PTC Inc (PTC) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's fourth 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, this conference is being recorded. I would now like to introduce Kristian Talvitie, PTC's Vice President of Corporate Communications. Please go ahead.

Great. Thank you. Good morning, everyone, and thank you for joining us today. Before we get started, I wanted to quickly cover a couple of housekeeping items. First, as you hopefully all know by now, we are hosting a live event in Boston tomorrow to unveil our Project Lighting Strategy. This promises to be a pretty exciting event so please register on PTC.com to attend the live virtual event which starts at 10 a.m. Eastern tomorrow. Second, as you also hopefully all know, we are having our fiscal 2011 investor day next week on Wednesday, November 3, in Manhattan at the NASDAQ market site. The event will last from 9.30 to abolut 3.30 Eastern time and will include presentations from management as well as some customers. As we share our longer-term business strategy and key product platforms and talk in more detail about our 2011 targets and financial model. If you haven't registered already please contact me or Kristen to do so.

With that moving on to the Safe Harbor language, this call and 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 Forms 10-Q on file with the SEC. All financial measures on this call are non-GAAP financial measures, a reconciliation between the non-GAAP measures and the comparable GAAP measures is located in the prepared remarks document on the Investor Relations page of our website at www.PTC.com. Participating on today's call are Jim Heppelmann, President and Chief Executive Officer, Jeff Glidden, Executive Vice President and Chief Financial Officer, and Barry Cohen, Executive Vice President of Strategy. With that I will turn the call over to Jim.

Thank you, Kristian. Good morning. I am very excited to be joining you here today on my first earnings call as the Company's new CEO. And though I am the new CEO, I think most of you will recognize that I am not really a new voice on the call, and in fact, many of you have known me for years already. So just to quickly recap my background for those of you who maybe knew, I have been with PTC for about 13 years since I was acquired into the Company in 1998 as the founder and leader of the Windchill Technology Company. I stayed with PTC following that acquisition and then for most of the decade that followed, I was the head of product development and strategic marketing functions at PTC. You may remember that this was a time during which we completely reinvented our strategy and our product portfolio, and reemerged as a technology leader which is an accomplishment that naturally I am very proud of.

So during my time year I have also invested much of my time in the sales process and with the customers. So I feel that with the combination of background, I've had a chance to learn the business very well and to learn it from several different perspectives. I have had a great opportunity to help steer the Company in the time I have been here and feel that I have been a key driver in the effort to reshape the CAD Company of the 1990s, into the growing enterprise solutions Company that we have today. So, then finally, it was probably one of the most thoughtful succession plans I'm aware of, I joined the Board in 2008. I became President and Chief Operating Officer in 2009, and now I am taking the helm as the CEO going into fiscal 2011. So I have to say it is a really exciting time to take over, the Company is in a good position today, and I think we have a legitimate opportunity to make this one of the great stories in the tech industry going forward.

So looking back at fiscal 2010, I think the year will go down in the record books as a terrific accomplishment. Let me first remind you that we began the year with guidance of $980 million in revenue and $0.96 in EPS. That goal represented 4% revenue growth which we based on an assumption of 20% license growth, which many people, including some on the call, thought was far too aggressive at the time. But throughout the course of the year, the business kept getting stronger and we raised our revenue and EPS targets. We ultimately ended the year at $1.010 billion in revenues and $1.00 in earnings per share. That represents 8% revenue growth based on nearly 40% license growth which I think ranks us amongst the strongest growth companies in the software industry right now. The 25% earnings growth result readily surpassed our original goal of 20% and you'll remember that along the way, we made significant new investments to position the Company for growth in FY 2011 and beyond.

So if you think about it, while 2010 was a great year in retrospect, we actually had a lot of challenges that held had us back from an even greater potential. Let me talk about a few of them. So first, if you look at how we segment the business, our license revenue was strong, but our service and maintenance business actually declined slightly in 2010. Our enterprise business was strong but on the other hand our desktop business wasn't. Our direct sales force did exceptionally well, but our reseller business was held back by the economy. Then regionally, North America and China in particular was strong, but Europe, Japan and parts of the PAC Rim really were not. So while 2010 was a pretty good year, in some ways it felt like we had an eight cylinder engine with only four spark plugs firing. But during the course of the year, all of these trends have been improving steadily and now it feels like the business is strong on all fronts as we transition into FY 2011.

For example if you glean through the fiscal fourth quarter results, you will notice that license, service, and maintenance lines of business all grew. Enterprise and desktop segments both grew and I think some eye popping license growth numbers in the desktop business. The direct sales business did well, and the reseller business did very well, again, with some pretty large license growth numbers. And then North America, Europe, Japan, and the PAC Rim all grew. So if I were to use a baseball analogy I am not sure it's a perfect game but it certainly was a shut out if we reflect on the results.

So right now it feels like everything is starting to work. Clearly we have a lot of sales and revenue momentum right now as we head into fiscal 2011. But sort of to pile on, fiscal 2011 will be the biggest new product year the Company has ever had, and by some distance. So let me take you through some of the highlights.

So our Windchill product line, which is already recognized now as the clear leader in PLM, will see the biggest single release we have ever produced in the Windchill product portfolio when we ship Windchill 10 in the second quarter of fiscal 2011. Then our Pro/ENGINEER and CoCreate businesses are going to undergo a compelling reinvention when we launch our Lightning initiative publicly tomorrow. We feel that this initiative is the single biggest innovation in CAD technology since our founder, Sam Geisberg, brought Pro/ENGINEER to the market in 1987.

Moving on to ArborText, we recently positioned our ArborText business to make it more strategic to our customers by thinking about it as a way to produce service information rather than a way to produce documentation. That's subtle but important and we can elaborate on it next week. But we have some important releases that sort of cement that concept in place and we think that this new service information system approach has unlocked a pretty strong growth spurt and has really raised our internal views quite a bit on the growth opportunity associated with ArborText. We are going to have a customer at our event next week who is going toelaborate on this in some detail, I think you will find it pretty interesting.

Moving on to Relex, our Relex line of reliability software, which has a tremendous amount of momentum giving some of the high profile failure products in the market, the shut off valve on the ocean floor that didn't shut off, the automotive recalls and so forth. That business has a lot of momentum right now and we just shipped a big release called Relex 2011 in the last few weeks.

And then InSight, which is this new product suite we have been developing and acquiring into which deals with product analytics, is going to have a pretty important very significant new release that's going to establish basically a new architecture platform but add product cost analytics and a carbon footprint lifecycle analysis to the platform we already have for environmental analytics for companies that are bound by hazardous material regulations which, by the way, is almost all of them.

So there's a lot of good stuff, a lot of good momentum in the business. An unbelievable product line up coming in fiscal 2011. Obviously we remain concerned about the economy. We read the same newspapers you read. But with all this momentum, we do have an increased level of confidence going into fiscal 2011. And as a result of that we raised our revenue guidance to 10% to 12%, and we raised our EPS guidance to 20% to 25%, at a constant currency level relative to last year.

So Jeff's going to elaborate on that shortly but I'm looking forward again to sharing this type of information in more detail with many of you live next Wednesday at our investor day in New York. It will be a great opportunity for you to get a deeper look at the factors that are driving our momentum.

So finally, and in closing I'd like to say I am very honored and pleased to have successfully recruited Jeff Glidden to be our new Chief Financial Officer. I had said on some earlier calls that we had a lot of interest in the CFO position during our recruiting process and I thought we would get an opportunity to have our pick of the litter. Basically that is how I think the situation played out, when we found Jeff we found an incredible enterprise software experience base. We found someone who has a great track record and history of helping companies like ours unlock shareholder value. I'd have to say in just a few short weeks that Jeff has been here, we have already seen what a big difference he can make and I am very pleased to add him to what I think is already a very strong management team. So with that I would like to turn it over to Jeff and he has a few words to offer as well. Jeff?

Thank you, Jim. I am very, very pleased to have joined the PTC team. As you know, I joined the Company on September 27, for the last week of the fiscal year. This timing was important, as I want to be fully immersed and onboard as we closed out the fiscal year. By the way, as a veteran CFO, I know that no one can explain what a year end really is about. A CFO must live it to understand all the energy, issues and opportunities. That said, our sales, legal and finance teams performed very well and we delivered strong results for the quarter and the year.

In my roll as CFO our fundamental goal is to build value for our shareholders, our customers and our employees. We will review all of our investments, plans and priorities with the goal of building long term value. To these ends, you should expect an increased focus and drive on business planning, profit planning, cash and cash flow.

As Jim highlighted, we had a very strong finish to the year and I will provide a brief overview of our results for the year and the key business drivers. Our business has always been impacted by a number of significant and large customers. In Q4 we had a record 28 customers that generated $59 million in license and service revenue. For the year, we had 70 deals which represented $187 million in revenue. The good news is that we are significantly growing a large base of annuity accounts, the close rates and quality of these deals has been excellent, and I would add that the strength and sales momentum of year-end has continued and we are off to a good start for the new year.

A second key highlight of the year has been the growth of the maintenance business. This business had been flat at approximately $490 million for two years and returned to growth in Q4 with revenues of $125 million. And perhaps the most important metric in our maintenance business is active seats. We ended the year with more than 1.2 million seats, up over 20% year-over-year. For the full year, our revenue totaled $1.010 billion, our non-GAAP operating profit increased 30% to $158 million. This represents an operating margin of 15.6% which is up 270 basis points from 2009. Non-GAAP earnings per share increased 25% to $1.00, we generated $157 million in cash flow from operations, and we ended the year with $240 million in cash and no long-term debt. So overall, a very good year for PTC.

Before moving to guidance, for 2011, I will address two one-time items that are included in our year-end results. One, a tax structured reorganization that was completed in Q4 and two, the resolution of the GE Japan litigation that has been addressed in Q1 of FY 2011. During Q4, we completed a reorganization of our legal entity structure to support our tax and cash planning. As you know, PTC has significant amounts of cash throughout our international operations and the clear benefit of this reorganization has been to enable significant redeployment and repatriation of cash between our domestic and international operations. While this reorganization has resulted in a one-time increase in our FY 2010 GAAP tax rate to 70%, it has no effect on cash taxes paid and no effect on our non-GAAP tax rate. Based upon this reorganization, we also expect the Company's effective tax rate for both GAAP and non-GAAP to be approximately 25% for 2011 and for the next several years.

I am also pleased to share with you that in October we resolved the litigation brought against us by GE Japan, which has been pending for more than three years. As you will recall in the fall of 2007, PTC established a reserve for customer advances of JPY4.7 billion, approximately $57 million in US currency as of October 2010, related to certain transactions, involving an employee of Toshiba Corporation. During the litigation it became evidenct that the Toshiba employee was engaged in a Ponzi scheme defrauding both GE and PTC. This individual, now a former employee of Toshiba, has been convicted of fraud and is now serving a prison term. It also became evident that PTC had been paid with funds that this Toshiba employee had obtained fraudulently from GE. As a result of this resolution with GE Japan, in October, PTC has recorded a GAAP benefit of $9 million and paid amounts received from these transactions back to GE Japan, a net cash payment by PTC of $48 million. As a result of this resolution, GE has assigned any right to recovery to PTC. We are also very pleased to have this issue resolved, the future liabilities cleared and to put this uncertainty behind us.

I will close my remarks with some comments related to our FY 2011 guidance. Looking first at our expectations for 2011, we see continued growth in our business. We are raising our full year revenue target to a range of $1.110 billion to $1.130 billion for growth of 10% to 12%. While we are continuing to invest in increasing our sales capacity and funding new product development, we also plan to increase our operating margins from 15.6% in FY 2010 to 17% to 18% in FY 2011. We expect non-GAAP EPS to be $1.20 to $1.25. I'd add that these estimates are based on an exchange rate of $1.37 US to the euro which is our simple average rate for 2010, so this is essentially a constant currency comparison. For Q1 we expect revenue be $255 million to $265 million with non-GAAP EPS of $0.22 to $0.26. This guidance for Q1 includes continued investment to expand sales capacity and to launch new products like Lightning tomorrow.

In summary, we have just completed a very successful year and while we are tempered by the economic outlook, we expect continued growth and margin expansion in 2011. I look forward to seeing you all next week at our investor day, and we'll now open the line for questions.

Thank you. (Operator Instructions) Your first question comes from Richard Davis with Canaccord Genuity.

Thanks very much. One of the areas that we think will be big is something called kind of collaboration as a service and frankly, Windchill fits dead into that space, so the question I think we have heard from some investors is can or do you intend or how much is currently in the cloud and what are the dynamics to do that because putting it in the cloud givers you operating leverage et cetera but there's the push back socially from some companies et cetera. But if you can talk about that because to me that seems like a fairly interesting longer term strategy that you guys executed on.

Hey Richard, its Jim. Do you think we should toss that one Jeff's way to see how he does it?

I am running.

So I think that the interesting thing is that Windchill is cloud-ready. We began to offer a could version of Windchill some years ago. I think we were ahead of our time. If I reflect on the situation today and then think about tomorrow, I would say a large amount of Windchill deployments go into a private cloud today. That is a data center filled with virtualized hardware and so forth. The classic private cloud is very important to our business. I think it is really an emotional issue that people have been a little afraid if you will to collaborate with such critical product design IP in sort of public clouds if you want to call them that. But I think at some point in time that emotional issue will break through. We are in a good position. The business we started originally we went through a transaction to give to a very close partner of ours who does the hosting. So we have a cloud-ready solution, ready to go, and a technology that supports a multi-tenant shared architecture. So we are in a good position, probably out ahead of it a bit. But definitely the private cloud is important and the public cloud to your point may become important going forward.

Perfect. Thank you very much.

Dave [Canning] with Longbow Research.

Hi guys, thanks for taking my question. I guess my main question would be on looking at guidance for first quarter. Your revenue guidance bracketed seat expectations, your earnings guidance was a little light, and so I am wondering, what did analysts get wrong in terms of that guidance? Was it the sales team hiring, were there merit increases in the year? What is pressuring the first quarter EPS?

So Steve, this is Jeff, I'll make two comments, just recall that last year we had about some very significant large deals, maybe $20 million of large deals. So when you look at the year-over-year growth, without forecasting large deals, we're probably 10% to 12% growth. So I think the revenue numbers are pretty solid and as I said we are off to a pretty good start.

On the expense side, it is probably just a flow within the year. We are making front end investments in both sales capacity and in launching some of these new products, so those are the two areas. And I think we believe those are the right investments and feel very comfortable with what those will bring us later in the year.

Steve it is Jim, maybe just to sort of back your question, what did you get wrong. I think generally speaking, PTC's internal view of our annual revenue has a bigger hockey stick in it than most analysts models show. I think if we looked back in history we would see that year after year after year. Now the good news is we may be making some progress (inaudible) that. For us to come out with guidance for first quarter thats nearly flat with a pretty good fourth quarter, this is a new trend. That's what happened last year, on the strength of some huge deals, but that's what we are guiding to again this year, and in the time I have been here, we used to look at significant drop from fourth quarter to first quarter and now we're looking at guidance thats almost flat. I think that's a pretty good trend.

Then just on that point, if I can follow up with one quick one, are you starting the quarter with some big deals in the bag? What gives you the confidence in your visibility into first quarter to do that? That was a pleasant surprise to see the revenue guidance flat or up year on year.

I would just comment that the finish to the year was very strong. Just recognize fourth quarter, July and August are usually quite, particularly in Europe, and Labor Day was late this year so we were very busy in September. Let me say that in a positive way, a lot of activity and we closed a very, very strong book of business in the quarter and I think that momentum carried over. So we have two or three significant deals that have already closed and shipped in first quarter. So I think the momentum that we saw at the end of the year, the activity, the confidence of the sales team and really buying patterns of the customers, have continued to be strong as we entered the quarter.

Particularly if you look at the Windchill business, what happened with our Windchill business was far more than economic bounce back last year. I don't have the exact numbers in front of me, but I think our Windchill revenue in 2008 was $406 million, and if I am correct, in 2009 it retreated a little bit to $392 million. I am looking at Kristian here. But this year, it's substantially above fiscal year 2009 or fiscal year 2008 levels. And the 70% license growth in Windchill was not a bounce back because it never dropped 70% or any number even close to that. So I think we are in a situation where that business has fundamental strength, unrelated to the economy. These are long sales cycles which in some ways, long sales cycles but then a fair amount of big deals, predicting exactly when a deal is going to close is challenging, but at the same time, you get a good long term view of the pipeline because these deals don't just come out of nowhere as Bluebirds. You work them for a long period of time and we have an incredible pipeline and we will elaborate on that next week as well. But we have an incredible pipeline here of PLM business.

Great.

Sasa Zorovic with Janney Montgomery Scott.

Yes. Thank you, a couple of questions. My first one would be regarding any sort of competitive changes that you have seen here for the quarter or you would sort of say, or has there been any kind of market share shift or do you see sort of this more like an economy coming back? And then secondly, would be specifically to product and after some of the maybe slower start there, obviously we have started seeing the acceleration toward the year end. What is the outlook specifically there?

Yes. Okay. It is Jim here. So when we look at our results in 2010 and particularly at that 40% license growth, I always attribute it to three factors. One factor is the economy got better. A second factor is there is genuine strong interest in PLM, above and beyond economic bounce back, and the third factor is PTC is taking more than our share of that strong interest and of that economic bounce back. So, it is hard to know if these factors are equal. I suspect they probably are, that as the economy recedes maybe that one-time economy improvement factor will start to dissipate. But we see no signs of the fundamental demand weakening and no signs of PTC's market share grab dissipating. These are very strong factors and I think it will continue going forward. So will we have 40% license growth next year, no. But I think our model says we will have something in the mid-20s which is suggesting that the economy was worth 15 points of that 40% license growth and that the other 25 is fundamental strength of the business.

On the question about ProductPoint, though ProductPoints an exciting product, and I think we had a pretty good year with it. I read one little report this morning that said we hit our amended goal of 300 but missed our original goal of 400 wins. In fact those are the same goal. We had 100 followed by 300 more for a cumulative goal of 400 more. So we hit all of the goal just in case anybody is unclear on that point. I think we had a pretty good year with ProductPoint. It is certainly an important market share trend developing. It's a product starting with $0 in revenue and it takes awhile for a product starting at $0 to become meaningful at the say 1% level, 2% level, so it is not yet that meaningful. But we are pleased with the trend, we're very pleased with the product and the customer reaction to the product. We did have good lower right box, SMB PLM performance in the quarter and some of that definitely was on the backs ProductPoint. We have also seen a trend where ProductPoint's a great door opener and then as we get in the real conversation, some amount of those ProductPoint campaigns turn into Windchill proper campaigns which is great, even better. So I mean I think we are happy with the product and I would say stay tuned because I think we are probably two quarters away from a pretty surprising announcement about ProductPoint that we are not quite ready to make here today.

Great. Thank you very much.

Mike Olson with Piper Jaffray.

Thanks. Good morning. It sounds like for the most part the business is tracking at or better than expected in all geographies, but under that context, which geography would you say is improving relatively slower than the rest, where there's maybe dry powder as that geography improves?

I would say Japan probably is the place where we continue to feel like we have a lot of upside. Japan has stabilized. I don't think we are happy yet with the growth rate. But we have some impressive new management on the ground in Japan, probably six months ago. We reorganized the way we do business in Japan. We have a Japanese President now who manages the Japanese organization including sales, service marketing and so forth. I think that's important because it is very difficult for an American company to do business in Japan the American way. And so I think we have a better leader and a better organizational model which will help us there a lot. I would say the other place is Europe which is probably not been bad but it has lagged the recovery that we saw in North America and China, but our reported results in fourth quarter were 2% growth in Europe, but on constant currency basis it was 10%. The Euro has been bouncing all over the place, but that's a pretty good result to see 10% constant currency, so it feels like that one is starting to come around again.

Okay. Assuming the improvement in demand continues, are there additional investments that you are going to need to make in fiscal year 2011 as far as sales head count or just other investments that capitalize on the momentum?

I think we have fiscal 2011 fully funded in our plan including sales capacity. When we got ahead of plan in 2010, we took the sort of bold move of prefunding the 2011 investments at mid-year 2010, which meant those sales reps aren't just coming on board now, they generally are on board, they have been through training and they're out on sales calls on October 1 here. So I think what you might see, if we got ahead of plan again next year maybe we would start thinking about 2012. But I feel like 2011, as the plan and guidance we gave you, is fully funded in our expense model.

Thanks very much.

Blair Abernethy with Stifel Nicolaus.

Thank you. Nice quarter, guys. Just a question on your Domino implementations, looking back now, 2008 one win, fiscal 2009 six wins, can you give us a sense as this, as this backlog builds, give us some color on the stage of implementation of some of these early deals?

Yes, I mean I would say most of them are early- to mid-stage, the earliest ones are mid-stage meaning they're probably in production but we will expand from there. The more recent ones of course, the one we got early this quarter, nothing is appreciably even started yet. But I think it take a while to implement this software and not just implement the software but more importantly, prepare the customer to work in a new set of business processes. That takes some time and a lot of careful planning, hand holding, you have to make sure you have buy-in of the business to work that way et cetera. So I would say some of these Dominos--let me back up for a minute.

When we look at these Dominos, we gave you a model for how they monetize over time and they generally start with a small order of pilot project, pilot project becomes a production project, the production project - now we're in years three and four, it's expanding into new business units, it's expanding into new product programs, et cetera. And it becomes a very long term annuity. But when we reflect on the actual Dominos we won, probably three quarter of them follow that model, and somewhat surprisingly, one quarter of them have given us a big software purchase order up front which is fine too. That really locks them in and secures a big commitment to us. So, again I am not sure there exactly an average Domino, and if there were, the standard deviation would be large because some gave us a big license order up front. Others, that big license order may be a year or more away from us.

I would say though on this whole Domino topic, this has been a very good program for PTC and I think with this community on the phone here, to help you understand kind of what is happening beneath the water line on that iceberg, as we described it originally, over time we inside the Company, and we probably want to provide visibility to you, we want to focus on the annuity streams we are getting from these customers. We want to start thinking of that our key asset is a portfolio of annuity accounts that are giving us revenue of greater than $2 million a year on a reliable basis, greater than $5 million, greater than $10 million or greater than $20 million. We will give you at our investor day next week a little bit of a peak at what that portfolio currently looks like and over time, a Domino is very interesting because it represents competitive strength at the time you win it, but to the extent it becomes an annuity at the $2 million, $5 million, $10 million, $20 million level, then it is really interesting. So we want to sort a little bit shift all of the collective attention to what does this annuity portfolio look like because if PTC is going to be $1.6 billion in 2014, like we think we are going to, it will be on this bedrock of a growing list of annuity accounts and the accounts within that list simultaneously growing themselves in terms of the revenue contribution they're giving to PTC. So I think we will try to shift your attention a little bit over time to this annuity discussion but we won't leave the Domino discussion too quickly because it is a great indicator if you will of our competitive strength in the market.

Okay. Great. Thanks very much.

Ross MacMillan with Jefferies and Company.

Thanks a lot. Just a couple of questions. The first just one on your commentary around first quarter. It sound like you had the ability to maybe shift maybe one large Domino deal or maybe it failed in first quarter, about an eight figure deal and that's providing some of the confidence here for first quarter. Is it fair to say that you're starting first quarter in a stronger position from what's been signed already relative to even last year when your first quarter was obviously a very strong quarter relative to fourth quarter?

I will let Jeff take these more over time. First of all I don't personally think we have any you eight figure deals in the plan. I'm not sure.

Not presently.

So no megadeal here that gives us this confidence. It is general business strength. I'm trying to remember exact timing, but last year in first quarter, we had some nice deals come in early in the quarter which gave us confidence in first quarter and then subsequently we had some more big deals come in. If you remember, we overperformed to the tune of $220 million or something like that which is almost 10% upside on our guidance last year. Keep that in mind, by the way, when you evaluating whether or not the guidance is strong for first quarter as if we're comparing ourselves to a 10% over performance year last year. But I think again these deals are big. We have a lot of them in the pipeline. It is hard to predict exactly when they will close. I think at the end of every quarter, we succeed at pulling some in from the next quarter. Then a few will leek out to the next quarter and at the end of the day, it probably cancels each other out and we sort of are where we are. So I don't think any of our guidance is based on specific big deals, it is based on a big pipeline of strong business with strong demand.

That's great color, thank you. And one other one just so I understand, the merit increase that was implemented in fourth quarter, was that already decided at the time of setting guidance? Or was that something that you implemented subsequently such that in effect you managed to basically deliver the revenues X that merit increase on a lower cost base? I am just trying to understand when that decision was made.

It was not really baked in our guidance. Let me try to explain what we did here. First, why we did it. Last year when we started the year, we had a pretty conservative view of where the economy was and so forth. And wanting to make sure we hit our 20% earnings growth we said sorry, there will be no merit increase for our employees, which to be frank with you added $0.04 of earnings to our model. But it came out of the pockets of our employees just to fast forward we gave $0.01 back. Then as we got into the year, things started looking good, and of course our employees were saying hey what about us, and we began to believe that if we overperformed, then some first chunk of that overperformance needs to go back to our employees to make them whole or at least partially whole. We are really talking partially whole. So our model was there will be no merit until such time as we can pay it and remain at or above $1.00 a share. So from that standpoint it wasn't in our guidance. If we would have been at $0.99 or just $1.00 without the merit payment, or the profit share as we call it, there would have been no profit share. Obviously we did better than that, such that we could pay the profit share and still remain at $1.00, so in my view and you can reverse engineer this is that we overperformed but went back and fixed an inequity from a prior time.

This is Barry. Let me make one modification, fourth quarter was not a merit, it was a spot bonus based on overperformance that we shared. It is not a cost that we are carrying forward and next year we do have merit built into the plan and into guidance, and that is already baked in and we do not anticipate any spot bonuses in the coming year at all.

Yes maybe let's just elaborate on this a little more because I think it is important. Because people want to make sure than when we overperform some respectable amount of it (inaudible). So what happened a couple of times in this bad economy period is we did not pay a merit and then I think at least two or maybe three of the last four years we paid a spot bonus because we actually did better than we thought we would when we took the merit away. But what we also did is we said lets go back to drawing board on this whole merit program and think about differently. Let's start treating it not as a fixed cost but as a cost that is part fixed and part variable. So I can tell you that there will be no discretionary profit share bonus paid next year because next year it's in the plan and we will accrue for it. And if we overperform, then any profit share will be accrued for in the numbers that we're posting. We didn't have that program last year. We took it away and then overperformed so we felt we had to give it back. Next year this need not be a discretionary decision because it is all carefully planned for in the cost structure.

That's super helpful. Thanks. One last one if I may, I am just curious, Project Lightning, you are going to talk about it tomorrow, but it sounds like the formal launch, the GA of the product still a ways off. Could you help us understand that kind of interim period and what the plan is, is it educating customer, are you still working through late stages of a beta program, if you can provide some color, that would be great? Thanks.

I don't really want to give you all of the big secrets from tomorrow's launch here today. But there's going to be surprising twists and turns in what we announce tomorrow. Hopefully you will come to understand why we are announcing it at this period of time and we will be in a good position to discuss it in some deep detail at the investor day for those of you who also choose to participant in that. But, just before I go into that, let me back up a second. What I am excited about? What I'm excited about is what Kristian showed me yesterday, and it's in our notes here, that industry analysts are now forecasting the CAD market to grow at an average of 6% [kger] for the next four years, and that surprises me a little bit because I thought we had all pretty much given up on growth in the industry. So we thought Lightning would help us post growth rates that were better than the industry, but we were assuming that the industry growth rates probably weren't that interesting. Now we think that that's still true but the industry growth rates suddenly look more interesting. I'm not sure these analyst actually have a crystal ball but certainly there's a lot of optimism that there will be fundamental growth in the industry and I think we have a lot of optimism that on the backs of what we launch tomorrow we will get more than our fair share of it. If we do that, that would have a material positive impact on everything we are telling you in the long term plan, because none of that's really contemplated or even required to perform against the 20% earnings growth we have been talking to you about now for some time.

Great. Thanks a lot.

Sterling Auty with JPMorgan.

Let me actually start with Jeff. This is the first quarter technically for both CEO and CFO, it is pretty typical that the first quarter out of the box you take a conservative outlook in terms of guidance but you are actually raising the numbers. I am kind of curious what you saw in term of the forecast capability that is describing the pipeline that give you the confidence? Then on the heels of that, is there a strategy kind of for the first 100 days in office? You mentioned the focus points in terms of business planning cash and cash flow, but maybe a little bit more color in terms of what your approach is your first 100 days in office?

Okay, Sterling, thank you very much. I think being here at the end of the quarter, it was very important, while I was only on board for five days I have to sign off on a 10-K that represents 365 days. So, in that week I probably did five weeks worth of work going through all the major deals, major accounts et cetera. And for us and for me, everything starts with our customers. So understanding the customers, the deals, the pipeline, and so forth and I will just reiterate I was very, very pleased with the way we closed the quarter and the momentum that continued and our ability and visibility into the business. So I think as we see and I think Jim described it that fourth quarter felt like a number of pieces of the business turned in a positive way and we expect those will continue. So I think the trend from fourth quarter and the year should continue in first quarter. So we gave the guidance we did.

And while we had a head wind if you will from FX, we probably now have a little bit of that shifting and we are giving constant currency. So currency does affect us and that can be a giveth and taketh away. So I just say currency we have taken that off the table. It is constant. In term of my own approach, again I started with customers, I think just a couple of war stories. I have been on board an hour and a half and Jim came into my office and said we have a large customer downstairs I would like you to meet them, so on my first day I spent two hours with a large customer. And I spent a good part of the week with our sales team. I met 1100 new friends and drilled into a lot of the accounts. So I feel very good about the market and the customer perspectives and some of the sales teams. So I think the sales teams are excited. So that feels good.

I think the areas we need to work on is profitability and profit planning across the business, and that relates to product line profitability, segment profitability, and not in an accounting sense but in the way we look at our business. Regional profitability so start measuring there, and another one that, Sterling, is near and dear to my heart is cash and cash flow. We have I think a very strong cash position and a great cash flow story and I think we can do better. So I would expect at the end of first quarter we should be able to and I should be able to give you a much crisper view of both the future in terms of margin expansion as well as cash and cash flow.

Great. Sterling, it is Jim, just to follow on a little bit here, I had ample opportunity to interview Jeff and talk philosophy and everything else. It is actually refreshing when you hire someone because you spend time on quality topics that when you get busy, you don't talk about again for a while. But you've all heard me, I hope by this time, talk about my mantra of growth, leadership, efficiency, and predictability. We want to grow, we want to be a growth company, we think that we can and need and want to be a leader, not just a player but a leader. On the backs of growth and leadership we can drive huge amounts of efficiency, healthy, natural efficiency that translates into operating margin expansion, and then we want to be predictable and have a good solid grasp of where our business is and where it is going so none of us are surprised. So I look at it and say as the CEO I will go on growth and leadership. That's what I do. I am a vision guy, a customer guy, a strategy guy, and I went out and looked for a CFO who could really own efficiency and predictability. And that's sort of the partnership I have with Jeff. Let me cover the front half, you cover the back half, we'll meet in the middle and really build a great company, and I think Jeff is the perfect guy to go do that.

I'd just add that I'm introduced as the pick of the litter or the new guy. Hopefully, I'll be the guy that delivers, Sterling.

Sounds good. Jim, on the growth idea when you look at PLM license revenue growth that you are looking for and 2011, can you give us a sense of how much of that you would expect to come from the existing Domino deals that are already signed?

I am not sure I have a good way to break that out, maybe third quarter, I don't know, clearly, if you just think about the life cycle of the deal, winning the deal a large percentage of the time is not a big license event. One way to look at it is the real potential of those 19 annuities has hardly been tapped with the exception the minority who might have given us a big license order up front. So I think we want to keep adding Dominos because they become the long range annuity and we want to keep up selling the rest of them. But I am not sure I could put that into a quantitative number for you, just be guessing.

One point I think, Barry again here, is that the Dominos not only our source of annuity and growth, we have a large and fluid base that accounts for our opportunity to grow our revenue going forward. So while we are emphasizing the Domino because of its market share implications, we don't want anybody to forget we have a large SAM account program that produces a lot of revenue and will be part of the annuity program going forward.

Okay. Then last question, you touched upon it a bit in terms of the core CAD market and the 6% growth, but I am wondering qualitatively, how much you have heard from customers now that Unigraphics has been part of Siemens for a while now, and looking at the dynamics of investment in especially the mid to high end CAD, is there an opportunity that you are hearing from customers that maybe there is a potential upgrade or replacement cycle that might be in front of you?

Let me first say that in the CAD industry, if you take the naysayers view and view it as a mature industry, one of the things you conclude is that the switching costs are so high that it is very difficult for customers who become disenfranchised to switch anyway. Therefore it is very difficult to steal them and it is very difficult to lose them. One of the biggest most exciting break throughs I think we will talk to you about tomorrow is we think we have broken the back of the switching costs equation. We think we are going produce a product here that is very compelling and relatively easy to switch to. I think it is not necessarily going to be easier to switch from because the other products won't have this characteristic that ours has that's special. We will try to elaborate on that in some detail tomorrow, but if this works as we think it will then we will have CAD Dominos and I certainly don't want to forecast that yet and I would reiterate our whole thought about 20% earnings growth doesn't really require that, but if we are able to deliver on this initiative in a growing market and start taking share on top of that, it is going to be a very exciting time.

All right. Great. Thank you, guys.

Do we have time for one more question? Thank you. Yun Kim with Gleacher.

Thank you. First welcome aboard Jeff and also to Jim with the new CEO.

Thanks.

Thank you.

On Project Lightning, how important is your current network for retailers for this new product offering? Do you feel you need to make considerable investments into the expansion and training for the new product launch or are you going to be more focused on selling the products through your direct sales force initially?

No I think that, the resellers are very important, and they're very excited by the way. We have given them a preview at the sales and reseller kick off the week before last. So they're very important. And I think that if you go back to the four box we would characterize the reseller CAD business as a growth market. And we think this is going to help us significantly in that market because I talked earlier about switching costs. The real fundamental biggest break through is usability and that battle is all about usability and ease of use. So our resellers are pretty excited about that. Now, our resellers have a certain amount of coverage and I think within that coverage they will do well with this Lightning strategy. If Lightning becomes a strategy that can start actually switching accounts, then we will need more coverage. But I think that's a story that will play out over some period of time and we will have ample time to react to it. If we have to go recruit more resellers because we now have an opportunity to display SolidWorks or other desk accounts, that would be a very good problem to have and we will cross that bridge when we get to it.

Okay. Great. Then Barry, I want to make sure with guidance for fiscal year 2011 business, has there been a change, because I thought initially maybe you were looking at growing that business in the mid-teens for the year but it looks like you guided for 10% growth. Is there something that I am his missing or I just missed something here?

You want to take that, Jeff.

On the services business I think we feel good about the growth in that. I will say one thing we will focus on is efficiency and productivity in that, but the view currently is that's a very important piece of the puzzle, particularly as we deploy and basically deploy the new products and technologies. We feel good about the opportunity for growth there and I will say there's an opportunity for efficiency and productivity as well, and we will address all of those.

And I think that the view really for service business is greater than 12% growth going forward after 2011, and that the 2011 looks like about 10% to 12%, so we are guiding a little conservative on the 10% but we expect that to be a solid double digit growth.

Okay. Great. And then, lastly, Barry obviously with the business booming here, with a lot of these large scale deployments associated with Domino accounts happening, can you just talk about whether you are getting more and more interest from large system integrators and can you talk about the overall status of your SI partnerships equisystem?

Yes. I can take that or Jim can but we are seeing a lot more interest from the SIs and we are targeting more and more accounts together than we ever did before. We will expect that that kind of partnership in the equisystem will grow in 2011 and beyond and yes, more interest and more partnering activity going on with is SIs.

Okay. So we are out of time. Thanks a lot. A lot of good questions sort of in summary, it feels like we had a great fourth quarter that capped off what in retrospect was a really great fiscal 2010, especially given our thoughts when we started the year versus where it actually ended. And it feels like we are in a pretty interesting situation right now where we have most things working and a lot of momentum as we go into next year, raised our guidance a little bit to reflect that, but confident that we could have a pretty good year in fiscal 2011. That might be the first of many that would follow. So just in closing I invite you to all tune in tomorrow, to the virtual launch of our Lightning strategy and then, of course, hopefully we will get you live and in person next year at our investor day at the NASDAQ site in New York. Okay? All right. Thanks a lot, everybody.

This concludes today's conference call. Thank you for attending. You may disconnect at this time.