PTC Inc (PTC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's first quarter fiscal year 2007 results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will follow at that time. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce Meredith Mendola, PTC's Vice President of Corporate Communications. Please go ahead.

Thank you, Candy. 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 Executive Vice President 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 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 2006 Annual Report and Form 10-K,, and in the Company's other reports filed with the SEC from time to time.

A replay will be available until 5:00 p.m. Eastern Monday January 29 at 402-220-9741. Additionally this conference call is being webcast, and a replay will be available through our website at PTC.com until Monday, January 29 at 5:00. p.m.

Also on our Investor website, you will find a document with Fiscal Q1 2007 financial and operating metrics, which we will discuss on this 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 only. If you have an additional question, you will need to get back in the queue.

I will now turn it over to Dick.

Meredith, thank you. Good morning, everyone. Thank you for joining us on our first quarter 2007 earnings call. Today, I will share my thoughts on our business and outlook. Then Neil will walk you through the financials in detail, and we will take your questions after that.

Last quarter, I talked about the progress we have made toward achieving the long-term financial goals we set forth in 2004. You will remember those goals were to achieve $1 billion in revenue, with 20% non-GAAP operating margins by 2008. 2008 is approaching rapidly, and we have become more optimistic in the outlook, based upon our recent performance, as well as some changing dynamics in the market.

We are growing faster than we originally expected. We expected our organic business to grow as fast as the growth of the overall PLM market, which in 2004 was 7%, and today is 9%. In fact, our organic business has been growing about 50% faster than the market for almost a year, and we believe we can sustain this momentum. Therefore by 2008, we believe we can easily outperform the $1 billion revenue goal, and we expect to achieve the 20% margin goal. So we believe it is time to share with you a new long-term goal, this time for 2010.

As you saw in the press release this morning, that goal is to achieve $1.5 billion in revenue, with 22% operating margins by 2010. This implies revenue growth of 15% per year on average, and almost 7 percentage points of operating margin improvement from our 2006 operating margins. Disciplined execution of our current strategy, coupled with sustained market conditions will make these new goals achievable. Regarding revenue growth, we continue to expect the majority to come from organic revenue.

We plan to continue to compliment internal development through strategic acquisitions when they make sense. This strategy has resulted in some small and medium-sized acquisitions that are very important to us and our customers, such as Arbortext, Mathsoft, ITEDO, and Polyplan. For operating margin expansion we will continue to drive profitability, primarily through our distribution and service delivery models, as well as leverage on our top line growth. This strategy has resulted in significant operating margin improvements over the past few years. Now we will spend a few minutes discussing our first quarter 2007 results, and why I believe we are executing well.

First, our total revenue of 222 million was ahead of our targets. This drove upside in our operating margin and EPS as well. We have incorporated this upside into our outlook, and have raised our 2007 guidance accordingly.

Second, our desktop solutions revenue grew 14% in Q1, with organic growth nearly double the overall market growth. Our desktop license revenue grew 20%, and maintenance revenue was also accelerating. This is the third quarter in a row in which we saw this type of performance. This is a PTC phenomenon, as the underlying market growth has not changed. I believe our growth is attributable to our great products that scale across customers of all sizes, as well as the strength of our full product development system. This is now driving new CAD growth in larger accounts.

Third, our Enterprise Solutions revenue showed great strength, versus a very difficult comparison in the year ago period. Our performance here is the result of having a single platform that scales from engineering throughout the extended enterprise. We are the only company in the industry with this single solution. Our customer migration from local Pro/ENGINEER data management to Windchill is driving our Enterprise Solutions success.

Fourth, our acquired businesses are executing very well. Medium and large customers are particularly excited about tying technical publications into their product development processes, with Arbortext, and the ISO draw product we just added through the acquisition of ITEDO. And our channel began selling MathCAD this quarter with positive early results.

Finally, we are executing well around the world, with double-digit growth in all major geographies. We are capitalizing on the various global and local trends in each key region, to grow our business and help customers succeed. Revenue in Japan grew significantly this quarter, but we still have work to do here to improve our consistency.

I can illustrate many of the reasons for the strength in our business by highlighting a customer example from last quarter. Mitsubishi Electric is a leading provider of electrical and electronic equipment used in home products and industrial systems and equipment. Based in Japan, the company has 100,000 employees, and over 30 billion in annual revenue. The company is executing a strategic initiative around the product development and intellectual property, in order to achieve growth and shareholder value.

Mitsubishi Electric has been a long-standing Pro/ENGINEER customer, who used Pro/INTRALINK to manage its engineering data. The customer recently decided to migrate from older versions of Pro/INTRALINK to the Windchill architecture. By upgrading these Pro/ENGINEER seats to a package configuration, that also includes Windchill PDMLink, and Windchill Projectlink, Mitsubishi Electric is extending its data management capabilities to support more sophisticated processes, like change management and configuration management. Based on the success of this strategy within a few departments at Mitsubishi Electric, the company has made an IT decision to roll out our product development system more broadly.

This is an instance in which the compelling event of Windchill PDMLink migration, led to improved customer benefit, and ultimately an expanded relationship with PTC. This is starting to happen throughout our customer base, and is driving revenue growth across product categories and geographies. To summarize, we are off to a great start in 2007. We are raising our 2007 guidance to revenue of $950 million, and non-GAAP EPS of $1.17 to $1.22, as a result of our outperformance in the first quarter.

We continue to feel confident in our ability to deliver revenue and earnings growth for the remainder of the year and beyond, as we execute against our new long-term goals. Customers are increasing their focus on product development because it is a strategic initiative. Today's solutions allow them to realize significant value from their investments. Therefore we believe they will continue to invest, particularly in PTC's differentiating solutions.

I will now turn the call over to Neil for details on the quarter and our guidance, and I look forward to taking your questions in a few minutes.

Thank you, Dick, and good morning, everyone. I am pleased about our Q1 results and our newly announced long-term goal. Today I will discuss those results in detail, and then provide our outlook for the second quarter and full fiscal year. And we will then open up the call to questions.

First, our high level income statement results are as follows. Total revenue for the first quarter was $222 million, with 15% growth from the same period last year. Non-GAAP operating expenses were in-line with guidance at 189 million, and we achieved 15% non-GAAP operating margins in the first quarter, which compares to 12% operating margins in the first quarter of 2006. This operating margin was ahead of our expectations, due to higher than planned revenue growth. Non-GAAP EPS was $0.23, above the high end of our guidance, and this represents a 35% improvement from the same period last year.

Now let's turn to revenue metrics. Our total revenue growth of 15% was the result of continued strength in organic revenue growth, as well as the contribution of revenue from the acquisitions of both Mathsoft and ITEDO. By line of business, the revenue breakdown for the first quarter was as follows. Our license revenue grew 14% year-over-year to 67 million, and as a reminder, we had a large transaction in the first quarter of 2006, that makes the year-over-year performance especially notable. Growth in license revenue is primarily attributable to strong sales of desktop solutions licenses.

First quarter consulting and training services revenue grew 23% year-over-year to 54 million. We continue to see significant demand for consulting and training services, as a result of increased adoption of our products. And first quarter maintenance revenue grew 12% year-over-year to 101 million. That's the second consecutive quarter of 12% year-over-year growth for maintenance, and is the highest maintenance revenue in the Company's history. The health and growth in maintenance revenue is important to us, as it shows that our customers believe in our product road map, and also in the value of our solutions.

By geography, our revenue was as follows. North America grew 14% year-over-year to 86 million, and we continue to see positive results in North America, from our strategic account program at the high end of the market, to our indirect channel at the lower end of the market. Five of our Top ten deals were from North America this quarter.

Our first quarter European revenue was 83 million, up 10% year-over-year, or 3% at constant currency. This was the highest quarterly revenue from Europe in five years. In addition, Europe was the region in which we booked a significant customer transaction in the year-ago period. So the growth is particularly impressive. Three of our Top ten deals were in Europe this quarter.

And Asia-Pacific revenue was up 26% year-over-year to 52 million. On a constant currency basis, Asia-Pac revenue was up 27%. The Asia-Pacific growth is a result of good execution throughout the region. Pac Rim revenue grew 28% year-over-year, reflecting continued traction in this high growth region, and Japan revenue grew 24% year-over-year, reflecting better execution in that part of the world, and the close of a fairly significant customer transaction. Two of our Top ten deals were in Asia-Pacific this quarter.

Our reseller channel grew 20% in the first quarter to 47 million. This growth was evident across all major geographies. Our reseller channel represented 21% of total PTC revenue during the quarter. Those of you who were able to attend our Media and Analyst Event at corporate headquarters last week, heard about our strategy for serving small and medium businesses in detail.

This segment of our market is very important at PTC, and it will be even more important in the future. We are very pleased with our success to-date and excited about the opportunity. We will continue to invest in marketing and other support programs, to help our channel partners grow, and we will continue to provide our channel partners access to acquired products, such as MathCAD and IsoDraw.

Moving on to metrics around larger customers, in the first quarter we had 12 license and service revenue transactions over 1 million each, for a total of 28 million. Large transaction revenue was more evenly distributed than it was in the year-ago period, in which we had eight customers account for 27 million in license and service revenue, including a transaction that was in excess of 5 million. The revenue growth from our larger customers is the result of a focused effort to support large strategic accounts with dedicated sales and service teams. This effort combined with our channel programs for small and medium businesses, continue to be a major driver of both revenue and margin growth for PTC. Okay.

Revenue by solution is as follows. Our first quarter desktop solutions revenue grew 14% year-over-year to 144 million, and desktop solutions revenue represented 65% of total revenue for the quarter. Our desktop solutions license revenue grew 20% year-over-year to 43 million. License revenue growth in this category is attributable to strong sales of Pro/ENGINEER, as well as the addition of acquired products. Pro/ENGINEER revenue grew across high end and low end packages, as well as upgrades in modules. This was the third quarter in a row in which we saw very strong Pro/ENGINEER license revenue.

Desktop solutions consulting and training service revenue was up 15% year-over-year to 20 million, due to higher training revenue in the quarter. And desktop solutions maintenance revenue was up 11% year-over-year to 81 million, reflecting higher renewal rates, and our recent acceleration of license revenue growth, as well as the contribution from acquired products. Okay.

Moving on to Enterprise Solutions growth, the metrics are as follows. Total Enterprise Solutions revenue grew 17% year-over-year to 77 million. This represented 35% of total revenue in the first quarter. Enterprise Solutions license revenue was 23 million, up 4% year-over-year. This was a significant amount of license revenue for our first quarter, and we are pleased with the growth because we had a difficult comparison, due to the significant customer transaction in the year-ago period that I mentioned earlier. Growth came primarily from sales of Pro/INTRALINK, Windchill PDMLink, and related modules, and FlexPLM, our offering to the retail, footwear, and apparel industry.

First quarter Enterprise Solutions consulting and training services revenue grew 27% year-over-year to 35 million, as a result of increased adoption of our solutions. And Enterprise Solutions maintenance revenue grew 18% year-over-year to 19 million, reflecting successful customer implementations.

Now I will move on to our spending. Our first quarter non-GAAP operating expense was 189 million, which was in-line with our guidance. Our expense for stock-based compensation was 8.6 million, slightly less than expected, and our acquisition-related amortization expense was 3.4 million, and that was up slightly from the fourth quarter, due to the acquisition of ITEDO last October. All right.

Moving on to the balance sheet, our cash balance ended at 147 million, in-line with our guidance, and down from 183 million in the fourth quarter. The decline in cash was primarily due to our $17 million acquisition of ITEDO in the first quarter, as well as annual compensation and bonus payments made in the first fiscal quarter that related to last year. We saw a similar decline in cash in the same quarter last year. Accounts receivable increased 15 million from the fourth quarter of 2006.

We continue to execute well on receivables collection, although we did have an increase in DSOs to 80 days this quarter, from 73 days in the year-ago period. But DSOs would be 70 days this quarter when adjusted for fourth quarter orders of last year, on which payment is due in the second quarter of this year, as well as year-over-year impact of foreign currency on accounts receivable. We do expect DSOs to return to 70 days or less for the remainder of this fiscal year.

And finally, deferred revenue was 206 million, and that was up from 196 million in the first quarter of last year, as the result of an increased maintenance revenue, as well as the addition of Mathsoft. And as expected, deferred revenue was down sequentially from 211 million at the end of the fourth quarter, due to the typical seasonality of maintenance billings. Okay.

Now let's turn to our outlook. As we mentioned earlier, we have made great progress towards our long-term goal we set in 2004, to achieve 1 billion in revenue, and 20% non-GAAP operating margins by fiscal 2008. Now that we have shared with you our new goal to achieve 1.5 billion in revenue, and 22% non-GAAP operating margins by 2010, the prior goal is obsolete. However, we remain committed to achieving 20% non-GAAP operating margins by 2008, along with revenue that we expect to be in excess of 1 billion. Achieving the 2010 goal implies average annual revenue growth of about 15%, which we expect to come primarily from organic revenue growth.

Additionally, the goal implies further non-GAAP operating margin improvements that average close to 2 percentage points per year. Our more detailed near-term outlook is the following. For the second quarter ended March 30, 2007, we anticipate revenue between 225 and 230 million, up 12 to 15% year-over-year.

We expect GAAP operating expenses, inclusive of stock-based compensation and amortization of intangible assets to be between 208 and 211 million. And on a non-GAAP basis, we expect operating expenses in the second quarter to be between 195 and 198 million. This increase from Q1 relates primarily to merit increases for our employees, and payroll taxes associated with starting a new calendar year. Because of this planned investment, and because of the strength in non-GAAP operating margins in our first quarter, our second quarter non-GAAP operating margins should be about flat sequentially, but will be higher on a year-over-year basis.

On a GAAP basis, second quarter total earnings per share are expected to be between $0.11 and $0.13. We expect non-GAAP earnings per share to be between $0.22 and $0.24. And the non-GAAP operating costs exclude the following estimated costs and expenses in the second quarter. Approximately 10 million of expense related to stock-based compensation, and approximately 3 million of acquisition-related amortization expense.

As Dick mentioned for the full year, we are increasing our revenue guidance from 945 million to 950 million, reflecting our strong first quarter performance. On a GAAP basis, which includes stock-based compensation and amortization of intangible assets, we expect operating expenses for the year to be approximately 837 million. On a non-GAAP basis, we expect operating expenses to be approximately 783 million, and this implies a 17.5% operating margin for fiscal year '07, up from 15.3% in fiscal year '06.

We expect GAAP EPS for the full year to be between $0.71 and $0.76, and non-GAAP EPS to be between $1.17 and $1.22 for the full year. The non-GAAP operating costs again exclude the following estimated items. Approximately 40 million of expense related to stock-based compensation, and approximately 14 million of acquisition-related amortization expense. So just to summarize, we have raised both the high end and the low end of our annual non-GAAP EPS guidance by $0.02, once again reflecting better than anticipated Q1 performance.

With respect to other below the line items, we expect other income to be insignificant for the second quarter and full year. We anticipate that our Q2 and fiscal year 2007 effective tax rate to be similar to our GAAP and non-GAAP tax rates in the first quarter, and we expect diluted weighted average shares outstanding to be about 117 million for the second quarter, and 119 million for the full year.

There is one item we discussed on last quarter's conference call that we want to remind people of, which is our valuation allowance against U.S. deferred tax assets. For the first quarter of 2007, we have again concluded that the full valuation allowance, which was established back in 2002 is still required. Based on our improved financial performance over the course of the last year and a half, we continue to anticipate the reversal of this previously recorded valuation allowance sometime during fiscal year 2007.

At the time of the reversal of valuation allowance, PTC would record a one-time non-cash income tax benefit, and an adjustment to the balance sheet. The one-time tax benefit would result in a significant one-time benefit to our GAAP net income for the period in which it is recorded. However, this benefit would be excluded from our non-GAAP results. The current valuation allowance is about 100 million, and it will continue to be reduced by the amount of U.S. profit we generate in the future, until a reversal of this allowance is warranted.

The 2007 financial targets outlined earlier, do not currently include this potential non-cash benefit. Once we reverse the valuation allowance, we will return to recording a full income tax provision for U.S. profit on our income statement. Therefore, our effective tax rate on pretax income is likely to move to the 35 to 40% range once we reverse this allowance.

However, our cash tax payments will continue to benefit from net operating loss carry-forwards, that we expect to utilize for the foreseeable future. And therefore we expect our cash tax rate to continue to approximate 20 to 25% of pretax income. Now we have reviewed reporting practices in the industry for valuation allowance reversals, and we have concluded that when this change occurs, the best practice is to apply the full corporate tax provision to non-GAAP results in addition to GAAP results.

However, in order to help investors analyze our year-over-year results on an apples-to-apples basis, we intend to provide an alternative view of prior period results, as if they had been taxed at the full corporate tax rate. We will provide an update on this item as appropriate in the future. Additionally, we described an item in our press release that I would like to repeat here.

We have received notice that a large customer is [desuding] outstanding payments owed to the customer's third party financing provider, which relate in part to purchases of PTC software and services from 2003 to 2006. We have also learned that this customer has defended its nonpayment by disputing certain aspects of the underlying purchase transactions. We are reviewing this matter, but we have been paid for such software and services and based on our review to-date, we believe the transactions were binding, and that neither party has any basis for recourse against us. We will provide additional information on this matter when it becomes available.

So just in summary, we hope you're as pleased as we are with our first quarter results. We continue to be encouraged by the strength of both our organic and acquired products, as customers adopt PTC's product development system for their product development needs. We are very pleased that we continue to outpace the market, growth of the overall, outpace the growth of the overall PLM market, and to post double-digit organic and overall growth.

And finally, we are excited about our plan to drive further shareholder value through our new long-term financial goals of 1.5 billion in revenue, and 22% operating margins in 2010. Thank you for your time today.

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

Thanks, Neil. All right. I think we are ready to take questions, Candy.

Thank you. [OPERATOR INSTRUCTIONS] One moment for the first question. Okay. We have our first question from Richard Davis from Needham & Company. Your line is open.

Thanks. So the first part is, kind of leads into the second part, but with regard to acquisition strategy, it seems, if I kind of look at where you potentially have holes and gaps where you would like to fill in, or white space, it feels like a lot of these acquisitions would be more technology tuck-ins, as opposed to gigantic, you know, things to swallow. So question one, is that correct, is that a correct assumption?

Then question two, which is related to the first one, with regard to Arbortext, has that business, I know you acquired it and it makes a lot of sense to put them together, but has that business started to accelerate in terms of outlook, in terms of growth for your fiscal '07 such that in theory it could become, I know you don't break it out, but a 50 or $60 million business in '07? That would be the two questions.

Okay. Richard, this is Jim Heppelmann. I will take the first question and Dick or Neil can join me on the second part. I think if you look at the profile of the M&A transactions we have been doing, they are typically smaller technology tuck-ins that, you know, expand our footprint into some new adjacent space, and therefore make our overall solution much more powerful.

That strategy has been working very well for us, so I think the base plan is to continue with that strategy. You know, that said, we will be opportunistic of if other things come along, we will certainly take a look at them, but that strategy has been working extremely well for us, and I think we will keep by default pursuing that one.

Richard, on the Arbortext side, and, again, we don't break out to revenue, I would say at a high level we really are and our customers are excited about that product, the concept of really extending the associativity throughout the process all the way to the technical documents. Lot of great pilots running. I would tell you that it's, I'm not disappointed in where it is, but it's probably dilutive right now to the overall growth rates, and there's a reason for that, which is that Arbortext is integrated to Windchill, but not to the old Intralink product. We did that on purpose, and we knew that it would cause a little bit of delay in acceptance. You know we are migrating our Intralink base over to Windchill PDMLink, and that's begun and there's sort of an end point in June of '08 for the old Intralink product.

So we are starting to see some acceleration, but it's a little bit tied to the migration of Pro/E data management to the Windchill platform. So I really think that it's going to provide some real upside that we don't have in the business at the back half of '07, and into '08 and beyond, as we make that associative with the Windchill platform and those upgrades.

The other point, if I could real quick, Arbortext is today one of our biggest differentiators. That whole dimension of our story is completely unique in the market. It's very compelling, and it lifts our whole story in terms of being a more unique and powerful story than the competitors can put up. So this has been a great transaction overall, you know, go ahead, Neil.

I was going add a little bit of color on other acquisitions, too, although we don't break out that revenue either. So both, I will tell you that both Mathsoft and ITEDO outperformed our expectations in the most recent quarter. It was the first quarter out of the block for ITEDO, so that was exciting, because we are in the process of integrating that acquisition.

Would it be fair to say with regard to Arbortext, to some degree you can use that as a velvet hammer with clients to get them to switch off of Intralink into Windchill?

It's another reason for them to go there.

Right.

We have talked about some of the deals we won, but the Dell deal that we won, they moved to PDMLink, to the Windchill environment to the manage the Pro/E files, and they started pilots with Arbortext. That's where we see a lot of new pilots starting.

As we have the conversations with those customers, and we are very early in the process in terms of getting those customers off the old Intralink and on to PDMLink, it's just beginning right now, but as we have those conversations with a customer, there's a reason with, the sales people have a reason to then go expand the conversation to include Arbortext and MathCAD, and more seats of Windchill, since they are going through the migration anyway.

Got it, okay. That's helpful. Thanks.

I think the pilots that we've done, which have been very positive are going to really have some potential upside for us, again, back half of this year, and as we get into '08.

Excellent. Thanks. Next question, please.

Thank you. Ross MacMillan with Jefferies, your line is open.

Thank you. Congratulations on the quarter. Just, Neil, you mentioned the DSO, which ticked up, and you an explanation for that, but I guess I'm still just focusing on cash flow. This particular customer that is disputing payment, how does that fit in with the increase in payment terms effectively, extending payment terms that you had with some customers last year, and does this particular issue make you change, or think about changing the policy on those extended payment terms? I'm just trying to understand if the two things are interrelated at all? Thanks.

There's no connection between the two issues. The customer issue, and again, it's an issue principally between a customer and their third party financing arm. That has nothing to do with extended term payment issues, and there were not extended payment terms that PTC granted on those transactions.

Okay. And then just on Japan, obviously it was strong this quarter. It sounds like maybe one of the larger Asia-Pac deals was there, but it doesn't sound like you think that it's fully fixed. Can you just elaborate a bit on that, and how we should think about Japan improving its growth rate over this current year? Thanks.

Sure. Ross, it's Neil. Japan's growth rate was up even absent the large transaction that I mentioned, so that's an inuring sign. At the same time, we recognize that the comps are relatively, are easier in Japan, if you will, this year given our relatively poor performance in that region last year. So being up 24% was a great start to the year, but I think we have acknowledged before that, you know, fixing what was going on in Japan for us is, has some short-term elements and some longer-term elements. We expect Japan to be up for the full year.

We are encouraged by the start this year. We have got a cross functional team in place in our corporate headquarters that's working closely with our Japanese management to improve results there. But I think, I wouldn't want you to take away the impression that we are expecting 24% year-over-year growth every quarter in Japan. I think that might be a little bit misleading.

Right. You know, just a little more on the point as well, because I want people to understand that there were no big deals this quarter in the company greater than 4 million. So the biggest deal was less than 4 million and, you know, not really even that close to 4 million. So the Japan, we would have had really good performance in Japan notwithstanding the nice deal that we did get there. I think that actually bodes well for the whole business this quarter, was that it was just strong across the board.

We cleaned out, as you know, in the fourth quarter, which we really didn't talk about, but we had pretty extraordinary performance in the fourth quarter. We had to preannounce, it was so good. So this quarter was pretty interesting because we sort of had to, you know, identify and rebuild the pipeline, and close that business across all geographies inside the quarter, you know, create a little bit of offense. And we did a pretty good job of that. So that was encouraging.

The other thing I would say about Japan, and it's back to my other point that I made a minute ago about one of the things that is driving this, the growth that we have had here in the last year, is this migration from an environment where we had two separate data models, one in the engineering department, and one in the enterprise. The old Intralink and the new Windchill. The migration that's moving where we're putting Windchill inside the engineering department.

I can just tell you, and you could hear from other companies as well, Japan just as a country is very conservative, and so I think part of the slowdown and one of the things we are working on is a way to accelerate their migration, their upgrade process, because they are just highly conservative. They want to make sure the migrations are going to work well and that everything is solid.

So they are sort of the last country to go to the new set of software. So, you know, I think it will be slow for a while and we're working on, as Neil described it, a number of issues to help the customers there. But we have a huge base. It's our second largest overall country in terms of deployment. So I, I think as we solve these problems, there is really some pretty good upside in the future.

Great. Thank you, Ross. Next question, please.

Thank you. Next question, Jay Vleeschhouwer with Merrill Lynch. Your line is open.

Thanks. Good morning. First question is regarding your long-term growth forecast now through the end of the decade. The things that is interesting about it it is very similar to the forecast from two of your major peers, in terms of their growth expectations. In the case of Autodesk, they at least are in multiple vertical markets, some of which are arguably underpenetrated, and they are not only in manufacturing.

In the case of Dassault, which is talking about something similar, I guess we'll see, but maybe just walk us through in a little bit more detail if you could why you think, you know, you stand those chances of mid-teens growth sustainably, or mostly organically and that it would be in fact so far above current spending expectations in CAD PLM, which we think are in the mid-single digits, at least market, and then a Pro/E question.

Well, Jay, it's Neil. I'll start and Dick can chime in. You know, I think first of all, if you just look at the trend of our business over the past, you know, six quarters, we have really seen an acceleration of our organic growth. So if you look back to the first quarter of last year, for example, where we reported 14% year-over-year growth, you know, about half of that was 'organic,' and half of that was acquired products essentially. If we move forward to, fast forward to the first quarter of this year and we talk about 15% year-over-year growth, you know, 80% of that growth was organic. So there has been kind of a change in the organic growth trajectory of our business that we have been watching kind of very carefully over that period of time, which is pretty exciting.

You know, we see two things, you know, one thing is we see an acceleration of our overall Enterprise Solutions business. Organically our Enterprise Solutions business last year was up about 23% even though the whole, the business as a whole was up 35% last year, and we definitely saw an acceleration throughout the course of the year.

And as Dick mentioned earlier, the last three quarters has given us increased confidence on our desktop solution business, I think if you would have asked us a year ago what we thought the growth trajectory was for our desktop solutions business, we would have said probably 4 or 5%. And we are looking at a business today that's driving, that's double-digit growth overall, and probably at this point kind of high single digits organically.

Dick talked about some of the reasons why we think that is occurring and we think, you know, we are having some success in customers that have adopted Windchill, that our larger customers that are coming back and reevaluating some of the CAD decisions they have made in prior years.

So we just see an improving trend organically in our business on both sides of the equation and, you know, I know 2010 is a long way out, but I feel like there is some momentum in our business which is sustainable, and I think, you know, underlying that momentum is the strength of, is the fundamental strength of the products that we have to offer to our customers.

Jay, another way of looking at it, too, for us, if you look at sort of what I call the sweet spot for, you know, I look more at UG, let's say and Dassault at the high end, which is really where the sweet spot is, where most of our revenue is and where those big customers really are. You take NX and IMAN/Metaface from UG, which is not growing, or for 1 or 2% growth at best. You take CATIA plus ENOVIA, which is their sweet spot, that's what they want to do well. That I think is declining in the last two quarters, including the Clawback from IBM. Then you have Pro/ENGINEER Windchill which is growing at 15%. So in the sweet spot, which is the high end of the customers, the big deals, on those core products, we are absolutely winning today.

And it's because of the single data model. And we are going to continue to win because they can't solve the problem they have, which is all the acquired databases in these acquisitions. They just can't reconcile them so we really feel like organically we're going to continue to outperform the market, and we just have a competitive advantage today.

The following Pro/E question is as follows. It would appear based on current trends that Pro/E maintenance revenue can this year get back to the last peak, which was set back in '01, which I think was around 320 million. You think in fact that you can meet or beat that maintenance number, or do you think it will peak there again or keep going, I guess is the question, and any comments on your expectations for the new Pro/E packages that you talked about last week?

Yes, so I think it was 81 million for the quarter, the maintenance. Pro/E maintenance in Q1 was 81 million. It's not going to decline during the course of this year, which means that if you are right that in '01 the peak was 320, we are going to surpass that peak this year. You know, we should do, if you just take the 321 and roll it out, it will be 324, and it's going to grow during the course of the year.

So we are going to go past the peak and I'll tell you that, you know, it will grow next year. Pro/ENGINEER, at organic growth for Pro/ENGINEER is what, is it 10% roughly, organic growth for Pro/E? Almost 10%. Jay, the market is growing for CAD is growing 3 or 4%, and the high end is, you know, is flat at best, including our 10% growth. So the maintenance is going to keep growing nicely.

On the second point about the packaging scheme, just to clarify, we have always been offering to the market a scalable model for buying Pro/E. You can buy a low end package at a low end price point, and then with that same technology, grow it, grow it, grow it all the way up to the high end package. All we did recently was we changed the scheme names, to help people understand that these are not different products, but a scalable scheme for buying the same product family.

So we, PTC, are the only CAD vendor out there offering an interesting, attractive low end product, that scales to an interesting attractive high end product. Autodesk doesn't have a high end product and both Dassault and UGS are offering a separate low end product, in the case of Solid Works or Solid Edge, it is discontinuous from their high end product being CATIA or UG NX. So it's a very differentiated position, and I think it's really helping us a lot on both ends of the spectrum.

Thank you.

Great. Next question, please?

Thank you. Next Tim Fox, Deutsche Bank, your line is open.

Hi, thank you. Good morning. First question, a little bit of a follow-on to Jay's about the outlook going forward around this 15% growth, but in focusing on Pro/E for a moment, a couple quarters ago I think you started offering a, sort of a worldwide access licensing model for Pro/E, where you can share the license across border. I am wondering how much of your recent success in the Pro/E family has been from this new licensing model, and how long that may be sustainable as customers continue to adopt that new licensing model?

Tim, I don't have the, I don't know if we have a breakout on what we call this global licensing scheme, but it's not a big number right now. It's fairly new, and what we have a tendency to do, it's generally applicable to the larger customers, and you know, usually we will have conversations about sort of upgrading those over time, as their maintenance might come due, and so forth. I think it's a small amount of, if I had to guess, I would say 5%.

The strength in the Pro/ENGINEER license business, particularly around things like upgrades, has more come from folks that started with us on the entry level $5000 package, and are adding modules or adding, you know, an upgraded configuration. So they go from 5K package, to 13 K package, or 5K to 20k package, and there's strength in that business there. That is the most frequent configuration of the upgrades.

Okay. Great.

What did we do, almost 5000 seats of Pro/E this quarter? So, yes, it's strong. The global thing, I think that will actually get more important over time, but I don't think it's something that people are just going to make a decision and jump into it in a quarter or two.

That makes sense. Following question for Neil, what are your cash flow from operation expectations this year? I know obviously disappointing in fiscal '06, looking to make some changes to the customer financings that have been done, but any sense of where we should see CFFO come out this year?

Yes, I think we gave guidance before that we expected to generate as a whole. I am not sure this is completely answering your question, Tim, so let me know, between 100 and $120 million of cash this year, and we started off the year at just over 180 million in cash. So that means ideally we would like to end up at $300 million of cash at the end of the year.

The assumption around that from an extended payment term perspective, which is something we talked about last quarter as well, is that we were going to do the same more or less from an extended payment terms perspective as we did last year, which would either have a neutral, it would have a neutral to positive impact on cash for the year. Those are still our expectations.

Okay, great. Thanks. Congratulations on the quarter!

Thank you.

Thanks, Tim.

Next question, please.

Thank you. Next, Chris Sailer with Goldman Sachs, your line is open.

Thanks. One quick housekeeping item, for the EPS guidance that you gave, what is the tax rate you are using?

It's about, for GAAP tax rate or non-GAAP tax rate, respectively, it's about the same as the Q1 tax rates.

Okay.

So the rates are a little bit different.

Okay, and then in terms of, I guess following up on Jay's question, you know, if I look at sort of the implied growth for the guidance this year, you know, say it's sort of in the 11% kind of range, and if you back out the currency benefit in the current quarter, you know, in some of the acquisitions, maybe it's, I don't know, closer to, say 10%. So I guess the question is, what is really driving the acceleration that you see coming in after this year when the business, you know, appears to be quite good already?

Well, I might answer that question a little bit differently, which is I think we were very pleased with our progress that we made in Q1 with 15% growth. We have given guidance for the second quarter at 12 to 15% growth. You are right, our guidance for the full year reflects a slightly lower growth rate of about 11%, and you know, I think our perspective on it is, you know, we have had several good quarters in a row now.

We have got an increasing growth trajectory on our organic business, but we have always said that, you know, in terms of the full year, we would like to see more than one quarter of this year, in terms of what the trajectory of our business looks like, before we kind of make a call on potential changes to the 11% number. And so, we could take a look at Q2 and see what happens.

I think also, part of your question was what's driving it. I think it's the things we talked about. We are in an interesting product sort of refresh time for the Company. This conversion to Windchill 8.0, PDMLink, and Projectlink 8.0, which obsoletes the old client/server Intralink product, there's 100,000 users of that old product and we have probably migrated 5% of the base.

So there is a huge runway for us over the next two years, to convert that base over to PDMLink. It's a chargeable upgrade if they opt for the PDMLink upgrade itself. That license, plus service, plus maintenance, then you have a conversation with the customers, that says if you are going to do the upgrade, why don't we add more seats. Mathsoft, with MathCAD 14, Version 14 is coming out--

--in February.

-- in February, so we have got a new version that. Pro/E Wildfire is out. There is a new version of Windchill 9.0, which is going to extend our capabilities in the whole sort of PLM enterprise offering by another leap. The functionality in 9.0, which comes out in the May/June timeframe is going to make a big jump over the traditional competitors, bigger than the one we have today.

I think it is product refresh, we have a huge installed base that we built up over the last 20 years, the channel is really growing nicely. We are getting execution from all geographies. The strategic account program is growing, and, you know, we are just getting benefit from everything. I think at the same time--

Yes, I would just add to that, I think that, you know, five years ago, six years ago, we committed to a strategy to redevelop Pro/ENGINEER, make that product competitive, continue our development of Windchill, build this product development system, and we have a five-year trend going here of improving organic results. And quite frankly, the differentiation between PTC and the competitors is getting clearer and clearer and clearer.

Some of our competitors actually inflicted some self damage to their story. When Dassault picks up Matrix, their story becomes even more convoluted, when they try to explain to a customer how Matrix is going to work with Smartteam, work with Enovia, work with VPM, trust me, it's all going to work, that scares customers. Customers turn and then look at PTC's solution as clean and elegant, and they turn to UG and that's messy and ugly. So I think the differentiation is crystal clear. The competitors are losing momentum, and we are five years into a trend right now.

Directionally, what do you think the growth on the Windchill versus the CAD side will look like in that 15% trajectory?

I think what we would say is over time, I think we've said this before, that over this period of time, probably Windchill is going to end up being 50% of our overall revenue, so it will be a 50/50 mix between the enterprise side and the desktop side. I think that's one thing.

By 2010?

You can do the math to get there, but I think you're going to find that the math is somewhere in the 20% growth rate for the enterprise side, and it's probably in the, you know, high single digits for the desktop side.

To be honest a little bit, too, I mean we're a little bit, I don't want to, the Pro/ENGINEER acceleration was a little bit more than we thought it would be. If it continues to grow at 14 or 15%, that says is will take a little bit longer to get, we would like to have it 50/50. That's sort of a nice mix for us, in terms of the desktop and the enterprise. What is happening is that most large customers have a mixed environment.

They will use our products and those of our competitors, and what we have seen since they have been migrating to Windchill 8.0, the power of Pro/ENGINEER with Windchill 8.0, and the ability to use Arbortext and the other solutions, has created and environment where these large customers in a mixed environment are going back and consolidating their CAD decisions.

We are actually saying to the customer we don't care. Keep a mixed, heterogenous environment, and they are coming back to us and saying, give us a proposal to replace the UG seats, or the Catia seats, to the Solid Works or AutoCAD seats, because our programs that are running with Pro/ENGINEER and Windchill are so much more optimized that we want to replicate throughout different parts of the business that powerful solution. That's what is driving the Pro/E business, is a consolidation around a more powerful product development system.

Okay. Let's take a couple more questions.

Really? All right.

Thank you. Next Philip Alling from Bear, Stearns, your line is open.

Thanks very much. Question here just with respect to investor expectations on large deals, and they have been figuring more prominently really, and the question pertains to sort of visibility that you have. Could you speak to what, we should be looking for as far as contributions to revenues from large deals?

Well, we have got a forecasting system in place that we have talked about in the past, and, you know, so we have visibility to our large deals in any particular quarter, and then we have visibility throughout the rest of the two or three or four quarters in the future. Now, the visibility farther out is obviously because of time a little bit less predictable.

Last year we had, was it 59 I think transactions greater than a million, versus 35 the year before, and we have in the first quarter this year, we had 12 versus 8 a year ago. The visibility on deals over a million continues to increase is what I would tell you. And deal sizes, you know, they are in that between 2 and 3 million on average. I would say they are actually say they are getting larger. They are growing slightly larger. So we still have to get out there and execute those deals, but when we look at Q2, Q3 and Q4, and the pipeline, there is a growing list of bigger deals that we have out there.

The ones that are actually a little bit even less predictable, you know, less likely to predict, are the ones that, let's say, you know, we told you last quarter we had two that were greater than 5 million. Those are a little bit harder to predict, the real big ones, and so we see some of those, but obviously they are more difficult, because they are bigger commitments by the customer, and so forth. But we do have some pretty good size deals out there in the pipeline as well in the back part of the year.

Just clarification, I think you, based on your own data sheet, it indicates there were 55 deals greater than $1 million in '06, and 36 in the prior year.

Okay. So I was going out of memory. I was close.

You were close, yes.

Thank you.

A follow-up question, with respect to what you had indicated as far as, you know, the Mitsubishi deal, is there, do you have visibility to new license sales, as far as what you had indicated there, or should the expectation be, that you know, some of that deal is going to flow from deferred onto the income statement, or how should we really be thinking about sort of follow-on sales opportunities from that Mitsubishi deal?

Well, I'll just talk generally maybe about the deal because there is some license revenue that we recognized right away. There is service revenue that will, and maintenance revenue that's deferred, and you recognize it as you perform it. And then because their customer has now upgraded to the full Windchill environment, there's an opportunity to go in there and talk about more enterprise seats, because largely our penetration to an account like Mitsubishi Electric has been in the engineering department.

Now there's an opportunity to go expand the number of PDMLink and Projectlink seats, and to talk about MathCAD, talk about Arbortext, and because our footprint is larger in terms of functionality, there is an opportunity to go in there now that they have this single database, and sell them that greater functionality. So there is much more upside in the account.

Thanks.

Sure.

Excellent. I'm showing right at the top of the hour, so I realize I there might be a couple of people hanging on the line. We will get to you after the call. Dick, any parting words?

No. Just that we are pleased with Q1, it is always a sort of a barometer I think for the year, and this was a strong Q1, so we need to continue to execute. Our customers are happy. Our products are really strong right now, and in a really nice sort of refresh that is going to last for a long time, and I think our competitors are a lot more difficult here, a lot more uncertain than they were in the past. Matrix is gone. Agile is not performing like they used to necessarily. UG's growth rates, they declined last quarter. And I think Dassault is trying to figure out what they want to do, with respect to their channel partners. We have a good situation. We need to execute.

So thanks a lot, and we will look forward to talking with you again in the spring. Thanks.

Thanks.