PTC Inc (PTC) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's second 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 and instructions will follow at that time. As a reminder, ladies and gentlemen, this conference is being recorded.

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

Thank you. Good morning, everyone, and thank you for joining us today. Participating on the call will be Dick Harrison, our President and Chief Executive Officer, and Neil Moses, our Executive Vice President and Chief Financial Officer.. In addition, Jim Heppelmann, our Executive Vice President and Chief Products Officer, and 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 2006 annual report in Form 10-K, the Company's 10-Q from the first quarter and in the Company's other reports filed with the SEC from time to time. A replay will be available until 5 p.m. eastern Monday, April 30th at 402-220-9746. Additionally, this conference call is being webcast and a replay will be available through our website at PTC.com until Monday April 30th at 5 p.m. Also on the investor website you will find a document with fiscal Q2 2007 financial and operating metrics, which we will discuss on this call.

I'd like to take a quick moment for a brief commercial message. In conjunction with the upcoming PTC user conference in Tampa, Florida, we are hosting a global media and analyst event on Monday, June 4th, and Tuesday, June 5th. We have sent preliminary information to our investor e-mail list already and we'll be sending registration information this week. If you haven't received information yet, but you are interested in attending, please contact me and we'll send you information immediately. 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 yourselves to one question and one follow up. If you have an additional question, you'll need to get back into the queue.

I will now turn the call over to Dick.

Okay, Meredith, Good morning, everyone. Thank you for joining us on our second quarter 2007 earnings call. PTC delivered total revenue of $228 million and EPS of $0.24 in the second quarter. Our results reflect our continued momentum in the market and successful execution of our strategy to drive shareholder value. I'll highlight a few of the items that demonstrate this success. We grew license revenue 31% year over year in the second quarter. For the first half of 2007, license revenue grew 22%. This is outstanding performance and is a clear indication that we are winning in the PLM market, which analysts believe is growing at about 9%. Our Desktop Solutions continue to grow at an accelerated pace. Desktop Solutions license revenue grew 40% year over year. All products performed well, including acquired products from Mathsoft and ITEDO. Organically, Desktop Solutions license revenue grew several times faster than the overall CAD market segment. Our performance is being driven by IT consolidation at the high end of the market. At the low end of the market, our success is being driven by a strong channel with the best and broadest set of PLM solutions for small and medium businesses.

Our Enterprise Solutions are also outpacing the market -- the growth of the market with growth of 20% year over year. We continue to win the confidence of customers. They like our single-platform architecture, deep domain expertise, and broad capabilities that help customers develop the full set of product deliverables, including documentation. In addition to our revenue growth, our financial success is also highlighted by our continued operating margin and earnings expansion. We continue to drive this expansion primarily through two factors; distribution productivity improvements and services profitability improvements. We are on track to achieve our annual target of an 18% non-GAAP operating margin, with longer-term plans to achieve 22% operating margin. Finally, our cash flow during the quarter was exceptionally strong. This is an important operating metric. We are focused on delivering significantly-improved cash flow in 2007 versus 2006 and are on track to do so.

Our software solutions and process expertise are helping us win. We are helping customers realize demonstrable business value, improved time to market, higher quality products, lower cost of product development, and more innovative products. These are no longer intangible benefits that customers view as nice to have. They are imperatives that are driven at the board level. The trends of the industry reflect this. For example, the globalization of product development and IT application consolidation are driving PLM investment. PTC is best positioned to capitalize on these trends.

I'd like to share a customer story from the quarter. For over 15 years, a group of federal laboratories and facilities that are contracted by the U.S. Department of Energy's National Nuclear Security Administration have used pro/ENGINEER solutions to improve engineering productivity. In the second quarter, PTC received an order from this group of contractors to extend the use of pro/ENGINEER and to add the use of Windchill, Arbortext, ProductView and Mathcad across the sites. This decision was made because of the breath, power, and scalability of our solutions delivered on our integral web-based architecture.. Lawrence Livermore National Laboratory led the discussions with PTC on behalf of the federal facilities. This order is an example of a customer trend to complement an existing pro/ENGINEER investment with our full product development system.

Some customers choose the product development system because it helps lower total cost of ownership, other customers choose the product development system because of the tight integration between the solutions is unmatched in the industry. Therefore, it is the only system that easily enables distributed product development for products that have mechanical, electronic, software, and documentation components. These are important factors in driving business value for customers. We believe these trends will continue to drive investment in our solution for years to come. At the midpoint of 2007, we continue to have a high degree of confidence in our business outlook, our ability to sustain annual organic revenue growth of at least 10%, and our ability to continue to drive significant operating margin and earnings growth in the second half of 2007.

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

Thanks, Dick. Good morning, everyone. Our Q2 and year-to-date 2007 financial results reflect solid execution of our strategy. I'll discuss our results in detail and then provide our outlook for the third quarter and full fiscal year, and then we'll open up the call to questions. First, our high-level income statement results for the second quarter and first six months are as follows: Total revenue for the quarter ended March 31st was $228 million, up 14% from the same period last year. Non-GAAP operating expenses were in line with our guidance at $195 million, and we achieved a 15% non-GAAP operating margin in the second quarter, in line with our expectations and up from a 13% operating margin in the second quarter of 2006. Our non-GAAP operating income grew 25% year over year. Non-GAAP earnings per share were $0.24, at the high end of our guidance, and a 20% improvement from the same period last year. And for the first six months of 2007, we delivered 15% revenue growth, 15% non-GAAP operating margins, and $0.047 in non-GAAP earnings per share, a 30% improvement from the same period last year.

Okay, now let's turn to revenue metrics. Total revenue of $228 million was a result of continued strength in organic revenue growth as well as the contribution of revenue from our acquisitions of Mathsoft and ITEDO. The growth reflects success across product lines, lines of business, geography, and account size, and I'll comment in each of these areas. Total revenue by product categories is as follows. Q2 Enterprise Solutions revenue grew 20% year over year to $82 million and represented 36% of total revenue in the second quarter. For the first six months, total Enterprise Solutions revenue grew 18% from the same period last year. And total Q2 Desktop Solutions revenue grew 11% year over year to $146 million and represented 64% of total revenue in the quarter. Total Desktop Solutions revenue grew 13% in the first six months of this year.

Okay, revenue by line of business is as follows. License revenue grew 31% year over year to $71 million in the second quarter, with outstanding growth in both major product categories. Desktop Solutions license grew 40% to $49 million due to strong sales of pro/ENGINEER seats, upgrades, modules and the contribution from acquired products. This was the fourth consecutive quarter in which we delivered very strong pro/ENGINEER license revenue growth. This reflects success in customer accounts of all sizes and is due in part to an increasing number of customers choosing to standardize on pro/ENGINEER. Enterprise Solutions license revenue was $23 million, up 15% year over year. Growth came primarily from sales of Windchill PDMLink, our visualization solutions, and Flex PLM, our offering for the retail, footwear and apparel industry.

In the first half of the fiscal year, total license revenue grew 22% from the same period last year, with Desktop Solutions up 30% and Enterprise Solutions up 9%. Consulting and training services revenue grew 3% year over year to $58 million in the second quarter. This increase was the result of 23% growth in our Enterprise Solutions consulting and training services revenue to $40 million, offset by a 24% decline in our Desktop Solutions consulting and training services revenue to $18 million. This decline is due in part to a difficult comparison versus the second quarter of 2006, in which we had a significant customer transaction. And for the first six months of the fiscal year, total consulting and training services revenue grew 12% over the same period last year, with Enterprise Solution services revenue up 25% and Desktop Solution services revenue down 8%.

Second quarter maintenance revenue grew 11% year over year to $99 million. This growth is a result of the recent acceleration in our license revenue growth and reflects continued success in driving customer satisfaction with valuable solutions, product enhancements, and technical support. Second quarter Desktop Solutions maintenance revenue grew 9% year over year to $80 million. We experienced a slight sequential decline in Desktop Solutions, maintenance revenue due to the timing of ongoing -- excuse me, the timing of maintenance renewals within our customer base. This number should be up above Q1 levels again in Q3. And second quarter Enterprise Solutions maintenance revenue grew 20% year over year to $19 million. For the first six months of 2007, total maintenance revenue grew 12% year over year, with Desktop Solutions maintenance revenue growth of 10% and Enterprise Solutions maintenance growth of 19%.

By geography, our revenue was as follows: North America revenue grew 15% year over year to $89 million in the second quarter. This growth continues to be driven by strong license sales across all product lines. Our pipeline in North America remains strong, although year-over-year comparisons in Q3 and Q4 will be more difficult due to outstanding performance in this region in the second half of fiscal 2006. Five of our top ten license and service customers were in North America this quarter. And for the first half of fiscal 2007, North America delivered 14% growth compared with the same period in 2006. The second quarter revenue from Europe grew 24% year over year to $83 million or 13% at constant currency. The same trends that have been driving our outperformance in North America during the past year seem to be driving our European results now. European customers who are looking for a partner to help them globalize product development are drawn to our broad footprint of solutions delivered on a single architecture. Three of tour top ten license and service customers were in Europe this quarter, and for the first half of 2007, our revenue grew 17% in Europe.

Second quarter Asia Pacific revenue was up 1% year over year to $56 million or 2% on a constant currency basis. The performance was driven by year-over-year growth in the Pacific Rim of 10% offset by an 8% decline in revenue from Japan. With the very strong results we delivered in Japan in Q1, we expected that the revenue trend would be a bit lumpy as we continue our efforts to recover in this geography. In the second quarter, two of our top ten license and service customers were in Asia Pacific. For the first half of 2007, revenue from Asia Pacific is up 12%, with 18% growth in the Pacific Rim and 5% growth in Japan. On a constant currency organic growth basis, the Pac Rim has been and should continue to be our fastest growing region in the world, driven by the strong demand for our PLM solutions in China.

And finally, our revenue metrics related to customer size are as follows: Revenue from our reseller channel grew 24% in the second quarter to $49 million. Growth came from all major geographies, and our reseller channel contributed 21% of total revenue in the quarter. This model continues to help us improve our profitability and increase our reach to small and medium businesses around the world. Our channel partners have been ramping up on Mathcad and Arbortext IsoDraw and we expect to continue to see our channel grow faster than the overall business in the second half of 2007. For the first six months of 2007, reseller revenue grew 22%. We also continue to grow our revenue contribution from our larger customers. In the second quarter, we had 16 license and service revenue transactions over $1 million each for a total of $36 million versus 12 large transactions with a total of $26 million in license and service revenue in the second quarter of 2006. This is evidence of continued success in our strategic account program.

All right, now I'll move on to our spending and our operating margins. Second quarter non-GAAP operating expenses were $195 million, in line with our guidance, our Q2 expense for stock-based compensation was $8.8 million, slightly lower than expected, and our acquisition-related amortization expense was $3.5 million. On a GAAP basis, total second quarter expenses were $207 million. Our year-over-year operating margin improvement was driven primarily by an increase in direct and indirect sales productivity. Sequentially, our operating margin was flat, reflecting one-time costs in G&A offset by marketing cost savings. Moving on to the balance sheet, our cash balance ended at $238 million, up $91 million from $147 million in the first quarter. Our second quarter is historically a strong cash flow quarter as a result of seasonality and collections on maintenance billings. Our year-to-date operating cash flow was $76 million compared to $39 million for the same period last year.

Accounts receivable decreased $11 million from the first quarter of 2007, primarily from strong collection activity. We also had a decrease in DSOs this quarter to 74 days compared to 80 days in Q1. Although we had a strong collections this quarter, we fell short of our goal of 70 days or less, and this will continue to remain a focus area for us. Finally, deferred revenue was $250 million, up from $233 million in the second quarter of last year, as a result of growth in the number of customers on maintenance, the contribution from acquisitions and the effect of foreign currency. As expected, deferred revenue was up sequentially from $206 million at the end of the first quarter due to the typical seasonality of maintenance billings.

All right, now let's turn to our thoughts on the future. We remain enthusiastic about our outlook, and therefore are reiterating our full-year guidance. As a reminder, we are anniversarying our Mathsoft acquisition in Q3. Our outlook for the third quarter ending June 30th is as follows: We expect revenue of $235 million to $240 million, up 8% to 11% year over year, and we expect our non-GAAP operating margins will be between 16% and 18%. On a GAAP basis, third quarter total earnings per share -- excuse me -- are expected to be between $0.15 and $0.18, and we expect non-GAAP earnings per share to be between $0.26 and $0.29. The non-GAAP operating costs exclude the following estimated costs and expenses; approximately $10 million of expense related to stock-based compensation and approximately $3.5 million of acquisition-related amortization expense. We expect our cash balance to be approximately $260 million at the end of the third quarter.

For the full year our guidance remains unchanged at $950 million in revenue. We continue to expect non-GAAP operating margins of approximately 18%, and that's up from 15.3% last year. 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 exclude the following estimated items; approximately $40 million of expense related to stock-based compensation and approximately $14 million of acquisition-related amortization expense. Our guidance also reflects an assumption that our Q3 and fiscal 2007 effective tax rate will be similar to our GAAP and non-GAAP tax rates for the first half of this year. Additionally, we expect diluted weighted average shares outstanding to be about 118 million for the third quarter and for the full year.

Finally, I'd like to provide an update on an issue we've highlighted for the past two quarters, which is our valuation allowance against U.S. deferred tax assets. For the second quarter, we have concluded that the full valuation allowance, which was established in 2002, is still required. Based on our improved financial performance, we continue to anticipate the reversal of this previously-recorded valuation allowance sometime during 2007. At the time of the reversal of the valuation allowance, we would record a non-cash income tax benefit and an adjustment to the balance sheet. The tax benefit would result in a significant 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 valuation allowance at the beginning of fiscal 2007 was approximately $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 that we outlined earlier do not currently include this potential non-cash benefit or the resulting change in our effective tax rate. Once we reverse the valuation allowance, we will return to recording a full income tax provision for U.S. profit on our income statement. For our non-GAAP results, this tax rate increase will occur retroactive to the beginning of the quarter in which we reverse the valuation allowance. Based on recent projections, our effective tax rate on both GAAP and non-GAAP pretax income is likely to move to the 35% to 40% range once we reverse this allowance. 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 be approximately 20% to 25% of non-GAAP pretax income.

Hypothetically, if we were to make the decision after the close of the third quarter that the valuation allowance should be reversed in Q3, our non-GAAP EPS results would be reduced by approximately $0.05 to $0.07 for the quarter. If the decision is not made until after the close of the fiscal year, our Q4 non-GAAP EPS results would be impacted by the per share effect of this higher tax rate on Q4 non-GAAP pretax income. Returning to a full corporate tax rate in the U.S. is a positive and inevitable step in PTC's turn-around story. We will continue to share as much information as we can about this anticipated change in our effective tax rate and about our assumptions about the impact on our financial results. In addition, we will provide an alternate view of prior-period results as if they had been taxed at the full corporate tax rate in order to help investors analyze our year-over-year results on an apples-to-apples basis.

Finally, we'll continue to highlight metrics that reflect the momentum in our business, including revenue growth, operating margin growth, and operating cash flow. These are the metrics we use to measure our progress toward achieving our long-term goals of $1.5 billion in revenue and 22% non-GAAP operating margins by 2010. Our Q2 results only strengthen our view that these goals are achievable.

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

Thank you, Neil. All right, we're ready to open up for questions.

Thank you. (OPERATOR INSTRUCTIONS) And the first questions is from Mr. Philip Alling of Bear, Stearns. Your line is open.

Yes, thanks very much. Neil, just wanted to get a clarification on the comments you just made with respect to reversal of the valuation allowance against deferred tax assets. Did you say that you expect that that would occur in the third quarter this year?

No, what I said, Philip was that we expect it to occur this year, either in Q3 or Q4. I then said that the increase in our non-GAAP tax rate associated with that event would be retroactive to the beginning of whatever quarter the valuation allowance is reversed.

Right. Okay.

Okay?

Understood on that. With respect to the affirmation of guidance for the full year this year, obviously that's based on the lower tax rate, that does imply more of a back-end loaded year than I think some were looking for. Could you give us some more color as far as what you see driving stronger performance in your fiscal 4Q on the margin side and as well as on the revenue side?

Yes, well, I'd make a couple of comments. One is we had operating margins in excess of 20% in the fourth quarter of last year. They were reduced to about 19% when we settled the Rand lawsuit, so we had very, very strong operating margins last year. We made some investments in our business in the first half of this year that we expect to leverage in the second half of the year this year, particularly in the fourth quarter, which we think will lead to improved operating margin performance. And finally, we grew our net income and EPS by 30% in the first half of this year and our plan for the full year calls for about 22% growth in earnings per share, so we feel pretty comfortable that it's achievable. As far as the split between Q3 and Q4, we give guidance one quarter at a time as well as financial targets for the full year and you guys fill in the blanks in between. And so I understand that people had different numbers for Q3 and Q4 than we did, but we're comfortable in our full-year guidance.

Any color in particular with respect to the outlook on blended consulting service gross margins? Is that an area in particular where you'd expect to see some improvement in the second half of the year?

We do expect to see some improvement in gross margins for the business in the second half of the year and in our ser -- in the net margins for our services business, as well.

Okay. Just with respect to -- there was solid seat growth for your Windchill product that you reported. Is there anything -- really the implied ASPs look like they were down, given the disparity between the seat growth and the license growth number that you reported for your Enterprise business. Is there something going on there that you could help us better understand what the relationships are there between the reported seats and the license growth?

Our ASPs have been pretty static on a seat basis for sometime now. We had a period of time that ended about a year and a half ago where we had falling ASPs in Desktop. That isn't the case anymore. But to look at -- to look at quarterly numbers and implied ASPs and try to suggest a trend really isn't reflective of what's going on in our business. We look at that an a trailing 12 month basis, and as I said, I think we've been -- ASPs have been pretty stable over that period of time.

Okay. I counted four questions there, Philip. Let's move on to the next person.

All right, I'll move on. Thanks very much.

The next question is from Mr. Richard Davis of Needham & Company. Your line is open.

Hey, thanks very much. Could you give us an update on -- kind of your status of your relationship with IBM? I know we talked about it a lot last year and some of the changes they're having with some of their previous partners and things like that. Could you just give us a point of view on what's going on there?

Well, Richard, the I think that IBM -- it's hard to speak for them a little bit. But what we see is that -- they had an exclusive arrangement with [Deso], which served both companies really well for 20 years. I think that it was more focused on the CAD part of the business, historically. And that in the last year and a half or two years, IBM's wanted to have a broader penetration around the PLM side of the business, the enterprise applications. And I think that they've reached out to a number of other partners with this product development information framework.

They have a strategy out there, this PDIF that they announced. When they did that, they invited a number of companies to participate, including PTC. I think that led to a closer relationship at the -- at the sort of product integration level where we've made some commitments around supporting some of their products, such as WebSphere. And at the sales level, I think it's a more open playing field with respect to a lot of the accounts out there, where their salespeople are now more willing to engage with us in working on these large accounts. So I continue to see IBM and Deso continues to move a little bit more farther and farther apart, although I still think they have a good strong relationship. But I think IBM, again, has a more opportunistic desire to work with, not just ourselves but other PLM providers to leverage the opportunity that's out there in the market.

Got it. In the past seven to eight years, you haven't seen a lot of major account changes, you haven't seen major firms do that. But I'm just wondering, again -- and I'm sure it's hypothetical because we'll wait and see if it happens in favor of you guys or not -- but I were a large conglomerate and UGS was just bought by one of my major competitors, how long would it take -- whether it's just in a generic sense -- how long would it take for the companies to consider if they did decide to change vendors in your mind? Is there any way to gauge that? Is it a period of quarters or is it several years that it would take guys to decide to make a change in software vendors if you had some new playtectonics and those kind of things? Is there a sense that you have for that kind of change?

That's a good questions. We're certainly out there. We made a list of all of the Siemens competitors in -- sort of by vertical that they're in; transportation, power generation, electronics, automation, and so forth. And we're out there calling on those customers. With a number of aspects to the story, but in particular, those that we've identified that are -- those competitors that we've identified that are UGS users, we're all over those accounts.

I think in terms of a timeline, some of those accounts that have a mixed environment -- so for example, there's a pretty big U.S. company that competes with Siemens in a lot of the different areas that we just described, one of their divisions has a mixed environment, PRO UG mixed environment. I think there's a much faster opportunity and we've already had multiple meetings with this group to swap out the UGS software and consolidate around PTC. I think in a division where it's 100% UGS, it's going to be a longer term kind of a play, and it's expensive for these companies to make a big decision. I think, again, these mixed environments can move more quickly and the ones that are solely using the UGS products are going to be a little bit more difficult. But I do think they have a lot of concern -- each and every one of them has concern about using products that are owned by a competitor.

Maybe -- Richard, it's Jim here, maybe I can elaborate a little bit more. I'm sure in retrospect when we look back in five years, it'll be a bell-curve shape to help people switch. And so we're at the beginning of it and probably the meat of the bell curve is two years. But I think what's happening today, as Dick said, is people have a mixed environment and are trying to decide, should I go purely with PTC or purely with UG, because the mixed environments can be problematic. Dick talked about competitors to Siemens, and there's a lot of them, not feeling comfortable with that relationship. There's also a lot of comfortable -- a lot of discomfort with respect to strategy Siemens for UG.

We're talking to companies about global product development, lean product development, product development process improvement, and they're talking about integration between MCAD and shop floor automation and control, and that story just doesn't resinate to people. So they feel -- I think a lot of people feel like where Siemens wants to take UG isn't where they were headed, and it brings some clarity to, really, who ought to be their partner on a go-forward basis. So, I think we're starting to see the mixed environments moving first and I think time will tell, but probably some pure UGS environments will grow increasingly concerned with Siemens strategy for UGS and we'll start to see some of them move a little bit farther out, once they see evidence or not, as the case may be, what's really happening there.

Got it. No, that's helpful. I'll let someone else do the next question. Thank you.

Thanks, Richard.

The next question is from Mr. Mike Olson of Piper Jaffray. Your line is open.

Hey, thanks. I just had a quick question about the INTRALINK 3.0 migration and just wondering what percent of customers do you think have moved off INTRALINK 3.0 at this point? And of those that have moved, can you give us a flavor for what percent of move or what percent have moved to INTRALINK 8.0 or what percent have moved to Windchill PDMLink?

It's difficult to give you precise numbers because we can't readily get this data. If the customers do the movement themselves, they're not obliged to report back to us and so forth. I think we could probably say anecdotally maybe 10% have moved, maybe another 20% are currently in the process of moving, and most of the balance are the planning the process of moving. I think in general, everybody either has moved, is moving, or is working on the plan to move. And generally speaking, I think probably a majority of them at this point are going to the PDMLink software because it's more readily expanded into the broader picture should you want to do that. It's an upgrade rather than a side-grade.

That makes sense. And then just second, as far as organic desktop license revenue, do you think that can continue to grow faster than the market overall? And I gu -- what gives you confidence that we're going to continue to see stronger pro/E business?

Well, I think it's -- Mike, it's Neil. I think it's a couple things. First of all, we're doing extremely well with our Mathsoft acquisition, so that's helping to contribute to our overall growth rate. But organically, which is really your question, I think what we've talked about in the past is we're starting to see customers looking to standardize on pro/ENGINEER, where they might have had -- previously had multiple CAD environments. So when they adopt our product development system and they've adopted Windchill software and technology, we've seen customers with multiple CAD environments come back around and make decisions around CAD standardization. And that's really in the last few quarters driven the growth of the high-end portion of our pro/ENGINEER business, whereas the low-end portion has been growing pretty impressively for sometime now, and we don't see any signs that trend is abating.

This is Jim. If I could elaborate a little bit, as Neil just said, our low-end numbers look pretty impressive compared to SolidWorks or Autodesk Inventor or anybody like that. And I think the fact of the matter is -- we've said this before but just to go over it again -- we have a very differentiated story. We have a product that can start small, but it can scale to world-class 3D computer-aided design, manufacturing, simulation, PLM, and beyond. And I think that's an interesting story, because we have a little marketing message out there right now that says, you don't have to be a Fortune 500 company to buy our software, you just have to want to be one.

And I think a lot of small companies are saying, some day we might not be a small company, or they're saying, hey just because we're a small company doesn't mean we don't have sophisticated requirements. We might be a specialty company working on the most sophisticated problems. So I think there's a lot of small companies who really want a growth path. And with SolidWorks there's a glass ceiling, and beyond that, I guess you're supposed to switch to CATIA , and we all know that that switch cannot be made, and with Autodesk there is not high-end product.. So you start small, you stay small, and if your needs grow beyond that, you've got to switch to a different vendor. Only PTC can give these customers a scalable path; start small, grow as far and as high as you need with no discontinuity. And that's a pretty impressive story, and there's a large segment of that community who likes that story. Maybe not every last one, but a fair amount of

And to put it into some -- into numbers, I think the MCAT market high-end low-end combined is growing at 5% at best, license revenue. And we grew what, 17% organically for the quarter from 15% or so for the first six months? So we're growing at three times the rate of the market right now. We're absolutely clearly winning in the high end, which the competitors in the high end are not growing at all. UGS announced for the last two years that they've had a decline in high-end CAD revenue. And Deso's only grow -- they have decline in seats and the only growth that's coming is the claw back from the IBM on the margin with the new contract that they signed, where they switched the discount rates and much more favorably to themselves. So in the high end we're absolutely winning and capturing market share and in the low end we're doing the same thing, as Jim just described. I think it's sustainable because when we look at it, it's been going on for a while now and the forecast says the same thing.

All right, thanks. I'll pass it on to the next question.

Thanks, Mike.

The next question from a Mr. Ross MacMillan from Jefferies. Your line is open.

Thank you, this is [Herosio] for Ross. A question on DSOs, they seem to be -- you addressed it a little bit on that transcript -- but when do you think you'll reach your targets and what's really going on there, because they're about six days higher than last year?

It's Neil, DSOs are higher because of the amount of extended payment term financing we did last year, okay? So we've made a commitment to ourselves that that number was not going to go up in 2007 and we've taken -- kind of taken steps to make sure that didn't happen. But what happens is, when we put a deal on the books where we enable a customer to pay for it over two or three years -- and the limit for us is three years -- part of that deal, the part that's less than 12 months, goes into accounts receivable and part of it goes into a long-term asset, and the part that goes into accounts receivable impacts our DSO. So this is really the result -- not so much of what's happened this year but as a result of the extended payment term financing that we did in the third and fourth quarter of last year, which in turn was the result of the significant number of large transactions that we completed in Q3 and Q4 of 2006. Having said all of that, the number's going to come down, but it's going to take us probably three to four quarters to get that number back below 70 days.

Okay.

Hope that makes sense.

Yes, it did. Real quick on Germany, just wanted some specific color on that country, particularly given Siemens is based there and the manufacturing base there and some of the other software vendors that are having mixed results out of Germany?

Well, I think the German -- the market for us -- I don't have it right in front of me in terms of the quarter or the first half, but it's been strong for us. I think Germany grew like 30% in the first half or so, year over year. So like Europe, like -- Germany fuels Europe and Europe's had a great first half for us. Having said that, we've already seen a number of opportunities that are getting more difficult because of the Siemens acquisition, particularly in the Siemens automation base. So if you have a large company like -- Volkswagen is the largest user of Siemens automation drive and controllers in the world, I would think we're going to have a little more trouble in that account going forward in terms of expansion. I think we have to wait and see there. And a little bit back to Jim's point that he made earlier, the story doesn't necessarily resinate with those customers. The factory automation, downstream shop floor story doesn't necessarily resinate with the classic PLM sales cycle with the people involved in that. But at the same time, Siemens is a powerful company in Germany and it's not going to help us there. The combination of UGS and Siemens is not going to be helpful for us in that country.

It may be helpful for us elsewhere.

Yes, it will.

Got it, thank you.

The next question from Mr. Jay Vleeschhouwer of Merrill Lynch. Your line is open.

Thanks, good morning. A question first for Dick and then a product question follow up for Jim. I want to ask about the channels, Dick. You have nominally 300 or more resellers. Your VAR is growing, as you point out, but how broadly is the activity level occuring in the channel? That is to say, how many of the resellers are meeting or beating the quota? How many of the resellers are seeing a good level, or increasing level of their number of transactions of pro/E and other products, then a follow up with Jim?

Jay, the channel's performance really in the first half of the year has been for us just great. And as I travel around and meet with the channel partners, the growth is around the world. It's everywhere. Really, really good performance in Europe and Asia and improved performance in the U.S., as well, which is in many ways our most difficult territory for the channels. So I think we're going to continue to see it. I don't have in front of me the percent or the number of the 300 resellers that have grown their business year over year and so forth. We could think about taking a look at that for you in the future -- for everyone in the future. But just broadly speaking, the channel has a lot of enthusiasm, they're adopting the new products and so when they go against Autodesk or SolidWorks at the channel level, they're now including ITEDO and Mathsoft and broadening the footprint and making our story even more compelling than the PDS story that they've had out there, as well. So, there's -- the channel reseller team, the sales team inside PTC is forecasting up side in the channel during the balance of the year. And just the volume and the deals are there, the forecast is pretty strong.

Maybe even two more quick comments, Jay. I think that basically the acquired products are really something that the channel's interested in. The channel can sell Arbortext IsoDraw. The channel can sell Mathsoft. So the channel basically has more arrows in their quiver. Windchill is still a relatively nascent phenomena in the channel, although it's growing. But our channel partners I think are pretty happy with the scalable version of pro/ENGINEER that we offer, and Jim made those comments about scalability earlier. but they wanted more product to sell and we've given those to them with our recent acquisitions. So I think that's -- that is really helping to drive the overall growth of the channel. The second thing is that we have really supported the channel this year with some additional marketing investment, which they requested, And I think that that also is helping to drive the business.

the other thing, Jay, that's not necessarily clear in the way we report the numbers, though, is the maintenance for those small and medium-sized businesses inside the channel numbers, and the maintenance is growing at a slower rate than the software and services. If you were to look at software and services numbers from the channel in terms of growth, it's a much higher number.

For Jim, a couple of product or technology or questions, particularly in terms of a release schedule. First of all, what are your expectations for MPM Link and how well you think you might do in that manufacturing planning market? Is Wildfire 4 still on schedule for the end of the calendar year or early calendar '08? And finally, with respect to Windchill deployment, if we just do a simple average of all Windchill sold to date, the average customer has fewer than 200 Windchill licenses. Obviously you have some with a great deal more than that, like Airbus, but what is the trend in terms of the scale of deployments of Windchill, both within and without engineering?

Okay, so the first question about MPM Link is generally related to our Windchill 9.0 release, so for everybody on the phone call here, we are coming out with a major, major release of Windchill. It'll be the biggest release of Windchill in the history of the Company. It's coming -- it's being launched this current third quarter at our user conference, which some of you will participate in that launch, probably. It'll be shipped in the early part of our fourth quarter, so it'll probably have some impact on fourth quarter revenues. It contains a long, long list of major enhancements and capabilities and some major -- major, major capabilities, like a brand new manufacturing process planning and process management module that we're calling MPM Link, Manufacturing Process Management. It also contains a new business intelligence subsystem based on cognos technology and a long list of things, too long to review here, but maybe you'll get a review at the analyst meeting. So that -- that release -- like I said, it'll ship in the fourth quarter.

We have high expectations around MPM Link. Not high revenue expectations in the short term, but probably building momentum as we go through fiscal '08 and beyond. There's a lot of interest in this product. Because today, almost everybody's struggling with manufacturing process planning solutions that are not well connected to engineering and product design solutions. Those are different vendors. Even companies that have both have two separate products and two different architectures and two different data bases. So, this idea of putting a manufacturing process management solution into your product development system is a breakthrough, and it's a breakthrough a lot of big and medium sized and even small companies are pretty excited about. So I think we're going to see momentum, but it's not like flipping a switch. You've got to start a sales cycle and run through it and there's already a lot of preinterest, so to speak. So anyway, that all looks good. We're pretty excited about it. I think there'll be a big splash, like I said, at the user conference and analyst conference.

Regarding Wildfire 4, that's a pretty big release of Wildfire 4. It's still slated for the end of the calendar year, possibly the beginning of next calendar year, but that's on track per the schedule you outlined. And with respect to the Windchill deployment an average of 200 seats, one way to put that in context is that I think the average pro/ENGINEER deployment has half a dozen seats or something like that, if you look across all of the large and small customer sites together aggregated together. That suggests two things. I think number one, we are in fact getting well outside engineering with Windchill deployments, but a second phenomena is, yes, we probably also started Windchill in the big accounts and we're moving down market with it. I think we've done a pretty big job with Windchill in the biggest accounts. We're now doing well in sort of the medium-sized account and the resellers have a lot of interest, with either on premise or on demand solutions even taking it downstream from there.

Yes, I think the critical thing ultimately, is this is a solution that complements pro/E, but it goes a lot further than that. And it also works in environments, I want to remind you, that have no pro/E, in our footwear and apparel segment, where Windchill sales are really strong. There's no mechanical CAD to speak of period, much less pro/E at that. So, there's a lot of opportunity here and I think there's a long, long run way for Windchill, both in terms of accounts, seats, new modules like MPM Link, and -- you know, we've got a long, long laundry list of projects we can keep busy with for the next ten years.

All right, next question, please?

The next question is from Mr. Tim Fox of Deutsche Bank. Your line is open.

Hi, thank you, good morning. First question, I think other than mentioning Arbortext IsoDraw, you really haven't discussed the more traditional Arbortext products on the call, and I'm just wondering if you could give us a little bit of an update on how that product's been performing? Has it performed to your satisfaction after the acquisition and where we are from an integration perspective?

Well, I think from an integration perspective we've said all along it's integrated into PDMLink, so -- and I think I've described this before -- we expect it -- as the migration from INTRALINK continues to move to PDMLink, then the opportunity to sell Arbortext into our install base increases. So right now with only 10% of the installed base having moved over to PDMLink, there's a -- sort of a narrow opportunity in the install base today, although that -- as Jim described earlier, that's moving. What we've really done is focused the Arbortext sales force and the development people really in the manufacturing space, our core market, and we've had some really good wins. The Arbortext revenue was up quarter over quarter this quarter again. So the sales force is selling it. It's a part of their forecast and their pipeline, they're pretty excited about it. And I think we're going to continue to see some pretty good results from that.

We probably don't have the same focus in our direct sales force in the nonmanufacturing verticals, so we've employed in the last six months or so more of a partner program to go after the nonmanufacturing verticals. That's probably resulted in a little bit of a downturn in the Arbortext revenue outside of manufacturing in the short-term as we make that conversion. But I think as those partners get more comfortable with the product and build their pipelines, we'll start to see some up side there, as well. But, Tim, the customers love the story about being able to create physical products and associatively create the documentation on time that reflects those products, and we have the world's only turnkey solution to do that. We continue to enhance that solution with products like ITEDO, like IsoDraw, and we have more ideas in terms of doing that. I think it's going to be a big part of our business as we go forward.

That's helpful, thanks. One for Neil, well done on the cash flow in the quarter. Just wondering, given the use of the financing last year, has that ramped back at this point and do you have a cash flow from operations outlook for the full year for us?

Yes, it really remains unchanged. We're forecasting $100 million to $120 million in operating cash flow for the full year. And we started -- I think we started the year at roughly $180 million, so we expect to end the year somewhere between $280 million and $300 million, Tim.

And on the financing, has that -- has that scaled back this year?

It has scaled back somewhat. We implemented some things for the second half of the year because the biggest impact to us on extended payment terms was in Q3 and Q4 of last year, not in Q1 and Q2, which is more associated with the ramp up of big deal activity that we saw. And so we'll await the results of that in Q3 and Q4, but we're sticking to our cash flow guidance, and our cash flow guidance assumed that we would not increase the amount of that type of financing we did this year.

Great. Let me sneak one more in before the bell goes off. Any change at all in respect to the stock buy backs, given your growing cash balances? There's sort of a cash balance level where you get to where it really makes sense to start implementing a plan like that.

Well, I guess I'll say what we have said before. We don't have any current plans to do a stock buy back, but I think periodically -- and that's probably every three to six months -- we do discuss that issue, both as a management team and with the board. And I would say that, while there are no current plans to do that, it's probably likely we'll have that discussion again next quarter.

And I'll ask again. (LAUGHTER)

All right. Thanks, Tim.

Thank you.

I think we have time to sneak in a couple quick questions. I'm told that there's a couple more on the line hanging.

Thank you. The next question is from Barbara Coffey of Kaufman Brothers. Your line is open.

Yes. Good morning, and I will keep it quick. I know that Autodesk is having a push to have their resellers to sell more 3D product. Are you seeing this as an opportunity going forward as more people are exposed to this, but what is your take? and then my second question has to do with, as more products go through the reseller channel, do you foresee a mix shift in the amount of maintenance and service that you guys provide to those clients versus the resellers provide that?

Bobbie, it's Jim, I'll try a stab at your first question. I'm not 100% sure I understood the intent. I think what you were saying that as Autodesk resellers begin to talk more and more about 3D that that causes more people to think 3D and then somewhere in that process they come and talk to us?

Yes.

Is that the gist of it? Yes. I think that, in general, we in the low end feed to a certain extent off the movement of accounts from 2D to 3D and to the extent Autodesk gets them started that way, we pick off a fair number of them. And again, I think our numbers support that. So that's a good phenomenon. We're participating in some of Autodesk's success there, I think, and so to is SolidWorks, no doubt.. I'll turn the maintenance question over to Neil.

Yes, I think -- Bobbie, if I understood you, the second question that you asked, you thought if we were going to -- if we thought we'd see an acceleration in service and maintenance revenue --

No the other way. Do you foresee your resellers providing some of this to the small and medium sized market?

Well, they do provide most -- the bulk --

No, no. Hang on. She's saying instead of booking our revenue, are they doing it themselves like a --

On the serv -- on the services side, the resellers have been providing and will continue to provide. We don't provide in that segment of the market for the most part. And on the maintenance side, we don't foresee any shift. The maintenance revenue is coming our way and will continue to come our way.

And should track the license revenue, really.

Yes.

Thank you.

And the final question is from Sasa Zorovic of Goldman Sachs. Your line is open.

Thank you. My question is what is going on in Japan? Down 8% on a year-over-year basis, we've had new management there [inaudible] quarters. Why aren't we seeing sort of a better results already at this time?

Well, I think what we said on the last call and maybe even at the outset of the year is that we expected to see a modest recovery in Japan this year. That it was a long-term fix that we were working on that we had some significant distribution issues to deal with and had experienced last year of fairly level hi -- a high level of sales turnover in that market. So we actually, I believe, said on our last call that we expected mid single-digit growth for the year, and that while we were happy with the 25% growth that we saw in Q1, that a big part of that growth was the result of a large transaction that did in Q1 and that the balance could be lumpy. So at the the midway point of the year, Sasa, we're up 5% in Japan, which is about where we thought we'd be. We probably were ahead of the game in Q1 and behind the game in Q2. We continue to implement what we think are the necessary fixes, if you will, to improve our overall performance in the Japanese market. And we continue to anticipate the Japanese market will grow for us this year, all be it at probably single-digit rate. So, I'm not going to get too hung up on Q2, because I think we're where we thought we would be in the first half of the year. And I think we've indicated for quite some time that the recovery in that market is not going to be a short-term phenomena, it's going to be a long-term phenomena.

And we're not the only ones that see it. There are a number of other companies that have seen it difficulty in Japan. We'll work at it. I think some of it is the way that the Japanese -- they're just conservative in terms of upgrades and so forth. We've seen very slow movement in Japan to upgrade to both Wildfire and PDMLink. If you track it by country, they're dead last. Now ultimately, that's going to happen, and when it happens, we'll see some up lift in the Japanese revenue. But they're pretty conservative about grow -- moving towards, for example, the PDS system with Wildfire 3 and PDMLink 8. They just want to see it tested out and validated [and see the whole world go first]. But again, with the install base we have, as they start to migrate over time, I think we'll see that revenue come back.

In terms of giving guidance and stuff in the quarterly reports, how much of the benefit did you get from currency? And you're reiterating the guidance for the year, though you're getting benefit from the currency, so if we take the currency out, where we are ending up -- where are we ending up?

Year over year, we had about a $6 million revenue currency benefit offset by about a $5 million expense detriment, so the net impact on our results was about $0.01.

And then if we look forward for the remainder of the year, where you were reiterating the dollar guidance, and I guess your guidance was based off of the levels about six months ago, am I correct in terms of the dollar versus the euro and yen?

Well, we try our best not to predict currency movements. Certainly today we might see either a neutral to slightly positive impact in the second half of 2007 from currency. But we don't -- we don't plan our business at the start of the year or give guidance around our anticipated -- around anticipated currency movements.

So you anticipate basically that the currencies were to stay flat?

That's correct.

Thank you.

Okay. Well, thank you for participashing -- for the participation today, and we'll look forward to talking to everyone again in the middle of the summer. Take care.