regions. Reflecting this on our outlook, we expect modest growth for Medidata in H2. Moving on to mainstream innovation. Growth for the segment was moderate. SolidWorks was up mid-single digits with volumes acceleration. And the shift to subscription being well underway. Centric had a softer quarter than expected in Q2 due to some timing effects of renewals. Overall, we see Centric very well positioned and expect renewed growth in H2 supported by the tailwinds of renewals with some very concrete upsell potential and a good pipeline. Centric's compelling AI-infused PLM portfolio, including pricing, inventory, and now boosted by Centric product experience management, helps fashion and retail customers optimize designs, the production, and distribution of collections in real time. It is a top priority when operating in a constantly changing market dynamic. Now turning on to cash flow and balance sheet items. Cash and cash equivalents totaled 4 billion and 84 million as of Q2 compared to 3 billion 953 million at the end of 2024. This is an increase of 131 million. And reported on a Euro basis, cash and cash equivalents were negatively impacted by the weakening of the US dollar to Euro over the period. And this is 274 million, an impact of 274 million as of H1. At the end of the quarter, our net cash position totalled 1.506 billion, an increase of almost 50 million versus the net cash of 1,459,000,000 as of December 31st, 2024. Now let's look at what drove our cash position at the end of the first half. We generated 1.147 billion in operating cash flow for the first six months, which is up 2% year over year. While we had a seasonally strong Q1 cash generation driven by strong collections on contracts signed in Q4 and improvements in operating working capital, Q2 was mainly impacted by the timing of billings and some payments and the negative currency translation impact. Now, net of currency operating cash flow year-to-date would have been up 4% year-to-date. For the first six months, cash conversion from non-IFRS operating income was 1.23 times, similar to last year. Now, any additional information you will find in the operating cash flow reconciliation in our presentation that we published earlier today. To sum up, operating cash flow in H1 was mainly used for investments, $332 million. of which $240 million was dedicated to acquisitions, and with the remainder in capex of $95 million to support our business and cloud growth. We paid $343 million in dividends and made a net repurchase of Treasury's shares of $84 million year-to-date. Now, what to expect for the full year? We now expect the operating cash flow to be flat for the year. However, I want to highlight that this is only a timing effect. The main reason for this change is that in the current volatile business context, it was important to us to secure long-term customer contracts in H1, and that includes payment terms with collections early next year. The bottom line is, We have a timing impact as mentioned on the operating cash flow in 2025. However, we are securing the long-term value of our customer relationships and fully recover the cash from those receivables early 2026. The other element impacting the year-on-year operating cash flow growth is related to non-recurring tax payments and social charges, which will mainly materialize in Q3. This includes the impact the rate increase on social charges for share-based compensation, and the exceptional contribution surtax in France. This was already a factor in our previous estimates. The DSOs already improved by 14 days towards the beginning of the year, and we are continuing with this effort in the second half. Now looking to our financial objectives for 2025. As you heard, we maintain our 2025 guidance range for both the total and social revenue to grow 68%, excluding currency, and EPS to grow 7% to 10%, excluding currency impact. That means recurring revenue will be 7% to 8%, and within that, subscription growth is in the range of 13% to 15%. As some of you have already reflected in your models, we also adjusted our FX assumptions, our currency assumptions, to reflect recent currency movements, particularly in the U.S. dollar. This impacts our revenue and EPS in absolute terms. Thus, we are now expecting to report total revenue for 2025 in the range of $6,410,000 to $6,510,000. Likewise, there is an impact on our operating profit margin, which we expect to be in the range of 32.2% to 32.4%. At the EPS level, we now guide to for full year 2025 in EPS of €1.32 to €1.35 with the currency effect causing 4 cents of an impact. Now I want to highlight that the growth in constant currency remains unchanged. Briefly for Q3, let me provide a bit more insight to help you refine your models. We expect U3 revenue growth in the range of 5% to 8%, with software revenue growing 5% to 9%, and the subscriptions up 10% to 15%. Operating margin is expected in the range of 29.7% to 29.9%. And EPS growth is in the range of 5% to 9%, excluding currency, to achieve a range of $0.29 to $0.30 EPS for the quarter. Now in conclusion, as I reflect on the full year, you already saw our revenue growth accelerating from 4% in Q1 to 6% in Q2. And that was despite the volatile global environment and the tariff uncertainties. So you can see that the momentum is building and we expect H2 to continue in a positive direction. At the low end of our guidance, and this reflects two points of acceleration from H1 to H2, And the building blocks to achieve this two points of growth acceleration are broad-based, and they are supported by our pipeline, including the momentum of 3D experience, specifically in the industrial innovation market, but not only. And also it's supported by the gradual improvement that's expected with SOLIDWORKS and also with life sciences. As well, on top, we have the return to double-digit growth that we expect from Centric in H2. So, to conclude, finally, I want to highlight, we will continue to invest right for innovation, customers, and shareholder value. Everything we do is guided by a single principle, creating long-term value and sustainable value for our clients, our shareholders, and our diverse industries that we serve. And now, Pascal and I are looking forward to taking your questions.

Thank you very much, sir. Ladies and gentlemen, as a reminder, if you wish to ask any questions, please press star 1 on the top of the keypad. And just make sure your line is not muted until I reach our equipment. Our very first question today is coming from Mr. Jay Vyshauer of Griffin Securities. Please go ahead, sir.

Thank you. Good afternoon, everyone. Let me start with a number of questions on 3D universes. Let's call it UR for short, which was highlighted, of course, at the meeting last month. You gave a specific revenue objective for several years from now for that brand. Are you also able to be specific about the internal investments or spending specifically pertaining to UR? I mean, are you able to separate out what you're spending for that versus everything else that you're doing? And perhaps you could talk about some of the initial roles and packages and deliverables to that brand objective. And then an additional question about that.

Okay, Jay, I will maybe start and Ruben feel free to add. So on the investment side, the topic, Jay, is much more how to rebalance the R&D capacity along the different technology we are using. To make a long story short one, it's how you are basically redeploying some modeling simulations and AI capabilities to be relatively well-balanced between those three domains, which are the foundation for the next generation of virtual twin. And you remember the universe is really when you connect all those virtual twin together. So clearly, we continue to invest, but the biggest lever we have is really how to redeploy some of the existing capacity we have. From a portfolio standpoint, we started to release, if you remember, two different nature of things. One is what we call the virtual companion. And the virtual companion is very simple to understand. As you may know, all of our software are packaged in roles, processes, and solutions. So the virtual companion is the AI extension of the existing role portfolio. For all the role we have within our portfolio, we will have a collection of virtual companions attached to each. With the idea that the virtual companion is doing two things. One, basically automating certain tasks. And the other one, expanding the capability of certain role by encompassing a knowledge which is normally not fully mastered by the current person having the roles. And the compliancy I was referring to is a good example of this. The second nature of what we do is the generative experience. Here is when, if you want, the virtual twin is automatically created. It's not a question only to have a set of companions. It's when you have companions almost working together without having humans being part of it and generating the end results. So, and you are aware that we have this initiative called Virtual Twin as a Service. We made several times a presentation what it means. And this is typically a category of generative experiences we are releasing on the market right now. And the second example I was referring to in my presentations, in my comments earlier, which is Moving from the software-defined production systems, this is exactly what I mean. It's how you can automatically generate the code which will be embarked into the new generation of PLC without having an army of people to do it. It will be automatically generated by the algorithms. So this is the true nature of the things we are delivering. Now, if you look at, we released... I don't have the exact number, but it's in order of magnitude or more than 20 companions already. And we have around 10 generative experiences already on the market. And we are consistent, continuously on a, not on every quarter, but because, you know, it's an agile development. So we are releasing almost every six weeks the portfolio and And I do expect that in probably 18 months to have more virtual companions and we have goals within our portfolio and to have more generative experience and we have processes in our portfolio. Long answer, Jay, but I think with this you have a clear understanding of what we do.

Okay, so perhaps 1 more on that subject and then I'll switch to something else. So, is there anything in your experience over the last 3 years? since you introduced 3D experience works that is indicative of or a lesson for how the progression of 3DUR might go. And the reason I ask that is three years ago, BS was quite optimistic on the adoption of 3D experience works. You thought it would be one of the principal leaders of your cloud revenue growth and didn't quite work out so far that way. So is there anything in that experience in terms of the product, the pricing, the channel that might be indicative for you of how this new brand might progress over the next number of years?

So there are two angles to answer to your questions. One is, as you said, the simplification of the portfolio. We did it. And I'm sure you are aware that we over Simplify, we came back to the recipe, which is the standard premium and pro. And by having those configurations, we are basically enriching the different configuration with more capabilities within each. So I think the portfolio is done. The topic, which is a little bit more tricky, is the following. As you know, with the works family, we are not only addressing the CAD market, but we also are addressing the lifecycle, we are addressing the simulation, and we are also addressing the manufacturing parts. And also with Denia Works, the ERP parts. The lesson learned over the last two to three years, we need to have specialized partners. The Works family has already integrated all those products in one single platform, which is giving for the customer the benefit to have by design and integration, which is done. And by design, new capabilities we can do. For example, we can do the order-to-bill systems. We can design to target. We can basically have the different processes being connected. But to do the go-to-market, you need a higher specialization of the resellers. And this is the missing piece. You know relatively well the CRE, the SolidWorks Resellers Network. Many of them are extremely skilled on the CAD side, but only little of them have the deep expertise on the different domain I just mentioned. So we need to complement this network by either having specialists or having a different way to give the accreditations in order to promote the things.

Okay. So it sounds like, therefore, the 3D UR will be pretty dependent more on CSE and CTE than CRE.

No, no, I think it's a different category of product. Let me give you an example. The Delmere Works is really a fantastic product. But only, I don't know, we have less than 10 resellers capable to promote what an ERP is to this inside base. So we have to hire some specialists, the ERP specialists, having, by the way, the services practiced in order to do the proper configuration for this kind of product line. So this is what I mean.

Okay. Two last questions perhaps. For Ruben, within the context of your expense and headcount growth for the year, in Q2 there was an interesting shift where sales was a higher percentage of your total openings than was the case in Q1. So maybe talk about how you're thinking about your sales capacity or sales investments. And to ask the final question, Our preliminary calculation is that SOLIDWORKS new unit volume was up around 9% or so to over 22,000, so certainly quite a bit better than Q1. Do you think, however, that you'll be able to, for the year, achieve the high single-digit quota that you gave to the channel earlier this year for SOLIDWORKS, or given the Q1 shortfall, that it might be difficult to make that up?

No, I think I'll start with the second question, Jay. Q2 was a good quarter for SOLIDWORKS in terms of unit expansion and cost. Quite an acceleration compared to the first quarter. So we are on the right trajectory. Specifically, the growth was driven in North America. So, I think from a GEO perspective, also, we are well balanced. You know, North America was a little bit of a headwind in the last years, and I think we see this now behind us. So, we are confident about the target that we set for the SOLIDWORKS volume growth. Related to the partners, related to the headcount, it's an interesting observation that you're making. You know, some of the, of course, the job postings are also related to a twofold, right? They're either growth or replacement. So it can also be that, you know, from time to time, there's more replacements than growth. So overall, our investment policy has not shifted. We have done investments over the last two years in sales at a higher rate. than into other areas. And we are not planning to follow that trend and rather slow it down a little bit. So for that perspective, I think there's not much to read into this what you observed as a trend. It's more a reflection of a combination of growth plus replacements that you can then see in the total hiring but it's not a reflection of the net cost.

Understood.

I would add maybe one point, Jay. If you include, for example, Centric, this is clearly where we have invested a lot in sales because here we are building a sales force for a dedicated market, and it's a very large market, a very, very large market. You know we're opening new industries with retail. There's a large market to cover, And we have gone through a renewal cycle, which also has been, you know, a new experience for this company because so far it's been a hunting. Now we are doing hunting and farming together. Okay. Great. Thank you both. Thank you.

Thank you, Jay. Thank you. What's your question, sir? Ladies and gentlemen, if you find your questions being answered, you can remove yourself from the queue, but best you start to. We'll now move to Balaji Tirupati of Citi. Please go ahead.

Hi, thank you for letting me on. Two questions from my side. Firstly, I wanted to understand the change in share count in the quarter, as well as increase in share based compute. Firstly, on share count, considering employee shareholding plan and the amount of buyback, what has led to the 8 million decline here? And secondly, on stock based comp, which is now more than 5% of revenue in 2025. I understand pulls and pushes around employee shareholding plan, also increase in social charges and change in share price. Still, could you advise how should we think about stock comp beyond 2025?

Yes. Thank you for the question. So maybe I'll start with the second one. So in the share based compensation, there are a few effects. in 2025 that you won't see repeated in 2026. So one, for example, is the employee share based plan, which we do every two years, and that accounted for one third of the increase here to date. The second effect is that we have, which is elevating the share-based compensation is related to the social charges that we have to expense related to share-based compensation, which are differently computed in France than in the rest of the world, specifically in the U.S., because social charges are not capped in France. So the rate you pay on share-based compensation for social charges has increased from 20% to 30%. And that has been a significant increase when you do the year-over-year comparison. Now, part of that will, of course, be recurring because that rate is not going to be temporary. That rate will continue, which will make the share-based compensation or the share-based programs more costly. But there was a catch-up effect as well that we had to reflect in the second quarter. But these are the two main effects that are driving the increase in share-based compensation year over year. And I expect in 2026 this to come down for one part because we won't have a share-based plan for the employers next year. It will be the year after in 2027. And also in terms of the vesting of plans, in 2026 we have less plans vesting than we have in 2025, which is a factor. But overall, I think our policy on share-based compensation in terms of the volume and number of LTIs issued is very consistent, and the variable element is the social charges on share-based compensation.

Understood.

Yeah, please.

No, I was just repeating the question on decrease in share outstanding in the quarter despite a share-based plan and limited buyback?

Yeah, we have. We are, as you know, we are performing share buybacks to offset dilution from share-based compensation. We also advanced some share buybacks related to gather the employee plan, which we completely take off the market when it's issued. And so that has an impact in the quarter. It's a small one, and it will neutralize over the year. but it's really related to share-based compensation. It's not anything else.

No, I understood. So the question was more that I see there is on your cash flow, there are charges around buyback as well as charges around issue of new share, which is broadly comparable. Still, the number of shares outstanding in the quarter went down by 8 million. is there an impact which is more in terms of timing during the quarter and will reverse in coming quarters?

Yes.

Okay. Maybe if I ask another question here with your permission. How are you seeing your clients who have signed contracts with you ramping on implementing this software? I ask as growth in your services business has been moderate and we are also seeing in general system integrators citing more measured client behavior. And given your revenue and subscription contracts ramp with implementation, does that create some sort of headwind on software revenues?

No. I think it's a right observation that our service revenue was a bit muted in the first half, but the order book is very healthy. We expect an acceleration in H2. And And, you know, we have won some significant contracts over the last nine months, which we are ramping up. And at the same point in time, you know, our portfolio is shifting now to AI. And also we have to manage that at a global level, you know, U.S. versus Europe versus Asia. That's another factor.

Maybe I should complement a little bit. At the beginning of the 3D experience, when we introduced the expansion market, we were doing most of the services as a prime for our customers. Now, after more than a decade, the vast majority is flowing through the CSI. So this is a reason why also, as you can see, using the license as a proxy to anticipate the revenue coming from the services could be a little bit tricky. Now, what is the reason why we are doing this? It's because we want to have the global capacity to be able to deploy worldwide and to have also this capacity to be spread across multiple partners, not to have dependency only on one of them. So this is the reason why, you know, you have this little bit disconnection between the two. But as Ruben said, we expect anyway to have some recovery also at the end of the year because we are also some, you know, project ramp-up and also commissioning of some certain deliverables, because we are less and less time and materials, and we are more and more deliverables-driven, which is also a way for us to ensure that we have the right gross margin on the services activity, which is, again, for us, it has always been clear that – The main point, and this is the way we are managing the services, is on the growth marketing. It's not on the revenue side.

Very clear, Pascal. Thanks a lot.

Thank you much, sir. The next question today will be coming from Mr. Jason Salino, colleague from KeyBank Capital Markets. Please go ahead.

Great. Thank you for taking my questions. Maybe just one clarifying point. I think on the morning... you talked about some deal slippage in the second half. It sounds like most of it was dominated in the U.S., but curious if there's further color on, like, what sectors that might have been seen in.

Well, I think thanks for the opportunity to clarify. You know, we didn't talk too much about slippage. We said we secured some major deals in the first six months. multi-year contracts that we closed in H1. Of course, in our pipeline, we have the deals that can shift between quarters, but I think when I look where we are for the first half of the year, we're on track to achieve our guidance. We secured that through larger transactions that we closed across several sectors, but also the volume of deals was healthy. And for H2, yes, there are deals that maybe we could have had that moved a little bit into the second half, but that is the nature of things. That's not a concern at all. And it was offset with other deals we signed in the first half. So it's the nature of being able to you know, to pull in and then let things maybe mature a little bit before you close at the right time. So, I think we have mastered that so far for the year and the trajectory is in place.

But, Ruben, I made this comment during the Q&A when I was saying that the volume of deal slipping from one quarter to another one, whatever it's in terms of number of transactions and volume of transaction was increasing, right, compared to what we used to see in the past. And I was also mentioning, you're right, that some of this is coming from some large deals we have in the U.S., because U.S. is really the geo where we have not only a large potential for large deals, but also more dependence, I would say, to fulfill the goals with the large deals. Answering to your question, This volatility is clearly coming from the auto and the aerospace. And why so? Because you know what Mr. Trump is doing to have, you know, Americas being back in the manufacturing space. This is good for the nations, but for many American companies, it's a nightmare because they source most of the systems or the subsistence from abroad. And for them, they are, when they import the systems or the parts, it's like considering by, you know, they are exposed to the same tariffs than any kind of company. So this is the reason why, yes, you're right, we have a little bit of volatility, we can see. But it's not at an order of magnitude, which is crazy. I was making this comment this morning. Usually, we have between 25 to 30 billion shipping from one quarter to another one, and here is two times to give you an order of magnitude what we are talking about.

Okay. Excellent. That's very helpful. And then I think it was also mentioned that you have about two and a half times coverage for your pipeline for Q4. Yes. you know, how this compares with other Q4s or other periods. It's just in software, you know, we hear coverage ratios, you know, sometimes higher than this, but obviously you'd know best if, you know, two and a half is consistent with your trend.

In average, because it's basically 2.5 times across all the product line we have across all the industry and across all the geos. But to give you a comparison, it's a good number. it's really a good number. Usually, we are much more close to 2.1, 2.2. So, 2.5 is really a good one. There are certain product line or certain geo we know that we need much more three times because due to the volatility and so on. But in average, it's a good one. And more importantly, I made this comment this morning, it's relatively well distributed across many industries and many geos. So, we do not have too much dependency on one or two, geo one or two industry.

Okay. Very helpful. Now, thank you again. You're welcome.

Thank you very much, sir. Maybe a very last question, George.

Will do, ma'am. Today's very last question is coming from Mr. Frederick Boulin. Thank you, American. Sorry for interrupting you, ma'am. Please go ahead, sir.

Hey, good afternoon. Two questions, please. First of all, on AI, if you can spend a little more time on your commercial model, what kind of upside the seat do you expect versus your existing offering? I mean, as you said this morning, it's still been in flux as a debate. And one concern on the industry is risk to seat-based pricing with more efficient AI agents. Is it a risk you see on your customer base? And then different question on maybe data, still no progress on growth in Q2. It would be good to have an update on market conditions, competition, traction of the new offering you launched in the last year, beginning of this year, and any significant share in terms of growth trajectory into next year.

Thank you. I will give a first initial answer to the first one. So, I made this comment this morning that AI is part of many engagements. And the most important thing for us is to prove the value. That's clearly the key topic for us. Why so? Because AI is not an incremental improvement of what we do. It's a radical shift. It's a disruption. What I have developed internally is what I call the moonshot value whereby we are not against looking for 20 or 15, 20% improvements. We are looking by a factor of improvements. There are certain domain where the improvement is such that you can almost automatize 90%. It's not true everywhere. There are certain domain where, and it's a minimum of two times. So why I'm making these comments? Because you know the large company we are serving. So if you are telling them they can do two times more with what they have, or they can do the equivalent with what they have with two times less, we are talking about really, really big number. And Before to jump too much to the conclusions on pricing, it's extremely important to establish this value across the different parties and the people to recognize that not only it's possible, doable, but what we're going to get at the end. And that's the reason why I do not want to rush. to conclude on certain things without having this established, if you want, this abacus first. Then after you have the topic of the virtual companion, which is probably easier, because as you say, we are pricing role. Role is the price per seat or price per, sorry, it's the price per name user, not per seat anymore, name user. And what we want is a virtual companion to be user-based. And it's a good combination. Because on one hand, you have almost a fixed price per user, and the virtual companion is giving you the ability to upsell relative to the usage. But for the generative experience, what I was referring first, which is really the big gains or big savings we can do or the new possible we can do, this we cannot basically miss the point, and that's the reason why I really want to take the time to establish properly the the value equation. But maybe not completely answer to your questions. And I was making this comment this morning that if you look at all the people, I'm not talking about the one providing the infrastructure for the AI, the NVIDIA of the world, data centers and so on. They are the one for the time being making money. But all the others, the one who have developed the services on top of it, the online services, none of them are really earning money because again, it's a difficult discussion between technology providers and the customer, and we need to socialize. We need to establish the common view before to discuss what should be the take we should have, the fair share we should get to us. That's where we are.

Maybe a few comments later? Yes. Beth? So I finish up on a few comments on Medidata. Yes, Medidata is flat here today. I think there are different dynamics in the Medidata business to see. One which is heavily dependent on clinical trial stats, which is the CROs, which we know we saw continued decline in the first six months. And then there is the large pharma business where It's much more strategic and port-based and less dependent on the volume. It's more of the ability to transform how clinical trials are designed and then executed. So we have right now, we see right now growth in the large enterprise part, which is, which is offsetting the decline on the volume part we have the CROs. And I think what's important to see is that the nature of conversations is evolving fast. On the large pharma side, I think we're building a nice pipeline, and I'm confident on the outlook. It's more difficult at this point in time still to assess the CRO part because it's so volume dependent, but also here the conversations are shifting. And we have evidence for that. So I think while it's disappointing to see the zero growth for the first semester, we're expecting moderate growth in the second half. And that should also include some level of stabilization on the CRO side. The last point I would like to make is, as you heard from us this afternoon and also this morning, our focus is clearly to expand our strategy to the enterprise level of life sciences. And for that, we see very positive traction. You know, we have the complementary portfolio. We have a very strong customer base, and I think this will be an important part and source of growth for us in the future. Thank you very much.

Thank you. Maybe before to conclude, I want to make one specific comment. This morning, we had a lot of discussion related to the cash flow and the impact on certain deals where we will collect the revenue early next year. Again, this money will be collected. It's not lost. Oven was giving to you an order of magnitude, and I just want to do the simple math for you. Let's assume that it's close to 100 million, because at the end, that's the order of magnitude we are talking about. At the end, the impact, the financial impact for us, it's only a loss of interest rates on the cash we could have collected for maximum of nine months. So at the current interest rate, at 3.5%, it means around 2.5 million. That's, at the end, the losses. Why we do this? Because if we want to push certain transactions to be close in the current timing, we have to do otherwise the discount. And the discount, to give you another magnitude, in this case, it will be much more close to 20%. So on one hand, you are comparing 2.6 million, and again, it's a missed opportunity to have financial income, with a 20% discount, which would be perpetual. I think from a value creation standpoint, I do not understand why you are blaming us for this. I think it's a good management decision. And I hope all the investors and all the analysts participating to this call will make the proper indications to the people to understand that this is the right thing to do in the current timeframe. So, having said that, again, for the closing, I think Q2 is another solid quarter in terms of executions and progress toward our strategic goals. I think not only we deliver strong financial results, but we continue to invest in innovation, and we remain focused on delivering the long-term value for our shareholders, customers, and employees. Looking ahead, I think, Ruben and Beatrice, you will be participating to several investor events in the coming weeks, and we are looking forward to the opportunity to meet, if not all of you, but many of you in person in the coming weeks. In the meantime, have a good summer break and see you no later than October. Thank you.

Thank you very much, sir. Ladies and gentlemen, that will conclude today's presentation. Thank you for your attendance. You may now disconnect. Have a good day and goodbye.