PTC Inc (PTC) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's first-quarter fiscal 2004 results conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce Meredith Mendola, PTC's Director of Investor Relations. Please go ahead, ma'am.

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; Neil Moses, our EVP and Chief Financial Officer, and Jim Heppelmann, our EVP of Software Products and Chief Product Officer. In addition, Barry Cohen, EVP of Strategic Services and Partners, is 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 predications 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 2003 annual report on Form 10-K and in the Company's other reports filed with the SEC from time to time.

A replay will be available until 5:00 PM Eastern Monday, January 26 at 402-220-0205. Additionally this conference call is being webcast, and a replay will be available through our Website at www.ptc.com until Monday, January 26 at 5:00 PM. Also on our Investor Relations Website is a PDF document with financial and operating metrics that we will discuss on this call.

Finally, I want to announce that we will be holding a financial analyst event on the afternoon of March 8th in New York City. Details for the event will be e-mailed in a couple of weeks. 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, and if you have any additional question, you will need to get back in the queue. So let's get started.

Okay, Meredith. Thank you. Thanks for joining us today. Overall we saw very good progress in the first quarter, particularly in our operating model, and I will share some of my thoughts with you. We achieved a significant milestone in achieving an operating profit excluding restructuring charges for the quarter. We are accomplished this earlier than expected with very strong execution of our cost reduction program.

In just one quarter, we removed $23.5 million of quarterly expenses. We are well on our way to reaching our goal of quarterly operating expense at 150 million by the end of the fiscal year. Achieving this sooner rather than later should benefit our full year results considerably.

Last quarter we told you that we wanted to build the cost reduction program so that we would have the necessary leverage to drive positive operating margins, even with continued softness in revenue results. Our revenue in Q1 was on target with those expectations for ourselves and the street. As we have mentioned before, we don't need to see near-term revenue growth to make a dramatic improvement in our financial performance in 2004.

With that said, we are in business to win, to be a PLM leader, which we're doing today, and to grow revenue which will happen over time.

We are executing well against our strategic and operating plans. Our solutions continue to lead the market. Windchill 7.0 is shipping, and Jim Heppelmann will talk about this with you. This is an excitingly release that has received very positive responses from our customers and industry analysts. Customer activity seems to be improving, although we do not have a strong handle on customer budgets for 2004 yet because we are at the outset of the calendar year. A recent Merrill Lynch CIO survey suggested that a majority of companies expect IP spending to growth 0 to 5 percent in 2004. This is encouraging, and regardless of timing, the PLM market and PTC should be a benefactor over time.

We won several important competitive deals this quarter. The most significant one is with Raytheon where Windchill was chosen over the incumbent system as the PDF standard for the entire company. This unanimous decision across five business units was a comprehensive 18 month technical evaluation. This is evidence that we are delivering on our strategy to provide key customers with a full suite of PLM applications. Just as a reminder, this follows on the heels of major wins last year at Toyota, Boeing, the Department of Defense and many others.

We continue to create value for customers and improved customer satisfaction. This quarter our global services organization completed a major Windchill project at NASA. Our consultants consolidated multiple stand-alone Legacy databases to improve access to records and product information by NASA suppliers and partners, which should help foster both collaboration and control of information as well as improve the quality of the data.

Our value-added resellers performed well this quarter. They are bringing in revenue, new customers, and have grown the number of new seats of Pro/ENGINEER they have sold in each of the last six quarters. We're improving our competitive position against our low end competitors. This is evident in the transactions the VAR has closed, as well as our VAR recruiting efforts over the past year. In fact, partners that have been in our program for less than a year accounted for almost half of the VAR revenue this quarter. The success of the reseller is confirmation that customers want a single product that is scalable and applicable to all phases of product development.

To close, I believe continued successful execution of our 2004 operating plan will improve our profitability and, therefore, shareholder value. With the first quarter behind us, we have significantly improved our operating leverage and are now in a better position to capitalize on the opportunity for future revenue growth in an improving economy. I am optimistic that we can grow our operating margins further as the fiscal year progresses, and I look forward to providing updates in the coming quarters.

The big news for the quarter from a product standpoint was the release of Windchill 7.0. Windchill 7.0 was announced earlier this week on Monday, January 19th but actually began shipping to customers in December of 2003.

Windchill 7.0 is one of the most significant Windchill releases ever for PTC. Customers are excited about Windchill 7.0 because this release, coupled with what we have already delivered with Pro/ENGINEER Wildfire, completes our vision of a Product Development System. To elaborate on that, we have talked with you in the past about our vision of a Product Development System that offers a comprehensive footprint of create, collaborate and control capabilities. We referred to this as the three Cs.

To achieve that footprint and yet work as a true system, our solution needs to blend CAD, visualization, PDM, collaboration and ERP integration technologies on a single consistent software architecture. This is what we have accomplished with Windchill Release 7.0, and as a result, PTC now stands alone as the only vendor who can offer a complete solution footprint on an architecture that can be described as being integral, Internet-based and interoperable. You might hear me refer to these characteristics again as being the three Is.

I want to start by talking about the characteristically we call integral. Integral means all the components work interdependently together in a single consistent high-performance architecture with a single database and a single data model. To compare and contrast, many of our PLM competitors lack one or more of the critical ingredients required to put a Product Development System in place. This is especially true of companies like MatrixOne or Agile that offer point solutions for PDF or collaboration, and it's equally true of companies like SAP or Oracle who are trying to enter PLM from an ERP perspective.

To fill out a system footprint that is similar to PTC's, their customer would have to purchase additional CAD, collaboration or visualization offerings from other third parties and then figure out how to make that combination of point solutions work together, allowing, of course, for redundant databases and in consistent software architectures. Quite frankly, this is a bigger and riskier project than most customers want to sign up for.

If you look at competitors that do have (technical difficulty), companies like IBM and EDS, you will see that this functionality was built-up through a series of acquisitions, and as a result, the functionality is actually spread over a range of overlapping software products and inconsistent architectures. This approach makes for a good marketing story, but a Frankenstein-type of implementation. Fortunately more and more customers are beginning to discern the difference between a collection of discrete products and a true integral system where all the critical components dovetail nicely together and work in unison.

The second characteristic, Internet, has a more obvious meaning. Windchill was born with a pure Internet architecture, but in Windchill Release 7.0, we have enhanced support for new Internet protocol by adding full support for Java 2 Enterprise Edition, frequently called J2EE, and we have added a comprehensive new set of Web services capabilities. We have also enhanced our visualization technology so that all relevant Windchill webpages include an interactive 2-D or 3-D thumbnail that visually confirms to the user which data is being reviewed. And by licensing and incorporating Acrobat technology from Adobe, we have extended Windchill's view of markup support beyond the world of 2-D and 3-D CAD formats to include documents from any variety of sources. Collectively these improvements insure that our end-users have the most compelling and visually interactive experience in the PLM industry.

The third characteristic, which was interoperable, refers to the need for the Product Development System to integrate smoothly with other critical information systems that exist at the boundaries of the product development process, the most common, of course, being ERP. Many customers realize that their PLM system represents the ultimate source for product information that their ERP systems needs to operate, yet they don't have a good strategy for achieving the required level of PLM to ERP integration in a cost-effective manner. With Windchill 7.0, we have introduced a new module that we call Windchill ESI, for enterprise system integration, that provides a sophisticated turnkey interface to ERP systems that is bidirectional and incorporates full transaction management capabilities.

With this new ESI module, PTC's Product Development System is a single seamless environment that allows the customer to create digital product data, share that data with nonengineers over the Web, collaborate with suppliers and customers, management the flow of information through configuration and change management processes, and then release that same information into their production system, all in the course of a morning's work. This is what customers really want, and no other vendor has this type of solution.

On a final point about Windchill 7.0, our customers clearly place quality above all else when they evaluate a new release of our software. Throughout the 7.0 development process, we have invested a tremendous amount of focus on producing a high-quality deliverable, and as a result, we feel confident that despite the amount of new capability this is the highest quality Windchill release ever. Altogether the work we have done in Windchill 7.0 translates into more value with less investment and less risk for our customers.

Moving onto Pro/ENGINEER for a moment, I wanted to share with you that in November of 2003, Pro/ENGINEER Wildfire was awarded Technology of the Year from Industry Week magazine. We feel that this coveted award is a great recognition of the dramatic improvements we have made to Pro/ENGINEER that make it the industry's only simple, powerful and connected 3-D modeling tool.

On a final note, during the past quarter, most of you probably became aware of an unexpected timeout bug that we found in many of our products which was threatening to interfere with the software's operation after January 10th of 2004. I am happy to report to you that we tackled this problem aggressively, and we communicated openly with our customers about it. In the end, we delivered high-quality (inaudible) to more than 17,000 customers in three short weeks. As a result, January 10th came and went without any major disruptions reported. Our open and proactive approach was met with overwhelmingly positive feedback from customers, analysts and publications and, indeed, was recognized by many as a solid proof point of PTC's growing commitment to customer satisfaction.

That wraps it up for me. I would like to turn it over to Neil Moses.

Thanks, Jim. At the end of the first quarter, our performance is consistent with our business plan and hopefully ahead of your expectations. We have made great progress with our cost reduction program, and this progress enabled us to achieve a quarterly operating profit, excluding restructuring charges for the first time in two years. We are encouraged but not yet satisfied with these results.

In going forward, we will be intensely focused on two other important objectives, growing revenue and achieving bottom-line profitability. For now, however, let's talk about the first quarter.

Total revenues for the first quarter were 156.8 million, a 4 percent decline from the fourth quarter and a 9 percent decline year over year. This decline was anticipated in the guidance we gave on last quarter's call due to the resetting of our pipeline and a new fiscal year, as well as the near-term effects of significant cost reductions. Our license revenue was 43.5 million, a decline of 13 percent sequentially and 16 percent year over year.

Service revenue was 113.3 million, flat sequentially but down 6 percent year over year. The two components of this service revenue are maintenance revenue, which grew 3 percent sequentially, and consulting and training revenue, which declined 8 percent sequentially.

By geography, North American revenue was 56.8 million or 36 percent of total revenue, down 3 percent sequentially and 17 percent year over year. European revenue was 59.2 million or 38 percent of total revenue and was down 4 percent sequentially and 1 percent year over year. On a constant currency basis, revenue from Europe declined 6 percent sequentially and 13 percent year over year.

Our revenue in Asia-Pacific was 40.8 million or 26 percent of revenue and declined 5 percent sequentially and 7 percent year over year. This was attributable to a sequential decline in large deal revenue in Japan, partially offset by stronger revenue in the Pac Rim. On a constant currency basis, Asia-Pacific revenue declined 8 percent sequentially and 11 percent year over year.

Our reseller channel performed very well this quarter as indirect license sales were 13.4 million, up 45 percent sequentially and 3 percent year over year. The growth of our channel business is a key element of our strategy, and the improvements we have made in our channel infrastructure during the last two quarters have strengthened our ability to grow our channel profitably.

At the beginning of the year, we started to allow some of our VARs to sell their Windchill Link Solutions. We believe, and our channel partners concur, that there will be demand for Windchill software from smaller customers that are part of a larger supply chain. For the first quarter, however, the vast majority of revenues driven by the VARs was designed solutions revenues.

And speaking of designed solutions revenue, our total revenue in this category was 113.9 million, a 4 percent sequential decline and an 11 percent decline from the year ago period. Designed solutions license revenue was 29.8 million, a decline of 12 percent sequentially and 17 percent year over year. This quarter we were very successful with our low-end design package as revenue from these seats was at its highest point in eight quarters. This is evidence of the success we are having with Pro/E Wildfire in the low-end of the MCAD market. However, this improvement, particularly at a lower ASP, was not enough to offset sequential declines in both upgrade revenue and new high-end seat revenue.

Designed solutions consulting service revenue was 16.5 million, down 8 percent sequentially and 16 percent year over year. On a positive note, designed solutions maintenance revenue was up sequentially for the first time in seven quarters to 67.6 million.

Our new customer number for the designed solutions business was very strong at 613 compared to 540 last quarter. This number was driven primarily by the reseller channel and brings the cumulative designed solutions customer base to 37,092. Cumulative designed solutions seats were 302,700 with 3,500 seats added during the quarter. License revenue from existing designed solutions customers was 85 percent of total designed solutions license revenue, in line with past results.

ASPs this quarter were down sequentially from 10,100, to 8,600 due to strong VAR sales, resulting in a significantly higher mix of low-end seats sold in the quarter.

Turning to Windchill, total Windchill revenue was 42.9 million, down 6 percent sequentially and 2 percent year over year. Windchill license revenue of 13.7 million declined 15 percent sequentially and 13 percent year over year as Windchill license revenue from the fourth quarter was particularly strong. Windchill Link Solutions revenue was 36 percent of total Windchill license revenue, a lower percentage than the typical quarter as a result of stronger Windchill foundation follow-on sales to existing Windchill customers.

Windchill consulting service revenue was 18.4 million, down 8 percent sequentially and 9 percent year over year. And Windchill maintenance revenue grew for the fourth quarter in a row, up 13 percent sequentially and 42 percent year over year. This is attributable to growing customer acceptance of the Windchill Link Solutions since their introduction.

We had 73 new Windchill customers in the quarter, which brings our total Windchill customer number to 1,165. We also had 153 Windchill transactions versus 189 transactions in the fourth quarter. Our transaction size was slightly higher sequentially, though not enough to offset the lower transaction count. Cumulative Windchill seats are 271,500 with 9,150 additions in the quarter, and Windchill ASPs came in at about $1500 which is in line with past results. We are getting a significant amount of repeat orders from customers, which is encouraging given the decline in deal size over the past couple of years.

As we have made it easier for customers to buy our software incrementally and achieve ROI in stepwise fashion, our repeat Windchill business has increased. And as proof of this, license revenue from existing Windchill customers was 96 percent of Windchill license revenue compared to 90 percent last quarter.

Now I will move on to spending, which reduced significantly during the quarter. Our goal was to deliver operating expenses of 160 million, excluding restructuring charges. Actual operating expenses came in lower at 156.3 million. Our headcount decreased 9 percent to 3,186 compared to 3,500 at the end of the fourth quarter. Execution of the cost reduction program we outlined over the last two quarters is about 80 percent complete, and spending declined sequentially in all functional areas.

Sales and marketing decreased by 13 percent, cost of service declined by 10 percent, R&D was down by 9 percent, and G&A declined by 23 percent. Combined we removed 23.5 million in quarterly functional expenses, which has immediately improved our earnings performance and will give us significant operating leverage going forward.

We recorded restructuring and other charges in the first quarter of 21.6 million for severance and facility-related charges associated with our current cost reduction program, in line with our guidance of 20 to 25 million. Of this amount, 12.4 million was for severance and 9.2 million was for facilities-related charges. Given that our cost reduction program is well underway, we do expect most restructuring activity to be complete by the end of the second quarter.

Tax expense was in line with our guidance of 5 million, and for the foreseeable future, we expect to continue booking a quarterly provision of approximately 5 million to cover mostly foreign entity tax liabilities and indirect taxes in some Asian entities.

Turning to the balance sheet, our cash was 190 million, down from 205 million at the end of the fourth quarter. 190 million, however, is higher than we anticipated due to significant favorable currency impact, as well as continued strong cash collections which helped to offset the cash impact of our net loss and restructuring charges. Receivables DSO was up three days to 80 in the first quarter. Much of this increase is attributable to currency movements in the quarter.

Our deferred revenue grew to 184 million from 173 million last quarter. This is attributable to normal seasonality of deferred revenue from annual maintenance contracts as Q1 and Q2 are typically our highest deferred revenue quarters.

Now let us talk about our outlook going forward. Our guidance for the second quarter of fiscal 2004, which ends on April 3rd, 2004, is as follows -- revenue of 150 to 160 million and an improved net loss per share between 5 cents and 9 cents, including approximately 15 million in restructuring charges. Due to the projected net loss in the second quarter, as well as the cash impact of our current restructuring program, cash and investments are projected at 175 million to 180 million in the second quarter.

Our pipeline does seem to be getting stronger with more customer request for proposals and demos. But we are not yet willing to forecast revenue growth until we see more concrete evidence of spending increases by our customers in the manufacturing sector. We are taking one quarter at a time this year, and as I mentioned earlier, we have three key objectives. Number one, a sustainable operating profit excluding restructuring charges, which we started this quarter. Number two, a quarterly net profit for which we are better positioned due to our reduced cost structure (technical difficulty)-- and number three, revenue growth, which we have positioned ourselves to achieve with our products and customer approach and accept it will occur along with increases in IT spending. We do think the economic environment is improving, and we look forward to reporting back to you on our progress in April.

At this point, I will turn the call back over to Meredith.

Great. Thanks, Neil. So I think we are ready for the Q&A session. So get your questions queued up and we will take them as they come.

(OPERATOR INSTRUCTIONS). Philip Alling, Bear Stearns.

Thanks very much. Could you just give us a better sense of what is underlying the fluctuation that we see in the ASPs in the Windchill business?

Well, the ASPs were about 1500 on average last year, and they are approximately 1500 this quarter. So while they do fluctuate from quarter to quarter, depending on whether we are doing more Link Solutions business or more foundation business, you are going to see fluctuations in overall ASPs. But they have been pretty consistent over the past five quarters on average.

I think part of the fluctuation there is dependent on what modules we sell along with Windchill, so sometimes when you see a very -- with a higher ASP, like around $2000, it is either because we're selling heavy user seats of the software or because there is some good stand-alone visualization business going on in the quarter, and that tends to have a higher ASP as well.

Can we expect to see continued seasonality in the Windchill business, and what impact might the Windchill 7.0 release have on the pipeline for those products?

When you say continued seasonality, I am not sure what you mean?

I mean should we expect to see -- is there a particular quarter in the year in which you would expect to see either a decline or an increase given the time of the year, or might we get to a point where there is a more recognizable trend either up or down for that product?

We would love to see that, too. Windchill performance has been somewhat soft over the last four or five quarters quite frankly, and certainly we are looking for Windchill to grow as a percentage of our overall revenue this year. And as we mentioned, the fourth quarter was very strong, and the quarter just ended was less strong. But I would not say there is a particular seasonality that we are anticipating. We are anticipating overall growth in that business.

The final question would be prospect for sales to new customers for the Windchill. Are you primarily selling into your existing customer base? Is that what is baked into your guidance going forward? What can you tell us about really the prospects for sales to new customers for the product?

A couple of points. I think we are just right now releasing Windchill 7.0, and Windchill 7.0 is a release that has been under development for 18 months or so. Over time I think we will give you better than we can just on the phone here this morning, a better sense for what that really means to our customers. But it is a total integration of the Link Solutions under one common data model.

So when customers see a demonstration of the capability in terms of being able to create models with Pro/ENGINEER and invite suppliers or partners to participate in a design review and in updating any of the changes across this extended value chain, it is a very powerful solution. So I think we are going to see some upside in that we have strengthened the position of Windchill once again in a Link Solutions, not only just vis-a-vis what it used to do but certainly again vis-a-vis its competitors.

So that should result in stronger sales and penetration we hope into our installed base, which the direct sales is particularly focused on, and it should also help us penetrate some new account opportunities like Raytheon, which was held by an incumbent and which we want, Toyota, Boeing and many of the other bigger deals we have talked about, I think there is an opportunity to win in these competitive environments even more so as we perform technically better than our competitors.

The third thing maybe I would say is that -- and again it is to try to give you a sense for what has happened in the quarter -- year-over-year we are down in excess of 100 sales reps. So what has happened is that in the pursuit of lower-cost and with Wildfire as a really strong product, we have been able to rely on the channel to cover our small and medium accounts in a much better fashion than we could in the past, and that is really paying off. The channel revenue was really good. The ASPs are lower down there because of the margin the channel gets. But on the other hand, it has enabled us to redeploy a significant number of sales reps that are really pretty much focused on the links up into larger accounts, predominantly on our base, but also in terms of new account opportunities. So I think with Windchill 7.0, with the deployment of our sales guys, salespeople continuing to go upstream that if we execute well and the software is good, which it seems to be, there could be some upside as we get into the year.

What is the expectation about the role that your VAR channel may play for Windchill going forward? Obviously the focus really for them has been more on the MCAD side, but is there --?

Let me add to this, and then we are going to bring up another question here if we could -- but I think we want to be careful. One of the nice things about Windchill 7.0 is that it comes packaged with a series of services offerings that help our global services people, as well as potentially the resellers do rapid deployments. We have talked in the past about quick starts and other forms of deployment to get our customers up and running quickly. I think what you will see is that we will select carefully case-by-case the strongest resellers and enable them to begin to sell Windchill into their installed accounts and just sort of monitor how that goes, and then particularly 7.0 has a lot of ease-of-use kinds of interoperability things inside it. I think if we are successful during the course of the year and the next few quarters, then we will open up to a greater number of resellers based on that trial and error.

Gene Munster, Piper Jaffray.

Hi, everybody. Good morning. Could you talk a little bit about the ASPs? You talked about the strength in the low-end ASPs? Could you breakout any sort of percentage of the MCAD business that was the lower ASP versus the higher ASP?

No. We probably know that, but I don't think we have articulated that for you. But I think if we talk about ASPs at the end user level, they are probably unchanged largely. What has happened with us is that as the channel revenues increase and the channel gets a 40 percent margin, let's just say on average, what we realize is going to be a lower amount as the channel revenue increases.

And you know, that is okay because it is more profitable business for us. And we are able to cover a lot more customers, not only with our installed base but with the 615 new accounts that we sold as well as this quarter. We did really really well on the channel. The channel is excited. I know that many of you -- I think you have checked yourself with the channel in terms of their prospects, and there is really a lot of good things going on in the small and medium accounts with Wildfire and then potentially the links.

So I think that is going to be pretty steady this year, and even hopefully Wildfire 2.0 is going to ship this quarter in the February/March timeframe, which is only further going to substantiate Wildfire as a really really solid product not only for the small and medium-sized accounts but the large ones as well.

Can we look at the higher ASP business and get some sort of parameter of how much of that business could shift to lower ASP business just to get some sort of idea of when there is going to be some stability? Obviously trying to predict when the economy is going to impact your business is difficult. But maybe that is a different perspective on it is to say you have had X percentage of high-end business that has gone to the low-end, and now there is that pool obviously is smaller today than it was before. Is there anything you can give us guidance that might basically build an argument that we are getting towards the end of this shift from high ASP to low ASP?

I don't know. I can maybe take a try at it. I am not sure. Maybe, Neil, if you have some data you want to add to it, but at a higher level I would say that almost repeat for you what we think is happening in the marketplace, which is that in the large accounts there is relatively little changeover in terms of CAD systems. Very little displacement. We are actually sort of hopeful that Wildfire represents an opportunity to do that.

Mitsubishi heavy industries, a very very large Japanese company, tried to deploy Katya (ph) 5.0 for the last two years. Could not deploy it because there is no workgroup manager, there is no local data manager. Could not manage their assemblies. Replaced it with about $1 million worth of Pro/ENGINEER this quarter. So I think on the high-end as we continue to demonstrate that really at the high-end it is data management which drives the performance of the CAD system and, therefore, the effectiveness inside the account I think as we continue to show that to customers with the new solution, we might be able to pick up some changeover in the high-end.

But basically I think industrywide the cost of switching in these high-end accounts is so prohibitive that I think we will see the ASPs pretty much they were they are there. On the other hand, as our channel business grows as I was describing, we are going to see the ASP get compromised a little bit as they do well. Hopefully we make it up with volume because the volumes were up 45 percent over the fourth quarter. If we can continue to make it up with volume, then I am fine with the ASPs declining a little bit in those small and medium-sized accounts.

Just to add to that, I don't expect the kind of quarter-over-quarter decline in ASP that we saw between the fourth quarter and the first quarter. Our VAR revenue was up 45 percent, and that was the primary driver of that. I do, however, expect that as we continue to grow our channel business that that will continue to put some pressure on ASPs overall.

The one thing I would say about the high-end side is that perhaps there is a little bit more demand elasticity around the purchase of the high-end seat than there is around the purchase of a low-end seat. And so I think that when we start seeing IT spending resume again, I think that that will help stabilize things somewhat, but I also think that the trend is going to be towards the low-end seats, although more gradual than you saw this quarter.

One final question. Would you estimate of the new seats that were sold, do you say three-quarters of them are lower ASP seats. Is that a safe number because of all the things you talked about there, the growth in the VAR channel and so forth?

Gene, it was actually a more significant mix toward the lower-ends than three-quarters. One of the things -- not to belabor the point here -- but if you notice our calculation of ASPs that we give every quarter is simple math, right? You take a license revenue, you divide it by the number of new seats in the quarter and (inaudible). This is not an end-user ASP that we're selling the software for. It's impacted by sales of modules, and the numerator is impacted by sales of upgrades in the numerator but not the denominator. So if we had movements in those two areas and yet the end-user ASP, if you will, stays the same, we will still have movement in that number that we report to you.

Great. Thank you.

Richard Davis, Needham & Co.

Could you talk about what kind of tangible basis you guys have other than a notional improvement in the economy that would indicate that the revenues are going to grow again? In other words, have you seen an increase in the pipeline, an increase in the number of engagements your sales guys are going out to pitch, or are their bookings increasing? Those kind of things. It is clear you have a very well-received product. It is just I think people want to see what drives the revenues, and what do you think that means once the economy recovers? What kind of pace you think this business should be able to grow at longer-term?

Well, so, Richard, I talked a little bit about the fact that Wildfire actually is still only about 10 months old. So I think we have seen -- any product takes a little bit of time to get demonstrated and settle in and build some momentum. I think it bodes well for us going forward.

We definitely see in the salesforce in terms of the customer visits, demonstrations, work-in-process benchmarks and so forth, an uptick in activity. Part of that is the salesforce was reorganized because as I described we took 100 sales reps out -- really more than 100 -- and 30 or 40 of the management team, which basically are the best sales reps during the last year, almost half of which came out October 1st of this year, so 90 days ago. So that had I think a little bit of a negative impact on Q1 in that people were getting new account assignments as we took them out of the low and medium accounts. Some of them we cut, and then a significant number of other ones we took out of the small and medium-sized business and redeployed them into new account opportunities at a GE or United Technologies or an account like that.

So hopefully as we get into the back half of the year, we are going to see them and they are out there selling the Link Solutions into new and existing accounts, we are going to see better coverage on these high-end accounts that could show some upside in the revenue. We are just not yet willing to forecast that today.

But there is very low turnover in the sales force. There is a little bit of bounce. I think that the forecast that they have done for Q2, the preliminary forecast, is more solid than Q1. But we need to see the execution throughout the quarter.

One last little caveat. We talked about the resellers, but we did not take any revenue from Rand this quarter because of the state (inaudible) of vis-a-vis their position back when they made their own announcement. From an accounting standpoint, we took a conservative stance and did not recognize any revenue.

Now there won't be anymore Rand activity going forward because basically they are not selling Pro/ENGINEER and maintaining it anymore. They can still do some global services and training, but there was some Rand revenue in the quarter which we just decided not to take as well.

Got it. Okay. Thanks.

Jay Vleeschhouwer, Merrill Lynch.

I would like to start first on the Pro/E side of the business. About a year or so ago, as you were getting set to launch Wildfire, you had an expectation that about by now you would have about half of the base up on Wildfire, perhaps more. So what is, in fact, the conversion rate that you have seen?

Also, on Pro/E, Neil, you pointed out the first sequential uptick in maintenance revenue there in quite awhile. Is that truly indicative you think of the turn, or given the long downward trend we have seen in Pro-E for the last number of years, it is still somewhat unavoidable that you'll have a further decline in Pro/E maintenance through the end of this year at least as you previously anticipated?

I think what we said a year ago -- your notes might be better than mine. I know you are a good note taker, but I think we said that the year out, which would really be through the March quarter, that we wanted to hit the 50 percent number. We were at 37 percent at the end of December. So I think we are well on our way towards that 50 percent goal by the end of March.

Incidentally there is Wildfire 2 as I mentioned is coming out as well. So I think we'll hit that 50 percent at the one year mark, and that is up from 25 percent last quarter. So if you add another 12 there, we are right on track to hit that 50 percent.

In terms of the Pro/E maintenance, Neil, you can comment on it as well, but I think it is basically sort of a substantiation that our customers are pretty excited about the product. This is a great product. And the things we have talked about in the past vis-a-vis our competitors is that a customer and their suppliers, be they large or small in terms of customer size, or the assembly itself be it small or large, simple or complicated, everybody can use the same tool. They don't have to mix and match incompatible systems that were put together through acquisitions.

This long-term is a great competitive advantage for us, and I think the maintenance bears that out, has stabilized. It is a manifestation obviously of license revenue, which we have to improve on. But if we do that, the maintenance should stabilize and then maybe even start to increase. This quarter I believe roughly -- I don't have the exact numbers right in front me; maybe Neil does -- but I believe we turned on twice as many Windchill seats as we sold. So we had a huge quarter in terms of adoption in large accounts like Lockheed and HP and others that have been customers for awhile, that have been rolling it out department by department, and then doing sort of a big bang rollout, which further signifies that the Windchill solutions really are working really productively for our customers today.

So there is some really good news in terms of adoption of Wildfire and the links, and that is only going to get stronger as we go through this year with the channel, with Wildfire 2, which ships in 45 days, and with Windchill 7.0.

May I just add that I think we're feeling pretty good right now. I know we've had conversations before about the attachment, if you will, of maintenance to license revenue, but we are feeling pretty good right now, both based on first-quarter results and our expectations going forward about the trajectory of both Windchill and Pro/E maintenance revenue.

Just before your next part of your question, remember as I already said, we took out those sales reps, but we have also taken out of the Company here close to 800 people in the last year. I think as we get into the back half of the year, and back to Richard Davis' question a little bit, and we start to look at some comparisons -- I think revenue in Q3 a year ago was 165 and 164 in Q4 -- we have a chance if we execute with these new products and the channel and the deployment of our direct salespeople to start to show some year-over-year revenue growth. I would not forecast it today, but it certainly is something we could foresee.

For Jim, a market and technology question. On the technology side, once you are done with Wildfire 2.0, what is the update on some of the other further out development programs you have had, the X10 and K1 releases you have talked about for this year and next? On the market side for PLM, what are you seeing in terms of customer selection criteria or rationales or motivations for PLM purchasing relative to what you have talked about in your roadmap for instance?

So I think on the first question, some of the longer range things, Wildfire 2.0 is scheduled to ship here in March. That contains or will contain, amongst other things, a lot of the deliverables we have been jointly developing with Toyota. We have talked about that in the past.

As it relates to both Wildfire and Windchill, Toyota has an appetite to do another round of this same type of funded development, so there is a set of projects, which really allow our products to sort of capture or epitomize Toyota's processes which we are pretty interested in doing. And then there is, of course, main projects above and beyond unrelated specifically to Toyota. Some of the examples there would be on the Pro/ENGINEER and Windchill side, we are entrusted in growing a little deeper in this manufacturing area with process planning and related capabilities, which require some development in both products.

More short-term on the Windchill side, after Release 7.0, we have an interest in bringing the Pro/ENGINEER base over onto the Windchill architecture, and we have put in place a number of development projects to ensure that a Pro/ENGINEER customer looking at Windchill sees nothing but goodness, sees better performance, better capability and an easy path to get there because there is 6,500 Pro/ENGINEER customers who we feel would really like to come forward with us if the path looked nice and easy. So that is a smattering of some of development projects we are working on.

But back to the market, I think what is getting interesting about our message is we are really boiling it down to you need the right footprint and capabilities and they need to work together on the right architecture. That is three Cs and three Is, and the world is starting to break down pretty easily in terms of competitors into companies who don't have an adequate footprint and companies who don't have an adequate architecture. I think fortunately for us, all of our competitors fit into one of those two camps.

Like I said, companies that don't have enough capability need to team together, and already then you have an architecture question. And those companies who have built out a more comprehensive portfolio, people like EDS and IBM, it is a facade. It is a nice (inaudible) has a brand-name, but I don't understand how it works. And the same thing when I think about Dassault and DeNoveau (ph) or Dassault and IBM.

Anovaya (ph) is an interesting story, and Team Center (ph) is an interesting story, but what if you want all of that capability? How would that stuff ever work together? It is a web sphere architecture, a dot.net architecture there. It just doesn't make any sense. So I think our story is starting to get very clear and concise and straightforward, and you can explain this to a customer -- no big words involved, pretty obvious -- and I think they relate to it. That is what is helping us really begin to differentiate at both MCAD and Windchill level.

One last one since you brought up the point about competitive architectures. With respect to Toyota, what is the funded development work you're doing with them, imply if anything about their adoption of the Katya Anovaya (ph) set of products, and vis-a-vis your comments about EDS, the data would suggest that they have seen something of a turn in their business since the June quarter. Maybe those are just maintenance renewals, but they seem to be doing better and they are getting set to do the integration of the Anex (ph) releases. So do you think that EDS, notwithstanding your comment, is, in fact, becoming more competitive after all?

Okay. Back to Toyota and Dick can join me here if there is anything you want to add. Our project at Toyota is real, and it is a Product Development System story. We call it PDS; they call it UES. It is the same concept. So it is a Pro/ENGINEER and a Windchill story.

We have been clear with you before that it is powertrain deployment. I would say, though, that our story is real, and beyond powertrain, I think there is less real progress being made. So everyday we gain momentum and an opportunity to take our deployment or maybe just the Windchill part of our deployment broader in the Company. We will see how would it plays out, but time is working to our advantage here because we are delivering on a real project. We will see how it plays out. I don't know if you have anything to add to that.

I think there is upside for us to branch out around this. What companies are increasingly talking about, and this happened at Raytheon, Boeing calls it the virtual team room, I think Volkswagen calls it the engineering center aggregate. Companies are looking for a system now, and they are out there evaluating this where they can get control of the digital/virtual bill of materials during the product development phase. Then they want to aggregate all the information around that product definition, ultimately pass it to the physical bomb in an ERP system such as SAP.

We have not really talked enough about why we won Raytheon and why we won Boeing and Lockheed and Smith Industries and General Dynamics, Airbus, EADS, we really are penetrating the aerospace business really well around this whole virtual/digital bomb. That is a manifestation really of the strength of Windchill and its ability to connect heterogeneous systems and manage information.

Back to Toyota, I think there is some upside opportunity for us in that same area if we execute well on powertrain. Dassault can say what they want and other people can as well, there are no seats of Katya V5 in production at Toyota and there won't be for the foreseeable future, nor are there in any other major account because they cannot manage the data. It is as simple as that. If you really check, for example, at Mitsubishi Heavy Industries, Mahari (ph) Group, they were not able to get a work group manager to work. DeNoveau does not manage V5 data.

When you move to a system that is a third generation CAD system like Pro/ENGINEER with the complexities of the associativity, it really becomes more of a data management issue than a geometry issue, and I think they have yet to sort that problem out. So Toyota continues, as Jim described, to deploy -- they are moving toward the thousand seats of Pro/ENGINEER powertrain. I think they have built a lot of confidence with us around our ability to deliver. They look at us as a trusted guide and advisor for new solutions and different opportunities, and I think we are only going to continue to make progress there.

The second part of your question had to do with EDS and competitive changes. I don't know. Have they announced any deals, Jay? It is nice to say so and so and so. I have not read about a win that they have had in I don't know how long. I cannot think of a win. They were the incumbent supplier at Raytheon. They were basically the incumbent at Boeing when we won the virtual team room deal last year. I don't know where they have won a deal or won that has been announced. So maybe they are doing better -- I hope they are, and it signals that the industry as a whole PLM space is getting more looked by the IT groups and that the economy is coming around, that would be good news. I really cannot think of a competitive win that they have had.

On the other hand, not that I am defending them, but your new Windchill license revenues were the smallest in several years. You will be breaking that data out by pretty good margins.

I really do think we will do better this quarter. I think it was a manifestation of the really significant changes in the sales organization that happened October 1st.

When you say new Windchill license revenue, are you talking about some new customers?

That 4 percent number.

We happened to have some pretty good size deals with existing Windchill customers in the quarter. That was what drove the Windchill link as a component down and all that kind of stuff. The license revenue -- I think the license revenue was fine, but this quarter we happened to sell more on our own base.

Understood. Thank you.

So we are out of time, and I understand from the operator that we've got a couple of people hanging on the phone, so I apologize about that. But I am available on the phone all day today, so give me a call.

Thank you.

Thank you participants for your participation on today's PTC conference. This does conclude our call. You may disconnect at this time.