PTC Inc (PTC) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC second-quarter fiscal 2004 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. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen this conference is being recorded. I would now like to introduce Meredith Mendola, PTC's Director of Investor Relations. Please go ahead.

Thank you. Good morning everyone and thank you for joining us today. Participating on the call will be Dick Harrison, our President and CEO, Neil Moses, our CF0 and Jim Heppelmann, our 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 prediction 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 and form 10-K, our first-quarter 2004 10-Q, and in the Company's other reports filed with the SEC from time to time. A replay of this call will be available until 5 PM Eastern, Monday April 26, at 402-220-4148. Additionally, this conference call is being webcast and a replay will be available through our website at PTC.com until Monday, April 26 at 5 PM. Also on our investor website is the PDF document with financial and operating metrics that we will discuss on this call. As always, after the prepared remarks we will hold a Q&A session. In order to keep this moving please limit yourself to one question and one follow-up. If you have an additional question, please get back in the queue. Let's get started. Dick.

Okay, thanks, Meredith. Thank you everyone for joining us today. At the midway point in fiscal 2004 we are pleased to report that we are ahead of schedule on our financial goals for the year. These goals are, first, an operating profit in every quarter excluding restructuring charges. We have achieved this in each of our first two quarters and should achieve this goal for the full year. Our operating profit in the second quarter was 15 percent, and the combined first half operating profit was almost 8 percent. We are on our way to achieving our long-term operating profit goal of 20 to 25 percent. As we said at our Analyst Day in March, we believe we can achieve this with modest revenue growth over the next three years.

Our second financial goal for fiscal 2004 is to drive a quarterly net profit by Q4, 2004. We have returned to profitability as of the second quarter and we should continue to generate earnings going forward. Finally, our third financial goal for the year is to achieve sequential revenue growth by Q4, 2004. This we also achieved in the second quarter. And we hope to achieve year-over-year revenue growth in the second half of fiscal year '04. Our restructuring activities will be complete as of May 1st.

Going forward our strategic and operational focus will be on revenue growth to leverage our new cost structure. This will enable us to deliver further improvements in profitability and shareholder value. In our own strategic planning process, we are looking at multiple growth opportunities. Organic growth is our top priority. As we've said in the past, we are focused on stabilizing our MCAD revenue and growing Windchill revenue. We have invested heavily over the past several years in our integral product suite and our distribution model. This has allowed us to deliver a highly differentiated offering that will enable us to achieve our organic revenue goals.

With our design solutions we are gaining traction and continue to expect stability in this revenue line on an annual basis by fiscal year 2005. Opportunities for us in MCAD includes further penetration of our existing customer base with Pro/E Wildfire, 2-D to 3-D migration, and a rapidly growing Asian market. This quarter we achieved a sequential MCAD license revenue improvement as well as sequential and year-over-year maintenance revenue growth. We also saw further growth in our VAR channel revenue which is a good proxy for our success against competitors like Solid Works and Autodesk Inventor.

Additionally, we achieved our goal to migrate 50 percent of the Pro/ENGINEER base to Wildfire within its first year of availability. Through our Windchill solutions, our strategy is to deliver the best collaboration and control solutions to the market. The most important lever for Windchill growth is our product development system. None of our competitors can match the breadth of our solutions built on an integral architecture. This is helping us to tap into the significant revenue opportunity within our existing customer base.

We are expanding relationships with customers such as Lockheed Martin, United Defense and Toyota. Additionally, Windchill's openness helps us win PLM customers outside of our existing installed base. Our Windchill Link solutions are gaining momentum, continued growth of Windchill Link license revenue and our Windchill maintenance revenue are indicators of improving customer adoption of these solutions. To complement our organic growth strategy we will look at other avenues for growth through strategic partnerships and acquisitions. Our options in this area will continue to grow as our stock price improves and we build our cash position.

M&A activity will enable us to broaden our product footprint and address new markets. A good example of this is our recent acquisition of OHIO Design Automation which Jim Heppelmann will discuss with you in a few minutes.

Finally, our growth strategy will be facilitated by improvements in the manufacturing economy. As demand for manufactured goods improves, we believe manufacturers will accelerate the trend of globalized product development. Outsource suppliers and offshore development teams add more complexity to the product development process. This growing trend will drive the need for PLM solutions. PTC is well-positioned to take advantage of this opportunity.

To close, we are pleased with our second-quarter results and are looking forward to delivering further earnings growth in the back half of fiscal 2004. We are even more excited about our longer-term strategy to grow revenue again and to take market share from our competitors. I will turn the call over to Jim now who is going to discuss our acquisition of OHIO Design Automation and the launch of Wildfire 2 0.

Thanks, Dick. As Dick mentioned on the product front there were two major developments in the second quarter that I would like to comment on and the first is the acquisition of OHIO Design Automation. And just in case you are curious, OHIO is actually an acronym that describes a small company who has deep expertise in electronic design automation which many people refer to generally as EDA or ECAD, for purposes of this discussion I’m going to refer to it as EDA electronic design automation. OHIO has about 20 employees in Nashua, New Hampshire which is about a forty minute drive from PTC's headquarters here in Needham, Mass. The primary technology of OHIO is called Intercom. Intercom is a commercially successful product already on the market which has become somewhat of a de facto standard for EDAs to PLM interoperability.

Intercom interoperates with printed circuit board design tools or PCB tools from Cadence, Mentor, and Zuken, the three major EDA players and creates a standard, normalized representation of PCB data which can be used throughout the balance of the product development process. By incorporating Intercom technology directly into Windchill, we increased the ability of Windchill to capture and manage data created by Cadence, Mentor, or Zuken tools. And then with viewing, markup and data interaction capabilities, Intercom gives us the ability to pass this PCB data throughout the enterprise and the value chain for purposes of design collaboration, as well as utilization within purchasing and manufacturing processes.

Intercom also gives PTC the ability to raise the bar with respect to ECAD MCAD or electromechanical design integration, and collaboration. The Intercom technology fits cleanly into the Windchill platform, there is no redundant architecture or data bases to cloud our current architectural differentiation. The acquisition of OHIO helps to strengthen PTC's offering to the electronics and high-tech sector which has historically been one of our strongest market segments. This acquisition also helps in automotive, industrial, and aerospace and defense sectors, all of which have increasing amounts of electronic design in their products.

In addition to working with Cadence, Mentor and Zuken the Intercom technology is currently licensed in an OEM fashion by UGS, PLM and by MatrixOne. Essentially this means our competitors are licensing this technology, however, we believe that Intercom can be an even more valuable asset to PTC if we continue to position it as an industry standard. Accordingly we've engaged in preliminary discussions with all of the EDA and PLM vendors to inform them of our intention to maintain Intercom as an open industry standard which would be a win-win for everybody. More work is required but thus far that message has been met with a very warm reception.

The second major development I would like to talk about is the release of Pro/ENGINEER Wildfire 2. Wildfire 2 is shipped to manufacturing earlier this week as scheduled, so CDs will soon be in the hands of customers. Our metrics indicate that the release quality of Wildfire 2 is an all-time high. Wildfire 2 is significant in that it contains the first deliverables that are a direct result of a joint development agreement with Toyota Motor Company. Key new developments within Wildfire 2 include a new 3-D drawings capability that allows designers to annotate the 3-D model directly thereby eliminating the need to produce 2-D drawings entirely.

Eliminating drawings represents a significant process change with the potential for dramatic savings and productivity advantage for our customers. With the first Wildfire release you may remember that we established an award-winning new user interface paradigm throughout the core product. With Wildfire 2 we have extended that interface through peripheral applications such as sheet metal, assembly design, simulation, and drawings. We've also added a powerful new associative manufacturing process planning capability that allows engineers to capture manufacturing instructions directly in the model during the design process.

Finally, we've expanded Pro/ENGINEER's data exchange and interoperability capabilities adding the ability to maintain associative connectivity to data that's been modeled in CATIA 5 or Unigraphics. Finally, as Dick mentioned, we achieved our goal of converting more than 50 percent of the base to this new Wildfire technology in less than a year, which we believe has been a great accomplishment. So that is it for the product update, I would like to turn it over to Neil for a financial discussion.

Thank you, Jim. I think you have gotten a sense from Dick and Jim's comments that we have delivered well against our plan, even as we have removed a significant amount of cost from our business. Our restructuring plan is almost 100 percent complete; we have only a small charge to take in the third quarter. As Dick mentioned previously, this means we can now devote our operational focus towards growing revenue to leverage our new low-cost structure. It also means we are positioned for stronger earnings results in the second half of 2004. But before I get to our detailed guidance, I'll discuss our financial and operating performance from the second quarter.

I'll start with margins. Our operating margin excluding restructuring charges was about 15 percent. This compares to just above break even last quarter and an average of negative 7 percent for fiscal 2003. Our gross margin improved to 75 percent, our highest level in years. This was driven by a significant improvement in services margin from 56 percent to 66 percent sequentially. About half of that increase was related to a $5 million onetime benefit, but the other half was driven by good expense management. With our services margins up over 60 percent again, our gross margins ought to stay above 70 percent going forward.

Now let's move to revenue metrics. Total revenues for the second-quarter were 164.7 million, a 5 percent improvement from the first quarter but a 4 percent decline year-over-year. Achieving sequential revenue growth is an important milestone on the way towards returning to year-over-year revenue growth. Our licensed revenue was 51 million, up 17 percent sequentially, but down 8 percent year-over-year. Service revenue was 113.7 million, flat sequentially and down 2 percent year-over-year.

The two components of our service revenue are maintenance revenue, and consulting and training revenue. Our maintenance revenue continues to improve and was up 2 percent sequentially and 5 percent year-over-year. Our maintenance business has benefited from our focus on improving the customer value proposition in terms of functionality, quality and performance. And our consulting and training revenue was down 2 percent sequentially and 14 percent year-over-year as we removed some of our delivery capacity as a result of our cost reductions. This has improved service's profitability overall which is important to our near-term goals.

By geography, North American revenue was 54.9 million or 33 percent of total revenue. Down 3 percent sequentially and 19 percent year-over-year. European revenue was 61.5 million or 37 percent of total revenue, and was up 4 percent sequentially and 7 percent year-over-year. On a constant currency basis revenue from Europe declined 4 percent sequentially and 9% year over year. Our Asia-Pacific revenue was 48.3 million or 30 percent of revenue and grew 18 percent sequentially and 6 percent year-over-year. This growth was primarily attributable to several large deals in Japan. As a matter of fact, five of our top ten deals in the quarter were from Japan. On a constant currency basis Asia-Pacific revenue grew 16 percent sequentially but declined 2 percent year-over-year.

Our geographic results reflect the trend in manufacturing companies towards the globalization of product development. We believe we will begin to see stabilization in North American and European revenues as each region's manufacturing economy continues to improve. Long term we are excited about the Asia-Pacific region as a significant growth opportunity for PTC. Our reseller channel continued to grow this quarter as indirect license sales were 14.2 million, up 6 percent sequentially and 2 percent year-over-year. We are on target to deliver our goal of 20 percent channel revenue growth for fiscal year 2004.

Total design solutions revenue was 123 million an 8 percent sequential increase but a 4 percent decline from the year ago period. Design solutions licensed revenue was 38 million an improvement of 28 percent sequentially and a decline of 5 percent year-over-year. This quarter new seat revenue was up significantly both sequentially and year-over-year. This is the result of traction with Pro/ENGINEER Wildfire and strong sales activity around the first step in our seven step PDS adoption roadmap, which helps customers optimize their CAD environments.

Design Solutions Consulting Services revenue was 16.3 million, flat sequentially and down 20 percent year-over-year. And design solutions maintenance revenue was up sequentially for the second-quarter in a row to 68.6 million. This was the first year-over-year improvement in our maintenance revenue since 2001.

Our new customer number for the design solutions business was 574, compared to 613 last quarter. This brings the cumulative design solutions customer base to 37,666. Cumulative design solutions seats were 306,700 with 4000 seats added during the quarter, our strongest quarter for seat volume since the fourth quarter of 2002. And importantly, ASPs this quarter were up 12 percent, in the design solutions business sequentially to 9600.

Total Windchill revenue was 41.7 million, down 3 percent sequentially and 2 percent year-over-year. Although Windchill license revenue of 12.9 million declined 6 percent sequentially and 15 percent year-over-year license revenues from our Windchill Link Solutions grew 32 percent sequentially and represented 56 percent of total Windchill licensed revenue. We saw growth in Windchill pilots this quarter, which results in smaller transaction sizes but gives us an opportunity to grow our follow on orders, excuse me, our follow on revenue in future quarters.

Windchill consulting services revenue was 17.8 million, down 3 percent sequentially and 8 percent year-over-year. And Windchill maintenance revenue continues to grow; it was up one percent sequentially and 38 percent year-over-year. This is attributable to growing customer acceptance of the Windchill Link Solutions since their introduction. We had 84 new Windchill customers in the quarter which brings our total Windchill customer number to 1249. Cumulative Windchill seats were 278,500 with 7,000 additions during the quarter. And Windchill ASP's were 1,850, which is slightly higher than normal due to a higher mix of heavy user seats.

Now I'll move on to our spending. Operating expenses, excluding restructuring charges, were 140.2 million, a 16.1 million sequential decline and a 40.2 million year-over-year decline. Part of this reduction was a $5 million onetime benefit to cost of service which is the result of successful contract renegotiation. Headcount decreased 5 percent to 3,028 from 3,186 in the first quarter. The cost reduction plan that we outlined to you over the last three quarters is almost 100 percent complete.

Spending declined sequentially in all functional areas with the biggest decline in cost of service at 23 percent. Without the onetime benefit cost of service declined 13 percent. When we began this fiscal year, we committed to reducing our quarterly expense structure from 180 million to 150 million over the course of the year. And to achieving total fiscal year 2004 expense savings of 100 million. I'm happy to report that we have been able to achieve a recurring quarterly expense structure of 145 million by the end of the second-quarter. Which in tern will enable us to achieve year-over-year cost savings of approximately 130 million.

As a management team, however, we are most proud of the fact that our sales force has been able to achieve sequential revenue growth in the second quarter notwithstanding the significant reductions to our expense structure. We recorded restructuring and other charges in the first quarter of 16.7 million for severance, facilities and other related charges associated with our cost reduction program. Of this amount 6.8 million was for severance, and 9.9 million was for facilities and other related charges. The third quarter will be the last quarter that we expect to record a restructuring charge associated with our cost reduction program.

Tax expense was in line with our guidance of 5 million. 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 some Asian entities. Now let's turn to the balance sheet.

Cash was 222 million, up from 190 million in the first quarter. This is higher than we anticipated due primarily to our improving operating performance and strong cash collections. Receivables day sales outstanding was up sequentially and flat year-over-year at 85 days in the second quarter. This is primarily attributable to a $16.3 million increase in our accounts receivables balance which includes normal seasonal strength and maintenance billings during the quarter. With continued strong execution in cash collections we should be able to grow our cash balance again in the third quarter and reduce our receivables balance.

Deferred revenue grew to 214 million, up from 184 million in the first quarter. This is attributable to a few large deals during the quarter that had significant deferred revenue components and also to the seasonality of deferred revenue from annual maintenance contracts. Now I'll give you a brief update on our share count. In the second quarter our diluted share count for the purposes of calculating EPS increased to 274 million shares from 266 million shares in the first quarter. The primary reason for this increase is the need to include common stock equivalents from previously issued stock options as a result of recording a net profit in the second quarter.

Additionally, if our stock price continues to improve the share count is likely to continue to increase. Although it is difficult to predict future movements in our stock price we are modeling 275 million and 280 million shares outstanding in the third and fourth quarters of 2004 respectively. Our guidance for the third quarter of fiscal 2004 which ends on July 3, 2004, is as follows. Revenue of 160 to 170 million, operating expenses of 150 million including approximately 5 million in restructuring charges. We expect to grow earnings per share on a GAAP basis to a range of 2 to 6 cents. We also expect cash to improve to approximately 230 million in the third quarter due to our expectation of stronger earnings and our opportunity to turn our higher Q2 receivables balance into cash through our collection efforts.

We expect service and maintenance revenue to be relatively flat in the third quarter so our licensed revenue will be the main determinant in our revenue performance. Customer activity in our sales pipeline continues to grow and Wildfire 2.0 will be available for sale in the third quarter. However, the second quarter was the first quarter in years that we closed more business than we had expected. We would like to see that become a trend before we begin to forecast significant revenue growth. We are comfortable forecasting further earnings growth in the second half of the year based on the leverage we gained with our new cost structure and the sequential decline in restructuring charges. And we look forward to reporting our progress for the third quarter when we speak to you again in July.

Thank you very much. At this point I will turn the call back over to Meredith.

Thanks, Neil. I think we are ready to open up the call to Q&A, so remember one question, one follow-up, if you have more questions, get back in line, we will try to get to everybody, we’ve got a half an hour, let's go.

(OPERATOR INSTRUCTIONS) Jay Vleeschhouwer with Merrill Lynch.

Dick, I would like to ask you about your thoughts, your expectations on what organic growth could eventually be, once you have migrated much of the base or as much of the base as can go to Wildfire and improved maintenance revenues? What do you think your organic growth is going (technical difficulty) on the CAD side of the business if any, could be. Also, the second part of that question, you very much focused on Asia which did have a good quarter, but by the same token, two of your principle competitors, Dassault and Autodesk, are also very much focused on that market as well. So perhaps you could talk about how competitively positioned you are in that region, and then a follow up.

So, on the organic growth side, Jay, I do not think we’d modeled any organic growth necessary on the CAD side. I think our primary goal there is to stabilize things. But having said that, where we are right now, we actually have a series of planning sessions going on in the next 90 days where we have asked the operating council that is made up of 20 key employees to go out and identify organic growth opportunities for us for next year. For example, the VAR business. That has been doing pretty nicely, could that grow, if it did 70 million this year or so, and I am not sure will it end up, could it grow to 90 million next year, by a little bit more investment or even just on its own because it has some momentum.

Could there be through MCAD services some additional growth, could we do a better job of executing around the MCAD maintenance in terms of touching every single user out there including the ones that are really the smaller accounts that have been more difficult for us to touch this year. We have a lot of ideas about how we can go back having stabilized the business and then start to grow it, not only on the MCAD side but on the Windchill side as well. I think there is even more opportunity to sort of grow the business on the Windchill side as we look at it. Again keeping in line with our strategy about stabilizing the MCAD and growing the Windchill.

With respect to Japan, we really did have a great quarter there. I think as I look at the pipeline there is even more room for that. Certainly Wildfire because of its combination of ease of use and power in terms of modeling anything is a strength for us. I think that we had pretty good adoptions for Windchill actually in that market as well in terms of some new opportunities, pilots that we did close. I think we've gotten some real momentum from the Toyota reference in terms of having that reference as probably the premier company in Japan, if not the world. Saw some good business there and in their supply chain.

One of the other assets I think we have that may be (inaudible) Autodesk don't have is we have a direct sales organization that is now ten or so years old. And so there is a lot of maturity around our ability to engage some of our large accounts not only through a pretty strong reseller channel but also dealing particularly with the larger accounts through a direct sales model. I think we are going to compete pretty favorably there in the next couple of quarters and years.

Follow-up on Windchill is, in your last call a few months ago you talk about the momentum or number of seats that had previously been purchased but which had not been turned on. What are you seeing now in terms of that phenomenon of seats going live (technical difficulty) for Jim, in the same vein, how successful are you in terms of being able to actually document or sell on ROI for Windchill?

In terms of the Windchill revenue basically has been pretty flat for the last few quarters, which to some degree it might seem disappointing but to us it really isn't because we just had a lot of nice pilots that have been happening. We talked about, for example, earlier we did announce the fact that we'd won the Raytheon contract and we haven't recognized any revenue from that deal yet. I think that going forward in the back half of the year we will see Windchill perform nicely actually. We did see, and I think it's reflected in the maintenance increases, that increasingly companies that had bought Windchill were turning on more and more seats and putting them into production. This ultimately will result in a demand for more seats as they put them in production, they're happy with them and the users and the suppliers start to want to use the software more.

I'll comment on documenting the value proposition. As we discussed at our analyst date historically we have cast the value proposition of Windchill around the fact that it improves the product development process, you’ll do better with time to market quality, innovation, et cetera. And I think that story makes a lot of sense to people but it is a bit of a soft dollar story. What's happening now more and more in conversation with customers is we are having discussions around global development and the ability to deploy Windchill as an enabler to move resources around to deploy resources in low-cost regions to have dramatic hard dollar savings to the bottom line. And we are starting to see a new kind of value proposition developing here which is pretty dramatic and pretty quantifiable in terms of hard dollar savings. So I actually think our value proposition discussions in the last quarter or two have actually become far more interesting with customers because not only can we make the product better but we can seriously take some significant cost out of it in the process.

Richard Davis with Needham & Co.

With regard to the maintenance uptick, I was trying to remember what percentage of the customer base was kind of off maintenance and so the question I had was the fact that you introduced I guess inarguably a significant new product in Wildfire and the Links -- if that enabled you to go back to those people that may have been off maintenance and get them back on maintenance, and if so how many, what percent have you converted and kind of what your expectations are on that side of the equation?

It has definitely enabled us to go back. Both products have enabled us to go back because really the ease-of-use component as well with respect to all the work that was done on the user interface and linking the two products together. We've gone back into the installed base, where customers might have frozen on a prior release of the old Pro/E and upgraded them. We have been able to go back in also through the expanding VAR channel and touch a lot of the smaller accounts that for the last couple of years just didn't make sense for us to touch with the direct sales force as the sort of the ASP's had declined. I don't really have that at my fingertips; maybe that is something we can look at in terms of reporting for you at the next call. But, anecdotally the maintenance people and the VAR people that get a little cut of the maintenance have been in there talking to that installed base and upgraded them not only with the maintenance but with some new seats at Pro/E Wildfire. We have pretty good Pro/ENGINEER quarter.

Just to add to that, Richard, as part of the customer value proposition we talked about before. We didn't -- we made the contingent decision not to charge for Wildfire the customers that were maintenance paying customers. But I do think the end result has been that customers that perhaps had ceased paying maintenance have got a lot more interested in returning if you will to paying maintenance when Wildfire was introduced.

That is helpful, thank you.

Gene Munster with Piper Jaffray.

Autodesk’s – one of the successes they've had is they’ve kind of gone back and obviously they have a different model, less on subscription and been raising prices as well. Obviously ASP's were up this quarter which is positive. But are there elements to improving the business model, your business model in the sense of raising prices in the future? Sounds like demand is starting to come back; maybe that's a little premature but could you talk to me about how you see pricing over the next year or so?

That's one of the subjects that this committee inside PTC right now is going to study, and we will include that as we sort of prioritize how we might grow next year. I was talking about a little bit earlier when Jay had the question -- we will sort of build that out during the summer and put it into our plan for next year. So we haven't made any decision on increasing prices, I don't really think we are likely to right now. I think we will sort of take a look at it and see what's going on. But again, Autodesk has a pretty different model where they can sort of terminate old products and charge people a final upgrade and so forth and they do not really have an ongoing maintenance stream per se like we do. So that is a pretty different model that we are just not in the business of selling our products that way.

I just think that we are more likely to actually try to increase some value for our customers in terms of bundles, and it's possible that we could as we release these products with more functionality put together some bundles that the customers actually see as increased value. In the context of that, we might get some price lift. Jim was talking, for example, about the hard dollar ROI that accompanies the value proposition say that we have with the customer. And increasingly we are having discussions with large manufacturing companies around this off shoring or globalization of engineering, it sort of happened with software development, it's happened with call centers. Increasingly we see our customers coming to us and asking how they could delineate different parts of the product development process and maybe go offshore with those. As we do that with a hard dollar ROI I think there's an opportunity for us to realize that in the way we bundle the software.

A question regarding the restructuring -- obviously it's basically complete right now. I remember back in September when you announced this, you said there would be basically the headcount reductions would last six months and you had talked about that finishing up. Has there been some, is that how it actually played out? Is that there were people being let go up until the very end of March? Trying to get a feel in terms of how stable the work environment is right now and is it clear to employees that things are done right now?

I think actually what's happened is that we have completed the cost reduction program a little bit ahead of what we had planned. So for example, the restructuring charge that we took in the second quarter was about $6 million higher than we had planned. And the restructuring charge that we were going to take in the second half of the year is correspondingly reduced. We have actually tried to accelerate the program, get it behind us, and focus on growing the business. Yes, I think PTCs employees are aware of the fact that we are essentially 100 percent complete. I think we've made that known. I think that while it's difficult to go through a cost reduction program like this from a morale standpoint, the fact that the company is now again growing revenue and is again profitable is a huge morale lift to the organization.

I think the other thing that's important is that we laid out a plan for our employees internally about what we were going to do, when we were going to do it, how much it was going to cost us, and when we would be done. I think pretty much we have been, our performance has been very consistent with that. So, I actually think that morale, given our performance this quarter is as good as it has been at PTC in a long time. We are cognizant of the fact that if the economy gets better people may have other opportunities but generally speaking, I think we are in much better shape from a morale standpoint internally than we were nine to twelve months ago.

Is it safe to say that the end of the headcount reductions was the middle of the March quarter or the beginning? Can you give us just, I know you said it is done, but when was --

Well, Dick actually said May first, and that is actually the final date, but we said we are essentially one hundred percent complete today.

Okay. Great.

There were 800 that were sort of, you know, gone on the restructuring and there's probably 20 or 30 to go and that's just associated with the natural course of doing business and taking care of our customers, so it is basically done.

Thank you.

Philip Alling with Bear Stearns.

With respect to the relative strength that you showed in your MCAD business this quarter versus Windchill, are any changes in your thinking as far as where growth is going to come from in your model going forward?

I don't really think that -- maybe I will just back up. I think that one of the things we have been trying to do for the last couple of years, our strategy going back let's say three years ago we were very, very focused on improving the product line. For years we had Pro/ENGINEER, it was the best modeling product, I think some of our competitors may have caught up to it a little bit and so forth. And so in 2001, 2002, 2003 we really focused on Wildfire, revitalizing that product, it is the best modeling product again having combined the look and feel of the low end with the power of the high-end solution. And we are out winning benchmarks everywhere again. At the same time we revitalized the whole Windchill program by taking that foundation which was heavily customized and revitalizing that product by making it more off-the-shelf, easy-to-use and so forth with the Links. I just want to give you a sense that while we had some difficult times we were totally focused on revitalizing the product line and giving ourselves a competitive advantage from that standpoint. We really feel like we've done that.

And with our new message around this integrated product development system we are really winning competitive benchmarks again like we used to in the past. This year having built out the product line was all about cost control and profitability and we were in a position to do that because the products were so strong, so we could focus on the profitability, reducing the cost. Our revenue per employee this year is going to be up dramatically. We really feel good, and as Neil was saying, the employees feel good about where we are. We achieved pretty close to year-over-year comparable revenues with 800 fewer people. So and I think cost reductions in the quarter of $40 million year-over-year. So we feel good about that. Now, having achieved those two things the revitalized product line and a real focus on the profitability and the cost structure we are right now planning for the growth. I think I would rather answer your question in more detail as we get into the July call, I think we can definitely stabilize the MCAD business and maybe grow it, and I think we can definitely grow the Windchill business. And we are going to have a definite plan on how to do that that's going to be formed in the next 90 days or so.

From looking at the numbers that would not necessarily tell a story that we are on the verge of growth in your Windchill business, but that was really the import of the question.

I want to comment a little bit on one other phenomenon here that's influencing some things in the short term but might actually turn a little bit for us. As we put in place this product development system built around the new Pro/ENGINEER which we call Wildfire and the new Windchill technology which we refer to as the Links, we also put in place a new go to market strategy inside the company. In terms of how do we introduce this into our customer base and we call this the adoption roadmap, for those of you who were at our analyst day we laid this out as a seven-step process.

You might remember step one is get the customers on our latest and greatest modeling technology, because that's a nice easy springboard into everything else. So we've in the short-term here put a lot of focus on driving upgrades to Wildfire, getting Wildfire implemented, installed, getting customers in production on that environment because from there we can easily launch PDMLink campaigns and then ProectLink campaigns and then sell visualization, ECAD interoperability using this OHIO technology, ERP connectivity, MCAD connectivity, you name it. Once we have a customer on Wildfire we have them in a great position to execute a multiyear, multistep strategy to continue to bring more and more products to bear in that environment with, you know, this completely seamless transition as the footprint expands. So I think in the short-term we've had a lot of success with Wildfire but that positions us now in those same accounts to keep going back and expanding this solution out.

My one follow-up, just wanted to on the MCAD side of the business I wanted to understand what's going on there a little better with respect to -- could you give us a little bit of breakdown in terms of the split there between sales of lower-priced solutions versus higher priced seats? I know that over the last year you've done some work to come out with a solution more lower-priced, to more effectively compete with Solid Works and Autodesk. What can you tell us there?

I think the first thing is the VAR number is a really good proxy for how we are doing in the low end, right? Because most of what the VARs are selling to the customers is the smaller customer that they support is that lower end solution. And they have been gaining traction steadily over the course of the last two years as we watched our revenue from the channel grow and grow and grow. I think that's a good proxy. From a seat perspective in terms of color we actually saw low end seats about the same as they were last quarter, but the reason why our ASPs went up this quarter is because we sold some more high-end seats as well. It was a better quarter overall from MCAD perspective; our overall new seat revenue grew and that was from a perspective of a similar performance from a low end seat perspective, which last quarter was a great quarter for us and then growth on the high-end situation as well.

That's helpful, thank you.

Keith Gay with Thomas Weisel Partners.

Good morning. Last quarter you mentioned there was some selected resellers you would be -- they would be starting to sell Windchill, I just wanted to know what the feedback is there, how that's going?

I do not know, do we have the number of the breakdown on what the VARs did with the Links?

I think there it was under $1 million or so this quarter which was basically the first quarter, there was a lot of enthusiasm about it and we are introducing it to them slowly. I would say that if there are 250 resellers worldwide, fewer than 10 percent have it right now. That's part of our plan that we are going to introduce next year is a more comprehensive go-to-market for the resellers with the links complete with services, packages and offerings like that that will make it easier for them to sell it and deploy it. I think we will see some sort of slow, steady increase by the resellers selling the Links they want to. I think there is a subset that is really capable of doing it and there is demand in their accounts.

If I might, I might also add that of this small set of resellers that are selling the Links technology they've actually been able to produce some pretty good results in terms of standing up reference customers and so forth. So in terms of can we move the technology through the channel, I think some of the preliminary signs are pretty positive.

With the MCAD 8 (ph) ASP turning up for the first time in a couple of years, just picking a product point on the high-end such as the Flex3C package, trying to get a sense for where the customers do they want the larger fully bundled functionality or do you still see more strength in going forward around more the lower end or the lower cost extensions?

I think last quarter again without having all the exact detail, I'm not sure if we provide that by seat, but we basically saw that the low end seats were flat and there was growth on the high end. So more customers were moving up -- I think and looking at the value inside the Flex3C and that's why we had increased revenue from the MCAD side of the business and increased ASPs.

I also think that as part of that as we are starting to see some improvement in the economy probably we are going to start seeing some better growth in terms of high-end seats relative to where we have been the last couple of years. Because I think that's been a greater impact to what's been going on in the high-end than it has been on the low end. And you know, it is one quarter's worth of information. We are really pleased with MCAD ASP this quarter, but just like our sequential increase in revenue we want to see that develop into a longer-term trend.

There are a couple of questions on pricing and so forth. One of the things that we are considering, for example, is not necessarily raising the prices but effecting a little bit more control, Wildfire 2 is just an outstanding product, it's really good. And one of the ways to basically effect a price increase is to have more discipline around the discounting and to be –- you know, enforce more discipline around the sales discounts for license as well as maintenance. I think that's definitely something we will look at is having to discount points at higher volume switches is an effective reduction of the overall discount.

Thank you.

Gibboney Huske with Credit Suisse First Boston.

Hi, this is actually (indiscernible) for Gibboney Huske. First, a follow-up on the gross margin improvement this quarter. I know the 38.7 also includes the 5 million, but could you just elaborate on what you meant by the good expense management?

Well, what we meant by good expense management is and I touched on this briefly in my comments which were that we did remove some service delivery resources as part of our plan, as part of our cost reduction plan. In certain geographies based on our analysis of profitability and services and utilization worldwide, and that plan really started to kick in in the second quarter, and if you look at our services revenue you see that it’s been down a little bit this year but from a profitability standpoint we have done a much better job. We plan to start growing that business again too, but I think we had some work to do from a restructuring standpoint, particularly in certain geographies where we were not as profitable as others.

On Windchill, if you could highlight some of the competitive dynamics and who do you intend to compete with the most now and whether anything changed and just some visibility on contributions from Boeing this quarter?

I do not think anything has changed on the Windchill side in terms of who we compete with most, I think we see SAP and their installed base, I think we see EDS, UGS now probably most often with probably the most complete offering. And from time to time we see MatrixOne, but it looks like they are moving more towards this consumer products and some of those other areas. I think the competitive situation is largely the same. We feel like we are doing pretty well.

Yes, I might add, there are two kind of Windchill campaigns we run. One is grow a Wildfire implementation into a product development system implementation. And that's frequently done without competition. And then there is a stand-alone, if you will, PLM or maybe enterprise PDM initiative and then in that we might compete with the likes that Dick just described. I think a significant number of our campaigns now happen under the radar screen without the competition ever being invited in because we are really leveraging and growing an incumbency position as opposed to a stand-alone campaign.

Any visibility on contributions from Boeing this quarter?

We had a good quarter with Boeing both on the -- I don't think we are going to broadcast revenue from a customer but we had a good quarter from Boeing, it's pretty consistent in terms of license and services that we derive of a sort of quarterly basis from the customer. It's good. They are one of our largest accounts. On the Windchill side we actually had some pretty good wins. We had a pretty good win at Rolls-Royce, Marine which is a division of Rolls-Royce where they really have traditionally been standardized on a competitor of ours, and predominately their collaboration and change management applications come from UGS. I think we replaced Matrix at a couple of accounts at NCR and FCI. We had a pretty good win at a number of other accounts like that. Again it’s -- the customers in this Windchill part of the business there's definitely momentum, I believe, around customer evaluations and our work in process and so forth. But as we have described and I think as other software companies will describe for you the customers are slow and cautious in terms of making a decision, implementing a pilot, validating the returns and even the expansion thereafter is sort of careful and methodical. To be honest with you that's fine with me. Because it just makes for a slower more almost subscription like revenue recognition of the business over a long period of time, I'm fine with that.

I think we are going to take just one more question.

Jay Vleeschhouwer with Merrill Lynch.

Follow up on your emphasis a number of times during the call the notion of your integrated product development system, that Jim had talked about this as an architectural differentiator back at the user conference in June. We otherwise have not really heard a lot out of you about that until this morning. So has something really changed in the technology in terms of its integration? Or is this now something that you are emphasizing more from a sales and marketing perspective and is it something that really is allowing you to differentiate yourselves versus other multiple product architectures we see at other vendors? For instance how are you to gain some adoption or leverage over let's say (inaudible) in terms of performance and associativity issues, for example, and a follow up.

I don't think it is a new strategy, but I think we have crossed the finish line on some critical deliverables that make this strategy real. So for example, the introduction of Wildfire sort of tore down the wall between Pro/ENGINEER and Windchill, if you will and made that integration seamless. And then the release of Windchill 7 at the beginning of this second quarter in the waning days of December tore down the wall between our enterprise PDM solution called PDMLink and our business to business of value chain collaboration solution called ProjectLink, so now Pro/ENGINEER connects seamlessly into PDMLink which really is the same as ProjectLink which connects seamlessly to ERP and other ECAD and MCAD tools and visualization is in there and so forth. I think this is a long-term strategy we have been executing; the difference is in terms of the fundamentals we are done. So now we are off selling it more, talking about it more. I think enjoying some of the successes that this competitive advantage sets up for us.

Maybe I can add a little bit to that from my perspective too. I think the customers historically there was a market for PDM inside the engineering department. And then more enterprise sort of collaboration and configuration management as well. Most of our competitors have multiple solutions for that and we do too, historically. We had INTRALINK managing Pro/E files in the engineering department and Windchill was more of an enterprise solution. Today when we compete in every single benchmark we bring one product that solves the integration of all of the MCAD and ECAD solutions and that's PDMLink at the engineering department level and the exact same product is used to do enterprise configuration change management and so forth.

That puts a great deal of competitive pressure on Dassault and EDS, UGS. To really the customers don't want multiple models if they can have one model that provides the same solution, they do not want to have to deal with the integrations and the loss of data and our competitors have to then try to figure out how to synch up releases so that they talk to one another. We don't have that problem anymore. When we, in a competitive situation, set the benchmark criteria and insist that one PDM solution manages the step two of the adoption process which is the MCAD, ECAD data management at the engineering level and the same solution manages the enterprise and can be used for collaboration. It's a real competitive advantage. Slowly but surely too our customers –- we are going to deemphasize INTRALINK and PDMLink is that one integral fresh solution for all aspects of PLM. That is a big competitive advantage. You can call it team center, you can call it anything you want, but when you take the covers off it its iMAN in the engineering department which is 15 years old, 1988, and its Metaphase in the enterprise department which Jim wrote it 15 years ago, it is what it is. I think the customers actually understand it. You take away the cosmetics and it is what it is under there. For Dassault it is ENOVIA, God help them on the engineering side and Smartteam I guess on the enterprise. Those are two distinct different models from different companies to different acquisitions. We have a distinct advantage today in a competitive benchmark solution, and I just don't think they are going to catch us very quickly.

Just to finish up then, I have to ask the obligatory question on the size of the sales force now and also on the reseller side, how is mench (ph) doing?

Mench had a pretty steady mention (ph) machine. They had a nice quarter as was just, we can't really continue to grow the VAR revenue unless they do well. So they grew right along with their plan. This was their first quarter so they were probably down just a little bit from the fourth quarter which is the December quarter was their fourth-quarter which is always big. But they are going to have a good year. We had a really good quarter for recruiting resellers worldwide, I'm not sure exactly, we added something like 40 resellers worldwide which was pretty good, and we prune out the ones that are not performing. On the direct sales headcount we are right around 315, and I think that's pretty much where we want to be at. I think we actually I think the budget calls for 325, and we have just again been sort of conservative on the managing of the cost. Potentially they will be back to 325 this quarter because the revenue per employee was so good and our productivity has been up so dramatically actually this year, year-over-year, with the cost reductions that I just want to make sure that we do keep a healthy headcount there.

And increasingly those sales reps are deployed in the large accounts, the Lockheeds, we actually had some pretty good PDM deployments from Motorola which has never used PDMLink before. That was a UGS account for data management. We had two sites that chose PDMLink and started to deploy it this quarter. So we are really focusing as we have been talking about; it is an ongoing process. More evolutionary in the past it was a little bit of a revolution where we take the sales guys out of the small accounts and give them to the VARs. Today the line continues to move up slowly but surely and the direct people are really increasingly deployed in those large accounts.

Thank you.

Thank you very much. We really feel pretty good. We have more work to do. We have a lot of optimism. However, we understand that it has been a difficult couple of years and we don't want to get overconfident so we are going to go out and try to execute really well in the second half. It's pretty exciting for us. We do have a good chance to have year-over-year growth both in the third quarter and the fourth quarter. Not only on earnings but equally importantly if not more so on the revenue side. So that is what we are going to work hard to do and we will look forward to talking with all of you again in July. Thanks.

This concludes today's conference call. We thank you for your participation, you may disconnect at this time.