PTC Inc (PTC) 2002 Q2 法說會逐字稿

Welcome to the Q2 2002 earnings call.

Following today's presentation, there will be a formal question-and-answer session. At that time, instructions will be given should you have a question. Until that time, all lines will remain in a listen-only mode. At the request of the company, this conference is being recorded. Should you object, you may disconnect at this time. I would now like to turn the meeting over to today's host, Mr. Tom Barth, PTC's Vice President of Investor Relations. Sir, you may begin.

Thank you, Michelle.

Good morning, everyone, and thank you for joining us today.

Participating on the call will be Dick Harrison, our President and Chief Executive Officer, and Ed Gillis, our Chief Financial Officer. Also available for questions will be Jim Heppelmann, the company's Chief Technology Officer and Executive Vice President of Software Products.

Before we get started, I would like to remind everyone that during the course of the conference call, we will make projections and other forward-looking statements regarding future financial performance, business trends and other future events. We caution you that such statements are only predictions and that actual results might differ materially from the results projected in our statement. We refer you to the risk details in the company's 2001 annual report and form 10K, our fiscal 1st quarter 10Q, and in the company's other reports filed with the SEC from time to time.

A replay will be available until 5:00 p.m., eastern, Friday, April 19, with a dial in of (402) 220-4184. Additionally, this conference is being Webcast and can be accessed through our Web site at PTC.com. The Webcast will also be available until Friday at 5:00 p.m.

Finally, I'd like to invite everyone to participate in our third PTC systems integrator and customer conference call with Wall Street on Tuesday, May 7, at 11:00 a.m. eastern. We pushed it back a couple of weeks to not conflict with earnings season. Much like last quarter, this quarter's call, you'll hear from a system integrator partner and one Windchill PDMLink customer will tell you their views on the collaborations phase and on our PTC solutions. More importantly, it provides you the forum to ask some questions directly. You can expect the details of this event to be available next week. So why don't we get started. Dick.

Thanks, Tom.

So, in summary, I mean the results for Q2 obviously were very disappointing. In fact, we were surprised by the results to some degree, as there was generally pretty good visibility around the sales opportunities at customer sites where we had technically won some important decisions. Customer spending in the quarter, and I think you're going to hear a lot about it from other companies, like IBM and others, did just not materialize at the end of the quarter. I've tried to describe before in many respects, even our customers don't easily understand the order approval process internal to their own companies.

We had about 14 or 15 sales opportunities that were greater than $1 million on the forecast in March that were really in the most likely best case area, and not one of them got executed in terms of closure. On the design solutions side, the MCAD business was largely flat, down just a little bit from our Q1.

We made some actually very good progress with resellers, as Rand now accounts for only 30 percent of our total reseller revenue. The Rand portion will continue to decline as the overall of our revenue, as it did last quarter, increases. We're getting more sort of diversity in terms of that revenue mix from lots of different resellers worldwide.

There's a lot of interest in Pro/ENGINEER, Pro/DESKTOP, Pro/COLLABORATE and the Link solutions in the reseller channel. 28,000 people downloaded in the quarter Pro/DESKTOP, which is a brand new product on the low end in terms of that Windows native solution. We continued to make progress on the distribution model, as today 75 percent of our sales force worldwide are now focused and deployed on large vertical named accounts.

On the PLM side, create, collaborate and control remain the foundation for product development. The PLM space in our mind is absolutely real, and it will be a very large market. As a new or emerging market, it faces more scrutiny today, during a time of reduced IT spending than it might normally see. Companies all around the world continue the trend of outsourcing an increasingly larger percentage of their products to the supply chain. This dictates the adoption of PLM solutions to manage the product development process.

In the PLM space, we won a number of important, major account technical decisions, as I described earlier, which will turn into revenue. During the sales operations review last week, we confirmed really a huge pipeline of qualified PLM opportunities, which are active work in process, but which are difficult to predict in terms of closure.

With respect to the forecast, looking forward, unfortunately, I see no discernible improvement in IT spending for the balance of calendar year 2002. We will continue to focus on achieving a break-even position from operations, which will dictate a reduction in the work force of about 300 people.

We will continue to focus on the initiatives that we've described for you in the past, including our customer satisfaction initiative, improving and achieving the highest possible levels of product quality, continuing to improve on our relationships with the systems integration partners, of which they are their premier partner today for the big five.

We want to continue to attract resellers in the low end to get leverage and productivity from that part of the marketplace. We're going to continue to optimize the sales coverage model in terms of focusing our direct people on large vertical accounts. We need to continue to improve the impact of our global services operation as well. As we described really at the February analysts meeting, we are creating a category here. It takes time for these major categories to mature and develop. When the economy turns and real IT spending improves, we are going to be extremely well positioned for growth.

Ed, let me turn it over to you, and you can take us through some of the statistics.

OK. Thanks, Dick. I'm going to spend a couple of minutes on some of the components of the numbers, and walk through a little bit on outlook. Revenues were $185 million, and loss per share before amortization was two cents. The revenue breaks down into license components of $57 million in contrast to $64 last quarter. Services at $128 million in contrast to $136 last quarter.

By geography, North America represented $80.3 million, Europe was $58.6 million, and Asia Pacific was $46.1 million. Currency had a negative impact of about $3 million in the quarter, and a year-to-date negative impact of about $6 million. If we look at the product line breakdown, Windchill revenue was $40 million for the quarter. The license component of that was $11, and the service component was $29. On the CAD side, a total revenue of $145, the license component was $46, and the service component was $99.

From an operating metric perspective, we added 3,715 seats in MCAD, with an ASP of about $12,400 per seat. We added 504 new customers in the CAD space. Recurring revenue in the CAD space was 89 percent, and 77 percent of the CAD seats were installed on NT. On the Windchill side of the equation, we added 5,100 seats for the quarter, for an ASP of about $2,100. We've got about 260 accounts now in production.

On the spending side of the equation, head count stands at 4,166, down from 4,204 last quarter. Gross margins on license were 92.9, and on services, 59.5. Tax rate for the quarter was 14.5 percent. The expected rate for the full year is now 23 percent. The accounting rules require us to book the difference basically between the original estimate of taxes for the full year, which was 29 percent, and the new estimate, which is now 23 percent, in the quarter in which the estimate changes. Accordingly, the rate this quarter is abnormally low. The difference in the expected rate for the year is obviously primarily due to lower revenue and profits and the resulting impact on the mix of profit around the world and different geographies.

If I turn to the balance sheet, cash was at $196 million, down from $228. The decrease primarily results from the loss from operations of $6 million on a kind of cash basis, the cash component of severance costs related to restructuring taken in earlier periods, which is about $12 million, and an increase in working capital, largely related to taxes receivable of about $10 million. We did not purchase any stock in the quarter.

DSO stands at 78, up from 75 last quarter, although the agings of accounts receivable over 30 days are in good shape and, in fact, are down from the prior quarter. Current revenue is $192, in contrast at $202 in the first quarter. Share count for the quarter stands at 261 million shares.

Let me briefly turn to outlook, and as I do, let me remind you that our comments regarding outlook and guidance constitute forward-looking statements. As Tom has just indicated to you, they may involve assumptions about the future which could be wrong. The risks and uncertainties associated with these assumptions are outlined in our public filings with the SEC and should be referred to in order to evaluate the reasonableness of them.

Dick kind of gave you a quick recap on the principal operating initiatives that we've described to you over the last several quarters. Despite the work we're doing around these initiatives in distribution, in product, in marketing and in operations, despite these initiatives, spending, at least in our sector of the economy, is weaker.

As Dick indicated, at this point it appears likely to last longer than we had expected. This weakness and volatility has contributed to poor predictability. It's impacted big deal spending, it's impacted new category spending, and, frankly, it's impacted the technology vertical spending disproportionately. We can do better around our key operating initiatives, and we'll work hard to improve our performance here. However, until the economy improves, we're unlikely to see significant revenue growth or profit growth or frankly, for that matter, significantly improved predictability.

At this point, we do not know what to expect for the 3rd and 4th quarters. Dick indicated we were surprised this quarter, in part because activity levels measured in terms of sales leads and sales opportunities in the pipeline were improving substantially. These did not result in revenue, and at this point, we do not know whether or when revenue is likely to result from this growing activity.

Accordingly, we're forecasting flat to slightly down revenues for the 3rd and 4th quarters at $180 million for each of the two remaining quarters. We'll adjust spending accordingly so that these revenue levels, or at these revenue levels, I'd expect we'd lose two to three cents in Q3 before amortization and be break even in the 4th quarter.

Obviously, if we do better in revenues, we'll do better in profitability. Our mix of revenue is equally uncertain, and at this point, we would use Q2 product mix as a proxy for the balance of the year. This outlook is disappointing and, in fact, it's frustrating, but we're convinced that this product development category is an under-penetrated and under-invested large opportunity.

We outlined that vision to you in our technology conference in February, and we strongly believe that if we continue to work hard at improving our execution around our major initiatives and distribution, in product, in marketing and in operations, we'll be strongly positioned to capitalize any opportunity when customers begin to spend money again. With that, I'm going to open it up for questions and turn it back to Tom.

OK, Operator, we're waiting for questions. If I could just remind everybody to ask one question, and we'll allow you one follow up. I'll be pretty strict on that today. Operator.

Thank you. At this time, we'll begin our question-and-answer session. If you have a question, press star, one on your telephone touchpad. If at any time you wish to withdraw your question, you may do so by pressing star, two. Again, that's star, one if you have a question. One moment while questions register. Our first question is from Jay .

Thanks. Good morning. A couple of questions . First on the Pro/E business. We've asked this before, but I'll ask it again. What can you do to turn that business around. Economy aside, but from a technical competitiveness or market coverage standpoint, what can you really do to halt the decline in that business. You had said at the that you had felt that the worst of the market share loss there was behind you, but that doesn't really seem to be the case after all.

The second question in regard to the PLM category overall. Again, economy aside, and recognizing that this is a new category, what can you say about your basic competitiveness there in that space and even how well you and your peers in that group are making the business case for PLM. As an example, at a presentation in Chicago just a few weeks ago, Accenture itself said that the industry needs to do a better job of making the business case for PLM. If you could address those issues.

Let me start, Jay, and then I might have Jim help me a little bit on some of the product related side on the competitive part. You know, at the February meeting, we did sort of imply that we hoped to halt that slide that you're describing on the sort of the MCAD side of the business; and we have a number of product initiatives that we've described there, such as Pro/DESKTOP, Pro/COLLABORATE, Wildfire, which is due out now in the summertime and isn't too far away, which I think can help that. In addition to that, we needed to continue to recruit resellers, particularly in the lower end of the market and mid-range companies. The MCAD business was down $5 million, which is down, in the 2nd quarter.

Coming off that analyst meeting, which was in February, the MCAD business is seeming to be pretty steady right now; and I think it will be for the balance of the year. We'll see what happens more in Q1. You know, I've said before, I think that when you look at the competitive positioning in the marketplace, we're probably declining, losing market share and declining faster than the market is. I think our MCAD business in total was down -- let me say that if I look at some of the competitors though, such as EDS, they're having exactly the same problem. I think just in general, the overall market is declining.

On the PLM side, let me let Jim talk for a minute maybe about some of the positioning around the competitiveness and what we think is happening in the space as well in the category and try to help you there. I am actually, in some ways, somewhat confident that, just leaving Pro/ENGINEER, that that part of the business is more or less getting stabilized through the distribution and the product enhancements that are going to be coming out in the next six months.

Again, calendar 4th quarter I think is going to be an interesting quarter to watch what happens then because that's our 1st quarter. Typically, for the balance of a particular fiscal year, it sort of follows what happens in the 1st fiscal quarter. Do you want to talk about the PLM stuff for a second.

Actually, if I could throw in an MCAD comment too, I'd like to.

Sure.

Just to sort of reiterate and add a bit of depth to Dick's comment. We do have big initiatives, which have either just arrived or are just around the corner. Pro/DESKTOP is an example of a big initiative to give us a viable and compelling story for how we address the low-end requirements for CAD in the broader enterprise.

The Wildfire initiative, which is all about Web technologies and peer-to-peer technologies and usability, combined with the Pro/COLLABORATE initiative, which is going very well, I think really represent a different course than Pro/ENGINEER is on from its historical course. We're not talking to customers about more and more features and functions for individual user productivity, but we're talking about a process story for how Pro/ENGINEER really becomes a critical tool in how an enterprise and a value chain work together collaboratively to develop products. I could tell you that story really resonates.

That's a story that customers want to hear versus more and more features and functions in what's already a high-end tool. I think that that story makes a lot of sense to our customers, and I think we'll continue to solidify the sort of results we see from them. With respect to the Windchill products and a bit more on the IT side of the PLM equation, the first thing I would say is when we look at deals that didn't close, the sales force never says it was due to competitive issues. We're not losing any deals as near as I can tell. It's really just around inability to close them and get the order from the customer.

Nonetheless, we are doing a lot of things that I think make our products better, more competitive and even open us up to a broader marketplace. In the quarter, for example, we introduced PDMLink, which is really our quick start deployment option for PDM, which gives us for the first time really a prescriptive way to implement the product and to do it in a fixed cost, fixed timeframe sort of approach. That really opens up a whole new category of customers and a significant amount of the Pro/ENGINEER base who really is interested in the concept of PDM but a little scared of it. To the extent that PDM is a big somewhat open-ended initiative, they're scared.

As soon as you can bound it and say this is what it does, this is what it costs, there's very little risk, and I can point to dozens of customers who have done exactly what we want to do for you, I think that changes the dynamic quite a bit. I really feel like on the Windchill side, competition is not a problem. Closing the deals in the current economic environment has been the problem, and I think that from a competitive standpoint, we're probably in better shape than we've ever been quite frankly.

Finally, from a category perspective. What are we doing to get focused on a category. Obviously, all of the work of the systems integrators is focused on that. I think, Jay, you know we hired a Chief Marketing Officer. We have substantially increased the amount of money that we put into marketing. I think we're going to spend somewhere around nine percent in marketing this year. Two years ago, we were in the 4.5 percent category.

We've got an advertising program around the theme of product first, all of which is directed to getting greater CXO focus and attention on the importance of product development. I think those things will help. None of them are like flipping a switch. They all take some consistency and persistence and patience. Next question.

Thank you. Our next question is from William Brown.

Good morning. Kind of building on some of the commentary around Windchill, you mentioned that the PLM pipeline was pretty strong. Can you give us any more perspective on that and, given that that pipeline is so strong, the outlook. The mix commentary doesn't seem -- Talk to me about how those two line up. Finally, on Windchill as well, can you just give us an update on how the additional solutions are coming together as far as development.

OK. Let me start on the pipeline, Jim, and then you can talk about the Links that are coming out. One of the things that we did recently, really in the last week, was we had a business review from basically the three major countries. We had the sales leaders in from the U.S., Germany and Japan, and we went through the forecast of their revenue.

We sort of extracted what we call base business, so, transactions under $1 million, and quantified that number for the different geographies, and then took a look at the rollup of any deal that was over $1 million. The rollup on the WIP was just over $140 million in deals that were above $1 million. The number of transactions that that encompassed was probably somewhere between $90 and $100. Most of the deals were in that one to 1.5 to $2 million range. A few were bigger.

There's a very large number of work in process deals that are I'd say 80 percent PLM -- so Windchill related -- that really are the result, I think, of the story that we've been talking about, the work we've been doing with the systems integrators and the work that we've been doing during the last two years, which has really sort of concluded now in terms of getting our sales force, 75 percent of whom are now focused on vertical industries and large named accounts and have been working with these customers with very low turnover for the last year on these kinds of opportunities.

Just in those three major countries, Germany, Japan and the U.S., we rolled up $140 million plus in WIPs that was above $1 million deals. That doesn't include transactions that are smaller than $1 million and the core, general base business. What we have to do now, we went through every single deal to quality the deal, to understand who the economic buyer was, whether or not it was budgeted, what was the business problem the customer was trying to solve, was it changed management, was it design anywhere/build anywhere, and we forced the sales managers to have a great deal of knowledge about these individual deals. I think they're real. The question is when will they close. Jim, why don't you take a second and talk about the Links.

Yeah. You might remember maybe 18 months ago, at this point, we outlined a pretty broad vision for transforming our enterprise product into a series of sort of quick-hit initiatives that still sum together into an enterprise system but give customers more flexibility to get faster time to benefit and a faster implementation with less risk and so forth. This really was the Link series of products Dick referred to. You might remember we've introduced now as a result of that strategy on a quarterly basis ProjectLink, Pro/COLLABORATE, PartsLink, DynamicDesignLink, and this quarter we introduced PDMLink. I think we've made great progress.

I can tell you, though, that I'm getting a fair amount of push back from the sales force, from customer, even from people from development, saying I'm not sure we actually need more new products right now, particularly in this economic climate. To some extent, it's distressing the system a little bit. That's a lot of new products. There's two more theoretically scheduled to come out, that being SupplyLink and the after market ServiceLink product. I think what you're going to see us do is continue to execute that strategy, just be a little less religious about releasing these next two products in the next two quarters. I don't feel like anybody really feels a sense of urgency to get those products out.

People would like us, in the short term and given the economic situation, to focus on tightening up the story, tightening up the technology, building out reference customers, making sure that every new product is localized in every language for every country in which we do business, and so forth. We're going to continue to execute the strategy, but I think we're probably going to back off from the quarterly new product introduction, feeling that on a go forward basis that's actually becoming counterproductive.

Great. Thank you.

OK. Next question, please.

Our next question is from Jessica .

Hi, everyone. I have a couple of questions actually. Can you talk a little bit about your indirect distribution strategy, a little bit about the total dollar contribution from all the resellers this quarter, and if you expect any change to take place in that strategy to address the low-end base going forward.

Also, given obviously your problems with sales and forecasting sales, and clearly there has to be some level of miscommunication between what's happening in the field and what's actually getting filtered up to management, how you're addressing that better. I know you have a Siebel system in place, but I'd like to understand better about how the checks and balances are going to be going into the system going forward and if you expect any change in management, particularly within sales, going forward. Also, if there's any higher sales turnover that you've seen so far.

OK. Let me take a run at those issues. I know, Jessica, because we've spoken before and it bubbles up from other people, but you feel like the sales organization isn't sort of performing up to the level it should and that in fact we have sort of distribution problems. I think I'd characterize it that way. I don't agree with that.

I think if you were to take the leadership in our sales organization in the Far East and in the United States, we have an outstanding sales organization. I don't anticipate any changes in new leadership for the sales organization. I know turnover is at a low for the last 10 years. They're committed, they believe in the space, they believe in the products, and they're working hard on this pipeline that I've described. I don't see any changes from that standpoint in the distribution model. We have made some changes in the sales force that we haven't really gone into detail about in some ways as we've evolved more the direct presence up towards large accounts. That's because we had a sense that we were being perceived as having been making some excuses about distribution and so forth.

By that, I mean that if you really were to look a year ago or a year-and-a-half ago, 65 percent of our sales reps were focused on accounts around the world whose annual sales were less than $500 million a year in revenue, and 35 percent were focused on large accounts.

Today, 75 percent are on large accounts, and 25 percent are on the small and mid-sized accounts. We basically on the MCAD side sell a high-end product in contrast to the solid works and solid edges of the world. In truth, as a high-end product, our competitors don't have any direct sales force in those smaller and medium sized accounts. We've been completing that transition, and the work in process that's underway right now in those large accounts is evidence, I believe, that we're going to get a pretty interesting return some time in the future on the work that we've been doing there.

In the meantime, we've had to recruit resellers, and we've been a little bit handicapped because Rand, which is the largest worldwide reseller, had an exclusive presence for us up until about a year ago on the low and mid-sized accounts. In fact, Rand doesn't really want to be a reseller anymore. I'll let Brian , who's a good friend of mine talk about his business when you speak with him, but the truth is he wants to be a systems integrator. He really doesn't want to sell software anymore, I don't think for us or anybody else. He wants to be a services provider.

Now, we have been recruiting resellers to complement what Rand does, and in fact, in the first quarter, we did $10 million through the reseller channel. This most recent quarter, we did $11 million, so the revenue is up. A year ago, Rand in the second quarter accounted for about 80 percent of the revenue from the reseller channel, and today they're below 30 percent. We have a lot of exciting and excited new resellers that are interested in our products and really want to sell them. They're companies that want to sell software on the low-end part of the business.

They love the PDMLink and ProjectLink opportunities to expand their revenue opportunity. They like Pro/COLLABORATE and /DESKTOP for market share and mind share. They like Pro/ENGINEER and its installed base. I think the reseller business will continue to grow there, particularly also because we've extracted our direct guys, who are also competitors for the resellers. We're more and more every day focused on the large accounts through a direct bottle, and we have less and less conflict for the resellers on the low end. I think that you'll see us continue to do well. I think Rand will be a smaller and smaller part of our business. That's fine for them as well.

Dick, what percentage of your seats that are currently deployed, which you know -- I would think that you would be minding that on . What percentage of those seats are placed in these large, large accounts versus the smaller accounts now they're being addressed by the channel.

Do you have the breakdown on sort of by account size, where the 200,000 or 250,000 seats are.

No. I think the way we've historically thought about it is the low end of the market is probably 35 percent of the seats, and 65 percent of the seats are in the higher end of the market.

We had a disproportionately large number of seats probably in the low end, vis a vis STRC, Unigraphics, because Pro/ENGINEER for years made a lot of presence in those smaller and medium-sized accounts. As Ed said, there's probably a third down below and two-thirds up above.

That's a recent number and that takes into account the market share losses.

Yeah, because we still -- You know our maintenance numbers on Pro/ENGINEER -- people are still using the software and like the software, and there's not much turnover in terms of the use of Pro/ENGINEER. What we're not getting, because we don't have all those direct sales reps down there anymore, are sort of new seats in that part of the market. But, people are using Pro/ENGINEER, just like they always did. Jessica, on the forecasting side, you're right, we did roll out the Siebel system on April 1. We've used it to sort of track this WIP that I'm describing.

We're holding the sales managers accountable for the WIP. We'll track the progress of that work in process by account. When it disappears from the forecast or the work in process, we'll go and ask the sales managers why that was. Was it a competitive loss, was it a customer priority or change of priority. I think this Siebel system is going to enable us to be a little bit more tactical in terms of how we track by country, by rep, by sales manager that work in process and start to build some trends around that.

It's been difficult for us in the past for us to articulate for you a total number of work in process by product. We can now do that, and we can start to build some comparisons that say, OK, we closed 20 percent of that WIP, or, if we closed 30 percent of that WIP. We're going to have a better ability to forecast, even in these difficult times, I believe, the revenue going forward.

And, are you going to link sales force compensations potentially to forecasting accuracy.

No. No.

The big problem, frankly, right now at senior levels is a piece of it is already tied to quarterly forecast accuracy.

OK.

There's already an element at senior management level sales.

I was thinking more about the sales guys. We don't have much turnover. It's a difficult time, and we don't want to have turnover. We're going to put the kind of pressure on them that we have historically because that's what the sales force is all about. But, in point of fact, I also want to put some rewards in place so they -- we're discovering that good tenure salespeople are going to be more productive than a situation where there's lots of turnover. I think we'll roll out some things for the sales force. I hope some of them are listening right now. That will actually get them excited about the opportunity to do well during the next year.

OK. Great. Thank you.

OK.

Our next question is from Gene .

Hello. If you guys could touch on just the Pro/DESKTOP. I know you mentioned that earlier in terms of the 20,000 downloads and so forth, but, when we could see the fruits of those seated DESKTOPs starting to upgrade to the real deal.

Well, Jim can have it, or I'll take it; whatever you want. He doesn't want the question. I'll take it. That's the first time I've seen that. There were about 28,000 downloads. Pro/DESKTOP has two versions: one is DESKTOP Express, which is a free version, and I don't know myself the mix of the downloads, and then there's a $1,000 version of Pro/DESKTOP with more functionality.

What we're looking for there, as we've described in the past, is a sense of mind share and market share and some ubiquity around our products, where we really get the customers to feel that we have some nice products based upon their particular design or product development requirements.

There's obviously Pro/ENGINEER for more sophisticated users, and the Link solutions are blended throughout that. I think if we can sort of capture lots of users that way, whether or not they might be paying for the software or not, it's an opportunity for us over time, as you just described, to upgrade them to Pro/ENGINEER, but, certainly to include them in the collaboration and control kinds of solutions that the Windchill Link solutions represent. I think we need a little bit more time since this was really the first quarter with Pro/DESKTOP out there in the marketplace. I think we'll see some results toward the end of the year.

It's probably too early to have any data about any Express people that have gone to the full version. Is that correct.

Yeah. I think it is too early.

Have you seen any impact on just overall pricing on DESKTOP versus having the Express version out there that tweaked any of the pricing, or have the pricing lines remained relatively solid.

Well, we haven't really seen much change in the pricing.

I think the prices remain fairly solid. I think that one element that this will help is from a defensive perspective. I think it really does help keep some of the low-end modelers out of the that is looking for kind of the Pro/E modeling kernel. I think it will help in that regard. ASPs for the quarter came down a little bit. I think I indicated earlier they were at 12,400. I don't think that DESKTOP has had much of an impact on that at this point, and, in fact, they're really excluded from the seats. I'm talking really Pro/ENGINEER seats.

Can you remind me the sequential. I think it was 12,400, but what was it in the December quarter.

13,000.

Thank you.

Next question, Operator.

Our next question is from Keith Gay.

Hi. On the cost side, can you give us a little more color on additional cuts and where they need to occur. It looks like you're operating expense level this quarter was around $137 million level. How much more do you need to take out of that, and where do you expect those cuts.

In round terms, we expect to take out somewhere around 300 people between now and the end of September. We're going to try to do most of that this quarter through a combination of attrition and head count reduction. I'm expecting that that will probably result in a restructuring charge of somewhere in the probably 8 to $15 million range. Obviously, that mix is somewhat a function of how much is attrition and where kind of geographically reductions occur.

We also, I think, announced previously that we were selling the ICEM product line. We hope -- we expect to get that closed this quarter, and that will also be part of that head count reduction. That will account for something in the order of 50 to 60 people out of that 300. More specifically on the head count in terms of where it will be, at this point I think we're kind of reluctant to get into a lot of details. That's a work in process over the next several weeks.

OK. It looks like operating expenses are going to come down another $10 or $12 million to reach that break even target.

Yeah. That's right. I would expect that this quarter, this quarter being the quarter ending June, will see $5 of that, and the September quarter will see $10 to $12 of reduction. The full reduction should likely be realized in that 4th quarter.

OK. Thanks.

Thank you. Our next question is from Husky.

Thanks. Just wanted to follow up on one of your comments with regards to the difficulty in getting particularly some of the Windchill deals to close. You said there's some confusion even in terms of the approval level. You just talked about sort of where you are in terms of are these to sort of risen to CFO/CEO level at your companies -- customers. In addition to that, I think there was some commentary it's started to be allocated as a line item in the IT budget. I noticed earlier you talked a little bit about what the expectations are for next year in terms of directionally what spending people are talking about.

We had, as I described, a number of situations where we had gone through the sales process and technically validated Windchill as the solution. Then we went through with the customer sort of the internal process of getting an order approved and released, which would include a business plan, a return on investment plan, some work with the systems integrator, and in the context of the process of going through that, we're absolutely seeing these deals get elevated at a minimum to the CFO level.

At some point in some of these deals, the CFO has simply said, look, we're committed to do this; we understand the product first story. We understand we need to get better links and connections out to our supply chain, but we're just not prepared to make the investment today, given the economic situation. So, the deals are basically on hold.

I've been out myself, and I know Jim has, to lots of customer situations which I've described in the past. I think that in contrast to a year or two ago, the PLM spending as a budget item has elevated in terms of a priority on the IT spending list, but at the same time, having said that, as a new category, it's probably one of the first to get scrutinized and taken off the spending category, at least in the short term, until these companies feel better about their own positions.

The other thing that I think feels like a common denominator is the higher it goes in a company, the more typically there is concern about prior horror stories with enterprise-wide purchases in the past or implementations in the past of other technologies. That invariably creates some cautiousness and creates a bias to purchasing small as opposed to purchasing big. We're clearly dealing with that. That's a wildcard. That's an unpredictable element at the senior levels in a lot of these companies.

I think, maybe building upon what Ed just said there, If I build that out a little bit and maybe try to give you some anecdotes, we recently had the leader of Accenture's entire supply chain business in here.

Basically, in a funny way, he came in just to tell us that he is totally convinced that this PLM space not only is real, but is fundamental to how the business is going to grow in the future. He described that from the context, if you think of a company dealing with a supply chain, let's just take someone like Siemens Corporation. They're dealing with their suppliers. Most of the investment that they've made in the past has been around the back end integration of that supply chain.

In other words, if Siemens is working with a supplier, they basically do three things with the supplier: they design with that supplier, they procure from the supplier, then they take delivery of the supplier's product and assemble it into the larger product.

Well, most of the investment has been with the I2s, Manugistics, SAPs of the world, and Oracle has been on the back end on the delivery, which is really the tail on the dog. I think there's a real awareness out there today that it all should start from the PLM system around the design phase. Let's design with the supplier, then we buy something from him, place the order for production, then we schedule the delivery of those products and sub-assemblies. This is a real understanding about that.

Now, a little conflict there is that some of the investments that have been made in the supply chain on the scheduling side haven't necessarily panned out and been deployed well, which sometimes slows us down a little bit. There is an awareness that as companies outsource more and more of these products, and in some cases, in an automobile today, it's 80 or 90 percent, that as they connect with the supplier, the real emphasis is going to move to the PLM part of the business where they initiate the interaction with the supplier around the designing of the products.

Operator, we have time for about one more question and a quick closure.

Thank you. Our final question is from Robin Roberts.

What is the number for your quota-carrying people here, and how many of them have been with the company for more than nine months. How many of them have hit the Windchill quota versus the MCAD quota.

Let's see. There's 550 quota-carrying sales reps. I don't have right in front of me, I don't know if, Ed, you might in terms of how many have been here more than nine months. I'd say two-thirds, if I had to guess.

I would guess even higher.

Even higher. 75 percent. There's been very low turnover in the last year. What percent was your last question have hit their Windchill number.

Right. Windchill number and also MCAD number.

Well, they're basically half way through the year. Right. So, on a year to date basis, they're probably 35 or 40 percent -- in that range, or 50 percent are probably at they're year to date number.

OK. And on your service contract side, what's the percentage of service contracts that are on a fixed price basis.

Virtually all of them are on a time and material kind of basis.

Right. Less than five percent.

OK. And as you increase your market fraction with each new product which are deployed, like PDMLink is deployed on the time fixed price basis, where you expect a percentage of service contract, more -- increase on these fixed price basis.

I think the answer is yes. It will definitely increase as a percentage, but I would like to point out the word quick start. We may begin an engagement where we can with a high degree of confidence assure the customer we'll get them into a certain state of production for a certain price and time period. That isn't to say, though, that that doesn't lead to ongoing engagements which might be on a time and materials basis to go rework some processes and change other -- expand the implementation in different directions and so forth.

The quick start is very clearly defined for the customer in terms of what we'll do for them and what our responsibilities are. It's actually a very nice program in terms of sharing some risk, but gaining their confidence in terms of deploying a PDM solution in five to six weeks.

Thank you, Robin. Dick, do you want to conclude.

Well, I think we've said it. We are as confident, if not more confident, than ever about the progress that we're making in building this category. The company -- the employees, I think, are excited.

Jessica, I can tell you, if you're still on, the sales force is more excited than ever really about the opportunities that the create, collaborate, control, the integration of these solutions represent.

I think our partners are feeling the same way that we are. All of them are committed to this new space as a major opportunity. We've got to be patient in a difficult time. I hope to see the business improve, although we're not going to forecast it during the back half of the year.

Thank you very much, and we'll speak with some of you individually as you might want to and all of you again in July. Thanks.

Thank you all for participating in today's teleconference, and have a good day.