PTC Inc. (PTC) Q2 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to PTC's Second Quarter Fiscal Year 2012 Results Conference Call. After brief comments by management, we will go directly into the question-and-answer session. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce Tim Fox, PTC's Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining us on our Q2 final results and outlook call. Before we get started, I would like to remind everybody that this call and Q&A session may include forward-looking statements regarding PTC's products or anticipated future operations or financial performance. Any such statements will be based on the current assumptions of PTC's management and are subject to risks and uncertainties that could cause actual events and results to differ materially. Information concerning these results and uncertainties is contained in PTC's Form 8-K filed yesterday and in our most recent Form 10-K and Forms 10-Q on file with the SEC. All financial measures in this presentation are non-GAAP financial measures. A reconciliation between the non-GAAP measures and the comparable GAAP measures is located in our Prepared Remarks document on the Investor Relations page of our website at www.ptc.com. With us this morning, we have Jim Heppelmann, Jeff Glidden and Barry Cohen. With that, I'll turn the call over to Jim.

Thanks, Tim. Good morning, and thank you, all, for joining us on the call this morning. In line with the comments we've previously made on the April 5 call, we at PTC were disappointed with the overall results from our Q2 of FY '12. But at the same time, we did see many important bright spots that suggest we're making good progress on our longer-term initiatives. On the revenue front, in Q2, the license shortfall we experienced was confined to the large deal category of license transactions above $1 million. And of course, it was most acute in the category of megadeal license transactions above $5 million, where we failed to close the large forecasted European transaction that we spoke about on the earlier call. Had we secured this deal, we would've posted a decent quarter relative to our guidance range and relative to last year. But beyond that single transaction, the large deal category in general was weaker than expected in North America, where our performance came in below our forecast. Naturally, we have investigated this situation in some detail and find that the shortfall is not easily attributable to a single factor, but rather, a combination of factors that are hard to characterize with a blanket statement. There was, for example, a defense-oriented deal whose funding was intercepted by another defense program; several situations where a customer decided to take a more cautious approach and spread a large upfront purchase out over several phases and, thus, place a smaller initial order than we had forecasted; and there was a sizable expansion order in a commercial customer that was interrupted by acquisition dynamics, in some ways similar to the large European deal. So please note that none of these situations directly involved competitors. And in each case, we do expect to ultimately secure all of this revenue. I think in every quarter's forecast, there are deals that move in and deals that move out and deals that change in size. So in Q2, we can't really attribute the results to changes in the economic situation or to competitive dynamics, but rather, to poor forecasting and execution. This is something we'll have to monitor closely in the back half of the year. As we've mentioned, we are approaching the go-live date this quarter for a new CRM system and look forward to the improvements in pipeline visibility and forecasting accuracy that we expect to see from that investment and from the process changes that it will enable. Aside from the big deal issue we've discussed, there were many notable bright spots in the quarter. Our maintenance and services business both posted strong revenue results, as did our reseller channel, and even our base business of smaller transactions in the direct channel. We were pleased with the performance of the MKS Integrity acquisition and excited about new strengths we are seeing in Japan, both in the quarter and in the pipeline going forward. We did secure a follow-on license transaction from a large Korean automotive OEM that serves to expand their Phase 1 user base, and we're continuing to work with them on Phase 2 deployment plans in the incremental license expansion opportunities that surround that. So the foundation of our business remains healthy. On the product front, Q2 was a strong quarter, as we delivered Creo version 2.0, which is a significant MCAD release that's likely to become a major destination for our MCAD customer base. We also delivered significant Windchill enhancements in Windchill 10.1, including mobile platform support and integration to the Integrity ALM Suite that will enable a much stronger cross-sell story going forward. Included in this release are our new capabilities for quality lifecycle management and important enhancements to our supply chain planning and optimization capabilities. We also released Mathcad Prime 2.0, another major destination release for our customer base. So together, these developments on the product front will do a lot to help us expand PTC's competitive advantage and solidify our growth opportunities going forward. Finally, aside from the effects of the license shortfall itself, Q2 was a good quarter on the earnings front. Our earnings per share grew 15% year-over-year on relatively flat license revenue, which suggests that we made substantial progress with our business model and cost structure. The services margin of 14% in the quarter is perhaps higher than we can sustain on a short-term basis, but it demonstrates the great progress that's been made in this line of business. The 10%-or-better services margin guidance we've given for the year is roughly double our services margin performance from last year. In Q3, looking forward now, inclusive of the European deal that's left over from Q2, we are pursuing several megadeal-sized license transactions. However, in light of the Q2 disappointment and some concern about ongoing risk associated with pipeline visibility and forecasting, we have removed these megadeal-sized transactions from the guidance range we shared for Q3. If we were to close one or more of these deals, we could certainly perform better than guidance, but we believe it prudent at this point could take the more conservative approach. In summary, we believe that our 2015 goals remain achievable but feel that, in the short term, we need to be a bit more cautious on revenue guidance, particularly around the larger deals until we've had more time for the new sales capacity to settle into place in a way that broadens our base business and reduces our dependency on these big deals, and in parallel, until we've made more progress around the initiatives to enhance our pipeline management processes that we spoke about in the April 5 call. So with that, I'll turn it over to Jeff Glidden to recap some of the specific financial developments in the quarter. Jeff?

Thank you, Jim. First, just a few comments on our Q2 results, and then I will discuss the outlook for Q3 and the full year. Q2 non-GAAP revenue increased 12% year-over-year to $301.9 million. Our recent acquisitions of MKS and 4CS performed well and contributed approximately $23 million of revenue in the quarter. Q2 non-GAAP EPS increased 15%, as Jim cited, to $0.30 a share, somewhat better than our preliminary estimates of $0.26 to $0.28 per share, as reported on April 5, due primarily to better-than-expected service margins, as Jim cited, and lower sales commissions and bonus expense. As we have discussed, our Q2 license revenue of $74.8 million was up 1% year-over-year. On a mix basis, our CAD desktop license revenue was $40 million. While down significantly from a recent record of $49 million in Q2 of fiscal '11, it was roughly flat sequentially from the $41 million in our first quarter of this year. Within our CAD desktop business, our channel sales grew both sequentially and year-over-year. Our direct CAD business revenue was -- for Q2 was lower sequentially and year-over-year, reflecting both a tough year-over-year comparison and a number of direct deals that did not close in Q2 of FY '12. Our PLM Enterprise license revenue of $35 million for Q2 FY '12 was up significantly, approximately 39% from the prior year but lower sequentially from a very strong Q1 of FY '12. A highlight of the quarter was clearly cash and cash flow. Cash increased to $224 million in Q2. We paid down our revolver by $40 million and repurchased $15 million of PTC stock as planned. Cash flow from operations of $97 million reflects both excellent customer collections, coupled with very good maintenance renewals in the quarter. Turning to our outlook for Q3 and FY '12. Our revenue guidance for Q3 is $300 million to $315 million. And this guidance, as Jim cited, does not include any megadeals and that, again, is license revenue of greater than $5 million. We are continuing to be very disciplined on all spending plans, while we continue to build our direct sales capacity. For Q3, we are expecting our operating expenses to increase sequentially from Q2, as sales commissions and bonuses will increase with revenue, and we hold our annual user conference PlanetPTC Live in June. For Q3, we expect our non-GAAP EPS to be $0.28 to $0.32 per share. We have a significant base of very large customers and are working on a number of megadeal opportunities. And these are an important part -- very important part of our business. In developing our full year guidance, we have been conservative in considering these opportunities. Our revenue guidance for the full year is $1,265,000,000 to $1,285,000,000, and we expect full year EPS to be in the range of $1.42 to $1.50. And as Jim cited earlier, we are fully committed to delivering growth and increased profitability. And with that, we will now turn to Tanya to open up the session for Q&A. Thank you very much.

[Operator Instructions] Our first question, Matt Hedberg with RBC Capital Marketing.

I think you guys did the right thing, obviously, to remove the impact of the megadeals largely for what -- completely from Q3 and then sounds like largely from full year. I guess I'm wondering, it sounds like a more cautious approach. Really, have your internal close rate assumptions actually changed? Or is it really more of a function to kind of, like you said, create the potential for upside to estimates?

Matt, it's Jim. I think definitely in Q2, in North America, our close rates were not sort of what we were expecting or perhaps what we've become accustomed to. I think whether that's just a short-term problem, like SAP thought it was, or perhaps indicative of a deeper issue related to the accuracy of our forecasting remains to be seen, so we're trying to be a little conservative to let that play out. But aside from the North American phenomenon, I think we were relatively pleased elsewhere with the close rates in terms of the forecast versus the actual.

And then in term -- on the expense side, it looks like headcount, if I read this right, was reduced by about 168 for the restructuring, which is a little bit less than the 185, I think, we talked about last time. I guess 2 questions. One is that is that more a function of timing, or did you not eliminate as many as you'd maybe originally assumed? And then second, we know you guys, obviously, how important profitability are for you guys in the fact that you've reiterated your fiscal '15 targets. Can we take the fact that there wasn't further restructuring as a sign of more internal optimism? This is a one-quarter bump, really, rather than a larger issue.

Yes, so, Matt, this is Jeff. In terms of what we accomplished with the restructure was really to realign the business and reduce cost, and we probably eliminated, in terms of dollars, a very significant number of improvement in terms of the overall profile. I think we will also be very tight as we go forward, and we'd expect our headcount at the end of the year to be lower by the end of the year than it is today by roughly a similar number. Maybe another 100, 150 people over the course of the back half of the year. So we're continuing to tighten up in all areas. I think we took the actions we did. We felt those were appropriate then, as well as tightening up further as we go forward.

That's helpful. And then if I could squeeze one more -- one last one here. Capacity is obviously up nicely here, and you indicated it looks like it should grow sequentially here at least from the quarter-bearing sales reps. Where do you expect that to end the year? And when should we see some of the productivity gains from some of these reps that you've hired the last couple quarters?

Yes, I think year-over-year, we're up about 75, 76 in terms of direct capacity. I think we'll look to add a minimum of 20 in the next quarter with a goal of trying to do more than that. Again, by the end of the year, I think we'd have targets to be over 100 adds, well over 100 adds in the year, Matt. And I think that we’re starting to see signs of activity and productivity. Activity has been good; seeing productivity of the, I'll call it the first class of those new reps, so we’re monitoring that carefully, and I would say, really, we'd start to expect improvement in that delivery in the fourth quarter of this year and into 2013. So a lot of what we're doing is setting up both our cost structure and our sales capacity, both for the back half of the year and, in particular, for 2013.

Matt, if it's -- if I could, it’s Jim here. Just to add, I do think that our new guidance reflects more a conservatism around how fast that new capacity becomes productive, probably pushing it a little bit farther out than we previously were suggesting.

Our next question, Blair Abernethy with Stifel, Nicolaus. Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Two things. First, just, Jim, I wonder if you can fill us in on your sense of the competitive landscape. We saw Deso’s numbers out this morning, looking pretty decent across the board. And also what are you seeing? Are you seeing any impact yet from Autodesk's cloud-based PLM offering?

Yes, I don't really think we've seen any meaningful change in the competitive dynamics. We just reviewed that yesterday. I have the list of deals in front of me here that we didn't close, that we had hoped to. None of those really involved changes in competitive dynamic. So I don't really think we see it. And with respect to the Autodesk thing, I've yet to really hear a mention of that coming back from our sales force, so I think that's a lot of noise from Autodesk but not necessarily a lot coming back from the field at this point. Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Okay, fair enough. And then just turning to your PLM business. Can you give us an update on the progress on how some of the PLM benchmark wins are progressing in terms of getting into rollout?

Yes, I mean, I think there were a number of nominal accounts that we won in the past couple of years, particularly when we were highlighting that program. That's driving the kind of strength that you see in our services business and in our maintenance business right now. So I'd say, by and large, those deployments are going well. We talked about the automotive OEM in Korea, where we successfully deployed the first phase and contracted for more seats for the first phase, while we are simultaneously negotiating what a second phase is going to entail, both services and license. So I think, by and large, those programs are going well. And you see that in the seats on maintenance, in the maintenance revenue growth in PLM and in the services growth. And I think the services margin suggests we’re doing a pretty good job of executing these programs as well. So I think all looks pretty well in terms of the big accounts we've won. And I’ll remind you, the European big deal, that we've -- the megadeal that we didn't close would have been a big competitive takeaway. It still will, if we close it.

Our next question, Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Were you able to go back and kind of take a look at what was the sales coverage ratio kind of coming into the quarter, kind of going back to the idea of the close rates?

Yes, Sterling, so we -- obviously, the close rates were lower than we expected in the quarter. We've done a fairly deep dive on that, and we would really look at it and say a part of that was a maturity of the pipeline, the activity, the customers. They’re very clearly customers of ours that we would expect those to close so we would expect close rates to improve and forecasting to improve in Q3, really just because of the scrub we did. And then longer term, we really need better visibility and data. And I think salesforce.com, in the process around that process improvements and inspection will give us a better view as we really implement that over the next few quarters, and as Jim said, we’ll be going live in May with that system, but we really need to put the data in. We're doing that today and really develop the full process and data analysis that’ll be available with that system.

Sterling, it's Jim here. Just to add a few more points to that. I do think in the quarter ended and in the last few quarters, we have made a number of changes. For example, we brought on a lot of new capacity, particularly in North America, which means a lot of new territory assignments and so forth. And that rejuggling of territory assignments creates some amount of disruption, as does, of course, the hiring and training process and so forth. So I think that's probably a factor. I don't want to say it's the only factor or the only major factor, but definitely some of the changes around the restructuring, the RIF, the new capacity, the new territory assignments, this is stuff that probably added a factor to the close rates and so forth in the quarter, and it's something that we think we can work our way through to a more stable situation and get back to the kind of close rates we're more accustomed to. Sterling P. Auty - JP Morgan Chase & Co, Research Division: And the readjusting of territories, et cetera, that was for some of the established people, so that's where you're saying you could have seen some disruptions. And just one follow-on to the previous, have you already scrubbed the pipeline, or are you scrubbing the pipeline further as it goes into salesforce.com?

Yes. So first of all, on the coverage model, we always did cover the entire planet. It's just in some cases, we covered it pretty thinly. So any time we bring in a lot of new capacity, we'll have to find pockets to put that new capacity into, and sometimes, that involves cutting an existing territory in half or something like that. So there's definitely some amount of disturbance associated with that. With respect to scrubbing the pipeline, we've been nonstop scrubbing in here for the full month of April for sure. I think we're trying to get a better set of data manually here to help us work our way through Q3, and then move that type of data and discipline into salesforce.com here in the quarter. And then I think what salesforce.com will also give us is a lot more visibility to the small- and medium-sized deals. Because when we do the manual process, we tend to focus on the big deals, which is important, and they move the needle a lot. But at the end of the day, where the new capacity really should be adding its value over time here is in sort of the small- and medium-sized deals first. And without a system, the transaction count we're talking about is so high, that manual processes are just tedious to keep the data, to gather the data and keep it accurate. So we certainly don't feel like we have best-in-class pipeline management and forecasting processes, and we're about to go through a transformation to where we think we actually will have best-in-class processes, and that will help us better set guidance, better manage our pipeline forecast, better understand where to make investments, better understand where to put new capacity and so forth.

Our next question, Perry Huang with Goldman Sachs.

I just had a question about your China business. I guess, in the prepared remarks, it declined year-over-year. Could you provide any more color on the region's performance in the quarter, for example, what were the key drivers behind the softness? And then also how should we think about China being factored into the full year outlook?

You want to take the first shot at that, Jeff?

Yes. So we -- in terms of the Pac Rim, I think if we looked at that overall, it was flat sequentially from the prior quarter. And I think we’re feeling reasonably good about what we're doing in the Pac Rim. It's certainly a area of opportunity and growth for us. That said, the growth, both for us and for China, has slowed a little bit. So we continue to, I think, invest there, and we continue to think we have a very attractive and strong business there. But it was -- it had -- the growth has slowed little bit.

I will say, though, Perry, that as we've been scrubbing the pipeline, the Q3 and, particularly, the Q4 pipeline in China looks pretty good. So I think we feel reasonably confident about the business in China, not really fearful of some kind of a meltdown that you might be afraid of.

Maybe just one other comment. We have added resource in China, and we've done some reorganization. And that, obviously, creates some change that maybe puts a little more risk in the back half of the year with that change. I think we've put some really good talent in, but they're relatively new in those roles and in those positions, and as you know, we’re addressing any of the topics and subjects that we think we need to do to make sure that we have a solid long-term business.

Our next question, Yun Kim with ThinkEquity.

Jim, you mentioned that some customers took more cautious approach and decided to sign up for smaller deals than you expected. Can you give us a little more detail around the situation? Is there some -- I mean, are there some hesitation among customers? Are customers approaching PLM projects more cautiously, and that's resulting in slower deployment? Are you seeing any sign of the existing projects getting downsized, postponed or even canceled?

Yes. I mean, I'll talk to you in an example, Yun, of a particular transaction I'm personally familiar with. It involves a North American automotive firm, and we were, on one hand, talking to them about a program to implement this concept of global platforms that we talk about, which is a combination of Windchill PLM and Creo capabilities to put in place in a modular product architecture. And there's a high level of interest in that conversation. And in parallel, we're talking to them about a conversation to go implement a service lifecycle management program. And there's a high level of interest in that conversation. So our sales guys were forecasting a transaction that would include both. And what the customer said in the end is, "That's a lot of change at once. It's a big investment. Why don't we get started on this program and do a little bit more planning on the second program?" And so that's how the transaction came in. Now I think there's always some amount of that. That might have been a forecasting problem more so than a customer retrenchment issue. Perhaps had the customer's situation been better qualified, we would've realized that to implement 2 such programs in parallel at the same time might have been more than this customer probably was willing to sign up for. So I don't think, in general, we think it's an economic problem. We think that all companies right now are careful how they spend money. PTC is and was a quarter ago. But I think that it's a case where probably our forecasting optimism was too high in some of these transactions.

Okay, great. And then it's been a while since we'd talked about SharePoint product. Is that something that is being deemphasized? And along that point, in terms of trying to align like product strategy to improve visibility in the model, what are some meaningful low ASP product opportunity out there that could be meaningful revenue stream down the road, or is it just simply improving visibility more driven by increasing self capacity to target lower end of the enterprise markets?

Yes. So first on the SharePoint question, Yun. We were developing a number of products based on SharePoint. And in fact, we backed off on one of them and continued forward on the others. So the one we backed off on was this ProductPoint product, and we really backed off on that simply because we found that customers who saw ProductPoint were interested, but when they then saw what Windchill proper could do, they tended to switch back to Windchill proper. And then we said this whole product feels like a marketing program because it gets people interested but then they buy something else, so probably does not justify the level of R&D investment we were making. But the other capabilities that are SharePoint based, for example, our product portfolio management capabilities, our social computing capabilities, our integration into the SharePoint portal, those efforts continued forward and I think are quite interesting to our customer base. If you look at the second part of your question, which is low ASP, I think the gist of your question, as I interpret it, is do we have some things that would allow a new rep to get started in a smaller transaction without having to go for a sort of elephant hunt right off the beginning? And I think the answer to that is yes. For example, this area of product analytics that we have. This is the capability to take a product design and try to analyze how much would it cost, do we have the right suppliers, would it comply with environmental regulations, what would its carbon footprint be, et cetera. This is a pretty slick capability, and it is in some level a PLM agnostic, so you can bolt it onto our PLM system or onto somebody else's. So I think that's a pretty interesting piece. I think the ALM business is another example of that, that we can go into a company and begin a discussion about putting in place a better software development infrastructure, completely independent of what CAD tools and what PLM tools they're using, so we don't have to go for the big PLM transaction. All or nothing, we can start in these other areas. And I think, service lifecycle management is a piece of that, too, because a key building block for service lifecycle management starts with some of our 2D and 3D technical publishing capabilities. So those are some examples of where a new rep can engage a new customer even if they are committed to somebody else's CAD and PLM situation. There's still a number of conversations we can get started that should provide some of these smaller- and medium-sized transactions without having to go for the big elephant hunt right upfront.

Okay. And then quickly and finally, can you just talk about the adoption of nonCAD-driven Creo products? I think one of the strategic rationale of Creo was really try to expand a potential target installed base within the -- within your installed base. How is that going?

Yes. I'd say on progress, just to put Creo in context a little bit, last April, I believe it was a year ago, we came out with Creo 1.0, and this was an exciting release, but as release 1.0s of major new products are, people tend to kick the tires a little bit more and be conservative about going into production. They tend to wait for the second release. So the fact that we just shipped Creo 2.0 I think really delivers a much -- both broader and more robust offering into the market, that our customer base will upgrade to, and that I think, in general, will promote a lot harder and push a lot harder. So Creo 1.0 has been very successful in driving maintenance win-backs. The number of seats on maintenance has increased significantly during that timeframe, and I think Creo 2.0 was a release that we can go play more offense with and as well bring the customer base forward.

Our next question, Raimo Lenschow with Barclays.

Two quick ones. First, I hear you on on deal and the internal issues, but it still strikes me as odd that we had one of the worst of Q1 results season with SAP, Symantec, et cetera, all having issues in North America. How confident are you that it's just you and they are not -- that we have like an issue that might go on for a little bit longer as you go through that? And then going back to the Creo 1.0, as you have version 2.0 out in the market now, what do you think how long it will take to kind of get momentum there, and where do you see the early success stories coming out of?

Let me, Raimo, address the first part, which is the North America part first. I think in our guidance, we've allowed for the possibility that there could be a problem that lasts for a couple quarters here. As I mentioned, SAP didn't do that. So we're comparing and contrasting ourselves to them there. That said, when I look at the list of transactions that did not close, I can't, in any one of them, say they said it was because of the economy. That really wasn't the situation. So I think you're right. We had a bad quarter. We look around; we see some other people also had weak North American quarters. We think it's an internal issue, but I think we took the approach of saying let's be conservative and assume that this is a quarter – sorry, this is a issue that has a multi-quarter hangover. And if it doesn't, then we’re going to do better than that. But I think in our guidance, we took a more conservative approach of saying let's assume that whether it’s an internal issue or whether other factors develop, that it's a potential multi-quarter problem. On the Creo 2.0 question, I think that where you see we did pretty well with Creo was in the channel, and that's a place where there's a lot of new business being won and lost, and the growth rate there was relatively good. So we think that Creo, in general, is helpful in a new win. Let's say a greenfield environment of a small company buying its first 3D CAD product. This is a very sexy product that compares very well to SolidWorks and to the Autodesk Inventor Suite, much better than Pro/ENGINEER ever did. I think the bigger opportunity, in terms of bigger license transactions, is in the direct space to the extent we can get some competitive displacements going. There's a few substantial ones in the pipeline. And in fact, there's one that we did close in the last year in a deal that we actually took ratable, so it hasn't really shown up as a big deal transaction, but it's been a big contributor. So I think there's some optimism around that. And again, it's hard to push a major release 1.0 product, so I think having this release 2.0 product sort of makes the whole story a lot safer, if you will, for a customer who's excited about the content.

Our next question, Ross MacMillan with Jefferies. Ross MacMillan - Jefferies & Company, Inc., Research Division: I actually had a couple of questions on maintenance, if I could. I was curious to get a sense for -- I noticed the active maintenance seats for the other category were down sequentially. Could you provide any color on that?

Yes, Ross, this is Jeff Glidden, and thanks for calling in. If you look at our maintenance overall, first, there's a slight decline. I think it's about 6,000 seats. Part of that is the other category includes Integrity, and as we brought their demo over to the system, we've done a little bit of cleanup. That's one piece that caused a little -- a few thousand seats to be lower. On the second one, we've got some renewals that we didn't capture in the quarter, that we're still pursuing. So we say that -- I don't think there's anything fundamental there, but a little bit of cleanup and some open seats to be recaptured. If you look at the other metrics, I would just site that Creo is up nicely year-over-year. It's up about 14,000 seats; it’s 8%. Very significantly, Windchill was up 215,000 seats or about 22%. And I think we cited in the quarter, the maintenance has been a highlight of the programs. Attach rates are in the mid 90s, renewal rates are in the high 80s to low 90s. And I think overall, the team has executed very well. Ross MacMillan - Jefferies & Company, Inc., Research Division: Jeff, just to follow-up on that. I agree the growth rate on maintenance has been good. But I think you highlight 610 [ph] for the year on maintenance, and you did like 306 [ph],I think, in the first half, so that actually implies flat or even modestly down in the back half. I'm just trying to understand if that's just conservatism or if there's anything else we should be reading into that.

I think those are reasonable numbers. I would give you one just from Q1 or really from last year into this year. We do have a bit of a headwind on currency. The currency -- the rate last year was $1.37; that does affect our reported numbers. And this year, we're right now outlooking $1.30, and we've been holding in that level. So there is, year-over-year, an FX impact, but I think all the fundamentals, all the attach rates and so forth, still very good on the maintenance side. Ross MacMillan - Jefferies & Company, Inc., Research Division: And just a couple of others, if I could. You had a really strong cash flow quarter here. Jeff, do you think you could provide us with any thoughts about cash flow from ops for the full year?

Yes. There will be -- clearly, we'll build cash from here and cash flow. We would look at -- be more cautious on the back half because of the shortfall on Q2. That really translates, the lower revenue translates into lower cash collections directly in the next quarter. That said, I think we can be pretty positive about cash flow. But we'll be a little bit more cautious as we look forward. We are planning in this quarter to continue both the buyback and the repayment of debt. Q4 is usually a slower cash quarter for us just because of the year-end which we’ll be a little bit more cautious on with Q4 as a result of the lower revenue numbers. Ross MacMillan - Jefferies & Company, Inc., Research Division: Will cash flow continue to grow at or above the rate of operating income -- non-GAAP operating income?

It will continue to grow. I'm not sure I've done the math. As it will grow relative to operating income, it will grow with it. And I think we feel pretty good on the cash flow. We’re right now, at $1.10 year-to-date, in cash flow from operations; that's $0.80 in the quarter, $1.30 in the prior quarter, I think for the year, we'd expect that to continue but at a more moderate pace in the back half. Ross MacMillan - Jefferies & Company, Inc., Research Division: Okay. And then very last one for me just on the long-term targets. So I was curious, is this -- maybe have you done scenarios? So I know that your 2015 target is based on an 11% to 13% revenue growth rate. But I was curious as to whether, for example, if you were to do something maybe more like 6% to 8% or 8% to 10%. Have you done any scenarios around what operating margins you think you can achieve under different revenue growth scenarios?

Yes, it's a great question, and by the way, our goal is even if we moderate the revenue numbers, we're still driving to the operating profit numbers that we cited. So those are intact for 2015, the 25% to 27%. We have run a number of scenarios, and as we complete those, we'll update our guidance longer term, but we've given the 11% to 13%; we've looked at growing at a -- let's say it grows at 9% to 10%, what does that mean, we can run various scenarios. And I think the view continues to be very attractive in terms of our ability to achieve those long-term operating profit targets.

Maybe a way of putting that is that the margin expansion is driving a disproportionately larger part of the earnings growth than is the revenue growth.

That's correct.

In that timeframe. So we're committed to the margin expansion and to the extent we believe revenue growth would be less, and we're not there right now. But to the extent that were a position we guided to, then I think there's an opportunity to say could we get more aggressive with margins? So those are all just scenarios right now. We're not willing to commit to any of those. We're still happy at this point with the program that's out there.

Our next question, Richard Davis with Canaccord.

So I'm trying to square the fact that we’ll say over the past year, expectations for license revenue growth for 2011 is kind of dipped down from 17% to 11% to 5%. With the need -- in my opinion, and this is why I'm trying to figure out if I'm right or wrong, and kind of following on Ross's comments, but that license -- the license service mix for Windchill would seem to have to be moving much more towards licenses, I would think, in order to get that segment's margins up from, as best we can tell, somewhere in the mid single digits to the high teens, in other words, to help you get those margin numbers up. Because I think it's pretty clear, the CAD business is nicely profitable, but the margin structure of Windchill is not where it should be. So can you help me kind of square those 2 issues and where I’m -- help me out; figure that out?

Yes. Well, this -- first, Richard, on the license growth, I mean, obviously, the 5% is a pretty conservative number. At this point, it assumes we don't close several of these larger transactions that we've been pursuing. And keep in mind, you start talking about a $10 million transaction, it's 3% license growth all by itself. And if you start thinking about the implications of a couple of those going one way versus the other, you don't have the wide swings on our license growth rate. So number one, we've shifted to a more conservative outlook for the back half of the year, no doubt. On Windchill margins, in general, it really does come down to mix, but there are several different contributing factors to the mix. One is maintenance. There’s license, there’s maintenance, there’s service, obviously. The maintenance part of the mix continues to increase nicely, and that helps with profitability. And the services part of the mix, while it's still strong, the margins of that services revenue are also increasing rapidly, double last year, which has a significant impact on the profitability. So I think in the end, license revenue is the way to really win the game with our PLM business, but what we've been doing with maintenance and what we've been doing with services margin does a lot to move the profitability needle of that business in the meantime.

Our next question, Steven Koenig with Longbow Research.

I would like to ask you a question about the long-term guidance as a follow-up on that, and then just one quick follow-up after that. So in the long-term guidance in your prepared remarks, you talked about the PLM market growing 9%, the CAD market growing 5%, so you're relying on share gains, it looks like, to make those kind of targets. Now you did just talk about going through the analysis of where those scenarios might go. So I'm wondering what would cause you to lower long-term guidance or not? If you found out that this had just been a Q2 phenomenon, you came right back, is that what would cause you to keep it? Or would the analysis by itself be enough to say that you ought to de-risk by lowering the long-term guidance?

Steve, it's Jim. I think the real factor we're going to have to monitor is the impact of the new sales capacity because we've put a lot of sales capacity into the system. It hasn't yet worked its way through the system, but that's going to happen, particularly as we go through the back half of the year and then into next year. And I think as that sales capacity settles into place and creates the sort of productivity that we anticipate they will, then we're going to feel pretty darn good about those long-term growth numbers. And if they didn't, then I think that's the point where we'd have to say is that 11% to 13% growth rate reasonable or not. And of course, having a better pipeline management forecasting system will help us do a good job on making that call.

Okay. That makes -- that makes perfect sense to me. And then for the follow-up here, this is more about just [indiscernible] It was good to see that revenues from deals below $1 million grew pretty well. I calculated 16% year-on-year. Going to the large deal execution now, I'm wondering, what, if any, changes have you made to the sales organization since the miss or the sales process besides scrubbing the pipelines here and getting the forecasting system in place?

Yes, I think that the changes we made in the sales organization were made prior to the miss, and we still think those are the right changes even if they introduce some disturbance that we have to work our way through. I think the bigger question is how do we manage the pipeline and manage the forecasting process? And again, I mentioned earlier, the way we do that today is not a best-in-class way of doing it. And we've been working for some time to transition toward a best-in-class way of doing it, and that transition will begin to take route this quarter. It's not an instant miracle, but it's a better way of doing it; it's a better process. And so I think that we'll -- today, in this current quarter, in the last month, we've been doing a lot of work with the old manual process, and what we'd like to have is a systematic approach to understand what does the pipeline look like for MCAD, for PLM, for supply chain management, for SLM, for ALM? What is the safety factor we have when we put a forecast or some guidance out there. We need better visibility. A good example is this new capacity is probably not going to show up in the big deal pipeline but more in the sort of mid-market which you mentioned’s actually showing some good signs. But we need much more granular visibility to get this new capacity delivering as we expected to. And if not, why, and so forth.

Our next question, Barbara Coffey with Brigantine.

A quick question on how you're balancing your new capabilities with new salespeople with the assignments that get sent of to the channel. And then as part of understanding sort of what the channel is selling, can you speak a bit about some of those -- sort of what are they selling? Are they selling the full suite of Creo, as well as some of the PLM stuff?

Yes. I think there's been some discussion amongst analysts about changes we made in the channel space. So let me talk through that. We kind of made, let's say, 2 changes in the last quarter or so regarding the channel space. One is we went from a centralized management of the channel to a regional management of the channel. And we did that really because it allows us to eliminate some overhead. And I don't think that in of itself represents any meaningful change to what's happening. The second change we did is we did put some of the new direct capacity into the mid-market space in regions where the channel is not as strong as it is elsewhere. So for example, in North America, our channel is not as strong as it is in Europe, so in North America, we expanded a little bit into the mid-market space with some of this new capacity. And part of the reason we do that is because, as you know, our channel is very strong as it relates to MCAD growing in their strength with PLM, but we also have ALM and SLM, and there may be some pretty good opportunities, let's say, in a $0.5 billion-sized company for ALM or SLM. And in some cases, the channel is just not in a position to pursue that. So we've moved the line a little bit, really, in the regions where the channel probably is insufficient in terms of its ability to pursue accounts at that level of size and complexity. That said, if I point out, the channel performance in the quarter was actually pretty good. So that's not really the root of any problems we had.

No. With so many people being hired, some of the discussion being at the middle market, mentally I was thinking that often was where your channel was and was just trying to understand the new dynamics.

Okay. Another question from Barbara or any other questions on the road -- on the line here?

Our next question, Ben Rose with Battle Road Research.

In your analysis of the quarter, looking specifically at certain industry sectors that you sell to, whether it's industrial machinery, automotive, electronics and high tech, were there any larger conclusions to draw in terms of the relative health of those industries? And are there any plans to change the focus, if you will, on those industries given what you may have seen in this quarter?

Yes, Ben, I think we did not see any meaningful trend across the verticals, meaning that all of the verticals performed more or less at the same level. Meaning that, for example, the big deals, one was a defense deal I mentioned, one was an industrial deal, one was an electronic deal, so I think we did not see any type of concentration that would say we have a problem or that we have a great opportunity in this vertical. It was really consistent with our overall view of what the opportunity is.

Our last question, Jay Vleeschhouwer with Griffin Securities.

Jim, in an earlier answer, you talked about some of the changes you had put in place for the channel in North America, affecting mid-market coverage. Just a clarification, were any changes like that made or priority plans be made for any channel outside the U.S.?

I think, Jay, in general, we're working around the strength of the channel. So in Europe, as I mentioned, the channel’s strong. And that's not to say they're strong in every region, in every vertical and so forth. So we're trying to complement the channel, basically. And there's a lot of customers, a lot of companies in that mid-market space, and it's difficult to cover them all. And in some cases, our channel is not even covering big chunks of the market, so what we're trying to do is complement them. And where we see a lack of effective coverage, we're putting some PTC capacity in there. Because the channel doesn't really have the luxury to expand quickly. And in particular, when you move beyond CAD into some of these more enterprise accounts, it's difficult for these channel resellers to quickly expand their capacity into SLM or something like that to build that expertise. So again, the key message is we're working around the strength of the channel and trying to make the ecosystem stronger and not just move it from one spot to another.

Okay. There was an earlier question about possibly having some lower-priced offering, for example, around SharePoint. Let me ask an opposite question, which is the possibility of doing more with higher-priced versions of your software or mixing up in some way for either Pro/E or Windchill? Is there any thought that through mix or configuration that you might be willing to trade off volume, let's say, for some higher ASP mix, both for the upfront license and therefore, you pull-through more maintenance revenues perceived down the road if you do that?

Yes. I don't think that's an explicit strategy. I think that what's happening is our more mature direct reps tend to work on bigger programs, bigger deals. I think you know that if you looked at our pipeline right now, both the existing programs and some of the stuff in our pipeline, for example, there's some really interesting service lifecycle management opportunities in that pipeline, but that's not necessarily where we want a new rep to start. So we're trying to have an opportunity for a rep to scale, start with a territory with some lower-cost products, some products that aren't such an all-or-nothing proposition to the customer, get in there, win some business, grow it, and maybe down the road, you'll have an opportunity at something really big. But I don't think we have an explicit strategy to go toward higher-cost products. I do think our solutions, though, things like SLM and ALM are high-value solutions which leads us over time into more and more of these big transactions. What we'd like to do in our pipeline is to have a nice balance of the big transactions in the base business, such that the forecast could be more based, if you will, on the base business and less of a dependency on closing that last transaction to make a quarter, like we saw this past quarter.

Okay. And then just a couple of last ones. You mentioned in earlier remarks Auto once or twice, and of course, there’s the HKMC relationship. If you think back over the last dozen or more years in this industry, the large 8- to even 9-figure transactions in Auto were pretty occasional. There was a Ford, there was a Toyota, there was a Nissan every so often. And the question now is do you think there is more opportunity now for churn, let's say, in automotive? Are there more large automotive OEMs, do you think, in play that are rethinking their product development infrastructure so that where you may not have had much footprint in auto, though, there is a potential for more HK-like transactions coming into play?

Yes. I think if you look at the different segments, you'll see an interesting story, which is not many major automotive OEMs really want to switch CAD tools. And you see an occasional situation like Daimler that had some special circumstances around it. But by and large, the automotive industry is not switching CAD tools. There is a certain amount of them, though, that are reconsidering what their PLM strategy is, and Deso’s V6 strategy has actually forced some companies to reconsider what are they going to do for PLM, and that creates some opportunity for us. But when you switch from that discussion to ALM and SLM, it’s greenfield. There is hardly any major automotive company that isn't interested in an SLM conversation or an ALM conversation. And it doesn't really matter which CAD and PLM tools they use. So I see us having a very large opportunity in automotive, particularly around ALM and SLM, which are areas that PTC's traditional competitors in CAD and PLM don't match up against us and don't necessarily have even the means to block us from entering some of their best accounts. So I think that's where the real opportunity lies. Some is -- not so much in CAD, some in PLM, lots of opportunity in ALM and SLM.

All right. And sorry, just one last clarification on the sales coverage issue, and has there been any change at all in your number of named accounts over the last year or so? And if not, has there been any change, however, in the number of named accounts per senior rep, let's say? Has that changed at all?

I think that the number of named accounts is not really materially changed. And I think in the bigger accounts, you would see very little churn when you get into that -- to the low end of the direct space, you'd find a situation where a typical rep has far more accounts than they can really cover, to be honest, and that's where you'd see a territory being broken into 2 territories, and then reps having to spend more time, more effort getting to know the customers a little bit more intimately than just driving around and seeing if there's a transaction amongst a large portfolio of accounts.

Great. Thank you, folks. We want to highlight that PTC is going to be participating in 2 upcoming investor events. The first, Jefferies's Global T&T Conference in New York on May 8; followed by JPMorgan's Tech Conference in Boston on May 17. Again, thanks for joining us this morning, and that concludes our call for today.

All right. Thanks, everybody. We’ll look forward to seeing you at the next opportunity. Bye-bye.

That concludes today's conference call. All lines may disconnect.