PTC Inc (PTC) 2013 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to PMTC's third quarter fiscal year 2013 results conference call. After brief comments by management, we will go directly in question and answer session. (Operator Instructions). And as a reminder, ladies and gentlemen this conference is being recorded. I would like to introduce Kristian Talvitie, PTC's Senior Vice President of Investor Relations. Please go ahead.

Good morning everyone. Thank you for joining us on today's Q3 earnings call. As a reminder, today's 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 bebased on the current assumption of PTC's management, and are subject to risks and uncertainties that could cause actual events and results to differ materially. Information concerning these risks and uncertainties is contained in PTC's most recent Form 8-K, Form 10-K, and Form 10-Q on file with the SEC. Unless otherwise indicated all financial measures in today's call are non-GAAP financial measures, a reconciliation between the non-GAAP measures the comparable GAAP measure is located in the Q3 2013 press release and prepared remarks document on the Investor Relations page of our website at www.ptc.com.

With that, I will turn it over to Jim.

Thank you Kristian. Good morning to all of you, and thank you for joining us here on our third quarter fiscal 2013 earnings call. In our third quarter, we delivered earnings that were at the high end of our guidance range, coming from revenue that was at the low end of our guidance range. Naturally we would like to see the Company deliver stronger top line results, but this recent trend of delivering strong earnings growth even with lighter than desired revenue growth is largely attributable to the disciplined execution of our margin expansion strategy that we told you about years ago. Our progress on margin expansion has allowed us to hold our EPS guidance relatively constant all year, despite the pressure of increasing revenue headwinds. We are now nearly four years into our strategy to drive a 20% compound average EPS growth rate through a combination of margin expansion and revenue growth, and we are right on track with that plan.

We continue to believe the Company should be able to achieve an operating margin in the 28% or even 29% range in the years beyond 2015, so there remains a good runway of margin expansion ahead of us, and we see ourselves in a position to deliver superior earnings growth over a multi-year period going forward. Most economic outlooks have suggested the macro-environment would improve in the course of this year, but it is clear from our results and from those of our peers, that we have not seen any meaningful improvement materialize yet. In this past quarter we saw an additional macro headwind develop, as the Chinese manufacturing economy suffered an unexpected setback, which translated into a more difficult selling environment, and disappointing results in our Asia Pacific business. This factor which we weren't anticipating 90 days ago, served to move our revenue performance towards the lower end of the guidance range.

There were many high notes during the quarter, in early June we held our Annual PTC Live customer event in LA. This year we launched a new format where we held a service oriented event in parallel to a product development event in co-located convention centers. Both events had great attendance, butthe inaugural service event far surpassed our expectations, with many attendees at this event declaring it to be the premiere event in the SLM industry.

PTC's message about how our solutions help manufacturing companies transform themselves so that they can compete in a world of smart global products that are connected to the internet and delivered with a service-oriented business model, resonated both with the audience whose businesses it is to create the products, and the audience whose business it is to service them. There is definitely a buzz among our customers, as well as with analysts and peers, that PTC's strategy is compelling and it is better differentiated than ever from our traditional CAD and PLM competitors. Most importantly, this strategy is much more aligned with where these customers see themselves steering their own companies. So given the growing focus the manufacturing companies have on after-sales service strategies, SLM is a hot topic with our customers, and it is a domain in which PTC is viewed as the clear leader.

Our SLM pipeline is particularly robust and the PTC sales force has quickly adopted Servigistics, and helped it to perform above our expectations all year. During the quarter our SLM strategy helped us to land several important domino-style wins. One I would like to call out is Renault, theEuropean automotive OEM, who is a member of the Renault Nissan alliance, which is the third largest automotive group in the world. Renault awarded PTC a large SLM contract to restructure its service systems and processes, in order to transform their customer service experience.

Due to the size and structure of this order, we will recognize it ratably over time, and thus have provided no license revenue in the quarter. You may be aware that Renault has a strong partnership with Dassault Systems in the CAD and PLM arena, so this win is a good proof point for the compelling and differentiated nature of our SLM offering. As the first major automotive OEM win for our SLM business, this represents a watershed event for PTC in automotive, which is the largest vertical in manufacturing.

We were also pleased to close the Enigma acquisition in early Q4. Though is a small tuck-in to our SLM strategy, Enigma is a well-known brand in the service organization of our customers, and the Enigma technology and domain expertise will add a lot of value to our SLM strategy. With revenue and purchase price, both in the single digit millions range, this acquisition will not be material to our financial results in FY 2013 or in fiscal 2014. As you can probably sense, our optimism about the future is only growing. Based on the size of the pipeline that we are attracting across our five segments, we believe stronger revenue growth lies ahead of us. And at some point as the macro-environment improves, we will begin to see this pipeline convert in a more attractive revenue growth rate.

With the leverage we have created in our business model, and improved growth rate will make our earnings rate even stronger. As we are approaching the of our fiscal 2013 we are current in the midst of our annual planning process, and will be providing formal fiscal year 2014 guidance in conjunction with our Q4 earnings release in October. However, we wanted to provide some directional insight into our current thinking about our next fiscal year that starts October 1st. Assuming a stabilizing macro economic and foreign exchange environment, we are currently targeting low to mid-single digit revenue growth in fiscal 2014, together with 15% to 20% EPS growth. This thinking is based on the size and maturity of our pipeline, coupled with our initiatives and commitments to enhancing profitability.

With that I will turn it over to our CFO, Jeff Glidden, who will review some of the key financial metrics for the quarter.

Thank you very much. As Jim said, we are pleased with our Q3 earnings performance, gross margins increased to 73.2%, operating margin expanded to 22.2%, and we delivered earnings of $0.45 a share, up 22% year-over-year. Our favorable earnings performance in Q3 resulted from a combination of lower overall spending, higher service margins, and favorable revenue mix.

For the nine months of FY 2013, our operating margins have increased by 220 basis points from the prior year, with again approximately half of this improvement coming from increased gross margins and the balance from leverage on operating expenses. I would also note while our operating results for FY 2013 have been strong, we have been dealing with significant unfavorable headwinds related to foreign currency when compared to FY 2012. In Q3 of 2013, foreign currency shifts particularly from the yen negatively impacted our reported revenue by $8 million, and EPS by $0.03 per share when compared to the prior year. On a constant currency basis our non-GAAP Q3 EPS would have increased by 30%.

The highlight of our Q3 performance was cash and cash flow. We ended the quarter with cash $257 million, up $16 million from Q2. Cash flow from operations was $85 million. We paid down $40 million on our credit facility, repurchased $20 million in PTC stock, and spent $7 million in capital expenditures.

Now looking ahead to our outlook for Q4 and the full year, given the challenging macro environment, we expect revenue to be in the range of $330 million to $340 million, including license revenue of $95 million to $105 million. We expect to deliver EPS of $0.50 to $0.55. For the full fiscal year we expect revenues to be in the range of $1.280 billion to $1.290 billion, and EPS to be in the range of $1.72 to $1.77. We thank you for your support.

I will now turn the call back over to Kristian Talvitie.

Great, thanks, I think we are going to open the call up for questions. We would ask you to limit questions to one question and one follow-up. With that, Nikki?

(Operator Instructions). Please stand by for the first question. Matt, your line is open.

Good morning, thanks for taking my questions, guys. Yes, the one thing that stood out to me was your commentary around expanding pipeline specifically in the US. I wonder if you could give us a few more details on the confidence level there and what you are seeing?

Good morning, Matt, it is Jim here, so as you know we went live four quarters ago with this Salesforce.com CRM system,which we are happy to have, because it does give us high fidelity view of what is in the pipe, and then it allows us to track close rates on a quarterly basis, on a geographic basis, on a segment basis, and so forth, against that pipeline. What I would say is from Q3 to Q4 our pipeline is significantly stronger. If you think about close rates for a minute, sort of an industry rule of thumb would be that you will close one-third of your pipe. If you look at what happened in Q4 a year ago, we did better than that, sort of Q4 magic if you will. If Q1 and Q2 of this year we were right on that industry metric of closing one-third of the pipe, this past quarter we did less than one-third of the pipe, and really feel that is the pressure of the macro-environment. It is littleharder to close these deals in the quarter. As we look at Q4 we have a pretty strong pipe. But we are sort of operating with the assumption that close rates will be challenged like they were in Q3, but at some point as the economy gets better and the close rates drift back to where industry standard and really what is was PTC's standard, we will deliver some pretty interesting growth off of the pipeline that we are tracking, if it happens.

That is great. That is helpful. Maybe as a follow up to Jeff, we do appreciate the initial look at that fiscal 2014. I guess I am wondering from a high level can you talk about how license would shake out, that assumption of low to mid-single digit revenue growth?

Just as a comment, what we are assuming in that outlook into next year is a stabilizing economy. It doesn't get worse, but it necessarily get better. We are assuming stable currency just as a point of reverence. We would expect the license revenue to be higher than the overall revenue for next year, so that is probably somewhere in the mid to upper-single digits. As a function, as Jim said, we see good activity. We see a lot of building in the pipeline. It is really a function of how we close that and what the timing is. We feel this is an appropriate level of guidance to provide at this time. We will give you a better update at the end of Q4.

Great, thanks guys.

You are welcome.

Next question comes from Steve Koenig from Wedbush Securities, your line is open.

Thanks for having me on the call. I would like to ask about how the quarter ended. Did you see any large deals get pushed out that you expected to close, and you also made reference to a large deal in Japan. Was there a particularly large deal in the Americas that contributed to that with a fairly good result?

Good morning, Steve. Yes, I think there was a handful of large deals that were pushed, and a few more that came in but downsized a bit. So definitely the pipe in Q4 gets a little stronger, simply by the fact that some of the Q3 deals slid into Q4. Just to cover an issue you didn't quite ask, but it is related, is there any competitive pressure, I would say by the time we are forecasting a deal, we are largely through the competitive dynamic. We are past the competition phase, and we are into the negotiating and closing phase. Of all of the deals that were pushed, none of them were competitive. Of the deals that downsized, none of them were competitive. At this point, they had previously been competitive, but we are through that phase. It is really just a question of when do we close them, and at what size.

Okay, that is great. That is related to my follow-up question. I think for the follow-up, Jim, I would like to ask maybe looking a little more broadly past Q4. How do you guys think about the competitive dynamics and your share, and how that is the same or changing in the CAD and PLM market segments?

I think if you look at our five segments, probably in CAD we have the least bullish story. We sort of feel like our growth would be at or maybe a modest notch below the industry. But a lot of that growth for everybody these days comes from the base. There are not a lot of share shifts going on. We have a product cycle ahead of us that we think could be helpful, but we are least bullish relative to the industry in CAD.

If you switch to PLM, we think we will win every major competition as we go into it, and 80% of the time we do. If you look at SLM, we feel like we really don't have competition. That we somewhat invented this category, and between ourselves and Servigistics we were the premiere players, we are teamed up together today. We feel pretty good about it. ALM, it would depend on how does the customer see this? Do they see software as software, or do they see software as part of a manufactured product. If they see software as part of the manufactured product, and they are worried about the whole product, they will like our story. If they think software is standalone, then there are some big competitors, IBM, Microsoft, HP, et cetera, that would be in strong footing as well. I think in general we feel like we will outgrow our competitors, particularly in the segments of our business that really represent the growth opportunities.

Great, thanks a lot, Jim.

Raimo Lenschow with Barclays, your line is open.

Thanks for taking my question. I want to go back to the economy, sorry for doing that. If I look at some of the leading indicators in terms of IFO, ISM, they start to look slightly better even in Europe where your numbers were not that great. Can you comment a little bit what you see in Europe, because the numbers are still relatively weak, but I hope the pipeline is starting to build there?

Good morning, Raimo, that is a fair expectations, and sort of aligns with what we see. If you look at our European business, it was down a bit in 2012 and down again in 2013. If you look at our assumptions for 2014, which are really a forecast based on a pipeline, we are actually projecting some reasonable growth in Europe, a rebound if you will, so I think that the macro-factors, the macro-data points sort of reflect that as well, that the situation in Europe appears to have stopped getting worse, and might actually be starting to get better. It is too early to call that for sure, but that is what we see in our pipeline, and that is what our FY 2014 color would imply, to a limited degree anyway.

Perfect. One follow-up I had, first of all thanks for giving us the beyond 2015 view a little bit on the margin drivers. Can you highlight a little bit what do you think the next drivers would be to continue to have progression on the margin side? Thank you.

Yes, so just to add some clarity to that, back in I guess it in 2009 when we outlined this margin expansion program, maybe it was 2010, we talked about the front nine and the back nine. At that point in time, we said that our target was 28% margins, but only 26% by the 2015 time frame. So we always had a view that there was more beyond 2015, but we were only showing a financial look through 2015. So I think that we have some new ideas that have come up since we have been working on that front nine-back nine for the last four years. Some new types of service offerings, new efficiencies in some parts of our business, that might allow us, for example, to take our services margins to a number that was meaningfully higher than any number we have ever shared with you. I would say stay tuned. We would like to give you more color on that on an Analyst Day that we are hoping to pull together later this year. We think that there is definitely the opportunity to get to the 28% we saw four years ago, and we think if you ask us the question today, we might it was 29%.

Okay, thank you.

Sterling Auty from JPMC, your line is open.

Yes, thanks. In terms of the restructurings that you have done, could you give us a sense of where your sales capacity and productivity is today? Meaning, once we start to see economic expansion pick up in demand, how much can you layer on and produce before you actually have to start increasing head count again?

Good morning Sterling, so that too is a very interesting question. What has happened in the last couple of years is that we added a fair amount of sales capacity, and perhaps because the macro-environment gave it up in productivity. If you look year-over-year we have more capacity, we don't necessarily have the growth we would expect. Simple math would suggest less productivity, particularly if you look at it versus two years ago. We feel like right now we don't need more capacity for FY 2014, even to support the sort of color we gave you. But what we need is a rebound in productivity, and we have a number of strategies to try to drive up that productivity. One of them obviously is the macro-environment beyond our control. That would help a lot.

But separately internally we have interesting strategies. If you think of our front nine-back nine, one of the things on the back nine is better tighter solutions, that would have better value props, shorter sales cycles, et cetera, and that stuff is starting to come to market now. So we think we will have that in the water supply for example in FY 2014, and that independent of the macro-situation that would be helpful. We would expect to see a rebound in productivity in FY 2014, and if that happens, as we get into FY 2014, we will start asking the questions about capacity for FY 2015. But at this point, we don't really see a big capacity need to support our FY 2014 outlook.

When you look at the potential for license growth acceleration, when you look at the pipeline, what is it that is going to lead you out? Is it going to be the PLM side, it is going to be further acceleration of SLM, or do you think just once the economy starts to improve internationally it will be a broad based improvement?

I would characterize our pipeline across four of our five segments as being pretty good, and then being exceptionally good in SLM. But I just want to say that I think SLM could do relatively better than the others, but all of them look pretty promising in terms of the actual opportunities that are being worked in the pipeline.

Okay, thank you.

Yun Kim from Janney Capital Markets, your lines are open.

Hi, thank you, you talked about the CAD business a little bit, but can you just go into a little more detail about the continued weakness you are seeing in that business? It has been down year-over-year for the past six quarters in a row, it has since decelerated again this past quarter, obviously CAD business does have some negative streaks before, but I don't think it has ever shown six quarters of decline at least not in the last ten years. Is there something fundamentally different about this downward trend this time around, versus previous down cycles in the CAD business? The CAD business, does that have a much bigger exposure to Europe and Asia region than the other business? And then final on the CAD, one of the key growth drivers behind the Creo notion was the ease of usability, which should have expanded your target market beyond engineers, how is that progressing, at least, not necessarily in terms of sales but from an interest point of view? Thanks.

Yes, good morning Yun. Let me try to get the second part of the question, because that provides a good context for the first part. We in our Creo product as compared to our Pro Engineer predecessor products, we have a lot of new capabilities, new modules, better usability through better user interface, through simpler direct modeling capabilities, and so forth. We have said that in order to get to that capability, we need to take the base forward to this Creo version. It is hard to sell the new stuff in Creo to a customer that is still using Pro Engineer. We have been tracking our progress against upgrading the base to Creo.

We have been projecting that by calendar year end, we expect to have 50% of the base on Creo. We are on target for that. There are some big customers Caterpillar and John Deere type customers that are going to upgrade between now and the end of the year, they will drag with them their whole supply chains, and so forth. So we think that by the end of the year that we will be over the top of the hill, in the sense that 50% or more of the base will be on Creo, and we have actually seen some promising data that says, once a customer updates to Creo, a majority of them loop back in a quarter or two and buy some of the new stuff.

We actually think that this product cycle is out there. And that is interesting, because with the product cycle, we can sell more software to customers even if they are not hiring, but short of that product cycle a lot of CAD growth is driven by seat count growth, in an environment where nobody is hiring there is no seat count growth. And I think if you look at AutoDesk performance, if you look at Dassault's performance,nobody is not going to cover up the ball with CAD growth right now, and it really is because hiring has been a problem for the last six quarters that you referred to. But if hiring picked up that would be helpful, but independent of that as we get farther into this product cycle, we should have an upside opportunity that is not hiring-based.

Thank you for that color, I think that helps a lot. In terms of your CAD business driven by the resellers today, how is that progressing versus prior trends, and whether or not your channel business is improving or not? Thanks.

Yes, I think our channel business Jeff was flattish.

It was up slightly. Both direct and channel were up in the quarter, very small amounts but that is not a trend. We have been holding our own in the channel.

So I think that the picture is not materially different in the channel. Of course, the channel does tend to sell more new seats, because they tend to sell to small and medium business, and you find some influx of new companies, start-up companies and so forth, buying their first-ever CAD seat. Generally speaking there is a little bit of a different driver down in the SMB space, but that too has been under pressure for us and for our peers, our CAD peers over the last six quarters. So again I would say,I don't think our performance there is markedly different, than that of AutoDesk or Dassault, but you may have studied that closer than I.

Thank you.

Ross MacMillan with Jefferies. Your line is open.

Thanks, so Jeff, on fiscal 2014 it looks to me like the initial view is that you are going to achieve at least the same incremental operating margin increase, and maybe more actually if you hit the high end of the non-GAAP earnings growth rate. I wonder if you could just maybe help us with a couple of things. One is, where do you think the professional services gross margins could go? I would be interested in your view on, you have done a great job of expanding that. Maybe next year, maybe ultimately what you think the range there could be? Then when we think about the other area of leverage, is it mostly just, let's call it a very, very prudent approach on operating expenses? Thanks.

So Ross, I appreciate that. Obviously to get to 15% to 20% EPS growth next year, we need to add more than 200 basis points. We really need to add 300 to 400 basis points in terms of operating margin expansion in the year. I would say specifically to your professional services discussion we have been tracking either on or ahead of all of the metrics that we put out there. We did 15 points this quarter. We will do 14 for the year. We would be outlooking by 2015 that we get to 17% or better, and we would say longer term we think that is consistent with Jim's discussion, longer term that could be pushing 20 points of margin. That piece continues to give us basically gross margins that have now moved from 70% to 73% to 75%, or above that.

The other pieces you described is really I think that we have had, done a very good job in expense control and looking at continuing to leverage the operating expenses, and I think the combination again a very good performance on the services business, and on expense control can push us not only the benefit that we described here for 2014, but into 2015 and beyond.

I think, Ross, it is Jim, to just add some more color here. It would be good to paint a more accurate picture for you at our Analyst Day, that like I said I hope we have this fall. But if you think about it this year,we are in the 21% to 22% range, and if you go back to maybe we can ultimately get to 28% to 29%, that said there are 7 points of margin before we feel like we have really optimized things. You might guess that would be front-end loaded, because we can move more quickly now. Particularly in an environment where the growth is less robust, we can move more quickly on margins.

So perhaps in the short term, say next year, you would have a story with a good chunk of market expansion, and a little bit of growth, and then maybe the year after that it would be a better balance of growth and margin expansion, as the economy gets a little better, and maybe in the years after that we would be returning to what we feel like is more normal growth rate in a good economy, but if you follow that map, that says there could be four good years of EPS growth ahead of us. That is really what I meant by superior growth. We could continue to deliver growth that was markedly better than other software firms, we believe, for a number of years to come.

That is great. That is really helpful. Thank you. Maybe two quick follow-ups. One for Jeff. From the debt side you are getting close again to sort of net debt neutral position. You are paying down your debt, you did $40 million I think this quarter. As you get to this position, how are you balancing either debt pay down versus other uses of cash, such as stock buy back? How should we think about that progress?

Okay, great question. The good news obviously is we expand margins we also add and expand cash flow. So that gives us a lot more flexibility for the year 2013,we began the year with the view that we pay down debt $100 million to $120 million, we will be at the high end of that range. We indicated share repurchase of $55 million to $75 million, we will be at the high end of that range. That continues to give us more flexibility as we just described, we will both repurchase stock in the fourth quarter and pay down additional debt, and that cycle continues. I think what we are doing this year is actually purchasing, repurchasing more shares in 2014 than we did in 2013, and I think, I am not committing to the future, but we continue to have more flexibility, and particularly as we pay down the debt that gives us more flexibility on perhaps share repurchase. I think we have been very disciplined also on M&A, and we will continue to do that, I think that we cited the Servigistics acquisition, as an example that we closed at the beginning of the year, that has been a very meaningful strategic decision, but also a very from a financial standpoint that has performed very well. We will continue to look at those balances, and all of the acquisition M&A activity is really driven by the strategic framework, as Jim has articulated it.

Last one from me. Just on that, what sounds like a really good SLM win at Renault, when you mentioned the structure it meant that no revenue was taken. I was just curious, is that a function of the contractual arrangement, or are there future deliverables that need to be fulfilled, so that it is more delay on how revenue can be taken as a result of future deliverables being required? Thanks.

It is because of the size and scale of it. This is really accounted for under contract accounting, percent complete, and we did recognize some services revenue in the quarter. It was small, a relatively small number, but we would have that. It really looks like a ratable deal to us over time. So over the next multiple years, similar to the way we are looking at Caterpillar, because it is a similar kind of model, that would be a large opportunity and win up front, and then recognizing revenue ratably as we deliver on a percent complete basis.

Is that something that you anticipate will apply to most of the large deals, and/or is that something that you are deliberately pursuing?

Yes, we will have a few of these, and I think it is really a function of what the customer requires. If they require a larger program like this, we get into a place where we say contract accounting is appropriate. I think it is the exception not the majority of our business.

Yes, Ross, it is Jim here, I might say that the sales team fought like crazy not to let that happen. That is certainly not an overt strategy of the Company. But as these deals get bigger and more complex, the accountants step in and say, I don't think you have the VSOE type of evidence to support an unbundling of that transaction. So let's take it all ratably.

Great, thanks, and congratulations on the very strong earnings.

Thank you.

Matt Williams with Evercore Partners. Your line is open.

Good morning guys, thank you for taking the questions. Just wanted to I guess dig into two product areas, and try to get a little bit more color on what you are seeing there. Obviously a good quarter again in Servigistics, and the year obviously the expectations look higher than what you initially thought. Underlying that the organic SLM business has been a little bit weaker. I am just curious if you could provide a little color on some of the dynamics there, and how we should think about the relationship between Servigistics and some of your core SLM offerings going forward?

Good morning. That is a very interesting question. Because you may remember when we acquired Servigistics, we were very clear that we were going to move to integrate it quickly. As a consequence of that, the PTC sales force quickly jumped into the game, and started running Servigistics campaigns. So some amount and the distinction between organic and Servigistics that we are talking about here on this call is completely lost on a sales guy who is just trying to win a deal. So some amount of the upside of Servigistics is driven by the PTC sales force, who are running these campaigns as an entry point, planning to drag the organic stuff in later, but it is very difficult for us to separate the two and say that one half is doing better than the other half, because in fact it is executed as a bundle. So for us it is more meaningful really in terms of our operations, to think about how the bundle is doing. That is my view of the situation.

Okay, that is helpful, thanks. Then the other area I was interested in is just the ALM business. Back in June we talked about that they are fairly complex sales and that the sales cycles could be a little bit longer there. So just curious as to what you are seeing sort of around the pipeline build, and ALM and how the sales cycles are performing in that business, and I guess beyond that sort of how you are continuing to think about the cross-sell opportunity for ALM into the existing PLM base?

Yes, I think when we look at our data for ALM both historical performance here and then pipeline going forward, it looks a lot like PLM. The business is not doing relatively worse than PLM. It is actually maybe doing a notch better than our PLM business. When we look at the pipeline going forward it is a pretty good looking pipeline, as is PLM. I think that actually says there is a fair amount of cross-sell, and we are selling the same kinds of stuff to the same kinds of customers. Whatever reasons they might use to delay a PLM purchase are the same reasons they would use to delay or downsize an ALM purchase. I think that our view is that it has been a good acquisition. It has performed relatively well, and the pipeline looks relatively good going forward. The premise of the acquisition feels completely intact to us.

Okay, great, thanks so much.

Jay Vleeschhouwer with Griffin Securities, your line is open.

Thanks, good morning. Jim, I would like to follow-up on the earlier line of questioning about your CAD business, I think your CAD support revenues which are still your largest line item of revenue, your active CAD seat count grew sequentially from the prior quarter according to your prepared remarks, but there has now been three sequential quarters of decline in the CAD and supporting revenue. Can you talk about the influences inside of that number in terms of flow through of prior weakness in new CAD ASPs or currency, or perhaps even mix, and how you are thinking about that number in the context of your fiscal 2014 guidance? Then one or two follow-ups, thanks.

Jeff, you might have to help me out here. The data I am looking at says that our CAD maintenance, or what we now call support revenue, was essentially flat year-over-year.

I would say if you look at this, the two areas that have been impacted in terms of the reported dollars, I think you cited the CAD seats have performed well. I want to get back to you with constant currency data, because we do have a significant headwind, particularly in Japan as an example, where the yen is off close to 20%. And that is a big support business for CAD. So there has been a headwind, clear headwind on currency for both the quarter and the year, and overall the seats are up. So I would say that is a piece of the puzzle. I don't have all of the data in front. We could follow up with that.

I am looking at more data here that might be helpful. So on a constant currency basis, our maintenance revenue was up about 1%. Our seat count was up in part because of some large deals, but our license revenue was down as we discussed earlier. So I think that in general license revenue is challenged. Maintenance revenue has been holding up pretty well. We probably for example in this order in Japan booked a large seat count which helped the seats on maintenance.

It will be forward-looking maintenance recognition as well. I would make one other broad comment just to take it up a level, Jay. If we take a look at an area of strength and really overperformance in the quarter, it was our support business. We continue to I think deliver very well against the goals and guidance, and in particular its attach rates are 99%-plus, renewal rates continue to be very strong. I would just want to make sure that we understand how critical, that is 52% of our revenue in the quarter, and I think when you drill into all of those metrics, while there are always things you can do to make it better, I think that piece of the business is well guided and has been performing very well. I want to make sure that we have that context.

You asked a question about next year in terms of FY 2014, again we just gave you some color. Within that color we would expect the maintenance growth rate to be at or slightly better than the Company growth rate in FY 2014.

Okay, now to give you somewhat a longer term look at the conference in Anaheim last month, in some of the management presentations, we heard you speak about your more or less having settled in the 18 to 24 month product release schedule, for Creo for example, and for Windchill. Which is somewhat different from what your competitors do. The question for you is, if at some point you did in fact want to move to a more rateable model, following up on Ross' point earlier, at least on Windchill, do you need to have a more rapid release schedule roughly every year or so to underpin that kind of a rateable or subscription model for at least some of the product lines?

Yes, I mean, you are asking how would we react to a strategy to go to a ratable model, but we haven't actually declared a strategy to go to a ratable model, so it is hard to answer that question.

Okay. Referring back to the comments you made earlier about Renault, you inserted Caterpillar, or your experience with Cat in that answer. But when you look back at what happened in 2011, early 2012 with the Cat business for SLM, there were two or three quarters of pretty substantial upside to revenue, and then a pretty sharp falloff thereafter. When you say ratable in context of Renault, do you mean actually even levels of revenue over some period of quarters, or do you think the experience might be the same with a spike for a couple of quarters and then a falloff?

Let me just say that the way we look at this accounting, it is a percent complete. If we deliver more on a particular activity or a particular time frame with more resource on it, we will recognize more revenue. So this will ebb and flow over time. It is not direct linear where you say that it is a 24 month project, and you divide by 24, it is going to be based on the work completed and the hours but in against the estimate to complete. So we will move around a little bit, but I think fundamentally to think about a big win like Caterpillar, most of the revenue rec is ahead of us, in both Caterpillar and Renault kinds of deals, they were big wins and they represent annuity streams that we will recognize over the next several years, so I can't be any more specific.

I think I know what you see, so let me respond to that. In the case of Caterpillar, we did multiple back-to-back contracts. Some of those first contracts had revenue rec up front, and then really it was the third contract that we went ratable on. So at that point you stopped seeing really meaningful license revenue, even though you might have seen some earlier. There has been a steady diet of services revenue coming out of the Caterpillar project. Renault, if we were to break that out in our reporting for the next number of quarters, would look like a good chunk of services revenue and probably a little bit of license revenue, but you will never see a big pop in license revenue coming out of this Renault contract, even though it does contain license revenue.

Great. Thanks Jim, thanks Jeff.

I think we have got time for one more caller.

Richard Davis with Canaccord. Your line is open.

Have you seen any pricing pressure at all on your support? Some companies have, some companies haven't, I was just wondering?

Good morning Richard, no, we are not really seeing any pricing pressure. In fact, we probably see a pricing opportunity. Our renewal metrics are high. Our attach metrics are high. We feel like there are opportunities probably around pricing, opportunities around discounting, et cetera. Our maintenance or support business, as we call it, is full speed ahead.

Great, thanks.

Thank you.

Okay, I think that wraps up this morning's call. We would like to thank everybody for their questions and their support, and we look forward to speaking with you.

Go ahead.

I was saying we look forward to speaking with you at our next earnings call, and then probably shortly thereafter on Investor Day, and we will get back to you on dates for that.

I was just trying to tell Kristian I wanted an opportunity to thank you all, and thank you for your time here this morning, I appreciate that, and for your support, and all of the great questions. I am always impressed by how insightful you guys are to the things that make our business tick. I appreciate that. And I appreciate your time. Thanks a lot, and we will talk to you again soon. Bye bye.

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