PTC Inc. (PTC) Q2 2009 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the PTC’s second quarter fiscal year 2009 results conference call. After brief comments by management, we’ll go directly into the question-and-answer session. (Operator Instructions) I would now like to introduce Kristian Talvitie, PTC’s Vice President of Investor Relations. Please go ahead sir.

Thanks everybody. Good morning. As you know, we put out the press release and prepared remarks last night, so we’re going to shortly here just get right into Q-and-A. Before we get started, I’d like to remind everyone that during the course of the conference call, we’ll make projections and other forward-looking statements regarding future financial performance, business trends and other future events. We caution you that such statements are only predictions and that actual results might differ materially from the results projected in these statements. We refer you to the risks detailed in yesterday’s press release, the company’s 2008 annual report on form 10-K and in the company’s other reports filed with the SEC from time-to-time. With that, I’d also like to remind everybody please, to try to keep it to one question and one follow-up. With that, we’ll turn it over to you for Q-and-A.

Alright, and our first question comes from Richard Davis of Needham & Company

Thanks very much. You guys have kind of had a trend towards more channel sales and more focused direct sales and with the number of large deals down and hopefully it doesn’t stay down 40%, 50% year-over-year, how do you think about that and the real question is; and this won’t make friends in the sales side of your firm, but is there ever a scenario where you go predominantly indirect and do you have channel partners that could handle that; in other words, to help get your cost down as your deal sizes kind of shrink just because you’re focusing on the different parts of the market?

Yes Richard, I’m not sure if we get to predominantly direct. I mean we do want to see the trend continue to move and I’m not sure what the absolute right sort of percentage would be. I think we said earlier we’d like to get it to 65 direct, 35 indirect in the next two to three years. I don’t think there’s an obvious partner out there that could pick up all of the big major accounts that we have and that would replace our direct sales force. So, as we win in these large accounts, we continue to move our direct guys up into those large accounts and back down. We send accounts down to the channel, and the channel opens up new accounts and as we build new products and opportunities out like product point, we’re able to recruit more channel partners and so I think the mix should gradually go that way, but I think it has a natural end point somewhere. I’m just not sure where it is; maybe it’s 50-50. I don’t see anybody like IBM that’s an obvious replacement for our direct sales force.

Then the follow-up would be, just with regard to new modules and futures and functionality that you guys are working around on the R&D side. I know you were thinking about analytics and stuff, but are there one or two things that we should be thinking about that will come out this year, that presumably could drive both same-store sales and potentially new account wins?

Yes, I think that the new news is stuff you’ve heard before, but it’s still known and that is our shift point strategy which is doing quite well and then this product analytic strategy around the Synapsis acquisition and related things that we’re working on, which you’ll hear in the balance of the year here. So, both of those are new strategies, layered on top of the Windchill business, the Pro/E business, the Arbortext business so forth. That said, there’s important new development in the Pro/E product line coming out, part of it related to share point stuff to make Pro/E more share point friendly and more web 2.0, than any other gadget that’s out there and a major release as well on the Arbortext front plan.

Got it. Thank you very much.

Next question’s from Justin Bandy of KeyBanc Capital Markets.

Hi, guys. This is Justin Bandy on for Steven Koenig. I’d like to draw down a little bit in the maintenance attrition. I know there is a pretty noticeable sequential decline in maintenance paying seats. I was just wondering if you could give us a little color around what happened there; was it the attrition concentrating in one month or was it kind of spread out over the three quarters and what are kind of reasonable estimates for thinking about how seat counts might change over the balance of the year?

Yes Justin its Neil Moses. I think if you look at the maintenance business this quarter, our attach rates, in other words, attaching new maintenance to new sales of licensees were actually up. Our renewal rates were down slightly on a sequential basis and I think what really happened in terms of maintenance seat growth or lack thereof, was the fact that if you think about what happens every quarter, we have certain seats that expire; majority of those are renewed; that was continuing to be the case this quarter. But the amount of new seats that were sold, new licenses, was down significantly year-over-year and that decrease really drove the decrease in active seats on maintenance. So, I think the answer to your question is if we look forward, it’s really going to be driven by what happens on the license revenue side. We forecasted license revenue is up slightly in the third quarter relative to the second quarter, but still down year-over-year. So I would imagine that active seats on maintenance would be down slightly next quarter as well and as we tend to see it, if we see a pickup over the longer term in license revenue, I think we’re going to see the active seats resume their growth.

Okay, great. Then just one follow-up; it would be great to hear a little bit about your services pipeline. I know, with license revenues having been weak for a little bit, I was just wondering how much of a lag we should expect between kind of when license sales started to become weak and when we’re going to see that showing up in kind of a hit to your services revenue going forward?

Hi. So this is Barry. So, we’re looking very solid for this year in terms of what our bookings and backlogs look like and so we’re not seeing any immediate decline over the next three quarters. I would say in our service revenue, service bookings, we’re expecting that as that license revenue stabilizes, which it is and begins to up tick that we’ll be okay going to ’10. So we don’t have any concern there at this point.

Okay, thank you very much.

Next question is from Yun Kim from Broadpoint Amtech

Thank you. The channel business declined for the first time on a year-over-year basis in a long time you believe or maybe the first time. What are specific investments that you guys are making to keep your channel partners network intact and also be able to leverage these partners when the environment improves?

So Yun, its Neil Moses. The channel’s very important to us, you’re right. This is a fairly significant decline in the channel business in Q2. That also by the way impacted active seats on maintenance, as well as the direct business, but perhaps even a little bit more than the direct business did. In terms of specific steps we’ve taken, I think we’ve talked about them before, but we do have a 0% financing option that’s available to our reseller channel; that we’ve made available, that we are financing. We did have probably $300,000 of business that was financed that way in Q2. So, that didn’t turn out to be a large number. We incurred an interest expense on that 0% financing option. The interest expense in Q2 I think was only around $15,000, so it was not material, but that’s one thing we’re doing with the channel. We’ve also invested this year in marketing and support of the channel, which they’ve asked us for and then secondly, we’ve got a new systems initiative called lead to order, which is really kind of a lead generation, automation of lead generation and the whole process of lead to order, which is going in place this quarter as well. So, I think you know that investing in the channel is kind of one of our three strategic initiatives and we’ve continued that investment even during the downturn. As a matter of fact, we haven’t cut any of our channel business development managers, even though we did reduce the size of our direct sales force about three months ago.

Have you been making or have you been doing a lot more of a joint sales and marketing event with the channel partners, now say versus even a year ago?

Joint sales and marketing events, you mean between the direct sales or…?

No, the channel partners a year ago?

Yes, I’d say that number’s about the same that we’re making there. We average a joint seminar somewhere around the globe, minimum one a day. So, I’d say that effort’s about the same. It’s actually tough out there. Our competitors have exactly the same issues that we have. So, I don’t think its PTC specific. I think it’s the fact that the SMB space in a difficult credit environment is one that’s feeling the pinch. You just have to look at the results from Autodesk, which are significantly worse than ours and I think all that works as well has the same issues. So it’s more of I think sort of an industry thing than it would be PTC specific.

Yes. I completely agree with you. I think a lot of it is really about keeping your channel partner network intact more than anything else in this environment. Real quick Neil, huge decline in accounts receivable, great job, but does this mean that account receivable could be up sequentially big in the June quarter?

I think that I don’t expect our DSOs would be at 53 days again, but I think we have had a couple of good quarters of collection experience there. There certainly is possibility that accounts receivable could be a slight use of cash rather than a generator of cash in Q3 given our solid performance in Q2.

Okay, great. Just quickly, one last one bit to Barry, what kind of carriers are you dangling at large system integrators to get them to start investing more aggressively in pitching PLM as a strategic investments to their clients, even through current environment and having a closer relationship with PTC?

Well, I think one of the things we’re doing very well relates to an earlier question. We’re doing much more segmentation in terms of what accounts should be direct accounts from a sales point of view and also doing that as it relates to a service point of view. So, we’ve developed and invested this year in a very big way in a service partner strategy, where we are growing partners to be able to take care of accounts that make sense either for specific verticals or specific products. Included in that is an elevated relationship with the SIs and the way we are giving guarantees and certain even direct accounts, sales people will get commissioned on those service revenues from our partners, as well as ours in some sort of predetermined way. So, we have a lot of different ways that we’re enticing, encouraging partners to join the PTC economy.

Okay, great. Thank you very much.

Next question is from Ross McMillan of Jeffries.

Thanks. First one for Neil, just on the cost reductions this quarter, can you tell us how big the one-time accrual reversal of the bonus that was kind of already accrued in Q1 as well? How much was that onetime effect on operating costs?

A little bit less than $2 million, Ross.

Okay and then just going back to the maintenance question. Neil, can you just maybe give us where we actually stand with the renewal rate number? Can you give us a number for the quarter and maybe how that compares to what maybe last year’s was on average or some frame of reference for the change there? Thanks.

We’re still in that range, we fluctuate in the 85% to 90% range from a renewal rate perspective.

Is that dollars?

Percent of accounts renewed.

Units?

Yes and we’re still in that range. We are on the lower end of that range this quarter and previously we’ve been on the higher end of that range.

Okay, and then so just last one from me. I noticed your European direct business was actually up. I guess the question I had was, did you take that largest deal in Europe this quarter and could I then tie that through to Nokia or is it still too early to say you’ve taken revenues from Nokia? Thanks.

We took a little bit of revenue from Nokia this quarter, but it was less than $1 million. So first of all, glad you brought up Nokia, because it’s pretty interesting and it’s a manifestation of what we’ve told you is happening that you don’t yet see. EADS is a $60 billion to $70 billion company that chose us in September. We had a small footprint really in EADS in one division in Airbus. We had no footprint in Eurocopter, or Military Transport, Astrium all the other divisions. All of which were now converting to Windchill from Siemens and ISO products. So we follow that now with the Nokia deal. Nokia’s an $80 billion company, the market leader in cell phones with 40% share and one of the biggest tech companies in the world as well. They have standardized on PTC Windchill and that’s going to be a big account for us as we execute. That’s the sole replacement; we never had any revenue at Nokia ever before. So, there’s a series of these accounts going on. There’s going to be another big major European Automotive household account. We’ll make an announcement next week about a winner. Not sure yet who it’s going be, but the encumbrance already been notified that they’re out. So, either semen’s or PTC is going to get that account. So Ross I don’t think that there’s an appreciation yet on your part for the impact of these major wins in these large accounts and under the covers we’re doing a lot of work. There’s a much bigger list of these accounts that we’re winning right now. So what you’re seeing in the European Large Account revenue is there’s a bigger, bigger base of revenue that we can get and really we haven’t seen the impact because the customers are making small purchases for the initial deployments. So, if we execute well on these deployments and as the economy comes back, we’re telling you there’s a pent up demand for our software services and maintenance that’s going to occur during the next couple of quarters and years as things turn. Now, another manifestation of that is the fact, for example, and DISO a fine company, but they pre-announced twice in the last two quarters; and a lot of what they called deferred accounts and deferred purchases are actually going to PTC. So I’m telling you again, for like the third quarter in a row, trying to give you a little bit of an emphasis and again, the economy is bad and so forth, but we are building up a list of new accounts that are going to be very, very big for us over the next few years. Our sales force has gone from protect mode, focused on our installed base to one where we continue to focus on the installed base, but a big part of the sales force has gone into attack mode. We are all over the Siemens and DISO install base around the world. So that’s really what you’re seeing when you talk about some of that revenue and I’m just give you a forecast that you’re going to see that improve. We can’t win EADS, Nokia, this big automotive account that’s going to happen next week. We can’t have these big wins for as protection. These are all outside of our installed base and not derived some nice benefit in the future. The reverse is true for our competitors. They can’t lose those accounts and continue to do well. Nokia, anyway you might want. I know when we won the EADS deal; Bernard Shaw said it was a maintenance update, that’s the biggest joke in the world. I don’t know how you explain away Nokia. We’ve never sold them anything, but we won the account. There will be some explanation. I don’t know what it is going to be.

These deals, do you think Nokia could be of equivalent size to EADS in terms of if you will average run rate revenue?

Yes. I mean if we execute inner deployments and create value where we can help them collaborate with the supply chain, improve the quality of their products and their competitive position, get control of the bill of materials in a more powerful way. If we execute on that value and they’re a big share point customer as well. As built out the warm analytics and the share point strategy, there is a big opportunity to help that customer gain competitive advantage. If we execute well, it can be a huge account. Again, it’s an $80 billion a year company.

Yes, I think the way to look at it if we execute well, I mean it would be expected almost that Nokia will be one of our top five accounts?

Yes, or more. Now, what’s happening Ross in simple terms and again, I don’t feel like you appreciate it yet, is that Windchill has achieved a level of separation from both the Dassault product and the Siemens products, that the customer base understands at this point, both inside our base and outside; and depending upon the urgency of the situation and the importance of appeal and initiative, you’re starting to see us win major accounts outside of our installed base and major wins inside our installed base, which are sometimes shared with our competitors. So, our footprint at Raytheon which didn’t exist three years ago is now at 80% Windchill and Siemens continues to lose share there and within a year or two they’ll be completely gone, same is true with Lockheed Martin. So, what I’m suggesting to you, and every single technical benchmark we’re winning, it’s becoming more and more known that there’s a separation that’s occurred between our products and those of the competitors and that they are not going to fix that in the short term. By short term, I’m saying three to five years. We have a window here, where our strategy around the integral single data model and our expanded footprint and now complemented with the share point initiative is really putting our competitors in an extreme disadvantage.

Next question is from Blair Abernethy, Thomas Weisel Partners.

Hi, thank you. Just want to ask you to sort of expand a bit on the commentary around signs of stabilizing or stabilization. Can you just give us a sense of by verticals, geographies and also on pricing, particularly around maintenance pricing, what are sort of some of the data points that are giving you guys comfort that we’re starting to bottom here?

Okay, so by geography, by vertical, we’ll talk a little about maintenance pricing too. If we talk about geographies, I think we’ve seen signs in the North American business, which has been actually tough for us for a couple years now. The things are starting to stabilize there; business feels better in North America. Maybe the best sign is that, we track our forecast by geography from beginning of quarter to end of quarter, kind of on a monthly basis and North America, really for the first time in probably six or eight quarters came in at a higher number at the end of the quarter than they were forecasting at the beginning of the quarter, okay. It’s still a low number, but we beat the initial forecast in North America and we had not been seeing that. In Europe, I’d say business continues to be challenging. I think the drop in Europe followed the drop in North America, but I think all in all, if you look on a constant currency basis, we’re holding up reasonably well in Europe. We had a difficult quarter in Asia-Pac this quarter. We don’t really know what to make of that yet because one quarter does not a trend make. We did see our business in China. We saw our business in China down for the first time in a number of quarters and so I think what we say in Asia-Pac, is that we like to see a couple of more data points on what’s really going on there. We’re not sure what to make of Q2, but I think we’re holding up relatively well in Europe and we’re seeing signs of stabilization in North America which is good to see. If we talk by vertical, I think we said in the past that we think that the aerospace and defense business has held up reasonably well for PTC. That business represents 25% plus of our overall revenue, so that’s a good sign. If we talk about the other major verticals, electronics and high tech has been a little bit challenging. That’s also about 25% of our revenue. Heavy industry, you’d have to say has been challenging. Although we’re looking forward to the stimulus package kind of kicking in and that particular vertical beginning to improve in the latter half of this calendar year. Those three verticals comprise 75% or 80% of our revenue. We are fortunate I guess that automotive is about 10% of our revenue and obviously that’s been a very challenging vertical, as has retail footwear and apparel in this environment and I’d say the last vertical we operated in med devices has held up pretty well. If we talk about maintenance pricing, really have not had much of an issue with respect to maintenance pricing. I think that our customers are trying to do exactly what we’re trying to do, which is we’re trying to either limit annual increases or escalators on maintenance pricing, where we’re in fact at a good reduction. So, generally speaking, I would say more often they’re not we’re not getting them or our customers. So I think maintenance pricing has held up pretty well. The challenge ON maintenance of course as I mentioned before, is new seats sold in the quarter and that number is obviously down significantly in Q1 and Q2 and that’s affecting active seats on maintenance, but I’d say there’s been diminimus impact on maintenance pricing at this point.

Okay, thanks great. Thanks very much.

The next question is from Sterling Auty of J.P. Morgan.

Yes, thanks. Hi guys. With unemployment kind of pushing towards 10%, why shouldn’t the maintenance seats under active maintenance seats decline 10% from peak to trough?

Because there’s a penalty for customers to turn maintenance off. They don’t just do it idly. They have to think about it. If they have programs that are really important, which their products are and they need to do development, if they start to turn seats-off, it gets expensive when they want to turn them on. If they turn them all off for a period of time, they wouldn’t get any maintenance support or bug fixes, which could result in a critical problem. So, customers don’t turn maintenance off on a whim. They think it through carefully and it’s not something they want to do right away.

I think the other answer to that question is, there are a lot of customers out there that are doing something that’s similar to what we’re doing. Is that we are continuing to invest during R&D and product development during the downturn. So that 10% of unemployment, I don’t think is represented equally across all functions within companies.

Okay and then, so the color on Windchill. At this point, what kind of revenue synergies are you getting between Windchill and the core kind of CAD business that you’ve got? Meaning, so the two still need to the hand-in-hand; are you actually able to win business because you’re CAD platform is in there or is the decision even within your installed base being made just because the PLM product stand alone is so much better than competition?

Yes, this is Jim. I think that there is significant revenue synergy between these two product lines. What I think has happened in the last few years is that we’ve been able to leverage the Pro/ENGINEER base to grow Windchill substantially, and Windchill is the number one best selling product in the PLM market by far. What’s happened is, because we’ve been able to leverage that base and get this leadership position for our product, we’re now starting to win. We’re starting to have this reputation of having the leading product and we’re able to now win well beyond the base as well. Examples like Nokia and EADS are good examples, where there essentially is no Pro/ENGINEER. So, I think there is good synergy there and we’ll continue to harvest that synergy for some time to come. It’s also helped propel us to a position where we can go beyond it as well. Just one more comment. I think, we’ve never demonstrated huge synergies going the other way, but I think that opportunity is still out there to a certain degree where customers with Nokia rethink their MCAD tool. If we had them up and fully productive on win chill and they really saw PTC as a strategic partner going forward, they might rethink their MCAD decision and take a good hard look at Pro/ENGINEER. When they purchased their current MCAD tool about five years ago, Pro/ENGINEER was right up there, kind of almost tied for first place and they decided to go with a European company instead, but that European company has proven to be a frustrating partner, and they might rethink the whole thing, but I think it’s up to us to deliver on the Windchill piece at first.

I think in the low end, just to complement what Jim said; one of the things we’re trying to do with product point, the share point version of Windchill is to change some of the dynamics around the decision-making at the low end in the SMB space, so that it’s not just CAD features and functions, it’s by the way, I can connect and be part of the community. I can do social product development, and that’s the combination of Pro/E along with product point. So we believe their synergy is the low end as well as at the high end between the CAD and PLM, but we’re trying to build an even closer link which we think is going to affect the way decisions are made about those tools in the SMB space over the next couple of years. We know it’ll have some effect.

Alright. Thanks.

Next question is from Greg Dunham from Deutsche Bank.

Hi, thanks. I dropped off a little bit, so I hope I’m not repeating question, but do want to follow-up on the CAD PLM point. I guess first question is how important is being CAD agnostic in your PLM sales, is it to win some of these bigger deals? A follow up would be, if some of the competition became more CAD agnostic, would that kind of turn the table and make it a little harder for you to win that kind of business that you’re winning?

Yes, well Greg its Jim. I think it’s critical to be CAD agnostic and not just agnostic across MCAD tools, but keep in mind there’s this thing called ECAD and there’s a heck of a lot of products with electronics and then there are software development tools for embedded software and there’s documentation tools with technical publishing and so forth and you need to actually be agnostic across that whole suite. So, I think in these big EADS and Nokia type deals, it’s absolutely critical. In fact we wouldn’t even be a contender if we didn’t have that. Now, I’d say that Siemens to a certain degree is CAD agnostic. We simply have not executed them. I think Dassault doesn’t even understand what the word CAD agnostic or the phrase CAD agnostic means. That is so far from their DNA, that even if they said they were going to be CAD agnostic, I’m not sure they would even know what they are saying. They’re so homogenous, closed minded, closed in their thinking that they could never execute a strategy like that even if they tried. So, I think there is zero threat, the idea that Dassault is certainly going to be CAD agnostic out there presenting a threat to us. There’s a little more at that end, there’s another subtlety there. What’s been happening in the last few years, and this is sort of important actually, the EADS and other places as well; is that we demonstrated at the enterprise level that Windchill could work with third parties, other products or competitive products. What’s happened more recently in the last year and you’re going to see an acceleration here, is that we’ve moved the Windchill deployments farther over towards engineering. So, we’re replacing our competitors in the engineering department, managing they’re CAD files. So, the single integral data model that we described where Windchill could manage the engineering Pro/E files, as well as the enterprise collaboration, we’re taking that same sales campaign directly into our competitors accounts and we’re saying, “Hey, keep your CAD your files here and EX-files; we’ll manage them directly with Windchill at the engineering level and then we’ll extend the value of that out into the enterprise in terms of collaboration.” We’re demonstrating that we can manage their CAD files better than they can; particularly in a distributed or web based environment where suppliers are linking in and as Jim said, there’s a requirement also to manage heterogeneous with ECAD and embedded software. So, the ground rules for competition have changed and that Windchill is managing not just our own CAD files, but our competitors CAD files better than they can and that’s what’s leading to these, and opening of the eyes in our outside of our installed base where people are saying “Wow, I can have that same benefit of a single integral data model, engineering through enterprise” MCAD to ECAD through embedded software; inside the PRO/E environment, but equally importantly in our competitors accounts, which has led our sales guys to then go out and attack with that story. It’s not fixable for the competitors right now. They have to go do a better job of managing their own CAD files before they can think about doing ours. I mean, they’ve got a long way to go to get this turned around.

Then one follow up, on the note that you mentioned, the supply chain, the full…

Could I say one other real quick comment, if you dig into this, another illustration. So do you think that Nokia looked at there V6? They’re 100% Dassault account, CATEA, they use SmartTeen, they use Matrix, do you think they looked at V6 before they made the decision or do you think they made it without looking at V6? Of course they looked at V6 and so the fact that they would choose us with a competitive, potential, offering out there, they looked at it and found that there was nothing there.

Well worse, it’s probably to destroy they broke the camel’s back. They probably said “we’re done letting you dictate terms to us.”

So, a quick follow-up on that, because the EADS win was a couple of quarters ago and you’re pretty confident about kind of the flow through to the supply chain potential.

Absolutely. They’re going to deploy internally and lock that down for us, but all of these customers find it critical to include the supply chain. It’s a major part of every deal and discussion.

So, are you still confident that that’s a near-term opportunity and then a final question just to clarify? I mean in terms of size of these opportunities, just to make sure that I’ve got it right, I mean the EADS deal, when you think about your biggest deal, that’s in the multiple tens of millions a year in license, right?

Well, we’re not going to give you numbers, and we don’t just look at it, we look at it as license and service and maintenance and our partnership and yes, we want to derive the revenue, but we really want to create value for the customer, that’s really how we look at it. But these are big, big companies with lots of employees that build lots of products and complex products and so there is a big opportunity. As we execute beyond the traditional managing CAD files and really start to go out and manage the bill and materials and have it integrated with your ERP systems and include the supply chain and collaborate and so forth due to BOM analytics, then the footprint gets bigger and our ability to derive more value as we help our customers gets bigger as well, both in terms of license, service and maintenance.

Yes, I mean I think we can say; look, we know that our top ten customers represent 15% of revenue or roughly $150 million. If you take our top five customers, they probably represent roughly 10% of revenue or $100 million and obviously if we take our top one or two customers they represent more than the average of $20 million a year and we can leave it at that, but that’s the kind of opportunity that’s out there.

Let me take one other cut at it and see if this might be helpful overtime as we talk about it. If the customers just do content management, submit, retrieve our files, we’re not going to drive a tremendous amount of revenue. One of the reasons we’re able to displace our competitors right now is that their actual deployments over the last ten years have been pretty simplistic. They’re simply doing submit, retrieve, content management, not particularly exciting. What we’re talking about with our customers is doing technical publications of technical documents, bill of material analytics, enterprise configuration and change management, content management and so forth. So, as we deliver on a broader set of applications and we integrate with a broader set of applications inside the customer’s business; as we do that, then the opportunity to derive more revenue gets bigger and bigger. If we only deploy content management vaults, then we’re really not going to maximize our opportunity and that’s why the services are really important and the functional footprint of the software is also really important. We have to help our customers, move to the next level in terms of distributed engineering. We’re really helping them manage the bill of materials, that engineering bill of materials. Our competitors have a two dimensional view of the bill of materials. We’re offering our customers a three dimensional view of the bill of materials and that’s why we’re winning.

Our next question is from Michael Olson of Piper Jaffray.

Alright, thanks. I’m getting down to the nitty-gritty here, but is there any update you can give on just the migration from INTRALINK 3 to PDMLink like? Just any numbers on what percent of customers from that base have moved and has the soft environment slowed that migration at all and then last, do you still think the majority of INTRALINK 3 users are going to move to PDMLink versus just going to INTRALINK 9?

This is Jim. I haven’t seen the exact data on that, but anecdotally we’re somewhere probably north of 50% and south of 65%, probably in that range. I think there’s still some big accounts that are just moving. In fact we got a large order from AGCO that was called out in the press release. That was one of the biggest single outstanding INTRALINK systems, which as decided to move to PDMLink and that will be a very large project, to actually consolidate 28 separate INTRALINK systems into one PMDLink system. I think we’ve seen the second part of your question, the vast majority of these customers are moving to PDMLink. They’re not moving sideways, they’re moving sideways and forward.

Okay. That’s helpful and then just, let me follow-on something you mentioned earlier. You said the drop in Europe followed the drop in U.S. and that’s clearly been the case in other markets as well, but do you expect there will be a lag between when we see stabilization in U.S. versus international or do you think the recovery will be simultaneous?

I’m just speculating. I don’t think we really know, but in my personal opinion I think there’s going to be a little bit of a lag internationally on the recovery as well.

Alright, thanks.

Next question is from Robert Maina of CRM, LLC.

Yes, good morning. I just wanted a clarification on two things. It wasn’t clear, I don’t think on the call, but ex-currency, your guidance really didn’t materially change to the Q3 and Q4, is that correct?

That’s true. Currency was 75% of the change in our guidance.

Okay, and then on the maintenance, even though the C-comp has come down, again EX-maintenance, looking at in Q3 and Q4, is there a material degradation in the revenue from the maintenance seat decline or is it sort of flattish EX-currency?

It’s sort of flattish EX-currency. So we were thinking $510 million of maintenance revenue I think in our previous guidance, we’re thinking $500 million today. Probably I can’t remember what the specific currency impact does on maintenance, but its probably $6 million or $7 million, so it’s mostly currency.

And then the last question, I guess on product point, just give us an update what the status there is, how it’s rolling out and then maybe at this point, do you have a sense in what the addressable market is in that product in terms of dollars?

Yes. So on the first part; it’s been in the market now for two quarters. We haven’t yet disclosed exact numbers, but we had a good chunk, good healthy start in terms of the number of transactions in Q1. We nearly doubled that in Q2. So, from the number of transactions we did, there’s a nice building there. I’m not sure; we’ve quantified the size of the markets. I think there’s these two segments we’ve talked a little about. There are the smaller companies, sort of the SMB segment, where resellers are selling this as a collaboration platform with all the data management that a small company probably needs. In the big companies, I think there is actually a much bigger opportunity. Really as a collaboration complement to the high end, sort of data changing configuration management capabilities of core Windchill and I would say in that segment, we’re really seeing some exciting developments. In terms of big companies, really getting aggressive around Web 2.0 and SharePoint and so forth, just yesterday I was with a $12 billion company and the CIO has five initiatives. One is PLM and the other is Web 2.0 and it turns out that PTC is covering essentially 40% of her waterfront of strategy and we spent most of the time talking about the PLM staff, because that’s why I went there and then it was almost happenstance; at the end I said, “Oh, by the way, are you thinking about SharePoint? What are your strategies there?” and that unlocked this whole other opportunity and suddenly now we have two campaigns going in this $12 billion company. So, that a good example that gets repeated day in and day out, week after week, where we keep discovering these big companies, have a strategy that here therefore we didn’t necessarily know of or have visibility to and perhaps they didn’t think we were relevant, but I’d say, this company I visited yesterday, we are probably top of mind now in terms of how they are going to execute their Web 2.0 strategy.

Tell me who that was after the call.

I will.

I think Jim, just to complement what you’re saying as well, so ProductPoint release one comes out in December. You have a big maintenance release or something scheduled for the summer?

Yes, we just shipped the maintenance yesterday.

Okay, just talking about that for a second; when is the release two coming and how many people do you have on SharePoint versus ProductPoint?

Yes, okay. So when we build ProductPoint, we had sort of an average headcount of 30’ish building the product. We’re now in the process of taking that to nearly 150. So we have a massive sort of road map here that involves some short-term work to mature the products we already have out there, including this maintenance released yesterday. We have released 2.0 coming later sort of towards the end of the fiscal year and then we’re going to be announcing subsequent to that, a number of additional sort of companion products that sit on the SahrePoint architecture next to this ProductPoint product. So a little too early to get into the details of that and we’ll probably talk about some of that at our user conference and investor day; that will be a more appropriate time to reveal some of that strategy, but let me just say, I think what I’m excited about SharePoint and this whole Web 2.0 or social computing, social product development strategy and this for us is like a adjacent market that could prove to be extremely large. I think PTC is probably in a strong leadership position and staking out a claim that will represent a pretty significant barrier to entry, for other people to follow us. Not, that they won’t, but I think we’re going to be a mile ahead and moving fast.

Thanks guys.

Your next question is from Barbara Coffey of Kaufman Brothers.

Yes, good morning. I actually have a couple of questions. When you take a look at the $10 million deals from the deals that are greater than $1 million, can you break out sort of what percentage this is the CAD side versus what percent is the collaboration side, so that’s question one. Then on the CoCreate side, are you seeing the same kind of pressures on that side of the business versus seeing it on the more of traditional Pro/E type of the business?

I’ll take the first one Bobby, its Neil. The answer is most of the large transactions are a combination of CAD and Data Management. As we get outside of our base, that may change overtime, but today most of our large transactions are actually both. However, the predominance and the revenue coming from those transactions tend to be more Data Management revenue than it does CAD revenue.

Are those deals structured, like is there a general profile of what percent’s software versus maintenance and support?

Well, I think that profile has changed a little recently, because we’ve talked a little about what’s going on with our business. Typically, there’ll be an up-front license purchase, which is fairly significant and there’ll be follow on services implementation work that takes place, which has quite a long tail on it.

One thing is, we define a large deal as more than a million recognized in the quarter. So given the ratable recognition of maintenance and the ratable recognition of services, to get a large deal it either has to be an extremely large deal and you’re taking a quarterly piece of it in the services or maintenance business, or it has to have some license content in it.

Yes, all I was going to say was, the large deals today have a lot less license content in them than they typically did, than they did last year and that’s one of the manifestations of the challenge we have from our license revenue perspective, that everyone has from a license revenue perspective in this environment. As far as CoCreate, I’d say that that business has held up recently well, probably a little bit better than our overall base business.

Okay. Is that because of the different kind of end markets or is there any thought to why that might have held up better?

An incredibly loyal customer base, that’s what I attribute it to and its two-thirds maintenance.

Okay. Thank you.

Okay. Well again, thank you for the time this morning and we’re going to be out there in a difficult economy executing our plan, which we’re really excited about. We look forward to speaking with everybody again in July.

Yes, one last comment. We really hope that any of you who can, can join us for our User Conference which is in early June. Kristian, the date of the investor day is?

June 8.

In Orlando, Florida.

Okay. Thank you.