PTC Inc (PTC) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the PTC's second quarter fiscal year 2008 conference call results. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, the conference is being recorded.

I would now like to introduce Kristian Talvitie, PTC's Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Before we get started, I want to just quickly cover a couple of housekeeping items. First, we had emailed RSVPs for our upcoming investor analyst and media day, which is held in conjunction with the PTC user conference in Long Beach, California this year. The primary management and customer presentations will be on Monday, June 2nd with time available on Tuesday, June 3rd for one-on-ones. For those who are interested, there will also be an opportunity to attend portions of the user conference as well. The RSVP email that we sent out has details about hotel reservations and registering, but please feel free to give me a call if you have any other questions regarding the event. Also, next quarter, we're going to be making a change to the press release, earnings call process. We'll be issuing the press release and related information after the market closes the day before the call. We hope this will allow everyone, especially the folks on the West Coast, a little more time to analyze the results prior to the call. And so today, on the call we have Dick Harrison, President and Chief Executive Officer, Neil Moses, Executive Vice President and Chief Financial Officer. In addition, Jim Heppelman, Executive Vice President and Chief Product Officer, and Barry Cohen, Executive Vice President of Strategic Services & Partners are here to participate in the Q & A.

As you know, there's supplemental financial and operating metric information, including a reconciliation between GAAP and non-GAAP measures, available on our investor website. And finally before we get started, I would like to remind everyone 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 those projected in these statements. We refer you to the risks detailed in this morning's press release, the Company's 2007 annual report on form 10-K and in the Company's other reports filed with the SEC from time to time. After our prepared remarks we'll hold a Q&A session. In order to keep this moving please limit yourself to one question and one follow-up. With that I'll turn the call over to Dick.

Okay. Thanks, Kristian. Good morning everyone. Thank you for joining us on our Q2 call. As you all read in the press release, we had a solid quarter, $259 million in non-GAAP revenue and $0.30 non-GAAP EPS for the quarter. Our Windchill business continues to outpace the market growth. We added 25,500 new seats of Windchill during the quarter, up from 22,950 in Q2 of last year. We now have more than 550,000 maintenance paying Windchill seats in the market. This is up 28% year-over-year. We are winning in the field. Our technology is performing very well in competitive benchmarks with large global accounts. As you know, we launched Windchill 9.0 last quarter and that is going well. We have a number of customers who are already deploying this version of the product.

The next version of Windchill, 9.1, will be released this fall and will include incremental improvements to some of the new functionality in 9.0 such as MPM link for integration with SAP and Oracle and configuration management capabilities. 9.1 will also offer new capabilities enabling outsourced design to help our customers coordinate better with suppliers and partners.

Our CAD business is also performing well in a difficult market environment. We added 5,000 new Pro/E seats in Q2 up, from 4,850 in Q2 of last year. We now have over 130,000 maintenance paying Pro/E seats in the market. This is up 4% year-over-year. We just launched Pro/E Wildfire 4.0 during the second quarter. This is the most compelling release of Wildfire and is the culmination of 22 months of development work. 4.0 really builds on the foundation from versions 1 through 3, which were all about improving usability, quality, and connectivity with Windchill. 4.0 now comes with some new functionality as well as four new chargeable modules including a DRM or digital rights management tool and an ECAD/MCAD collaboration tool. We have big customers who have begun deploying 4.0.

Overall I feel very good about the business. Companies are continuing to recognize the necessity of PLM applications in an increasingly global and distributed yet collaborative engineering and manufacturing environment. To succeed in today's market, companies need to be able to leverage global resources and share complex information amongst numerous departments internally as well as with suppliers and other partners. We are hearing increasingly about large global companies who are allocating significant capital to PLM implementations. We are continuing to see a solid stream of revenue from large deals.

In Q2 we recognized more than $1 million of revenue from 16 customers during the second quarter, totaling $38 million. Six of these customers were in North America, six in Europe, and four in Asia. This was up from 12 customers last quarter totaling $32 million and comparable to 16 customers totaling $36 million in Q2 of last year. As you know, large deal activity is typically a leading indicator of customers' willingness to invest in our solutions, and we are pleased to see that this investment has continued, notwithstanding the fact that we are faced with a more challenging economic environment, particularly in North America.

Now I'd like to take a few minutes to talk about some of our revenue metrics and our outlook for Q3 and the full year. In aggregate, we achieved 14% year-over-year non-GAAP revenue growth in Q2 including the revenue contribution from CoCreate. By line of business, license revenues of $73 million were up 2% year-over-year, reflecting very strong license sales in Europe, partially offset as expected by continued softness in North America. Sequentially license sales were up in all geographies and 9% in total. Looking forward to Q3, we are expecting a modest sequential but significant year-over-year increase in license sales. For the full year, we are currently expecting mid to high single digit license growth.

Services revenues of $64 million were up 10% year-over-year. We had solid services growth in all geographies, driven by an increasing number of Windchill implementations. Looking forward to Q3, we are expecting flat sequential performance in services revenue. For the full year, we are currently expecting mid to high single digit year-over-year growth for our services business, which is higher than anticipated in our initial FY '08 guidance. At the same time, we expect our services business to be more profitable than in FY '07 due to significant improvements in our consulting business.

Maintenance revenues of $121 million were up 23% year-over-year and 6% over Q1. Q2 was our biggest maintenance quarter ever. As we look to Q3 and Q4, we are a currently expecting modest sequential growth in each quarter. For the full year, we are currently expecting year-over-year growth in the high teens, which is higher than our initial FY '08 guidance.

Revenue by channel and direct. We continue to have good success in expanding our reseller channel with $62 million or 24% of our total revenues coming from the channel in Q2. This is 26% year-over-year growth and up 5% from Q1. Year over year, our channel revenue grew in all geographies, 16% in North America, 35% in Europe, 30% in the Pac Rim and 7% in Japan. Q2 SAM and direct account revenue grew 9% year-over-year.

The outlook for Q3 and FY 08, turning now to our outlook for Q3, we are currently expecting non-GAAP revenue between $260 million and $270 million with non-GAAP EPS between $0.28 and $0.32. For the full fiscal year, we continue to expect non-GAAP revenue of approximately $1.060 billion with at least 22% non-GAAP operating margins. We are expecting non-GAAP earnings per diluted share at the high end of our previously announced range of $1.17 to $1. 27. Despite the potential impact of a slowing economy in 2008, we are confident in our ability to achieve our fiscal 2008 revenue targets. Why? Approximately half of our expected 13% revenue growth for the year is expected to come from the CoCreate acquisition, which is performing very well. The remaining half of the expected growth implies approximately 6% year-over-year organic growth. This is lower than our 9% organic growth CAGR over the past three years as we anticipated a softening U.S. economy in 2008 when we established the target.

65% of our revenues come from outside North America and we have been and expect to continue driving strong performance in Europe and Asia. Approximately 45% of our revenue is maintenance revenue, and given the strength of this business, we are confident that we can meet our $1.060 billion revenue target for the year. Our globalization plan has enabled us to invest in our sales capacity. The number of PTC resellers has risen from 400 last year to 500 today, including the CoCreate acquisition. In addition, for the first time in three years, we have increased sales -- direct sales capacity. On October 1st, '07 we had 380 sales reps. Today that number is 430 and the target is 450 by the end of this fiscal year. This is all built into the 22% operating margin plan.

With that I'll turn the call over to Neil Moses.

Thanks, Dick, and good morning, everyone. As Dick mentioned, we had a very strong quarter, $259 million in revenue with $0.30 in earnings per share. It's worth pointing out that relative to our guidance, these results include approximately $1.3 million or $0.01 in EPS from a legal settlement in our favor and another $0.01 of benefit from a lower than expected tax rate for the quarter. Our non-GAAP tax rate for the quarter was 34%, rather than the 37.5% we had anticipated. Even taking these items into account, our EPS would still have been at the high end of our guidance range for the quarter. We have approximately 117 million shares outstanding as we repurchased $22 million worth of our stock during the quarter or approximately 1.4 million shares.

From an operating performance perspective, we achieved 21 % operating margins, which is a 630 basis point improvement over last year. The drivers of the operating performance improvement were a combination of the margin accretion from the CoCreate acquisition and our ongoing efforts to evolve our distribution model, globalize our workforce, and improve our services business model.

More specifically, as a percentage of total revenue, sales and marketing expense was 290 basis points lower compared to the second quarter of 2007, as we continued to build out our reseller channel and our SAM program. Our services net margin was up 370 basis points over the second quarter of fiscal 2007, as we continue to drive up consulting utilization rates and improve the overall efficiency of this business. And our G&A expense was down 100 basis points, reflecting the benefits of our globalization efforts. And importantly, R&D spending remained in line with last year at 17.7% of total revenues, reflecting our committment to continue to invest in our integral product development system.

Overall, our Q2 non-GAAP operating expenses were $205 million, up 5% from Q2 of last year. The Q2 expense for stock-based compensation was $11 million and our acquisition related amortization expense was $8.9 million. We also had a restructuring charge in the quarter of $1.9 million related primarily to our globalization strategy.

For the first half of 2008, our non-GAAP operating margin of 19.6% is up 480 basis points over the first half of fiscal 2007. Keep in mind, however, that the first quarter of 2008 included approximately $3 million of G&A expense related to the audit committee investigation and restatement completed during that quarter. Excluding that expense, our year-to-date non-GAAP operating margin is up approximately 540 basis points compared to the same period last year.

Total headcount was 4,725 at the end of the second quarter, up 83 employees from the end of the first quarter. And during the quarter, we added 17 new sales reps and remain on track to add 40 direct sales reps this year, primarily in emerging geographies such as China, India, and Eastern Europe.

Okay, moving on to the balance sheet. Our cash balance ended at $259 million, up from $215 million in Q1. And Q2 operating cash flow was $107 million compared to the $92 million for the same period last year. At the half way point in our fiscal year, we have generated $128 million of operating cash flow, $52 million more than the same period last year.

During the quarter, we repaid $52 million of our $220 million debt obligation on the CoCreate acquisition and used $22 million to repurchase shares as I mentioned earlier. We have $8 million remaining on our current $40 million authorization and intend to renew this authorization in order to offset any future dilution. We also continue to have strong receivables collections. Accounts receivable decreased $12 million from last quarter and is down $36 million year-to-date. DSOs for the second quarter are at a five-year low at 64 days, down from 73 days in Q1 and 74 days in the second quarter of fiscal 2007.

Further to Dick's point about the strength of our maintenance business, our deferred revenue balance is at an all-time high at $286 million. We continue to believe that it is one of the best indicators of the strength of our business and our relationships with our customers. The second quarter is typically our strongest quarter for deferred maintenance due to seasonal maintenance renewal patterns, and this quarter is further benefited by the CoCreate acquisition and from favorable currency impact.

Speaking of currency impact, let me give you some further color. On a constant currency basis, we achieved 8% year-over-year revenue growth in the second quarter. And if we look at constant currency growth by geography, Europe grew 16%, Japan and the Pacific Rim each grew 8% and North America declined 1%. Year-over-year, Q2 revenues benefited by approximately $13 million, while expenses were negatively impacted by approximately $8 million. The net result of these currency movements was a $0.03 benefit to earnings per share.

Before I turn to our outlook for Q3 and the full fiscal year, I want to comment on the CoCreate acquisition integration. We are very pleased with our progress here and are on track to complete the integration by the end of the fiscal year. We have also begun the background work to integrate CoCreate with Windchill. Okay, let's now turn to our outlook.

As Dick mentioned, for the third quarter we are expecting non-GAAP revenue between $260 million and $270 million and non-GAAP earnings per share between $0.28 and $0.32. We are expecting slightly lower operating margins on a sequential basis, given some incremental sales and marketing expense in the third quarter. On a year-over-year basis, we are anticipating an improvement in operating margins of over 700 basis points. This guidance assumes a 35% non-GAAP tax rate and 118 million shares outstanding. The non-GAAP revenue and earnings expectations exclude a deferred maintenance revenue writedown of about $1 million associated with our acquisition of CoCreate and the following third quarter estimated expenses and their tax effects. Approximately $11 million of expense related to stock-based compensation, $9 million of acquisition related amortization expense, and approximately $2 million of restructuring expenses related to our continued globalization program.

On a GAAP basis, we are expecting third quarter revenues between $259 million and $269 million with earnings per share ranging between $0.14 and $0.18. Our GAAP tax rate is expected to be 37.5%, and again, this guidance assumes $118 million shares outstanding. And finally with respect to Q3, we expect to retire approximately $50 million of debt.

Okay, turning to the full year, we remain very confident in our ability to achieve our non-GAAP revenue target of $1.060 billion, with non-GAAP operating margins of at least 22%. Given that we have changed our assumption for our fiscal 2008 non-GAAP tax rate to 35% from 37.5% previously, we expect earnings per share to be at the high end of our previously announced range on $1.17 to $1.27.

The full year non-GAAP revenue and earnings expectations exclude a deferred maintenance revenue writedown of about $5 million associated with our acquisition of CoCreate and the following full-year estimated expenses and their tax effects. Approximately $44 million of expense related to stock-based compensation, $32 million of acquisition related amortization expense, $2 million of in process research and development expense related to acquisitions we completed in the first quarter, and approximately $15 million of restructuring expenses related to our continued globalization program. On a GAAP basis, we expect full year revenues of about $1.055 billion, and earnings per share to be between $0.66 and $0.77.

Our GAAP tax rate is expected to remain at 37.5% and we're assuming approximately 118 million shares outstanding. One final note on taxes. We continue to expect our cash tax rate to be at about 25% for the foreseeable future.

Before opening up the call for questions, I'd just like to say thanks to everyone for their support over the past couple of years. We have made a number of changes to our business model, which I believe are becoming quite apparent in our year-to-date results and our going forward outlook. In short, we have built a business that can deliver high single digit organic growth and mid 20% operating margins on a sustainable basis.

Now, I'll turn the call back to Kristian for the Q&A portion.

Thanks, Neil. Okay, with that I'd just like to remind everybody if you could please keep it to one question and one follow-up, and with that we'll just turn it over to the operator to take questions.

[OPERATOR INSTRUCTIONS]. We have our first question from Jay Vleeschhouwer with Merrill Lynch.

Thanks, good morning. Dick, first a clarification about your outlook for the year. Notwithstanding the softness in the North American region, you're otherwise making no changes in your sales capacity plans or other operational plans for the year?

That's correct. So on the sales capacity plan, the plan was to add -- to go from 380 direct reps at the beginning of the year and finish at 420, which we're on track. We're at a little over 400 today. And in addition to that, we've added 30 through CoCreate, so we're really going to end the year at 450 direct sales reps and there's no current plan to change that. If anything, Jay, we might, if the back half of the year remains and the forecast feels good today -- remains steady, as we go into the beginning of next year we might even look to add a few more.

All right, the next question regards Windchill. First, are you seeing indications at all that the Windchill business is becoming an inducement to Pro/E or other business by contrast to the historical pattern where CAD business drives PDM business. Additionally, can you comment at all on the rationale for and timing of the forthcoming light version of Windchill?

Well, I don't think we're going to -- we're not really going to talk about any light version of Windchill today because it's -- there's something in the product plan, but, Jay, it's premature to talk about that.

I think what I would say about customer buying patterns today is that in the old days and until the last couple of years, buying decisions might have been more CAD centric. Today, customers are looking first at the overall importance and complexity around managing their engineering or product information, and that's what's driving most of the decisions. Increasingly, companies like a Toyota, or Volkswagen, BMW, Airbus, Boeing and others have heterogeneous CAD environments that include electrical, mechanical, the software components we've described, and a desire on those larger companies and even mid-size companies to consolidate around a single data model for product information and to manage that information. So we're seeing more emphasis on the data management part of PLM.

PLM is a catch all of everything, which is a little bit of a misnomer. But when we look managing CAD data in the engineering department and in the enterprise, Windchill is by far the market leader. We're winning the business there versus our competitors and we do have examples, big examples of customers that have made those decisions for Windchill and then gone back, companies like Dell, Ingersoll-Rand, and others, and consolidated CAD decisions around that PLM decision.

All right, finally just a quick question on Pro/E. It's been a year now since you introduced the multiple configurations of Pro/E with other product, such as Arbortext. Have you seen any mix and therefore ASP improvements in that part of the business?

Jay, it's Neil. The ASPs for the Pro/E business have remained relatively flat over the past year and I would say that the -- in terms of the packages, still the most popular packages are the high end package at roughly $20,000 ASP price point and the kind of low end package at the $5,000 price point, but we have seen some traction in the other three packages that we announced a year ago.

Okay.

The other thing, it's Jim, just to add, the real reason behind that repackaging and naming project we did last year was to help customers really understand, particularly in the reseller space, the advantage of Pro/E being a scalable product . And I think the best metric is how are we doing with seat sales, because if people understand the advantage of a scalable product, they're more likely to buy that product than some of its competitors. And I think using that metric it feels like that program is working fairly

Okay. Thanks a lot.

Sasa Zorovic with Goldman Sachs, you may ask your question.

Thank you. So, specifically regarding currency benefit when you mention year-over-year, could you tell us what the benefit has been sequentially and specifically since you provided your guidance for the quarter?

I think I'm going to let Neil handle that one. Do you have that?

Sasa? I don't know (inaudible) sequentially.

I'm sorry, say again.

Hang on, we're getting the answer for you.

Oh, okay.

Okay, so we've been -- last year, last quarter, we benefited $12 million year-over-year. This quarter we benefited $13 million year-over-year from a currency perspective overall. But I don't have the number of -- Sasa, we can take it off line because I think we have a call today on the currency benefit since we provided our guidance.

Okay, fair enough. Now, could you also then tell us a little bit about sort of what happened in the rest of Asia outside of Japan. So obviously Japan was fairly strong, but given how strongly the economies are growing there, in Asia outside of Japan, I believe there was a 9% growth rate there. Why not more than that?

Yeah, if we dissect Asia a little bit, the growth in the China market, which is our largest Pac Rim market, continues to be very strong; and when I say very strong, I mean in the 20-30% range, and that's been the case for some time now. We had a more difficult quarter in the Taiwanese market; and the Korean market, which is our third major market in the Pac Rim, had mid to high single digit revenue growth overall.

And is that? Is it because of -- why is that, specifically? Is it like competitive or why is that?

Actually, the Korean economy is not growing at the same rate that the Chinese economy is, so we're growing in Korea in line with the market and we've got about 70% market share in Taiwan and so we've kind of got a situation where our business is somewhat saturated there.

Thank you.

Mike Olson with Piper Jaffrey, you may ask your question.

All right, thanks a lot. Just a question on the macro environment. It makes sense that you're taking a conservative stance on North America. Does it make sense that if North America is weak that that could catch up to other developed geographies like Western Europe, and is there a potential for weakness there, and is that in your outlook?

Yeah, Mike, it's Neil. We're not seeing that yet. I think that you're absolutely right. If we're in for a prolonged problem in North America, I think it would be a little bit naive to think that Europe wouldn't be affected by that as well. But at this point in the year, half way through the year, we're not seeing it, and our forecast for Europe going forward at this point, the pipeline still looks pretty strong. But again, I think it's how long are we in it in North America, and if we're in the much past the end of this year, then probably Europe is going to be difficult as well, but again, the pipeline doesn't reflect that today.

Okay. And then just second one is -- probably this is more of a question for the Analyst Day, but do you guys have any metrics on what revenue per customer or revenue per user looks like over the last couple of years? I would imagine it's moving higher as Pro/E customers become Windchill customers, become Arbortext customers, et cetera, but any specific metrics you can give there?

Yeah. It's not necessarily the metric we track but we'll do a little bit of homework on that, Mike, and we will catch up with you on that at Analyst Day if not before.

Perfect, thanks.

Yes.

Andrew Matorin with Bear Stearns, you may ask your question.

Thank you very much. Just with respect to North America and the continued weakness there, can you comment a little bit about what you're seeing in the pipeline and your customers' temperament. Has it changed at all in the last couple of months, improved or worsened, to any degree?

I think we talked about it during the last meeting a little bit, the last conference call, that we -- I would say that North America is a little bit cautious, although what -- Quarter-over-quarter, was North America up a little bit in terms of -- it was down 1%? So I think that what we saw is some big deals get a little bit smaller, so they're still continuing to invest but maybe instead of going out with a 2 or 3,000 seat deployment right away they might cut that in half. So they're still investing in this globalization and the infrastructure behind it. They're just being more cautious about some of the rollouts.

But also the forecast that we sort of -- the preliminary forecast we have for Q3 shows that North America is going to go up a little bit. And there's enough activity across-the-board with channel and direct and the maintenance and so fourth that we feel pretty good about that. Now, we have to execute on those big deals but there's pretty good work in process in the forecast.

When I think about it at a higher level right now, we're at an early cycle in terms of refreshing our products. Windchill 9.0 came out October 1st, roughly. Wildfire 4.0 came out in January or February, so these are two brand new releases, both with chargeable modules, and we've added 50 sales reps in the last six months, so we feel pretty good about the fact that -- and probably with CoCreate an additional, and our own recruiting, 100 channel partners in the last six months. So we're starting to make a dent in the capacity issue. At the same time we have brand new products coming to the marketplace, or versions of those products, and we feel pretty good about the back half of the year. And the maintenance business is particularly strong, which is going to give us a little bit of lift in the back half as well, so that's a little bit what I'd say is behind the guidance.

And just a little bit more on that. You had said that the 3Q forecast is North America going up. Is that year-over-year or quarter-over-quarter or both?

Both.

And then just an additional question on the indirect channel. Obviously, you acquired some more resellers via the CoCreate acquisition, and looking at the growth in the indirect revenue I think it was up about 25% year-over-year. Can you talk about the organic kind of growth in the channel and kind of if you're seeing change in kind of the demand at that mid market level?

Organic versus CoCreate on the channel mix?

In terms of the overall growth rate?

Yes.

At 26% overall, if I had to estimate it, probably around 15% of that is coming organically from the channel and the balance is coming from CoCreate. We can try and give you an exact number.

Okay, and you haven't seen any significant changes in the demand, then, in the mid market environment?

Nope.

It continues to be strong there as a matter of fact.

And in terms of -- sort of the pretty close to the exact numbers, we started the year with about 400 channel partners. CoCreate brought 65 or so, and then we've added another 35 ourselves in terms of recruiting 35 or 40, and we deleted a few, so we're right around 500 total channel partners today.

Okay. Great, thanks a lot.

Yes.

Greg Dunham with Deutsche Bank, you may ask your question.

Yes, quickly on the margin front. Looking out to the back half of the year, plugging in the numbers and the 22% operating margin, I'm having a difficult time getting even below that 127 number for earnings. I guess the question is twofold. What are you assuming for taxes and other income and where do you think you're going to get the leverage on the margin line going forward?

So I guess the first piece is we're assuming a non-GAAP tax rate for the full year of 35%.

Okay.

So that -- so what we said today on our call was that although our guidance previously has been $1.17 to $1.27, that we expect it to be in the high end of that range because of the change to our non-GAAP tax rate, lowering it from 37.5 to 35%.

So on the back half that tax rate should jump to around 37.5, then?

No. No, we're about 34% at the half way mark.

Okay. So it's just up slightly?

Up slightly.

That helps and then looking back, you've grown services margin by nearly 400 basis points over the past 12 months. What kind of expansion would you expect going forward over the next 12 to 18 months on that front?

Well, I think the -- what you seen in the last six or so months in the services business is what you'll continue to see for the balance this year. Our plan is to expand our services margins by 400 basis points for the full year, and the principal reason that's taking place is because the rates on our -- the utilization rates for our consulting business are up significantly. They're up about 10 points from where they were in the year ago period and that's driving some significant margin expansion.

Going forward beyond this year, we obviously have not put together a plan for next year yet, but do we think there's more leverage there? Yes, probably not the same type of leverage we're experiencing this year. But is there another 3 to 5 points of utilization leverage in our services business and could that drive a couple more points of services margin? Yes, I think it probably could.

Okay, and then one final question quickly. Given the change in the market and given the integration of CoCreate, do you guys consider yourself more likely to get more aggressive on the acquisition front, given the valuations of some of these other properties out there?

Well, it's a good question. I guess first of all, what we said for at least the first half of this year and probably in the short-term, we're still continuing to focus on making the CoCreate acquisition a success, integrating that company successfully into PTC, and I think I said before it's going well. You know, as far as future acquisition activity? I would say that there's still a disconnect between most companies that are out there, if they're public companies, between what their valuations were six months or a year ago and what they are today. And so even though there are depressed valuations that seem like they might create opportunities, you can't pay a 20% or 30% premium over today's valuation and expect anybody to pay attention to you. So I don't really think we've gotten to the point where companies that could potentially be acquired by PTC or for that matter other companies in the software space have come to terms with their current valuation. And I think that's actually acting a little bit as an inhibitor to acquisition activity over the next six months or so.

That's very helpful. Thank you.

So I don't think, in the short answer -- I think it's a good answer, Neil, but we're not going to be more aggressive than we've been. We don't have any plans to be more aggressive. And I think as I was describing, we feel like our products are strong, we're improving our capacity, we've done some acquisitions to round out our footprint. Right now, I think we have a really good opportunity to execute against the solutions we have in our installed base and we're winning some new accounts with the footprint we have.

Great. Thanks.

Our next question is from Steve Koenig with KeyBanc Capital Markets.

Good morning, thank you. First question and then a follow-up. First one is just looking for a little more color on the strength in licenses that you have this quarter. Can you help us understand -- is it modules and upgrades, new license deals, big customers, small customers, CoCreate, just a little bit of color in terms of what was maybe most important in helping you there.

Yeah, Steve, it's Neil. On the Pro/ENGINEER side, it's definitely sales of new seats, both low end and high end. Sales of modules have actually been down for several quarters now, and that's because we just released a new version of Pro/E Wildfire. Towards the end of a previous release, those module sales decline and then when you release a new product, they begin to increase again. So what's driven Pro/ENGINEER license revenue is principally sales of new seats.

On the Windchill side of the house, I would say that the primary driver of Windchill license revenue has been PDM length, which -- and that's actually been the case for some time. That's definitely the biggest driver of what we're seeing in terms of Windchill license growth. That would be new seats of the most core module.

Okay. Great, thank you. Which kind of bridges to my next question then. How did CoCreate do from a license perspective? And you guys gave the break out for CoCreate on the indirect channel. Can you help us with kind of the break out overall or at least for the direct channel, that -- regarding CoCreate?

Well, I can tell you we don't kind of break out the CoCreate revenue separately but just anecdotally, from a license and total revenue perspective, CoCreate is performing as if not slightly better than we expected for them this year.

Okay, great and then just a clarification there. When we looked at the 8-K for CoCreate prior 12 months last year, kind of relative to your guidance, it looks like you've been fairly conservative on CoCreate. Is it currency? Is it you're pruning revenues in selected geographies, or is it that you've got some upside possibility? Could you help us understand that?

I'm not sure I understand the comment that it was relatively conservative. Before we purchased CoCreate, their revenue was relatively flat for two or three years at roughly $75 million to $80 million annually. We corrected a plan this year on the basis of that knowledge, and the fact that this year was an integration year for CoCreate and the real leverage associated with the sales force was probably an '09 issue as opposed to an '08 opportunity. But let's put it this way, CoCreate's revenue is up year-over-year.

Okay. That's very helpful, thank you.

We're not talking about a big number.

Yes.

They running at roughly $20 million a quarter. We're not talking about a big number.

Okay, great. Thanks.

Ross MacMillan with Jefferies, you may ask your question.

Thanks. Neil, just on the FX. So you said I think 8% growth ex-currency and you had in print 14, which implies about 6 percentage points of growth from currency. Would it be fair to think about that being the right number to also apply to the license number, so you had a five or six point benefit on license as well?

It's a little bit disproportionate to the maintenance business. So when you think about how our maintenance business performed, you should provide a greater percentage to maintenance than you should to either the license or services business.

Because of the CoCreate European base?

Yes.

Okay. And then just on --

And by the way, we have a disproportionate volume of maintenance for PTC in Europe as well.

That's fair, yes. Okay. And then just on the -- you obviously paid down I think certainly more than I expected on the debt this quarter, and it sounds like you going to do another $50 million next quarter. I can't remember if you actually disclosed what you'd be paying down but it seems ahead of plan, so should I think about that sort of $50 million per quarter paydown rate as being kind of ongoing?

No. It will vary a little bit by quarter. I think on the last call we talked about the fact we expected the debt balance to be in the $100 million range at year end. So the fourth quarter paydown will be less than $50 million, maybe half that amount.

Okay. So there's no change to the paydown plan?

No.

Okay, perfect. And then just on the M&A, going back to that question. Obviously this year you're still kind of going through the process of integrating CoCreate, but just from a capacity standpoint, would you be willing to take more debt again in the event of another acquisition that came your way if it was the right thing to do?

I think the answer is if it was the right thing to do, the answer is yes, but my comments earlier I think are a little bit important because I think there's -- it's tougher to get a deal done in this environment right now, both because of the mind set of companies that could potentially be acquired and because the debt markets are obviously not in very good shape.

Yes. And then just final one just on the buyback. It sounds that you're going to go and reup on the buyback authorization and you also mentioned I think just keeping the share count sort of adjusted for the dilution. Is that how we should think about it, it's more going to be kind of flatlining on a diluted basis, you're just going to try to keep that number relatively flat compared to stock option issuance with the buyback?

That's right.

Perfect. Thanks very much.

Just a clarification, we're going to ask for the authority to do that. We haven't done that yet, but that's something we're going to ask to do.

Yes.

Sterling Auty, with JP Morgan, you may ask your question.

Yes, thank you. If we take the 6% organic growth comment and kind of back out the currency benefit and look at that growth rate, it would seem to suggest that the seat growth is actually a little bit better than the organic revenue growth without the currency benefit. And what I'm wondering is what is that suggesting about what's happening to pricing out there in the marketplace?

That's a good question. I think first of all your high level observation is correct. On the Pro/ENGINEER side, ASPs have been relatively flat and we expect will continue to be. On the Windchill side, ASPs are down slightly, which is -- and the reason for that is, increasingly, the seats that we're selling with respect to Windchill are not necessarily the high end seats that were sold into the engineering department, but they're lower end seats that we're selling into the enterprise, which is the strategy around Windchill, right, populate engineering department first and then populate the enterprise. So pursuing that strategy means over time, Windchill ASPs probably will come down slightly, but there will be a proliferation of seats, and hopefully that will continue to help drive a real healthy Windchill revenue number, north of 20%, as it has been for the last three years.

So it's still just a mix issue, not an actual pricing issue?

That's correct.

And then the follow-up question is on the maintenance side, can you give us a little bit more color? So the 21% growth in maintenance, how much of that is just from kind of bringing CoCreate into the mix? Is there any other items, whether it be customers coming back to maintenance or any other items that might be benefiting you on that front?

Well it's really three things, right? One is CoCreate, a second is the benefit of currency and the third is we have had a big push in our maintenance business in terms of win back programs to try to drive up higher initial attach rates and higher longer term renewal rates and those efforts have really been going on for a couple years. It's one of those initiatives like globalization, like services profitability, like evolving our distribution model. It's really begun to pay off for us.

Okay, thank you.

Jay Vleeschhouwer with Merrill Lynch you may ask your question.

Thanks, a follow-up technology question for Jim. First, are you seeing customer piloting activity at all of Dassault's V6 architecture? Secondly, any take on yesterday's UG announcement of their new so-called synchronous CAD for Solid Edge and for NX, and then a follow-up?

So on the V6 thing, I think most customers I talk to are highly skeptical about that. A lot of them think that it's sort of an out there idea based on some questionable architectural approaches. For example, storing CAD data in a database rather than in a file system, which has been proven by several vendors not to work that well. So I'd say I see a huge amount of skepticism from customers and I think customers would by and large prefer that Dassault just finish V5 rather than switch horses again and start talking about a new architecture.

So I don't see any competitive pressure. In fact, I think Dassault is potentially walking the plank with here this V6 story, having not really satisfied customers with V5 and now embarking on a riskier yet strategy.

With respect to UG, the synchronous CAD story, all I would say is I think that's a reaction to PTC buying CoCreate and starting to position some of the benefits of explicit modeling, because that is really a story about the new UG architecture which embraces more explicit modeling. And by the way, Dassault has had some similar comments where they're talking about their next -- their V6 architecture also highlighting explicit modeling so I think that this CoCreate story is getting some traction and I think the competitors are trying to react to it and beef up their explicit modeling strategies as well so we don't pull ahead with a big advantage in that area.

Just a clarification on a phrase you used earlier in the presentation; I think it was Neil. You said you have an integral product development system. Is that the same as integrated, the term you've been using historically?

Well, we've been using the term integral for a long time, Jay, if you go back and check our slides and so fourth. What integral means is that the pieces are designed to work together. Okay? Integrated means they're actually not designed to work together and then after the fact you do your best to patch them together. I was in a meeting last week with a large aerospace company and I said, your aircraft are integral, the wings are designed for the fuselage. You don't make any wings with any fuselage. When you launch a new program, you do a fuselage and wing integral design, and that aircraft performs very well. That's the concept of our product development system is that the products are engineered, or in some cases reengineered after an acquisition, to work seamlessly together. We bring the source code all in house. We do the engineering that's necessary so we that can put a pretty impressive solution back in front of the customer.

All right, and then finally, do you think that next month's CoCreate release will move the revenue needle at all, or is it just relatively small thing, do you think?

I think in the world of CoCreate it's a pretty big release, actually, so I think there's a lot of -- there's some trepidation no doubt in the CoCreate base. What does it mean that PTC bought CoCreate? What will they do with CoCreate? Is it really strategic or not? I think that this release will answer those questions. This is going to be a big media impressive release that came out under the PTC brand, and I think it will reassure people that we're serious about this product and they should feel comfortable moving forward with buying decisions or expansion decisions.

Thanks, Jim.

That it?

So we have time for one more question.

Okay, Sterling Auty with JP Morgan, you may ask your question.

Yes, thanks. On the comments you guys made around the strength in Windchill and PDMLink, can you just give us additional color? How much of that is traction in kind of the interlink upgrade process, and how much of that might be just greenfield opportunities just because of the need for data management, where it just hasn't existed before?

Yeah, we're looking around here. It feels pretty balanced, maybe half and half. We're doing well on both fronts. The pro interlink upgrade, that's a big opportunity and a lot of that remains out ahead of us and at the same time, independent of that, without that factor, we continue to do well competitively and have a pretty robust pipeline of Windchill deals unrelated to Pro/ENGINEER.

Okay, thank you.

Okay, so again, thanks for the participation today, and we do, we feel pretty good about, notwithstanding the economy, about where the products and capacity is right now, and the services engagements and so we'll look forward to giving you a good report in July. Thanks again.

This does conclude today's conference. You may now disconnect.