Parametric Technology (PMTC)

Q2 2011 Earnings Call

April 28, 2011 8:30 am ET

Executives

Jeffrey Glidden - Chief Financial Officer and Executive Vice President

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

Barry Cohen - Executive Vice President of Strategy

Kristian Talvitie -

Analysts

Richard Davis - Canaccord Genuity

Sterling Auty - JP Morgan Chase & Co

Yun Kim - Gleacher & Company, Inc.

Ross MacMillan - Jefferies & Company, Inc.

Ben Rose - Battle Road Research Ltd.

Jay Vleeschhouwer - Merrill Lynch

Michael Olson - Piper Jaffray Companies

Steven Koenig - Longbow Research LLC

Presentation

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Operator

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Good morning, ladies and gentlemen, and welcome to PTC's Second Quarter Fiscal Year 2011 Results Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce Kristian Talvitie, PTC's Senior Vice President of Financial Planning and Investor Relations. Please go ahead.

Kristian Talvitie

Thank you. Good morning, good afternoon, everyone. Thanks for joining us on our Q2 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 assumption of PTC's management and are subject to risks and uncertainties that could cause actual events and result to differ materially.

Information concerning these risks and uncertainties are contained in PTC's 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 the Investor Relations page of our website at www.ptc.com.

With us today on the call is Jim Heppelmann, Jeff Glidden and Barry Cohen. And with that, I'd like to turn the call over to Jim.

James Heppelmann

Thanks, Kristian. Good morning, and thanks for joining us, everybody. Let me start by saying that, I think, all in all, Q2 was a very strong quarter. I won't tell you it was a perfect quarter, but I will say that I'm very excited about the underlying strength of our business that was demonstrated. While we posted a quarter that was ahead of our plan and at the top of our guidance range, we can still see some relatively obvious ways we can make the business even stronger going forward. We feel there's room for improvement, and with that, the potential of even stronger performance in the future.

Let me start by reminding you that since 2009, I've been saying that the primary measure of our success is our ability to deliver on this 20% earnings growth per year through 2014. So against that draw, Q2 represents another good quarter under our belt. And with very strong performance from our maintenance business and with surging demand for our Creo CAD solutions, we're confident that we'll deliver the 20% to 25% earnings growth that we've been guiding till here in fiscal 2011. So factoring in the 25% earnings growth that we had last year, finishing 2011 in this guidance range would put us well ahead of the required pace at the 40% mark of that 5-year plan, with strong momentum going forward.

I talked to you a number of times about how our 20% earnings growth plan is rooted in 4 factors, being growth, leadership, efficiency and predictability. So I'd like to reflect back on Q2 and actually the first half of fiscal 2011 from the perspective of that framework.

In the area of growth, we said we'd like to increase our organic growth rates into the low teens and drive toward a 13% growth CAGR over the timeframe of this 5-year plan. We remain confident that we have strong growth prospects with our Windchill PLM and our Arbortext SIS, or Service Information System business, and similarly with our license revenue. But to get to the low teens overall, we said we needed to increase the growth rates of CAD and the growth rates of our Maintenance business, both of which have been growth laggard in recent years.

So over the past 2 years, we put in place a number of initiatives to drive growth in these areas, including our Creo strategy for CAD, and a series of new business policies and operational improvements in our Maintenance business. Quite frankly, the success we've now demonstrated in those areas has surpassed my expectations. So the biggest challenge we have at the moment is balancing the various growth opportunities against our capacity.

As you know, we have the same sales force selling both Creo and Windchill, and the strong demand we've seen for Creo in the first half, clearly takes selling cycles away from Windchill, suggesting we should be thinking about and probably working on remedies to what may currently be a capacity limitation to our growth opportunity.

On the leadership front, we had another good quarter securing domino accounts that we've been using to demonstrate our ability to take market share in tough competitive environments. So included amongst the 3 accounts was our first true Creo domino, which was a large Japanese electronics company who decided to sweep out a mix of the Sol and Siemens tools in favor of an across-the-board standardization on Creo.

A second account was a significant European industrial company who replaced an SAP PLM strategy. And the third was TJX, a local and large retailer here in Boston, who has multiple store brands, and starting with a long list of 15 vendors and ultimately selected PTC from the short list that included Siemens and the Sol. So we have good momentum there, and we feel we're well on track for our goal of 30 dominos by year end.

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