PTC Inc (PTC) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's first-quarter 2005 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 Vice President of Corporate Communications.

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. In addition, Jim Heppelman, our EVP of Software Products and Chief Technology Officer and Barry Cohen, EVP of Strategic Services and Partners are here to participate in the Q&A.

Before we get started I would like to remind everyone that during the course of the conference call we will make projections and other forward-looking statements regarding future financial performance, business trends, and other future events. We caution you that such statements are only predictions and that actual results might differ materially from the results projected in these statements. We refer you to the risks detailed in the Company's 2004 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 24 at 203-369-1212. Additionally this conference call is being webcast and a replay will be available through our website at PTC.com until Monday, January 24, at 5:00 PM. Also on our investor website is a PDF document with financial and operating metrics that we will discuss on this call. As always after our prepared remarks, we will hold a Q&A session. In order to keep this moving, please limit yourself to one question and one follow-up. If you have any additional questions, you will need to get back in the queue. Let's get started. Dick?

Thanks, Meredith. Good morning, everyone, and thanks for joining us today. We have made a great start to fiscal 2005. In prior years we were focused on improving our products, our distribution model, our competitive position, and our cost structure. With these efforts behind us we are focused on revenue and earnings growth in 2005 and beyond.

Our strong performance in the first quarter put us ahead of schedule to deliver this growth. We exceeded our Q1 revenue plan with 8 percent year-over-year growth. We grew in all major geographies across both major product lines. Our profitability improved significantly year-over-year. We are ahead of our plan to increase operating margin and net income through revenue growth this year. We are making some modest investments to fuel this growth though not at the expense of further improvements in profitability.

Our Q1 results reflect good execution of our strategic plan on all fronts. In the small and medium business space, our channel continues to grow its revenue contribution to PTC. Our channel organization is executing very well from operations to marketing to sales reports. Resellers are truly excited to be a part of the PTC ecosystem and they are being rewarded with growth and competitive success. This is indicative of the major turnaround we have made in the growing market for entry-level 3-D Design Solutions. Pro/ENGINEER is a major force in the market and it does not ask customers to compromise between ease-of-use and power.

In strategic accounts, we have increased our sales productivity through operational improvements as well as our ability to deliver industry specific solutions and expertise. In addition, we have increased sales capacity and we now have 320 direct reps on board. We are driving demand for our solutions both inside and outside of our base. We are helping customers realize value in 4 major verticals; industrial products, aerospace and defense, high-tech and electronics, and automotive. And increasingly we are achieving success outside this space, particularly in medical products and consumer products.

I would like to highlight 2 examples of the work we're doing inside and outside the core verticals. As many of you know, Airbus has been a PTC customer for many years. Additionally many of you know that yesterday Airbus unveiled the A380, the world's largest passenger airplane. PTC has been at the heart of the development initiatives for the A380 and continues to support Airbus now that it has entered full scale production. Airbus has created a new paradigm for its aircraft and its development process. Airbus needed to leverage their resources and innovation residing in its heritage companies while achieving radical reductions in cost and time to market.

The biggest impediment to these improvements was the difficulty in enabling the thousands of Airbus engineers spread across Europe, separated by different processes, systems, and languages to concurrently engineer and manufacture a highly integrated system such as the A380. Using Windchill, Airbus created a virtual 3-D space where designs could be reviewed, simulated, and shared virtually across Europe. Windchill is also being used to facilitate manufacturing, planning and assembly. It is even being used in sales activities so that Airbus can collaborate with its customers and prospects for custom configuration of the aircraft.

Windchill has enabled Airbus to save time and money on this massive program due to a higher degree of confidence in manufacturability. Windchill is also at the heart of future Airbus programs such as the A400M and we look forward to continuing to support their product development needs for years to come.

Outside our traditional base, customers are also taking advantage of our solutions and expertise. One example is the work we're doing with British Telecom Retail, a provider of local and long distance communications services to more than 19 million consumer customers and over 1 million business clients. BT Retail has deployed Windchill ProjectLink and Windchill PDMLink to enhance its product launch processes and to improve the control and access to product data.

Currently Windchill is enabling the feed of product and pricing information to BT Retail's customer facing website. In the future BT's CRM and billing systems will be able to tap into product information automating a process that for many companies is manual and prone to errors. Working with PTC, BT Retail now has a simple and complete method for developing products, launching products, while improving efficiency and reducing costs.

With a solid Q1 behind us, we feel our prospects for 2005 are very strong. We have several points of leverage that we are focused on, a productive distribution model, a profitable services organization, a very large and happy customer base, early success in new vertical markets, a roadmap that drives customer value one step at a time, and a cost structure that will yield revenue and earnings growth. With good execution we will succeed.

Now I'll turn the call over to Neil for a discussion of the financials.

Thank you, Dick. At the end of the first quarter we are off to a solid start for fiscal 2005 with 8 percent year-over-year revenue growth, a $45 million improvement in net income, and over 330 million in cash on the balance sheet. We have exceeded our targets for both revenue and EPS and we expect to show continued growth throughout the year.

Our financial and operating metrics are available on our website, so I will take just a few minutes to add some color to our financial performance and then follow up with our guidance before we open up the call to questions.

Total revenue for the first quarter was at 169.2 million and breaks down as follows. License revenue grew 8 percent year-over-year to 46.9 million, a key indicator of the improving health of our business. Consulting and training services revenue grew 7 percent year-over-year to 37.4 million and our services business delivered double-digit margins for the second quarter in a row.

Maintenance revenue grew 8 percent year-over-year to 84.8 billion. This maintenance revenue growth has been trending upward for a year now and reflects improving relationships between PTC and our customers.

By geography our revenue was as follows. North American revenue was up 3 percent year-over-year to 58.3 million. We have seen a modest recovery in the manufacturing sector in this region, which has favorably impacted customer spending. European revenue was up 15 percent year-over-year to 67.8 billion. At constant currency, European revenue grew 4 percent year-over-year. We are encouraged by this performance as the manufacturing economy in Europe has been weak. This quarter's performance is due to growth in the number of large deals we closed in Europe.

Asia-Pacific revenue was up 6 percent year-over-year to 43.1 million. At constant currency, Asia-Pacific revenue grew 4 percent year-over-year and within the region we continue to perform particularly well in Japan where revenue grew 14 percent year-over-year.

As Dick mentioned earlier, our reseller channel continues to grow and for the quarter the channel grew 9 percent year-over-year to 33.2 million and represented 20 percent of total PTC revenues.

Moving on to our operating metrics by product line, total Design Solutions revenue was up the 8 percent year-over-year to a 123 million. Design Solutions license revenue was up 9 percent year-over-year to 32.5 million. Our seat volume was up more than 30 percent versus the year ago period. This had a very positive effect on overall license revenue but a negative effect on ASPs as the majority of seats sold were our entry-level package of Pro/ENGINEER for small and medium businesses. This reflects our success in this faster-growing part of the market.

Sales of our high-end Pro/ENGINEER package showed meaningful year-over-year growth as well. Design Solutions Consulting Service revenue grew 11 percent year-over-year to 18.3 million. This increase is due to higher sales of training services and assessment packages intended to improve our customers’ effectiveness in using Pro/ENGINEER. And Design Solutions maintenance revenue grew 7 percent year-over-year to 72.2 million, reflecting an improved trend in license sales and Wildfire adoption as well as well as continued increases in customer satisfaction.

For Windchill the metrics are as follows. Total Windchill revenue grew 8 percent year-over-year to 46.2 million. Windchill license revenue was 14.4 million, up 5 percent year-over-year. We had another strong quarter for Windchill PDMLink, which reflects our success in helping our customers adopt our solutions incrementally. As our customers move from optimizing their design environment to adopt PLM functionality, PDMLink is the solution many of our customers invest in first in order to manage data and product development processes.

Windchill Consulting Service revenue grew 4 percent year-over-year to 19.1 million. This growth is attributable to increased services delivery capacity and a growing license revenue trend. Windchill maintenance revenue grew 17 percent year-over-year to 12.7 million driven by our ability to move customers more quickly from the pilot environment to production environment. This is a fundamental driver for license revenue as well. So we feel confident that our Windchill license revenue will continue to improve.

Now I will move on to our spending. Operating expenses were 146 million. This is in line with our plan to make modest investment to help fuel growth throughout the year. We are increasing our spending in our services organization to increase delivery capacity, particularly in Asia-Pacific. In addition, we are making measured investments in our sales organization as we train on our Windchill software and add direct reps in our strategic accounts as well as in Asia-Pacific. We are also investing in R&D programs aimed at adding vertical functionality to our products.

Finally in G&A, we are investing in corporate development initiatives and are continuing our Sarbanes-Oxley compliance efforts. Going forward we anticipate spending approximately 150 million per quarter on operating expenses to support our base business and to fund the revenue generating initiatives I just described. Based on our topline performance in our first quarter, we're confident that this incremental $20 million investment in our business for fiscal year 2005 will enable us to achieve our growth objectives.

Moving on to the balance sheet, cash was 334 million, up from 295 million in Q4. Cash usually declines from Q4 to Q1 due to incentive pay outs at year-end as well as Q1 kickoff activities for the sales and service organization. However, this decline was more than offset by the receipt of our $40 million tax refund during the quarter, our strong operating performance and solid receivables collection.

Our receivables DSO was 71 days this quarter, down 9 days from the year-ago period. Deferred revenue was 200 million, up from 177 million last quarter as a result of typical seasonality of deferred revenue from annual maintenance contracts. Deferred revenue was up year-over-year as well primarily reflecting an increase in maintenance bookings. The first and second quarters are usually our strongest quarters for maintenance contract renewals.

Moving on to our outlook going forward, our guidance for the second quarter of fiscal 2005, which ends on April 2, is as follows. Revenue of 170 to 175 million and earnings per share on a GAAP basis of 6 to 8 cents. Cash should improve further to approximately 350 million in the second quarter.

We remain committed to our long-term targets of 1 billion in revenue and 20 percent operating margins and we are focused on growing our business at a double-digit rate through a combination of organic growth and strategic acquisitions. With respect to organic growth, we expect the drivers to be our Windchill product offerings, the Asia-Pacific region, and our indirect distribution channel.

On the acquisition front, we are looking at opportunities to accelerate our own PLM roadmap, broaden our PLM footprint to adjacent articles, and invest in the rapidly growing market for global product development.

Before we open up for Q&A, I would like to take a few more minutes to discuss some corporate governance initiatives we are planning. Last week we filed a preliminary proxy statement with the SEC for our 2005 annual meeting which will be held in March. The proposals in the preliminary proxy are intended to improve our equity and compensation structure and are predicated on PTC's adoption of stock option expensing in the fourth fiscal quarter of this year. The proposals are designed to support 3 primary objectives.

First, reduce our annual burn rate to approximately 2 percent of total shares outstanding. Second, reduce our options overhang from its current level of 32 percent of total shares outstanding to 20 percent in the short term and 15 percent in the long term. And third, bring our total number of shares outstanding in line with that of other software companies of similar size, a range of 100 to 150 million shares outstanding.

In order to make meaningful progress against the first objective, we have proposed that our shareholders approve the use of restricted stock as an employee and management incentive. This will help reduce the burn rate, limit the expense associated with our incentive programs under new stock option expensing rules, and give us the ability to use performance-based restricted stock with PTC executives. If approved, a portion of PTC executive equity grants will be tied to achieving performance targets established by the Compensation Committee of the Board.

With respect to our second objective of reducing options overhang, the proxy describes a one-time option exchange program for certain underwater options held by nonexecutive employees. When combined with a voluntary cancellation of over 3.3 million options held by Dick and other executives, we will make a dramatic improvement in our options overhang. If approved by shareholders, we expect to undertake this program after June 30, 2005 and will adopt stock option expensing at the same time.

The options exchange program will be affected through the use of cash and we may use restricted stock for certain of the exchanged options. In no event will the amount of cash used be in excess of 20 million.

Finally, we have proposed that our shareholders grant the Board the ability to affect a reverse stock split that will help align our total share count to those of peer software companies. When used in tandem with a program to reduce overhang and burn rate, a reverse stock split should be an effective way to improve our overall equity structure and in turn benefit our existing shareholders. We have proposed a 2-for-5 ratio which would bring our share count to about 110 million.

If approved by shareholders, the actual decision to implement the reverse split would be at the discretion of the Board and we would not expect any action on this until after adopting stock option expensing and executing the option exchange program. As I mentioned earlier, our annual meeting will be held in March and we will post the results of the shareholder meeting at that time.

Thank you for your time today and at this point I will turn the call back over to Meredith.

Thanks, Neal. I think we are ready for the Q&A session.

(OPERATOR INSTRUCTIONS) Jay Vleeschhouwer -- excuse me, Tim Fox of Deutsche Bank.

Thank you. First question I had was for Neil regarding taxes. It looks like taxes came in a little lighter than you had planned. You guided to 6 million per quarter. What drove that difference and where would you expect that to go for the rest of fiscal '05?

Tim, the difference was primarily driven by the fact that we resolved a foreign tax issue that allowed us to reduce the reserve that was held outstanding for that purpose. So he would have otherwise expected a tax provision in the $5 million range for the quarter. Going forward, we are estimating probably a similar provision to that for Q2. And maybe a slightly larger provision for Q3 and Q4 in the $6 million range.

Okay, great. And following up on a couple of the statistics you were talking about earlier, it looks like new customer growth for both MCAD, maybe the highest in 2 years there and the highest for ever for Windchill but ASPs for both segments were down fairly substantially. Is there any correlation between these 2 things or is as an indication of pricing out there?

We don't think that there has been any change in the pricing environment, so -- the ASP measure we continue to report it because people are interested in it, but we don't really think it is a good indicator really of the health of our business. What is fundamentally going on is that we are having some significant success in the low end of the market driven by Pro/ENGINEER Wildfire and that success is driving ASPs down. Coupled with the success of Pro/ENGINEER Wildfire, we're having success in the channel and our success in the channel is driving ASPs down.

And I guess the way we look at it internally is that we feel pretty good about 8 percent year-over-year revenue growth especially where we've been in the last couple of years and as long as our pricing is remaining relatively stable and it's the low end of the market that has the biggest growth opportunities, we will take that kind of year-over-year growth all their long.

Okay, that's fair. Maybe just one follow-up maybe for Dick. You reported last quarter that Boeing and Toyota were the 2 largest customers for fiscal '04 and it looks like you did some more follow-on offerings this past quarter. Could you talk a little bit about what products are driving adoption at these large accounts? Where you think penetration may be at these accounts? Just some sort of context around what is left for growth at these large multi-vendor installations?

I think there's probably some pretty good opportunity for growth in both accounts. I know there is and both will continue to add to what they are using in terms of our products this quarter and pretty steadily in all the quarters throughout the year. Toyota uses our products for powertrain development. So when they are building engines and with their supply chain they are using Pro/ENGINEER, ProjectLink and PDMLink, a fully loaded what we call Flex 3C.

We've talked in the past about how we have done some partnership with Toyota around driving enhancements that are inside the Pro/ENGINEER executable. We're now doing the same thing for them with the Windchill products and I just think you're going to continue to see expansion not only in Toyota powertrain but potentially in different parts of the business that go outside of powertrain as well as the supply chain. So they really remain our largest account and largest opportunity.

I also think you'll hear about this year because there are some pilots quietly starting and some other automotive accounts that we have not yet penetrated, so we are pretty well penetrated in powertrain. At Hyundai, at BMW, at Volkswagen, that Gemma (ph) engine which was a combination of DaimlerChrysler and Mitsubishi and Hyundais all done in Pro/ENGINEER but there is some new pilots starting in powertrain and some other accounts and I think it's a direct result actually of some of the momentum what we had publicly because of what Toyota is doing. At the end of the day, Toyota is the Company that's looked at by all automotive competitors as the number 1 company in the world.

On the Boeing side, they are using Windchill; ProjectLink predominately, some PDMLink for collaboration throughout the entire organization. So for all of their defense programs they are using ProjectLink on the commercial side as well today. When they think about collaborating both inside their firewalls and more importantly today, outside the firewalls, ProjectLink is the standard for collaboration. And they continue to enhance that. We continue to get built out on more and more new projects and we will report those to you as they happen but both those accounts are doing pretty well.

Thank you, nice quarter.

Jay Vleeschhouwer of Merrill Lynch.

Good morning. Dick, I would like to follow-up on the question concerning revenue composition in the quarter. So as Tim pointed out, your Pro-E units were in fact the highest since the fourth quarter of 2001 as far as we can tell. (multiple speakers)

Where's Jiminy Husk (ph) today?

I couldn't tell you. So I guess the question is given that momentum and volume you're doing at the entry level, is there any thought being given to reconsidering how you position the Company in the MCAD business? In other words, you've got some sales still at the high-end with Flex 3 as you point out, but is there some positioning change that you might want to consider in terms of becoming more explicitly a kind of midrange CAD Company to the extent that perhaps VS and Eugene might have a stronger positioning at the high-end?

With respect to the Windchill business, Links came in at just over 7 million in license revenue for the quarter which is consistent with the previous 8-quarter average for Links; 7, 7.5 million. And I guess the question there is what do you have to happen or when would you anticipate some breakout of Link's revenue from that level to a more material Link's revenue number? Then a follow-up.

Okay. Jay, we don't really have any plans to reposition our message today. The message that we have today for our customers is pretty consistent I think at the high-end and the low-end to tell you the truth. And it's really about a product development system verses in MCAD system or a Windchill collaboration or control system. We have really built out this message about if you want to create innovation, collaborate with others, control the changes, you need an integrated system and ours is the best one to do that.

We certainly don't view Dassault and Unigraphics as having any better market position in high-end accounts. "High-end accounts." I mean, what is Motorola? It's a $25 billion company. What is ABD? Siemens? These are all major, major users -- Toyota, Volkswagen -- of our product. So we compete just as well as they do. Lockheed Martin did a corporate-wide benchmark for MCAD last quarter and we won definitively over those 2 other companies and we are the standard at Lockheed Martin for MCAD. So Lockheed Martin is a $40 billion company.

Raytheon is using our products, Pro/ENGINEER and Windchill for the development of all their products. So I don't really want to give these other good competitors the position that they are the high-end system and we are more of a midrange system. I just don't think it plays out that way.

Jay, if I could, this is Jim. We have actually a very unique and compelling position I think with the only scalable solution. We have an entry-level price and configuration that makes sense to a newcomer on the block or to a small company getting started. But we're the only Company that can grow that exact seat into a very powerful, robust configuration without starting over. And I think that story makes a lot of sense, because small companies all have a vision that someday they are not going to be a small company and they would like to not have to start over halfway through the process.

Jim, that has been your message since your presentation at the user conference 1.5 years ago and I have always thought it's been a very viable message but the question about that is can you discern or measure that it's really affecting the business other than just being a good marketing message?

I think the results sort of speak to the fact that it seems to be working, I guess.

I'm not sure if there's a competitor that is going to announce 8 percent organic MCAD growth this quarter. It's pretty good growth. So on the Link side, we would like to see the breakout just like you would. I think that we continue to enhance those Links, make them more and more tightly integrated to Pro/ENGINEER.

There is a major Windchill release coming out in about 90 days which will further enhance that ability to naturally manage the ProE files basically in a way that makes it more natural in terms of having a common PDMLink solution that directly manages ProE in the engineering department. And then extends the use of that information into the enterprise with one common tool, not multiple databases that have to be synchronized. And I think that what you saw this quarter again was -- and I think this a little bit speaks to the pricing and the number of new accounts -- is lots of pilots started in lots of companies that ultimately as they are successful and we track the success of that and audit them with outside independent audit companies that as we do that and the customer gets the ROI, you're going to see some uptick or breakout sometime in the future. I really believe that.

We also introduced the Links for the first time and it's not even quite up and running yet but we announced this with IBM, the OnDemand program. And last quarter we did almost $0.5 million in bookings and the system isn't even up and running yet of links products through the channel into small- and medium-sized accounts. So we are very hopeful like you are that we're going to see some kind of a breakout sometime in the future. I think it will happen.

The other thing I would say is that we said we expected Windchill to grow 10 to 15 percent this year and we have not wavered from that expectation. So that is still what we're planning on for fiscal year '05.

Dick, you are confirming that Windchill 8 goes around April and Wildfire 3 presumably still in summer?

Yes, I am. I will let Jim back it up.

I am happy to confirm that. That's the expectation that we remain.

Both are going to be great products. Great products, Jay. I visited 4 or 5 of the user groups. I think there were 8 different user group meetings around the world. I was in Japan, the U.S., Germany. Our customers have never been happier, more confident about the vision, the product quality; customer satisfaction is the highest it's ever been. They love the vision of the products today and they are only going to get better this year.

Thanks Dick. Thanks Jim.

Richard Davis of Needham & Company.

Could you talk maybe broadly about your point of view on how you are approaching possible acquisitions either are you looking for functionality or tuck-ins to get more customer footprint or not all or help us understand that, what might be additive to your business?

Sure, Richard. It's Neil. I mentioned briefly that we kind of have 3 areas of focus. One area is Jim has got a roadmap that he is following in terms of our R&D development efforts and we are very interested in any opportunity that is out there that would help us kind of accelerate our path down that roadmap. And when we talk about that area specifically, I would say that typically we're talking about smaller kind of tuck-in acquisitions which are very strategic but perhaps contribute a relatively small amount of revenue.

The second area that we have spoken about is our interest in broadening our overall PLM footprint. As you know, if you ask the vendors in this space how PLM is defined, you'd get a number of different answers. And so we do have an interest in broadening our PLM footprint. We have also talked about adjacent verticals that are of interest to us and we specifically talked about medical products and consumer products on this conference call. And so if we see some opportunities that we think would help us expand the footprint, those could either be tuck-in acquisitions or they could be more substantive revenue. But those would be of interest to us as well. And we have 3 or 4 specific areas that we are looking at and I probably won't get more specific than that on this call.

The last area that we're interested in is this whole phenomenon that we have talk to many of you about, about global product development, the fact that product design work, engineering design work is moving offshore. That PTC itself has spent a lot of time in the past couple years -- really with Jim's initiative on driving that process internally here at PTC, both as a way to reduce costs but also as a way to kind of leverage additional resources for the same amount cost. We think that the whole global product development initiative will be a driver for us of sales of our license products but we would like to really expand the opportunity beyond that. And so we are looking at how we could benefit on the services basis through potential acquisitions or joint ventures or partnerships in that area. And those are the 3 areas we're really focusing our acquisition activity on at this point in time.

And is this a business that should be able to be at least a 20 percent margin business in your mind, whether that is '06 or '07 or something like that? But is that kind of directionally where you are headed or would you would like to be higher -- ?

(multiple speakers) We said it publicly. We have a plan to be at $1 million in revenue, 20 percent operating margins in 3 years.

Right. Okay. That's what I need, thanks.

Sasa Zorovic of Oppenheimer.

My first question would be you mentioned that Japan grew 14 percent year-over-year. Could you tell us how that number would change on a constant currency basis?

I think we said Asia-Pacific grew 6 percent, 4 percent growth on a constant currency basis. And if you hang on one second, we can get you the same information for Japan. 11 percent.

11 percent, and how about -- could you talk a little bit about the linearity of the quarter?

In terms of how the revenue came in by month?

Yes.

Well, the maintenance and services revenue were much more linear obviously than a license revenue and the license revenue as is historically the case was fairly significantly backloaded. Although I'd say that in this quarter our quarter was in large part done prior to the holidays, which is kind of nice. The last week was not as hectic as it normally is.

Was it similar to the previous December quarter? Did you notice a change in it?

It was about 13 million better, wasn't it? 157 to 169. (multiple speakers)

You mean linearity similar? It was, for the most part. I would say it was a little bit easier.

Great, thank you very much.

Yun Kim of A. G. Edwards.

Thank you. Good quarter again. More questions on the Windchill side out of the business. With the Windchill posting 5 percent year-over-year growth in the quarter and that side of the business facing much tougher comps in the second half of the year, it seems like it may be tough to grow your PLM businessmen in the 10 to 15 percent range this year like you said earlier in the call. Is this optimism largely based on the new product release coming out in 90 days or are you just seeing such a strong sales pipeline activity?

This is Jim Heppelman. Yes, we do actually in this new product release have a special card that we're going to play for the first time and that is in this new Windchill 8 release, we are releasing a module of Windchill called Pro/INTRALINK. Pro/INTRALINK has to this point been a separate product broadly adopted and in fact we are merging that product into our Windchill architecture and into our Windchill product portfolio. That makes it much, much easier for us to go to those customers and put them on a path were we can sell them many, many different new modules and upgrades and services in the coming quarters and years.

So I think that this new release actually does represent some important new news as it relates to our ability to grow the Windchill business on a go forward basis.

So on that basis do you see the ASPs for the Windchill side on the downward trend or where do you see the dynamics of the ASPs for the Windchill side of the business trending for the year?

The ASPs for Windchill have not been on a downward trend. So we continue to think that the ASPs of the Windchill business are going to be kind of as they have been for the past 6 quarters or so which is 1500 to 2000 ASP range.

Does the Windchill Link carry a higher price tag?

Than what?

Than those transactions that have involved Links, include Links? Just wondering what the pricing is around the Link product compared to just the plain old vanilla Windchill.

It's the same. I think the licenses are approximately the same. The real difference is in the service requirement. The Windchill foundation series that preceded the Links was characterized by much more customization and complex services. That became somewhat of a constraint to growth. The services around the Link series are much more standardized, prepackaged sort of repeatable, if you will. And therefore it's still good services revenue but it is not really so much a constraint to moving forward in a deployment.

Okay, great. One last quickly Neil. I might have missed it, but could you talk about the pricing impact on the overall revenue line quickly?

I think we didn't talk about it on the overall revenue line. I think we talked about it just regionally, so hang one second.

It’s Meredith. We were up 8 percent year-over-year. And on a constant currency, we were up 3 percent.

Okay, and Europe was up 3 percent?

No, Europe was up 15 percent. On a constant currency basis, it was up 4 percent.

Okay, thank you.

Philip Alling of Bear Stearns.

Thanks very much. Just in looking at your revenue expected performance in the quarter if you drill down and look at the perspective license performance in the Windchill business as well as an MCAD, you actually succeeded in growing your MCAD business on a license by 9 percent and say a lower rate 5 percent in Windchill which that would run counter to what you might of assumed given comments from you guys in the past as far as your long-term growth expectations for those different parts of your business. Have you had a change in view regarding what the growth prospects are given the success you've had with selling the low-end solutions in MCAD? How should investors really be thinking about their respective growth rates in those different parts of your business given the recent performance you've had?

Our view really hasn't changed based on this quarter. We try not to get too caught up in quarterly fluctuations in the metrics. We tend to look at a rolling 4 quarter average as something that we think is a more reasonable way to look at our business. And we continue to think that overall in Windchill we have a 10 to 15 percent growth opportunity this year and I think we said that in the MCAD business, it is a low to mid single digit growth opportunity in total.

But having said that, we are very encouraged by our performance at the low end of the MCAD market and we hope we can land in the upper end of that range.

What are the expectations with respect to ASPs and the MCAD business? Do you expect to gain more traction through the channel and sell an increasingly large number of lower-priced seats? And what should our expectations be there?

I think we think that the ASP for this quarter is a little bit of an aberration. Again, we prefer to look at rolling 4 quarter averages. But I think we've said in the past we expect ASPs to continue to decline in the MCAD space, not to decline as aggressively as they had the last few years and that maybe we'll see some stability around those numbers a couple years out. But I think in the meantime we expect modest declines.

Is there any visibility to channel sales for your Windchill products and has that changed in the last quarter or so?

No. We do very little business through the channel with Windchill today. I think for all of last year, Philip, it was 2 or $3 million. We do have this initiative as the talked about, our most important and largest resellers in terms of training them on selling Windchill PDMLink and ProjectLink and I think that will be an important metric to report at some point. But we are probably not planning on reporting that this year because we still think that the number will be relatively modest. On the other hand, maybe 2006 is the point where that becomes meaningful hopefully and we can give you some visibility into it.

Okay, good enough.

Again, Philip, we are going live here shortly with this OnDemand for the Links for the small- and medium-sized businesses and we are going to drive things that way because the ease of deployment, the investment and startup costs and so forth are much more comfortable let's say for a small- and medium-sized customer. I think we are going to see some traction with that. I know we are based on what happened last quarter when we didn't even have it up and running.

Thanks so much.

(indiscernible) for Keith Gay of Thomas Weisel partners.

First of all, I just had a question on the other expense line. If you could give us a little more color on that, that would be very helpful. And then secondly, we are seeing growth in maintenance and services. Can you give us a number on maintenance renewal rate and how would you characterize the pricing on maintenance?

Okay, I will answer your second question while I'm looking at the first. Maintenance pricing has been relatively stable. We did do some maintenance price increases actually in the last quarter, not across the board in certain geographies. But other than that, maintenance pricing has been relatively stable. I think your first question was on the other expense line?

Yes.

The 487,000?

Yes.

That really has to do with some financing fees associated with some acquisition activity that we have been working on.

Okay and in terms of the resellers channel, do you have a long-term goal for that in terms of percentage of revenue?

I'm sorry, say that again.

In terms of your reseller channel, do you have a long-term goal as a percentage of revenue?

I think we said in the past that we would like to see our reseller revenue move closer to 30 percent of total revenue. Today it is just over 20 percent.

Okay and just lastly, can you give us a little more detail on your thinking behind your '05 guidance? Does it mean the product releases increase in the manufacturing environment, macroeconomic, fundamentals?

We didn't give '05 guidance, did we?

No, we haven't given any guidance. We basically told people that we expect our same structure to look like for the full year. We haven't given explicit revenue guidance for the full year. We've just given revenue guidance one quarter out.

Okay.

I would say I think that things feel a little bit more open in terms of the customers and their spending right now. I think they feel a little bit better. Europe was open more so than it has been in the last couple years and we'll have to see. Again, as Neil said, one quarter doesn't make a trend. But certainly the Asia-Pacific area is pretty open to investment today. This quarter here that we are in right now is typically a good strong quarter in the whole Asia-Pacific area. A lot of companies have their fiscal year ends in March.

So I think in general on a worldwide basis there is a little bit more spending particularly on product development as companies are thinking about how to go more global and we are seeing engineering much like software development went offshore in the last couple years, engineering is moving offshore. So that does represent an opportunity for us.

Alright, thank you.

Gene Munster of Piper Jaffray.

Congratulations and good morning. Most of my questions have been asked. But just from a very high level, if we are going to take everything up to the highest level here it sounds like you are more optimistic. I don't put words in your mouth but do you feel like you are at an inflection point? And if so, what would you say kind of are those two key drivers that we should really focus in on here to kind of confirm this if we are at an inflection point? To confirm this inflection point over the next couple quarters?

I think your high-level summary is accurate. We talked about the things that we are looking for to drive our business. Obviously, topline revenue growth is front and center the most important thing we are looking to achieve while still growing our bottom-line profitability. And the drivers of the topline revenue growth this quarter were a little different than perhaps what we had planned. It was Europe as opposed to Asia. But longer-term we think Asia is going to be a continued driver of our topline growth.

We've talked about the fact that our channel business, our indirect distribution business is going to continue to grow. And we expect that to be a driver of our topline growth. And then finally, we've talked about the fact that we have an expectation that Windchill is going to grow at a double-digit rate and that is going to enable us to continue to grow in a manner that is hopefully exciting for all of us.

The other thing we really did see last quarter and I think it will continue is we saw better execution in our strategic accounts, our largest accounts. Our sales capacity is as high as it has been in probably 2 or 3 quarters and we will continue to grow that this quarter. We'll add to the 320 reps during this quarter.

So execution on the Boeings, and Raytheons and Toyotas and those large accounts is really starting to pay off. We introduced this whole strategic account program to those customers about a year ago and we're starting to get some real traction on that. There is some better delineation between our direct sales force in the largest accounts and our resellers map (ph) to the small- and medium-sized businesses than ever in the history of the Company. I think there are still some geographies where we can tune that up and will tune that up and those are actually more over in the Asia-Pacific area.

But those large accounts if the channel continues to grow like is it is and we execute well in those large accounts where they oftentimes trickle down into the small- and medium-sized accounts, then we can have a pretty good year.

Great, thank you.

I think that is all the time that we have for questions. We really appreciate your time today. Dick, any parting words?

No. Just thank you very much. Talk to you soon. Goodbye.