PTC Inc (PTC) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the PTC second quarter fiscal 2003 results conference call. At this time, all participants are in listen-only mode. Later with he will conduct a question and answer session. Instructions will follow at that time. If anyone should require assistance during the call, please press star followed by the zero on your touch-tone phone. As a reminder, ladies and gentlemen this conference is being recorded. I would now like to introduce Meredith Mendola, PTC's Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone and thanks for joining us today. Participating on the call will be Dick Harrison, our President and Chief Executive Officer, Jim Heppelmann, our EVP and software products and Chief Products Officer and Tom Beaudoin, our SVP of Finance and acting Chief Financial Officer. In addition, Barry Cohen, EVP of strategic service and partners is here to participate in the Q&A.

Before 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 financial performance, business trends and other future results (ph). We caution that you such statements are only predictions and that actual results might differ materially from the results projected in these statements. We refer you to the risks detailed in the company's 2002 annual report form 10-K, our fiscal first quarter 10-Q and the company's other reports filed with the SEC from time to time. A replay will be available until 5:00 p.m. eastern Monday April 21st at 402-998-1030.

Additionally this conference call is being webcast and a replay will be available through our web site at PTC.com until Monday April 21st at 5:00 p.m. For those of you that saw our earnings press release this morning, there was a typographical error that has been corrected via the news wire service. In paragraph two and three of the release we inadvertently referred to the current quarter as the first instead of the second quarter. I would also like to direct everyone's attention to our investors relation Web site at www.PTC.com where we have posted a PDF document with financial and operating metrics we will discuss on the call. As always, after our prepared remarks, we will hold a Q and A action. Limit yourself to one question and one followup. If you have an additional question, you will need to get back in the queue. (inaudible) would you like to begin?

Thanks, Meredith. Good morning. On balance given the economy and world events, I feel like we had a pretty good quarter, but a year ago revenue of $179 million included 4 million from eye some (ph) that has since been sold. On a comparative basis, we did 175 million last year and $171 million this year. We have $4 million short fall in maintenance, which was a result of poor sales execution and closing renewals. I expect this to improve in the next two quarters. License revenue was down 2 percent year-over-year and up sequentially 7 percent. Windchill links (ph) revenue was up 49 percent quarter to quarter and now represents 62 percent of Windchill license revenue for the quarter. Windchill new name accounts were 84 up from 34 last year. The combination of the links revenue increases with these new name accounts suggest a much more rapid adoption of these out of the box quick to value solutions.

VAR license revenue was up $14.1 million up 8 percent sequentially and 13 percent year-over-year. This occurred while RAN's (ph) contribution condition continued to decline to about 10 percent of overall VAR license revenue. Wildfire adoption has begun. Please remember that Wildfire shipped at the mid-point of the quarter in English only. All translated versions shipped in the last week of March, about 8,000 customers have now loaded Wildfire and begun plans for its use. We expect this will continue throughout the balance of the year.

Next let me just talk for a minute about our commitment to our strategy. Just as a reminder, we are focused on the following initiatives, the first is superior products which Jim will talk about, optimized distribution, brand recognition, customer satisfaction, which incidentally has increased from 6.3 on a scale of 1 to 10 to 6.8 during the last four quarters, making very good progress there. And then finally the initiative around growth and profitability.

I want to talk for just a minute about the -- our plans to achieve profitability. Some of you have wondered why we haven't reduced expenses more quickly. Believe me, we are committed to making a profit, however, we were not quite ready, given our commitments to deliver Wildfire and the links (ph) solutions, as well as the requirement to service our installed base of small and medium accounts while we developed the channel. We are now prepared to reduce expenses from a position of strength. I believe we will be able to reduce expenses and achieve these corporate initiatives I described.

Expense reduction has already begun this quarter and will have the effect of lowering operating expenses beginning this quarter. We have a detailed plan that calls for a reduction in operating expenses from 180 million per quarter, last quarter to 160 million in the December quarter. This should also result in a positive operating margin in Q4, the September quarter, without including restructuring charges. We will not elaborate today on the details of the reductions as we have yet to communicate the plan internally.

Let me talk for a few more minutes about some interesting wins that occurred last quarter. The first one I want to talk about is Steris (ph). Steris (ph) is a medical manufacturer with annual sales about $1 billion with an installed base of 125 seats of auto CAD inventor, mostly in the manufacturing area and 50 seats of solid works in the engineering area. They decided about three or four months ago to standardize on one system worldwide. PTC was not initially considered for the evaluation, given that Pro/ENGINEER was considered to be old and expensive. After some good selling, PTC was invited to participate in the benchmark. We demonstrated Pro/E Wildfire and stressed the theme of a new modeling paradigm or modeling system, within that included simple or ease of use, powerful and connected. Simple, powerful and connected. PTC received an order for 138 seats of Wildfire to replace all of the inventor and solid work seats. Steris (ph) has begun a PLM initiative corporate wide which I'm certain we are going to compete in.

A second interesting win we had occurred in united defense. This is a long time Pro/ENGINEER user. Recently, we have begun demonstrating Wildfire as the foundation for our message about a new product development system and again, the heart of a product development system are the themes around creating product information, collaborating with others while you do it and controlling all the changes. Last quarter in the armaments division, we delivered product development systems solution which resulted in a nice Windchill order and the displacement of a competitor.

Recently, the third example, an Aerospace company began an initiative to become more competitive in the way it collaborated with its extended value chain, including suppliers and customers. On average, 70 percent of all aerospace products throughout the industry are designed and built by suppliers. PTC has no relationship with this customer and it was a large IBM (ph) deso (ph) customer traditionally. Let me read an approved statement. On March 4th, we signed company-wide multiyear agreement with Boeing. The standardized pricing and licensing for using Windchill technology as part of their enterprise collaboration initiative. Now, a more formal and detailed press release will follow shortly. I would comment that this was as much a result of a dramatic superior technological win as the sense that we gave Boeing about PTCs renewed ability to be viewed really as a great partner.

Finally on the win section, we will conclude shortly, I believe, an agreement with a major automotive OEM that has brought into our product development system vision in a particular part of their business. While there will be no material revenue impact this quarter as it is configured partly as a subscription, I hope to be able to tell you more about it in the next conference call. But again, some of the themes that we are talking about here as we get into the discussion, simple powerful and connected on the modeling side, create collaborate, control as the heart of a product development system. So let me pass things over to Tom for his discussion on the financial part.

Thank you, Dick. Revenues for the quarter were 171 million and loss per share was 6 cents. This was in line with our financial update on April 3rd, 2003. Total (ph) revenue was down 1 percent sequentially and 5 percent year-over-year. License revenue was 55.3 million in Q2 2003, up 7 percent sequentially but down 3 percent year-over-year. Service revenue was 115.7 million, down 4 percent sequentially and 6 percent year-over-year. By geography, North America revenue was 67.8 million or 40 percent of total revenue and was about flat sequentially and down 10 percent year-over-year. European revenue was 57.6 million or 34 percent of total revenue and was down 4 percent sequentially and about flat year-over-year. Asia Pacific revenue was 45.6 million or 26 percent of revenue and was up 4 percent sequentially and about flat year-over-year.

On the Windchill side, Windchill revenue was down 2 percent sequentially and up 7 percent year-over-year. Windchill licensed revenue was 15.2 million in the quarter and service revenue was 27.3 million for a total of 42.5 million of Windchill revenue in Q2, 2003. Total licensed revenue was down 4 percent sequentially and up 39 percent year-over-year. The Windchill links solution licensed revenue was up 49 percent sequentially and 347 percent year-over-year. EDM link (ph) has now grown to contribute about the same amount of revenue as project link, our most mature link solution. We anticipate the Windchill link solutions will continue to grow as they become the standard for collaboration and control for our expanding list of customers.

We had 84 new Windchill customers in the quarter, which brings our total Windchill customer number to 908. This new customer number is about flat sequentially and up significantly from an average of 38 per quarter in fiscal 2002. During Q2, 2003, we had 177 Windchill transactions versus 185 in Q1, 2003. Windchill cumulative seats were 249,000 with 12,400 additions in the quarter. Licensed revenue from existing Windchill customers was 80 percent of Windchill Licensed revenue. Windchill ASPs were 1,226 on par with historical levels.

On the design solution side, total design solutions revenue was 128.5 million, with 40.1 million in license revenue and 88.4 million in service revenue. Design solutions licensed revenue increased 12 percent sequentially but declined 13 percent year-over-year. The sequential increase was due to growth in new seat revenue in both high and low-end seats. Design solutions service revenue is down five percent sequentially and six percent year-over-year, due to lower maintenance revenue. Maintenance revenue was impacted by operational issues which led to some renewal business left unclosed in the quarter. We recently reorganized the maintenance business under new management and we should gradually recover the revenue loss from this quarter.

Our new customers for the design solutions business was 568, bringing the cumulative design solutions customer business to 35,402. Cumulative design solution seats were 292,000 with 3200 seats added during the quarter. Licensed revenue from existing design solutions customers was 88 percent of total design solutions license revenue. ASPs improve this quarter to 12,700, on par with 2002 levels.

Regarding our VAR channel, indirect license sales were 35 percent of total design solutions license sales. This is 14 million in licensed revenue, which is an eight percent sequential improvement and 23 percent year-over-year improvement. We continue to diversify the VAR network. This quarter, our new European distributor partner, Mention (ph) Machines, commenced its agreement with PTC and again to administrate our European VAR channel and train its VAR network to sell Pro/ENGINEER Wildfire.

As we have stated in the past, the line between our solutions for product design, collaboration and control are blurring. This quarter, with the launch of Wildfire, we began selling a product development system seat called Flex 3C for create, collaborate and control. This next generation CAD package is configured to meet the needs of the high-end design engineer working in an extensive value chain environment. It contains Pro/ENGINEER Wildfire, advanced engineering models, real time design collaboration through our partnership with Groove (ph), Windchill project link and Windchill PDM link.

We were encouraged by the number of customers that bought this new integrated PLM (ph) package during the quarter as well as those existing Pro/ENGINEER customers on a less complex package configuration who upgraded to the new package during the quarter. Bus the package includes both design and Windchill solutions, we developed a revenue allocation plan in January along with the Wildfire pricing and packaging. New Flex 3 seats revenue is allocated 90 percent to our design solutions and 10 percent to Windchill. Flex 3 upgrade revenue is allocated 50 percent to our design solutions and 50 percent to Windchill.

Operating expenses including amortization was down 1.3 million sequentially. Headcount decreased slightly sequentially to 3,787 from 3800 in Q1. Year-over-year, headcount is down from 4,166. In Q2, we settled the foreign tax audit and assessed exposures and taxes for the remainder of the year, resulting in a Q2 tax provision of 5 million or negative 48 percent. For the remainder of fiscal 2003, please use the quarterly provisions of approximately $5 million in your models to cover mostly foreign entity tax liabilities and indirect taxes in some foreign -- some Asian entities.

On the balance sheet, cash was $206 million, down from 215 million in Q1. Receivables DSO was 85 in Q2, 2003, compared to 83 in Q1, 2003. Cash collection was on target this quarter, including the collection of the shortfall in Q1, 2003. DSO was negatively impacted by lower overall revenue and currency movements in the quarter. Deferred revenue was up significantly to 199 million from 179 million in Q1. This increase is deferred revenue is primarily attributable to the significant number of customers with annual maintenance contracts with January renewal dates. Weighted average shares outstanding for Q2, 2003, was at 263.8 million shares. I would like to turn it over to Jim Heppelmann for additional product comments.

All right, thanks, Tom. Obviously, this was a very important quarter on the product side of PTC strategy. As Dick mentioned we launched the Wildfire version on February 10th and followed up with the multi-language versions of Wildfire late in the quarter so this, I mentioned many times, really represents the keystone that completes our vision of a complete product development system that help people to develop products in their digital products value chain.

So, our product development system, just to review is really a full footprint of capabilities that we describe as create, collaborate and control, on a single integrated web architecture. The work we did with Wildfire was very critical because what we put in place now is an architecture, integrated architecture, there is no discontinuity between the work the engineer is doing inside the Wildfire application and the involvement that a product manager or a purchasing manager or a manufacturing engineer has in the overall product development process. There is one single continuous system that each and every participant in the big picture product development process can easily participate in.

So on one hand this concept of a product development system can be viewed as the next generation of CAD, but this generation is enterprise ready so that when we upgrade the CAD seats to Wildfire it is very easy, in fact, we really only need to turn on the other seats and other members of the value chain can engage and participate in the product development process. We think this is an important strategy, our customers are aligning behind it. You know, our confidence is definitely bolstered by some of the customer wins and active that Dick spoke of. For example, the win at Steris (ph) really is a CAD versus CAD win, where we demonstrated that purely as a CAD tool, we have best in class technology. The agreement that Dick spoke of with Boeing is purely on the Windchill side. We demonstrated that the we have the best technology purely in the collaborative and control space.

The win Dick spoke of with United Defense shows the synergy when you put these things together and our ability to upsell from a CAD feed (ph) to a complete product develop the seat there is real strong evidence both in the number of transactions, number of new orders and our ability to upsell from a CAD seat to a product development seat that this strategy is coming together. I would like to turn it back over to Tom for comments and outlook.

So let me remind that you our comments regarding outlook and guidance constitute forward-looking statements which involve assumptions about the future which may be wrong (ph). The risk 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 stated in our press release this morning and talked about by Dick earlier, PTC is currently implementing cost reductions that will bring our operating expense structure to a level of 160 million per quarter as we enter fiscal 2004 in October. We plan to take an aggregate restructuring charge of 25 to $35 million as the reductions are made.

For your models, assume one-third of this charge will be taken in Q3, 2003. On the revenue side, we continue to believe that our product development system will change the way customers are drive value from their product development processes. We have already seen an improvement in the new seat (ph) revenue for our core product development system products, Pro/ENGINEER Wildfire and Windchill links solutions. However, because our revenue performance has been and will continue to be dependent on the macroeconomic outlook and customer spending, we believe revenue for Q3, 2003, will be about 170 million sequentially. And spoke earlier about the tax provisions. So, at this point, I would like to turn it back over to Meredith.

Great, so I think we are ready for Q& A. I just would like to remind everybody, one question, one followup and if you have got more questions, you have got to get pack in line.

Thank you, at this time, we are ready to begin the question and answer session. If you would like to ask a question, press star one on your touch-tone phone. Star one to ask a question.

Mr. Richard Davis, you may ask your question and please state your company name.

Richard Davis, Needham & Company. Either Dick or anyone there, could you talk about just other on the -- say for example the win at Boeing. Walk through kind of, you know, how that -- how that proceeded and then kind of financial -- I know you can't give us detailed financials but just in the general sense, you know, what the financial impact of this is. I know it is a big deal, at least it seems to me technologically, but how does it play out over the long term analogous stories like a Boeing and then maybe if you could talk about in general terms are there other Boeings out there you would like to hunt down?

Well, there is definitely other Boeings out there we would like to hunt down and we are in the process of hunting down and one of these, this automotive opportunity that I hope to tell you about next quarter. It is actually pretty far down the path. But, you know, I -- Richard, I can't talk too much about this agreement right now because it is pretty new and we have a partnership with Boeing. They are announcing sort of the details internally and have just asked us, you know, not yet to come you with the a broad description. You know, I explained to, you know, our partner there a little bit it is potentially material and so we have to at least describe it at a high end and, you know, that was really the statement that they have sort of authorized right now.

So, I can't drop down and tell you about programs or anything like that. I think, you know, at high-levels, they understand, like most manufacturing companies, because there is such a requirement to outsource, that in order to be competitive globally and so much of their business and Lockheed's and other companies are in the Far East and Europe and so forth. In order to really connect all these diverse locations as well as their suppliers as well as the airlines or the defense, you know the DOD component, groups, customers, in order to connect everybody, just needed to make fundamental changes in sort of the processes and the people and the technology that they use to sort of reinvent the way they build products. They did an extensive benchmark, they invited all the big players.

I think we were last on the list going in because we didn't have any installed base or history with them. I think it is a surprise for you and probably everybody else that we won. As I said earlier on my comment before, I think had we won only technologically, which was a clear decisive win in the benchmark, I think that, you know, more fundamentally, we demonstrated to them that, you know, we could act as a partner that they could rely on us that our global services people were as much a part to of the decision as was the technology. I think you are going to see our global services revenue rise, you know, in the coming quarters but of accounts like Boeing, viewed more and more as a trusted guide to these large manufacturing companies. So I think I have probably said enough. I think I will be able to tell you more about it over time but I want to respect, you know, wanted to be able to just describe it, bus it is important. But I want to respect, you know, their wishes we not do much more than that at this time.

Okay.

Were you surprised?

It was a good win.

Yeah.

A good win. So, yeah, thank you very much.

Okay.

Thank you, Gibboney Huske, you may state your question.

Credit Suisse First Boston. With ASPs improved sequentially, both on the Windchill side and pro-E side, I was wondering if you could give us more color on what was behind that and maybe context with regards to the competitive environment.

Well, let me give a shot at the ASPs. Let me -- ASPs and sort of competitive environment. The ASP side, I will give a quick shot today and I probably want to leave it at that until we get a little more information about what's happening, given that Wildfire was, you know, released as Jim and I both described part way through the quarter and really for the far east and Europe, you know, the German, French, Japanese and Chinese versions didn't ship until the last week of March. Mention (ph) machine only began to really sell the product, I think today.

They spent the month of March signing up distributors and really, I think they sold a few seats but haven't really kicked in yet, so -- the ASPs though I think were -- the increase was a manifest station of new operation and bundling that we did, where we added some functionality into the -- these core packages and I think we were able to in term of demonstrating this vision about a product development vision and product development seat keep some of the retained value and have a little bit less discounting given that you know, people sort of liked the products and the story. So, let's see what happens in the next couple of quarters. I do think as we have more resellers and as the reseller business increases, that is going to provide a little downward pressure on ASPs and, but, you know, we were a little bitten coupled (ph) by that in the course of this quarter. So ...

I guess the ...

... need more data there, you know what I mean?

That makes sense. I guess I was sort of fishing for some commentary that perhaps pulling back a little bit on solid works, not being quite as aggressive as you have in the past which I guess would contribute to downward pressure on the Pro/E side. Are you seeing it? Is that part of the dynamic?

What are you seeing, Jim?

No I think -- I think this bundling represents more value for which there is not a competitive alternative, hence less price pressure. I mean that is my personal view. But as Dick said, we are sort of speculating because we don't have enough history here to prove any of it. I think we are offering a proposition which there are not alternatives, hence there is less price pressure.

I think on the solid works side, Gibboney, which we have talked a little bit about before, a good product, a good company, all that stuff, if they are conflicted, this Steris (ph) deal that I talked about ...

Right.

What I didn't -- the competitors were in the finals there were four finalists in that benchmark, the RFI went out to 14 companies and boils down to four finalists, CATEIA (ph) was one, solid works another, inventor was the third and we were the fourth. EDS didn't even make the finalists. But solid works was conflicted, as was CATEIA (ph), CATEIA (ph) was viewed as easy to use and couldn't complete the assembly. And solid works couldn't complete the assemblies either and couldn't show a product vision that wasn't going to compete with CATIA, I think you are going to see more and more solid works try to be aggressive in actually cutting price, which might put downward pressure on our margins, I don't think they can improve the product without an (ph) earthquake the bigger revenue producer which is CATEIA (ph), that is a real conflict.

Okay.

Interesting to see what happens this quarter.

Great, thanks a lot.

Okay.

Thank you, Jay Vleeschhouwer, you may ask your question and please give your company name.

Merrill Lynch. Are you seeing any indication the high end flex three version of Pro/E will become a larger part of the mix or the other hand do you think the ASPs will continue to decline perhaps to less than $10,000?

Well, no we don't really see a decline in the ASPs right now bus they increased this quarter. Again, I think that because these products are brand new. As Jim described there is inherent greater value built into the configurations that the competitors are having difficulty sort of deal wig think right now. We need a little more time and sort of anecdotal and real data to analyze what is happening there. I think is too early to tell.

Okay. Can you also give us an idea of what is the current size and composition of the direct sales force and the number of indirect resellers?

Let's see. I think the direct sales force is right around 450 direct sales reps. I believe world wide, the number of resellers is somewhere around 150 or so? 150 resellers contributed revenue this quarter, I think that, you know there is a greater number. In fact as we have described in the past, mention machine, which is the large European retailers used to sell that still sells the auto desk products but has really begun a pretty interesting transition to ours, they are a master distributor, they are out busily signing up sub-distributors under them.

So I think you are going to see the number of total resellers (ph) continue to climb somewhat dramatically quarter by quarter. We had all of the U.S., the major U.S. resellers have been in here the last two days. I met with them yesterday. There is real excitement. They don't think they are going to lose a deal when they walk into a deem these days. So the top ten resellers advisory committee has been in and met with them two hours later there is real bounce down there. They don't think when they come in with Wildfire, they are not worried about inventor or solid work or solid edge or anybody else. They think they are going to win the deal.

Now, be a sent some political reason or some crazy discount, they are going to win technically the deal. You know, one of the things just going back to the ASPs also a little bit, but in sort of line with that, we didn't really talk about, you know, the external (ph) events and I won't talk about them, because I don't want to use them as an excuse, but in terms of big deals, just sort of a comment I wanted to make earlier, we had only six deals that were over $1 million this quarter and they totaled about 17 million in revenue. So that was pretty similar to last quarter but I think far off from where we would like it to be and where it might be give than the economy improves and some of the -- I guess uncertainty about things given the world events occurs.

We really had some visibility coming into the last two weeks of the quarter for, you know, a larger number of those large deals. A greater number didn't happen than is normal. Normally we hit about 50 percent of those large deal transactions and this quarter we hit about a third of them. So you know, I just think historically, you know, we lost a little bit of revenue there, particularly on the large deals. So the base business was actually, again, very solid. What we didn't see was some upside to those larger transactions.

Okay, thank you.

Thank you. Philip Alling, you may ask your question and please state your company name.

Yes, Bear Stearns. Certainly viewed as approved to be lowering your cost structure, just a question as to whether we should be assuming that you are, you know, factoring in sequential declines in total revenue in the September and December quarters given production plan that you are putting in place?

Well, you know, so we are giving guidance for one quarter which is this quarter, the June quarter at 170 million. We will give you guidance in July about the September quarter again, given a sort of what we see happen here. We are in a mode we have great new products on the market, Windchill side, Pro/ENGINEER side. We have a real rapid adoption that is increasing in the channel that lets us touch, you know, these 33,000 small and medium sized customers that we have built up as an installed base the last 15 year. Meanwhile, as we have described, focused our direct sales force on the larger counties like the Boeing --other accounts like the Boeing and others we have described today.

So I think we have given some pretty fair guidance it is what we think is right. I said earlier, I believe now with the products, with the distribution channel and so forth, that we are going to be able to hit these revenue targets and hopefully protect them. Ultimately we would like to talk about a plan to grow them. I think we can do what we describe here without a significant impact as we reduce the costs. So, we are very committed or I wouldn't have described it as directly to have an expense run rate at 160 million dollars, operating expenses in the December quarter. So, you will see that wind down sort of ratably the next few quarters. Not going to give you guidance for this quarter or yet for the September quarter on expenses, but, you know it is an ongoing program that has begun T will hit all the functions and I think we will do it in a way with a detailed plan that protects the revenue. And if we think it will be different, we will tell you.

Right. Just a follow up question with respect to -- what is the expected (inaudible) for the Windchill license sales between existing and new customers? Obviously I can see here from the data that you provided that the percentage of the license revenue from existing customers was up significantly in the quarter for Windchill to about 87 percent from 56 percent in the previous quarter so any number (ph), you know, going forward basis what you are looking to from the existing customer basis from Windchill south?

You have that?

Excuse me. From existing customers, yes, it was a little higher this quarter. We think that is probably due to some focus on the new products that we got out this year this quarter, around, you know, Windchill and the Flex 3C packages plus continuing to advance the links solutions. We don't really have a target, nor do we plan that way for each particular, you know, revenue. Our plan has been as we have said all along to releverage (ph) our installed base, but then to continue to drive these solutions in the mark wet new customers. I think you will see that number, you know, fluctuate a little bit quarter to quarter as we roll this thing out.

What is going on at a high-level is that the sales force and not yet but soon the resellers are presenting the links aggressively into the installed base as Jim described as part of an overall product development system no longer are we selling a CAD system like our competitors only. We believe we have extended our capabilities something newer describing as a product development system which adds to the core CAD functionality, the ability using the internet to connect with suppliers and customers, manage changes and the overall process at a higher level. The sales force is aggressively in there marketing the links that are off the shelf, out of the box, easy to use and deploy into that install base and that is a good sign. What we want to see are those link solutions not only be sold into the engineering department but to expand outward into the procurement, marketing, manufacturing and other enterprise functions throughout these companies.

Secondarily, we want to sell these link solutions to new accounts, for example, like Boeing, and others, which represent an opportunity for us to expand into new accounts, both with standalone Windchill solutions as well as Steris (ph), which represented, you know, the introduction there was to Wildfire. As I describe there had, there was an enterprise PLM initiative under way, we are probably in third place there because we came in late and going to work hard to win that deal as well. We are trying to drive through the resellers, through our direct people into the installed base as well as new accounts. Really touch those different areas.

The final question would be the status of naming a permanent CFO. Any update there?

We are going through a process. Tom Beaudoin here, our acting CFO, a great job is one of the candidates. I think that we are narrowing the process down and certainly no later than July, the next time we all get together, we will make a decision. I think we will make one sometime here in the next few weeks.

Great, thanks.

Thank you. Keith Gay, you may ask your question and please state your company name.

Keith Gay, Thomas Weisel partners. You allude to maintenance rev revenue, operational issues, can you give us the maintenance renewal rate and what has been the trend in that over the last several quarters and what are your expectation there is?

I don't have the renewal rate with me. We will have to get that -- we don't broadcast maintenance renewal rate historically. Basically what happened on the maintenance and I am not, you know, going to go into too much more detail, but we basically had a sales execution problem in terms of configuring, invoicing and following up with the base on some renewals, we didn't execute, came down to the weeks of the quarter we basically left a solid four to five million on the table. Now, we can recover that we will go back it will be back maintenance, but we are - at the same time, we brought in someone to sort of head up the maintenance program and just have a better focus on how we deal with our customers in terms of presenting the value of maintenance and so forth.

A bit of aside on that one of the reasons I think that we will get it back - I am confident we will get the maintenance back to where we should be, and I really think the baseline is in that roughly $80 million per quarter, not going to say how quickly we will get it back there, but it should not be next couple of quarters but we have a couple of things going on that are going to help us. First of all, Wildfire is now in the marketplace. So customers that really like this product are going to need to stay on maintenance to get it. Those that have not been on maintenance during the last year or two are great for opportunities to go back and put on maintenance again, just because of the sheer functionality inside Wildfire. It's really a great product.

Secondly, we had a slight price increase on the maintenance, when did these bundles I described. That may be why you saw the average seat prices go up. As ASPs go up and maintenance is a reflection of the list price of the software as we increase the maintenance a little bit that is going to add towards upside on the maintenance. License revenue was up sequentially, we'd great license revenue quarter. I don't went to talk about some of the other enterprise software companies out there, but there are well known CRM companies and HR, human resource solutions providers out there whose licensed revenue was barely above ours and they are two, two and a half, three times our size in total revenue. Our licensed revenue was very, very strong for the quarter. We are doing some things in maintenance and global services to grow those parts of the business in the future but as licensed revenue is up that is going to contribute to maintenance going up in the future as well.

So I think the final thing I would comment on is that there is a greater and greater adoption rate of these Windchill link seats it is much easier for us to get them deployed torque get our customers to a value proposition and that too will contribute to maintenance prices or maintenance revenue going up, so, Wildfire slight maintenance price increase, the fact our license revenue in general was up and the adoption of the links all make me comfortable, along with the new focus in terms of the management on maintenance, the maintenance will go up.

Followup ...

One point of clarification on something Dick said. So knows things will all help maintenance, but maintenance is not part of the ASP. The ASP is calculated on licensed revenue. I just want to make that clarification.

That is right. But as the ASPs in general go up, I think that they -- the trend too would suggest that the maintenance would go up.

Right. And also can you just comment on sales activity in Asia Pacific, how that is going?

Well that has always been sort of a strong area for us. We had a really good quarter last quarter, last year has been a good year. We are nervous about the forecast in the far east in particular with this SARS situation. We are not really traveling. I was actually supposed to go to China myself in May and postponed that. I'm going to go as soon as everybody says things are clearer. But I don't think the SARS is going to have - it's obviously, not going to help things, we don't yet know what the impact might be. So we are just going to have to watch that but it is -- definitely a concern.

Okay, thank you.

Thank you as a reminder, if would you like to ask a question, press star one on your touch-tone phone. Star one to ask a question. Dennis Wassung, you may ask your question and please state your company name.

Yes, Adams, Harkness & Hill a couple of quick questions. The Flex 3C product line you are talking about, curious how substantial that was in Q2 and how new that product sounds like it is fairly new in terms of the bundling of it and that was a part of any of the wins you talked about?

The Flex 3C bundle was brand new in the quart tender didn't happen until we brought Wildfire out. It was sort of linked with Wildfire and then we bundle it had some other things including PDM link and project link so Flex 3C represents this also known as this product development system where we incorporate the create product information as the modeling, collaborate with others as project link, control the changes PDM link, create, collaborate, control. That came out, introduced this quarter, halfway through, definitely contributed to revenue. I don't note number of seats that Flex 3C represents.

We don't usually break that out. We did see, you know, good performance in seats across-the-board in both low end and high end. These flex 3Cs would be counted in the high end. So we saw kind of an across-the-board early good performance as Wildfire went out.

So you talked about with the ASP increases some strength due to bundling, assuming that is a result of the Flex 3C introduction?

Yes. I would say that was, you know, that was part of it the other thing is you know, changes again it is hard to -- so new, hard to really describe it for you, but changes the par dim for our competitors. They are out principally selling CAD seats, stand alone CAD seats and we are describing a different par dome for the customer this product development seat, much more far reaching and encompassing. We will have to see how they respond to that.

Okay and was this part of any of the three wins you talked about with Steris (ph), United Defense or Boeing?

United Defense was a create collaborate control. With a flex -- I don't any if they bought flex 3C or not they have Pro/ENGINEER, I don't know if they upgraded to flex 3C or no they are a Pro/E use they're will go to Wildfire and they bought Windchill on top of that

So that is the order we talked about earlier in the conference call was permanently a Windchill order?

United defense. Steris (ph) is predominantly a Wildfire order.

And you said Boeing was purely Windchill at this point as well?

Boeing is Windchill.

All right, and could you give a number, part of your prepared statement there about Boeing, was there a number of seats you talked about?

No.

There wasn't? Okay. Very good. Thank you.

Were you surprised about the Boeing deal?

Certainly, it was good deal.

Thank you. Actually on Steris (ph), I believe, yeah, I think there was some Flex 3C in Steris (ph), I don't have the exact number of seats for the mixture.

Okay. Thank you.

Okay. I think that's it. Let me thank you all again. We are, you know, concerned about the economy and the world events. We feel like our products have never been in a position where they are stronger. We are going to continue to capitalize on that and invest in all the product lines as we have for the last couple of years. We are totally committed to making money and we will in the -- I believe in the September quarter we will give you more guidance on that as we get into July, but we believe we will have our expenses in line so we should be able to do that and we are committed to get that expense run rate, the operating expenses down to 160 million per quarter by the December quarter. So thanks for your time. And we'll talk you to in 90 days. Thanks.