PTC Inc (PTC) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's third-quarter fiscal 2005 results conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce Meredith Mendola, PTC's Vice President of Corporate Communications. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thank you for joining us today. Participating on the call will be Dick Harrison, our President and Chief Executive Officer, and Neil Moses, our EVP and Chief Financial Officer. In addition, Jim Heppelmann, our EVP and Chief Product 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 the 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 and Form 10-K, our Q2 2005 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 5:00 PM Eastern Monday, July 25th at 402-220-3509. Additionally this conference call is being webcast, and a replay will be available through our website at www.ptc.com until Monday, July 25th at 5:00 PM.

Also, on our investor website right now 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 an additional question, you will need to get back in the queue.

Dick, would you like to begin?

Thank you, Meredith. Good morning, everyone, and thank you for joining us on our third-quarter results call. Our results for the quarter and year-to-date reflect our solid execution. Year-to-date results are ahead of our targets for revenue, operating margin and EPS. Our revenue performance by product line is also at the high end of our expectations. This is the result of improvements in our competitive position and customer satisfaction. Our recent performance has strengthened our balance sheet. This in turn has given us the flexibility to improve our offerings through investment in our business and M&A activities.

We are on track to deliver strong fiscal year 2005 results. These results will be driven by organic growth and inquisitive growth from our recent strategic acquisitions.

On this call I would like to discuss our strategic direction. We have spent the last several years building our core product development system to help address key customer challenges. First, the globalization of product development has created both opportunities for our customers as well as new challenges. In order to benefit from global product development or GPD, companies need to connect teams of people and data that are geographically and functionally disbursed. The goal of our product development system is to enable secure access to up-to-date information while supporting the constant change of that information.

Second, engineering processes and content impact a significant number of downstream deliverables. Examples of these deliverables are manufacturing instructions, user manuals, service and maintenance documentation, marketing materials and regulatory submissions. Today there is a weak connection between product development and these downstream deliverables. The goal of our product development system is to drive associativity into these downstream deliverables. By giving customers a strong connection, a change to the single information source at the content creation stage will automatically drive a change in the deliverable. And this connection allows the downstream processes to become concurrent processes. This is extremely important to a company's competitiveness, when days, weeks and months can be removed from the process of bringing products to market.

Our development efforts over the past few years have focused on our integral architecture and ease-of-use. This focus has given us a strong competitive advantage in our core product development system and positions us to help customers solve the GPD and downstream deliverable challenges. While this core infrastructure -- with this core infrastructure in place, PTC has begun to add key capabilities through development or acquisition. We have carefully chosen our acquisitions to provide demonstrable value to our customers and our shareholders. We want our acquisitions to enhance the value of our core product development system by adding capabilities that appeal to our existing customers or give our product development system a broader appeal to new vertical industries.

Arbortext and Polyplan are great examples of this. We are adding new capabilities to our product development system to address more downstream deliverables like manufacturing process plans and regulatory filings. At the same time, these acquisitions, along with our acquisition of Aptavis help expand our footprint to new markets where we can provide different configurations of our product development system.

We believe we have purchased companies that will help accelerate our revenue and earnings growth in the near-term, and we expect that growth to be sustainable over time. To summarize, our strategy is solid and we are executing it well. We have a strong core solution set that drives customer value, and we are now adding to that core selectively to enhance customer value and our own growth prospects going forward. We are entering our fourth quarter of fiscal 2005 with a very high degree of confidence in our business prospects. We expect to perform well in the fourth quarter by continuing to drive organic growth, as well as growth through the addition of Arbortext. We are working hard to integrate the businesses to ensure that we build upon the success of PTC and Arbortext in the future.

I look forward to taking questions in a few minutes, and now I will turn the call over to Neil.

Thanks, Dick and good morning, everyone. As Dick mentioned, we exceeded our targets for the quarter and the first nine months of 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 third quarter was 180.3 million and breaks down as follows. License revenue declined slightly year-over-year and sequentially to 49.2 million, mainly due to lower revenue from large deals. Consulting and training services revenue grew 29% year-over-year and 15% sequentially to 44.7 million. This improvement reflects increased delivery capacity we have added to drive profitable growth, and maintenance revenue grew 6% year-over-year and 2% sequentially to 86.4 million. Continued strength of our maintenance revenue reflects the increased value our customers receive from our offerings.

By geography, our revenue was as follows. North America revenue was up 11% year-over-year and 5% sequentially to 66.3 million, reflecting our strongest North American performance in over two years. Four of our top 10 deals were in North America this quarter.

European revenue was up 14% year-over-year and 12% sequentially to 66.4 million. At constant currency, European revenue grew 7% year-over-year and 14% sequentially. And three of our top 10 deals were in Europe this quarter.

Asia-Pacific revenue was down 5% year-over-year and 11% sequentially to 47.6 million. This was primarily due to a decline in revenue from large deals in Japan. At constant currency, Asia-Pacific revenue declined 8% year-over-year and 11% sequentially. Three of our top 10 deals were in Asia-Pacific this quarter.

Our reseller channel continues to grow. We achieved double-digit year-over-year channel revenue growth in North America and Europe largely offset by weaker performance in Asia-Pacific. Overall third-quarter channel revenue grew 4% year-over-year and 3% sequentially at 35.9 million. This represented 20% of total PTC revenue.

Okay. Moving on to our operating metrics by product line. Our Design Solutions revenue was up 4% year-over-year and 1% sequentially to 126 million. Year-to-date Design Solutions revenue was up 4%. Design Solutions license revenue declined 7% year-over-year and 4% sequentially to 33.5 million. However, our seat volume was strong, reflecting continued traction in the SMB market.

Design Solutions consulting and training services revenue grew 26% year-over-year and 7% sequentially to 20.2 million. This increase is due to higher sales of training and consulting packages that help our customers improve user proficiency and engineering productivity. And Design Solutions maintenance revenue grew 4% year-over-year and 2% sequentially to 72.4 million. Our Design Solutions maintenance revenue has grown consistently year-over-year for more than a year.

For collaboration and control solutions, the metrics are as follows. Total collaboration and control solutions revenue grew 16% year-over-year and 6% sequentially to 54.3 million. This was the strongest Windchill quarter in four years. And our Windchill cumulative seat count surpassed our Pro/ENGINEER cumulative seat count this quarter. Year-to-date Windchill revenue grew 15%, which is at the high end of our expectations.

Windchill license revenue was 15.8 million, down 4% year-over-year and 12% sequentially. However, on a year-to-date basis, Windchill license revenue was up 12%, and sales of our Windchill Link solutions continue to grow significantly.

Windchill consulting and training services revenue grew 32% year-over-year and 22% sequentially to 24.5 million. This growth is attributable to increased services delivery capacity and the growing license revenue trend in previous quarters. And Windchill maintenance revenue grew 20% year-over-year and 7% sequentially to 14.1 million driven by our ability to move customers more quickly from the pilot environment to production environment.

Okay. Now I will move on to our spending. Our operating expenses were 153.8 million. This is in line with our plan to make modest investments to help fuel growth throughout the year. We have invested in our services organization and have not only driven revenue growth but also margin growth as well. In fact, our third-quarter services margins of 15% were the highest services margins we have had in five years.

All other spending line items were relatively flat sequentially and reflect year-over-year investments in line with our previous comments.

Moving on to the balance sheet, cash was 403 million, up 19 million from 384 million in the second quarter. We continue to execute well on receivables collection, and our receivables DSO was 65 days this quarter, down 12 days from the year ago period. Deferred revenue was 202 million, down from 221 million last quarter as a result of typical seasonality of deferred revenue from annual maintenance contracts. The deferred revenue is flat year-over-year.

Okay. Let's turn to our outlook, and we have several items to discuss. With our acquisition of Arbortext and the adoption of stock option expensing in the fourth quarter, we will begin to report both GAAP and non-GAAP income statements starting in the fourth quarter. The non-GAAP income statement will exclude equity-based compensation, amortization of acquisition-related intangible assets, write-offs of in process R&D related to acquisitions, and restructuring charges. Our guidance will also be given on both a GAAP and non-GAAP basis.

Our guidance for the fourth quarter of fiscal 2005, which ends on September 30, is as follows. Revenue of 190 to 195 million, which represents 12 to 15% year-over-year growth. We expect non-GAAP operating cost to be 165 to 170 million, including certain integration costs associated with the acquisition of Arbortext. Our non-GAAP earnings per share should be between $0.06 and $0.08. And non-GAAP operating costs exclude the following estimated cost and expenses in the fourth quarter.

First, approximately 19 million of expense related to equity-based compensation, which includes a quarterly expense for cashback option grants, as well as a full-year expense for PTCs annual equity grants for 2005. Second, approximately 2 million of acquisition-related amortization expense primarily associated with the acquisition of Arbortext. And finally, a write-off of in process R&D of approximately 2 million which is associated with the acquisition of Arbortext.

On a GAAP basis, including these costs and expense estimates, fourth-quarter total costs and expenses are expected to be between 188 and 193 million, and earnings per share are expected to be between a loss of $0.02 and breakeven.

For the full year, we are raising our guidance. We expect revenue of 715 to 720 million, which is 8 to 9% year-over-year growth. Non-GAAP operating costs for the full year should be between 615 and 620 million, and we expect earnings per share on a non-GAAP basis to be between $0.30 and $0.32. These non-GAAP operating costs and earnings expectations exclude the additional fourth-quarter estimated expenses relating to equity-based compensation, acquisition-related amortization expense, and write-off of in process R&D as described above. And on a GAAP basis, including the above cost and expense estimates, fiscal year 2005 total costs and expenses are expected to be between 638 and 643 million, and our earnings per share are expected to be between $0.22 and $0.24 per share.

Okay. I would like to make a couple of comments on equity-based compensation expensing. First, with our adoption of stock option expensing in Q4, we are also moving some stock option grants to restricted stock grants for our employees. Second, we delayed our 2005 annual equity grants pending our adoption of stock option expensing, and this delay will result in a higher quarterly expense in Q4 than we expect in future quarters. Going forward we expect average quarterly equity-based compensation expense of about 8 to 9 million.

And finally, we are committed to keeping our annual burn rate at 2% or less of common shares outstanding and also to reducing our overhang to 20% or less of common shares outstanding. This latter objective will be accomplished through our buyback program, which is approved by shareholders at our 2004 annual meeting and is currently in process. This program will not have a material impact on our income statement, and the associated cash outlay will be at the low end of our previous guidance or about 15 million.

Regarding the Arbortext acquisition, we paid 190 million in cash, so it is worth noting that our cash position will decrease in the fourth quarter, and therefore, our interest income should decrease as well. With the cash disbursement from the stock buyback program and the Arbortext acquisition partially offset by fourth-quarter income, we expect our cash position to be approximately 200 million at the end of the fourth quarter.

We expect to provide fiscal 2006 guidance for the full year on our fourth-quarter 2005 call and are comfortable with our current organic growth rate. In addition, we are excited about the growth prospects for Arbortext. We believe we are on track to achieve our goals of growing at a double-digit rate for the foreseeable future.

Thanks for your time today. We look forward to your questions, and at this point I will turn the call back over to Meredith.

Great. Thanks, Neil. I believe that we are ready to open up the call to questions.

(OPERATOR INSTRUCTIONS). Richard Davis, Needham & Co.

When you guys -- you put up a lot of neat stuff. You have the new acquisition on Arbortext, but when you think about some of the simulation side of the world, you know the CAE and stuff like that, how do you view that as a go-to-market? I know you have some low-end product. Do you view that as a market where it makes more sense for you guys to partner with people and maybe even invest some of that functionality or make it at least adjacent to what you have, or is this something that would eventually be an acquisition target much like your French counterparts have done?

Richard, it is Jim Heppelmann. I will take that question. So, first of all, we have a fairly good simulation product called Pro/MECHANICA, which deals with most of the basic structural and thermal simulations and motion simulations that an average engineer needs to do in an average lifetime. So we really feel like we have a good basic middle of the road solution that is deeply integrated, completely associative and so forth.

However, in the simulation industry there are many many many types of very very specific simulations one might want to perform, and it is our view that we should build a partner network and allow our partners to step in and provide solutions that integrate with ours to address those simulation needs where they exist. But we feel like our MECHANICA solution addresses probably 80% of the total needs that our customers have.

As it relates to acquisitions, you know we are sort of -- we have a different view I think than maybe the French company you mentioned has. We believe that there are opportunities to expand out of engineering and to get more value out of the engineering data, and Arbortext is a fantastic example of that. So I think we are a little confused why they are doubling down in engineering. We are more excited about our strategy to expand beyond engineering and to get more value out of the investment that companies have made in engineering data.

I would suspect Pro/MECHANICA has been growing alongside the whole space. Is that a fair assumption? It's been growing as fast as into market?

Yes, I don't think we break out numbers for Pro/MECHANICA, so I don't actually have that data right in front of me here.

Jay Vleeschhouwer, Merrill Lynch.

Dick, I would like to ask my two allotted questions related to growth. At the meeting in Orlando last month, you talked about an expectation of about 6 to 8% organic growth for the product development system part of the business. If we assume that your ASPs there declined even at a moderate rate, a few percent a year perhaps, to $8000 or less per seat, wouldn't that suggest that you would need to have high single digit growth in units in that part of the business, and if that math is right, how do you expect to achieve that kind of accelerated unit growth on a sustained basis?

And secondly, a more broad question perhaps for Jim. With respect to architecture and integration and moving downstream as per the Arbortext acquisition, how do you think about the revenue metrics in terms of the value of that integration and customers' willingness to pay for that value? In other words, would you expect larger deal sizes on average? An increasing number of transactions? What are some of the revenue metrics that you foresee going forward that would really indicate that customer's value to the integration that you talk about?

On the first part, you know when we take a look at this year and in terms of the organic growth we are pretty excited about what has happened there vis-a-vis last year, and we started to see the organic growth materialize in the second half of last year. It grew by 2% in the third quarter, 4% in the fourth quarter of last year and then started to grow at 7, 8% this year.

We will talk more about '06 when we get into the call in October, but I certainly think that is sustainable in Q4 this quarter that we are in. And it is coming from sort of a nice blend of areas I guess in the business. It is coming from geographically three different locations. They are all basically for the course of the year increasing. It's coming from both Pro/ENGINEER and Windchill in that both products are growing. It's coming from growth in maintenance services and license. So we feel like the organic part of the business there is pretty sustainable.

Now with respect to the unit growth, and I think you're mostly referring to the MCAD part of the business, you know I think we probably have to do a little bit more work in terms of again forecasting that for you for all of next year, and it is premature to do that. But we see pretty good customer acceptance with the whole product development system and some of the dynamics of I think competitive dynamics have changed. Our competitor's largest customers are talking to us about the impact that our integral system is actually making on time to market and so forth. The channel is executing well, and I think that the unit sales in the channel will definitely grow next year, particularly in the small and medium-size systems, so.

And then we are selling more and more of the Link products, although that is more related to the Windchill part of the business both through the channel, as well as for the direct side of the business. So I think we just feel good about the customer satisfaction, about the user group attendance, about the quality of the products, about the impact of those PDFs, and I think this organic growth -- and we will again give you guidance in October for next year in terms of what the percent number will be -- but I think it is sustainable right now given that it's coming from all those different aspects of the business.

It is Jim. On the second part of the question, let me just comment a little bit on why I think this integration does drive a lot more value. If you back up to sort of the founding principles of PTC, two of the words that have been used here for just about 20 years are parametric and associative. If you think about what that means for a minute, the idea of parametric means it is very easy to change a design and reuse all the design concepts and the intellectual property based on that design. But you can do one design and then produce a whole family of slightly different product variations off that one design.

What associative meant is that every time you change that design everything else that is associated with it automatically changes. So parametric and associative are a pretty powerful combination. You can change the design and then dynamically republish the drawings, the toolpaths, the manufacturing instructions and so forth.

So this concept of dynamic publishing really is the concept that made Pro/ENGINEER the product that it is today. This ability to work concurrently on the deliverables but keep it all synced up to associativity.

So what we are doing now is we are taking that to the next level. We are saying how can the manufacturing instructions, the maintenance instructions, the training materials, the regulatory submissions, all be maintained associatively back to the core design intellectual property?

Now this is important because I think it really means that we are taking that concept and that value that was embodied in parametric and associativity, and we are just elevating it to an Enterprise level. So the value you get from dynamic configuration managed technical publications, regulatory submissions and so forth is far far greater than simply having a better authoring tool for creating manuals. This concept of associativity and dynamic publishing and having it all linked together in a single common data model just as Pro/ENGINEER linked drawings and models together in a single common data model is super powerful.

So I think that number one we believe we can increase the penetration rate of manufacturing companies and other companies adopting technologies like Arbortext because we are unlocking a whole new dimension of value. And then the second thing is I would argue that the value of a seat on that software has gone up dramatically simply because you can get so much more out of it when it is part of a parametric associative dynamically published and configuration managed solution.

So I do think that this concept of integral, which is really the concept of parametric and associativity and dynamic publishing just unlocks so much value for our customers.

Tim Fox, Deutsche Bank.

Thank you. Good morning. The first question is on Arbortext, and it looks like if you take the midpoint of your guidance, it looks like it is about 11 million or so in revenue from Arbortext, and that is only for I guess the last nine weeks of the quarter. If we use that to look into next year's, should we account for any seasonality in their business? In other words, is this quarter coming up any stronger necessarily than other quarters for them?

I think we are not going to comment specifically around guidance with respect to Arbortext at this point in time. You know we are currently in the midst of putting together our plan for 2006 and you know, but you're right.

I meant we have Arbortext for basically 70 days out of 90 days for the quarter having closed it yesterday, and I think we will be able to give you some more color when we get to our October call in terms of what our guidance looks like for 2006, but I don't really want to talk specifically about Arbortext within the context of our overall guidance.

Okay. That is fair. The second question I had was -- I know Meredith won't like this because I'm going to bring up ASPs again -- but in the Windchill business, you did mention that Links were up I think 26% year-over-year, obviously taking down ASPs a bit. Can you talk a little bit about the dynamics that are driving the Windchill part of the business as it relates to Links and why that is such a key growth driver going forward?

This is Jim. I will certainly try a stab and others can add value as they see fit. You know what is important about the Links is it is the newer generation of Windchill technology. When we first came out with Windchill, it was a little more toolkit and sort of infrastructure-oriented and customers needed in many cases to role their own solution on top of the Windchill platform. And, of course, there is not so much let's call it appetite for that type of approach out there in the industry today. Today people are really concerned about total cost of ownership, time to value, etc.

So our links solutions are a newer generation of product. It's easier to implement, quicker time to value, and then on an ongoing basis with reduced customization far better total cost of ownership profile. So for us the Links are the future of the business, and the core platform is still important and reused in the Links, but sales of it on a stand-alone basis are a little bit more a Legacy view of the business.

Okay. And that is what is driving -- could drive the ASPs to drop?

It is what is driving our seats up.

Keep in mind, too, that whereas there was one core platform, there are half a dozen Links solutions. So though the ASP of a single solution might be lower, the ASP of a combined total solution could actually go up.

Great. That makes sense. Thank you.

Tim, one more observation. This is Neil. Just back to your original question, you may know this already but if you think you don't, maybe it's helpful in trying to go where you want to go, is that Arbortext is on a calendar year fiscal year.

Got it. Okay. Thank you.

Barbara Coffey, Brean Murray.

A couple of questions. First, is there any specific sort of flu that seems to have hit Asia that the revenues from the Asia region were down?

And then on the Arbortext, it said when you announced the deal that it was a $40 million run-rate. Is there any more color on that for us to sort of get our hands around forecasting?

Okay. Maybe on the Asia-Pacific I mean we can chime in, but I think it was really an issue around a couple of big deals that may or may not have happened in Q3. The business remains very strong there. It will bounce back in Q4 and be very strong. We had one or two bigger deals in particular that could have happened last quarter. There is one in particular that we actually --it delayed out of Q3 into Q4 and got bigger because the customer was basically growing the investment. So I think it was a quarterly thing, and it will bounce right back in Q4. That part of the business is very strong for us.

And on your question on Arbortext, I think we said in our call a couple weeks ago, yes, the run-rate of that business over the past 12 months had been approximately 40 million. And then we also said that the market itself, according to IDC, was growing at approximately 25% per year. And we did not comment specifically about Arbortext's growth, but I think you can make some inferences there.

You know, this acquisition, and I think we've said this a couple of times but maybe just to sort of reiterate it, Windchill in particular, and I think this is true for a lot of the PLM offerings, I think historically has been maybe better at capturing product information and storing it, and less successful around making it easy to use in terms of redelivering that information to people that need it in the organization.

It is always easier to sort of store something than it is to reformat it and deliver it. And what we have been working very hard at during the last couple of years and actually describing it is making the availability of that engineering data increasingly easy to lots of people.

The reason that the Links are driving the revenue and the seats are going up, and I don't think the ASPs will decline, is that we are increasingly making accessibility to this product information more and more readily available to lots of users. The Arbortext acquisition opens up again a nice window for all the kinds of deliverables that we were describing -- maintenance and service manuals, regulatory submissions, instruction sets, owners manuals. All that kind of information is now more readily deliverable to lots of users in the organization or the extended value chain out to the supply chain, and increasingly that is what we are going to work on. So I don't see the ASPs for the Links declining. I think as we unlock value through accessibility, easy accessibility, we might even see ASPs increase as we start to unlock this value. And in particular, on the Arbortext deal, people don't really appreciate, and our customers really do, the impact on time to market and delivery of these really important products when people are waiting around for the service manuals, the operating manuals, the instruction sets well after the product has been sort of designed and manufactured. So there really is a quality and a time to market impact that these deliverables are going to bring.

If I could just add two cents to that, the other thing is it's not just about producing manuals. You know more and more companies have service revenue strategies. In fact, more and more companies are starting to make more money on the downstream service than they make on the original manufacture and sale of the product.

So if you think about it, technical publishing is to service what engineering is to manufacturing. It is the organization that prepares the information that they must have in order to start their processes.

So what we actually found when we started doing this research on Arbortext is that this group of people in the organization, their ability to get to market quickly, to be able to dynamically reconfigure and repropose information and keep it all accurate, you know this is mission-critical if you want to try and execute a services revenue strategy.

So again I think it's a pretty strategic application in the ability to reuse and repurpose that original data, literally saves months of time to market, and it avoids many many mistakes which, of course, could cost millions of dollars if they flow down into the service execution process.

And this is a good company, too. When we did our checks, our diligence checks, their customers are very happy. This is good stuff.

Sasa Zorovic, Oppenheimer.

The first question would be regarding the license revenue decrease this year. You said that (inaudible) the larger deals being somewhat smaller, I guess probably a smaller number of larger deals. I was wondering why would that be the case? Is it somewhat of an industry-wide phenomenon? Is it like a blip, or is it PTC phenomenon? Is it a blip? Is it a trend? What is this?

Well, I think there is two ways to look at that. First of all, we commented that we had less large deals in Japan and that we had some very significant large deals last year that we're comparing ourselves against.

Secondly, if you look at our large deal performance in terms of the aggregate revenue from our 10 largest deals, at this point during the year, it is up and it is up fairly significantly against the year ago period. So I do think this is a blip rather than a trend.

And then the final thing I would say is there is two ways to look at that situation. One way to look at it is that our base book of business is doing very very well. Right? And if we had had the large deals to go with it, we would have even had a better quarter. So I don't think it is a long-term phenomenon.

And then secondly, regarding the bigger deal in Asia, I guess that was pushed from Q3 to Q4 and got bigger. Did that one close now?

It is not closed yet, but we should -- you never know until you get it. But it is a customer that has been with us for a long time. They like our stuff. They are expanding the use, and we should get it in Q4.

Yun Kim, A.G. Edwards.

Can you give us some more color on what is really driving the growth of your consulting business? Is the Pro/INTRALINK really the catalyst for the growth in the consulting business here? And then also, if you can give us some color around the headcount for the consulting organization and how many people were added in the quarter or hiring plans around there? I'm trying to find out whether increasing consulting business is a result of the better rate utilization or just simply added headcount?

This is Barry Cohen. Two parts of our consulting business is changing. We're moving up upstream in terms of our consulting business, in terms of higher end product development and consulting, and we have an education and training business that is a subscription business that gives customers an opportunity to do a blended learning experience.

Historically a lot of the training delivered through live classrooms and customers don't want to travel to live classrooms anymore. And what this does is give them a chance to have virtual classrooms and also as well to have a subscription that allows them to take educational classes when they need it, when they want it on an individual basis, and the training and education business ramped up $5 million, and the regular consulting business was up based on the customers recognizing the service value that we deliver. So it was not so much in terms of the INTRALINK 8.0 migration which we have not seen yet, which will be a big part of our business going forward and will also add to our growth story in the future. We have added about 100 people or so in the consulting business in this last quarter.

Just a point on the INTRALINK 8.0 thing. Keep in mind we just released that in the end of the first week in June. So it was a little late in the quarter to have any meaningful impact.

Can you see any impact going forward or --?

Sure, absolutely.

Okay. Real quick, will the contribution from the reseller channel continue to show good growth here? When will we expect to see some leverage out of that channel in terms of showing up in margins?

Well, I think you have and will continue to see leverage out of the growth -- leverage out of the channel showing up in margins. This particular quarter we had actually a very very good quarter in both North America and Europe, and unfortunately both for our direct business and for our channel business our business was down in Asia-Pacific. But our reseller channel continues to grow. We expect it to continue to grow in a meaningful way, and that is going to continue to improve overall sales productivity.

Great, thanks. And then Neil, do you have a non-GAAP tax rate assumption for us?

A non-GAAP tax rate assumption?

Yes. Or do you -- are you assuming it will be about the same rate between GAAP and non-GAAP?

We have assumed in the past approximately 6 million per quarter, and I don't think it is going to vary much as between GAAP and non-GAAP.

Philip Alling, Bear Stearns.

Thanks very much. I just wanted to come back to the comment that you made with respect to raise guidance for fiscal year '05. I just want to get a better understanding really of what is going on with respect to sort of your core CAD and Windchill business and bearing in mind you have added Arbortext now into the mix. Should we view your comments there in the revenue range that you gave as signs of sort of higher revenue expectations in your core CAD and Windchill business, or given what we should assume as far as additions to your revenue from Arbortext that maybe those are going to be sort of below what we might have assumed given the revenue run-rate at the time of the acquisition and the growth rate expectations that you provide at the time?

I think what you should assume is that our overall 7 to 8% growth rate in organic business continues. A growth rate of 4 to 5% for the Design Solutions business continues. A growth rate of roughly 15% for our Windchill business continues as it has pretty much for this year. And you should also assume that our Arbortext business is being integrated in the fourth quarter and has tremendous gross prospects growing forward.

Okay, I appreciate that. Just sort of as a follow-up with respect to the Windchill business, so no changes in your view with respect to the longer-term growth prospects there given the somewhat up-and-down performance you have had in the license performance in the Windchill business over the past few quarters?

Well, you know, I guess there is one or two ways to look at that. You can either look that it was down slightly for this quarter, or you can look at it that it was 12%, that we have had 12% growth in Windchill license revenue year-over-year. I prefer to look at it in the latter way, and I think that is a more meaningful measure of how we are performing.

Okay. Just finally on the guidance policy going forward, I understand that you're not wanting to sort of break things out with respect to Arbortext at this time. Should investors expect next year that there is going to be a breakout in the guidance with respect to MCAD, Windchill and the Arbortext business, or is that going to be sort of blended in, and what can you tell us at this point on that point?

Yes, you should expect it to be blended in.

Into the collaboration and control business?

That is correct.

Duckett Calaha (ph), J.P. Morgan.

Just two questions, really housekeeping. What were the number of new seats added for Pro/E?

I know the second question then would be, I know that we talked about ASPs for Windchill and Links. I was just wondering what the comparable number was for Pro/E? I think the comparable number to that was 8400 for last quarter. That is it. Thanks.

This is Meredith. The new seats that we added for MCAD this quarter were 4150. We have been each quarter of this fiscal year up above 4000 seats per quarter, which is a significant increase over previous quarters. We are really seeing a lot of strength in sales of our entry-level and midrange packages. As a result of seeing the strength in the entry-level and midrange packages, it does have a negative impact on the overall ASP because of mix shift. The way that we used to calculate ASPs, we do the math, I think it was about 8000.

Brad Holtz, Cyon Research Corporation.

If you look at the license and maintenance revenue year-over-year, you are essentially flat in both Windchill and the design side. With very very strong strength in services, all of the growth is taking place in services. Can you comment on what we should expect going forward?

Well, first of all, let me just correct your comment a little bit. Our license business as a whole is up year-over-year between 2 and 3% I believe, and our maintenance business is up between 5 and 6% year-over-year. So if you link those things together, our overall growth in our licenses and maintenance business is up 4 to 5% a year year-over-year.

Well, I'm looking at -- I'm just combining the license revenue plus the maintenance revenue.

That is what I'm doing as well. So maybe off-line we can (multiple speakers). But our license business is up year-over-year, and our maintenance business is up year-over-year. Okay?

And then to your point about what you can expect going forward, our services business has had a tremendous year. You know, I think that what you can expect going forward is growth in all three lines of business. And probably it is true that for the foreseeable future, our services business will outgrow our license and maintenance business lines because that has been a trend we have seen this year, but I would expect not to the extent that it currently is.

So the services business ultimately is too, and it has done well. First of all, you form a partnership with your customer because we are working with them to build modular designs up front that can then be outsourced component pieces of subassemblies or outsourced to the suppliers. So that services engagement ultimately leads to we think more license and maintenance revenue as they begin to deploy seats because a good service engagement results in a happy customer, in a value proposition that is strong and that ultimately is going to drive more seats. So particularly as we add increasingly, we add more sort of software solutions, you know, to the mix of the footprint we have out there.

Well, I'm looking at the quarter year-over-year and I'm seeing 25% or more growth in services in both MCAD and Windchill. Can we expect that type of growth ongoing, or should that be decreasing?

Well, maybe some of the confusion a minute ago, so let me just comment again. If you're looking on a quarterly basis year-over-year, I think you are correct. I was looking at the nine months year-over-year.

Okay.

Okay? And I think that is a more appropriate measure of our business than how we perform in any particular quarter.

Fair enough.

I always try to tell folks on the calls that if you look at a trailing 12 months reflection of our business, it is the best indicator of how our business is performing as opposed to that specific quarter. And in this case, it is no inception. Barry, do you want to address the services business a little bit?

Yes, I think one is again to reiterate Dick's point here is, our customers are really looking for realized value. Part of the problem in general in the technology industry is that while technology, leading technology is necessary it is not sufficient to deliver value. And in our service organization, as Dick said, we are forming partnerships with our customers to make sure that the metrics that we define are metrics that lead to business value, and given that, that accounts for the growth. We expect our growth in the service business to be around 10 or 15%, not quite at the level that it was for this quarter.

Thank you. That helps.

Jay Vleeschhouwer, Merrill Lynch.

A follow-up regarding new business. You have been doing roughly 90% of your sales by which you call repeat business with existing accounts. I'm wondering how you are thinking about the possibility of moving that percentage up over the next couple of years based on either technology or channel coverage?

If you look on the channel side, DS is going through some changes in its channel coverage vis-a-vis the IBM relationship on the architectural side. UG is looking at its final integration on PDM side. Late next year I'm wondering if you see any possible openings here for improving your displacement or new business or your resource constraint as far as that is concerned?

I think that actually our sales force is pretty excited about it right now in terms of being able to compete for new business, and we feel like we are winning a lot of the competitions for new business. We are outperforming those two competitors that you just described.

Two fronts. A, some new accounts where there is new opportunities in the small and medium-size business in particular. But also inside the large accounts as a major aerospace or high-tech or automotive account, which has a multi sort of vendor strategy introduces new programs, we are winning a greater share of those new programs.

Keep in mind, those customers are probably already in our customer list. So that metric does not reflect traction at companies like Boeing or traction at companies like Siemens where we are growing our revenue in those accounts, but they have been customers for years.

Right, so you won't necessarily see that as a new account business, even though it is new program business in those markets.

Also, there are new verticals that we have been describing that are now open to us because of Arbortext and Aptavis and some of the other acquisitions that we have. So that is going to contribute to new business.

And vis-a-vis the competitors, they don't have today -- when we talk about doing distributed engineering around the globe with a common data model that enables people to access information, work on it, and take advantage of it, we have a much stronger position than both of those competitors today. Dassault does not really have a product line today that facilitates heterogeneous open distributed engineering with an extended supply chain. And they don't even think they do.

And with respect to Unigraphics, which is a fine company, you cannot really take a data management system like IMAN -- it is an elephant, let's say, and marry to a camel and come out with some kind of a new hybrid animal. It just metaphases the camel. So they are going to have a major problem with their installed base depending upon which architecture they choose. One is going to get left out. And there is no way around that change. And every CIO in the world knows that.

So I think our competitors are faced with a dilemma where today they have a competitor, PTC, that has this common database integral story, which is supplemented now by Arbortext and makes it even more compelling, and they are faced with the transition that we went through a couple of years ago where they are going to have to choose a common data management solution and convert their base to it and so forth, all of which is going to result in a great deal of sort of uncertainty, migration problems and incompatibility in their installed base. So we really feel competitively we are in a great position right now.

But having said all of that, excluding acquisitions and in your case Arbortext, if we don't see your license and/or maintenance revenues growing consistently better then either DS's or UG's, what would that tell us?

I think one of the points that maybe if you dissect that and points we've been on many times, if you look at the core license of our competitors, if you look at Catier (ph) or Aenova or Metaphase and you look at those core products and dissect them out from all the portfolio of their products, their core products are not growing. We have a strategy basically that is an integrated strategy from an Enterprise point of view and an integrated product strategy where we are looking at our overall revenue is based on our core products. That is -- our growth comes from our core products. It's a much healthier growth than that comes from our competitors, which is basically a fragmented collection of products, and their core products are declining in the base.

The fee is not growing out. They have a pretty interesting play. I think we have talked about it where they are going to it looks like slowly country by country terminate the relationship with IBM, and they will look like they are growing organically as they take the revenue that was once going to IBM and incorporate it in their business. But in the long-term that is problematic because that's only going to sort of mask the problem for a short period of time.

So thanks again for the time today. We feel pretty good at the three-quarter mark in terms of what the year looked like, and we really feel like we're going to have a strong execution here in Q4. The pipeline is strong. The sales force is very strong. There is no turnover in the sales force or really for that matter in any part of the Company.

I think it is, you know, it is a strong indicator that people have a lot of confidence. Customers are happy. Products are strong. We have a lot of work to do to continue to integrate these acquisitions and make our products easier to use and improve the quality, and we have a major initiative under way there that maybe we should talk about some time in one of these calls because I think that is going to extend our advantage in the future.

So we will look forward to getting together in October. Thank you.

Thank you. This does conclude today's conference call. Participants, you may disconnect at this time and have a good day.