PTC Inc (PTC) 2003 Q3 法說會逐字稿

Please stand by for realtime text. The Parametric Technology conference call will begin shortly.

Good morning, ladies and gentlemen. Welcome to PTC's third quarter fiscal 2003 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the call, please press star followed by zero on your touch tone phone. As a reminder, ladies and gentlemen, this call 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 thank you for joining us today. Participating on the call will be Richard Harrison, our President and Chief Executive Officer and Neil Moses our EVP and Chief Financial Officer. In addition Jim Heppelmann our EVP of Software Products and Chief Product Officer and Barry Cohen EVP of Strategic Services and Partners are here to participate in the q and a. Before we get started I would like to remind everyone 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 these statements. We will refer you to the risks detailed in the company's 2002 annual report and form 10K,, our fiscal second quarter 10Q and the companies other reports filed with the SEC filed from time to time. A replay will be available until 5 p.m. eastern on Monday, July 21, at 402-530-7895. Additionally this conference call is being webcast and a replay will be available through our web site at PTC.com until Monday, April 21, at 5 p.m.. I would also like to direct everyones attention to the website at PTC.com where we have posted a PDF document with financial and operating metrics that we will discuss on this call.

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

Sure. Thanks Meredith. Good morning. As you saw in our press release revenue was 165 million and we lost 13 cents a share in the quarter. Revenue was slightly below planned. We made some progress on expenses, but we need to make more. We do have a detailed plan there that Neil will elaborate on a little bit later in the call. What I would like to focus on in the next couple of minutes is our progress against our strategic initiatives. On the positive side we continue to execute against the strategy.

First with respect to wildfire adoption, our product position is really once again very strong. Visa-visa competitors, (inaudible) license revenue due to wildfire was up both sequentially and year over year. This is a very positive sign as it will enable us to secure and stabilize our base business of 35,000 customers. And to that end, wildfire adoption is actually progressing very, very well inside the installed base. Secondly, the Windchill links which are a major part of our strategy, continuing to see more rapid adoptions in terms of new accounts with 97 for the quarter, our highest total ever. Remember last year we spoke about -- that we have averaged 38 new Windchill accounts per quarter.

While the new name accounts were up, the average transaction sites was down considerably, signaling again that companies are implementing software solutions cautiously and with a clear ROI in mind. So with good deployments in these 97 new accounts this quarter and 87 last quarter and so forth we will see repeat orders and results and better upsides in the future as we again enforce these good deployments. Third we see in our base and in our new accounts an endorsement of our vision around a product development system. A PDS is characterized by an integrated solution that enables manufacturing companies to build innovative products by creating product information, collaborating with others while doing so and controlling all the configuration changes for the extended enterprise. Create, collaborate, control.

We have a number of major companies, small companies and medium companies that's have begun to adopt this vision and we rolled it out very aggressively at the pro-ENGINEER worldwide user meeting in June. Fourth, last quarter I spoke about a significant win for our company at Boeing which has now standardized on Windchill for all collaboration and connectivity outside their firewalls with their supply chain. Today I would like to announce that Toyota Motor Company has standardize on the use of pro-ENGINEER for all design inside of power train. And extending that out into their supply chain. We have concluded a good sized contract with Toyota Motor Company and I will answer a few more questions during the Q and A. Let me pass things onto Neil so he can elaborate on some of the financial results and plans.

Okay. Thanks, Richard. After one month at PTC I am looking forward to my role in helping position the company both operationally and financially. So we can better leverage our two primary assets, our strong products and a large customer base. Continuing to strengthen our operating model for the future should help generate better shareholder value, especially as we focus more intently on profitability. I look forward to meeting our shareholders and analysts in the coming weeks and months.

Regarding the third quarter, let me give you a recap. As Richard mentioned, total revenues were 165.2 million which is a 3% sequential decline in a 7% decline year over year. The decline was primarily attributable to a decrease in license revenue which was 48.6 million in the third quarter, down 12% sequentially and 14% year over year. Service revenue was 116.6 million in the third quarter. Up 1% sequentially, but down 4% year over year. Primarily as a result of lower maintenance revenue. By geography, North American revenue was 54.3 million or 33% of total revenue. Down 20% sequentially and 25% year over year on weak license sales.

Many of the deals that were greater than 1 million in license and service revenue were in Asia and Europe in the third quarter. European revenue was 60.5 million or 37% of total revenue. It was up 5% sequentially and 7% year over year. On a constant currency basis, however, revenue from Europe grew 1% sequentially and was actually down 11% year over year. Asia Pacific revenue was 50.4 million or 30% of revenue. And it was up 10% sequentially and 3% year over year. With stronger sales in Japan offsetting slighter weaker sales in the pac rim. Asian currency movements had no impact on the sequential growth rate this quarter, but on a year over year basis, Asia Pacific revenue declined 2% on a constant currency basis.

Total design solutions revenue was 123.6 million with 38 million in license revenue, 18.4 million in consulting service revenue and 67.2 million in maintenance revenue. Total design solutions license revenue declined 5% sequentially, but grew 2% year over year. As we mentioned in our press release, pro-ENGINEER, license revenue improved significantly sequentially and year over year driven by pro-ENGINEER wildfire. This was particularly evident in the new seat revenue of our flex 3C package for the high end market which is a fully integrated product development system for digital product creation, collaboration and control.

Design solutions consulting service revenue was down 9% sequentially and 3% year over year. As a result of lower sales of our diagnostic tool used for training purposes and proficiency. And design solutions maintenance revenue was down 1% sequentially and 10% year over year due primarily to the lag affect of license revenue declines in prior periods. Our new customer number for design solutions business was 537. Bringing the cumulative design solution customer base to just under 36,000. Cumulative design solution seats were 295,900 with 3,600 seats added during the quarter. The largest such increase this year.

License revenue from existing design solutions customers was 88% of total design solutions license revenue. And ASP's for (inaudible) were down sequentially from 12,700 to 10,700. Due in part to a higher mix of low end seats in the quarter. Regarding our bar channel, indirect license sales were 25% of total design solutions license revenue. Or 9.7 million. This is lower than expected compared with 14 million last quarter and 10.2 million a year ago.

Nonran bar revenue was stronger year over year by 7%, but declined sequentially. Enviro revenues were off sequentially in all geography's except the pac rim. Our relationship with mention machine is progressing well. As we aligned almost all of our European VARS, our existing European VARS under this new structure during the quarter. However, the reduction of margin to PTC associated with the move to the two tier structure was not yet offset by new license revenue in the quarter. Mention machine did add 46 new retailers to its PTC network in the quarter and devoted resources to training and marketing throughout Europe to help make these VARS successful. Total Windchill revenue was 41.6 million, a 2% sequential decline and an 11% year over year decline.

Windchill license revenues was 10.6 million in the quarter and reflects lower sequential Windchill link solutions revenue and general license weakness in North America. Windchill consulting service revenue was 21.7 million up 12% sequentially and 7% year over year. Stronger consulting revenue from north American accounts. And Windchill maintenance revenue was up in the quarter, 18% sequentially and 21% year over year. This is attributable to stronger customer acceptance of the Windchill link solutions over the past year. As well as strong sales of the pro-ENGINEER wildfire flex 3C package which includes Windchill software.

As Richard mentioned earlier, we had 97 new windchill customers in the quarter which brings our total Windchill customer account to 1,005. The new customer number for the third quarter is up from 84 last quarter and up significantly from the average of 38 per quarter in fiscal year 2002. From a transaction standpoint we had 173 Windchill transactions in the third quarter compared to 177 such transactions in the second quarter. These numbers indicate that customers remain enthused about the Windchill link solutions. However, due to the smaller size of these transactions, it is clear to us that overall customer spending continues to be minimal. Windchill cumulus seats were 254,350 additions in the quarter. The decline in seat count this quarter compared to last quarter corresponds to the overall Windchill license revenue decline. Windchill ASP per seat were 2,109 which is higher than normal due to a higher mix of heavy user seats sold in the quarter.

As well as the smaller average transaction size which typically involves little to no discounting. License revenue from existing Windchill customers was 67% of Windchill license revenue. Compared to 87% last quarter. All right. Let's talk about operating expenses for a minute. As you know, mid quarter we began to implement our cost reduction plan announced on last quarter's call. During the quarter, head count decreased 3% sequentially to 3,671. From 3,785 last quarter. Year over year our head count is down from 3,990.

Head count declined in all functional areas except R&D where head count was approximately flat. Operating expense including amortization but including restructuring and other charges was down 1.5 million sequentially. This includes a 7% reduction in sales and marketing expense offset by the following: Increased cost of revenue, due to higher sales of royalty bearing products, and higher GNA expense due to increased maintenance fees to our IT vendors and increased corporate insurance costs. We recorded restructuring and other charges at 15.1 million during the third quarter. These consist primarily of two items, $8 million associated with the current cost reduction plan as well as a charge of 6 million to increase previously established liabilities for excess lease facilities associated with PTC's 1998 acquisition of computer vision corporation. Tax expense was in line with our guidance of 5 million. For the remainder of fiscal 2003 we expect a quarterly provision of approximately 5 million to cover mostly foreign tax and any liabilities and indirect taxes in some Asian entities.

Let's turn to the balance sheet for a minute. Our cash was 208 million and that was up from 206 million in the second quarter. Basically we had a very strong collections quarter from recent annual maintenance billings and it helps offset the cash of our net loss. Our receivables DSO was 88 days in the third quarter and that compares with 85 days in the second quarter. DSO was negatively impacted by two things, lower overall revenue and also currency movements in the quarter. The strong maintenance collection that we mentioned earlier did not reduce our DSO because maintenance billing primarily resides in other current assets rather than accounts receivable. Deferred revenue is down to 190 million from 199 million in the second quarter. This was attributable to normal seasonality of revenue amortization from our annual maintenance contracts.

Okay. Let's talk about our outlook for the 4th quarter. As we stated in our press release this morning, our goal is to be profitable in fiscal 2004. We are going to continue to implement the cost reductions announced in April which were designed to remove about $20 million of cost per quarter. These cost reductions will decrease our quarterly operating expense structure from 180 million to 160 million by the first quarter of fiscal 2004. But I think as a company we need to move faster in this direction and to do so without sacrificing product quality or customer satisfaction and we have recently made a decision to be even more aggressive in reducing our costs to further improve our ability to drive productivity gains in 2004 and to achieve profitability next year. So execution of our new plan is intended to reduce our quarterly operating expense structure by an additional 10 million to a level of 150 million by the end of fiscal 2004. As a result of the additional reductions the aggregate restructuring charges that's we told you about last quarter will be higher than 25 to 35 million. We expect about 50 million dollars in aggregate restructuring charges to be spread across the 4th quarter of 2003 and on into fiscal year 2004. Our guidance for the 4th quarter of this year which ends September 30th is as follows: Total revenue of 160 to 170 million and a net loss per share of 10 cents to 14 cents including approximately 15 million in restructuring charges.

Thank you very much for listening and for your support of PTC. I look forward to meeting each of you soon and at this point I would like to turn the call back over to Meredith.

Great, thanks, Neil. We are ready for the Q and A section of the conference call now.

Yes, thank you. At this time if you would like to ask a question, please press star 1 on your touch tone phones. Star 1 for questions. If your question has been answered, you may press star 2. We'll take the questions in just one moment. Again star 1 for any questions. Our first question is coming from Jay Vleeschhouwer. Your line is open.

Uh, thanks, a couple of questions on outlook. Where do you expect to be able to further reduce your head count to get down to 150 a quarter? You already reduced the sales force to 410, 420. Do you anticipate Richard, having to go below the 400 level to get to that new expense level, and then the second question, more for Jim, following up on some comments you made down at the meeting in Orlando, you talked about the product release schedule for the fall and to fiscal 04 such as Windchill 7 and some of the next generation Windchill products, so can you talk about whether that schedule is still on track and what some of the major functionality or performance or ease of deployment improvements are we should look for with those next releases over the next year or so?

So, Jay, this is Neil, let me take your first question and then I will turn it over to Jim. As far as the specifics around where we are going to reduce costs, you know, that's an on going process. We started an initiative which we talked about last quarter. We have accelerated that initiative. I think we will be very prepared to talk to you in a fairly good level of detail in the 4th quarter around what exactly that's gonna look like.

I will tell you this: First of all we want to focus on a couple things that I mentioned before which is making sure that we are driving product quality and making sure we are driving customer satisfaction, but we are not limiting our efforts, if you will, to one specific area. For example, I would say in the third quarter, certainly our GNA performance is somewhat disappointing relative to where we expect it to get. So we will take a closer look at that area and that's something that I am focused on. But as far as the specifics around the rest of the cost reduction program, we would ask you to be patient and let us give you some fairly specific detail when we get on the 4th quarter call with you.

Jim, do you want to talk --

Yes, I would be happy to take the question about product outlook. Keep in mind, to really implement our product development system strategy which really says how these products work together in support of a customers business process. What's most important in order to implement that strategy we had to re-engineer our products to some extent. Obviously, wildfire was a big piece of that. We delivered that earlier this year. We had to do some work to re-engineer pro intro link. That was delivered in the current quarter here. Certainly the language versions of it. And then, a key final piece was we wanted to do some work some additional work to the Windchill product line that will be delivered in the Windchill 70 release which is starting to roll out now into some of the preliminary early adopter customers and will become sort of a general release in the first fiscal quarter of the next year.

So when is first fiscal quarter in terms of what is in Windchill 7 thats important. There are many things in there, but there are a couple I would like to highlight. The first one is what I would describe as integral behavior of our PDM link and project link solutions. In fact, what we are basically doing is taking two solutions and merging them together. So from a pricing packaging standpoint we will continue to sell them as two, but from an installation in-operability standpoint it will be exactly the same system and exactly the same data the user can use the same information in either component of the integral solution. And then a second component which I think is key is our whole new middle wear and integration strategy, this capability we call ESI which stands for Enterprise Systems Interface and it includes some embedded middle wear from TIPCO. It includes, for example, a turn key bi-directional interface between Windchill and SAP and some other related capabilities. Keep in mind this idea of a product development system for us.

You know starts with pro-ENGINEER and can include interlink, it includes project link and PDM link and our visualization technology. And we want to extend it out to an SAP type ERP solution and ensure that business processes can start in PRO-E and end in SAP and there is no discontinuity in between. So I think Windchill 7 is a key sort of last piece, if you will, to complete that picture.

Richard, you already had Toyota power train, so what changed there.

Well, I think that we had, Jay, for the most part, pilot programs in Toyota power train and historically, I guess in maybe the two or three years we had pieces of Toyota power train. I'm not able to sort of describe in too much detail because they don't want everybody to know how they design and so forth, necessarily, but this past quarter in June we signed a contract with them that is pretty extensive where they are now standardizing everybody inside power train at Toyota and then rolling it out to the supply chain. Pro-ENGINEER is the standard tool for the completion of all of the components of the engine. So that's a major part of the agreement. There is an R&D piece that goes along with that. A number of global services people that are on-site. So pro-ENGINEER is the only product off the shelf, sort of commercial piece of software that is in production inside Toyota for design today.

You know, they had a senior executive that stated pretty publicly at an automotive seminar in Germany two months ago that they have made some decisions, to use (inaudible) in body, for example, nothing is in production and won't be for the foreseeable future, but today pro-ENGINEER is the standard for all power train design. So, that's a good endorsement for us and um, we have broadened the relationship with Toyota. There is a broader partnership that includes services, R&D, executive sponsorship and so forth and I think that it is potential spring board for us to do a lot more with the company. Not only inside the company but also with this supply chain. That's a major part of the way they work and the way they want us to engage with them. It is a much more public endorsement of our company and our solutions than in the past where, you know, they were using it in different component pieces of the engine, but they hadn't really sort of made a final decision to standardize on it. There are about 500 seats now in production and potentially many, many more as we go forward.

Right. In Orlando, Jim, you talked about having had through then, 18,000 installs of wildfire which at the time was less than 10% of the base. You know, where do you think you stand now and do you still think you will get a conversion rate of half by the end of the calendar year which would be a normal pro-e conversion rate for a maintenance release.

Jay, we're going to answer this question and then let somebody else go.

Sure, I understand.

The date obviously is not significantly different than user group time frame that was only four weeks ago. I remain confident that we will be on or ahead of a normal track of adoption in ultimately all of the customer base will adopt this technology.

Another question?

Our next question is coming from Richard Davis.

Thanks. I guess the big question that a lot of people would wonder about is that, so we spent a half a billion dollars in the last three or four years on product development. You now have a new product out that appears to be pretty interesting and have a lot of interesting technology and things like that. And you have won some good kind of reference accounts, certainly Boeing and it sounds like Toyota is getting a bit bigger so that is obviously a big positive. So the question is, do you believe then that the payoff from all this effort should be revenue growth, or do you think this is more a plan that kind of keeps revenues flat for the next few quarters or years or something like that? In other words you are stemming the tide but um, which is fine, but do you think you can actually start moving the needle on the front on the top line? Because it sounds like you are going to do a pretty good job on the expense side of the equation.

Yeah, Richard, that's the $6 million question, this is Neil right. Certainly if you look at our history over the last couple years. So,we need to do what we are doing expense side. We will go ahead and do it and execute against that plan and share those details with you in the 4th quarter. On the revenue side, you know, I think there is a couple things going on. The first question is, you know, what's the adoption rate, right? And the second question, I think is, what's the trajectory of our core m-cat business. And, you know, I don't think we really know the answers to those questions, quite frankly. Until the end of next year. And a lot of it obviously, depends upon what kind of spending outlook we see from our customers from a macro economic perspective. So it is the right question to ask. We are confident that we have a strategy in place that is going to stabilize and then grow the top line. We're looking at 2004 as a test to that strategy.

Got it. Okay.

I think, Richard, it is the tough question. Not to hide behind it, but I think in the last couple quarters I'm not so sure about this one, we have to see what the other results are, but I think we have actually begun to capture market share again a little bit. I don't know if we made the point strongly enough, but the pro-ENGINEER license revenue, pro-ENGINEER revenue was up year over year and sequentially for the first time in years. So I think wildfire is going to do a really good job of securing that base, enabling us to penetrate it with the link solutions and so forth and then sell additional solutions in there over time which I think has been very important for us. That whole question about stabilizing the m-cat business and stabilizing the basis one that we have been working hard on. We have to sort of see what's going there. There is throughout the business, I think on the CAD part of the business, which I think we have worked very hard to reposition ourselves, is something more than a cat cam company. I think a cat cam company is in a bit of jeopardy just given the fact that the average seat prices are declining in that space. And, so what we have really worked hard to do is to broaden our portfolio, our vision and products behind it, this PDS story so we have a much more sort of well rounded and positioned set of products.

Now, the second part of the question is if we can stabilize the cad business. How real and when is the PLM part of the business? The extended connectivity, collaboration, change management. There is no question, I think really for anybody, that customers have a real problem in terms of, you know, manufacturing companies having to engage with suppliers and customers all around the globe that are outsourced. How do they get their arms around these difficult problems? There is no question there is a problem. The question that we have to sort of prove out on our side is whether or not our solutions easily let customers solve that problem with a meaningful ROI. So I think there is a lot of investigation. I think the link's new name accounts was up that was a positive sign.

But I think really what’s happened a little bit is that with wildfire to some degree, our sales force has gone back into that core base and begun to sort of engage with the customers again in the engineering department around our link solutions as an extension of this initial extension of the whole PDS system. And I think the customers too are much more cautious about their initial investment, you know, sort of proving that out before they will come back and spend more money. So I think those are some of the dynamics around whether or not we can do more than simply stabilize the revenue and then once again begin to grow it. We feel very very strongly from Toyota from Boeing and (inaudible) from other accounts we have won that our solutions today are the most powerful and are winning the benchmarks. We have to overcome the adoption in the PLM space and just see how fast we can make that happen.

Have you been able to get any people that are off of -- have been off of maintenance and back onto maintenance. Can you walk in and go, look, we have a better product?

Yes, we have. We have had a number of people that have been off maintenance come on maintenance. We had a number of companies -- I described one last quarter and there are more this quarter where they were using other low end systems that were mixed in with pro-ENGINEER and now gone back and standardized on one system, pro e wildfire throughout the company. Actually at another step or glance on the quarter, Far East was really actually very strong. You know in this environment, we had a good quarter in the Far East. Europe was sort of okay.

And the U.S. had a difficult quarter. And we just didn't knockdown any big deals in the U.S. in terms of commitments from customers around license deals and so forth. The services were actually up. The Windchill maintenance was way up which means again they are adopting the links. But sort of new deals. The base business was pretty stable. New deals just didn't really materialize. I think they will bounce back in the next couple quarters.

Okay. Thanks.

Thank you, our next question is coming from Gibboney Huske. Your line is open.

Thank you very much, my question is around windchill as well. It is somewhat of a disappointment number I guess it is pretty consistent with what we are hearing from other software companies, but at the same time, you know, I guess my question really is there maybe a sales execution issue in there as well? Obviously with wildfire that was something new for your sales person to talk about and did that maybe take some momentum away from Windchill? And alternatively maybe you could discuss in a little bit more detail some of the competitive dynamics in maybe the -- has the competition heated up a bit? And, you know, if this so, make further progress. I mean I guess the risk is if the market finally develops, but meanwhile the window for others to catch up to your technology has been long enough that your competitive position is not strong when the market finally picks up. Finally, this from a business model perspective, obviously you are still investing in Windchill. I know that you have gotten through the profitability there down. But as you think about taking that additional cost out, you know, what are the implications in terms of the balance spending toward Windchill versus how you are spending towards your core business for m-cat basically.

Um, yeah, so, boy, --

multi part question.

It is a good thing I was taking notes. Sort of on the dynamics in the quarter in terms of Windchill. Again, sort of, in the far East and Europe we actually, I would say internationally we were right on target in terms of where our guidance would have been and so forth in terms of their hitting their part of the 170.

Right.

For guidance and the 168 you really sort of had us at. The down fall really happened in the U.S. and I think it was, again, just typically we will have four or five deals, license deals that are in that $2 million-range and they didn't materialize this quarter.

Was that a pipeline issue? Or was that just a close rate issue?

I think it was a close rate issue. I think we did actually, because of the Windchill new name accounts being at 97 I think we actually. But I think customers continue to be very conservative and so the deal shrunk. You know, they said okay, instead of going out and spending a million we are going to do a $300,000 pilot. The good news about the lengths you can more recently sell them and they are easier to use and they are easier to install, and a little bit on the other side, the flip side of it is the customer can actually make a commitment and learn something and do a pilot with lest investment. They don't have to do all -- do a serious deployment with customizations and so forth and a one year investigation before they can find out what's going on. In someway it is easier for them to just buy off a smaller amount, identify a pilot and roll it out. I think that hit us a little bit.

But doesn't that imply the way -- if that should transition in terms of -- and that is consistent with other software as well and the revenue, the license number for Windchill, I mean, maybe you've got sort of a multi-quarter transition to that type of buying behavior, so -- and maybe that's part of why I guess your guidance for Q4 is relatively conservative versus historical seasonality.

Yes, it is also because Neil is here and he wants to make sure we hit the number and I don't blame him. He is doing the right thing there. I think also if you look back the last three quarters, you know, the Windchill new accounts were 85, 88, 97. I don't know if those are the exact numbers, but pretty close.

Right.

I think what you will see now is we will go back in and a lot of the deployments are set up nicely. The maintenance is rising and so now we are back in the account talking about, okay, you bought 200 seats, let's expand it to the next range, another 500 to 1,000 seats. So it may be that we'll see -- I think that we are going to continue to see these new name accounts on the Windchill side increase and increase. We also have to continue to go back into the one that's have now been deployed for three or four quarters and expand them. And that's really what this whole vision about the product development system is all about. On the competitive side, to be honest with you and I don't mean to sound smug, but I just think customers really tell me that we win the benchmarks. And I think that's pretty consistent.

I think that as you check and I think some of the other -- your piers have checked. I think the general feeling out there is that Windchill, because it is typically fresher than some of the other competitive products that are out there, it is newer. It is written in Java and is not a rewrite and so forth. It just really has the sort of strength of functionality that lets us really win the benchmarks. We weren't going to win Boeing. And we didn't win Toyota unless really we had demonstrably better products. These are companies that have had a commitment to our competitors for years and really we displaced them in these accounts and there are more companies like that, you know that, we talked about in the past and there will be more in the future. So, I think -- I really do, as I said, I think -- I can't yet say the PLM space is real. I think I would like to. I can say definitively the customer problem is real and that there is a lot of investigation out there. I think Kevin Omara from AMR wrote a report and said, this is the PLM decade. It is going to happen. But we really have yet to see the customers invest in a way we want them to. They are concerned about the risk in the ROI and whether or not any of the competitors yet have a solution that they can deploy easily and naturally that will solve the problem. It is a complicated problem.

And just one quick follow-up. On the Boeing, was there any material revenue recognized this quarter and is that something where we can expect contribute more meaningful over the next couple of quarters?

Yeah, I think that a lot of revenue was in the services area and I can't really disclose what it was about, how much it was, but I think we have got now over 30 people full time deployed on site there. Up from zero in March. And it is going to continue to expand and there is license revenue that goes with it as well. That is starting to kick in and contribute and certainly Toyota did as well.

Thank you very much.

So on the competition side. I don't know what going to happen. I think that um, we feel strong there. I think really I characterize, actually I characterized the (inaudible) of the CAD Cam company largely and Enovia is doing our interlink product. I think that EDS is most more of a competitor in terms of their PLM offering and their focus on it. You asked a final question on sort of getting the costs out.

Just managing sort of, from a business model perspective, your investment from a sales dollar and rnd dollar toward cad which at best case is sort of stable and Windchill which is potentially growing in the long-term, but short-term, relatively small and is that sort of structurally part of what you are looking at for getting your costs down next year?

Yeah, I mean to do the kind of expense reductions that we had previously committed to and then Neil sort of additionally added incrementally today, we need to look at our cost structures everywhere in the company, to be honest. So we will revisit cost structure from pro-Engineer and Windchill within the R&D organization for sure. And I'm sure my colleagues in sales and services will be doing the same sort of thing. It is part of the process we have been in and become more aggressive with.

Giving it another view of the question, and I think we have begun to say this to you, it is less and less clear for us the demarcation between pro-ENGINEER and Windchill. We really do talk with our customers and internally about a product development system.

In R&D we have people working on multiple projects that cross one another. We have deployed Windchill technology directly inside pro-ENGINEER and we have new product that's are under way that if you took a look at them you really wouldn't be sure if it was pro-ENGINEER or Windchill. So I do think that we are a little ahead of you in terms of how we look at where we are spending. It is less clear there is this demarcation that these are pro-e people and these are Windchill people.

Okay. Fair enough. Thank you.

Next question please.

The next question comes from Gene Munster. Your line is open.

Hey everybody, I am sorry I got the call a little bit later here. If we could just recap in terms of some of the restructuring and the increase in restructuring. What is a target operating margin? I know you don't want to give you a lot of details about it right now, but if you could talk about how you see this business model over the long haul and kind of assuming little to no revenue growth, what can be a target operating margin number 1 and 2, and can you recap what the head count changes are going to be? Thanks.

Sure. Let me take that one. I think, first of all what we said and I don't know when you joined the call, was that we were going to drive our expense structure to 160 million by the end of the first quarter of next year. And 150 million by the 4th quarter of next year. Okay. So that was the first thing we said about driving a more productive organization. We also said our goal was to be profitable for fiscal year 2004. The final thing we said was we expected about $50 million dollars in remaining restructuring charges going forward. That includes both the remainder of the restructuring charges associated with our initial cost reduction plan, plus the new restructuring charges associated with what we announced today. Okay, I think the next question were you asking was really in terms of getting to operating margin was to give you guidance on a longer term revenue number?

Operating margin number.

In all fairness, we are not prepared to do today. What we will do, as I mentioned earlier, is we will give you the details surrounding the cost reduction program and we will do that, I think to your satisfaction at the close of the 4th quarter. But I think in this environment to provide annual revenue -- annual revenue guidance is not responsible, quite frankly given what we have seen in the last 4 to six quarters.

Okay.

We will continue to give you it a quarter at a time and continue to give you color around what is working and what is not working within our business, but we are going to steer clear of an annual revenue guidance at this point. And I guess, if you know what our operating structure is and know our goal is in terms of being profitable, excluding restructuring charges, you know, if you want to, I guess you can try and back into it that way.

Okay. But, I understand there are all these pieces that are interester related, just from a big picture operating margin target I realize the revenue is a big component of that, but do you think you can gravitate back to historical trends or do you have ambitions of getting halfway there or any thoughts on that?

Again, I think we would be getting ahead of ourselves to try to speculate on longer term operating margin at this point.

How about in terms of head count in anticipated changes over the -

finalizing our plan for fiscal 2004 and stabilizing our revenue base.

General thoughts on head count changes?

I think you are going to see some fairly significant reductions in head count changes, you know, quite frankly in terms of what happened in the third quarter with our current plan, we had hoped to see a more significant reduction and I think you will see that going forward. As far as the specifics in terms of where we end up, we will talk about that on our 4th quarter call.

Thank you.

I think we have time for one more question.

Thank you. Our next one is coming from Philip Alling. Your line is open.

Yeah, hi, Phil Alling from Bear Stearns. Could you just -- I was wondering -- I wanted to know what specifically led to the decision to lower the cost structure another $10 million by fiscal 04 to 150 million. Is there certain metrics you can point to that led to that decision?

I think it is pretty simple. I think that what we looked at and said is look, what's our goal for next year? Again, what we said before is our goal is to be profitable, excluding the restructuring charges that we talked about earlier. And then the second question we asked ourselves is do we think we have some additional opportunity above and beyond what we have already done, especially now that we -- especially given the money that we spent bringing our new products to market in the last couple years. I think our decision was that, yes, we do have some additional opportunity and we ought to move sooner rather than later. So that was the decision surrounding where we were driving things to. I think realistically we are looking to stabilize our revenue. But even in a pessimistic revenue case we like the company to make some money next year.

Right. Just to clarify then, so the target profitability for fiscal 04, that is a full year and that is exclusive of the restructuring charges? Or is that on a GAAP basis?

That is exclusive of restructuring charges.

For the full year?

Uh-huh.

Fare enough. Thanks.

You're welcome.

Is that -- I think we are done.

I think that's it.

Listen, thank you again for the time and we'll look forward to getting back together in the second or third week in October. Thanks a lot. And have a nice summer.