Lectra : Management discussion and analysis of financial conditions and results of operations for fourth quarter and full year of 2020

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR FOURTH QUARTER AND FULL YEAR OF 2020

Dear Shareholders,

We report below on Lectra Group's business activity and consolidated financial statements for the fourth quarter and full year ending December 31, 2020.

Audit procedures have been performed by the Statutory Auditors. The certification report will be issued at the end of the Board of Directors meeting of February 24, 2021.

Since 2017, Lectra has marketed and invoiced its software both in the form of perpetual licenses with their associated maintenance contracts and on a subscription basis for its Software-as-a-Service (SaaS) offers.

To facilitate the comparison with prior years, the Group decided in 2018 and 2019 to include subscription software sales in the amount of orders for new systems, by multiplying the annual value of the corresponding contracts by 2.2 (a coefficient that enables the calculation of the amount an order would represent, had it been sold as a perpetual license).

As from January 1, 2020, orders for new systems are reported using two indicators: on the one hand, the value of software sold separately under perpetual software licenses, equipment and accompanying software (sold in the form of perpetual licenses) and non-recurring services; and on the other hand, the annual value of new subscriptions for software sold in SaaS mode.

Revenue corresponding to orders for perpetual software licenses is reported under "Perpetual software licenses;" revenue corresponding to embedded software is reported, as previously, under "Equipment and accompanying software." Revenue from software sold on a subscription basis is reported under "Software subscriptions."

Detailed comparisons between 2020 and 2019 are based on 2019 exchange rates ("like-for-like") unless otherwise stated. As the impact of the acquisition of Retviews (see press release dated July 15, 2019) on the financial statements for the fiscal year is not material, like-for-like changes exclude only the variations in exchange rates.

The detailed tables and like-for-like changes in orders for new systems, revenues, and income statements for the fourth quarter and the full year are provided in the additional information of this report, starting on page 13.

1. SUMMARY OF OPERATIONS FOR Q4 2020

With an average exchange rate of $1.19/€1 in Q4, the US dollar was down 7% and the yuan declined by 1% against the euro, compared to Q4 2019. Currency changes thus mechanically decreased revenues by 2.8 million euros (-4%) and income from operations before non-recurring items by 1.7 million euros (-15%) at actual exchange rates compared to like-for-like figures.

While the Group's business activity and results since the beginning of the year have been severely affected by the COVID-19 crisis and its consequences, the fourth quarter performance brought confirmation of the initial signs of improvement observed in Q3.

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Indeed, after a decline of 42% in Q2 and 21% in Q3, compared to the corresponding quarters a year before, orders for perpetual software licenses, equipment and accompanying software, and non-recurring services (27.7 million euros) were 1% higher in Q4 than the fourth quarter in 2019.

The annual value of new software subscription orders amounted to 1.1 million euros, up 53%, confirming once again the success of Lectra's new offers for Industry 4.0 sold in SaaS mode.

At the same time, revenue from consumables and parts, a leading indicator of the Group's customers' activity, increased by 1% in Q4, after having declined by 46% in Q2, then by 9% in Q3 2020, compared to the corresponding quarters a year before.

Total revenues amounted to 65.6 million euros, down 8% compared to Q4 2019 (-12% at actual exchange rates). They were 28% lower in Q2, and 15% lower in Q3 than in the corresponding quarters of 2019.

Income from operations before non-recurring items came to 10 million euros, up 5% (down 10% at actual exchange rates) and the operating margin before non-recurring items was 15.3%, up 2.2 percentage points like-for-like (+0.3 percentage points at actual exchange rates) compared to Q4 2019.

After a non-recurring charge of 0.8 million euros recognized in 2020 for fees and other costs relating to the proposed acquisition of the company Gerber Technology, income from operations came to 9.3 million euros.

Net income amounted to 6.6 million euros, down 18% at actual exchange rates compared to Q4 2019.

Free cash flow was positive by 15.2 million euros (18.1 million euros in Q4 2019, which included receipt of the balance of the 2015 research tax credit, in the amount of 5.7 million euros, while the 2016 research tax credit, in the amount of 2.6 million euros, was received in Q3 2020).

2. SUMMARY OF EVENTS AND PERFORMANCE IN 2020

The COVID-19 epidemic and its consequences had a very significant impact in 2020.

From the start of the crisis, the Group took the necessary hygiene and physical distancing measures to safeguard the health of employees, customers, suppliers and other stakeholders. These measures are still in effect.

A remote working system was in place throughout the year for all employees whose physical presence on site was not required; this was done in France and all other countries where such measures were ordered or recommended by the government.

In parallel, the Group maintained all business operations. In particular, it continued its manufacturing operations; maintained deliveries of equipment, consumables and parts; and provided after-sales support for the Group's solutions worldwide and without interruption throughout the year.

Furthermore, in light of its sound financial position, capacity for resilience, and medium-term outlook, the Group decided not to put in place short-time working arrangements (under the partial activity scheme), and not to benefit from any financial support from the French government.

Lectra also supported the nation's collective effort to fight the COVID-19 crisis by voluntarily cutting masks and medical personal protective equipment.

Lockdown measures implemented by most countries, at different times during the year, led to a significant reduction in activity by the Group's customers.

While overall business activity improved in the closing months of the year, many customers were still operating below pre-crisis levels and therefore made reductions in capital expenditures or operating expenses. All three strategic market sectors-fashion, automotive and furniture-have been strongly impacted, though the furniture market experienced a rebound starting in the third quarter.

Negative impact of currency changes

With an average exchange rate of $1.14/€1 in 2020, the US dollar was down 2% compared to the same period in 2019. The slide in the dollar intensified late in the year, and the exchange rate stood at $1.23 to the euro on December 31, 2020. The yuan also declined by 2% against the euro.

Currency changes thus mechanically decreased revenues by 4.4 million euros (-2%) and income from operations before non-recurring items by 2.3 million euros (-8%) at actual exchange rates compared to like-for-like figures.

Orders down overall, strong growth in software subscription sales

In the unique, unprecedented environment of the COVID-19 crisis, orders for perpetual software licenses, equipment and accompanying software, and non-recurring services (82.6 million euros) were down 22%. Orders for perpetual software licenses (7.8 million euros), equipment and accompanying software (64.3 million euros), as well as training and consulting (9 million euros) declined by 39%, 18% and 27%, respectively.

Geographically, orders for perpetual software licenses, equipment and accompanying software, and non-recurring services fell by 32% in Asia-Pacific, by 24% in Europe and rose by 18% in the Americas. They were down 45% in the rest of the world (including North Africa, South Africa, Turkey and the Middle East). They decreased by 28% in the fashion market and by 26% in the automotive market but increased by 1% in the furniture market and 5% in other industries.

In addition, the annual value of new software subscription orders came to 2.9 million euros, up 55% compared to 2019. This strong increase, at a time when orders for perpetual software licenses fell due to the consequences of the COVID-19 crisis, confirms the positive adoption of the Industry 4.0 offers launched in 2018-2019 and strengthens the Group's confidence in their potential for growth. These orders increased in all geographical regions, primarily in the fashion market.

Strong resilience in earnings and free cash flow, despite the consequences of the health crisis

Revenues were 236.2 million euros, down 14% relative to 2019 (-16% at actual exchange rates).

Revenue from perpetual software licenses, equipment and accompanying software, and non-recurring services (77.7 million euros) were down 28%; and revenue from consumables and parts (59.2 million euros) fell 15% due to the severe reduction in business activity by the Group's customers. Revenue from recurring contracts, on the other hand, rose by 3% to 99.3 million euros. This component of the revenue stream is a key pillar of the Group's business model and constitutes a protective factor that has mitigated the impact of the COVID-19 crisis on the earnings.

Furthermore, the Group has implemented measures to reduce its overhead costs by cancelling or postponing all non-essential expenses. Overhead costs were initially budgeted to increase by 8% in 2020 but ended the year 7% lower than in 2019.

The reduction in overhead costs mitigated the impact of the decline in revenues on income from operations before non-recurring items and on the operating margin before non-recurring items, which declined by 32% to 25.6 million euros and by 3.0 percentage points to 10.9%, respectively. At actual exchange rates, income from operations before non-recurring items fell by 37% and the operating margin before non-recurring items by 3.7 percentage points.

Income from operations came to 24.9 million euros, after a non-recurring charge of 0.8 million euros recognized in 2020 for fees and other costs relating to the proposed acquisition of the company Gerber Technology.

Net income totaled 17.6 million euros, down 40% at actual exchange rates.

Free cash flow amounted to 25.2 million euros, compared to 36.2 million euros in 2019. Free cash flow exceeded net income by 7.6 million euros in 2020; the decline from 2019 was slightly less than the decline innet income, which again confirms the strength and resiliency of the Group's business model, including in a challenging environment.

Particularly robust balance sheet - positive net cash position of close to 135 million euros

At December 31, 2020, consolidated shareholders' equity amounted to 192.2 million euros (183 million euros at December 31, 2019), after payment on May 8 of the dividend of 12.8 million euros (€0.40 per share) declared in respect of FY 2019.

The Group has no financial debt. Cash and cash equivalents, as well as net cash position, totaled 134.6 million euros (120.6 million euros at December 31, 2019).

3. 2020-2022 STRATEGIC ROADMAP: FIRST PROGRESS REPORT

The Lectra 4.0 strategy was launched in 2017 with the aim of positioning Lectra as a key Industry 4.0 player in its markets before 2030. It has been implemented to date through two consecutive strategic roadmaps.

The first roadmap, for 2017-2019, established the key fundamentals for the future of the Group. These included the successful integration into its new offers of the key new technologies for Industry 4.0 (cloud computing, the Internet of Things, big data and artificial intelligence), the strengthening of the Executive Committee, the reorganization of subsidiaries into four main regions, and the launch of the first software offers in SaaS mode.

The second roadmap, for 2020-2022, was published in the financial report dated February 11, 2020. It will enable Lectra to capture the full potential of its new offers for Industry 4.0, while delivering sustainable, profitable business growth.

Despite the consequences of the economic crisis caused by the COVID-19 pandemic (see chapters 1 and 2 above), most of the objectives of the 2020-2022 strategic roadmap remain unchanged, particularly the acceleration towards Industry 4.0. The only adjustments to the original objectives are in the growth targets for the end of the three-year period - particularly following the proposed acquisition of the company Gerber Technology.

The Lectra 4.0 strategy, and each of the chapters in the strategic roadmap for 2020-2022, are summarized below, followed by the first progress report on the related actions implemented in 2020.

Lectra 4.0: a long-term vision

Markets are undergoing profound changes

Throughout the world, Lectra customers are faced with changes in consumer behavior, as buyers reveal new expectations in terms of experience and personalization, and demand ever greater transparency, authenticity and ethical commitment from all actors in the value chain.

To remain competitive, fashion brands and manufacturers have to call themselves into question. They must rethink and merge the in-store and digital experience, release new and ever-more creative models to market quicker, and demonstrate their eco-responsibility - while also reducing inventories, markdowns, and unsold stock.

In addition, automotive suppliers, under pressure from carmakers and faced with challenging market conditions, must also reinvent themselves to maintain their margins, while laying the groundwork for car interiors of the future.

Finally, furniture industry players are forced to adapt without delay to the demands of younger generations yearning for configurable and personalized furniture, changing lifestyles, and the challenges of digital technology.