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Executives

Kristian Talvitie – VP of IR

Dick Harrison – President and CEO

Neil Moses – EVP and CFO

Jim Heppelmann – EVP, Software Solutions, and Chief Product Officer

Analysts

Jay Vleeschhouwer – Merrill Lynch

Greg Dunham – Deutsche Bank

Vijay Haynes [ph] – Needham & Co.

Mike Olson – Piper Jaffray

Ross MacMillan – Jefferies & Co.

Sasa Zorovic – Goldman Sachs

Steve Koenig – KeyBanc Capital Markets

Barbara Coffey – Kaufman Brothers

Sterling Auty – JP Morgan

Parametric Technology Corporation (PMTC) F4Q08 (Qtr End 09/30/08) Earnings Call Transcript October 29, 2008 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to PTC's fourth quarter fiscal year 2008 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, ladies and gentlemen, this call is being recorded.

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

Kristian Talvitie

Thank you and good morning everyone, and thanks for joining us today. Before we get started, I just wanted to quickly cover a couple of housekeeping items.

First, as you may have noted there is a type error [ph] related to the dial-in number. It is for the replay of this call in the press release we issued last night. So, our (inaudible) release went out and the correct replay number is now on our web site, on Yahoo Finance and so on. Apologies for that and second as you also know we have postponed our 2009 investor day originally scheduled for next week to February and more details on the exact date of this event will be forthcoming when it is finalized.

Before we get started with the call, I would like to remind everyone that during the course of the conference call, we will make projections and other forward-looking statements regarding future financial performance, business trends and other future events. We caution you that such statements are only predictions and that actual results might differ materially from the results projected in these statements. We refer you to the risks detailed in yesterday's press release, the company's annual report on Form 10-K and in the company's other reports filed with the SEC from time to time. Participating on today’s call are Dick Harrison, President and Chief Executive Officer; Neil Moses, Executive Vice President and Chief Financial Officer; and Jim Heppelmann, Executive Vice President and Chief Product Officer. I'll now turn the call over to Dick.

Dick Harrison

Thanks, Kristian. So, just a few remarks. Again we had a – we are pretty excited about the year. We had in the quarter – it was a record quarter in terms of revenue in the history of the company and a record year. So, we are excited about our ability to build on that. We had some major wins in the marketplace during the year. Many of you know about the EADS win and we can talk more about that, but I will also say that as we look at the pipeline which is very solid we think there are going to more wins like that coming during the balance of the year and some maybe as soon as this first quarter.

We have done a nice job in the last 12 months of building out capacity both in terms of our direct sales force and our channel, and our products have never been in a stronger position in the history of the company. So, let us move into Q&A and we will take the first question.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Jay Vleeschhouwer with Merrill Lynch. Sir you may ask your question.

Jay Vleeschhouwer – Merrill Lynch

Thanks, good morning. Dick a few things, first looking into fiscal ’09 what are your expectations for being able to maintain new maintenance and maintenance renewals, signings, are you seeing any indications at all that customers are scaling back on renewals, maintaining the license space but perhaps not paying maintenance on as many seats as before.

Dick Harrison

Jay we haven’t seen any deterioration in the maintenance. In fact, I think we had in the script. We have a record number, historical record number of users that pay maintenance for our software in the range of 900,000 active users on a daily basis and the number is going up, not down. So there is no deterioration in the maintenance numbers.

Jay Vleeschhouwer – Merrill Lynch

Secondly, looking at the market, could you talk a little bit more about the various markets auto, aero, high tech, other industrial markets, any important indications in any of those and with respect to one of the major objectives you delineate in the prepared remarks for ’09 meaning the investments in the channel and channel capacity, could you talk about that? What are the objectives for growing capacity and are you seeing any improvements in channel economics? Is it increasingly valuable to a reseller to do business with you versus let us say (inaudible) or anyone else. Is their margin structure becoming better by doing business with you?

Dick Harrison

Well, with respect to the verticals, again, we didn’t really see any softness in the September quarter. You know, we had a record quarter with over $300 million in revenue. It was the high end of the guidance both on earnings as well as revenue. So, we didn’t see any softness. At the same time, with the exchange rate and just watching what is happening we are opening up the new year, fiscal year, here with a sort of a cautious attitude. With respect to verticals, we didn’t see any sort of, you know, softness in any particular vertical. I mentioned that on the heels on the EADS win, we really do have some big active campaigns. A number of them are displacements of our competitors and it crosses multiple verticals. So, we are not really seeing as much of that.

We are not as heavily invested in automotive as some of our competitors as a percent of our revenue, while we in the supply chain and automotive and in power train, but even in those markets, you know, right now we haven’t seen lot of softness. I think if you are a big supplier to the US OEMs, that might be problematic. On the channel side, we grew our channel business last year. It was in the range of 40% plus. Organically, it was in the range of 20%. We have said, if you go back 5 or 6 years, the channel accounted for 10% of our revenue, today it is 25%. We are driving towards 35%. Now some of that is our current channel partners are investing with more reps.

We are offering them more products, both organically and acquired, and we really have an aggressive plan to drive towards that 35% of total revenue over the next 3 years. I want to be at least there. So, we are making investments in the channel in terms of marketing. We are also – we are recruiting new channel partners to sell Windchill at the enterprise level, but we also are getting a lot of inbound calls from our competitors channel partners because in many respects they are not making business, just selling 2 and 3 licenses and giving those things away half the time. And they are looking at some of our story around the product development system. It brings services with it. They are very excited. We had our channel kick off meeting in Los Vegas 2 weeks ago. They are really exited about the ProductPoint solution as a compliment to the whole product development system story for the SMB market. So, I think we are going to continue – I actually think we have an aggressive goal for the channel this year, but it is very makeable and the forecast out of the channel earlier this week is strong.

Neil Moses

Related to that is we have seen 800 basis points of margin expansion in the last 4 years in our sales and marketing expense and that is largely because of driving channel growth. So, this is kind of the single most important initiative for the company for long-term operating margin expansion.

Jay Vleeschhouwer – Merrill Lynch

Finally, on units Dick. You had a good sequential increase in ProE from a not so terrific June quarter number for ProE. Was just normal seasonality in terms of improving that number? It contrasted for example, with Solid Works reported this morning which was the second sequential decline in a row for them in the unit, and then you also had an unusually large number of Windchill seats, larger then the first 3 quarters of the year combined, if you could talk about that?

Dick Harrison

Well, Jay, I mentioned earlier, just quickly in the opening remarks, our products are in a very, very strong position today. Wildfire 4, Wildfire 5 on its way pretty soon. Windchill, PDM linked whole series. It is going to – 9.1 is going to ship little bit later in November here. So a month away. ProductPoint is coming a few weeks after that in early December. Our product position has never been stronger competitively. Go back to the EADS win, a big European company with incumbency from SAP, (inaudible), and Siemens were all much bigger incumbents than we were and we won that deal on the strength of our products and our ability to partner with the customer. That is what they told us in the debriefing. So, what are trying to do here is since we have such a strong product position from a competitive benchmarking position, we want to increase capacity and we are doing that aggressively in the channel in terms recruiting new ones and in getting our current ones to invest and add more reps and technical people and then we have added about 50 or so direct sales capacity in addition to CoCreate sales force. Our issue right now in the short-term is we need to have more people telling our story because it is a really good one and when we get to the market we win. Next question.

Operator

Our next question comes from Greg Dunham with Deutsche Bank. You may ask your question.

Greg Dunham – Deutsche Bank

Hi, yes. Thank you. Want to follow-up, partly on the characterization [ph] of the pipeline, and clearly you are forecasting, you know, kind of the similar growth this year as you did last year on a constant currency basis, the license. I mean could you quantify in terms of what you are seeing in the pipeline, how much bigger it is and what are assuming in those rates going forward versus looking backward.

Dick Harrison

Well, we look at the pipeline in a couple of ways. We do weekly conference calls with the different geographical sales leaders and with them – we do the same thing with the channel, the Vice President of sales for the channel part of the business. And as we look at the pipeline it continues to be very strong. There is a good list of deals. The pipeline is automated. We use Siebel System to capture the pipeline that goes out about a year and as we look at the pipeline, as we talk to the resellers when we are out in Vegas. I was there myself. And as we go through the weekly calls, the pipeline looks strong. From a channel standpoint, it feels like you know, it is going to be up sequentially. Now we haven’t factored in all of the input from currency but just from an activity standpoint, from a deal standpoint and so forth it looks pretty strong and the same is true on the direct side. We do about – in Q1, Q2, and Q3 for every year we do about 16 or 17 deals over $1 million, somewhere between 15 and 17 per quarter. Q4, it bounces up to the low 20s, but as we look at our pipeline that would generate those 15 to 17 deals over $1 million, the pipeline today in Q1 is very strong. It would indicate with normal close rates, you know, that we will have the same kind of number of deals.

Neil Moses

Hi, Greg just to follow up. It is Neil. I think that you made a good point which is the constant currency license growth projected is pretty similar to what took place last year, and I think we are trying to balance two things. One is to Dick’s point the pipeline looks strong even on large deal activity today, but at the end of the day we may see a little bit of a diminution in the size of those deals for macroeconomic reasons. On the other hand, we have 50 more feet on the street from a direct sales force perspective and we think that is going to help counter perhaps a slowdown in the size of large deals for macroeconomic reasons.

Greg Dunham – Deutsche Bank

That is helpful. So, the increase in sales capacity helps to offset potential, you know, close [ph] rates continue just going forward, if there is some –

Dick Harrison

Either close rate changes or size of deal issues.

Greg Dunham – Deutsche Bank

Okay. In the script I also saw that you mentioned Windchill at double-digit growth rates going forward, now is that – if I recall that has been doing 20% plus looking backwards. Does that – has that come down or am I just reading too much into it.

Dick Harrison

Windchill growth has historically been if you look over the last 4 years, it has been slightly over 20% compound annual growth. So, you know, I don’t – given our guidance for this year, I don’t know if we are going to see that but that is what we expect to see in kind of a normal economic situation, yes.

Greg Dunham – Deutsche Bank

Okay, that is helpful. And then the final piece on Wildfire and the additional modules, was that part of the strength for the MCAD business in the quarter or is that something else that drove the kind of year-over-year in sequential improvement that was so strong?

Dick Harrison

Yes, Wildfire helped and actually our modules performance was pretty good in Q4 as well.

Neil Moses

The other thing we have done is we have gone back from a sales capacity standpoint and put on focus on Pro/ENGINEER. We built overlay team inside the sales force that is responsible in the direct business. This is not the channel itself. But in the direct sales force there is an overlay group that is responsible for selling only Pro/ENGINEER. So, we have gone back into the base with the release of Wildfire 4 with a concentration on retailing the Pro/ENGINEER story in our large accounts and even into some competitive accounts. So, I think that additional focus is also helping. We will continue to do that.

Greg Dunham – Deutsche Bank

Thank you very much.

Jim Heppelmann

I might also add quickly if you look at resource reports and I only saw only some quick facts from that this morning, but I think Solid Works had 13% growth last quarter. So, if you look at our channel, we sort of see our channel with ProE competing against the Solid Works channel. Those businesses are pretty close to the same size. Solid Works is a little bigger. But we now have a growth rate in the last quarter that is 50% higher than theirs, which speaks to more than just modules, it speaks to a product story that has differentiated the marketplace and people are waking up to it.

Greg Dunham – Deutsche Bank

Right, thank you.

Operator

Our next question comes from Vijay Haynes [ph] with Needham & Co. You may ask your question.

Vijay Haynes -- Needham & Co.

Hi, thanks. Just to go back to Jay’s question on the maintenance, I understand that you guys aren’t seeing any deterioration on the number of customers paying maintenance. Are you seeing any pricing pressure and then I guess would you be wiling to cut maintenance prices if that was to come under pressure?

Dick Harrison

Right now we would not cut maintenance pricing and actually Q4 was our highest both attach rates for maintenance and renewal rates for maintenance in quite some time. So, we won’t be cutting pricing on maintenance.

Vijay Haynes -- Needham & Co.

Okay, and then I guess can you comment on the fairly well publicized rumor that you are shopping [ph] the company and I guess provide us an update on where that stands?

Dick Harrison

We are not shopping the company.

Vijay Haynes -- Needham & Co.

Okay, that is a good update then. That is it from me. Thanks.

Operator

Our next question comes from Mike Olson with Piper Jaffray. You may ask your question.

Mike Olson – Piper Jaffray

Thanks, good morning. Clearly a lot of companies are seeing some macro headwinds and as you mentioned (inaudible) likely tweaked down their revenue guidance as well. What specific geographies do you expect to see kind of the biggest headwinds in or I guess which geographies are you most cautious in as we move into ’09?

Dick Harrison

Yes, Mike that would be Euro. We have had some tremendous growth in Europe in the last couple of years. You know we – our European business grew from $350 million in 2007 to over $450 million in 2008. Now part of that was from the fact that CoCreate had about 50% of its revenue in Europe, but – and part of it was favorable currency, but another part of it was strong organic growth. So, that is the geography we are probably most concerned about simply because the Euro has retreated from a $1.50 to $1.25 in the course of the past 8 weeks and you know, if you look at the guidance for the year at $1.1 billion probably we were anticipating a few months ago looking a plan of roughly 10% revenue growth for the year, which would put us around $1.80 billion. You know, we have haircut that plan you know, roughly a little bit more than $50 million for the new currency with the European numbers a little bit greater than that because the Japanese yen has actually moved in the opposite direction and you know, that haircut has impacted plan to EPS if you will by more than 20% and it has impacted operating margins by a couple of 100 basis points. So, that is that area that I would say that you know, we have the most concern as it pertains to currency. If we are wrong – so it is roughly a $50 million currency haircut and an additional haircut if you will just to be conservative from a macroeconomic perspective and if currency starts trending near the direction or the macroeconomic doesn’t play out as badly as we all expect, we think we have an opportunity for further market expansion.

Mike Olson – Piper Jaffray

Okay, understood. And just one last one, when we talk to the resellers, you know they are generally optimistic about the business and again kind of setting aside the macro headwinds, what you do think channel revenue growth can look like in ’09. I know, you mentioned it was 40% in ’08.

Dick Harrison

Yes, the over 40% in ’08, about half of that was CoCreate related and half of it was organic. So, I think, we would expect to see the same kind of growth out of channel next year as we saw organically this year.

Mike Olson – Piper Jaffray

Okay, thanks.

Dick Harrison

In that 20% range.

Mike Olson – Piper Jaffray

Okay, perfect.

Operator

Our next question comes from Ross MacMillan with Jefferies & Co. You may ask your question.

Ross MacMillan – Jefferies & Co.

Yes, thanks. So if I strip out my assumption for CoCreate license, you know through the quarters of ’08 and then adjust for currency, it seems that you know, outside of Q3 where the comp was easier, you probably were flat to down on license revenues most quarters. So I am just going back to this comment with regard to the mid-to-high single digit growth for ’09. Has it really come down to the extra capacity of the 50 new sales reps. Is that the primary reason or is there anything else, you know –

Dick Harrison

The channel is growing, as we said the channel is growing. The plan for the year here organically as the channel is going to actually accelerate a little bit organically, given the investments we are making in marketing, more capacity and so forth and products. So we are going to get really nice increase, it looks like from the channel and then if you look at our productivity numbers, it is just sort of straight math. You know, the average sales rep generates somewhere around $1.3 million to $1.4 million per rep and if you add the additional 50 reps we see some upside. So, it is really a capacity issue. So, there was no additional capacity in ’07 and from ’07 to ’08. We embarked on a globalization program where we moved 600 or 700 people offshore. There was a tax associated with that and during the year we didn’t add the capacity until the end of the year. So, we didn’t get any increase in coverage either in ’07 or in ’08. This is the first year in 3 years that we are going to have incremental capacity and we do – that is the reason along with the channel capacity that we plan for the 10% growth.

Ross MacMillan – Jefferies & Co.

Okay, great. That is helpful.

Dick Harrison

I know you are skeptical about it and that is fair but with the products where they are and with the extra capacity we fully anticipate to have that kind of growth.

Neil Moses

Maybe just one more comment. You know, remember that our channel business is predominately just license and maintenance revenue. And then we are also introducing maybe Jim will talk about this a little bit later on, but we are introducing Windchill ProductPoint as you know later on which we think is going to be a great product for the channel and a great product overall, which should help to drive license revenue as well.

Ross MacMillan – Jefferies & Co.

Okay, and then just going back to the very big Windchill unit number in Q4. Was that down to like a specific you know, deal or you know couple of deals or can you just kind of talk about that also in the context of pricing, because obviously that is a huge uptick and it implies that obviously you are selling higher volumes with lower priced seats, but I sense is that that was what you kind of always done to penetrate accounts, you know, with enterprise seats if you will. So, can you just maybe add some color to that big increase in units?

Neil Moses

Just two comments Ross, it is Neil. First of all, there were a couple of deals in particular and I don’t want to get specific that drove a larger number of seats and a lower ASP this quarter than we have typically seen in quarters past. But having said that I think, we have stated in the past that we expect the ASP for Windchill to go down over time as we are moving out of the engineering department which is predominately heavy seats and into the enterprise, which is predominately light seats. So, I don’t think – the fourth quarter numbers are a little bit of an anomaly but the trend ought to be in that direction.

Ross MacMillan – Jefferies & Co.

Yes, that makes sense. Congratulations. Thanks.

Dick Harrison

Just I want to quickly go back to a point that Jim made just to elaborate a little bit more on it, because there is misperception sometimes in the market about the strength of our channel. Our channel did 270, almost $275 million last year. In the fourth quarter, the channel did $75.5 million. That is a run rate in excess of $300 million. That is the same size the Solid Works or Inventor. Those companies, their business is no bigger for their SMB market through their channel than ours and in many respects, you could say it is smaller because Solid Works sells into larger accounts and we restrict our channel to a smaller marketplace. So, no one should think that our channel business is marginalized vis-à-vis the competitors. In fact it is just as big and growing faster and we are going to have a really good year in ’09 in the channel. ProductPoint is going to provide upside to that whole business because our channel partners are really excited about bringing to market a share point solution to a set of customers that have already deployed share point. So, it is going to be a very natural situation for them to drop this product in and sell this more collaborative approach to product development in the SMB space. Okay, next question please.

Operator

Our next question comes from Sasa Zorovic, you may ask your question, with Goldman Sachs.

Sasa Zorovic – Goldman Sachs

Thank you very much. So, my question would be on I guess, I am finding it a little bit of a disconnect between your prepared remarks and the tone on the call versus the interview that you have provided with Reuters where I am finding sort of this commentary to be very bullish at this point versus, you know, as I am sort of looking you sort of quoted here that listening to the whole economy is falling apart, you are citing here a deal of 3000 folks that kind of came down to just 800, lower closure rates, average deal sizes anticipating going down. So, was it that in this interview you were not really quoted properly or how am I really sort of to reconcile the two?

Neil Moses

Hi, Sasa. It is Neil. Do you think that a lot of times when you had the interviews with the press that they are looking for the items that are perhaps more sensational than they are looking for, you know, the content of what you are saying over the course of the entire interview.

Jim Heppelmann

Liberal media.

Neil Moses

Sasa, I haven’t said to anybody that – maybe it was just in the course of the conversation, somehow it was misinterpreted. But I never said the global economy is collapsing or whatever. I just – I don’t believe it. We didn’t see it in the fourth quarter and I don’t see it right now. You know, I think that there is some sense out there that certainly does. Financial markets have collapsed but manufacturing companies are not collapsing today. I certainly think, you know, when we talked about it in the past, there has been a little bit of a headwind in the United States. There has been a recession in the United States and business has been a little bit more difficult to come by. We did talk about the fact. We anticipated what we might see if there was a recession and that is different than seeing it. If we were to see a slowdown in Europe that Neil was alluding to for example, that might happen, certainly we are going to get a headwind from currency. But if we were to say okay, things might slow down. We don’t see customers not buying. We don’t see them stopping their services engagements. We might see them shrinking a little bit the size of their investment or first deployments. So, instead of buying 1000 seats, maybe they will buy 700. We have talked about this in the past, but the globalization, the connectivity, the collaboration aspects of our products are enabling manufacturing companies to compete more aggressively in a global world where they have to and they simply can’t ignore our solution today, even in a bad economy. So that was really I think more the tone is, if we did see a recession what might happen and we really said we don’t see a big fall off. We might see some slowdown but not a fall off and I think maybe I think that got misinterpreted.

Sasa Zorovic – Goldman Sachs

So, if you look at sort of the trend in the business that you have seen. So, they have been companies that have specifically pointed to that the second half of September and then kind of beginning into the December quarter here, have you sort of noticed any sort of particular sort of slowing down around that sort of standpoint or you are basically giving this commentary that in essence you haven’t really changed, seen all that much change than earlier in the September quarter up until the present?

Dick Harrison

We really haven’t seen much change. We haven’t seen any change in China. The US has been flat for the last 18 months and I think the forecast for the US right now, is actually on a relative basis it is pretty strong. We could up over a year ago as I mentioned the pipeline is there. In Japan, it is sort of flattish and in Europe it has been good. Now we are anticipating a little bit. The dollar is going to hurt us because it went from $1.50 to $1.25. And there is nothing we can do about that, but in terms of big deal activity. A year go right now we were working on the EADS deal and everybody knew about that deal. That is a big company, big transaction. Today, a year later, I would say that there are 5 or 6 deals that all of the competitors are working on, some of which have already been down selected and some of which have been chosen with companies that are in the same relative size in terms of revenue, annual revenue as EADS. So, companies that have $40 billion to $80 billion in annual revenues are making decisions about their PLM future and we are right in the middle of all of them and the competitors are not. So, from that look at the pipeline it is actually a better pipeline than it was a year ago. And we think we are going to be announcing some big deals during the course of the year.

Sasa Zorovic – Goldman Sachs

So, finally regarding geographies as you mentioned you know, Europe had a very strong year. Japan however, was a little bit disappointing again, on a constant currency basis I guess something like 13% down. I was wondering is that really more like a market issue there or are you again seeing some of the some of the institution issues that the company has had a while back now?

Dick Harrison

Yes, we got to check the numbers. I think the 13% down was Q4 only. That wasn’t the whole year.

Sasa Zorovic – Goldman Sachs

Yes, I apologize, Q4 only.

Neil Moses

Japan was up 23% for the year. I don’t remember what the number was on a constant currency basis but –

Dick Harrison

That is just big deals. That is just the seasonality of big deals that couple of them came in early in June versus September. It is all big deals.

Jim Heppelmann

And we had solid channel performance in Japan as well.

Dick Harrison

Yes, Japan grew for the year 11% in constant currency. You know, check with our competitors. I don’t think they did better than that.

Sasa Zorovic – Goldman Sachs

Great. Thank you very much.

Operator

Our next question comes from Steve Koenig with KeyBanc Capital Markets. You may ask your question.

Steve Koenig – KeyBanc Capital Markets

Good morning. Thanks for taking my question. If I may I just would like to maybe tie the threads on revenue one more time here and then have a question on margins, if you will. So, on the revenue side then am I correct in interpreting that your constant currency guidance given projected softening in Europe requires that US growth rates improved this year and I am just wondering if that is true then how do I reconcile that with kind of – the credit situation grew almost exponentially worse in late September. You had your fiscal year end and seasonality is always a positive factor. How – what assumptions are you making about the US economy next year within the context of your guidance going forward.

Neil Moses

Well first of all, excuse me, the US business for us has been soft for 18 months now, which is not a new phenomenon. You saw our performance in the US last year, it was flat. And actually down a little bit if you take out the revenue we got the CoCreate there. So, we have had a difficult time in the US for a number of quarters now. And I think your point is, if you are assuming that Europe is coming down because of currency pressure that requires US growth. Well, we do think that the US is going to be better than it was last year, this year, quite frankly. But the fact that we have seen currency pressure in Europe is not that – it doesn’t necessarily mean that we are projecting a down year in Europe. I am just saying that we are not going to see the kinds of growth rates that we see in the past. Our European revenue last year I think grew 28% year-over-year. So, we expect, you know, modest growth in the US and growth in Europe, but certainly not to the extent that we saw last year. And we expect continued strong growth in Asia-Pacific particularly in China where we have been growing in excess of 20% a year for the past 4 or 5 years.

Steve Koenig – KeyBanc Capital Markets

And just a last question on that topic, and Neil what drives the improvement in the US, is that primarily the channel and sales hiring, is that what you expect to drive the improvement this year?

Neil Moses

Yes, we have got. Some of the capacity that we talked about probably about 20% of it went into the US. So that will help. And yes, our channel in the US has been doing extraordinarily well. So, those – you are exactly right.

Steve Koenig – KeyBanc Capital Markets

And then last question on the margin, you know, guidance suggested margins kind of flattish next year due to some of the investments in the channel, you know, I think we had been hoping that some of the various initiatives that you are pursuing could result in some margin expansion. Is there potentially some upside on margins next year?

Neil Moses

Yes, so a couple of things. First of all, if you think about our plan for next year we are increasing revenue by $25 million year-over-year and expenses are increasing by about $20 million year-over-year. So, when we are talking about investments we are making you got to understand that pretty modest investments on a year-over-year basis. They really are. I think they are important investments that the company has made. Secondly, as I said, currency is impacting margins by over 200 basis points this year and we further haircut the plan as I said to account for a little bit of a macroeconomic slowdown which we are all feeling today. So, if those assumptions prove to be too conservative, there is absolutely an opportunity for margin expansion and I go on to say that we haven’t made assumptions in our plan about kind of across the board headcount freezes for example, in terms of hiring, but we are being fairly judicious in our hiring at this point in time and if we continue that pace throughout the year. There will be opportunity for margin expansion there as well. Okay, great. Thanks a lot.

Dick Harrison

Operator, we got time a couple of more questions and then we will wrap it up please.

Operator

Thank you. Our next question comes from Barbara Coffey with Kaufman Brothers. You may ask your question.

Barbara Coffey – Kaufman Brothers

Yes, good morning. Can you speak a little about the launch of the ProductPoint and what features and functions that it has that are duplicative of your other products versus sort of the – sort of the target market ASPs, so we can sort of can figure out where in the market this is going to go.

Jim Heppelmann

Yes, Barbara it is Jim. I will cover that. So, ProductPoint is a native share point based solution. It sort of takes the basic concepts of share point, which range from collaboration and source of networking up to project management and content management and it extends those so that they work in the world of CAD and enterprise applications and so forth. So, I like to think that we are making share point useful to people doing product development rather than like porting to share point. Now, in terms of the target market, our primary first target market is, let us say, the small to medium size companies who are looking for very inexpensive, simple PLM footprint. Perhaps they are using shared drives right now and suffering with all the problems trying to manage versions and structured file sets and so forth that are (inaudible). So, the primary target would be the channel to sell a smaller of a share in some of the medium sized accounts and then the secondary audience would be the medium and large accounts as a compliment to Windchill. This would be the big accounts who really need a serious PLM engine but still would like to get more utility out of share point, you know, as a collaboration tool for working with suppliers and so forth. So, in fact, it is not that much overlapped. I would say, de minimis overlap perhaps on the area of collaboration, team-based collaboration where Windchill has a capability and of course that is where share point specializes in. but as a percentage of our footprint it is a very small percentage. So, I think we are actually going to do well both selling it standalone in the low-end as well as a compliment to Windchill in the high end. I think it is a new way to get into new high end accounts who maybe have somebody else’s PLM solution, but really are pretty willing to sit down and listen to a story about how to use share point in product development. I will actually draw your attention to a report I was looking at a couple of days ago from Forrester, the industry analyst firm. They did a report on share point adoption. They went out and interviewed 233 CIOs, 87% of them had a plan to adopt share point within the next 12 months, like 50% of that was sort of like within the first – within the next 6 months. So, you know we see a potential rapid adoption of share point and PTC with a strong leadership position in how to get utility out of share point and product development. We can take that into our existing account and we can use it as a way to get into brand new even you know competitive hostile accounts with a story around share point.

Barbara Coffey – Kaufman Brothers

Okay, and then is there any update on the Toshiba matter?

Dick Harrison

Well the case brought by General Electric Credit Company in the US courts was dismissed and so that is where it stands today. There is still ongoing litigation in Japan as of today. Today were not a part of that litigation, but you know we’ll see what happens in the wake of the dismissal of the US case.

Barbara Coffey – Kaufman Brothers

So the reserves are still there and so it won’t be reversed until you know the conclusion of the litigation.

Dick Harrison

Yes. Until we know the conclusion of the litigation in Japan and whether or not we’re going to be a part of that litigation.

Barbara Coffey – Kaufman Brothers

Okay, thank you.

Operator

Our last question comes from Sterling Auty with JP Morgan. You may ask the question.

Sterling Auty – JP Morgan

Yes thanks. Hi guys. There is an article in the journal a few days back talking about customers’ ability to finance technology acquisitions and I believe, you guys obviously given the size of some year transactions use some third-party finance companies. I’m just kind of curious what you’re seeing if there is any difficulty in some of these larger deals that you’re doing, you know, for your customers to get financing terms and is that impacting your ability to close some of those deals.

Neil Moses

Sterling it is Neil. We actually do very little in the way of third party financing. If you look back on this last year for example, I think we did maybe at most $10 million or $15 million of third party financing predominantly around larger deals. If you look at the, you know, the volume of larger deals last year, I think it was an excess of $160 million. So it’s less than 10% of the large transactions that we do each year.

Sterling Auty – JP Morgan

Okay. And then Dick you mentioned the productivity for sales rep the $1.3 million to $1.4 million. Was that for an average rep or because you’re adding 50 new reps. I thought in the past you have talked about kind of a three quarter or so ramp for a new rep to kind of hit, you know, the productivity run rate.

Dick Harrison

Well, there is a ramp for them to hit that productivity run rate. But when you – if you take out the maintenance and then we will let them ramp up a little bit. But someone who is in, you know, has been here a year, we expect them to do anyhow sort of just track it historically in the last three years or so, it’s somewhere between $1.3 million and $1.4 million per rep for license and service. Now we started to lay those extra 50 people in really in the back half of last year from April through September and we think they’re going to make an impact. Some of the reps that we did put in, we put into the channel as well to develop you know more channel partners and Windchill reseller partners and so forth as well. They’re not 100% direct reps, but they have to have some kind of an impact given the strength of the products today during the course of the year.

Sterling Auty – JP Morgan

Okay that makes sense. And then on the EADS contract. Can you just remind me in terms of how the revenue was supposed to flow. I don’t think you’re disclosing how much if you are that will be great, but just talk to us how that kind of flows through the income statement in terms of the timing?

Dick Harrison

Well, just like you mean all revenue there’s a maintenance component that has been ongoing for years and, you know, as we deploy more seats will go up. There is a services component that we recognize as we perform the services and then there from time to time they’ll decide to buy more licenses or more seats. You know I think like all companies they’re cautious today and they’re not buying in advance of when they want to deploy. Years ago, we saw companies do more of that where they will do these big deals and buy licenses and they might sit in the shelf for a while, but that doesn’t happen anymore. So, our – historically our presence and again our competitors were really well – as well represented across the EADS companies as we were. Our footprint has really only been in the airbus account. So, already we’ve begun to displace the competitors in Eurocopter and they there are plans going forward to continue that. EADS wants to standardize on Windchill for all legacy and future programs for all divisions of the company. So that implies that over the next few years as we, you know, migrate our way to the different divisions. They will add more seats as they – as we displace the competitor seats.

Sterling Auty – JP Morgan

Okay and last question. Can you describe, I think Parametric historically has been a lot different than some of the competitors in terms of exposure to automotive, specifically you know, given all the talk that we have with General Motors and Ford, et cetera. Can you just review for us kind of where you stand in terms of the business exposure to the automotive industry.

Dick Harrison

Yes. Again I was talking a little bit about this earlier, but I think that you know automotive and aerospace accounts for about 10% of our revenue.

Neil Moses

No, not along with aerospace.

Dick Harrison

I am sorry, automotive – thanks. Automotive accounts for 10% of it. The aerospace market for us is really good and continues to be strong. Automotive accounts for only 10% of our revenue. I don’t know what it is for the competitors, but it is probably in the range of 30% of their revenue. So our biggest competitors are much more concentrated on automotive. So we’re not going to see, we haven’t yet, and we are principally in the supply chain and then in power train inside the OEMs.

Neil Moses

Yes. For example, we don’t do business with the U.S. OEMs at all. (inaudible).

Jim Heppelmann; We are principally offshore in automotive as well.

Dick Harrison

Yes. So it doesn’t feel like we have a lot of risk in our business because of that. I would make, you know, just as a quick comment there. I think the US automotive companies, you know, they like to say that they’re not doing well because of the pension issues and all that. I will tell you publicly they’re not doing well because their products stinks and that’s the principal reason and they don’t use our products. So maybe there is a link there. They ought to come talk to us if they want to improve their position.

Sterling Auty – JP Morgan

I was wondering how you’re going to bring that back around and tell them their products (inaudible) decide a negotiation. Alright guys thank you very much. I appreciate it.

Kristian Talvitie

Thanks everybody. Thanks very much. We look forward to talking to you soon.

Dick Harrison

Yes, we look forward to talk in January. It should be an interesting call at that time. We’ll see what happens. Thanks.

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Source: Parametric Technology Corporation F4Q08 (Qtr End 09/30/08) Earnings Call Transcript
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