PTC Inc (PTC) 2009 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the PTCs first quarter fiscal year 2009 results conference call. After brief comments by management we will go directly into a question and answer session. (Operator Instructions)

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

Thank you and good morning everyone. Before we get started I would like to remind everybody that during the course of this conference call we will make future 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 may 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; Jim Heppelmann, Executive Vice President and Chief Product Officer; and Barry Cohen, Executive Vice President, Strategic Services and Partners. With that everybody had a chance hopefully to read the press release and prepared remarks last night so we are going to open the call up straightaway for Q&A.

All right. Thank you. Our first question comes from Greg Dunham, Deutsche Bank.

Yes, thank you. I want to hit on the maintenance business. This is over half of revenues now and you're forecasting a $5 million sequential decline quarter over quarter. Now I know some of that's seasonality and some of that's FX but there's got to be some increased attrition I would imagine specifically in the CADs business. Can you talk about renewal rates and what you are seeing on the attrition front within CADD as well as Windchill?

Greg, it's Neil actually there has not been any attrition. I know that's something that everyone is concerned about. If we are in a long, long economic downturn maybe we'd be concerned about it as well but we haven't seen it yet. As a matter of fact our renewal rates and attach rates are actually up. So what we are seeing on the maintenance revenue side is we are actually seeing a little bit of a currency head wind I think as we mentioned in our prepared remarks. And now we've just anniversaried CoCreate in terms of maintenance revenue in the first quarter. But even after, even if you strip CoCreate out our maintenance revenue was up 4% for the quarter. And that's with a currency head wind. So I think that underscores how important that business is to us at this point in time and we are hopeful that we can continue to improve the attach and renewal rates even though we are in a difficult environment.

This is, in addition to that, Neil, I think this in fact the number of seats under maintenance total seats for all products increased again in Q1 over Q4. It's been increasing every quarter for the last, that I'm looking at right here eight quarters and we ended Q1 with it looks like 915,000 seats under maintenance up from 899,000 in the September quarter. So there hasn't been any attrition in terms of active users paying maintenance. In fact it's increased.

I think one important point I guess I think a lot of people would assume or make analogous your CAD business to let's say Autodesk CAD business where I think people are expecting more attrition. Could you talk about the differences between the two and how maybe the high-end MCAD is less sensitive?

This is Jim Heppelmann. I think the biggest difference is our business, CAD business is comprised almost entirely of perpetual seat and maintenance. That is simply not the situation for Autodesk. They are selling seats and largely selling upgrades. And upgrades, there are I guess a form of maintenance but structured very differently and very easy to opt out of for another year. I think what you see with Autodesk is difficulty in the upgrade business and for us we don't really have that type of an upgrade business. We have a perpetual subscription maintenance business.

That's helpful. The other question I want to hit on is the sales headcount. That's come down pretty dramatically. I think. I think it's the right move to right size the businesses especially with the economy out there. But could you talk about where you are paring back some of the sales and marketing headcount?

First of all the sales headcount at this point is not down dramatically. Why do you say it's down dramatically?

I'm using the 355 number versus the 475 number in quota carrying reps.

Greg, it's Kristian, the 355 number in addition to that there's about 125.

In the channel.

In the channel business.

Oh, okay.

You got to add them together.

That makes sense. I was getting a little mixed up between.

So it's not down. I do think that we are going to size the business and we are going to have a layoff here and in that context we probably will take some nonperformers out of the sales organization but we are not looking for a dramatic reduction by any means. You may or may not have a sense for how we feel we are doing. We actually think from a comparative standpoint if you look at how we did in Q1, in the December quarter our Q1 versus Autodesk, Siemens is no longer publishing the numbers but we actually did better than the competitors in terms of our growth. Or growing slower. Or the reduction of the growth not being as fast. So we don't want to impact our investments in R&D because we are really excited about where our products are today and our sales force is competing and winning. There were some big wins last summer around EADS that we talked about. There are others that are sort of, that validated a lot of other deals that we've been working on and gave us a boost and I think we are going to announce some more wins as we go through this year. So we are trying to be careful about those sales headcount cuts. There are some territories where we can cut because you can convert a direct territory into a channel territory in certain areas and we are looking at doing that and we will take out some nonperformers but there's not going to be a big reduction in sales headcount.

That's a good point. I think looking forward would you say that your pipeline is probably the same or not reduced significantly and that you are just using much more conservative close rates as you look out?

That's true. Our pipeline continues to be encouraging it's the ability to convert that pipeline into license revenue that's challenging and I think we said that in the remarks. That's what we are working on. But the pipeline itself continues to be robust.

That's an important point. I'll pass it on. Thanks.

Thanks. If we could keep it to one question and one follow-up that would be great. Thank you.

All right. The next question is from [Horatio van Brugge] from Jefferies.

This is Horatio for Ross MacMillan. I guess just real quick could you address the reclassification of the computer based training to most of it going to license and give us some color on geo as well, geo-strength.

It's Neil. I'll address that. First of all we are reclassifying, as we said, the computer based training program intellectual property from principally from services revenue to license revenue. We decide to do make that change late last year beginning with our Q1. Our sales folks actually sell that computer based training product and so therefore we think it's more appropriately classified as license revenue. We have restated all of our historical results in the results that we posted on our website today. So that you can look kind of an apples-to-apples basis versus Q1 of this year versus Q1 of the last several years. And actually the computer based training sales were down more than our license sales were down this quarter so that reclassification actually hurt us as opposed to helped us in terms of talking about license revenue this quarter.

Moving on to your other question which is on a geographic basis I think that what we said is we saw weakness in really all geographies, all major geographies in terms of license revenue. And we saw relative strength in all major geographies from a services and maintenance perspective. So it was pretty consistent performance. Japan was a little bit worse than the balance of the other major geographies I guess so it's probably worthwhile pointing that out. And if we look at overall revenue on a constant currency basis from a geographic perspective we were up in Europe, we were up in the Pacific Rim and that importantly includes being up I think 7% in China. And we were down in Japan and about flat in North America.

Thank you.

Next question is from Yun Kim of Wedbush Morgan.

Thank you, hi, guys, just want to stay on the topic of maintenance revenue. Can you just talk about any risk to your revenue maintenance stream coming from the SMB market and your channel partners? For instance how much are you guys really exposed to the smaller design shops simply going out of business or simply not renewing maintenance? And then also are you giving out any additional incentives to your channel partners regarding maintenance renewals?

We are not giving out any additional incentives Yun to our channel partners. Our channel maintenance business continues to perform well. We don't really think there's significant risk to our maintenance revenue for fiscal year '09. We think we are going to be able maintain attach and renewal rates even in this difficult environment and as I said our maintenance business overall continues to perform well. We did identify in prepared remarks that there's perhaps some longer term which would be 2010 and beyond risk to maintenance that is really driven by how we perform in the license line because ultimately maintenance revenue is going to follow license revenue performance. But I don't think that's an issue for us this year.

There always is some risk that some of these companies are going to go out of business and if they do they are not going to pay their maintenance.

Maybe just to put some color on how our maintenance works again to compare and contrast to Autodesk. When a customer buys our product they sign up for maintenance contract which number one, most important, gives them entitlement to the new releases of the technology in that product. As we come out with new releases they get that thanks to the maintenance contract. Secondly it entitles them to hot-line technical support infrastructure. So a customer can't stop maintenance now and start it up again two quarters down the road. We don't allow that. If you stop maintenance you're off the train and the only way to get back on the train is to rebuy the software. For customers it's a big, big, big decision. One that's not entered into easily. Now if you are going out of business it's probably not such a big decision but. It's only a long list of tough decisions you are going to make.

You are probably not going to buy the maintenance if they go out of business.

Even when times are tough customers have to go through a gut wrenching decision to opt out of that. If they are a small company and they are a supplier and their OEM customer doesn't upgrade now they can't do the upgrade along with their supply chain because they've opted out of maintenance. Then they are in a situation of having two pay essentially five time the price to rebuy the software and then get back on maintenance again so that this problem doesn't recur. There's a real risk actually that you'll get more cost by opting out of maintenance and just staying with the program.

Maybe just one more comment Yun to address your question on channel maintenance more directly. Our channel maintenance for the quarter excluding CoCreate was up 6% whereas our overall maintenance business was up 4% excluding CoCreate. Our channel maintenance business actually performed better than our direct business.

Great. So and then you just like you pointed out, Neil, in the prepared remarks you did comment that the license revenue could be down 35% for the year. If you finished the year at that rate would that lead to declining maintenance revenue in fiscal year '10?

Certainly the maintenance revenue would come under pressure if we saw kind of a continued $950 million or $960 million run rate in terms of overall revenue which was driven by license revenue. It would come under some pressure in 2010, that's correct.

Okay. And then are you currently seeing any pricing pressure on maintenance renewal out there?

Bob, we certainly have had customers ask us if we were willing to reduce prices on maintenance. Certainly we are doing that with some of our own vendors and we would expect no less from our customers. But I'd say that in large part we've been able to resist that pressure thus far.

Great. Switching gears a little bit can you just talk about the overall financial health of your channel partners, especially the top ten? I think it took a lot of effort on your part to build out your channel system out there. Would it make sense to spend additional money today especially in marketing dollars to maintain that ecosystem or do you also plan to align your spending on your channel business according to the current demand out there? And also do you plan to hand off more lower end accounts to your channel partners again this year? Just wondering whether or not your channel growth strategy would change in the current environment.

It actually is not going to change. We have handed over effective Q1 additional accounts to our channel partners as parts of our strategy to continue to move in that direction, that's number one. Number two, we do have an investment in support of our channel partners which is an important strategic investment for PTC this year which is in large part going to be maintained then includes marketing spend. So I think we identified developing our channel ecosystem as one of our three or four strategic initiatives and we said in our prepared remarks that we intended to continue to invest in those strategic initiatives.

This is Barry, just one other point I think you might have noticed one of our investments is on strategic service partners so not only are we continuing with the channel strategy but we are also segmenting our accounts to allow for partners to participate in our direct account sales so that we can enhance the mix and improve profitability of the Company over time.

And those partners should require some up front cost on your ends?

They don't require much cost because there will be some fees for the support. What they require in order to ensure that the quality meets the same quality that we are driving for in our realized value platform is it will require some training and some support.

Quickly last one. Given that you have some financial leverage on your balance sheet, can you just talk about whether or not if you are maybe planning on to extend payment terms or extend credit to your key partners if it does make sense?

Yes, we are testing, Yun, it's a good question, a 0% financing option for our channel partners beginning in Q2. We have a policy of extended payment terms no longer than 24 months currently. And that typically applies to transactions that are $1 million or more. We have reduced that $1 million threshold to $500,000 effective in Q1. We have done some things I guess to your point to try to help our customers kind of bridge the situation that they are in by offering them some more attractive financing arrangements.

Great. Thank you very much.

The next question is from Steve Koenig of KeyBanc Capital Markets.

Thank you very much. Good morning. Wanted to find out about revenues. First of all on the license line your guidance suggests when we look at the year over year compares quarter by quarter that those comparisons will get dramatically worse in Q2 and Q3 and then kind of flatten out by Q4 and then it sounds like you are thinking FY '10 is probably flattish. Curious what kind of data supports that pattern, first the worsening from this quarters level and then the improvements as we get back towards the end of the year and maybe flattish at the end of the year, what are you seeing that supports that?

Steve, just to be clear we've reported Q1, we've given Q2 guidance and full year guidance. We have not said anything specifically about question, Q3, Q4 or for that matter fiscal year '10.

Okay.

What we've said in, Q1 was down 29% from a license perspective. If you do the math on Q2 you probably get down closer to 40% based on current estimates.

Yes.

And I think we did say that we thought things were going to get a little bit worse before they get better. Our full year guidance implies license revenue down about 36%. So you'd have to draw the conclusion that our expectation in the second half of the year is essentially the same as our expectation in the first half of the year in terms of overall license revenue performance.

So you are not willing to put a stake in the ground directionally as to how we see the second half evolving?

I really think it's too early to the tell. I think one of the things that we would expect, typically we have a 20 million or $30 million license revenue spike in the fourth quarter. Relative to the Q1 through Q3 and a lot of that is driven by large transactions. I think the one thing that we would say is that it's probably unlikely we are going to see a 20 million to $30 million license revenue spike in Q4 in this environment. But we would expect Q4 obviously to be the highest license revenue quarter of the year because our incentive program for our sales force is 65 designed to drive that behavior.

Okay. All right. Thanks, Neil, and one quick follow-up related on the revenue side. We've been accustomed to getting new seats for ProE and Windchill which I don't think we see this time. So we are kind of wondering what kind of visibility do you have into PLM sales and how is that doing. I think some of your competitors have commented that PLM for them is weak and we didn't pick up that sort of qualitative commentary from you on the preannouncement.

Well, I think in general you'd say that our PLM license revenue or if you will our enterprise license revenue Windchill actually performed better than our desktop license revenue did, not significantly better but slightly better which is probably a little bit of a surprise given the fact that a lot of the large transactions that we typically see are Windchill or enterprise type transactions. And I think the other thing that we commented on in the prepared remarks is that even though Windchill license revenue is down PDM Link which is kind of the core of Windchill license revenue was up 10% in that area.

Okay. Great. Thanks, Neil, thanks, everyone.

You're welcome.

Next question is from Richard Davis, Needham and Company.

Thanks. With regard to, you talked about continuing to invest in R&D and things like that. Could you talk a little bit about some of the features and functionality that the customers are requesting that you're adding because obviously if you add more features and functionality that makes your maintenance stickier, which is a good thing?

It's Jim, I would break the R&D investment into two camps. One we continued to do a lot to Windchill to make it a little easier to use, a little easier to deploy. That's what our customers are asking us for. They are saying I think this is a good product. If you could help me get it in place faster and get people using it faster that make the value proposition that much more interesting to me. Then there's many other things at a lesser level for advanced configuration management for our aerospace and defense customers where we are essentially winning every deal. We are doing pretty good right now on some big automotive deals and they want this concept that is essentially features and options in a product, understanding how a product could be configured many different ways and then being able, for example to do a digital mock-up of any one of those configurations. So there's some of that stuff.

The second major category though that I would say we are going to continue to invest in is this new share point solution. We brought that to market in December as product point. I would say that that's had a nice embrace by the marketplace, not that meaningful yet to revenue because it's brand new and a lot of our initial sales are in the channel. But I think that we are getting great feedback from customers large and small that decide via of building out of PLM footprint on Microsoft share points a killer app and worth investing in so we are going to invest in that as well.

A tactical question probably for Neil but with regard to, if I'm a salesman and I close a large deal, let's say it's a $1 million deal, do I get paid a commission or roughly I don't know whatever it is 10% or something on both the license and the services value or just the license or does it end up being still roughly 10% of the $1 million?

Thanks for relegating me to the tactical question.

It's a fun time.

The answers is you get paid a commission on both but the commission on the license portion of the transaction is much more significant.

Got it. Okay. Those are my questions. Thank you.

Next question is from Mike Olson of Piper Jaffray.

All right, thanks, good morning. I recognize most geographies are in pretty tough shape but I think you mentioned 7% growth in China. You guys seem to have a bit of a head start on some others there. Who do you see most directly from a competitive perspective when you're working on deals in China? And maybe, why are you guys seeing relative success there? And then also you how do you deal with piracy because some of your competitors seem to have a tougher time getting paid?

The success in China gets back to where we opened up a direct presence there in the early 1990s, not long after Pro Engineer was released we hired a Chinese national and he built out a really great sales organization in China. And that enabled us to land a lot of important strategic accounts, accounts like Huawei and Foxcom, AVIC, the Chinese Aviation Company, the new spin-off of that for the commercial aircraft in China. Those are the, a whole bunch of other, the ship building programs are largely ours. We just got a really good footprint there that's enabled us to build on the supply chain and so forth. I think we see different competitors not unlike we would see in other geographies so we would see Autodesk quite a bit on the low end through the SMB space. I think we probably see Siemens most in the biggest accounts in terms of competitiveness. And we probably right now are just out executing them given our products and references that we've had for the last 15 years.

What about on the piracy front?

Piracy side, I mean we have a program that's in place to go out and aggressively pursue these accounts where we can find out where they are. We have a team of people that's dedicated to that and we actually don't feel terribly when we find out that someone is pirating the software because we have a very good success rate when we discover it in terms of converting to it revenue.

Maybe I could just add some color. Our piracy rate probably is as high as anybody else's but I think we do have some strategies to try to attack and then recuperate our losses related to piracy and at some point it becomes like a deferred revenue strategy as Dick said. Pirate away because if we can catch you we can quickly turn these things into media license deals and they have to come clean with it.

The last piece that I would add there is we have been building on our reseller channel in China in the last couple years and we've also enlisted our reseller partners as partners with us in trying to detect piracy and commission them actually on enabling us to bring that deferred revenue in.

Okay. And then just one question channel overall. I might not be remembering this right but it seems like the expectation going forward of 35 to 40% of revenue through the channel is a little higher than what we heard in the past. Is that right? If that is right, why is there an uptick in expectation there and I guess what are the benefits for you guys in doing that?

Well, I think we've been saying that really for the last three to six months. Prior to that we probably we were looking at a 25 to 30% rate. We've moved the percentage of our revenue that comes through the channel from low, mid single digits to roughly 25% by the end of last year. And that's one of our overall initiatives both to drive more revenue, to reach more customers and to improve margins. And so it's true that we are continuing to invest in that initiative probably more aggressively than we did last year and we've kind of raised the bar in terms of where we expect to be.

Thanks.

Next question is from Barbara Coffey at Kaufman Brothers.

Yes, good morning. As I'm taking a look at your number it really does look like the reseller channel is stepping up relative to sort of the large deals sort of coming in. Can you speak to sort of, are you seeing different buying patterns, different sort of outlooks in the future coming out of the small and medium-size businesses versus the large or how they are approaching difficult economic times and trying to design their way out of it?

Well, let me take a cut and then Neil and Jim can add some stuff if they like. We, our SMB, our channel partners right now have a tremendous amount of confidence. We have an annual -- we meet with them during the course of the year and then we have an annual kick off meeting and we had that in October. If you were to measure, and I know many of you do, you do your channel checks and that's a good thing, they've just had accelerating confidence and I think a lot of it is they are selling our whole PDF story the whole vision routing product development system where our competitors in the low end are just sort of selling almost disposable CAD seats. We have a value proposition that the channel partners also expand upon. And there's a services component that is important to them as well.

So they have a tremendous amount of confidence today that they can beat Solid Works and Inventor and we have confidence as well and we've been investing, we've been investing in marketing programs and lead generation programs and new products. They are really excited about this share point product point addition to the family because they are going in and they are changing the dynamics of a decision so that it's not just CAD functionality and price but it's also, hey, how are you going to connect with people? So we are, I think they are very, very optimistic and we are as well and we continue to get them more territory and more accounts as we relocate and reposition our direct sales force up to that.

I think really what it means in a longer term is that when this economy turns and at some point it will we are going to be better positioned than our competitors to grow more rapidly. We are going to have a very strong channel partner program that's winning with new and better products and we continue to execute lots of benchmarks and build pipeline in the large accounts and we are winning market share up there particularly in the Windchill part of the business that when the economy turns is going to result in an acceleration in revenue. So we actually feel pretty good about the business.

I think maybe just to tag on to what Dick said and maybe to answer your question Bobby and maybe come back tow a question, Mike, that you asked a minute ago, we broaden the definition what have channel means to PTC, for the last five years, it meant building out and investing in a reseller ecosystem. Right. We've added to that ecosystem this concept that Barry mentioned a few minutes ago about strategic services partners and we've also added to that ecosystem enterprise resellers such as QAD or NF Solutions in Japan. And so one of the ways we get our channel revenue to 35 to 40% of total revenue is by continuing to develop our traditional reseller base. But then we also broaden the definition of a channel to include those two other categories as well.

Okay. And is there a different take on how fast a recovery, how healthy companies are going to be at the small and medium-size group versus the larger company?

No. I mean we are not, we don't have the answer to that question really. We can give you anecdotes here and there but we are not the right people to tell what's going to happen globally in SMB versus large accounts.

Just didn't know if you were getting different senses out of different stratas of the?

I don't think it's a strata thing I think what clearly is the case it's an industry thing. Automotive clearly it's being smacked pretty hard and high tech and some of aerospace and defense things are not being hit as hard. It's not by size of Company, it's more by industry and our assumption is clearly as the economy turns our license revenue will rebound strongly. It's just a question of the external factors that are depressing where we are and that's pretty much by industry.

Yes, I think one of the last things I'd say on that front Bobby is that large deals are coming under increasing scrutiny. As you would imagine. That is one of the issues in terms of both the size of those deals and the number of those deals that we are closing. And so even though we are feeling some pressure in the channel as well probably we would expect the direct business to be more challenged simply because there are more signatures and approvals required on reasonable size transactions today than there were in the past whereas smaller transactions tend to be quote, unquote under the radar screen.

Okay. That makes sense.

Great. Thanks. I think we have time for two more questions.

The next question is from Sterling Auty of JPMorgan.

Yes, thanks. Hi, guys. Can you talk to us a little bit about, you talked about the gross margins on the maintenance revenue but do you think about what the operating margins in maintenance are? In other words at this point what percentage of your operating income is actually just coming straight out of your maintenance revenue?

Well, we don't really think about operating margins by lines of business like that. Certainly the maintenance business is generating the majority of our operating income if we did look at it that way but that's not really the way we manage the business.

Okay. That's fair enough. And on, can you review for us and I think it might just be some of the answers to the last couple of questions. In terms of the attack on the expense side in your prepared remarks you talked about ending the year with still 5,000 or so employees. Given that all the headcount reductions we've seen across all industries what's the tactic not to be more aggressive from a headcount perspective on the expense side?

Well, it's a good question. I think what we decided is we are doing a reduction in force. We have decided to exempt R&D from that reduction in force because Jim mentioned some of the things that he's working on and with we think they are very important to us strategically and are going to enable us to emerge even stronger when the economy turns. And so we haven't kind of specified the level of reduction that we are going to do but let's just say that it's probably excluding R&D it's probably a high single-digit number. But with R&D included it's probably a mid single-digit number and we think that's the right balancing act for the Company today between investing for the future and making sure that we react appropriately to preserve a certain level of operating margin in this current economic downturn.

All right.

It's Jim, just add a little color on the R&D thing. Here's the way you should do it. If the R&D organization participated on an equal basis I would take out about 100 heads. In fact I am essentially taking 100 heads out of the business that has been in place and investing then about 100 heads in a couple of new initiatives principally the share point thing and then a little bit more around expanding this recent acquisition we did Synapsis and expanding the capabilities that that product could deliver because that's a pretty exciting product as well. So we are going to slow down a little bit on some of the programs that we've been executing and begin to fund a couple of other new ones that we think are real big differentiators and ultimately are going to prove to be pretty meaningful to our business.

Then last question, you talked about lowering the threshold on the extended payment terms out of the channel partners. Can you make some comments on what we should anticipate that does to your DSOs going forward as well as in the press release is there going to be another quick area at the earnings release that we can kind of monitor the credit side in terms of bad debt and collections as some of the payment terms extend?

Let me just make sure that I didn't misspeak before. The lowering the threshold on extended payment terms is for direct deals. And it used to be a $1 million threshold and now it's a $0.5 million threshold. I also mentioned that with respect to our channel partners we were doing an 0% financing option for them on a test basis with a lending institution beginning in Q2. From a DSO perspective we were at 70 days this quarter. That compares to 73 days in a year ago period. So we've been able I think to manage our receivables collection pretty well. It is something that we were watching closely and certainly from a, if you will, a kind of a monitoring and evaluation perspective we've kind of stepped that up with our more significant channel partners and with our direct customers. But I think our expectation at this point this year is that we are going to be able to maintain DSOs in that kind of 70 day range and we don't anticipate significant, any additional bad debt expense based on what we are seeing.

All right. Thank you.

The last question is from Horatio van Brugge of Jefferies.

Just a follow-up here. And actually it was similar to Sterling's question around the magnitude of headcount reductions given the magnitude of license declines that you're expecting. If you're looking at a over 40% decline potential here in Q2 and you are not forecasting sort of much of a rebound in second half maybe in the mid 30s declines, why not more aggressive? It sounds like you guys want to invest in some areas. I guess a related question would be how do you guys, do you guys sort of view the rest of the year as potentially being able to rebound on license in the back half and this is sort of a kitchen sink type view to where maybe you don't want to put too much in the bone here on the sales side because things could rebound faster than you think? And if that's the case and potentially if things continue to be weak out there then you might have to relook at cutting additional headcount later in the year.

I think that, it was a long question. I think that where we are, and it's hard to give you an appreciation for it, but the wins that we had at Airbus and EADS and the strength of the products that we have particularly in the, really the total product suite but particularly in the PLM area is such that there are many, many companies out there that are evaluating Windchill in particular for a whole host of reasons, globalization, collaboration, managing the bill of materials in an important way particularly in a down economy. So there are a lot of evaluations going on out there that you don't know about.

Many are installed base that we are winning as we upgrade people from Intralink to PDM link but increasingly a significant number of large deals that are happening outside of our base where we are potentially displacing our competitors in some major accounts. We hope to report on those during the course of the year. So as we look at the strength of our products, as Jim develops more products like the Sharepoint product, and some new things that he has under development right now that will be released during the course of the year, we are attacking our competitors in their backyard and winning. So we don't really want to cut into the bone. We'll take a look at what happens during the back part of the year but we think that we've given you a pretty accurate forecast as to what we see right now. As Neil said the operating margins actually improved to almost 20% in the back two quarters of the year. And it takes at least a year to recruit and develop and get a sales rep productive with respect to a good pipeline. And so we don't really have any interest in a short term ninety-day revenue improvement or profit margin improvement with a negative impact it could be one or two years out by cutting a really good effective sales rep.

Maybe just to add onto what Dick said. If you had asked us before Christmas what we were planning to do we would have said we were planning to cut about $30 million expenses this year. We have upped that number to $50 million in discussions on this call. I think if we do in that neighborhood $960 million of revenue that's probably what we are going to do. If things get either better or worse we may make some adjustments to those numbers. But we think that that $50 million level is appropriate based on where we are headed today.

One of the other things that we see that you can't that we can't always talk about, there have in fact been decisions made, evaluations and benchmarks done, decisions made but not communicated and orders not yet placed in significant accounts that our competitors are not going to be able to explain how they lost them. So there are some that are not yet decided and there's a big pipeline of them. There are some that have already been decided and we don't have the orders on and we are going to announce those during the course of the year. When we do like the EADS they are not going to be able to explain how they lost and there are going to be a building number of those. So we're not really interested in compromising that, what I would call that, all that ice under the iceberg that you can't see we don't want to compromise that by cutting the sales force too dramatically right now. We are going to take out some nonperformers which make sense. We are not perfect recruiters and we make some mistakes and those are the reps we'll take out, but by and large we have too nice an investment not only in the indirect side but on the direct side to compromise it right now. Our competitors are very nervous about what's happening in the PLM space and with the things that Jim's talked about we are only getting stronger there and broadening our footprint so we feel good about what's going to happen when the economy turns. I think, is that it?

That's it.

So thanks again for everybody's participation and just like you we are all hopeful that at some point at least we see things bottom out. I think that first and foremost, it would be nice to have a bottoming out of the bad news that's out there and then a leveling off so to speak and then hopefully things will start to slightly improve and so forth. So we'll look forward to talking to you again in April. Thank you.

This concludes today's conference. You may disconnect at this time.