PTC Inc (PTC) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to PTC's fourth quarter and fiscal year 2005 results conference call. [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. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Participating on the call will be Dick Harrison, our President and 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 future financial performances, 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 10K, our Q3 2005 10Q and in the Company's other reports filed with the SEC from time to time.

A replay will be available until 5:00 p.m. Eastern on Monday, November 7th at (402)220-9726. Additionally, this conference call is being webcast and the replay will be available through our website at ptc.com, until Monday, November 7, at 5:00 p.m. 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 an additional question you will need to get back in the queue. So Let's get started. Dick?

Okay, Meredith, thank you. Good morning, everyone, and thank you for joining us on our fourth quarter and fiscal year 2005 results call. 2005 was a great year for PTC. We grew 9% for the full year and 15% in the fourth quarter, demonstrating that we can deliver solid organic growth while executing and integrating strategic acquisitions. Our organic revenue grew at the high end of the growth rates of the PLM market. And we made further strides in improving our profitability while continuing to invest in our future.

We have spent the past several earnings calls describing to you how our focus on our products, distribution model, services business and operating model would position us to win in the PLM market. I would like to review some important execution highlights from 2005.

First, our product development system, PDS, resonates with our customers. We are the only company in the industry with a single architecture, broad functionality, PLM platform. Our customers are using the PDS to realize value in a complex global product development environment. Because of its simplicity, it is quicker to implement and has a lower total cost of ownership than competitive offerings. As a result we are delivering outstanding Windchill growth in fiscal year 2005. Customers like Toyota, Volkswagen and Raytheon are expanding their relationships with us because of the power of our PDS.

Next, we have added significant vertical specific capabilities to our products. This year we delivered new capabilities for aerospace and defense, electronics and high-tech, medical products, and footwear and apparel. This has helped us gain significant traction in these industries. For example, Windchill has emerged as a standard for Data Management and collaboration in aerospace and defense. Customers like Airbus, Boeing, Exostar, Lockheed Martin, NASA, Raytheon, Talus and the U.S. Army use Windchill every day to develop some of the most innovative products in the world.

Another highlight this year is that our distribution model continues to improve. Our direct sales productivity increased 10% in fiscal year 2005. It is the highest it has been in several years. We attribute this to our success in building out our worldwide reseller network which has enabled our direct sales organization to focus on the largest and most profitable strategic account opportunities.

Next, we have done an excellent job in driving profitable growth in our services business. Some of you may remember that this business was slightly unprofitable two years ago. And that the growth had stagnated. We have transformed our services business over the past two years into a world class consulting business. The focus has shifted from an implementation and training business that followed license sales to a true process consulting business that drives value for our customers. Our strategy to provide more valuable services to customers has not only increased the profitability of this business, but it has also boosted our revenue growth. Consulting Services was our fastest growing business in 2005 and it is delivering a 15% profit margin run rate. We expect this business to continue to deliver incremental profit margin as it grows in the future.

Finally, our significantly improved financial performance has allowed us to become more acquisitive. In 2005, we made three important acquisitions -- Polyplan, Aptavis, and Arbortext. All three of these acquisitions expand our technology footprint and our addressable market opportunities. Polyplan will enable us to extend the value of the PDS to the manufacturing discipline within our customer base. Our customers are enthusiastic about the opportunity to develop manufacturing process plans simultaneously with the overall development of their products. As a PTC partner, Aptavis helped us to expand our addressable market to footwear and apparel companies. And now that we own the company, we have begun to aggressively expand our sales effort around the world. And Arbortext, the largest of our 2005 acquisitions, will help us expand both within existing accounts and to new vertical markets. Every single customer I have spoken to since this acquisition is excited about our vision to bring together all product information whether it is graphical or textual. The integration of all these acquisitions has gone well so far and we are excited about the accelerated growth opportunity they bring us.

These highlights from 2005 reflect sound strategy and solid execution. We have articulated a highly differentiated vision to the marketplace and we will continue to look for strategic partnership and acquisition opportunities. As good as 2005 was, I think 2006 will be even better. I have a high degree of confidence in our goal to deliver revenue growth of approximately 12%. At the same time, we will continue to improve operating and net profitability, our employees, customers and partners share our excitement about our business and we hope you do as well. I look forward to your questions in a few minutes, but now I will turn the call over to Neil for the financial review.

Thanks, Dick. Good morning, everyone.

As you can see from our results we had a great fourth quarter and fiscal year. Significant improvements in revenue and more than doubling our net income. I want to take 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.

Let's start with revenue. Our total revenue, as you know, was $195 million for the quarter, and for the year revenue was $721 million. That represents 15% and 9% year over year growth, respectively. The revenue breaks down as follows.

License revenue grew 17% year over year in the fourth quarter to $60.9 million. Our license revenue was strong in the fourth quarter organically and we also saw great performance in the sale of Arbortext products. For the year, license revenue was $210 million, up 5% from 2004. Our fourth quarter consulting and training services revenue grew 39% year over year to $47 million. This improvement is mainly due to the emphasis we have placed on providing customers with process consulting, training, and adoption services, which have helped us grow the services business. These services are more profitable than traditional implementation services.

Additionally, we did receive a benefit from a partial quarter of Arbortext services revenue. For the full year, our services business was our fastest growing line of business, up 22% to $168 million.

Our fourth quarter maintenance revenue was up 3% year over year to $87 million, and for the year maintenance revenue was up 6% to $343 million. The maintenance business represents about 48% of our total revenue and continues to be very predictable and profitable.

By geography our revenue was as follows. Our strongest growth for the fourth quarter and the full year came from North America. Our fourth quarter revenue was up 37% year over year to $84 million. We had a great quarter in terms of organic growth. In addition, sales of Arbortext products, which have traditionally been skewed towards North America, contributed to our overall growth in this region. Six of our top 10 deals were in North America this quarter including one from Arbortext. For the full year, North American revenue grew 17%, reflecting solid execution all year long.

Our fourth quarter European revenue was down slightly year over year to $61 million. At constant currency, European revenue was flat year-over-year. Europe's base business has showed solid growth this year but quarterly revenue was a bit lumpy throughout the year depending upon the timing of closing big deals. Just one of our top 10 deals was in Europe this quarter. For the full year, European revenue grew 6% to $254 million.

Our fourth quarter Asia-Pacific revenue was up 5% year over year to $50 million on both an actual and a constant currency basis. Three of our top 10 deals were in Asia-Pacific this quarter. For the full year our Asia-Pacific revenue grew 4% and we had very strong direct sales offset by weaker channel revenue performance in Asia.

Speaking of our reseller channel, our fourth quarter channel revenue was $35 million which was down 11% year over year due to our performance in Asia. We continue to see rapid channel growth in North America and Europe. For the full year, total channel revenue grew 2% to $139 million and this represented 19% of total PTC revenue. Though our performance in Asia was not as strong as other geographies this year, we have recently modeled our Asian channel business after our channel business in North America and Europe, and expect this revenue to grow significantly in 2006.

Before I describe our operating metrics by product line, I want to briefly walk you through our new revenue categories which are the result of the Arbortext acquisition as well as the launch of Pro/INTRALINK 8.0. As you know, PTC previously reported revenue in two product categories, design solutions which included Pro/ENGINEER and related products and collaboration and control solutions which included Windchill and related products. The Arbortext acquisition gave us both desktop offering tools that fit well conceptually with Pro Engineer, as well as publishing solutions that are more closely aligned with our data management and collaboration solutions. Additionally, we just launched Pro/INTRALINK 8.0 which is Windchill-based. Previous versions of Pro/INTRALINK were not based on Windchill. It was sometimes used stand alone and other times use together with Windchill. As a result, in the past, our Pro/INTRALINK revenue was allocated 50% to design solutions and 50% to collaboration and control solutions.

Our new revenue categories are called Desktop Solutions and Enterprise Solutions. Desktop Solutions include Pro/ENGINEER, Arbortext Editor, and all other solutions that help companies create content and improve desktop productivity. Enterprise Solutions include Windchill, Pro/INTRALINK, Arbortext Publishing engine and all other solutions that help companies collaborate, manage and publish information across an extended enterprise.

Just to give you a sense of how these revenue categorization changes will affect our metrics, Pro/INTRALINK total revenue is about $20 million annually. Therefore, our $10 million of annual revenue, or about $10 million of annual revenue, will move from the former Design Solutions category to our new Enterprise Solutions category. Coincidentally, adding the Arbortext Editor revenue to the category called Desktop Solutions basically negates the impact of moving half of Pro/INTRALINK revenue out of this category. Regarding metrics, in addition to the revenue categories I just described, we will still continue to provide Pro/ENGINEER and Windchill seat information calculated in the same way they have always been. We will no longer provide new customer information by product line but instead we'll provide this information for the whole company. And these metrics are posted, as you know, on our website.

Okay. Let's go on to revenue by solution category.

As far as Desktop Solutions revenue is concerned, our fourth quarter Desktop Solutions revenue was up 6% year over year to $129 million, and for the year, Desktop Solutions revenue was up 5% to $503 million. Our fourth quarter Desktop Solutions license revenue grew 6% year over year to $38 million, and for the year, Desktop Solutions license revenue was flat. Our Pro/ENGINEER seat volume grew 12% in 2005 compared to 2004 and this reflects our success in the SMB market. Fourth quarter Desktop Solutions consulting and training services revenue grew 27% year over year to $21 million. For the year, Desktop Solutions consulting and training services revenue grew 20% to $78 million. These increases are due to higher sales of training consulting packages that help our customers improve their design processes, their user proficiency, and their engineering productivity. Our fourth quarter Desktop Solutions maintenance revenue was up slightly year over year to $71 million, and for the year Desktop Solutions maintenance revenue was up 4% to $286 million. This reflects continued success in driving customer value with our solutions. Now, let's move on to Enterprise Solutions revenue and metrics. Fourth quarter Enterprise Solutions revenue grew 37% year over year to $66 million. Although some of this growth is from the acquisition of Arbortext, we continue to deliver Windchill revenue at the high end of our own expectations. The revenue contribution from this fast-growing revenue category is at its highest level ever, and represented almost 34% of total revenue in the fourth quarter. For the full year, Enterprise Solutions revenue grew by 21%. Enterprise Solutions license revenue was $23 million, up 40% year over year. We sold over 14,000 new seats of Windchill software this year, a 53% increase year over year. For the full year, Enterprise license revenue was up 19%, we sold over 50,000 Windchill-only seats in 2005 and that's a 42% increase from last year.

Okay. Enterprise Solutions consulting and training services revenue was up 50% year over year to $26 million. This growth is attributable to our focus on new process consulting offerings and the growing license revenue trend in previous quarters as well as the Arbortext acquisition. For the year, Enterprise Solutions consulting and training services revenue grew 25% to $90 million. Our fourth quarter Enterprise Solutions maintenance revenue grew 18% year over year to $16 million, and for the year Enterprise Solutions maintenance revenue grew 19%. The impressive growth we are seeing in this business reflects our growing license trend and our ability to move customers more quickly from the pilot environment to the production environment.

Okay. Let's move on from revenue and on to spending. Fourth quarter non-GAAP operating expenses were $167 million. Much of the sequential growth in this number is due to the added expenses from our newly acquired businesses and I would also say that the year over year expense growth for the fourth quarter reflects our plan to make modest investments in 2005 to help fuel organic growth.

As we discussed on our last earnings call, we began expensing stock based compensation this quarter. The fourth quarter cost was $15.2 million which is higher than we will expect on a quarterly basis going forward, due to the impact of delaying our fiscal year 2005 grants to the fourth quarter, rather than making them earlier in the year. In our press release issued this morning we included information about our fourth quarter and full-year stock based compensation expense by functional organization to give you better visibility into our expense performance.

Other items to note in our fourth quarter are acquisition related amortization of $1.6 million and a write off of in-process R&D of $.7 million, which was related to the Arbortext acquisition. We also received a benefit to restructuring of $1.3 million, and that was related to the release of some excess facility restructuring reserves related to our headquarters facility. Finally, we received a one-time tax benefit in the fourth quarter of $7.7 million. Our non-GAAP presentation excludes these charges and benefits so that you have a view into our operating results that should supplement your understanding of our GAAP performance.

Okay. Moving on to the balance sheet. Cash was $204 million, down from $403 million in the third quarter. And, of course, the main reason for this change is our acquisition of Arbortext for $190 million. Also, as previously announced, we completed our employee option exchange program for $12.7 million. We continued to execute well on receivables collection and our receivable DSO was 68 days this quarter, down 1 day from the year-ago period. Deferred revenue was $200 million in the quarter, up significantly from $177 million in the fourth quarter of last year and about flat compared with last quarter. We saw our typical seasonal decline of deferred revenue from annual maintenance contracts which was offset by the addition of Arbortext deferred revenue.

Okay. Before I discuss our outlook for 2006, I wanted to mention that the press release we issued this morning also indicates that we are looking into certain issues in the Asia-Pacific region primarily relating to the 2001 to 2003 fiscal year time frame. The items we have identified are not material to our results for these fiscal years, but we do feel that it is appropriate to disclose that we are looking into these issues and we expect to complete our review in time for filing of our Form 10K in December.

Okay. Now I will turn to our outlook. I am really pleased that we are able to provide you with annual guidance for the first time in three years. Our business is strong and we are approaching next year with confidence in our growth prospects.

Let's talk about first quarter guidance initially and then we will get to the full year. Our guidance for the first quarter of fiscal 2006, which ends on December 29 of 2005, is as follows. Revenue of 190 to $195 million, which is 12% to 15% year over year growth. On a GAAP basis for the first quarter, total costs and expenses are expected to be between 177 and $182 million, and earnings per share expected to be between $0.02 and $0.04. On a non-GAAP basis, we expect operating costs of 165 to $170 million consistent with our fourth quarter spending and we expect earnings per share on a non-GAAP basis to between $0.06 and $0.08.

These non-GAAP operating costs exclude the following estimated costs and expenses in the first quarter. First, approximately $10 million of expense related to stock based compensation. This expense is slightly higher than previously expected because we have decided to implement a mix of performance based and time based equity incentive plans for senior management. PTC previously used only time based equity incentives which carry a lower initial accounting expense than do performance based equity incentives. Second, the non-GAAP operating costs for the first quarter exclude approximately $2 million of acquisition related amortization expense primarily associated with the Arbortext acquisition.

Okay. For the entire fiscal 2006 period, we expect revenue of 805 to $815 million which is about 12% year over year growth. On a GAAP basis fiscal year 2006 earnings per share are expected to be between $0.18 and $0.20, and we expect non-GAAP earnings per share to be between $0.35 and $0.37. These non-GAAP earnings expectations exclude approximately $40 million of full-year expense related to stock based compensation and approximately $9 million of acquisition related amortization expense.

So, in summary, we are very pleased with our progress this year both on the top line and the bottom line and we are really looking forward to delivering both strong growth and increased profitability in 2006. Thank you for your time today.

We look forward to your questions. And at this point I'm going to turn the call back over to Meredith.

Great. Thanks, Neil. Okay, so I think we're ready to open it up for questions. One question, one follow-up and if you have got more, please get back in the queue so everyone can ask a question.

[ OPERATOR INSTRUCTIONS ] Our first question comes from Richard Davis, Needham & Company.

Thank you very much. With regard to Arbortext, one of the things that, to me, is interesting with them is that they are in some industries that historically you guys haven't been in at least in an in-depth manner. How should we think about Arbortext? Does that eventually pull you guys in to those industries or is it better for us just to kind of say they will continue to grow in these other areas, but we shouldn't expect a lot of cross sell pull into those markets?

Yes, Richard. This is Jim Heppelmann. I will take that question. We describe our solution today, our Product Development System, as create, collaborate, control. Now we have added a fourth C, communicate, to the Solutions stack. That is really to reflect the Arbortext capability to publish information in various forms and formats for different audiences. So really what Arbortext brought to the system here is a new create tool and then new forms of communication tools on the back end. But as we look at some of these new verticals, be it pharmaceutical or financial services or government or other publishing industries, they all have a need to create, collaborate, control and communicate. So in fact, we think that we can add the PTC aspects of collaborate and control to the Arbortext aspects of create and communicate and then bring a full solution into those industries. So really to get to the point, we think there is a good opportunity, particularly for our Windchill products, to team with the Arbortext Prize and follow them into this new market opportunity.

Got it. Okay, good. Thanks very much.

Our next question comes from Tim Fox of Deutsche Bank.

Hi. Thank you. Good morning. Just to take a look at guidance a little bit, Neil, the 12% top line obviously is a little bit better than we had anticipated and the street anticipated, but it looks like operating profitability jumps about just 1%, 100 basis points, year over year and EPS growth looks like it is going to be just about 9% for the mid-point. This seems like a little bit of a deceleration in your cost expense efforts you have been progressing so nicely with. Can you talk a little bit about whether or not, first of all, operating margins will be around the 15% area next year and are you anticipating being a little bit conservative here on the cost side or should we expect to see better EPS throughout the year?

Okay. So --

Unless you changed your guidance already?

Good questions, Tim. I think, first of all, EPS growth to the mid-point is from $0.31 to $0.36. I think our EPS growth is actually somewhere between 14% and 20%, in that range. We can talk about that offline if you want but I think that's about what it is. The second thing I would say is that from an operating margin perspective, we are looking at somewhere in the 15% to 16% range from an operating margin perspective probably in the mid-point of that range in terms of what our expectation is on operating margins. We look for the same kind of improvement -- I guess the way to say it is we look for the same kind of improvement in operating margins next year that we achieved this year.

Okay, so similar level. Okay. Second question was around the VAR channel. As you mentioned, it was up a couple percentage points year over year but down in the quarter, particularly weak in Asia. Can you talk little bit about what changes you are making to that VAR channel particularly in Asia and why you expect that growth to accelerate in 2006?

Yes. So Tim, what we did a couple years ago, maybe 18 months ago, we -- historically, actually, the VAR business and the direct business were managed by the same organization. And we have gone through a process of going around the world counterclockwise here, from starting in the U.S. and then to Europe and then to Asia PAC just now, where we sort of have this separation of direct and indirect, and I think that what we have seen in the U.S. and Europe is that in fact a sales manager that is managing both would get conflicted and it is tough for somebody to manage both. The really good performance I think you have seen here in the U.S. and Europe is a result of having gone through that separation and had a reseller sales manager that owns that business independent from the direct sales person managing that now for a period of time and we have gone ahead and implemented in Asia Pacific that same kind of organization. What you sometimes get when you implement the change is you get a little bit of sort of uncertainty and some new people coming in and so forth. You get a little bit of a lapse in productivity, but we expect to see the same kind of big increase in productivity in Asia Pacific that we have seen now in Europe and the U.S. And I think it will happen pretty soon.

How recently were these changes implemented in the channel?

As I said, in the U.S. it went back probably about 18 months ago, Europe was probably a year ago and Asia Pacific we really did over the summer.

Okay. Thank you.

Thank you. Our next question comes from Barbara Coffey, Brean Murray.

Good morning. When -- you were speaking about having a faster time from pilot to deployment. Is there any specific reason that that is occurring?

We could take both a product and services perspective. Go ahead from a services perspective. From a product perspective there has been a tremendous amount of packaging of the product. And it's just generally maturity of the product. In the early years when we brought the Windchill product out it was a little green, and so customers would typically do more customization to convert the product from what they receive from PTC to what they needed for a solution. In the past years we've had a strong focus on building turnkey solutions, so we've analyzed all those gaps, built them into the product so that the product now, as you pull it out of box, is substantially ready to go for many many customers. This removal of customization and gap analysis and so forth has allowed our services guys to take a whole different approach and maybe I will turn it to Barry to comment on that.

This is Barry. Two points on that. One is, in our service organization we actually have a service engineering group that captures the knowledge from old implementations around the world and offers and constructs service packages which captures that methodology and allows the customers to benefit from that knowledge. So coupled with what Jim has done to the product, those implementations are taking place faster and with less risk than they did before and that is a big gigantic plus for us. The other thing that we have done very heavily is we have a very intensive evaluation process around customer value, so we have a lot more conversations with customers now as they implement things. So we increase our learnings not only from the service people, from the customer's perspective, about what things make a difference not only in terms of time to implementation but producing value at the other end, which has helped our service business, but really strengthening the use of the technology.

Next question?

Our next question comes from Jay Vleeschhouwer, Merrill Lynch.

Thanks. Dick, first question is about your outlook and the overall market outlook for 2006. Sounds like you are anticipating some improvement in your organic growth in '06 versus '05 and yet one of your largest competitors, Dassault, is anticipating still good growth in '06 but perhaps some moderation in their case of organic growth in '06 versus '05, so the two of you would seem to end up at around the same point in terms of organic growth; you are moving up a bit, they are moderating a bit.

I think we're taking some of their revenue, Jay.

Okay. I'll give you plenty of opportunity to expand on that. But the premise of the question too is that it would seem that spending intentions for PLM do appear to have moderated some. They're better than they were two years ago but versus where they were at the beginning of the year, again in terms of intent by CIOs and software spending surveys, there does seem to have been more moderation, but you are anticipating some improvement in the face of that, so that is question number one.

The follow-up has to do, this is more for Jim, the product roadmap. You did a detailed outlook at the user conference in June. Are you still adhering to that detailed schedule in terms of Wildfire 3 and updates, for example? Maybe you could talk about your expectations over the course of '06 for the conversion to Windchill 8. Thanks.

Let me take a stab at the first one, which is a pretty -- that's a tough question to answer quickly here. Jay, I think what we've tried to do in the last couple years and tried to explain it -- maybe I'll even simplify it here a little bit more. One of the things we tried to do, I guess, is to simplify our solutions for our customers to make them more easily deployable and so forth. If I even take a step back for a second, we are really in the business of, with Pro/ENGINEER and the Arbortext Editors, of creating product information, creating content about complex content about a description of a product. Then Windchill captures all of that information and manages the configuration and the change orders and so forth. So it manages that content. PLM in fact is probably content management of sophisticated content, if you want to keep it simple. And then applications like Polyplan and Arbortext and even other ones inside Pro/ENGINEER around process planning and so forth, basically distribute that information out to different people in the organization that need it. So we create it, we manage it and we distribute this information. The four Cs were create, collaborate, control, and communicate. So the same concept.

So what we have been doing, too, is we've built out this -- we are completely unique in terms of having one common data model to manage that information. Unigraphics has five or six, Dassault has six or seven, our competitors -- SAP probably only has one. They're most like us in terms of this integral approach. But I think that is paying off pretty big benefits for us in terms of ease of use, ease of deployment, capturing market share inside accounts, new accounts and also accounts where we exist with our competitors. And I think you are going to see some acceleration because of the ease of use of our products and the naturalness with which the customers can deploy them and get real return on their investment.

We feel really good not only about '06 but for the next couple of years because of the power of these solutions and the momentum that we have in accounts like Toyota, Boeing, Lockheed, Airbus, Raytheon, which were all classically thought of as accounts that our competitors did well in. We have the momentum in those accounts and I think it is going to be sustainable for a long time and I think you are going to see some real acceleration in this whole Arbortext solution. We can talk more about it but it actually takes all that rich content that we created and then managed inside Windchill and associatively links it back to the engineering information, it is associatively linked now for service manuals and owner's manuals. We had a customer in from an aerospace and defense company two weeks ago and showed him a demo of Pro/ENGINEER Data with text, managed by Windchill, and then distributed into a service manual and an operating manual for a piece of field equipment with a change that occurred in 10 minutes. The impact on their business is extraordinary for these companies. I just think customers are relating better to our solution today than they are to those of our competitors.

Jay, it's Jim. I will pick up on the product roadmap discussion. There are no -- substantially no material changes from the vision we painted at the PTC user group in June with one exception and that is a positive change around the introduction of a Windchill Arbortext integrated solution. Let me just run through the details.

We still have the same schedule for Wildfire 3 which should hit the market -- it is already out in the market in the pre-release form. It will hit the market in the final release form in the March/April time frame which is the date I gave at the user conference. Our Windchill 8 release, of course, was shipped in June; our Windchill 9 release is basically scheduled for, let's call it end of -- let's call it early calendar '07 to be a little conservative here. All of that stuff is pretty much the picture we painted.

The one new surprise is the Arbortext integration into Windchill would nail down to be, let's call it the mid point of fiscal '06 [INAUDIBLE] for PTC. That is a surprise because I think people thought that that integration would take us a long time. In fact we've had great reuse of technology that we had developed for the management of complex Pro/E structured data we can now reapply to the management of complex Arbortext structured data pretty directly. So in the mid-point of the year we're going to have a very, very robust, probably the most robust, solution for managing complex structured XML based technical publications.

We're already seeing a lot of interest in that from Arbortext customers. An Arbortext customer in the past would have purchased create tools and communication tools from Arbortext, but then they would have to go out and do a separate procurement activity to get this collaboration and control piece that's necessary in the middle. Now, they see PTC as a single vendor, completely integrated solution, one-stop shopping and one-stop accountability, they are pretty excited about it. We're already beginning to see a pipeline for that develop even in advance of having the capabilities in the marketplace. We are pretty excited about it and things are going well in the R&D labs right now.

Tha answer goes back a little bit to Richard Davis's question, too, in terms of the new verticals or new market opportunities. As Jim refers to collaborating the control piece, the content management piece, we are able to go back into pharma and financial institutions that use Arbortext's solutions for editing and publishing and sell them the content engine, so that we have a complete solution. There is real upside into these other vertical markets in terms of additional Windchill revenue.

Just a quick observation. I may have said this before to some of you, but if you were to look at the Arbortext editor product, at surface value, it looks like Microsoft Word. It actually works like Pro/ENGINEER. So the way it creates complex structured data, and the processes you'd have to follow for collaborating and managing that complex structured data, are exactly the way Pro/ENGINEER works. It looks like Microsoft Word, it works like Pro/ENGINEER, meaning all of that expertise we built up around collaboration and control as it relates to complex structured data, is directly applicable and, quite frankly, highly differentiable in these other marketplaces. Like scalability, a competitive solution we were discussing, really has a problem when the documents start to have more than 200 components in it. We're worried about an assembly with 10,000 components, so the level of expertise and scalability and robustness we have is really unmatched in the content management industry. We need to hook it all together and then figure out the right way to introduce it into those market verticals. But it is really pretty exciting technical capability that we already have that is completely repurposable.

For example Toyota is using Pro/ENGINEER and Windchill to design all of their power trains. They now have Arbortext in the services organization throughout the dealerships in the United States. We're going to be able to publish, to service manuals or HTML pages, changes to the power train so that they can provide the servicing content information to their service engineers in hours after they make a design change versus what would have been in the past days, weeks or even months, and it would have been a manual process. So we are really taking a look at managing the content and then distributing it out to those that need it in a much more easy and efficient manner.

Very thorough answer, guys. Let's take the next question.

Our next question comes from Yun Kim, A.G. Edwards.

Thank you. Neil, quickly, can you talk a little bit more about what is going on with the financial review in Asia Pac? Can you tell us if this review needs to be completed for you to file the 10K or are you able to file the 10K when reviews are completed?

Yun, I can't comment too much more on what we are doing other than what I have already said, but it is our expectation at this point that the review will be complete before we file our 10K. I think we are going to want to complete the review prior to filing the 10K as, I think, anybody would want to do that. As I said the items we found so far, while we're not happy with them, they haven't been material and it is our hope that that is where we will end up overall when we are complete. But we're going to take the month of November to do a little bit more work and satisfy ourselves that we are in good shape.

Okay. Thanks, Neil. At a high level can you talk about the pipeline for large deals? The number of seven figure deals is down a bit this year versus last year. It seems like you should be signing more seven figure deals with your previous product strategy and then with the Arbortext acquisition you definitely have more products to sell. What trend do you see out there that's keeping you guys from signing bigger deals?

Well, actually, our big deal revenue is up substantially quarter over quarter and it's also up year over year. I didn't go back and take a look at the full year information, so I am not really sure what you're referring to. But we had a tremendous quarter in terms of big deals in the fourth quarter. We had $25 million of revenue out of them, which is the highest number, I think, at least since I have been here.

Just an observation, though, we don't just look for big deals any more either. We have this adoption roadmap we talked about in the past. It's really a prescriptive approach to selling one piece at a time and building up a sophisticated solution over a series of transactions over a period of time. So I think the big deals should be viewed in light of the fact that we used to chase big deals, if not exclusively, it was a big focus, and now they're a little bit more incidental to the mainstream business, which is just building sustainable ongoing relationships with the customers.

Okay, great, thank you.

Yun, just to comment further, maybe I see what you are referring to. The number of big deals decreased year over year, the dollar value of big deals increased by in excess of 10% from $77 million to $85 million.

I would think, if anything, those numbers will go up in the future.

Thank you.

Our next question comes from Philip Alling of Bear Stearns.

Thanks very much. Could you guys give us a sense really what the historical split was between the Arbortext Editor product and the publishing engine that you're now going to be reporting in different segments there just so we get a sense of the relative size historically of those two parts of the product that you there acquired from Arbortext?

Sure Philip. It's roughly one quarter/three quarters in terms of the split.

Would you say -- hopefully this is still part of my first question because I do have one follow-up. Is there any difference in terms of the comparative growth rates for those two products?

I am not sure that we expect there will be any difference in growth rates, no.

And just a follow-up question. Wanted to get a better understanding of looking at the VAR channel revenue number there, wanting to sort of reconcile that with the growth that you have seen in the sales of your lower price Pro/E Wildfire solution, how do we -- you did have declines in the VAR channel revenue in the quarter. Could you just help us better understand sort of what the dynamics are there given sort of the growth you have seen in the lower price Pro/E Wildfire solution?

The answer to your question, if I understand it correctly, is our low end Pro/ENGINEER package, which sells for $5,000, is sold by both our direct sales force and our channel. So the answer is for this year we saw tremendous growth in our low end Pro/ENGINEER Wildfire package at $5,000. Most of that growth in fiscal year 2005 came through our direct sales force as opposed to our channel.

Okay, great. Thank you very much.

[ OPERATOR INSTRUCTIONS ] Our next question comes from Brad Holtz, Cyon Research Corporation.

Good morning. The license revenue from existing customers in both MCAD and in Windchill, can you describe either what those numbers are or whether they have increased or decreased or remained stable.

Hi Brad, it's Meredith. We're actually not reporting that number anymore. With the acquisition of Arbortext and the movement of the Pro/INTRALINK revenue, it just got a little bit too [INAUDIBLE] to keep our arms around so we won't be reporting that number anymore. But I think if you look at the most recent history of both of those numbers they have actually been pretty stable. You know, Brad, that our strategy has really been around expanding our relationships with existing customers through this adoption roadmap and so as a result we have seen a lot of repeat business from our customers. We think that is great business and we are going to continue to do that.

So you expect new business from new customers to remain in the historic 10% to 12% range?

Yes, I mean, and the one caveat that I would say with that is that now that we have added Arbortext and we have got a wealth of new customers, I don't know if you noticed in the company new customer number, this quarter, there was a huge jump, and that was because we added one-time non-overlapping Arbortext customers into that number. It was actually somewhere over 700 customers that we got through the acquisition of Arbortext that we didn't already have. That is the one caveat that I would say as we go and spread our wings into those new marketplaces, with both Arbortext Solutions and Windchill, I would expect to see kind of some new customer acquisition there.

Very good. Thank you.

Thank you. Our next question comes from Tim Fox of Deutsche Bank.

Thanks, just a follow-up. Are you still sticking to your longer-term plan of 20% operating margins within a couple years?

I think our longer-term plan, Tim, was -- we talked about a couple things. We talked about $1 billion in revenue and we talked about 20% operating margins; so let's call that $200 million in operating income. And I think what we are looking at today is that is still our plan and we feel very confident in our ability to attain it. If I was a betting man today as opposed to a year ago, probably I would say that we would have a little bit more in the way of growth and perhaps a little bit less in the way of operating margin percentage in terms of how we get there, but not materially different from the plan that we laid out for you.

Thank you. That's helpful.

Do we have one more question or are we done? Let me wrap up and thank everybody this morning. We really feel good about 2005. It was a real good return to growth and a building upon the profitability that we had in '04, and we think '06 is going to be an even better year. We are excited, our customers are excited, the employees are excited, the competitors are nervous and I think it's going to be a great year. We will talk to you in January. Thanks.

Thank you for participating in today's call and have a good day. You may now disconnect at this time.