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Executives

Kristian Talvitie -- VP, Corporate Communications

Dick Harrison -- Chairman and CEO

Neil Moses -- EVP and CFO

Jim Heppelmann -- President and COO

Analysts

Sasa Zorovic -- Janney Montgomery

Greg Dunham -- Deutsche Bank

Mike Olson -- Piper Jaffray

Sterling Auty -- JP Morgan

Richard Davis -- Needham & Co.

Embrano [ph] -- Jefferies & Co.

Blair Abernethy -- Thomas Weisel Partners

Yun Kim -- Broadpoint AmTech

Ben Cadillac [ph] -- First Investors

Parametric Technology Corporation (PMTC) F3Q09 (Qtr End 07/04/09) Earnings Call Transcript July 29, 2009 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the PTC’s third quarter fiscal year 2009 results conference call. After brief comments by management, we’ll go directly into the question-and-answer session. (Operator instructions). As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce Kristian Talvitie, PTC’s Vice President of Corporate Communications. Please go ahead.

Kristian Talvitie

Thank you. Good morning, everyone. Just quickly before we get started, this conference call and web cast may include forward-looking statements regarding PTC's future operations, prospects, expected financial performance for products. Any such statements will be based on the current assumptions of PTC's management and are subject to risks and uncertainties that could cause actual events and results to differ materially.

Information concerning these risks and uncertainties is contained in PTC's Form 8-K filed yesterday and in its most recent forms 10-Q and Form 10-K on file with the SEC. PTC will use non GAAP measures to describe its results of operations and expected future financial performance. A reconciliation between the non GAAP measures and the comparable GAAP measures is located in the financial and operating metrics document on the Investor Relations page of our website at www.ptc.com.

With that, I would like to turn it over to Dick Harrison for some brief opening comments and then we will open the call up to Q&A. I think as everybody knows we published the prepared remarks yesterday, they are also available on our website, so we are not going to get into the lengthy discussion there, but Dick has a few words to say to kick us off.

Dick?

Dick Harrison

Okay, Kristian, thanks a lot, and I will be straight and pretty brief here. We have a little bit of an advantage. The management team is calling from an off-site meeting that we have in New Hampshire every year where we do some planning for next year and we have the leadership from the worldwide sales organization here for the last three days. We have had a chance not only to review what has happened so far this fiscal year but also to think about Q4 and get some input about next year.

And one of the comments I would make is that it feels like the business has bottomed out. I think that was represented in the quarterly results, which were pretty similar in the June quarter to the March quarter. But the attitude of the salespeople is such that things have bottomed out, I wouldn't say they see a lot of upside for next year but we are talking about growth for next year, and I think that is a good indication.

It certainly seems when we talk to the sales leadership that we're winning. Our products are extremely strong today and very differentiated from those of the competition. Our customer satisfaction reports show that the customers again have never been happier. We know from the people that that we have hired and just anecdotally in the work we're doing that our competitors have never been more nervous than they are today. Our employees, which we survey every year, are confident and committed. We have a validation of some of the positive things that I'm alluding to in our ongoing win list in the domino accounts and we will be more specific about that in a few minutes.

Our support people, the presales people gave us a review during the week here. We're winning all of the technical benchmarks around the world. In addition to the domino account, and I think that this is something that we want to spend more time on, I don't want to water down the importance of the domino account that each of the three major geographies, North America, Europe and Asia Pacific, has a list of very recognizable named accounts that are owned by our competitors, that have active displacement campaigns today in addition to the domino account. And we will also try to quantify this as we speak later on in the Q&A about what the revenue potential might be.

So we -- and then finally I guess I would say we have an unbelievably nice product portfolio that is going to be released each quarter during the next 12 months that I feel is going to further add to our product differentiation and our advantage today. And if it comes up in some of the Q&A, maybe Jim can talk more about that. But in addition to the advantage that we have today, there is a really exciting list of new products that we're going to be introducing again over the next 12 months.

So with that as an introduction, why don't we open it up for Q&A? No questions?

Question-and-Answer Session

Operator

(Operator instructions). One moment for the first question, and our first question is from Sasa Zorovic with Janney Montgomery. Go ahead, your line is open.

Sasa Zorovic -- Janney Montgomery

Yes, thank you. So we did a quarter that was characterized by very strong license revenue and really strong performance in Europe and America. Now why was Asia departed from that?

Neil Moses

Well, Sasa. It is Neil. You know I think actually this quarter was difficult for Asia and you know it is a little bit of a tale of two cities there. Quite frankly the second quarter was a little bit difficult also. Japan, as you know, has been challenging not only for PTC but for most technology companies for some time. So that is not really new news. I think in the Pac-Rim and in China specifically, we have seen performance has been down year over year in the last couple of quarters.

Again back to the Dick's discussion earlier about having the sales leadership in here the last couple of days, I think the folks that are in that region of the world actually feel pretty good about the fact that they think things have bottomed out there and are beginning to recover. But I think really in the last couple of quarters as we have seen in Europe, we have seen the lagging effect if you will of the recession that has been going on in North America for quite some time. But I think there is a feeling that the Pacific Rim marketplace is going to recover more quickly than the US did.

Sasa Zorovic -- Janney Montgomery

Thank you.

Operator

And our next question is from Greg Dunham with Deutsche Bank. Go ahead. Your line is open.

Greg Dunham -- Deutsche Bank

Yes, thank you. Wanted to hit on the domino account that you mentioned, it has been almost a year since the EADS deal (inaudible) could you give us a sense of the progress thus far revenue contribution or anything on roll out statistics to give us a sense of how that is going and how we can see some of these other accounts needs license revenue going forward?

Dick Harrison

Well, I'll take a shot at the non-revenue piece, Neil, you begin.

Neil Moses

Sure. I think we're making good progress. You know since that time we – Airbus subsequently committed to deploy Windchill on the A-350 program and that is well underway and doing well. We have started up a project, Eurocopter. There is a couple of other projects in the planning phases and some of the other business units, Astrium and so forth. So I think good solid progress. There is a plan around the A-400 which you know is a program at Airbus that is a little bit in limbo, and they're trying to figure out how to get that program restarted, not with PLM piece but the aircraft program itself. So I think we are making the kind of progress we would have expected. There was some upfront license revenue in that deal and then there was quite a bit of ongoing services revenue as we view the performance and I don't if anyone wants to add any color on that.

Dick Harrison

I think we have to be careful about in terms of disclosing revenue by customer.

Jim Heppelmann

Yes. We don't disclose revenue by customer in this way. Airbus is our a number one customer by a factor of you know two to three the times and I think that just gives you the, if you will, the idea of the power behind the domino strategy and the potential that they are to unlock a huge opportunity for PTC. If we talk about our most recent wins in dominos, whether they be this quarter or last quarter for example on Nokia, I think we have commented in the past that we have won these very extensive competitive benchmarks but we have also commented on the fact that they haven't really translated into meaningful revenue as of yet given the current market environment that we are in. And so we are less focused on at least this year driving meaningful revenue contributions out of those wins than we're knocking down those wins and performing successfully as a pilot and setting ourselves up to where revenues success of those accounts in 2010 and beyond.

Dick Harrison

So as an illustration you mentioned that we sort of began talking about this. I think we landed the EADS order and as Jim described, they are really six big divisions inside EADS, all of which now have plans to consolidate and standardize on the Windchill. Since we knocked that down in roughly the September timeframe, we did get the you know an introductory order at Nokia. That is not necessarily a displacement deal at all but a complementary deal that is important to us and has upside and potential.

We knocked down I think in the April time frame the Volvo group companies which were using the source products for PLM for data management exclusively. And there are old press releases out that from four or five years ago when they said that (inaudible) was their standard and going to be going forward. That has been replaced now with the Windchill Strategy.

Subsequently this quarter, we won an important position at Otis Elevators, the United Technologies Corporation company. We already had one in the carrier division there, so now we have – we are the standard at two big divisions inside UTC, a 50 or $60 billion company, and Otis was using a competitor's product and not our own in that space.

Caterpillar selected us for the first time in the data management area for a very important project and we consider that an important domino account. And there was a large German retailer that had previously selected (inaudible) product. They merged with an American company that was using Windchill and the de facto standard today now is Windchill for all of their new acquisition in terms of procurements, and they made a nice procurement again this quarter.

You know if I were to try to quantify a little bit and build on what you Neil talked about, before I say that, we promised you I think 10 domino accounts before the end of 2010 and today we are at six. So in the first nine months of three quarters, we have done six big dominoes and there are more coming. We feel pretty confident about that 10 number, I'm not going to raise it today, but there is a really good pipeline there.

I would say at a higher level that what we think is that these accounts once they become mature let us say in the second or third year, if we prove out well in the pilot stage, they should be doing between 5 million and $10 million a year, pretty easily. If you add up software, services and maintenance, an important domino account should easily do 5 million a year and more likely 10, and there is upside on top of that.

We have other accounts that we have that aren't necessarily called domino accounts that are doing that kind of revenue. So we would be pretty disappointed if a domino account wasn't actually doing in that range of 5 to 10 million a year with a potential for upside if they were to adopt our entire footprint.

Jim Heppelmann

One more thing I want to add, we have got every significant order from Lenovo in the quarter and that too is a domino account. We're not going to count it in the 10 because we had secured our first foot in the door prior to committing to that ten. So we're not going to count it in the 10 but this too is a case… you know was, Lenovo obviously was an ex IBM business unit and naturally they had committed to this whole product line.

And I think that probably the largest license order we have got last quarter came from Lenovo which was buying the Windchill seats having done the pilot project successfully and the Windchill seats to complete the full displacement and really move on to standardize the Windchill. So that is another domino account for you. A major international global company…

Dick Harrison

25 billion or so in revenue…

Jim Heppelmann

Yes, deciding to switch over to our technology and sort of abandon the path they had been on.

Dick Harrison

It's a good illustration, Jim, also from what I was saying from the standpoint that probably in the first year they did low single digits in terms of revenue for us and this year they will definitely be between the 5 million and 10 million in terms of revenue for us. So that is a good illustration in terms of what we are talking about. In the second year with that company, they will follow some of the characteristics that I was describing in terms of how we can grow that account. Next question please?

Operator

Our next question is from Mike Olson with Piper Jaffray. Go ahead, your line is open.

Mike Olson -- Piper Jaffray

All right, thanks. Good morning. Can you just review some of the new product introductions that you alluded to in the opening remarks?

Dick Harrison

Yes. You know naturally our main products today revenue wise are Pro/ENGINEER and Windchill. There is a new release of Pro/ENGINEER that just came into the market in July this month, 1.405, we're pretty excited about that. That has got a set of new capabilities, quite a few improvements throughout the product. It is just another shot in the arm really of strength for the full engineering product line.

On the Windchill side, there has been a number of sort of ongoing developments against the 9.1 release, which is currently in the market, and in fact we're in the process right now of shipping this type release a new requirement package. So we really significantly expanded the footprint and the preliminary feedback I'm getting from the field is pretty darn positive.

Okay, so going on beyond that then our ProductPoint, you know our SharePoint-based solutions, we have shipped the 1.1 version, which was the follow-up, and at that point we had committed to 100 deals and my math says we are at 83 right now. We're a little ahead of our target there too. So we have shipped this 1.1 product or about to ship it I should say this which will sort of fill in a couple of gaps you know typically a 1.0 product might have a few gaps and then there is a 1.1 product that kind of shows up and plugs those gaps over there.

We acquired the Relex Technology and you know are in the process of introducing that to our sales force and our customer base and so forth. We had a pretty good quarter with this synapses acquisition. We had made, when was it, last November, that this environmental compliance solution. So that is a new product and we have got a decent pipeline there and actually did a quarter that was ahead of our forecast there (inaudible).

Then there are some development projects we're working on. I think we talked a little bit about bringing Relex and Synapsis together into this InSight platform, that was pretty exciting. We have committed internally now to go do a project around in embedded software solution, which we're pretty excited about. We're expanding significantly our SharePoint footprint, and in fact in partnership with Microsoft we are building out a product portfolio of management solutions based on SharePoint Project Server and Portfolio Server, which are three of Microsoft sort of main enterprise technology.

So anyway you can see there the big pipeline. It starts through with Pro/E is solid and sort of holding its own and growing generally SMB space, maybe not in the last year, but as that space comes back, Pro/E will be fine. Windchill is just on a sort of land grab right now. We're expanding the print footprint. We are winning big accounts after big account after big account and then we're planting the seed for sort of the next generation growth engines on SharePoint and around this InSight product and we are excited to be in embedded software and so forth. So we feel like we have sort of historical strength, current strength and really are planting the seeds of future growth strength as well.

Dick Harrison

So in the next 12 months you're going to see as Jim ticked through roughly 8 major product releases or upgrades to the core product that are going to be significant and we're really excited about that. Windchill 10, the beta version of Windchill 10, which is you know we have already seen a little bit of, is going to be out in the next 12 months as well, and it is just going to change – it is going to change the paradigm actually in terms of ease of use for these data management solution and it's a really exciting release.

So we just think we're going to extend our competitive advantage. InSight, Windchill 9.1, the maintenance release, which is another important investment area for us and I will talk about it because it is related to the domino account, is we have got a significant number of developers that work on integrating our competitors authoring tools or CAD tools into the Windchill database. So it is becoming easier and easier for us and that is how we won the Volvo deal and a number of these other deals to go in and tell the customer, okay, keep your Catia seats or your NX seats, and then we will manage them directly with the Windchill product.

So what we talk about there is something technical called heterogeneous designing context and work through managers. But we are able to manage our competitors CAD files better than they can at this point and so there's a tremendous amount of ongoing development and point releases that substantiate that in these competitive benchmark and domino wins.

Mike Olson -- Piper Jaffray

Right, thanks.

Dick Harrison

Next question please.

Operator

Our next question is from Sterling Auty with JP Morgan. Go ahead, your line is open.

Sterling Auty -- JP Morgan

Yes, thanks. Hi, guys. So a couple of questions. First on the license revenue that came in post the analyst day, could you characterize were those things that you may have thought were going to close in the fourth quarter and just closed early or just some more color around how why those folks when they did?

Neil Moses

Sterling, it is Neil. Are you talking about whether or not we saw higher win rates in the third quarter…

Dick Harrison

… 221 or 222 or maybe 226.

Neil Moses

No. I just think it…

Dick Harrison

I'm guessing that is it.

Sterling Auty -- JP Morgan

Yes.

Neil Moses

We have a lot in the pipeline. I think we got incrementally more positive as we got through it the end of the month and we had a relatively good close rate but at the same time there were number of deals that rolled into Q4. So you know I just think we dealt as the months went on incrementally more positive in terms of what we're seeing in the pipeline and the ability to close it out before the end of June.

Dick Harrison

We actually had another roughly $2 million that we just couldn't recognize, that did close, but we had some rev rec [ph] issues and we had to clean up some deals on another $2 million worth of deals.

Jim Heppelmann

There were two…

Dick Harrison

You know two one million dollar deals that came in the first day of the quarter already. So it was a little bit – it built a little bit in June and I think that naturally in this environment we want to be conservative and I think we still want to be conservative because customers are very careful about bringing internal requisitions from major expenditures up to the CFO but we are seeing lots of activity in smaller size deals and so forth you know and then the sales guys sometimes can grow them, so it could be half a million deal and then all of a sudden they grow it up to a million dollars or 1.5 million sometimes. So it is not a complete science. There is a little bit of art to some of it.

Sterling Auty -- JP Morgan

Got you. Back on the domino deals, what are the milestones or the things that give you visibility that the account is tracking towards that maturity in year two and year three and what possibly can you give us on an ongoing basis so we can get a feel on how they are tracking on that majority contribution?

Jim Heppelmann

It is Jim. We actually have a sort of maturity map if you will where we have different phases for the domino accounts that moved to. First of all we spent a fair amount of time up front competing, right, and when that competition ends with a decision to go with PTC, you know that is a big celebration, but from a revenue standpoint, not much necessarily happens there. But you know that is the beginning of the whole process, that is the commitment to the customer to become married to PTC.

Okay, then there is typically a final project. Everybody's says, all right, let us try it out, make sure everything is going to work the way we want, maybe adjusting a little bit, coming out of that. So there is a pilot project and there is some license revenue typically some amount of services revenue. But sort of what happens at Lenovo when you get to all that, then in the customer says, all right, I want to do the broad rollout.

Now at that point there may be a little bit more services but the software to a certain extent has already been installed and is operational so they just need the seats to allow more people to start using it. So I think obviously what we just candidly hear in this earnings release is the point of domino accounts to just step across that line of being committed to be married to PTC and not necessarily a ton of revenue from these accounts but as Dick said to the extent we can grow them to be something like EADS has become or to the level that Lenovo just went to, this is going to be a big chunk of incremental revenue for us in each of the next years.

Dick Harrison

Well, I think it should level too, we are going to talk to the customer, it depends on what their initiative is. So Volvo wanted to manage all of their authoring tools in the engineering department first and then once they had their arms around that that will be the focus of the first year or two and then as they do that they want to move into the, let us call it the back-office and start to do more heavy configuration change management collaboration with the supply-chain.

We have already introduced them to Arbortext and they have started a pilot with Arbortext with a technical document. We have been now introducing them to InSight and Relex around compliance, environmental compliance and reliability. So in these campaigns and that is why it is important about our product portfolio, you know we generally start with one or two important initiatives and then we begin to introduce complementary ideas that feel could take a year or two for them to really sort of to grow and turn it to more revenue but you know we have this broad footprint today of functionality and capability and I think I didn't even really talk SharePoint. And most of these major accounts that we are describing do have SharePoint initiatives inside the company particularly around collaboration.

Jim Heppelmann

I think too – going back to when we introduced this domino concept at our analyst day, it is not all of our revenue. It is the influence that this series of successive major brand names switching and committing to PTC, it is a collective influence that we think begins to position us as an unambiguous leader. You know SAP is the unambiguous leader in ERP and nobody really can mount a good argument against that.

In PLM it has been a little more muddy because you know some of our competitors had five products to compete against is. Siemens/UGS has several major products that compete against us. And you add all that revenue together and you know they're big, we are big, whatever, but we think we are already the single product revenue leader by some distance, and when you have put headline after headline after headline, of their biggest customers switching to our technology instead, you begin to create this case that PTC is breaking away from the pack. And at some point success begets success, right? People start to by from the leader because they don't want to be the last person to buy from somebody who is no longer a leader, and I think we are starting to see that phenomenon.

Dick Harrison

And why we're excited, the CAD market is nice and we have the best CAD products but we have really become a data management PLM company with the best authoring tool Pro/ENGINEER. But if you really want to be in a growth market going forward, the CAD market is going to be low single digits for everybody, and the action in the next five years is going to be in the data management space, in connecting companies, diverse companies around the globe, their supply-chain, helping them collaborate, even the community aspects or the social product development aspect of building products more easily with those supply chains, that is where the action, the growth is going to be.

And as Jim said, these domino accounts are substantiating the fact that we are becoming the unambiguous leader. When we walk into a deal today, a new account, and I will tell you there are 150 other deals behind the dominoes. When we walk into one of those -- we will announce them next quarter in Q4, when we walk into those accounts increasingly as we come in, we are validated as the leader. People know that we are probably going to win.

And as our sales guys set up the benchmarks, the technical evaluations, they feel today that there is no area in the technical benchmark that we are not going to win. So we feel like we are going to win in the engineering department managing the competitors CAD tools, we feel like we're going to win the configuration change management, we feel like we are going to win in technical publication, we feel like we're going to win in the collaboration aspect, we feel like we have these other applications around product analytics that are going to expand the footprint, and we don't think our competitors can beat is in any inning of the ballgame. We're going to win them all right now.

Sterling Auty -- JP Morgan

Okay. Jim, for the domino accounts, can you tell us, how many of them are not moving beyond pilot or is that something that you will be willing to share with us going forward so we can track the evolution?

Dick Harrison

I think we can do that actually now and yes, let us do some work on that, because did ask the question, I think we ought to go back and sort of analyze where we are. I can tell you EADS for example as Jim described, that are some divisions where we are in full deployment, there are some where we are in pilot, let us go back and do a little bit of work on that.

Jim Heppelmann

But the simple answer really is, we had to -- we just gave you a full one. For just made a decision so there are just this week maybe in the case of Volvo, they made a decision two months ago, but they're just putting together the plan to go do the pilot and made the decision where they're going to go back, now they're going to go do the pilot. So four of the six thus far are brand-new. Then you go back to the two previous ones we had given you. And you know there in the case of EADS both in production and some new pilots in the case of the second one you know right now in the process of completing a pilot and wrapping it up and evaluating and putting together the plans to go to the next phase.

Sterling Auty -- JP Morgan

All right, thank you.

Operator

And our next question is from Richard Davis with Needham & Co. Go ahead. Your line is open.

Richard Davis -- Needham & Co.

Thanks. This is a little bit of a tactical question but you have some of your customers and we are seeing this with some of our other firms that we follow but you know like Harley Davidson has layoffs, John Deere has layoffs, and you guys as I recall more or less like most people have kind of one year renewals. How do you keep when those things come up for renewals, and your customer has fewer employees, and then obviously sometimes they may not have fired engineers, but how do you keep those renewals at the same price? What have you got to do, do you have to throw in new modules or talk about the kind of that process in an economy where you know headcount is a little bit lower than it has been?

Jim Heppelmann

My sense in discussing this with (inaudible) is that has not been a major factor. In fact I mean we've not been throwing more stuff and to keep the renewals at the same price. We have done a pretty good job of renewing. I think you might remember a quarter ago at the time of our analyst day, there were some panic that our total seats on maintenance had dipped down ever slightly and I would point out that reversed itself and they dipped – you know they went up actually in the past quarter.

So I think actually there is a different element. You know I had a customer come in last week and put up on a slide you know the famous quote that crisis is a terrible thing to waste. And this customer is basically saying now that the pressure is off of operationally, we can go do some retooling because we all know that this economy is going to turn and we would like to quickly put in place some new capabilities, new solutions and so forth, so when the economy takes off again, we're ready to go.

Dick Harrison

And Richard part of the discussion too is actually like a number of users and volume discount percent so let us say a company has a 1000 users. And that justifies a 30% discount. Well if they come back at renewal time and say we want to only renew 700, we're going to look at our -- we have a sheet and we will say, okay, at 700 users you're only get a 20% discount.

And so the net net of it is they have fewer users, if they want to do that, but they're going to get a smaller discount. And so we end up netting about the same amount. We also had some creative stealth campaigns where you know we are empathetic to a customer situation. We don't want to have them feel like we won't listen and we're not in partnership and I know we have had a couple of situations on the Pro/E side where people wanted to reduce maybe the licenses and we will end up keeping our prices pretty much the same way I described it.

But we have also brokered important executive meetings in return say, okay, look, we will talk to you about that, but we want to have a half day session with the whole management team to talk about our PLM vision and our product development strategy and how we can help you. And so to some degree we are trying to use the difficult situation to drive a little bit better executive awareness inside some of these important accounts.

Jim Heppelmann

So just back to the first question now, in a constant currency basis, our maintenance business has grown year-to-date. So and that is with a lot less license revenue coming through the door. So again I think our maintenance business is alive and well and quite frankly tracking online.

Richard Davis -- Needham & Co.

Got it. And then if I can I ask a follow-up so the other thought is if your kind of morphing or emerging as a kind of data management PLM company, is it accurate to same because one of the problems with -- not a problem, but with CAD software, it is hard to get people to switch because I'm used to the tool if I'm an engineer, I would get really grumpy about switching from one version to another or one vendor to another.

Is it fair and logical to say that to employ your kind of configuration management, your tech parts, your collaboration, all of those things that you have outlined, does that require less business process change on the part of the users, which therefore means greater opportunity for you guys to kind of step in and display disconnected systems or legacy systems which seems to be what you're doing? Is that a logical conclusion from the initial success you have seen?

Neil Moses

Yes. I don't think so actually. I think you're right that CAD is hard to switch both from a data standpoint and all the data you have ever created is now under our own format and then also from a user retraining same point and also the interruption standpoint CAD is hard to switch. If you look at back let us say in the heyday at [Author ID1: at Wed Jul 29 22:52:00 2009

]of Pro/E in may be the mid-90s, that product was so much better than the competition that people said let us bite the bullet.

We can't afford to sit here with the technology we have despite the bullet go through the pain and switch. And you know PTC was switching account after account after account in the heydays of Pro/ENGINEER despite the difficulty of switching. And this is because the gap was so big. And that is where we are right now on the PLM side, the gap has become big enough that it is justifies going through the pain and agony of switching even though that is difficult.

And I really think you know we at PTC and certainly our field management team, you know they feel like we're approaching the level of relative strength we have with Pro/E in the sort of early to mid 90s, you know where it has become the only game in town and we feel like we can walk into any kind of legitimate competition, you know a fair fight where at home field or in a way game, and we're going to work out with a win, and we are going to be able to justify the switch.

And so these dominoes again that is why these are the headlines in the rest of the newspaper about the other smaller deals but these are companies who are saying, it is time to switch. The gap is big enough, we can't afford to sit where we are, let us go.

Richard Davis -- Needham & Co.

Got it. That is helpful. Thanks.

Operator

And our next question is from Ross MacMillan with Jefferies & Co. Go ahead. Your line is open.

Embrano -- Jefferies & Co.

Hi guys. This is Embrano [ph] in place of Ross who had to drop of. I had a two part question. The first one is on your guidance for tax rate in Q4 going to 20% on non-GAAP. Should we go back to 25% for fiscal year 2009? And also on the services you talked about the Windchill weakness starting to deteriorate services a bit, what should we expect for fiscal year 2009 year-over-year on a year-over-year basis ?

Neil Moses

Was your question around 2009 tax rate and services…

Embrano -- Jefferies & Co.

I am sorry, fiscal year 10, sorry on both of those questions.

Neil Moses

Okay. On the second question, it is a little bit premature to give you guidance around our services revenue for next year given that we haven't given guidance for the full year on total revenue. I will say as I think Jim mentioned earlier that you know we are feeling more confident in our ability to grow next year we are absolutely more disappointed last quarter and our guidance will ultimately reflect that when we give it in October.

As far as the tax rate is concerned, the 20%, 21% we are projecting for this year, there is a significant difference in tax rate by geography, and so one of the things that we are seeing this year is a geographic mix is such that we are and have a lower tax rate than we anticipated. Over the longer term, we think 25% is still the appropriate tax rate to use in this business. You know we're committed to grow our earnings next year by 20% even at a higher tax rate than we projected this year.

Embrano -- Jefferies & Co.

Okay, great. And that kind of leads you to my second question around that 20% goal that you have. You know I can sort of keep the OpEx pretty flat with this year and sort of show some moderate modest to moderate growth or if you're going to continue growing up your growth has to be a little bit better, I am just wondering given all the cost containment you have had with sort of myriad increases being stopped and some of the other things you have done this year, what you expect for OpEx next year in terms of the ability to hold that flatter or just modestly up?

Neil Moses

Sure. Again I certainly understand the interest in having a better feeling for that. What I would say is that it is a little bit premature given where we are in the planning process. I would say that that there is guys – there is Wall Street consensus out there about how PTC is going to do for next year and we're not uncomfortable with that consensus even though we didn't develop that.

So that is the first thing I would say. Secondly we are right in the midst of our planning process. You know Dick mentioned the sales meeting that we had the last two days. Prior to that, we had a corporate management strategy meeting late last week. We are meeting over the next couple of days, so our decision in terms of the level of revenue growth that we are comfortable with and the OpEx that goes along with that is going to kind of unfolded over the course of the next 30 to 45 days. So we're just going to have to add ask you to be patient as we develop that. But just to reiterate we are committed to 20% earnings growth using a 25% tax rate.

Embrano -- Jefferies & Co

Great. Thanks a lot.

Operator

And our next question is from Blair Abernethy with Thomas Weisel Partners. Go ahead, your line is open.

Blair Abernethy -- Thomas Weisel Partners

Thank you. Just a couple of questions, just following on the discussion on the PLM side in terms of customers switching and so one, can you just give us some sense of the decision-making process on the customer side, what level are these decisions being made now and has that changed at all this year?

Dick Harrison

You know I think it varies a little but generally we're getting a high level executive involvement in the these procurement and in particular in displacement. One aspect and Jim did I think a nice job of describing what is happening into that (inaudible) I just want to follow up. I say I characterize ourselves as a management company today but I don't want anybody to think that we don't have the best authoring tool. Pro/ENGINEER is the best CAD tool out there in the marketplace today.

So these decisions particularly the displacement fields are technical and I was trying to describe there are different aspects of the technical evaluations, there is sort of front office and back office, it may be an analogy, the front office is the engineering department where they are managing all the CAD tools and so forth, and the back office is sort of the configuration management, collaboration, more the enterprise aspects.

So when you get into the technical benchmark and so forth, you know we're trying to win in all aspects of that and we do, but there is also a value proposition and a business case that goes along with it, so we're involved with the CFO, you know very high level people in the business around their investment, and there is a political aspect I tell you as well which often compels us to get right into the executive office because even in many cases at the CEO level, because our competitors are good companies and they have had relationships with these customers for many years, and they're going to appeal to the highest level that they can for a voice or more time or some kind of clemency, and so if we are not at the executive level, describing the fact and reminding them we want clearly and unambiguously technically.

And that translates into a value proposition around time-to-market, higher quality, supply-chain integration, and all the things that are important to them, we would be able to tell that story. So we are high we are in there, we are at the VP of engineering level, we are at the CIO level, we are at the CFO level, and in many aspects in many deals, we actually get all the way up to the CEO.

Blair Abernethy -- Thomas Weisel Partners

Okay, great. Thank you.

Dick Harrison

One of the other little things that is happening more recently, we have been trying to build a partnership program around this category or this market for probably six or seven years and we have actually said to ourselves and to you that the category really probably won't break out and be significant until the partners become you know more and more active and involved and they have a tendency to follow markets, the Accentures of the world and EDS, HP and IBM's Global Services and so forth.

And we have noticed also in the last three quarters, last year or so, it has been accelerating that the partners are bringing us some deals and the partners are more and more coming to our door and wanting to talk more about how they can work with us. It used to be that we were trying to push the partnership concept out to them and we noticed that it is now they're coming to us.

And we'll have to give some more input on what is happening with that but that could accelerate some deals. We won a pilot that we haven't described yet in June, we haven't talked about it today, but it is a major major company, one of the biggest in the whole world. And a partners brought it to us, it was a competitive take off, we won the pilot, and we will talk more about that I think at the October call if we do well in the pilot which I think we will.

But that was a deal that was actually I would say a 13-8 sales cycle, the partner, which was Accenture, teed it up and had an open bidding contest. They were pretty well-versed in what the competitive offerings were and we were selected for that initial bake off. And it is hard to us. So I think it'll be pretty excited when we tell you the name of that company in the fall. Again I'm going off the level a little bit because we have to execute well in the pilot here in the next 90 days but I think…

Jim Heppelmann

That is the case where the pilot proceeded the commitment. A lot of times there is the commitment to go with PTC and then a pilot is just the first step of rolling it out and it is kind of a learning experience. But in this case, they said, let us do the pilot, and you know, see, you won the pilot, if you execute then we will make a commitment.

Blair Abernethy -- Thomas Weisel Partners

okay, Great. Thank you. And just Neil I wonder if you can give us some color around the services business just in terms of how your backlog is looking now that we are sort of three quarters through significantly lower license revenues and services were down a little bit sequentially, and can you also just talk about service pricing?

Neil Moses

Yes. I would say that first of all, answering your second question first, we haven't seen any deterioration in services pricing whatsoever. From a backlog perspective, the thing is it will get a little softer in Q3, if you think back on our maintenance business in the second quarter where our (inaudible) were down for the first time in a couple of years, and then it is now back this quarter, then we saw a little bit of softness in our service business both in backlog and in revenue in Q3.

I think our guidance incorporates similar thinking around Q4 and I think we talked before about a little bit of a lag effect of a few quarters of difficult license revenue on both the services and maintenance business. So I think what we're starting to see though which is actually pretty encouraging is we're starting to see our licenses business recover. It was up 18% in Q3. Our guidance assumes it is going to be up close to 25% in Q4, and I think the services business and the maintenance business are going to recover all along the license business albeit a quarter or two behind.

Blair Abernethy -- Thomas Weisel Partners

Okay, great. Thanks very much.

Dick Harrison

Welcome.

Operator

And we have time for two more questions, our next question is from Yun Kim with Broadpoint AmTech. Go ahead, your line is open.

Yun Kim -- Broadpoint AmTech

Thank you. I may be mistaken but it seems like there were some improvement in sales of midsize fields, it looks like the number of large deals remained the same from previous quarter, and it looks like the channel business remained the same as well. Can you just talk about what is driving the sequential improvement in the license revenue in the quarter and again it seems it was driven by mid sized deals from the direct sales, any particular products driving this, or is it simply large deals getting downsized or broken into smaller chunks? Thanks.

Neil Moses

Well you know I think the license improvement was driven in a couple of areas. First of all our enterprise license revenue is up 55% sequentially. And so you know Windchill definitely is leading the license recovery if you will. That is the product side. On the geographic side, North America, North America license sales were up 51% sequentially. So we're beginning to sees recovery in North America.

I think it is encouraging that enterprise license sales are up as much as they are sequentially because that is typically where the large deal activity takes place. So while we had nine deals over $1 million which was comparable to last quarter, I think the improvement in enterprise license sales bodes well. We're seeing more large transactions going forward. I think if we look ahead into Q4, last year we did 24 large deals in excess of $1 million. I don't think we're going to do 24 but I think we are going to do significantly more than nine and that is being driven by the enterprise license performance.

Yun Kim -- Broadpoint AmTech

Okay great. And then in terms of channel business, it looks like it's kind of stalled again in the quarter, can you give us any update in your channel business and from your point of view when can we start to see the growth back again?

Neil Moses

Yes, we have had a couple of quarters of business in the channel has been stopped. Our worldwide channel manager for PTC was here the last couple of days, I think he feels like his business is bottoming out and we're going to start to see some recovery there. But you're right. We had a tough couple of quarters in the channel, we are fortunate that that among our over 400 channel partners that we have, there is only that is going out of the business so far this year. So I think we worked with our channel partners very aggressively and kind of helped them through with the 0% financing options and what have you that helped them through difficult times. And I think we expect to see the channel business kind of around the bend either in Q4 or Q1.

Dick Harrison

I think just to put things in perspective again if you go to 50,000 feet, a year ago, the same PTC executive team sat in the same room in the same hotel we are in right now and actually projected a lot of growth because we saw a lot of interest, we saw a huge competitive advantage, we thought 2009 was going to be a pretty good year. Then come September 26, Lehman goes out of business and collapses, and you know just the whole world has changed dramatically and everybody stops spending money.

And what happened is that customers didn't become disinterested and we didn't lose our competitive advantage, just everything froze. And so now I think we are starting to see some relative amount of unfreezing taking place and that hasn't trickled down yet to the small companies you know who are probably more conservative, but the bigger companies, the medium-sized companies are starting to sort of open the wall a little bit and give the green light to projects that they had just frozen you know back in September, October kind of time frame when the world was falling apart.

Yun Kim -- Broadpoint AmTech

Okay, Neil, how much of your near-term margin expansion plan is driven by the channel business growth?

Neil Moses

You know I think it is probably -- probably not in the near-term very little of it. For the long-term, it is obviously a different factor because we said we want to get to 35 and 40%, and that it is a pretty efficient model as we move in that direction. But over the next 12 to 15 months you know very little of that margin expansion will be driven through the channel.

Yun Kim -- Broadpoint AmTech

Okay great. And then I'm not sure if David is there or not, but can you explain the dynamics of how you guys were able to improve services margin when there was a sizable sequential decline in the consulting business, were they really driven by headcount reduction in your facility -- organization?

Neil Moses

I am sorry, was the question around how we were able to improve services margin?

Yun Kim -- Broadpoint AmTech

Yes. believe I did the math right or did it decline?

Neil Moses

Services margins were up…

Yun Kim -- Broadpoint AmTech

Potentially.

Neil Moses

Jim, do you want to address that?

Jim Heppelmann

I think that we are driving greater efficiency in our organizational models going forward and secondly our delivery capacity is flexible. So we drive delivery capacity in relation to what the revenue looks like and being will be able to manage those portfolios successfully. We have also taken some of our capacity, work capacity offshore so we are able to offer our services at the low combined price.

Dick Harrison

Yes, I think if you remember from the analyst day again, we probably talked to this some of it verbally, some of it in the slide, but basically the bigger engagements are more profitable for the services business. If they getting a lot of small onesie, twosey short duration deals, they have a hard time driving their margins where they want them to be. So fundamentally what the services group did and we talked about it that day is they have concentrated the PTC direct services typically on let us call it the 250 largest customers and then put us in place a partner program, a services partner program to back fill the sort of the medium-sized and smaller deals. And that program is making good progress and sort of delivering the kind of results that we hoped it would.

Yun Kim -- Broadpoint AmTech

Okay. So this improvement in the margin on the services side services side of the business should be sustainable right going forward?

Neil Moses

Absolutely, yes.

Yun Kim -- Broadpoint AmTech

Okay, great. That is it from me. Thank you very much.

Operator

And our final question is from Ben Cadillac [ph] with First Investors. Go ahead. Your line is open.

Ben Cadillac -- First Investors

Hi, thanks for taking the question. Not to miss the forest for the trees here but what changed between your analyst day in June and I guess your release here that would have you sort of lower fiscal year 2009, you know is it just near-term things became more uncertain, but longer-term you are more excited? And then secondly, you covered some of this a little bit in some other questions, but I was wondering if there is any more visibility on the timing of revenue recognition on these major benchmark deals? I mean is it sort of like 10% first year, 30%, I mean to get to that 5 to 10 million run rate, how should we view those new running up on a quarterly basis or a yearly basis? Thanks.

Neil Moses

So first question was around guidance for this year. You know I don't -- what I would say is that we think it is appropriate to be conservative, I think Dick mentioned this before. Certainly over the course of the next three months even though we're seeing signs that to Jims point of falling out of the freeze on spending that we have seen for about nine months now. So it is appropriate to be conservative and hopefully we will see more signs that this business is moving in the right direction over the next 90 days and you know hopefully that will culminate in our ability to drive some growth in the business through 2010 that quite frankly a quarter ago we probably would not have anticipated.

As to your second question, I don't think there's one particular pattern around the recognition of revenue or the size of the orders that we're going to get through "domino account." What is true in this environment is to Jim's point usually the initial foray after a commitment is a pilot project, there's a small amount of revenue associated with that. That process may take place for as long as six months or maybe even longer and typically that would be followed by a more significant order or the orders over a period of time.

I think at the outset of the call, Jim talked about airbus where we got a fairly substantial license quarter up front. But the account has evolved into an ongoing annuity which is comprised in part of license revenue primarily of services revenue and maintenance revenue as well. So what we're trying to develop to these domino accounts is that type of ongoing annuity, and I would tell you that you once you obtain commitment from a customer, it is probably going to take you 6 to 12 months before that annuity starts to take shape.

Jim Heppelmann

I was just thinking – I was just thinking out loud here that maybe the model -- we should try to model this for you, the homework is done, but maybe it would be like 20, 40, 40. But then I realized that in fact a lot of these deal never end and so what happens is you just expand the footprint. You know they might look at it as data management vendor for changed configuration management but as we get into the project, pretty soon we are talking about Arbortext and then we're talking about the InSight product analytics and the environmental stuff and the reliability stuff and then we will be talking about SharePoint, and after that we're going to have a conversation about embedded software.

And the truth of the matter is these turn into huge annuities that might last for 10 years or more. Airbus has been one of our top five accounts I'm sure for probably each of the last this five years, and I don't think they we would say that project is going to be down and they're going to fall of the radar. I mean we feel like if you check into the last 10 years from now, Airbus would probably still be -- EADS would probably still be one of our biggest accounts.

Dick Harrison

And we have our own sort of sales campaign strategy that we refer to internally but which is called surround all around. So as Jim was describing it, as that footprint gets bigger for example last quarter we didn't even talk about it. Ericsson is a pretty nice company, I don't know what their annual revenues are but they are very, very big. It is never really been a customer of ours, we just sold them a very, very nice deal for InSight for environmental compliance and SharePoint and we had even talked about it.

So that is a foothold now into the account which we will use as a beachhead to go back in and start to suggest to them that they take a closer look at Windchill for configuration and change management today. They have a homegrown system that is highly customized, so as Jim was describing in these large domino accounts, ultimately if we were to get that complete footprint that we're talking about, we're going to go back and attack the CAD deployment as well.

And already many of these customers at least have an open mind at having a conversation about that somewhere in the future. They will acknowledge that if we deploy our data management solution that we're managing our competitors CAD offering, that we're doing the back-office work around changing configuration management, technical documents, SharePoint, that at some point that would at least entertain a conversation and the value proposition around swapping out the competitive CAD offerings and having a complete system from PTC.

Ben Cadillac -- First Investors

Right. So just a quick follow-up if I may, so you know these sort of dominoes that you have announced right now, I mean have you already begun the pilots, are you sort of at the beginning stages of the pilots, halfway through, towards the end…

Dick Harrison

Before we announced we just secured a commitment, so the pilot projects are starting next week.

Ben Cadillac -- First Investors

Starting next week, okay great.

Dick Harrison

there might have been already some level of proof of concept but you know the deployment is starting next week.

Ben Cadillac -- First Investors

Okay great, all right thanks.

Dick Harrison

So I think that we will continue to work on those. It could be interesting for you to ask the leadership of our competitors which again they are a great fine companies what they think about our dominoes. I think you know as they may have been able to shrug off the first or second, I think they're going to have an increasingly difficult time explaining the inexplicable, which is how they are loosing these real critical accounts. And then again we're going to work hard during this summer, we're hoping to have a really nice fourth quarter, and we look forward to getting back with you in the fall with our plan as well for fiscal year 2010. Thanks again.

Operator

That does conclude today's conference. Thank you for participating. You may disconnect at this time.

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Source: Parametric Technology Corporation F3Q09 (Qtr End 07/04/09) Earnings Call Transcript
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