Business News
PTC: Q4 AND FISCAL 2008 PREPARED REMARKS
Monday 03. November 2008 - We provide a written copy of our prepared remarks in conjunction with the press release after the market closes on Tuesday, October 28.
Our conference call before the market opens the morning of Wednesday, October 29 will be primarily Q&A. The intent behind this process is to provide our shareholders with more time to review and analyze our results.
OPENING COMMENTS
Q4 and FY08 were the highest revenue quarter and year in PTCs 25 year history. We also generated $222 million of operating cash flow in FY08 and achieved a 460 basis point improvement in our non-GAAP operating margins.
Companies continue to enhance their competitiveness through product innovation and the globalization of their product development and manufacturing processes, facilitating faster time-to-market and improved product quality at a lower total cost. To do this effectively, they need to leverage and share complex product design data amongst numerous departments internally as well as with suppliers and other partners. We believe the necessity of PLM applications is increasing, especially in difficult economic times when cost savings from globalization initiatives is so important to our manufacturing customers.
PTC has been investing in both technology and product portfolio to support our customers requirements, as well as in our business development infrastructure to capitalize on the global market opportunity. We have also undertaken a number of initiatives to enhance our long-term business model, including significant steps toward globalizing our work force, evolving our distribution model, enhancing the efficiency and scale of our services business and growing our base of maintenance-paying customers.
As we look to the future and contemplate the potential impact of a slowing economy and currency fluctuations in 2009, we believe that our outlook and strategic initiatives reflect a warranted balance of caution about next year and optimism about the longer-term health and growth potential of the business. We are currently guiding to FY09 revenue of $1,100 million – a modest increase in revenue over FY08. This guidance assumes current exchange rates of approximately USD 1.25 / EURO and YEN 95 / USD. It is worth noting that the simple average Euro exchange rate for FY08 was $1.50; clearly recent foreign currency movements are having a significant impact on our outlook, as more than 40% of our revenue comes from Europe.
In addition to the challenges currency exchange rate volatility creates in providing guidance, the uncertainty around the current macroeconomic environment only adds to the challenge. As our Q4 results indicate, we did not see any dramatic changes in business trends in our September. The economic situation became more volatile in early October. Consequently, we remain mindful of the global economic issues we all read about every day.
Balancing a difficult near-term economic situation with the longer-term opportunity for the business, we are modestly increasing our investments in the business. Consequently, we are expecting FY09 non-GAAP operating margins, earnings per share and cash flow to be comparable to FY08 even in a difficult economy. We expect FY09 GAAP EPS of $0.85 to $0.90.
Our primary strategic initiatives for FY09 are:
1) Invest in R&D to further improve the breadth and competitiveness of our product portfolio, potentially supported by modest acquisitions
2) Continue to evolve our distribution model through increased investment in support of our reseller channel and investment in developing a network of enterprise reseller partners
3) Enhance and leverage the value of our services business through expansion of our services ecosystem, including the addition of strategic services partners
4) Continue the globalization of our workforce, primarily through investments in emerging economies
We remain committed to further expanding our operating margins over the longer-term and believe the strategic investments we are making this year position us well for the future. Should our revenue estimates prove conservative for the year, there is opportunity for continued margin expansion in FY09.
Q408 AND FY08 RESULTS VS. GUIDANCE
PTC provides non-GAAP supplemental information to its financial results. Please refer to the attached tables for a reconciliation between GAAP results and the non-GAAP supplemental information.
Q408 NON-GAAP RESULTS VS. GUIDANCE
$300 million in revenue – at the high end of our guidance of $290 to $300 million
24.9% operating margin – slightly below our expectations
$0.45 EPS – above our guidance of $0.38 to $0.42
GAAP Results: Our Q4 revenue was $299.5 million with 15.8% operating margins and $0.31 EPS.
FY08 NON-GAAP RESULTS VS. GUIDANCE
$1,075 million in revenue – above our guidance of $1,070 million
21.6% operating margin – slightly below our 22% target
$1.36 EPS – above our expectations
GAAP Results: Our FY08 revenue was $1,070 million with 11.7% operating margins and $0.68 EPS.
Q4, FY08 REVENUE and FY09 COMMENTS
We had a very strong quarter and year on the top line. Our products continued to perform well in competitive benchmarks and our sales force continued to execute in a tough economy. For example, we recently won a rigorous and highly visible PLM benchmark at EADS against competitors such as Siemens PLM, SAP, and Dassault. We benefited from favorable foreign exchange movements for Q4 and FY08. The CoCreate Software business we acquired on November 30, 2007 also performed well for the quarter and the year. From a revenue mix perspective, we had slightly more services revenue than anticipated, which negatively impacted overall operating margins in Q4. Our tax rate in Q4 was lower than anticipated, which benefited EPS by approximately $0.04.
NON-GAAP REVENUE BY DIRECT / CHANNEL
Our direct sales force is primarily focused on large enterprise customers in the MCAD and Data Management and Collaboration (DM&C) markets. Our reseller channel is focused primarily on Small and Medium Businesses (SMB) in these markets.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Direct
$174.4
$179.2
$177.3
$215.3
$746.1
$183.0
$191.6
$202.1
$224.7
$801.5
Channel
$47.3
$48.9
$47.6
$51.4
$195.2
$59.5
$67.9
$70.6
$75.5
$273.4
Channel as % of Revenue
21%
21%
21%
19%
21%
25%
26%
26%
25%
25%
In Q4 non-GAAP channel revenue of $76 million was up 47% year over year. We continue to have success expanding our reseller channel, with 25% of our total revenues coming from the channel in Q4 compared to 19% in Q407. These results reflect organic growth, favorable foreign currency rate movements and the addition of the CoCreate reseller channel. Excluding CoCreate, our channel revenue was up 20%. Direct account revenue, including Strategic Account Management (SAM) accounts, grew 4% year over year, and was up 11% from Q308.
FY08 non-GAAP channel revenue of $273 million was up 40% year over year, with 25% of our total revenue coming from the channel compared to 21% in FY07. Again, these results reflect organic growth, favorable foreign currency rate movements and the addition of the CoCreate reseller channel. Excluding CoCreate, our channel revenue was up more than 17%. Direct account revenue, including Strategic Account Management (SAM) accounts, grew 7% year over year.
Looking forward to FY09, we intend to increase our investment in marketing and business development to further accelerate the growth of our channel business. We have an excellent position in the growing SMB MCAD market with our scalable version of Pro/ENGINEER, as well as CoCreate, Mathcad and other products. We are releasing Windchill ProductPoint in December 2008 to capitalize on the growing market demand for an SMB Data Management & Collaboration (DM&C) solution. We are starting FY09 with more than 420 SMB channel partners. We also intend in fiscal 2009 to develop a network of enterprise resellers to further expand the Windchill ecosystem. Over the longer term we are targeting channel revenues to comprise 35% to 40% of total revenue.
On the direct side, we are starting the year with 50 additional direct sales reps which we added during the course of fiscal 2008; we now have 475 quota-carrying sales reps, including approximately 35 from CoCreate. We have a large base of customers using Pro/ENGINEER, CADDS, Mathcad, Arbortext and other products in the MCAD market. We continue to grow and cross-sell our Windchill, ProductView and other Data Management & Collaboration solutions into this installed base. We continue to see double-digit growth in the large enterprise Data Management & Collaboration (DM&C) market, which we believe is a reflection of product superiority and strong sales execution.
LARGE DEAL ACTIVITY
Large deal activity is a significant growth driver, as it tends to generate 13% to 15% of our total revenues in any given quarter, with the exception of Q4 which is typically higher. Large deal activity is driven primarily by direct sales reps. We define “large deals” as recognizing more than $1 million of license and services revenue from a customer during a quarter.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Number of Large Deals
12
16
17
22
67
12
16
13
25
66
L&S Revenue
$28.2
$35.6
$34.7
$58.2
$156.7
$32.1
$37.6
$35.6
$61.3
$166.6
Avg. Deal Size
$2.4
$2.2
$2.0
$2.6
$2.3
$2.7
$2.4
$2.7
$2.5
$2.5
% of Total Revenue
13%
16%
15%
22%
17%
13%
15%
13%
20%
16%
In Q4 we had 25 large deals totaling $61 million. 10 of these customers were in North America, 11 in Europe and 4 in Asia. This compares to 13 large deals last quarter totaling $36 million, and 22 customers totaling $58 million in Q407.
In FY08 we had 66 large deals totaling $167 million. 24 of these large deals were in North America, 26 in Europe and 16 in Asia. This compares to 67 large deals in FY07 totaling $157 million, with 29 of these large deals in North America, 24 in Europe and 14 in Asia. The average large deal size was slightly larger in FY08 compared to FY07.
FY09 Outlook
We continue to have a strong pipeline of large deals that we are working on world-wide. Having said that, large deal activity is influenced by macroeconomic conditions. In Q1 we expect to see a sequential decline in large deal activity due to seasonality, and it is too early to tell how the economy will impact year-over-year large deal performance. As a point of reference, we had 12 large deals totaling $32 million in revenue in Q1 of FY08.
REVENUE BY LINE OF BUSINESS
LICENSE
License sales generate the highest gross margins, which are in the mid- to high 90% range. License revenue tends to represent 28% to 35% of our total revenues in any given quarter, with Q4 generally being our strongest quarter.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
License
$66.6
$71.3
$62.1
$96.1
$296.1
$67.2
$72.9
$77.6
$98.5
$316.2
% of Total Revenue
30%
31%
28%
36%
31%
28%
28%
28%
33%
29%
Q4 License revenue of $99 million was up 3% year-over-year, against a strong performance in Q4 of FY07. We had a strong quarter for product sales in the MCAD market, with revenue up over 10% on a year-over-year basis and more than 25% sequentially. Our product sales in the Data Management & Collaboration (DM&C) market were down on a year-over-year basis against a strong comparison in Q4 of FY07. On a sequential basis, our product sales in the Data Management & Collaboration (DM&C) market were up over 20%. Our products continue to perform very well in competitive benchmarks, and our new releases in FY08 of both Pro/ENGINEER and Windchill continue to gain momentum in the market (see Maintenance and Technology/Product sections below for further detail on seat counts).
FY08 License revenue of $316 million was up 7% year-over-year, reflecting benefit from CoCreate and favorable currency movements. Our product sales in both the MCAD and Data Management & Collaboration (DM&C) markets were up high single digits on a year-over-year basis.
Looking forward to FY09, we are expecting mid- to high single-digit growth in license revenue. In addition to the 50 net new direct sales reps, we intend in fiscal 2009 to invest further in marketing in support of our channel business. We also intend to invest to develop a network of enterprise resellers to further expand our Windchill ecosystem. It is worth noting that, given the potential impact of a slowing economy in 2009 and currency fluctuations, we have reduced our growth expectations for Europe relative to our exceptionally strong performance in FY08. For Q109, we are expecting flat to modest year-over-year growth in license revenue.
SERVICES
Our services business provides significant value to our customers, helping them re-engineer their global product development business processes and implement our solutions and providing them with training on our software. Our services net margins typically run between 10% and 15%. Services revenue tends to represent approximately 25% of our total revenues in any given quarter.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Services
$54.5
$58.0
$59.7
$64.6
$236.7
$60.2
$63.8
$63.8
$68.8
$256.6
% of Total Revenue
25%
25%
27%
24%
25%
25%
25%
23%
23%
24%
Q4 Services revenue of $69 million was up 7% year over year. Our training business, which typically represents about 25% of our total services revenue, was down 9% year-over-year. Our consulting business, which primarily supports Windchill implementations, was up more than 10% year-over-year. Our services net margins were 12%, compared to 20% in Q407.
FY08 Services revenue of $257 million was up 8% year-over-year. Our training business was up 4% year-over-year and our consulting business was up approximately 10% year-over-year. Our services net margins were 12%, compared to 13% in FY07.
Looking forward to FY09, we are expecting flat to low single-digit growth in services. We also intend in fiscal 2009 to enhance and leverage the value of our services business through expansion of our services ecosystem, including adding strategic services partners. We continue to focus on improving our services net margins and are targeting mid-teens services net margins in FY09. For Q109, we are expecting flat to a modest year-over-year decline in services revenue.
MAINTENANCE (NON-GAAP)
Our maintenance business is an important barometer of customer satisfaction with our solutions. It is also a strong source of recurring revenue for PTC. Maintenance gross margins are in the mid- to high 80% range. Maintenance revenue represents 47% to 48% of our total revenues in any given quarter, with Q4 usually being lower as a percent of total revenue due to typically strong performance of license sales in that quarter.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Maintenance
$100.6
$98.8
$103.1
$106.0
$408.4
$115.1
$122.8
$131.3
$132.9
$502.1
% of Total Revenue
45%
43%
46%
40%
43%
47%
47%
48%
44%
47%
Q4 non-GAAP maintenance revenue of $133 million was up 25% year-over-year. All of our geographic regions delivered year-over-year growth. Maintenance revenue growth in FY08 benefited from the CoCreate Software business which had a large maintenance base. Excluding CoCreate, we also delivered more than 10% year-over-year growth in maintenance revenues driven by solid execution and currency benefit.
FY08 non-GAAP maintenance revenue of $502 million was up 23% year-over-year. This was the first year in our history where maintenance revenue exceeded $500 million.
Active Maintenance Paying Seats
We have almost 900,000 active maintenance paying seats of PTC software in use today. Q4 is our 14th consecutive quarter of maintenance seat growth. We believe the solid, growing base of maintenance-paying customers is a testament to the quality of our products and we also view it as one of our largest assets.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Pro/E
128.8
126.7
127.3
129.6
129.6
130.9
132.3
134.4
135.2
135.2
Windchill
419.3
430.2
450.1
481.3
481.3
534.2
552.2
579.5
615.3
615.3
All Others
65.0
90.5
93.6
89.3
89.3
151.7
150.4
152.3
148.9
148.9
Total
613.1
647.4
671.0
700.2
700.2
816.8
834.9
866.2
899.4
899.4
Looking forward to FY09, we are expecting flat maintenance revenue, primarily due to foreign exchange impact. For Q109, we are expecting more than 10% year-over-year growth in maintenance revenue; keep in mind that we only had one month of contribution from CoCreate in Q1 of FY08. On a sequential basis, we are expecting flat to modestly down maintenance revenue.
NON-GAAP REVENUE BY GEOGRAPHIC REGION
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
North America
$86.5
$89.4
$86.9
$102.2
$365.0
$84.7
$88.4
$90.2
$102.0
$365.2
% of Total Revenue
39%
39%
39%
38%
39%
35%
34%
33%
34%
34%
North America non-GAAP revenue was $102 million in Q4, flat with Q407 but up 13% over Q308 reflecting our typically strong Q4. Channel revenue in North America in Q4 was up in the mid-teens compared to FY07. For FY08, revenue of $365 million was also flat with FY07, which we believe reflects the economic situation in North America. Channel revenue for the year was up in the low-teens compared to FY07.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Europe
$82.7
$82.8
$86.2
$101.6
$353.4
$102.3
$107.1
$112.3
$131.1
$452.9
% of Total Revenue
37%
36%
38%
38%
38%
42%
41%
41%
44%
42%
Europe non-GAAP revenue was $131 million in Q4, up 29% compared to Q407 and up 17% over Q308. Channel revenue in Europe in Q4 was up more than 50% compared to FY07. For FY08, revenue of $453 million was up 28% over FY07. Channel revenue for the year was up more than 50% compared to FY07. Our solid performance in Europe in Q4 and FY08 reflects our strong sales performance in this region, benefit from currency fluctuations, contribution from CoCreate and our typically strong Q4.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Pacific Rim
$28.0
$30.7
$32.6
$34.2
$125.6
$30.0
$33.5
$34.3
$39.5
$137.3
% of Total Revenue
13%
13%
15%
13%
13%
12%
13%
13%
13%
13%
Pacific Rim non-GAAP revenue was $39 million in Q4, up 15% compared to Q407 and up 15% over Q3. Channel revenue in the Pacific Rim in Q4 was up more than 40% compared to FY07. For FY08, revenue of $137 million was up 9% over FY07. Channel revenue for the year was up in the mid-teens compared to FY07. Our solid performance in the Pacific Rim in Q4 and FY08 reflects our strong sales performance in this region and our seasonally strong Q4. Notably, China continues to be a strong growth area for us with revenue up 18% in Q4 and 20% in FY08 compared to prior year periods.
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
FY ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
FY ’08
Japan
$24.5
$25.1
$19.2
$28.6
$97.3
$25.5
$30.4
$36.0
$27.7
$119.6
% of Total Revenue
11%
11%
9%
11%
10%
11%
12%
13%
9%
11%
Japan non-GAAP revenue was $28 million in Q4, down 3% compared to Q407 and down 23% over Q308, as we had a couple of large deals in Japan which drove strong performance in Q308. Channel revenue in Japan in Q4 was up more than 80% compared to Q407. For FY08, revenue of $120 million was up 23% over FY07. Channel revenue for the year was up more than 60% compared to FY07. Our performance in FY08 reflects improving sales performance in this region, benefit from currency fluctuations and contribution from CoCreate.
CURRENCY IMPACT ON NON-GAAP RESULTS
Because we have a global business with real strength in Europe and Asia, which represent more than 65% of our revenue, our results are impacted by currency fluctuations. Q4 revenue benefited year-over-year from favorable currency impact by approximately $14 million while expenses were negatively impacted by approximately $8 million. FY08 revenue benefited year-over-year from favorable currency impact by approximately $58 million while expenses were negatively impacted by approximately $33 million.
On constant currency basis, we achieved 7% year-over-year revenue growth in Q4. Looking at constant currency revenue growth by geographic region in Q4: Europe grew 18%, the Pacific Rim grew 14%, North America was flat and Japan declined 13%. On constant currency basis, we achieved 8% year-over-year revenue growth in FY08. Looking at constant currency revenue growth by geographic region in FY08: Europe grew 15%, Japan grew 11%, the Pacific Rim grew 8% and North America was flat.
Looking forward, the guidance we are providing assumes current exchange rates of approximately USD 1.25 / EURO and YEN 95 / USD.