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| PMTC > SEC Filings for PMTC > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and profitability, the development of our products and markets, and adoption of our solutions are forward-looking statements that are subject to the inherent uncertainties in predicting future results and conditions. Risks and uncertainties that could cause actual results to differ materially from those projected include the following: our customers may continue to decrease, delay or forego investments in our solutions in this weakened global economic climate; customers may delay, or become unable to pay, payments due to us in this weakened global economic climate; our efforts to reduce our operating costs may not become effective as quickly as we expect, thereby impacting our profitability, and such reductions could harm our business by decreasing our investments in necessary or strategic initiatives; our cost reduction initiatives may delay our ability to take advantage of business opportunities when the economy recovers; our ability to successfully differentiate our products and services from those of our competitors and otherwise compete could be adversely affected by the relatively larger size and greater resources of several of the companies with which we compete; as well as other risks and uncertainties referenced in Part II, Item 1A. "Risk Factors" of this report.
We develop, market and support product lifecycle management (PLM) software solutions and related services that help companies develop physical and information products. The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) market and the collaboration and product data management solutions market, as well as many previously isolated markets that address various other phases of a product's lifecycle.
Our PLM software solutions provide our customers with an integrated product development system that enables them to create digital product content, collaborate internally and externally, control content and automate processes, configure products and content, and communicate product information to people and systems across the extended enterprise and design chain.
The most significant challenge we faced in the third quarter and first nine months of 2009 was the current global economic environment, which has weakened considerably since 2008. While we have seen recent signs that cause us to believe the economy is beginning to stabilize, we expect that the economic environment will continue to impact us at least for the near term and that our customers (including those of our resellers) may continue delaying purchase decisions or reducing the size of their purchases. Another significant factor impacting our 2009 results was the decline in the value of certain non-U.S. currencies in which we transact business, particularly the Euro, relative to the U.S. dollar, which adversely affected, and may continue to adversely affect, our reported results as amounts earned in these currencies are translated into dollars for reporting purposes.
We recorded $226 million and $692 million of total revenue in the third quarter and first nine months of 2009, respectively, compared to $272 million and $771 million in the year-ago periods. This reflects a decrease in license revenue of 38% in both the third quarter and first nine months of 2009 (a decrease of $30 million and $87 million, respectively).
We view the decline in license revenue as particularly significant and, accordingly, have reduced our revenue expectations for the year. We expect license revenues for the remainder of 2009 will continue to be
below 2008 levels. The declines in license sales have recently begun to have a negative impact on our consulting and training services sales and maintenance sales, and may continue to negatively impact such revenue for the remainder of 2009 and beyond.
Primarily as a result of revenue declines, our operating income declined by $30 million and $74 million in the third quarter and first nine months of 2009, respectively. Net income declined by $11 million and $28 million in the third quarter and first nine months of 2009, respectively, primarily due to lower operating income, partially offset by a decrease in our income tax provision of $13 million and $42 million over the same periods.
As a result of our lowered revenue expectations for 2009, we took actions in the second and third quarters of 2009 that reduced or contained our operating costs, including:
• implementing a hiring freeze other than for selected positions that support our key strategic initiatives;
• eliminating annual merit pay increases for our employees;
• reducing travel and marketing related expenses; and
• reducing our workforce.
We recorded $16 million of restructuring charges in the first nine months of 2009, primarily related to reducing our workforce by approximately 5%. We expect that additional workforce reductions, and potential associated facility consolidations, will result in total combined restructuring charges in the fourth quarter of 2009 of approximately $10 million.
While we remain focused on containing costs, we intend to continue to make strategic investments we believe are critical to gaining market share and improving operating profitability over the longer term. Such investments include:
• improving the breadth and competitiveness of our product portfolio through both internal development and strategic acquisitions;
• expanding our reseller channel and developing a network of enterprise reseller partners; and
• expanding our services ecosystem with the addition of strategic services partners.
Continued macroeconomic pressure or additional declines in revenue beyond that which we expect could cause us to reduce or delay these strategic investments and/or take further actions to reduce our operating costs.
Explanatory Note about a Change in Our Revenue Reporting
In the first quarter of 2009, we began classifying revenue from sales of our computer-based training products as license and maintenance revenue to better align our reporting with how these training products are sold to customers. Prior to that, computer-based training product revenue, and maintenance thereon, was classified as consulting and training service revenue and included in total service revenue. Revenue for the first nine months of 2008 has been reclassified to conform to the current classification and the discussion below gives effect to this change.
Impact of Foreign Currency Exchange on Results of Operations
Approximately two-thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. dollar. Because we report our results of operations in U.S. dollars, currency translation affects our reported results. On a year-over-year comparative basis, our revenues for the third quarter and first nine months of 2009
were unfavorably impacted as a result of changes in currency exchange rates, primarily the Euro. Conversely, our expenses were lower as a result of changes in these rates. If actual reported results for the third quarter and first nine months of 2009 had been converted into U.S. dollars based on the corresponding prior year's foreign currency exchange rates, revenue would have been higher by approximately $15.4 million and $32.0 million, respectively, and expenses would have been higher by approximately $14.7 million and $33.7 million, respectively. The net impact on year-over-year results for the third quarter and first nine months of 2009 would have been an increase in operating income of $0.7 million and a decrease of $1.7 million, respectively. The results of operations, revenue by category, and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes year over year on a constant currency basis.
Summary of Results of Operations
Nine months
Three months ended Percent Change ended Percent Change
July 4, June 28, Constant July 4, June 28, Constant
2009 2008 Actual Currency 2009 2008 Actual Currency
(Dollar amounts in millions)
Total revenue $ 226.2 $ 271.7 (17 )% (11 )% $ 691.8 $ 770.8 (10 )% (6 )%
Total costs and expenses 224.2 239.8 (7 )% - % 687.7 693.0 (1 )% 4 %
Operating income 2.0 31.9 (94 )% (92 )% 4.1 77.8 (95 )% (97 )%
Other income (expense), net (0.5 ) (7.1 ) (1.8 ) (5.8 )
Income before income taxes 1.5 24.8 2.3 72.0
Provision for (benefit from)
income taxes (2.3 ) 10.3 (13.3 ) 28.8
Net income $ 3.8 $ 14.5 $ 15.6 $ 43.2
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Revenue in the third quarter and first nine months of 2009 compared to the third quarter and first nine months of 2008 decreased primarily due to:
• a decrease in license revenue; and
• the unfavorable impact of foreign currency exchange rate movements on revenue described above.
These revenue decreases were partially offset by revenue from the CoCreate business (acquired on November 30, 2007), which was higher by $8.2 million for the first nine months of 2009 compared to the first nine months of 2008 (which included only seven months of CoCreate revenue).
Costs and expenses in the third quarter and first nine months of 2009 were lower due to:
• actions taken in the second and third quarters to reduce our expenses described above in "Executive Overview"; and
• the favorable impact of foreign currency exchange rate movements on costs and expenses described above.
These decreases in costs and expenses were partially offset by:
• two additional months of costs from the CoCreate business for the first nine months of 2009; and
• restructuring charges of $6.6 million and $16.4 million recorded in the third quarter and first nine months of 2009, respectively.
Details of Results of Operations
We discuss our results of operations for the third quarters and first nine months of 2009 and 2008 in detail below. Our results of operations include the results of operations of companies we acquired beginning on their respective acquisition dates.
Revenue
Our revenue consists of software license revenue and service revenue, which includes software maintenance revenue (providing our customers software updates and technical support) as well as consulting and training revenue (including implementation services).
In connection with our reclassification of computer-based training product revenue in 2009, for the third quarter and first nine months of 2008, we reclassified $2.4 million and $11.1 million, respectively, to license revenue and $1.0 million and $2.7 million, respectively, to maintenance revenue from consulting and training service revenue, to conform to the current classification. The table and discussion below gives effect to this reclassification. The amount of computer-based training product revenue varies from quarter to quarter and, for the first nine months of 2009, was below the amount of such revenue recorded in the first nine months of 2008.
Revenue by Category Three months ended Percent Change Nine months ended Percent Change
July 4, June 28, Constant July 4, June 28, Constant
2009 2008 Actual Currency 2009 2008 Actual Currency
(Dollar amounts in millions)
License revenue $ 49.5 $ 79.9 (38 )% (35 )% $ 142.0 $ 228.8 (38 )% (35 )%
Service revenue:
Maintenance revenue 121.8 131.2 (7 )% - % 375.2 368.0 2 % 6 %
Consulting and training
service revenue 54.9 60.6 (9 )% (2 )% 174.6 174.0 - % 7 %
Total service revenue 176.7 191.8 (8 )% (1 )% 549.8 542.0 1 % 6 %
Total revenue $ 226.2 $ 271.7 (17 )% (11 )% $ 691.8 $ 770.8 (10 )% (6 )%
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Revenue by Category as a Percentage of
Total Revenue Percentage of Total Revenue
Three months ended Nine months ended
July 4, June 28, July 4, June 28,
2009 2008 2009 2008
License revenue 22 % 30 % 21 % 29 %
Maintenance revenue 54 48 54 48
Consulting and training service revenue 24 22 25 23
100 % 100 % 100 % 100 %
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Revenue results for the third quarter and first nine months of 2009 reflect weak license sales as customers reduced the amount of their purchases and delayed purchasing decisions in the current adverse economic environment. Additionally, revenue in the first nine months of 2009, compared to the year-ago period, was negatively impacted by unfavorable foreign currency exchange rates in most foreign currencies in which we do business. While our maintenance and services businesses performed well in the first half of 2009, declines in license revenue have begun to have a negative impact on our maintenance and service businesses. Revenue for the first nine months of 2009 included higher revenue of $8.2 million from the sale of CoCreate products, primarily because the first nine months of 2008 included only seven months of CoCreate revenue. CoCreate revenues are concentrated in Europe and Japan.
License Revenue
License revenue in the third quarter and first nine months of 2009 decreased year over year in every region and across most of our major product families. License revenue was also unfavorably impacted in the third quarter and first nine months of 2009 by approximately $2.3 million and $5.8 million, respectively, due to unfavorable foreign currency exchange rate movements.
Maintenance Revenue
Maintenance revenue in the first nine months of 2009 includes $11.8 million more CoCreate maintenance revenue than the first nine months of 2008 due to the fact that 2008 results included only seven months of CoCreate revenue. Maintenance revenue in the third quarter and first nine months of 2009 was unfavorably impacted by $8.9 million and $15.3 million, respectively, as a result of foreign currency exchange rate movements.
The total number of active maintenance-paying seats increased slightly as of the end of the third quarter of 2009 compared to the third quarter of 2008 and the second quarter of 2009, after a modest sequential decline in active maintenance paying seats in the second quarter of 2009 compared to the first quarter of 2009. Declines in license seats sold have begun to have an adverse effect on maintenance revenue and may have an adverse effect on future maintenance revenue.
Consulting and Training Service Revenue
Due to the significant decline in license revenue, our consulting and training service revenue (which has a lower gross profit margin than license and maintenance revenues) has accounted for a larger percentage of our total revenues. The decrease in consulting and training service revenue in the third quarter of 2009 compared to the third quarter of 2008 was primarily the result of foreign currency exchange rate movements, which impacted revenue unfavorably by $4.3 million, and recent declines in license revenue.
Consulting Services Revenue. Year over year, consulting services revenue was down 6% in the third quarter and up 2% in the first nine months of 2009. Consulting services revenue in the third quarter reflects a 28% decrease in Asia-Pacific offset by a 5% increase in Europe. The increase in consulting services revenue for the first nine months of 2009 reflects growth in North America and Europe partially offset by a decrease in Asia-Pacific.
Training Service Revenue. Year over year, training revenue, which typically represents about 15% of our total consulting and training services revenue, declined 26% and 9% in the third quarter and first nine months of 2009, respectively.
One of our strategic initiatives is to continue to expand our services ecosystem by adding strategic services partners who can focus on smaller engagements, enabling us to focus on larger engagements. We expect this strategy to result in a concentration of our services engagements among a smaller number of customers.
Although we have pending service engagements that we expect to perform, recent and continuing declines in new licenses sold, particularly Windchill licenses, have had, and will likely continue to have, an adverse effect on future services revenue.
Revenue by Geographic Region
Three months ended Percent Change Nine months ended Percent Change
July 4, June 28, Constant July 4, June 28, Constant
2009 2008 Actual Currency 2009 2008 Actual Currency
(Dollar amounts in millions)
Revenue by region:
North America $ 85.3 $ 90.0 (5 )% (5 )% $ 248.3 $ 262.7 (5 )% (5 )%
Europe $ 91.6 $ 111.8 (18 )% (3 )% $ 280.9 $ 319.6 (12 )% 1 %
Asia-Pacific $ 49.2 $ 69.9 (30 )% (31 )% $ 162.6 $ 188.4 (14 )% (18 )%
Revenue by region as a % of
total revenue:
North America 38 % 33 % 36 % 34 %
Europe 40 % 41 % 41 % 42 %
Asia-Pacific 22 % 26 % 23 % 24 %
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North America. The decrease in revenue in North America in the third quarter and first nine months of 2009 compared to the third quarter and first nine months of 2008 was primarily due to decreases in license revenue of $3.9 million and $18.7 million, respectively, partially offset by an increase in maintenance revenue of $4.4 million in the first nine months of 2009.
Europe. Revenue in Europe in the first nine months of 2009 reflects a $35.0 million decline in license revenue and a $6.8 million decline in maintenance revenue, partially offset by an increase of $3.1 million in consulting and training services revenue. Revenue from CoCreate products in Europe was higher by $3.2 million for the first nine months of 2009 compared to the first nine months of 2008 due to the fact that 2008 results included only seven months of CoCreate revenue.
European revenue in the third quarter and first nine months of 2009 was unfavorably impacted by foreign currency exchange rate movements, particularly with respect to the Euro. At foreign currency exchange rates consistent with the comparable year-ago periods, revenue in the third quarter and first nine months of 2009 would have been higher by $16.3 million and $40.3 million, respectively. Excluding the impact of currency movements, revenue in the third quarter of 2009 reflects an $8.0 million decline in license revenue, partially offset by a $3.9 million increase in consulting and training services revenue.
Asia-Pacific. Revenue in Asia-Pacific for the third quarter of 2009 reflects year-over-year declines of 32% in Japan and 28% in the Pacific Rim. The decline in Japan, which comprised 50% of total Asia-Pacific revenue in the third quarter of 2009, was primarily due to a $10.3 million decrease in license revenue. The decline in revenue in the Pacific Rim was primarily due to a decrease in license revenue of $5.9 million and a decrease in consulting and training service revenue of $3.6 million. Revenue in Asia-Pacific for the first nine months of 2009 reflects year-over-year declines of 11% in Japan and 16% in the Pacific Rim. The decline in Japan, which comprised 50% of total Asia-Pacific revenue in the first nine months of 2009, was primarily due to an $18.5 million decrease in license revenue partially offset by:
• an $8.1 million increase in maintenance revenue;
• favorable changes in the Yen exchange rate relative to the U.S. dollar (an impact of $9.0 million); and
• an increase in revenue from CoCreate products of $3.0 million.
The decrease in revenue in the Pacific Rim in the first nine months of 2009 was primarily attributable to a $14.4 million decrease in license revenue and a decrease in consulting and training service revenue of $2.8 million.
Revenue from Individual Customers
We enter into customer contracts that may result in revenue being recognized over multiple reporting periods. Accordingly, revenue recognized in a current quarter may be attributable to contracts entered into during
the current period or in prior periods. License and/or consulting and training service revenue of $1 million or more recognized from individual customers in the third quarters of 2009 and 2008 was $27.8 million (attributable to nine customers) and $35.5 million (attributable to thirteen customers), respectively; for the first nine months of 2009 and 2008, such revenue was $76.7 million and $105.1 million, respectively. This revenue represented 27% and 25% of total license and consulting and training service revenue in the third quarters of 2009 and 2008, respectively, and 24% and 26% for the first nine months of 2009 and 2008, respectively. The declines in revenue with respect to such transactions were primarily declines in license revenue. We attribute the decline in the number of such large transactions and the decline in license revenue to the unfavorable macroeconomic environment.
The current adverse global economic conditions have resulted in longer sales lead times and smaller deal sizes, which we expect to continue at least for the near term. While we expect fluctuations and uncertainty in the level of customer spending for at least the next year, over the longer term we believe our historically strong performance in large accounts will continue as we believe that customers will continue to invest in PLM solutions relative to other IT spending initiatives and that customers will continue to invest in our PLM solutions due to the strength and breadth of our solutions.
Channel Revenue
We have been building and diversifying our reseller channel to provide the resources necessary for more effective distribution of our products. We believe that using diverse and geographically dispersed resellers that focus on smaller businesses provides an efficient and cost effective means to reach these customers and allows our direct sales force to focus on larger sales opportunities.
Three months ended Nine months ended
July 4, June 28, Percent July 4, June 28, Percent
2009 2008 Change 2009 2008 Change
(Dollar amounts in millions)
Revenue $ 56.9 $ 70.3 (19)% $ 178.4 $ 196.5 (9)%
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The decline in the third quarter reflects decreases in all major geographic regions except for North America. The first nine months of 2009 includes two additional months of CoCreate revenue compared to the year-ago period. Excluding CoCreate revenue, our channel revenue in the first nine months of 2009 was down 13% year over year. We expect our channel revenue to comprise a growing percentage of our total revenue as we continue to focus on expanding our use of resellers.
Costs and Expenses
Three months ended Nine months ended
July 4, June 28, Percent July 4, June 28, Percent
2009 2008 Change 2009 2008 Change
(Dollar amounts in millions)
Costs and expenses:
Cost of license revenue $ 7.6 $ 9.0 (15 )% $ 22.2 $ 20.6 8 %
Cost of service revenue 66.2 76.6 (14 )% 214.2 221.4 (3 )%
Sales and marketing 73.8 78.7 (6 )% 225.0 223.1 1 %
Research and development 46.6 47.4 (2 )% 139.7 134.7 4 %
General and administrative 19.3 20.3 (5 )% 58.4 64.7 (10 )%
Amortization of acquired
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