PTC Inc (PTC) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to PTC's first quarter fiscal year 2010 results conference call. After brief comments by management, we will go direct into the question-and-answer session. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce Kristian Talvitie, PTC's Vice President of Corporate Communications. Please go ahead.

Thanks and good morning and good afternoon, everyone. Before we get started, I'd just like to remind everybody this conference call and Q-and-A session may include forward-looking statements regarding PTC's products or anticipated future operations or financial performance. Any such statements will be based on current assumptions of PTC's management and are subject to risks and uncertainties that could cause actual results and events to differ materially. Information concerning these risks and uncertainties is contained in PTC's most recent Forms 10-K and 10-Q on file with the SEC.

All financial measures in this conference call are non-GAAP financial measures. A reconciliation between the non-GAAP measures and the comparable GAAP measure is located in the financial and operating metrics document on our Investor Relations page of our website at www.ptc.com and is also provided at the end of the document, the prepared remarks in the press release document that we e-mailed to everybody earlier.

With us today is Dick Harrison, Chairman and CEO, Neil Moses, CFO. Barry Cohen, EVP of the Services Business, and on the phone is Jim Heppelmann, President and Chief Operating Officer. With that I will turn it over to Dick.

Thanks Kristian, and I just -- maybe just a couple of quick comments, then we'll open it up for questions. But it was an interesting and a good quarter for us, and we just feel confident, as is evidenced in some of the press releases that we've released in the last couple weeks. Most recently today we had one from Volvo and Raytheon as well this week that some of the things we've been talking about, about this market and our leadership position, are starting to materialize a little bit. So let's throw it open to questions and get into it and have a good discussion about what's happening.

Thank you. We will now begin he the question-and-answer session. (Operator Instructions). Our first question comes from Yun Kim. You may ask your question, and please state your company name.

Sure, Broadpoint. First of all, congratulations on a great quarter. So obviously, you guys have done a good job executing on Q1, maybe too good of a job, perhaps. Just wondering if the pipeline needs to be rebuilt again, especially around those large domino deals. Looks like you guys are close to meeting your goal for the year already. Can you just talk about the overall pipeline and any change in visibility and pipeline coverage as you go into Q2 from Q1? Thanks.

Well, the pipeline for Q2, we feel is really strong, and the pipeline for the balance of the year, and even as we look out into next year a little bit is strong. It continues to increase. We've spoken about the dominos themselves, but again, behind the dominos, we have today, I think there are in the range of 150 active displacement campaigns in our competitors' bases. There are over 100 active deals that we think are worth more than $1 million, let's say, that could happen in the next year.

One of the things that happened in the first quarter was that some of the sizes of the deals increased. Oftentimes we'll be talk to the customer about a particular transaction and what we saw in the first quarter was that we've been able to demonstrate conclusively the value that our solution brings to the customer. So as we've done the pilots and so forth, that value creation enables us to have a discussion about a broader footprint, more applications inside the whole Windchill footprint, the and some of those deals grew in size. We had them in the forecast, we had them in the pipeline, but they might have gone from a $1 million deal to a $3 million deal, or a $3 million to a $5 million, and that's what contributed a lot to the up side. So you know, we don't always know exactly how big those deals are going to be. We do know we have a nice list and a growing list in the pipeline, and it gives us a pretty good deal of confidence for the second quarter and really for the balance of the year.

Yun, it's Jim here. Just to add to that, if you look at our prepared remarks, we comment about 50% license growth forecast for Q2. And again, we couldn't be projecting 50% license growth again if we didn't feel confident about the pipeline.

Okay, great. And then quick question for Barry. So obviously with the -- a lot of these domino deals happening already, a lot of these things ramping up quickly, will this put some pressure on your consulting business, especially on the margin side, as you try to ramp up more quickly than planned?

I think we planned fundamentally for an increase in the second half, so I think we're pretty much within our capacity plan at this point. So these are not surprises to us. The pipeline is strong.

How are the bookings?

The bookings are good, back up from a drop last year. Bookings are now back up to 115% of our revenue projections, so I think we're pretty confident and we have a pretty good plan. Thank you for the question.

Thank you. And lastly, overall, how much are large system integrators engaging these domino deals, and how big of a role are they playing in the sales cycle?

Well, they are -- I would say they're not playing a huge role yet, but it's increasing. So we've had some of the large systems integrators involved in, I want to say like of the 11 dominos, maybe three or four of them, that in range, but it's growing. In a couple of cases, they've brought us in. There's one than we haven't talked about yet, and it's a big company, where Accenture brought us in, and we've completed a pilot, for the most part, and think we're going to get an order here shortly. The first nice big order. But increasingly, I think the systems integrators are saying that the market, we want to talk about a little bit today and as we engage, how big is this market and how big is our window, vis-a-vis the competitors that we have, because it's an interesting point about the systems integrators. If the market is as big as we think it's going to be, they'll play an increasingly bigger and bigger role here in the future.

Okay, great, thank you, and congratulations on great quarter.

Thank you.

Thank you. Next question comes from Blair Abernathy. Please state your company name.

Thomas Weisel. In terms of the domino implementations of the 11, obviously four are just in the last quarter, but of the overall group, can you give us a since of where you are at in terms of starting points with some of these implementations versus well into or is anybody at the halfway mark at this point?

Jim, you want to do that one?

I don't know if we have Jim.

I'm sorry, I'm having a bit of a phone problem. Yes, I certainly can talk to that question, Blair. I think it varies a couple of the dominos were at very early stages. You might remember, Volvo originally put out a press release saying they made a directional commitment to PTC. Just this morning we sent out a press release saying basically we've passed the test phase and they're now confirming that directional decision is a firm decision and they're moving forward. That would be an example where most of PTC's revenue opportunity is quite frankly still front of us in that particular opportunity.

On the other hand, a couple of the large orders represent dominos who had proved out the software, in some cases implemented it in a given business unit or whatnot, and then gave us a very significant order to sort view of proliferate the software across the entire company, all business units and all the different user constituencies and so forth. So I think it's a mix, but I think, clearly most of these dominos we see as annuities, if you remember back to our earnings -- or our analyst day we had back in October. These things become really year after year opportunities where we broaden the footprint, functionality, we broaden the number of users and divisions and so forth. We might come back with a new program around Arbortext or something around our green solutions or something around our reliability solutions or whatnot, and I don't think we're ever done, quite frankly, with these dominos. I think we showed some examples, if you think back to that day in October where, we have some companies that we've been doing Windchill business with for five, six, seven, eight years, and they just keep expanding the deployments over time. We'd rather think of these dominos as annuities than big transactions, even though from time to time they do produce big transactions.

Okay, great, thank you. Second question is just maybe if you could provide a little more color around product point, now that you've had it in the market effectively for 12 months. What kind of -- what's working there on the product point side of things, and maybe give us some sense of the average deal size is still pretty small, or are they changing there at all?

I think -- this is Jim again, I'll take this. I think what's working is the number of customers purchasing it. What could use a little bit of work is the deal size. And I think what's happening right now is there's a lot of interest, there's a lot of people placing an initial order for small quantities to play around with it and test it. The idea of using SharePoint is a platform for product development is a bit of a radical idea to some people. So I think they're intrigued, they want to go explore. We expect a lot of those people to circle back and give us follow-on orders that are more significant as we move through this year and into next. So I think that's -- we're on the same page you are here. It's very exciting. We'd like to seat be more impactful to revenue going forward, but in the meantime the core Windchill business is doing so well, that there's no pressure for us to try to squeeze something artificial out of this product point business.

Okay, great, thank you. Last question for Neil, can you just talk a little bye about maintenance renewals, particularly the on the Pro Engineer side of the business, which is the bulk of your maintenance base?

Yes, our maintenance renewal rates, I think we talked about last year they were down a percent or two, which was good in the macro environment everyone was experiencing. I think that our maintenance business has held up well. Certainly we're still feeling a bit of a hangover from last year's soft license revenue, which I think we've said will continue for the first half of this year, but we're pretty optimistic that renewal rates will hold and perhaps increase over the course of the year and it will be back to growth, both constant currency and otherwise in our maintenance business in the second half of this fiscal year.

Okay, great, thanks, guys.

Thank you. Next question comes from Sasa Zorovic.

Sasa Zorovic here with Janney Montgomery. Just talking about 11 actual deals and target of 12 by the end of the year seems to get to the target with just one for the remainder of the year. I wanted to make sure, are you just keeping the target of 12 to be very conservative, or should we interpret this as probably a slowdown at the rate of the domino deals being added? Because, looking at this I would say you've delivered four in this past quarter, the target of 12 should be up for the whole year.

It's Jim. I'll take that one, Sasa. Clearly we are going to blow through the target of 12. You make a good argument, we could lift the target. I think PTC's view is maybe we should change our focus a little bit to how are we driving revenue off those dominos as opposed to how many dominos are we landing. But, clearly we're going to do better than 12. You shouldn't take -- you shouldn't read anything into us not changing that target. I think we're just simply changing our focus a little bit to the license revenue forecast, the 50% growth and so forth, is probably the thing he we ought to be talking to you about at this point. But, I think we should take it under advisement to reconsider the domino target.

Yes, Jim, it's Neil. Let me just add to that. What we're saying, remember, we talked about the dominos as a sign post that PTC was winning in a pretty unhealthy macroeconomic environment. As the environment begins to improve, and we're starting to win more of these domino accounts, the true measure of success here is overall revenue growth and license revenue growth. You're seeing the first stages of that in Q1.

Thank you. Now, my second question would be regarding your indirect business. So clearly the business has started pick up on the direct side and with a large buyers, but on the SMB side, I'm sort of wondering, what could be done there? Is it really just an -- is it really an economy story, and is it just we're to wait for that or is it something that could be done, PTC specific in order to accelerate the recovery of that business?

Jim, you want that one?

Yes. I'm happy to take that. I think it's largely a macroeconomic issue. I think it's well understood that the smaller companies suffered more on the downturn and are more cautious about coming back and spending money as things improve. So I think PTC will continue to work our own programs to make sure we're getting our fair share or more so of whatever spend level exists there. But I think that fundamentally we're still seeing depressed spend levels in the small and medium businesses, and we don't see the kind of acceleration that we're seeing in the larger enterprises.

Then my final question would be, you mentioned your share shifting in the market in your favoring, obviously looking at that two by two matrix in your growth rates, the enterprise business, one would -- easily can follow that. But I take that it your comment really implies that for all the four quadrants specifically, am I right in interpreting like that? It's not just for one, it really is for each and every one, am I right?

I'm not sure I understand your question.

So that you are gaining share in each one of these four market segments as identified by your two by two matrix.

I'm not sure we could say we're gaining share in all four, just to be honest. I think in the upper left box, the large enterprise CAD, I think there are no meaningful share shifts happening in any direction, nor would we forecast them. So I think that we're holding our own and participating well in the lower left. That is to say, the SMB CAD market. We are definitely taking significant share in the lower right, that is the SMB PLM market, and we are take dramatic chunks of share in the upper right, the large enterprise PLM market.

Great, thank you very much for your clarifications.

Thank you. Next question comes from Sterling Auty. Please state your company name.

JPMorgan. Following up on a couple of themes there, first on the domino deals, how would you characterize the timing of when those deals close, given that you closed four? Were all those expected to close in that quarter, or did some of them actually land a little bit earlier than what you might have thought originally?

Let he me just think for a second.

Dick, I think there was one notable -- meaningful transaction here that probably dame in earlier than we thought. We might have forecast that as Q2 business, but the deal was he ready, and so we took it on good terms. So I think by and large, though, it was sort of business we expected in the quarter with one notable exception.

Right.

Okay. And then so the comment about not updating the target, one of the things some of us have looked at is the turn around, or your improvement, is coming from doing these large deals. So if the focus is going to be on license revenue is there perhaps maybe a metric you want to share, like the amount of license revenue that comes from deals over certain thresholds, so we can get a sense of how you're monetizing those opportunities?

Neil, you can feel free to add here, but I think the most important revenue is Windchill revenue in general, then Windchill revenue as sort of the leading edge of the spear here. That's what I would focus object. Whether the Windchill revenue comes from a large collection of small and medium size deals or a few big ones I think is less important. You might actually argue that a large collection of medium size deals is a better, more reliable platform. So I think that you've got to remember that the dominos don't all produce huge transactions for us. Nor do we necessarily want them to do that. We want them to be huge annuities, not huge orders, not huge one-time transactions. So a lot of times, in a given quarter, revenue from a domino would fall below some artificial threshold. Nonetheless, it happens four quarters in a year in a given year and it ends up being important, in the context of our revenue in that given year, even though in any one quarter it might snot have been a million dollar revenue transaction.

I don't want to start giving awe whole bunch of different ways to measure things. We'll go back and rethink the dominos. As Jim said, we're going to blow through the number, the 12 number what. We thought, again, just to reiterate, was most important was the concept of dominos, when we couldn't -- you gave us a lot of questions in the last year about, well, if you think you guys are winning, why don't we see it? So we tried to use the dominos toil straight. That there's no better illustration than 50% license revenue growth. And a reiteration of 50% again. What company, public or private, anywhere in the world today, greater than $50 million in revenue, is doing 50% license growth? I think there was a lot of skepticism yesterday about whether or not we do 20% license growth. So the dominos are an important sign post, as Neil called them, and we're going to continue to report on them. More importantly, there's 150 other displacements behind them, a very large pipeline, and the license revenue and the -- is growing at 50%. So that to me is what's compelling about the report today.

Maybe just one last comment, which is that 50% license growth in the first quarter, looks like it will be that in the second quarter. I think we committed to 30% license growth for the year. I don't think at this point there are a lot of software companies talking about 30% license growth for the year. You may be able to attribute one quarter's worth of license growth to a number of large transactions but 30% over the year, that growth has to be pretty broad based. Maybe one more comment. I think we actually provide from a metrics perspective more information you get than most people. Particular with the four box information license, service, and maintenance by four box. I challenge you, Sterling to find anybody else that is providing the level of detail around their progress that's equal to or greater than we're providing today.

I think one important point is we use the dominos and displacements to signal our leadership position in the industry and our market. But remember, we have a very small penetration even in our installed base with enterprise Windchill. So our opportunity for growth doesn't rest just on displacement or dominos.

Okay?

Thank you. Our next question comes from Ross MacMillan. Please state your company name.

It's Jefferies. Congratulations on a great quarter. Just on the deal size, the average deal size ticked up a lot here. Is there any color on out of the 10 over a million bucks how many were eight-figure deals?

We're not -- Ross, we're not going to get into starting to report on the size of deals. Customers don't want us to and so forth. We've been consistently reporting the deals over a million, and you can see that in the quarter there were 10 deals over a million. A year ago there were nine. The average deal size in the year-ago quarter I think was $2.5 million, and this quarter it was about $5 million. So I've tried to describe that earlier when I said that we're getting -- the customers are doing pilots. They're realizing value.

Just to try to give an illustration, companies are trying to -- let's say they're working together to build an engine at a particular -- an auto engine is and multiple designers are across the globe, because they're globalizing their engineering. They're updating their designs real time and building pilots that demonstrate. This it's like instant messaging for product development, and our competitors are using the UPS. So they're building pilots, and validating that the impact of our software, we have one customer, which was a domino this quarter told us the productivity impact versus the solution from the competitor was 10x. Not 2x, 10x. So it is sometimes difficult for us to predict the size of these deals in a quarter. We have a negotiation and what we found in the first quarter, we might seat in the second quarter in the balance of the year is that the deal sizes are ticking up because the footprint has been bigger, the value that we create is better, and it's easier for them to build an ROI. So to some degree we actually don't know what's going to happen with those deal sizes.

Yes, Ross, I think it's sort of an interesting exercise here. If you rank those top 10 big deals by size, then cross out the top two, we would still have add pretty decent quarter.

That's helpful color, thank you. Just maybe one -- two follow-ups. One is just on that competitive environment. I think you talked historically about really this being a two-horse race between yourself and Siemens, do you feel like you're further distance yourself from them now? Is there some dynamic that's leading to better win rate versus them? Just curious. Thanks.

Jim, you want that one?

I'll take that. Roughly a third of the dominos have been Siemens displacements, and I think our win rate against Siemens is a notch -- let's say our displacement rate against Siemens is a notch below that against Deseau, but our win rate in a green field environment is really high. There was a couple dominos, one which it was GE healthcare account, which was a major displacement of the Siemens incumbent position which obviously we're pretty happy about. There were a couple of others. Otis, for example, called out in the press release. These were actually customers turning off the Siemens software and switching to the PTC software. What we talked less about, in the EADS benchmark Siemens was there and competed like crazy and we walked out with a win there, too. I think we're doing very well against both. I think that Deseau is very vulnerable, and we are capitalizing on that.

That's helpful. Then, last one, Neil, just on the op ex, obviously the driver here when you have such a strong quarter from a license perspective, but sequential increase, given the headcount was flat, any color you can add to that just in terms of either rolling back salary increases or other suppressed costs so that we can understand kind of how that shape looks for the remainder of the year? Thanks.

I think if you look at what happened in Q1, the principal issue was commissions related to higher license revenue, which we're obviously happy to pay. If you look going forward, Ross, there's a number of -- a couple things involved. I think we've talked about the fact that we want to continue to invest in the business. We'll be investing in distribution capacity, both with direct sales force and channel, maybe making a little bit more investment around R&D as well. And then I think we also talked in our prepared remarks around the fact that there were some, if youl temporary cut-backs that we made last year that impacted PTC employees, and we'll look to make some investments back in our employee base as well as the year progresses. So that's really where the target and investments are planned, and I think weave given guidance around the fact that our -- fundamentally our op ex will be probably a shade over $850 million for this year. So if you look at the fact that we spend, I think around 213, 214 for Q1, looks like the spend for the balance of the year will be relatively consistent with that.

That's helpful. Thanks a lot. Congrats again.

thank you. Our next question comes from Mike Olson. You may ask your question. Please state your company name.

Piper Jaffray. Congratulations on a great quarter. Follow up on that last question. You mentioned in the prepared remarks about some of the temporarily reduced costs coming back which definitely makes sense. Would you be, Neil, willing to quantify the level of expenses removed in '09 that will return in 2010?

I think if you look at the planned op ex spend right now, just over $850 million, versus if you looked at our initial guidance you would have seen a number more like $810 million, $815 million. Probably ultimately about half of that increment will go into new investment and probably half of it will go back into some of these programs that were foregone. The other comment to make, we have increased our tax rate estimate for the years as you probably saw, from 23% to 25%. The highest tax rate jurisdiction for PTC worldwide is the US, and obviously the US is performing extraordinarily well, and so that's a largely good news story but at least on the tax rate line it's a little bit of a bad news story.

Okay, that makes sense. Then one more, Neil. As far as the pro forma gross margin it's been in the low 70s for a couple quarters. Is that sustainable or how should we think about gross margin for the remainder of the year, maybe what are the factors that could move it back in the high 60s or keep it in the low 70s?

I think that number is sustainable.

Thanks very much.

you're welcome.

Next question comes from Greg Dunham. Please state your company name.

Deutsche Bank. Quick follow-up on the large deal activity. How much of the $50 million in large deals were due to the four new dominos? And really what I want to get to is the follow through from past signings.

I don't know. I mean, I'd have to go think about it.

Would you say that the A S D on the new business is less than the average that you had?

I don't know, Neil, do you even that have data?

I don't want to guess at it. Again, not all that large deal activity is domino activity, right?

Yes, the point I'm trying to make, I think investors would be concerned if you signed four new big deals and that's really what drove the up side and you're not raising your domino count outlook going forward. If that's the occasions I think people may be a little cautious on the license growth, looking he ahead. However, if more of the revenue up side is driven from past deals, then I think investors will have a little bit more comfort as you look forward.

I think if we go back to -- we'd have to go think about it and do a little more analysis on it. I don't want to guess at it right here. I think we'd stick to what we tried to describe is that domino initially starts with a pilot, they might do two or three million the first year. I think we said as they get into their second and third year they're moving more towards 5 million with license, maintenance, and service, then it can get bigger as they do some of these deployments. I think that's a good proxy for what happens. It's possible that a new account, a new domino, for whatever reason, sees the value. I -- we're going to get some of those. I think the vast majority, we're going to do what we described, which is to start slowly, validate the value that they get from it, then deploy a bigger footprint over time. If the makes you feel any better, we would not have given guidance about the second quarter license revenue where it is if we thought that it came from a few big surprise deals that weren't going to happen again.

Nor would we lift our annual guidance to 30%.

That's exactly right. I can tell you that the Q2 number actually, there are like five or so deals out there that we know are going to happen, not necessarily this quarter, that are in the range of like $4 million to $5 million. There's a really nice mix for Q2 of good size deals. Nice ones. Not explosive deals. Are we going to get all five or six? There's five or six that are in that four to -- $4 million to $5 million range. Are we going to get them all? No. Could the customer did he side, at the last minute, I'm going to do half those seats, instead of all of what we might project? Yes. So those are the dimensions that might occur in the negotiations at the end of the quarter, or during the middle of the quarter, whatever it might be that make it difficult to give you some of these exact answers that you are looking for. But there's a really nice short-term mix of deals, some are new, most are more established customers that have done their pilots that are right there for this quarter. And if we don't get one or two or three of them for this quarter, for whatever reason, we'll get them the following quarter, because they're basically in procurement kind of deals.

Dick, just reflecting on this domino discussion is kind of interesting, because as Neil said, we wand to show you last year when there was very little spend in the system that we had an incredible competitive advantage. And dominos really meant big accounts, where we're going into a hostile situation in terms of a competitor being incumbent, or us having no incumbency position, and we're able to either defeat or displace the competitors in this difficult sort of away game type environment. So, I think clearly from the discussion here, you all appreciate the power of beg able to do that. And I think it was sort of PTC's miscue here that we thought the dominos would give us evidence until we could supplant that evidence with revenue evidence. And then the body of discussion would shift over to revenue. But clearly I think you're all pretty interested here in our ability to continue displacing competitors. And it's not slowing down at all. We just sort of assume that your level of interest would shift to revenue, but if I was in the room with Dick and these guys, I'd probably write a number on the Board, and we'd change the forecast or up the target.

If you want, we can do that.

I can't make eye contact with you here to see what's the right new contact, but clearly, we're not saying we're stopping at 12. We just didn't both tore update the forecast thinking the discussion would now shift to revenue, viewing dominos as a bridge to revenue. But I think it is important that we continue to displace competitors in difficult environments.

Raise to the 15? Do you want to just raise to the 15?

Sure, 15.

Oh, that's it. We'll do 15, and as we go through it, we'll give you an update on it. But I think underlying the questions, and they're good questions, and we appreciate them actually, because they do cause us to reflect. But if the concern is that we had an aberration and got lucky and a couple of deems drove things, I'm telling you unequivocally that the pipeline and the forecast continues to grow.

Paul Cunningham had a forecast review worldwide yesterday. The forecast inside the company here, his forecast, the pipeline grew. At this point, that's a good sign. So there were more deals in there. Best case deals, but the deals are growing, and that's why we're going add more direct sales reps and invest in the business. But this is not an aberration we have separated ourselves from the competition. We have unambiguous leadership in -- technically in the Windchill space. We talked about GE healthcare. We didn't really describe. That I don't want to get into too much of it. But they had an incumbent Siemens, for 25 years in the engineering department. Deseau, they bought a little company, they had 134 pro EC's. We begged them to include us in an evaluation because they wanted to make a consolidation decision. I personally met with the CTO who told me, I'll let you in. I flew out there. He said is I'll let you in, but you have no chance. A year later, we displaced Siemens, the initial order is to displace Siemens, and it's Pro/ENGINEER Windchill, and they're going to expand that footprint for the entire enterprise. So how did we win that deal? It wasn't close. The technical evaluation at the end of the day really wasn't close.

And that's really what we want you to take away from the results and our confidence that it's not an aberration. The up side was not an aberration. Some of the deals that we he eve been working on got bigger than we thought they were going to get.

Thank you, that's helpful.

Thank you. Our next question comes from Richard Davis. You may ask your question. Please state your company name.

Historically, the Windchill back several years ago certainly was lower margin business than the CAD business, because you were investing in it, and things like that. And so you've actually done a good job and it looks to continue this year increasing margins, but the Windchill business, if I'm correct, is maybe on fall cost allocated basis, lower margin, so how do, from an outsider standpoint, unless you want to give us the cost accounting breakdown, but from an outsider standpoint how should we think about the way you guys manage kind of growth versus margins, or is this even a correct assumption from an outsider standpoint?

Richard, it's Jim. Clearly that's a correct assumption. But I want to go back to the commitment as a management team we made was to 20% earnings growth on a sustainable basis. We want to do 20% earnings growth five years in a row. Now, if you back down a level, the recipe for how we want to do that is three parts revenue growth, one part margin expansion. So clearly we need a balance of some margin expansion, which we definitely think can come through leverage on the revenue growth and so forth, grow revenue faster than expenses, but clearly we have a strong focus to drive that earnings growth on the backs of revenue growth.

So that's a little bit the balancing act here. We have a portfolio of product. Some are extremely profitable and not growing fast. Others, on the other hand, are growing extremely fast and less profitable. You put that portfolio together and it works pretty well against this 20% earnings growth strategy, which I think people felt was a pretty aggressive strategy.

That's a correct statement, because I've talked to guys inside your firm, and they were all like, man this is a big deal. So yes, did you set the high jump bar high. So in that region, you were correct. Thanks very much. That's my question.

I think, Richard, the desktop business, the pro E business, the desktop business, there's a very low service component so it's more profit afternoon. The license acceleration on the Windchill business, we get beret mix of license versus service and that will help drive better operating margins as well.

I think on a year-over-year basis we're going to add $100 million of Windchill revenue roughly let's say in 2010 versus 2009. We're schedule not adding $100 million of underlying expense to that. So clearly the Windchill business is getting more profitable as we scale it.

I don't think it's just the license and service mix, it's a maintenance mix issue, too.

Right.

Absolutely.

One of the things that was in the note, because it just hit my mind as we talked about, but the Windchill business, what was it, $122 million? $122 million. So it's going to be close to -- hat a run rate of a $500 million enterprise business. This thing really has some momentum.

Yeah, I mean to put in that perspective, $500 million, Richard, is about the size of (inaudible), $500 million is twice the size of Deseau's PLM product all put together. We have the number one product out there in front by a considerable distance and moving at twice the velocity of everybody else. So it's good spot in to, in a good market.

Got it.

And I think it will be interesting to contrast, if we don't get the Siemens results, they're not public, but we think overall they're going to have negative license revenue like most software company, and it will be interesting to see what Deseau has when they announce in a couple of weeks. The contrast will be interesting to sort of take a look at. What else?

Thank you. Our next question comes from Jay Vleeschhouwer. State your company name.

Ticonderoga securities. For Neil, with respect to your comments on reinvesting and distribution as your initial priority, for reinvesting back in the business, could you be a little bit more explicit about that? When we look at your direct sales headcount, it's down again sequentially. About 270 heads. That's not only down from recent numbers, but probably the lowest since early in the '90s. Given everything you've been talk about on growing the enterprise business, what's your objective for growing that number, and where might it be by the end of the fiscal year? On the indirect side, for Jim, to what extent is distribution capacity an issue for product point? For instance, do you need to sign up some material part of either the auto desk or solid works channels for them to carry product point as a kind of complimentary product to their CAD businesses?

Hey, Neil, at the risk of stepping on your toes here, I want to comment on the first piece as well, then I will turn it over to you. Jay, you're on to something kind of interesting, which is when you have the kind of competitive advantage that we have in the marketplace right now, the last thing you want to do is let your distribution channel shrink. So clearly we need to invest in the distribution channel. Last year when we took cost out of the system we took some of it out of distribution, thinking that there was so little spend in the market that some of the distribution wouldn't prove productive anyway. I think now we see spend coming back in. We see ourselves getting a disproportionate amount of it. It makes sense for us to significantly left the number of direct sales headcounts and go after that opportunity. So I will let Neil comment more on the magnitude of it, but I think you're on exactly the right point, which is it doesn't make sense to let the size of our sales force shrink.

While I have the microphone here, I'll hit the second part. I think that that's also an interesting question on product point in the SMB space. We have a pretty good SMB channel that covers our Pro/Engineer base, and to say that that channel will do a very effective job in covering the distribution opportunities sort of within the PTC base, but you're right, there's a huge base of auto desk customers who basically have no PLM solution but certainly would be interested in a SharePoint solution for PLM, and there's a huge base of solid works customers in the same boat. So we at PTC are coming up with strategies. We'll maybe unveil them down the road, but coming one new ways to potentially take our product directly into their base and capitalize on this open window of opportunity to become the main PLM supplier in those type of customer bases.

Okay. With respect to the displacement business, you implied earlier, Jim, that your win rate against Deseau is perhaps better than against Siemens. Two questions there. Are you essential giving them no credit or little credit to V 6 that would allow them to protect their base if not grow their PLM sentence.

I'm glad you asked that question. It's worth clarifying a little bit. I think our win rate against both is high. I think Deseau has a customer base that's frustrated, and very vulnerable. They feel like they bought something trying to get an advantage in their business. They now look at it and thanks is not an advantage, it's a disadvantage, the and we need to switch to something that doesn't make any sense because it doesn't make sense to keep paying maintenance on something that's not yielding any competitive up side. We happen to have had a number of significant displacements in the base and a pretty good amount in the Siemens base as well. A competitive win rate in green field opportunities against both is pretty high. So I think we're doing pretty well. I have not seen any material evidence that suggests V6 is a magic wand. It will be interesting to see what Deseau'ss numbers look like on February 11th. If their PLM numbers have sort of the same spring in their step that PTC's do, maybe the customer base is listening to the V6 story. On the other hand, if they don't show that kind of trend, we can read into that as well.

Lastly, in your prepared remarks you have an interesting table for your active maintenance base. What you seem to have done is update your historical numbers for the Windchill base. So when we look at that versus previous quarters, we can infer how much Windchill seems to have gone out in connection with the Pro E package. And it looked like a fairly large number. So the question is, what's your long-term expectation of that mix of how Windchill is sold in terms of attach to Pro E in some kind of configuration as we see from your new numbers versus just going out, perhaps as a street PLM product attached to someone else's CAD product?

Yes. You never miss a tick, do you, Jay? It's an interesting question. If you think about it logically, one of the places we would have sold Windchill first would be to those customers we have the strongest, deepest relationship with. That is to say, the customers and actual companies who use Pro/Engineer. Could you imagine our Windchill business, looking back twenty years from now, you could imagine revenue being front end loaded by pro E users. If we think now about thesis domino account, there's a significant number of account that don't have Pro/Engineer. Almost by definition they wouldn't have Pro/Engineer. Over time the amount of Windchill seats that are attached to a Pro/Engineer seat I would logically expect to decline, but it certainly was a leverage point for us in the early days night.

I've been patient. I want to come back to this capacity issue for a second. It's interesting, we're actually on track, Jay, for having the highest productivity we've ever had in our direct sales force. Higher than we had in 2008. So we absolutely do need to add capacity, and we've got a management meeting actually in February where we'll make decisions around that.

One other issue which I think is relevant in terms of capacity which we haven't talked about yet is other signs in our business apart from North America, apart from Windchill, and that is that even though the European business is still soft, it was down year-over-year. Actually up sequentially against a pretty strong Q4. Our Chinese business was up year over years even though Asia remained -- overall Asia remains relatively soft. We saw growth in our channel sequentially. Point is we're seeing some levers in terms of growth apart from just North America and just Windchill in North America, and so we're going to take a look at what we think is happening in other areas of the business when we consider the capacity constraints that we currently have, and as I said, make some decisions there in terms of investment in February.

Jay, I can't imagine, if the number is 270 right now, it's going to be around 300 we're going decide something, but we're going to add that in range of 30 sales reps. There will be some technical sales pee. We'll give you the number when we talk next, but it' going in to that range. It ought to be back up over 300.

Thank you.

Great. I think we've got time for one more question.

Thank you. Our question comes from Steve Koenig.

Thank you, Longbow Research. maybe I'll switch to the other part of your business, then one final follow-up. But for CAD, you're starting to get visibility into when you think CAD could turn positive year on year, when that kind of stability could be seen? That's my CAD question, then I want to turn back to PLM briefly.

Steve, it's Neil. Our CAD business was down 6% for the quarter as you said. I think that we have the ability in either Q3 or Q4 to turn that business positive. It will depend upon how quickly the channel recovers, because to Jim's point earlier that upper left-hand box is a relatively low to no growth business anyway for everybody who participates in it.

You're going to have an easy comp this quarter.

That's true.

could even happen this quarter.

But we need to sea the channels kick in more than it has. If that happens, as expected during second half of the years we could see growth in Q3 or Q4 in that area.

Okay, thanks. And then if I could just ask about PLM, looks like you've -- your traction has been especially gin North America, and not that you haven't won some deals in EMEA, a but what is necessary tactically to drive that kind of success in North America more into EMEA and other geographies?

Well, if you look at the dominos --

I've got a quick count here. Five of the 11 are European.

Right. So we probably haven't gotten as much revenue from the ones in Europe, and I think the European spend and rebound in the economy is a little bit lagging behind the US. But as Jim said, almost half of those -- the dominos are from Europe. Really big name, good account that we've talked about. So I think that's just, again, a manifestation of it. What stage, are they coming out of the pilot stage and moving into the second year? Are they going to get bigger faster? We don't always know and cannot always predict that. But our pipeline, when we look at it, is not skewed toward North America. There's a really nice balance throughout the pipeline for the rest of the year across all the geographies. There are even some interesting deals, I wouldn't call them large yet, in Japan, where there are a couple of consolidation deals that are going on right now and we think we're winning. So China looks solid. Jim and I are both going to Asia this weekend. I'm not really looking forward to that trip, but there's activity -- there's enough activity where both of us are jumping on planes, and we're going to different places, then we're convening on one place at the same time. So it's not all North American centric.

Okay, that's great. Thanks again. Congrats on the quarter and safe travel.

Okay. Is that it for questions? Thanks again for the time, and we'll see what happens is with this quarter. I think some of the questions really were around is the up side that we had in the license revenue in particular repeatable. We really do have a lot of confidence, given the pipeline and the size of the deal opportunities and the value that we're creating from our customers, and the way the customers talk with us about the return on investment and so forth that we're going to have a strong second quarter and a strong year. So we'll look forward to giving you those reports as they happen. Thanks again for the time.

Thanks, and this does conclude today's conference. We thank you for your participation. Although this time you may disconnect your lines.