PTC Inc (PTC) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's third quarter fiscal 2008 results conference call. After brief opening remarks, we will conduct a question and answer session. Instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded.

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

Thank you. Good morning, everyone, and thanks for joining us today. Before we get started, I wanted to quickly cover a couple of housekeeping items. First, as we've been communicating this quarter, we've adopted a new approach to releasing our financial information. In addition to the normal supplemental financial and operating metric information, which includes a reconciliation between GAAP and non-GAAP measures which we posted to our website yesterday in conjunction with the press release, we have also provided a written copy of the prepared remarks portion of today's call which we will not be reading live. The intent behind this change is to provide our shareholders with more time to review and analyze our results prior to the call. Consequently, this morning's actual prepared remarks will be very brief and then we'll open the call up for Q&A. We look forward to any comments you may have regarding this new process.

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 these -- from the results projected in these statements. We refer you to the risks detailed in yesterday'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. Now on to the call. Participating on this morning's call are Dick Harrison, President and Chief Executive Officer, Neil Moses, Executive Vice President and Chief Financial Officer, Jim Heppelmann, Executive Vice President and Chief Product Officer, and Barry Cohen, Executive Vice President of Strategic Services and Partners. I'll now turn the call over to Dick.

Thanks, Kristian. We had a very strong quarter with $273 million in non-GAAP revenue, above our guidance of $260 million to $270 million, $21.3 non-GAAP operating margins above our expectations of between 20% and 21%, and $0.33 non-GAAP EPS, above our guidance of $0.28 to $0.32 cents. And we have a solid outlook for Q4, despite a soft economic environment in the US and some uncertainty about the strength of the global economy. We are initiating guidance for the fourth quarter of non-GAAP revenue of $290 million to $300 million and non-GAAP EPS of $0.38 to $0.42 cents. I continue to feel good about the long-term prospects for our business. We have made some substantial changes to our business model, which I believe are becoming quite apparent in this quarter's results and our going-forward outlook.

We have been investing in sales and marketing resources to capitalize on the market opportunity, we continue to invest in R&D and it is paying off. Our products are performing very well in competitive benchmarks. In short, we are winning. Companies are continuing to globalize their engineering and manufacturing work forces and processes. To do this effectively, they need to be able to leverage and share complex, product design data amongst numerous departments internally as well as with suppliers and other partners. We believe the necessity of PLM applications is only increasing in today's market and that PTC is very well positioned to deliver value to our customers and our shareholders. With that, I'd like to open up the call for questions. Operator.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Ross MacMillan with Jefferies & Co

Thanks. So, congrats on the quarter. First question just on Japan. We've been watching Japan for some time and it gradually improved, but this seemed to be a breakout quarter. Could you just describe whether there was any particular single large deal there or just are we reaping the benefits of the improvements and change in management you put in place a little while ago?

Ross, it's Neil, good morning. It was a good quarter for Japan, no question. We did have several large deals in Japan. As a matter of fact, three of our top five deals this quarter were in Japan. So even if you strip those deals out, it was a good quarter for Japan. But, we did have significant large deal activity there.

Great. Then just to follow up, I know you gave specific clarity on the revenue and operating expense benefit from FX. Could you just remind us, I don't know if you have it to hand, do you have the last couple of quarters where you could give us the same data?

I'm sure we could get it for you offline. I don't have it in front of me right now.

Okay. I'll get it offline. Very last one, I think CoCreate when you bought it was doing kind of quarterly run rate license of maybe something around $4 million or $5 million a quarter. Would that be consistent, has that business kind of performed in line with your expectation from a new license perspective as you've started the integration process?

Yes. The license revenue has performed in line with expectations and the overall CoCreate business has performed slightly above expectations.

That's great. Thanks a lot.

You're welcome.

Thank you. Our next question comes from Jay Vleeschhouwer with Merrill Lynch.

Thanks, good morning. Besides Japan, there were two other metrics that were notably changed from prior quarters. First, ProUnits, as you mentioned in the remarks, were down sequentially quite a bit from Q2. They were up a little bit year-over-year, but you got it against an easy compare. Would you say that it's in the ProE unit volume that you're seeing the bulk of the effect of a softer US economy and what are your expectations now therefore for Q4 and beyond? Secondly, you had unusual strength in maintenance, sequentially particularly, but I would assume that that was highly correlated to the strength you saw in Windchill, so the question there, too, is how repeatable or sustainable is that strength in the maintenance number?

Jay, it's Neil. With regards to your first question, actually, our business in North America is more heavily weighted towards Windchill and enterprise revenue, relatively speaking, than our overall revenue worldwide, so the weakness we've seen in North America has manifest itself more on the enterprise side than it has the desktop side. So that's not an explanation for the desktop units. Your second question, I always get confused with two-part questions.

Me, too. So the question was about the unusual strength in maintenance and whether that was repeatable or sustainable.

Well, the maintenance business has been very strong. There are three pieces of it. The underlying organic growth for maintenance has been strong, number two, we've exceeded expectations on the maintenance stream in CoCreate and then finally, currency has been a significant tail wind for our maintenance business. With respect to the first two pieces, we expect those to continue. Our renewal rates improved this quarter in maintenance, which was great to see. With respect to the tail wind from currency, obviously, you know that's a crap shoot.

Right. Just to follow up, though, on the first question about desktop, regardless of the weighting of North America, how do you explain the rather large sequential decline in pro E, regardless of where it occurred and how are you factoring in ProE for Q4?

Jay, at that level, there's a lot of fluctuation in those numbers when you go down two or three levels from total revenue to desktop units from quarter to quarter and we try to understand why it took place, but it -- there's a lot of fluctuations in our business that take place at a micro level like that, that we don't spend a lot of time on, quite frankly.

And Q4, the forecast which we've talked about, Jay, looks strong, so I'd anticipate right now it's going to bounce back a little bit. And the other thing we've done is we've talked about the fact that one of the things we've been able to do with our offshoring plan this year is not only to save a lot of money, but to invest in sales and marketing for the first time really in the last three years. So we've added some overlay capacity, sales capacity, I'm not sure if I'd call it overlay.

We've actually attached these sales reps in the field directly to the regional managers out in the field, so they have sales quotas specifically for ProE. They're not corporate resources, they're field resources and the regional sales managers have a ProE quota, for example, or a target that they have to hit with these additional product specialists. So I think that will provide a little more focus on the ProE business as we go forward and the channel execution has been great. Channel had a very, very good quarter. So I would say that if you're disappointed in the ProE seat numbers, it's probably coming from the larger direct accounts where we've talked about the fact there is some saturation.

Right. Lastly that last comment regarding the field, Dick, leads to my final question regarding sales capacity. The direct side, you substantially rebuilt that over the last few years, not as high as it was back in the old days, but it's the largest number in a while. How are you thinking about that in terms of capacity driven growth into '09?

Well, we think -- so we started this year at about 380 reps. Then we bought CoCreate and we picked up about 30 sales reps there and during the course of the year we've added another 35 or so -- 35 or 40. We're at about 450, 455 total sales reps today and we're going to continue to add a few more in the fourth quarter. So we're basically going to add 90 sales reps during the course of the year, which is a significant number. Now, depending upon where they're allocated, we're going to -- and the sales cycles associated with that, I would layer in that capacity and the impact of that capacity over the '09 year. We always factor in a six to nine-month ramp up. So we're not looking for any real input from those sales adds in '08, although we might see a little bit in the fourth quarter here, but I think we'll start to see it come in to '09 and particularly in the back half of the year.

Thanks, Dick.

Thank you. Our next question comes from Sterling Auty with JPMorgan.

Thanks, hi, guys. Can you talk to us about given the FX benefit that you saw in the quarter, what have you actually embedded into the guidance for the fourth quarter on currency exchange for the major currencies?

We don't, we don't assume any up tick or down tick with respect to currency when we give our guidance for Q4 or the full fiscal year. So our projections are based on where currency is today in terms of the guidance that we give. We never speculate on currency from a forward-looking guidance perspective.

Okay. On Japan, was it channel or was it direct sales that brought in the large deals and can you comment, were any of the big deals actually Toshiba kind of coming back to the -- coming back to the plate here.

Yes. That's a good point. Jim just mentioned the CoCreate's in that Japan number too, they have a strong business in Japan, about 25% of the revenue. The large deals that came in were through the direct sales force and one of those large deals was with Toshiba.

Great. Then last question is we've talked in the last couple of quarters about the idea of kind of the higher price, full featured Windchill seats versus some of the lower priced ones, given the real good seat count in Windchill, can you give us a flavor to what that mix looked like during the quarter?

To be honest with you, I haven't seen the mix numbers on the Windchill seats between high end and low end. I don't think we have that data yet.

Do we have ESP. We could infer it from that. Sterling, we'll get back to you.

Okay. That's fair enough. Thanks, guys.

Thank you. Our next question comes from Richard Davis with Needham & Company.

Hi, thanks. With regard to the Dassault kind of V6, it seems to me that they're, at least when you talk to end users, they seem to be kind of closing down their or locking down their network or locking down their access to their software in terms of working well with other vendors. How does your strategy compare to that and what have you heard from clients? Do they, competitively, do they like that strategy or is there -- the point is I'm trying to figure out if there will be any plate tectonics with regard to market share.

It's Jim here. So if you look at this V6 strategy, there's a couple of sort of fundamentals to it. One is the idea of deeply integrating CAD with data management. That's a pretty good idea. We did that five years ago when we launched our concept of a product development system. So I'd say that's a good idea five years behind the rest of us. The second thing, though, is a closed attitude, as you mentioned. The Dassault strategy basically is we're going to hide the Catia files inside the Matrix database, so if you want to use Catia you'll have to buy the Matrix database. Basically, you won't have an option theoretically to use another system, it will be too closed for that.

You can imagine that already just the principle of it being closed is quite irritating to customers and the attempt to force sort of secondary decisions through a closed strategy, but I think the bigger problem -- Windchill supported the idea and so have others of sticking CAD files inside a database for some time, but I can tell you there are massive performance implications. If you -- if you add a second to how long it takes to access a file and then you try to open a 10,000 part assembly and it takes 10,000 seconds more than it did at the previous release, you're pretty much ready to throw the software out the window. So I think -- personally what I'm telling you is I don't think it's going to work technically. Second of all, I think customers are going to reject it because they're not really in a mood to adopt closed strategies in this day and age. Our strategy integrates things deeply, but in an open way.

We gave you a compelling reason to buy Windchill if you use Pro/ENGINEER, we don't force you to. And I think customers don't like being forced to do anything, especially the big auto and aero accounts who have been a little abused by the Dassault in recent history and don't really want another round of it. So I think the tectonics are there may be a massive nonadoption of Catia V6 and a massive vulnerability associated with that when customers scratch their head about what's the future of their relationship with the Dassault.

I think it's already happening. Have they announced a Matrix win in the last two years?

They may have, but I didn't see it.

Our windchill business is exploding and one of the reasons it's exploding and I think Siemens PLM business is strong as well, both of us are feeding off the Dassault base. We're in their biggest accounts and many accounts are going directly from Catia to Windchill. I think this V6 is a reaction to the fact that they're getting clobbered out there and Matrix has become sort of difficult. It was just misused for so long, I think it's been difficult for them to repair it. Before they acquired it, it was just in disrepair and we're going to continue to announce lots of deals where we're managing Catia files and I think this strategy is going to compel them to actually lose business. I know Volkswagen in the body area is going to manage Catia files with Siemens PLM system with Team Center.

There are a number of those kinds of things happening in the marketplace today. I think it's a reaction a little bit out of the fact that they're losing market share and they don't know what else to do about it. But to Jim's point, we looked at doing the same thing with Windchill and we're ahead of them in terms of deploying solutions with Windchill. Windchill is going to do $420 million or so in revenue this year and Matrix is doing $100 million. So we're way ahead of them in terms of revenue. We're four times larger. We have a lot of experience in managing those CAD files directly in a Windchill database and Jim just told you technically it's not going to work.

Not for nothing, directionally, at least, the anecdotal comments that I have gotten have been similar to what you're saying. That's what I asked. So thanks very much.

Yes.

Thank you. Our next question comes from Mike Olson with Piper Jaffray.

Good morning. An area of focus from a risk to numbers perspective has been Europe and you had a strong Europe quarter. What are the catalysts in the Europe business that would work to offset kind of a Europe macro slowdown in the second half of the year if things were to significantly deteriorate there?

Well, what I would say is, Mike, it's Neil, our European business has been strong now for 18 months or so and certainly we've benefited from currency, but we've basically seen kind of mid-teens or better growth even if you strip out currency. At this point in time, we've got a very, very strong sales force in Europe, a number of very large global accounts there and that's where the heart of our competition is with Siemens and Dassault and SAP. It's the area where we continue to do best. That's not to say that if the North American recession is prolonged and that it's not going to spread globally and certainly spread to Europe. Today we are not seeing signs of that. We -- our European business continues to be strong. Our pipeline there and in Asia continues to be very strong. North America business stabilized a little bit this quarter, albeit off of a weak quarter from last year, but we are seeing signs of stability in North America for Q4, not necessarily growth, and our internal forecasts for Europe continue to be strong for the balance of the year.

Okay. And as far as operating margin targets, are you still comfortable with this 25% op margin target for fiscal '10?

Yes.

And tax rate for fiscal '09, any guidance you can give us there?

We're not going to give any guidance for FY '09 on this call, but I think if you look at what's happening to our non-GAAP rate this year, it's coming in under expectation. We're running, I think about 33% or 32% --

34% for the year.

34% for the year, but 32% or 33% year-to-date and we hope we can knock a point off -- or two of that off of next year, but we'll talk more about that in October.

One last one. Can you just give us any update on how far we are through the migration of interlink three to Windchill users. I think the last data point was that you were around a third of the way through the transition of the user base there. Any latest data points you can give us?

Yes. I have not seen new data. We haven't run a new analysis of that in the real recent time frames, but I would imagine we're in the 40% to 50% range now.

Okay, thanks.

Continuing to make good progress and there's a large number of customers yet to go.

Okay. Thank you.

Thank you. Our next question comes from Barbara Coffey with Kaufman

Yes, good morning. A couple of things. As you're taking a look at the reseller channel, it had some pretty amazing growth. Would you attribute some of this to the CoCreate acquisition or are there other specific factors that are in play there? Also, as you look around the world, are there certain verticals or certain industries that are showing outside strength versus others that are showing particular weakness?

So on the reseller question, Bobby, it's Neil, I think we had 48% growth year-over-year in the reseller channel. If you strip out CoCreate, which has a very, very strong reseller channel, our quote unquote organic reseller revenue growth was I believe 19% year-over-year and we've averaged 15% or 16% over the past four years. So it was a strong kind of, quote unquote, organic reseller quarter and we got a great contribution from the CoCreate reseller base. When we talk about specific verticals going forward, we continue to see strength in the aerospace and defense vertical, which continues to be good for us. Certainly we continue to see strength in high tech and electronics. And if we've seen any weakness this year by vertical, probably it's been in the kind of consumer product/retail footwear and apparel area, which was actually -- we had a decent quarter this quarter, but year-to-date, the business has been softer than last year.

I would add I think it's more geographic than industry based right now.

Okay. And as a cousin to that, there's been some migration of the retailer channel selling more products. Could you sort of speak to where you stand on migrating the resellers to selling more products and sort of up the food chain?

Well, it's certainly the case still that the majority of what our reseller community sells is Pro/ENGINEER, but increasingly, we're making our acquired products available to them. MathCAD has done very well in the channel.

IsoDraw.

IsoDraw, which is an ITEDO product, has done extremely well in the channel, just to name a couple.

The Windchill business is building. It's still a minority contribution, but there's some traction there and I think we'll accelerate that when we ship this Windchill product point product later this year.

Yes. I think we talked about in the analyst day that the growth of Windchill in the SNB marketplace that's represented by our channel has been, off of a small number, but basically 40% compound annual growth.

Thank you.

The other thing at a higher level about the channel, if you go back three or four years ago, we probably did 10% of our revenue in the channel and we said back then in '04 that we wanted to drive channel revenue to 20%, 25% here in '08 and it's going to be around 25%. As we go forward and have a three-year picture looking forward, what you've seen is that we're now driving additional direct sales capacity with the incremental adds we've done this year.

Those reps are all going to be targeted -- well, for the most part, some of them are channel support reps, but for the most part they're targeting an even ever larger accounts and it looks like we're building our plan for '09 right now, but I'm trying to drive up an incentive plan where a piece of our bonus is tied to additional channel performance as a percent of revenue. So we're very intent on driving this channel number from 25% to 35% in the next three years and we're going to lose some of our own money if we don't do that. We want to continue to have a nice balance and an even better balance between indirect and direct, but that means that both grow at a substantial rate. So we're going to have more reps than ever in the direct accounts and we think the channel performance is going to continue to really expand nicely.

Thank you.

Thank you. Our final question comes from Steve Koenig with KeyBanc Capital Markets.

Good morning. Thank you. Let's see. I have a question about thinking about kind of revenue growth going forward here on a kind of a normalized basis. Probably the first half of the year wasn't indicative of what you think you can do and Q4 is going to have tough comps. So if you think about your business more on a normalized basis, how do you think about growth here? And just to toss this out, I guess we calculate that revenues grew in organic constant currency terms at about 5% this quarter year on year. You're hiring sales reps at a 10% to 15% pace even organically this year. Do you foresee revenue growth is going to pick up from here then and what gives you confidence that demand will support that level of growth going forward as you won't have currency working for you and the effect of CoCreate starts to diminish?

Well, Steve, it's Neil, I'll take a crack at it, anybody else can join in. If you remember again at our analyst day, we showed you the four box, if you will, our business by SNB and large enterprise and also by MCAD and data management. We talked about there being a natural kind of acceleration to our organic growth trajectory. If the trends in each of those boxes that have taken place in the last three or four years continue for the next three or four years and what we said was that all other things being equal, and of course all other things are not equal, for example, this is kind of stripping out any kind of macro concern from the equation, but all other things being equal, we ought to be a double digit grower next year, around 10% hopefully, and we ought to accelerate into the mid-teens three years out and we think that's going to happen.

Now, the sales capacity that we've added is meant to meet demand for accounts, larger accounts that we can't currently cover and, you're right, our organic growth for this year has been less than double digits. You're pretty close for your estimate on Q3. But we've also expanded margins by over 600 basis points so far this year and certainly that takes a little bit of the wind out of your sails from an organic growth perspective when you make that kind of leap inside of 12 months. So with the additional sales capacity, we absolutely think that the demand is there, we don't think we're covering enough accounts out there and we don't think that capacity is helping us at all this year, to Dick's point earlier, other than adding a little bit of expense in Q3 and Q4, but hopefully we will hit the ground running for fiscal year '09.

We wouldn't have added the sales capacity unless we surveyed the field and asked them what they thought because they have to step up and take the quota next year. As we interviewed the geographical sales leaders, they all came back and said that they have more demand for sales opportunities and resources than they could react to. So that was a driving force behind that decision. And in particular, our whole story about the product development system is particularly strong. That coupled with some really nice product releases, Wildfire four, I think, was delivered in the March time frame, about four or five months ago.

Windchill 9.0 is now getting in to sort of its third quarter, third or fourth quarter and we're getting a lot of people moving to Windchill 9.0 and 9.1, which is a point release that looks like a major release, is going to ship in December around the same time as that low end version, the share point version of Windchill. So we're sort of at a position where we have great momentum, particularly in our installed base, we're winning some new accounts in terms of transition, we're adding more reps, the products are strong and we think if we execute well, that we can improve the growth rate next year.

Okay. That's helpful. I appreciate your answer on that. So thanks and congratulations on the quarter.

Thank you.

Thank you.

Operator, are there any other questions?

At this time, there are no further questions.

Okay. Well, wish everybody a good summer and thank you for attendance this morning and we'll talk to you in October. Thanks.

Thank you for participating on today's conference. The conference has concluded. You may disconnect at this time.