PTC Inc (PTC) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to PTC's third quarter fiscal year 2010 results conference call. After brief comments by management, we will go directly 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 everybody. Before we get started here, I just want to quickly read through the Safe Harbor Statement. This Q&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 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 on Forms 10-Q on file with the SEC. All financial measures in this Q&A will be non-GAAP financial measures, a reconciliation between the non-GAAP measures and comparable GAAP measures is located on our Investor Relations website at www.ptc.com.

With that, we've got with us here today is Jim Heppelmann, Barry Cohen, Neil Moses, and Dick Harrison. With that I'll turn it over to Jim for brief opening comments and we'll go right into Q&A.

Thank you, Kristian, and good morning to everybody on the call. Based on the press release and the earnings transcript which we provided to you already, I think you'll agree that we had a very solid Q3. We came in above our revised guidance both for revenue and for earnings, which we were pleased with. Naturally, this gives us a lot more confidence in our full year plan and we're pretty confident in that billion dollars in revenue and a dollar in earnings. That would land us naturally at 25% earnings growth for the year which of course is ahead of the 20% earnings growth long term goal that we have. So we would be sort of in the win column for the first year on that with a little bit of upside.

In the quarter, we had very strong PLM results again, as well as some sort of renewed strength in the resellers segment and in the desktop business, which was good to see, but the most important thing I think as we continue to see this market share expansion phenomenon continue in the PLM sector, we talked about landing two more of these big important domino competitive wins. One of them was this Continental Automotive account that we had a press release on yesterday or the day before. Continental was 20 billion Euros in 2009, so it's a very large company. This is a company who had largely standardized on the sold PLM productline and we went through a comprehensive benchmarking process, a proof of concept and then as a result of all that, successfully concluded a very significant order which would be one of the large orders in the quarter.

We also won another domino account. I'm not yet able to disclose the name, but it's a medical technology company, again a company that's about $20 billion in revenue. This was an account that was somewhat Greenfield though I will note the one PLM institution they did have was from [DiSo]. Again a long comprehensive benchmarking process and PTC was selected the winner. So if you add the two dominos we secured in Q3 to the goal we had for the year that puts us at 15, which was our twice revised goal.

I have a little piece of good news here this morning which is we've already secured one more domino account in Q4. This one is Target. Target you'll probably recognize is the $65 billion retailer. Very much sort of sets the standard for private label products. Target is a case where they have an active installation of a competitors product. They began to question whether or not that installation was providing adequate value. They went through a one year comprehensive benchmarking process and at the end of that, decided to make a switch to PTC which we're very pleased about.

So the reason of these dominos and the competitive displacements in general are so important is I think they are just adding to our revenue growth abilities, and I'll remind you what we said before is that today's domino is tomorrow's annuity and our ability to take these accounts and these wins and monetize them for years to come is really the sort of basis for the magnitude of the PLM business that we're building.

In the quarter we also made some incremental investments for growth in terms of sales capacity and a few other areas. We will continue to do that in Q4 per our plan. We told you in June we were slowing that down a bit. Just to be cautious, I think we're going back to our original plan based on where Q3 landed and their outlook for Q4, and then finally, one closing comment.

I'd like to point out that the CEO transition is going well. Mr Harrison is sitting here with us this morning and I'll note for the record that his sun tan is a little deeper than it is most Summers at this point in time. So with that I'd like to turn it over to the Operator and we'll begin the Q&A process, thanks.

Thank you. (Operator Instructions) Our first question today comes from Mike Olson with Piper Jaffray.

Good morning. A couple real quick ones here. You talked about Direct Americas revenue is from the transcript being down due to timing of large deal closures. Does that at all suggest that there's some domestic deals that got pushed into the September quarter that they closed later in the June quarter than you expect, or any details you can provide on the comment that was in the prepared remarks?

Well it's Jim here. I think the challenge we have as some of you will remember when back to June when Paul Cunningham, our Head of Sales, shared sort of our big deal pipeline and we have quite a bit of revenue coming from this big deal pipeline. This is very difficult to predict when a given order is going to land in this quarter or next quarter. I can tell you pretty confidently, none of these deals went away in North America, none of them got downsized.

On one hand there was some deals that we would have liked to close in Q3 that became Q4 business. I'll tell you on the other hand some Q4 business became Q3 business and when you netted it all out, we landed where we landed which was a good place. So I don't think you should read anything into that other than when you're running a sales cycle that's 12-18 months is it 12, is it 15 or is it 18? That's difficult to predict when you're sort of sitting there maybe at the 10 month mark, so that's the difficulty, but I think the fundamental business in North America is very strong.

Okay, and then as far as another kind of quote from the prepared remarks regarding the new CAD platform Lightning, I realize you're probably not wanting to give a ton of detail on that right now, but is that intended to be kind of the next upgrade of Pro-E or is it something totally different?

So let me just say to sort of introduce the Lightning subject a little bit on the call here. At our customer user group meeting in early June, we disclosed an initiative with pretty vague details to be honest. But we told people tune in on October 28 because we'll tell you what we're really doing and I'll tell you the same thing on October 28 we'll disclose a little more details, but suffice it to say Lightning is really a Next Generation CAD platform that we think is very compelling, will really put us una whole different competitive position and we'll be fully upward compatible from an existing implementation of Pro Engineer. It's a lot more than the next revision of Pro Engineer, but one of the things PTC has learned, I think better than our competitors in the CAD space, is when you come out with something new that lets you pick up with what you were working on yesterday in the older version that's compelling. So we'll have that kind of capability and we will be able to position this as a big product cycle upgrade.

Thanks very much.

The next question comes from Ross MacMillan with Jefferies & Company.

Thanks. I guess the big question is just really on the implied, or the fourth quarter guidance. You had talked about a billion of revenue at your analyst day in June. Since then, you upsided Q3 and you've had a positive FX shift, so keeping the billion dollars implies some lower than previously assumed revenue in Q4. Could you just talk to how you approach Q4 guidance, whether you think you've just baked in more conservativism because it seems like your business is strong and from your comments there, Jim, it sounded like there had really been no change in your view of the Q3-Q4 kind of mix. So I'm just curious as to why the change on Q4. Thanks.

Yes, I think it's important to take this all into context of the year and the chronology of guidance we've given you and so forth and I'll say what I said back in June which is at the beginning of the year, we forecasted 20% license growth and nobody believed it and then we took into 30% to 35% and nobody believed it, then we took it to 35% to 40% and nobody believed it, then currency took a huge swing in the wrong direction and we said we were going to hold it at 35% to 40% and I think at that point maybe you were starting to believe us.

Now, we have a piece of good news with three million ahead with a quarter to go. Should we take up our guidance? It just gets back to the difficulty of projecting which deals these quarters will land in, or which quarters these deals are going to land in and I think you could say as we now stand with a billion and a buck, there's less risk in the billion and a buck than there would have been had we come in at consensus or somewhere else in the range we had given you.

That makes sense. Just to be clear then, no real change in your view in either buying patterns or the demand, the conversations you're having with customers about their willingness to move forward on projects?

Yes, no change whatsoever and I'll remind you we're in a pretty aggressive position already. So we're not saying it's less attractive. We're not saying it's more attractive. We're saying it's equally attractive and we expect these trends to continue.

That's very helpful, thanks.

The next question comes from Ben Rose with Battle Road Research.

Good morning. Question on the 250 active competitive accounts that you're pursuing. Jim, could you share with us any progress there? I know you talked about the two domino accounts this quarter, but just by way of these other 250 if you can quantify any progress in whether it continues to be your view that DiSo is the most vulnerable of your competitors in that regard.

I think our view is shifting a little bit that Siemens is equally vulnerable because some of the dominos I'm talking about here were DiSo accounts and some were Siemens accounts and I think we've, both in the business that we've already transacted and in the business we are pursuing right now, it's kind of an equal mix of Siemens and DiSo displacements and we're making great progress is all I can say.

I think the point we made before which I know you're curious about, we think that the strength of our business right now comes from three factors. One is the economy is better. Better than it was. It may not be perfect, but it's certainly better than it was in 2009 and companies are spending money again. The second thing is PLM is a sector that people are choosing to make investments in, so there's some natural growth in the marketplace right now and then the third thing is we're taking a lot of market share. We're taking our natural growth and a big chunk of Siemens and DiSo's natural growth as well. When you add those three factors together that's how you get to the sort of 38% license growth number that we've been forecasting.

I think when you roll into next year, the economy will be different because we'll have tougher comps. We'll be comparing somewhat better economy to a somewhat better economy hopefully and that one factor will go away, but the other two which is investment in this area and market share grab will continue forward and I think we'll have pretty strong license growth and overall revenue growth going into FY 2011 as well.

Okay, thanks.

Next is Sterling Auty with JPMorgan Chase.

A couple of questions. First on the domino deals, can you give us a sense as to what kind of revenue contribution you're getting out of the existing? Meaning we've talked about how the domino deal should ramp into that annuity phase. Can you give us a sense as to how that growth in the annuity contribution looks at this point?

Sure, Sterling it's Neil. One thing that we track and I think that we'll talk more about as we head into next year is not just a number of dominos won, but also kind of the annuity characteristics of those dominos. I think we've talked about that a little bit at our June user event, but I think we would like to provide more visibility into that information. What I can tell you is that when we started down this path just over a year ago, but starting this year, dominos represented really less than 5% of PTC's revenue in aggregate and today, if you look they represent just under 10% of PTC's revenue. So basically they've doubled as a percentage of our revenue in the past 12 months and we expect that trend to continue.

All right, great. And then you mentioned adding sales teams. Can you define for us what is a sales team? So what should we expect in terms of total headcount increase as you add the additional teams?

Yes, let's just say on average, or as a proxy, it varies a little bit, but as a proxy you could say a sales rep, an application engineer, a technical specialist and then a business development manager. Business development would be the person that's putting together sort of the financial case for how this technology is going to help the Company save money and so forth. It's the business that it's going to create. Those aren't always on a one-to-one to one basis, so it's not exactly like that, but just simply put sort of a 3:1 ratio if we hired 30 teams we're probably talking 90 people more or less.

Okay, and then on the CAD side, I'm going to try from a different angle. In terms of the new solution that you're talking about, is it changing some of the core design functionality within the program or is it some of the ancillary extensions of what the program can do that you're looking at the new version?

I think it's a radical new idea that nobody has thought of, developed or delivered before. We saw some great big problems, very much worth solving. It changes some paradigms around things like useability and switching costs and so forth and you can upgrade seamlessly from your current Pro Engineer installation.

And do you think --

And the customers what they said like --

Yes, astonishing is sort of an adjective we've seen used a couple times by customers when we've taken them inside and given them a sneak peak at it, so be patient. I can tell you I'm super excited about it. I think the rest of the Company is really buzzing about it, but we're not quite ready to do the full disclosure, but we'll do that in October.

Okay.

Let me just jump to the punch line though. The punch line is we're not going to project here on this call or give guidance, but we think this could change the fortunes of our desktop business and put it back on a growth factor.

Great. Thanks.

And next is Yun Kim with Gleacher.

Thank you, a question for Barry. With you expecting very strong acceleration in the consulting business in fiscal year 2011, do you expect to see margin pressure and headcount to meet demand, or do you think there's enough capacity right now to ramp without hurting the margin?

Well, I think a little bit like the Company and Jim's plan for 13 and one, revenue growth and margin expansion, I think we could have seen greater margin expansion next year if we weren't investing particularly in the domino, but we see good team growth next year and also margin expansion for us in services.

Yes, just to add to Barry's point, this is Neil. One of the things we're also excited about is when we think about our service and maintenance business I think we've spoken before about the hangover effect of last years license revenue performance being a drag on both those businesses in 2010. Actually, in the fourth quarter, we're expecting the services business to cross the threshold and begin growing again and then again in FY 2011 in a very significant way, but in the fourth quarter we expect the services business to be up both on a constant currency basis and on an absolute basis and we expect our maintenance business to be up on a constant currency basis as well. So that tide is starting to turn and that's, I think a good omen for 2011.

Okay, great. And just kind of sticking with the most popular theme in this quarters earnings season, what are you seeing out there in the second half of the year, calendar second half of the year for you? Thanks.

Just in terms of revenue performance?

Yes, just in terms of overall visibility, business, the overall sales environment?

Yes, I would say that we just actually reviewed our pipeline yesterday and the sales pipeline continues to look strong. I think our feeling on the economy is it's definitely improving. We hope it continues to do so, but certainly we're not hitting on all cylinders yet, but I think we feel good about the pipeline and the opportunity to deliver the types of numbers that we talked about in the prepared remarks for fiscal year 2011.

One thing I'd like to point out though is that I'd like to remind everyone that the first quarter of this fiscal year, fiscal 2010 was a blowout quarter for PTC and that's typically our smallest quarter of the year in terms of the revenue. So when you think about your models for next year, think about kind of a more normalized Q1, but still with the growth characteristics that we talked about roughly 20% license growth, services growth in the mid teens and maintenance growth in the mid single digits on a constant currency basis.

Okay, great and finally, Neil, any update on the CFO search?

I'm not sure I'm the right guy to ask. I think I'll turn it over to Jim.

Yes, I think the search is going well. We're sort of through the process of identifying the list of candidates we want to talk to and we're half way through the process of talking to those people. At least two candidates that I wouldn't mind hiring right now, but we're going to keep going through the rest of the list and back up and analyze and decide overall who is the best fit, but I think it's going well and we're going to land a world class CFO.

Okay, great. Thank you so much.

Next is Steve Koenig with Longbow Research.

Good morning. How you doing?

Good.

A couple questions for you. First one I'd like to dig into Q3 a little bit. As usual, lots of great data in the prepared remarks. Maybe just a few other things I would love to get a little more granular it on. One question would be linearity in the quarter and how do close rates look. Another question would be indirect revenues. You have good SMB CAD license year on year growth, indirect revenues were kind of flattish or had been a little weak sequentially for a couple quarters. When might that turn around? And then a couple more questions on the quarter and we'll look beyond that.

Well Steve I'll jump in and take the SMB comment and then Jim, maybe you want to talk a little bit about linearity? I think what we're seeing in the SMB business is that that business is slower to recover, no question. We are seeing year on year growth both license revenue and total revenue. So that's good news, albeit relatively small growth at this point. So we think that that trend is going to continue in the SMB marketplace and we'll see stronger growth next year, and it's just going to take a few more quarters until that business gets back to where it should be I think is the answer.

Yes, on the linearity thing, we have a bit of a hockey stick within a quarter and then we certainly have a hockey stick within the year and I would say the macro forces are pushing towards a bigger hockey stick, particularly within the year and by that I mean more and more of our revenue is coming from enterprise deals, enterprise deals are getting bigger we've seen, we'll probably do, by the way the four biggest license transactions we've ever done. The top four this year in the windshield business. So there's some macro external forces that are trying to make an even bigger hockey stick and then I'll tell you there's internal programs that PTC will try to mitigate that and smooth it back out.

So I think from a linearity standpoint, we're going to continue to see the situation probably be as is in the short-term with this hockey stick in the quarter and in the year. We're going to work on and we have some ideas and some programs we're putting in place to try to manage that better, but it's tough because the customers are part of the problem here.

Okay, and Jim, maybe one more question about the quarter and then I just want to move to next year. On the quarter, any $5 million deals and then secondly, looks like non-large deal revenue really carried the day. It was up pretty nicely from Q1 and Q2. Any color on the modules and upgrades business?

I'll hit the first part of that. There was one deal greater than $5 million. I don't specifically know about the module business. Maybe you can have that?

Yes, the module business I think in the upgrades business were good, not great this quarter, and you're right. The base business since there was just one large deal, the base business really kind of carried the day.

Okay, and then lastly let me turn to guidance about Q4 and then kind of directionally for next year. What have you assumed about the macro economy in Q4 and about close rates, and then also that question applies to next year and kind of the corollary to that would be if your revenue growth next year were say more like 9% to 10% instead of 12% long term you're targeting, how much risk is there to your 20% EPS target and that's all my questions.

Yes, well it's Jim again here. I think first of all on the economy assumptions we don't actually have an economist on the staff here, so we just assume it's going to be like it is now, not better, not worse.

Okay.

We assume that for Q4 and we assume that for next year.

Okay.

What was the second part of the question?

Oh, the question was about the $1.20.

Yes, the $1.20. So I want Neil to go through sort of a currency discussion in a minute, but I'll just start off by saying we're very committed to the $1.20. We're more committed to the $1.20 than we are to the revenue growth level and we think we can hit the $1.20 at different revenue growth levels and Neil will take you through what currency does in a minute here, but currency has a much more profound effect on the revenue numbers than on the $1.20 or the earnings growth number in general. So we're committed to the $1.20 for next year and it's really a question of exactly which combination of margin expansion the revenue growth in FY 2011 are going to get us there and that's largely a currency discussion.

So we don't have a foreign exchange specialist on the staff either, so from a currency perspective, we basically take what the currency is today and project it forward. We're using $1.25 which I haven't looked this morning, but I think it's a little bit more conservative than where the Euro is currently sitting as far as next year is concerned. I think we talked back in June at our investor conference about the fact that every $0.10 movement in the Euro on an annualized basis was worth let's call it $25 million to $30 million in revenue, $15 million to $20 million worth of movement in expense, and $0.05 to $0.07 in earnings. Now in any given quarter that doesn't impact the results that much. It may be $0.01 or $0.02 but not much more than that.

Now turning to the full year, what Jim said is actually correct. Whether we grow 9% to use your number Steve next year or 12%, we'll hit the $1.20. We have a natural hedge the way the revenue and expense moves together and we have the ability to, if you will, slowdown additional investments if we need to to insure that $1.20 is a committment we can make to you.

Great. Thanks a lot. Thanks, everyone.

Yes.

(Operator Instructions) Our next question comes from Blair Abernethy with Thomas Weisel Partners.

Good morning. Thanks. Just a couple things. First on the PLM side on the domino wins that you seem to continue to tick along nicely here this year, has there been any changes that you're seeing in sort of the evaluation and selling cycle for the dominos you're targeting, number one. And number two, can you talk a little bit about what your closure rate has been this year in the domino space if you will and in terms of some of the deals that got away, whether sort of what are some of the key factors as to why that happened?

Well, why don't we start the year emphasis. How many are we going to do in the fiscal year?

I'd have to think about it chronologically, but just to put things in context, the goal we gave you originally through FY 2010 was 10 domino wins. We subsequently upped that to 12. We subsequently upped it to 15. This morning we're sitting here at 16 with most of the quarter to go. I think we'll land greater than 16, but 20 or less so in that range. So clearly, the closure rate and the overall development of the domino program seems to be better than we were projecting is I think if we would thought the answer was 20 we probably wouldn't have told you 10. We might have told you 18, but it's clearly going very well and I think what I would expect to happen over time, we're really building now a reputation in the brand that screams PLM later.

I think over time we're going to start to see that translate into shorter sales cycle, higher win rate although the win rates incredibly high right now, but shorter sales cycle, less discounting, better pricing power, et cetera. I talked about the target campaign, that ran for a year. A year is well below our average.

Who did we displace there?

It wasn't the sub, although it did compete in the benchmark. We won against DiSo, but now they weren't that company that was the incumbent. So anyway that's a good example of a comprehensive process that ran from start to finish in a year. I'd say our average process is still substantially longer than a year, maybe a year and a half, maybe longer than that, but again what's happening in some of these campaigns is people are starting to say there's a leader emerging. It's easy. We all know this. It's easy to buy from the emerging leader. It takes triple the justification to buy from somebody whose clearly not the emerging leader and that phenomenon over time, I think will become more and more impactful and I think we'll continue to feel our market share grab and growth rates.

Just to answer the last question, Jim correct me if I'm wrong but we haven't lost a domino competition that we've been in this year?

No.

I think that's right. And the challenge really -- our win rate is exceedingly high and what we're really focused on as we talked about before is monetizing those dominos. We know it's a long sales cycle. How quickly can we convert that win into revenue and realize the kind of annuity opportunity that's out there?

Yes, maybe just a little more on that because it is important. The important thing about or exciting thing about dominos is they should turn into annuities and annuities become base business and that's great. We provided to you at a previous investor event a model that we called the typical domino monetization model and we said that a typical domino reminds me to put quotes around the word typical because there is actually a bit of variability, but a typical one when we win we get a pilot project that produces $1 million to $2 million in revenue in the first year, typically dominated by services revenue, because they say that we made a selection, but we want to validate that selection in the real world of our business and at the end of that, let's call it first year, they say okay, it works. Let's roll it out and that tends to produce a license order and then maybe in the second year we'll do $2 million or $4 million, the license order, the more services, et cetera. In the third year, they decide to expand this to another program or another division or another business unit and we get a further expansion. In the next year after that they might decide to do a footprint expansion, add some new modules and new capabilities, et cetera. In the year after that they go to a new business unit or more users or what have you.

So we see these dominos typically ramping over a couple years to let's say a $5 million run rate and then we've seen some evidence they stay at $5 million for an extended period of time as we continue to evolve and deploy and tackle new problems and so forth. So I think that model is very important. What we really want to do next year is provide more systematic tracking internally of how are we doing in this portfolio of annuity accounts that may have come from dominos or quite frankly may have come from inside the base customers, because we talk a lot about dominos because those are competitive wins, but we can have an inside the base customer doing an equal amount of revenue and they are just as important. It's just there wasn't a competitive process to get them there.

So nonetheless we want to think about this portfolio of dominos and what are the trends around the portfolio, how is it expanding, what are the sort of, if you will, renewal rates, maybe different levels of annuity customers within that portfolio, et cetera. So we're going to put a better tracking and management program in place and I would anticipate some of that will fall through and we'll provide visibility to you on some of the key data points.

One thing to take a little mystery of the out win rate, what's happening is customers are realizing there are new requirements to succeed in the global market place. When they look at their legacy systems they see that those systems can provide them with what they need. They've already made a decision that their legacy systems are not capable of helping them so when they go outside, that's a perfect environment for us to show our competitive advantage and that's why our win rate is so great.

Okay, that's great. Thanks for the color.

Yes, just a little more comment maybe from a competitors perspective which I always think is sort of important, when we talked about the Continental deal and trying to provide just a little color about that, that's a German automotive company, the second largest automotive company in Germany. Its been combined recently with Schaeffler, with [Ena] Schaeffler and I think actually the combined revenues of the two companies now rival Bosch, so it's either first or second in the world in terms of automotive business --

Supply.

Supply business, right. This is a Company that it's German and we have two big, let's say of our three big competitors, DiSo's Siemens and SAP, two of them are in Germany, SAP and Siemens and so for us to -- and we didn't have a big incumbent in terms of position there. We had some PRO Engineer seats and diversified automotive supplier and they've acquired some companies and so forth so we do have a presence but again, not unlike some of these other deals when we describe EADS a while ago and some of the others, we are not the odds on favorite going into these evaluations. In fact, you can make an argument that an odds maker would put us last, and so it's pretty telling and I think our competitors have a lot of explaining to do, much more than we do actually as to why we won or how they lost because we've won by a complete, as Jim describes it, market leader technological advantage coupled with a partnership with the customer where they really believe we understand their business and we can help enable change and globalization and so forth.

So the dominos we described early on, they are inexplicable. How could we win and how could the competitor lose and we continue to knock these down and I think we're going to approach the 20 number. There are going to be three or so at least this quarter and there's going to be a big number next year. We have all of the sales people, the sales leadership from around the world in here Monday and Tuesday of this week reviewing the tone of the competitive landscape. We specifically asked them questions in the ongoing domino benchmarks, as well as the displacement benchmarks, the other 250 active campaigns, we don't see any indication that the competitors have closed the gap at all technically. They haven't announced any wins out there. Has the competitor ever announced the displacement of our system? No.

So I'm trying to give you a sense for just how important these continue to be and also answer that aspect of the forecast, because there probably is more conservativism built into the forecast than there would be risk, but I think that it's prudent for us to do that just given the nature of the business and how we want to run that business going forward. So the confidence in the sales teams is as high, if not higher than ever and I think you're going to continue to see lots of these win rates.

I was thinking earlier, we could go through the $14 million deals we won, the 14 deals or whatever it was this quarter greater than a million and we could tell you where they came from sort of from a competitive landscape. I didn't do that, but back to the point, it's basically a mix. It's not just DiSo. It's pretty much a nice general mix there which is good for us because that indicates there's a broad base of competitive accounts that we're going after and can win it.

I'm not usually one to jump on your band wagon when you're on a roll like that, but I think the other point you make about Conti which we feel good about is that not only was it in Germany, but it was in automotive and automotive is probably not our area of traditional strength.

No. That's an excellent point. Now you take the Conti deals, the Volvo truck deals and a number of other automotive suppliers, ArvinMeritor that we've been winning, we've been upping our presence in that whole automotive sector and I think you're going to continue to see better and better, more and more wins in that sector next year as well.

This is Jim. One thing to pile further on. I want to talk about the fact that our competitive advantages also diversifying a little bit. We've talked a lot about a product/technology advantage and clearly we have a technology advantage today, but those of you who have followed the Company for a long time, Jay Vleeschouwer for example, you have been at many of our user group events, we've been talking about this idea of product development process improvement that technology is means to an end, the end in a win for the customer is a better process. And what's happened is we've developed a secondary and tertiary advantage now similar to the technology advantage, which is secondarily we understand better than anybody how to put this technology to work, affect process change, and create value, and then that's really a services advantage. And then at the sales level, we are the masters now at being able to characterize the financial value, being able to establish strategic long term partnerships. The sort of PTC sales rep of circa 1990s basically doesn't exist anymore. We are definitely the trusted advisor in developing long term strategic relationships and these things are very hard to replicate.

You can't wave a magic wand and become process experts. You can't wave a magic wand and have a consultant of enterprise salesforce as tops in the industry and you certainly can't wave a magic wand and replicate our technology advantage. It's becoming a system of components working together that reinforce each other and are increasingly difficult for somebody to replicate and in some cases I'll draw your attention to that Continental press release. It basically says you'll see some comments in there from the CIO and the CFO that talk about PTC as a partner and some of the intellectual property we're bringing to the table about how to optimize processes and then of course the great technology that's an enabler for that.

Okay, that's great. Thank you.

Our last question comes from Sterling Auty with JPMorgan.

Yes, thanks. I just wanted to circle back to something Neil said. I think you were commenting about the December quarter and I was a little bit (Inaudible), I think you were trying to say you had a blowout December quarter last year and I think you were saying we should think about more of the normal seasonality. So as you look at the consensus estimates and look at the sequential should we be looking for a traditional sequential change from the September quarter to December, or should we be applying the 20% license growth to that big quarter that you produced last December?

You should be looking and thinking about a more normalized quarterization. So typically the first quarter is our lowest revenue quarter and we see usually a step up in Q2, Q2 and Q3 are usually pretty comparable and then I would say that Q4 is usually somewhere between $20 million and $30 million higher than Q3 and Q2. So I think you should be thinking about a more normalized quarterization of our results, which is not what happened this year.

Got it.

One other thing you brought up is 20% license growth and I want to reiterate. Our belief is that that's a constant currency license growth rate. Now that said, if currency stays where it is today, our average currency rate for fiscal 2010 will be somewhere around $1.35. So we are in a deficit position today versus the average of last year. It's very hard to predict where this will go. I'm just encouraging you to think of 20% in constant currency terms because currency does have this fairly dramatic swing on the revenue.

Got it. Thanks.

And there are no further questions.

Okay, great. Well I'd like to thank all of you for the time here and really a series of pretty good questions. I think you have a sense for the momentum we have in the business and pretty strong outlook. I'll remind you again that the directional information we gave you for next year was something short of guidance. We will come back to you at the next call and give you fiscal 2011 guidance, but in the meantime the directional information is hopefully directionally correct and we're very committed to this idea of 20% earnings growth on a sustainable basis over a five year window and looking forward in 90 days to reporting the first year in the win column. Thanks a lot and talk to you all soon.

And that concludes today's call. Thank you for your participation. Please disconnect your lines at this time.