Lectra : Management discussion and analysis of financial conditions and results of operations for the third quarter and first nine months of 2020

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR THIRD QUARTER AND FIRST NINE MONTHS OF 2020

Dear Shareholders,

We report below on Lectra Group's business activity and consolidated financial statements for the third quarter and first nine months of 2020, ending September 30. The financial statements have not been reviewed by the Statutory Auditors.

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 first nine months of 2020 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, in revenues, and in the income statements for the third quarter and first nine months of 2020 are provided in the additional information of this report, starting on page 7.

1. SUMMARY OF OPERATIONS FOR Q3 2020

With an average exchange rate of $1.17/€1 in Q3, the US dollar was down 5% compared to Q3 2019 and the yuan declined by 4% against the euro. Currency changes thus mechanically decreased revenues by

1.8 million euros (-3%) and income from operations by 0.9 million euros (-9%) at actual exchange rates compared to like-for-like figures.

In its Q1 and Q2 financial reports, published April 29 and July 27, 2020, respectively, the Group had anticipated the impact of the COVID-19 crisis and its consequences on the financial statements for 2020. Nevertheless, it had indicated that a gradual increase in the volume of orders, revenues and income from operations could potentially occur as early as the third or fourth quarter of 2020.

While the repercussions of the pandemic continued to mark Q3, several signs of improvement were observed.

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Financial Report at September 30, 2020

Indeed, after a decline of 42% in Q2, orders for perpetual software licenses, equipment and accompanying software, and non-recurring services (20.7 million euros) were down 21% compared to Q3 2019.

The annual value of new software subscription orders amounted to 0.8 million euros, up 75%, thus confirming the adoption of Lectra's new offers for Industry 4.0, sold in SaaS mode.

At the same time, revenues from consumables and parts, a leading indicator of the Group's customers' activity, declined by 9%, following a 46% drop in Q2.

Total revenues amounted to 56.5 million euros, down 15% compared to Q3 2019 (-18% at actual exchange rates). They had fell by 28% in Q2 2020.

Thanks to the measures implemented since March to control spending, and maintained in Q3, overhead costs decreased by 10% compared to Q3 2019.

Income from operations came to 8.5 million euros, down 24% (-31% at actual exchange rates), while it had decreased by 79% in Q2.

The operating margin was 15%, down 1.8 percentage points like-for-like (down 2.9 percentage points at actual exchange rates) compared to Q3 2019.

Net income amounted to 6.6 million euros, down 24% at actual exchange rates compared to Q3 2019. It was down 85% in Q2 2020.

Free cash flow was positive by 8.5 million euros (5.6 million euros in Q3 2019). This includes receipt of the balance of the 2016 research tax credit, in the amount of 2.6 million euros (the balance of the 2015 research tax credit, in the amount of 5.7 million euros, was received in Q4 2019).

2. CONSOLIDATED FINANCIAL STATEMENTS FOR FIRST NINE MONTHS OF 2020

The COVID-19 epidemic and its consequences really marked the first nine months of 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.

Lockdown measures implemented by most countries, especially during the first half of the year, have led to a significant reduction in activity by the Group's customers, and to the suspension of some commercial discussions with Lectra.

While a gradual increase in activity occurred in Q3, many customers have not reached the level of activity they had before the crisis and have been led to temporarily reduce their capital expenditures or operating expenses. All three strategic market sectors-fashion, automotive and furniture-have been strongly impacted.

With an average exchange rate of $1.12/€1 for the first nine months of 2020, the US dollar remained stable compared to the same period in 2019 ($1.12/€1), while the yuan declined by 2% against the euro. Currency changes thus mechanically decreased revenues by 1.6 million euros (-1%) and income from operations by 0.6 million euros (-4%) at actual exchange rates compared to like-for-like figures.

Decline in revenues and income from operations

In this unique and unprecedented environment, revenues (170.6 million euros) decreased by 16% compared to the first nine months of 2019 (-17% at actual exchange rates).

Orders

Orders for perpetual software licenses, equipment and accompanying software, and non-recurring services (54.9 million euros) were down 30%. Orders for perpetual software licenses (5.7 million euros), equipment and accompanying software (41.6 million euros), as well as training and consulting (6.5 million euros) declined by 41%, 29% and 28%, respectively.

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Financial Report at September 30, 2020

Geographically, orders for perpetual software licenses, equipment and accompanying software, and non-recurring services fell by 44% in Asia-Pacific, by 24% in Europe and rose by 2% in the Americas. They were down 49% in the rest of the world (including North Africa, South Africa, Turkey and the Middle East). They decreased by 41% in the automotive market, 29% in the fashion market, 14% in the furniture market and 12% in the other industries.

In addition, the annual value of new software subscription orders amounted to 1.8 million euros, up 56% compared to the first nine months of 2019. These orders increased in all geographical regions, primarily in the fashion market.

Revenues from software licenses, equipment and accompanying software, and non-recurring services

Revenues from perpetual software licenses, equipment and accompanying software, and non-recurring services (54.4 million euros) fell by 31%. They include mainly:

• Perpetual software licenses (5.8 million euros), which decreased by 44% and accounted for 3% of total revenues (5% in 2019);
• Equipment and accompanying software (40.1 million euros), which declined by 31% and accounted for 24% of total revenues (28% in 2019);
• Training and consulting (7.4 million euros), which decreased by 16% and accounted for 4% of total revenues (4% in 2019).

At September 30, 2020, the order backlog for perpetual software licenses, equipment and accompanying software, as well as training and consulting amounted to 19.8 million euros. It rose by 0.6 million euros compared to December 31, 2019, and by 4.2 million euros compared to June 30, 2020, like-for-like.

Revenues from recurring contracts, and consumables and parts

Revenues from recurring contracts-which represented 44% of total revenues-amounted to 74.5 million euros, a 4% increase.

This revenue component is a key pillar of the Group's business model and constitutes a protective factor that will help mitigate the impact of the COVID-19 crisis on revenues and results. The breakdown is as follows:

• Software subscriptions were 2.5 million euros (0.9 million euros in 2019);
• Software maintenance contracts (28.2 million euros), which declined by 1%, represented 17% of total revenues;
• Equipment and accompanying software maintenance contracts (43.8 million euros), which increased by 3%, represented 26% of total revenues.

In parallel, revenues from consumables and parts (41.6 million euros) were affected by the acute reduction in business activity of the Group's customers due to the health crisis, especially during the lockdown periods, and decreased by 21%. They represented 24% of revenues (26% in 2019).

Overall, recurring revenues (116.1 million euros) declined by 7%.

Gross profit

Gross profit amounted to 128.5 million euros, down 14% compared to 2019.

The overall gross profit margin was 75.3%, up 2.2 percentage points relative to the first nine months of 2019. This increase stems primarily from the evolution of the product mix, and specifically from the greater share of recurring contract revenues.

Personnel expenses and other operating expenses incurred in the execution of service contracts or in training and consulting are not included in the cost of goods sold but are accounted for in overhead costs.

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Financial Report at September 30, 2020

Overhead costs

Total overhead costs were 112.9 million euros, down 6% compared to 2019. The breakdown is as follows:

• 106.5 million euros in fixed overhead costs (-2%);
• 6.5 million euros in variable costs (-42%).

Research and development costs (23.2 million euros), which are fully expensed in the period and included in fixed overhead costs, represented 13.6% of revenues (23.1 million euros and 11.2% of revenues in the first nine months of 2019). After deducting the research tax credit applicable in France and grants received, net research and development costs totaled 16.6 million euros (15.8 million euros in 2019).

Income from operations and net income

Income from operations amounted to 15.6 million euros, down 45% compared to the first nine months of 2019 (-47% at actual exchange rates).

The operating margin was 9.1%, down 5 percentage points like-for-like, and 5.3 percentage points at actual exchange rates.

Financial income and expenses represented a net charge of 0.3 million euros. Foreign exchange gains and losses generated a net loss of 0.6 million euros.

After an income tax expense of 3.7 million euros, net income totaled 11 million euros, down 48% at actual exchange rates.

Net earnings per share came to €0.34 on basic capital and on diluted capital (respectively €0.67 and €0.66 in the first nine months of 2019).

Positive free cash flow

Free cash flow was 10 million euros (18.1 million euros for the first nine months of 2019). This decline is attributable mainly to the lower income, the working capital requirement having decreased by 1.6 million euros in the first nine months of 2020.

Particularly robust balance sheet - positive net cash position of close to 120 million euros

At September 30, 2020, consolidated shareholders' equity amounted to 183.5 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 117.9 million euros (120.6 million euros at December 31, 2019), after payment of the dividend.

The working capital requirement at September 30, 2020 was a negative 19 million euros. It comprised the current portion (4.6 million euros) of the 21.5 million euros receivable on the French tax administration (Trésor public), corresponding to the research tax credits recognized since fiscal year 2017. The portion to be repaid in over one year is carried on the balance sheet under other non-current assets (see note 6 below).

3. SHARE CAPITAL - OWNERSHIP - SHARE PRICE PERFORMANCE

Change in share capital

At September 30, 2020, the share capital totaled €32,346,421, divided into 32,346,421 shares with a par value of €1.00.

Share capital increased by €247,321 (with a total share premium of €1,877,339) due to the creation of 247,321 shares since January 1, 2020, resulting from the exercise of stock options.

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Financial Report at September 30, 2020