PTC Inc (PTC) 2010 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the PTC second quarter fiscal year 2010 results conference call. After brief comments by management we will go directly into the question-and-answer session. (Operator Instructions)

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

Great, thanks, and good morning, everyone. Before we get started I would like to quickly remind everybody that this call and Q and A session may include forward-looking statements regarding PTC's products or anticipated future operations, forward financial performance. 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 to differ materially. Information concerning these risks and uncertainties is contained in PTC's most recent Form 10-K and Forms 10-Q on file with the SEC All financial measures in this discussion are non-GAAP financial measures. A reconciliation between the non-GAAP measures and the comparable GAAP measure is located in the press release and prepared remarks documents on the Investor Relations page of our website at PTC.com.

With that, I would like to turn it over to Dick Harrison for a few opening comments, then we'll move right into Q and A.

Thanks, Christian, and welcome, everybody, today. We feel like we had a really nice quarter. Again, as we saw in Q1, license revenue grew in excess of 50% -- 54% again. So we're greater than 50% at the halfway mark in the year in terms of license growth. We'll get into more detail on it, but we had growth in all products, in all geographies.

Those of you that know our four box, we saw license growth and just growth in general in all those four categories. That just suggests strength across the entire business. We have maintained our guidance in the face of about $18 million headwind in currency for the back half of the year, which is effectively raising the guidance, and we'll talk more about that. The number of big deals -- 18 deals over $1 million -- was substantial. It was greater than it was in the same quarter in 2008. And really suggests, and I will confirm it for you, there's an underlying pipeline of big deals -- deals greater than $1 million, that's at least twice the size that it would have been a year ago at this time.

So with that, let me open it up to questions and answers.

Thank you. At this time we are ready to begin the formal question-and-answer session. (Operator Instructions) Thank you. Our first question comes from Sterling Auty from JPMorgan.

The one area I guess I need better explanation is what you characterized as the lingering hangover in the services business. I would have thought that some of the services revenue would have either been coincident, meaning in parallel with the improvement in license or even a precursor to certain extent. Could you give us more explanation as to why the license -- I think you characterized the weak license in the first part of 2009 on Windchill is actually affecting some of the services business now. I didn't quite understand that.

Hi, Sterling, it's Jim Heppelmann. One way to think about the services business, if you imagined -- or hypothesized -- an average services engagement of lasting four to six quarters what you realize is you have a rolling portfolio of services engagements. The new quarters we're adding now are not yet get offsetting the quarters of project that are wrapping up. So I think it's a very positive trend, and Barry can comment in a minute that the bookings are strong for new business going forward, but we're suffering this hangover of projects that were not started back in 2009 because of the bad economy, are now part of that portfolio -- that rolling portfolio services projects -- and thus the services revenue is down, but we all know pretty clearly that where license goes, services will follow. So we look at it as it's more or less a type of backlog going into next year that we absolutely should expect to see that services revenue coming online next year.

The only point I would add there is when you look at the results and where we are in terms of bookings and revenue, it's a little lumpy. So when you look at North America where the license revenue was okay in 2009, our service revenue in North America is pretty strong. And where we see some of the lag is where the license was softer in 2009, like in Europe and Asia. So we've already seen the rebound in North America, and we certainly expect the rest of the rebound to take place in the latter half of this year and the beginning of next year.

I think in summary, for us to post the quarter we did on a combination of revenue that was extra heavy on license and a little bit softer on services, first of all, that's not really bad news by anybody's measure.

No.

But it's always problem that will, and almost by definition must correct itself going forward, just given the nature of -- you sell the software, then you follow with the implementations over four to six quarters that follow.

Just to add to that, Jim, if Sterling were sitting in our staff meeting, as we talk about it, we view it in light of a slightly different problem, which is we see an acceleration of services potentially coming, given all the license revenue. So as we do our planning, the back half of this year and next, we know there are going to be services that are going to accelerate. Part of what we want to do is off load that to partners for the medium sized accounts and so forth. That's one of the things that we actually spend a lot of time on. Next question.

Thank you. Next question comes from Jay Vleeschouwer from Ticonderoga Securities.

Following up on that last comment about the progression of services, I would like to tie that into the profitability of the Windchill, or PLM business. As we look at the most recent quarter, over 40% of the enterprise or PLM business was in services. Less than 10% of the desktop or CAD business was in services. I would have to imagine that the PLM business, while growing, has a fairly minimal margin versus the CAD business.

I'm wondering if you could talk about how you see that profitability progressing on the PLM side, either from revenue scaling or diminishing the proportion of revenues from services. Thanks.

Good question, Jay, and it's another one that we do spend a lot of time on. In terms of the profitability, one of the things that we're seeing with the license growth on the Windchill side and the maintenance growth on the Windchill side, which we're focused on, as those become a bigger and bigger part of the overall Windchill/enterprise revenue number, then the profitability will go up.

As we talked about in the past, we have a sales force that sells all products, so we have to do allocations when we try to predict what the profitability is and they're not exact. But we do think the Windchill business is profitable, and we think that it's going to become increasingly profitable as again we get bigger and bigger license and maintenance numbers. Part of that is our ability to provide services, which we want to do for the most important accounts and the most profitable accounts because they're long-term service engagements with predictable margins, and then we want to off-load other services to medium-sized account to a growing partner program that's getting better and better at deployments.

Okay. Do you expect that in the third quarter that maintenance revenues will finally bottom, and then improve sequentially thereafter?

Yes, I think --

Talk about it in context of FX a little bit.

If you think about -- we're obviously being hurt the most on maintenance from FX, Jay. It's Neil. I think either in the third or fourth quarter we're going to see that bottoming you described and growth off of that.

Okay, then finally, in your data sheet, of course, you do the installed base comparisons, and we continue to see some erosion in the non ProE and non-Windchill all other categories, in terms of sequential and year over year base count. So the question there is when do you think we'll see a turn in that active installed base for those smaller brands. Then more broadly, how do you think you are doing in terms of multi-product sales and really doing configurations and growing the smaller brands?

Yes, I'll answer the first question, then maybe, Jim, you want to weigh in on the second question in terms of our -- the smaller products in our portfolio. I think you're referring to active seats on maintenance, Jay, for the all other category. We're going to look at that probably bottoming at the same time that we see our maintenance revenue bottom that we talk about either in Q3 or Q4. So I think we've talked about, and the fact that we have a little bit of a hangover in both the services and maintenance business associated with last year's license revenue.

With what's happening with license revenue this year, obviously that turn-about is going to come fairly quickly. As I said, it's either going to be Q3 or Q 4. Jim, do you want to comment on the strength of our performance in our, if will you, products related to ProE and Windchill?

Yes, I think you mean products other than ProE and Windchill that might be bundled with or sold to the same customers. I think Arbortext in particular we're pretty optimistic about. Kristian, we didn't disclose Arbortext numbers, I don't believe --. But, I think that the Arbortext revenues were up nicely last quarter. We're forecasting Arbortext to be a decent growth engine going forward 2011 and beyond. We've rejuvenated that strategy. We talked about that a little bit at our press day back in February, but we've rejuvenated that strategy and that business appears to be back on a growth factor, and we're pretty optimistic that that will be a long run, quite frankly that that business will be a significant contributor.

I think if you go to MathCAD, we're in a bad product cycle position with respect to MathCAD where we're on the brink of launching this new MathCAD prime which is a substantial overhaul of the MathCAD software and everybody knows it's coming, but yet it's in the market in a preview form but it's not in the market in a final ship form. So I think that puts a little bit of pressure on the MathCAD product. The rest of the stuff is small enough that it's difficult to read much into one quarter's data.

One more thing, Jay, to be more specific I think about the maintenance. The maintenance number bottomed out in Q2. Q3 constant currency maintenance will be above Q2. That's what I will tell you.

Thanks very much.

Next question, Richard Davis from Needham & Company.

You mentioned -- so goes license, so goes services, in terms of follow-up. If I'm buying $100 worth of perpetual license software from you guys, how much, roughly, will I have to spend on services over the next four to six quarters? Is the ratio one to one? One to two, whatever, those things.

I think at one level, if you just look at our license and service revenue, typical steady state services is equal to license, or slightly greater. I think that with Windchill it's probably a little bit more strongly balanced toward services, and with ProE, less so balanced towards services. I would say, yes, where we sell $1 in Windchill we're going to sell somewhere between $1 and $2 of services in the next six quarters on that same $1 of license revenue.

There's two phenomenon going on with the Windchill business. One is those attach rate, the amount of services that attach to $1 of license revenue are coming down over time because we're doing more and more out of the box implementations with Windchill but the other phenomena is that Windchill is growing as a percentage of our total revenue. As a result we expect our services business longer term to grow in line with PTC's overall growth objectives which are in the 12% to 15% range.

One other point, Richard, I think the ratio is definitely have come down to the rate, like 1.2 from what it used to be like, too, because of the out of box thing. The other thing you see is when customers actually do the personal implementation, it's heavy-duty on process redefinition and some heavy-duty service work. Then as they move out, the service work actually declines in relation to some of the new licenses they buy to expand their footprint.

An engagement in the early days may be more heavily weighted towards services, and as that customer relationships matures two, three years into it, it's moving more towards a pure maintenance and service -- I'm sorry, maintenance and license engagement.

If I could back up on this portfolio of six quarters idea -- what I was really trying to say is that the services revenue we did this quarter is a function of the licenses we sold six quarters ago, five quarters ago, four quarters ago, three quartering ago, and so forth. In fact, the licenses we sold this quarter actually don't have much impact on services revenue this quarter. They have impact on services bookings, but very little of those bookings were delivered against the license deal. For example, that came in the last two weeks of the quarter.

So you can't really look at licenses this quarter as affecting services revenue this quarter. You have to think of services revenue this quarter being slightly affected by license revenue this quarter, more affected by license revenue one quarter prior, two quarter prior, three quarter, et cetera, and as back up into three quarter, four quarters, five quarters prior, the revenue is soft. Again, that's why I like to say where licenses go, services will follow, but it may follow three to four quarters behind that trend.

Got it. And then just the follow-up would be, on the [domino beachhead] accounts what are your expectations and how, as an outsider, would you track your success of expanding from those foot holds and things like that at least notionally, I had figured the way to think about that is you get a domino account, then maybe a year later, you have a decent shot, expanding from that position. Obviously there's exceptions to the rule, but is that a proper way to think about it? Is that how you think about the opportunity?

Yes, we had, if you remember back to our investor day, was it last October -- we provided a monetization model of dominos, and we said there's a competition phase, then there's a win, but following the win, in the first year you might have $1 million to $3 million in revenue, and it might be dominated by services. And that's to get an initial implementation stood up, at which point there's typically a license buy.

Then from there on, at that point in time, you have a somewhat contained deployment. It may be contained organizationally, it may be contained by program, it may be contained by geography, and so after that you go into a series of successive expansions. Move on to the next program, move to the next business unit, move over to the next geography what have you, and that domino may provide us many successive orders for software and services and maintenance for years to come. I provided one notable example of a customer who had expanded the system nine years in a row with successive license and maintenance deployments. So that's the model. Not that much revenue at the time of the win, but it joins this portfolio of annuities, particularly one and two years later, then remains there for some long period of time.

And so that's still intact and that has not changed.

No, absolutely not.

Super, thanks.

Next question comes from Steve Koenig from Longbow Research.

Two questions that are somewhat related so I'd like to ask them both up-front. The first question is, would love to get some color on large deals. There are a lot of large deals in the quarter but the ASPs were lower. I'm assuming there were no mega deals, call it $5 million or up, just for the sake of having a definition. So I'm curious, what's your assumption on these mega deals going forward. How much are they baked into your Q3 or Q4 full-year guidance? So that's question number one.

And if I may, let me put question two on the table since it's somewhat related. It's pretty atypical to see 50% to 100% license growth rates for a public software company. Can you provide some color on what drove the 100% growth in tail end licenses and what to expect for that trajectory going forward as well?

Maybe I can start on the large deals, then we'll try to hit the -- on the second question, we have a distinct, and I think recognized increasingly competitive advantage, which is driving the license revenue. We've talked about the domino accounts. They're displacement deals. So we're outside of our install base. We're certainly upgrading our install base and broadening our footprint, in that account for a good part of the license revenue growth. But what's complimenting that, which is really important, and it's not just the dominos, there's a whole list, like an Arvinmeritor -- we don't call a domino, we secured that deal last quarter, it was a Dassault replacement in an automotive account -- supplier account. So there's a whole list of displacement deals that are active that are contributing to that license revenue growth. When we look at the big deals, and we had 18 deals over $1 million in Q2. Two years ago in '08 we only had 16, which was a really good quarter. So we've surpassed -- in Q2 of 2010 -- the number of deals over $1 million that we had two years ago, which is really a good sign.

What you see on the, let's call these larger deals, or deals over $1 million, from time to time, one of them or two of them or three could become a mega daily. In Q1 we saw some of those commitments from the customers -- the initial commitments -- were particularly large and that gave up side to the results. If we look at the forecast, for example, for the back half of the year, there are in the pipeline, in our forecasting system, almost 100 deals that are greater than $1 million. And so we know we're going to have a very, very strong back half of the year. A year ago, it was probably 35 deals at this time that were over $1 million for the back half of the year. So it's substantially higher. Some of those deals are going to grow to be mega deals.

The customer has a choice to make. They can start with as Jim was describing, maybe more of an initial $2 million pilot, but in some cases, the ROI is so compelling that they'll do a bigger deployment right up-front. And in that case you are going to see up side to the forecast. So we've tried to give you guidance based on a nice number of these greater than $1 million deals coming in at traditional deal sizes -- in the $2.5 million range -- and to the extent that we get more of them that are bigger, and we do see some, there's up side in the forecast.

Maybe just adding one thing, Steve this is Neil, if you look at the geographic dispersion of these larger deals, that was really encouraging as well. Ten of the deals came in from, excuse me, yes, ten of those deals came in from outside the US so more than half. If you look at Q1, almost all the large deals we did and we only did ten, came from the U.S. So we're definitely seeing some recovery from an international perspective, both from a license perspective and from a large deal perspective.

Steve, it's Jim. I want to go back to your second question, just add some more color. Personally, I think there are three factors that are driving this phenomenal level of license growth that we're showing this year. One is the economy is improving, and clearly that helps a lot. The second thing is I think PLM as a category for customer investment is hot right now. I've seen some surveys for example that rank it near the top of CIO priorities for investment in 2010. And then the third thing is market share. We are taking a lot of market share.

So there's -- the economy is generally better, people are feeling good about spending money, then they say a place where we ought to prioritize spending is PLM, then, by the way, the PLM vendor and solution to buy is PTC. And I think that those three factors are helping us. Now, the economy, once it's improved and we have a set of good economy comps, compared to good economy comps a year from now -- that will be less of a factor in terms of license growth so that will take some of it away. But I think this issue of PLM being a hot category and PTC taking market share, those are phenomenons that should be around for quite some time and really drive some pretty decent license growth next year even when we don't have the comp against the bad economy like we do now.

Thanks for the in-depth color. Very helpful.

Thank you. Sasa Zorovic from Janney.

Specifically, I would like to -- your color regarding geography. I guess Japan has been somewhat of a straggler for quite some time, and it continues to be. What do you attribute that to? Does it continue to be very specific to Japan or what is going on there, if could you comment?

Sasa, it is Neil. We talk about Japan's performance. First of all, Japan license revenue was up 34% year over year so we had a very good quarter in Japan from a license revenue perspective. I think overall performance in Japan was down slightly year over year although up very, very much sequentially.

So I think first of all, we have new leadership in Japan who has now been on board for about six months. We're very, very happy with the person that we brought on board to run our business there. Secondly, we are starting to see more large deal activity in Japan as well. We're making good progress with our reseller channel. And I think we're poised to see continued growth in the Japanese market for the first time in some time.

Okay. My second question would be regarding your M&A activity. So that used to be a very key part of your growth strategy. If could you update us there as to what your thinking is -- obviously you were purchasing some share back during the quarter. Do you see that as a better way to deploy your cash at this point than acquisitions, if could you comment, please.

I will comment on the general strategy of M&A, and Neil I'll allow you to address the specific question on buyback. We have the strategy of 20% sustainable earnings growth. We think the way we're going to get 20% sustainable earnings growth is this so called win in the market strategy. PLM is a growing segment and we're going to go on to become the clear leader, we're going to take market share, we're going to generate a lot of organic growth and that will be the main part of the 20% earnings growth engine, if you will. I characterize it as three parts revenue growth and one part margin expansion, if you remember.

Now, that said, acquisitions can play into this but we don't have a strategy to go acquire 20% earnings growth. We have a strategy to get it largely organically and compliment that with acquisitions. I think there's two things -- two areas where acquisitions make sense. One is little technology tuck-ins here or there. We made a small acquisition in the last quarter or so of carbon information modeling technology to help people understand the greenhouse gas implications of early product design and so forth. That's all interesting. They typically bring little revenue and quite frankly in some cases no margin to the Company when we do those. But we work them into the solution and they become meaningful sometime later when we take them to market as part of our overall solution.

And then secondly, I think we want to be opportunistic. There's a changing software market out there, and we might get some opportunities here and there to opportunistically take down something that's bigger that might give us an entree into a new market segment or something like. I would say that's not the strategy but we want to be open to opportunities that may be presented to us but working backwards always from a strategy of 20% earnings growth and a fundamental belief that's mostly going to come from organic revenue growth.

And, Sasa, I will maybe just add to what Jim said and give you some insight as to how we think -- right or wrong -- what we've been talking the about, from a competitive standpoint, which is reflect in the dominos and the other displacements is that we have this single data model that enables everybody in an organization to know that the product information is true and accessible, and our competitors don't have that. They're trying to copy that today. So with [these six] as an attempt to copy Windchill and Siemens with the unified product as an attempt to do the same thing.

While they're trying to do that, and it's going to take them years, and we'll see if they're successful -- we've been broadening our footprint. We've already solved that riddle around a single data model. So now we're building out an application footprint that enables our customers to deploy an out of the box solution and that's important to us. We're extending our advantage by broadening that footprint with applications such as Arbortext, product analytics, share point. So to Jim's point we're going to build some of those applications and in some cases, opportunistically we've been doing technology tuck-ins to compliment that footprint. Again, it gives us an extension, a competitive advantage when we go in and do these deals so that's how we think about.

Integral data model, broadening footprint vis-a-vis our competitors, and absolutely a competitive advantage in terms of out of the box,. One of our big customers that we've talked about locally, a defense contractor, 50,000 seats deployed, 97% out of the box. One of EADS defense companies, one of the six divisions has replaced Siemens and SAP with Windchill in the last year since we won that agreement. 99% out of the box, and these deployments are replacing systems that are basically 90% customized. So that's our story to the customer, and I think you will see acquisitions -- small ones -- if we can again expand our competitive advantage. Okay?

Thank you.

Thank you. Ross McMillan with Jefferies & Company.

Thanks a lot. Just on the big deals, I guess the question I had was, you're clearly growing very nicely in volume relative to last year and tracking almost to the '08 levels. Just as we think about it is this really a volume gain? I heard you, Dick, talk about 100 deals in the pipeline versus 35 last year. It sounds like, although some of these can be up-sized, it sounds like your guidance is really based more on the volume that you are seeing. That's question one.

Question two, just so I understand what's happening on maintenance, it looks like some of the impact is because of the higher value ProE maintenance seats coming off as you still ramp Windchill seat growth. Are we getting the same attach rate on maintenance with Windchill as we had historically with ProE? Thanks.

Let me take a shot at the forecast and the big deals and the volumes. I would basically say that you are right, that our guidance is predicated on a growing volume of nice-sized deals. We said earlier, too, though, we're seeing recovery in the channel, so it's across all aspects of the products and geographies. When we look at those deals over $1 million, those are certainly an important barometer, and the number is growing at a very fast rate, and we track it weekly.

You might also have observed that we decided to add 90 people in the sales organization. It's approximately 30 sales reps, 30 application technical support people, and 30 business development people that basically create leverage across the sales organization by freeing up the sales people so they don't have to do the value propositions and the ROI calculations. We have teams of people that support the sales guys. We didn't add those people -- we added them simply because we saw this volume increasing.

So again, we're seeing a great deal of volume in those transactions of $1 million and greater, many of which are in our competitors' install bases. I think we're going to continue to see that grow. Some of those could grow to become mega deals. And again, that's just an aspect of how quickly the customer wants to make their investment.

On the maintenance side --

Ross, it's Neil. The Windchill maintenance attach rate is 100%. We require customers to attach maintenance on Windchill. So it's actually higher than ProE, and I'd say renewal rates are comparable to ProE.

That's helpful, thanks a lot.

Blair Abernathy from Thomas Weisel Partners.

Just a follow up on the sales adds. Could you just clarify when those -- have all those 30 new reps been added already, or what are you looking at in the back half of the year?

I don't know exactly where we are in the 30 reps. Again, don't discount the 30 business development people, because they're going make more productive and effective -- potentially 100 reps, they would support throughout the geographies in these large accounts.

On reps, just reps now, not AES's or business development people, we're about 375 today on our way to 400. So we're in the early stages of adding that capacity.

We authorized that capacity in early March, essentially, and the hiring process started -- probably not many of those people have been landed yet, maybe a smaller percentage, and the rest will be coming on, I'd say actually this month and next month.

Okay.

But probably impactful next year. If you look at the ramp up time and the training time and building the prospect base, I don't think we're forecasting a lot of return from that investment this year. It's more with an eye towards having good growth next year.

Okay. Great. And could you just give us an update on the progress with the product point and what your longer term expectations are there now?

Yes, I think we had a pretty good quarter. We've been disclosing a number of transactions, and I think we, did what, 106 or something, Kristian, against a goal of 400. So we're this quarter at a run rate that would help us meet that goal, perhaps even exceed it. They've typically been transactions sold through our channel so the revenue contribution is not that meaningful yet, but as transaction volumes increase and the maintenance volumes increases and so forth, that will become meaningful.

The other thing is we're approaching the Release II timeframe where we're going to have a significant follow-on release which we think that will make that product that much more interesting. Again, that product is going well. We define our criteria for as doing well -- in the early days as transaction volume because we're trying to get market share. Against that criteria, which we've shared pretty openly with you, I think we're doing pretty well.

Great, thanks.

Thank you. Yun Kim from Broadpoint.

Jim, so product point obviously is doing well. Can you just talk about what exactly is the end game for that product point? Are you looking at that as more a platform play and eventually monetizing the install base by selling more add-on modules? I think you just talked about more transaction volume basis initially. What does that really mean?

You're right, it is a bit of a platform play, and there's maybe two different angles. Let's say for SMB, we're selling on the initial product point offering, we have three more major share point products coming to market that would compliment that. And would provide up-sells from that initial product point sale. So we're working on a PPM offering -- program portfolio management. We have a social product development -- how to use web 2.0 technologies -- that's a new offering. Then a third offering behind that.

So I think definitely it's a platform. And particularly in SMB, we'll leave the product point and up-sell it. I think in larger account it gives us a whole new discussion to have in what might otherwise be a difficult account to sell PLM. So we might go interest a large corporation who has a competitor's PLM environment installed, and they might say, we're all fine on PLM, thanks. We say, do you have a share point strategy? And quite frankly more often than not the CIO says, yes we do have a share point strategy. And then we say would you like to have a conversation about how share point could be a little bit more useful in your product development processes? And they say, yes, I would like to have that conversation, because quite frankly, the competitors aren't having it with me.

So I think it's also a new entry point, a new door, if you will, to penetrate some of the bigger account as well. But first and foremost here it's an SMB strategy in the short term.

Great. Then, Barry, going back to our favorite topic here today, I understand the lag between initial bookings and then revenue recognition on services business, but specifically, I'm just trying to reconcile the consulting business coming in weaker than what you were expecting at the beginning of the quarter. Do mega-size projects typically take longer to plan, and because of it, the delay in the consulting business that we saw in the quarter. Or were those simply just sudden unexpected delays in the implementation work during the quarter?

I think that's a good question. It's a little bit of both. I think when you have -- we're doing a lot more -- because out of the box now people are not customizing, they're doing more process redefinition. That up front work takes a little longer to start the project in terms of deployment. So I think that's happening. I think as well as -- some of the bookings come in as a relationship to how much revenue of that you can take in the quarter and that had an effect as well.

Let me make a prediction. A year from now on this call you guys will be asking a lot of questions about how much services we have in the mix and is that becoming a profitability problem and all that stuff.

Exactly.

That's the real problem.

Okay, great. Then quick last question. Can you just give us some update on your channel business and what investments you're make into that business right now. I think you made a comment awhile back that you want the channel business to continue to move up the volume ladder in terms of deal size. Do you still feel comfortable with that growth strategy for your channel business.

Yun, it's Neil. I think right now -- most of the investments we made were made that we talked about a minute in terms of sales capacity, were made in the direct sales force at this point in time. The reason for that is we're seeing the rebound really in our direct business right now, and particularly in that upper right hand box with Windchill large enterprise deals.

So I think we've talked previously about the fact that we think our channel business is about 30% of revenue now. It's probably going to stay there for the time being. We'll address the question whether we make further investments in our channel business as we head into next year -- July, August time frame. We do see some improvement in the channel. If you will, our lower left-hand box had 35% license growth in Q2, so that was encouraging. But I think that recovery is a little bit more slow than we've seen in the direct space, and so probably additional investment isn't warranted at this point in time.

Okay, great. If I can just ask one last question, is there any new product release coming out on the low end part of the market or the desktop part of the market that could maybe re-energize the channel business?

You're not going to tell him now, are you?

Nothing we're ready to talk about today. I think you're aware we have Road maps for ProE. We just did release a major release of CoCreate that's getting pretty good traction, CoCreate 17. But Dick is referring to some bigger ideas that we have that aren't ready for prime time yet.

All right, great. Look forward to it. Thanks.

Thank you, Ben Rose from Battle Road Research.

Good morning. With regard to the 200 Windchill competitive displacements that you see out there could you give us a rough sense these days with regard to where you see the greatest opportunity vis-a-vis the install base of Dassault, Siemens, and Oracle?

If we look back at the last year or so -- actually, it's pretty even across both the Dassault and the Siemens base -- maybe a little bit more towards the Dassault base -- some of the Matrix install base account have been particular vulnerable. They're waiting for the V6 platform which has been promised now for three years. It must be eminent at some point. The Unified one has been promised for four years. I don't know if it's any farther along.

Both of those systems, when we do see them trying to get some foothold, are still heavily customized deployments. We don't actually see any live deployments out across the world. But when we see customers attempting to deploy them, they're heavily customized, which is, again, a big advantage for us as we look at our out of the box. It's probably -- I guess to answer your question more specifically, I would say it's 60% Dassault, 30% Siemens, and 10% others.

Funny enough though, if you had to pick a single product that we're having the most success at displacing, it would the Matrix product from Dassault. Which funny enough is the basis for the V6 strategy. Even the customers who have Matrix are frequently saying, we're done, we're out -- we're not going to V 6.

Given your strength in the industrial and electronics verticals, particular large to mid-size companies where I have to think Oracle is often the database being used by your customers on the ERP side, are you seeing any resurgence from Oracle -- not so much from displacement of the Agile product, but any resurgence from Oracle in terms of having a more forceful thrust into the PLM marketplace?

Yes, this is Jim, I'm looking at Dick here. I think neither one of us. We both spend a lot of time with the sales force. Neither one us really engage in many discussions with the sales force about Agile competition. It just seams like after Oracle acquired Agile, things went quiet and have remained pretty quiet ever since.

I think that's true, when we do the corporate visits, I'm trying to think back as you ask the question on a corporate visit. We were in Europe last week flying around and visiting with customers and so forth. Anecdotally -- or a transaction this happened this quarter -- I can't think of one that was really dominated by a discussion around Oracle.

The Agile product never really did capture the authoring information, -- electrical, mechanical, embedded software. It was actually more of an ERP application at the far end of the design process. It might have overlapped in the process -- it got closer to where the ERP people had their application. So we don't really see it that often, and I can't imagine it's doing particularly well.

Okay, thanks.

Thank you. Sterling Auty from JPMorgan.

Yes, guys, a follow-up on the headcount addition. The incremental investment. At this point, are you happy with the incremental investment for this year, how much capacity it adds, or is there additional incremental investment from a headcount in any of your operational areas that you think would be necessary -- either this year or the very beginning of next year?

Well, it's Jim here. I think, Sterling, the way to look at it, is normally as we approach fiscal '11, starting October 1st, this summer we would go through a planning process of authorizing some additional expenditures based on the business plan we see for FY11 and so forth. This year we did something different and quite frankly a bit unique in that we were significantly ahead of our 20% earnings goal at midyear, and so we said, let's get started on some of those investments now, realizing that to Dick's point earlier -- someone you hire October 1st doesn't really contribute in the first quarter, maybe starts to contribute in the second quarter, but they provide a meaningful contribution in Q3 and Q4. So we basically said let's start some of those hires two quarters early so that by the time October 1st rolls around some of these people hit the street running.

Bottom line is we've made an early investment in FY11 based on being ahead of our plan substantially here in FY10, but going into FY11, I expect that we have an opportunity to make an incremental investment that probably is larger in magnitude than the one we've already made, but we need to go through that planning process yet.

Okay, thank you.

I think we need to see what happens in the back half of the year.

Thank you. Our final question comes from Jay Vleeschouwer from Ticonderoga securities. Two broad follow-up questions on market trends. First, Jim, you made a remark earlier that you've seen some recent surveys that suggest PLM has moved up in priority, perhaps fairly high up on the list. It seems to have taken about a decade for PLM to get there. It's typically been certainly low in priority. So, the question is, what do you think has changed now to make PLM now more of a verb and not just an interesting acronym?

And, secondly, I suppose I'll have to ask the obligatory cloud question, Dassault particularly their SolidWorks business has made quite a lot of commentary recently about their intentions for putting apps on the cloud that may entail some possible changes in licensing models and the like -- away from your industry. Oracle had a fairly well attended event yesterday for customers on cloud computing here in New York. So something is going on, obviously. Just curious as to your thoughts on the cloudiness issue.

Let me see -- in general if you look at where IT spending is going rate now, it's going into enterprise applications. And within enterprise applications, I think we all know that the ERP thing is a bit run its course. So I think companies are saying, we need to move on, find that next opportunity to bring some business process advantage to our company. It isn't ERP. We've been there done. Any advantage we ever thought we had has been matched by everyone else, and there is no next generation of that concept.

So some of the growth problems you see for SAP is because their market segment has matured, whereas PLM is not at all mature and I think there's been some real focus shifting to -- this PLM thing is another form of business process advantage, and quite frankly, it may be a more enduring form of business advantage, anyway. So I just feel like there's ample evidence out there that it's not infrastructure and so forth that spending is going into. It's really applications, and within applications, it is PLM. There's a couple of different surveys. You can find them yourself, but a couple of different surveys that suggest that trend.

On the cloud issue, we've been on the cloud, we are ready to be on the could, we are on the cloud in a limited way rate now but I don't think the cloud in and of itself changes that much in our industry. It's a different deployment option. This is an application that runs on a server, and whether that server is a new data center or up in somebody else's being run for you, and delivered to you as a service, what that technology does and the business advantage it brings to you is what's most important. I don't think SolidWorks is going to go on any big growth spurt because they're putting apps in the cloud. I don't feel like the cloud has proven itself in many industries, quite frankly. There was an interesting report I read recently on where the cloud has worked and where it hasn't worked. The truth is it's worked well in pretty select industries like CRM, and there's a whole lot of industries it hasn't been very impactful to. So we'll keep monitoring it.

But we've had this Windchill on demand thing for quite some time. Agile had an on demand solution. The Arena guys previously known as bom.com, have a pure cloud solution. So the idea of cloud for PLM is not a new idea, but it is an idea that really hasn't seen much adoption on the customer side. I've pointed out many times before that there's a technical issue around bandwidth and large data sets, and then there's an emotional issue around the protection of critical crown jewel type IP. People are just a little afraid to put the latest thinking of their corporation, their latest design, up into a cloud when they're not 100% sure that it's safe up there.

Seems like it should be, but it's a real concern that doesn't seem to go away.

Thanks, Jim.

Okay, so again, thanks for listening in this morning, and we actually feel really good about the back half forecast, about the pipeline of the big deals. I actually think in many respects we spent too much time on services. It's not a concern for us. We're aware of the situation, but as Jim said, and I tried to say as well, we have a broader concern about it, which is -- the license revenue is going to dictate much much higher services volume, and it's going to be a different kind of a problem for us as we try to ramp up to address it. So again, thanks for your time this morning, and we'll look forward to talking to you again in the summer. Thanks.

Thanks, everybody.