PTC Inc (PTC) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the PTC's fourth quarter fiscal year 2008 results conference call. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded.

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

Thank you, good morning, everyone. Thanks for joining us today. Before we get started, I just wanted to cover a couple of housekeeping items. First, as you may have noticed, there is a typo related to the dial in numbers for the replay of this call in the press release we issued last night, so a revised release went out and the correct replay numbers are now on our website on Yahoo! finance and so on. Apologies for that. Second, as you also know, we postponed our 2009 investor day originally scheduled for next week to February, and more details on the exact date of this event will be forthcoming once it's finalized.

Before we get started with the call, 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 yesterday's press release, the Company's annual report on Form 10-K, and in the Company's other reports filed with the SEC from time to time. Participating on today's call are Dick Harrison, President and Chief Executive Officer; Neil Moses, Executive Vice President and Chief Financial Officer; and Jim Heppelmann, Executive Vice President and Chief Product Officer. I'll now turn the call over to Dick.

Thanks, Christian. So just a few remarks. Again, we're pretty excited about the year we had in the quarter. It was a record quarter in terms of revenue in the history of the Company and a record year. So we're excited about our ability to build on that. We had some major wins in the marketplace during the year. Many of you know about the EADS win. We can talk more about that, but I'll also say that as we look at the pipeline, which is very solid, we think there are going to be more wins like that coming during the balance of the year and some may be as soon as this first quarter. We have done a nice job in the last 12 months of building out capacity, both in terms of our direct sales force and our channel, and our products have never been in a stronger position in the history of the Company. So let's move into Q&A and we'll take the first question.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Jay Vleeschhouwer with Merrill Lynch. Sir, you may ask your question.

Thanks, good morning. Dick, a few things, first, looking at the fiscal '09, what are your expectations for being able to maintain new maintenance and maintenance renewals, signings? Are you seeing any indications at all that customers are scaling back on renewals, maintaining license base, but perhaps not paying maintenance on as many seats as before?

Jay, we haven't seen any deterioration in the maintenance. In fact, I think we had it in the script, we have a historical record number of users that pay maintenance for our software in a range of 900,000 active users on a daily basis. And the number's going up, not down, so there's no deterioration in the maintenance numbers.

Secondly, looking at the market, could you talk a little bit more about the various markets, auto, arrow, high tech, other industrial markets, any important indications in any of those? And with respect to one of the major objectives you delineated in prepared remarks for '09, meaning investments in the channel and channel capacity, could you talk about that, what are the objectives for growing capacity and are you seeing any improvements in channel economics? Is it increasingly valuable to a reseller to do business with you versus, let's say, an Autodesk or Solid Works or anyone else? Is their margin structure becoming better by doing business with you?

Well, with respect to the verticals, again, we didn't really see any softness in the September quarter. We had a record quarter with over $300 million in revenue. It was the high end of the guidance, both on earnings as well as revenue. So we didn't see any softness. At the same time, with the exchange rate and just watching what's happening, we're opening up the new year, fiscal year here with sort of a cautious attitude. With respect to verticals, we didn't see any sort of softness in any particular vertical. I mentioned that, on the heels of the EADS win, we really do have some big, active campaigns. A number of them are displacements of our competitors and it crosses multiple verticals. So we're not really seeing as much of that. We're not as heavily invested in automotive as some of our competitors as a percent of our revenue. While we are in the supply chain in automotive and in powertrain, but even in those markets, right now we haven't seen a lot of softness. I think if you're a big supplier to the US OEMs, that might be problematic.

On the channel side, we grew our channel business last year, was it 40, in the range of 40%-plus. Organically, it was in the range of 20%. We've said if you go back five or six years, the channel accounted for 10% of our revenue. Today, it's 25%. We're driving towards 35%. Now, some of that is -- our current channel partners are investing with more reps. We're offering them more products, both organically and acquired, and we really have an aggressive plan to drive towards that 35% of total revenue over the next three years. I want to be at least there. So we're making investments in the channel in terms of marketing. We're also -- we are recruiting new channel partners to sell Windchill at the enterprise level, but also we're getting a lot of inbound calls from our competitive -- our competitors' channel partners, because in many respects they are not making business just selling two and three licenses and giving those things away half the time. And they are looking at some of our story around the product development system. It brings services with it. They are very excited. We had our channel kickoff meeting in Las Vegas two weeks ago. They are really excited about the product point solution as a complement to the whole product development system story for the SMB market. I actually think we have an aggressive goal for the channel this year, but it's very makable and the forecast out of the channel earlier this week is strong.

The other thing to that, is we've seen 800 basis points of margin expansion in the last four years in our sales and marketing expense and that's largely because of driving channel growth. So this is kind of the single most important initiative for the Company for long-term operating margin expansion.

Finally on units, Dick, you had a good sequential increase in ProE from a not so terrific June quarter number for ProE. Was that just normal seasonality in terms of improving that number? It contrasted, for example, with what Solid Works reported this morning which was the second sequential design in a row for them in the unit and then you also had an unusually large number of Windchill seats, larger than the first three quarters of the year combined, if you could talk about that?

Well, Jay, I mentioned earlier, just quickly in the opening remarks, our products are in a very, very strong position today. Wildfire 4, Wildfire 5 is on its way pretty soon. Windchill sort of PDM linked the whole series, 9.1's going to ship a little bit later in the November here, so a month away. Product point is coming a few weeks after that in early December. Our product position has never been stronger competitively. Go back to the EADS win. A big European company with incumbency from SAP, (inaudible) and Siemens were all much bigger incumbents than we were and we won that deal on the strength of our products and our ability to partner with the customer, that's what they told us in the debriefing. So what we're trying to do here is since we have such a strong product position, from a competitive benchmarking position, we want to increase capacity and we're doing that aggressively in the channel, in terms of recruiting new ones and in getting our current ones to invest and add more reps and technical people and then we've added about 50 or so direct sales capacity in addition to the CoCreate salesforce. Our issue right now in the short-term is we need to have more people telling our story, because it's a really good one, and when we get to the market, we win. Next question?

Our next question comes from Greg Dunham with Deutsche Bank. You may ask your question.

Yes, thank you. Want to follow-up, partly on the characterization of the pipeline. Clearly you're forecasting kind of similar growth this year as you did last year on a constant currency basis, the license. Could you quantify in terms of what you're seeing in the pipeline, how much bigger it is, kind of what you're assuming in close rates going forward versus looking backwards?

Well, we look at the pipeline a couple of ways. We do weekly conference calls with the different geographical sales leaders and we do the same thing with the channel. The Vice President of Sales channel for the part of the business. And as we look at the pipeline, it continues to be very strong. There's a good list of deals. The pipeline's automated. We use Siebel System to capture the pipeline that goes out about a year, and as we look at the pipeline, as we talk to the resellers, when we're out in Vegas, I was there myself, and as we go through the weekly calls, the pipeline looks strong. From a channel standpoint, it feels like it's going to be up sequentially.

Now, we haven't factored in all of the input from currency, but just from an activities standpoint, from a deal standpoint and so forth, it looks pretty strong. And the same is true on the direct side. We do, about in Q1, Q2, and Q3 for every year, we do about 16 or 17 deals over $1 million. Some were between 15 and 17 per quarter. Q4, it bounces up to the low 20s. But as we look at a pipeline that would generate those 15 to 17 deals over a million, the pipeline today in Q1 is very strong and it would indicate with normal close rates that we'll have the same kind of number of deals.

Greg, just to follow-up, it's Neal. I think you made a good point, which is the constant currency license growth projected is pretty similar to what took place last year and I think we're trying to balance two things. One is the at this point, the pipeline looks strong, even on large deal activity today. But at the end of the day, we may see a little bit of a diminution in the size of those deals for macroeconomic reasons. On the other hand, we have 50 more feet on the street from a direct salesforce perspective and we think that's going to help counter perhaps a slowdown in the size of large deals due, for macroeconomic reasons.

That's helpful. So the increase in sales capacity helps offset potential close rate changes going forward, if there is some--?

Close rate changes or size of deal issues, right.

Okay. In the script, I also saw that you mentioned Windchill at double-digit growth rates going forward. Now, is that -- if I recall, that has been doing 20% plus looking backwards. Is that -- has that come down, or am I just reading too much into it?

Windchill growth has historically been, if you look overt last four years, it's been slightly over 20% compound annual growth. So given our guidance for this year, I don't know that we're going to see that, but that is what we expect to see in kind of a normal economic situation, yes.

Okay, okay. That's helpful. And the final piece on Wildfire and the additional modules, was that part of the strength for the MCAD business in the quarter, or is there something else that drove the kind of year-over-year and sequential improvement that was so strong?

Yes, Wildfire helped and actually our modules performance was pretty good in Q4 as well.

The other thing we've done, is we've gone back from a sales capacity standpoint and put some focus on Pro/Engineer. We've built an overlay team inside the salesforce that's responsible, in the direct business, this is not the channel itself, but in the direct salesforce, there's an overlay group that's responsible for selling only Pro/Engineer, so we've gone back into the base with the release of Wildfire 4, with a concentration on retelling the Pro/Engineer story into our large accounts and even into some competitive accounts, so I think that additional focus is also helping and we're going continue to do that.

Thank you very much.

I might also add quickly, if you look at the sales reports, and I only saw quick facts on that this morning, but I think Solid Works had 13% growth last quarter, so if you look at our channel, we sort of see our channel with ProE competing against the Solid Works channel. Those businesses are pretty close to the same size. Solid Works is a little bigger. But we now have a growth rate in the last quarter that is 50% higher than theirs, which speaks to more than just modules. It speaks to a product story that's differentiated in the marketplace and people are waking up to it.

Right, thank you.

Our next question comes from [B.J. Haimes] with Needham & Company. You may ask your question.

Hey, thanks. Just to go back to Jay's question on the maintenance, I understand that you guys aren't seeing any deterioration in the number of customers paying maintenance. Are you seeing any pricing pressure? And then I guess would you be willing to cut maintenance prices if that was to come under pressure?

No, we would not cut maintenance pricing and actually Q4 was our highest both attach rates for maintenance and renewal rates for maintenance in quite sometime. So we won't be cutting pricing on maintenance.

Okay, and then I guess can you comment on the fairly well publicized rumor that you're shopping the Company and I guess provide us an update on where that stands?

We're not shopping the Company.

Okay. That's a -- that's a good update then. That's it for me. Thanks.

Our next question comes from Michael Fenwick from Piper Jaffray. You may ask your question.

Thanks, good morning. Clearly a lot of companies are seeing some macro head winds and as you mentioned, [Desellus] slightly tweak down their revenue guidance as well. What specific geographies do you expect to see kind of the biggest head winds in, or I guess which geographies are you most cautious in as we move into '09?

Mike, that would be Europe. We've had some tremendous growth in Europe in the last couple years. Our European business grew from $350 million in 2007 to over $450 million in 2008. Now, part of that was the fact that CoCreate had about 50% of its revenue in Europe and part of it was favorable currency, but another part of it was strong organic growth. So that's the geography we're probably most concerned about, simply because the euro has retreated from $1.50 to $1.25 in the course of the past eight weeks and, if you look at the guidance that we gave for the year at $1.1 billion, probably -- we were anticipating a few months ago looking at a plan of roughly 10% revenue growth for the year, which would put us at around [1.080 billion]. We've haircut that plan roughly a little bit more than $50 million related to currency. The European number's actually a little bit greater than that because we know the Japanese yen has actually moved in the opposite direction. And that haircut has impacted planned EPS, if you will, by more than 20% and it's impacted operating margins by a couple hundred basis points. So that's the area that I say that we have the most concern as it pertains to currency. If we're wrong, so roughly a $50 million currency haircut and an additional haircut, if you will, just to be conservative from a macroeconomic perspective, and if currency starts trimming the other direction or the macroeconomic environment doesn't play out as badly as we all expect, we think we have an opportunity for further margin expansion.

Okay, understood. One last one, when we talked to the resellers, they are generally optimistic about the business and again kind of setting aside the macro head winds, what do you think channel, revenue growth can look like in '09? I know you mentioned it was 40% in '08.

Yes, the over 40% in '08, about half of that was CoCreate related and half of it was organic. We would expect to see the same kind of growth out of our channel next year as we saw organically this year.

Okay, thanks.

In that 20% range.

Okay, perfect.

Our next question comes from Ross MacMillan with Jefferies & Company. You may ask your question.

Yes thanks. So if I strip out my assumption for CoCreate license through the quarters of '08, and then adjust for currency, it seems that, you know, outside of Q3 where the comp was easier, you probably were flat to down on license revenues most quarters. So I'm just going back to this comment with regard to the mid to high single-digit growth for '09. Has it really come down to the extra capacity of the 50 new sales reps? Is that the primary reason, or is there anything else--?

The channel's growing, and as we said, the channel's growing, the plan for the year here organically is the channel's going to actually accelerate a little bit organically, given the investments we were making in marketing, more capacity and so forth, and products. So we're going to get really nice increase, it looks like, from the channel. And then if you look at our productivity numbers, it's just sort of straight math. The average sales rep generates somewhere around 1.3 million to $1.4 million per rep and if you add the additional 50 reps, we see some upside. It's really a capacity issue. So there was no additional capacity in '07, from '07 to '08. We embarked on a globalization program, where we moved 600 or 700 people offshore. There was a tax associated with that. And during the year, we didn't add the capacity until the end of the year. So we didn't get any increase in coverage either in '07 or in '08. This is the first year in three years that we're going to have incremental capacity, and we do -- that's the reason, along with the channel capacity, that we planned for the 10% growth.

Okay, great. That's helpful.

I know you're fickle about it and that's fair, but with the products where they are and with the extra capacity, we fully anticipate to have that kind of growth.

Maybe just one more comment. Remember that our channel business is predominantly just license and maintenance revenue. And then we're also introducing and maybe Jim will talk about this a little bit later on, but we're introducing Windchill Product Point, as you know, later on, which we think is going to be a great product for the channel and a great product overall, which would help to drive license revenue as well.

Yes, okay. And then just going back to the very big Windchill unit number in Q4, was that down to like a specific deal or, couple of deals, or can you just kind of talk about that also in the context of pricing? Because obviously that's a huge uptick and it implies that obviously you're selling higher volumes of lower priced seats, but my sense is that that was what you could have always done to penetrate accounts, with enterprise seats if you will, so can you just add some color to that, that big increase in units?

Yes, two comments, Ross. It's Neil. First of all, there were a couple deals in particular, and don't want to get specific, that drove a larger number of seats and a lower ASP this quarter than we've typically seen in quarters past. But having said that, I think we've stated in the past that we expect the ASP for Windchill to go down over time as we're moving out of the engineering department, which is predominantly heavy seats and into the enterprise, which is predominantly light seats. So I don't -- the fourth quarter numbers are a little bit of an anomaly, but the trend ought to be in that direction.

Yes, that makes sense. Congratulations. Thanks.

Just I want to quickly go back to a point that Jim made, just to elaborate a little bit more on it, because I think there's a misperception sometimes in the market about the strength of our channel, our channel did almost $275 million last year. In the fourth quarter, the channel did $75.5 million. That's a run rate in excess of $300 million. That's the same size as Solid Works or Inventor. Those companies, their business is no bigger for their SMB market through their channel than ours. And in many respects, you could say it's smaller because solid works sells into larger accounts and we restrict our channel to a smaller marketplace. So no one should think that our channel business is marginalized vis-a-vis the competitors. In fact, it's just as big and growing faster and we're going to have a really good year in '09 in the channel.

Product Point is going to provide upside to that whole business because our channel partners are really excited about bringing to market a Share Point solution to a set of customers that have already deployed Share Point. So it's going to be a very natural situation for them to drop this product in and sell this more collaborative approach to product development in the SMB space. Okay. Next question, please?

Our next question comes from Sasa Zorovic, you may ask your question, with Goldman Sachs.

Thank you very much. So my question would be -- I'm finding a bit of a disconnect between your prepared remarks and the tone in this call versus the interview that you provided with Reuters where I'm finding sort of this commentary to be very bullish at this point versus, as I'm looking, it's interesting the whole economy's falling apart, you're citing here a deal of 3,000 folks that came down to just 800. Lower close rates, average deal sizes anticipated going down. Was it just that in this interview you were not really quoted properly? How do I reconcile the two?

Sasa, it's Neil. Do you think that a lot of times when you have interviews with the press that they are looking for the items that are perhaps more sensational than they are looking for the content of what you're saying over the course of the entire interview. Liberal media. They have an agenda.

Sasa, I haven't said to anybody that -- maybe it was just in the course of the conversation, somehow it was misinterpreted, but I never said the global economy's collapsing or whatever. I don't believe it. We didn't see it in the fourth quarter. I don't see it right now. I think that there's some sense out there that certainly the financial markets have collapsed, but manufacturing companies are not collapsing today. I certainly think and we talked about it in the past, there's been a little bit of a head wind in the United States. There has been a recession in the United States, and business has been a little bit more difficult to come by. We did talk about the fact -- we anticipated what we might see if there was a recession, and that's different than seeing it.

So if we were to see a slowdown in Europe that Neil is alluding to that might happen, certainly we're going to get a head wind from currency. But if we were to say, okay, things might slow down, we don't see customers not buying. We don't see them stopping their services engagements. We might see them shrinking a little bit the size of their investment or first deployments, so instead of buying a thousand seats, maybe they will by 700. We've talked about this in the past, but the globalization, the connectivity, the collaboration aspects of our products are enabling manufacturing companies to compete more aggressively in a global world where they have to and they simply can't ignore our solution today, even in a bad economy. So that was really I think more of the tone. If we did see a recession, what might happen and we really said we don't see a big falloff. We might see some slowdown, but not a falloff. I think maybe that got misinterpreted.

So if you look at sort of the trend in the business that you have seen, so there have been several companies that have specifically pointed to sort of the second half of September and then kind of beginning into the December quarter here, have you sort of noticed any sort of particular sort of slowing down around that sort of standpoint, or are you basically giving us commentary that in essence you haven't really changed, seen all that much change since earlier in the September quarter up until the present?

We really haven't seen much change. We haven't seen any change in China. The US has been flat for the last 18 months. I think the forecast for the US right now is actually on a relative basis it's pretty strong. We could be up over a year ago. As I mentioned, the pipeline's there. In Japan, it's sort of flattish. And in Europe, it's been good. Now, we're anticipating a little bit, the dollar's going to hurt us because it went from $1.50 to $1.25, and there's nothing we can do about that. But in terms of big deal activity, a year ago right now we were working on the EADS deal, and everybody knew about that deal. That's a big company, big transaction. Today, a year later, I would say that there are five or six deals that all of the competitors are working on, some of which have already been downselected and some of which have been chosen with companies that are in the same relative size in terms of revenue, annual revenue as EADS. So companies that have 40 billion to $80 billion in annual revenues are making decisions about their PLM future and we're right in the middle of all of them and the competitors are not. So from that look at the pipeline, it's actually a better pipeline than it was a year ago and we think we're going to be announcing some big deals during the course of the year.

And so finally, regarding geographies, as you mentioned, Europe had a very strong year here. Japan, however, was a little bit disappointing again. Now, on a constant currency basis, I think you're something like 13% down. I was wondering is it really more like a market issue there or are you again seeing some of the execution issues that the Company has had a while back now?

Yes.

We got to check the numbers. I think 13% down was Q4 only, that wasn't the full year.

Yes, I apologize, Q4 only.

Yes, Japan was up 23% for the year. I don't remember what the number was on a constant currency basis.

That's just big deals. That's just the seasonality of big deals. Couple of them came in early in June versus September. It's all big deals.

And we had solid channel performance in Japan as well.

Yes, Japan grew for the year 11% in constant currency. Check with our competitors. I don't think they did better than that.

Great, thank you very much.

Our next question comes from Steve Koenig with KeyBanc Capital Markets. You may ask your question.

Good morning. Thanks for taking my question. If I may, I just would like to maybe tie the threads on revenue one more time here and then have a question on margins, if you will. So on the revenue side then, am I correct in interpreting that your constant currency guidance, given projected softening in Europe requires that US growth rates improve this year, and I'm just wondering if that's true, then how do I reconcile that with kind of the credit situation grew almost exponentially worse in late September. You had your fiscal year end and seasonality, as always, a positive factor. How -- what assumptions are you making about the US economy next year within the context of your guidance going forward?

Well, first of all, the US business for us has been soft for 18 months now. This is not a new phenomenon. If you saw our performance in the US last year, it was flat. And actually down a little bit if you take out the revenue we got from CoCreate there. So we've had a difficult time in the US for a number of quarters now. And I think your point, is if you're assuming that Europe is coming down because of currency pressure, that requires US growth. Well, we do think that the US is going to be better than it was last year this year, quite frankly, but the fact that we've seen currency pressure in Europe is not -- doesn't necessarily mean that we're projecting a down year in Europe. I'm just saying that we're not going to see the kinds of growth rates that we've seen in the past. Our European revenue last year I think grew 28% year-over-year. So we expect modest growth in the US and growth in Europe, but certainly not to the extent that we saw last year. And we expect continued strong growth in Asia Pacific, particularly in China where we've been growing in excess of 20% a year for the past four or five years.

And just on -- last question on that topic, and Neil, what drives the improvement in the US, is that primarily the channel and sales hiring? Is that what you expect to drive the improvement this year?

Yes, we've got -- some of the capacity that we talked about, probably about 20% of it went into the US, so that will help. And, yes, our channel in the US has been doing extraordinarily well, so you're exactly right.

Okay. Then last question, on the margin, guidance suggested margins kind of flattish next year due to some of the investments in the channel. I think we had been hoping that some of the various initiatives that you're pursuing could result in some margin expansion. Is there potentially some upside on margins next year?

Yes, so a couple of things. First of all, if you think about our plan for next year, we're increasing revenue by $25 million year-over-year and expenses are increasing by about $20 million year-over-year. So when we talk about investments we're making, you got to understand they are pretty modest investments on a year-over-year basis. They really are. I think they are important investments for the Company to make. Secondly, as I said, currency's impacting margins by over 200 basis points this year, and we further haircut the plan, as I said, to account for a little bit of a macroeconomic slowdown, which we're all feeling today. So if those assumptions prove to be too conservative, there's absolutely an opportunity for margin expansion and I go on to say that, we haven't made assumptions in our plan about, kind of across the board headcount freezes, for example, in terms of hiring, but we are being fairly judicious in our hiring at this point in time and if we continue that pace throughout the year, there will be opportunity for margin expansion there as well.

Okay, great. Thanks a lot.

Operator, we've got time for a couple more questions, then we'll wrap it up, please.

Thank you. Our next question comes from Barbara Coffey with Kaufman Brothers. You may ask your question.

Yes, good morning. Can you speak a little about the launch of the Product Point and sort of what features and functions that it has that are duplicative of your other product versus what's the target market, ASPs so we can sort of figure out where in the market this is going to go.

Yes, Barbara, it's Jim. I'll cover that. So product point is a native Share Point-based solution. It sort of takes the basic concepts of Share Point, which range from collaboration and social networking up through project management and content management, and it extends those so that they work in the world of CAD and enterprise applications and so forth. So I like to think that we're making Share Point useful to people doing product development rather than, like, porting Windchill to Share Point.

Now, in terms of the target market, our primary first target market is, let's say, the small to medium-size companies who are looking for very inexpensive, simple PLM footprint. Perhaps they are using share drives right now and suffering with all the problems, trying to manage versions and structured file sets and so forth that are pretty typical of our world. So the primary target would be the channel, sell in the small for sure and some of the medium size accounts. And then the secondary audience would be the medium and large accounts as a complement to Windchill. This would be the big accounts who really need a serious PLM engine, but still would like to get more utility out of Share Point as a collaboration tool for working with suppliers and so forth.

So in fact, there's not that much overlap. I would say de minimus overlap. Perhaps on the area of collaboration, team-based collaboration where Windchill has the capability and of course that's what Share Point specializes in, but as a percentage of our footprint, it's a very small percentage, so I think we're actually going to do well, both selling and stand-alone in the low end, as well as a complement to Windchill on the high end. I think it's a new way to get into new high end accounts who maybe have somebody else's PLM solution. But really are pretty willing to sit down and listen to a story about how to use Share Point and product development.

I actually draw your attention to a report I was looking at a couple of days ago from Forrester, the industry analyst firm. They did a report on Share Point adoption. They went out and interviewed 233 CIOs. 87% of them had a plan to adopt Share Point within the next 12 months, like 50% of that was within the next six months. So, we see a potential rapid adoption of Share Point and PTC with a strong leadership position in how to get utility out of Share Point and product development, we can take that into our existing accounts and we can use it as a way to get into brand-new, even competitive hostile accounts with a story around Share Point.

Okay, and then is there any update on the Toshiba matter?

Well, the case brought by General Electric Credit Company in the US courts was dismissed and so that's where it stands today. There's still ongoing litigation in Japan. As of today, we're not a part of that litigation, but, we'll see what happens in the wake of the dismissal of the US case. So the reserves are still there and those won't be reversed until the conclusion of the litigation? Yes, until we know the conclusion of the Japanese -- the litigation in Japan and whether or not we're going to be a part of that litigation.

Okay, thank you.

Our last question comes from Sterling Auty with JPMorgan. You may ask your question.

Yes, thanks, hi, guys. There was an article in the journal a few days back talking about customers' ability to finance technology acquisitions and I believe you guys obviously given the size of some of your transactions, used some third party finance companies. I'm just kind of curious what you're seeing if there's any difficulty in some of these larger deals that you're doing for your customers to get financing terms, is that impacting your ability to close some of those deals?

Certainly. It's Neil. We actually do very little in the way of third party financing. If you look back on this last year, for example, I think we did at most maybe t most 10 million or $15 million of third party financing, predominantly around larger deals. If you look at the volume of larger deals last year, I think it was in excess of $160 million. So it's less than 10% of the large transactions that we do each year.

Okay, and then, Dick, you mentioned the productivity sales rep, the 1.3 million to 1.4 million. Was that for an average rep or because you're adding 50 new reps? I thought in the past you've talked about kind of a three quarter or so ramp for a new rep to kind of hit the productivity run rate.

Well, there is a ramp for them to hit that productivity run rate. But when you -- if you take out the maintenance and then we'll let them ramp up a little bit, but someone who has been here a year, we expect them to do sort of just track it historically in the last three years or so, it's somewhere between 1.3 million and 1.4 million per rep for licensing service.

Okay.

Now, we started to lay those extra 50 people in really in the back half of last year from April through September, and we think they are going to make an impact. Some of the reps that we did put in, we put into the channel as well to develop more channel partners and Windchill reseller partners and so forth as well. They are not 100% direct resp. But they have to have some kind of impact given the strength of the products today during the course of the year.

Okay. That makes sense. And then on the EADS contract, can you just remind me in terms of how the revenue was supposed to flow. I don't think you're disclosing how much. If you are, that would be great, but just talk to us how that kind of flows in through the income statement in terms of the timing?

Well, just like all revenue, there's a maintenance component that's been ongoing for years and as we deploy more seats, we'll go up. There's a services component that we recognize as we perform the services, and then from time to time, they will decide to buy more licenses or more seats. I think like all companies, they are cautious today and they are not buying in advance of when they want to deploy. Years ago, we saw companies do more of that, where they would do these big deals and buy licenses and they might sit on the shelf for a while. That doesn't happen anymore. So our -- historically our presence, and again, our competitors were really as well represented across the EADS companies as we were. Our footprint has really only been in the Airbus account. So already we've begun to displace the competitors in Eurocopter and then there are plans going forward to continue. EADS wants to standardize on Windchill for all legacy and future programs for all divisions of the Company. So that implies that over the next few years, as we migrate our way through the different divisions, they will add more seats as they -- as we displace the competitor seats.

Okay, and last question, can you describe to us, I think Parametric historically has been a lot different than some of the competitors in terms of exposure to automotive specifically, given all the talk that we have with General Motors and Ford, et cetera. Can you kind of review for us where you stand in terms of the business exposure to the automotive industry?

Yes, again, I was talking a little bit about this earlier. But I think automotive and aerospace accounts for about 10% of our revenue.

Not aerospace.

Thanks. Automotive accounts for 10% of the -- he aerospace market for us is really good and continues to be strong. Automotive accounts for only 10% of our revenue. I don't know what it is for the competitors, but it's probably in the range of 30% of their revenue. So our biggest competitors are much more concentrated on automotive. So we're not going to see -- we haven't yet, we're principally in the supply chain and then in powertrain inside the OEMs.

Yes, for example, we don't do business with US OEMs at all.

Right.

We have no revenues.

We're principally offshore and automotive as well.

Yes. So it doesn't feel like we have a lot of risk in our business because of that. I would make just as a quick comment there, I think the US automotive companies, they like to say they are not doing well because of the pension issues and all of that. I will tell you publicly they are not doing well because their products stink and that's the principal reason and they don't use our products, so maybe there's a link there. They ought to come talk to us if they want to improve their position.

I was wondering how you were going to bring that back around, tell them their products stink as part of negotiation. All right, guys. Thank you very much. I appreciate it.

Thanks, everybody. Thanks very much. We look forward to talking to you throughout.

Yes, we look forward to talking to you in January. Should be an interesting call at that time. We'll see what happens. Thanks.