Parametric Technology (PMTC)

Q3 2011 Earnings Call

July 27, 2011 8:30 am ET

Executives

Tim Fox -

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

Analysts

Rafael Garcia - Morningstar Inc.

Richard Davis - Canaccord Genuity

Sterling Auty - JP Morgan Chase & Co

Yun Kim - Gleacher & Company, Inc.

Matthew Hedberg - RBC Capital Markets, LLC

Ross MacMillan - Jefferies & Company, Inc.

Jay Vleeschhouwer - Merrill Lynch

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Steven Koenig - Longbow Research LLC

Presentation

Operator

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Good morning, ladies and gentlemen, and welcome to PTC's Third 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 Tim Fox, PTC's Vice President of Investor Relations. Please go ahead, sir.

Tim Fox

Thanks. Good morning, everyone. Thanks for joining us on our Q3 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 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 most recent Form 10-K and Forms 10-Q on file with the SEC. All financial measures discussed on this call are non-GAAP financial measures. A reconciliation between the non-GAAP and the comparable GAAP measures is located in our prepared remarks documents on the Investor Relations page of our website at www.ptc.com.

With us on the call this morning, we have Jim Heppelmann, Jeff Glidden, Barry Cohen and Kristian Talvitie.

With that, I'd like to turn the call over to Jim.

James Heppelmann

All right. Thanks, Tim. So good morning, and thank you all for joining us. I'm pleased that we've been able to announce another solid quarter of business here in Q3 with total revenue growth of 20% and non-GAAP earnings growth of 52%. Those are pretty good headline numbers.

Our revenue growth was well above our guidance range, but even if you back out the MKS contribution and look at the organic component, that revenue was above our guidance range, and our non-GAAP EPS came in at the very high end of the guidance range we had given you a quarter ago.

We have a relatively balanced growth of 21% in the Desktop business and 20% in the Enterprise arena. We had very strong demand from maintenance with 17% growth and services at 27% growth. And our license growth rate improved to a very respectable 18%.

So again I think these are all very solid numbers. During the quarter, at our PlanetPTC customer event, we formerly launched the Creo product, which transformed a great story and a strong vision into a reality for us. At that event, we received some tremendous customer feedback as well as great reports coming out of the event from press and industry analysts.

So all this buzz about Creo, dating back to the October event in Boston, has translated into a lot of sales activity, which in turn has translated into a surge in expansion orders from our existing customer base and a noticeable increase in new customers captured by our reseller channel.

We continue the recent trend in this business as we posted another very strong Creo quarter with license revenue up more than 40%.

During the quarter, we also closed the MKS acquisition. MKS is a very exciting and very strategic acquisition for us and it will add to our revenue growth opportunity far into the future. With the Integrity product, MKS had become the leader in helping companies develop the embedded software that goes into manufactured products. The number of software engineers within the engineering departments of our manufacturing customers is growing at a very fast rate as products become increasingly sophisticated and increasingly filled with electronics and software control systems.

So Integrity provides a very compelling standalone sales opportunity, which gives us a great way to penetrate new accounts even when there's not a PLM or MCAD opportunity readily available to us.

At the same time, when the software development strengths of Integrity are combined with PTC's historical strength in hybrid development and PLM, now we have a very compelling and completely unique solution for customers. So we're very bullish on the Integrity opportunity. And you'll note in our guidance that we increased by a bit our expectation for the contribution of MKS in our Q4 outlook.

We shipped our blockbuster Windchill 10.0 release earlier this year. And in Q3, our Enterprise business began to show good signs suggesting that the rebound that we've been predicting to show in the back half of this year is underway.

Total Enterprise revenue was up 20% in the quarter. License revenues were up dramatically from last quarter, though flat with the tough year-over-year comparison. And the maintenance and services business continued to put up -- to pose very strong growth numbers as customers proceeded with their deployments in the ongoing use of the software.

We saw better performance from our federal aerospace and defense vertical, and we also secured 2 important new domino accounts. One of the Domino accounts is in the electronics and high-tech vertical and the second represents another major win in the retail and consumer vertical, where we have a fabulous win streak going and a lot more runway in front of us. You'll notice, of course, that we have a lot of big deal activity in Q3 and about 1/3 of this activity came from this portfolio of domino accounts. So clearly, Windchill is on track as we continue to demonstrate our ability to capture market share and then deleverage those new accounts to expand our growth opportunity.

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