PTC Inc (PTC) 2003 Q1 法說會逐字稿

Good morning, and thank you for standing by. All participants will be able to listen only until the question and answer session of the conference.

This conference is being recorded at the request of Parametric Technology. If you have any objections, you may disconnect at this time.

I would like to introduce the host for today's conference, Ms. Meredith Mendola, Director of Investor Relations. Ms. Mendola, you may begin.

Thank you. 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 Tom Beaudoin, our Senior Vice President of Finance and acting Chief Financial Officer. In addition, Jim Heppelmann, our Chief Technology Officer and EVP of Software Products, Barry Cohen, EVP of Strategic Services and Partners, and Tom Butta, EVP and Chief Marketing Officer, are here to participate in the Q&A.

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 may differ materially from the results projected in our statement. We refer you to the risks detailed in the company's 2001 annual report on Form 10-K, our fiscal third quarter 10-Q, 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, January 17th at 402-220-9653. Additionally, this conference call is being Webcast, and a replay will be available through our Web site at ptc.com until this Friday at 5:00.

As always, after our prepared remarks, we will hold a Q&A session. In order to keep this moving, please limit yourself to one question and one follow-up. If you have an additional question, you will need to get back in the queue.

Dick, would you like to begin?

Okay. Thank you, Meredith.

Good morning. We had an okay quarter -- a little lighter than we had hoped, but there was some good signs that our strategy is working. Windchill new accounts more than doubled from 40 to 87, which suggests the links are being adopted by our customer. Pro/E new accounts were at 649, the highest number in nearly two years. Reseller revenue was up 19% year-over-year, suggesting improved coverage in the base and new accounts. Windchill transactions rose from 120 to 185 from Q4 to Q1.

What did not materialize were the larger deals. In Q4, we had 12 contracts over $1 million, which totaled $29 million in revenue. In Q1, we had 10 deals over $1 million, which totaled 15 million. This is a $14 million delta. Finally, we made some investments in our channel which were negative to revenue by $3 million to $4 million.

On the maintenance side -- let me talk about that. On the maintenance side, we implemented a new automatic maintenance accounting system worldwide. This is part of an investment in technology we have described before called Project E-volve (ph). The old maintenance system was manual. It used a standard practice of estimating the amortization of thousands of contracts. When we converted to the new automated maintenance system, we discovered a shortfall in the deferred maintenance account and immediately notified PWC. Tom Beaudoin will give you some more details in a moment.

I continue to be confident and optimistic about this year. Let me describe why. Superior Solutions is the first area. We have a major software release in mid-February of what promises to be the most compelling modeling solution in the industry, Pro/E Wildfire. It combines the simplicity and ease of use of the low-end systems with the power of Pro/ENGINEER and includes the connectivity of the Internet. Simple, powerful, and connected. This is the foundation for our product first story with its components to create, collaborate, and control.

The pricing, packaging, and maintenance for the Wildfire product represent some incremental revenue opportunity during the last half of the year. Pro/E Wildfire solidifies our base and begins to more easily set a foundation for the Windchill-linked solutions. The Windchill-linked solutions continue to make good progress, particularly in the area of integration, ease of use, and ease of deployment.

The more rapid adoption of the Windchill links represents a large service opportunity going forward. And the next Windchill module supply link will ship next week.

The second area for my confidence has to do with market leadership, and this is where we are making a good deal of progress on thought leadership around our Product First road map. We have an expanded and integrated set of products that deal with the reality of today's product development environment. This is one that stresses connectivity because of the demands of outsourcing. We extended this product offering with a focus on off-the-shelf, easy-to-use, deployable linked solutions. And last quarter, we articulated and delivered to our customers a road map to achieve this Product First vision.

The third reason for my confidence has to do with our sales coverage model and its optimization. The task of optimizing the sales coverage model is largely complete. Direct sales are focused on large accounts, a vertical structure has been applied to the large accounts, resellers are excited, as is evidenced by the growth in VAR (ph) revenue.

As previously noted, we have restructured the Rand agreement with terms and discounts which are more favorable. Europe's largest MCAD reseller, Mention Machine (ph), is ready to begin selling our products at the end of this quarter, and we have very high retention throughout the sales organization.

The fourth reason for my confidence has to do with global services. Service revenue has stabilized and was ahead of planning Q1. We have restructured our service offerings so that they mirror our software product offerings. The service offerings are prepackaged offerings around Wildfire and the Windchill link solutions, and are again focused on ease of use and rapid deployment. There is an enhanced training curriculum that features distance learning. We have implemented a client-partner engagement model that reflects our commitment to building partnerships with our customers. We have a continued program of success with our SI partners, and our customer satisfaction, as measured independently, continues to rise.

Finally, the last reason for my optimism has to do with growth and profitability. We are committed to profitability. I anticipate break-even results in Q2. I won't forecast it now, but with Wildfire and its integration with the Windchill link solutions, there is potential for upside in the second half of the fiscal year.

Now, let me turn it over to Tom Beaudoin.

Thank you, Dick.

Revenues for the quarter were 171.9 million, and loss per share was 4 cents. This was in line with our pre-announcement on December 31st, 2002. Licensed revenue was 51.4 million in Q1 2003. Service revenue was 120.5 million. By geography, North American revenue came in at 70.9 million or 41% of total revenue, European revenue was 53.8 million or 31%, and Asia Pacific revenue was 47.2 million or 28% of revenue.

Windchill license revenue was 15.8 million in the quarter, and service revenue was 27.8 million, for a total of 43.6 million of Windchill revenue in Q1 2003. Windchill link solutions, licensed revenue was up significantly in the quarter, with 40% of Windchill license revenue coming from these solutions. This compares to 25% last quarter. Project Link (ph), as the most mature solution, continues to be the largest revenue contributor. PDM Link (ph) showed the strongest growth rate without cannibalizing our Windchill foundation revenue.

We continue to make progress with the systems integrators. We now have more than 750 partners trained on Windchill implementations. Windchill-related partner revenues billed directly to their customers was approximately 17 million, and partner-influenced business to PTC was 36%. This percentage reflects the higher mix of smaller Windchill link solution deals that typically do not involve partners, as well as a number of larger deals with both MCAD and Windchill components that are also usually handled through our direct sales effort.

We continue to see strong commitment from our community of systems integrators and increases in their product development practices. We are currently working with our partners to drive the Product First road map as a means of engaging customers.

Windchill cumulative seats were 237,000, with 15,000 additions in the quarter. Recurring revenue from existing Windchill customers was 56% of Windchill revenue. Windchill ASPs were 1,049, reflecting a higher mix of lower-priced solutions revenue. Production accounts in the quarter were up to 322.

On the MCAD side, MCAD licensed revenue was 35.7 million, and service revenue was 92.6 million, for a total MCAD revenue of 128.3 million.

Regarding our buy channel, indirect license sales were 35% of total MCAD license sales. This is $13 million in licensed revenue, which is a 12% sequential improvement and 19% year-over-year improvement. We are making good progress at diversifying our reseller network. During the quarter, we (inaudible) Measured Machine as a major Pro/ENGINEER distributor in Europe, and we restructured our agreement with Rand.

Despite revenue declines in MCAD, our new customer number was up significantly in the quarter at 649 customers. This brings the cumulative MCAD customer base to 34,834. Cumulative MCAD seats were 289,000, with 3,200 seats added during the quarter. Recurring revenue from existing MCAD customers was 85% of total MCAD revenue. MT seats (ph) represented 81% of seats sold in the quarter. Finally, MCAD ASPs were 11,100 for the quarter.

On the spending side, excluding all amortization and one-time charges, spending was down 3.1 million sequentially. That count increased slightly sequentially to 3,800 from 3,780 in Q4. This is on plan. Year-over-year headcount is down from 4,204.

Regarding taxes, the QM (ph) tax provision was 1.2 million, or negative 11%. The Q1 provision is for taxes in those foreign jurisdictions in which the company has recorded income. In North America and other foreign jurisdictions, the appropriate accounting treatment is to not book a tax benefit while the company is in a loss situation. As earnings approach break-even, the tax rate can fluctuate significantly, so for the short term, use a tax rate of 50% in your models.

On the balance sheet side, cash was $2 15 million, up from $210 million in Q4. The sequential increase included a $48 million federal income tax refund. As a result of the tax refund, we decided to make discretionary payments during the quarter which included funding our Computer Vision pension plan with an additional $10 million in cash.

Typically, Q1 is a quarter in which we use more cash, as year-end incentives and commissions are paid out, and it is year-end for most of our customers, who tend to defer payments. As a result, cash collections, primarily in North America, were below our expectations. As of today, we have already collected a substantial portion of this shortfall.

As you would expect, the collections shortfall resulted in an increase in receivables DSO to 83 days, up from 76 in Q4. With the expected cash collections in Q2 2003, the DSO numbers should be back in the 70s again next quarter.

Deferred revenue was 179 million, down from approximately 197 million in Q4. Deferred revenue is down due to the impact of larger deals and the seasonality of calendar-based contracts. Our second fiscal quarter typically provides an opportunity to improve both deferred revenue and cash as a substantial number of maintenance contracts are renewed at the beginning of the calendar year. Weighted average shares outstanding for Q1 2003 was 262.6 million shares.

FAS 142 -- this quarter we adopted FSAS 142 and accordingly have discontinued amortizing goodwill. Going forward, primary reporting method for operating expenses and net income will be on an actual basis, reserving pro forma for one-time charges and gains. The new accounting treatment removes the majority of expense in the amortization of intangibles line in our P&L. However, a small amount will remain each quarter and will bring our operating expense structure up to about 182 million per quarter. For your models, as well as the estimates you provide to First Call, please be sure to adopt a similar methodology.

On the status of the Form 10-K and the maintenance contracts, as we stated in our press release, the review of our maintenance revenue for service contracts continues. We initially believed we would be able to complete this analysis by now. Our work to ensure the completeness and accuracy over the appropriate periods has required more time. At this point, we are comfortable with our estimate of the total September 30th, 2002 deferred revenue impact of $33 million, and Q1 FY '03 maintenance revenue.

We expect to report a corresponding network reduction of maintenance revenue in fiscal 2002 and prior periods. As a result, we also expect to revise our financial statements for the three most recent fiscal years. With the support of our independent auditors, we are working to complete the work, and we will file our Form 10-K upon its completion. I would like to remind everyone that this restatement impacts a relatively small portion of our maintenance revenue during these periods, and that is strictly a timing issue with no cash impact.

On outlook, let me remind you that our comments regarding outlook and guidance constitute forward-looking statements which involve assumptions about the future which may 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 our perspective on the future.

As Dick said, we remain confident in our plan and as such, guidance for Q2 2003 remains unchanged. Our target is to achieve break-even operating results. Excluding all amortization, operating expenses are $180 million. On an as-reported basis, which includes the effect of FAS 142, operating expenses are about 182 million. We believe our mix of revenues will remain difficult to predict. However, as Dick mentioned earlier, we do anticipate that our design solutions revenue will begin to stabilize within a few quarters of our Pro/ENGINEER Wildfire launch, scheduled for later this quarter.

Windchill revenue is likely to remain in the range of 40 million to 50 million per quarter until customers begin to spend more on this new category with an improvement in the economic climate.

Meredith, I will turn the call back to you for now.

Great. Thanks, Tom. Everybody, we are going to open up the call for questions now. I just want to remind you, one question, one follow-up. If you have any more, you have to get back in the queue.

Laura (ph), I think we're ready for questions.

Thank you. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press star one. You will be announced prior to asking your question. If would you like to withdraw your question, you may press star two. Once again, to ask a question, please press star one.

One moment, please.

Our first question comes from Gibboney Huske of CSFB. You may ask your question.

Thank you very much. Just addressing your Q2 guidance, you expect kind of a return to break even. I was just wondering, how much of that is just, you expect some of the revenue shortfall in Q1 was a result of people deferring spending in front of Wildfire? So is that the basis for your assumption of kind of getting back to break even, assuming that revenue on the CAD side of business rebounds and that gets you the revenue and your outback stake (ph) where they are and Q1, or is there anything else behind that? Just trying to understand more details behind that guidance.

Gibboney, I think that there were some delays, particularly from some larger accounts that have seen Wildfire and are excited by it - both some new accounts as well as established accounts. And I think that the release of Wildfire, which is very, very shortly, and we are excited about that, will provide some upside in Q2.

I also think that there will be a number of sort of these larger million-plus deals that have had a chance to mature a little bit. I mentioned there was a delta of about 14 million to 15 million between Q4 and Q1. I think if we can close the gap a little bit by knocking down some of these larger transactions as well, both on the Windchill side as well as the Pro/E side, that we can begin to get pretty close to that 180 million number.

And just one final question, just -- the channel business and all the restructuring and your go to market strategy has sort of -- kind of coming together, and I guess looking at -- I know you don't really like to do this, but the profitability, your core design solutions business versus Windchill, are you getting to the point where it's maybe a little bit more balanced in the resources devoted or commensurate and, you know, I guess just any kind of visible outlook for maybe getting to a profitable situation or meaningful profitability on the Windchill side?

Well, first of all, we really are committed to the profitability and we have talked before on some of these calls about that. I want to achieve, actually, higher-end profitability through some growth. I think we have an opportunity to do that with Wildfire and with the links solutions and the way they interoperate and our story about create, collaborate, control, all of which we have discussed. So I think there is pretty good potential there.

Really, there is nothing changed, I would say, in terms of the model, with respect to the design solutions business and the Windchill business. We still need to drive some profitability in the Windchill side of the business. I think we can do that, particularly as we grow the revenue there, as that Windchill link revenue is more accessible because of the integration with Wildfire and because of the ease of deployment of the links solutions.

We actually had a very good Windchill quarter on balance. It was up over Q4; as I described, the number of new accounts and transactions rose dramatically. We are going to make the links solutions now available to the resellers this quarter. And so you're going to start to see, with this package service offerings, I think some upside in that part of the business, none of which I forecast yet.

So, just to be specific, so you said 40 million to 50 million Windchill this year sort off ...

This quarter.

This quarter, At what level does that become profitable? Is it north of 50 million?

Yes, I think we have said in the past that it is around 60 million.

60 million. Still got some ways to go?

Yet again, Gibboney, it's hard because part of that we factor in an estimation on where the sales force spends its time.

Right. That's fair.

So part of it is an estimation, but I think that's a fairly accurate one.

Okay, thank you very much.

Okay.

Our next question comes from Jay Vleeschhouwer of Merrill Lynch. You may ask your question.

Thanks. I would like to follow-up on Tom's last comment about customers willingness to spend on class of technology. You had, as you say, a reasonably good quarter for Windchill in terms of number of transactions and sequential revenue, yet on the whole, the so-called PLM market was almost certainly down in 2002 by a fairly significant amount, if you include Windchill plus your competitors.

So the question is, what has to happen, other than a better economy, for this class of technology to really begin to take off? Is it just a function of the economy or do you see, you know, some other requirements, technically or otherwise, for customers to really begin to ramp up? We have seen, obviously, widespread willingness to defer projects here, such as at Sun, for instance. And then a follow-up. Thanks.

Yes, I'll take that one. Jay, this is Jim Heppelmann. First of all, as you know, the economic spending has most pronouncedly affected IT spending, which is a category that Windchill lives in. So as long as is there a damper on IT spending, that will serve to hold us and the PLM industry back.

But I think, kind of looking beyond that, what's really important is for companies to gain a deeper appreciation for the value of product development and the value of investments in improving the product development process. That's really what our whole product First Initiative is about, and that's how we are positioning our products is the way to help companies excel in product development, and there's no better way to be successful than to produce the best products. That's sort of, like, the best strategy, we feel.

So we think we need to continue to drive this awareness, as do our competitors, and that will help drive the overall growth of the entire PLM industry.

All right. Follow-up on the MCAD side. Your ASPs to Pro/E were just over 11,000, which I believe is the lowest ASP in the company's history, a little bit below our expectation. Do you think that, with Wildfire, you can improve upon that or stabilize that? And by comparison, we have done a study recently to compare industry ASPs which, over the last several years, indicates that, industry-wide, MCAD ASPs are now probably somewhere down to the $9,000 level or lower. So the question is, can you continue to justify a premium to what is now the industry average for MCAD ASPs?

Let me take a shot at it, Jay. On the -- part of the -- I think the decline was a manifestation of increased bar revenue, and that's not all a bad thing because it gets us more coverage across the installed base, as well as the new accounts.

One of the other things that we have talked about, though, that we are trying to do, and I think it is related to your first question, is to really expand the market and our product offerings that reflect the requirements of product development today, an environment where outsourcing is key, where companies want to invite customers to participate in design reviews and so forth. And so the standard sort of what I call modeling stand-alone paradigm, I think, is one that, in particular, has some jeopardy.

I think, to the extent that we are right about our vision and leadership with respect to a new paradigm where modeling is critical, but the ability to connect and notify and control changes, and if we can integrate that story well and make it easy to use, I think we can actually charge a premium for our solutions.

So that is really what Wildfire's about, what Project Link and PDM Link are about, and the integration of those three products. And I think, in a lot of competitive situations right now, we are setting a new balance for what the requirements are in order to compete and win.

Okay. Jim, you made an interesting comment, and I think you are probably right, that customers need to recognize the value of the product development process and concept. Let me ask you this -- are you yourselves a good product development company? In other words, you know, we have seen delays from time to time in Wildfire itself, apparently there are some issues with respect to new interlink (ph) ability. So how would you grade yourselves in terms of your product development and engineering processes to bring your own products to market in a timely fashion?

I would like to sit down with you sometime with our Product First road map and show you that there is actually a number of different strategies that companies can pursue in product development. As it relates to Pro/ENGINEER, we have a strategy that says quality is job one, to quote a familiar saying.

With respect to Pro/ENGINEER, what we really tried to do is make sure we deliver a top quality product. We have done a lot of innovation in the product. There's a tremendous amount of new code. But we said, with this release, we are going to ship it when it meets some very stringent quality criteria, which by the way, it now meets. So we are feeling like that's the right strategy for Pro/ENGINEER.

On the Windchill side, we have done a lot more innovation, done a lot more creation of new products, we've introduced a tremendous number of new products in the past 12 to 18 months, actually. So I think, you know, we've been executing two slightly different strategies. They're actually coming a little closer together now, because Wildfire begins to really blend in Windchill.

But I think if you step back and graded our product development process, I think, first of all, we spend a lot of time scrutinizing our product development process. We compare it against our best thinking and our Product First road map and that whole body of thinking. Definitely there is room to improve different dimensions of it, but I think on balance, we have a pretty good process.

Next question please?

Thank you. Our next question comes from Richard Davis of Needham & Company. You may ask your question.

Thanks. More just kind of perfunctory questions, I guess. I just wanted to make sure, did you guys say that your operating expenses you thought would be about 180 million to 182 million on the kind of go-forward basis, or will it be slightly -- or was it that's what it was in the most recent quarter?

On a pro forma basis, which we've historically reported, we are about a 180. As we implement FAS 142, there is a small residual impact that you do continue to amortize. That gets us to 182 on an actual basis.

You also said you thought you would be break even in the second quarter -- in the March quarter?

Yes.

Okay. And then, the accounting change or the maintenance change, wasn't it originally said it was going to be, what, 20 million to 25 million ...

... 20 million to 25 million, we put that out, you know, September 30th. In the meantime, we have been completing our work and completing our analysis and driving the accuracy, and we did discover that the number was slightly higher.

And then the last question is, seat (ph) pricing on Windchill, do you approach it that way or can you talk about that, or are you just kind of walking into folks and saying, listen, why don't you buy the whole suite soup to nuts, and we'll figure out the best deal for you?

No. I mean, we definitely have a per seat price on a per module or per link basis for the product, and then there is heavy seats and light seats. So there is definitely a pricing guide that goes along with this. In the end, we need to aggregate it up to provide you an average seat price.

Are you asking, Richard, for the quarter, what was it, or ...

Yes. Just if there's any trends, if it's going up or down, basically.

It went down this quarter a little bit.

And what I might say is the per-seat pricing on the linked solutions is generally less than the per-seat pricing on our Windchill enterprise solution. So, you know, the good news is the number of transactions is going up as we are receiving this product much more broadly through the market. The bad news is, the price points are a little lower. But what you are really seeing here is like the first sale -- not the whole sale, but the first sale into an account, and we can go back and continue to sell more seats, more links, more modules, you name it, to continue to upsell that account now over a period of time which might reach into years.

Got it. Okay, thanks.

Our next question comes from Ken Carey of UBS Warburg. You may ask your question.

Thank you. Question on the R&D spend. Now that you are getting to where you are going to start bringing out your new products next quarter, or later this quarter, do you think the R&D spend is going to be flat with last year or flat with this year, or do you think it will be coming down because of new product (inaudible)?

I will ask Dick to join me here but, you know, I think we have it modeled right now as flat with current spending, and we'll continue to monitor that and look for opportunities to optimize. But I don't think we have dramatic plans to change that.

Okay. And also, on the financials, a follow-up. Cash flow from operations, can you talk about what that was this quarter, and when you expect to be cash flow break-even?

Well, cash flow from operations, I think this quarter we were down 11 million. And, you know, that will continue to flow as we get back to this break-even, and then hopefully get back to profit.

Okay. Thank you.

Our next question comes from Gene Munster of Piper Jaffray. You may ask your question.

Just in terms of the kind of (inaudible) question that's been asked a number of times a different way here, but in terms of Windchill and the adoption, the use of the seeds, is there any sort of metrics you can use? Obviously there was a lot of seats went out there, but where your customers are in terms of actually turning on the seats or, you know, the - really, the meat and potatoes behind collaboration, or any way to benchmark or watch how that's rolling out?

Well, we do sort of track the number of accounts that are -- first of all, we track the new accounts and then we track the number of accounts that have moved into production. It's a little more difficult for us to sort of give you a consistent answer there because the adoption rates, I think, for the older style Windchill foundation, which had more customization in it in large accounts, that adoption cycle is a little bit slower than it will be for the links solutions, which are more off-the-shelf, deployable, with a service offering and a commitment on our standpoint to bring the customer up in somewhere between five to seven weeks.

So I think we are seeing really interesting adoption -- fast adoption rates on the links solutions, although, again, it's a little bit difficult to quantify those seats, again, because of the mix between both the links as well as the foundation seats.

How about just any soft commentary from customers or salespeople that you feel like we are at or approaching an inflection point -- I mean, from an overall economic perspective, I wouldn't suspect that we are. But do you see any sort of inflection point in terms of just the - I guess the production of Windchill?

I think we do. I think the reference accounts are way up. I think that, when we look at our forecast and when we talk with our customers about what I call the Sopratic (ph) development system, which we talk about with Wildfire, PDM Link, Project Link, create, collaborate, control, more and more of our forecast and our work in process has the three solutions integrated. And they are very demonstrable, and we can reference them, and they work together. They're natural, they're easy to use. People can get up and run their business quickly with those three solutions.

That's a different story than in the past where, you know, you had to get Pro/ENGINEER and then buy Windchill Foundation and customize it, and you might get up and running in 18 months. We are letting our customers get up and running somewhere between one month and two months. I think we are going to see some real upside there during the course of the year because of that.

Just one quick comment to add to that. Dick mentioned in his introductory comment that the number of overall transactions was up, and the number of new customers was up, in the Windchill program. The number of sales to existing customers was also quite strong. So I think that that's a good metric that customers who previously bought some software or services are now coming back and buying more software and services. So I think this quarter showed some strong evidence that, you know, customers are expanding implementations they previously started.

Okay. And then, just a follow-up in terms of the guidance. Obviously, with the new products coming out, that's going to have some positive impact going forward, but just a slight softness that you had in the December quarter, you really didn't carry that forward into the guidance. Any particular reason, other trends that will be reversed effectively that were in December, or is it just a product cycle, or any thoughts on the rationale there?

Are you suggesting what -- some of the -- some of the five million or so, seven million that wasn't there, that we add to the Q2?

No, not add, but just kind of further pull estimates down, I guess.

I think really we are looking at the work in process, we're looking at the new products that are out, we've done some creative things which are hard to describe because of their complexity on the phone here, around packaging, pricing, and maintenance with Wildfire and the links solutions have been rolled out to the sales force last week. So I think, in the context of the new -- major new release, with new bundles, both on the maintenance as well as the software side, and I think that some upside potential on the larger deals, that we're pretty comfortable in the 180 range.

Okay. Thank you.

Our next question comes from Tim Fox of SG Cowen. You may ask your question.

Thank you. I was wondering if you could describe a little bit your expectations for the Wildfire upgrade on a percentage basis of the total installed base for this fiscal year and related. Will customers get sort of the base version of Wildfire under maintenance, and can you describe in more detail some of the pricing for the more advanced versions of Wildfire, and maybe what percentage of the base will actually pay for a higher version this year, and your expectations?

I will start and again, Dick and others can join me. So let me start with the -- with the last question, which is, you know, Wildfire has lots of new capabilities -- new user interface capabilities, new connectiveness, many new features, many, many improvements. And every user, independent of what package or configuration they previously bought, will enjoy a nice set of new features. Those customers who hold our premium package will get all of the new capability. Those customers who hold something less than the premium package may have to pay to upgrade to the premium package to get the full range of new capabilities in a Wildfire release.

So there is definitely an opportunity here, and a compelling story, to go sell some upgrades to the premium package, or to the next level, in any case. So we think that there is a revenue opportunity there. We need to go drive adoption. We are going to be far more proactive about driving adoption than we have in the past.

Our expectation is that, by the end of the calendar year, we will get at least half the base on the new Wildfire code up in production. Now, it is actually easier for a new customer, because we can just start them on Wildfire. An existing customer wants to take the software, get comfortable with it, plan an orderly transition - generally, they're not in a huge hurry. They want to move, and the more compelling the reasons to move, the more likely they are to do it quickly.

So I think it's an immediate opportunity, a new sales opportunity, and again, more of a methodical movement. Like I said, we hope to be past the halfway point by the end of the calendar year.

Okay, just one follow-up, if I could. Is there any way for us to think about the base as it relates to the percentage that are actual premium customers at this point to - just to give us a sense of what the upgrade cycle may look like?

Yes. I think you'd have to look at it slightly different if you looked at it as seats versus sites, but somewhere less than, say, 10% of seats are in the premium category. So we have a good upgrade opportunity.

Great, thank you. That's (inaudible). I think there's -- I know there is, from the customer business, there is a lot of pent-up demand about Wildfire. There's a lot of discussion about it. It really is going to be differentiable and compelling, vis-a-vis our customers as well. I think if you were to sort of contract - we've got one offering that addresses the low end, the mid-range, the high end, where our competitors all have a little bit of a compromise situation where, for one set of users, they have one low-end sort of what I call solid X offering, and for the high-end customers, they've got a completely different, incompatible modeling paradigm. None of their products are based on the Internet, or enjoy that connectivity that's implicit inside Windchill.

So I think there is a lot of excitement and pent-up demand, and again, we've done, I think, some pretty interesting and creative things on the bundling to incent the customers to move up to the premium seat, both through the purchase as well as the maintenance pricing.

Great. Thank you.

Our next question comes from Jay Vleeschhouwer. You may ask your question -- of Merrill Lynch.

Thanks. A couple of follow-ups.

For Jim first, to what extent are Windchill sales going into situations as kind of a post-failed PDM attempt? In other words, where there might have been some attempt with Metaphase or perhaps some other PDM situation where you come in as kind of the follow-on technology as compared to situations where there really was no preexisting PDM or PLM kind of technology?

Then for Dick, can you talk about the ramp of -- with M and M? When do you think, for instance, that it might get to the point of fully replacing what had been your levels of revenue with Rand, and do you think that, by offering them a steeper dealer discount, that -- for your product, for the moment, than Autodesk is giving them, that in itself will be the main inducement to ramp up the business through them.

Do you want to go first or ...

Sure. I will do my best here, Jay. I don't have any quantitative data, so I will have to speak qualitatively.

I would say that, you know, previously, when most of our efforts were focused on the Windchill enterprise offering, which is sort of our high-end offering we were selling, you know, pretty much exclusively in the early days to large customers, we were doing a lot of replacements of existing systems, because most larger companies doing very complex manufacturing processes have made some previous investment in PDM or PLM technologies.

What I think we are starting to see with the links is a slightly different trend, which is we are moving down market. There is a whole set of Pro/ENGINEER customers out there, for example, who might be a medium- sized company, never made a previous investment, and now they see the links solution -- Product Link, PDM Link, et cetera -- as software that really is pretty sexy.

We have now quantified and contained the implementation cost and made that pretty reasonable. We have tightened up the integration with Pro/ENGINEER such that they see that -- this is like upgrading Pro/ENGINEER from geometry development to product development and involving everybody else in the process. And I think we are starting to see, especially in this last quarter, a big movement of Windchill into medium-sized accounts, some even small accounts, in the Pro/ENGINEER base who are really doing it for the first time.

Jay, on the M and M side, you know, we have to really see what is going on there. Your - Rand, actually, in Europe - and they are still a reseller for us, and will be for the next year, and we will see what happens beyond that. But they are actually still pretty productive for us Europe, and that is a good thing.

With respect to M and M, they are a large master dealer - master distributor kind of a reseller. What happened with M and M was - that was sort of an interesting story, maybe I told you, but the others -- I might have anecdotally told this to the group before.

But we went to the European User Group meeting, which occurred, like June 1st last year, and the M and M people, the technical people, had snuck into our user group meeting and spent a day looking at Pro/E Wildfire, unbeknownst to us. At the same time, we happened to be talking to management about, you know, maybe they would want to pick up our products and so forth. And we had this new paradigm where you could have -- you know, sell a simple product that was powerful, connect to that whole story. We'd begun telling that story.

So, Artie Drotlak (ph) told me the story that, when he met with his own people that came out of our user group meeting, they came back and told them that if they didn't sign an agreement with us -- he didn't tell me the story until after we negotiated the deal - but his technical people told him that Wildfire was going to change the modeling paradigm, that it combined all of the things that customers wanted to use for product development.

So I think they are the kind of marketing machine that knows how to create demand, they know how to create customer prospect lists and so forth. They know how to run the prospects through a network of up to 1,000 dealers throughout Europe. And think they are going to continue to work with Autodesk, and they should, because they have a nice business that's built around those products.

But I think they can recognize greater upstock as they begin to -- as they begin to sell Wildfire with the link solutions, there is more upside for M and M and the resellers to make money, just gross dollars. And I think that we are going to see some nice revenue from them, really towards the back half of this year and next year after they get ramped up.

Okay. One follow-up more for Jim, and then another for Tom. For Jim, you have had historically an installed base of Pro/PDM and Pro/Intralink running collectively in the tens of thousands of seats, and maybe a lot of those have already converted to Windchill. But could you talk about the ongoing availability or requirement for Intralink as it relates to enabling either their Wildfire or Windchill functionality.

And the question for Tom, going back to the maintenance thing, that $33 million number, if we're doing the arithmetic right, that would suggest about 15,000 Pro/E seats under maintenance to get to that kind of number that you have to restate. So the question is, if that number is right, that's still only a relatively small percentage of the Pro/E base, and your average customer has a relatively small number of seats. So, do you think, therefore, that that number is enough, that you have actually gone back and scrubbed enough of the base to get to that number?

Okay, I will take the easy question. So I want to talk about Pro/PDM and Pro/Interlink. So first, I to some extent want to discount Pro/PDM, because that chapter is nearly closed. There are a handful of important customers still using Pro/PDM and we're working with them and supporting them, but by and large that base has moved to pro-Interlink and beyond. So this is really a discussion of Pro/Interlink and Windchill. And the user base of Pro/interlink is very significant - it's in the thousands of customers.

So I think -- we want to accommodate those customers. We want to not cause them any undue pain, but we also want to give them a path forward to this more compelling, Internet-based, create, collaborate and control story. So what we have done for those customers is provide two alternatives. You can bolt Windchill onto Interlink and use that combination so that Interlink is managing your Pro/E files but Windchill is managing your product development process from a broader enterprise perspective, and we call that the gateway solution, or sometimes call it the layered solution. And then we've given them another alternative, which is slightly cleaner from an IT perspective, which is to use Windchill to also do what Pro/Interlink does.

So sometimes there is some consternation because people say, well, Windchill does what Interlink does, and that's true, and that's because really, on a go-forward basis, you know, Windchill is our primary product line. We have Pro/Engineer, Wildfire, and we have Windchill on the links and Windchill Enterprise as our primary product line.

The Pro/Interlink customers can continue using it indefinitely at this point. We continue to upgrade the product, we continue to add features to it, we continue to keep it integrated with Pro/E Wildfire. So that basis fine (ph), a long runway ahead of them, no need to move. At the same time, there is some pretty compelling reasons to move and, you know, they're starting to see, and it is true, that we are putting a big investment in Windchill and how Windchill interacts with Pro/ENGINEER. And I think that's a good thing. Many Pro/Interlink customers are compelled by the idea.

Yeah, we agree that, from a relative standpoint, it is a small number. We have gone back and verified that number. I want to be clear -- the 33 represents the shortfall in deferred revenue at the end of September 30, 2002, and it's based on a contract number. So yes, we feel very confident at this point, given the work that we have done, that that number is, you know, the best estimate that we have right now, and will conclude this work pretty shortly.

Jay, we -- again, I'm going to wrap up here. We wouldn't look at it quite the same way you described it in term of the seats because it is spread out over a period of years as well. So it's a little more complex than looking at it in term of seats.

Let me sort of wrap up and thank everybody for their time today. We are out working hard, and the sales force is pretty excited about the opportunity here, so we just have to execute against the strategy that we have built around our market leadership, around our superior solutions, around the global services and the sales force optimization, and I hope to be having a pretty good conference call with you in the middle of April.

Thanks again.