PTC Inc (PTC) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's fourth fiscal year 2011 results conference call. After brief comments by management we will go directly into the question and answer session. As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce Tim Fox, PTC's Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us on our Q4 results and outlook call.

Before we get started, I would like remind everybody that 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 current assumptions of PTC's management and are subject to risks and uncertainties that could cause events and results to differ materially.

Information concerning these risks and uncertainties is contained in PTC's most recent Form 10-K and Form 10-Q on file with the SEC. All financial measures in this presentation are non-GAAP financial measures. Reconciliation between the non-GAAP measures and the comparable GAAP measures is located in our prepared remarks document on the Investor Relations page of our website at www.ptc.com.

With us today we Jim Heppelmann, Jeff Glidden, and Barry Cohen. I will turn the call over to Jim.

All right. Thank you, Tim. Good morning, everybody.

I'm pleased to report that Q4 was a solid quarter, with strong results really across the board. Quarterly revenue was a record high for PTC, up 27% year over year, while operating profit was up 62% from what was a relatively strong Q4 last year. We posted solid growth across our license, maintenance and services lines of business. We delivered in the quarter a good balance of desktop and enterprise growth, and we believe that the improvement we've seen in our enterprise growth rates, starting back in Q3 and continuing now into Q4, reflects the effects of our effort to ramp sales capacity, as we've been discussing.

We won three new domino accounts in Q4, and with that we succeeded in reaching our goal of 30 for the year. Additionally, there were a couple of substantial deals that we were pursuing in Q4 that were completed actually in Q1, so we're off to a good start here already in fiscal year 2012.

We posted a good overall year in FY 2011, with momentum in growth rates increasing throughout the year, and leading to an all time annual record revenue growth rate -- or revenue level for PTC of $1.17 billion.

On the earnings front, our non-GAAP EPS growth rate of 26% topped last year's 25% EPS growth, meaning that we've now exceeded our 20% EPS growth goal for a second year in a row, andwe've moved a bit further ahead as the pace required to hit our $2 per share EPS target in 2014.

There were some other important transformations that happened in FY 2011 that have set us up well over FY 12 and beyond. First, the new leadership team is in place and working well together. As you know, over the last two years, we put in place a new CEO, a new CFO, and new EVPs heading up sales, services, R&D and marketing organizations. In that same time frame we've restructured the Board of Directors, and brought in four new members that have significant enterprise software experience, and combined them with some of the previous talent that we retained from the manufacturing industry and from academia. So the new Board is functioning well, and they have a laser focus on increasing shareholder value.

In FY 2011 we launched a new generation CAD offering called Creo, and that product went on to see growth that far exceeded our expectations at the beginning of the year. While much of that growth can be attributed to a better economy and a rebound in cash spending levels, we believe that at steady state this new technology will add three to five points to the low single digit growth rates that we had been forecasting a few years ago prior to the advent of Creo.

In the product life cycle management, or PLM, arena we launched Windchill 10, which was a very significant major new release of what has become our flagship offering. Windchill 10 is a product that customers find to be very compelling due to both substantial improvements in ease of use and adoption, as well as a lot of new capabilities like product analytics and quality lifecycle manage.

On a related note I'm pleased to report Hyundai/Kia implementation is going well, and we're on track to complete phase I of the HKMC enterprise PLM initiative by calendar year-end.

We had a big year in retail and consumer industry, with important new wins at customers like Sears, Ralph Lauren, [Espree], Dicks Sporting Goods, Tommy Bahama, and a long list of other major retailer. These customers have turned to PTC for help in optimizing product development across very distributed global supply chains. The retail vertical continues to be a strong growth driver for PTC, and we think the supply chain optimization solutions that we've pioneered for these retail customers represent an incremental growth opportunity for PTC in the coming years, as we introduce the same capability back into some of our traditional verticals, like electronics, industrial, aerospace and automotive, who also have globally supply chains helping with product development.

On corporate development front, in 2011 we made a sizeable acquisition in MKS, which opened up an entirely new growth opportunity for PTC in helping our customers to develop the software that goes into or alongside the manufactured products. We typically refer to this type of software as embedded software. This is a hot topic amongst our customers right now due to the trends in the product development industry toward more electronics and software.

And the Integrity product is recognized as the leader in this embedded segment of the application lifecycle management, or ALM, market. The embedded segment is clearly our focus area, and it's where some of the strongest growth in the ALM market is coming from. The integration of MKS is proceeding smoothly, and you probably noted that we had strong results from our first full quarter of Integrity sales in Q4.

So to add to, that late in the year we acquired a company called 4CS, which is not large but has significant strategic value as it helps us to continue to transform our ArborText story from a very tactical technical publishing capability we acquired back in 2005 into what's becoming a very strategy service life cycle management for SLM offering. SLM, which is a market segment covered by industry analysts, represents another new market segment for PTC and significantly increases the opportunity size for our ArborText offering.

Incidentally, the service information system implementation at Caterpillar that many you are aware of is going very well, and we received a substantial follow on order in Q4 to fund the next phase of this deployment.

So in summary, we continue to have strong prospects for growth in PLM, we really upgraded our growth products in CAD with the introduction of Creo, we see our supply chain or SCM opportunity developing nicely, we've acquired our way into the new growth opportunity in the ALM, and we've transformed ArborText into a stronger growth opportunity by expanding into SLM. So with all that opportunity, we feel our long term growth prospects are stronger than ever.

So having accomplished all of that transformation I mentioned, while at the same time delivering a solid year of 26% EPS growth on the back of a 16% revenue growth, I'd like to take a second to thank the new leadership team and as well the new Board for their hard work and dedication throughout the year. We're all pleased to be able to put FY 2011 into the win column and turn our full attention to FY 2012.

Looking forward then, we're providing a relatively strong growth outlook for FY 2012 that is based on a current pipeline and forecast data. At first glance it might seem too strong. Keep in mind, however, that the 2012 guidance of mid teens overall revenue growth on the back of 20% license growth includes a full year of revenue contribution from the MKS acquisition, plus a secondary contribution from the 4CS acquisition.

We assumed an organic contribution of low to mid teens license growth that's consistent with last year's actual. Because of the acquired revenue and the fact in 2012 we will have significantly more sales capacity, the overall license growth target feels more conservative than the headline number might otherwise suggest. So overall we're moderating our organic revenue growth aspirations somewhat in FY 2012 by intentionally dialing back our services growth targets.

Obviously, as you know, we want to expand our operating margins, and it's clear to us that continuing to have services growth rates like we've experienced in FY 2011 isn't really the right way to get there. So in FY 2012, we plan to hold our organic services growth rate to high single digits. To do that, we will be relying more on partners like [Accenture] and others, and at the same time we're going to redouble our focus on driving solutions that fundamentally require less services.

Of course, the acquire revenue streams of MKS and 4CS will add a nonorganic contribution to our services growth, but I think that inclusive of that contribution we will have a services growth in the low to mid teens, which is roughly half the rate of fiscal year 2011 and a rate that helps drive a more profitable revenue mix.

We also plan an incremental improvements in our services net margins, which we expect to be in the high single digits in FY 2012. This will provide additional support towards expanded profitability. So with a mid teens overall revenue growth comprised of a more profitable mix than last year, our goal of 20% earnings growth feels realistic for FY 2012.

So naturally, this guidance assumes a relatively stable economic environment. We're fully aware of and fully mindful of all of the concerns about the economy. We see the headlines every day, but feel that we should rely more on the forecast and pipeline information that we have at our disposal, even if this data doesn't completely correlate. We're going into FY 2012 with a good head start, a plan that delivers solid growth in the year.

But at the same time, we're going to keep our ear to the ground, and we've prepared contingency plans in case we see signs of the economy softening in a way that's impactful to us. For example, while we remain full speed ahead on hiring related to sales capacity, we've already begun to moderate other forms of spending and hiring. So with our -- the effect of that by the way showed what in our Q4 EPS results. So with our contingency planning, we feel that we're in a position to dial back spending and hold 20% earnings growth, even on softer revenue growth than we're currently forecasting.

Of course if the economic environment were to weaken drastically, it would become increasingly difficult and then even impossible at some point to hold the 20% earnings target, but we don't really foresee that happening at this point. On the other hand, if the economy does not soften substantially, we could be in a position to deliver some earnings outside based on the spending and hiring restrictions we put in place. So when you balance those upside and down sides scenarios together, it seems appropriate to stick with our middle of the guidance range of 20% earnings growth on the backs of 14% to 15% revenue growth for fiscal year 2012.

So finally, I want to bring your attention an investor relations day that we planning to host in New York on February 7 of 2012. We plan to use this forum, which will follow our Q1 earnings call, to provide an update on our FY 2012 views, to discuss our market position and our opportunity in the CAD, PLM, ALM, SCM, and SLM segments where we do business, and to provide an updated perspective on longer term revenue and earnings goals. Tim Fox, the head of Investor Relations, will supply you with more information about the specifics of this event as we get closer to it, but for now I simply ask you to mark the date on your calendars.

And with that, I'll turn it over to Jeff Glidden, our Chief Financial Officer

Thank you, Jim. I'll make few additional comments on the quarter and then summarize our guidance for Q1 and FY 2012.

As Jim cited, total Q4 non-GAAP revenue of $341 million was up 20% -- 27% year over year, driven by 19% year over year PTC organic revenue growth, coupled with $23 million in revenue from our MKS and 4CS acquisitions. Q4 non-GAAP operating profit increased by 62% year over year to $77.5 million, and EPS [links] to $0.47 per share.

Higher than anticipated tax rate and other expense items negatively impacted our reported Q4 EPS by approximately $0.02 per share, while our Integrity business contributed positively, adding $0.01 per share to our non-GAAP EPS in the quarter.

Clearly, a highlight of the past year has been our focus on driving higher profit margins while investing to capitalize on the long term growth opportunity. In Q4 2011 our non-GAAP operating margin increased to 22.7%, up from 17.8% in Q4 of 2010. And for the full year FY 2011 we have expanded operating margins from 15.6% to 17.7%.

This 210 basis points improvement results from increased sales and R&D productivity. While we have increased our R&D spend to $203 million in the FY 2011, we've also realized significant operating leverage, as these new products have been delivered to market such that our R&D expense as a percent of revenue has declined from 19% in the prior year to 17.3% in FY 2011. And we've realized increased sales productivity as our sales and marketing spend has declined from 30.1% to 29.2% in the same time frame.

On the balance sheet, we ended the quarter with $168 million in cash. During the quarter, we repurchased $15 million of PTC stock. We completed the acquisition of 4CS for $15 million. We purchased capital equipment of $10 million and paid down $50 million on our line of credit. In addition, we've renegotiated a revolving credit agreement with our banks to extend this agreement through August of 2016 and at more favorable rates.

Turning to our outlook for Q1 and FY 2012. As Jim cited, we ended the year face ago very uncertain global economy. We're continuing to add sales capacity and at the same time we're being very disciplined with our broader spending and staffing plans. A key goal for FY 2012 is to drive at least one percentage point improvement in operating margins. We expect approximately half of this gain to come from higher gross margins and the balance from leverage and operating expenses. Our longer term goal is to drive non-GAAP operating margins to 20% to 22% by 2014.

As noted previously, approximately 25% of our business is transacted in euros, and changes in FX will impact our reported results. Our guidance for the first quarter and for FY 2012 assumes $1.40 USdollars to the euro. This rate compares to $1.45 US to euro in our Q3 guidance, and this change would have the effect of reducing our expected FY 2012 reported revenue by some $15 million.

For Q1 we expect non-GAAP revenue of $305 million to $320 million, and EPS of $0.28 to $0.32 per share. While we're off to a good start in the new year, we have broadened our guidance range for the quarter to reflect the present level of macro economic uncertainty.

For the fiscal year 2012, we are raising our non-GAAP revenue guidance from $1.32 billion to a range of $1.33 billion to $1.34 billion. And we expect our non-GAAP EPS to be $1.48 to $1.52 per share.

We expect our full year 2012 non-GAAP tax rate to be approximately 24%. We plan to purchase approximately $50 million of PTC's stock during the year. We also expect stock-based compensation to be approximately $51 million or 3.8% of revenue for 2012, and we expect our longer term stock based compensation to trend towards 3% of revenue.

In summary, we are very pleased with our financial results and progress in 2011, and we're off to a very good start in FY 2012. Thank you for joining us, and we'll now open up the call to your questions.

Operator, questions please?

Yes, sir. Our first question comes from Yun Kim with ThinkEquity. Your line is open.

Thank you. Congratulations on a strong quarter, Jim. You mentioned you are directing more business to system integrators this year. Can you just tell us how you are achieving this and whether there will be additional investments that you have to make to ramp up the SI channel? Are you expecting Accenture to be your biggest SI partner this year? And then also where are they in terms of the resources today, and do they have specific plan to increase their resource this year or is it more contingent on the amount of business you bring to them?Thanks.

Yes. Well, Yun, good morning firstof all. That's a series of questions, and hopefully I'll capture all of them in my answer here.

I think it starts a little bit with a philosophy and an attitude and a compensation program thatisn't designed to maximize the revenue. So in the past, we've had a compensation program that paid our services guys on operating margin dollars, which meant the more revenue they brought in, even if it was that margins that maybe we don't like, the more revenue they brought in, the more compensation they could earn. So we're changing that immediately, or have already changed it to really an operating margin percentage, which we're saying we want more profitable revenue, not necessarily more of it, but more profit in the revenue.

And then we have, in fact, invested quite a bit now in a partner program infrastructure that's ready to kind of help transition some of the incremental opportunity for services to our partners. We've had a partner program in the past. I think we're just going to get much more serious about it in FY 2012. That does cost some money, but that's all baked into our plans and assumptions already.

And then with respect to the actual partners, Accenture I would say is emerging as our strongest partner right now, but certainly we have other strong partners and sometimes on a geographic basis it might not be Accenture at all, or perhaps on an industry basis. But I think we're certainly starting to get a lot of momentum and a lot of projects with Accenture and feel like it's capturing their attention as well, and they're starting to double down on their side of the investment as well.

I have one more point. This is Barry. Just as our service organization itself is being [goaled] on partner economy, so they're invested growing that service economy, which is a very important change for us going to 2012.

Okay. Great. Thank you so much. And then just in terms of the visibility that you have into this -- going to this year, can you share with us any metric regarding the visibility that you have [at this year] on large deals? I think last year you told us you had 79 annuity customers who spent at least $2 million in revenue, representing 44% total revenue. I'm wondering where that particular metric is tracking for fiscal year 2011 and where do you expect that to trend this year?

Yun, this is Jim. I'll take it a first stab at that, and then Jeff can add. One of the metrics I like is the amount of revenue we continue to get from these domino wins. Keep in mind that domino wins by definition are competitive take-aways. There's also a series of just good healthy in-the-family accounts that look exactly the same, other than being competitive take-aways.

So what we're starting to see is relationships that are really very annuitous to PTC, and we're starting to feel the large portfolio of them. That's really where we want to take that -- the focus of the attention next year, from dominos to and annuities, because we want to show you the whole portfolio, how many accounts are in that portfolio, and how many of those accounts are doing a lot of business with us now year in and year out.

And so that's what I like is that we're building up a steady kind of bedrock of big accounts doing a lot of business with us every year as we're on a journey of continuous improvement in the product development processes.

I would just add, Yun, that this -- in the prepared remarks we cited 103 large transactions in the year. That's up from 70 a year ago. Very significant growth there, representing $248 million in revenue. Better than 85% of our revenue in any given year comes from our existing customer base, so that's a very -- gives us good visibility, good understanding. And I think the expansion of the sales team is giving us better coverage of those accounts as well as penetration into new accounts. So I think the visibility in programs are improving, and we feel pretty good about that.

Okay. Great. And one last question for Jeff. Cost of license. You saw big sequential bump in the quarter. What's going on there, and is this a new baseline going forward? Thanks.

Our margins on license have traditionally been in the mid to upper 90s, and so we would expect that would continue as we go forward. So I feel very comfortable with the margin and the mix as we cited before. So I'm not sure I have any specific comment on the quarter other than to say it's always been consistently in the upper -- mid to upper 90s

Okay. Great. Thank you.

Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Good morning, thanks for taking my call. And very nice quarter. It's really nice to see the strong results really across all lines of business. I guess MKS had a very nice quarter here out of the gate here, and I guess one of the things we liked about that transaction was the ability to cross up sell. It's still early I imagine, but is there any -- do you have any anecdotal evidence that MKS brought you guys into certain deals or vice versa?

Yes. Jim here, Matt. Good morning. Let me say right now I think that the ability to cross and up shell is greater than we anticipated it to be. In fact, we have to push back a little bit on some of the efforts to do so, because we don't yet have the infrastructure in MKS to engage MKS in all the PTC accounts where the sales guys want to pull them in today. So it looks very promising, and I think that this acquisition over time is going to prove to be an extremely good move on PTC's part based on the anecdotal evidence we see of revenue synergy at this point.

That's great. And then in terms of global results, obviously you guys had a very strong results, essentially across all geographies. With the 26% currency growth in Europe, what changed there?Was it execution on your part, or how do you kind of account for the strength there?

Matt, this is Jeff. Europe has been a very significant market for us, and I think traditionally it's been about 38% of revenue. For this year it was 40%. We're very much focused in Central Europe, Northern Europe, and have just a very large install base, particularly in the industrial sector, which has been very strong for us. So I think it's been very, very good execution by the team in Europe. I think we have a great base of customers, and we just continued to both expand with those customers and add new customers. So would I say probably good opportunity and good execution by our team.

Yes, maybe just add a little color to that. I think in the Scandinavia area, we've had some incredible competitive wins in the last few years. Really kind of cleaning up competitively. And that's translated into a lot of annuity accounts and a lot of revenue that we just didn't have a few years ago.

And I think, if you go back to Germany, the midsized and larger German industrial companies, the German automotive suppliers and so forth. I mean, we've just had fantastic business with them. And I think they're doing well. We all hear about the bad economy in Europe, but I don't think the German industrial companies are doing poorly at this point.

Great. And then one last question for Jeff in terms of the license guides. I think you guys did a good job of really differentiating the organic and inorganic license targets to get to the 20% for full year. I think you also indicated that your guidance now assumes a pretty stable economic environment, yet the Q1 range is pretty wide between 6% and 26%. What -- I mean, canwe assume the 6% is at things getting significantly worse, and 26% things getting materially better, and a midpoint of 16% is a stable economic environment.

I think that's reasonable. I think there's more upside based on activity. We were just, honestly, being very cautious as we were putting our notes together. The level of uncertainty, we felt was prudent to broaden that range. Clearly we're driving towards the -- from the mid to the upper end of that range, and that's the visibility we have.

But as you know and we can anticipate, there could be a few deals that, we get to the end of December, that push into January. So it's really just that caution. I think the overall activity is very, very good, and we feel very confident in the year. A little bit of caution on the Q1 numbers.

Great. Thanks guys, and congratulations on a great quart.

Thanks, Matt.

Our next question comes from Richard Davis with Canaccord. Your line is open.

Thanks very much. So the mid and high end CAD -- a two kind of part question -- but mid and high end CAD hasn't been a growth business for a decade. So what I'm trying to figure out is all that was -- with all that is needed is kind of integration of 2D history free CAD and into ProE and then rebranding the product, and then that created a tipping point? Or are we seeing kind of pent-up demand from underserved accounts that, frankly were using other vendors that weren't investing as much as they should?And then if so, how do you gauge -- what's the evidence that you have that this is more than just a -- the burst of growth that will last more than a few quarters. BecauseI think that's a question that people, including myself, are trying to noodle over.

Yes. Richard, it's Jim here. Thank you, and good morning to you as well.

I think it's really kind of a balanced combination of those two factors. I think definitely there was a situation, if you go back to 2008, 2009, where our customers were questioning our commitment to the CAD business. And maybe some of them were not making investments with PTC because they weren't sure if PTC would be their vendor five and ten years down the road. So I think that, plus then the bad economy of 2009, caused a certain amount of pent-up demand, and then 2010 and now especially in 2011 the economy has been much stronger in the CAD sector.

And I think that our customers -- I mean it's just fun to go to customer meetings right now and talk about CAD, because they are blown Q&A by Creo. Just -- it's just emanating vision and leadership and so forth. And so people who maybe question whether or not this Company was going to be in the CAD business long term are back to questioning whether we're going to regain leadership of CAD business in the long term, because we have a really exciting product. So I think they're going back to buying things that maybe they had tabled for a while.

And then we bring in the second factor, which is we have so much new stuff to sell them. So what I've been telling me is I think that the factor of the economy and the pent-up demand will play itself out at some point, and then we're going to switch to the factor, which is we've got a lot of new stuff to sell. And keep in mind we have a massive customer base here. So we have a lot of new modules and new capabilities, the whole direct modeling, flexible modeling type stuff you mentioned. And we have 27,000 companies to go sell that to. And if we sell each one of those 27,000 even a little bit of this new stuff, it produces very big numbers.

So I think -- I view it that the economy thing will play out, and the real factor -- the Creo real factor is just getting started, and that will carry on for a number of years now.

Got it. And then the quick tactical question, and then I'll bounce out. On the maintenance guidance you guys have, if you kind of annualized your maintenance guidance at 155, gets to you a full year already, and I'm unclear. So if that's true, but you're also signing all sorts of big license deals, why wouldn't that show up in a maintenance increase in terms of why wouldn't that number grow faster than just kind after straight line? Or is that just being conservative.

So, Richard, there's a lag effect. That's probably the number one thing. So as we sign new deals, they beget maintenance revenue streams in subsequent quarters and subsequent years. So I think we feel very, very positive about all the metrics, both tax rates, retention rates and so forth, and I think our modeling would suggest that there's a reasonable growth that we put in there. Again, it's off a large install base, and I just remind everyone that we really blew away that number this year.

And so there will be a lag effect, which means in 2013 we see another significant and attractive increase in maintenance as we close out the -- close all of the new business that we expect to in 2012. So it will be a continuing sustainable growth revenue stream for us.

Got it. That makes sense. Thanks.

Our next question comes from Ben Roads with -- excuse me, Ben rose with Battle Road Research. Your line is open.

Good morning, Jim and Jeff. A couple questions. Now that the HKMC first phase is coming to a close, Jim, could you talk a little bit about your expectations for next year as it pertains to license sales, perhaps to HKMC? And the second question is for the supply chain optimization that you -- the product you've been selling in the retail industry, who are you encountering there in terms of competition?

Yes. Okay,those are good questions, Ben. Thank you and good morning.

So with each HKMC we are wrapping up this first phase, and it's gone as well or quite frankly better than I would have expected given the complexity versus the time frame we had to execute in. So things are in good shape there. That means there will be a second phase.

I don't necessarily want to tell you what the negotiations are at the moment with HKMC,but what I will tell you is we're not going to lose money on the second phase. That this is going to be a project that's not an investment, but hopefully reaping the rewards of the investment we made in Q1 of FY 2011. So I think there will be a significant license component to it. It will undoubtedly be a significant services component as well, but that will be fully funded and the transaction all in will be a pretty positive looking transaction.

On the second question about supply chain optimization, who are we competing with, this is probably the newest sector of PLM. You wouldn't find many retail companies using PLM five years ago. And what happened is all of the PLM vendors sort of jumped into it at the same time. It started really with -- this kind of supply chain stuff should be done by ERP companies perhaps, but they just missed the boat completely, because it's too much churn, it's too dynamic, too many suppliers, too many changes, too fast. And so I think the ERP and traditional supply chain vendors basically don't have a solution here.

So PLM was sort of forced into this -- forced into duty, if you will, solving this problem. And what happened is all three of -- PTC, Siemens and Deso -- jumped into this. I would say at this point, in our view Siemens has nearly exited the business. They had a couple wins and -- the most notable of which have switched over to us at this point -- and our win rate against Deso is sky high -- arout almost -- in this particular sector. It's a little harder in other sectors.

But I would say the most competitive sector PTC is in right now is the supply chain. I mean, the place we have the strongest competitive advantage is this supply chain sector and these big retail accounts, because our win rate is approaching 100%. It's not quite there, but it's very high.

Okay. Thank you.

Thanks, Ben.

Our next question comes from Blair Abernethy with Stifel Nicolaus. Your line is open.

Thanks very much. Nice quarter, guys.

Thank you.

Just looking for an update on the Windchill 10 upgrade cycles. Can you give us some sense of where that is, or how that's being received in the base? How quickly you think that's going to disburse. And then also on your three domino wins this quarter, were those PLM or CAD, and just color on whether they were displacements or not.

Okay. On the second question, of the domino wins, all three of those were PLM wins.

On the first question of Windchill 10 and adoption rate and so forth, I'd say that Windchill 10 is doing well. Right now we have a very large body of upgrades happening within our customer base that we're involved in. Like double what we had been in the prior six-month period. So I think what happened is customers upgrade on a regular basis, but in anticipation of Windchill 10 some people held off a little bit, and now there's a huge waive of upgrades moving through the system. So I think the feed back has really been phenomenal.

One of the things we did -- and I don't mean to go technical on you here as the former CTO -- but we adopted this agile or scrum development method a couple years ago. And in that method, you involve a lot of customers in the R&D process. So in this particular case, 50 to 60 customers actually touched the code while it was under development and gave us their feedback and so forth. And so when Windchill 10 came out with this new user I interface, it was more or less perfect. In fact, there was a customer that told me the other day it was like Christmas. I got just -- I looked under the tree and I got just what I wanted.

So I think that was a good situation, and I think the customers are excited, and there's a big wave of upgrades, and it's starting to show in the competitive work that we're doing.

Okay. Great. Thank you.

Our next question comes from Jay Vleeschhouwer with Griffin Securities. Your line is open.

Thanks. Good morning. I'd like to ask first a two-part question actually about maintenance. First, in Q4 you had an unusually large increase in enterprise (inaudible -- gap in call) and year over year, and I'm wondering if you can break down the components of that in terms of the (inaudible -- gap in call) from previous quarters, any reason statements you may have done in Q4, or even pricing?

So that's the first part. And then secondly, as the impact of annuity accounts and large deals grow, what do you think that might mean, if anything, for maintenance seasonality?The reason I ask is when you look at one of your larger peer's maintenance business, they have very pronounced seasonality in Q4, then it drops off in Q1 --

Jay, we may have lost you. We can't hear.

Can you hear me now?

Yes, butto be honest, you dropped out about three times while you were talking, so -- Can I answer the second question?We might need you to restate the first one just because some critical parts of your question disappeared on us.

Sorry.

On the second question, I know what you're referring to, which is one of our competitors have quite a sawtooth in their maintenance. And I don't really understand that myself, Jay, because of course for us all of this maintenance is recognized ratably. So independent of when you land the renewable or the contract, it just all then gets spread out over a long period of time, which actually makes it very difficult to have big spikes in value. So I don't foresee us having a lot of seasonality other than consistent with what we had in the past, which is minor seasonality compared to the company you're talking about.

So I don't see that happening. Look at -- back in 2009 in the depths of the depressionour maintenance slowed down from mid single digits to kind of flat, and then it picked back up again. I mean we just didn't have big spikes. This particular company you're talking about has it going up 10 and 15 -- up and down 10% and 15%, and I can't actually understand how that works myself.

Okay. And let me repeat the first question. Sorry I broke up. In Q4 you had an unusually large increase in enterprise maintenance revenues, both sequentially and year over year. And I'm wondering if you could break that down in terms of previous quarters license volume flowing now into maintenance, reinstatements, pricing, anything of that kind?

Jay, this is Jeff. So a couple things. We have very good metrics all year. Again, reiterating attach rates, renewal rates, et cetera. We had programs that we capture seats as well, where people may have been off maintenance. I think all of those may have been successful.

The impact in Q4 is continued organic growth. We posted year over year 24% growth in maintenance. 16% of that was organic. The other 8% came from the acquisitions, particularly MKS. They have a large install base, a good install base, and so that was really the differential between -- in Q3 we were up 17%, a very small impact of MKS. Organically 16% in Q4, plus MKS. The nice thing is now that rolls forward, creating a new base for us going into 2012.

Yes, Jay,I think that another take on your question is probably the biggest reason for that spike was acquired maintenance. A secondary reason is probably some currency impact.

But the fundamental strength in maintenance is constant currency organic maintenance growth. And what's really interesting is some of the policy changes we make four, even five quarters ago produced a gift that keeps on giving. Because if we negotiated, let's say back in Q2, a renewal at much better rates, or if we took a new deal at much better rates than we might have previously, because we take all of that revenue ratably, it continues to have a positive impact in all the quarters going forward as well. So I think there's a snowballing as well of all the positive impact of prior policy changes in the portfolio of maintenance -- let's say customers or maintenance accounts -- renewing into these better terms and policies that we now have in place.

And I think as you'll see, Jay, just adding a couple other comments, is that the Windchill seat counts have gone way up, and they'veprogressed all year. That's really reflective of the revenue and implementations that began well over a year ago now flowing through as active seats and being now under maintenance. So I just think the team has done a great job, and we'll continue to look for them to continue to drive those metrics and drive those numbers.

Okay. Just two follow-ups, if I may. When you think about your large deal pipeline in geographic terms, what are your thoughts about Europe for fiscal 2012?The reason I ask is that the majority of the increase in large deal transactions in fiscal 2011 were in Europe. You had some increase in Asia and a couple in America, butthe bulk of it was in Europe, particularly in the second half.

And then lastly, for Jim, what are your thoughts about your opportunities, particularly at the automotive OEM level. There would seem to be some ferment, let's say, in terms of what's going on with the larger car companies, and what they're thinking about in terms of PLM infrastructure. So what are your thoughts in terms of being able to win additional business there, particularly in competition with Siemens?

I'll take the second question first, and then, Jeff, you can circle back to the first one.

I do think you correctly identified that there's a wave of change threatening to happen in the automotive industry. And I think that Deso stands to probably give up some share, ifI had to read the tea leaves, and I think you might agree with me on that. And I think PTC and Siemens stand to gain some share.

Now, I'll tell you Siemens, as you know, is in a strong position, but PTC, with the wins at Volvo Truck and then especially the win at Hyundai, we've certainly improved our standing in that community. And as you know, people are saying it would have been easy for Hyundai, it would have been a noncontroversial decision to switch from Deso to Siemens, but instead they switched to PTC. Why is that?And as you know, the Hyundai guys view themselves as leading the next wave, not following the last one. And if others see things the way Hyundai does, then we stand to pick up a lot of market share in automotive.

I don't want to predict that yet. I'm certainly optimistic, but I'm really excited about the fact I think there's going to be a lot of change going on. And in the past, with no change there's no opportunity. And so with change there's great opportunity. It's a question of how much can we capture.

And now going back to the question on large deals. Clearly Europe was a very, very strong performance for both the year and the quarter. By the way, that activity and that pipeline has continued to build and transact as we entered FY 2012. So Europe is doing very well, and weexpect that to continue.

That said, I think our largest growth and pipeline ahead is in the US and the Americas. And we have a very good year, but we've also seen very substantive growth, particularly in high tech and electronics, along with industrial. Particularly along -- and as Jim cited, retail is another area. But I think the pipeline growth is probably most significant as we look ahead in the North American market.

Okay. Thank you.

Thanks, Jay.

Our next question comes from Steve Koenig with Longbow Research. Your line is open.

Hi, gentlemen. Thank you very much. Just I wanted to get one or two [self capital] questions out of the way, and then maybe one follow-up. I'm wondering, Jeff, can you remind us -- this deferred being down it looks like a seasonal pattern. What's behind that?

And another question on the cash flows. Even if DSOs had been more normal this quarter, the quarter maybe not quite so back end loaded, the cash flow doesn't look like it would have been great. Not growing -- it didn't grow at the level of earnings. How should we think about this going forward, and maybe what drove that?

Sure. Two things, first on deferred, it's a seasonal pattern that -- our big renewal times are really December and January, and then in the middle of the year. So if you look at our deferred and you look that historically, you'll see it builds at the end of the year and into Q1, then comes down slightly in Q2, rebuilds and at the end of Q3. Our fiscal year it will be down slightly at the end of the year, which it was. In all of that the good news is the whole business is building nicely and gives us great cash flow. So I would say we feel very good about that, and that pattern is very consistent. All the metrics look good.

In the quarter, the cash and cash flow -- basically break even in cash flow. It's really reflective of a significant increase in receivables, which is good for the future. And a piece of that example, I think we cited 4CS was added in September. There was about $5 million worth of receivables, with virtually -- a very small amount of revenue in the period, so that added about a day to DSOs.

If I look overall at our accounts receivable, we're actually in better shape than we've been in many, many years in terms of past dues and so forth. So we feel very good. We actually had very good subcash collections in the first part of the quarter. So I would say I feel very good about where we are in terms of receivables, and I think the outlook for the year -- we'll generates significant amounts of cash, we'll buy better than $50 million worth of stock, and we expect to pay down about $100 million of debt over the year. So I think the cash and cash flow position feels very good to me.

Okay. I guess if you were to add back litigation expense this is last year and adjust for DSOs, do you think cash flows will grow here at the level of earnings?

Yes -- theyshould be very close to our operating -- non-GAAP operating margin. Should be very, very close to cash flow. And to your point, yes, clearly last year we had a $52 million litigation settlement that occurred in the first quarter of last year. That was -- if you adjust for that, and again, DSOs -- to the extent we're typically right around 60 days. Adjusting for 4CS, we're at 61 days. The good news is we have got a lot of receivables. The good news is that it will all convert to cash.

Okay, great. Thanks, Jeff. And then if I may, just a little bit on the large deals, and also the services outperformance that's on Q4. Were there any $5 million to $10 million whale type deals? Were they -- and were they skewed to services? Was there any doing services work before the licenses came in, et cetera? If you could give us some color on that large deal activity and the services outperformance, that would be helpful.

Okay. So the first piece, we disclose, as you know , the large deal transaction. We had 30 large deals that transacted. The average value of those was $2.8 million. That was up slightly, but in the zone from where we traditionally had been. We're usually between $2 million and $2.5 million. So we did have a few additional larger deals. But nothing -- in terms of the average, we're very consistent.

Jim did mention we had a significant follow-on transaction with Caterpillar, so that would probably be one of the larger transactions. And we don't specifically disclose more data than that, but I'd say overall we feel pretty good about where that mix

Maybe, Steve, to be honest the Caterpillar transaction would qualify as a whale, but we only took a small piece of it in the quarter.

That's correct. That's a real good point, because that is an annuitystream we'll see over the next quarters and years that will continue to return to us.

On the services side, a lot of services growth has been as we discussed earlier, the implementations of Windchill from transactions and sales of both 2010 and the early transactions in 2011, and so most of those -- we think of services as both a lagging and leading indicator. That is, after we sold the Windchill, we're into major deployments. As those deployments get completed, as we talked -- as an example, HDMC, we'd expect follow on license revenue as those are completed.

So I would say the services level of activity is high. It creates substantial value for our customers, and it's the leading indicator for the next wave of additional license sales.

Okay. That's great. Now, if you don't mind, I have got one follow-up for Jim that he might like to answer. I'm wondering, Jim, can you give us any commentary of uptake of Creo, particularly direct? And I'm just wondering is there a potential that history-free modeling could see a big adoption wave over the coming years, or are we more likely looking at something that is going to be a niche or at least a complimentary method to Parametric?

I would say personally the latter. I don't think standalone history-free modeling will take over the year. In fact, the opposite has happened in the last 15 years. The Parametric modeling has taken over the world. But I think the combination of the two make a good powerful combination.

Either one by itself leaves half the people frustrated, because Parametric modeling, if you're a power user, it is much better. On the other hand if you're a casual user, the direct modeling is better. And because at any given company half the people are power users and half are casual users, what you really want is a system that can meet both needs in a compatible way, and that's the promise of Creo. And so I think that there's a few people out there with standalone direct modelers. I just don't see them taking over the world, because they'll leave the power users very frustrated.

Great. Thanks a lot for your answers. I appreciate it.

Thanks, Steve.

Our next question comes from Sterling Auty with JPMorgan. Your line is open.

Thanks. Hi, guys. You talk about the leverage you're getting in sales capacity that -- sales area, but I'm wondering specifically, the new capacity that you brought online over the last couple of quarters, how are they ramping in particular in terms of their productivity?

Well, I think there's two sources of new capacity. One is we've unwound to certain extent overlay organizations within the Company, and taken people who were overlaying the mainstream sales force and move them into the mainstream sales force. And these people become productive quite quickly, because maybe they used to be in the mainstream sales force, so they don't have a long learning curve, they just need a different charter.

And then there's people we're hiring, and I think people we're hiring by and large haven't contributed much yet, because the learning curve there is several quarters long. So I think that the hires we started to make in Q3 and Q4 are becoming meaningful now in Q1 and Q2, and that will be the trend throughout the year, is that we're getting more and more benefit.

We are tracking a series of primarily activity metrics to make sure the people we hire are doing something, and we're encouraging them to keep setting out meetings and customer visits and all that stuff, which is an important part of the learning process. And I think there's a lot of that kind of activity happening right now.

Okay. And then on the European performance in the quarter, you happened to break out during the supplemental remarks the number of large deals. But what I'm curious about is how was the performance in Europe in terms of the direct sales versus the channel in the region? Where did you get more bang for the buck this quarter?

I think in general, Sterling, it's been on the direct side, it's been the large accounts. We're very strong and active there, and so I would say it's really our direct sales organization that has been driving that growth. And I expect with a large scale deals we're doing and the complexity, that will continue. The channel had quite a good year though (inaudible -- multiple speakers) --

They had a good year. I won't say -- but I just say the big transactions to speak specifically to that. That will be through the direct organization.

Okay. And last question, in the prepared remarks, a nice sprinkling of ArborText through there. Just want to make sure I walk away with the right interpretation. What's been the performance there, and what's your expectation for 2012?

Yes,I think one of the things we want to do at this February event is go deeper into the market segments we're in, as opposed to the product mix. Because to some extent, when we say ArborText, like the ArborText project at Caterpillar, it turns out it involves a whole lot of Windchill and a good dose of Creo as well. So what we're really saying is we should talk to you about our service lifecycle management offering, we should talk to you about the service lifecycle management segment, the competitors, the growth rate, the market share, et cetera.

And we want to -- let me say back at June at our PlanetPTC event, we unveiled that framework, and I think at this February investor event we want to take you a lot deeper in that. Because we think the SLM solution we have right now is unique and powerful, and we think there are a lot of Caterpillar-like accounts lined up behind Caterpillar. And we want to tell that story with some richness at the February investor event, but it's definitely an area where we will see a lot of growth.

I say all that because when we say ArborText today, we don't -- we actually mean something much more than that company we acquired back in 2005 now. That's the richness we want to give you in February.

Thanks, Sterling. Operator, we have time for one more question. Thanks.

Yes, sir. Our final question comes from Ross MacMillan with Jefferies. Your line is open.

Thanks a lot, and I got on a little late so I apologize. And congratulations on the quarter. Either Jim or Jeff, you obviously made a change to [called] plans last year around maintenance discounting. Is there anything that you're setting up as we go into fiscal 2012 on similar lines, anything we should be thinking about that could have implications for the model? Thanks.

Yes. First of all, thanks for joining us. And on the maintenance side, I think that's been a highlight this year. We've talked about attach rates, renewal rates, recapture has been very good, as well as discipline on pricing, and again I think that's been very strong program, and I would just anticipate that that will continue in the years ahead. And as we said earlier, that makes our maintenance business a very sustainable growth area for the business, and it's really, as we would cite earlier, as we generate new license sales, that lags quarters and months behind but builds a nice annuity stream behind it. So I would say the maintenance side is steady as she goes, continues to see that being very successful.

And think one of the changes that we've talked about in the model and for the year will be services, and just harken back to rate growth this year to implement programs, we're building up a partner ecosystem, and we would expect our portion of that to be more strategic, more high value add on many fronts. We've got a very high utilization and a talented group, and they create significant value in our customer base, but it will grow at a more slow -- a slower rate with higher margins. So as we look to 2012, we would expect slower growth on services, higher margins.

And just a reminder that our 2011 results included the impact of the HKMC deal early in the year, and that cost us about 2 percentage points on gross margins and services. So with that behind us and the programs we just described, I think we look at service as being a very significant opportunity for us this year.

Great. And just one related to maintenance, last year was a somewhat different year from a normal seasonal trend in Q2 -- fiscal Q2, when maintenance declined. Can you think forward to that this year, and help us understand how you're thinking about that fiscal Q1, Q2 transition on maintenance?

Usually Q2 is a little bit softer, but we would expect it not to be a decline, but to be at a pretty consistent level just because of the base we have. So while it is seasonally a little bit slower, I wouldn't expect to see a decline in the second quarter, but would expect it to look similar to our Q1.

One last one for you, Jeff. Just on the cash flow, I think it was asked earlier, I just wanted to be sure I got that. So you think cash flow from operations will approximate to non-GAAP operating income in fiscal 2012?

Yes. And again, that's going to adjust -- the adjustment would be working capital, or really receivables, so depending on the timing and seasonality, it could be plus or minus the change in receivables, but that's always -- our AR is very solid, very high credit, so that's the caveat on the change. But fundamentally we would be generating cash at non-GAAP operating profit

And very last one for Jim. So obviously this service lifecycle ArborText piece is starting to come to fruition. Think you got to some milestones with a big customer. There were a number of other customers, I think, on a council who are also I guess contributing to the spec and very interested in how this was evolving. How do you -- how fast do you think some of that might translate into new opportunity, new business for PMTC? Thanks.

I think that we will see a nice growth rate for ArborText here in 2012. Think it will be one of the stronger elements of growth in the Company portfolio as those other accounts come into the picture. And I think that's a run that's going to last a decade, because we're onto something that feels pretty important here, and we have a solution that's relatively unique. Not really a good competitor lined up against it, and a lot of customers in the industrial sector, in the automotive sector. Anybody who's producing things that last a while and get serviced and maintained and warranty claims and tech support calls and so forth, they're pretty interested to talk to us.

So I think it will be a growth leader here in FY 2012 in our portfolio. It's not huge yet. It's sort of medium sized, but I think it will be a growth leader, and I think it will become a substantial business for us over the next decade.

Okay, I think with that we're probably out of time, and I don't want to keep everybody longer than we need to here. Tim, I don't know if you have any final comments.

Sure, just to wrap up. As Jim mentioned, stay tuned for some more details regarding our event in February. We also want to remind everybody that PTC is going to be participating in two upcoming investor events in New York City; the RBC Software Symposium November 15 followed by UBS Global and Technology Services Conference on the 16th.

Again, thanks for joining us this morning, and we look forward to talking to you again on our Q1 earnings call.

Okay, great. We appreciate your time and your support, everybody, and look forward to see being you again in 90 days, if not sooner. Thanks.

This concludes today's conference. You may disconnect at this time.