PTC Inc (PTC) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's fourth-quarter fiscal year 2012 results conference call. After brief comments by management we will go directly into the question-and-answer session. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded.

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

Hey, thanks, Teresa. Good morning, everyone. Thanks for joining us on our Q4 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 on our prepared remarks document on our IR website on www.PTC.com.

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

Thank you, Tim, and thank you all for joining us here on our Q4 fiscal 2012 earnings call. As you have seen for both Q4 of fiscal 2012 and for the full year, we reported results that could be characterized as strong earnings growth on lighter than expected revenue growth.

For the full year we are reporting 20% earnings growth on 8% revenue growth, which at constant currency would be 24% earnings growth on 10% revenue growth. While we have encountered revenue headwinds from the economy and from currency throughout the year, we are pleased that we did achieve our original margin and earnings expansion goals for the year.

On the macroeconomic front, we see the current situation as being very uncertain, with some clear evidence that the environment has been getting more difficult for our customers. Depending upon whom you talk with, our customers have concerns that range from the potential fiscal cliff to the European debt crisis to the China slowdown. More recently, in Q4 we learned of a new concern in Japan regarding deteriorating trade relations related to the territorial dispute with China.

It is more than just uncertainty, as most analyst reports suggest that the actual growth rates of worldwide manufacturers have been trending down over the past four quarters. When our customers are nervous and see a slowdown in their revenues, the result has been a tendency to dial back spending in order to preserve their earnings.

The lead article in the October 20 Wall Street Journal reported that S&P 500 revenue growth would likely be flat to negative in the most recent quarter, reflecting a consistent downward trend from double-digit growth levels of the year-ago period, which is a time when our own revenue growth was much stronger as well. The article talked about earnings reports at a number of major product companies such as GE, Danaher, Ingersoll Rand, Dover, Parker Hannifin, IBM, and Microsoft that were generally light on revenue but solid on earnings due to the implementation of increased cost controls.

This story felt familiar to us because most of these companies are customers that we know well. And while we did successfully negotiate sizable deals at four of these profile companies in the fourth quarter, we also shared some of their pain in terms of landing smaller deals than we were expecting. In each case, the customer execute part of the expected purchase in Q4 and pushed the balance out for consideration in future periods.

We shared with you on the previous earnings call that we entered Q4 with visibility into a strong pipeline in North America. We were pleased to see that despite some of the obstacles I just mentioned our Q4 license results in North America were up substantially both sequentially as well as versus the year-ago period.

Our business in Europe was incrementally softer in Q4, reflecting growing currency and economic headwinds. The Pac Rim business performed reasonably well.

Our business in Japan was unexpectedly soft as several larger deals that we were expecting to close pushed into future periods. This was attributed in part to the China trade concerns that I mentioned earlier. Given the size of the Japan shortfall, one could argue that this factor largely accounts for our revenue landing toward the lower end of the guidance range.

We closed the Servigistics acquisition on October 2, and in so doing we significantly advanced our strategy to create product and service advantage for our customers through technology solutions that transform how products created and serviced. We are excited about this acquisition because when we put PTC's pre-existing SLM business together with the new Servigistics SLM business, the combined entity became a clear leader in the growing SLM market, as measured in terms of solution footprint and revenue.

We have seen ample evidence that our SLM strategy is compelling to our traditional CAD and PLM customers and that it can provide an entry point into new accounts as well. Our SLM capability is unmatched by our traditional competitors, and we have a solid pipeline of opportunities in this new arena.

Going into 2013 we are equally confident with the balance of our solution lineup. With Creo 2 now on the market for more than a quarter we are getting good reviews and seeing a majority of our large customer base preparing to move onto the Creo platform over the next four to six quarters. This has already driven strength into our maintenance business, thanks to numerous winbacks as customers recommit to move forward with Creo and with PTC. There are many new capabilities in Creo that were not available in Pro/ENGINEER, so as the base upgrades we begin to unlock an important new selling opportunity as well.

Our core PLM and the related supply chain business have been a revenue bright spot throughout FY12 and we expect that momentum to continue into FY13 and beyond. Then with our ALM business we have completed the MKS post-merger integration; and going into FY13 we now have the ALM products in the hands of our mainstream sales organization, which opens the gates for stronger revenue synergies. So we feel good about our segment strategy across the board.

As you know, we have added significant incremental sales capacity starting in the back half of FY2011. We see early indications that this incremental sales capacity is starting to gain traction.

Whereas big deals and especially megadeals have been challenging to close in recent quarters, we've had solid performance in the base business of deals less than $1 million, particularly in Q4. This is indeed where most of our incremental capacity has been deployed and targeted, and we believe that building a stronger base business over time is key to making our business more predictable by reducing our dependency on the bigger deals.

We have been clear that our primary financial goal since 2009 has been to expand earnings growth by 20% or more per year through a combination of margin expansion and revenue growth. Throughout the 2012 year, we remain fully committed to that strategy and implemented more aggressive margin expansion to meet the 20% goal for a third consecutive year, even on lighter revenue.

PTC management is focused on delivering this earnings expansion goal. So careful management of spending and increased operating margin is an attitude that you can expect we will carry forward into 2013. As we have said before, we believe there is ample room for additional improvements in our margin structure without affecting our revenue opportunity, if we layer in efficiencies as we develop them over the next few years.

Looking forward to 2013, our guidance attempts to balance the confidence we have in our strategy and in our selling capacity with an economic environment that is challenging now and likely to remain so. That is not easy to do, given the level of uncertainty out there.

Our assumption for 2013 is an economic environment consistent with what we saw last quarter. Given that, our outlook calls for upper-teens earnings growth based on 8% to 10% revenue growth and about 200 basis points of margin expansion. We realize the revenue situation is the most unpredictable, and we will retain a strong focus on margin expansion as we did throughout FY2012.

In closing, I'm hoping you will join us next week for our Investor Day in New York where we will be able to provide a lot more insight regarding our strategy and our outlook. And with that I will turn it over to Jeff to review a few more of the financial details.

Thank you, Jim. First, just a few additional comments on our FY12 results and then I will discuss our targets for '13. We are very pleased with our earnings performance in Q4, as non-GAAP operating margins expanded to 24.5%. This improvement is primarily due to increased service margins of 12%, up from 7% in Q4 of FY11, coupled with diligent headcount and expense management.

For the full year, our operating margins increased to 19.6%, up 190 basis points from FY11. And as Jim said, for FY12 we increased our non-GAAP EPS by 20% to $1.51 per share.

A quick note on taxes as we close out the year. Our FY12 non-GAAP tax rate was 23.7%, roughly the same as in FY11; and we expect our non-GAAP tax rate to be approximately 23% in fiscal '13.

In addition, given our mix of revenue and expenses, historical profitability by region, and our outlook for FY13, we established a valuation allowance against our deferred US tax assets. This resulted in a $124 million non-cash GAAP charge in Q4 and will have no impact on our cash taxes paid.

Turning to the balance sheet, we ended the year with $490 million in cash including $230 million in funds which were used to complete our acquisition of Servigistics on October 2. The highlight of the year has been strong cash flow. We generated $217 million in cash flow from operations, or $1.80 per share. This increase in cash flow was driven by expanding margins coupled with excellent cash collections from our customers.

Now looking ahead to our target for FY13, clearly we enter 2013 facing significant and increasing economic uncertainty. As Jim cited, a number of large industrial companies including PTC's customers have lowered their growth expectations for the coming year. With this backdrop we are providing our current outlook for FY13 and Q1.

For FY13 we expect revenues to grow by 8% to 10% to a range of $1.360 billion to $1.380 billion, including license revenue of $370 million to $380 million. Despite this moderated revenue outlook, we remain committed to expanding margins and driving increased profitability.

We are targeting to expand our FY13 operating margin by approximately 200 basis points to some 21.5%. Given our revenue outlook coupled with continued margin expansion, we expect non-GAAP EPS to be approximately $1.70 to $1.80 for the year.

For Q1 we expect revenue to be in the range of $315 million to $325 million, including license revenue of $75 million to $85 million. And we expect non-GAAP EPS of $0.30 to $0.35.

And finally a few comments on uses of cash for 2013. We expect to repay some $120 million in debt and to repurchase between $55 million and $75 million worth of PTC stock during the coming year.

We thank you for your support, and I will now turn the call back over to Tim Fox.

Thank you. Teresa, you can open up the call for Q&A.

(Operator Instructions) Ross MacMillan.

Thanks a lot. I had a question on the margin progression within your forecast. It looks like we are going to start off in Q1 with actually I think a slightly lower operating margin year-over-year, which then implies that by the time we get through into the second half of the year we are going to have a significantly higher margin structure.

Jeff, can you just talk to that and that progression, I guess, as you think about the cost base as we move through the year? Thanks.

Yes, Ross, thanks for your call. We did announce that we were reducing costs and doing -- began the quarter with a restructuring. We only have a partial benefit of that restructure actually in Q1 included in our guidance. And as we complete that restructuring we would get a full benefit of those cost savings as we complete that really in the Q2 time frame.

So there is about $5 million of benefit that won't be fully realized in Q1 that will be realized in Q2 and beyond. I think in addition we will continue, given the outlook, to be tight on expenses. So I think we are pretty confident -- I think we are prudent on Q1 guidance and I think we are confident on margin expansion as we go through the year.

Would I be right in thinking that once we get that full impact of the $5 million then your cost base, as it has been actually for the last, call it three quarters, has been relatively static. Is that the right way to think about the operating expenses as we move through Q2 to Q4? Or will we see an increase?

I would expect that it will continue to improve the cost structure, reduce the cost structure as we go through the year. So we would expect to see expansion of margins in the subsequent quarters beyond just flat on expenses. Okay?

Yes, Ross, just to be clear, though -- it's Jim here. We are going to add the Servigistics cost base into Q1. So any comps (multiple speakers) year-over-year you've got to reflect Servigistics in FY13.

And then we are going to restructure to take advantage of certain cost synergies and other cost savings opportunities we are pursuing, which will lower it then as we get into Q2 and beyond.

Yes. I guess the reason I am asking is thinking about the exit margin next year. It strikes me that by the time we get into, for example, Q4 fiscal '13, assuming things play out to the forecast, that we will be at a substantially higher exit margin in Q4 of next year than in Q4 of fiscal '12.

Yes, I think that's fair. I think we should be exiting -- this year we exited at 24.5%. We should be significantly better than that as we exit 2013.

Yes. (multiple speakers) placeholder planning for 2014 would be another 2 points of operating margin for the full year. So that suggest we do need to exit at a higher level.

Yes; that's helpful. Then just on your assumptions around -- given the environment, given the large-deal close rates have been more challenging, can you help us understand just what assumptions, if any, you are making around large deals in fiscal '13 and perhaps even megadeals, the $5-million-plus type deals in fiscal '13? Thanks.

Yes, Ross, this is Jeff. Our business is characterized positively by very large customers that often place significant, $1 million, $2 million orders, and we would expect that trend to continue. And we have assumed that our large customers continue to buy those kind of rates throughout '13.

That said we also have very large, as you cited, megadeals. And every year we have had generally somewhere approximating four of those a year.

Our guidance for Q1 at the low end of the guidance does not require any megadeals to close to get to those numbers. We do have opportunities that could be megadeals. What we have seen, I think as Jim cited, is a trend where some of those that were possibly megadeals in a quarter downsized in the quarter, and someone purchased $2 million to $3 million and they may purchase another $2 million or $3 million later.

But we're not -- we are trying to reduce, clearly, our dependence on these very large megadeals. And I think building out the capacity and really the midmarket and base business has been helping us as we went through '12. We expect that to continue in '13.

Great. Thanks a lot, I will pass it on. Thank you.

Sterling Auty.

Yes, thanks, guys. I guess I missed it if you mentioned it; but maybe for everybody's benefit can you talk about what is implied in terms of the revenue contribution from Servigistics? And then another revenue follow-up.

Yes. We have been, I think, prudent on the Servigistics, as we are going into the integration of that as we speak. We would expect that to be a contribution of approximately $60 million to perhaps an upside of $70 million in the year. And they do have large customers as well, so I think we have been -- I guess I would call it prudent, maybe using your word, Sterling, to -- in our outlook for that.

So in terms of growth, about half our growth would come organically and about half of it would come from acquisition for the full year.

Okay. Looking at the comments you made about starting to get a little bit of traction with the new sales hires, does that match geographically what you saw? In other words, where did you apply those sales resources predominantly? And what else can you do in some of the weaker areas like Europe and Japan to try to bolster demand?

Sterling, a fair amount of that capacity was in fact deployed in North America, and I think that led actually to the strong pipeline we were talking about 90 days ago and to the relatively strong results we announced yesterday. So I think there are some good signs there.

I think the European situation is something that we just need to work through with all of Europe here. I am hopeful that the Japan thing is a short-term phenomenon and that that problem gets resolved more quickly and goes away. Because we have had pretty good execution in Japan, and I don't think we have -- I don't think a new problem has developed within PTC. I think a new external phenomenon suddenly impacted us a little bit, and I am hopeful that that washes over and our Japan business gets back online, as we would expect.

Yes. Maybe just a last question because I know it will be on people's minds. Competitively have you seen anything change? Because it seems like the weakness was actually not in CAD but in some of the non-CAD areas. Have you seen any changes in those non-CAD competitive dynamics?

No, I don't think there were any meaningful changes. In fact if you look at the full year, the CAD business -- let's take constant currency, because when you compare us perhaps to a European competitor, if you don't do constant currency it changes dramatically. Helps them, hurts us.

But if you take constant currency, our CAD business was relatively flat. Our PLM business was up about 13% in total, with 13% more license revenue.

So one thing I would suggest is -- we are going to stop using this 4-Box because it rolls together too many apples and oranges. Our PLM business had a very good year. Our SLM business had a softer year and in particular a softer Q4, in part because we had a very large SLM transaction in the year-ago Q4 period. So there is a tough comp for SLM, but in fact our PLM business really did pretty well for the quarter and for the year.

All right, thank you.

Steve Koenig.

Hi, guys. Thanks for taking my question. I would like to ask on Servigistics. It looks like, when we look at the margins for Q1 and then the restructuring, that that business may longer be accretive for this year. If that is the case, I am wondering what has changed in that business. What has caused your outlook to not be as good?

This is Jeff. We would expect that to continue to be accretive to our business. We have a consolidation here as well of our existing business plus that, so I think we continue to expect that that will be a positive play for us.

I think in our current outlook, given the macro factors, we have been more conservative. But I think we feel, as Jim indicated, very solid on the strategic basis; and I think there is upside in that business as well.

But we have been, I think, prudent, given more macro factors and current trends, and we are still at the early stages of just integrating that business. We are right now about three or four weeks into that, and I think we are encouraged, but we have probably been a little bit more moderate on the outlook presently.

Yes, I think, Steve, just to add a little more color to it, the Servigistics business is somewhat of a bigger-deal business. So, their revenue comes from a lesser number of transactions by far than ours does.

So we feel like, to the extent the economy is bad and bigger deals are hard to get done, it could weigh relatively more heavily on Servigistics than on PTC.

So we have suggested that if PTC were probably to end up toward the lower end of our range it might be because Servigistics underperformed relatively more than the main of PTC. That is a bit what we are thinking as we go into our year and as we put together our guidance.

Okay, great. If I could just follow up with one question. I am curious just to get some color on how you are thinking about the revenue line next year. Like I am wondering, are you going to be adding sales capacity or doing any reorgs?

The revenue line -- it looks kind of flattish in Q1. Then obviously it will need to trend up later. But how does that happen seasonally as the year progresses?

And have you talked to your customers about their spending plans for next year? And what are you hearing?

Let me speak to the seasonal pattern. I think we are expecting -- we are being I think prudent on Q1. Typically Q1 represents somewhere 22%, 23% of a full-year number for us. We would expect Q2, given the current outlook, which is I think consistent with what we saw in Q4, we would expect Q2 to be similar in revenue sequentially, and then a step up in Q3, and typically Q4 is our strongest quarter. So I think that pattern we would expect.

At the present time I think we have good opportunities with customers. I think the uncertainty that is reflected here is just the uncertainty in terms of their outlooks themselves. Right now I think we are being prudent on that for the year and for Q1.

And it will be -- time will tell us a little better as we get through that period what their outlooks are. Maybe I will let Jim comment on the sales capacity.

Yes, and as well on the customer thinking. From a sales capacity standpoint, we have ample capacity to cover us for our 2013 plan and even some distance into 2014. So I think we are going to stabilize sales headcount where it is and focus on making these people more productive.

We don't anticipate any meaningful reorganizations of that salesforce in the process. Incidentally, on that note we are going to merge in the Servigistics salesforce quite rapidly from the standpoint that we feel like this is a business we are already in, and given the momentum and the pipeline we have in SLM it wouldn't make sense to have two different salesforces out there acting independently, as we did with MKS for a while.

But coming back to the question about what the customers are thinking, I think there's been lots of data points that suggest that customers were getting incrementally more nervous throughout the course of the last quarter. I think we are maybe at the peak of uncertainty right now. Somebody characterized it recently as a Twilight Zone. You know, nobody is sure what is going to happen.

But I do think there is a sense of optimism out there. There is a number of analyst reports that suggest things will get better next year. And there are some customers that believe too that once we get the presidential election behind us and things settle down a little bit, maybe it will improve.

But we don't want to build guidance based on that, which we would have to characterize as wishful thinking. So we are putting our guidance together, assuming that we are in for a difficult macroeconomic year, and then hopeful that maybe it will turn out better than that.

Great. Thanks a lot, guys.

Jay Vleeschhouwer.

Thanks, good morning. Jim, Jeff, I would like to ask about your fiscal '13 thinking about what has been among your largest line items of revenue by geo and by product. So if I am not mistaken, by geo your largest source of revenue is maintenance out of Europe, when you break down license, maintenance, and service by geo. What is your thinking about maintenance in fiscal '13 in that region, given your comments about softness?

Then on the product side, as we have talked in earlier calls, Pro/E maintenance or Creo maintenance is your single largest product source of maintenance revenue. What is your thinking going into next year on that, particularly given your comments about Creo 2 uptake and possible winbacks and upgrades, Jim?

So, let me -- this is Jeff, Jay, so thanks for the call, the question. Let me ask -- answer a few comments and then let Jim fill it in.

We continue to have very, very good both attach rates and renewal rates, particularly in the Americas and Europe. And our outlook would be for maintenance, those rates -- and I think all our history for Q4 and the full year were those both we maintained good rates in all dimensions and probably improved; had a number of winbacks in the fourth quarter. So I think we are very solid.

We would expect our maintenance revenue to increase as we showed in the guidance. I think it is like 6% or 7% year-over-year. So I think we feel pretty good about maintenance.

I think the uncertainty is more around new purchases. So I would say we feel very good about the maintenance rates. I think particularly on Creo, the interest and uptake on Creo 2.0 is really value to customers. And as a result we are seeing, I think, continued expectations on good attach -- great attach rates and very strong renewal rates, along with I think successful winbacks.

So I think we would say that it's a very, very important line for us. It is more than -- approximately 50% of our revenue. And I think we would feel very solid with probably the highest level of confidence of any line in the P&L would be the maintenance line.

Yes, and maybe there's two pieces of color I would add to that. Our view of the economy going into 2013 is not great, but it's a lot better than it was back in 2009. And I point that out only because in 2009, when license revenue for PTC and almost everybody fell quite a bit, our maintenance held pretty steady through that.

So I think we feel like maintenance does not necessarily follow license down, if license slows down. Not quickly and maybe not at all, as we sell in 2009.

Coming back to the CAD piece, in the prepared remarks we gave you, it does talk about Creo active maintenance seats. And you see a really positive trend there, that the number of seats on maintenance in Creo has been really growing faster than the new seats we are selling.

So what is happening here is that when customers see Creo, if they had slipped off maintenance suddenly they say -- maybe I should get back on it, because if I could figure out a way to get back on maintenance that might prevent me from having to rebuy the software.

And then there is a supply chain phenomenon, which is when the big OEM-type customers, likes let's say a Volkswagen Audi in Europe upgrades to Creo, now the entire supply base has to upgrade to Creo to maintain that level of compatibility. If some of the suppliers were maybe becoming a little delinquent in their maintenance, suddenly there is a huge incentive to get back on maintenance to make sure you can stay in the ecosystem of Volkswagen and Audi or Toyota or Hyundai or somebody like that as they upgrade to Creo. So this upgrade cycle does a very good thing for maintaining the momentum of our maintenance business.

Okay. A couple follow-ups. The prepared remarks talk about 12% to 15% growth in services for fiscal '13. Would it be fair to say that Servigistics accounts for the bulk of that? If I am not mistaken I think about a quarter or a third of their revenues were services prior to the acquisition.

And with respect to your existing PLM services engagements pipeline, do you feel you have adequate capacity to meet that? What we are seeing, for example, with some of the other PLM systems integrators is that they are running at pretty high utilization rates. Some, for instance in the case of Siemens PLM, they are looking to add capacity. So do you think you have enough in place, or you are going to have to be out in the market like your competitors looking for capacity?

First, the answer to the growth, the 12% to 15% as you cited, that is correct. About 8% to 10% of that would be Servigistics. That is really the size and scale of their service business. So our organic growth would be about 4%.

In terms of capacity I think we have got good capacity. I think given the economic outlook, if the demand exceeds what we have today we can add capacity. We are doing, as you know, both delivering the demand as well as improving overall margin. And I'll --

Yes, maybe I will remind you of course that when you think about our program to increase operating margins, the front-nine/back-nine program, we have a very explicit strategy to develop a services partner ecosystem and to shift a large amount of the growth over to that ecosystem. So we have been doing that.

If you go back, I think in 2011 our services growth rate was 26%, and it was somewhere around half of that in 2012. And then organically it will be half of that again in 2013.

So that really reflects a proactive strategy to develop an ecosystem and a push a fair amount of services into that ecosystem so as to lower the mix and to help us drive up the margin of the services that we do.

Thank you.

Matt Hedberg.

Hey, guys. Good morning. You talk a lot about uncertainty here in the outlook and the macros. And I guess one other topic, Hurricane Sandy; obviously we continue to hope for the best for the people in the Northeast.

But does that play into -- it is still early, obviously. But how does that play into your guidance? Is that reflected in your outlook now? Or is it too hard to tell?

You're saying specifically Hurricane Sandy? I don't think we have a --

I don't think we reflected that in our guidance in any -- in fact, we had developed much of this guidance before the hurricane came. But I also don't think that New Jersey/New York City area is a big hotbed of manufacturing either. So I am hopeful that the impact will be in the category of round-off error.

But it could be that there is a deal or two that affected by it, so we should probably go back through our forecast and see if that is the case.

That's helpful. Then you talked -- obviously, you are slowing your quota-bearing sales rep hiring now; and you talked about productivity improvements. Is there any way to quantify what you are looking for, for productivity improvements this year?

We are clearly driving productivity. I don't have all the data right at my hands here. We are going to be in New York City next week and I think we can provide a more fulsome discussion of that, both where are we and where we see ourselves going.

But I think the reiteration that Jim cited earlier is we see the productivity from the new reps being up and we are going to continue to drive that in terms of training on both the new products and overall training for those guys. So I think, Matt, we can give you a good update on that. In fact, Bob Ranaldi will next week.

Yes, maybe just to give you a directional, without specific numbers, we added a lot of new people to a running system. And in doing that, we averaged in or we averaged down the productivity of the whole system quite a bit.

We think that those new people take around two years, maybe a little more, to become as productive as the people that had already been on the staff. So, you could imagine that we lower the productivity of the whole organization by bringing in much less productive people; but as those people ramp, then the productivity of the whole organization trends back to where it was.

In trending back to where it was productivity-wise, we have the opportunity to generate a lot of license growth. And that is why I say we are covered for 2013 and well into 2014 with the capacity we have, if we can ramp that productivity back in the direction that it used to be at before we went on an expansion.

That's helpful. Then one last question, and maybe this is a sneak peak for next week as well. We continue to be asked about your thoughts on the software-as-a-service or cloud-based initiatives, and certainly SLM I think is ideally suited for products of that nature. Is there any guidance you can give us in terms of how you are thinking about integrating products such as that into your portfolio?

Yes. In fact, Servigistics has a meaningful software-as-a-service business already and has been doing well. So I think you're right. We feel like PLM is somewhat of a lagging industry to move into the cloud. It is probably happening, but PTC was ahead of this trend when we tried to do it back in 2004.

It will happen over time, but it is a lagging industry. But I think that SLM for a number of reasons, some of which are technical, some of which are related to less intellectual property at risk and so forth, that is a category that customers are much more willing to put in the cloud. And we are going to tell you next week about the progress that we are making there, particular with Servigistics.

Great. Thanks, guys.

Richard Davis.

Just a quick question on Servigistics. So, of the new $65 million outlook for next year, we are thinking that $26 million of that is services. And then should I roughly then think the balance of it is more or less split half-and-half between license and maintenance? Because I am trying to just back into what the company is doing and what you guys paid for it.

I think the services piece is correct. Maintenance would be the next largest piece, followed by license. So when you think about it -- by the way, the comment I would make is their services business is relatively larger than ours, so that has a little pressure on margins. And also their services margins aren't as strong as PTC's.

So we're giving Marc Diouane the challenge of not only integrating that but driving the profitability of it. So just a few comments on Servigistics. But a smaller portion of it, probably in the $15 million range, would be license.

Then who knows about future acquisitions, but is the going rate these days for acquisitions 3 to 4 times revenues? Or -- obviously I am sure it varies all over the place. But is there any way you could categorize the M&A pricing market these days?

Yes. I mean the most recent data point we have is Servigistics, which was what, $220 million on $80 million; so that was slightly under 3 times.

I think it depends on the property, the scarcity, it's an overall value. Every deal is somewhat different and we will look at the economics clearly on any deal.

Got it. Okay.

Perry Huang.

Morning. Thank you for taking the question. Just had a couple questions. First one around the maintenance seats. On a sequential basis it looked like Creo and Windchill did pretty well and rose generally in line with seasonal trend for a fourth quarter. But for the all-other seat segment it was up sequentially, but it looked a bit softer versus trend and then also coming off an easy comp in 3Q. I was wondering if you could talk about any drivers there.

Yes, just a comment on the all-other bucket. There is a piece of that, a significant portion of that is MKS. And as we completed the integration we did have some cleanup of those seats. So I think we began with a set of numbers that, as we cleaned them up, we found there was a little bit of shrink in there.

That was not what we wanted, but we've got it to the right base. We are now growing that base again. So I think when you look at the trend, it's positive as opposed to negative.

It did trend down for a couple quarters as we did some cleanup. We are now in a growth mode on that.

And I think as Jim cited earlier, probably the highlight has been the growth of Windchill seats as well as increasing on Creo as well. So I think the trends continue to be pretty good, and we would expect those to continue next year.

Okay, got it. Then just as a follow-up, you have talked about the cost cutting that you are making next year. But looking at your guidance, I mean, given that OpEx growth is -- it looks like it's going to be minimal at about 2% year-over-year growth at the midpoint of guidance. How should we think about the key areas of spend for fiscal '13? Maybe in terms of R&D and sales and marketing.

Yes, I think as we integrated, we are integrating Servigistics this quarter. We have got -- already announced some plans to lower our cost and we will complete that integration.

As we look forward, I think we provided in the model our expectation would be to continue to see productivity improvement, i.e. sales and marketing, continue downward slightly as a percent of revenue.

R&D we have -- continue to be in roughly a $200 million run rate, and we would expect that to continue. One of the benefits you do get is as the new products come to market we get a revenue boost with a relatively flat R&D spending. So I would say we are continuing to be tight in all areas with probably the drive, as Jim mentioned, productivity particularly in the sales group would be a factor as we look into next year.

Thank you.

Blair Abernethy.

Hi, thanks very much. Jim, just a couple for you. Just want to get a sense of the competitive landscape on the PLM side. In particular over this past year where we have seen Autodesk move more into this space, become more vocal, more higher profile.

How is that impacting PTC in terms of your going to market? And longer term, is there a potential pressure? Or I am just wondering what deal size is, because typically your business on the PLM side has been driven by even larger deal sizes than the CAD side.

Yes, what I would say it is if you look at that 4-Box we published, let me first say I am unaware of any competition between PTC direct sales and Autodesk PLM. I am completely unaware of any.

I think where the competition would exist, if it did exist, would be in the reseller space. And if you look at the 4-Box, our resellers had a pretty good year in PLM. In this case enterprise really is mostly PLM because the resellers aren't selling ALM or the supply chain or the SLM stuff in any meaningful quantity.

If you look at the year that we had, constant currency, 19% growth on 18% license growth, 22% maintenance growth. That is a pretty good year. So I guess my view would be I don't think Autodesk is a competitive factor for us.

Okay, great. Then just turning to the MKS Integrity business, how have you progressed there in terms of cross-selling into more verticals now that they are under PTC's bigger distribution channel?

Let me back up a little bit and revisit how we did the integration and then, using that context, talk about progress we are making. When we acquired MKS, we were effectively getting into a new business we weren't already in, unlike Servigistics, where we are adding to a business we are already in.

So ALM was, for us, a brand-new business, and we made an integration decision to keep their salesforce separate through 2012. In retrospect I am not sure that was the right decision, but that was the decision we made at the time.

So there was not a lot of cross-selling happening through most of 2012. Then in the last quarter or so of 2012 we told our sales guys -- you know, go ahead and get started on campaigns.

We did land several interesting SLM opportunities particularly in North America -- I'm sorry, ALM opportunities through the PTC direct salesforce. And we are building up a pipeline of bigger opportunities. But you got to think that these guys are just getting started with campaigns now, many of them, going into 2013.

We had a pretty good year in automotive, and I would attribute a chunk of that to success with ALM in automotive. But that was less about cross-sell and more about the fact that the ALM story is compelling to automotive manufacturers. So I think that most of the revenue synergy of MKS is still in front of us.

Okay, great. Thanks very much.

Ben Rose.

Yes, thanks for taking my question. Jim, in the past, when we've gone through these economic downturns, large industrial customers have used PLM and CAD both for cost-cutting opportunities as well as driving new product cycles. Is it your sense now that cost cutting is trumping their focus on new product cycles? And if so, has that caused any change to the sales message value proposition that you are using out in the field?

Yes, I think it's a good question. I think right now what we saw particularly in Q4 was people just delaying things. They are saying -- I am not sure I should spend this money yet. There is another quarter left in a lot of people's fiscal year. Let's wait a quarter; let's see what happens.

So, I don't -- it is not like 2009 where people were really trying to take cost out. I think right now it is trying to avoid putting more cost into the system.

But in 2009 we did shift to a story around the element of taking cost out of your products and taking cost out of your product development processes through more global development processes and so forth. I think that story makes sense, and it becomes a story we will probably tell if indeed the economy actually gets worse and people start trying to take cost out as opposed to avoid putting it in.

Again, I would characterize our issue as more about downsizing and delaying things than actually trying to cut costs.

Okay, thanks. If I may, just one final question around -- you had mentioned the fiscal cliff in your prepared remarks. I noticed in the press release you mentioned an order with the U.S. Army. What are you seeing specifically with the outlook for U.S. Defense agencies and so forth?

Yes, I think to be fair we actually had a reasonable quarter in the aerospace and defense industry vertical. But I think that is a little bit people saying -- we should get our orders placed before there is a chance that the country does go off this so-called fiscal cliff. So I think that there has been a short-term positive effect in the aerospace and defense industry ahead of what they view as potentially a longer-term negative effect.

Our view for next year would be that this industry continues to plod along. There are some opportunities that aren't discretionary, but we think that this is not necessarily going to be a big growth opportunity for PTC next year as well.

Okay. Thanks very much.

Okay, folks. So thanks for joining us this morning. Again, if you would like to register for our Investor Day, please go to the PTC.com and register accordingly. With that I'll hand it over to Jim for closing comments.

Yes, well, I just wanted to thank you all again for spending your time with us here this morning and for your support of the Company. Obviously, we are very optimistic about the future, but in the short term feel like we need to work our way through a tough macro and potentially currency environment.

But we appreciate the time here today and hopefully look forward to seeing some of you again next week, and we will go back through this stuff in a lot more detail. Okay? Thank you very much.

This concludes today's conference call. Thank you for your participation.