PTC Inc (PTC) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's second quarter fiscal year 2012 result conference call. (Operator Instructions). I would now like to introduce Tim Fox, PTC's Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining us on your Q2 final results and outlook call.

Before we get started I would like to remind everyone 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 the current assumptions of PTC's management and are subject to risk and uncertainties that caused actual events and results to differ materially. Information concerning these results and uncertainties is contained in PTC's Form 8-K filed yesterday, and in our 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 and the comparable GAAP measures is located in our prepared remarks document on the Investors Relation's page of our website at www.ptc.com.

With us this morning we have Jim Heppelmann, Jeff Glidden and Barry Cohen. With that I'll turn the call over to Jim.

Thanks, Tim. Good morning and thank you all for joining us on the call this morning. In line with the comments we've previously made on the April 5 call, we at PTC we were disappointed with the overall results of Q2 2012. But at the same time we did see many important bright spots that suggests we're making good progress on our longer term initiatives.

On the revenue front, in Q2 the license short fall we experienced was confined to the large deal category of license transactions above $1 million. And of course, it was most acute in the category of mega deal license transactions above $5 million where we failed to close the large forecasted European transaction that we spoke about on the earlier call. Had we secured this deal we would have posted a decent quarter relative to our guidance range and relative to last year.

But beyond that single transaction, the large deal category in general was weaker than expected in North America where our performance came in below our forecast. Naturally we have investigated this situation in some detail, and find that the shortfall is not easily attributable to a single factor, but rather a combination of factors that are hard to characterize with a blanket statement.

There was, for example, a defense oriented deal whose funding was intercepted by another defense program. Several situations where a customer decided to take a more cautious approach and spread a large an up front purchase out over several phases and thus placed a smaller initial order than we had forecasted. And there was a sizable expansion order in a commercial customer that was interrupted by acquisition dynamics in some ways similar to the large European deal.

So please note that none of these situations directly involved competitors. In each case we do expect ultimately to secure all of this revenue.

I think in every quarter's forecast there are deals that move in and deals that move out and deals that change in size. So in Q2 we can't really attribute the results to changes in the economic situation or the competitive dynamics, but rather to poor forecasting and execution. This is something that we'll have to monitor closely in the back half of the year.

As we've mentioned we're approaching the go live date this quarter for a new CRM system and look forward to the improvements in pipeline visibility and forecasting accuracy that we expect to see from that investment and from the process changes that it will enable.

Aside from the big deal issue we've discussed there were many notable bright spots in the quarter. Our maintenance and services business both posted strong revenue results, as did our reseller channel and even our base business of smaller transactions in the direct channel.

We were pleased with the performance of the MKS Integrity acquisition and excited about new strength we're seeing in Japan, both in the quarter and in the pipeline going forward. We did secure a license transaction from a large Korean automotive OEM that serves to expand their Phase One user base, and we are continuing to work with them on Phase Two deployment plans in the incremental license expansion opportunities that surround that. So the foundation of our business remains healthy.

On the product front Q2 was a strong quarter as we delivered Creo version 2.0 which is a significant MCAD release that is likely to become a major destination for our MCAD customer base.

We also delivered significant Windchill enhancements in Windchill 10.1, including mobile platform support and integration to the Integrity ALM suite that will enable a much stronger cross-sell story going forward. Included in this release are new capabilities for quality life cycle management and important enhancements to our supply chain planning and optimization capabilities.

We also released Mathcad Prime 2.0, another major destination release for our customer base.

So together, these developments on the product front will do a lot to help us expand PTC's competitive advantage and solidify our growth opportunities going forward.

Finally, aside from the effects of the license shortfall itself, Q2 was a good quarter on the earnings front. Our earnings per share grew 15% year-over-year on relatively flat license revenue which suggests that we made substantial progress with our business model and cost structure. The services margin of 14% in the quarter is perhaps higher than we can sustain on a short-term business, but it demonstrates the great progress that has been made in this line of business. The 10% or better services margin guidance we've given for the year is roughly double our services margin performance from last year.

In Q3 looking forward now, inclusive of the European deal that's left over from Q2, we are pursuing several mega deal size license transactions. However, in light of the Q2 disappointment and some concern about ongoing risk associated with pipeline visibility and forecasting, we've removed these mega deal size transactions from the guidance range we shared for Q3. If were to close one or more of these deals we could certainly perform better than guidance, but we believe it prudent at this point to take the more conservative approach.

In summary we believe our 2015 goals remain achievable, but feel that in the short-term we need to be a bit more cautious on revenue guidance, particularly around the larger deals until we've had more time for new sales capacity to settle in place in a way the broadens our base business and reduces our dependency on these big deals. And then [parallel] until we've made more progress around the initiatives to enhance our pipeline management processes that we spoke about on the April 5 call.

So with that, I'll turn it over to Jeff Glidden to recap some of the specific financial developments in the quarter. Jeff.

Thank you, Jim. First just a few comments on our Q2 results, and then I'll discuss the outlook for Q3 and the full near.

Q2 non-GAAP revenue increased 12% year-over-year to $301.9 million. Our recent acquisitions of MKS and 4CS performed well and contributed approximately $23 million of revenue in the quarter. Q2 non-GAAP [EPS] increased 15%, as Jim cited, to $0.30 a share. Somewhat better than our preliminary estimates of $0.26 to $0.28 per share as reported on April 5, due primarily to better than expected service margins, as Jim cited, and lower sales commissions and bonus expense.

As we have discussed our Q2 license revenue of $74.8 million was up 1% year-over-year.

On a mixed basis, our CAD desk top license revenue was $40 million. While down significantly from a recent record of $49 million in Q2 of fiscal 2011, it was roughly flat sequentially from the $41 million in our first quarter of this year. Within our CAD desk top business our channel sales group both sequentially and year-over-year, our direct CAD business revenue for Q2 was lower sequentially and year-over-year reflecting both a tough year-over-year comparison and a number of direct deals that did not close in Q2 of 2012.

Our PLM enterprise license revenue of $35 million for Q2 2012 was up significantly, approximately 39% from the prior year, but lower sequentially from a very strong Q1 2012.

The highlight of the quarter was clearly cash and cash flow. Cash increased to $224 million in Q2. We paid down a revolver by $40 million and repurchased $15 million of PTC stock as planned. Cash flow from operations of $97 million reflects both excellent customer collections coupled with very good maintenance renewals in the quarter.

Turning to our outlook for Q3 and 2012 our revenue guidance for Q3 is $300 million to $315 million. In this guidance, as Jim cited, does not include any mega deals, and that again, is license revenue of greater than $5 million. We are continuing to be very disciplined on all spending plans while we continue to build our direct sales capacity. For Q3 we are expecting our operating expenses to increase sequentially from Q2 as sales commissions and bonuses will increase with revenue, and we hold our annual user conference, Planet PTC Live, in June.

For Q3 we expect our non-GAAP EPS to be $0.28 to $0.32 per share. We have a significant base of very large customers and we're working on a number of mega deal opportunities. These are a very important part of our business. In developing our full year guidance we've been conservative in considering these opportunities.

Our revenue guidance for the full year is $1.265 billion to $1.285 billion and we expect full year EPS to be in the range of $1.42 to $1.50. As Jim cited earlier, we're fully committed to delivering growth and increased profitability.

With that we'll now turn to Tonya to open up the session for Q&A. Thank you very much.

(Operator Instructions). Our first question, Matt Hedberg with RBC Capital Marketing. You may ask your question.

I think you guys did the right thing to remove the impact of the mega deals completely from Q3 and sounds like largely from full year. I guess I'm wondering, it sounds like a more cautious approach. Really have your internal close rate assumptions changed, or is it really more of a function to, like you said, create the potential for upside estimates?

Matt, it's Jim. First of all, good morning. I think definitely in Q2 in North America our close rates were not what we were expecting or perhaps what we've become accustomed to. I think whether that's just a short-term problem like SAP thought it was or perhaps indicative of a deeper issue related to the accuracy of our forecasting remains to be seen. So we're trying to be a little conservative to let that play out. But aside from the North America phenomenon, I think we were relatively pleased elsewhere with the close rates in terms of the forecast versus the actual.

On the expense side it looks like headcount, if I read this right, was reduced by about 168 for the restructuring which was a little bit less than the 185 that I think we talked about last time. I guess two questions. One, is that more of a function of timing, or did you not eliminate as many as you maybe originally assumed?

And then second, how important profitability are for you guys, and the fact that you have reiterated your fiscal 2015 targets? Can we take the fact that there wasn't further restructuring as a sign of more internal optimism this is a one-quarter bump really rather than a larger issue?

Matt, this is Jeff. In terms of what we accomplished with the restructure was really to realign the business and reduce cost, and we probably eliminated in terms of dollars a very significant number of improvement in terms of the overall profile. I think we'll also be very tight as we go forward, and we would expect our head count at the end of the year to be lower by the end of the year than it is today by roughly a similar number. Maybe another 100, 150 people over the course of the back half of the year.

So we are continuing to tighten up in all areas. I think we took the actions that we felt were appropriate then, as well as tightening up further as we go forward.

That's helpful. If I could squeeze one last one here. Capacity is obviously up nicely here, and you indicated it looks like it should grow sequentially here at least from the quarter bearing sales reps. Where do you expect that to end the year, and when should we see some productivity gains from some of these reps that you've hired the last couple quarters? Thanks.

Yes. I think year-over-year we are up about 75, 76 in terms of direct capacity. I think we'll look to add a minimum of 20 in the next quarter with a goal of trying to do more than that. Again, by the end of the year we have targets to be well over 100 adds in the year, Matt.

I think we're starting to see signs of activity and productivity. Activity has been good. Seeing productivity of the first class of those new reps. So we're monitoring that carefully, and I would say really we'll start to expect improvement in that delivery in the fourth quarter of this year and into 2013.

So a lot of what we're doing is setting up both our cost structure and our sales capacity both for the back half of the year, and in particular for 2013.

Matt, if I could, this is Jim here, just to add. I do think that our new guidance reflects more conservatism around how fast this new capacity becomes productive. Probably pushing it a little farther out than we were previously suggesting.

That's helpful. Thanks for the color.

Our next question, Blair Abernethy with Stifel Nicolaus. You may ask your question.

Thanks very much. Two things. First just, Jim, I wonder if you could fill us in on your sense on the competitive landscape? Dassault's number is out this morning, looking pretty decent across the board. Also, what are you seeing? Are you seeing any impact yet from Autodesk's cloud-based TLM offering?

I don't think we've seen any meaningful change in the competitive dynamics. We just reviewed that yesterday. I have the list of deals in front of me here that we didn't close that we had hoped to. None of those really involved changes in competitive dynamics.

I don't think we see it with respect to the Autodesk thing. I have yet to really hear a mention of that coming back from our sales force. So I think that's a lot of noise from Autodesk, but not necessarily a lot coming back from the field at this point.

Okay, fair enough. And then just turning to your PLM business, can you give us an update on the progress how some of the PLM benchmark wins are progressing in terms of getting into rollout?

I mean, I think there were a number of domino accounts that we won in the last couple of years, particularly when we were highlighting the program. That's driving the strength that you see in our services business and in our maintenance business right now. By and large those deployments are going well.

We talked about the automotive OEM in Korea where we successfully deployed the first phase and contracted for more seats for the first phase while we are simultaneously negotiating what a second phase is going to entail both services and license. So I think by and large those programs are going well, and you see that in the seats on maintenance, in the maintenance revenue growth in PLM and in the services growth. And I think the services margin suggests we're doing a pretty good job of executing these programs as well.

So I think it all looks pretty well in terms of the big accounts we've won. And I will remind you the European big deal, the mega deal that we didn't close would have been a big competitive take away and still will if we close it.

Okay. Great. Thank you.

Our next question, Sterling Auty with JPMorgan. You may ask your question.

Thanks, guys. Were you able to go back and take a look at what was the sales coverage ratio coming into the quarter, going back to the idea of the close rates?

Yes. So Sterling, obviously the close rates were lower than what we expected. We've done a fairly deep dive on that, and we would really look at it and say part of that was the maturity of the pipeline, the activity, the customers. They were very clearly customers of ours that we would expect those to close, so we would expect close rates to improve and forecasting to improve in Q3 because really just because of the scrub we did.

And then longer term we really need better visibility and data. And I think Salesforce.com and the process around that, process improvements and inspection, will give us a better view as we really implement that over the next few quarters.

And as Jim said, we'll be going live in May with that system, but we really need to put the data in. We are doing that today, and really develop the full process and data analysis that will be available with that system.

Sterling, Jim here. Just to add a few more points to that.

I do think in the quarter, and in the last few quarters we have made a number of changes. For example, we brought on a lot of new capacity particularly in North America, which means a lot of new territory assignments and so forth. That re juggling of territory assignments creates some amount of disruption as does, of course, the hiring and training process, and so forth.

So I think that is probably a factor. I don't want to say that is the only factor or the major factor, but definitely some of the changes around the restructuring, the [riff], the new capacity, the new territory assignments. This is stuff that probably added a factor to the close rates and so forth in the quarter, and it's something that we think we can work our way through to a more stable situation and get back to the close rates that we're more accustomed to.

And the readjusting of territories, et cetera, that was for some of the established people, so that's where you're seeing you could have seen some disruption? And just one follow onto the previous, have you already scrubbed the pipeline or are you scrubbing the pipeline further as it goes into the Salesforce.com?

So first of all on the coverage model, we always did cover the entire planet. It is just in come cases we covered it pretty thinly. Any time we bring in a lot of new capacity we have to find pockets to put that new capacity into, and sometimes that involves cutting an existing territory in half, or something like that. There is definitely some amount of disturbance associated with that.

With respect to scrubbing the pipeline, we've been non stop scrubbing for the full month of April for sure. We're trying to get a better set of data manually here to help us work our way through Q3, and then move that type of data discipline into Salesforce.com here in the quarter.

I think what Salesforce.com will also give us is a lot more visibility to the small- and medium-sized deals. Because when we do the manual process we tend to focus on the big deals which is important, and they move the needle a lot.

But at the end of the day where the new capacity really should be adding it's value over time here is in the small and medium sized deals first. And without a system the transaction count we are talking about is so high that manual processes are just tedious to gather the data and keep it accurate.

We certainly don't feel like we have best-in-class pipeline management forecasting processes, and we are about to go through a change to where we think we actually will have best-in-class processes. That will help us better set guidance, better manage our pipeline forecast, better understand where to make investments, better understand where to put new capacity, and so forth.

Thank you, guys.

Our next question, Harry Huang with Goldman Sachs. You may ask your question.

Hi. Thank you for taking the question. I just had a question about your China business. In the prepared remarks it declined year-over-year. Could you provide any more color on the region's performance in quarter? For example, what were the key drivers behind the softness? And then also how should we think about China being factored into the full-year outlook?

Do you want to take the first stab at that, Jeff?

Yes. So in terms of the PacRim, I think if you looked at that overall it was flat sequentially from the prior quarter. I think we're feeling reasonably good about what we're doing in the PacRim. It certainly is an area of opportunity and growth for us.

That said, the growth both for us and China has slowed a little bit, so we continue to invest there and we continue to think we have a very attractive and strong business there. But growth has slowed a bit.

I will say though, Harry, that as we've been scrubbing the pipeline, the Q3 and particularly the Q4 pipeline in China looks pretty good. I think we feel reasonably confident about the business in China and not really fearful of some meltdown that you might be afraid of.

Maybe just one other comment. We have added resource in China and we've done some reorganization. That obviously creates some change that maybe puts a little more risk in the back half of the year with change.

I think we've put some really good talent in, but they're relatively new in those roles and in those positions. As , we're addressing any of the topics and subjects that we think we need to do to make sure that we have a solid, long-term

Got you. Sounds good. Thank you.

Our next question, Yun Kim with ThinkEquity. Your line is open.

Thank you. Jim, you mentioned that some customers took a more approach and decided to sign up for smaller deals than you expected. Can you give us a little bit more detail around the situation? Are there some hesitation among customers? Are customers approaching PLM projects more cautiously and that is resulting in slower deployment? Are you seeing any sign of existing projects getting down sized, postponed or even canceled?

Yes, I'll talk to you about an example, Yun, of a particular transaction that I'm personally familiar with. It involves a North American automotive firm. We were on one hand talking to them about a program to implement this concept of global platforms that we talk about which is a combination of Windchill PLM and Creo capabilities to put in place a modular product architecture. There was a high level of interest in that conversation.

In parallel we were talking to them about a conversation to go implement a service lifecycle management program. There is a high level of interest in that conversation.

So our sales guys were forecasting a transaction that would include both. What the customer said in the end is that's a lot of change at once. It's a big investment. Why don't we get started on this program and do a little bit more planning on the second program. So that's how the transaction came in.

Now, I think there is always some amount of that. That might have been a forecasting problem more so than a customer issue. Perhaps had the customer situation been better qualified we would have realized that to implement two such programs in parallel at the same time might have been more than this customer was probably willing to sign up for.

I don't think in general we think it is an economic problem. We think that all companies right now are careful how they spend money. PTC is and was a quarter ago. But I think it's a case where probably our forecasting optimism was too high in some of these transactions.

Okay. Great. It's been a while since we talked about SharePoint product. Is that something that is being de-emphasized?

And along that point in terms of trying to align product strategy to improve visibility in the model. What are some meaningful low ASP product opportunity out there that could be meaningful revenue stream down the road? Or is it just simply improving visibility by increasing sales capacity to target the lower end enterprise markets?

Yes, first on the SharePoint question, Yun. We were developing a number of products based on SharePoint, and in fact, we backed off on one of them and continued forward on the others.

So the one we backed off on was this ProductPoint product. We really backed off on that simply because we found customers who saw ProductPoint were interested, but when they saw what Windchill proper could do, they tended to switch back to Windchill proper. We then said this whole product feels like a marketing program. It gets people interested but then they buy something else.

It probably does not justify the level of R&D investment we were making. But the other capabilities that are SharePoint based, for example; our product portfolio management capabilities, our social computing capabilities, our integration into the SharePoint portal. Those efforts continue forward and I think are quite interesting to our customer base.

If you look at the second part of your question, which is low ASP, I think the gist of your question as I interpret is; do we have some things that would allow a new rep to get started in a smaller transaction without having to go for an elephant hunt right in the beginning. The answer to that is yes.

For example, this area of product analytics that we have. This is a capability to take a product design and try to analyze how much would it cost, do we have the right suppliers, would it comply with environmental regulations, what would it's carbon footprint be, et cetera.

This is a pretty slick capability and it is in some level PLM agnostic. So you can bolt it on to our PLM systems or somebody else's. I think that's a pretty interesting piece.

I think the ALM business is another example of that. We can go into a company and begin a discussion about putting in place a better software development infrastructure, completely independent of what CAD tools and what PLM tools they're using, so we don't have to go for the big PLM transaction. All or nothing. We can start in these other areas.

I think service lifecycle management is piece of that too. A key building block with service lifecycle management starts with some of our 2D and 3D technical publishing capabilities.

So those are some examples of where a new rep can engage a new customer even if they're committed to somebody else's CAD and PLM situation. There are still a number of conversation we can get started that should provide some of these smaller- and medium-sized transactions without having to go for the elephant hunt right up front.

Thank you. Quickly and finally, can you talk about the adoption of non-CAD driven Creo products? I think one of the strategic rationales of Creo was really to expand a potential target install base within your install base. How is that going?

Yes. I'd say on progress.

Just to put Creo in context a little bit. Last April, I believe it was, a year ago, we came out with Creo 1.0. This was an exciting release, but as release 1.0's of major new products are people tend to kick the tires a bit more and be conservative about going into production. They tend to wait for the second release.

So the fact that we just shipped Creo 2.0 I think delivers a much broader and more robust offering into the market that our customer base will upgrade to, and that I think in general we will promote a lot harder and push a lot harder.

So Creo 1.0 has been very successful in driving maintenance win back. The number of seats on maintenance has increased significantly during that time frame. And I think Creo 2.0 is a release that we can go play more offense with, as well bring the customer base forward.

Okay, great, thank you.

Our next question, Raimo Lenschow with Barclays. You may ask your question.

Two quick ones. First, I hear you on the deal and internal issues, but it still strikes me as odd we had one of the worst Q1 result seasons with SEP, Symantec, et cetera, all having issues in North America. How confident are you that it's you, and that we don't have an issue that might go on a little bit longer as you go further?

And going back to Creo 1.0. As you have the version 2.0 out in the market now, how long do you think it will take to get momentum, and where do you see the early success stories coming out of? Thank you.

Let me address, Raimo, the first part which is the North America part. First, I think in our guidance we have allowed for the possibility that there could be a problem that lasts for a couple of quarters here. As I mentioned SEP didn't do that, so we are comparing and contrasting ourselves to them there.

That said, when I look at the list of transactions that didn't closed, I can't in any one of them say they said it was because of the economy. That really wasn't the situation.

I think you're right. We had a bad quarter. We look around, we see some other people also had weak North American quarters. We think it is an internal issue, but we took the approach and said, let's be conservative and assume this is an issue that has a multi quarter hangover. And if it doesn't then we can do better than that. But in our guidance we took a more conservative approach of saying let's assume whether it's an internal issue or whether other factors develop, it's a potential multi quarter problem.

On the Creo 2.0 question, I think where you see we did pretty well with Creo was in the channel. That's a place where there's a lot of new business being won and lost. The growth rate there was relatively good.

We think Creo 2.0 in general is helpful in a new win. Let's say a green field environment of a smallcompany buying it's first 3D CAD product.

This is a very sexy product. It compares very well to SolidWorks and to the Autodesk Inventor suite. Much better than Pro/Engineer ever did.

I think the bigger opportunity in terms of bigger license transaction is in the direct space to the extent we can get some competitive displacements going. There are a few substantial ones in the pipeline, and in fact, there is one that we did close in the last year in a deal that we actually took [and ran with the ball]. So it has not really shown up as a big-deal transaction, but it has been a big contributor.

So I think there some optimism around that. It's hard to push a major release one product. So I think having this release two product makes the story a lot safer, if you will, for a customer who is excited about the content.

Thank you.

Our next question, Ross MacMillan with Jefferies. You may ask your question.

Thanks a lot. I have a couple of questions on maintenance it if I could. I was curious to get a sense for -- I noticed the active maintenance seats for the other category were down sequentially. Could you provide any color on that?

Yes, Ross. This is Jeff Glidden, and thanks for calling in. If you look at our maintenance overall. First there is a slight decline. I think it's about 6,000 seats. Part of that is that other category includes Integrity. As we brought them over to the system we've done a little bit of cleanup. That's one piece that cost a few thousand seats to be lower.

On the second one we have got some renewals that we didn't capture in the quarter that we're still pursuing. I don't think there is anything fundamental there, but a little bit of clean up and some open seats to be recaptured.

If you look at the other metrics, I would just cite that Creo was up nicely year-over-year. It was up about 14,000 seats at 8%. Very significantly, Windchill was up 215,000 seats or about 22%. We've cited in the quarter the maintenance has been the highlight of the programs. Attach rates are in the mid-90s, renewal rates are in the high 80s to low 90s and I think overall the team has executed very well.

Thanks, Jeff. Just a follow up on that. I agree the growth rate on maintenance has been good. But I think you highlight 610 for the year for maintenance, and did you 306, I think in the first half. So that actually implies flat or even modestly down in the back half. I'm just trying to understand if that's conservatism, or if there is anything else we should be reading into that?

Those are reasonable numbers. I would give you one just from Q1 really from last year into this year. We do have a bit of a head wind on currency. The currency rate last year was $1.37. That does effect our reported numbers. This year we're right now looking at $1.30, and we're holding at that level. So there is a year-over-year in FX impact, but I think all the fundamentals, all the attach rates, and so forth, feel very good on the maintenance side.

Just a couple of others if I could. You had a really strong cash flow quarter here, Jeff. Do you think you could provide any thoughts about cash flow from Ops for the full year?

Yes. We'll clearly build cash from here, and cash flow we would be more cautious on the back half because of the shortfall in Q2. That really translates -- the lower revenue translates into lower cash collections directionally in the next quarter.

That said, I think we can be pretty positive about cash flow, but we'll be a little bit more cautious as we look forward. We are planning in this quarter to continue both the buyback and repayment of debt. Q4 is usually a slower cash quarter for us just because of the year end which we'll be a little bit more cautious on with Q4 as a result of the lower revenue numbers.

Will cash flow continue to grow at or above the rate of operating income? Non-GAAP operating income?

It will continue to grow. I'm not sure if I've done the math. Will it grow relative to operating income? It will grow with it. I think we feel pretty good on the cash flow.

We're right now at $1.10 year-to-date. Cash flow from operations that's $0.80 in the quarter and $0.30 in the prior quarter. I think for the year we would expect that to continue,but in a more moderate pace in the back half.

Okay. And then very last one for me, just on the long-term targets. I was curious as maybe--have you done scenarios? I know that you're 2015 targets based on an 11% to 13% revenue growth rate. I was curious as to whether, for example, if you were to do something maybe more like 6% to 8% or 8% to 10%. Have you done any scenarios around what operating margins you think you can achieve under different revenue growth scenarios?

That's a great question. By the way our goal, even if we moderate the revenue numbers, we're still driving to the operating profit numbers that we cited. Those are intact for 2015, the 25% to 27%.

We have run a number of scenarios. As we complete those we'll update our guidance longer term.

But we've given 11% to 13%, we've looked at growing that at 9% to 10%. What does that mean? We can run various scenarios. I think the view continues to be very attractive in terms of our ability to achieve those long-term operating profit targets.

Thanks.

Maybe a way of putting that is that the margin expansion is driving a disproportionately larger part of the earnings growth than is the revenue growth.

That's correct.

In that time frame. So we're committed to the margin expansion, and to the extent we believe revenue growth would be less and we're not there right now. But to the extent that we were in a position to get to, then I think there is an opportunity to say could we get more aggressive in the margins?

These are all just scenarios right now. We're not willing to commit to any of those. We're happy at this point with the program that is out there.

Thank you.

Our next question, Richard Davis with Canaccord. You may ask your question.

I'm trying to square the fact that let's say that over the past year, expectations for license revenue growth for 2011 has dipped down from 17% to 11% to 5%. With the need, in my opinion, and this is why I'm trying to figure out if I'm right or wrong, and balling on Ross' comments. But the license service mix for Windchill would seem to have to be moving much more towards licenses, I would think, in order to get that segment's margins up from, as best as we can tell, somewhere in the mid single digits to the high teens. In other words to help you get those margin numbers up. I think it's pretty clear that the CAD business is nicely profitable, but the margin structure of Windchill is not where it should be. Can you help me square those two issues and help me figure that out? Thanks.

First, Richard, on the license growth, I mean, obviously the 5% is a pretty conservative number that assumes we don't close several of these larger transactions that we've been pursuing. And keep in mind you start talking about a $10 million transaction, it's 3% license growth all by itself. And if you start thinking about the implications of a couple of those going one way versus the other, it has wide swings on our license growth rate.

Number one, we've shifted to a more conservative outlook for the back half of the year, no doubt.

On Windchill margins, in general, it really does come down to mix. But there are several different contributing factors to the mix.

One is maintenance. Those licenses are maintenance and service obviously. The maintenance part of the mix continues to increase nicely. That helps profitability.

And the services part of the mix while it's still strong, the margins of that service revenue are also increasing rapidly. Double last year which had a significant impact on the profitability.

So I think in the end license revenue is the way to really win the game with our PLM business, but what we've been doing with maintenance and and what we've been doing with services margin does a lot to move the profitability needle of that business in the meantime .

Got it. Thanks.

Our next question, Steve Koenig with Longbow Research. You may ask your question.

Hi, guys. Would like to ask you a question about the long term guidance as a follow-up on that. Then just one quick follow-up after that.

In the long-term guidance in your remarks, you talked about the PLM market growing 9%, the CAD market growing 5%. You're relying on share gains, it looks like to make those kinds of targets. You did just talking about going through the analysis of where those scenarios might go.

So I'm wondering what would cause you to lower long-term guidance or not if you found out this had just been a Q2 phenomenon and you came right back. Is that would that cause you to keep it, or would the analysis by itself be enough to say that you ought to de-risk by lowering the long-term guidance?

Steve, it's Jim. I think the real factor we are going to have to monitor is the impact of the new sales capacity. We put a lot of sales capacity into the system. It has not yet worked its way through the system, but that is going to happen, particularly as we go through the back half of the year and into next year.

I think as that sales capacity settles into place, and creates the productivity that we anticipate they will, then we're going feel pretty darn good about those long-term growth numbers. And if they didn't, then that's the point where we have to say is that 11% to 13% growth rate reasonable or not. And of course, having a better pipeline management forecasting system will help us do a good job on making that call.

Okay, that makes perfect sense to me. And then for the follow up here. This is more about [fourth quarter]. It was good to see that revenues and deals below $1 million grew pretty well. I calculated at 16% year on year.

Going to the large-scale execution now, I am wondering what if any changes have you made to the sales organization since the [miss] or the sales process besides scrubbing the pipeline here and getting the forecasting system in place?

Yes. I think the changes we made in the sales organization were made prior to the miss, and we still think those were the right changes even if they introduced some disturbance we have to work our way through. I think the bigger question is how do we manage the pipeline and manage the forecasting process.

Again, I mentioned earlier the way we do that today is not a best-in-class way of doing it. We've been working for some time to transition to best-in-class way of doing it, and that transition will begin to take root this quarter. It's not an instant miracle but it's a better way of doing it, it's a better process.

Today in this current quarter in the last month we've been doing a lot of work with the old manual process. What we would like to have is a systemic approach to understand what does the pipeline look like for MCAD, for PLM, for supply chain management, for SLM, for ALM? What is the safety factor we have when we put a forecast or guidance out there? We need better visibility.

A good example is this new capacity is probably not going to show up in the big deal pipeline, but more in the mid market which you mentioned actually showing some good signs. But we need much more granular visibility to -- is this new capacity delivering as we expect it to? If not, why, and so forth.

Great. Thanks a lot.

Our next question, Barbara Coffey with Brigantine. You may ask your question.

Good morning. A quick question on how your balancing your new capabilities with new sales people with the assignments that get sent off to the channel. And then as part of understanding what the channel is selling, can you speak a bit about what are they selling? Are they selling the full suites of Creo as well as some of the PLM stuff?

Yes, I think there has been some discussion amongst analysts about changes we made in the channel space, so let me talk through that. We made two changes in the last quarter regarding the channel space.

One is we went from a centralized management of the channel to a regional management of the channel. We did that because it allows us to eliminate some overhead. I don't think that in and of itself represents any meaningful change to what is happening.

The second change we did is we put some new direct capacity into the mid market space in regions where the channel is not as strong as it is elsewhere. So for example, in North America our channels are not as strong as it is in Europe, so in North America we expanded a little bit into the mid market space with some of its new capacity.

Part of the reason we do that is our channel is very strong as it relates to MCAD growing in their strength with PLM. But we also have ALM and SLM, and there may be some pretty good opportunities in a $0.5 billion sized companies for ALM or SLM. And in some cases the channel is just not in the position to pursue that. We moved the line a little bit really in the regions where the channel probably is insufficient in its terms of it's ability to pursue accounts of that level of size and complexity.

Thank you.

That said, if I point out that channel performance in the quarter was actually pretty good. That's not really the root of any problems that we had.

No. With so many people being hired, some of the discussion being at the middle market. Mentally I was thinking that often was where your channel was and was just trying to understand the new dynamic.

Okay, another question from Barbara or any other questions on the line here?

Our next question, Ben Rose with Battle Road Research. You may ask your question.

Good morning, gentlemen. In your analysis of the quarter looking at specifically at certain industry sectors that you sell to, whether it's industrial machinery, automotive, electronics and high tech, were there any larger conclusions to draw in terms of the relative health of those industries? Are there any plans to change the focus, if you will, on those industries, given what you may have seen in this quarter?

Yes, Ben. I think we did not see any meaningful trend across the verticals, meaning that all of the verticals performed more or less at the same level.

Meaning, for example, the big deals, one was a defense deal I mentioned, one was an industrial deal, one was an electronics deal. We did not see any type of concentration that would say we have a problem, or that we have a great opportunity in this vertical. It was consistent with our overall view of what the opportunity is.

Okay, thanks.

Our last question, Jay Vleeschhouwer with Griffin Securities. You may ask your question.

Thank you. Jim, in an earlier answer you talked about some of the changes you put in place for the channel in North America effecting mid market coverage. Just a clarification. Were any changes like that made or planned to be made for the channel outside of the US?

I think, Jay, in general we're working around the strength of the channel. In Europe, as I mentioned, the channel is strong. That's not to say that they're not strong in every region, in every vertical and so forth.

We're trying to compliment the channel, basically. There are a lot of customers, a lot of companies in that mid market space, and it's difficult to cover them all. In some cases our channel is not even covering big chunks of the market.

So what we're trying to do is compliment them, and where we see a lack of effective coverage we're putting some PTC capacity in there. The channel does not have the luxury to expand quickly, particularly when you move beyond CAD into some of these more enterprise accounts. It's difficult for these channel resellers to quickly expand their capacity into SLM or something like that. To build that expertise.

So again the key message is we're working around the strength of the channel and trying to make the ecosystem stronger and not just move it from one spot to another.

Okay, there was an earlier question about possibly having some lower priced offering, for example, around SharePoint. Let me ask the opposite question, which is the possibility of doing more with higher-priced versions of your software or mixing up in some way for either Pro/E or Windchill.

Is there any thought that [clue] mix or configuration that you might be willing to trade off volume, let's say, for some higher ASP mix, both for the up front license and therefore you pull through more maintenance revenues per seat down the road if do you that?

I don't think that's an explicit strategy. I think what's happening is our more mature direct reps tend to work on bigger programs, bigger deals.

If you look at our pipeline right now both the existing programs and some of the stuff in our pipeline, for example, there is some really interesting lifecycle management opportunities in that pipeline. But that's not necessarily where we want a new rep to start.

We're trying to have an opportunity for a rep to scale. Start with the territory with some lower-cost products, some products that are such an all or nothing proposition to the customer. Get in there. Win some business. Grow it, and maybe down the road you'll have an opportunity at something really big.

But I don't think we have an explicit strategy to go towards higher cost products. I do think our solutions though things like SLM and ALM are high-value solutions which leads us over time to more and more of these big transactions. What we would like to do in our pipeline is to have a nice balance of the big transactions in the base business such that the forecast could be more based on the based business and less of a dependency on closing that last transaction to make a quarter, like we saw this past quarter.

Okay, just a couple last ones. You mentioned in earlier remarks auto once or twice, and of course there is the HKMC relationship. If you think back over the last dozen or more years in this industry, the large eight or even nine-figure transactions in auto were pretty occasional. There was a Ford, there was a Toyota, there was a Nissan, every so often.

The question now is do you think there was more opportunity now for turns, let's say, in automotive? Are there more large automotive OEMs in play that are rethinking their product development infrastructure so where that you may not have had that much footprint in auto there is more potential for more HK-like transactions coming into play?

Yes, I think if you look at the different segments you'll see an interesting story, which is not many major automotive OEMs really want to switch CAD tools. You seen an occasional situations like Daimler that had some special circumstances around it. But by and large the automotive industry is not switching CAD tools.

There is a certain amount of them though that are reconsidering what they're PLM strategy is, and Dassault V-6 strategy is forcing some companies to reconsider what they're going to do for PLM. That creates opportunity for us.

But when you switch from that discussion to ALM and SLM, it's green field. There is hardly any major automotive company that is not interested in an SLM conversation or an ALM conversation. It doesn't matter which CAD or PLMtools they use. I see us having a very large opportunity in automotive around ALM and SLM which are areas that PTC's traditional competitors don't match up and don't necessarily have even a means to block us from entering some of their best accounts. I think that's where the real opportunity lies.

Some not so much in CAD. Some in PLM. Lots of opportunities in ALM and SLM.

All right, and just one last clarification on sales coverage issue. Has there been changes at all in your number of named accounts over the last year or so, and if not, has there been any change in the number of named accounts per senior rep, let's say. Has that changed at all?

I think that the number of named accounts has not really materially changed. I think in the bigger accounts you would see very little churn.

When you get to the low end of the direct space you find the situation where a typical rep has far more accounts than they can really cover. That's where you would see a territory being broken into two territories. And then reps having to spend more effort getting to know the customers a little bit more intimately than just driving around and seeing if there is a transaction amongst a large portfolio of accounts.

Thanks, Jim.

Thank you, folks. We want to highlight that PTC is going to be participating in two upcoming investor events. The first, Jefferies Global TMT Conference in New York on May 8, followed by JPMorgan's Tech Conference in Boston on May 17. Again, thanks for joining us this morning, and that concludes our call for today.

Alright. Thanks everybody. We will look forward to seeing you at the next opportunity. Bye-bye.

That concludes today's conference call. All lines may disconnect.