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Executives

Kristian Talvitie – VP, Corporate Communications

James Heppelmann – President and COO

Cornelius Moses – CFO

Barry Cohen – EVP, Strategic Services and Partners

Analysts

Michael Olson – Piper Jaffray Companies

Ross MacMillan – Jeffries & Company, Inc.

Ben Rose – Battle Road Research

Sterling Auty – JP Morgan Chase & Co.

Yun Kim – Gleacher & Company, Inc.

Steven Koenig – Longbow Research LLC

Blair Abernethy – Thomas Weisel Partners

Parametric Technology Corporation (PMTC) F3Q10 (Qtr End 07/03/2010) Earnings Conference Call July 28, 2010 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the PTC’s Third Quarter Fiscal Year 2010 Results Conference Call. (Operator Instructions) I would now like to introduce Kristian Talvitie, PTC’s Vice President of Corporate Communications. Please go ahead.

Kristian Talvitie

Thanks, (Inaudible). Good morning, everybody. Before we get started here, I just want to quickly read through the Safe Harbor Statement. This Q&A session may include forward-looking statements regarding PTC’s products or anticipated future operations or financial performance. Any such statements will be based on the current assumptions of PTC’s management and are subject to risks and uncertainties that could cause actual events and results to differ materially. Information concerning these risks and uncertainties is contained in PTC’s most recent Form 10-K and on form 10-Q on file with the SEC.

All financial measures in this Q&A will be non-GAAP financial measures. A reconciliation between the non-GAAP measures and the comparable GAAP measure is located on our Investor Relations website at www.ptc.com.

With that, we’ve got – with us here today is Jim Heppelmann, Barry Cohen, Neil Moses and Dick Harrison. With that I’m going to turn it over to Jim for some brief opening comments, and then we’ll go right into Q&A.

James Heppelmann

All right. Thank you, Kristian, and good morning to everybody on the call. Based on the press released and the earnings transcripts, which we provided to you already, I think you’ll agree that we had a very solid Q3. We came in above our revised guidance both for revenue and for earnings, which we were pleased with.

Naturally, this gives us a lot more confidence in our full year plan and we’re pretty confident in that billion dollars in revenue and a dollar in earnings. That would land us naturally at 25% earnings growth for the year, which of course is ahead of the 20% earnings growth long-term goal that we have, so we’d be sort of in the lean column for the first year on that, a little bit of upside.

In the quarter, we had very strong PLM results again as well as some sort of renewed strength in the reseller segment and then the desktop business, which was good to see. But the most important thing, I think as we continue to see this market share expansion phenomenon continue in the PLM sector, we talked about landing two more of these big important Domino competitive win. One of them was this Continental Automotive account that we have a press release on yesterday or the day before.

Continental was €20 billion in 2009, so it’s a very large company. This is a company, who had largely standardized on the (inaudible) and product line and we went through a comprehensive benchmarking process, proof of concept and then as a result of all that, the (inaudible) concluded a very significant order, which would be one of the large orders in the quarter.

We also won another Domino account. I’m not yet able to disclose the name, but it’s a medical technology company. Again, that company is about $20 billion of revenue. This was an account that was somewhat brain field though; I will note the one PLM installation they did have was from Dassault. Again, a long comprehensive benchmark in process and PTC was elected the winner.

So, if you add the two Dominos we secured in Q3 to the goal we had to the year, that puts us at 15th, which was our twice revise goal. I have a little piece of good news here this morning, which is we’ve already secured one more Domino account in Q4. This one is Target. Target, you’ll probably recognize as the $65 billion retailer, know very much sort of step the standards with private label products.

Target is the case where they have an active installation of a competitor’s product. Now, they began to question whether or not that installation was providing adequate value. They went through a one-year comprehensive benchmarking process and at the end of that, decided to make a switch to PTC, which we’re very pleased about. So, the reason these Dominoes and the competitive displacements in general are so important is I think they’re just adding to our revenue growth abilities and I’ll remind you what we said before, is that today’s Domino is tomorrow’s annuity, and our ability to take these accounts and these wins and monetize them for years to come is really sort of the basis for the magnitude of the PLM business that we’re building.

In the quarter, we also made some incremental investments for growth, in terms of sales capacity and a few other areas. We will continue to do that in Q4 for our plan. We told you in June, we were slowing that down a bit, just to cautious, I think we’re going back to our original plan based on where Q3 landed in their outlook for Q4.

And then finally, one closing comment, I’d like to point out that the CEO transition is going well. Mr. Harrison is sitting here with us this morning and I’ll note for the record that his fontan’s (ph) is a little deeper than it is most summers at this point in time. So, with that, I’d like to turn it over to the operator and we’ll begin the Q&A process, thanks.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question today comes from Mike Olson with Piper Jaffray.

Michael Olson – Piper Jaffray Companies

Hey, good morning. A couple of real quick ones here. You talked about direct America’s revenue is from the transcript in down due to timing of large deal closures, does that at all suggest that there’s some domestic deals that got push into the September quarter that closed later in the June quarter than you expect or just any detail that you can provide on the comment that was in the prepared remarks.

James Heppelmann

It’s Jim here. I think the challenge we have is something to remember back to June when bolt cutting hammer our head of sales, share (ph) is sort of a big deal pipeline and we have quite a bit of revenue coming for this big deal pipeline. It is very difficult to predict when a given order is going to land in this quarter or next quarter. I can tell you pretty confidently, none of these deals went away in North America, none of them got downsized.

On one hand, there were some deals that we would have like to close in Q3, it became Q4 business. I’ll tell you on the other hand some Q4 business became Q3 business and when you netter it all out, we landed where we landed, which was a good place. So, I don’t think you should anything into that other than when you’re writing a sales cycle that’s 12 to 18 months – is it 12? Is it 15? Is it 18? That’s difficult to predict, when you’re sort of sitting their maybe at the 10th month mark, so that’s the difficulty. But I think the fundamental business in North America is very strong.

Michael Olson – Piper Jaffray Companies

Okay. And then as far as another kind of quote from the prepared remarks regarding the new CAD platform, Lightning. I realized you’re probably not wanting to give a ton of detail on that right now, but is that intended to be kind of the next upgrade of Pro/E or is it something totally different?

James Heppelmann

So, let me first say, to sot of introduce the Lightning subject a little bit on the call here. At our Customer User Group meeting in early June, we disclose an initiative with pretty vague details to be honest. But we feel people tune in on October 28th, because we’re going to tell you what we’re really doing and I’ll tell you the same thing that on October 28th, we’re going to disclose a lot more details.

But suffice it to say that Lightning really is a next generation CAD platform that we think is very compelling, really will put us in a whole different competitive position and I’ll tell you will be fully upward compatible from an existing implementation of Pro/ENGINEER. It’s a lot more than the next revision of Pro/ENGINEER, but one of the things PTC learned, I think better than our competitors in the CAD’s basis, when you come out with something new that let you pickup with what you were working on yesterday and the older version, that’s compelling.

So, we’re going to have that kind of capability and will be in the position as the big product cycle upgrade.

Michael Olson – Piper Jaffray Companies

All right. Thanks very much.

Operator

And the next question comes from Ross MacMillan with Jeffries & Company.

Ross MacMillan – Jeffries & Company, Inc.

Thanks. I guess the big question is just really on the inside or the fourth quarter guidance. You guys had talked about a billion of revenue at your analyst day in June since then you up sided Q3 and you’ve had a positive effect shift. So, keeping the billion dollars in price, lower than previously assumed revenue in Q4, could you just talk to how you approach Q4 guidance, whether you think you just baked in more conservatism because it seems like your business is strong and from your comments there, Jim, it sounded like there had really been no change in your view of the Q3, Q4 kind of mix. So, I’m just curious as to why the change on Q4. Thanks.

James Heppelmann

Yes, I mean I think it’s important to take this all in the context of the year and the chronology of guidance we’ve given you and so forth. And I’ll state what I said back in June, which is at the beginning of the year, we forecasted 20% license growth and nobody believed it, then we took it to 30 to 35% and nobody believed it, then we took to 35 to 40% and nobody believed it. The incurrence you took a huge swing in the wrong direction and we said we’re going to fold it that 35 to 40% and I think at that point, maybe you’re starting to believe it.

Now, we have a piece of good news with 3 million ahead with a quarter to go. Should we take up our guidance? It just gets back to the difficulty of projecting which deals were going to land in – and stuff, which quarter these deals are going to land in. And I think you could state as we now stand here with a billion in buck, there’s less risk in the billion in the buck than there would have in had we come in sort of at the consensus or somewhere else in the range we had given you.

Ross MacMillan – Jeffries & Company, Inc.

That makes sense. Just to be clear then, no real change in your view in either buying patterns or the demand that the conversations you’re having with customers about their willingness to move forward on projects.

James Heppelmann

Yes, no change whatsoever. And I’ll remind you that we’re in a pretty aggressive position already. So, we’re not saying it’s less attractive, we’re not saying it’s more attractive, we’re saying it’s equally attractive and we expect this trends to continue.

Ross MacMillan – Jeffries & Company, Inc.

That’s very helpful, thanks.

Operator

The next question comes from Ben Rose with Battle Road Research.

Ben Rose – Battle Road Research

Good morning. Question on the 250 active competitive accounts that you’re pursuing. Jim, could you share with us any progress there, I know you talked about the two Domino accounts this quarter, but just by way of this other 250, if you can quantify any progress and whether it continues to be reviewed at Dassault is the most vulnerable of your competitors in that regard.

James Heppelmann

I think our view is shifting a little bit that Siemens is equally vulnerable because some of the Dominoes I’m talking about here with the Silicon (ph) and some were Siemens account and I think we’ve close in the business that we’ve already transacted and then the business we are pursuing right now. That’s kind of an equal mix of Siemens and Dassault displacement and we’re making great progress that’s all I can say.

I think the point we made before which I know you’re curious about, we think that the strength of our business right now comes from three factors, one is the economy is better, better than it was. It may not be perfect, but it’s certainly better than it was in 2009 and companies are spending money again. The second thing is PLM is a sector that people are choosing to make investments in. So, there’s some natural growth into marketplace right now, and then the third things is we’re taking a lot of market share.

We’re taking our natural growth and a big chunk of Siemens and Dassault natural growth as well. When you add those three factors together, that’s how you get to the sort of the 38% license growth number that we’ve been forecasting. I think when you roll into next year; the economy will be different because we’ll have suffered comps. We’ll be comparing a somewhat better economy to a somewhat better economy, hopefully, and that one factor will go away. But the other two, which is investment in this area and market share grab, will continue forward and I think with our pretty license growth and overall revenue growth going into the airplay level as well.

Operator

And next is Sterling Auty with JP Morgan Chase.

Sterling Auty – JP Morgan Chase & Co.

Yes. Thanks. Okay, a couple of questions. First on the Domino deals, can you give a sense as to what kind of revenue contribution you’re getting out of the existing meaning we’ve talked about how the Domino deal should ramp up into that annuity phase, can you give us a sense as to how that growth in the annuity contribution looks at this point.

Cornelius Moses

Sure. Sterling, it’s Neil. One thing that we track and I think that we’ll talk more about as we head into next year is not just a number of Dominoes one but also kind of the annuity characteristics of those Dominoes. I think we’ve talked about that a little bit at our June user event, but I think we’d like to provide some more visibility to that information.

What I can tell you is that when we started down this path over a year ago, but starting this year Domino has represented really, that’s been 5% of PTC’s revenue in aggregate and today, if you look they represent that just under 10% of PTC (inaudible). So, basically, they’ve doubled as the percentage of our revenue in the past 12 months, and we expect that trend to continue.

Sterling Auty – JP Morgan Chase & Co.

All right, great. And then you mentioned adding sales teams, can you define for us what is a sales team? So, what should we expect in terms total head count increase as you add the additional teams?

James Heppelmann

Yes. I mean let’s just say on average or as a proxy, if there’s a little bit. But as a proxy, you could say a sales rep, an application engineer, technical specialist and then a business that (inaudible) manager, business development would be the person that’s putting together sort of the financial case or how these technology is going to help the company save money and so forth. It’s the business advantage (ph) that’s going to create. Those aren’t always on a 1:1:1 basis, so it’s not exactly like that, but just simply put sort of a 3:1 ratio, if we hire 30 teams. We’re probably talking 90 people more or less.

Sterling Auty – JP Morgan Chase & Co.

Okay. And then on the CAD side, I’m going to try from a different angle. In terms of the new solution that you’re talking about is it changing some of the core design functionality within the program or is it some of the ancillary extensions of what the program can do that you’re looking at the new version?

James Heppelmann

I think it’s a radical new idea that nobody thought of, developed or delivered before. It saw some great big problems that very much worth solving. It changes some paradigm around things like usability and switching CADs and so forth, and you can upgrade through it seamlessly from your credit Pro/ENGINEER installation.

Sterling Auty – JP Morgan Chase & Co.

And do you think that you could –

Unidentified Company Speaker

(Inaudible) customers that they’ve been like a scion.

James Heppelmann

I mean yes, astonishing is a sort of adjective we’ve seen used a couple of times by customers when we taken them inside and given them a sneak peek at it. So, be patient. I can tell you, I’m super excited about it. I think the rest of the company is really buzzing about it, but we’re not quite ready to do the full disclosure, but we’ll do that like so.

Sterling Auty – JP Morgan Chase & Co.

Okay, thank you.

James Heppelmann

Let me just jump to the punch line though, the punch line is we’re not going to project this here in this call or give guidance, but we think this could change the fortunes of our desktop business and put it back on a growth vector.

Sterling Auty – JP Morgan Chase & Co.

Great. Thanks, guys.

Operator

And next is Yun Kim with Gleacher.

Yun Kim – Gleacher & Company, Inc.

Thank you. A question for Barry, with you expecting very strong salivation in the consulting business in fiscal year ‘11, do you expect to see some margin pressure of you and head count to meet demand or do you think there’s enough capacity right now to ramp without hurting the margins?

Barry Cohen

Well, I think that a little bit like a company and Jim’s plan for like 13 and one, revenue growth and margin expansion. I think we could’ve have seen a greater margin expansion next year, if we weren’t investing particularly in the Domino, so we see 15 (ph) growth next year and also to margin expansion for us and services.

Cornelius Moses

Yes, just to add to Barry’s point. This is Neil. One of the things that we’re also excited about is when we think about our services and maintenance businesses, I think we’ve spoken before about the hangover effect of last year’s license revenue performance being a drag on both those businesses in 2010. Actually, in the fourth quarter, we’re expecting the Turbine (ph) business to cross the threshold and begin growing again and then again in FY ‘11 in a very significant way.

But in the fourth quarter, we expect the services business to be up both on a constant currency basis and on an absolute basis and we expect our maintenance business to be up on a constant currency basis as well. So, that tide is starting to turn and that’s I think a good omen for 2011.

Yun Kim – Gleacher & Company, Inc.

Okay, great, and just kind of sticking with the most popular theme in this quarter’s earnings season, what are you guys seeing out there and you roll up in second half of the year, or chart calendar second half of the year for you guys. Thanks.

Cornelius Moses

Just the terms of revenue performance?

Yun Kim – Gleacher & Company, Inc.

Yes. Just in terms of overall visibility. This is the overall sales environment.

Cornelius Moses

Yes. I would say that we actually reviewed our pipeline yesterday and the sales pipeline continues to looks strong. I think are feeling on the economy is definitely improving. We hope it continues to do so. But certainly we’re not hitting on all cylinders yet. But I think we feel good about the pipeline and the opportunity to deliver the types of numbers that we talked about in the prepared remarks for fiscal year ‘11.

One thing I’d like to point out though is that – I’d like to remind everyone that the first quarter of this fiscal year, fiscal ‘10 was a blowout quarter for PTC, and that typically are smallest quarter of the year in terms of revenue. So, when you think about your models for next year, think about kind of a more normalized Q1, but still with a growth characteristics that we talked about roughly 20% license growth, services growth in the mid-teens and maintenance growth in the mid-single digits kind of constant currency basis.

Yun Kim – Gleacher & Company, Inc.

Okay, great. And finally Neil, any update on the CFO search?

Cornelius Moses

I’m not sure I’m the right guy to ask. I think I’ll turn it over to Jim.

James Heppelmann

Yes, I think the search is going well. We’re sort of through the process, identifying the list of candidates we want to talk through or talk to and we’re halfway through the process to talking to those people, at least two candidates that I wouldn’t mind hiring right now, but we’re going to keep going to the rest of the list and then back up and analyzing, and decide overall who’s the best bet for it. I think it’s going well and we’re going to land a world-class CFO.

Yun Kim – Gleacher & Company, Inc.

Okay, great. Thank you so much.

Operator

And next is Steve Koenig with Longbow Research.

Steven Koenig – Longbow Research LLC

Good morning. How you guys are doing?

James Heppelmann

Good.

Cornelius Moses

Good.

Steven Koenig – Longbow Research LLC

A couple of questions for you. First one I’d like to dig in to Q3 a little bit, as usual lots of great data in the prepared remarks, maybe just a few other things, I would love to get a little more granularity on. One question would be linearity in the quarter and how to close rates to load up. Another question would be indirect revenues, you had good SMB CAD license year on year growth. Indirect revenues were kind of flattish or – it’s been a little weak sequentially for a couple of quarters, when might that turnaround? Then a couple more questions on the quarter and then will let be on that.

Cornelius Moses

Well, I’ll jump in and take the SMB comment and then Jim, maybe you want to talk a little about linearity. I think what we’re seeing in the SMB business is that this is a slower to recover, no question. We are seeing year on year growth both license revenue and total revenue, so that’s good news. I’ll be at relatively small growth at this point. So, we think that trend is going to continue in the SMB marketplace and we’ll see stronger growth next year, and it’s just going to take a few more quarters so that this does gets back to where it should be, I think it’s the answer.

James Heppelmann

Yes. On the linearity thing, we have a bit of a hockey stick within the quarter, and then we certainly have our hockey stick within the year and I would say the macro forces are pushing towards a bigger hockey stick particularly within the year and by that I mean more and more of our revenue is coming from enterprise deals. Enterprise deals are getting bigger, we’ve seen. We’ll probably do, by the way, the four biggest licensed transactions we’ve ever done the top four this year and the Windchill business.

So, there’s a macro external forces that are trying to make an even bigger hockey stick and then I’ll tell you there’s some internal programs that PTC was trying to mitigate that and smooth it back out. So, I think from a linearity standpoint, we’re going to continue to see the situation probably be as is in the short-term with this hockey stick in the quarter and in the year. We’re going to work on and we have some ideas and programs before to place to try to manage that better, but it stopped because the customers are part of the problem here.

Steven Koenig – Longbow Research LLC

Okay, and Jim, maybe one more question about the quarter and then I just want to move to next year. On the quarter, any $5 million deals and then secondly, looks like non-large deals are having to really carry the day. It was up pretty nicely from Q1 and Q2, so any color on the modules and upgrades business?

James Heppelmann

I’ll hit the first part of that. There was one deal greater than 5 million. I don’t specifically know about the module business, maybe you have that there.

Cornelius Moses

Yes. The module business, I think and the upgrades business were good, not great this quarter. And you’re right the base business since there was just one large deal, the base business really kind of carry the day.

Steven Koenig – Longbow Research LLC

Okay. And then lastly, let me turn to guidance about Q4 and then kind of directionally for next year. What did you assume about the macro economy in Q4 and about close rates? And then also that question applies to next year and kind of correlated that would be, if you’re revenue growth next year or say more like 9 to 10% instead of the 12% long-term carter you’re targeting. How much risk is there to your 20% EPS started and that’s all my question.

James Heppelmann

Yes. Well, it’s Jim again here. I think first of all on the economy assumptions, we don’t actually have an economist on the stuff here, so we just assume it’s going to like it is now, not better no less.

Steven Koenig – Longbow Research LLC

Okay.

James Heppelmann

We assume that for Q4 and we assume that for next year.

Steven Koenig – Longbow Research LLC

Okay.

James Heppelmann

What was the second part of the question?

Barry Cohen

The question was about the $1.20.

James Heppelmann

Yes. The $1.20, so I want Neil to go through sort of a currency discussion in a minute. But I’ll just start off by saying; we’re very committed to the $1.20. We’re more committed to the $1.20 than we are to the revenue growth level and we think we can hit the $1.20 at different revenue growth levels and Neil, take it to what currency does in a minute here. But currency has a much more profound effect on the revenue numbers than on the $1.20 or the earnings growth number in general.

So, we’re committed to the $1.20 for next year. It’s really a question of exactly which combination of margin expansion, the revenue growth in FY ‘11, are going to get it there and that’s largely a currency discussion.

Cornelius Moses

Yes. So, we don’t have a foreign exchange specialist on the staff either. So, from a currency perspective –

Barry Cohen

That’s you.

Cornelius Moses

We basically take what the currency is today and project it forward. We’re using $1.25, which I haven’t looked this morning, but I think it’s a little bit more conservative than where the Euros currently sitting as far as next year is concerned. I think we talked back in June that our investor conference around the fact that every €0.10 movement in the Euro, on an annualize basis was worth – let’s call it $25 to 30 million in revenue, $15 to 20 of moving in expense and 0.05 to 0.07 in earnings.

Now, in any given quarter that doesn’t impact the results that much. Maybe it’s much – 0.01 or 0.02, but not much more than that. Now, turning to the full year, what Jim said is actually correct whether we grow 9%, the user number, Steve, next year or 12%, we’re going to hit the $1.20. We have a natural hedge the way the revenue and expense move together and we have the ability to, if you will slow down additional investments if we need to, to ensure that $1.20 is a commitment we can make to you.

Steven Koenig – Longbow Research LLC

Great. Thanks a lot, Neil. Thanks, everyone.

Cornelius Moses

Yes.

Operator

(Operator Instructions) And our next question comes from Blair Abernethy with Thomas Weisel Partners.

Blair Abernethy – Thomas Weisel Partners

Good morning. Thanks, guys. Just a couple of things, first on the PLM side on the Domino wins that you seem to be pertaining to take a long nicely here this year. Is there – have been – are there any changes that you’re seeing and sort of the evaluation and selling cycle for the Dominos you’re targeting, number one, and number two, can you talk a little about what you’re closure rate has been this year in the Domino space, if you will and in terms of some of the – one deal that got away, sort of what are some of the key factors as to why that happened? Yes.

Cornelius Moses

Well, let me – first thing (inaudible) –

James Heppelmann

Before we start the year, I think how many we’re going to do in the fiscal year?

Cornelius Moses

Yes, I’d have to think about it chronologically. But just to put things in context –

James Heppelmann

Well.

Cornelius Moses

The goal we gave you, originally, through FY ‘10 with 10 Dominos with. We subsequently up that to 12, we subsequently up that to 15, this morning we’re sitting here at 16 with most of the quarter to go. I think we’ll end greater than 16, 20 or less sort of in that range. So, clearly the closer rate and the overall development of the Domino program seems to be better than we were projecting because I think we were taught the answer was 20, we probably wouldn’t have told you 10, we’d have told you at 18, but it’s really going very well and I think what I would expect to happen over time, we’re really building now our reputation and a brand that screams PLM later.

I think overtime we’re going to start to see that translate in the sure (ph) to sales cycle, higher wind rate although the wind rate is incredibly high right now, but sure (ph) to sales cycle, (inaudible) discounting, better pricing power, et cetera. I talked about the target campaign that run for a year, our year is well below our average.

James Heppelmann

Who do we disclose it?

Cornelius Moses

Throughout really, the lab set.

Barry Cohen

And it wasn’t Dassault.

Cornelius Moses

It wasn’t Dassault. Although it did compete in the benchmark, we want to get Dassault, but nobody wants that company with the incumbent. So, anyway that’s a good example, a comprehensive process that ramp we start to finish in a year. I see our average prices are still substantial longer than a year, maybe a year and a half, maybe even longer than that.

But, again, I think what’s happening in some of these campaigns is people are starting to say, “Hey, there’s a leader emerging.” It’s easy, we all know that it is easy to buy from the emerging leader, it takes triple to justification to buy from somebody who is clearly not the emerging leader and that phenomenon overtime, I think will become more and more impactful and I think it will continue to feel our market share grab and growth rate.

Just to answer the last question, Jim, correct me if I am wrong, but we haven’t lost a Domino –

Barry Cohen

Yes.

Cornelius Moses

A competition that we’ve been in this year.

James Heppelmann

No.

Cornelius Moses

I think that’s right. And the challenge really is so our wind rate is exceedingly high, we’re really focus on as we talk about before is monetizing those Dominos. We know it’s a long sale cycle, how quickly can we convert that win into revenue and realize the kind of annuity opportunity that (inaudible).

James Heppelmann

Yes, maybe just a little more on that because it is important. The important thing about it, the exciting thing about Dominos is that they should turn into annuities and annuities become base business and that’s great. We provided to you at a previous investor event model that we felt the typical Domino monetization model and we said that a typical Domino, reminds you of what’s around the word typical because there actually is a bit of variability, but a typical one when we win, we get a pilot project that produces $1 to 2 million in revenue in the first year, typically dominated by services revenue.

Because they say, “Hey, we made the selection but we want to validate that collection in the real world of our business.” And at the end of that, let’s call it first year, “They say, okay, it works. Let’s roll it out,” that tends to produce a life disorder (ph). And then maybe in the second year, we’ll do 2 to 4 million life disorder (ph), similar services, et cetera. In the third year, they decide to expand this to another program or another division or another business unit, and we get a further expansion.

In the next year after that, they might decide to do a foot print expansion, ask them to do modules, and so new capabilities, et cetera. In the year after that, they go to a new business unit or more users or what have you so. So, we these Dominos typically ramping over a couple years to let’s say we have $5 million run rate and then we’ve seen some evidence they say at 5 million for an extended period of time as we continue to evolve and deploy and tackle new problems and so forth.

So, I think that model is very important. What we really want to do next year is provide more systematic tracking internally. How are we doing in this portfolio of annuity account? It may have come from Dominos or it may have come from inside the base customer because we talk a lot about Dominos because those are competitive win, but we can have an inside the base customer doing an equal model revenue and then just as important, it’s just there wasn’t a competitive process to get them there.

So, nonetheless, we want to think about this portfolio of Dominos and what are the trends around the portfolio. How is it expanding? What are the sort of that you will renewal rates, maybe different levels of annuity customers within that portfolio, et cetera. So, we’re going to put a better tracking and management program in place and then I would anticipate some of that will fall through and we’ll provide the visibility to you on some of the key data points.

Barry Cohen

One thing to take a little mystery on the wind rate is what’s happening. Customs are realizing that there are new requirements to succeeding the global market cycle, when they look at the legacies that’s been – they see that those systems can’t provide them with what they need. They’ve already made a decision that they’re legacy systems are not capable of helping them, so when they go outside that’s a perfect environment for us to show our competitive advantage and that’s why our wind rate is so great.

Blair Abernethy – Thomas Weisel Partners

Okay. That’s great, guys. Thanks for the color.

Cornelius Moses

Yes and add a little more, comment is from maybe a competitor’s perspective, which I always think it’s sort of important. When we talk about the Continental deals –

Blair Abernethy – Thomas Weisel Partners

Yes.

Cornelius Moses

In trying to provide just a little color about that, that’s the German automotive company, the second largest automotive company in Germany. It’s been combined recently with Scheffler, with Ina (ph) Scheffler and I think actually the combined revenues with two company now rival Bosch. So, it’s either first or second in the world in terms of automotive business.

Barry Cohen

(Inaudible).

Cornelius Moses

(Inaudible), right. This is the company that is German and we have two big – let’s stay up our three big competitors Dassault, Siemens and SAP, two of them are in Germany, SAP and Siemens. And so far us to, and we didn’t have a big incumbency in terms of position there. We had some (inaudible) and it’s a diversified automotive suppliers. They’ve acquired some companies and so forth, so we knew of a presence.

But, again, not unlike some of these other deals when we describe the ADS awhile ago and some of the others, we are not the odds on favorite going into these evaluations. In fact, you can make an argument that odds maker would put us last, and so it’s pretty telling and I think our competitors have a lot explaining to do, much more than we do actually as why we won or how they loss because we won by a complete as Jim describes it. Market leader technological advantage coupled with a partnership with the customers, where they really believe we understand their business and we can help enable change and globalization and so forth.

So, the Dominos that we described early on, they’re inexplicable. How could we win and how could the competitor lose and we continue to knock this down. And I think we’re going to approach the 20 number, they’re going to be three or so at least this quarter and there are going to be a big number next year.

We have all the sales people, the sales leadership from around the world in here, Monday and Tuesday, this week reviewing the tone of the competitive landscape we specifically ask them questions in the ongoing Domino benchmark as well as a displacement benchmarks, the other 250 active campaigns. We don’t see any indication that the competitors have closed the gap at all, technically. They haven’t announced any wins out there, could take ahead the competitor ever announced the displacement of our systems? No.

So, I’m trying to give you a sense for just how importance this continue to be and it also answer that aspect of the forecast because there is probably is more conservatisms built into the forecast than there would be risk. But I think it’s prudent for us to do that, just given the nature of the business and how we want to run that business going forward. So, the confidence and the sales teams are as high if not higher than ever and I think you’re going to continue to see lots of this win rates.

I was thinking earlier we could go through the $14 million deals that we won, 14 deals or whatever with this quarter, all grayer (ph) than a million and we could tell you where they came from sort of from a competitive landscape, I didn’t do that. But back to the point, it’s basically a mix; it’s not just a salt (ph). It’s pretty much a nice general mix there, which is good for us because that indicates that there’s a broad base of competitive accounts that we’re going after and can win it.

James Heppelmann

I’m not usually want to jump on your bandwagon when you’re on a roll like that. But I think the other point you’re making about Conti, which we feel good about is that not only with Germany, but it was in automotive and automotive is probably not our area of traditional strength.

Cornelius Moses

No, it’s an excellent point now. You take the Conti deals, the Volvo truck deal and a number of other automotives suppliers, (Inaudible) that we’ve been winning. We’ve been upping our presence in that whole automotive sector and I think you’re going to continue to see better and better – more and more wins in that sector next year as well.

James Heppelmann

So, one thing. This is Jim just to further on. I want to talk about the fact that our competitive advantage is also diversifying a little bit. We’ve talked a lot about a product/technology advantage and clearly, we have a technology advantage today. But those of you who follow the company for a long time, Jay Vleeschhouwer, for example, you’ve been at many of our User Group event. We’ve been talking about this idea of product development process improvement that technology is a means to an end. The end in the win for the customer is a better process.

And what’s happened is we’ve developed a secondary and tertiary advantage now similar to the technology advantage, which is secondarily, we understand better than anybody how to put this technology to work, affect process change and create value and then that’s really a service advantage. And then at the sales level, we are the masters now at trying to – being able to characterize the financial value, being able to establish strategic long-term partnerships. The sort of PTC sales rep of circa 1990’s basically doesn’t exist anymore, we are definitely the trusted adviser in developing long-term strategic relationships and these things are very hard to replicate.

You can wave a magic wand and become process experts. You can’t wave a magic wand and have consulted an enterprise sales force that tops in the industry and you certainly you can’t wave a magic wand and replicate our technology advantage, becoming a system of components working together that reinforce each other and are increasingly difficult for somebody to replicate. And in some case, I’ll draw your attention to that Continental press release.

It basically says you’ll see some comments in there from the CIO and the CFO that talk about PTC as partner and some of the intellectual property we’re bringing to the table about how to optimize processes and then of course, the great technology that’s the enabler for that.

Blair Abernethy – Thomas Weisel Partners

Okay, that’s great, guys. That’s great, guys. Thank you.

Operator

And our last question comes from Sterling Auty with JP Morgan.

Sterling Auty – JP Morgan Chase & Co.

Yes. Thanks. I just want to circle back to something Neil said. I think you were commenting about the December quarter and I was a little bit – I think you were trying to say listen you had blowout December quarter last year and I think you’re intonating that we should think about more the normal seasonality. So, as you look at the consensus estimates and look at the sequential, should we be looking for a traditional sequential change from the September quarter December or should we be applying the 20% license growth to that big quarter that you produced last December.

Cornelius Moses

You should be looking and thinking about a normal, a more normalized quarterization. So, typically, the first quarter is our lowest revenue quarter and then we see some steps, usually a step up in Q2 and Q3 are usually pretty comparable and then I would say that Q4 is usually similar between $20 and 30 million higher than Q3 and Q2. So, I think you should be thinking about a more normalized quarterization of our results, which is not what happened this year.

Sterling Auty – JP Morgan Chase & Co.

Got it.

Cornelius Moses

One other thing you brought up this 20% license growth and I want to reiterate. Our belief is that’s a constant currency license growth rate. Now, that’s had a currency stays where it is today, our average currency rate for fiscal 2010 will be somewhere on a $1.35. So, we are in a deficit position today versus the average of last year.

I mean it’s very hard to predict where this will go. I’m just encouraging you to think of 20% in constant currency terms because currency does have this fairly dramatic swing on revenue.

Sterling Auty – JP Morgan Chase & Co.

Got it. Thanks, guys.

Operator

And there are no further questions.

James Heppelmann

Okay, great. We would like to thank all of you for the time here and we really observed some pretty good questions. I think you guys have standards for the momentum we have in the business and pretty strong outlook. I’ll remind you again that the directional information we gave you for next year was something short of guidance. We will come back to you at the next call and give you fiscal ‘11 guidance, but in the meantime the directional information is hopefully directionally correct and we’re very committed to this idea of 20% earnings growth on a sustainable basis over a five-year window, and looking forward 90 days reporting the first year in the Wind Gala.

All right. Thanks a lot and talk to you all soon.

Operator

And that concludes today’s call, thank you for your participation. Please disconnect your lines at this time.

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Source: Parametric Technology Corporation F3Q10 (Qtr End 07/03/2010) Earnings Call Transcript
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