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Parametric Technology Corporation (PMTC)

February 07, 2012 9:00 am ET

Executives

Jeffrey D. Glidden - Chief Financial Officer and Executive Vice President

James E. Heppelmann - Chief Executive Officer, President, Director and Member of National FIRST Executive Advisory Board

Brian A. Shepherd - Executive Vice President of Product Development

Justin Teague -

William Berutti - Executive Vice President of PTC Business Units

Unknown Executive -

Robert Ranaldi - Executive Vice President of Worldwide Sales and Distribution

Analysts

Unknown Analyst

Yun S. Kim - ThinkEquity LLC, Research Division

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Ross MacMillan - Jefferies & Company, Inc., Research Division

Jeffrey D. Glidden

As you all collect here. I just really like to thank you for joining us. We're delighted to have you here. I think we've got a very packed agenda, so we do want to get going at it. We have, I think, a great facility, but we had greater turnout than we expected. So there's some seating in the back, and there's still some seating down front. So it's a little bit like church, the front pews are still empty. So if you want to come down, we'll get started. But really I want to thank you all and just let you know on some housekeeping items. Kristen and Janet will help you with any questions. If you're looking for facilities or rest rooms, they're actually out to the right. There's an escalator. You have to go downstairs. There's plenty of food and so forth in the back. And there's a few -- I think on my team, I think most people know Kristian Talvitie, Tim Fox. Patty Lawless is also here today on my team, and Jim will introduce a lot of -- the rest of his team as we come up. But we'll get started here momentarily.

And I'll just go over the agenda quickly. There's a lot and there should be handouts. If you grab the handout on the way in, that's terrific. There's a lot of material we'll cover. If you want a soft copy, I think we can take care of that, too.

So the agenda in the morning, we're really going to drill through one of the new solution areas, and we'll drill that, I think, spend most of the morning on that. Jim will give an overview. We'll really introduce you to the team, which is terrific I think. After lunch, we will have lunch here at Ça Va, and I think there's some -- we'll figure out exactly where the dining room is. We'll give you those instructions at noon. We'll come back, and Bob Ranaldi will do a nice overview of what we're doing in the sales side. I think you know the story there. We're adding capacity to pretty aggressive pace, and Bob will give you that update. A very important piece of the puzzle is what we're doing in the services space. Marc Diouane is here, and he'll be presenting. And I'll do the wrap-up in terms of the financial data, try to tie it together for you. And then Jim will come back, we'll open up for questions.

So that's the agenda. There's a lot here. And really, we want it to be interactive. If we're presenting in each piece, if you have a question, we'll try to save some for the end. But I think as the speakers come through, if there are particular things you want to drill on, we'll do that.

Given the amount of material we're trying to cover, I will be in the back trying to shepherd everybody to be completed. We'll not be putting up signs if there's 2 minutes left, but if we need to cut it off to keep us on pace, I'll be the sergeant at arms on that.

In terms of just forward-looking statements, clearly, things we'll talk about today relate to the future, the uncertainties. We certainly ask you to look at all of our SEC filings, et cetera. There are reconciliations between GAAP and non-GAAP information in the handouts, as well as on our website. Most of information that we'll be presenting today or virtually all of it is non-GAAP related. So we just wanted to be very clear on that.

And at this juncture, I will have Jim come up to really go over the whole -- the overall strategy, and then we'll get into the segments. Thank you very much.

James E. Heppelmann

Great. Thank you, Jeff. You guys hear me okay? Microphone working? No. I didn't think it was. Is it working? I need to mount this better. Well, let me start by saying we brought the whole team down from Boston this morning. And many of us were expecting a different outcome in the Super Bowl.

I do want to say that we had agreed amongst ourselves that had the Patriots won, we were planning to treat you all with a great amount of grace and respect here today. And thus, we would expect the same back from you all given the circumstances. No, I'm mean, let it rip. We don't care. So what we're hoping to accomplish here today, throughout the course of the whole day not just my presentation, is to give you a lot deeper insight into what the company really does. We've had this sort of 4-box model that I think has served us well for a long time, but in fact, it's a little bit getting in the way of telling you the deeper story, the richer story that's a little bit more compelling to give you a better insight into the markets we compete in, the growth rate, the competitors we have, the solutions we have, the value we create with those solutions and so forth.

So the first thing I to do is help you better understand the company as we see it and as the customer would see it. The second thing I want to do is talk then, once we've shown you what our growth opportunity is, we want to talk about our opportunity to drive operational improvement and to drive efficiency, basically, to drive up our operating margin. And then that would give us the basis to sort of bridge the changes we made to our fiscal year 2012 earnings goal and as well to bridge and provide the basis for the longer-term FY '15 set of goals that we introduced at the last -- in the last earnings call. So that's sort of the big picture we hope to accomplish today, basically, give you enough information to credibly understand what we're doing and why we're so confident it is going to produce the results that we're talking about.

Now just to provide a backdrop for my strategy discussion, I wanted to provide the results of some sort of in-depth analysis we've done of our own company. Over the course of much of last year, we did a -- what Mike characterizes is a no holds barred analysis, no sacred cows of the company we have and the way we run it. And we basically asked ourselves, given strong growth, why can't we have peer-comparable operating margins. Why does this company have operating margins in the teens when other desktop companies, other enterprise companies, other direct companies and other indirect companies typically have operating margins in the upper 20s? What's the problem? Is it some fundamental constraint in our business? Or is it the way we run the business? And we concluded as a result of this analysis that the basic issue, which you could figure out yourselves with a little bit of analysis, is that it costs us about 5 points the margin too much to sell our solutions. And on the other hand, it costs us about 5 points too much in the gross margin category to service our customers. And that's a combination of the amount of services we do and the net margin of those services. So the sort of missing 10 points really comes from inefficiencies in sales and service. However, our sales and service guys are not doing a bad job. We're saddling them with a root problem. The root cause of the inefficiency in sales and services is basically that we're bringing solutions to the market and finishing them, if you will, in the field. We start with a technological platform that's a very flexible, and therefore, it lends itself to variation. Perhaps, the sales guys like that because it's kind of nice to sell something that's very flexible and you can go different ways with it, but it leads to a longer selling process because you have to validate something that you're trying to create to some degree for the first time. And then if you had your services guys compensated wrong, they might actually like the fact that it generates a lot of services and actually build on that and use it as a strategy to generate even more services.

So I think we're going to talk a lot about today is changing our solutions to tighten them up, to become more concrete and more discreet about the problems we're trying to solve and the value we create and having solutions that are more ready to go so that the job of selling and servicing is really unlocking the value that's already in the solutions as opposed to creating value using the solutions as a starting point.

So we're going to talk a lot about that. That'll be a theme throughout the course of the day. What it essentially means is we're trying to move from a somewhat of an engineer-to-order business model to a much more efficient, configure-to-order business model.

We sort of say amongst ourselves sometimes that the goal ought to be to have solutions that are cloud ready. Whether we put them in the cloud or not, that depends a lot on customer preference, but the idea of a cloud-based solution, particularly a multi-tenant system, is you're sharing it with a lot of other people. It's the exact same system. You can configure it to a certain degree, but it's not going to be a unique solution. It's going to be a shared solution. And that's really the goal we're driving towards.

Now it's not easy to make all these changes, and we can't make them instantly. But I think inside this big challenge is really a great opportunity. The executive team were sitting around at dinner last night, and I said, "What a great place to be." Because we have a company with really strong fundamental growth prospects, and we understand actually how we can increase our operating margins year-after-year until we get it to the upper 20s. And if we do that, if we keep this growth going and a drive up these operating margins, we're going to great a tremendous amount of value for our shareholders in the process.

So given that, let me explain to you the strategy of PTC through the eyes of a customer of PTC. So if you were one of the thousands of customers that comes to visit us in Boston every year, you'd think of PTC as a company that provides technology solutions that transforms how products are created and serviced. And there are some important words in here: technology solutions. We are a software company, and we want to always be a software company. We need to understand how our software creates value and then work with the customer to transform their processes using this technology enabler so that they can fundamentally do a better job at both creating and servicing their products.

Now the outcome that we're trying to drive for these customers is what I would characterize as the ultimate competitive edge, which is product and service advantage, not a better product but a better way of creating product and not a better service but a better way of creating service and best of all, aligning those 2. So it's you're simultaneously optimizing the product and the service.

We are giving our customers a sustained ability to transform their best ideas into their best products and couple that with the best services. And we're doing that by changing their processes and transforming the way they work using our technology and our expertise.

So this is a pretty good story, but I want to back up even one more level, start with almost a clean sheet of paper and build this story up, so you understand the company as I understand it.

So if you were a typical PTC customer, you would have a couple of major organizations. You'd have an engineering organization that engineers both the physical, hardware part of the product and the digital, software part of the product. And then you'd have an organization that's trying to figure out who will we get the parts and components from, who will we outsource manufacturing to, what will manufacture ourselves. This is really the supply chain and manufacturing organization. Sometimes that's 2 organizations. Sometimes it's one. And then you'd have another organization, sometimes 2, that deals with the customer-facing part of the business: the sales and service. This might be your dealer network for example. And there you're worried about what does the customer want and how can we sell it to them successfully and then service it after the sale and so forth.

Now pretty simple so far. I would submit that within each one of these organizations, there are certain activities that are really activities of strategy, deciding what to do. And then there are activities of operations, which are actually doing it. And there's a fundamental difference between deciding what to do where the output is information and actually doing it where you're doing physical work and producing physical goods and physical processes.

So if I give you some examples in the activities of strategy category, within hardware and software engineering, trying to decide the engineering of the full system, the engineering of the physical part of the product, the engineering of the software part of the product, the validation that, that software and hardware will work together to meet the customer requirement, these are all strategy activities. In fact, I'd say that engineering is mostly a strategy functional organization because the main output of engineering is information.

If we move to supply chain, there is the design of the supply chain. That's the idea of making the right selections about the type of suppliers to use, how to get regional efficiencies, how to get economies of scale and purchasing and so forth.

There's cost management and risk management, and that's understanding if we build the product that the engineers are envisioning, using this set of suppliers, what would it cost and what type of problems might we run into? They could be compliance problems. They could be business interruption problems and so forth. And then somebody says, how would we actually build that product that the engineer, the design of the manufacturing process and then how would we actually -- what kind of special equipment would we need in that process? And that's doing.

And then downstream from that, there's a sales and service organization thinking strategically about what are the requirements of the customer or the market. What would they buy from us? And if they bought it, how would we application engineer it if necessary? And then how would we service and support it? If the design, the service and support processes, it's literally service engineering. And what kind of information would they need? And what kind of spare parts, think parts catalog-type information would we need to provide to them? How would we handle problems after we sell the product coming back to us? How would we diagnose the root cause and go get that changed? So there's a good sampling of strategy activities. Again, the common denominator here is that the output is information.

Now on the other side of the fence, there's a lot of operational activity, not so much in engineering but a good example of accounting where do people spend their time on what and so forth. Projects accounting would be a good example.

Then, in supply chain and manufacturing, there's a tremendous amount of operational activity, actually purchasing things, actually shipping things from point A to point B, inspecting those things to ensure they are as promised, actually planning the production schedule and then controlling the processes being used in the factory. I've put that all in the doing of things.

And then sales and services, the same story, actually creating demand, actually filling up a pipeline, actually winning deals and signing contracts. And then as necessary, scheduling aftermarket service and delivering that service and providing the spare parts and keeping them in the right depots and shipping them to the right place at the right time is all operation.

So in the operation side, it requires a lot of coordination between all these operational activities. And I would say basically that's what an ERP system does, is it coordinates all of these operational activities within the functional silos and across them.

So equally well and maybe even more so, it's important to coordinate the strategy activity because they're so interdependent. The design of the product, the design of the supply chain, the design of the manufacturing process, the design of the service are all highly interdependent and should be thought of as a system, not independently.

So it requires a lot of strategy coordination, and that's fundamentally what PTC does. So we see a situation time after time in our big customers, where they say we have 2 main information systems. One is the PTC system to help us with all that upfront strategic work, and we have the SAP or Oracle system, which helps us with all that downstream operational activity.

And it's hard to say which of these is more important. In fact, I would make an argument that the operational work had sort of a garbage in, garbage out effect, which is if you feed them poorly coordinated design or just plain bad ideas, they'll do their best to execute them. But you'll get products that aren't that interesting.

So I think it's not really of which is more important, but to help you understand sort of the scope of what we're trying to do, it's big. It’s strategic. And winning companies understand, you need both sides of the brain. The creative side and the logical side and being really good at that stuff on top can create a tremendous amount of value and a tremendous competitive advantage for your company.

Okay. So going forward with the rest of my slides here, I'm going to zoom in on the top part of this box -- sort of ignore the bottom part -- and tell you about PTC's business sort of as depicted like this. And the first thing I would tell you when we zoom in is that, that actually makes us or puts us in a situation of competing in 5 different market segments. And so let me kind of go through them and describe PTC as being in 5 different businesses, solving 5 different interconnected problems with 5 different sets of competitors, 5 different market opportunities and so forth. This is a much richer, better understanding of PTC. And I'll start at the lower left, which is our mechanical CAD business.

So have PTC using FY '12 numbers here, you'll see the '12 -- '12's [ph] to $1.330 billion in sort of midpoint of our guidance or in our guidance range. So MCAD would be about a $600 million business, and this is a business that we're going to grow, we believe, going forward at 5% to 8%. And we'll have a segment breakout next on each 1 of these 5, and we'll justify how do we come up with these numbers and how do they compare to the growth rate of the market and what's our solution and value prop and our competitive dynamic. So MCAD is a big business, but it's the slower-growing one.

The second business is the other side of engineering, the software side, and that's the application lifecycle management market where we compete with our Integrity products, the MKS acquisition. That will be about a $90 million business this year, and we see that as being upper teens grower, 15% to 20%.

That brings us next into the supply chain management segment, and this is a business a lot of you probably didn't even know we were in but it's actually become an interesting business just in recent years, growing from nothing to $50 million and continuing to expand at quite an aggressive clip. This is an upper teens grower, probably at the upper end of that range. And we'll describe our difference, but fundamentally, we're helping people design and optimize the supply chains rather than execute it. So the vast majority of companies in supply chain management are in the execution side. We're little bit unique and paving some new ground on the design and optimize side of the supply chain.

But that brings me next to the service lifecycle management business, a business that we've traditionally referred to as Abortext. That for us this year will be about a $90 million business, also a fast grower. And this is a situation where our value proposition is really interesting and the competition relatively nonexistent. So we're making a lot of ground in this business right now, and I think that this is one that's going to be a very important part of the future of PTC.

And then finally, that brings us to our coordination business, our enterprise business, if you will, that links all those together, which is PLM. And here in 2012, after we de-allocate, to those other sectors, revenue that previously would have been called enterprise because we only had one bucket, this is about a $500 million business. And we think that'll be a 10% to 15% grower. It's getting big enough that it's sort of hard to grow it in the upper teens, but it's still a pretty big and relatively fast-growing business.

Now one more thing before I move on, which as you see this little box called product intelligence, and that's the special sauce that makes these 5 independent businesses cross leverageable. It is essentially a rich data model describing digitally what the hardware, the software, the supply chain, the manufacturing process and the service looks like and how they're interconnected, such that if you want to change something, you can see the full impact of that change and then actually execute it in all the nooks and crannies where it does have that impact. So this concept of product intelligence is really the thing that makes 5 separable businesses operate as one when it's to our advantage in cross-selling.

Now we didn't just invent this for this presentation. In fact, we've been working on this strategy for a very long time, and I think this is our opportunity to finally pull the 4-box model out of the way and show you what we've been working on. Because if you look at some of the big acquisitions and big organic projects we've been doing, you'll see there's a lot of stuff happening here. In the MCAD space, for example, on hardware engineering, the big Creo initiative we launched last year, the Mathcad initiative of 2005, the CoCreate acquisition of 2007, those all play together in a very interesting way.

We realized in 2011 that we really needed this software engineering element because so much product engineering has shifted in recent years from hardware to software, so we went out and acquired the leading company MCAD, the leader in the development of product software, not IT software, product software. And so that was a very interesting acquisition that made us an instant leader in that category.

In the supply chain management business, we're several acquisitions into this. We acquired a company called Aptavis, which had developed originally the supply chain capability on top of our Windchill product. Think of them as a partner who builds an extension that extended PLM in the supply chain. We acquired them back in 2005, and that began our journey into the supply chain business. We subsequently added Polyplan, which is a manufacturing planning technology; and then more recently a company called Synapsis that does a lot of supply chain analysis. If a bill of material is supplied by dozens or hundreds of suppliers, what would the aggregate chemistry of that bill of material be so that you know whether or not you can sell that product as governed by the environmental regulations in Europe? Or what would the aggregate cost of a product like that be? So we have some very interesting product analytic tools that basically take a bill of material and chase it up into the supply stream to get all the data that you can roll together to answer that tough question of does it meet our key technical requirements.

In the supply chain or -- I'm sorry, in the service lifecycle management business, we first got into this business with Abortext in 2005. That was the beginning of a pretty smart way of creating technical information, typically text based. So we added to it ITEDO in 2008, and that brought the whole CAD-based graphics piece into the story. So now we could do graphics and text very efficiently.

We acquired a company called LBS in 2009, which dealt with some special delivery system requirements particularly in the aerospace and defense industry but led us into the idea that the documents don't have to be documents. We should be creating information more so than documents.

And then more recently, we acquired a pretty hot company called 4CS, which really took a concept of technical publishing or service information and expanded it into a full service lifecycle management story.

And then in the PLM area, of course, we acquired my company, Windchill, back in 1998. Shortly thereafter, acquired a company called Auxilium, which had some important integration middleware-type technology. We added DIVISION in 1999, which is the basis for all of our visualization technology that's everywhere in our products today. And then more recently, Relex, which really brought in an incredible set of quality analytics tool and helped us develop a very important quality management aspect to our PLM service set.

Now behind each of these segments, we have some pretty great customers. And I'm not trying to make an exhaustive list here at all. I just wanted to pick a couple of anecdotal stories to talk about.

Let me begin with Whirlpool. So you'll actually see that Whirlpool logo in all 5 of these sectors. So this is a typical way that we would engage a customer particularly on a go-forward basis is our Whirlpool relationship began years ago when they acquired our mechanical CAD tool. And then for a long time, we were just their mechanical CAD provider. Ultimately, we convinced Whirlpool that we could help them architect a more modular global platform strategy for their products if they would give us the PLM business, which they did. And having put in place this global platform strategy, we then showed how it could be used to make their service business much more efficient, and they began to bring us into their service lifecycle management or dealer network. After that, we showed them the product analytics piece, and they brought us into that and as well acquired the integrity technology for managing all of the software that ends up in those appliances. And there's actually quite a lot these days. So that's a great example.

If I could cherry pick a few more, if you take Volvo and Hyundai, both of those companies use our CAD tool, but they also use more of the competitor's CAD tool. So we had a relationship with them for designing the engines in their product. But in both cases, we ultimately prevailed and said, "You should give us the exclusive PLM platform across the enterprise." Now having secured the PLM ground, we're engaged in discussions with both of them around service lifecycle management, supply chain optimization and application lifecycle management. And I would personally expect both of those relationships to continue to develop in those areas, because if you think about the dealer network of a major truck company or major automotive company, it's a massive part of their business, life with inefficiencies that we could help address and create tremendous amount of value.

Another example is Huawei, the big Chinese electronics company. They have a relatively insignificant mechanical aspect to their products. So we had a footprint there, but the truth is their produced are electronics and software that you put in the mechanical cabinet. So it wasn't that important. But again, we managed to secure with our superior PLM solution the PLM backbone, and now we're engaged in a pretty interesting conversation around ALM, because for every mechanical engineer you'll find at Huawei, you're going to find 20 or more software engineers. So this is the holy grail of Huawei is software engineering. And we're now in the driver seat to go put a new infrastructure in place for that.

Now everything doesn't have to start with CAD, maybe it used to have them. But I think with these independent solutions, we have a lot of interesting new entry points. For example at Caterpillar, though we had the mechanical CAD business, a competitor a decade ago won the PLM business, and we've been unable, to date, to justify displacing that. However, we were able to mount an independent campaign in the sales and service area and show that not only did we have an very interesting SLM solution but that it shared the same product intelligence with that upstream mechanical CAD solution, and so that's a good example of winning an independent campaign.

Bombardier is another example. This is a company that we've done no businesses with for years, but we were able to go in there and win the aftermarket service, as I mentioned, of their business because our traditional CAD and PLM competitors don't really have an offering, and there was a problem to be solved.

If I jump over to ALM. Denso is the great example. This is a major Japanese automotive electronics company who, again, had never done any CAD or PLM business with PTC but has chosen now to standardize on our software development introduction. And once again, this is a company who has far more software engineers than mechanical, so that's a great win for us and ultimately, a better position to own.

So there are many other examples. I don't have time for all of them. Maybe one more, MRJ, that's Mitsubishi Regional Jet, another example of a company we had not done any business with. We showed them our quality solution and managed to secure a pretty significant order as being the basis for the management of quality at Mitsubishi Regional Jet. That's sort of the company bringing online a new midsized 737-type airplane.

So lots of great examples. What I want to do next is play a Volvo video for you. And the Volvo video, really talks about PLM, but you'll see in it lots of this product intelligence ideas. It's rich digital descriptions of the product. So let me go ahead to this slide, and I'll just click on it here, try and get them up. Sorry, here. We need some volume.

[Presentation]

James E. Heppelmann

All right. That's a interesting little video that Volvo created to internally help drive the adoption process to explain the systems coming your way and here's why and what and so forth. So it's a good little peak into the view that a pretty major customer. I don't know exactly what Volvo's revenues were last year, but last time I looked, they were $46 billion. It was a pretty big, major international company and the value that they see coming from a PLM system.

Okay. So moving on, if I take these 5 sectors and break them into the actual solutions that PTC is developing that you're going to hear about today, PLM, for example, can mean many things to many people, but at PTC it means 4 things. It means global platforms, global development, global quality and global offering. And really these are 4 different aspects of managing the type of business that Volvo was just talking about. So 4 different entry points, if you will, into a very comprehensive PLM story.

If you move into mechanical CAD, we're really talking about workgroup design. That's how engineers works together while doing mechanical design. We're talking about enterprise design, which is how those engineers work with everybody else in the company to share information in lighter-weight fashion to make sure that the manufacturing engineers buy off on it, the service engineers buy off on it and so forth. And then the concept called model-based enterprise, which is really an attempt by forward-thinking companies to get rid of the non-value-added process of creating paper drawings that most downstream manufacturing companies expect to yield. So there's a real opportunity to just rethink that and rather than make it easier to create drawings, just get rid of them entirely. And that's a big initiative at some companies.

On the ALM side, there's 2 dimensions. One is software systems lifecycle management. So that's the lifecycle management of the software system in the product. And then there's the even bigger picture solution of systems engineering, and that's understanding, given a set of requirements, which requirements will be satisfied or allocated to mechanical designs and which will be allocated to electronics, which will be allocated to software, how to codevelop simultaneously the mechanical electronic software element and bring them back together, test them and ultimately, construct the full system that's basically capable of meeting those requirements and validate that it does. It is a very hot topic for a lot of companies, as the amount of electronics and software in their formerly mechanical products continues to grow.

In the supply chain planning area, you'll hear us talk about supply chain risk and compliance. That's some of the analysis of understanding what that supply chain looks like in terms of some of your performance targets, be they regulatory targets or for example, price targets. Components, materials and supplier management, just trying to make sure that you drive the fewest number of parts required to actually implement your product strategy and drive out redundancies that create tremendous inefficiencies downstream. Sourcing and cost management and then manufacturing and planning. So these are the solutions if you will. This is the product catalog at PTC we're talking about here, the things, ultimately, you buy from us. And then sales and service area requirements management, service information -- service parts, which is again the spare parts kind of aspect of it and warranty management, call center and field service or field analysis of field issues and so forth.

So again, think of this as of the PTC price book more or less. These are the key solutions we sell, and you're going to hear next from each of these guys, talk about these solutions, the value they create, the market they compete in and so forth.

Now these solutions are great because they truly are transformative when applied to a customer's process of developing and servicing product. So this is a process roadmap. The objective isn't to go through it here today. But this view of processes, you can see cuts across time, which is the left to right dimension and cuts across all of those functions, both enterprise coordination and then hardware, software engineering, supply chain manufacturing and sales and service. So what PTC has is both expertise and an integrated technology platform that can help optimize these products, these processes but also better share information between them to make sure that decisions made in one process are readily understood and incorporated into the stream of activities that are happening in another process. So behind this process view is an integrated technology view. Again, the goal isn't to take you through this in any detail but to basically, say PTC has a broad and comprehensive set of technologies today. All of the blue things are technologies provided by PTC. And there's a couple of gray boxes here, in particular ECAD and ERP where PTC doesn't provide technologies, but we do provide very important integration points because understanding how to integrate to these things is critical.

In the middle of this picture is really this concept of product intelligence. It's all the shared information, this rich data model that helps you understand how information created upstream for purposes of engineering gets used again for supply chain, supplier selection, used again for manufacturing process design and used again for service design. And everybody's working on the right configurations, the right versions and so forth as changes are continuously introduced.

So ultimately what the big differentiator for PTC is both the broad technology platform, where we have industry-leading capabilities built on a best-of-breed or built on an integral and scalable architecture, but products that are independently great, but share this concept of product intelligence.

And on the other side, there's deep process expertise. This is something that PTC has started working on more than a decade ago, basically telling ourselves that the reason the technology exists is to create process value and that we needed to understand the process side of it as well as the technology side of it. In fact, our goals in creating process value ought to be the thing that guides the ongoing development of our technology. So I think today -- and you're going to hear this from our services organization, Marc Diouane, we feel like we know more about these processes than any other company on the planet. We have more people working on it. We've done more engagements, and we have a bigger body of institutional knowledge in what these processes are and how to optimize them than any company you can throw at us. And it's a great advantage for us.

This concept of product intelligence really is the thing that's shared across these solutions. It really means that digital, single source of truth that both optimizes and then aligns what are the requirements, what are the engineering designs, what's the supply chain choices, what's the manufacturing process and what's the service process to make sure that these things are independently and collectively optimized and aligned with each other.

This, again, is the basis for operating the operational side of the company. And it really is a situation where getting the strategic plan right is a terrific goal in the operational side, because if you give the operational guys a bad design, they're obligated to go execute it. I sometimes use an analogy that I think works well for people, very simple. Think of a word processor and a printer. We're the word processor. ERP system's the printer. Our goal is to get the information right. Their goal is to transform a digital description into a physical product. And so in our world, it requires intense collaboration and lots and lots of validation. A word processor needs a spellchecker and a grammar checker. We need a cost checker, a supplier checker, a structure checker, a collision detection checker, many, many types of analysis to be performed. But when it's right, you hit the print button, and this information flows downs into the operational processes and gets executed. I've never seen a printer take a document I wrote and make it better than it was on the screen. Now they can introduce new problems. They can crinkle the paper or smear the ink, but they never actually make it better. And if they did, that would actually be a problem because that's not their mission. Their mission is to transform digital into physical.

That's a good way to think about what we do, and I think that's an analogy that helps our customers understand very clearly if you want to have a great product, you have to be great on the computer screen before you hit the print button because it won't get any better after that.

Okay. So given that strategy, I want to talk a little bit about how we've organized around it. I mentioned on the earnings calls in the past, PTC had a functional organization and then some deep business units. From a growth standpoint, it's tempting to basically break into 5 separate companies to go execute these 5 dimensions of our product, but it's not efficient to do so. So what we've created is an organizational structure where we have 5 segments that's focused on what's unique and special about their world, who is their customer, what problems does that customer have, what solutions are we creating, what is the value of those solutions, who are we competing against, what are our differentiators against those competitors and so forth. That's where we're in 5 separate businesses. But we want one sales force because of the opportunity to enter any place and cross sell across. We want one services organization who can implement any or all of that and make it work well together, and we want one R&D organization who upholds this common architecture into single source of truth that is the product intelligence I've been talking about. So we think this is a great model that balances the growth aspect we get from being specialized with the efficiency and operating margin aspects we get from having scale and a higher degree of operational efficiency.

If you translate this model into an org chart, it looks like this. And so we have all these people here in the room this morning. Maybe I'll introduce them. So on the corporate side, there's myself and Jeff, whom you've met; and Aaron Von Staats, representing the 5 segments, are 3 executives who report to me. Two of these guys own 2 segments; Justin Teague, who will take you through our mechanical design segment; Bill Berutti, who has been managing our SLM segment, and after the acquisition of MKS we bumped him up a level and also put him in charge of the Integrity ALM segment; and then Brian Shepherd, who historically has been managing our R&D and product management group has taken over this $500 million PLM segment and really shepherds that -- no pun intended -- on a go-forward basis.

And then the functional guys also in the room, Bob Ranaldi, whose our EVP of sales. Many of you met him. He's 3 quarters into the job, done a pretty good 3 quarters. He's doing a great job. Marc Diouane, who's what? Now 5 quarters into the job, doing an extremely good job optimizing our services business; Rob Gremley, who has managed marketing in the past and we've also put him in charge now of the development organization; Tony DiBona, who's done a fabulous job managing and optimizing our maintenance business. And those of you who have been watching what's been happening with our maintenance business in the last 2 years know that we made a lot of changes, and they've paid some huge dividends. And then Barry Cohen, who's the head of our strategy organization and also happens to manage HR and tech support.

So it's a great executive team. It's a new team. If you go back 2 years, there are only 2 people that has the same job 2 years ago. That's Tony in maintenance and Aaron Von Staats in the legal department. We're done with organizing the team. This is the right team. I don't foresee any more changes. These guys are happy, young, most of them, eager. It's a great team and a great group of guys to work with everyday. Proud to be part of this organization.

So the goals of organizing this way, again, are really to maintain the strong segment focus, which is the basis for the growth we've been seeing and the growth we see going forward but at the same time, keep the bulk of our resources in a more efficient, functional organization. Our second goal here is that we have much better internal transparency now to the financial view of these 5 types of businesses.

In the past, we treated this all as one business, which means, essentially, we had one P&L, if you will, which made it very difficult to see the nuances of which businesses were highly profitable and which weren't and where do we need to make improvements. But now we've sort of deconstructed and put in place an allocated model to help us understand financially how each of these 5 businesses look. And as you might guess, they actually look quite different from each other. And inside that is great opportunities to drive efficiencies going forward.

And then finally, this does a good job of keeping our big picture solution strategy together, one chief technology officer underpinning all this stuff, one integrated group of R&D executing all these different solutions.

Okay. So that's the basis really, the growth in the operating margins expansion opportunity for this fiscal 2015 long-term plan that we provided on the earnings call. Jeff will take you through this in more detail in his segment later on today.

But again, we feel like maintaining an 11% to 13% revenue growth, which is really an organic number, is quite doable given the mix of businesses we had. And if you look at those growth rates -- and we'll try to justify all of them to you in the next part of this agenda -- we think that we easily have an 11% to 13% growth opportunity here. At the same time, by making some strategic changes to the solution and by building up a better partner ecosystem and by improving efficiency of the services we do, we have an opportunity to expand our gross margins by several points.

I think from a sales and marketing standpoint, we're looking to make some substantial changes over time to eke out 4 or 5 points of improved profitability. R&D, we feel like we've already now over last year converged on what's probably a sustainable spend rate, which we think would be in the 16% to 17% range. G&A, more or less continue in the range it is, and that will drive our operating margin up incrementally more or less 2 points a year to get us in the 25% to 27% range by 2015.

Now we're not trying to get all this operating margin improvement at once. And we're talking about 2 points a year. So we've created a framework to help you understand the things we're doing that are short-term payouts and some of the things we're doing that are longer-term payouts. So I'm no big gulper but this analogy worked for me, which is the idea of the front 9 and the back 9. So we have a slightly different strategy to get the short-term improvements than we do the longer-term.

On the front 9, we're really talking about operational improvements, starting with a restructuring and a reduction in force that we already announced and then largely executed. There are many other places though in the business to get operational efficiencies. For example, travel, our travel budget has skyrocketed in the last couple of years, and we're just cranking that back and saying we need to get some discipline and control on that again.

Services margins, when you hear Marc Diouane talk, much of the margin expansion will actually happen. Some of it happened in '11. Much of it will happen in '12 and again in '13.

In the area of sales ratios and sales overlays, Bob will take you through this. We have a large sales force, but for every guy that's selling stuff, there's a whole team of people following around, helping him. And that team of people is simply too expensive, and we can't scale the team as fast as we scale the rest. And so we're putting in place a number of changes to change the ratios over time and as well to decommission some of the very expensive sales overlays of which we think we have too many.

And then finally, the progress we've made on maintenance discipline and discount discipline and so forth, which paid big dividends last year, is something we're going to continue on throughout the front 9 and as well the back 9.

Then, on the back 9, we're talking about changes we're making now that either take a while to make or take a while to pay off. So some of the back 9 strategic improvements would be, for example, understanding the financial view of these 5 different segments in a lot richer detail, so we can understand where the problems and opportunities might be.

The services partner program, we'll show you we have big expectations to grow that program. We need that to be in place more on the back 9.

Solution maturity, the idea of shortening the sales cycle, lessening the amount of services that are done in typical implementation would be an example. That would create a better proposition, which would lead to some things including, for example, better pricing. We really feel like there's an opportunity to revisit our pricing, but we should do that in the context of better articulating our value and being able to better rep and sell it. So this is the framework others will reference back to, particularly the sales and service guys later in the day.

Okay. So let me summarize my introductory presentation. I think that PTC is really in a great spot right now. I was talking to the executive team over dinner last night, how exciting is it to be in this situation where we have -- what we feel pretty confident about a double-digit growth opportunity and the opportunity we can all see and we all agree to go do a lot of margin expansion in the coming years here and a deep commitment to it. So I think we see ourselves in 5 market segments. 4 of 5 are double-digit growth opportunities. Having these independently scalable solutions give us many doors to enter a customer and then begin to the cross-sell process. To think that there's operational improvement that can get us to our margin goals in the near term and strategic changes that will pay off in the sort of midterm. And if we execute against these, we're pretty confident we're going to create a lot of shareholder value for those of you here in the room and those of you as well on the webcast.

Okay, with that, I'm going to thank you all and did want to see if there was a question or 2 here. I'm 5 minutes early. Maybe, Jeff, question or 2 before we move on, just 1 or 2. Okay, go ahead then [ph] .

Question-and-Answer Session

Unknown Attendee

[indiscernible]

James E. Heppelmann

Yes, I'd like to defer that question because Brian will cover that in great detail, if you don't mind, in a second.

Unknown Attendee

[indiscernible]

James E. Heppelmann

Yes, I like to defer that question, too, because we have much better...

Unknown Attendee

[indiscernible]

James E. Heppelmann

Yes. I think I've tantalized you here. But we have very good content coming up on exactly those type of questions. So maybe one more try here and we'll give up. Go ahead.

Unknown Attendee

[indiscernible]

James E. Heppelmann

Yes. That's Mark Halperin's [ph] asking the question really about -- if I can rephrase it, we're talking about discrete manufacturing. There's also adjacent to that process manufacturing and some of our competitors are talking about process manufacturing. We haven't spent a lot of energy in process manufacturing, and I don't actually expect us to for a couple of reasons. First of all, it's quite different and discrete industry, and a lot of the solutions we produced for discrete manufacturing don't really have any applicability on the process side. And the second thing is we don't feel we need to. If we felt like we were constrained on growth, we would probably be more aggressive in expanding into that adjacent market space. But we feel like -- and I'm pretty sure you guys will agree by the end of the day. We have ample growth opportunity within discrete. And in fact, what's really happened is we're no longer constrained to our customer base, our traditional customer base. So we have tremendous growth opportunity, and given that, we think that by focusing on what's becoming a very strong position in a very large discrete market -- by the way discrete is many times bigger than process as a market -- we think we're better served by focusing on what we're becoming very good at than by potentially watering it down and trying to also do something else that doesn't have as much leverage as we'd like to have. Okay?

All right. With that, I'm going to turn it over to Brian Shepherd, and he's going to talk first about the PLM segment. And then he'll come back in a minute after that in a half hour or so later and talk about the supply chain segment. Thank you.

Brian A. Shepherd

Okay. Thanks, Jim, and good morning, everybody. My excitement really around this PLM segment, I think, starts with an understanding of the tremendous assets that we have in place today in this business. Many of you might know about the underlying technology that we released last year, the Windchill 10 release that's meeting with fantastic reception in the marketplace for customers. So the technology base is strong. You'll hear from Bob Ranaldi later today about the fantastic growing and successful sales force that we have that represents these solutions to customers. You'll hear from Marc Diouane later today about the fantastic services organization, the biggest in the industry with deep expertise around PLM. So we have some fantastic assets in place. One of those assets is a really good position in a very strong and vibrant market for PLM. So you'll see this chart for each of our 5 segment presentations, as we finish out the morning presentation. I think the takeaway here is viewed broadly, even including, for example, the process industry, is you'll see that PLM, this kind of core enterprise market that we're defining is a big, let's call it, a $7 billion market this year growing pretty fast. But even when we strip out some of the industries that, as Jim mentioned, we're not focused on today, we still see a very vibrant market, let's call it, a $4.5 billion PLM market that we're participating in here, a strong #2 let's say. And we feel like we have a lot of momentum. So we've got great technology and great product base. We've got the right field organization, and we've got the right market and position in that market, I think, to really be successful.

What I feel like we can bring to this business to kind of achieve the goals that Jim has laid out for us here of growth and more profit is some, let's call it, coordination, some strategy, some leadership, some planning to coordinate the activities, all of this efforts, all of these investments we're making to really make PLM easier to buy, easier to implement, easier for our customers to get value from.

So Jim described our mission as a company here to help our customers achieve this product and service advantage. So if we back up from that thing, what are the prerequisites that our customers need in order to achieve that in order for them to be successful? We think about these 4 things. The first is they have to start in the right direction. They have to establish the right target for their products, for their offerings in the market. They have to do a professional job of managing their portfolio of offerings. And what do those offerings do? Once you've started in the right direction, usually because there's a lot of diversity in those requirements, you have to have an efficient strategy for pursuing, for delivering those products, a design that's flexible, let's say, to meet the needs in various geographies or various customers. And you have to do that, you have to pursue that strategy with a very efficient team that leverages all of the expertise inside the company and in their supply chain in an efficient manner to deliver on those product ideas. And they have to do that in the context of a high-quality, let's call it, operating system for their company. And we feel like if they can achieve those 4 things, head out in the right direction by establishing the right targets, having an efficient strategy for hitting those targets, leveraging their teams and their people effectively and doing it in the context or the fabric of high-quality processes, that they really can be successful on achieving this product and service advantage.

So the approach that we're talking about here is 4 solutions for PLM. We're really trying to simplify but at the same time, expand the opportunity for PLM inside of our customers. So I'll describe each of these in a little bit more detail.

We talk about our global offering solution, helping customers do that portfolio management and establish the right target. We talk about a global platform solution, which is, let's call it, the architecture of the product that they bring to market. We talk about a global development solution to help their teams work effectively together and also with their suppliers. And we talk about a global quality solution. Right, so let's talk about each of these in just a little bit more detail to help you understand the benefit. And I think frankly, the big message here, as we're talking to our customers about these solutions, is they're really starting to understand PLM at a much more strategic, a much bigger picture than maybe traditionally has been the case when you talk about PDM or configuration management or things that's, let's call it, a lower level of process detail. These are big transformative solutions for our customers.

So global offerings, think about this as helping a customer, one of our customers, analyze the offerings that they have in the marketplace, the hundreds or thousands or tens of thousands of SKUs that they have in the marketplace and really optimizing their portfolio in the market and then for each one of those, establishing the set of requirements, the set of what will make that SKU successful in the field and then tracking that project and that product through its lifecycle. There's a lot of activity here. Let's call it establishing the right target, moving in the right direction.

As you might expect and as I mentioned, typically, customers see a lot of diversity in the requirements in order to sell successfully in North America and in China and in Europe and to meet customers in their different, not just geographies but kind of sub-specialties. So there's usually a lot of diversity in those requirements. And a company cannot afford to take kind of a one-to-one mapping of requirements to strategy for architecture. So most of our customers today are pursuing a global platforms approach, a very efficient way to meet the diversity of requirements but achieve some very important economies of scale by having a flexible platform to do that.

I think the best way to maybe articulate that is to show just a brief video here that explains this global platforms idea in a little bit more detail.

[Presentation]

Brian A. Shepherd

So I think that's an example of how we're elevating the importance and the message around these PLM solutions. What we're talking about there is a CEO-level strategy topic for our customers, and that is really kind of the opportunity that's in front of us, I think, for all of these PLM solutions.

The third one I wanted to describe is the global development solution. This is a challenge for seemingly all of our customers today, as they struggle to get their globally dispersed teams including their supply chain, coordinated and organized, communicating in a secure way. And we have a fantastic solution in place that allows those customers to have that single source of product truth of information, that rich digital model that Jim describe in his product intelligence part of his presentation that really exists today to allow them to bring together all of that product information and again, communicate in a secure way.

The last of the 4 solutions that I wanted to introduce today is the global quality solution. A common thread with all of the customers that I talked to is they have plenty of activities around quality in their enterprise, specifically they're siloed into different organizations. They have an engineering focus or a manufacturing focus or a service focus. What's missing and I think the secret ingredient here to unlocking even higher levels of quality for our customers is an enterprise focused on quality. You can't fix the quality problem in just one of those organizations. You have to tie all of that information together. You have to have an enterprise solution for quality management. And that's exactly the focus here of our global quality solution.

These 4 solutions best described here have big opportunities and big impacts. Companies that do these things right, the increased profits, increased savings, better processes and better product quality and better product offering. So I really think there is, let's call it, a hard value return on investment argument that we can make with our customers here that will help them understand the importance of global PLM and really move that forward on their priority list.

Of course, we're not alone in this marketplace. We do battle on a daily basis with competitors. We feel like against the competitors we see everyday, let's call it the multi-solution provider. We have some strengths and advantages that are important in the marketplace, things like an architectural advantage, things like a footprint or a capability advantage. Some of that driven by the acquisitions that Jim described earlier. We have an advantage with process understanding and process expertise. We really are experts in product development in each solution, and that expertise pervades or pervasive start through our company.

And over point solution providers, I think the common theme here is that we have an enterprise solution, which is really, again, I think the secret for unlocking the value here. Companies don't want more point solutions. They want fewer, bigger enterprise solutions to address these big requirements.

I'll just finish up here with a customer story, illustrating a little bit of the power of PLM. Schneider Electric is a long-time PTC customer. They grow through acquisitions, so they began to have quite a disjointed scenario for product development from a technology standpoint, from a process standpoint. They worked with PTC over years to really consolidate their product development activity onto our global PLM solution. You can see that the results here are pretty impressive, really getting to this single global source of truth for product information across the Schneider enterprise, really reducing their process time around key business processes. And today, it's a system of record for more than 6,000 users across Schneider.

With that, I'll turn it over to Justin to go through the second of our 5 segment presentation today. We will do Q& A, but let's go through the 5 segment presentations. And then we'll have a dedicated section here just before lunch on segment Q&A.

Justin Teague

All right, Brian, thanks. Brian though is a tough act to follow. I don't have any of those cool videos. But maybe the first thing I'll do is in starting the segment is make myself a cool video. Any better? Better?

Okay. So let's talk about the MCAD thing. This is a really interesting opportunity for us, and I'll walk through where we think growth is going to come from and also maybe take a step back and just remind everybody about the Creo strategy that we launched last year.

I think everyone's familiar with this market. It's a $6 billion market growing in 6% at a macro level. We actually think a little bit more -- if we peel a layer back about our focus being in the true sort of 3D mechanical engineering space. And we've got an interesting position here. We've got the second-largest technology in terms of revenue. We've got a great customer base. And you'll see later on, that customer base really is the foundation for where we get our growth and how we actually have a healthy growing business. And we have a technology leadership position, we have for a number of years. But a refocus on solving some key problems really establishes a new type of leadership for us.

So to remind you of this Creo strategy, we had a stagnant business somewhat for the last decade, and a couple of years ago, we took a -- what is it about our business that has changed? And fundamentally, one of the things we came to conclusion is that we don't -- we're not adding incremental new value to our customers as it relates to solving some key problems that still linger. 25 years later after the -- we revolutionized the market with Parametric tools.

There were still some lingering problems that were interrupting efficiencies and the effectivity of engineering process.

So we started to break those down in 4 areas. One being the ease of use. And not ease of use in terms of user interface, but think about the right tools for the job. Putting in a nail with a screwdriver is a hard proposition, but a screwdriver is not a hard tool to use. So it's about making sure that we have the right application of technology for the right problem. And then there's this recognition of interoperability that says, if you look at the process of product development and then it together as a mechanical engineering space, there's a lot of different tools deployed. A lot of companies would tell you they have up to 1,000 tools involved in engineering. So let's just take the basics, 2D, 3D parametrics, 3D direct. Those products need to talk to each other to really create efficiency. Otherwise, you the stifle reads. You create inefficiency by requiring data translation between these tools. So let's look at this concept of interoperability.

And then there's this idea of technology lock-in and this sort of culminates in 2 ways. One, companies have grown, they've grown through acquisitions, they've got multiple different tools in their environment, they're trying to create optimization of engineering process, but yet people are on different disconnected tools. It also sort of culminates in this idea of a global supply chain of suppliers and, even internally, people that work in multi-CAD formats. When you have these challenges and you can't easily translate information or reuse information, you're sort of locked-in to processes and technologies that's difficult to get out of. And then of course, some of the really interesting stuff that Brian talked about, around global platforms, but the ability to get from a sophisticated configuration problem, or even strategy of a company, down to deliverable like 3-D assemblies then you can then go validate. These problems really haven't been solved. And so we introduce them really groundbreaking technology here. By taking some of the existing concept and our leadership in direct modeling, for example, our leadership in parametric tools, and putting some them together into Creo, which is a scalable suite of interoperable, right-sized and integrated applications that really stay in this whole spectrum of product development. Taking a step back from the very upfront ideation and creation of concept, even the calculations at the various front-end, all the way through the back-end deliverables of tooling creation and maybe photo rendering for sales and marketing deliverables. And so we introduce some really interesting technology and what's important here is, one, either being recognized as groundbreaking and different, and they actually are being recognized by our customers as having a tremendous amount of value. We're solving real problems and this is leading to some great opportunities for us. So we introduced this concept of AnyRole App, that says, go look at the spectrum of users here and put the right tool for the right person at the right point in the process. Don't take one monolithic tool and build all the capabilities into it because the person that wants to do a light 2D sketch or an upfront conceptual design or industrial designer, they don't want to use a big complex engineering tool. But in engineering, you still need that fourth power and the sophistication required. So can we somehow break down a suite of tools and put the right tool to the right job for the right person? That's this concept of AnyRole App.

And then, if we actually look at this paradigm, as I mentioned before, you've got 2D and 3D and layout tools and sophisticated engineering tools and everything down to simple tools like photo rendering or analysis. And so these need to inter-operate and this is a concept of AnyMode Modeling. I want to be able to start a concept in 2D, maybe create surfacing with my industrial design team in 3D, move that into a more sophisticated engineering tool. But what if I actually want to go change that surface to make it more ergonomic? I want to be able to back to that simple, lightweight, flexible tool that the industrial designers want to use and then move back into that engineering environment. And if I can't do that in a seamless way, in this concept of AnyMode Modeling seems to be moving in between, I create inefficiency, not efficiency. So we solved that problem.

And we look at this adoption problem. This idea of either migrating from one system to another or working with a distributed team of suppliers and other people's constituents in the process. How do we work in this multi-data environment, multi-CAD environment, more efficiently? We introduced the concept of AnyData Adoption. It literally allows us to do file open SolidWorks and then start editing it right away. There's no third party or third file format that we have to translate to and rebuild the model. So we've introduced concepts that are revolutionary here in this idea of this dispersed CAD, multi-CAD environment. And then this concept of AnyBOM, which is this, how do we get that final 3D assembly deliverable out of this sophisticated configuration.

So these are groundbreaking technologies. And what does this proves for us is a recognition of PTC back into thought leadership as it relates to mechanical engineering. We've been recognized for it by the industry. In fact, this top one is sort of latest press news. We achieved this winner of the 2011 Synaptic Tech Breeze Product of the Year Award. So that's one of the series of awards recognized by the industry. The other thing that's happened is, along with our thought leadership and our commitment back to the CAD space, we've received a commitment back from our customers. And this commitment from our customers culminates in a really interesting dynamic around our health of our base and our active number of seats. Healthy customers, dedicated customers, who see value in our technology and see that we're dedicated to solving their problems, culminates in this really interesting relationship that helps us grow organically. It culminates, currently, with all-time highs for retention rates for example. Retention rates for the last decade are really important. As often as we acquired a new license of software, we actually lost one, a customer turned it off. For any number of reasons. Now, with a higher retention rate, we can organically grow and continue to add. And this adds up pretty significantly. A 1% increase in our -- a sustainable increase of our retention rate leads to about a $20 million opportunity over 3 years. The other thing that happened with our customer base with this new infused energy and focus on CAD is the opportunity to win back customers that have migrated away from us. Maybe the tooling department was tired of using a heavy Pro/ENGINEER feed and went to mid-range tool that was lightweight for example or a new start-up decided to go with a low-cost solution. But the reality is we have a great customer base, even if turned off feeds, we call win backs that we actually take an inactive seat and turn it back on. Last year, we had an incremental $13 million from this type of business. And that represented just 1% of the addressable market for win-backs. We think we can get a couple more points of that over the next couple of years.

And so finally, you've got this 11 seat contest, which is that I've 10 engineers and 10 licenses. If I were to grow organically, if I'm healthy as a company, I'm going to add an 11th seat just like when I added an 11th engineer. And so the more active healthy customers we have and the more active install seats we have, we get a self-fulfilling prophecy of organic growth there. So we add this all up, and the chart on the right here is sort of the top part of the longer chart but it shows sort of 5,000 feed increments of where we are. We're actually at a high -- a recent high per-active install feed, even back to 2008 which was a revenue high in the last sort of 10 years. You add all this up, it represents an interesting 3% to 4% growth opportunity over our current trajectory for the next couple of years.

The other thing that Creo provide us with these net new applications that provide value and process efficiencies is an upgrade and expansion opportunity. We have this direct modeling capability, which is really revolutionary in helping companies accommodate flexible changes they need, maybe late in the process or if they want to reuse data as legacy data and flexibly change in a way that wasn't anticipated. You can add this flexible modeling capability right into your existing feed of Creo parametric or Pro/ENGINEER. So recent surveys from our customer base, after we've expose this technology and of course released it to market with the release of Creo 1.0 in June, says that 70% of our customers expect to adopt this over time. We aren't going to get that all in the first year or 2, but that's a revenue opportunity measured in tens of millions of dollars of incremental upgrade.

And then likewise, we actually have a standalone app for direct modeling. And there's another use case, for example, if I'm an engineer using Pro/ENGINEER or Creo parametric and I decide that I want to -- I have a problem I need to solve. I need to actually ideate on a brand-new part to solve a problem. I might actually want to go out to a lightweight direct modeling environment for the concept design. So there's a use case that our customers are validating as they're direct modeling next to parametric modeling is a really important value for them. In fact, the Department of Energy here is an example, they added 1,000 feeds of direct modeling along with 1,000 feeds of Pro/ENGINEER or Creo parametric. So we have this net additional capability to add apps and functionality. And over the next couple years, we expect to release 15 to 20 new apps, all penetrating out into this extended enterprise, this concept of enterprise design that Jim talked about. What does it mean for us to go reach the upfront person that wants to do simple 2D layout or upfront concept design ideation, calculation and downstream to somebody that wants to make that photo rendering, want to make that assembly documentation. So we have apps that are right for that person that inter-operate, that take down the barriers of file translation and enable reuse. We can go penetrate all of this potential downstream. And we don't need a lot of penetration there to go achieve what we think is an interesting, incremental 1% to 3% growth opportunity, whether depending on adoption rates for Creo. That's why that chart on the right there sort of highlights where we are with direct modeling. We found incremental million dollars in Q4 alone of direct modeling capabilities over and above far what have been an organic trajectory there, validating that direct modeling in the context of a traditional parametric environment really has value.

And so the third point here is consolidation opportunities. Our customers have a real desire to consolidate on a platform. Growth through acquisition has been pervasive. We have an interesting customer in the electronics -- consumer electronics. They have a lighting division and then they have a consumer electronics division that makes things like alarm clocks. Well they grew through acquisition. In fact, the lighting division uses needs a SolidWorks and the other one uses Creo. And they actually had a project where they wanted to create an alarm clock with a light on it, that as you woke up, it sort of simulated the sun rising. But the challenge of putting those two engineers together to collaborate on this combined product was overwhelming. In fact, the benefit they got out of the collaboration was detrimental due to the separate engineering teams. And so they have a desire to say we want to get people on to the same platform. But the challenges of doing that, historically, have been too high based on the value. And so Creo takes down those barriers, 2 really important ones. One being, I've got multiple groups around the company, be it multiple engineering groups or multiple disparate people outside that could be participating in engineering. I want the right tool for them. We need to take down the barrier of why the tooling department shows a midrange tool for cost and ease-of-use. Creo takes down the barrier for them. Why the industrial design users are using a tool for surfacing that's not integrated with the core engineering tools because they needed something specific to that task. So we've taken down the barrier of having the right application for the right role that's easy to use, cost effective. It allows them to tackle that piece of the equation along with -- now that I want to go move to a consolidated platform, that lighting division that used SolidWorks, we can now just file-open in Creo and start building assemblies. You don't have to do this extensive data migration. So by taking down those 2 barriers, we open up a really interesting consolidation opportunity, even within our own base. And so Sony Ericsson being another example here. They had Creo, they had NX, they have a number of other tools. When they went out to say, we have a standardization initiative, they wanted to get optimization of their engineering resources globally, particularly China and Europe -- I'm sorry, Japan and Europe, they chose Creo because they saw that it had the best applicability for their processes and the efficiencies that they wanted to gain. So we don't have to do a lot here even within our own base to see sort of a 1% increase in organic growth trajectory.

And so you add these up, we really feel like we have a realistic opportunity to get into the 5 to 8 growth opportunities for us over the next couple of years with that. And I'll sort of touch on one last example here, which I think is interesting, it's sort of as a third party evaluation. People might not think of the Guinness World Book of Records as a credible third-party validation, but they do their analysis and they have data to back it up. If you're familiar with this gaming environment, a couple of years ago, Nintendo launched the Wii and sort of changed the paradigm of how the user interacted with the gaming system through a kinetic motion-based controller. And Sony and Microsoft to a certain degree found themselves flat-footed and behind. So Microsoft parked a team of engineers in a room and said you got to go create a product that is competitive. And they not only created a product that was competitive but they actually, in the shortest amount of time that they could have imagined, leveraging concept of Creo, direct modeling and parametric working together and lightweight and flexible for ideation and concept design and parametric for getting products that are manufacturable out to the ecosystems. They actually broke the Guinness World Book of Records for the most successful, fastest selling consumer-electronics product with the Xbox Kinect. They sold something like 8 million units in the first 6 months. So a real interesting validation of value that our customers are seeing. And without the value and our commitment and our technology leadership, that's sort of not possible. And that kind of leads into to the final piece here is as Brian put it, we're not alone here. But opportunity number one to compete is we actually have a great opportunity to keep our customers happy and motivated and committed to us. And that always hasn't been the case. Creo changes the paradigm of value that we deliver to our customers.

The second sort of opportunity for us is to really look at companies that have this challenge of growth through acquisition or dispersed teams and suppliers and say, we have the opportunity to help them. Essentially, these OEMs have become system integrators, to a certain degree, of balancing all the different parts and components and constituents involved in their product development process and managing how it all comes together with our AnyRole and our AnyData concept, we can actually enable this more effectively than anybody.

And then thirdly, we think we have this distinct ability to go help with the global engineering challenge and the global product development challenge, particularly as it relates to platforms and dispersed global teams. So that's sort of where we kind of differentiate with Creo and it really opens up a very interesting opportunity for us.

Okay. With that, I'll turn it over to Bill.

William Berutti

Thanks, Justin. Can you guys can hear me okay? Yes? Okay. All right, hi everybody, I'm Bill Berutti and I'm going to talk about our Application Lifecycle Management segment. So I'll start, as Justin and Brian did, with a decision that the market. So the broader ALM market, and many of you are probably familiar with it, is the market for all the tools it takes to manage the process of creating developing, delivering a software product. Now that market is large, as you can see here, measured in 8 billion and growing. It has a reasonable growth rate, moderate, not terribly exciting. But is really focused, for the large part, on the IT and ISV space. So I want you to think about different kinds of software for a minute. There's software that you build, as the CIO of a company, for internal development. There's software that you build as an ISV, like PTC, for sale. And then there's software that gets put inside of a manufactured product, a physical product. Sometimes referred to as embedded software. So this market, that we see here on this slide, the broader market, is that complete market for all 3 opportunities to provide tools to help build software. The market that PTC is focused on is more interesting. It's still reasonable in size. It has a much more interesting growth rate and is focused on this idea of software that ends up in a physical product and that's a unique problem that we are in the position to solve, different from others in the marketplace. And I'll talk about that. So the part market we're focused on is faster growing and solving a unique problem where software and hardware come together in a finished product.

So why is this market interesting and why is it growing? Well the simple reason is that software is exploding inside of physical product. Our customers are hiring more software engineers than mechanical or electrical engineers. More and more of our customers have more software engineers than any other kind of engineer in their company. And the reason for that is we all know that whether it's our car or our phone or consumer electronic device, they are more and more differentiated by the software on that piece of hardware, more than the piece of hardware itself. So this is an interesting space because of the growth and this is why we acquired MKS and their Integrity product because they had been focused exclusively on this idea of solving the software development process management problem for companies that make physical products full of software.

Now manufacturers are starting to suffer some pretty interesting problems with this explosion of software. They're facing challenges around compliance. For instance, in the automotive industry, there's a particular compliance, ISO standard, which requires you to show that you can demonstrate that the software quality and the process for creating that software is meeting a certain certification standard. It's also causing time-to-market problems, products are coming to market late. And it's also increasing dramatically, the cost of engineering as software explodes inside of these manufactured products. So there's a real problem to solve that create competitive advantage and create cost advantage for our customers in helping them streamline this part of their process.

I'm going to show you a brief video that describes the explosion of software in the automotive industry and some of the problems that it is creating for OEMs and suppliers.

[Presentation]

So I think that video does a good job of describing, in the automotive industry, the challenges that the explosion of software is creating. And you can apply those same examples to aerospace and defense, to medical device, to electronics, and consumer products as well.

All right. Now let's talk about why it is creating a problem for manufacturers and what traditional approaches they've tried to take to get their software development process under control. The first thing that you see, when you look at a typical manufacturer that's living with this explosion of software, is that they have a number of point solutions. They have solutions that they're using for source code management, for change of configuration management, for test and defect management, for requirement management. And they bring together these point solutions because there really isn't a holistic solution on the market that addresses the entire process. And the problem with that approach, of course, is that then it's the manufacturer's job to figure out how to make these different tools work together in a process. And furthermore, these tools don't really live on their own, they have to integrate with other third-party tools, whether it's Excel or Word or Eclipse for instance or open-source technology that might come from a third party or a supplier. And so this world of complexity creates a big opportunity for error. And so, really, OEMs have become their own systems integrators, having to piece together different pieces of the solution, different point solutions, to be able to create their own solution for managing the process of building software that gets embedded in a product. Now the problem is actually even given than this because that's just the software part of their design process. Over in another organization, they're doing hardware design, electrical and mechanical. And of course, there's tremendous amount of dependency between electrical, mechanical and software. And so the problem in software is big, but the problem between the different disciplines is equally a problem.

So PTC's approach is to enter the market by solving the complete problem. For those of you in the room that are engineers, you'll recognize this V which represents the product development process, starting on the top left with a high-level system design. What are the requirements of the product? What are the systems and subsystems, hardware, electrical, software that could be necessary to develop the product to meet the requirements? Then at the bottom of the chart, you go into a detailed development phase where you're doing detailed electrical, mechanical and software design activities against all the different subsystems. Once things reach a certain level of fidelity, you then move up to the right where you're then bringing these subsystems back together, again, mechanical, electrical, software and saying do they meet the requirements? Do they test and validate against what I expect and what I wanted from this design? So PTC's views is that, really, what OEMs want is something that addresses this entire picture. And again, the Integrity acquisition brought to PTC the ability to complete this picture. So the first thing that we have, that's really unique in the marketplace, is a holistic requirements management solution. And when I say holistic, what I mean is it addresses mechanical, electrical and software engineering. Again, most of our customers today have different solutions for figuring out how to define the requirements to their product and then tracing those throughout the process to determine whether or not they've met those requirements. With Integrity, we acquired the ability to manage electrical, mechanical and software requirements in one solution, and this is driving a tremendous amount of our growth opportunity.

The second thing that we acquired with Integrity, and really the bulk of their business, is what's referred to as software system life cycle management. This is ALM for product-centric software. Software that ends up in a physical product. These are the complete set of capabilities necessary, depicted here in blue, to be able to manage the entire life cycle of a software product, from requirements and system design, through detailed design and up to test and validation. And this was the bulk of Integrity's business and is a huge opportunity for us to clean up that spaghetti chart that I showed you a few slides ago, where they're using disconnected solutions to be able to complete a solution for software development. Integrity offers a complete platform for being able to do that. So that puts PTC in a very unique position.

Then lastly, of course what manufacturers really want is a complete solution. They want to be able to manage that entire V product development process across mechanical, electrical and software. And if you think about what Brian talked about, in our PLM strategy, and what we could do today with Windchill, the marriage of these 2 solution areas creates the basis for a complete systems engineering solution. To manage and trace the development process across mechanical and electrical and software. And this puts us in a very unique position to help OEMs and suppliers get control of their complete product development process.

So a word on competition. If you think -- focus now on this software ALM space, and again in the manufactured products space, we have 2 forms of competitors. Sort of a larger competitors that you traditionally think of, IBM, HP and Microsoft. And really, the big difference here between us and them is that we're focused exclusively on this discrete manufactured product space with software embedded in it. And that's a big differentiator. Because the problems that you face when building software that ends up in a physical product are much different than the ones you face as a CIO trying to build a homegrown application. The speed of change, the number of variants and that relationship between hardware and software creates a unique set of problems that we're in a special position to solve.

The second category of course is point solution providers. And here, there's lots of small technology providers, some larger, some smaller that provide point solutions but none of them have the complete footprint to support the entire process, support complete traceability throughout that process. And none of them also do that while at the same time having the focus on the marriage of hardware and software like PTC does. So we think that in this faster growing segment of ALM, we're in a very unique position to leverage that larger growth opportunity.

All right. Another way of thinking about the competitive dynamic would be to think about the niche solution providers that I had at the bottom of the previous slide versus people like IBM that, of course, have the more complete portfolio solutions. And then across the bottom, people that are focused on the CIO or IP application space versus people that are focused on this idea of product-centric software engineering. And if I build this out completely, reinforcing the point that I made a moment ago, we're in a unique position in this faster growth segment of ALM because we have both a complete platform and we have this focus on the marriage of hardware and software. And that's the part of the market that has a double-digit growth rate and we are the only company with that complete platform and focus on this unique problem.

I'll finish with a customer example. Continental, maybe you're familiar with them, $26 billion in Euro revenue. Last year, large automotive supplier, electronic systems, braking systems, et cetera. Over the last several years, software exploded inside of Continental's products. And they experienced the problems that I've talked about, the breakdown of their traditional processes with all of the software included in them, the breakdown of point solutions knitted together to solve this problem. And Continental is a great validation point for our strategy because they, on their own, selected PTC's PLM solutions and the MKS Integrity solutions to solve the complete PLM and ALM problem for them. In the end, their goal was to eliminate these disconnected point solutions they had, to be able to support that complete V that I referred to earlier address the problems that software had created for them in their product. So I think it's a very good validation, an important customer of ours for the strategy that we're executing.

Okay. That completes the ALM discussion. Thank you very much. And I want to introduce Brian Shepherd to come back up and talk about supply-chain management.

Brian A. Shepherd

Thanks, Bill. You might wonder a little bit why did we break up the 2 segments that I own, PLM and the supply chain, and the 2 segments that Bill owns, on the agenda, rather than just presenting both of the segments one right after another. It's really to reinforce the idea that these segments are addressing different solutions, different buyers, different value propositions inside of our customer. So we want to kind of break them apart cognitively here today because that's how we think about them back at PTC, right? As we're approaching this market. And you might also wonder, as Jim introduced in his presentation that supply-chain management is a $50 million business for us, where PLM is a $500 million business. You might wonder why didn't we just combine those things together. A lot of -- probably our competitors do think about it in that way. Well, the reason why is we wanted to make sure to, let's call it, shine a light on the opportunity here in supply-chain management in addition to, let's say, the solutions that I've talked about for PLM. And the reason why is that there's really an interesting dynamic in play that I'm sure you've seen from the other companies you cover understanding marketing dynamics. But if you think about kind of this decision that every company, every product company, has to make about their balance of let's call it in-house manufacturing, shown in blue at the top of the chart there, versus the amount of value-added or activity let's call it, some buy their suppliers in their supply chain. Every company has to make that very strategic decision about how they will bring their products to life. Again, whether it's their own factories or in the factories of suppliers. And you'll see that different industries today, kind of arrayed along the bottom of the chart, are at different decision points along that spectrum. You'll see that some are still quite vertically integrated. Maybe let's call it the old-style of manufacturing. But some like electronics, some like retail and apparel companies, that really move dramatically to the left on this chart, really with a complete reliance. They really don't own factories, they don't own that ability to realize products. They are dependent upon their supply chain partners. And certainly a trend that we're seeing here is that companies are moving more and more in that direction. Moving more and more to the left here, with a bigger and bigger dependence on their suppliers. That allows them to tap into expertise for example and economies of scale. Things that are very difficult for a company to own and maintain independently.

So it's this trend that kind of leads us to the idea of focusing on supply-chain management as a distinct business segment inside of PTC because there are some interesting dynamics at play here, that we feel uniquely positioned to go capitalize on. And one that I'll reference a bit later in this set of slides here is, notice where retail is here, on the very left. They're, a little bit in our thinking, the lighthouse. That's how manufacturing is moving. And we have a very strong position there that I'll illustrate for you. So we feel -- the old saying about Wayne Gretzky, skate to where the puck is going to be. In some ways in this supply chain versus manufacturing dynamic, we fell like we're already standing where the puck is going to be, because of our focus and our success over the last 2 years in this retail segment.

So okay, the market dynamics around supply-chain is a massive market. $8 billion market this year. And we are just a nick in that, right? At $50 million. So we're not making an argument here that we're the #1 or #2 in the supply-chain market. What we are saying is, if you strip out a lot of that logistics that Jim described as really the responsibility of let's call it ERP players. To get down to the supply-chain design and optimization, our focus, it's much smaller but still meaningfully sized market at, let's call it $1.5 billion this year. And while our presence at $50 million, again is still a small position there, we feel like this is an opportunity for us to really take more and more meaningful share over time, because of our expertise and because of this dynamic that I've described in the market.

So let's talk about the complexity that we see our customers facing in the supply chain. And I think it's worth that, again, to step back a little bit and just put yourself in the shoes of the supply-chain executive at any of the companies that we've been talking about today. They face a tremendous problem out there, a complexity of dealing with a big portfolio of vendors and suppliers, each of which is managing a pretty big portfolio of products and parts that they've supplied to the OEM. Each of those made out of different materials and each of those materials made up of different substances or let's call it chemistry underlying. All of that information is critical to the OEM to understand, have visibility into that supply-chain to make important decisions about that portfolio of substances and materials and parts. That complexity is changing all the time, that whole, let's call it network of information there is changing everyday. As their suppliers make changes inside their organization or as the OEMs drive change into their supply chain. So that's kind of a real rats nest, let's say, of complexity. That if the company can understand that, can manage that, and have some insight into that, unlocks a lot of value. And that's really the focus of our solutions. Our supply-chain solutions are designed to help our customers first, to rationalize some of this complexity. Some that complexity is not necessary. They have too many duplicate parts for example. They have -- because they've grown by acquisition, they're not leveraging economies of purchasing scale that they could have. So if they can rationalize and reduce some of that complexity, that's a win for our customers.

The next thing that a supply-chain executive needs to do is really align his organization, not just the supply-chain department, let's say, but the entire enterprise around optimizing the spend with their supplier. So once you've optimized a portfolio, you have the use that optimized portfolio in a good way, to kind of, let's call it, align that organization to actually use that optimized portfolio to manage spend effectively in the supply chain.

And the last thing you need is kind of understanding or transparency into the activities and the results of your supply-chain. You have to really be able to assure compliance against all of the different regulations, as well as all of, let's call it, your requirements as an OEM of your supplier. We feel like those 3 areas really help, again our customers, unlock some tremendous value that's buried in their supply-chain today.

So we'll talk about 3 solutions that do that. The first is the strategic sourcing solution from PTC. The second is the design-for-supply solution. A lot of that, in our industry, we talked about DFX, design for whatever, design for manufacturability, design for serviceability. But there's also a tremendous aspect available here, of design for supply. Make your products easy for your supply-chain to provide at low cost and that's not going to happen naturally but it is doable.

And the third solution that we'll talk about is the product analytic solution, again giving you some insights and understanding as to your product performance against requirement.

Okay. So the first one is strategic sourcing solution. The idea here is to have a set of preferred items in your supply-chain. And items being vendors, materials, substances, parts. It's really rationalizing and reducing more for, at the beginning here, the portfolio that your enterprise have to manage, have to procure, have to inspect. If you can reduce that unnecessary diversity upfront, you're really in a much better position for the second solution, which is design for supply. Here, the challenge, again, as a supply-chain executive, is to get the whole enterprise aligned to using this optimized portfolio. You really want to minimize the amount of new products, new parts, new materials, new substances, introduced into the supply-chain. We'll talk about customers’ examples here. But again, a lesson that we learned from our work with apparel companies, some retail companies, is the importance of, let's call it, reuse of some of these materials and substances. A company like JCPenney, in planning a line of apparel for the spring season or fall season, something like that, if left unmanaged, would wind up with dozens and dozens of different types of the same kind of material, a cotton material, let's say. But that doesn't have to be the case, and so by kind of thinking ahead and rationalizing that portfolio, they can design for supply with a much smaller kind of 3, 4, 5 different types of cotton with all of the different offerings that they're going to bring the market. Source from the same set of material. So that rationalization, that reduction has all of that different complexity in their supply-chain as delivered by all of their different, let's call it design agencies, really makes a huge difference in the effectiveness of their business.

The third solution here is one around that sharing compliance, what we call product analytics, and our customers face a tremendous amount of, let's call it, reporting obligation. Some of those are driven by regulation. So there are things for example around environmental compliance of their products. They need to understand the amount of all of these different substances in their products, hazardous materials for example. Even when those materials are sourced from hundreds of different suppliers around the globe. So this idea of reaching, of having visibility into the supply chain, not just as a status of a shipment level, but really down at the fundamental definition of the product level, is critical to our customers. And it goes beyond that, it's not just about environmental compliance or regulatory compliance. There's also a lot of value to be unlocked by understanding the sensitivities in the supply-chain. Sensitivities of risk associated with a supply disruption or a raw material price spike. If you can fix or understand the sensitivity, as an OEM of those kinds of disruptions or risks, really allows to build a more robust business, a business able to withstand supply-chain shocks or raw material shock. I mean, tell you, some of the natural disasters that have taken place over the last few years. I mean, the challenge from the Japan earthquake last year has been well documented on what it meant to a lot of those OEMs there. And really, OEMs around the world as their source of supply was disrupted there. Companies are now, because of that, even if it didn't impact their business, they're understanding that the risk -- they really want to have a greater visibility into this supply-chain risk that they face and build a more robust, and more willing to adapt to these disruptions in the supply chain.

All right. So from a competition standpoint, well there's a lot of helpful names here that make a living in the supply-chain segment. But we do feel like we have an advantage here because of the work that we've been doing over the last 2 years with these, let's call it, supply-chain experts. An example of one of those is Adidas. So Adidas is of course a leader in the apparel industry. I like the quote here, right? Where they're constantly churning out new products. Thousands, I think tens of thousands twice a year. Every 180 days they're turning over their product portfolio. So they are masters at bringing huge numbers of SKUs to the marketplace all through their supply chain. And what they've seen here is that they have a tremendous ability to get to market faster and to really have a high-performance supply chain, which we think is kind of, let’s call it the next generation of what other discrete manufacturers are going to look at. Adidas is by no means alone here. We have a very rich portfolio of customers in the supply -- or sorry, in the apparel and the retail industry, that gives us this expertise, if you will, on helping companies manage a very diverse, very fast-moving supply chain. And it's kind of this strategy that leads us back to saying, well, we have a $50 million business here today. We feel like there's actually a very interesting opportunity to help discrete manufacturers and more, let's call it, old line manufacturing to do a better job of working with a very agile supply chain. And we have the right solutions and the right expertise to help them do that. So that's kind of the story in a nutshell of our supply-chain business.

So I'll turn it back over to Bill for the fifth and final segment presentation before we do some Q&A.

William Berutti

Thank you, Brian. All right, you guys are being patient. Hopefully, I can keep you entertained here before we get to Q&A. I am going to talk about our Service Lifecycle Management segment. First, as we've done with the other ones, let's just talk about the market real quickly. So the broad market would be the market that supports any application in a service business. So think of everything from managing our call center to managing the field organization that actually physically executes service, warranty management, et cetera. But now, think about more than just manufacturing. This definition of the market would include the call center at a bank for instance. And so it's a very broad market. It has an interesting growth rate, 7%, and it's certainly large, $6 billion going to $9 billion over the next few years. But again, includes a lot of things that are uninteresting to PTC, particularly in these segments or markets where you're not dealing with manufactured goods. So the market that we're focused on is a little bit smaller, although still pretty interesting in the $2 billion to going to $3 billion range. And in this case, focus on manufacturing companies, product companies that have a physical product that needs to be serviced or supported once sold to the customer. And that market has a more interesting growth rate, 9% is the software application market growth rate when you focus on this manufactured product space. And I'll explain why we think that growth rate is sustainable and why we, as Jim said earlier, think we can do even better than that.

Okay. Let's first talk about why this space is growing and why OEMs, in particular, care about the service aspects of their business. So the first point is that growth for selling new products is not as interesting as the growth opportunity for the servicing aspects of an OEM's opportunity. Many industries are not seeing the levels of growth that they once did for the initial sale of product. But when they look at the market for servicing their products in the field, they see a substantial market with more interesting growth rates and where they don't participate enough. Most OEMs have allowed dealers and suppliers and third parties to become the responsible parties for servicing their products. And so that represents a big opportunity for growth. And then lastly, it represents the best opportunity for profitable growth. In the service segment, there is a bigger opportunity, as an OEM, to generate higher margins than in the original sale of the manufacturing good. So these reasons are compelling our customers, particularly the OEMs at the top of the food chain to say, we need to find ways be in the servicing business for our product, and we need to find a way to be efficient and profitable in being in that business.

So now, let's talk about the challenge that an OEM faces in trying to be more successful in being involved in the service aspect of their business. The first problem is that there's a lot of constituents involved there. If we start at the top, there's the owner and operator of the product. And that's obviously an important person. We're trying to drive utilization and customer happiness for that person. There are the people that do service and repair, whether they're employees of the OEM or in their dealer network. There's the parts counter which is a critical business for OEMs. This is a business that typically drives 50% margins for replacement parts, and OEMs desperately want to capture more and more of that share of the market, and not lose it to third-party manufacturers of replacement parts. And there's warranty, which again is very critical. A typical OEM loses between 2% and 6% of their revenue to warranty expense every year. That's right off the top line and so any opportunity to affect that drops directly to the bottom line. And then lastly, there's the call center and contact center which typically, the OEM does own and is supporting their customers, dealers and service technicians. And all of these different organizations need to work together in concert to support the service opportunity.

Now the problem is that each one of these folks cares about different things. And what's happened, in the market, is that the OEM has both lost control of many of these activities or they've implemented different systems. And so if they've implemented different systems, they're not connected, they're not sharing information and they're not really supporting the ability for the OEM to get a holistic view of what's happening to products once they're in the field.

Now I've mentioned these aren't connected so the processes between them don't share information. You're throwing information over the wall. Somebody in the parts counter doesn't know for sure what the latest configuration of the product is. And so since they don't have that information, they ship 2 or 3 parts out when you only need 1 because they're not sure exactly what the right match is going to be. That creates customer dissatisfaction, false inventory demand, shipping costs, et cetera.

And then lastly, for an OEM to really understand what's happening, they actually needs to string together the information that exists in all these different organizations. They need complete visibility to what's happening to their product in the field if they want to be in a better position to capture the revenue and profit opportunity that exists in servicing their products. So in order to grow, OEMs have to figure out how to get a hold of this information and to manage it in cohesive process, and that's the problem that we're solving for OEMs.

So our view is that what you want to do is take these different constituents and first provide them a single source of information. That someone doing any one of these jobs, parts counter, customer support, service technicians, processing a warranty claim, ought to have visibility to the latest information about that product. What's happened to it? What's the latest configuration? What parts have been replaced on it? What warranty claims have been made against it? If they have that information, they could do a lot of interesting things with it. Of course, these need to be connected together in a process so that single source of information needs to support the processes and application capabilities that are required by each one of these constituencies in order to do their job. And then of course we need to connect that information with other sources. So first, I want to talk about PLM because there is really a special connection here with PLM and what happens in service. And it goes in 2 directions. The first is how do I leverage the information that comes out of engineering to create a better service plan? How do I influence the folks doing engineering to design a product that's more serviceable, that would allow me to run my service business more efficiently? That would give me a competitive advantage against third parties trying to service my product? And how do I leverage the content that comes out of engineering to create better service deliverable? The other direction is, once my product's performing in the field and I see warranty claims spike or I see customer complaints that are beyond what I expected. How do I feed that information back to PLM, back to engineering to root out the cause of those problems and fix the designs so that they don't occur in the future? And then, of course, we have to connect the PRM and ERP. Service lives in the middle of a bunch of different processes and sources of information. And the customer record, for instance, might exist in PRM and we need to be able to integrate to that. And then of course, things like parts inventory need to be accessed and that might exist in ERP. And so our solution here needs to live in a world where it's connected to the rest of the enterprise.

So what we've done, through the development and acquisitions that Jim talked about earlier, is we have now the ability to provide these 5 solutions in the service life cycle management space. The first 2, technical information and service parts, are the legacy of the Abortext, LBS and ITEDO acquisition. And I'll talk about them in more detail in just a minute. And then the next 3, warranty, product support and service event management are the result of our recent acquisition of 4CS. And I'll talk about those and give you some examples well.

First, I'm going to talk about the 2 highlighted in white here, service parts and technical information. And before I show you a brief demonstration, I want to tell you a little story. Some of you heard the story last year from Leslie Paulson from Caterpillar who attended our event last year. And this is the focus, these first 2 solutions of our efforts with Caterpillar and many other customers at this point. What Leslie talked about was the fact that they had 230,000 consumers of technical and parts information in the ecosystem of Caterpillar. And some of the most important constituents in that 230,000 are the 88,000 people that turn a wrench generating service and parts revenue for Caterpillar everyday in their dealer network. And for those of you that weren't here, she shared with us that 10% to 30% of the average day, of that 88,000 person team, is spent preparing to do the service activity. Figuring out what information do I need? What training is required? What parts and tools am I going to need? And that is a significant amount of 88,000 peoples' time spent preparing to do the job. And so what Caterpillar wanted to do was revolutionize the way people get access to the information they need to do their job. Because if their turning wrenches faster, they're going to generate more value for their customer and their dealer network and they're going to increase the opportunity to do more service and buy more parts from Caterpillar which come at 50% margin. Now the second thing that they wanted to do is make it easier for their dealers and customers to identify a Caterpillar original part. Because they wanted to capture more of the parts revenue that they were losing to third parties who might make it for $0.05 or $0.10 cheaper. And they wanted to make it so easy to find a Cat part that you'd really never take the time to go think about buying it elsewhere. So what they wanted to do was revolutionize that delivery and access to information. And you might remember, again if you were here, that Leslie said they have 3.5 million unique products in service they have to support and millions and millions and millions of pages of content that people need to be able to access to learn how to do their job on any given day. So at PTC has done, and I'm going to show you a brief demonstration here, is we have completely changed the paradigm. We've said parts lists and parts booked, and service and operations manuals. They may need to exist in some form for a long time but that ought to be the past. That ought to be the legacy. We ought to eliminate that 10% to 30% of the day, dramatically reduce the amount of time it takes for people to get proficient and find the information they need by changing the paradigm. We don't want books, we want access to the information that we need in a much more user-friendly form.

So what this video demonstrates is a technician who is working on a particular product, who needs to replace the connecting rods that have broken inside of an engine. Now, typically, this person would spend that 10% to 30% of the day going to find that information, looking through books, doing lookups on the computer, et cetera. In this case, the paradigm shifted. We start by seeing a selection of the product. We then go deeper to identify the particular product that we're working on. We get a visual representation, yes, that is the loader that I'm working on. I don't want to look at all information about that loader. I only want to look at engine system information. And furthermore, I'm working on a piston and connecting rod so I only want to see that information. I've now got specific information about the product that I'm working on.

Now what you see here, I'm going to pause for a second, is the parts play. Now typically, in order to find the right part to find the replacement unit, you'd need to spend a lot of time looking through parts lists, make sure there wasn't an update that parts list and then you get to a part where you'd say, shoot, there's 3 different engine variants available on this thing. I hope I picked the right one. In this case, what we showed was the ability to get immediately to the exact component for that particular product then order it and ping the RP system.

Now what we're doing here is we're shifting and we're now saying, okay, I've never actually disassembled this piston and connecting rod assembly before. So I need to get trained on it. And rather than get a old-school set of 2D drawings that you might remember trying to put together toys for your kids that are hard to read, instead we're leveraging all of that rich product intelligence that comes out of engineering and we're creating animated movies that train people how to do disassembly, assembly and repair procedures. So would you see here is a representation of that CAD geometry that's been reduced in size significantly and made into a movie including the tools necessary to demonstrate how to disassemble this system and connecting rod assembly.

This is a much more efficiently way to train people how to do their job and will significantly reduce that 10% to 30% that technicians spend in their day preparing to do their job. So big economic value in terms of both reducing the amount of time people spend on un-billable work and also helping OEMs capture that parts revenue that they so very much want because it comes at such a high margin.

Okay, the next thing I want to do is show you a brief demonstration of the outcome of then having all of your service activities in one place. So I mentioned that acquired this company, 4CS, last year. And what they brought to us was the ability to manage the warranty process, to provide rich information at the call center, to help call center technicians be more efficient in answering customer and service peoples' problems. And then lastly, the ability to actually managed the service event and the as maintained configuration of product. So what this solution does, well integrated with CRM and ERP, is allows an OEM to get a complete picture of how the product performs in the field. So now imagine that, that system is in place and you're a products line manager. And you get a call from the CFO who says, hey, I need to talk to you. You just launched a series of new products and we are budgeting for a 1% warranty claim on this product. And you're spiking a 2% or 3%, and that wasn't budgeted. We didn't accrue for it, we're not planning for it. We've got a problem. You got to get this product fixed, you got to get this problem out of product. Now without visibility to the configuration, the warranty history and what's happening in the product in the field, a product line manager would have a lot of trouble. They'd have to look through a lot of different sources of information to try to find the answer to that question.

Now once implemented, our solution would allow that product line manager to enter into a system that has not only the complete service history but a management dashboard, and what you're seeing here are all different product lines in this particular OEM's portfolio. But we know that there's a problem particular with wheel loaders, and we can see that warranty is out of whack with our expectations and so we're going to drill in further. Now we can see all the different models of loaders that we have our family. And we can see that this one over on the top right is the one that's causing as the greatest pain in terms of warranty claims. So we're going to drill in deeper. And now, you can begin to see us leveraging the engineering subsystem information and the full product concept. So you see that visual representation. And then you can see all the different subsystems so you can see the subsystems of the product. And further, you can see the warranty history of those different subsystems. And we can see that the hydraulic system is really the system that's causing us the problem. So we want to drill in deeper, we want to understand why is the hydraulic system failing more than anything else and causing us this warranty problem. So what we'll do is we'll dig in even deeper on the product to look at the subsystems within hydraulics. And we can see here, we have pumps and valves and hoses. And we can see them again visually represented in their different subsystems and different colors. And we can see, again, that we have a particular spike in claims at the 18- to 24-month period. So we better dig in deeper on those pumps to figure out exactly what's failing within the different variants of pumps.

And so now here again, we get a representation of the different pumps on the systems. But again we could see that there's a particular area or particular part that's causing us the problem. So now -- I apologize, I lost my last slide there. The image that didn't pause quickly enough. But what you saw on that last image was a representation, not only of the failed pump, but all the different product models that it existed in. So I got a where-used. If this is a problem pump, I want to know all the products that it exists in. And then secondly, it showed us that there was one particular model that has the biggest problem. So probably, what's actually going on is we have an application problem. This pump's just fine in the other product line. But in one of them, we've put it to use in application that it probably isn't fit for.

And then the last thing that we saw was the 2 suppliers that provided that particular pump. And we could see that one of those suppliers actually had the greatest number of problems. And so now we know exactly what product, what part and what supplier to go deal with to root out this problem. Now with that, we can do 2 interesting things. One is we can go get the problem fixed. We can tell the supplier hey, you got to fix this pump or we need to swap in a new pump for the application. And the second thing that we can do is we can have a cost recovery discussion with these suppliers. Most OEMs have their parts under warranty from the supplier. But they have a very difficult time coming up with objective evidence that allows them to go to that supplier and say, you owe me some money for this failure. What this solution provides is the objective evidence to be able to go get cost recovery from the suppliers. And again, if we're talking 2% to 6% of revenue, and let's say 1% to 3% of that expense is covered by supplier warranty, which is typical, about 50%, that's a lot of money that we can go recover, as well as increasing the quality of the product.

Okay. Switching to competition. There are a number of competitors in this space. If we think about the larger competitors, not quite that large but Servigistics, that you may know, is a roll up of a bunch of different companies owned by private equity. A good company and then certainly a competitor of ours, but actually, if you're familiar with them, more focused on parts optimization and inventory positions. So what part needs to be where exactly when I need to have access to it. So not really a direct competitor in the sense of the problems that I spoke of. And then of course, Oracle and SAP provide solutions here. But again, they're not focused on this idea product intelligence, leveraging the product information, the closed loop back to engineering, and really tracking the product at the level of as-maintained, and warranty effectiveness that I referred to. And then of course there's lots of point solutions and again, these point solutions don't completely the address the problem. And in most cases, aren't focused on this manufacturing service problem in the same way that PTC is. So we think that our competitive position gives us a very good position to compete from, in terms of capturing this higher growth rate opportunity in the manufactured product space.

Okay. Last slide and an example here. Whirlpool, that you heard Jim talk about earlier, is an example of a customer that's engaging with us in implementing these solutions. And I think it's an interesting example because, as Jim said, they were a longtime PLM and mechanical CAD customer of PTC. And they kicked off an initiative, last year, focused on revolutionizing the way that they do service. And this was because of competitive pressures that they're seeing at the low end, particularly from Korean and Latin American manufacturers. And what they concluded was the best way to compete is actually not to try to compete on price. We need to compete on quality and service and customer satisfaction. And so they put in place a very large planned investment around service. And what's interesting here is that Whirlpool immediately realized that PTC could be a partner in this and selected us as one of a handful of primarily vendors that are going to backbone for this service initiative. And that really speaks to this idea leveraging our portfolio within our account base for further opportunities.

Thank you very much. That concludes the Service Lifecycle Management section. And I think we're now doing Q&A.

Unknown Executive

Yes we are. Brian and Justin, guys want to join us up there. So, Christian, I think you and Tim Fox have microphones that, ideally, we'll use to take the questions.

Unknown Analyst

The last statement you gave, Caterpillar, Whirlpool, back to a point that Jim made in his initial presentation regarding the ability to better engineer your systems that you can replicate the solutions quicker and faster. Those seem like very complicated products. Walk us through how you're institutionalized to that knowledge so that ramp time for new customers much faster than would be for either one of [indiscernible]. I realize [indiscernible]

Brian A. Shepherd

So you're asking how do we ramp the ability to sell and implement these products more quickly? Well, the first thing that I've sort of remind you the slide that Jim showed the history of our position in SLM, it actually dates back to the Abortext acquisition in 2005. So while you're right, we're in the process of launching a bunch of new solutions. We've actually been at it for while. And during that whole time or at least in the last few years, growing the revenue nicely while at the same time, making the investments in R&D. With respect to the specific solutions, the technical information and service parts capabilities exist today in the sense that that's what most of our customers are doing, with the combination of Abortext, ITEDO and LBS, the acquired companies, as well as the new Creo solutions that you saw in this demonstration. What we're working on at Caterpillar is sort of the next generation of that, and Caterpillar's implementation will start in a few months this year and extend through 2014, and those products are becoming available this year to support them in their ability to do that. So we'll have more opportunity to sell to other customers.

Unknown Executive

Let me just address the second one. So the 4CS acquisition, it's a relatively small company but it's a company that has been around for about 15 years, and actually had relatively mature solutions implemented at large OEMs. And so what we think we do there is leverage our scale against what is a fairly mature product already.

Unknown Analyst

So just an example, if Deere came here tomorrow and said we want to do exactly what Caterpillar did.

Unknown Executive

Yes. Maybe I can add, just some color on that. What we doing with Caterpillar is a pioneering this next generation's solution that's far more interesting than previous generations. The size of the project at Caterpillar is sort of like equal to a year's worth of revenue of the previous concept. So what we're doing is this concept that we say, write one, sell many. So at Deere and at Whirlpool and our other places, were taught by the exact same solution. And this is where we want to discourage the diversity. In the old model, we would have said okay, let's do something at Deere and it doesn't have to be the same as what would we did at Caterpillar. In the new model, we say let's do it very carefully at Caterpillar so that we get a real-world working solution that we understand well and have proven in a complex environment.

In the new model, we say, "Let's do it very carefully at Caterpillar" so that we get a real world working solution that we understand well and have proven in a complex environment. And now let's tell exactly that to everybody else. And to the extent the next customer wants something radically different, we'd say, "You're probably not the right engagement." We'll try to find somebody else and there are many, who want what built for Caterpillar. Go ahead, Jay. Is there a microphone up here that -- can we get a -- all right, you have to wait for a microphone. Go ahead, Yun.

Yun S. Kim - ThinkEquity LLC, Research Division

I think, Brian, compliance has been a more of a recent trend within PLM. How do you think of it from a product point of view? Are you trying to incorporate compliance within each of PLM's features and functions? Or are you trying to make a more of a standalone product and try to modify that better?

Brian A. Shepherd

Yes, that's a good question and in an area we've been investing a lot because there's nothing better for us than features and capabilities and products that are required by law that are customers own, so that is that the case for a lot of these regulatory compliance analytics around a product. That specific solution is embodied in one of the supply chain management solutions I overviewed called our Product Analytics solution. So it is available today. We have it updated for all of the most recent regulations, for example. But it really helps our customers understand and maintain compliance with those regulations. But we haven't sprinkled it out across all of our products. We really have inside the solution we call Product Analytics.

Unknown Executive

If I could add 2 cents to that, I think what we see -- the term we really like is technical compliance. Meaning, there's a whole series of things you need to comply with. Some are regulatory, like reach, like ISO 2626 and some are internal targets like costs and wage, a degree of reuse of parts and so forth like that. So what we want to be able to do is take an early concept design and start checking it back to the spellchecker. Do we have the right cost? Well, a lot of that cost is coming from suppliers. Will it be compliant with reach and environmental regulations? We've got to ask the suppliers what's the chemistry. So what we figure out is that as we take this early bill of material and begin to analyze it and ask the tough questions, we're constantly going back to the suppliers for data. And that's a little bit why the product analytics frequently ends up being a supply chain exercise. Although as a perfectly vertically integrated company, it wouldn't have to be, but in the real world, it tends to be.

Yun S. Kim - ThinkEquity LLC, Research Division

A quick second question on the core Cat product view. What are some of the things that you can get from a product point of view, a product development point of view that you can add in terms of features and functions to try to get the pricing up or even more of a like a marketing or just a more of a product marketing where you can get the pricing up of that product?

Robert Ranaldi

Are you sort of thinking about ASPs and the average selling? I think, we historically had a successful sort of upgrade business, if you think about it that way. At one point, we had $50 million a year in license revenue from an upgrade scenario, which is a culmination of adding technologies meaningful over time, and then at some point, packaging solutions that let a customer get to another level of capability of functionality. So that's a scenario that's very much on our plate today where we have a number of packages and they increasingly have more technology depending on the need. Some of us do the heavy engineering and want to do analysis on the desktop example would have a combined package. A new technology that Creo allow us to put some of those pieces together to enable -- get a new level of upgrade that we might provide. The other answer is high ASPs on individual seat basis isn't necessarily the goal as much as proliferation of the tool. So, for example, we have an aerospace and defense company. They did an analysis of how many tools do they have in and around engineering. For every seat of pro engineer, they have 3 seats of some other tool. We don't need to charge a lot on an individual proceed basis for concepting tool or a 2D layout tool. If we could go capture a volume of those because of the paradigm of the rightsized tools for that customer, they we could turn off a competitive seat. We could capture that as an integrated tool as part of the platform. So increasing -- maybe think about it -- that second paradigm is not average price per license but average revenue per customer. We can go out and capture a hundred of fees at once based on the consolidation. That in turn increases net revenue per customer. That's how we look at it.

Unknown Executive

And it could have -- I talked in the earnings call about this. It could have this funny consequence of blending down the apparent average seat price when it didn't really. If we sell a casual user a less expensive seat and average that in, the composite average drops a little bit. But if I could just reflect for a minute on the Creo presentation and the segment in general. Aside from CAD, the other 4 really are Enterprise process-oriented solutions. They're all in reasonably good-growth markets. And in each we feel that we have a special sauce which will allow us to outperform a market that's performing pretty well. I think at CAD, that's a situation where, for a decade, we've been underperforming in the market. And what we showed you here is a strategy that performs as the market performs without anything radical happening. By basically selling better into the base by selling these new capabilities and by winning a few of these consolidation opportunities, we can do sort of market level growth, which is markedly better, by the way, than the growth we saw from that business 2, 3, 4 years ago. So we feel like if we can get that CAD business to mid-single digits growth where the market is, hold our own, that does a lot of interesting things for our business, given that, that business in particular is characterized by relatively low services revenue and relatively high maintenance revenue, and you might get the profitability in that business that's extremely interesting. We'd like to get some more growth out of it. Jay, you got the microphone now.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

One is a follow-up from the solutions question earlier. I'm glad you didn't use -- no one used here today the term out-of-the-box. But the question is, there' s a logical consequence of where you're going with an increasingly large complex portfolio of suites or quasi suites approach to offering basically prepackaged kinds of solutions perhaps to various industries more vertically than horizontally. And can you also talk about how well you're going to be able to get some annual release schedule for most, if not all, of the product lines? And then an economics question, with all due respect to the ASP comment, if you look back over the last 5 years, the ASP for Windchill licenses to get everything else was about $800 within a pretty broad range mins and max. What is the opportunity to perhaps increase that ASP for Windchill licenses which is used out on a call as equipment for user?

Unknown Executive

Yes. Well, I should have known enough [indiscernible] since you're asking them. So that suites question first. There's the suites question and then sort of a -- what was the middle question again? But on the suites question, I think, we're definitely moving in that direction. If you watched that Deere -- that video, I'm sorry, that use of the Deere front-end loader, the diversity with scale video, that's selling a business solution that's really a combination of the AnyBOM concept from Creo, working really well with configuration management constructs and Bill of Material constructs in Windchill and then integrating actually down into the service aftermarket stuff that Bill was talking about in Service Lifecycle Management. So I think more and more, it's a different concept than what Autodesk is talking about. They're talking about point solutions put together, like Office. It's a combination of Word, Excel and PowerPoint solutions and it's buying convenience to get them as a package. I think we're talking about a different thing, which is magic happens when you combine these things in special ways. I mean, I think you saw this concept of product intelligence in all these solutions. The idea of no matter whether I'm working in marketing, sales and service, engineering, supply chain and manufacturing, they have this, not a dumb Bill of Material that's just lines on a spreadsheet, I don't understand it, but a rich Bill of Material, the line product in front of me that I can understand in detail and interact with, and it's a much better way to communicate information. So I think that's the suites idea. We didn't talk a lot about products here today. We're really talking about solutions because we think that we put our products together in one way and they produce an incredible quality management solution. You put them together another way and they produce a global platform solution. You put them together in another way and it's Service Lifecycle Management. So I think it's that suite angle, the special sauce you get by combining these things to solve business problems. But selling the value of selling the problem, solving the problem, not a Bill of Material of product and a big consulting contract to wire them together.

Unknown Executive

The middle of the question was annual release cycle, and yes, we are still on track for that annual release cycle of our products. But just kind of reinforcing the point Tim already identified, we're not talking a lot about individual products here today because we think about those as -- -- we call them platforms for building new solutions on, which I think leads to this AFP question which is the secret or one of the -- one of the items on Jim's front-9, back-9 slide. In the back-9 was pricing and what that what that really means is kind of recognizing the value that we're creating with these bigger, more powerful solutions. So rather than selling a kit apart, you can get a certain premium for a kit apart. When you put it together, you know what business problem is solved. You can prove to the customer what business problem it solved and the value associated with that. You can recognize a higher price. So that's our goal for, let’s call it the back 9-1b solutions are more mature, are more well understood, more well articulated to our customers to recognize a higher price and that'll lead to better ASPs.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Just 2 more cents on that. Today we have premium products at average prices and we think that solutions tomorrow is to move towards value-based pricing. We can charge more when it's perfectly clear the value we're creating. But again, if you're selling data management, configuration management, it's hard to understand discreetly what is the value. If you're selling a global platform strategy with profound implications for your supply chain and your parts inventory, then it's a lot easier to make the case that this solution is saving you tens, hundreds of millions of dollars. In fact, on this quality solution, one of Brian solutions, we had a large North American company run a value calculation internally. We didn't do it, they did. And they said, "By getting a better process for handling defects and making sure they go away, we could decrease our product return rate from 3%." Some number less than 3%. That would save us $1 billion a year. That was their calculation. $1 billion by simply, let's say, cutting returns in half. Well, how do you cut returns in half? You drive out problems when you find them. So when there's a problem, you find it, you make it go away. You'll never have that problem again. And it's a $1 billion value prop. And what do we get for that? We got what we call a megadeal, which is a deal bigger than $5 million, and it's interesting. So more and more, I think you're going to hear PTC talking about the value of the business problems we're solving not the bells and whistles of our technology.

Unknown Attendee

The sophistication of these new products is quite high. So can you speak a little bit about the selling cycles for the CIOs or to whomever you're selling to? How long is it, in some cases, still an educational sale?

Unknown Executive

Yes, Bobby, could I suggest that, that might be a better question to defer to our next session because I think Bob Ranaldi will spend some time on that particular subject, if you don't mind.

Unknown Attendee

The supply chain opposition segment is an interesting one for you to address. The one that I thought was fairly well covered by SAP and Oracle and Ariba and so forth. Is there some way -- is there some unmet customer need that you're seeing now an opportunity for in discreet or are the others falling down on the ball in some way? Can you just...

Unknown Executive

Yes, I think Brian's slide, and you can maybe add to this Brian. He showed a slide that showed that since 2005, we've landed 70% of the world's biggest retailers, mostly North America so far, to be honest, because that's where we really built the business. And we're starting global -- to get more global. These retailers are characterized by extremely large numbers of SKUs, huge amounts of supply chain outsourcing, a lot of cases, the design and the manufacturing is outsourced, but a great need to enable collaboration and enforce some amount of control and consistency across this supplier. They find traditional supply chain management solutions to be useless. And that's why we're just going into one store after another, one retailer after another, and really doing well. We have one traditional competitor here which is Dassault. They're in this business, I would say, not doing well at all. Siemens vacated this business, and this is very different that traditional PLM because there's no engineering involved, so it's very much supply chain. And that's what really led us into this supply chain business is realizing that the PLM problem faced by these retailers actually isn't a PLM problem, it's a supply chain coordination problem. And then we realized some of the supply chain coordination we're doing is equally interesting, for example, to electronics companies. So aren't that much different in terms of the degree of outsourcing. And as Brian said, everybody else is headed this way. So I think it's a very interesting opportunity. I think that the traditional ERP and supply chain tools just can't handle the degree of churn and change and the requirement for collaboration and the requirement for sort of management consistency across the supplier.

Unknown Attendee

Jim, 2 question areas. First, on PLM. I think it dovetails really well with what you were just saying. Have you had any additional insight in terms of what Autodesk is bringing to market and how do you feel that fits within the product...

James E. Heppelmann

I mean, I'm trying to be nice to all the competitors here, but in that case ID Autodesk in my mind has a fairly juvenile deal of PLM. They're talking about features and functions in the cloud. We're talking about solving major business problems. I don't even see it competing with that story. Because we want to talk about global offerings, global development and global platforms with global quality. And they're talking about data management and workflow in the cloud. It's very different story. I think they'll do fine with that within their relatively less-sophisticated small customer base. I think that story is not meaningful in the space we compete in. It's not even -- it's not even be going to be compared to ours, really.

Unknown Attendee

And then on a different topic, when you look at the ALM market, can you give us a sense -- when you go into an opportunity, what percentage of those opportunities actually have something that they're using maybe beyond just Word and Excel? And if that's the case, what are they using? Is it Serena? Is it some of the more traditional ALM offerings? And if it's not, are we talking about really greenfield opportunity that you're chasing?

Unknown Executive

The examples of where Word or Excel is in place is generally speaking around requirements where you're really managing source code, managing a change in integration management process. They're using something. Traditionally or typically, what we see them using is the product from IBM or HP in particular, the Quality Center from HP and then from IBM, the myriad of products that IBM's acquired. What we see as the competitive advantage that we have is two-fold: one, we have a single source of truth. A single solution for managing the entire process, which is unique. In fact, it's a little surprising how disconnected IBM's story still is given everything that they acquired. But it is. It's a collection of products that might or might not be knitted together well in a given customer situation. So one is that we have a complete solution. The second is this idea of the connection to the rest of the product development activity. All of those tools were built thinking about software as a stand-alone item, whereas, we're approaching it from the perspective of hardware and software working together. So there is some greenfield, but I think in most cases, people have a solution but it's one that's breaking because of the amount of change, complexity and velocity that's happening in their software development process.

Unknown Analyst

To put a spin on that, it's a happy hunting ground right now on [indiscernible] big company is frustrated IBM client?

Unknown Attendee

This is probably for Jim. Just within your largest Enterprise unit, PLM. My perception is that there's lots of growth to be had by really pursuing this discrete opportunity in the different verticals. It's not really a one-size-fits-all market. And retail's maybe a special case there because you've got -- it's go basically its own business unit, almost, in your new organization. But I guess, my perception also is in that in terms of enhancing your competitive position, #2 in the PLM market and achieving lots of growth and getting your product more ready deployable with less integration work, that really pursuing verticals specific development is a real key for you guys. Now the new organization -- the business units are -- they're more focused on horizontal functions in your customers, less focus on verticals per se. And I'm just wondering, how do you pursue a vertical focus within the context of...

James E. Heppelmann

Well, let me -- it's a very good question, and let me spend a lot of time on it and I want to challenge one of our associates. At PTC, we decided that the difference between the conversation we have with engineering and supply chain and aftermarket service, it's far more different than the conversation we have with an airplane company versus an electronic company versus an industrial company. But in fact, the degree of vertical difference isn't that high. In supply chain, it's different only in the sense that they don't care about the engineering -- I'm sorry, in retail, it's different in the sense that they don't care about the engineering part. But the way they care about the supply chain isn't much different than the way an industrial electronics company cares about the supply chain. So we organized around what we think are the biggest opportunities to create value, which is understanding what the head of sales and service really need, separate and distinct from what the head engineering really needs and optimizing for that as opposed to optimizing for a huge solutions on a per vertical basis. We just think that's a better way to do it. But it's a good question. We studied a lot before we came to that conclusion.

Unknown Executive

Steve, what I'd add to that is, we're definitely going to have to flavor these solutions that we're talking about for the specific needs of an industry segments. A med device manufacturer has a different compliance requirements than does an aerospace company. They both have compliance requirements but we feel like that could be very cost effectively tailored into these solutions that we're doing rather than engineered in. Jim used that phrase and moving the company from its engineer to order business model which we kind of are today to a configured order. But we haven't lost sight of the configure part of that. We just want to drive that to, let's call it, a reasonable size and the overall customer set. And that's why we don't use the term out-of-the-box too much because we hate out-of-the-box configures it little bit for the specific needs of that customer, and that's the solution. Next question comes from...

Unknown Analyst

Yes, since Jay set the precedent [indiscernible]. One is about simulation the other's about industry focus. On simulation, on each of your sector presentations, you took the time to redefine the market that you are focused on. In the MCAD segment, the only real difference between your definitions was on simulation. You took simulation out of the definition. Later on, when you talk about the pieces that you saw going after, you mentioned that, that was one of the pieces you were going after in MCAD. And then in the systems engineering piece, some people are saying, well, you need to have simulation as part of systems engineering. It's one thing that capture requirements across the mechanical, the electronic from software but you need something to figure out the interplay between those things. So where does that fit in your scheme? The second piece is on industry. But I know from the calls that we've had with you guys, you guys have a very deep bench in many industries. But several of your competitors, either the platform ones that have been doing industry focus for a long time or now people like Siemens and Dassault, they'd either have reorganize around industry or have industry overlays. Where does that industry stuff fit organizationally with PTC?

James E. Heppelmann

Yes. So I think there's a couple of different questions. You are right to notice in the CAD discussion the difference between the broad market and the narrow market was in fact to strip out simulation. And doing that actually made our narrow market less interesting. But that was a bit of a nod to do we compete with answers or not? And if you ask me to list the top 100 competitors of PTC, I wouldn't list answers. So what we're really saying is simulations is an interesting business. It's not a mainstream business for PTC. I'm talking about mechanical geometry simulation. Other kinds of simulations are sort of interesting. Simulating how you take apart a piece of machinery in service, that's interesting. Simulating in that video you saw 3 different configurations of a machine being color-coded according to where the problems are, that's a kind of simulation. But it's not mechanical design or mechanical engineering simulation. It's simulation of other business questions. So I think it's hard to use the word simulation broadly because I think it has many different flavors. I do think it's fair to say that we're not a mainstream player in CAE today. Maybe we should be, I don't know. But we were just trying to be pretty transparent to say that when we think of our mechanical CAD competitors, we don't think of assets, even though it would make the market look a little better if we did. We're just trying to give you an honest assessment of how we see it --

Unknown Attendee

On the vertical part, just to answer your question directly. We have some strategy owners across each of the vertical segments or vertical customer groups that we serve that are responsible for developing, let's call it, PTC's point of view, on the needs of that industry vertical. That's funneled into the segment organizations that we've been describing to you today. And then in many cases around the world where we think it's important to do that, we go to market with, let's call it, a vertically organized sales and services team. People that have deep expertise on working with the customers and aerospace and defense or med devices or retail. So they kind of -- it's almost an hourglass shape, if you will. So we have strategies with a lot of understanding. We kind of narrow it into the segments that we've been talking about so we can, let's call it, put it in a blender and come up with these pretty good, configurable solutions that serve the needs of a lot of different industry verticals. And then spread it back out again so that we can talk to customers from marketing and sales and services in the language that they like.

Unknown Executive

There's one all the way at the back there, but [indiscernible] maybe at some point you can get a microphone.

Unknown Attendee

Could you just talk about, over the next few years, the source of share gain? How much of it is coming from listed competitors that were around you versus what seemed in every segment a very large other. And I'm trying to understand as well as just looking at the number of people who have chosen or bracing going to single-point solutions, how much of that is just -- they're looking at initial cost of adoption or the fear of critique from bringing in sort of a master, fully integrated solution or best-of-breed versus you having to sort of sell them on all the attributes you've talked about and all the values that come from sort of a full life cycle approach to managing this?

Unknown Executive

Well, I think there's a natural sort of trend that happens particularly in the newer market where it's first invaded by point solutions. They're first to pioneer a new market opportunity. And if we take like Service Lifecycle Management, somebody comes up with a way to do texted document, somebody else comes up with a way to do graphics, somebody comes up with parts catalog solution and so forth. And then a lot of companies try to buy those components and layer them together and learn that that's no easy project. So I would say the biggest source of share gain across all of these things except CAD is actually replacement of homegrown systems, typically built around some combination of point solutions. The project we're doing at Caterpillar, it's a massive project. That's a system that they built themselves in the '90s. Their investment was more than $100 million to build that system, and they look at it, who could I buy it from today, the next version of it, because the system is long in the tooth and filled with a lot of problems that need to be solved. And last year, when the lady from Caterpillar was here, Leslie Paulson, she said we basically came down to 2 conclusions: we're either going to build another one ourselves or we're going to buy with PTC. Because that's the only vendor who could help us make a true replacement system, crossing all these different elements and capabilities they're required. So I think the big share gain we get is the next generation of the replacement system, maybe with the exception of PLM where we've taken a tremendous amount of share from Dassault in particular. But in general, in Service Lifecycle Management, it's still the homegrown solution. And people are scratching their heads saying what to do next, and PTC looks very attractive.

Unknown Analyst

This relates to software and your investments in software elements. Our clients have 2 major concerns and perceived challenges with it. One is orchestration of software development across the supply chain during new product development and the other is managing and maintaining the software during the service life cycle of the product. So I was curious about your plans and the demands in those regards at PTC. But your question about simulation now raised another thing I want to ask you about, I can't resist. You acquired Mathcad, and to me, that would seem like an excellent systems-level simulation tool. And I'm just curious about your plans for the future of Mathcad, if not clearly in the geometry-centric simulation.

James E. Heppelmann

So we'll have Bill do the software question and I'll address the Mathcad piece.

William Berutti

So on the software question, Mark, we're hearing the same thing from our customers. And this is an area actually where Integrity spent a lot of time. On the first part about software outsourcing in the supply chain, that's a big part of the problem that MKS and Integrity have been solving. And the Continental customer example that I gave is a very good one, where they have hundreds of suppliers that are developing software for them. Those different software elements need to roll together to represent a complete solution that actually does what it's supposed to do. And they're using Integrity as the single source of truth for the latest builds of all that software to bring it together and validate that it meet their requirements. And this is a big part of this ISO 26262 requirement in automotive, because there are real safety concerns that somebody else was building the software for the electronic braking systems, somebody else was building the hardware and somebody else was building the entire control system for the car, and the software didn't speak to each other correctly. The ABS system might not come on . And so that's the nature of this requirement, is to make sure that you have traceability and a closed loop process to ensure that everything works the way it's supposed to. So we're addressing that today with our ALM solution. On your second part, we're seeing that too. And we actually have a few customers that have started to use our ALM solutions in that area. But I don't think we've figured the solution out completely. And I think we need to bridge ALM and our SLM domains to make that happen. One example. We did some work with Boeing because on the new 787, there are 3,000 potential software elements on that new aircraft. And just to give an example, the predecessor aircraft had about 100. And so managing the configuration over time of those 3,000 potential software elements is actually now a regulation requirement because if the wrong pieces of the software and the configuration are put together, again, the system might not work. And so we actually have some customers, some airline customers that are using Integrity to manage the as-maintained configuration of what's in flight on the aircraft to bump that up against the certified configuration that comes from Boeing. So I think we see that same opportunity, and I think we haven't fully fleshed out how to leverage that one, but see it is a real potential.

James E. Heppelmann

So on that simulation/ Mathcad question. Again, I think we have to be careful with the word simulation. Because those of you in the audience who have a history with CAD, when I say simulation, you're thinking of something pretty specific, MSC, ANSYS, et cetera. But there are many forms of simulation. And mechanical geometry is but one. I mentioned a few already, simulating how you do a service process. And then they're simulating the way our system would behave. And all you probably produce, for example, DCF models on PTC which is a math-based model that simulates the value we'll create given different assumptions that around revenue growth and earnings and stock-based comp and all the rest of that stuff. That's engineering to be. That's applying math to simulate a system, in this case, the system is PTC, and the value it will generate. But you're right, engineers use math to simulate how an airplane is going to work or simulate how that antilock braking system is going to work. And so Mathcad's a great tool for doing that. And it's both the modeling tool-- it's modeling for purpose of simulation using a math-based model to understand how a system works. So in systems engineering, that tends to be more math-based. Mathcad is a great tool. And in that type of simulation, neither ANSYS or MSC would really be viewed as a competitor. The math works, pops up on the radar screen and suddenly there are pretty good company that has pretty good tools as well in that space, but again, it's a different type of problem. So just a sort of recap here, I think we should be careful using the word simulation because some people think it means something very specific. I happen to think it's a very general term. Okay. So the question on breakthrough...

Unknown Analyst

Back to your discussion about the best-of-breed point solutions versus complete solutions. I think there's a macroeconomic overlay on that too. When you're in recessionary times, people like that comfort of a complete solution, and when you're in expansionary times, they like the best-of-breed because they think they can get a leg-up over their competitors. So how would -- do you agree with that and how would you say you position to kind of get in the right place depending on the macroeconomic?

James E. Heppelmann

Well, I don't completely agree with it. I see your point, but I think that what drives point solutions is somebody's innovated the breakthrough in one little area. And then you're saying, would it be better to have that innovative breakthrough or to have a whole a whole system? Now there's no law that says a company that has integrated system can't also innovate. And I happen to think if you look at a lot of the technologies we have, they're pretty damn innovative. When we showed you -- Bill showed you that video of the service application where he was using all this product intelligence to get down to the root of the warranty problem. That's really innovative. It's also an amalgamation of just boatloads of technology that we happen to have. So I think that -- the real question is, if we go with point solution, then we, the customer, are the system integrator and are we smart enough to do that? Do we know what we're doing? And some customers would say, "Yes, we do. And we want to do that." And other customers would say, "I met with PTC and I listened to their point of view on process. And PTC's actually pretty smart." I mean, the concepts we're talking about in Service Lifecycle Management are generally a generation or two ahead of what customers actually understand in their business today. And they're saying that even if even if I had all the bits and pieces of technology, I'm not sure what to do with them. And PTC is this fusion of process and technology. PTC seems to have a pretty good point of view about what to do and conveniently, they have most of the technology pretty wired together to make that happen. I think that's the real difference. What we need to do is innovate, to stay ahead of the curve of other people, innovating if we get lazy. And I think in the past maybe in the CAD business, that happened. We rested on our laurels and other people innovated and chipped away at our solution. But I think today, I don't know how you view as we view ourselves as a pretty innovative, technology-driven company.

Unknown Analyst

I'm going to suggest that we continue this over lunch. We were on schedule right now with [indiscernible] which is --go to the left. Go through the lobby, right by the front desk. It's the -- there's a doorway just beyond that. I will be back here at 1:00. And we've got 3 pieces in the afternoon. We'll hear from Bob Ranaldi on sales, Marc Diouane on services, and I'll wrap it up with finance. And we'll have another Q&A session at the end. Thank you very much and enjoy the lunch.

Unknown Executive

Kristen, will the room be watched? Can they leave computers? Yes. The answer is yes.

Robert Ranaldi

I think we can finish fundamentally by 2:30 or 3, certain by 3. We'll aim for 2:30. All right. Jeff, can you hear me back there okay? My microphone working? I want to get people settled in. How was lunch? You guys got some of your questions answered? Good.

So welcome back. I want to say, as Jeff said earlier, I want to thank everybody for being here and I appreciate the opportunity to present. As Jim mentioned earlier, my name is Bob Ranaldi, and I'm responsible for the sales organization here at PTC. And I appreciate the opportunity to present. This is actually the second time that I've had the chance to present to this group. Maybe by show of hands, this is a fair question, how many people were at our June event that we had? So maybe 50% or so? Jim was there. That's good, Jim.

So back then, guys, if you are paying attention when I presented what I talked about, and this comes with complete sincerity, is that I feel like there's just a great opportunity here at PTC. As Jim said, this is my third -- I completed 3 full quarters with PTC in this particular role, but I've been with company for 14 years. When I talk about the market opportunity that seems probably pretty general. But just to give you an anecdote, our sales people are more busy now than they have ever been. I think that the consensus out there -- if you went and polled the salespeople they would tell you that we are unbelievably busy with customer interactions. And the basis for that is really working with customers to help them sort out problems that they have in area of creating products and the way in which those products are serviced in the field. So we have great products at PTC too. Maybe you guys are familiar with like the Windchill 10.0 release. I look at that and say, "Jeez, what a fabulous product." I like what we're doing with Creo, very enthused there.

And as you heard about this morning, we really have these emerging solutions, which is great because our customers, as you would expect, really want solutions more so than they do product. So I'm excited about that. We have a great sales team that I'm very fortunate to lead. I would say, though, that we're looking to get better in improving certain areas. And we're looking to do that while we continue to make the numbers. I mean, we're not losing sight of that. We need to make sure we deliver the results and that we don't ever take for granted the importance of making sure we deliver the results. But these are the 2 primary areas I'm going to talk to you about today. The fact that we're adding sales capacity in a significant way. And the second is that we're continuing to try to find ways in which we can improve the operational efficiency within the sales organization at PTC.

I would say that -- you, guys, can -- feel pretty to interrupt me if I'm going too fast and tell me to speed up if I'm going too slow in any particular point. But as it relates to sales capacity, we've added some 70 quota-carrying salespeople in the PTC sales population since July 2011. And that's a significant change for us. It's pretty radical investment in sales capacity. I'm fortunate that Jeff and Jim has given me the budget dollars to be able to go do that. And again, the basis for that, in simple terms, is to take advantage of this market opportunity that we have to go out there and apply the capacity against the great products that we have in these emerging solutions, and ultimately take advantage of the market opportunity that we feel is out there.

As noted here, we're also hiring what I think are the right people. We're trying to not just add quantity but make sure that we're adding the quality of the people that we hire too. As I was telling Jay over lunch that in this business that we're in, it's all about relationship building and you want to make sure that the salespeople that are at the forefront of that relationship are there for the long haul. If you're a customer, you want to make sure that you're going to do business with PTC over a lot of years. So my fundamental point is, you want to make sure you hire the right people so that they're going to be there for the long haul and be at the forefront of that partnership that many of our customers expect to take place over decades. And that's very important. Getting people from a lot of enterprise software companies, which I'm excited about, the quality of the individual has increased significantly.

I think back 5, 7 years ago, and I think our opportunity to recruit people in the company then is much different than it is now. I think people see PTC is a good company to work for. They see us growing at the rates we're growing at they feel like this is a place where I can make some money and be successful. And so we're fortunate that, that allows us to attract the type of people that we want to bring into the company. So ultimately, we want set this capacity out in the right direction. The ultimate direction is go build some pipeline and go deliver some revenue to the company. And that's of course what we tell our salespeople when they show up for work the first day. But how do I get there is the real question. How do I get to the point where I have a value-based relationship with my customer? How do I get this pipeline built? And these are examples of things that we direct our salespeople on. Go find executives within your customers that you're calling on the companies that we can bring forward some resources from PTC that will help you build the relationship at that level. The second is this thought of a corporate business. So this is really core of the way that we engage with our customers. It's common place if you're a big customer of PTC. I'll use an example like Cummins engine. They may come 2 or 3 times to our corporate business centers through the course of the year. And during that period of time, we'll share with them what we're doing as a company, a lot of what you heard this morning. We'll present at some detail what we're doing with our product roadmap, and they'll present to us too so that we got a good understanding of what their plans are on product development. And obviously, that's an opportunity for us to get some good intersection there.

As it relates to the growth of this new capacity, because Jeff and I figured you'd be interested to understand this a bit. We are projecting in the current fiscal year to have a revenue impact, an organic element here, an organic revenue impact of about $20 million to $30 million. So this new capacity is actually coming into the company and very quickly making an impact in the results that we deliver as a company. And I'm excited about that. We look back in Q1, and of course, as you would, we're very regimented in the way that we look at the impact that these new salespeople are making. And I was pretty optimistic with the contribution they made in our first quarter. And we're going to see more of that as we go through the course of the year as these reps become more and more tenured and experienced in their roles here at PTC.

So this is kind of an important point I'd like to take you through. There's probably some familiarity with the way that we define sales rep capacity at PTC. And I want to ask you to sort of understand that we're going to look -- to have you look at it a bit differently in terms of the definition. We used to define sales capacity by the total population and the total population would include the quota-carrying salespeople and then all the other people that help them make their quota. These are overlay salespeople, let's say. The definition that I believe in is correct, and I know Jim supports me on this, is really look at the population of people that own a PTC quota. They own part of a number that we're wanting to deliver within a given year. So I came into this job, as I said, 9 months ago, whatever it was, and I recognized right away that we've got to distribute the quota, the number that the company that needs to do to a greater population of people. And that's key, and may come across as obvious to you, but we've got a little bit off there for a period of time and we've corrected that. And we're going to continue to correct that as we go forward. So the new definition, as I mentioned here, is we want you to think of our sales capacity as how many people, Bob, are actually carrying the quota? They're going to help you make the license number that Jim and the executives are expecting you to make. This is the other concept that we think is the right one to focus on which is really this conversion of some of these overlay salespeople that look a lot like and act a lot like our primary quota-carrying salespeople, convert them to be more subject-matter experts. And that might mean that, that person has more of a technical background, it might mean they have a little bit more of a business background in these areas of the solutions that we're providing. So that to me is -- if I'm a quota-carrying salespeople, that's bringing me some incremental value as I go and engage with a customer try to find these value areas. So this is, again, just an understanding for you of the way that we're changing the definition of our sales capacity.

This is the trend that goes back from 2007 through fiscal year 2012, the current year that we're in. And you'll see that there's 2 things here that you'll notice. One is the headcount, noted in green, and then the other is license revenue that we did during this period of time, noted in blue. And back here, we were pretty healthy, at least, as it relates to some consistency. And then we got upside down in this period of time where we fell below 300 quota-carrying salespeople and it obviously had an effect on the revenue that we did during this period of time. And as I said now, as we move from fiscal year '11 and into fiscal year '12, we're fixing that problem.

There's maybe another important point here that if you haven't recognized, you might want to. In 2011, as an example, we have pretty good productivity. We had 293 sales reps, quota-carrying sales reps, delivered $342 million worth of license revenues. So I'm encouraged by that. I think it speaks to the depth of the engagement that we have with customers sort of getting deep into these accounts and building nice, big opportunities within the accounts that we have and yielding these nice productivity results. But I think, again, as we added capacity, it's going to be very supportive to our license revenue plan this year and beyond. A lot of the capacity that we added this year, we're going to have some effect from. We expect to have a return, but the real return comes in fiscal year '11 as this capacity becomes acclimated with their jobs and builds the pipeline that they're out there building each day that they go to work.

So can you guys see this in the backroom or maybe have a printout? This gives you a sense of the distribution of the capacity from a geographic standpoint. Simply put, there isn't necessarily one geography that we're investing more in with sales capacity than the other. And in this case, we're really -- we're going to invest in all 3 major geographies.

In the U.S., we've been a little bit, let's say, more aggressive adding the capacity, a little bit more successful bringing people in to the company than we have in some of these other geos. And this -- I thought I'd give you guys, as sense of how we're using this capacity. And there's, as you can see here, a few different things I'd like to talk about. So the first is to go and invest in an account that we really haven't done any business with. An example would be --leave the names off to protect the innocent, but a U.S. medical device company where we've done tens of thousands of dollars of business with that account on a yearly basis. When you look at it, can you say, we should be doing tens of millions of dollars business with that company. And by putting a salespeople person there and having them focused there and to get deep into the account across all these different solution areas that we talked about through the course of the morning, we feel that we're going to be able to make good progress. So an example -- first example, again, is to get into some new accounts. We think that, that presents a big opportunity. The other is this thought of expanding where maybe we have a certain amount of business we're doing with an existing account, but we see an opportunity to expand. It could be across different divisions within the company, it could be across some of these different solution areas that we talked about through the course of the morning. So for instance, there might be a European high-tech manufacturer that we see an opportunity that is staring us in the face around ALM. Maybe we're very strong with PLM, but we look at that and say, "Let's double down with the investment there because we think it's going to yield a nice return." The third example is this mid-market space, which I think is going to present PTC a nice opportunity. A lot of these medium-sized companies -- think of a $1.5 billion scooter manufacturer in Italy. They have a lot of the same product development problems that a $15 billion company has. And the maturity, I believe, and the thinking of some of these smaller companies has increased over time. They're realizing they need to get better control of their processes. They need to have better IT systems in place.

Sorry about that. I thought -- I did shut it off, but didn't realize it was going to make that noise. So I'm jumping at here, sorry. It's screwing up my presentation. The last is really on a surgical approach, emerging geography. Can we go into an emerging geography and win on the back or build ourselves -- our opportunity out on the back of a nice win there. An example could be an aircraft manufacturer in an emerging geography. Can we go into a vertical like within an emerging geography and build a nice win or win a nice piece of business there and then build upon that within some of the emerging geographies through the world. So these are -- just to give you a general sense of how we're using the capacity, that's the way we're thinking about it.

We changed the name -- for those of you that are familiar with our annuity account program, that's what we use to call it, we now call it diamond o -- diamond account program, excuse me. I'm blending all these names together.

Diamond account program. And so the definition for annuity, and now diamond, is that as the company that we do business with that generates $2 million or more in the trailing 12 months in the form of license service or maintenance. And as you can see, we're making good progress here. We continue to do really well in fiscal year '11. We had over 100 companies spend more than $2 million with us over the trailing 12 months. So you might -- maybe I state the obvious, if you're sitting here, maybe one take away for you is, to me this is all about getting really deep in the account and having a meaningful engagement with the accounts. We're broad and deep we're building some real business value there such that the number of companies continuing to spend this kind of money with us just increases over time. And again, if you go to my earlier point, I really do think it puts the emphasis on this sort of partnership, making sure that the customer sees PTC as a partner, somebody that want to do business with over a long period of time. And I think that's crucial to our continued progress with this diamond account program.

These companies noted here are just some examples of the new companies that we added in our first quarter. It's actually pretty interesting. I'll shy away from the details here, but some of these are with some of these emerging solutions that we have at PTC too, and going in and having an opportunity to take one of the solutions that my colleagues talked about this morning and put an agreement in place that generates multimillions of dollars of business for PTC. And maybe more importantly, generate a tremendous amount of business value for their customer. So there are some examples of that here noted in our Q1 diamond account ad.

Okay. So now I'll skip to talk about the operational efficiency improvements that we're working on. And there's a lot of different things, but we decided we would focus on just 3 as it relates to the sales department. And of course, I'm contributing to a lot of these other things like service margins. I mean, we work in a partnership. As an example, Mark and I do this, improve our service margins at PTC but that sort of fits within his area of responsibility in terms of the ownership. So the first is the operational efficiencies. There's many things that we're doing there. One point, and I think I made it over lunch is, we used to have a lot of sort of roles within the sales organization that were supported globally. We had a global overlay salesperson for Arbortext business. We had a global technical lead that sat within our technical organization. A lot of these global resources and what we've decided to do is to bring back that responsibility within the leaders within each of the 3 major geographies. So in North America, for instance, the responsibility, the technical assets now resides with the sales of the vice president that runs the U.S. The overlay capacity that we have in North America now reports into the leader of the North American business. I actually think the byproduct of that change will be -- we're a heck a lot of more efficient because there's some costs that we can take out because people aren't traveling globally and doing these global roles anymore, but there's also some better alignment that we can have within a given geography. And I think that can actually allow for us to generate more business, actually do more revenue. So to me, it's a very strong value proposition in an area that we've executed on around this operational efficiency.

We are looking to do less travel and use technology more often. And just to put it into context, I was -- I mentioned earlier that I was in Europe the week before last. Just to give you an example, and while I was there I think I went on 7 or 8 sales calls, I saw a bunch of different customers throughout Europe. And what generally happens is you go on those sales calls and then there's some follow-up of course, and typically, I might call upon one of my colleagues like Brian Shepherd or Bill Berutti to go on and meet with that customer talk more in detail about certain areas that we had talked about during my meeting. Now what we're trying to do is leverage video conferencing to be able to do that. And this isn't a revelation. I don't expect you guys to be shocked by this, but I think it's an effective way, especially with some of that follow-up, to keep the travel down and leverage technology to be able to go and to continue selling to the customer, continue the progress made on the particular engagement you're working on with a customer. We're also doing a lot of things on video, you saw some examples of that today, where I think, as a salesperson, I could walk in and I could give an introductory discussion to an executive about a certain topic and use some of the assets that we have in videos to be able to start that conversation, to try to set the hook, if you will, and then of course, there will be some need for follow-up to get into a richer conversation. But the thought of bringing less people on a sales call and leveraging something like a video to start that build process, we believe, can be pretty effective. Global platforms is a good example of that.

So we're expecting our salespeople to be competent and capable, to be able to go in and have a discussion with a customer, leverage the video, and then when we have to bring forth more resources, we can do that, but it's beyond just that first engagement with the customer.

So I mentioned, this fiscal year when we get to Q4, we expect to 100 more salespeople than what we had in Q3 of last year. And we're looking to do that with simply not adding any management. So the span of responsibility of our management is going to increase. We need our sales managers to step up and take on a broader responsibility. They're going to have more people working for them than they've had in the past. And I think a key point here is to make sure that we develop those salespeople really well as we bring them into the company. And we're kind of doubling down on this area of development too because it's important that the salespeople get the proper direction and they can get to the point where they can be a little bit more self-sufficient, therefore, less reliant on their management, because of the fact that we're going to have managers that have a lot more salespeople working for them than they've had in the past.

I'd talked about the overlay, so I think we've covered that. We really want to optimize. The point that -- it isn't that we don't need sales overlays. We actually believe that we do, but rightsizing that, making sure that there's some incremental value that those overlays salespeople are bringing in support of the primary quota-carrying salespeople that we have.

Okay. And then there's contests on the back 9. I made this point. I don't think you would talk to a single salesperson at PTC that wouldn't raise their hand and say amen. I love the fact that we're going to have solutions here at PTC. Because when I go knock on the door of my customer everyday, they won't have solution conversation with me. They don't want to talk about bits and bytes and products. They want to talk about what is the relationship of the solution PTC you can bring to the business problem I'm trying to solve. And that -- that really applies when you're selling higher up, of course, when you're talking to an executive. They're really not so interested in what does Creo do versus Windchill versus Arbortext. They're trying to figure out, again, that association of solution to the problem that they're trying to solve. I'm very excited about the maturity of these solutions. I think the value proposition is going to get stronger. It's not to say that it's been weak with PLM, but if you think about having an impact to a company's warranty costs, I mean, that has a tremendous opportunity for us to really elevate our gain and get into a higher level within the customers that we call on and have a much more meaningful conversation on hard dollar savings that these solutions can bring forth to a customer. And I think this is one of the great things about this segment, because if you're Brian or Bill, I believe they stay up at night, thinking about like, "How am I going to get so much value created with these solutions that I'm going to generate the opportunity with a lot of customers and get the sales force behind these great solutions that I've developed?" And I think that a lot of that is based on this business value that the solutions can provide, and the more that we can put into the hard dollar savings category, the better off we're going to be. I think that the reference selling is going to become more and more important for us over time. I mean, the thought of configuring and not having to customize a solution for a customer to me puts a reliance on proof that we've gone into one customer and proved that the solution can be implemented in a certain way with some level of configuration, such that we can leverage that success and build upon it with other customers. I mean, that's the thought here. So I'm optimistic that as we get on the back 9, we're going to need to do less technical validation of our solutions, which we do a lot of today, and we're going to have to do less work to prove out the business value because we've done this in a repetitive way and we have the proof for these references that we can build upon and really kind of grow and scale our business relative to these solutions we're working on.

The last is, and I'm all for it, if we can raise our pricing, I think that would be great. I mean,if we had a better relationship of the costs of our solution licensing and to service the problem that we're solving, I mean, I think that would be great. And I think there's a tremendous amount of opportunity to do that, again, as I said earlier, as we continue to identify some real meaningful value with the customers that we're working on.

The last slide here. I think I'm coming up on the half-hour, is I wanted to give you a sense -- I think we talked enough about Whirlpool today. Whirlpool is a customer that uses our solutions very broadly. I think we made that point pretty clearly. These are other examples of customers that use our solution less broadly. Continental might be an example of that where they use our software in the areas of hardware and software engineering, and at the Enterprise with PLM, but there's opportunities to expand that. I think if you were to look at PTC's customer base, even our customer base, you would find that there's a decent presence here and then there's just a really big opportunity over here and a continued opportunity in the area of PLM. So there's -- it sort of shines a light on the opportunity that we have to grow with the solutions that we're working on when we look at our customer base. And then you'd think of the non-PTC customers, and what this gives us the opportunity to do is to have several points of entry. We might decide that there's a customer that we have no shot of selling CAD to, we really have no shot of selling PLM to, but for god's sakes, we have a great value proposition to go and talk to that customer about solutions we can provide in the area of sales and service. So the opportunity to get into accounts that we haven't gotten into before is pretty exciting. And I mentioned, I think it was to Rob over lunch, that there was an example of a deal we got in Q1, it was a Textron company, I'll sort of leave it at that. I mean, Textron is not -- you're not going to see them on the diamond account list with for us. I mean, they're not a customer that we've done a lot of business with historically, but we're able to go in here with a value proposition around sales and service that allowed us to generate a nice opportunity on the back of providing some value in that particular area.

Now the way that we engage, I want to just give you a sense of how our quota-carrying salespeople work with these so-called subject matter experts. When I interview a person and they ask me the question, "What am I -- what are you expecting me to do when I show up for work?" And the first point that I make is "Your job is about building the relationship with the customer. That is -- needs to be sort front and center where you're thinking about your job as a PTC salesperson. And your job is to build that relationship on holistic basis." They own -- the salesperson owns the relations across all these different departments within a company. Now what they need is some support with the subject matter experts so that if a salesperson has an opportunity, let's say, in supply chain, they can get that engagement to a certain level, but then they're going to be reliant to bring forward maybe level of credibility that he or she as salesperson doesn't have. And that's where, again, we rely on these subject-matter experts to help us out. So I think it's a good combination of build the relationship, think holistically about the opportunity within an account and then engage the right resources relative to the opportunity that you have across these different dimensions that we're pursuing with these solutions.

So that's all I have. I hope that was helpful. In summary, this is kind of my thought here in terms of what -- Mark, I jumped ahead. I guess, we've cut my closing slide out here. We want to drive revenue in an efficient manner. We, as a sales organization, and I'll be the first to admit it, it's all been about driving revenue. But we're trying to drive the revenue efficiency. And it takes a little bit about a change of thinking for myself and the people that work for me, but we think, again, with the strategy that we rolled out and discussed with you this morning, we think that there's the opportunity to do that. So thanks again for your time.

Unknown Executive

Okay. Good afternoon. My name is Marc Diouane. For really quick introducing myself, 18 years working at PTC and almost 16 years, I will say, as a Manager, managing people in the organization. And as you know, this is my 6th quarter as the Head of the PTC Services Organization and Software Organization. And really here, the 16 years I've been traveling and living abroad, in Europe, in the Asia-Pac, and also here in U.S. and already moving to this role as the Head of the Services. You might be asking yourself the question here why having the sales person of the year as head of the organization. I will say the 18 years and 16 years experience working with sales organizations is predominantly a tremendous asset here for the service organization. In order to leverage, I will say, the asset of the sales organization, and then we'll be talking about it later on.

So the first part of my presentation is to give you a quick snapshot of who we are as a service organization because most of the time, these are unknown and how will we leverage the services organization as an asset for PTC moving forward.

The second part of the presentation, I will be merely focused around how will we improve the margin of the services and how the services organization will become, I would say, more contributed to the company's financial results and company margin expansion.

Talking about the service organization, as I said earlier, we would like the services organization to be, I will say, a tremendous asset for PTC and an asset in terms of deep knowledge of all processes and the product processes and how to leverage those assets in order to be able to help the customers around value and support the salespeople to sell more software. When we have all salespeople in the account is how can we support the salespeople to cross sell, win that account by helping the customers realize value.

The second really important way that we would like to leverage in terms of assets of this organization is about, I will say, our margin expansion. And as I've said earlier, with my experience in the business, our goals on the organization is really how we can leverage, I will say, to be the premium services organization with the deep expertise in the processes and leverage that premium organization as to get the premium price of service [indiscernible] to the customer.

The third, I would say, a really important utilization of the assets of the organization is to be able to support our, I will say, the corporate segments, how can we leverage the people on the ground before in the solutions to support, I would say, the development and the definition of the solutions and having the solutions more easy to be solved and easy to be deployed and try to support the corporate [indiscernible] value for the customer.

This being said, as you can see it here, PTC's service organization is the largest PLM service organization in the market today. The largest you can compare PTC service organization to any of our peers in the market and you will have found out I would say that size and that level of expertise as well. Most of the technology vendor in the market, they have a services organization that has [indiscernible] application experts, so they will sell one application experts to the customer or to proportionally their services partner, but few companies in the market have a big arm like we do have here that is capable to engage with the customer [indiscernible] on fixed price data to help the customer to define, I would say, the 2 midspace of their Product Lifecycle Management solution and deploy the solution and support the customer value relation. So this is a tremendous asset that will get delivered for the future, as I said earlier.

And you can see its 1.5 million hours of customer engagement. And it will bear more of those companies with whom we are engaging is that one of many companies with whom we are engaging. I just would say that the most important one. You've heard a couple of years ago about Airbus. I would say a tremendous engagement from PTC, airbus plus the ADA. PTC global services, one of the organization to fund the entire PLM deployment of Airbus and recustomize, I will say, the entire Airbus environment and move that environment in more, I would say, the PTC out-of-the-box solution. They can you can see at the bottom here, we have been recognized as well in fiscal year '10 and fiscal year '11 by CSIA. We received the award for our consulting organization for professional excellence and our innovation in the education services. I would like to highlight as well, when you think about PTC services, you should think about 2 different lines of business. The #1 and the most important one is with the consulting line of business; and the second one is the customer educational services, setting the training, helping customers to adopt the technology.

And moving forward, what I will be talking about the market expansion in the margin improvement, I will be addressing those 2 lines of business, how will we improve the margin of those 2 lines of business in order to get the appropriate goal.

A very quick snapshot here as well of one very important engagement and very successful account for PTC. Some of you have heard about HKMC. We won this deal back to December 2010, 2011, and we -- 2010, actually. And the customer as you know is high-demanding customer, a very complex environment, automotive OEM and really global service organization has really handled the challenge. Within 10 months, we've been successfully deploying the first stage of our technology in the account, and the customer wins went go live last January. So this is one example, and when you look at the scope of the solutions that should have been deployed in there, it's really a broad solution. If the broad solution -- it's the [indiscernible] management integration with third-party software like Dassault and few companies in the market, I would say, services companies in the market even at PMT size that don't have that level of expertise. And have I said earlier, we would like to leverage I would say, the IT that we built up over the year also to enable our partner ecosystem by providing to our partners the IT that can build us in terms of enormous experience to deploy these such kind of comprehensive, I would say, solutions in the market.

Moving now to the third initiative to improve, I will say, the efficiency of the organization and support the corporate market expansion. Moving from here, the 3-year, we'll have dollar impact on the improvement of PTC's dollar services business and market expansion. This one year is on expanding the partner ecosystem. We'll have a dollar impact on the corporate long-term mix. Mix management software services that will improve obviously, I would say, 50, 60 gross margin overall.

So let's get started with the first one here. As I said earlier, we would like to become a premium services organization. We are being viewed today as premium by our customers. Our customers across all the GOs. By default, they want to have PTC services organization engaged to help them to deploy the solution and help them to realize value. We would like to move to a situation where we can charge our premium price for the services. So it's one part, I will say, of the improvement of the margins and I will explain to you how these will have incremental impact in our margins moving forward.

The 7 very important initiatives -- starting initiatives that we have is we need in our delivery organization to be more efficient, more efficient in terms of time to value for the customer, in terms of utilization of our resources and in terms also of prework. We're using the prework that will have also a direct impact on the margin of the services organization.

And then PTC university, if you do recall in discussion of services, if all these customers trend and they will be nearly focused around the instructional like training on site or in our facilities. I will not be talking about the way [indiscernible]. It's a part that is being copied out of the software. On PTC University, what we are trying to achieve there, we are trying to increase the volume of that business. This is a high margin. It's almost 3x more profitable than the consulting. So our goal is making sure that we can increase the volume around our PTC University that would give us a good mix between consulting and education that overall can help the margin improvement of the services organization.

And finally here, the last part of my presentation, I will be focused on giving you an update on where we are around our partner ecosystem expansion. We're using here the front 9 and the back 9 strategy. When we look at the services organization, we are really focused on being more efficient and really focusing the entire organization around how can we improve the services margin. And one -- a few comments here. That is for many years the services organization has been used. I would say how the deployment services organization in PTC, we've never been focused on how we've been getting our share of fair value of the services that were deployed to the customer. And then to my experience running the business, it's really how I can leverage the asset and the expertise that we have there and charge the customer for a premium price of that organization and then contribute to PTC, overall, I would say the margin expansion hosted earlier. And during the back 9 for energy, I will be focused mainly on giving you a little depth as I've said before to run our partner ecosystem expansion.

So why should you believe in our ability to really achieve our goal in terms of services margin expansion? I would say here -- this slide here is showing you back to Q1 2011 the improvement that have already did. We almost doubled our operating margin of the services year-over-year. We embedded in the sixth floor [ph], and this has given us a high confidence in our ability, I would say, to achieve and to contribute to the corporate long-term goal.

For the corporate long-term goal, when it comes to the services, it's a move from a 4% margin of the services to a 15%. With the best interest companies, they are probably operating this technology, I would say, professional services organization. They are probably operating in the low teens, mid-teens, in some of the margins. We would like to be the known -- I would say the best-in-class professional services company in the market.

So how will we improve our margin from 4% to 15%? So a lot of you may be here and you have a good financial background, you might potentially having some questions how within 3 years' or 4 years' timeframe you can get there? So how will we get there? We will be focused on improving the light blue part of the bar here, which is all the cost related to our organization to manage our, say, the services business. It's the management cost. It's the operation cost, how is it for the field from the operation perspective. The R&D cost, R&D in the sense we have an organization within services that is responsible to design and to move the services offering and the methodologies and the process to the point of solution. How to train the indicator -- how can we be more efficient, a little bit also the training and sold and the fixed cost related. So the light blue, we are trying to move from 28 to 25, and I will explain in more detail how we can get there. And then the dark blue here is the cost related to our delivery people. Every consultant, project manager that is going to discuss to all customers, we would like to review the total cost from 60% to 42%, 60%. It's like moving from 32% delivery margin to 40% delivery margin.

So let me walk you through how when we improve that. So the first improvement here is related to our delivery margin. How will we move from 32% of our delivery margin to 40% by 2015? And you have here, at the bottom of the slide, how we will get there. So the #1 initiative that we are taking here is reducing the discounting that we are giving to this customer from the services. We used to discount the loss services. And services is a human capital business. So we kind of discounted that much. So we implemented last year a new discount policy that we are aiming to have an impact here on reducing the discount and obviously increasing the bill rate to our customer. The 7 initiatives that we are taking here, as I said earlier, we are being considered as the premium services organization in the world when it comes to the knowledge of the product life cycle management processes. So we would like to profit charge our premium price for those people.

And I would like also to highlight -- to some of you, we haven't increased our pricing of all people of the [indiscernible] for the last 5 to 7 years. You have some countries like China, where you had the 7% to 10% inflation every year. Our pricing didn't--we didn't increase our pricing for the last 5 years. So we would like start to have much there our pricing strategy that will contribute, I will say, to the improvement of the margin of the services. So the impact of that discounting strategy and pricing strategy in fiscal year '12, we are looking for 2% impact. And if you look here, it's cumulative here, okay? So we are looking for fiscal year '15 to have an impact of 6.5% over the next 4 years by having different pricing strategy and discounting strategy.

And then, of course, for strategy out here back, I will say to the previous management. We invested in a GF Academy. The GF Academy is a hiring junior people from -- out from university or 1-year, 2-year experience in the services and train the people within PTC GF Academy and send them back there, looking out for the customer and build that. So by doing that, what we are trying to do, we are trying to change the cost for any that we have in new services. We were, I will say, having an organization with reverse shift of the -- a lot of experienced people not being charged at the right level for the customers. So what we are trying to do? We are trying to hire enough junior people for the next couple of years in order to share the shape of that pyramid and lower the cost through our -- of our organization. So it worked so far very well. And the big improvement last year is mainly due, I will say, to the GF Academy within services organization.

And finally here, around the mix between training, as I said earlier, the educational services and consulting. You cannot see outright tremendous impact here. The most important impact in terms of margin will probably happen beyond 2015 because beyond 2015, we said that for the back 9, that strategy, we would start to have a partner ecosystem that will help us to reduce the amount of consulting and giving more so the partners by reducing the consulting and increasing PTC negotiating high-margin services. It will help us as well to improve, I will say, the overall margin of the services organization. For 2012, we are looking to 0.2 to 0.5 by 2015, but this will help us beyond 2015 in terms of margin, I would say, expansion or to sustain also the 15% margin that we are looking to achieve by fiscal year '15.

Looking now to what we are calling the low delivery cost. That means all the cost related to the management of our services organization related as I said earlier of the R&D, the sales organization, meaning the services responsible to sell services. So we are -- what we are looking to do here, we are looking to leverage the scale. So starting from this year, we will increase our revenue in the services and we will not add any management infrastructure in the organization or people to manage the services. So for the next 3 years or 4 years, we are planning to deflect the cost related to the management of the services and add only valuable people that offer the growth of the services. By doing that, every dollar that we bring in will come almost, I would say, $1 billion of margin that we are trying to, I will say, achieve. And actually, the big part of that reorganization changes and the restructuring we did last year. So really, we'll start to have the organization this year to run, I will say, full speed. And as I said earlier, during the last 6 quarters, you've already seen, I will say, a tremendous improvement of the margin due, I will say, to the change that we made in the organization last year. And as we continue to do in the organization for this year and the following years.

And the certain thing really important here is producing again. When you look at the field within the services organization, we invested in what we are calling client manager. The client managers are responsible to support salespeople to good value proposition. When the customer has a need, we have the salespeople that are engaged with the customer. And the customer is buying software, but they will have to buy the deployment, our customer software. So we have client manager responsible to sell, I would say, the services offering to the customer. And what we are planning to do as well? We are not planning to add more. We would like the people to really increase their level of productivity. And this is where our segment and our solution strategy will have a tremendous impact because when you will be in the position to be able to sell a highly repeatable solutions from the sales perspective and from the deployment perspective, you will need less experts to be able to write, I would say, the specifics for the customer. We can move to a much more, I would say, automated, I would say, system to be able to relieve sections of work of the customer.

The second thing really important is around the system automation. We would like to move from the fully auto manual field operation support to a much more, I will say, automated organization, implementing systems and so on within the organization that will help us also again some productivity around making our operation[ph]organization.

Shifting gears now and moving to the back 9 strategy. Around the back 9 strategy, I would be mainly focused along the services partner, the product. On the services partner program, here is the challenge that we are absolutely to handle. So the service that we need to handle, we need from fiscal year '11 to fiscal year '15 to create, I would say, a $300 million ecosystem of delivery capacity in the market. That $300 million is the booking or the revenue that we would like our partners -- service partners to lead in terms of selling to the customers and to lead in terms of delivery capacity. At PTC Global Services, we would like to move from $270 million to $400 million by 2015. So you can start to see, I would say, that the [indiscernible] controlled growth of the services to enable, I would say, and to help the company mix software, management and services while we are hiring and we are training and scaling to start, I would say, the partner ecosystem.

So let me explain why we would like you to really boost up enough confidence in you in our ability on how to boost up that ecosystem. I believe we are well positioned in an already unique situation today. First of all, let me explain to you before, I will say, the new partner program, how we used to handle it and how it is today. So before, the partner ecosystem or the system integrated strategy used to belong to the salespeople. And how the salesperson [indiscernible] into the [indiscernible], I would say before taking the job, my sole interest was to find a partner that can help me with software leads. But I was not that much interested or I didn't have the capability to support, I would say, a partner and help them to boost up our services delivery capacity. And I believe this is a tremendous change. And the services organization was viewing the partners more like competitor. So today, it's going to be different. The services partner strategy is looking, I would say, completely into growth of the services organization. So my services organization today is responsible for direct services business and for the indirect services business. And all the organization is the incentive to support the partner strategy and to help the partner to sell services and help them scale capability around deploying all solutions. So this is, I will say, a very important challenge.

The other very important challenge as well is back to the premium services organization. Today, we do have the IT. As I said earlier, we have a tremendous outfit within PTC. Services organization is our comprehensive organization and our capability to deploy successfully the solution. So the partners that would like to boost up, I would say, highly profitable services revenue stream. And today, we are capable to provide them all that IT almost for free in exchange with the commitment from the partners to invest in boosting capacity. So we will try to make it much more easier and much more profitable for any partner in the market to partner with PTC.

The other thing really important. I was talking about our client managers that's been within the services organization. We have people responsible to sell services. The people this year would share the compensation plan. They are not anymore composing only on the direct services booking. They have 2 goals. They have a direct services booking goal and they have a partner-lead booking dedicated services goal. But this stuff will need to have an impact, I will say, in the level of booking that we are driving through our partners across all the geo.

So why this program, I will say, will work today in comparison of the years before? I would say the #1 -- also a key driver here is the market abundance. We've never been positioned like we are today. If I'm looking for the last year, last year was a record year in terms of the services booking for PTC Global Services. We couldn't cover all the opportunities in the market. So the partners then have to invest. That's not, I will say, part in order to sell services. The abundance is there and we can redirect some our opportunities directly to the partners. So this is a very important, I would say, piece of structure to our partners. The [indiscernible] point is we are really focused around, enabling the partners to boost up services capacity. And we are measured in making sure that we are increasing the number of people that are trained around PTC deployment services so that they can support our business across all the geos.

And finally, as I said earlier, we would like to give to our partner and treat them as always on in the field and give them access to our training facilities. The way we train our consultants, we are giving the opportunity to the partners to use the same materials and potentially with some of the partners to use the same facilities and the same infrastructure that we have within PTC services organization.

So here, I have a couple of quotes from different system integers [ph]. We have Accenture. It's a well-known company. They have the practice lead that they're focused around the PLM. And you can see here that they are -- they can see the difference in terms of the program. The program today is much more mature and much more basic in the students to help the partners, I would say, to scale their capability.

The second quote here is from a company called PCO Innovation. The company is fully dedicated around the PLM services integration. They do only PDM and PLM and moving CDF [ph] supporting all the PLM provider in the market. So they have 100 people trained on PTC technology and really focused on delivering services -- PTC-related services to our customers. They are based in France and based in Canada.

The second one here is around is around ITC Infotech. ITC is a dedicated, I would say, PTC partner. We are leveraging ITC as our Indian solution center for many years. And ITC has 350 consultants trained around PTC and already built and helping back to deploy the solutions.

The last one here is around Tab Gemini [ph]. And this one here is a very interesting quote here because what we did last year, we wanted to try a different business model. Around the retail and consumer, it's a new market for us. We are talking about the retail and consumer in a new market. So we wanted to do what is right to do the first time, I would say, for that market and [indiscernible] to do everything direct and then scale down and moving to the partners. So we boost up an organization that is really focused last year in making sure that there can be incentive in driving the services to the partners and services through PTC. And we kept the number of consultants that they have. And it has produced, I will say, a lot of benefits because we are booking today 50% of the revenues coming around the weekend consumer. It's through the partners, and 50% of the services revenue is through PTC direct. So the strategy is working, and we are hoping moving forward to see more, I will say, success around the program.

This is my last part of the presentation, and I will turn it now to Jeff. And I will be more than happy, I will say, to answer any questions that you might have, I will say, around the services. Okay?

Jeffrey D. Glidden

Thank you, Mark. Now I'll wrap it up. It's really the financial data and back to questions following meeting. Can you hear me now? All right, here we go. We'll just do a quick summary and review of Q1, the outlook for Q2 and the rest of the fiscal year, and then we'll talk a little bit more about the 2015 financial target.

We had a great quarter. I think everyone has seen the data. Overall, revenue growth was 20% in total, about 12% organic. And we'll do a little bit more, carving that back as we go forward. Again, it's a high end of the guidance. License revenue was up 18%, very, very strong on the Enterprise side. That was up more than 40%. And essentially, on the Desktop side, it was largely flat year-over-year, really reflecting a very tough compare in the Q1 of 2011. Operating margin increased nicely. It's really reflecting the leverage in the software model, with EPS up 59% to $0.35 a share, well over the high end of our guidance. And just be reminded that in the first quarter and for this year, we're now looking at slightly higher tax rate of 25% versus 24%. That's really a function of the R&D tax credit not being extended. It expired at the end of the year. We have no present visibility as to whether that will be extended or not, but 25% tax rate.

Really just looking at some of the key metrics in terms of revenue, and I'll just move from the top left and go clockwise. Across the regions, we had very good performance, with really our strongest performance coming out of Europe with growth on a constant currency basis 22%, 12% in Asia-Pacific and 13% -- I'm sorry, in Americas, with 17% Asia-Pac, and Japan also grew nicely, clearly reflecting the Enterprise business. Our direct revenues were up significantly 21% as compared to the Channel, which also grew and was up 11%.

On a product line basis, again, we've talked about this, the Enterprise is right now about 48% of our business, grew very nicely. And this is all in revenue, not just licensed. So it's licensed maintenance and service. We would expect that these curves trough, that is our enterprise business, I would say in Q2, we'd expect our Enterprise business to be slightly larger than our Desktop and affiliate function of growth within that business.

Looking at the lines of business, I think really Bob and Mark did a great job articulating both the services and the license revenue fees. And I want to really just reiterate that 48% of our revenue in the quarter was maintenance. This is really reflective of the tremendous value that we deliver to customers and, I think, the great program that Tony DiBona leads with his team. And just to give a bit of a deeper dive on this, this is our revenue in the last, really, 5 quarters on maintenance on a consolidated GAAP basis. We did $560 million in revenue last year. I think this year, Tony, you'll crack $600 million. So that's terrific. Q1, $155 million. This does include acquired revenue. So what we've done is back that out just so we get year-over-year comparison. And you'll see the organic PTC business was $548 million last year, $146 million in the quarter. So very consistent growth in this space business on an organic basis. And you can see last year, we grew 10% for the year, 11% in the quarter. We've also given to you in constant currency. And this probably reflects probably the key metric in how we're doing. And you'll see that we grew from -- moved from small single digits to upper single digits, 8% for the year, 9% for Q4 and 9% again in Q1. So I think we've done a great job of really providing value to our customers through our maintenance program. Maintenance attach rates are in the high 90s. Maintenance renewal rate are in the upper -- in the mid 90s. Tony and his team have very, very solid programs in terms of recapture programs in premium services as well. And all of that is reflective and really the total feet that are out there. And again, we've included the total activity but with a particular focus on the organic Creo and Windchill fees. And when you look at the growth year-over-year, on a tremendous and a large install base, our seats at Creo grew 8% while our seats on the PLM side on Windchill actually grew 22%. So all metrics have been very, very strong. It's probably been a key driver for are success over the last 18 months.

Going a little deeper into the quarter and just providing the actual data at the top for the quarter, the $319.8 million in revenue versus $266 million and a summary of the P&L moving down. What I really wanted to focus on is the improvement in the operating model. I think this is not in the slide deck, but all the data is clearly out on our website. If you look at it, we had productivity improvement in all areas. So gross margins improved by 160 basis points while operating margins improved by 350. That gets us to $0.05 for the year, fundamentally driving productivity and efficiency in really all areas. We've kind of talked about sales, marketing, research, et cetera. I just -- suffice to say, we continue to make investments in these areas. At the same time, we're driving productivity in higher levels of performance in all of these areas.

Looking ahead, really, the -- we've got a long history of growth and profitability. We're presently outlooking well over $1.3 billion in revenue for the year with continued growth in operating margins, now targeting 20% for the year.

If we look at the guidance that we provided, really about 10 days ago, it gives you Q2 plus the full year and the guidance for the quarter, we provided $305 million in revenue to $320 million. But really, it really reflects in license revenue from 80 to 95. And I would just make one other comment. We would expect in the quarter, on licensed, we're seeing very, very strong continued growth in the Enterprise side, really heavily driven by PLM given the tough compare year-over-year through Q2 of a year ago. I would expect that our Desktop business would be down slightly from a year ago, notwithstanding we think the long-term trend in opportunity on that Desktop side is in the 5% to 8% growth rate.

In terms of EPS, we've guided 32 to 36 for the quarter. And for the year, we've increased our guidance and that's driven really by operating margins from about 18.5% to 20%. And EPS from essentially $1.50 a share to the midpoint of $1.60 a share. Then I reiterated that this reflects really a headwind and currency this year. The euro, currently, in this outlook is $1.30, down from our prior guidance at the end of fiscal year '11, which was $1.40 to the euro.

We also announced that we are restructuring and realigning our business really to support this segment to eliminate redundancies and to really drive operating efficiencies. We'll complete this activity, and it's largely complete today as we speak. We'll complete this in Q2. This will reduce our employment by about 3% or about 190 people on a worldwide basis, and we will take a restructuring charge of about $20 million in the quarter. The benefit that we would say -- would expect to begin accruing in the third quarter will be about $5 million a quarter. So it's a difficult thing, sometimes to go through this, but we looked at it and said, given the opportunity ahead of us, very, very important that we check spending. We've been doing that for some time, and this is a piece of that puzzle as well.

Just turning to the currency headwind that we have this year, we provided this guidance before. About $0.10 change in the euro can have a significant effect on our business. About 25% to 30% of our business is denominated as revenue, dominated in euro as is expenses. So we have something of a natural hedge, but it's not a perfect hedge. And so this kind of a shift, as we've cited here, could effect on an annualized basis a 10% change in the dollar to the euro, could take about $30 million to $35 million off of revenue and could reduce EPS by $0.08 to $0.10. So this is really a key piece of the puzzle for us to understand our guidance for the fiscal year '12. Basically, we provided this bridge and we began our outlook. The midpoint of our outlook at the beginning of the fiscal year was that we would expect to do $1,335,000,000 in revenue. We actually over performed in Q1. So very good. The green bar shows you the impact of that. The other side is really the headwinds that we have in currency. So in Q1, we had a negative currency effect of about $5 million, presently at $1.30 to the euro for the balance of the fiscal year. So this would be Q2, 3 and 4. That takes another $20 million off. We've over performed and really increased our forecast on the services side. So that bridges us to $1,320,000,000 in terms of midpoint of guidance for the year.

Then a similar bridge on EPS. We began the year with a midpoint guidance of about $1.50. We over performed in Q1. We just talked about the restructuring. The impact of the $10 million that we all saved in Q3 and Q4 adds about $0.07 per share. Currency for the balance of the year takes about $0.06 off. And the change in the tax rate from 24% to 25% takes another $0.02 off. And then other programs that we've already -- are underway in terms of saving and checking spending adds a $0.06 a share back, giving us a pretty clear and clean bridge through the current guidance of $1.60.

Probably, the key question that I get meeting with investors is still, "How do you get confidence about the back half of the year? How do we know that we're going to get to these numbers?" And I think we've had a good discussion on margin expansion, productivity in sales and so forth. And I wanted to parse just a little bit more. And we've really looked at last year. I think we've had some dialogue on the back half and the front half of last year as a tale of two halves. This is the total revenue as reported by the company. It's $1,170,000,000 last year, midpoint of our guidance to $1,320,000,000. And to really understand this, it's very important to just basically back out the effect of the acquisition, which was basically integrity -- the MKS Integrity deal along with Ford CF [ph] last year. So you come -- you'll recall that we recognized about $30 million worth of revenue last year from acquisition. So organically, our organic revenue was $1,140,000,000. Our guidance and outlook for this year for those acquired entities is $90 million to $100 million. So it's basically backed out $95 million. And you'd see our organic growth is growing from one -- is growing essentially year-over-year by about $40 million. That's the kind of number that Bob and I talk about in terms of driving and having to deliver incremental revenue. The outlook, just a few minutes ago, is the impact this year of that capacity addition we expect it will be $20 million to $30 million and that's largely in the back half of the year. In addition, that capacity additions that we have this year sets us up for '13. So just comparing year-over-year performance last year, organically, to this year's outlook, I think, compares very favorably. And in particular, with the additional capacity as Bob has articulated, I think we feel very good about this.

We've also provided the year-over-year growth rate and done this also on constant currency. So last year, the organic growth rate on license was 12%, essentially for the year. This year, we're out looking 12% again, organically. Last year, we had a little bit of a tailwind in currency. This year, we have a headwind. So really just adjusting for FX on a year-over-year organic currency adjusted license growth. Last year, 11%. This year, we're looking for 14% and. When you look at the back half, 13% last year versus 17%, that's really got to be driven by a combination of additional sales capacity and the full year impact of the new products that were delivered last year.

So I hope this bridge helps. You understand how we think about our business and how we gain confidence in achieving both the current quarter, the next quarter and the back half.

In summary, we've talked -- Jim used the slide at the beginning, really just talking about how we move from 20% operating margin, which is our outlook in this year, to 25% to 26%. I think as we've articulated, about half of that improvement comes from gross margin. I think Mark did a great job just articulating how we improved both the services margin and the services ecosystem that drives that. The other piece of the puzzle is really around sales productivity and sales capacity, where we're looking at essentially 100 to 200 basis point improvement in productivity in the sales team year-over-year as we go forward.

We've talked about the drivers, clearly adding capacity, adding productivity, very, very important, along with the strategic value that will be delivered particularly around the segment and solutions that we deliver going forward.

So as I bring Jim up, I just -- I hope this has been helpful. I think you'll see that were more data and metric driven than we've ever been. I think it's extremely helpful for us in managing the business and really for you in understanding the business.

So with this, I'll turn it over to Jim for some closing remarks.

James E. Heppelmann

Great. Thanks, Jeff. So just one closing side before we move into the final Q&A here. Just to sort of reiterate the points I made earlier in my executive summary that we feel like we're in a pretty good place. We're looking at what we feel is a compelling growth opportunity. And we tried in the first part of the agenda to give you some insight into that. It's more than Desktop and Enterprise, so really in 5 slightly different but very much interconnected businesses. We have great solutions in those businesses. 4 of the 5 segments in which we compete are strong growth opportunities. And we characterized the CAD business as a moderate growth opportunity. The ability to enter a customer base through our customer from 5 different doors and then expand as we cross-sell the platform means that we have opportunities which just go on for years and years and years. The PLM opportunity at a Hyundai-type account is a multiyear opportunity. And then somewhere in Year 2 of PLM, we turned it into an ALM opportunity and began what will be a multiyear ALM opportunity at Hyundai. And now we're beginning to have some conversations about who do we help you with SLM and your dealer network. And that's something that's probably we only to get started for 1 year or so, but that would be a 3 to 5-year sort of opportunity to proliferate that. So I think, you see, we can take a single account now and really turn it into a diamond, if you will, that continues to provide a lot of revenue to us, really for a lot of years as we continue to expand the footprint and the impact of PTC and our technology and our expertise on the business.

So at the same time, I think we have really a tremendous opportunity to crank up our operating margin. You basically heard from a team of management here today that we think we should have upper 20s operating margin. We think we can have upper 20s operating margin, and we're going to get upper 20s operating margin. It doesn't happen instantly. So we've kind of shown you the concept of some shorter-term operational improvement. And we have a pretty good track record in the last quarter -- the last couple of quarters of delivering on some of those operational improvement. And we've tried to give you some insight into some of the strategic changes because at the end of the day, if you want a company that's more profitable, we simply have to get more repeatable. And we've shown you an elaborate peek at how we get more repeatable but we simply have to do the same things in higher volume. And we're committed to do that by building tighter solution and then going out and making sure we have the efficiency and the sales and the services part of the business that will really deliver much greater operating margins than we have today.

So I think we're in a great place. It's the perfect place to be at the beginning of what could be a very long process of creating really a lot of shareholder value.

So with that, I want to thank you, all, for sitting through a tremendous amount of information here today. Hopefully, we're all still friends after all these. I didn't get harassed too bad, about the Super Bowl. I appreciate that. And so I would like to invite the PTC management team up here. And we can take questions on any subject. Obviously, we should try to make sure you don't have any open topics in the sales and services and finance information that was newly presented here, but if you have some pressing issues that we didn't get to before lunch, feel free there as well.

Unknown Executive

Sterling?

Sterling P. Auty - JP Morgan Chase & Co, Research Division

I'd like to kick off questions on sales. There was a lot of discussion around sales capacity, but I'm kind of curious how you measure sales productivity and how has that trended especially as you layer down. You talked about you were pleased with the new rep production in the quarter, but how are you actually, from a metric standpoint, looking at it? And how is that trending? And what are you looking for that to do over the course in that?

Unknown Executive

That's a great question, Sterling. I think that for me, the answer is that draw relationship of the quota-carrying capacity through the license revenue that we do. In its simplest form, that's what I think the math is to be based on how many quota-carrying salespeople do we have? And how much license revenue is coming in? That's at the core of that analysis. But then you can think of the additional support that the quota-carrying sales capacity gets, technical people, inside sales, overlays. And so maybe that gives you another dimension of how we're doing from a productivity standpoint. But I think, again, getting to the core of productivity starts with the revenue that we bring in, the license revenue we bring in based on the number of quota-carrying salespeople that we have.

Unknown Executive

And Sterling, if I can just add. If you look at last year, if the graph is in the book, when you look at basically flat headcount year-over-year last year versus the prior year when we grew our license revenue from 296 to 340, that's productivity of the existing team. The productivity has been building. It's been improving. It's the function of both the leadership as well as the additional products. And we've made very modest assumptions about productivity improvement right now in the sales team. I think that upside is really saying the most important thing we can do is add capacity to give us that upside. So I think the team has done a really nice job both on the direct capacity but also in terms of efficiency and effectiveness of those teams by really redeploying people in this product area.

Unknown Executive

Yes, maybe, Sterling, one more comment. Tim used the phrase, mega deals, earlier. That's the trend that continues to increase over time. I think we're going to see more and more mega deals. And so obviously, that's going to contribute to this increase in sales rep productivity still.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

A question about your margin objectives. Would it be fair to say that today, the CAD business is roughly a 35% to 40% operating margin business, referring, for example, from what you're peers see in their businesses of comparable size? And that to get to your 2015 objective, you would need the PLM business to get to about a 20% or so operating margin, where today's it's perhaps high-single digit, low-double digit?

Unknown Executive

Let me take that. First, we don't disclose those kind of numbers. I think Jim has been very clear -- really talked the measure of that level. We have a very profitable Desktop, Creo and CAD business. We want to grow that business and maintain that business. But what we're really driving is possibility in the new businesses. So the story really is, fundamentally, we've got good growth there and drive efficiency and profitability. So we don't have those specifics. And so I think directionally, you understand the model is where we are and where we go.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Just a quick follow-up to Mark. If we take your data at face value. That is the number of reps and the revenues for services, would it be fair to say you're doing about $200,000 a year for service professional? And if you had been getting the better pricing and less discounting and so forth that you have talked a lot, where do you think that revenue generation per year for service pro where it might have been versus what it is today?

Unknown Executive

That's a follow-up question. We don't track record of services for that for the time being, okay? We give you the projection, I will say, by 2015 that we would like to get around $400 million in total services. Last quarter, as you could see, we grew by 26%. And within 26%, we have the organic growth and you have also the acquisitions, you have [indiscernible] and you have the fixed. Even though in reality, as I said before, we are really in the services organization, leading the kind of market abundance today. So if we go out of services that PTC is taking directly, we know that the services related to PTC technology could be worth $1 profit and $3 of the services. So from the growth perspective, I cannot give you any numbers. But today, it's highly dependent of the number of people that you can hire within the organization and to be able to pull services. So this is the way we want. We really think that we are uniquely positioned today. We've got abundance that we can bring back to the partner ecosystem in. And they can take all services that we cannot support back. People who would like to have much better, they can manage and control growth on the services. So from a gross perspective, the market is really there.

James E. Heppelmann

Yes. Can I provide a little color on both of those questions from Jay? Your first question, Jay, I think we said is directionally correct, but we don't necessarily want to confirm or deny the precise numbers. But you basically suggested that our PLM business should grow to 20% margins by FY '15. And it's a $500 million business. I think that expecting a $500 million Enterprise business to have 20% margin, it will be a lot bigger than $500 million in that timeframe. That's not absurd at all. It absolutely should have 20% type margin. So I think you're directionally correct, and I think that's directionally doable. And I think we have a commitment, not that we better understand it to go make that happen, we understand kind of what needs to happen and so forth. So if I could give you a second perspective on your question for Mark, we've gone through a fundamental mind shift at PTC as it relates to services. We've gone from a "grow the hell out of it" mindset to a "grow the hell out of the margins" mindset. What that means, for example, is that Mark, as you saw in his chart, is giving most of the growth away. We're asking -- we're basically suggesting that between now and 2015, the organic piece of the business, the PTC piece, would grow about 50% over that timeframe, not annually but in total. And the partner piece would grow from 60, a net charge 300, which is 500%. So we're getting 90%, let's say, of the growth to the partner. That allows us to get a lot more selective. We're not going to take deals that aren't priced right. We're not going to take deals where the customer won't pay a fair price for the world's best PLM services company. We're going to be able to operate the business in a profit mode rather than a growth mode. I think you all know that when you're growing a service business fast, you're bringing in so many new people, training and there's always such a mass of basically unutilized capacity that's in training. It's hard to have high margins. But we're going to slow our own grow down. That allows us to get a lot more efficient on the overhead and among the new people we're training that aren't yet productive and so forth. And I think that this -- still, the key to it all is this abundance, which is suddenly there's far more revenue than we actually want in the business than we would operate differently.

Unknown Analyst

[indiscernible]

Unknown Executive

Yes. To make sure that everyone hears the question here. It's, what are the level of investments that we are already putting in place here in order to scale also the partner ecosystem? We have -- from of the investments, what -- as I said earlier in my presentation, what we did actually. We used to have before 2 different partner organizations, one under the sales organization responsible for the system integers and they've been mainly geared towards directing lead software at least. And the other part of the partner organization used to be in the sales organization around services partners. It's medium Tier 2, I would say, type of companies. So we really combined both. So today, to be able to get our piece of $300 million from the people performance effective, we think that we have the program and the people. We might need some certain level of investment that we are talking about here but that aren't tremendous investment to enable the partners to get trained. You have a partner that wants to train 100 consultants. So a fully chartered partner for the training should give the partner the IT for free? Should we have some resources to go to partners and to cut deals? So today, to answer the question, I don't feel that we need any tremendous investments to be able scale this capacity. We might need when we reach a certain level or too short of a number of partners in the market there. And had -- if you heard me also correctly, what we are trying to do? We are also trying to use PTC direct services infrastructure and management infrastructure to support also the partner. So around scoping activity, for example. Before, we used to have an organization in the partner organization that repaired simply the partners from finding the partners to helping the partners, to scope and to cut deals. What we did, we said we will have one single organization. So the client manager and salesperson are responsible for servicing in the field. Today, his responsible to do both. To quote a direct services opportunity by scoping and [indiscernible]. And also when it's indirect, he is also the same person responsible to support the partner to scope and to prod the opportunities and then have them to sell. So today, we don't feel that we need a lot of investments. We would like to level what we have and then we will see 2 or 3 years from now.

James E. Heppelmann

Yes. Can I put another spin on that one, too? Just a different perspective. I think that's a legitimate question, that face value of, "can PTC go build a partner ecosystem in that size and that timeframe?" Okay. Here's a different way to look at it. You’re all services partners. I have, in the next 4 years, an incremental $240 million of revenue to give you guys. Who wants it? You'd all raise your hand and say, "I like a piece of that." The thing that we've done is fundamentally different as we took the conflict out of our own system. We used to say a system integrator is Bob's friend but Mark's enemy. And therefore, Mark was essentially competing with his partner after actually to take the revenue from them. Bob was trying to sell with the partner, but the partner will get frustrated because they had no support from Mark's organization. So they really need to enable them. We need to fundamentally treat a services partner like we treat an internal services guy. That's what we do on the sales side. A reseller, a sales rep, it doesn't make a big difference to me. They're both part of the distribution channel. We support them equally. So Mark will have to support the services partners, but they're also willing to make some investment. If he needs to provide them training, he can call it a class and charge to come to the class. And most of them are more than happy to make that investment to get a piece of the sort of ecosystem of opportunity that were created for them. So I think we need to manage it well. I don't think it's undoable at all. I think it's actually pretty straightforward if we don't do anything unnatural, like create an internal conflict of the type we had.

Unknown Analyst

Okay, great. And then if I have a quick question for Bob. How do you manage -- it's a very difficult question. How do you manage for visibility and consistency? And is that a trade-off between that and the growth?

Robert Ranaldi

Can you re-share it?

Unknown Analyst

How do you manage your sales organization for more of increased visibility and consistency? And is that a trade-off between those 2 factors versus growth?

Robert Ranaldi

Yes. I think I understand the question right, which is how do we get visibility within the sales organization to certain things that they're doing?

Unknown Executive

Salesforce.com.

Robert Ranaldi

Salesforce.com. I thought [indiscernible] I just want to make -- looking back to make sure. So we're going to go live with Salesforce.com. Hopefully, I'm answering your question that's going to go live in May to be rolled out globally. And I couldn't be more excited about the fact that we're going to do away with Excel spreadsheet and this ambiguity around where we are with forecast that gets modeled in all kinds of different formats to include Excel and writing on the back of a bar napkin and things like that. We're going to have a system that is the single source of truth. And we will have the entire sales organization on that system for forecasting purposes as part of Phase I when we go live in May.

James E. Heppelmann

Yes. Maybe, again, some spin on that. Bob does a pretty good job forecasting right now, whether it's a -- it's a torturous process that burns a lot of cycle from a lot of people. And we really think there's an opportunity to use a better system and to actually wait less time, giving Bob the forecast data he needs, thereby allowing more time to sell. So I think this is a case of us sort of eating our own dog food, so to speak, about using information so as to transform processes to create great productivity and then just -- we're doing it ourselves.

Unknown Analyst

[indiscernible]

Unknown Executive

I think it's got to be -- when you implement a technology like Salesforce.com, it's probably a combination of both, the stick and the carrot. So we're looking at -- we figured out what the stick is, which is you're not actually going to get paid unless your business is in Salesforce.com. We've got that piece figured out, but I think we ought to look at maybe some carrots that we could dangle a little bit there, too, but the salespeople are incented to make sure that they're getting this information loaded into Salesforce.com.

Unknown Analyst

[indiscernible]

Unknown Executive

Yes. I think it's a great point. Now I think it's harder in some cases to go acquire a new customer, obviously, than it is actually to do repeat business with an existing customers. So you can make an argument to say that, "Maybe, we ought to pay more commissions as we acquire new customers." I do think that the system is going to gives us better visibility to things like that so that we can make, as Jeff said earlier, better database decisions, base decisions on how we manage certain things like that, like compensation.

Unknown Analyst

I just had a question about the 2015 revenue growth target. The 11% to 13% rate looks like a nice little pick-up from the historical 10% to 11% organic constant currency rate that you kind of posted the last couple of years. Just wondering what the key driver behind this sort of resetting to a higher level might be. Is it more the changes to the sales force capacity and the efficiency in that organization? Or do you see it driven more by the emerging growth businesses?

Unknown Executive

Yes. I mean, Jeff, you can comment, too. I think you nailed it. We have pretty interesting promotions. We showed you some of them are extremely interesting promotions. We're adding a lot of capacity, but we're not moving the needle much. 11% to 13% on a go-forward basis is not in a different ballpark than was FY '11 and then is our forecast for FY '12. So we're sort of saying, "steady as you go is organic growth more or less." But we're adding a lot of capacity. When Bob showed the slide, by the way, he misspoke. So I'll correct that for him. Earlier, what he was trying to tell you is the capacity we're putting in here in FY '12 is already the capacity we need for FY '13. So we're sort of catching up from being upside down and getting a lap ahead. You said FY '11 by the way. He meant FY '13. But anyway, I think we're doing a good job of putting in capacity. We're just being efficient about it. If I could come back to that sales productivity discussion, Bob said this, there's 2 ways to measure productivity: How productive is the rep? And how productive is the organization? And at PTC right now, you get pretty different answers. Our reps aren't bad. But for every rep, we got 4 guys along for the ride who haven't sold anything. So at the organizational level, that's what do we spend on sales as a percent of revenue. It's 5 points too high. That's the problem. So what we’re trying to do here is basically deal with these ratios, ratios of subject matter experts, ratios of managers, ratios of overlay reps, by sort of fixing the overhead and bleeding in more quota carrying reps. And that will allow us, we think, to maintain or slightly improve productivity at the rep level but make a dramatic change in productivity of the sales organization, the 1,250 people who are in that sales and marketing number, sales people then number.

Ross MacMillan - Jefferies & Company, Inc., Research Division

One for Mark, it seems like the biggest chunk of gross margin improvement in services is that pricing discount element. And you showed numbers where your gross margins have historically been quite low for services. So I'm curious. Given that there's a multiplier effect, typically, I don't know what it is, 3x the service dollar to one license. Hasn't that sort of, I don't know, discounted pricing you've been offering on service has been a competitive advantage, like you sell Windchill? So how do you know that when you start to push back and say, "We're kind of garner better pricing or less discount" that, that might not have a knock-on effect to the consumption of Windchill?

Unknown Executive

I think it's a pretty good question. But let's look how it is today. So today, we don't have that many partners capable to take all that revenue. So we don't have that much competition in the market today, okay. And your question here is tomorrow, we are increasing our capacity around the partners, increasing the partner ecosystem and increasing the pricing. It might [indiscernible] of services organization being a situation where we might not be competing anymore. So I would say from the customer perspective, as I said earlier, by default, we know that the customer would like to stay very close to PTC roadmap and PTC product synergy. And for the customer to stay that close, the insurance will then -- they wanted us to feel that slope. It's really having some direct service people to be involved, I would say, in the deployment. And really, where we'd like to be in, like, 2015? We would like to move from half of the big engagements [indiscernible] fixed price with a lot of freed from production to work to actually focus the organization around what is really important to the company and highly strategic and some way we can expect, I would say, the most important value to PTC. And then you were the partner do all the rest. And this is how SAP is doing that, which is how Oracle is doing that today. So we -- I don't think that the pricing would put us in a situation where we might basically to lose some business and we might see a decline in our services. But the business is there, and I believe the value proposition is very strong. We know the fact that it's really important. 90% of our consulting today is around PLM. So we haven't even started to scale the organization around the 3 other segments, excluding the Creo part, the SLM and the ALM. We had resources there, but as you saw, like in the presentation earlier, there is tremendous [indiscernible] involved there that will enable us somehow to leverage also the segment and the solutions to help to keep our rates high and to have basically more people, I will say, helping there to help us grow our sales and revenue [indiscernible]. I don't know if I've answered.

James E. Heppelmann

Let me add some more color. If you go back 6 quarters -- 6 quarters ago, we were guilty of typically overdiscounting maintenance and overdiscounting services to preserve license revenue. And 6 quarters ago, on the maintenance side, we said, "Stop. Enough. We're not going do it. It's outlawed. Forbidden. You cannot discount this maintenance beyond basically what our policy is." And this is all within the constraints of the accounting role because I got the [indiscernible]. But what happened is some of the sales guys said, "We're going to lose some deals." And we said, "Or the customer is going pay more." And what happened, 99.99% of the time, is the customers paid more. And so as it comes to services, right now, Mark has the ultimate premium PLM consulting organization in the world, and his prices are low. They're really low. I mean, we could damn near double them. And I don't think we do that all at once, but they're low. So what we definitely can do is say, "We're not going to discount like that. If you want the cheapest service provider around, we have this Indian partner, for example, who probably can take that deal at rates we can't touch." But in a situation where there's an abundance of opportunity, we're happy to say no to that one. Let somebody else have it. Or let our partner do that business to lower the overall cost of the offering in a sense that we don't lose it to Siemens or to sellers [ph] or something like that. So I just think we're in a strong position where our reputation in the market is getting stronger and stronger and stronger, and it gives us more and more backbone to push back on customers who say, "I need a cheaper price or else." In some cases, we will call your bluff because we think we have a much better solution and we're not going to take that price. So it worked pretty well on the maintenance side and for a couple of quarters had pretty good results on the services side.

Ross MacMillan - Jefferies & Company, Inc., Research Division

And then just a follow-up on -- for Bob. Just as you think about that second phase of "sales and marketing ratio improvement," it strikes me that the first piece is about getting a lot of the overlay and extra cost out and the next piece is much more about added productivity or larger deals or combination of both. Can you walk us through some more kind of color and sort of what happened?

Robert Ranaldi

Yes. I think that's a good point, Ross. I think, again, the use of terminology, back 9, a lot of the plants we have is related to the sales organization, the direct relationship to the maturing and the evolution of these solutions. There's a tight coupling there as the solutions get more mature, as we get more references around the solution. There's things that we can do within the sales organization that aren't going to allow us to take cost out. I believe that wholeheartedly. So some of this stuff, it may not be crystal clear to you in terms of what the back 9 looks like for sales with organizational optimization because, again, you have this sort of dependency around the maturing of the solutions within the segment. But I think there's a lot of upside there. I really do. I think that, as Jim has said, we are very effective in winning business. But we're oftentimes not efficient in winning business. We want to be both. We want to be effective and efficient at the same time. And it's not for today's conversation, but I could tell you that there's a lot of room for efficiency improvement in terms of us going and securing business. But again, there's this coupling with maturing of the solutions.

James E. Heppelmann

In fact, in other places, there's been a big change in attitude of the management team. We used to not really even worry about efficiency. We had what some people jokingly call a "win at all cost" mentality. And we're trying to win at the right cost going forward. So we're asking Bob to think about not just how do you win more than your fair share, but how do you do it without dragging along too much overhead. And that's the conversation that we didn't have a lot at PTC in the last couple of decades, but we're starting to have it a lot, sort of a new mentality in this day forward and so forth. And we're finding plenty of leverage to pull, ratios here and there and overlays and so forth. When Bob talked about primary quota-carrying reps and these other reps, there was a point when Bob first took over the job where 40% of the rep count of the company was overlay. So I said, "That means we have 40% of our reps selling to 60% of our reps who are selling to the customers. That doesn't make any sense. We're doubling down on almost every deal." So Bob's already taken that, more like the 20% of our reps selling to 80% of our reps who sells to the customers. And that kind of efficiency, that's 1 point or 2 of sort of margin at the cost of sales and marketing level right there by changing some of those approaches. And I don't think we're going to lose a lot of business by doing that. I think we're just going to be more cognizant of the investment we make in the pursuit of a given deal and just ask the tough question, "Do we need 2 reps on that account? Or could this guy handle it with a subject matter expert?"

Unknown Executive

A couple more questions there?

Unknown Analyst

There's a huge behavioral change that you need to kind of achieve on the process of achieving. Can you just give us more confidence, talk a little bit about the things you really do on the compensation structure, for example? So if you think about the services guy or the sales got selling services, have you changed the way they get compensated for that? And then on the sales layer, you have a huge product portfolio now, how do you make sure that the newer product gets sold because sales got eventually kind of sell stuff that they are comfortable with?

James E. Heppelmann

Yes. I mean, I'll handle the part of this and then you should handle the second product line part. Just in general, like at the management team, the group I was talking at lunch with, you should know the whole management team is basically paid by hitting a margin dollar target, the things that drive the EPS on these again. So we're all about margin dollars. And of course, there's different ways to get to margin dollars but that makes us watch operating margin percentages pretty close. The sales guys, their compensation has changed in some pretty meaningful ways in the past couple of years. Number one, we pay the same commission on new maintenance that we pay on license. So as to discourage them from thinking there's any advantage in trying to move dollars from maintenance into license, we prefer they move in the other way, make it renewable. And then on the services side, there's 2 things that are important. Number one, we paid the sales guys less than we did some years ago. So there was a period of time we paid them a lot for services and revenue. And the second same for Mark's guys is we pay them not on a margin dollar basis, but on a margin percentage basis, meaning that it used to be that Mark's guys had 5% profit revenue stream. They were enticed to grow it because more margin dollars -- even at $0.05 on the dollar, more dollars means more margin dollars. It means more compensation. Now we're telling them, "No. You're not paid on growing the revenue. You're paid on growing the profit percentage of the revenue," which suddenly, again, brings about this very different attitude, "Well, if that's the case, then I get to worry about discounting more so than growth." And in an era of abundance, there's plenty of both opportunity to start to get picky. And you start to basically say, "I'm only going to take deals that fit within my margin target." And you missed a customer either have pay more or you have to be willing to work with a partner who's not the world's premier services organization to go implement that thing. You can choose.

Robert Ranaldi

Yes. I think I'd say on your second question that it will come across a little both of it, but I actually believe that this is correct that in order to have a solution that you're selling, there's going to be a problem that you're solving. And so the salesperson should go out and uncover the business problem that the customer has and then get alignment there with the solution, such that you're not outpacing one focus area versus the other. Again, looking at the holistic account and the opportunity within that account and getting alignment of solution to problem, I think, keeps us in check in terms of making sure we don't get too carried away with one solution versus the other. I actually worry about the opposite of what you described, which is that salespeople sometimes have this tendency to look at the shiny object in the corner and get attracted to that at the expense of all this great opportunity that we have staring us on the face on expansion around PLM and things like that. So we can control that at some level. We can give out specific quotas for the products and the solutions that we have, and those are things that we're considering. And we do it at certain levels within the organization today. And maybe as time goes on, we drive that further through the sales organization so that you control the focus of time and the sort of revenue at some level that the salespeople are out driving. But again, I think fundamentally, if you got good alignment there, focusing on problems, you're going to bring forth the solutions that best address the customers' problems that they're trying to fix.

Unknown Executive

One more?

Unknown Analyst

Yes. A question about resource retention. I mean, in the sales area and service area, there's not a lot of skilled resources out there. And usually, that's actually quite a bit of turnover. Because of that, you're not the only ones that are growing. Other -- your competitors are growing, of course. As you retain more to get more expensive as well and hurts margin. So talk about how you're looking to grow at the same time making sure that you retain the people that have the skills that are more efficient in delivering at the same time.

Robert Ranaldi

Yes. So, Mark, maybe I can start from a sales standpoint. I'll just give you an anecdote and -- we had our President's Club trip at 30% to 40% of the salespeople around the world qualified for a down in Puerto Rico back in January. And you just got to have be there to appreciate this comment, but the feeling is like there's a lot of tenure and there's a lot of sort of like a family feeling, if you will. That might sound a little strange to say, but people like to work at PTC and they like to work at PTC because they've done well, it made good money out of the salesperson and they like the direction that we're going in. They believe that this company is going to be around for a while and continue to do well. So I think that if we can keep that right, which is a feeling of motivation with our existing personnel and get them continuing to be motivated about what the future opportunity looks like, we have very little turnover rate now within the sales organization. And I'm not that surprised, I don't anticipate that's going to change much going forward. So, of course, we try to find continual ways to keep people motivated in a nature that they're going to stay with us, but I don't see that as big problem for sales right now.

Unknown Executive

So the services throng. If you look back to the last year, last year, [indiscernible] of the people and we have tremendous impact on the margin and we have, I will say, less than 6%, I will say, turnover in the organization -- for the services organization. You know that services is there that they should think, if you look to [indiscernible], they will be more in the mid-teens and high teens [indiscernible]. I will say -- I would probably use the same argument that we have used before. We have disclosure within the PTC and when the people there in the services sales organization, they are -- is being [indiscernible] environment. That it's probably the #1, I will say, reason why the people, they are staying in the company. And the special thing, when you look to the services organization, I've said that we have this fairly that we are trying to reduce a little bit. So we are bringing people from universities. We are hiring them young, newly graduate, 1-year experience. We train people and we give them a fantastic, I will say, position career ability for the full year. Every year, there is a promotion cycle to get the people to the next level to make sure that we can improve and we would like -- we'll reach around the solution architect type of profession. And then doing the restructuring, I haven't mentioned that for [indiscernible], we did also look at the services organization. And the very -- same people in the organization, high tenure, expensive resources, we tried to get for them to move to the partners or production. They get to leave the camp, but in order to [indiscernible], I would say, [indiscernible] with the people, I will say, coming from the newly graduate or junior people. So I know that concern that much -- for the time being, I will say, that this is tough. History had demonstrated to us that it's more than 10% overall. And we have, as I said before, GF Academy helping us to bring us some fresh blood from outside like airtight companies throughout the world.

Unknown Executive

So I think we have pretty much time for one last question, if it can't come from Jay or Sam.

Unknown Analyst

Just a quick one. Maybe there's a time one more. Just on the services cost. Is part of your cost savings going to be changing the location of your in-house services people? In other words, will you be more offshoring? Or is not that a component?

Unknown Executive

No. It's not [indiscernible]. In our long term, I would say, even short term improvement of the margin of the organization, because we are doing already that. If you have [indiscernible] -- when you look at PTC Global Services, we have a tremendous asset there because the organization is very sharp, very experienced and some ability more than we do have all the level of flexibility. So we have solution centers in India, in Europe, in Poland. And if you look at the [indiscernible] if you look at any companies in the world that have that strong presence, I would say, in Korea. We have only have only 40 people there. So to be able to ramp up to 100, we have to use a solutions center. So the mix, onshore offshore, we are not planning to increase that mix, I would say, for the future.

James E. Heppelmann

Okay. Well, great. Then thank you, all, very much for a long day with us here. We appreciate a lot. I hope that this day was a productive use of your time and you leave with the answers to all your tough questions. Thanks.

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Source: Parametric Technology Corporation - Analyst/Investor Day
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