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Executives

Cornelius Moses – Executive Vice President, CFO

Richard Harrison – President, CEO

James Heppleman – Executive Vice President, Chief Product Officer

Barry Cohen – Executive Vice President, Strategic Services and Partners

Analysts

Greg Dunham – Deutsche Bank

[Ralpheal van Brough – Jefferies]

Yun Kim – Pacific Growth Equities

Steven Koenig – Keybanc Capital Markets

Richard Davis – Needham & Company

Michael Olson – Piper Jaffrey

Barbara Coffey – Kaufman Bros.

Sterling Auty – J.P. Morgan

[Horatio Van Brano – Jefferies.]

Parametric Technology Corp. (PMTC) F1Q09 Earnings Call January 28, 2009 8:30 AM ET

Operator

Welcome to the PTC's first quarter fiscal year 2009 results conference call. After brief comments by management we will go directly into the question and answer session. (Operator Instructions) I would now like to introduce Kristian Talvitie, PCT's Vice President, Investor Relations.

Kristian Talvitie

Good morning everyone. Before we get started I would like to remind everybody that during the course of this conference we will make future 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 may 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 Form10-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, Jim Heppleman, Executive Vice President and Chief Product Officer and Barry Cohen, Executive Vice President, Strategic Services and Partners.

With that, everybody hopefully had a chance to read the press release and prepared remarks last night so we're going to open the call up straight away for Q&A.

Question-and-Answer Session

Operator

Your first question comes from Greg Dunham – Deutsche Bank.

Greg Dunham – Deutsche Bank

I want to hit on the maintenance business. This is over half of revenues now and your forecast of $5 million sequential decline quarter over quarter. I know that some of that is seasonality and some of that if FX but there's got to some attrition out of that, specifically in the CAD business. Can you talk about renewal rates and what you're seeing on the attrition front within CAD as well as long term?

Cornelius Moses

Actually there has not been any attrition. I know that something that everyone is concerned about, and if we're in a long, long economic downturn, maybe we'd be concerned about as well. But we haven't seen it yet. As a matter of fact our renewal rates and attach rates are actually up.

What we're seeing on the maintenance revenue side, we are seeing a little bit of a currency headwind, I think as we mentioned in our prepared remarks. And now, we've just anniversaried Co-create in terms of maintenance revenue in the first quarter. But even if you strip Co-create out of it, our maintenance revenue was up 4% for the quarter, and that's with the currency headwind.

So I think underscores how important that business is to us at this point in time and we're hopeful that we continue to improve the attach and renewal rates even though we're in a difficult environment.

Richard Harrison

In addition to that Neil, I think that in fact the number of seats under maintenance, total seats for all products increased again in Q1 over Q4. It's been increasing every quarter for the last eight quarters, and we ended Q1 with it looks like 915,000 seats under maintenance, up from 899,000 in the September quarter. There hasn't been any attrition in terms of active users paying maintenance. In fact, it's increased.

Greg Dunham – Deutsche Bank

One important point, I think a lot of people would assume or make analogous your CAD business say to Autodesk CAD business where I think people are expecting more attrition, can you talk about the differences between the two and how maybe the high end is less sensitive?

James Heppleman

I think the biggest difference is our CAD business is comprised almost entirely of perpetual seats and maintenance. That is simply not the situation for Autodesk. They're selling seats and largely selling upgrades. And upgrades are I guess a form of maintenance but structured very differently and very easy to opt out of for another year.

So I think what you see with Autodesk is difficulty in the upgrade business and for us, we don't really have that type of an upgrade business. We have a perpetual subscription maintenance business.

Greg Dunham – Deutsche Bank

Another question I want to hit on is the sales head count. That's down pretty dramatically. I think it's the right move to right size the business, especially with the economy out there, but can you talk about where you're paring back some of the sales and marketing headcount?

Cornelius Moses

First of all, the sales head count at this point is not down dramatically. Why do you say it's down dramatically?

Greg Dunham – Deutsche Bank

I'm using the 355 number versus the 475 number.

Kristian Talvitie

It's Christian. The 355 number, in addition to that there's about 125 in the channel. You've got to add them together.

Greg Dunham – Deutsche Bank

That makes sense. I was getting a little mixed up.

Cornelius Moses

So it's not down. I do think that we are going to size the business and we're going to have a layoff here and in that context we probably will take some non performers out of the sales organization, but we're not looking for dramatic reductions by any means. You may or may not have a sense for how we feel when we're doing it.

We actually think from a competitive standpoint, if you look how we did in Q1, in the December quarter our Q1, versus Autodesk, Siemens is no longer publishing the numbers, but we actually did better than the competitors in terms of our growth or growing slower, or the reduction of the growth not being as fast.

We don't want to impact our investments in R&D because we're really excited about where our products are today, and our sales force is competing and winning. There were some big wins last summer around the ADS that we talked about. There are others, that validated a lot of other deals that we've been working on and gave us a boost, and I think we're going to announce some more wins as we got through this year.

So we're trying to be careful about those sales head count cuts. There's some territories that we can cut because they could actually be sort of, you can convert a direct territory into a channel territory in certain areas, and we're looking at doing that. And we will take out some non performers but there's not going to be a big reduction in sales head count.

Greg Dunham – Deutsche Bank

That's a good point. I think looking forward, would you say that your pipeline is probably the same or not reducing and that you're just using a much more conservative close rate as you look out?

Cornelius Moses

That's absolutely true. Our pipeline continues to be encouraging. It's just the ability to convert that pipeline into license revenue that's challenging. I think we said that in the remarks. That's what we're working on, but the pipeline itself continues to be robust.

Greg Dunham – Deutsche Bank

That's an important one. I'll pass it on.

Operator

Your next question comes from [Ralpheal van Brough – Jefferies]

[Ralpheal van Brough – Jefferies]

Could you address the reclassification of the computer based training to most of it going to license and give us some color on geo as well, geo strength?

Cornelius Moses

First of all we are reclassifying as we said the computer based training program intellectual property from principally from a services revenue to license revenue. We've decided to make that change late last year beginning with our Q1. Our sales folks actually sell that computer based training product and so therefore we think it's more appropriately classified as license revenue.

We have restated all of our historical results in the results that we posted on our website today so that you can look at an apples to apples basis versus Q1 of this year versus Q1 of the last several years. Actually the computer based training product sales were down more than our license sales were down this quarter, so that reclassification actually hurt us as opposed to helped us in terms of talking about license revenue this quarter.

Moving on to your other question which is on a geographic basis, I think that what we said was we saw weakness really in all geographies, all major geographies in terms of license revenue, and we saw relative strength in all major geographies from the services and maintenance perspective so it was pretty consistent performance.

Japan was a little bit worse than the balance of the other major geographies. It's probably worthwhile pointing that out and if we look at overall revenue on a constant currency basis, from a geographic perspective, we were up in Europe. We were up in the Pacific Rim and that importantly includes being up I think 7% in China, and we down in Japan and about flat in North America.

Operator

Your next question comes from Yun Kim – Pacific Growth Equities.

Yun Kim – Pacific Growth Equities

On the topic of maintenance revenue, can you talk about any risks to your revenue maintenance stream coming from the assembly market and your channel partners? For instance how much are you really exposed to the commodity line shop simply going out of business or simply not renewing maintenance. And are you giving out any additional incentives through your channel partners regarding maintenance renewals?

Cornelius Moses

We are not giving out any additional incentives to our channel partners. Our channel maintenance business continues to perform well. We don't really think there's significant risk to our maintenance revenue for fiscal year '09. We think we're going to be able to maintain attach and renewal rates even in this difficult environment and as I said, our maintenance business overall continues to perform well.

We did identify in our prepared remarks that there's perhaps some longer term that would be 2010 and beyond risk to maintenance that is really driven by how we perform in the license line because ultimately maintenance revenue is going to follow license revenue performance. But I don't think that's an issue for us this year.

Richard Harrison

There is always some risk that some of these companies are going to go out of business, and if they do they're not going to pay their maintenance.

Cornelius Moses

Just to put some color around how our maintenance works again, compare and contrast to Autodesk. When a customer buys our license, they sign up for a maintenance contract which number one, most important, gives them entitlement to the new releases out of technology in that product. So as we come out with new releases, they get them based on the maintenance contract.

The second thing is, it entitles them to our hotline technical support infrastructure. A customer can't cancel maintenance now and start it up again two quarters down the road. We don't allow that. If you stop maintenance, you're off the train. The only way to get back on the train is to re-buy the software.

For customers, it's a big, big decision, one that's not entered into easily. If you're going out of business, it's probably not such a big decision, but it's on a long list of decisions they're going to make.

Richard Harrison

They can't pay the maintenance if they go out of business.

James Heppleman

I'm just saying even when you talk with your top customers, really have to go through a gut wrenching decision to opt out of that because for example, if you're a small company and they're a supplier and their OEM customer doesn't upgrade, now they can't do the upgrade along with their supply chain because they've opted out of maintenance.

So then they're in a situation of having to pay essentially five times the price to re-buy the software and then get back on maintenance again so this problem doesn't re-occur. So there's a real risk actually that you'll get more cost by opting out of maintenance than just staying with the program.

Cornelius Moses

And just one more comment to address your question on channel maintenance more directly, our channel maintenance for the quarter excluding Co-create was up 6% whereas our overall maintenance business was up 4% excluding Co-create. So our channel maintenance business actually performed better than our direct business.

Yun Kim – Pacific Growth Equities

Like you pointed out in the prepared remarks, you did comment that the license renewal could be down 35% for the year. If you finish the year at that rate, would that lead to declining maintenance revenue in fiscal year 10?

Cornelius Moses

Certainly the maintenance revenue would come under pressure if we saw a continued $950 million or $960 million run rate in terms of overall revenue which was driven by license revenue. It would come under some pressure in 2010. That's correct.

Yun Kim – Pacific Growth Equities

Are you currently seeing any pricing pressure on maintenance out there?

Cornelius Moses

We've certainly had customers ask us if we're willing to reduce prices on maintenance. Certainly we're doing that with some of our own vendors and we would expect no less from our customers. But I'd say that in large part we've been able to resist that pressure thus far.

Yun Kim – Pacific Growth Equities

Can you talk about the overall financial health of your channel partners, especially the top ten? I think it took a lot of effort on your part to build out your channel system out there. Would it make sense to spend additional money today especially in marketing dollars to maintain that ecosystem or do you also plan to align your spending on your channel business according to the demand out there? And also, do you plan to hand off more lower end accounts to your channel partners again this year and just wondering whether or not your channel growth strategy will change in the current environment.

Cornelius Moses

It actually is not going to change. We have handed over effective Q1 additional accounts to our channel partners as part of our strategy to continue to move in that direction. That's number one. Number two, we do have an investment in support of our channel partners which is an important strategic investment for PTC this year which is in large part going to be maintained, and that includes marketing spend.

I think we identified developing our channel ecosystem as one of our three or four strategic initiatives and we said in our prepared remarks that we intended to continue to invest in those strategic initiatives.

Barry Cohen

One other point you might notice, one of our investments is on strategic service partners. Not only are we continuing with the channel strategy, but we're also segmenting our accounts to allow for partners to participate in our direct account sales so that we can enhance the mix and improve profitability of the company over time.

Yun Kim – Pacific Growth Equities

And those partners should require some upfront costs on your end?

Barry Cohen

They don't require much cost because there will be some fees for the support. What they require in order to ensure that the quality meets the same quality we're striving for in our realized value platform is they will require some training and some support.

Yun Kim – Pacific Growth Equities

Given that you have some financial leverage on your balance sheet, can you talk about whether or not you are planning to extend payment terms or extend credit to your key partners if it does make sense?

Cornelius Moses

We are testing a zero percent financing option for our channel partners beginning in Q2. We have a policy of extended payment terms no longer than 24 months currently and that typically applies to transactions that are $1 million or more. We have reduced that $1 million threshold to $500,000 effective in Q1.

So we have done some things I guess to your point to try to help our customer's kind of bridge the situations that they're in by offering them some more attractive financing arrangements.

Operator

Your next question comes from Steven Koenig – Keybanc Capital Markets.

Steven Koenig – Keybanc Capital Markets

I wanted to find out about revenues first of all on the license line. Your guidance suggests when we look at the year compares quarter by quarter that those comparisons will get dramatically worse in Q2 and Q3 and then kind of flatten out by Q4, and it sounds like you're thinking that FY10 is probably flattish. I'm curious, what kind of data supports that pattern; first the worsening from this quarter's level and then the improvement as we get towards the end of the year and maybe flattish at the end of the year. What do you see that supports that?

Cornelius Moses

Just to clear, we've reported Q1. We've given Q2 guidance and full year guidance. We have not said anything specifically about Q3, Q4 or for that matter fiscal year 10. What we said is Q1 was down 29% from a license perspective. If you do the math on Q2, you probably get down closer to 40% based on current estimates.

I think we did say that we thought things were going to get a little bit worse before they get better. Our full year guidance implies license revenues down about 36%. So you'd have to draw the conclusion that our expectation in the second half of the year is essentially the same as our expectation in the first half of the year in terms of overall license revenue performance.

Steven Koenig – Keybanc Capital Markets

So you're not willing to put a stake in the ground directionally as to which we see the second half evolving.

Cornelius Moses

I really think it's too early to tell. I think one of the things we would expect, typically we have a $20 million to $30 million license revenue spike in the fourth quarter relative to the Q1, Q2, Q3, and a lot of that is driven by large transactions. I think the one thing we would say is that it's probably unlikely we're going to see a $20 million to $30 million license revenue spike in Q4 in this environment.

But we would expect Q4 obviously to be the highest license revenue quarter of the year because our incentive program for our sales force is kind of designed to drive that behavior.

Steven Koenig – Keybanc Capital Markets

One quick follow up related on the revenue side, we've been accustomed to getting new seats for ProE and Windchill which I don't think we see this time, so we're kind of wondering what kind of visibility do you have in PLM sales and how is that doing? I think some of your competitors have commented that PLM for them was weak and we didn't pick up that sort of qualitative comment from you in the pre-announcement.

Cornelius Moses

In general you'd say that PLM license revenue, or if you will our enterprise license revenue, Windchill, actually performed better that our desktop license revenue did. Not significantly better, but slightly better, which is probably a little bit of a surprise given the fact that a lot of the large transactions that we typically see are Windchill or enterprise type transactions.

I think the other thing that we commented on in the prepared remarks is that even though Windchill license revenue was down, PDM Link which is kind of the core of Windchill license revenue was up 10% in that area.

Operator

Your next question comes from Richard Davis – Needham & Company.

Richard Davis – Needham & Company

With regard you talk about continuing to invest in R&D and things like that, could you talk a little bit about some of the features and functionality that the customers are requesting that you're adding because obviously if you add more features and functionality, that make your maintenance gear which is a good thing.

Cornelius Moses

I break the R&D investment into two camps. One, we continue to do a lot to Windchill to make it a little easier to use, a little easier to deploy. I think that's what customers are asking us for. They're saying that this is a great product. If you could help me get it in place faster and get people using it faster, that just makes the value proposition just that much more interesting to me.

Then there's many other things at sort of a lesser level for advance configuration management for aerospace and defense customers where we're essentially winning every deal. We're doing pretty good right now on some big automotive deals and they want this concept that is essentially features and options in the product, understanding how a product could be configured many different ways and then being able for example, do a digital mock up of any of those configurations. So there's some of that stuff.

The second major category that I would say we're going to continue to invest in is the new SharePoint solution. We brought that to market in December as a product point. I would say that that's had a nice embrace by the marketplace. Not that meaningful yet to revenue because it's brand new and a lot of our initial sales are in the channel, but I think that we're getting great feedback from customers large and small that this idea of building out a PLM footprint on Microsoft SharePoints are killer app and worth investing in. So we'll invest a little bit in that as well.

Richard Davis – Needham & Company

A tactical question, with regard to if I'm a salesman and I close a large deal, say it's a $1 million dollar deal, do I get paid a commission, 10% or whatever it is on both the license and the services value or just the license, or does it end up being roughly 10% of the million?

Cornelius Moses

The answer is, you get paid a commission on both but the commission on the license portion of the transaction is much more significant.

Operator

Your next call comes from Michael Olson – Piper Jaffrey.

Michael Olson – Piper Jaffrey

I recognize most geographies are in pretty tough shape, but I think you mentioned 7% growth in China. You seem to have a bit of a head start on some others there. Who do you see most directly from a competitive perspective when you're working on deals in China, and maybe why are you seeing relative success there? And then also, how do you deal with piracy because some of your competitors seem to have a tougher time getting paid?

Barry Cohen

I think the success in China goes back to where we opened up a direct presence there in the early 1990's. Not long after [inaudible] we hired a Chinese National and he built out a really great sales organization in China and that enabled us to land a lot of important strategic accounts. Accounts like Waway and Foxconn, AVIC, the Chinese Aviation Company, the new spin off that to the commercial aircraft in China.

A whole bunch of others; the shipbuilding programs are largely ours. So we just got a really good footprint there that's enabled us to build on the supply chain and so forth.

I think we see different competitors, not unlike we would see in other geographies. So we see Autodesk quite a bit on the low end to the S&B space. I think we probably see Siemans most in the bigger accounts in terms of competitors and we probably right now are just out executing them given our product and references that we've had for the last 15 years.

Michael Olson – Piper Jaffrey

What about on the piracy front?

Barry Cohen

On the piracy side, we have a program that's in place to go out and aggressively pursue these accounts where we can find out where they are. We have a team of people that's dedicated to that and we actually don't feel terribly when we find out that someone is pirating the software because we have a very good success rate when we discover it in terms of converting it to revenue.

Cornelius Moses

Maybe I can just add some color. The piracy rate is probably as high as everybody's else's but I think we do have some strategies to protect and then recuperate our losses related to piracy and at some point it becomes like a deferred revenue strategy. Pirate away, because if we can catch you, we can quickly turn these things into media license fields when they have to come clean with it.

Barry Cohen

The last piece I would just add there is that we have building on our re-seller channel in China in the last couple of years and we've also enlisted our retailing partners as partners with us in trying to detect piracy and commission them actually on enabling us to bring that deferred revenue in.

Michael Olson – Piper Jaffrey

One question on the channel overall, I might not be remembering this right, but it seems like expectation going forward of 35% to 40% of revenue through the channel is a little higher than what we've heard in the past. Is that right? If that is right, why is there an uptick in expectation there and what are the benefits for you in doing that?

Cornelius Moses

I think we've been saying that really for the last three to six months. Prior to that we were looking at a 25% to 30% rate. We've moved the percentage of our revenue that comes through the channel from mid single digits to roughly 25% by the end of last year. And that's one of our overall initiatives, both to drive more revenue, to reach more customers and to improve margins.

So it's true that we're continuing to invest in that initiative probably more aggressively than we did last year and we've kind of raised the bar in terms of where we expect to be.

Operator

Your next question comes from Barbara Coffey – Kaufman Bros.

Barbara Coffey – Kaufman Bros.

I've been taking a look at your numbers. It really does look like the reseller channel is stepping up relative to large deals coming in. Can you speak to, are you seeing different buying patterns, different outlook for the future coming out of the small and medium size businesses versus just the large, or how they're approaching difficult economic times and trying to design their way out of it.

Richard Harrison

Our channel partners right now have a tremendous amount of confidence. We meet with them during the course of the year and then we have an annual kick off meeting, and we had that in October. If you were to measure, and I know many of you do, and that's a good thing.

We've just had accelerating confidence, and I think a lot of it is just selling our whole PTS story, the whole vision around product development system where our competitors in the low end are just sort of selling almost disposable CAD seats. We have a value proposition that the channel partners also expand upon, and there's the services component that is important to them as well.

So they have a tremendous amount of confidence today that they can beat Solid Works and Inventor, and we have confidence as well. And, we've been investing. We've been investing in marketing programs and lead generation programs and new products. They're really excited about the SharePoint addition to the family, because they're going in and changing the dynamics of the decision so that it's not just CAD functionality and price, but it's also, how are you going to connect with people.

I think they're very, very optimistic and we are as well, and we continue to give them more territory and more accounts as we relocate and reposition our direct sales force up top. I think what it really means in a longer term is that when this economy turns, and at some point it will, we are going to be better positioned than our competitors to grow more rapidly.

We're going to have a very strong channel partner program that's winning with new and better products and we continue to executive lots of benchmarks and build pipeline in the large accounts, and we're winning market share up there, particularly in the Windchill part of the business that when the economy turns is going to result in an acceleration of revenue.

So we actually feel pretty good about the business.

Cornelius Moses

I think maybe just to tag on to what Dick said, and maybe to answer your question Bobby and maybe come back to a question Mike, that you asked a minute ago, we've broadened the definition of what channel means to PTC. For the last five years it meant building out and investing in a reseller ecosystem.

We've added to that ecosystem this concept that Barry mentioned a few minutes ago about strategic services partners and we've also added to that ecosystem enterprise resellers such as QAD or NS Solutions in Japan. And so one of the ways that we get our channel revenue to 35% to 40% of total revenue is by continuing to develop our traditional reseller base but then we also broaden the definition of a channel to include those two other categories as well.

Barbara Coffey – Kaufman Bros.

Is there a different take on how fast a recovery, how healthy companies are going to be at the small and medium size group versus the larger company?

Richard Harrison

No. We don't have the answer to that question really. We can give you anecdotes here and there but we're not the right people to tell what's going to happen globally in SMD versus large accounts.

Barbara Coffey – Kaufman Bros.

Just didn't know if you were getting different senses out of different strata's.

Barry Cohen

I don't think it's a strata thing. I think clearly it's an industry thing. You know, automotive clearly is being smacked pretty hard and high tech and some of aerospace and defense things are not being hit as hard. So it's not by size of company, it's more by industry and our assumption is clearly that as the economy turns, our license revenue will rebound strongly. It's just a question of the external factors that are depressing where we are and that's pretty much by industry.

Cornelius Moses

I think one of the last things I'd say on that Barry is that large deals are coming under increasing scrutiny as you would imagine. One of the issues in terms of both the size of those deals and the number of those deals that we're closing, so even though we're feeling some pressure in the channel as well, probably we'd expect direct business to be more challenged simply because there are more signatures and approvals required on reasonable sized transactions today than there were in the past where smaller transactions tend to be "under the radar screen".

Operator

Your next question comes from Sterling Auty – J.P. Morgan.

Sterling Auty – J.P. Morgan

You talked to us a little bit about gross margins on the maintenance revenue, but do you think about what the operating margins in maintenance are? In other words, at this point, what percentage of your operating income is actually just coming straight out of your maintenance?

Cornelius Moses

We don't really think about operating margins by line in the business like that. Certainly the maintenance business is generating the majority of our operating income if we did look at it that way, but that's not really the way we manage the business.

Sterling Auty – J.P. Morgan

Can review for us, I think it might just be some of the answers to the last couple of questions, but in terms of the attack on the expense side, in your prepared remarks you talked about any year over 5,000 or so employees, given all the head count reductions we've seen across all industries, what's the tactic not to be more aggressive from a head count perspective on the expense side?

Cornelius Moses

It's a good question. I think what we've decided is, we are doing a reduction in force. We have decided to exempt R&D from that reduction in force because as Jim mentioned, some of the things that he's working on and we think they're very important to us strategically and are going to enable us to emerge even stronger when the economy turns.

And so we haven't specified the level of reduction that we're going to do, but let's just say it's probably excluding R&D, it's probably a high single digit number. With R&D included, it's probably a mid single digit number and we think that's the right thing for the company today between investing for the future and making sure that we react appropriately to preserve a certain level of operating margin in this current economic downturn.

James Heppleman

Just to add a little color on the R&D thing. Here's the way you should view it. If the R&D organization participated at an equal basis, I would take out about 100 heads. In fact, I am essentially taking out 100 heads out of the business that has been in place and investing that about 100 heads in a couple of new initiatives principally the SharePoint thing and then a little bit more around expanding this recent acquisition we did and expanding the capabilities that that product could deliver, because that's a pretty exciting product as well.

So we're going to slow down a little bit on some of the programs we're executing and move on to a couple of new ones that we think are real big differentiators and ultimately going to prove pretty meaningful to our business.

Sterling Auty – J.P. Morgan

You talked about lowering the threshold on the extended payment terms out of the channel partners, can you make some comments on what we should anticipate that does to your DSO's going forward as well as in the price reserves, is there going to be another quick area at the earnings release that we can model through the credit side in terms of bad debt and collections and some of the payment terms?

Cornelius Moses

Let me just make sure that I didn't mis-speak before. Lowering the threshold on extended payment terms is for direct deals and it used to be $1 million threshold and now it's $500,000 threshold. I also mentioned that with respect to our channel partners we were doing zero percent financing option for them on a test basis with a lending institution beginning in Q2.

From a DSO perspective, we were at 70 days this quarter. That compares to 73 days in the year ago period so we've been able I think to manage our receivables collection pretty well. It is something that we're watching closely and certainly from a kind of monitoring and evaluation perspective, we've kind of stepped that up with our more significant channel partners and with our direct customers.

But I think our expectation at this point this year, is that we're going to be able to maintain DSO's in that kind of 70 day range and we don't anticipate significant, any additional bad debt expense based on what we're seeing.

Operator

Your next question comes from [Horatio Van Brano – Jefferies.]

[Horatio Van Brano – Jefferies.]

Just a follow up, actually it was similar to Sterling's question around the magnitude of head count reductions given the magnitude of license. If you're looking at over 40% decline in Q2, and you're not forecasting much of a rebound in the second half, maybe in the mid 30's decline, why not more aggressive? It sounds like you want to invest in some areas. I guess a related question would be, how do you, do you sort of view the rest of the year as potentially being able to rebound on license in the back half and this is sort of a kitchen sink type view to where maybe you don't want to cut too much in the bone here on the tail side because it went down faster than you think? And if that's the case the potentially if things continue to be weak out there, then you might have to relook at cutting additional head count later in the year.

Richard Harrison

I think that where we are, and it's hard to give you an appreciation for it, but the wins that we had at Airbus and the EADS and the strength of the products that we have, particularly in the, really the total product suite, but particularly in the PLM area, is such that there are many, many companies out there that are evaluating Windchill in particular for a whole host of reasons; globalization, collaboration, managing the bill of materials in an important way, particularly in a down economy.

So there are a lot of evaluations going on out there that you don't know about. Many of our install base that we're winning as we upgrade people from Intra-link to PDM-link, but an increasingly significant number of large deals that are happening outside of our base where we are potentially displacing our competitors in some major accounts. We hope to report on those during the course of the year.

So as we look at the strength of our products, as Jim develops more products like the SharePoint product and some new things that he has under development right now that will be released during the year, we are attacking our competitors in their backyard and winning. So we don't really want to cut into the ball.

We'll take a look at what happens during the back part of the year, but we think that we've given you a pretty accurate forecast as to what we see right now. As Neil said, the operating margin has actually improved to almost 20% in the back two quarters of the year and it takes at least a year to recruit and develop and get a sales rep productive with respect to a good pipeline.

And so we don't really have any interest in a short term, 90 day revenue improvement or profit margin improvement with a negative impact that could be one or two years out by cutting a really good effective sales rep.

Cornelius Moses

Just to add on to what Dick said, I think if you'd asked us before what we were planning to do, we would have said we were planning to cut about $30 million of expenses this year. We've upped that number to $50 million in discussions on this call. I think if we do in that neighborhood, $960 million of revenue, that's probably what we're going to do.

If things get either better or worse, we may make some adjustments to those numbers, but I think that $50 million level is appropriate based on where we're headed today.

Richard Harrison

One of the other things that we see that you can't, and we can't always talk about, there have in fact been decisions made, evaluations and benchmarks done, decisions made but not communicated and orders not yet placed in significant accounts that our competitors are not going to be able to explain how they lost them.

So there are some that are not yet decided. It is a big pipeline of them. There are some that have already been decided that we don't have the orders on. We're going to announce those during the course of the year.

When we do, they're like the ADS. They're not going to be able to explain how they lost, and there's going to be a building number of those. So we're not really interested in compromising that. All that ice under the ice burg that you can't see, we don't want to compromise that by cutting the sales force too dramatically right now.

We're going to take out some non-performers which makes sense. We're not perfect recruiters and we make some mistakes and those are the reps we'll take out, but by and large we have two nice an investment not only in the indirect side, but on the direct side to compromise it right now.

Our competitors are very nervous about what's happening in the PLM stage, and with the things that Jim's talked about, we're only getting stronger there and broadening our footprint, so we feel good about what's going to happen when the economy turns.

Thanks again for everybody's participation. Just like you, we're all hopeful that at some point at least we see things bottom out. I think that first and foremost it would be nice to have a bottoming out of the bad news that's out there and then a leveling off so to speak and then hopefully things will start to slightly improve and so forth.

We'll look forward to talking with you again in April.

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Source: Parametric Technology Corp. F1Q09 (Qtr End 12/31/08) Earnings Call Transcript
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