PTC Inc (PTC) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen , and welcome to Parametric Technology third quarter fiscal year 2012 results conference call. (Operator Instructions). As reminder ladies and gentlemen this conference is being record. 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 our Q3 results and outlook call.

Before we get started, I would like to 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 the current assumptions of PTC's management and are subject to risks and uncertainties that could cause actual events and results to differ materially. Information concerning these risks and uncertainties is contained in PTC's Form 8-K filed yesterday and in our most recent Form 10-K and Forms 10-Q on file with the SEC.

All financial measures in this presentation are non-GAAP financial measures. A 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 as always this morning is Jim Heppelmann, Jeff Glidden and Barry Cohen. With that, I'll turn the call over to Jim.

Thank you, Tim, and thank you all for joining us on the call here this morning. With revenue up 10% and earnings up 24% at comps and currency, we are pleased to see Q3 come in as solid quarter. We did not close the megadeal we spoke of 90 days ago, but we were able to back fill with other deals including deals that grew in size as the quarter progressed. So in the end we were able to come in toward the high end of the revenue range especially in the license category even though everything didn't go our way.

I would characterize our performance in Japan and Asia-Pac as being very good. Our performance in Europe as solid, and our performance in North American as unimpressive but in line with our most recent guidance. Looking across our five business segments the CAD, PLM, ALM, and supply chain management businessesperformed within a reasonable range of the expectation we had for each. Our service lifecycle management or SLM business stood out again this quarter with a growth rate that was much stronger than the other segments and substantially stronger than the Company's overall growth rate. We are excited about the prospects in each segment and continue to believe the growth opportunity created by this portfolio of 5 business is compelling and will support our long term goals.

In the third quarter we continued to make great progress on margin expansion. And the $0.37 of EPS came in well above of the guidance range, and allowed us to the raise our EPS guidance for the full year. We believe this quarter's EPS performance once again demonstrates the seriousness of our commitment to margin expansion and earnings growth even where confronted with a more difficult revenue environment. We are now live with salesforce.com, and we are operating with much better data and as we look at Q4 we see a strong pipeline particularly in North American. At the same time we see increased pressure from foreign exchange rates and see no reason to expect improvements in the top macro environment we are all in right now. Thus we are holding our Q4 and FY 2012 revenue forecast flat with the exception of making currency adjustments.

Looking ahead to FY 2013 we are now actively engaged in the planning process for the new year, and at this point we do not yet have a final plan or guidance thatwe can share with you. I can tell you now already that the bedrock of our plan will be strong earnings growth that targets the $1.70 to $1.80 EPS range. To provide some context to the planning process I will remind you that our timeless FY 2015 model assumes 11% to 13% annual revenue growth and 2 percentage points per year margin expansion; however , assuming today's FX rates hold through FY 2013 due to currency alone our FY 2013 revenue plan would lose $40 million or about 3 percentage points of revenue growth . So considering that big FX hit plus taking into account the likelihood of a continued difficult macro economic environment our planning process is leaning towards a FY 2013 recipe that involves more moderate revenue growth coupled with aggressive margin expansion. In any case our objective would be to drive towards 20% earnings growth with that recipe.

With that, I will turn it over to Jeff.

Thank you, Jim. Just a few comments on our Q3 results then I will discuss our outlook for Q4 and the full year. As Jim said we are very pleased with our earnings performance in Q3 as non GAAP operating margins expanded to 18.6% . This improvement is primarily due to increase services margins coupled with diligent headcount and expense management. Overall services gross margins improved from 5% in Q3 of FY 2011 to approximately 14% in the current quarter. During Q3 we eliminated some 41 additional positions further reducing our run rate. We expect these reductions will benefit our quarterly expenses by approximately $1 million in Q4.

The highlight of the quarter with cash and cash flow. Cash increased to $238 million , We paid down our revolver by $20 million and repurchase $20 of PTC stock. Cash flow from operations of $64 million reflects excellent customer collections . For the first 9 month of 2012 we generated $197 million in cash flow from operations or approximately $1.63 per share.

Turning to our outlook for Q4 and for FY 2012 our revenue guidance for Q4 is $320 million to $335 million, and again as Jim cited this reflects approximately $10 million of unfavorable headwind on FX . For the full year our revenue range is $1.255 billion to $1.270 billion. We expect Q4 non-GAAP EPS to be $0.44 to $0.50 per share, and for the full year outlook of $1.46 to $1.52. And again just reiterating this guidance assumes that the euro at 120 and that is down from the 130 we sited in the last quarter. As discussed previously, we are committed to driving our long term non-GAAP operating margins to 25% to 27% by 2015.

We thank you for your support. We will turn it back to the operator to open it up for the question and answer program. Thank you.

Thank you, sir. (Operator Instructions).

No questions this morning?

One moment, sir. Our first question comes from Yun Kim from ThinkEquity.

Great, thank you. Congrats on putting up a solid quarter. First I just wanted to ask you can you give us a sense on how many 7 figure deals were follow on deals from ongoing PLM projects, and how do you see that particular mix of those types of deals playing out over the next several quarters?

We sited large deals. I'm not sure we have exactly your information we can get at that. The total of large deals this would be more than a $1 million of license and service was up nicely it was 34 transactions. We did have one large deal that was in the $1 million to $5 million range that actually expanded in the quarter, so we had one deal that was over $5 million, 34 that were greater than $1 million and that generated about $75 million. So I think we feel quite good about these transactions. A number of these were follow on deals as well, so again the recurring revenue stream we feel pretty good about. As Jim cited there is a lot of activity and pipeline building particularly in North American that gives us I think a good level of confidence about our outlook for Q4.

Okay. Just looking at the average deal size for 7 figure deals it looks like it has been trending more on the low end of the range historical range over the last couple of quarters. Is that something that we can continue to expect given the current environment out there, and is that something that you feel comfortable handling in the self capacity more or less the growth around that becoming more limited?

Good question. The average has been pretty consistent around just over $2 million on those transactions, $2.2 million in the quarter . That is very consistent with prior periods. I think that is reasonable. Generally we have seen that between $2 million and occasionally the upper $2 million, but I would say $2 million to $2.5 million is what we would expect. We do have a number large of opportunities out there that we are pursuing.

Just looking at the data myself I think what causes this number to bounce around there is sort of a base line of the lower $2 million then it is the presence of several megadeals that averages everything out in some quarters. I think that is really the trend. I think it is hard to read much into this as a trend.

Okay. And then , Jeff, can you quantify what could be the foriegn exchange impact on revenue balance at the end of the September quarter. If we use your rule of thumb, is it fair to expect about $8 million to $10 million impact?

Our assessment because it is a large quarter it is approximately $10 million in revenue and that is the 120 versus the 130 . So that would come off of the top of the revenue guidance we provided in Q3 for both the quarter and the year, so it is about $10 million. That would normal translate into $0.02 to $0.03 of unfavorable impact on EPS, and obviously given our guidance we are reflecting we will mitigate that impact by basically managing expenses and we are also very pleased with the services margins that are running ahead of plan. We are now out looking for the year comfortable with 12 percentage points of services margins and we sited we are actually at 14% in this quarter.

So we should expect more or less the same kind of impact on deferred revenue balance, right?

Deferred was the key part of the question.

Deferred will be seasonal . We have 2 periods particularly at the end of the year. January is the biggest single period. It is really driven by maintenance , and all the maintenance rates are positive. There is some seasonality in there.

He is asking about the FX adjustment on the deferred balance.

Right. We reflected that in our guidance as well, so the guidance will come down slightly and we have reflected that in our guidance as well.

Okay. And then just lastly if you can just talk about different trends you are seeing in different verticals (Inaudible) better than the others and what not. Thanks.

Let me see if I have the vertical data here in front of me. When I looked at it previously I didn't notice anything substantial trend on a vertical basis. I'm sorry. I will look for this and comment on it -- here we go, I got it. There is not a substantial trend . There is some big numbers in vertical that are small so a lot of small numbers, but I think in general pretty much steady as she goes across most of our main verticals. The exception of course maybe worth pointing out is aerospace and defense which we have sort of told people all along that is going to be tough sledding this year given what is going on with fiscal spending in the government and so forth.

Okay. Great thank you so much.

Our next question come from Richard Davis with Canaccord.

Thanks guys . It is actually D.J. on for Richard. Jim, it sounds like even from conversations we had last quarter you are making a shift in sales headcount strategy from kind of aggressive growth to improving productivity. Any color on the timing of this decision? Is it preemptive cost controls efforts, is it worries about macro demand, do you feel like you are approaching full capacity help us think about that?

Well, let me point out a couple of things first. Our sales headcount was flat versus last quarter; however, that sort of the hides the trend. We actually added a fair amount of the new capacity , but then restructured the ALM sales force and merged it into the PTC sales force and in doing that turned over some people. You should think that we restructured that took headcount down and then we hired new capacity and took it back up. We actually did add some important new capacity in the quarter. I just think that capacity is up 26% , revenue is not up 26% , so there is some progress we need to make on lifting our productivity. I think you are going to see us keep hiring just not at the same rate. And I think it really does come down to a macro environment is not as optimistic as it was when we started hiring at this more aggressive rate. I think we should make sure we match the two, so we don't get too far out over our ski with capacity that is not productive in light of the economy.

The following up to that would be you hit on the salesforce.com implementation and said you guys are up live now. Help us withwhere you are in that process? Are we kind of still in the data population phase, or is it fully ramped to the point where you could see enhanced productivity in Q4 and looking forward?

What is in the system right now is our mainstream direct sales force . What is not in the system yet but will be coming in line is our resellers and the ALM pipeline just because that was being operated until this past quarter through a separate sales force here at PTC. That is all part of a plan to bring these people in over time. We have the data in the system. I would say we are in the phase of making sure the data is complete, and I think it is firming up. And then we are in the phase of trying to understand what it means. Having this data for the first time we need to calibrate our expectations againstit, but I will certainly tell you when we think about our guidance for Q4 we are much happier to have this data as we give you the guidance than we were in previously quarters where we did not have this level of (Inaudible) on exactly what was in play; what is the real potential upside, what is the potential downside. So we have much better clarity to that. But again with the exception that clarity does not yet extend over the reseller network or over the ALM sales force.

Got it. That is helpful . Thanks. I will hop back in to the queue.

Our next question is from Sterling Auty from JP Morgan Chase .

Thanks, hi guys. I want to follow on that a little bit but in particular in North American. Jim, you describe it as lackluster is the lackluster portion as you got salesforce.com up and running and scrub the pipeline maybe it wasn't as robust as you thought , or how much of it was sales execution because it feels like this is the second quarter in a row that North American was not that great?

Sure. If we back up the 50,000 feet and look at North American year-to-date total revenue were up double-digits, year-to-date license revenue were down mid single-digit. I think what the pipeline is telling us and what my gut was maybe telling me was that we have quartetazation problem with a big hockey stick in Q4, and we see that in the pipeline. So we had perhaps a relatively weaker pipeline opportunity in Q2 and Q3 and a relatively overweight stronger pipeline of opportunity in Q4. SO what we want to do here in Q4 is lets just go execute on that pipeline, post a pretty good quarter in North America in Q4 and we might end up with a year from a license revenue standpoint is somewhere around flat which would still be unimpressive but somewhere around flat and then total revenue would be up double-digit that is our goal.

Okay. How do you then manage that going forward? I think you talked about pipeline build. Is there a ongoing strategy to fill the top of the funnel do a little bit better job in terms of the managing and the timing of it?

Absolutely. As you know the presence or not of big deals in this pipeline skews things considerably. I think we have shared with many of you that a key strategy is we need to go direct a lot of this capacity together with marketing in to building pipeline of base business of sort of deals under a million including in the mid market so we get a more robust pipeline and the big deals move toward being gravy rather than potatoes.

Okay. Last question is around the PLM business. In this macro environment and specifically the domino deals that are out there I am kind of curious what you are seeing in terms of implementation plans. Are you seeing customer that are either holding back or slowing implementations or are things still kind of full speed ahead?

I think things are relatively full speed ahead. In fact I know of a couple of companies what are PTC's dominos opportunity that are actually struggling on their own top line and bottom line forging ahead with PLM programs because they see this as a part of a get well program in the long run. So I am not seeing any major programs that we are pursuing canceled , and I have actually been surprised that some of them continuing forward in the context of how those companies are performing themselves.

Got you. Thank you.

Our next question is from Matt Hedberg with RBC Capital Marketing.

Hi guys, good morning, thanks for taking my question. Obviously the Pacific rim in Japan had a very nice quarter, several large deals you mentioned. I think in the prepared remarks you also talked about expecting fewer large deals in the coming quarter . I guess I'm wondering how sustainable is the growth there? Do you think you drained thepipeline there, just kind of talk to us about the pipeline in A-Pac.

Jeff , you can comment too here . It is Jim. I will start. I think we had an exceptionally good quarter in Pac-Rim, but the trend has been pretty good for a long time. So I think what we are seeing inside a good trend we spiked above the trend we are not sure that spike is the new trend , but if we revert to the old trend that is not a bad trend of pretty descent growth. I think we are just cautioning you guys don't get ahead of yourself thinking our Pac-Rim business is exploding to some new level. It has been performing well. We think it will continue performing well, but perhaps it performed exceptionally well in this past quarter and that is not sustainable on a repeatable basis.

That is helpful. I guess in terms of Europe you quantified it as a solid quarter. I am wondering specifically I know the German market is a large percentage of the European business. How was that market in particular.

The German market for us was very good. In fact our results as reported are relatively flat. At comps and currency European result I think were up 9% , so that is pretty good. There aren't that many companies continuing to post those kind of growth rate. Coming off by the way a fabulous year in Europe last year. Last year our European business grew 24%, and against those comps we are continuing to post on a constant currency basis pretty impressive numbers this year.

And maybe just to add to that roughly half of our business is Germany we then go north to Scandinavia , so I think when we look at this most of our larger comps are driven by global GDP they are clearly going to be impacted by any down draft in European activity but pretty solid Companies and our exposure is largely Germany and north we have some good business as well in France.

That is helpful. And then, Jeff , you obviously had good results from the services business this quarter at least from a margin perspective you took up the reigns now expecting 12%. I think in the past you have talked about mid teens growth there. Kind of in a baseball analogy what inning do you think you are in terms of service margin evolution?

We said mid teens we are running ahead of our plans that we set at the beginning of the year. I would say the good news is we are a year in to it and result are about 2 years in to it. I think we are probably still in the early stage of this , Matt, and there is more to come on this. I think the guys have executed extremely well in services, and I think there is some more upside.

Matt, maybe to add some more color. I think a legitimate question is does our progress so far suggest we could do better than mid teens ultimately, and we are not going to give you an answer on that today but we are asking ourselves that question.

That is very helpful. Thanks. One last question in terms of your 4Q guidance, can you talk to us about the number of megadeals within guidance, and are you seeing any additional approval steps? I think you said you had one that didn't closed but you had one this quarter up sized to a megadeal. A little bit more color on that will be helpful for 4Q.

First of all we have a number of megadeals in play in Q4 ,and our guidance reflects relatively conservative close assumptions sort of the like the high end of our guidance range would still be less than 50% hit rate against the megadeal. I think we are relatively conservative there. We are not planing to clear the table by any means in our guidance. In this past quarter -- naturally one phenomenon here is the hockey stick phenomenon that tells the sales guys you got to get these deals done by the end of the year which causes some of them to stack up in Q4, and that has always been the trend here. I haven't figured out yet how to change that trend.

I think what happened in Q3 is the one deal we were pursuing and another deal as our sales guys want to do they are trying make these deals as large and significant as possible and they managed to take a deal that was just under the megadeal threshold and push it just over the megadeal threshold by getting some more customer requirements in there. Let me say one comment that megadeal that happened in there quarter was not unexpected it just got a little bit larger and became a megadeal but it was forecasted all along as a slightly less than megadeal it is not like we got lucky there. It is just that deal came in slightly larger than we had forecasted it. I think we had conservative close assumptions in the past quarter that served us well. And we will carry those conservative close assumptions into Q4 .

Very helpful thanks a lot. Nice quarter.

Thank you.

Our next question is from Blair Abernethy with Stifel, Nicolaus.

Thanks very much. Just two things. One to follow on the megadeal commentary. Jim, can you give us more color on what products were involved with the one you booked this quarter and the one that slipped back in Q2 is that still out there and what product areas does that focus on?

The deal that did come in this quarter was CAD and PLM. The deal that slipped was PLM, and going back to the Q2 deal the very large European deal we talked some amount about that was a PLM that is not in play this quarter so far as we are concerned. It may or may not be in play next year but we are working through a dicey political situations there where the customer wants to buy our software but fighting against the powers that be in the acquiring company around corporate standards and so forth.

Okay. Great thank you. The second question is just around maintenance wonder if you could shed some color around the Creo seat count has been flat for 3 quarters now. What is happening below the surface there and in particular how are you trending on the direct modeling side of things?

I think what sort of happened as you know you need to sale a fair amount of new license to keep the maintenance seat count flat. Our year-to-date license growth rate last year was pretty impressive this year it is relatively flat with that. So with relatively flattish license revenue it is hard to maintain or even harder to grow the seat count on maintenance just given the turn over in renewal rates. We have not yet monetized much of the real opportunity with Creo . I think that is going to be a strong focus as we go into next year. Now that we have the Creo 2 product out we have a much more solid offering before we had an exciting story but a release 1 offering now we have an exciting story and a release 2 offering and I think a strong focus in our sales organization next year is let's go harvest more of that opportunity and bring more of it to the bottom line.

Okay. And on and on the direct modeling how has that been trending?

As the rest of the business is trending more or less flattish license revenue overall and flattish seat count.

Okay, great. Thank you.

Our next question is Raimo Lenschow with Barclays .

Thanks for taking my question. If I look at the metrics you have given in terms of desktop enterprise , PLM, CAD the one area that seems to be growing much better and I agree it is a small number, is the PLM on the mid market where you sell indirectly. Can you maybe talk about the trends there given the noise that we also hear out of (Inaudible) around that area? Thank you.

Thank you for your question. It has been a focus of ours to take our PLM business down market over the last few years into the resellers space. I think we are make great progress there. Those guys continue to post good numbers quarter after quarter. I think there is a substantial opportunity for PLM in this sort of mid market/reseller space, and we are doing a good job of executing on it . The growth rates there are pretty high, and we don't forecast them to slow down dramatically at any point in the future here.

Thank you.

Our next question is from Ross MacMillan with Jefferies & Company.

Thanks a lot , and congratulation on a really good margin quarter. I had three questions. The first is on Q4 license guidance which looks actually like it is below normal seasonality at the mid point and about inline with normal seasonality at the high end of the range. Aside from foreign exchange which we understand will have an incremental negative impact on Q4 what other factors are influencing the way you guide for the license number to perform?

I don't think they there were other factors. I think we attribute the change in our Q4 license guidance purely to FX.

Ross, if I can just add just FX alone would have a negative impact versus prior quarter outlook of $3 million to $4 million on license. So the factor we look at are clearly pipeline build , we take into account macro factors and so forth. I think the good news is we feel pretty good about pipeline. But we have a very significant headwind in terms of the FX. If you look at the normal seasonality we typical are up $20 million to $25 million sequentially in the fourth quarter, and I think if you look at the guidance we provided we are providing guidance that is very similar to that against a headwind of very negative FX.

Understood thanks. Go ahead.

I was just going to add the current headwind on foreign exchange we consider our planning for '13, we are assuming the euro stays at 120 that alone while it takes $10 million out of Q4 it takes $40 million out of revenue for next year and would have a negative affect of $0.08 to $0.10 a share. And it is really our goal based on what Jim articulated earlier to maintain the targeted earnings which means we have to mitigate through margin expansion and expense management that negative impact to currency. Obviously we can't control it, but we are trying to everything we can to mitigate both in Q4 and next year at the same time.

That is helpful. So maybe just on that point you provided that 170, 180 range for next year without obviously guiding but assuming that is still on the premise of the euro being a 120 to the dollar?

That is correct. That reflect the negative affect of the euro on our FY 2013 outlook, so absolutely correct.

Great. I wanted to ask just about productivity per rep because you made comments obviously that you are going to moderate the pace of higher and look to get more product (Inaudible). By my math if I just simply do the average of the last 2 quarters versus the direct rep license sales it looks because of the pace you are hiring productivity on average is down something around 20% to last year. So the question is let's assume you didn't hire anymore sales capacity am I right in thinking you believe the current sales capacity you have will be able to support say in a more normalized environment something in the order of about 20% higher license sales?

I think that is a reasonable assumption. Just to make it clear to everybody as we bring in new heads in the initial time period these heads are not productive at all, and then they grow in productivity overtime a period of time, but the infusion of so many less productive new heads averages down the productivity of the whole sales force. So you are right that in lifting that productivity back to the levels it used to be at we could generate a lot of growth. And I think that is the point we now have the capacity to deliver a FY 2013 growth number that would be pretty good. So probably what we ought to do is focus on productivity, and then later in the year, later in FY 2013 year, start thinking about do we need to continue to add more capacity to support growth beyond the FY 2013 year. But certainly we shouldn't need more capacity to deliver FY 2013, it is just we don't want to get behind on it either because this productive needs time to ramp so we have to try to stay ahead of it.

That makes sense. Last one for me. You have maintained you revenue growth rate in terms of your long term target. I just want to understand the sensitivity if you will. Is there any way you can help us understand if the 3 year growth rate isn't 9% to 11% or 7% to 9% or 6% to 8% whatever parameter you want to use. Do you still think you can achieve 200 basis points year of operating margin, or is there any reason we would have to think about tempering that on a modestly lower revenue run rate? Thanks.

I don't think our growth rate and margin are quite as interlock as you might model them to be. We were pretty clear back in February that our Company's margins should be 10 points higher, and one might even argue with slower growth you should have any higher margins. I think our view is we need to go after core inefficiencies in our business model sort of irrespective of growth rates and to the extent revenue slow down, we might try to have margin expansion speed up. We feel like we are committed to this earnings growth a little bit irrelevant of exactly which revenue growth rate you peg in there it is we just might tweak the recipe a little bit depending upon the revenue growth rate you start with as an assumption.

Understood. That is helpful. Thanks again and congratulation.

Thank you.

Our next question is from Perry Huang with Goldman Sachs.

Hi, thank you for taking the question. I wanted to ask a follow-up question about the Pacific Rim, was China which was up 9% I think it was down 10% last quarter was China sort of the key for the large deal activity and strength in the region, and also was this new deal activity or was it maybe related to some deals that originated in 2Q and closed in 3Q?

First of all there were no megadeals in China nor any deals even close to the megadeal range. There wasn't like one or two huge deals. There were a number of $1 million plus deals just off the top of my head all of them I can think of were preexisting customer expanding their deployment.

Got you. Okay. If I could just for a follow-up. For Windchill and Integrity with the anniversary of the MKS acquisition could you talk about how the sales force is cross selling both products now and what sort of traction you are seeing so far?

Yes, as a post merger intergration strategy we kept the Integrity sales force separate from the PTC sales force for a year . That gives us some chance to get to know the business a little bit before we mess with it too much. But we clearly see strong interest and demand in the PTC base for the Integrity product. We decide last quarter we have hit the 1 year anniversary while we had planned to make changes at the fiscal anniversary we decided instead in Q3 already to begin making these changes a little bit ahead of schedule to go after this revenue synergy opportunity that is just obvious to us. We are right now in this quarter restructured the sales force so there isn't such a strong line of separation between people who sale PTC products like Creo and Windchill and people who sale Integrity. Now the PTC guys are also selling Integrity and we are beginning to see that kind of stuff enter the PTC pipeline in Q4 and going into next year.

Okay. Got it , thank you.

Our next question is from Jay Vleeschhouwer with Griffin Securities.

Thanks , good morning. Jim, I would like to ask first about a couple of product catalyst for you in fiscal 2013. At your conference in Orlando early last month you announced or previewed two fairly interesting new offerings. One is a small deployment version of Windchill the other was the option modeler that you talked about. Could you perhaps talk about your plans or expectation to how those might play out next year? A couple of follow-ups.

The Windchill for SMB version is a simpler version allows our resellers more quickly move through a sales cycle and then more quickly move through a deployment cycle into a production customer, so it a simplified version of Windchill that is just plain easier. That is something the resellers have been asking for. So even while they have been posting pretty good numbers they have been telling us if you could make this product a little simpler we might be able to do even better. That will add some tail wind if you will to the success we are having in PLM and SMB .

Then this option modeler that is a pretty futuristic capability and maybe I will see if I can explain in plain English what it means. What happens is that customers increasingly produce products that are highly configurable. It is like if you go to purchase an automobile you can decide which features and options you want included in that automobile that you are going to pick up in 2 weeks. The probably from MCAD stand point is that is that MCAD assembly modeling traditionally has been static, and when you start having products that are configurable you end up with millions of hypothetical combinations that could be create and you have a static CAD assembly modeler so you actually can't model many of these hypothetical configurations because it would take too much manpower.

So we have produced a concept that is part Creo part Windchill that blends together a dynamic modeler of the assemblies. If you said I want a piece of heavy construction equipment with this kind of a front end and this kind of a back end and this kind of tires and this kind of engine and this kind of emission control system then between Windchill and Creo not only could they figure out what parts would be require but they can put it together in 3D and make sure it would work for you. It is a very interesting futuristic capabilities. I think that is not a get rich quick scheme because requires customers to make some fundamental transformations to the way they create products but it is pretty darn interesting. That one will play out over a longer period of time. When we show that to customer their draw drops and then they begin the process of saying how would be actually make that change because we can certainly see the value in making it.

Okay. Follow-up on your sales and distribution could you talk about the relative capacity and productivity of your mid market direct coverage where you have been doing some hiring versus your name account reps and along the same lines in light of the changes you made in the reseller channel ,revenue line, and available number of accounts at least domestically is it at all conceivable your indirect business from the desktop side perhaps might be lower in fiscal 2013 than in fiscal 2012 in light of the these coverage or structural changes you have made?

I don't think we expect this to affect the reseller revenue much. In our coverage model there has always been a gap in these mid sized accounts that were too big and complex for the buyers to handle. They might be multi geographies accounts or simply complex accounts and the buyers have some difficulty with that. And then they were too small for the direct guys to cover. We have always had a meaningful coverage gap in the middle of the pyramid and we are pushing resources down into that. Now some of resellers say some of those accounts I don't mind if you take them because they scare me. They scare me because I might run huge sale cycles, I might not be able to get the deal, I might not be able to get the deal,I might not be able to implement the deal if I get it, it is a very expensive risky proposition for me to after accounts that size . If we could work together and allow me to work in my sweet spot of complexity and then you take those accounts it is okay. So our resellers have not been super successful in that space and our direct guys have basically abandened it because they moved up market. I think that putting new capacity in this area is basically going after a brand new incremental opportunity. This new capacity if you would look at the productivity numbers right now we should probably check in with Blair had a pretty good view on that, they are not that productive yet because they are all brand new . They are building some pretty nice pipeline we can see on salesforce.com. And it is interesting. As these guys ramp and continue to build and mature that pipeline we see this is as a largely incremental revenue stream that we are going to be able tap.

Okay. Lastly a part maintenance question for Jeff. First geographically your largest source of maintenance revenue is in Europe and are you seeing that attach and renewal rates are steady there or any signs of possible brewing weakness in the maintenance business as to Europe. And lastly , Jim , earlier you mentioned that in order to move the active Creo based number significantly given a sort of normal attrition you would need to sell a significantly more number of new licenses. If for the say of argument over the last 8 to 10 quarter you average new license volume on the CAD side lets call it roughly 6,000 units a quarter, where do you think you would have to be in order to significantly move that number net of attrition in the base.

Let me go back to the first piece for a minute and really looking at both attached rates and renewal rates they continue to be very, very solid and they really are in all geos including Europe. So we are getting very high attach rates and then the renewal rates continue to be very strong and I think we are selling a lot of value with the new product we are delivering our customers see the value. It is critical to them that they take the maintenance programs I think we have done a nice job with those. I would say it is steady as she goes in a positive way on all the maintenance metrics and that includes Europe. We are slightly lower on renewal rates in Asia-Pac , although those are trending upward as well. So I think the renewal rates, attach rates, and even recapture rates has been good. Where people were off maintenance the team has brought a number of people back on to maintenance because I think value selling and the new release of software.

Maybe rather than give you a specific answer I will walk you through the equation. There is a base of customers if you have 90% renewal rate that means 10% of them are going to attrite. However there another factor that we call perhaps somebody attrite in the past changing their mind wish I hasn't done that with win back. So you have to sell enough to replace the 10% that attrite, however there is another factor that we call win backs and that is perhaps somebody who attrite in the pasted changed their mind and said I wish I hadn't done that and then we have a program to get current with maintenance again that we call win backs. Since the introduction of Creo we have had a lot win backs. People who maybe said perhaps I am not sure (Inaudible) is the answer suddenly say I change my mind I actually think Creo is the answer can I get back in the program. We have been able to maintain the seat base relatively flattish even with license growth that in some quarters theoretically wasn't enough to offset the attrite rate but it is really the combination of new licenses plus new win back minus attrition based on renewal rates that is the equation.

Thanks, Jim.

Our next question is from Ben Rose with Battle Road Research.

Good morning. Jim, can you comment at all on progress you are making at HKMC and also whether you are seeing any additional interest in your products from other automotive OEMs at this point?

I was in Korea two weeks ago. I visited the powers that be at HKMC . This isn't new news but we did successfully complete the phase one deployment . They gave us a follow on purchase to purchase more seats . There is from an opportunity standpoint both more seats yet that could be added as they bring more vehicle programs because they have roughly half of their vehicle programs in the system at this point. So they are going to bring in more vehicle program in phase 1 while we simultaneously deploy phase 2. We are kind of working in parallel on an expansion of phase 1 and a new phase 2 as well. Separate from that, we are having conversation with them about ALM that is an interesting topic. They are thinking about what their future options are there. We are starting some conversations around our supply chain stuff some of which is interested them and so forth. I think HTMC is going well and will be a diamond account for us for years to comes if we continue to execute like we have been. With respect to other automotive OEM . I think if you could look into our salesforce.com system you would see a number of other automotive OEM PLM and SLM opportunities now in the pipeline. A lot of these things are risky and political and so forth, but certainly there are other companies who say I wish I had what HTMC has. So that story captures their attention and even scares them a bit. We have been able to leverage it pretty well and I think we will continue to do so, and with some luck we will land some more new automotive OEM domino accounts probably in to the next fiscal year.

Both in the U.S. and Europe?

I would say largely outside of the U.S.

Okay. Then one other question. The ANSYS acquisition of embedded software Company caught our attention recently , and wanted to know if you could make any comments there specifically . It looks like ANSYS has been more of adjacent player not a direct competitor . Your thoughts on what may have motivated them to sally forth into embedded software?

I think at some level ANSYS has a vision a bit like PTC's but not competitive. Let me explain my view of it. I think their vision is that products aren't purely mechanical. They once upon a time were purely mechanical then they drifted into the electronic space and then they drifted into the software space, but reallyalways on the analysis side of things. We are more on the creation and management of things. We have not really competed with them , and don't really see this new acquisition as competitive with our ALM store either. I think we are sort of the kindred spirits in our belief we have to deal with the whole product crossing mechanical, electronic and software disciplines. We both pursue our side of that strategy and hopefully we are both good companies and hopefully we won't end up in competition but right now we are definitely not.

Okay, great. Thanks a lot.

Our next question is from Steve Campagna with Wedbush .

Hi, guys. Thanks for taking my questions. Jeff, if I could just start with a housekeeping question on MKS and 4CS. It was a year ago you got MKS towards the end of that quarter I thought, so I'm wondering is the revenue number the $20.5 million this quarter is that a stub number or is that the full quarter and same question for the organic growth rates you site?

The number for this quarter for both of those of approximately $20 million would compare to a number which was only a partial quarter last year. I think we had about $5 million or $6 million in revenue a year ago from MKS . There was no 4CS so when we look at it on constant currency or we look at it on organic we take that out both numbers out so it is consistently reported on the organic basis.

Steve just to be clear as I recall we closed the MKS deal in early June.

Right around June 1st.

So we had one quarter of that, and we closed the 4CS deal as I remember in early August.

Okay. So just to be clear the $20.5 million is that the revenue in the full quarter of this quarter or only for the first two months of intake?

It is the full quarter.

The full quarter. Okay. That is what I needed to know. Perfect. Then I wanted to know maybe just a little color on the business units. What drove the SLM out performance. When do you expect (Inaudible) to be more broadly available, and then on MKS sequentially those results were down from last quarter then any comments there? Is it salesforce reorg is that the factor or quarterly volatility et cetera?

Yes, maybe on the second question, I didn't write down the first one, but on the second question. There was reorganization of the sales force, but I think we have also lumped MKS and 4CS together , and I would say within that combo ALM is doing better than the 4CS stuff. I think it is probably not meaningful change, but yes there has been some disruption in the sales force which in the short term is never good, but I think already in this quarter it is producing some interesting new pipeline as we are finally going after this revenue synergy that was the fundamental reason we made the acquisition in the first place .

Okay.

If I go back to the SLM question now that we have salesforce.com it is very interesting to look at for example coverage ratios. I can tell you that right now SLM we have the highest coverage ratio of pipeline opportunity to revenue. I think if you ask why is that it is a place where the sales guys have my migrated to because the customers want to talk about it. There are more and more companies who have service strategies around revenue and profit. PTC has a very interesting story. There aren't that many companies lining up to compete against us, and we are viewed as a very credible player who can bring a lot of value. When I was in Asia a couple of weeks for example I talked to a large industrial company. They are around $30 billion right now they plan to grow to $60 billion by 2020 and of that $30 billion of incremental growth roughly $20 million of it is going to be services in their model. Think about that. A $30 billion industrial company right now with a small service business wants to be a $60 billion company with a massive services business, and we are talking to the very top executive in the company because they view PTC as a partner and could make a big difference in their pursuit to transform the way they service their products and create service advantage with it. It is interesting and I think our pipeline is filling up this is a place where we are pretty optimistic for the long run about what the opportunity is.

Great. Thanks a lot guys.

This does conclude our question-and-answer session. I will turn it back to the speakers.

Thanks for joining us. One quick preview here. We are going to be heading to two investor conferences next month; the Oppenheimer Tech conference on August 14th and Canaccord Genuity shortly after on the 15th. That wraps it up. Thanks for joining us this morning , and we will be speaking with you soon.

All right. Thanks a lot everybody. Appreciate the time you gave us here this morning from your busy day, and appreciate all the support and good questions that you had. Thanks , and we will see you at one of these events or else in 90 days. See you.

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