PTC Inc (PTC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to PTC's Second Quarter Fiscal 2006 Results Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time.

[OPERATOR INSTRUCTIONS]

As a reminder, ladies and gentlemen this conference is being recorded. I'd 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, Neil Moses, our EVP and Chief Financial Officer, and Jim Heppelmann, our EVP and Chief Product Officer. In addition Barry Cohen, Executive Vice President of Strategic Services and Partners, are here to participate in the Q&A.

Before we get started, I would like to remind everyone that during the course of the conference call we will make projections and other forward-looking statements regarding future financial performance, business trends and other future events. We caution you that such statements are only predictions and that actual results might differ materially from the results projected in these statements. We refer you to the risks detailed in the Company's 2005 annual report and Form 10-K, our Q1 2006 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 4:00 PM Eastern -- 5 PM Eastern Monday, May 1st at 203-369-1121. Additionally this conference call is being webcast, and a replay will be available through our website at ptc.com until Monday, at 5 PM. I would like to direct your attention to our investor website, where you will find a presentation on our acquisition of Mathsoft, which Dick and Jim will refer to you in their remarks. There is also a document, with Q2 financial and operating metrics which we will discuss on this call. The address for that is www.ptc.com/investor.

I am going to take a moment for a commercial message. We're planning a worldwide media and analyst event that will be held in conjunction with the PTC User conference in Dallas, Texas on Monday and Tuesday June 5th and June 6th. And we sent information on this to our investor e-mail list. If you have not received the information, but are interested in attending give me a call.

Okay. Back to the earnings call. 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 we have got a lot to talk about it, let us get going with Dick.

Okay. Meredith, Thank you. Good morning, everyone, and thank you for joining us on our Q2 earnings call. As you can see from our announcement this morning, we have a lot of great use to discuss today. We delivered a major piece of our product integration for the Arbortext acquisition. We also announce the new acquisition Mathsoft, and of course we announced our Q2 financial results.

I will start with the quarter, and then move on to the other news. Half way through fiscal 2006, we continue to have a high degree of confidence in our business. We grew 14% year-over-year in the second quarter and the first half of the year. This has been fueled by continued growth across our product categories and lines of business. In Q2 we delivered the best Enterprise solutions quarter ever. The growth in this revenue category continues to outpace the broader market growth rate.

We're pleased with both organic Windchill revenue and revenue from our Arbortext solutions. Additionally we had our best services revenue quarter ever, and services delivery margin increase significantly. Our reseller channel continues to perform well, particularly in North America and Europe. We are aggressively building our reseller network in Asia Pacific and we're beginning to see improved results in this region as well. This important piece of our distribution model helps to improve our revenue opportunities as well as our sales profitability. As a result, direct sale productivity continues to climb. Finally, we close our first deal under our new agreement with IBM during the quarter. We're still ramping this relationship, but this first one is an important milestone for PTC and IBM.

I would like to turn to the acquisition of Mathsoft now. Jim will discuss details on the strategic rationale for the acquisition in few minutes, but I would like to highlight a few important aspects of this acquisition. Mathsoft makes engineering calculations software. In fact, Mathsoft makes the most widely recognized and use solution for engineering calculations, Mathcad. Mathcad is used by over 250,000 professional users in key verticals such as aerospace and defense, electronics, and high-tech, discrete manufacturing, architecture, engineering and construction and process manufacturing. It's also used in more than 2000 universities around the world.

We are purchasing Math software about $63 million. This acquisition will help us achieve our longer-term goals of reaching $1 billion in revenue and 200 million in non-GAAP operating income by 2008. Mathsoft have about $20 million of annual revenue and its growing 15% or 20% per year. The acquisition will be slightly dilutive to operating margin and EPS in the back half of fiscal 2006, but we expected to be accretive in fiscal 2007. We expect Mathsoft to add value to PTC strategically as well.

It's a natural fit for our product development system. It will help to extent and differentiate our capabilities in CAD/CAM and CAE. It will help to expand our addressable market with new verticals such as architecture, engineering and construction, and it also improve our capabilities and high-volume, low end marketing and sales opportunities. Finally, Mathsoft will enhance its value to the acquisitions as we leverage our global sales and support infrastructure and provide a tight integration with our solutions for customers.

I will now turn things over to Jim, to describe the acquisition in more detail.

All right. Thanks, Dick. For those of you who are following along in the presentation on our website, I am picking up on slide five. So what I want to do is explain sort of what is Mathcad and how does it fit into PTC strategy and why is that important.

And starting on slide five here. It's sort of interesting, if you just pick up with the definition of word engineering. You known as for a long time as an engineering company, if you look at what is engineering really, it's the application of scientific and mathematical principles to practical end such design manufacture, operation etcetera of economical structures, machines, processes and systems.

So at the front end of the engineering process there is a strong need to analyze design opportunities using scientific and mathematical principles. That's what you learned in engineering school, that's what Mathcad does. So we see a great opportunity to use Mathcad to help company work to the science and math of the great design, drive that into Pro/ENGINEER, where you start to see the practical ends such as design and manufacture, and then we use that information in the Arbortext world to help with the operation, support, installation etcetera of economical and efficient structures, machines, processes and systems.

So today no CAD vendor has a great way to drive that upfront analytical math process, that ultimately yields the critical parameters that would drive the Parametric design. We at PTC with this acquisition, really are now are in a unique spot with the concept we call predictive engineering, rather than just analyze the design after the fact, why not predict using Mathcad what the critical parameter should be an optimum design? So anyway the best way to capture full design intent is to understand both the geometry and the mathematics that led to that geometry. Pro/ENGINEER is a great way to capture the geometry. Mathcad is the world's best way to produce and then document the mathematics that drove that geometry.

If you look at coat here from Daratech from Monica Schnitger, you can see that company are beginning to realized that engineering calculations are really a critical type of institutional knowledge and corporate IP, but it's a type that's not been well-managed in many, many companies. If you flip to slide six, there are many opportunities for value associated with this acquisition. Now let's tick through them at a high level. If a Company could better capture and manage their IP, then it would not be at risk. If you perform a calculation in a calculator, you turn off the calculator and it's a lost. If you put that calculator -- or calculation in a paper notebook, it's locked away in a paper notebook. It's very difficult to share, find or reuse etcetera, it's lost to the corporation.

So by using a tool that allows you to perform the calculation efficiently and then document it in perpetuity, and interrelate it to the design and the rest documentation, you get a very powerful situation. It would help you avoid doing so many iterations in the design rather than take an initial guess and iterate around, you can now predict the optimum value and use backend CAE tools, traditional CAE tools, to validate that value as opposed to explore different values.

This will help for company who are dealing within aging engineering workforce and are losing employees either due to retirement and attrition, but want to make sure that the institutional knowledge of those employees remains behind. [It will] help companies who are globalizing. As company is globalize, of course they bring many new faces into their product development process. They want to assure that these new people have access to and can reuse their corporate IP and institutional knowledge, as perhaps was done before the company globalized. So again Mathcad is a critical way to ensure that best practices can be reused as new people enter the process.

And the finally, it's very important for regulatory compliance because in many cases you have to provide not just the geometry, but actually the calculations that led to that in a AEC setting or in a FAA type of setting or so forth. So many opportunities for value. I want kind of take you through a bit of time check and this acquisition is all about.

So on slide seven, if you start with the engineering design problem you can quickly go back to a series of handbooks that you might have own since you went through engineering school, that will explain all the different applied mathematics for different aspect of this process. This again is what you learn in engineering school. But now you need to find the read equations draw them out, apply them to your problem and solve all of these mathematical equations.

A lot of people would turn to excel. It's a very common tool. Everybody knows how to put an equation into Excel. Excel has turned out as severe and poor engineering tool. I mean, starting with the first problem, it doesn't understand units of measure. Second one is it doesn't understand a lot of types of math that are used frequently in engineering like calculus. So when people create an Excel spreadsheet you end up with a difficult to communicate tool, a tool that's difficult to debug. It may produce erroneous errors. It's very, very difficult to understand the engineering intent inside and Excel spreadsheet.

So if you flip to slide eight, Mathcad is similar in some senses to Excel. But it's all about mathematics, particularly engineering in design mathematics. So if you look at the right half of this slide, this is the corresponding Mathcad sheet, if you will. So instead of looking like cells and cell mathematics, it looks like the type of mathematics you learn in engineering school and that you're picking out of your engineering handbooks as well as your proprietary corporate knowledge.

It allows you to retrieve previous calculations, put in new parameters, watched the calculations recalculate live, it understands unit of measures. So you can mix imperial and metric units, its effective way to not just perform the calculations but to document it. The documentation comes automatically out of this calculation. Its human readable, easy to follow and provides full traceability.

But one of very interesting things about Mathcad, is it uses in XML format to capture this information and of course, Arbortext uses an XML format. So when teaching Windchill, how to manage all of this XML content from Arbortext, we've already put most of the plumbing in place to allow Windchill to manage all this XML content from Mathcad that blended them together, you know, in the various forms of documentation.

Switching to slide nine, there are many touch points from Mathsoft products in the PTC products. Mathcad for example has a very interesting value proposition around Pro/ENGINEER. This idea of predictive engineering use these Mathcad calculation to drive optimal value is of critical parameters in a parametric CAD model. Conversely you can use Mathcad to perform a lot of peripheral calculations that you would do after the fact under the design. So it's a bidirectional link back and forth, and together the combination Pro/ENGINEER and Mathcad provides full documentation of the intellectual property of a design.

There is a great CAE story here. I think some people, some customers, some analysts have felt that PTC hasn't had a lot of religion around CAE, so to speak. But Mathcad is actually a CAE tool at the end of the day. But it's a very unique CAE tool that drives designs as opposed to analyzes them after the fact. Both kinds are useful, but now we have Mathcad on the front end of the design and Pro/MECHANICA in the backend, together that's a more complete broad footprint than really any other CAD/CAM/CAE vendor has today.

There is a great story about our Windchill. As I mentioned the whole XML basis for Mathcad, fits very nicely into Windchill and from there very nicely into Arbortext. So we can publish a document that blends text, calculations and graphics and is dynamically published from components to match the given product to product variations. It's a very, very powerful story.

On slide 10, you can see that like Mathcad like Arbortext, isn't restricted purely to discrete manufacturing. That's where the biggest chunk of the business opportunity is, but there are many other interesting adjacent opportunities that we can take Mathcad and Windchill and Arbortext to provide a complete solution. So in the areas of civil engineering, oil and gas, power generation, process, and again in government, Mathcad has many, many customers, and this is a great opportunity for PTC to follow with Windchill and with Arbortext.

So on slide 11, you can see that we think this is a pretty unique offering, this concept of predictive engineering. It really helps companies who are today putting company institutional knowledge at risk. Mathsoft is a revolutionary new way to both create and document this knowledge. For PTC this will broaden and, in fact, differentiate our solution as compared to our competitors. This brings a lot of value to our product development system story with so many different touch points.

In turn for Mathsoft customers PTC brings a lot of value. We bring a much stronger global presence that will help customers and the distribution channel. We're committed to serving all of the industries and to remain open and working with all of the customers in different application environments. So I want to switch gears to little bit and talk about the other piece of big news, quickly, which is the release of our Windchill to Arbortext integration, which we also announced this morning, this software will start shipping on Friday of this week.

So on slide 13, just to provide some background, you know, this is the first truly integrated or better yet integral solutions for technical publications. It helps people to create, manage, and published all of this documentation in a way that very much aligns with what's going on in product development. If you look at manufacturing companies today, they all produce technical publications. Many manufacturing companies are prolific publishers of technical information. But they have a very, very bad process. In fact we sometimes say that this is the technological backwaters of an IT environment within our manufacturing enterprise.

So today's process, you know, it takes to long and costs too much. It produces poor quality information that either leaves customers disappointed or leaves liability issues on the table. With this new integration, our products development system really fundamentally changes the way that technical publications are produced. It provides a lot of value in terms of reducing the costs, reducing the time, improving the quality, improving customer satisfaction of documentation coming out of the product development process.

So switching to slide 14, we mentioned that this is bigger than PLM, that there is actually an enterprise content management or ECM opportunity here for PTC. I want to comment a little more on that. You know, we've decided to focus on a certain type of enterprise content management, on mission critical business information that's componentized and structured meaning authored is XML components instead of big fat dumb Word documents.

This information is typically created not by one user but by multiple users, perhaps, in a value chain. So blending the right mix of components together, being able to manage the documentation at the component level, and understanding if you change a paragraph that might affect 10 different documents. And so those 10 documents need to be republished. That's what dynamic publishing is all about, is grab the right recipe of components for the situation at hand and dynamically produce a document in different types of media, a web documents, a PDF document, other types of formats, but tune it for the different audiences, you know, is it a user or is it a mechanic, and then tune it to match the exact product or the process or the service that's relevant to the situation at hand.

So this is a very powerful concept, described this way it absolutely applies in manufacturing. But described this way it applies much broader than manufacturing as well. This is not unlike the use in a pharmaceutical environment, unlike the use in a financial services environment and so forth. So there is a great opportunity for us.

If you turn to slide 15. You know, I think, probably, many of you've seen this schematic before. But it, sort of, talks about our create -- collaborate control and communicate strategy across the top, sort of, chronologically. We today have three of the worlds best creation tools, Arbortext editor for creating structured documentation in an SGML or XML setting. Mathcad, which we just announced today for creating all of that intellectual property and institutional knowledge around engineering calculations, and then Pro/ENGINEER for creating 2D and 3D design information.

All of that information is now managed in our Windchill software. I should comment Mathcad soon will be, Arbortext and Pro/ENGINEER are, as well as many other authoring tools. In our Windchill software we can blend together the management of engineering data, calculations, text and correlate it all back to something like a common product structure. From that the Arbortext Publishing engine can generate all of these different forms and formats of information that can be rich and highly interactive for the end user.

So this is a powerful solution and you can see that Mathcad slots in their right between Pro/ENGINEER and Arbortext. Mathcad will have an important touch point with Pro/ENGINEER and an important touch point with Windchill. And through Windchill an important touch point with the Arbortext publishing engine. So it's a very exciting integration. On slide 16 the integration, just to recap the key capabilities. It's really two things, number one, integrate Arbortext editor on the front-end, so all of this XML information is created by Arbortext can end up in the Windchill repository where people can manage the content and the processes and collaborate and so forth on common information structures.

And then the second piece is the backend publishing engines, so that the Arbortext publishing engine can extract bits and pieces of XML graphics and soon Mathcad documentation to produce these dynamic publications. So this is the capability that we're shipping on Friday. We're the first company on the planet, who has a complete solution from offering to management to publishing of technical information. It's very exciting for our customers.

The reason it's exciting on slide 17, is there are many significant business benefits. I won't go through each one, but basically this is a much more efficient process. It costs far less in this process to produce information. You can produce the information much faster in this process and you can make the information accurate, which again makes your customers much happier. So this is all about significant improvements in cost, time-to-market, and quality of your technical information.

On slide 18, we've been working with a number of customers on this. Here is the few quotes from a particular customer at Sandia National Laboratories. This is [SS21] program, I believe is dismantling Russian nuclear ICBM missiles. Of course you need to have some pretty good documentation, if you're going to take apart nuclear warheads. They're all configured a little bit differently, so you'd really like your documentation to be configured pretty accurately. So this has been an early adopter they were asking us for this capability for quite sometime, and now with this integration we have the solution they're looking for. We've work with customers and generally speaking there's a great degree of excitement around this Arbortext integration.

So that concludes my comments. I'm going to turn it over to Neil for a financial discussion.

All right. Thanks, Jim and good morning everyone. I feel like I'm back -- we're back to the play by play now in Q2 after Jim's color commentary. As you can see from our results in Q2, we did have a great second quarter. It was our eighth consecutive quarter of revenue in earnings growth. So I'll take a few minutes to add some color on our results. And then, we'll talk about our outlook and then, we'll open up the call for questions.

Total revenue for second quarter was 200 million, year-over-year growth was 14%, and if we look by line of business, our licensing revenue grew 4% year-over-year to 55 million. And for the first half of 2006, license revenue has grown 14% over the same period last year. Our consulting and training service revenue was very strong it grew 44% year-over-year to 56 million. And we had improved delivery margins as well at 16%. So that was nice to see.

And for the first half of 2006, our services revenue has growing 32%, and that growth is primarily attributable to growth in sales of our training offerings and also the growth in high-value process consulting services. And our maintenance revenue in the second quarter grew 6% year-over-year to 89 million. Maintenance revenue also grew 6% in the first half, reflecting consistent growth in this line of business.

All right, by geography, North America delivered 24% year-over-year growth to 78 million. And this is our fifth consecutive quarter of double-digit growth in this region. And North America was strong across both desktop and enterprise solutions. And we had 6 of our top 10 deals from North America this quarter. Second quarter revenue in Europe grew 13% year-over-year to 67 million. And at constant currency, European revenue actually grew 23%. And that growth was primarily attributable to strong performance in enterprise solutions. Two of our top 10 deals came from Europe this quarter.

And second quarter Asia-Pacific revenue grew 3% year-over-year to 55 million. Although at constant currency, Asia-Pac revenue grew 9% year-over-year. Two of our top 10 deals were in Asia-Pacific this quarter. And the Pacific Rim continued to perform very well, delivering 22% year-over-year growth and strong sales across all lines of business. Now you may remember that our performance in Japan was weak in the first quarter. I'm pleased to report that we recovered sequentially in the second quarter, delivering 39% growth. However, we still have some work to do in Japan. Year-over-year, our revenue in Japan was down 11% this quarter, but was flat on a constant currency basis.

In our reseller channel, our second quarter revenue grew -- was 39 million, up 13% year-over-year due to continued channel growth in Europe and North America. Our reseller channel represented about 20% of total PTC revenue during the quarter. And our performance in the channel is evidence of the success we have had in the SMB market. Okay. Let's move on to our product categories. Second quarter desktop solutions revenue was up 6% year-over-year to 132 million, and this was primarily attributable to strong services growth.

Desktop solutions license revenue was flat year-over-year at 35 million, but for the first six months of this year, this business grew5%, principally due to strong performance in the first quarter. Our desktop solutions consulting and training service revenue for the quarter was up 26% to 24 million. And in the desktop business, much of our revenue growth was from increased sales of training services and training products. And our desktop maintenance revenue was up 3% year-over-year to 73 million.

Okay. Second quarter enterprise solutions revenue was up 33% year-over-year to 68 million. As Dick mentioned earlier, this was the best quarter for enterprise solutions revenue in PTC's history. The revenue contribution from this product category represented 34% of total revenue for both the second quarter and the year-to-date, up from 30% last year. We're very excited about the growth trajectory of this business and believe it reflects both our success in delivering leading products as well as a wider adoption of PLM solutions in the marketplace.

Enterprise solutions license revenue was 20 million, up 10%year-over-year. We sold over 17,000 new seats of Windchill software this quarter, which is higher than our quarterly average. And for the first half of the year, enterprise solutions license revenue was up 30%. Enterprise solutions consulting and training services revenue grew 62% year-over-year to 32.5 million, reflecting continued success in this line of business. And finally, enterprise solutions maintenance revenue grew 22% year-over-year to 16 million, reflecting strong adoption and implementation success.

All right, now I'll move on to our expenses. Our second quarter non-GAAP operating expenses were 173 million, in line with our guidance. And as we mentioned in our first quarter conference call, we planned on making modest investments in the first half of the year to help drive accelerated revenue growth. We delivered non-GAAP operating margins of 13.4% in the second quarter. And we expect these investments to drive accelerated margin growth as well in the second half of this year.

Our second quarter expenses for stock-based compensation and intangible asset amortization were 9.5 million and 2.2million respectively, both of which were in line with our guidance. Moving onto the balance sheet, our cash balance ended at 224 million, up considerably from 167 million in the first quarter. Now, the second and third quarters are typically our stronger cash flow quarters due to collections on seasonal maintenance contracts, but in addition, our DSOs in the second quarter were 67 days, down from 73 days last quarter and 71 days in the same period last year.

And finally on the balance sheet, deferred revenue was 233 million, up from 196 million last quarter. This increase is a result of seasonality in deferred revenue from annual maintenance contracts. But deferred revenue is also up year-over-year as well, reflecting continued success in our maintenance business. Okay. Now, I'll turn to our outlook. We have some exciting new initiatives we've been investing in, such as our IBM relationship and some new initiatives that we plan to invest in, such as the Mathsoft acquisition.

These initiatives will help us grow revenue in the second half of fiscal year '06 and beyond. At the same time, our operating margin goals are very important to us. And therefore, we have decided to scale back our spending in other areas, while investing in these new initiatives. For example, we will accelerate some planned consolidation activity from past acquisitions to partially offset our new expense run rate as a result of the Mathsoft acquisition. We plan to take these actions immediately and expect to record a restructuring charge of approximately $5 million in the third quarter of 2006.

Our outlook for organic growth and revenue from previous acquisitions remains strong. And with the acquisition of Mathsoft, we are raising our revenue guidance for the full year to 810 million to 820 million. This increased guidance includes the required deferred revenue write-down associated with the acquisition of Mathsoft. Our guidance for the third quarter of fiscal 2006 is as follows; Revenue of 205 to 210 million, which represents 14% to 16% year-over-year growth. On a GAAP basis, third quarter total costs and expenses are expected to be between 195 and 200 million, and earnings per share are expected to be between $0.02 and $0.07.

We expect non-GAAP operating costs of 175 million to 180 million. And we anticipate earnings per share to be on a non-GAAP basis to be between $0.20 and $0.25. The non-GAAP operating costs exclude the following estimated costs and expenses in the third quarter. First, approximately 10 million of expense related to stock-based compensation. Second, approximately 3 million of acquisition-related amortization expenses, about 1 million of which is related to the acquisition of Mathsoft. Third, about 2 million for a write-off of in-process R&D, which is also associated with the acquisition of Mathsoft. And finally 5 million due to the restructuring charge that I mentioned earlier.

With respect to other below-the-line items, we expect other income to be insignificant for the third quarter, particularly since we are paying cash for our acquisition of Mathsoft and are not drawing down any cash from our credit facility. We anticipate taxes to be approximately 14 million in the second half of the year. And we expect diluted weighted average shares outstanding to be approximately 115 million for the third quarter and full year. With respect to the balance sheet, we expect our cash balance to be down next quarter due to the acquisition we announced today. However, we anticipate closing the fiscal year with over 200 million in cash, even after having funded three acquisitions this year.

In summary, we're pleased with our progress to date and are confident in our outlook for the second half of 2006. In addition, we remain committed to our longer-term goals of $1 billion in revenue and 200 million in non-GAAP operating margin by 2008. This would represent a doubling of our operating margins in three years.

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

Great. Thanks, Neil. So I think we are ready for the Q&A. Just remember, one question, one follow-up. And if you have got more questions, you can dial back in queue to ask the next question. Thanks.

Thank you. And at this time, we'll begin the question-and-answer session.

[OPERATOR INSTRUCTIONS]

We have our first question coming from Philip Alling from Bear Stearns.

Thanks very much. Neil, just wanted to follow up the comment you made with respect to the deferred revenue write-down on the Mathsoft acquisition. Could you just give us little more specifics about what you think that may be?

The deferred revenue write-down will be between $1 million and $2 million this year. And there will be a little bit in addition next year, probably a little bit more than that.

Right. Okay. I appreciate that. As a follow-up here, just wanting to get a better sense with respect to the decline that you saw in the consulting service gross margins. What should the investors' expectations be? I mean you certainly did have material growth in terms of training revenue there. And if that trend continues, should we see -- expect the sort of moderation on the consulting services margins going forward?

Well, I think the issue is our service business performed very well from an operating margin perspective. As I said, our service margins were about 16%, which is the best performance we have had in a number of quarters, maybe the best performance we've probably had in the last three years. But our services business as a whole grew quite a bit as you saw in the second quarter. And that obviously has an impact on the Company overall gross margins.

Got you. And just a final question on the license growth expectations for -- in the enterprises solutions, certainly for the first half, you know, that dropped materially, though, which you showed in the quarter was down from the prior quarter. So what should investor expectations be really with respect to license growth performance in enterprise going forward?

When we get to that level of detail it's kind of tough to give guidance around Enterprise solutions license revenue growth. We're pleased with the 30% growth we saw in the first half of the year. I think we cautioned folks that first quarter was way above the expectations and we didn't expect to repeat that.

But certainly, we have an expectation that our Enterprise solutions license revenue business is going to grow significantly faster than PTC is growing, which is roughly 15% year-over- year and we would like to see a number probably in the -- certainly in the 20 or 30% range, and so 30% feels pretty good for the first half of the year.

I take myself circle back and get back in the queue.

Thank you. Next question please.

We do have a next question coming from Richard Davis from Needham & Company.

Hey thanks. When you're thinking about - now that you have the combined Arbortext and then unified suite available, do you feel there been any and your guidance is stuff like that but is there any kind of any sense that there was some pent-up demand of people saying hi great lock and load put these things together and we will step up to the plate and buy the product?

Richard this is Jim Heppelmann. I think that there is definitely pent-up demand for a whole better way to do technical publications. I think that the solution we are bringing in the market is something that snuck up on people. Including many of the people in the analyst community, maybe didn't understand day one what was possible if you combine Pro/E Windchill and Arbortext, now Mathcad.

So I think there is a bit of an education we need to go do to show people what's possible and then the reaction really is pretty unbelievable. So I think the demanded is a little cultivation but it's out there. It just needs a little cultivation and people get pretty excited about it.

Got it. Then the follow-up would be, they will be acquired whenever TIFF for T-I-F-F and they have Adobe Acrobat 3D. Do you view them as a partner or a competitor, and do you expect that to change at any time in the next year or so?

Yes I mean we have used them as a partner buy the way, we resell inside of our productive technologies some Adobe technology today. But yes we expect that to change in a very positive way. At PTC, our mission is to become the world's most prolific producer of 3D PDF data. So they have a great format we love it we have a great engine for producing it and production level of quality and quantities. I'm hoping that we will see a beautiful relationship blossomed there.

Got it. Okay, thank you very much.

Here Richard maybe there's another comment on your first question in terms of pent-up demand. I have been on the field lot this quarter and I do think here is a lot of pent-up demand. The manufacturing companies deliver that physical product and the technical documentation that supports it, it tells you how to use it or service it or sell it or whatever it might be.

And the Sandia was a good example -- all of the nuclear weapons complexes, which use Pro/ENGINEER and a lot of them which use Windchill. I was at a meeting with all of them a month ago out in California. They are all going to watch what happens with Sandia, and this is true with a whole bunch of our customers. The kind of market issue for products is really a problem with respect to technical documentation it's always a lag.

So there are a whole bunch of different sort of ROIs around this consolidated system approach to technology pub story. I think there's a lot of pent-up demand. And as Jim was saying this is the first time one company has ever provided a complete solution, with the graphics, text, a vault, which Windchill represents as well as the publication part on the backend. And I just think you're going to see some real upside in the next couple of years really beginning next quarter, this quarter in Q3.

And the delivery finally here which was pretty quick, cause we just acquired in August, of the integration between Windchill and Arbortext. It's really important with respect to proving it to customers that the solution works. So I am going to tell you some stories in July, which are going to happen this quarter about how we have re-framed and reshaped some decision criteria, and some pretty nice deals that we're winning and some that we have actually already won, where technical documentation became a real driver for this decision above and beyond traditional CAD plus vaulting, workflow, and configuration management.

That's good, that's helpful, thank you.

Okay. Next question please?

Thank you. We do have our next question coming from Sasa Zorovic from Oppenheimer.

Yes. Thank you. My first question would be -- what would be the organic growth rate in licenses there is particularly, and also services, if you were to take Arbortext so the just organic growth rates here in the quarter?

Sasa, we don't disclose that level of detail. We have the metrics on the website, and you can kind of refer to them there, but we do not show an organic acquisition growth rate. So the information we provide is basically what is on there.

Could you tell us a little bit more about a particular weakness in Japan? Is the Toyota included in that?

No. Toyota is doing great. They continue to be our No. 1 revenue producing customer. We're expanding the opportunities with Toyota and with deployment there it is really good. I think that in Japan, really, we're just lagging a little bit. If you look at the sort of revenue that Neil was describing in the US in terms of our revenue growth the last four quarters and so forth, and Europe as well, I think there is a little bit of a lag Sasa, between the message they get start around our whole product development system versus the point Solutions lets say of Pro/ENGINEER or Windchill for collaboration project, PDM etcetera.

I think Japan is been going through, in the last couple of quarters, a little bit of a transition where we were selling Pro/ENGINEER and Windchill more as the old sort of the point solutions that were integrated, but they're just a little bit behind in the power of that story around the combination around the products development system. So I think you're going to see some uptick in the back half of the year. And we also I would say we had a compounded maybe the slowness of the message and in terms of getting there, and that's pretty typical I think for all software companies.

With some a little bit of sales execution, we've been searching for a Japanese national and haven't had one that that we really wanted in terms of the leadership role there I think we're getting closer to that, so we've had sort of an American and actually a French person doing that I think it will be helpful for us from a sales point. So that conclude and get a Japanese national as the true leader for that sales organization.

Hey, Sasa. It's Neil. Let me come back to your first question and just give you maybe some directional comments on what you asked about license revenue growth organically. So our business organically has grown for the last six quarters pretty consistently overall between 7% and 8%. Okay. Our services business has grown the fastest, that business has grown kind of in the mid-teens during that period of time.

Our maintenance business has grown between 4% and 5% between that period of time, if you do the math, our license business is basically growing kind of at a high single-digit growth rate organically. And has - and that is been, you know, relatively consistent if you look kind of a trailing12-month view kind of for the last six quarters.

Thank you.

Yes.

Okay. Next question please?

Thank you. We do have our next question coming from Jay Vleeschhouwer from Merrill Lynch.

Thanks. Good morning. Jim, I would like to start with your description of the new integrated solution now which you have Mathsoft and Arbortext and Windchill. And the question really has to do with the addressable market for all of that together. When you think about the Windchill base, for instance to date the average customer anyway has less than couple of hundred seats.

The average for [E] customers has fewer than 10 seats. So when you think about the number of customers that have the - if the larger number of users or process scope that could do this, how much of the business of the market do you think is there for you? And how much of the customer base is [inaudible] let say, in a way that you mean in terms of this new sort of applications?

Well, again there is two opportunities, I think for growth, one is with the inner traditional pro/E base and the other is, in traditional discrete manufacturing market. And the other opportunity for growth is some of these adjacent markets where both Arbortext and Mathsoft have a foot in the door. So I think we still feel like within our pro-engineer base we have a lot of runway left. There is - I do not know, probably somewhere around 2000 customers. We're in the middle of the pro-intralink transition onto the Windchill architecture. That is going very well by the way. Customers are pleased with that. The conversions are going well. The upsell opportunities are materializing. It is part of the strength in our business that your seeing.

So I think, within the pro/E base there is plenty more runway. We're also doing pretty well, in accounts like Airbus and Boeing, for example, whether there is no pro/E. We are selling a lot of Windchill. So in manufacturing above and beyond the pro/E base there is good opportunity. And then, you know, what is interesting about Windchill, Arbortext and Mathsoft is they are not purely locked into the discrete manufacturing space like Pro/ENGINEER will tend to be. So that trio of products, [can team] together in various combinations and go watch the places where Pro/ENGINEER never would go. So there is a huge amount of opportunities there. And for us it is going to be the gets strategic around picking, which are the best targets, the most low hanging fruit, the most adjacent, the best product readiness and so forth.

Yes, it is various combinations. We can take Mathsoft and Windchill here. We can take Arbortext and Windchill there. We can take the whole suite into Boeing. There are lots of good opportunities and plenty of runway, for growth in our PLM business.

So that is kind of brings me to my next question, having to do with market coverage and that of course includes IBM. So IBM just disclosed for the first time what they're PLM business is pointed out in there - release last week it was about 6% of revenues and down in constant currency year-over-year. What is your interpretation of that decline in that business? Is there a market issue going on, at least as far as what they're seeing for the year-to-date and in terms of the PLM business? How much can IBM help you with this more encompassing scope of the business?

Yes. I will let others, comment here. We're all itching to get it on this one. You know, personally I think IBM needs a better partner and I think that is a little bit what is driving to relationship with PTC as IBM go, you know, IBM has largely been aligned with [Deso], and I think, that there is probably some strong linkage between the success of Deso in the PLM market and the success of IBM. I think it's one of the thing driving IBM to say, we should diversify a little bit, because some PLM vendors are probably doing a lot better than Deso. I think we have a lot of wind in our sails. IBM would like to join that and drive it even harder and be a beneficiary of it.

I think Jim said it pretty well. And I think we're really only one quarter into our deal with IBM. And I think it's driving in China two weeks ago. And visited with a lot of big accounts with them. There is a huge opportunity there. I think again, we've said pretty consistently, they have a long term relationship with the sell, which is important to them, and I think will continue to be important to them.

But, I think as Jim said they will probably want to get a little bit more diversified. They can't be happy, if their PLM business which is very important to IBM. They really believe it's the next big market space, and I just -- I think that they're not going to be too happy, if their revenue is declining there. So that represents an opportunity for us. We didn't really add our color to it, but we did that on our first deal with IBM, a company called CAE up in Canada, which we worked on that deal together. Since, sort of January. And got it closed in the quarter. It was a replacement of [metrics /DSO]. So it was a nice competitive replacement deal, which we worked on together and --

By the way the Arbortext board was very important there?

That helped to reframe the opportunity in terms of getting your technical documentation to market along with you products, more quickly. So I think -- and I think IBM also appreciates, as we sort of had an opportunity to work with them. The impact of this total solution around the technical documentation and the fact that it will drive more servers and infrastructure software and services. So I think you know we want to be patient here at the PTC side. We are respectful of their other relationships, but I do think that our business attempt is going to grow nicely over the next couple of years.

Maybe, I can just add a little more color. CAE makes flight simulators for large commercial jetliners. So as you might imagine, the flight simulator needs to be configured to map to the aircraft cockpit that it is trying to simulate. And of course, each airline tends to configure their cockpits differently and so far, and then there are many different airplanes from Airbus and Boeing, etcetera.

So they end up doing a fair amount of kind of engineer to order the flight simulator, which means, they need good CAD & PLM tools. But half the revenue comes from training and services and after market space on these flight simulators. So they need to configure a terrific amount of technical documentation and training materials and so the ability to have all this stuff meet in the middle around Windchill. So that given a configuration, of a flight simulator you know that mechanical design, the electronic design by the way the purchase order included some of our high-technology that we acquired in 2004. You know I reject, this is disagreed story and as Dick said, we were little bit able to reframe what's important. And they really saw the value in this in to go solution.

Okay. Next question, please.

Thank you. We do have our next question coming from Tim Fox from Deutsche Bank.

Thank you. Good morning. First question on Mathsoft that maybe for Jim. Mathsoft has been around for 20 odd years, 250,000 users. They got a pretty significant distribution network out there. And I think with Arbortext it was pretty clear, at least to us, where you could get the leverage by partnering and being part of PTC. I guess the question on Mathsoft is that given their proliferation in the market, can you just discuss, where you think the synergies come from on the revenue side and talk a little bit more about how you can leverage PTC in the market?

Yes. First of all, there is a tremendous amount of synergies here. So first of all, if you look at their revenue numbers, it is something like 75% North America, 20% Europe, 5% Asia approximately. So there is a huge distribution synergy in helping them become a global company as opposed to a mostly North America and then somewhat European company.

The second thing is I think we calculated there's about 1000 customers in common. So about 1000 of their customers are also Pro/ENGINEER customers. Keep in mind we have more than 20,000 active Pro/ENGINEER customers. So there's a huge amount of up-sell there. Mathsoft has been selling to companies irrespective of what CAD system they use and then again not just in discrete manufacturing companies they have been selling to CAE -- AEC companies sorry on and so forth. We have calculated that a company who uses Pro/ENGINEER or a similar 3D CAD system, probably needs 1.5 times as many Mathcad seats.

So Mathcad -- Mathsoft has been selling in a very different way than PTC. They have not traditionally driven big volume transactions at a top executive level like we do. So there's a huge opportunity for us to go in there into a site where they have few seeds and really proliferate the technology as a critical component of an overall product development system in a overall product development strategy. So there's lots of upside there. And hopefully I've given you just a few indications of it.

And another point about some of that too, is there is a big opportunity in our base -- we have these volume purchase agreements with our customers that go two or three years and they get renewed and there's always an opportunity in these renewals to go into the Boeings and Lockheed's and Toyotas of the world with new products. And as we sort of negotiate an extension of those agreements, it is pretty advantageous for us to have some of these new products to go in and talk to the customers about. So I think there is real big opportunity just alone inside the installed base.

And on the channel side, is that an indirect channel that they have or is it primarily direct and what are your plans for that integration going forward?

It is primarily direct. Yes.

It is a mix of both. They -- A few years back they were primarily indirect. More recently they have been developing a more important direct channel. So there is some amount of direct and indirect.

Okay. And then --

Just a store, Tim, as well. So it is just a little bit different for us and there's an opportunity there as well I think for us going forward maybe to take some of these smaller products with smaller volumes. We can run them through our channel, our traditional CAD channel, as they resell our channel and/or take advantage of the store opportunity.

Understood. That is helpful. And just my follow-up would be around the services in particularly in desktop, maybe Barry could talk a little bit about what is driving that particularly in this quarter up about 40% sequentially. Is that Pro/INTRALINK or is now Pro/INTRALINK pretty much in the enterprise solution bucket?

I think the most important thing to understand around like and something on the training business generally is, that what customers really care about the adoption and realize value, and that while we have the leading technology really in the world, it is not always and answering to customer about unleashing that power of that technology and we are doing a lot of training through our PTC university that helps users get more benefit out of this technology than they would normally think of getting.

So we're seeing a lot of uptick in our training business around teaching people how to use the technology in a way that fits in with their strategy like modular product architecture, that in order to compete in this world, the global world to have to be able to do things to your architecture of your product in order to create value so that you know how to work with your suppliers or with your customers. Or like Jim just talked about if you've got engineering to design, your product structure has to meet those requirements, and we are finding a lot of interest in our customer base to understand that to get benefit. And that's why we are seeing the uptick.

Okay. Thank you.

Thank you.

We have one more question.

Yes, one more question.

Yes. Our question comes from Yun Kim from AG Edwards.

Thank you. Actually more questions around Pro/INTRALINK. How did the product do in the March quarter versus prior quarters? Was there a little bit of falloff like the Enterprise license business or -- and then also just in general high level, where are we in the adoption cycle of Pro/INTRALINK within the CAD installed base, especially those installed base that is likely to buy Windchill products?

So let's again frame this so everybody is at the right place in the conversation. Yes, Pro/INTRALINK is a product we have had for a long time. But we unleashed a new generation of it based on Windchill last June when we released our Windchill 8.0 software which included Pro/INTRALINK 8.0. So there's sort of two questions that are relevant here. One is how is the transition to the new generation going? And the answer to that is pretty well. And the other question is how are new sales going? And the answer to that is pretty well too. So the business is pretty strong on both fronts.

And then I think there [inaudible] that Pro/INTRALINK is a [safe way] to introduce Windchill into a Pro/ENGINEER account. And what we are seeing is some customers are upgrading to Pro/INTRALINK 8.0, but saying if this works out well then PDMLink is around the corner. Other customers are actually saying, I already know that I'm going to move to PDMLink.

So let's do that in one step. So we have a model that works for customers regardless of their strategy and their willingness to move forward either in a stepwise fashion or kind of all at once. So we have seen an uptick actually in Pro/INTRALINK license revenue, we have seen an uptick in Pro/INTRALINK maintenance revenue as a result of this new strategy because they see that there is really a future for this product, where a couple of years ago the future of Pro/INTRALINK was questionable relative to Windchill really being seen as the future of our data management product.

Well the question is really, where are we in the adoption cycle? At what percent level of your installed base have Pro/INTRALINK? Where do we -- At which level can we start to expect that new Pro/INTRALINK installed base to start purchasing Windchill products and start seeing the acceleration?

Well, we are very early, Yun.

Okay.

We are nine months into the process since we launched it. We think it is a three year process. We have been saying that year two is probably going to be the bigger year for us. So I would say we are early. We do have some survey results that we have polled around the world, some customers. And generally speaking, what the survey results are telling us is that probably somewhere between 20% and 25% of our customers are interested in migrating either to Pro/INTRALINK 8.0 or Windchill PDMLink 8.0 over the course of the next several quarters. So --.

But there is no doubt that this is one of the factors that is driving that 33% growth in our enterprise business that Neil talked about thus far in the fiscal years.

Okay. And then Neil and Barry quick on overall services margin, really didn't improve sequentially from last quarter, even though you said the consulting operating margin improved a lot from last quarter. So help me understand again what kept the overall services margin from improving sequentially?

Yun, I am not sure, I understand your question, our services operating margins have improved from kind of a mid single-digit rate to a mid double-digit rate between -- from Q1 to Q2.

Okay, I will have to check my math again. Thanks.

Maybe we will take it offline.

Alright, okay.

Okay, well that's it again, thank you very much for time this morning. We are -- we feel really good about Q3, there's a lot of good momentum in the sales force, there's virtually no turnover in the sales force. The products are strong, services forecast is strong, and we look forward to doing a review in July. Thanks.

Thank you everybody, for joining the conference call today. Have a good day, you may disconnect your lines at this time.