Dassault Systemes SE

PAR:DSY

Q2-2025 Earnings Call

[Operator]

Hello, and welcome to the Dassault Systèmes 2025 Q2 and Half Year Earnings Presentation. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]

I'd like to hand the call over to your host today, Ms. Beatrix Martinez, to begin today's conference. Please go ahead.

[Beatrix Martinez, executive]

Thank you, George. I'm Beatrix Martinez, Dassault Systèmes' VP, Investor Relations. And from the company, we have Pascal Daloz, CEO; and Rouven Bergmann, CFO.

I would like to welcome you to Dassault Systèmes' Second Quarter and First Half 2025 Webcast Presentation. At the end of the presentation, we will take questions from participants from the call. Later today, we will also hold a conference call.

Dassault Systèmes results are prepared in accordance with IFRS. Most of the financial figures in 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 the non-IFRS, please see the reconciliation tables included in our press release.

Some of the comments we will 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 2024 Document d'enregistrement universel published on March 18.

And now I will hand over to Pascal Daloz.

[Pascal Daloz, executive]

Thank you, Beatrix, and good morning, everyone. It's, as usual, a great pleasure to be with you to walk through our second quarter and first half results. So let's get right into it.

We had a solid Q2, well aligned. Revenue growth picked up compared to Q1, driven by a strong performance in both subscriptions and 3DEXPERIENCE. Just some quick highlights. Total and software revenue grew 6%. Subscription revenue was up 10%, 3DEXPERIENCE grew 20%, and EPS came at EUR 0.30, which is very well aligned. Given this solid performance, we are keeping our full year 2025 guidance unchanged, which means revenue growth between 6% to 8% and EPS growth between 7% and 10% ex FX.

Before I hand it over to Rouven for the financial deep dive and outlook, I really want to quickly call out 3 big takeaways for the quarter. First, our customers are facing more complexity than ever, whether it's scaling up, driving innovation, managing costs or rebalancing activity from one country to another one due to the tariff, I think our platform is increasingly at the center of how our customers are navigating their change.

Second, I think we are seeing resilience in Transportation & Mobility and a strong momentum in fast-growing areas such as space, defense, energy and AI-driven cloud infrastructure. And this kind of diversification makes us stronger and open new doors.

Third, AI is really creating new growth paths. And this quarter alone, we saw real traction in 2 areas: the regulatory compliance and the software-defined productions. So we are not just talking about AI. We are really making a difference.

So with that, let's zoom into what's happened across the sectors, starting with Manufacturing. The first half of the year confirmed the resilience of Transportation & Mobility and Industrial Equipment. Mid-single-digit growth in Transportation & Mobility was led by France, Germany and Japan as well as the expansion with the battery manufacturers in China and India, where we are helping them to scale up their gigafactory fast. We are also seeing manufacturers rethinking their global strategy with tariffs in play. That's a space where we are really well positioned to help them move faster, make better decisions across the supply and the demand.

Aerospace & Defense had a strong start too, up 15% year-to-date, with a great momentum coming out from the Paris Air Show. The pressure is on to ramp up productions to move to the next-gen aircraft, but also to develop a strong new space model, and I think we are right there helping them to make it happen.

High-Tech is also growing steadily, high double-digit growth for the semester, thanks to our work in areas such as electromagnetic for simulation for consumer electronics, the productivity solution at large for the semiconductor manufacturing and more sustainable infrastructure for the cloud data centers, and I will come back on this topic later.

Now Life Science, still feeling the effect of the market contraction in clinical trials. However, we are seeing a shift. The investment is moving from R&D and clinical into manufacturing and supply, partially due to the global trade pressures. That plays to our strengths. There is a rising demand for platforms that connects the research and development directly to the manufacturing. We call it the lab to plan. And our PLM portfolio is really growing nicely as a result, up to the mid-teens for the first half.

In Infrastructure, there is a clear trend towards sovereignty infrastructure, and we are leaning into that opportunity. The energy transition, especially nuclear, is still a top priority, but sovereignty now goes beyond energy. It includes defense, cybersecurity and AI capabilities for the national data centers, and we are accelerating in our expansions into these fields.

Now let's look at some key wins this quarter. Let me give you some concrete examples. We recently signed a strategic partnership with Thales Alenia Space, which is a joint venture between Thales and Leonardo. They are right at the center of Europe's effort to build the sovereign space capabilities. If you remember, the war in Ukraine showed just how dependent Europe is on the non-European satellite systems, such as Starlink, for the critical communications.

Now I think Europe is moving fast to build its own low earth orbit constellations for the defense and the government use, and Thales Alenia Space is scaling up big time from producing a few thousand -- a few dozen satellites per year, 200 per year now. And they have chosen the 3DEXPERIENCE to help them to do it, not only for the design, the simulations and the validations of this, but also to operate the complex space missions at speed. I think it's a strong vote of confidence in us, and it's in our role of helping Europe to build its technological independence.

Now let's move in Life Sciences. As I mentioned earlier, that our PLM portfolio is a strong growth driver now. And another great story comes from Asia Pacific. Nihon Kohden, a leader in cardiovascular diagnostics, selected the 3DEXPERIENCE over Siemens a few years ago to drive their product development. Now they are expanding into manufacturing with a clear focus on quality by design. That means better traceability, better quality, full compliance, everything with only one platform. And I think this is a great example of how we can support the full product life cycle in Life Sciences.

Now let's shift to Infrastructure. You know that we are addressing this market with a specific focus because we are building the leadership in some way on the most complex high-value-added systems. We started with the nuclear and the rail, and now we are expanding into the data centers. This is a big space, a $650 billion market growing at 15% annually, but it's not without challenges. You know that the AI boom is really driving the massive infrastructure demand on one hand, but the energy cost is numerous.

Just to give you an example, supporting AI in the U.S. alone could require nearly 100 new nuclear plants, and almost none are being built today. So this is where we come in. With our system approach, we are helping the hyperscalers, the colocation providers and the enterprises to design more sustainable infrastructure and run it more efficiently, reducing emissions, energy use and water consumptions. And I think we are extremely well positioned to lead in this critical growth area, and we are already seeing the contribution in our Q2 results.

Now let's talk about AI. And specifically, as I was mentioning, the regulatory compliance. This topic is quickly becoming one of the biggest bottlenecks in highly regulated industry. But for us, it's a $100 billion opportunity, doubling every 5 years.

Do you know that in aerospace, an aircraft certification can take 5 to 3 years and involve a minimum of 10,000 requirements to be fulfilled? This with only one authority for the regulations. In pharma, it's almost the same story. The submission for one drug can be over 100,000 pages, and each day of delay costs $1 million. In banking, it's even worse because updates are constant and with $15 billion in fine just in 2024 last year.

So I think with our unique approach, which consists to have what we call the AI-powered virtual twin, we are really turning compliance into a strategic advantage, transforming documents, millions of documents, in fact, into dynamic knowledge and automatically verifying the design, so it's really compliance by design.

So what used to take months now takes minutes. What used to slow down your process and your calendar, your timing, now helps you to move faster. And I think if we do well, we can move the compliance being a cost center to a competitive edge, and we are building these solutions to make it possible. We have already launched our first AI-powered worlds and virtual companions, with more than rolling out soon.

Lastly, let me touch on the recent acquisition. In Q2, we acquired Ascon Qube technology, a startup in factory automation based in Germany, the nation of automation. And what do they do? They work with major players such as BMW and others. And their software is now part of our DELMIA brands to enlarge and to complement our manufacturing offer.

The factory automation is really a large market. You know it's dominated by the hardware. And in fact, 90% of the $13 billion market is hardware and requesting a lot of professional services for the programming. But that's going to change with AI. We believe the software will drive 2/3 of the value in the coming years. Why so? Because with the rise of the software-defined products, now we are seeing the need for software-defined production systems, flexible, cost effective and fully traceable, and this is the future we are building. And AI is making this possible because again, we can, from the virtual twin of the products, automatically generating the programming of the production systems.

So to close things out, I think we are operating in a world of growing complexity, and this is exactly where we had value. Our 3DEXPERIENCE platform helps customers to move faster, smarter and adapt with confidence. And I think if we step back a little bit, we are creating deep and long-term value for our customers, and we are just getting started.

So thank you again for your participation. And now over to Rouven for more financial and guidance.

[Rouven Bergmann, executive]

Thank you, Pascal, and welcome to our call today from my side. Thank you for joining us.

Q2 was a solid quarter. As you heard, it was well aligned with our objectives. But what I'm particularly pleased about is the resilient performance across the manufacturing industries, mainly driven by the outstanding performance of our brands, SIMULIA, ENOVIA and CATIA.

Regarding operational efficiency, we continue to focus our investments on capturing long-term value while protecting EPS. As you heard, in this quarter, we acquired Ascon, an innovative start-up with a mission to make software-defined manufacturing industrial-scale ready. We see the world of software-defined products and software-defined manufacturing coming together. It's an exciting move that positions us very strategically with AI in manufacturing automation.

Now let's review the Q2 performance and the first 6 months in more detail. In Q2, total revenue and software revenue were both up 6%, excluding currency, driven by subscription revenue growth at a rate of 10%. The engine of growth remains the very positive momentum in 3DEXPERIENCE, up 20% in Q2. We had a good quarter in upfront license revenue, up 5%, due to strong growth in China and multiyear 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, operating margin was up 10 basis points. EPS was EUR 0.30, up 4% excluding FX.

Now looking at the first 6 months, total revenue was EUR 3.096 billion, up 5%. Service revenue was lower in H1. However, we expect Q2 improvements to continue in H2, in line with our full year objectives.

To conclude this section, I want to highlight the progress and the shift of our business model and the lifetime value reflected in our recurring revenue base growing at 7%, driven by subscription revenue, up a strong 13% year-to-date. The recurring revenue now represents 83% of our software revenue. This 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 3DEXPERIENCE performance, up 20%. As a result, the share of software revenue now represents 41%, up 5 points. New 3DEXPERIENCE deals in the quarter show a healthy distribution across many industries such as High-Tech, auto and aero and defense. This highlights the growth potential of 3DEXPERIENCE 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 26% growth in H1, driven by strong customer adoption of cloud, and we are encouraged by the early adopters testing AI use cases.

Now let me briefly review the Q2 actuals versus our objectives. Total revenue came in at EUR 1.523 billion in the quarter, and it was EUR 12 million above the midpoint of our guidance in constant currency. However, currencies did move more than expected in the quarter, resulting in a negative headwind of EUR 38 million.

The operating margin was 29.3%. It was below the guidance midpoint due to a negative currency effect of 30 basis points.

Now looking at the operating income in Q2, it was up 5%, excluding FX, with an OpEx growth of 6%. Looking into H2, we expect to maintain a similar expense run rate as we will make focused investments to support our growth strategy.

EPS was EUR 0.30, and it was within the guidance range, thanks to a solid operating performance and 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 geographies and product lines. Europe was up 10% in Q2, led by France and Southern Europe. We saw good growth across multiple end markets such as automotive, Aerospace & Defense as well as High-Tech. Subscriptions provided a very strong tailwind in the quarter.

Americas rose 2% in Q2, with good performance in Industrial Equipment and High-Tech. They were both up double digit in the Americas, and we also saw very resilient growth in Aerospace & Defense over the first 6 months.

Asia was up 6% in the quarter, and it was led by strong double-digit growth in China, which was driven by High-Tech, Industrial Equipment and a solid performance in T&M. Meanwhile, India and Korea showed resilient performance, up mid-single digits in the first 6 months.

Now over to our product lines. Industrial Innovation software revenue had an outstanding quarter, as earlier mentioned, growing 9%, and it was led by strong growth in SIMULIA and good performance from CATIA and ENOVIA.

The Life Sciences growth was flat in Q2, with MEDIDATA continuing to be impacted by a weak CRO segment. While the enterprise segment was performing well at mid-single-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 highlighted. In fact, 3DEXPERIENCE is a platform to connect all domains across the enterprise to accelerate bringing drugs and medical devices to patients at lower cost while providing best-in-class regulatory standards.

And combining the revenue driven by 3DEXPERIENCE solutions in Life Sciences industry, we saw a growth in the mid-teens at a revenue run rate over EUR 200 million plus. So it's a meaningful business.

Again, this quarter, we had several wins such as Amgen, Vertex, Corcept and, as highlighted by Pascal, Nihon Kohden in medtech. And therefore, one thing in common, we are winning with the 3DEXPERIENCE platform.

Now an additional comment on MEDIDATA. We are confident on our momentum with large pharma as evidenced by our strong renewals over the last quarters as well as our pipeline. With regards to the clinical trial market, the volumes have stabilized. However, the market has continued to shift to smaller trials and a lower share of Phase 3. At the same time, MEDIDATA maintained its market share globally. And with Rave Lite, as you know, we are more competitive in the price-sensitive domains and regions. Now reflecting this on our outlook, we expect modest growth for MEDIDATA in H2.

Moving to Mainstream Innovation. Growth for the segment was moderate. SOLIDWORKS was up mid-single digits, with volume acceleration and the shift to subscription well underway. Centric had a softer quarter than expected in Q2 due to the timing of some renewals. Overall, we see Centric very well positioned and expect renewed growth in H2, supported by the tailwinds of renewals and 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 to optimize design, production and the distribution of collections in real time. It is a top priority when operating in constantly changing market dynamics.

Now let me turn to cash flow and some balance sheet items. Cash and cash equivalents totaled EUR 4.084 billion as of Q2, and it compares to EUR 3.953 billion at the end of 2024, an increase of EUR 131 million. Reported on a euro basis, cash and cash equivalents were negatively impacted by the weakening of the U.S. dollar to euro over the period, with an impact of EUR 274 million as of H1. At the end of the quarter, our net cash position totaled EUR 1.506 billion, an increase of around EUR 50 million versus the net cash of EUR 1.459 billion as of December 31, 2024.

Now let's take a look at what was driving our cash position at the end of the first half. We generated EUR 1.147 billion in operating cash flow for the first 6 months versus EUR 1.130 billion last year. This is a 2% increase year-over-year. While we had seasonally strong Q1 cash generation driven by good collection on contracts signed in Q4 last year and improvement in operating working capital, Q2 was mainly impacted by the timing of billings and some payments and a negative currency translation impact. Net of currency, operating cash flow would have been up 4% year-to-date compared to the 2%.

For the first 6 months, cash conversion from non-IFRS operating income was 1.23x, similar to last year. Now for any additional information, you will find the operating cash flow reconciliation in our presentation published this morning.

To sum up, operating cash flow in H1 was mainly used for investments, EUR 332 million, of which EUR 240 million was for acquisitions, with the remainder in CapEx of EUR 95 million to support our cloud growth and our facility infrastructure. We paid EUR 343 million in dividends and made net repurchase of treasury shares of EUR 84 million.

Now what do we expect for the full year? We now expect operating cash flow to be flat for the full year. The main reason for this change is that in the current volatile business context, it was important for us to secure long-term customer contracts in H1 that include payment terms with collections early next year. The bottom line is we have a timing impact on our operating cash flow in 2025. However, we are securing the long-term value of our customer relationships.

The other element impacting the year-on-year operating cash flow growth is related to nonrecurring tax payments as well as social charges, which will mainly materialize in the third quarter. This includes the impact of the rate increase on social charges for share-based compensation and the exceptional contribution surtax in France. All of this together is an impact of EUR 65 million to EUR 70 million. This was already factored in our previous estimates.

The DSO improved by 14 days versus the beginning of the year, and we want to continue this effort, and we will continue this effort in the second half.

Now looking at our financial objectives. We maintain our full year 2025 guidance range for both total and software revenue to grow 6% to 8%, excluding currency, and EPS to grow 7% to 10%, excluding currency. That means recurring revenue to be 7% to 8% growth. And within that, subscription growth in the range of 13% to 15%.

As some of you have already reflected in your models, we also adjusted our FX assumptions to reflect recent currency movements, particularly the depreciation in the U.S. dollar. This impacts our revenue and EPS in absolute terms.

And thus, we are now expecting to report total revenue for full year 2025 in the range of EUR 6.410 billion to EUR 6.510 billion. Likewise, there's 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 for the full year to EUR 1.32 to EUR 1.35, with currencies causing a EUR 0.04 of negative impact. This is all based on our new FX assumptions for an average rate for the year of euro to dollar at 1.13 and euro to yen of 166.

Briefly for Q3, let me provide a bit more insight to help you refine your models. We expect Q3 revenue growth in the range of 5% to 8%, with software growing 5% to 9% and subscriptions 10% to 15%. Operating margin is expected to be in the range of 29.7% to 29.9% and EPS growth of 5% to 9%, excluding currency, to reach EUR 0.29 to EUR 0.30 for the quarter.

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 tariff uncertainties. So you can see the momentum building, and we expect H2 to continue in a positive direction. At the low end of the guidance, this reflects a 2 points of acceleration from H1 to H2, and the building blocks are broad based, supported by our pipeline, including the momentum of 3DEXPERIENCE in Industrial Innovation, but not only, the gradual improvement we expect for SOLIDWORKS as well as Life Sciences, plus the return of Centric to double-digit growth.

Finally, before I finish, I want to highlight that we continue to invest right for innovation, for our 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 the diverse industries we serve.

And now Pascal and I look forward to taking your questions. Thank you.

[Operator]

[Operator Instructions] Our very first question this morning is coming from Adam Wood calling for Morgan Stanley.

[Adam Wood, analyst]

Maybe just a couple, if I could. Maybe just first of all, there's obviously been a lot of discussion around the uncertainty in the market and the difficulties of getting deals closed. Could you maybe just talk a little bit about the linearity of the quarter? Was the disruption more kind of weighted to April when that was the kind of peak uncertainty in the market? Or has it continued right through the quarter? And how did that impact large deal signings in Q2?

And then maybe secondly, as we look to the rest of the year, you've talked about some of the drivers to hit the low end of the guidance. But obviously, I think Street sits a little bit below the low end of your guide now and there's an acceleration required, especially in Q4, which has a tough base comp. Could you maybe just talk us through a little bit what would get you to a bit better than the low end in terms of the big deal pipeline, in terms of what you need to see in the bread and butter of the business improving? And maybe if there's any insight you could give on what you're assuming on conversion rates of pipe versus what you saw, especially in Q4 last year?

[Rouven Bergmann, executive]

Thank you, Adam. I'll start, and I'm sure Pascal has a few things to add. So to the uncertainty in the market, you're right. The volatility in the market is persistent. It was there in Q2. We see it probably the most in the U.S. market.

If I reflect on Q2, the large deals that we signed in H1, they have -- they're very well managed. They have a certain plan in order to close them. Typically, it always goes to the end of the quarter. So April, for sure, was -- the beginning into the quarter is when you really formalize and finalize all your plans, of course. The liberation day in April was not helpful in this. It's creating a lot of discussions, and that was probably not expected so much, but I think we managed that well throughout the quarter, and we're able to close what we expected to close pretty much in Q2.

There are, however, deals that moved from the first half into the second half, which brings me to your second part of your question, Adam, which -- our deal pipeline for H2, when I compare H1 versus H2, as I said, there is a 2 points of acceleration required to the low end of the guidance. We are now in a trajectory with the midpoint for Q3 to be between 6% to 7%, which will then give us around 7% to 8% for Q4 to reach the low or 8% to closer to 9% to reach the midpoint.

Our pipeline is weighted towards Q4. That is right, but that's traditionally the case. As I mentioned, we have some deals that came from H1 into H2 that are giving us confidence and visibility into Q3. They are -- there are multiple sectors, not dependent on one sector. So I think we have a good solid road map for the second half of the year, which assumes moderate acceleration quarter-to-quarter.

Q3 also has a favorable base effect, which we want to leverage. We know Q4 was a better quarter last year, but our pipeline is well balanced to manage that. And not only from an industry perspective, I feel it's balanced. It's also balanced from a geo perspective. As we have seen, we had a very good Q1 in the Americas. We have now a strong Q2 in Europe. We had resilient performance across Asia with good performance in China, and that is a good starting point as we transition to H2.

[Pascal Daloz, executive]

Maybe one additional comment, Adam, I can make, Pascal speaking. Because at the end, the question you're asking is really related to the Q4. The Q4 pipeline is exceeding 2.5x, which is a good pipeline. So -- and you're right to mention that last year was a good quarter, Q4. But the pipeline is really there. And as Rouven was saying, it's well diversified from an industry and from a geo standpoint, but also relatively well balanced between large deals and small deals. So it's not only concentrated on 1 or 2 large deals to basically make the number.

The second comment I want to make is the way we build the guidance, very simple. We -- if the volatility stay what it is, what we have seen in H1, we are basically in the low to mid. And if the volatility is improving, I think we have enough material to be between the mid and the high. It's as simple as that.

[Operator]

[Operator Instructions] We will now move to Michael Briest of UBS.

[Michael Briest, analyst]

Yes. Just in terms of the cloud performance, I appreciate there's volatility quarter-to-quarter, but 15% growth in 3DEXPERIENCE Cloud is quite a bit slowdown from Q1, and obviously, you have an ambition to get that to half of the revenues over the next few years. So can you talk about what your longer-term discussions, I guess, are with customers that are giving you that optimism or confidence in that mix shift and why customers aren't adapting to cloud today, maybe that relates to UNIV+RSES as well.

And then, Rouven, just on back on the cash flow. You made some comments about Q3 and some charges. Can you talk about Q3 cash specifically, what we should expect in terms of year-on-year or year-to-date? And then do you think you'll catch up, if you like, the flat cash flow performance this year in 2026 with a better than operating profit growth rate in operating cash flow?

[Pascal Daloz, executive]

Why don't I take the first one maybe, and feel free to add whatever you want. So Michael, the cloud performance of the 3DEXPERIENCE is relatively linked to the large transaction. That's basically the -- I go straight to the point. So this is reflecting the fact that in Q2, we didn't have 1 or 2 large transactions driving basically or accelerating the revenue on the cloud.

Now why it's linked to the large transactions for the time being? Because most of the large companies, they have planned to move to the cloud. And the reason for them, there are multiple. One is in our space to decommission many, many legacy system they have. You could not imagine, if you take an automaker, an aerospace company, a high-tech company in the PLM space, how many proprietary software they still have, how many heterogeneous systems. And the cloud is really a way to rationalize it in a much better way, assuming you have only -- you have one common platform for all the applications. This is what we are providing to them.

The second benefit, most of the large engagement we do are multiyears, as you know. And this is giving for them the flexibility to move the capacity from the design to manufacturing to simulation when it's needed. So the level of commitment is secure. However, we are giving this flexibility. And it's not only a business model of flexibility. It's also an easy way to provide and to give the services to different users. This is the second reason.

The third reason, as you mentioned, is related to AI and with 3D UNIV+RSES. Because if you want to get the benefit of what we do, it's easier to do it if it's on the cloud because our engine can automatically work on the data sets and provide, through the virtual companion of the generative experiences, the capability at the finger tips, if you want, or maybe tomorrow at the speech tips, we should say, because you are speaking to the systems for all the different users we are targeting. So if we project ourselves, I think all the large customers we have in the different industry embarking with 3DEXPERIENCE are projecting themselves on the cloud.

The question is after on the mainstream and the mid-market. What we see with the mainstream, the SOLIDWORKS or the WORKS family, the cloud is really accelerating. And I think it's -- the primary reason is coming from the AI because many of those users are looking from productivity tools in order to be more efficient and to do more with almost less. And it's relatively affordable for them.

Where it's still a little bit lagging behind is on the mid-market, the Tier 2, Tier 3 suppliers. Why so? Because they have to serve multiple large OEMs. And usually, they have different setup for all the OEMs. And they do not -- I found already their way, if you want, to navigate with one single instance. We are working on it because as you know, in the auto sector and aerospace sector, we have most of the large OEMs. Then moving to the cloud is definitively opening the door to create what we call suppliers hub. And this is -- it will happen. It's just lagging a little bit behind.

So long answer, Michael, but I think I'm pretty confident on the cloud trajectory in the coming quarters and years.

[Rouven Bergmann, executive]

Yes. And now to the cash flow, Michael, I go specifically to Q3. So what's driving the Q3 situation, which I want to make sure you are reflecting that for the next quarter. I see, come straight to the point, the operating cash flow to be down around EUR 120 million year-over-year.

That's driven by 3 factors. The first factor is high payments for social charges related to share-based compensation. And they are significantly higher this year than last year because the contribution rate in France is increased from 20% to 30%. And the significant vesting event is in Q3 of our share-based compensation. So that drives an impact of about EUR 40 million to EUR 50 million alone to increase.

The second impact, as I referred to before, is the timing effect. You mentioned that the contract liabilities are lower than what you would expect. It's because of what I mentioned. We have signed large deals with terms to collect the cash beginning of next year. This timing effect, of course, impacts Q3 compared to the years before in terms of the structure. And that's about -- of that overall effect, I attribute about 1/3 of this effect to the third quarter. The timing effect overall, as I mentioned, is about EUR 100 million to make the operating cash flow year-over-year flat. So 1/3 of that is impacting Q3. And then we also have an FX impact on the quarter.

And so you add those 3 effects together, it's around EUR 120 million. That's what I expect to be lower year-over-year in Q3. Now Q4, I expect to be improved year-over-year slightly to reach the flat outlook for the year.

[Michael Briest, analyst]

And will you have a catch-up next year because cash...

[Rouven Bergmann, executive]

Yes, yes. Yes, of course. There will be the catch-up at the beginning of the year. I expect the majority of it in Q1 because this is -- we will have the invoicing at the end of this year, and then the collection, we typically have 90-day terms. So we will collect in Q1.

[Operator]

We'll now move to Mohammed Moawalla of Goldman Sachs.

[Mohammed Moawalla, analyst]

Two for me. Firstly, maybe, Rouven, just on the -- as we think of larger deal impacts, how should we think of the assumptions at the low and the high end of the kind of Q3 outlook? I know you've got larger deals, which tend to be back-end loaded, but do you need sort of larger deals to kind of hit at least the lower half of the Q3 guide?

And then secondly, Pascal, obviously, the -- you've seen quite a bit of volatility over the past sort of 18 months not helped by all the kind of tariff noise. But how big of a kind of transformative effect can you see around your visibility or your conversion rate once some of this noise subsides and particularly with regards to bringing some of these larger strategic opportunities over the line?

[Rouven Bergmann, executive]

Thank you, Mo, for your questions. So specifically on Q3 guide, between the low and the high, the 5% to 8%, I think the -- how we built the guidance for the third quarter is really factoring in the moderate acceleration expecting in mainstream for SOLIDWORKS and also the acceleration on Centric in the third quarter. And the momentum we have on 3DEXPERIENCE is then going to play out, whether we will be the mid- to the high or whether we will stay at the mid.

We have 3DEXPERIENCE deals, larger ones, fairly advanced that moves into the second half. And we will see if we can close them before -- within September or they will become Q4. But of course, we see Q3 another way for us to derisk the year. So we will be very focused on closing those deals in the third quarter. But for now, I really want to make sure the focus of the guidance for Q3 and the expectation should be around the 6% to 6.5% growth for Q3, which really requires to deliver the acceleration on SOLIDWORKS mainstream, on Centric. We expect a moderate acceleration also in Life Sciences. The 3DEXPERIENCE momentum with midsized deals is well underway. And then the large deals will make the difference.

[Pascal Daloz, executive]

On the volatility, Mo, the best way for me to answer to your question is to tell you that since the beginning of the year, from one quarter to another one, we have 2x more deals in numbers and in amounts shifting from one quarter to another one. Usually, we have, let's say, between EUR 25 million to EUR 40 million shifting depending the quarter from one quarter to another one. Now it's 2x more.

Where it's happening? Specifically in the U.S. And why so? Because this is really the geo where we have most of the dependency on the large deals. And this is also -- and you can see in our quarterly results, we had an outstanding performance in Q1, and Q2 in the U.S. is smooth. At the end, it's still a good performance for H1. But from one quarter to another one, you have this volatility. That's my best answer I can give to you. So the way again, we have built the guidance, we have taken this into account.

[Operator]

Our next question will be coming from Mr. Laurent Daure of Kepler Cheuvreux.

[Laurent Daure, analyst]

Two for me as well. The first question is back on your comments on the CMD and the EUR 1 billion of revenue long term on AI. If you could share with us just for the first half of 2025, how concrete is it today in terms of revenue and the ramp-up and the acceptance, the very early acceptance of customer?

And my second question is back to the second quarter. I understand that most of the margin shortfall is FX related. But even without the FX, it seems like it's biased to the low end of what we were expecting. So I'm trying to get what kind of costs or maybe the mix of revenue has slightly changed from your expectations into the quarter?

[Rouven Bergmann, executive]

Okay, Laurent, thank you for the questions. On the Capital Market Day, I think for you, what's most important to take away is that engagements are going very well. They're very strategic. We are making a lot of advancements and gaining traction. This will help us to clearly define and refine the models we are going to apply to capture the value. So we're very pleased with where we are. And it is strategic and top to top. So I think the strategy is resonating very well, and the expectations are high, and that is good.

I also want to draw your attention on the fact that the acquisitions that we have made year-to-date in 2025, starting with ContentServ and now with Ascon, really have AI at the center. And we are bringing this at scale to our clients. We are opening new growth territories as Pascal was highlighting, in areas where we bring a lot of experience because regulated industries is at the core of our main clients. And they're facing real problems that can be very differently. They become competitive advantages if you leverage AI on our platform. And so we have a real opportunity to reposition and drive value in the future compared to where we are today, where we are already very important to them, but our importance will only increase.

So I think we are doing it from an organic perspective to summarize, but also from an inorganic perspective to enter and conquer new territories of growth, and AI automation is a big one that we have talked about today. Of course, from now on, we will have to see this also translating into business and growth, but this is to come.

I don't know, Pascal, if you want to add something to this?

[Pascal Daloz, executive]

Maybe, Laurent, I can give you much more qualitative also things. If I look at since the beginning of the year, since basically the announcement of 3D UNIV+RSES, I think we have a collection of engagements being centered around AI. So it's not an extension of what we do, is center with a significant change of order of magnitude of what we are talking about. There are certain engagement where the multiplying factor is around 5x. That's the order of magnitude.

The question is a little bit different, in fact, for us right now. If you look at all the companies promoting AI, all of them, they are losing money, all of them on earth. So why so? Because it's a very difficult thing to price. We have defined the pricing principles. And you remember, I explained it, it's a question we had during the Capital Market Day. But now we are confronting this to the reality of the customers. And it takes time for them to mature. It takes time for them also to plan it and to predict it for the future, and we are right in the middle of this kind of conversation right now.

But it's not only 1 or 2. I think it's a lot of large engagement we have really centered around this one and in all the sectors, auto, aerospace, Industrial Equipment, High-Tech, for sure, and also Life Sciences.

So it's maybe not answering completely to the question because what you are looking for is a number for H2, but what I'm trying to be is very transparent with you. The problem is not the number of engagement we have. The number is not the value because the value is really demonstrated. The question is how we are converging on the price, which is relevant for our customers and relevant for us as well. That's the real topic.

[Laurent Daure, analyst]

Okay. And on the margin side?

[Rouven Bergmann, executive]

Of course, Laurent. The margin, we don't forget the margin. Yes. So you're right. To categorize it, the results, the margin was probably at the lower -- was more of a low light to be below. It's impacted by currency of 50 basis points. There is another impact related to the dilution from acquisitions, which was around 20 to 30 basis points. So if you exclude that effect, the margin would have been up 10 basis points. So slight improvement year-over-year. And so that's one part.

Another part is we also had some onetime effects last year in our margin, which made the comparison a bit more challenging. However, of course, this was known coming into the quarter. So I expect it to be around -- probably more around the low end of the guide of the margin, which, excluding the acquisitions, is where we are.

Now looking forward, I think which is more important, I expect the OpEx cost to stay around the 6%. And with the acceleration we see in H2 at the low end 2 points, of course, more compared to H1, we will see the margin expansion in the second half and also contributing to the full year as expected. I hope that addresses your point.

[Laurent Daure, analyst]

Yes, yes. And I was just wondering because the impact from acquisition at the -- were you surprised? I'm wondering what's new versus 2 or 3 months ago. What surprised you? Because I guess you probably had already the acquisition contributing negatively the effect from last year. So the FX is new. But the rest, you should already have it in your forecast. So I was really wondering if there was something you were not expecting.

[Rouven Bergmann, executive]

No. No, I was expecting to be more at the lower end of the range to come in. And the acquisition of Ascon, of course, was new. We also didn't -- couldn't anticipate how Ascon would close because at the end, it was an asset deal where we acquired a part of the company, and there was some restructuring related to this as well. All of that contributed to the slight miss below the low, but I think this was anticipated.

[Laurent Daure, analyst]

So this acquisition has been consolidated for the full quarter?

[Rouven Bergmann, executive]

Almost.

[Operator]

Ladies and gentlemen, due to time constraints, this will end today's question-and-answer session. I will now turn the call back over to your hosts for any additional or closing remarks.

[Pascal Daloz, executive]

Thank you so much for your participation. Rouven and Beatrix will be on the road. So we expect to see you in person in the coming days. If not, see you after the summer break for the good things. Bye-bye.

[Operator]

Thank you very much.