PTC Inc (PTC) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PTC's third quarter fiscal year 2009 results conference call. After brief comments by management, we will go directly into question and answer session. (Operator Instructions). This conference is being recorded.

I would now like to introduce Kristian Talvitie, PTC's Vice President of Corporate Communications, please go ahead.

Thank you and good morning, everyone. Just quickly before we get started, this conference call and webcast may include forward-looking statements regarding PTC's future operations, prospects, expected financial performance, or products. Any such statements will be based on the current assumptions of PTC's management and are subject to risks and uncertainties that could cause actual events and results and to differ materially. Information concerning these risks and uncertainties is contained in PTC's form 8-K filed yesterday and in its most recent forms 10-Q and form10-K on file with the SEC. PTC will will use non-GAAP measures to describe its results of operations and expected future financial performance. A reconciliation between the non-GAAP measures and the comparable GAAP measures is located in the financial and operating metrics document on the Investor Relations page of our website at www.ptc.com.

With that I'd like to turn it over to Dick Harrison for some brief opening comments and then we'll open up the call for Q&A. I think as everyone knows, we published the prepared remarkes yesterday and we're not going to get into a lengthy discussion. Dick has a few words to say to kick us off. Dick.

Thanks a lot and I'll will straight and pretty brief here. We have a little bit of an advantage. The management team is calling from an off sight meeting we have in New Hampshire every year where we do planning for next year. And we've had the leadership from the worldwide sales organization here for the last three days. We've had a chance not only to review what's happened so far this fiscal year, but also to think about Q4 and get some input about next year.

One of the comments I'd make is that it feels like the business has bottomed out. I think that was represented in the quarterly results, which were pretty similar in the June quarter to the March quarter. But the attitude of the salespeople is that things have bottomed out. I wouldn't say they see a lot of up side for next year, but we are talking about growth for next year and that's a good indication. It certainly feels, when we talk to the sales leadership, that we're winning. Our products are extremely strong today and very differentiated from those of the competition. Our customer satisfaction reports show that the customers again have never been happier. We know from people that we've hired and anecdotally in the work we're doing that our competitors have never been more nervous than they are today. Our employees, which we survey every year, are confident and committed. We have a validation of some of the positive things I'm alluding to in our ongoing win list into domino accounts and we'll be more specific in a few minutes. Our support people and pre-salespeople give us a review during the week here. We're winning all the technology benchmarks around the world.

In addition to the domino account and I think this is something we want to spend more time on. I don't want to water down the importance of the domino accounts, but each of the three geographies, North America, Europe and Asia Pacific, has a list of very recognizable named accounts that are owned by our competitors that have active displacement campaigns in addition to the domino accounts. And we'll also try to quantify this as we speak later in Q&A about what the revenue potential might be. So-- and then finally, we have an unbelievably nice product portfolio that's going to be released each quarter during the next 12 months that I feel is going to further add to our product differentiation and our advantage today. And if it comes up in the Q&A Jim can talk more about that. In addition to the advantage we have today, there's an exciting list of new products that we're going to be introducing over the next few month.

With that as an introduction, why don't I open it for q-and-a. No questions?

(Operator Instructions). And our first question is from Sasa Zorovic with Janney Montgomery.

Yes, thank you. So we had a quarter that was characterized by very strong licensed revenue and really strong performance in Europe and Americas. Now, why was Asia departed from that?

Well Sasa, it's Neil and I think actually this quarter was difficult for Asia and a little bit of tale of two cities. Japan as you know has been challenging for PTC and for most technology companies for some time. So that's not new news. I think in the Pacific rim and China specifically, we've seen performance down year-over-year in the last couple of quarters. Back to Dick's discussion about the sales leadership the last couple of days, I think the focus in that region of the world feel pretty good about the fact that things have bottomed out and are beginning to recover. But as we've seen in the last couple of quarters in Europe -- we've seen the lagging effects if you will of the recession that's been going on in North America for quite some time. But there's a feeling that the marketplace is going to recover more quickly than the US did.

Thank you.

And our next question is from Greg Dunham with Deutsche Bank.

I wanted to hit on the domino account that is you mentioned. It's been a year since the EADS deal. Could you give us a sense of the progress on revenue contribution or anything on rollout statistics that give us a sense of how that's going and how we can see these other accounts lead to licensed revenue going forward?

I'll take a shot at the non-revenue piece if you have that data. I think we're making good progress. Since that time, Airbus subsequently committed to deploy Windchill on the A350 program and that's well underway and going well. We started up a project at Eurocopter, there's a couple of other projects in the planning phases in some of the other business units. I think good solid progress -- theres a planner on the A400, that's a little bit in limbo and they're trying to figure out how to get that program started. The aircraft program itself. I think we're making the kind of progress expected. Upfront license revenue in that deal and quite a bit of object going services revenue as we do these deployments.

I think we have to be careful.

We don't disclose revenue by customer. Airbus is our number one customer by a factor of two to three times. And I think that gives you the idea of the power behind the domino strategy and the potential that's there to unlock a huge opportunity for PTC. If we talk about our recent wins in dominos whether they be this quarter or last quarter. We've commented on the past that we won these competitive benchmarks but we've also commented on the fact that they haven't translated into meaningful revenue as of yet, given the current market environment that we're in. We're less focused on at least this year driving meaningful revenue contributions out of those wins and performing successfully in the pilot and setting ourselves up for revenue success with those accounts in 2010 and beyond.

Ye, you mentioned that we began talking about this. I think we landed the EADS order and as Jim described six big divisions inside which have plans to consolidate on windchill. Since we knocked that down in the September time frame, we did get an introductory order at Nokia. That's not necessarily a displacement deal but a complementary deal that's important to us and has upside and potential. We knocked down in the April time frame the Volvo group companies, which we're using to [sews] products for PLM for data management, exclusively and there are old press releases out there from four or five years ago when they said [Anovia] was their standard and going forward. That's been replaced with the Windchill strategy. Subsequently this quarter we won an important decision at Otis elevator, the United Technologies Corporation company. We already had won the carrier division there. Now we're the standard at two big divisions inside UTC of $50 billion or $60 billion company. And Otis was using a competitor's product and not our own in that space.

Caterpillar selected us for the first time in the data management area for a very important project and we consider that an important domino account. And there was a large German retailer that had previously selected [DeSews] products, they merged with an American company that was using windchill and the de facto standard today is windchill for all the new acquisition in terms of procurements. And they made a nice procurement again this quarter. If I were to build on what Neil talked about. We promised you 10 domino accounts before the end of 2010. And today we are at six. So in the first nine months or three quarters, we've done six big dominos and there are more coming. We feel confident about that 10 number. I'm not going to raise it today. But there's a really good pipeline. At a higher level what we think is that these accounts, once they become mature in the second or third year. If we prove out well in the pilot phase, they should be doing between $5 million and $10 million dollars a year pretty easily if you add up software, services, and maintenance, and important domino accounts should easily do $5 million a year and more likely $10 million and there's up side on top of that. We have other accounts that are doing that kind of revenue. So we'd be pretty disappointed if a domino account wasn't in the range of $5 million to $10 million dollars to year with the potential to up side if they were to adopt our entire footprint.

One more thing I might add we got a significant order from in the quarter. And that too is a domino account. We're not going to count it in the 10 because we had secured our first foot in the door prior to committing to the 10. This too is a case -- obviously [Lenova] was an IBM business unit and naturally they committed to the [DeSews] product line. And probably the largest licensed order we got last order came from which was buying the Windchill. Having done the pilot project successfully to complete the full displacement and move on the to standards with Windchill. That's another domino account for you. Major international global company.

$25 billion or so in revenue.

Deciding to switch to our technology and abandon the path they had been on.

It's a good illustration also from the standpoint that probably in the first year they did low single digits and this year they'll definitely be between the $5 million and $10 million dollars in term offense revenue for us. That's a good illustration in terms of what we're talking about. In the second year of that company, they'll follow some of the characteristics I was describing in terms of how we can grow that account.

Our next question is from Michael Olson with Piper Jaffray.

Could your just review some of the new product introductions that you alluded to in the opening remarks?

Naturally, our main products today revenue wise are Pro/ENGINEER and Windchill. There is a new release of Pro/ENGINEER that just came to market in July this month Wildfire Five so we're excited about that. A new capability and quite a few improvements throughout the product. It's just another shot in the arm of strength for the Pro/ENGINEER product line.

On the Windchill side, there's been a number of sort of ongoing developments against the 9.1 release, which is currently on the market and in fact we're in the process of shipping, just have released a new requirements package. So we'd really significantly expanded the footprint and the preliminary feedback I'm getting from the field is pretty darn positive. Our Sharepoint base solution, we have shipped a 1.1 version which was the follow up and we committed to 100 deals and my math says we're at 83 right now so we're a little ahead of our target there. We're about to ship it, which will sort of fill in a couple of gaps, typically, a 1.0 product might have a few gaps and there's a 1.1 product that shows up and plugs those gaps so we're there. We acquired the [Relix] technology and we're in the process of introduces that to our customer base and so forth. We had a pretty good quarter with the [Synapsis] acquisition. We made what was it last November this environmental compliance solution. So that's a new product. And we got a decent pipeline there and actually did a quarter that was ahead of our forecast there.

Let's see. I'm just ticking through it. And then there's development projects we're working on. I think we talked a little bit about bringing [Relix] and [Synapsis] together into this insight platform, that was pretty exciting. We have committed to go do a project around embedded software solutions which we're pretty excited about. We're expanding significantly our Sharepoint footprint. And in partnership with Microsoft building out a product portfolio management solution based on Sharepoint project server and portfolio server which are three of Microsoft's main enterprise technologies.

There's a big pipeline. It started with pro-E is solid and holding its own and growing in the SMB space maybe not in the last year but as the space coming back, pro-E will do fine. Windchill is on a land grab right now. We're expanding the footprint. We're winning big account after big account after big account. And then we're planting the seeds for sort of the next generation growth end with Sharepoint and around this insight product analytics idea. And we feel like we have historical strength, current strength, and really our planting the seeds of future growth.

In the next 12 months you're going to see roughly eight major product releases or upgrades to the core products that are going to be significant. And we're really excited about that. Windchill 10, the beta version of Windchill 10 is going to be out in the next 12 months as well. And it's going to change the paradigm in terms of ease of use for these data management solutions and it's a really exciting release. We think we're going to extend our competitive advantage. Inside Windchill 9.1, the maintenance release, which is another important investment area for us and I'll talk about it because it's related to the domino accounts. We've got a significant number of developers that work on integrating our competitor authoring tools or CAD tools into the Windchill database. It's becoming easier and easier for us. That's how we won a number of these other deals. Its making it even easier for us to go tell the customer, "Okay, keep your [catia or NX] seats and then we'll manage them directly with the Windchill products." What we talk about there is something technology called heterogenous design and context and the work group managers, but we're able to manager our competitors CAD files better than they can at this point. There's a tremendous amount of development and point releases that substantiate that in these competitive benchmark and domino wins.

All right. Thanks.

Next question, please.

Our next question is from Sterling Auty JPMorgan. Our next question is from Sterling Auty with JPMorgan.

Hi, guys. Couple of questions. On the licensed revenue that came in post the analyst day. Can you characterize -- were those deals that you may have thought were going to close in the fourth quarter or closed early? More color around how and why those closed when they did.

Are you talking about whether or not we saw a higher win rate in the third quarter?

221 or 222, 226. I'm guessing that's it.

We've had a lot in the pipeline. We felt incrementally more positive as we got towards the end of the month. And we had a relatively good close rate. But at the same time there were a number of deals that rolled into Q4. So, I just think we felt as the month went on even more positive in terms of what we were seeing in the pipeline and the ability to close it out before the end of June.

We actually had another $2 million that we couldn't recognize that did close. We had rev. rec. issues. We had some POs we had to clean up. There were two $1 million deals that came in the first day of the quarter already. So, it builds a little bit in June. And I think that naturally in this environment, we want to be conservative. And I think we still want to be conservative. Because customers are very careful about bringing internal requisitions for major expenditures up to the CFO. But we're seeing lots of activity in smaller size deals and so forth. And then the sales guys sometimes can grow them. It could be a half million dollars deal and they go it up to a million dollars or 1.5 million sometimes. It's not a complete science. There's a little bit of art it to.

Back on the domino deals, what are the milestones or the things that give you visibility that the account is tracking towards that maturity in year two and year three and what can you give us on an ongoing basis so we can get a feeling on how they are tracking towards that maturing contribution?

It's Jim. We actually have a sort of maturity map where we have different phases for the domino accounts to move to. First of all, we spend a fair amount of time up front competing. Right? And when that competition ends with a decision to go with PTC that's a big celebration. But from a revenue standpoint, not much necessarily happens there. That's the beginning of the whole process. That's the commitment for the customer to be married to PTC.

Then there's typically a pilot project. Let's try it out and make sure everything is going to work the way we want and adjust things a little bit coming out of that. And there's some licensed revenue typically and some amount of services revenue. But sort of what happened at [Lenova] when you get to all that, then the customer says I want to do the broad rollout. At that point, there may be a little more services. But the software has been installed and is operational. They just need the seats to allow more people to start using it. Obviously, what we just handed to you here in this earnings release is four new domino accounts that just stepped across that line of being committed to be married to PTC and not necessarily a ton of revenue for these accounts. We can grow them to be something like EADS has become or the level that [Lenova] just went to. This has a big chunk of incremental revenue for us in each of the next years.

At a certain level we'll talk to the customer. It depends on what their initiative is. Volvo wanted to manage all of their authoring tools in the engineering department first and once they had their arms around that that'll be the focus of the first year or two. And then as they do that, they want to move into the back office and start to do more heavy configuration change management collaboration with the supply chain. We've introduced them to ArborText and they've started a pilot for technical documents. We've been introducing them to insight and reel ex-around compliance and reliability. So in these campaigns and that's what is important about our product portfolio. We generally start with one or two important initiatives and we begin to introduce complementary ideas that could take another year or two to grow and turn into more revenue. We have this broad foot print of functionality and capability. I didn't talk about Sharepoint. Most of these major accounts that we're describing do have Sharepoint initiatives inside the company, particularly around collaboration.

I think too if you think back to when we introduced this domino concept on our analysts day, it's not all about revenue. It's the influence that this series of successive major brand names switching and committing to PTC, it's that collective influence that we think begins to position us as an unambiguous leader. In PLM it's been a little more muddy. Some of our competitors [DeSews] compete against us. Several major product that is compete against us. And you add all that revenue together and they're big, we're big, whatever. We're already the single product revenue leader by some distance and when you put headline after headline after headline of their biggest customers switching to our technology instead you begin to create this case that PTC is breaking away from the pack. At some point, success begets success. People start to buy from the leader because they don't want to be the last person to buy from someone who is no longer a leader.

The CAD market is nice and we have the best CAD products. But we've really become a data management PLM company, with the best authoring tool, the Pro/ENGINEER. But if you really want to be in a growth market, the CAD market is going to be low single digits for everybody and the action of the next five years is going to be in the data management space in connecting companies, diverse companies around the globe, their supply chains, helping them collaborate, even the community aspects or the social product aspects with those supply chains, that's where the action of the growth is going to be and as Jim said, these domino accounts are substantiating the fact that we are becoming the unambiguous leader. When we walk into a new account, and I'm telling you there are 150 other deals behind the dominos, we'll announce some next quarter in Q4. When we walk into those accounts, increasingly as we come in, we're validated as the leader. People know that we're probably going to win. And as our sales guys set up the benchmarks, the technical evaluations, they feel today that there is no area in the technical benchmark that we're not going to win. We feel like we're going to win in the engineering department, managing the competitors CAD tools. We feel like we're going to win the configuration change management. We feel like we're going to win in the technical publications. We feel like we're going to win the collaboration aspect. We feel like we have these other applications around product analytics that are going to expand the footprint and we don't think our competitors can beat us in any inning of the ball game. We're going to win them all.

For the domino accounts, can you tell us how many are in pilot and how many of them are moving beyond pilot. Or is that something you can share going forward so we can kind of track the evolution?

I think we can do that. Let us do some work on that. You just asked the question. We ought to go back and analyze where we are. EADS for example as Jim described. There are some divisions where we're in full deployment and some in pilots. Let us go back and do a little bit of work.

The simple answer is we had two, we just gave you four. Four have just made a decision this week, in the case of Volvo they made the decision two months ago. But they're just putting together the plans to do the pilot. And made the decision who they're going to go with. So four of the six thus far are brand new. And then you go back to the two previous ones we had given you and in the case of EADS of both in production and new pilots in the case of the second one. Right now in the process of completing the pilots and wrapping it up and evaluating and putting together the plans to go to the next phase.

All right. Thank you.

And our next question is from Richard Davis with Needham & Company. Go ahead, your line is open.

This is a little bit of a tactical question. But you have some of your customers and we're seeing this with other firms we follow. Harley-Davidson has layoffs and John Deer has layoffs. And you guys, as I recall, more or less like one people have one year renewals. How do you keep when those things come up for renewals and your customer has fewer employees, and obviously, sometimes they may not have fired engineers. How do you keep those renewals at the same price? Do you have to throw in new modules? Can you talk about that process in an economy where head count is a little bit lower than it has been.

My sense in discussing this with Tony is that that's not been a major factor. We have not been throwing more stuff in to keep the renewals at the same price. We've done a pretty good job of renewing. A quartering a or at the time of our analysts day there was some panic that our total seats on maintenance had dipped down ever slightly. That reversed itself and they went up nicely in the past quarter.

Actually, there's a different element. I had a customer come in and put up on a slide the famous quote "crisis is a terrible thing to waste." This customer is basically saying now that the pressure is off operationally, we can do retooling. We all know the economy is going to turn and we'd like to put in new capabilities so when the economy takes off, we're ready to go.

Part of the discussion too is actually like a number of users and volume discount percent. Let's say a company has a thousand users. And that justifies a 30% discount. Well, if they come back at renewal time and only want to renew 700, we have a sheet. And at 700 users, you only get a 20% discount. And so the net net of that is that they have fewer users but they're going to get a smaller discount. And we end up netting about the same amount. We've had creative sales campaigns we're empathetic to a customer's situation. We don't want to have them feel like -- we want to listen and I know we've had a couple of situations on the ProE, where people wanted to reduce the licenses and we've -- we'll end up keeping our prices pretty much the same the way I described. We've also brokered executive meetings in return. We'll talk to you about that. But we want to have a half day session with the whole management team to talk about our PLM vision and our product development strategy and how we can help you. To some degree we're trying to use this difficult situation to drive a little bit better executive awareness inside some of these important accounts.

Back to the first question though, in a constant currency basis, our maintenance has groan year to date. And that's with a lot less licensed revenue coming through the door. I think our maintenance business is alive and well and quite frankly, trucking right along.

Got it, and if I can I will ask a follow up. The other thought is if you're morphing or emerging as a data management PLM company, is it accurate to say, one of the problems with CAD software, it's hard to get people to switch because I'm used to the tool if I'm an engineer. I get really grumpy if I switch from one vendor to another. Is it fair to say to employ your configuration management, tech pubs, your collaboration, all those things that you've outlined does that require less business process change on the part of the users which therefore means greater opportunity for you guys to kind of step in and displace disconnected systems or legacy systems, which seems to be what you're doing. Is that a logical conclusion from the initial success?

I don't think so actually. I think you're right that CAD is hard to switch both from a data standpoint. All the data you've ever created is now in the wrong format and also from a user retraining standpoint and sort of an interruption standpoint. CAD is hard to switch. If you look back let's say in the heyday of pro-E in the mid-'90s, that product was so much better than the competition. So people said, let's bite the bullet because we can't afford to sit here with the technology we have. Let's bite the bullet, go through the pain, and switch. PTC was switching account after account after account despite the difficulty of switching. And it's just because the gap was so big. And that's where we are right now on the PLM side. The gap has become big enough that it justifies going through the pain and agony of switching even though that's difficult. We at PTC and certainly the sales management team feel like we're approaching the level of relative strength we have at pro-E in the early to mid-'90s. It's becoming the only game in town. We can walk into any kind of a legitimate competition whether it's home field or away game and we're going to walk out with a win and justify the switch. So these dominos, these are the headlines, the rest of the newspaper of all the smaller deals. These are companies who are saying it's time to switch. The gap is big enough we can't afford to sit where we are. Let's go.

Got it. That's helpful. Thanks.

Our next question is from Ross MacMillan with Jefferies and Company.

Hey guys, this is Horatio Zambrano in place of Ross. He had to drop off. I had a two part question. The first one is on your guidance for tax rate in Q4 going to 20% of non-GAAP. Should we go back to 25% for fiscal year '09 and also on the services you talked about the Windchill weakness starting to deteriorate services a bit so what should we expect for fiscal year '09 on a year-over-year basis?

Was your question around 2009 for the tax rate and services?

I'm sorry, fiscal year '10 on both those questions.

On the second question it's a little bit premature to give you guidance for next year given that we haven't given guidance for the full year on total revenue. I will say as I think Jim mentioned earlier, that we're feeling more confident in our ability to grow next year perhaps more than we were last quarter and our guidance will ultimately reflect that when we give it in October. As far as the tax rate is concerned, the 21% that we're projecting for this year -- there's a significant difference in tax rates by geography. And one of the things we're seeing is our geographic mix is such that we are going to have a lower tax rate than we anticipated. Over the longer term, we think 25% is the appropriate tax rate to use in business and we're committed to grow our earnings next year by 20%, even at a higher tax rate that we project for this year.

Okay, great. And that leads to my second question. Around that 20% goal that you have, I can sort of keep the OpEx pretty flat with this year and sort of show some modest to moderate growth, or if you're going to continue to grow OpEx, your growth has to be a little bit better. The cost containment with merit increases being stopped and some of the other things you've done this year, what you expect for OpEx next year in terms of your ability to hold that flat or modestly up.

I certainly understand the interest in having a better feeling for that. What I would say is that it's a little bit premature given where we are in the planning process. I would say there's Wall Street consensus about how PTC is going to do for next year. And we're not uncomfortable with that consensus even though we didn't develop it. That's the first thing I'd say. Secondly, we're right in the midst of our planning process. Dick mentioned the sales meeting we had the last two days. Prior to that corporate management strategy meeting late last week. We have a Board meeting over the next couple of days. Our decision in terms of the level of revenue growth that we're comfortable with and the OpEx that goes along with that is going to kind of unfold over the course of the next 30 to 45 days. We're going to have to ask you to be patient as we develop that. Just to reiterate. We're committed to 20% earnings growth using a 25% tax rate.

Great. Thanks a lot.

And our next question is from Blair Abernethy with Thomas Weisel Partners.

Just a couple questions. Just following on the discussion on the PLM side in terms of customers switching and so on. Can your just give us some sense of the decision making process on the customer side? At what levels are these decisions being made now? And has that changed at all this year?

You want me to start?

Go ahead.

I think generally we're getting high level executive involvement particularly displacement. And Jim did a nice job of describing. I want to follow up. I characterize ourselves as a data management company today, but I don't want anyone to think we don't have the best authoring tool, Pro/ENGINEER is the best CAD tool out there on the marketplace today. These decisions, particularly the displacement deals are technical. And there are different aspects of the technical evaluation. There's front office and back office. The front office is the engineering department where they're managing all the CAD tools and so forth. And the back office is the configuration management, collaboration more the enterprise aspects. When you get into the technical benchmark we're trying to win and we do.

But there's also a value proposition and a business case that goes along with it so we're involved with the CFO, very high level in the business around their investment. And there's a political aspect I tell you as well which often compels us to get right into the executive office because even in many cases at the CEO level because our competitors are good companies and they've had relationships with these customers for many years and they're going to appeal to the highest levels that they can for a voice or more time or some kind of clemency. So if we're not at the executive level talking to them and reminding them that we won clearly and unambiguously technically and that translates into higher quality, supply chain integration and all the things that are important to them. We need to be able to tell that story. We're at the VP of engineering level. The CIO and CFO level and in many deals we actually get all the way to the CEO.

Okay, great. Thank you.

One of the other little things that's happening we've been trying to build a partnership program around this category or this market for probably six or seven years. The category really probably won't break out and be significant until the partners become more and more active and involved. And they have a tendency to follow markets, the [Accentures] of the world and IBM global services and so forth. And we've noticed also in the last three quarters, last year or so and it's been accelerating that the partners are bringing us some deals and the partners are more and more coming to our door and wants to talk more about how they can work with us. It used to be that we were trying to kind of push the partnership concept out to them and we've noticed now they're coming to us. And we'll have to give you more input on what's happening with that. That could accelerate some deals. We want a pilot that we have in June. We haven't talked about it today. But it's a major, major company. One of the biggest in the whole world. And a partner brought with it to us. It was a competitive bakeoff. We won the pilot. And we'll talk more about that I think at the October call if we do well on the pilot which I think we will. That was a deal with 30 day sales cycle. The partner which was Accenture had an open bidding contest. They were versed in the competitive offerings and we were selected for initial bakeoff and it's ours to lose. I think you'll be excited when we tell you the name of the company in the fall. I'm going out on a limb a little bit. We have to execute on the pilot.

The pilot preceded the commitment. A lot of times there's a commitment to go with PTC and the pilot is the first step of rolling it out and it's kind of a learning experience. In this case, they said let's do the pilot and PTC if you execute we'll make the commitment.

Okay. Great. Thank you. And just Neil, I wonder if you can give us color on the services business just in terms of how you backlog is looking now that we're sort of three quarters through a significantly lower licensed revenues and services were down a little bit sequentially. Can you also talk about service pricing?

Yes, I would say that first of all, to answer your second question first, we haven't seen any deterioration in services pricing whatsoever. From a backlog perspective, things did get a little softener Q3. If you think back to the maintenance business in the second quarter down for the first time in a couple years, we saw a little bit of softness in our services business both in backlog and revenue in Q3. I think our guidance incorporates similar thinking in Q4. And I think we talked before about the lag effect of a few quarters of difficult license revenue on both the service and maintenance business. What we're starting to see which is encouraging is we're starting to see our licensing business recover. It was up 18% in Q3. Our guidance assumes close to 25% in Q4. And I think the services business and the maintenance business are going to recover along with the license business albeit a quarter or two behind.

Okay. Great. Thanks very much.

And we have time for two more questions. Our next question can from Yun Kim with Broadpoint AmTech. Go ahead. Your line is open.

I may be mistaken, but there were improvement in sales of mid-sized deals just like the number of large deals from previous quarter and looks like the channel business remained the same as well. Can you talk about what was driving in the sequential improvement in license revenue this quarter and again it seems like mid-sized deals from the direct sales? Any particular products or large deals getting downsized or broken into smaller chunks?

Driven in a couple of areas. Enterprise license revenue was up 55% sequentially. And so Windchill definitely is leading the license recovery if you will. That's the product side. On the geographic side it was North America. North America sales were up 51% sequentially. So we're beginning to see recovery in North America. I think it's encouraging that enterprise license sales are up as much as they are sequentially. That's typically where the large deal activity takes place. While we had nine deals over a million dollars comparable to last quarter, I think the improvement in enterprise license sales bodes well for seeing more large transactions going forward. If we look ahead to Q4, last year we did 24 large deals in excess of a million dollars. I don't think we're going to do 24. But I think we're going to do significantly more than nine and that's being driven by the enterprise license performance.

Okay, great. And then in terms of channel business, it looks like it stalled again in the quarter. Can you give us any update in your channel business? And from your point of view when can we start to see the growth back again?

We've had a couple of quarters where business in the channel has been tough. Our worldwide charge manager for PTC was here the last couple days. I think he feels like his business is bottoming out and we're going to start to see recovery there. You're right. We had a tough couple quarters in the channel. We're fortunate that among our over 400 channel partners, there's only one that's gone out of business so far this year. We've worked with our channel partners very aggressively to kind of help them through with the zero percent financing options and what have you to help them through a difficult time. And I think we expect to see the channel business round the bend in Q4 or Q1. I think --

Just to put things in perspective. If you go up to 50,000, a year ago the same PTC executive team sat in the same room in the same hotel room we're in right now and projected a lot of growth. Because we saw a lot of interest. We saw a huge competitive advantage. We thought 2009 was going to be a pretty good year. And then come September 26th, Lehman goes out of business and the whole world changed dramatically. And everybody stopped spending money. Customers didn't become disinterested. And we didn't lose our competitive advantage. Just everything froze. And now we're starting to see some relative amount of unfreezing taken place. And that hasn't trickled down yet to the small companies who are probably more conservative. The bigger and medium sized with giving the green light to projects that they had frozen in September, October, kind of time frame when the world was falling apart.

How much of your near term margin expansion is driven by channel business growth?

It's probably not in the near term very little of it. Over the long term obviously a big factor. We want to get to 35% to 40% and that's a pretty efficient model as we move in that direction. Over the next 12 to 15 months, very little will be driven through the channel.

And I'm not sure if Barry is there or not. Can you explain the dynamics of how you guys were able to improve services margin when there was a sizable sequential decline in the consulting business? Was it driven by head count?

I'm sorry, was the question around how we were able to improve services?

I believe I did the math right. Or did it decline?

Services margins were up do you want to address that.

I think we were driving greater efficiency going forward. And secondly, our delivery capacity is flexible. So we drive delivery capacity in relation to what the revenue looks like and we've been able to manage successfully. We've also taken some of our capacity and work packages offshore and able to offer our services at a lower combined price.

I think if you remember from the analysts day again, we probably talked through this some of it verbally, some of it in in the slide. The bigger engagements are more profitable for us. If they get in a lot of small sport duration deals, they have a hard time driving their margins where they want them to be. Fundamentally, what the services group did and we talked about it that day is they've concentrated the direct services typically on the 250 largest customers. And then put in place a partner program, a services partner program to back fill for the medium sized and small deals. And that program has made good progress in delivering the kind of results that we hoped it would.

Okay. So this improvement in the margin on the services side of the business should be sustainable going forward.

Yes, yes.

That's it for me. Thank you very much.

And our final question is from Ben Kadlec with First Investors, go ahead, your line is open.

Thanks for taking my question. Not to miss the forest for the trees, what changed between the analysts day in June and I guess your release here that would have you sort of lower fiscal year '09? Is it just near term things became more uncertain or longer term you're more excited? And secondly, you've covered this in other questions, more visibility on the timing of or revenue recognition on these major benchmark deals? Is it sort of like 10% first year? 30%? Until you get to the five to 10 million run rate how should we view those running up on a quarterly basis or a yearly basis?

So first question was around guidance for this year. We think it's appropriate to be conservative. I think Dick mentioned this before. Certainly over the next few quarters everyone though we're seeing signs of a thawing out of the freeze on spending that we've seen for nine months now. It's appropriate to be conservative. And hopefully, we'll see more sign that is business is moving in the right direction over the next 90 days. And hopefully, that will culminate in our ability to drive some growth in the business for 2010. Quite frankly, a quarter ago we probably would not have anticipated.

As to your second question, I don't think there's one particular pattern around the recognition of revenue or the size of the orders that we're going to get through a "domino" account. What is true in this environment, to Jim's point, usually the initial [inaudible] after a commitment is a pilot project. There is a small amount of revenue associated with that. That process may take place for as long as six months, some maybe even longer. And typically, that would be followed by a more significant order or orders over a period of time. I think at the outset of the call, Jim talked about Airbus, where we got a fairly substantial license order up front. The account has evolved into an ongoing annuity primarily of services revenue and of maintenance revenue as well. So what we're trying to develop through these domino accounts is that type of ongoing annuity. I would tell you once your bean commitment from a customer, it's probably going to take you six to 12 months before that annuity starts to take shape.

I was just thinking out loud that maybe the model. We should try to model this as a home work assignment. Maybe it would be like 20, 40, 40. A lot of these deals never end. What happens is you just expand the footprint. They might look at us for change confirmation management. But as we get into that project we're talking about the inside product analytics and the environmental stuff and the reliability stuff. And then we'll be talking about Sharepoint. And after that we're going to have a conversation about embedded software. And the truth of the matter is these turn into huge annuities that might last for 10 years. Airbus has been one of our top five accounts for the each of the last five years. I don't think we'd say that project is done and going to fall after the radar. We feel like if your check in with us 10 years from now. Probably be one of our biggest accounts.

And we have our own sort of a sales campaign strategy that we refer to internally which is called surround all around. As that footprint gets bigger, last quarter we didn't talk about it. Ericson is a pretty nice company. It's never been a customer of ours. We just sold them a very, very nice deal for insight for the environmental compliance and Sharepoint. And we didn't even talk about it. That's a foothold now in the account which we'll use as a beachhead to start to suggest that they take a closer look at Windchill for confirmation and change management to date. They have a home grown system that's highly customized. And as Jim was describing in these large domino accounts, ultimately, if we were to get that complete footprint we're going to attack the CAD deployment as well. Many of these customers have an open mind to having a conversation about that in the future. If we deploy our data management solutions that we're doing the back office work around change and confirmation management, technical documents, Sharepoint. At some point they would entertain a conversation and a value proposition around swapping all the competitive CAD offerings and having a complete system from PTC.

Just a quick follow-up. These dominos are you already begun the pilots? Beginning stages of the pilots? Halfway through?

Before we announced we just secured the commitment. The pilot projects are starting next week.

Starting next week.

So there might have been proof of concept. But the deployment is starting next week.

Okay, great. Thanks.

So I think that we'll continue to work on those. It could be interesting for you to ask the leadership of our competitors which they're great, fine companies, what they think about our dominos. As they may have been able to shrug off the first or second. I think they'll have an increasingly difficult time explaining the inexplicable which is how they're losing these critical accounts. We're going to work hard during the summer. We're hoping to have a really nice fourth quarter. And we'll look forward to getting back with you in the fall with our plan for fiscal year '10. Thanks, again.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.