PTC Inc. (PTC) Q4 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the PTC's Fourth Quarter Fiscal Year 2012 Results Conference Call. [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.

Hi, thanks, Theresa. Good morning, everyone. Thanks for joining us on our Q4 results and outlook call. Before we get started, I'd 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 risks 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 on our prepared remarks document on our IR website on www.ptc.com. With us this morning, we have Jim Heppelmann, Jeff Glidden, and Barry Cohen. With that, I'd like to turn the call over to Jim.

Thank you, Tim, and thank you all for joining us here on our Q4 fiscal 2012 earnings call. As you've seen for both Q4 of fiscal 2012 and for the full year, we reported results that could be characterized as strong earnings growth on lighter-than-expected revenue growth. For the full year, we are reporting 20% earnings growth on 8% revenue growth, which, at constant currency, would be 24% earnings growth on 10% revenue growth. While we've encountered revenue headwinds from the economy and from currency throughout the year, we're pleased that we did achieve our original margin and earnings expansion goals for the year. On the macroeconomic front, we see the current situation as being very uncertain with some clear evidence that the environment has been getting more difficult for our customers. Depending upon whom you talk with, our customers have concerns that range from the potential fiscal cliff to the European debt crisis to the China slowdown. More recently, in Q4, we learned of a new concern in Japan regarding deteriorating trade relations related to the territorial dispute with China. It's more than just uncertainty, as most analyst reports suggested the actual growth rates of worldwide manufacturers have been trending down over the past 4 quarters. When our customers are nervous and see a slowdown in their revenues, the result has been a tendency to dial back spending in order to preserve their earnings. The lead article in the October 20 Wall Street Journal reported that S&P 500 revenue growth would likely be flat to negative in the most recent quarter, reflecting a consistent downward trend from double-digit growth levels of the year-ago period, which is a time when our own revenue growth was much stronger as well. The article talked about earnings reports at a number of major product companies, such as GE, Dehner [ph], Ingersoll Rand, Dover, Parker Hannifin, IBM and Microsoft that were generally light on revenue, but solid on earnings due to the implementation of increased cost controls. This story felt familiar to us because most of these public are customers that we know well. And while we did successfully negotiate sizable deals at 4 of these profile companies in the fourth quarter, we also shared some of their pain in terms of landing smaller deals than we were expecting. In each case, the customer executed part of the expected purchase in Q4 and pushed the balance out in consideration of future periods. We shared with you on the previous earnings call that we entered Q4 with visibility into a strong pipeline in North America. We were pleased to see that despite some of the obstacles I just mentioned, our Q4 license results in North America were up substantially, both sequentially as well as versus the year-ago period. Our business in Europe was incrementally softer in Q4, reflecting growing currency and economic headwinds. The PacRim business performed reasonably well. Our business in Japan was unexpectedly soft as several larger deals that we were expecting to close pushed into future periods. This was attributed in part to the China trade concerns that I mentioned earlier. Given the size of the Japan shortfall, one could argue that this factor largely accounts for our revenue landing towards the lower end of the guidance range. We closed the Servigistics acquisition on October 2, and, in so doing, we significantly advanced our strategy to create product and service advantage for our customers through technology solutions that transform how products are created and serviced. We're excited about this acquisition because when we put PTC's preexisting SLM business together with the new Servigistics' SLM business, the combined entity became a clear leader in the growing SLM market, as measured in terms of solution footprint and revenue. We've seen ample evidence that our SLM strategy is compelling to our traditional CAD and PLM customers, and that it can provide an entry point into new accounts as well. Our SLM capability is unmatched by our traditional competitors, and we have a solid pipeline of opportunities in this new arena. Going into 2013, we're equally confident with the balance of our solution lineup. With Creo 2.0 now in the market for more than a quarter, we are getting good reviews and seeing a majority of our large customer base preparing to move on to the Creo platform over the next 4 to 6 quarters. This has already driven strengthen into our maintenance business, thanks to numerous win-backs as customers recommit to move forward with Creo and with PTC. There are many new capabilities in Creo that were not available in Pro/ENGINEER. So as the base upgrades, we begin to unlock an important new selling opportunity as well. Our core PLM and the related Supply Chain business have been a revenue bright spot throughout FY '12, and we expect that momentum to continue into FY '13 and beyond. And then with our ALM business, we have completed the MKS post-merger integration, and going into FY '13, we now have the ALM products in the hands of our mainstream sales organization, which opens the gates for stronger revenue synergies. So we feel good about our segment strategy across-the-board. As you know, we've added significant incremental sales capacity starting in the back half of FY 2011. We see early indications that this incremental sales capacity is starting to gain traction. Whereas big deals, and especially megadeals, have been challenging to close in recent quarters, we've had solid performance in the base business of deals less than $1 million, particularly in Q4. This is indeed where most of our incremental capacity has been deployed and targeted, and we believe that building a stronger base business over time is key to making our business more predictable by reducing our dependency on the bigger deals. We've been clear that our primary financial goal since 2009 has been to expand earnings growth by 20% or more per year through a combination of margin expansion and revenue growth. Throughout the 2012 year, we remained fully committed to that strategy and implemented more aggressive margin expansion to meet the 20% goal for a third consecutive year even on lighter revenue. PTC management is focused on delivering this earnings expansion goal, so careful management of spending and increased operating margin is an attitude that you can expect will carry forward into 2013. And as we've said before, we believe there's ample room for additional improvements in our margin structure without affecting our revenue opportunity if we layer in efficiencies as we develop them over the next few years. Looking forward to 2013, our guidance attempts to balance the confidence we have in our strategy and in our selling capacity with an economic environment that's challenging now and likely to remain so. That's not easy to do given the level of uncertainty out there. Our assumption for 2013 is an economic environment consistent with what we saw last quarter. Given that, our outlook calls for upper teens earnings growth based on 8% to 10% revenue growth and about 200 basis points of margin expansion. We realize the revenue situation is the most unpredictable, and we will retain a strong focus on margin expansion, as we did throughout FY 2012. In closing, I'm hoping you'll join us next week for our Investor Day in New York, where we'll be able to provide a lot more insight regarding our strategy and our outlook. And with that, I'll turn it over to Jeff to review a few more of the financial details.

Thank you, Jim. First, just a few additional comments on our FY '12 results, and then I'll discuss our targets for '13. We're very pleased with our earnings performance in Q4 as non-GAAP operating margins expanded to 24.5%. This improvement is primarily due to increased service margins of 12%, up from 7% in Q4 of FY '11, coupled with diligent headcount and expense management. For the full year, operating margins increased to 19.6%, up 190 basis points from FY '11. And, as Jim said, for FY '12, we increased our non-GAAP EPS by 20% to $1.51 per share. A quick note on taxes as we close out the year. Our FY '12 non-GAAP tax rate was 23.7%, roughly the same as in FY '11. And we expect our non-GAAP tax rate to be approximately 23% in fiscal '13. In addition, given our mix of revenue and expenses, historical profitability by region and our outlook for FY '13, we established a valuation allowance against our deferred U.S. tax assets. This resulted in a $124 million non-cash GAAP charge in Q4 and will have no impact on our cash taxes paid. Turning to the balance sheet, we ended the year with $490 million in cash, including $230 million in funds which were used to complete our acquisition of Servigistics on October 2. The highlight of the year has been strong cash flow. We generated $217 million in cash flow from operations or $1.80 per share. This increase in cash flow was driven by expanding margins, coupled with excellent cash collections from our customers. Now looking ahead to our targets for FY '13. Clearly, we enter 2013 facing significant and increasing economic uncertainty, as Jim cited a number of large industrial companies, including PTC's customers, have lowered their growth expectations for the coming year. With this backdrop, we're providing our current outlook for FY '13 and Q1. For FY '13, we expect revenues to grow by 8% to 10% to a range of $1,360,000,000 to $1,380,000,000, including license revenue of $370 million to $380 million. Despite this moderated revenue outlook, we remain committed to expanding margins and driving increased profitability. We are targeting to expand our FY '13 operating margin by approximately 200 basis points to some 21.5%. Given our revenue outlook, coupled with continued margin expansion, we expect non-GAAP EPS to be approximately $1.70 to $1.80 for the year. For Q1, we expect revenue to be in the range of $315 million to $325 million, including license revenue of $75 million to $85 million, and we expect non-GAAP EPS of $0.30 to $0.35. And finally, a few comments on uses of cash for 2013. We expect to repay some $120 million in debt and to repurchase between $55 million and $75 million worth of PTC stock during the coming year. We thank you for your support, and I will now turn the call back over to Tim Fox.

Hi, thank you. Theresa, you can open up the call for Q&A.

[Operator Instructions] Ross MacMillan. Ross MacMillan - Jefferies & Company, Inc., Research Division: So I had a question on the margin progression within your forecast. It looks like we're going to start off in Q1 with actually, I think, a slightly lower operating margin year-over-year, which then implies that by the time we get through into the second half of the year, we're going to have a significantly higher margin structure. And Jeff, can you just talk to that and that progression, I guess, as you think about the cost base as we move through the year?

Yes, Ross. Thanks for your call. We did announce that we were reducing costs and doing -- began the quarter with a restructuring. We only have a partial benefit of that restructure, actually, in Q1 included in our guidance. And as we complete that restructuring, we would get a full benefit of those cost savings as we complete that really in the Q2 time frame. So there's about $5 million of benefit that won't be fully realized in Q1 that will be realized in Q2 and beyond. I think in addition, we'll continue, given the outlook, to be tight on expenses. And so I think we're pretty confident -- I think we're prudent on Q1 guidance, and I think we're confident on margin expansion as we go through the year. Ross MacMillan - Jefferies & Company, Inc., Research Division: And would I be right in thinking that once we sort of get that full impact of the $5 million, then your cost base, as it has been actually for the last call it 3 quarters, has been relatively static? Is that the right way to think about the operating expenses as we move through Q2 to Q4? Or will we see an increase?

Well, I would expect that it'll continue to improve the cost structure -- reduce the cost structure as we go through the year. But we'd expect to see expansion of margins in the subsequent quarters beyond just flat on expenses. Okay?

Yes, Ross. Just to be clear, though, it's Jim here, we're going to add the Servigistics cost base into Q1. So any comps year-over-year, you got to reflect Servigistics in FY '13. And then we're going to restructure to take advantage of certain cost synergies and other cost-savings opportunities we're pursuing, which will lower then as we get into Q2 and beyond. Ross MacMillan - Jefferies & Company, Inc., Research Division: Yes. I guess the reason I'm asking is kind of thinking about the exit margin next year. It strikes me that in -- by the time we get into, for example, Q4 fiscal '13, assuming things play out to the forecast, that it will be at a substantially higher kind of exit margin in Q4 of next year than Q4 of fiscal '12.

Yes, I think that's fair. I think we should be exiting -- this year, we exited at 24.5%. We should be significantly better than that as we exit 2013.

Yes. And then if you place all their planning for 2014, it would be another 2 points of operating margin for the full year. So that suggests we do need to exit at a higher level. Ross MacMillan - Jefferies & Company, Inc., Research Division: Yes, that's helpful. And then just on your assumptions around -- given the environment, given the large deal close rates have been more challenging, can you help us understand just what assumptions, if any, you're making around large deals in fiscal '13 and perhaps even megadeals, the $5 million-plus-type deals in fiscal '13?

Yes, Ross, this is Jeff. So our business is characterized positively by very large customers that often place significant $1 million, $2 million orders, and we would expect that trend to continue. And we've assumed that our large customers continue to buy those kind of rates throughout '13. That said, we also have very large, as you cited, megadeals in every year. We've had generally somewhere approximating 4 of those a year. Our guidance for Q1 doesn't -- at the low end of the guidance does not require any megadeals to close to get to those numbers. We do have opportunities that could be megadeals. What we have seen, I think, as Jim cited, is a trend where some of those that were possibly megadeals in the quarter downsized in the quarter and someone purchased $2 million to $3 million and then may purchase another $2 million or $3 million later. But not -- we're not -- we're trying to reduce clearly our dependence on these very large megadeals, and I think building out the capacity in really the mid-market and base business has been helping us as we went through '12. We expect that to continue in '13.

Sterling Auty. Sterling P. Auty - JP Morgan Chase & Co, Research Division: I guess I missed it if you had mentioned it, but maybe for everybody's benefit, can you talk about kind of what's implied in terms of the revenue contribution from Servigistics? And then another revenue follow-up.

Yes. We've been, I think, prudent on the Servigistics as we're going into the integration of that as we speak. We would expect that to be a contribution of approximately $60 million to perhaps an upside of $70 million in the year. And they do have large customers as well. So I think we've been, I guess I'd call it prudent, maybe using your words, Sterling, to -- in our outlook for that. So in terms of growth, about half our growth would come organically and about half of it would come from acquisition for the full year. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. And looking at the comments you made about starting to get a little bit of traction with the new sales hires, does that match geographically what you saw? In other words, where did you apply those sales resources predominantly? And what else can you do in some of the weaker areas, like Europe and Japan, to try to bolster demand?

Sterling, so a fair amount of that capacity was in fact deployed in North America, and I think that led actually to the strong pipeline we were talking about 90 days ago and to the relevantly strong results we announced yesterday. So I think there's some good signs there. I think the European situation is something that we just need to work through with all of Europe here. I'm hopeful that the Japan thing is a short-term phenomenon. And that, that problem gets resolved more quickly and goes away -- because we've got a pretty good execution in Japan, and I don't think we have -- I don't think a new problem has developed within PTC. I think a new external phenomenon suddenly impacted us a little bit. And I'm hopeful that, that washes over and our Japan business gets back online, as we would expect. Sterling P. Auty - JP Morgan Chase & Co, Research Division: And maybe just a last question because I know it'll be on people's mind. Competitively, have you seen anything change? Because it seems like the weakness was actually not in CAD, but in some of the non-CAD areas. Have you seen any changes in those non-CAD competitive dynamics?

No. I don't think there were any meaningful changes. And in fact, if you look at the full year, the CAD business -- let's take constant currency because when you compare us perhaps to a European competitor, that's -- if you don't do constant currency, it changes dramatically. It helps them, hurts us. But if you take constant currency, our CAD business was relatively flat, our PLM business was up about 13% in total, with 13% more license revenue. So one thing I would suggest is we're going to stop using this 4-box because it rolls together too many apples and oranges. Our PLM business had a very good year. Our SLM business had a softer year and, in particular, a softer Q4 in part because we had a very large SLM transaction in the year-ago Q4 period. So there's a tough comp for SLM. But in fact, our PLM business really did pretty well for the quarter and for the year.

Steve Koenig.

I'd like to ask, on Servigistics, it looks like kind of when we look at the largest was Q1 and then they're restructuring that. That business may no longer be accretive for this year. And if that's the case, I'm wondering kind of what's changed in that business. What's caused your outlook to not be as good?

So we will expect -- this is Jeff. So we would expect that to be -- to continue to be accretive to our business. We have a consolidation here as well of our existing business plus that. So I think we continue to expect that, that will be a positive play for us. I think in the our current outlook, given the macro factors, we've been more conservative. But I think we feel, as Jim indicated, very solid on a strategic basis, and I think there's upside in that business as well. But we've been, I think, prudent given more macro factors and current trends. And we're still at the early stages of just integrating that business. We're, right now, about 3 or 4 weeks into that. And I think we're encouraged, but we've probably been a little bit more moderate on the outlook presently.

Yes, I think, Steve, just to add a little bit more color to it, the Servigistics business is somewhat of a bigger deal business. So their revenue comes from a lesser number of transactions by far than ours does. So we sort of feel like -- to the extent the economy is bad and bigger deals are hard to get done, it could weigh relatively more heavily on Servigistics than on PTC. So we've suggested that if PTC were probably to end up toward the lower end of our range, it might be because Servigistics underperformed relatively more than the main of PTC. That's a bit what we're thinking as we go into our year and as we put together our guidance.

Okay, great. If I could just follow up with one question. I'm curious, just to get some color, on how you're thinking about the revenue line next year. Like I'm wondering, are you going to be a -- well, are you going to be adding sales capacity or doing any reorgs? The revenue line, it looks kind of flattish in Q1. Then, obviously, it'll need to trend up later, but how does that happen seasonally as the year progresses? And have you talk to your customers about their spending plans for next year and what are you hearing?

So let me speak to the seasonal pattern. I think we're expecting -- we're being, I think, prudent on Q1. Typically, Q1 represents somewhere 22%, 23% of a full year number for us. We'd expect Q2, given the current outlook, which is -- I think, consistent with what we saw in Q4, we'd expect Q2 to be similar in revenue sequentially and then a step-up in Q3, and typically Q4 is our strongest quarter. So I think that pattern we'd expect. At the present time, I think we have good opportunities with customers. I think the uncertainty that's reflected here is just the uncertainty in terms of their outlooks themselves. Right now, I think we're being prudent on that for the year and for Q1. And it'll be -- time will tell us a little better as we get through that period what their outlooks are. Maybe I'll let Jim comment on our sales capacity.

Yes. Yes, and as well on the customer thinking. So from a sales capacity standpoint, we have ample capacity to cover us for our 2013 plan and even some distance into 2014. So I think we're going to stabilize sales headcount where it is and focus on making these people more productive. We don't anticipate any meaningful reorganizations of that sales force in the process. Incidentally, on that note, we are going to merge in the Servigistics sales force quite rapidly from the standpoint that we feel like this is a business we're already in. And given the momentum and the pipeline we have in SLM, it wouldn't make sense to have 2 different sales forces out there acting independently, as we did with MKS for a while. But coming back to the question about what the customers are thinking. I think there's been lots of data points that suggest that customers were getting incrementally more nervous throughout the course of the last quarter. And I think we're maybe at the peak of uncertainty right now. Somebody characterized it recently as the twilight zone. Nobody's sure what's going to happen. But I do think there's a sense of optimism out there. There's a number of analyst reports that suggest things will get better next year. And there are some customers that believe, too, that once we get the presidential election behind us and things settle down a little bit, maybe it'll improve. But we don't want to build guidance based on that, which we'd have to characterize as wishful thinking. So we're putting our guidance together, assuming that we're in for a difficult macroeconomic year, and then hopeful that maybe it'll turn out better than that.

Jay Vleeschhouwer.

Jim, Jeff, I'd like to ask about your fiscal '13 thinking about what have been among your largest line items of revenue by geo and by product. So if I'm not mistaken, by geo, your largest source of revenue is maintenance out of Europe. When you break down license maintenance and service by geo, what's you're thinking about maintenance in fiscal 13 in that region given your comments about softness? And then on the product side, as we've talked in earlier calls, Pro/E maintenance or Creo maintenance is your single largest product source of maintenance revenue. What's you're thinking going into next year on that particularly given your comments about Creo 2.0 uptake and possible win-backs and upgrades, Jim?

So let me -- this is Jeff, Jay. So thanks for the call -- the question. Let me answer a few comments and then let Jim fill it in. We continue to have very, very good both attach rates and renewal rates, particularly in the Americas and Europe. And our outlook would be for maintenance, those rates -- and, I think, all our history for Q4 and the full year were those -- both we maintain good rates in all dimensions and probably improved -- had a number of win-backs in the fourth quarter. So I think we're very solid. We'd expect our maintenance revenue to increase. As we showed in the guidance, I think it's like 6% or 7% year-over-year. So I think we feel pretty good about maintenance. So I think the uncertainty is more around new purchases. So I'd say I -- we feel very good about the maintenance rates. I think, particularly on Creo, the interest and uptake on Creo 2.0 is really value to customers. And as a result, we're seeing , I think, continued expectations on good attach -- great attach rates and very strong renewal rates along with, I think, successful win-backs. So I think about we would say that's a very, very important line for us. It's more -- approximately 50% of our revenue, and I think we'd feel very solid with -- probably the highest level of confidence of any line in the P&L would be the maintenance line.

Yes, and maybe there's 2 pieces of color I would add to that. Our view of the economy going into 2013 is not great. But it's a lot better than it was back in 2009. And I point that out only because in 2009, when license revenue for PTC and almost everybody, fell quite a bit, our maintenance held pretty steady through that. So I think we feel like maintenance does not necessarily follow license down if license slows down. Not quickly and maybe not at all, as we saw in 2009. Coming back to the CAD piece, in the prepared remarks we gave you, it does talk about Creo active maintenance seats, and you see a really positive trend there that the number of seats on maintenance in Creo has been really growing faster than the new seats we're selling. So what's happening here is that when customers see Creo, if they had slipped off maintenance, suddenly they say, "Maybe I should get back on it because if I could figure out a way to get back on maintenance, that might prevent me from having to re-buy the software." And then there's a supply chain phenomenon, which is when the big OEM-type customers, like, let's say, a Volkswagen Audi in Europe, upgrades to Creo, now the entire supply base has to upgrade to Creo to maintain that level of compatibility. And if some of those suppliers were maybe becoming a little delinquent on their maintenance, suddenly there's a huge incentive to get back on maintenance to make sure you can stay in the ecosystem of Volkswagen and Audi or Toyota or Honda or somebody like that as they upgrade to Creo. So this upgrade cycle does a very good thing for maintaining the momentum of our maintenance business.

Okay. A couple of follow-ups. Your prepared remarks talk about 12% to 15% growth in services for fiscal '13. Would it be fair to say that Servigistics accounts for the bulk of that? If I'm not mistaken, I think about 1/4 or 1/3 of their revenues were services prior to the acquisition. And with respect to your existing PLM services engagements pipeline, do you feel you have adequate capacity to meet that? What we've seen, for example, with some of the other PLM systems integrators is that they're running at pretty high utilization rates. Some, for instance, in the case of Siemens' PLM, they're looking to add capacity. Do you think you have enough in place? Or you going to have to be out in the market like your competitors looking for capacity?

So first, the answer to the growth, the 12% to 15%, as you cited, that's correct. About 8% to 10% of that would be Servigistics. That's really the size and scale of their service business. So our organic growth would be about 4%. In terms of capacity, I think we've got good capacity. I think given the economic outlook, if the demand exceeds what we have today, we can add capacity. We're doing, as you know, both delivering the demand as well as improving overall margin. And I'll...

Yes, maybe I'll remind you, of course, that when you think about our program to increase operating margins, the front 9-back 9 program, we have a very explicit strategy to develop a services partner ecosystem and to shift a large amount of the growth over to that ecosystem. So we've been doing that. If you go back, I think, in 2011, our services growth rate was 26%, and it was somewhere around half of that in 2012, and then organically, it'll be half of that again in 2013. So that really reflects a proactive strategy to develop an ecosystem and to push a fair amount of services into that ecosystem so as to lower the mix and to help us drive up the margin of the services that we do.

Matt Hedberg.

You talk about uncertainty here in the outlook and the macros. And I guess in one of their topics, Hurricane Sandy, obviously, we continue to hope for the best for people in the Northeast. But does that play into -- I mean, how -- it's still early, obviously, but does it -- how does that play into your guidance? I mean, is that reflected in sort of your outlook now? Or is it too hard to tell?

You're saying specifically Hurricane Sandy? I don't we have a...

I don't think we reflected that in our guidance in the new -- in fact, we had developed once this guidance before the hurricane came. But I also don't think that sort of New Jersey-New York City area is a big hotbed of manufacturing either. So I'm hopeful that the impact will be in the category of round off area -- error, sorry. But it could be that there's a deal or 2 that get affected by it. So we should probably go back to and -- go back to our forecast and see if that's the case.

And you talked -- that's helpful. Then you talked, to, obviously, you slowing your quota-bearing sales rep hiring now, and you talked about productivity improvements. Is there any way to quantify sort of what you're kind of looking for, for productivity improvements this year?

We're clearly driving productivity. I don't have all the data right at my hands here. We're going to be in New York City next week, and I think we can provide a more fulsome discussion of that, both where are we on where we see ourselves going. But I think the reiteration that Jim cited earlier is we see the productivity from the new reps being up, and we're going to continue to drive that in terms of training and -- on both the new products and overall training for those guys. So I think, Matt, we can give you a good update on that. In fact, Bob Rinaldi will next week.

Yes. Maybe just to give you a directional without specific numbers. We added a lot of new people to a running system. And in doing that, we averaged in or we averaged down the productivity of the whole system quite a bit. We think that those new people take around 2 years, maybe a little more, to become as productive as the people that had already been on the staff. So you could imagine that we lowered the productivity of the whole organization by bringing in much less productive people. But as those people ramp, then the productivity of the whole organization trends back to where it was. In trending back to where it was, productivity-wise, we have the opportunity to generate a lot of license growth. And that's what I say we're covered for 2013 and well into 2014 with the capacity we have if we can ramp that productivity back in the direction that it used to be at before we went on an expansion.

That's helpful. And then one last question. Maybe this is a sneak peak for next week as well. But we continue to be asked about sort of your thoughts on the software-as-a-service or cloud-based initiatives. And certainly, SLM, I think, is ideally suited for products of that nature. Is there any sort of guidance you can kind of give us just in terms of how you're thinking about integrating products such as that into your portfolio?

Yes. In fact, Servigistics has a meaningful software-as-a-business already, and it's been doing well. So I think you're right. We feel like PLM is somewhat of a lagging industry to move into the cloud. It's probably happening, but PTC was ahead of this trend when we tried to do it back in 2004. It will happen over time, but it's a lagging industry. But I think that SLM, for a number of reasons, some of which are technical, some of which are related to less intellectual poverty at risk and so forth, that's a category that customers are much more willing to put in the cloud, and we're going to tell you next week about the progress that we're making there, particularly with Servigistics.

Richard Davis.

Just a quick question on Servigistics. So of the new $65 million kind of outlook for next year, so we're thinking that $26 million of that is services. And then should I kind of roughly then think the balance of it is more or less split half and half between license and maintenance? Because I'm trying to just back into the what the company is doing and what you guys paid for it.

I think it's a -- I think the services piece is correct. Maintenance would be the next largest piece, followed by license. And so when you think about it -- by the way, the comment I'd make is their services business is relatively larger than ours, so that has a little pressure on margins. And also, their services margins aren't as strong as PTC's. So we're giving Marc Diouane the challenge of not only integrating that but driving the profitability of it. So just a few comments on Servigistics. But a smaller portion of it, probably in the $15 million range, would be license.

And then who knows about future acquisitions, but is the kind of going rate these days for acquisitions kind of 3 to 4x revenues? Or, I mean, obviously, I'm sure it varies all over the place, but is there any way you could categorize the M&A pricing market these days?

Yes, I mean, the most recent data point we have is Servigistics, which was, what, 220 on 80. So that was slightly under 3x.

I mean, it depends on the property, that scarcity, the -- then overall value. We'll -- every deal is somewhat different, and we'll look at the economics clearly on any deal.

Perry Huang.

Just had a couple questions. First one, around the maintenance seats. On a sequential basis, it looked Creo and Windchill did pretty well and rose generally in line with seasonal trends for a fourth quarter. But for the all other seat segment, it was up sequentially, but it looked a bit softer versus trend, and then also coming off an easy comp in 3Q. I was wondering if you could talk about any sort of drivers there.

Yes, just a comment on the all other bucket. There's a piece of that -- a significant portion of that is MKS. And as we completed the integration, we did have some cleanup of those seats. So I think we kind of began with a set of numbers there. As we cleaned them up, we found there was a little bit of shrink in there. That was not what we wanted, but we've got it to the right base. We're now growing that base again, so I think when you look at the trend, it's positive as opposed to negative. It did turn down for a couple of quarters as we did some cleanup. We're now in a growth mode on that. And I think, as Jim cited earlier, probably the highlight has been the growth of Windchill seats as well as increasing on Creo as well. So I think the trends continue to be pretty good, and we'd expect those to continue next year.

Okay, got it. And then just as a follow up, you've talked about sort of the cost-cutting that you're making next year. But looking at your guidance, I mean, given that OpEx growth is -- it looks like it's going to be minimal at about 2% year-over-year growth at the midpoint of guidance, how should we think about the key areas of spend that -- for fiscal '13 maybe in terms of R&D and sales and marketing?

Yes, as I think, as we indicated, we're integrating Servigistics this quarter. We've got -- already announced some plans to lower our costs, and we'll compete that integration. As we look forward, I think we provided in the model our expectation would be to continue to see productivity improvement, i.e. sales and marketing continued downward slightly as a percent of revenue. R&D we've continued to be in roughly a $200 million run rate, and we'd expect that to continue. And one of the benefits you do get is as new products come to market, we get a revenue boost without a relatively -- without -- with a relatively flat R&D spending. So I think we're continued to be tight in all areas with probably the drive, as Jim mentioned, productivity, particularly in the sales group, is -- would be a factor as we look into next year.

Blair Abernethy. Blair H. Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Jim, just a couple for you. Just want to get a sense of the competitive landscape on the PLM side. Particular over this past year, where we've seen Autodesk move more into this space, become more vocal, more higher profile. How is that impacting PTC in terms of your going to the -- going to market? And is -- longer term, is there a potential pressure or -- I'm just wondering what deal size this is because typically, your business on the PLM side has been driven by even larger deal sizes then CAD side.

Yes. What I would say is if you look at that 4-box we published, let me first say I'm unaware of any competition between PTC Direct Sales and Autodesk PLM. I'm completely unaware of any. I think where the competition would exist, if it did exist, would be in the reseller space. And if you look at the 4-box, our resellers had a pretty good year in PLM. And in this case, Enterprise really is mostly PLM because the resellers aren't selling ALM or the supply chain or the SLM stuff in any meaningful quantity. And if you kind of look at the year that we had, constant currency 19% growth on 18% license growth, 22% maintenance growth, that's a pretty good year. So I guess my view would be I don't think Autodesk is a competitive factor for us. Blair H. Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then just turning to the MKS Integrity business. How have you progressed there in terms of cross-selling into more verticals now that they're under PTC's bigger distribution channel?

Yes, let me back up a little bit and revisit how we did the integration and then, using that context, talk about progress we're making. So when we acquired MKS, we were effectively getting into a new business we weren't already in, unlike Servigistics where we're adding to a business we're already in. So ALM was, for us, a brand-new business. And we made an integration decision to keep their sales force separate through 2012. And in retrospect, I'm not sure that was the right decision, but that was the decision we made at the time. So there was not a lot of cross-selling happening through most of 2012. Then in the last quarter or so of 2012, we told our sales guys, "Go ahead and get started on campaigns." We did land several interesting SLM opportunities, particularly in North America -- I'm sorry, ALM opportunities through the PTC Direct Sales force, and we're building up a pipeline of bigger opportunities. But you got to think that these guys are just getting started with campaigns now, many of them going into 2013. We had a pretty good year in automotive, and I would attribute a chunk of that to success with ALM in automotive. But that was less about cross-sell and more about the fact that the ALM story is compelling to automotive manufacturers. So I think that most of the revenue synergy of MKS is still in front of us.

Our last question comes from Ben Rose.

Jim, in the past, when we've gone through these economic downturns, large industrial customers have used PLM and CAD, both for cost-cutting opportunities as well as driving new product cycles. Is it your sense now that cost-cutting is trumping their focus on new product cycles? And if so, has that caused any change to the sales message value proposition that you're using out in the field?

Yes, I think it's a good question. I think right now, what we saw, particularly in Q4, was people just delaying things. They're saying, "I'm not sure I should spend this money yet. There's another quarter left in a lot of people's fiscal year. Let's wait a quarter. Let's see what happens." So I don't -- it's not like 2009 where people were really trying to take costs out. I think right now, it's trying to avoid putting more cost into the system. But in 2009, we did shift to a story around sort of the element of taking costs out of your products and taking costs out of your product development processes through more global development processes and so forth. I think that story makes sense, and it becomes a story we'll probably tell if indeed the economy actually gets worse and people start trying to take cost out as opposed to avoid putting it in. Again, I would characterize our issue as more about downsizing and delaying things than actually trying to cut costs.

And if I may, just one final question around -- you had mentioned the fiscal cliff in your prepared remarks. I noticed in the press release you mentioned an army -- excuse me, an order with the U.S. Army. What are you seeing specifically with the outlook for U.S. defense agencies and so forth?

Yes, I mean, I think to be fair, we actually had a reasonable quarter in the aerospace and defense industry vertical. But I think that is a little bit people saying, "We should get our orders placed before there's a chance that the company -- the country does go off this so-called fiscal cliff." So I think that there's been a short-term positive effect in the aerospace and defense industry ahead of what they view as potentially a longer-term negative effect. Our view for next year would be that this industry continues to plod along. And there are some opportunities that aren't discretionary, but we think that this is not necessarily going to be a big growth opportunity for PTC next year as well. Okay?

Okay, folks. So thanks for joining us this morning. Again, if you would like to register for our Investor Day, please go to the ptc.com and register accordingly. With that, I'll hand it over to Jim for closing comments.

Yes, well, I just want to thank you all again for spending your time with us here this morning and for your support of the company. Obviously, we're very optimistic about the future but in the short term feel like we need to work our way through a tough macro and potentially currency environment. But we appreciate the time here today and hopefully look forward to seeing some of you again next week and we'll go back through this stuff in a lot more detail, okay? Thank you very much.

This concludes today's conference call. Thank you for your participation.