Oct 27, 2010
Operator
Good morning ladies and gentlemen and welcome to PTC’s fourth quarter fiscal year 2010 results conference call. After brief comments by management, we will go directly into the question and answer session.
(Operator Instructions) As a reminder, ladies and gentlemen this conference is being recorded. I would now like to introduce Kristian Talvitie, PTC’s Vice President of Corporate Communications.
Please go ahead.
Kristian Talvitie
Great, thank you. Good morning everyone and thank you for joining us today.
Before we get started, I wanted to quickly cover a couple of housekeeping items. First, as you hopefully all know by now we’re hosting a live event in Boston tomorrow to unveil our Project Lighting strategy.
This promises to be a pretty exciting event so please register on ptc.com to attend the live virtual event, which starts at 10:00 a.m. Easter tomorrow.
Second, as you also hopefully all know, we are having our fiscal 2011 Investor Day next week on Wednesday, November 3 in Manhattan at the Nasdaq market sight. The event will last from 9:30 to about 3:30 Eastern Time and it include presentations from management as well as some customers, as we share our longer-term business strategies from key product platforms and talk in more detail about our 2011 targets and financial model.
If you haven’t registered already please contract me or Kristian to do so. With that moving on to the Safe Harbor language, this call in 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 most recent Form 10-K and Form 10-Q on filed with the SEC.
All financial measures on this call are non-GAAP financial measures; a reconciliation between the non-GAAP measures and the comparable GAAP measures is located in the prepared remarks document on the Investor Relations page of our website at www.ptc.com. Participating on today’s call are Jim Heppelmann, President and Chief Executive Officer, Jeff Glidden, Executive Vice President and Chief Financial Officer and Barry Cohen, Executive Vice President of Strategy.
With that I will turn the call over to Jim.
James Heppelmann
Thank you, Kristian. Good morning.
I am very excited to be joining you here today, on my first earnings call as the company’s new CEO and though I am the new CEO, I think most of will recognize that I am not really a new voice on the call and in fact many of you have known me for years already. So, just quickly recap my background for those of you who maybe know.
I’ve been with PTC for about 13 years since I was choired into the company in 1998 as the Founder and Leader of the Windchill Technology Company. I stayed with PTC following that acquisition and then for most of the decades it followed.
I was the head of product development and strategic marketing functions at PTC. You may remember that this was the time, during which we completely reinvented our strategy and our product portfolio, and remerged as the technology leader, which is an accomplishment that, naturally I am very proud.
So, during my time here, I have also invested much of my time in the sales process and with the customers. So, I feel that with the combination of background, I’ve had a chance to learn the business very well and to learn it from several different perspectives.
I had a great opportunity to help steer the company in the time I’ve been here and feel that I’ve been a key driver in efforts to reshape the CAD Company of the 1990s, into the growing enterprise solutions company that we have today. Then finally, I was probably one of the most thoughtful succession plans I am aware of, I joined the Board in 2008.
I became President and Chief Operating Officer in 2009 and now I am taking the helmet [ph] of CEO going into fiscal 2011. So I have to say it’s a really exciting time to take over, the company is in a good position today and I think we have a legitimate opportunity to make this one of the great stories in the tech industry going forward.
So looking back at fiscal 2010, I think the year will go down in the record books as a terrific accomplishment. Let me first remind you that we begin the year with guidance of $980 million in revenue and $0.96 in EPS.
That goal represented 4% revenue growth, which we based on an assumption of 20% license growth, which many people including some on the calls thought was far too aggressive at the time. But throughout the course of the year, the business kept getting stronger and we raised our revenue and EPS target.
We ultimately ended the year at $1.10 billion in revenues and $1 in earnings per share. That represents 8% of revenue growth based on nearly 40% license growth which I think ranks us amongst the strongest growth companies in the software industry right now.
The 25% earnings growth result readily surpassed our original goal of 20% and you will remember that along the way we made significant new investments to position the company for growth in FY 2011 and beyond. So, if you think about it, while 2010 was a great year in retrospect.
We actually had a lot of challenges that held us back from an even greater potential. Let me talk about a few of them.
So first, if you look at how we segment the business, our license revenue was strong, but our service and maintenance business actually declined slightly in 2010. Our enterprise business was strong, but on the other hand our desktop business wasn’t.
Our direct sales force did exceptionally well, but our reseller business was held back by the economy. And then regionally, North America and China in particular were strong, but Europe, Japan and parts of the Pac Rim really were not.
So well, 2010 was a pretty good year, in some ways it felt like we had an eight cylinder engine with only four spark plugs firing. But during the course of the year all of these trends have been improving steadily and now it feels like the business is strong on all fronts as we transition into FY 2011.
For example, if you go into the fiscal fourth quarter results, you will notice that license, service and maintenance lines of business all grow. Enterprise and desktop segments both grow and I think some eye-popping license growth numbers in the desktop business.
The direct sales business did well and the reseller business did very well again with some pretty large license growth numbers. And then North America, Europe, Japan, and the Pac Rim all grow.
So, if I would use the baseball analogy, I’m not sure it’s a perfect game, but it’s certainly was a shutout if we reflect on kind of some of the results. So right now it feels like everything is starting to work, clearly we have a lot of sales and revenue momentum right now as we head into fiscal 2011, but so did they pile on.
Fiscal 2011 will be the biggest new product year the company has ever had and by some distance. So let me take you through some of the highlights.
So, our Windchill product line, which is already recognized now as the clear leader in PLM. We’ll see the biggest single release we’ve ever produced in the Windchill product portfolio when we shift Windchill 10 in the second quarter of fiscal 2011.
And then our Pro/ENGINEER and CoCreate businesses are going to under go a compelling reinvention when we launch our lighting initiative publicly tomorrow. We feel that this initiative is the single biggest innovation in CAD technologies since our founder Sam Geisberg brought Pro/ENGINEER to the market in 1987.
Moving on to Arbortext, we recently positioned our Arbortext business to make it more strategic to our customers, by thinking about it as way to produce service information rather than a way to produce documentation, and that’s settled but important and we can elaborate it on it next week. But we have some important releases that sort of estimate that concept in place and we think that this new service information system approach, has unlocked a pretty strong growth rate and it’s really raised our internal views quite a bit on the growth opportunity associated with Arbortext.
We’re going to have a customer at our event next week who’s going to elaborate on this in some detail. I think you’ll find it pretty interesting.
Moving on to Relex, our Relex line of reliabilities software, which has a tremendous amount of momentum giving some of the high profile failure products in the market, the shut off valve on the ocean floor that didn’t shut off, the automotive recalls and so forth. So that business has a lot of momentum right now and we just shift a big release called Relex 2011 in the last few weeks.
Then InSight, which is these new products we’ve been developing and acquiring into, which deals with product analytics is going to have a pretty important, very significant new release. It’s going to establish, basically a new architecture platform, but as the product across the analytics and carbon footprint life cycle analysis to the platform we already have for environmental analytics for companies that are bound by hazardous material regulations, which by the ways almost all of them.
So there is a lot of good stuff, a lot of good momentum in the business and unbelievable product line upcoming in fiscal 2011. Obviously, we remained concerned about the economy, we read same the newspapers you read, but with all this momentum we do have an increased level of confidence going into fiscal 2011.
And as a result of that, we raised our revenue guidance to 10% to 12% and we raised our EPS guidance to 20% to 25% at a constant currency level relative to last year. So, Jeff, going to elaborate on that shortly, but I am looking forward again to sharing this type of the information in more details with many of you live next Wednesday at our Investor Day in New York.
So it will be a great opportunity for you to get a deeper look at the factors that are driving our momentum. So, finally and in closing I’d like to say, I am very honored and pleased to have successfully recruited Jeff Glidden to be our new Chief Financial Officer.
I have said on some earlier calls, that we have a lot of interest in the CFO position during our recruiting process and I thought we would get an opportunity to have our pick of the litter. Basically that’s how I think the situation played out, when we found Jeff we found an incredible enterprise software experience base, we found someone who has a great track record in history of helping companies like ours unlock shareholder value.
I would have to say in just few short weeks, that Jeff’s been here we’ve already seen what a big difference he can make. And I am very please to add him to what I think is already a very strong management team.
So with that I would like to turn it over to Jeff, and he has a few words to offer as well. Jeff.
Jeff Glidden
Thank you, Jim. I’m very, very pleased to join the PTC team.
As you know, I’ve joined the company on September 27 for the last of the fiscal year. This timing was important as I wanted to be fully immersed in on board as we closed out the fiscal year.
By the way, the veteran CFO, I know that no one can explain what the year end really is about. CFO must live it to understand all the energy issues and opportunities.
That said, our sales, legal and finance teams performed very well and we delivered strong results for the quarter in the year. In my role as CFO, our fundamental goal is to build value for our shareholders, our customers and our employees.
We will reveal all our investments plans and priorities with the goal of building long-term value. To these ends, you should expect an increase focus in drive on business planning, profit planning, cash and cash flow.
As Jim highlighted, we had a very strong finish to the year and I’ll provide a brief overview of the results for the year and the key business drivers. Our business has always been impacted by a number of significant and large customers.
In Q4, we had a record 28 customers that generated $59 million in license and service revenue. For the year, we have seven deals which represented $187 million in revenue.
The good news is that we are significantly growing a large base of the annuity accounts. The close rates and quality of these deals has been excellent and I would add that the strength and sales momentum of year end has continued and we’re off to a good start for the new year.
A second, key highlight of the year, it’s been the growth of our maintenance business. This business has been flat at approximately $490 million for two years and returned to growth in Q4 with revenues of $125 million.
And perhaps the most important metric in our maintenance business is active seats. We ended the year with more than 1.2 million seats up over 20% year-over-year.
For the full year, revenue totaled $1.10 billion, our non-GAAP operating profit increased 30% to $158 million. This represents an operating margin of 15.6%, which is up 270 basis points from 2009.
Non-GAAP earnings per share increased 25% to $1, we generated $157 million in cash flow from operations and we ended the year with $240 million cash and no long-term debt. So, overall, a very good year for PTC.
Before moving to guidance for 2011, I will address two one-time items that are included in our year end results. One, a tax structured reorganization that was completed in Q4, and two, the resolution of the GE, Japan litigation that has been addressed in Q1 of FY ’11.
During Q4 we completed a reorganization of a legal entity structure to support our tax and cash planning. As you know, PTC has significant amounts of cash regard a international operation and the clear benefit of this reorganization has been to enable significant redeployment and repatriation of cash between our domestic and international operations.
While this reorganization has resulted in a one time increase in our FY 2010 GAAP tax rate to 70%, it has no effect on cash taxes paid and no effect on our non-GAAP tax rate. Based upon this reorganization we also expect the company’s effective tax rate for both GAAP and non-GAAP to be approximately 25% for 2011 and for the next several years.
I’m also pleased to share with you that in October we resolved the litigation brought against us by GE Japan, which is been pending for more than three years. As you recall in the fall of 2007, PTC established a reserve for customer advances of 4.7 billion Yen approximately $57 million in US currency as of October 2010, related to certain transactions involving in employee of Toshiba Corporation.
During the litigation it became evidence that the Toshiba Corporation was engaged in the scheme depriving both GE and PTC. This individual now a former employee of Toshiba has been convicted a fraud and is now serving a prison term.
It also became evidence that PTC have been paid with funds that this Toshiba employee had obtained fraudulently from GE. As a result of this resolution with GE Japan and in October PTC have recorded a GAAP benefit of $9 million and paid around amounts received from these transactions back to GE Japan a net cash payment by PTC of $48 million.
As a result of this resolution GE has assigned any direct recovery to PTC. We are also very pleased to end this issues resolved, the future liability cleared and to put this uncertainly behind us.
I will close my remarks with some comments related to our FY 2011 guidance. Looking first at our expectations for 2011, we see continued growth in our growth, we’re raising a full year revenue targets to a range of $1.110 million, to $1.130 million, for growth of 10% to 12%.
While we are continuing to invest in increasing our sales capacity in funding new product development, we also planned to increase our operating margins from 15.6% in FY ‘10 to 17% to 18% in FY ’11. We expect non-GAAP EPS to be $1.20 to $1.25.
I’d add that estimates are based on an exchange rate of $1.37 US to the Euro, which is our simple average rate for 2010. So this is essentially a constant currency comparer.
For Q1 we expect revenue to be $255 million to $265 million with non-GAAP EPS of $0.22 to $0.26. The guidance for Q1 includes continued investment to expand sales capacity and to launching new products like lightening tomorrow.
In summary, we just completed a very successful year and while we’re tempered by the economic outlook we expect continued growth and margin expansion in 2011. I look forward to seeing you all next week at our Investor Day and we’ll now open up the line for questions.
Operator
Thank you. (Operator Instructions) Your first question comes from Richard Davis with Canaccord Genuity.
Richard Davis
Thanks very much. Some of the areas that we think, it will be big is this, something called kind of collaboration as a service and frankly Windchill fits dead into that space.
So the question, I think we heard from some investors is, can or do you intend or how much is currently kind of in the cloud and what are the dynamics to do that because putting into cloud gives you operating leverage et cetera, but there is also the pushback socially form some companies et cetera. But if you could talk about that because to me that seems like a really interesting longer-term strategy that you guys could execute on.
Jim Heppelmann
Hey, Richard, it’s Jim. Do you think we ort to contact [Inaudible] way and see how he does with it [Multiple Speakers]?
So, I think the interesting thing is that Windchill is ready, we began the sort of offer a cloud version of Windchill some years ago, I think we’re probably ahead of our time, if I reflect on that situation today and then think about tomorrow, I’d say a large amount of Windchill’s appointments go into a private cloud today. That is the data center field with virtualized hardware and so forth.
The classic private cloud is very important to our business. I think it’s really sort of an emotional issue that people have been a little afraid if you will to collaborate with such critical product design IP in sort of public calls if you want to call them at, but I think at some point of time that emotional issue will breakthrough and we’re in a good position.
The business we started originally, we went through a transaction to get to a very close partner wise who does the hosting. So, we have a cloud ready solution ready to go and the technology that supports the multi tenant sheared secure architecture.
So, we’re in a good position like I said probably out ahead of it a bit, but definitely the private cloud is important in the public cloud to your point may become important going forward.
Richard Davis
Perfect. Thank you very much .
Operator
Steve Koenig with Longbow Research.
Steven Koenig
Hi guys, thanks for taking my question. I guess my main question would be, just looking at guidance for Q1.
Your revenue guidance kind of bracketed these expectations. Your earnings guidance was a little away and so I’m wondering what’s, what did the analyst get wrong?
What would we get wrong in terms of that guidance and whether the sales team hiring were the marred increases in the year? What’s pressuring the Q1 EPS?
Jeff Glidden
Yes, so Steve, I’ll make this [Inaudible], I’ll just make two comments. Just recall that last year we had about some very significant large deals, maybe $20 million of large deals so when you look at the year-over-year growth without forecasting large deals, we are probably 10% to 12% growth.
So I think the revenue numbers are pretty solid and as I said we’re up for a pretty good start. I think on the extent side is probably just a flow within the year.
We are making front end investments in both sales capacity and in launching some of these new products. So I think those are the two areas and I think, we are, we believe those are the right investment and feel very comfortable with what those will bring us later in the year.
Jim Heppelmann
Steve, its Jim, maybe just a sort of to you question. What did you get wrong?
I mean, I think generally speaking PTC’s internal view of our annual revenue has a bigger hockey stick and than most analyst models show. And I think if we looked at back at history, we’d see that year after year after year.
I think the good news is we maybe making some progress in muting that. For us to come out with guidance for Q1 that’s nearly flat with a pretty darn good Q4, it is a new trend.
That’s what happened last year on the strength of some huge deals, but that’s what our guidance to again this year. And in the time, I’ve been here; we used to look at a significant drop from Q4 to Q1 and now we are looking at guidance is almost flat.
I think that’s a pretty good trend.
Steven Koenig
And then just on that point if I could follow-up with one quick one is. Are you starting the quarter with some big deals in the bag?
What gives you the confidence in your visibility into Q1 to do that that was a pleasant surprise to see the revenue guidance, kind of flat or up year-on-year?
Jeff Glidden
Yes, and I would just comment that the finish of the year was very strong, just recognize Q4. July and August are usually quite particularly in Europe and Labor Day was late this year.
So we were very busy in September, let me say that in a positive way, lot of activity and we closed just, a very, very strong book of business in the quarter and I think that momentum carried over. So, I think we have two or three significant deals that have already closed and shipped in Q1.
So, I think the momentum that we saw at the end of the year, the activity, the confidence of the sales team and really buying patterns of the customers had continued to be strong as we enter the quarter.
Jim Heppelmann
And maybe just elaborate to a second level on that, particularly if you look at our Windchill business, what happened with our Windchill business was far more than economic bounces back last year, in fact I don’t have the exact numbers in front of me, but I think our Windchill revenue in 2008 was 406 and if I am correct in 2009, it retreated a little of 392, I am looking at Kristian here. But this year its substantially above FY ’09 or FY ’08 levels, and that’s 70% license growth in Windchill was not a bounce back, because it never drop 70% or any number even close to that.
So, I think we are at a situation with that business has fundamental strength unrelated to the economy and these are long sales cycles, which in some ways long sale cycles, but did a fair amount of big deals predicting exactly when a deal is going to close is challenging, but at the same time you get a good long-term view of the pipeline, because these deals don’t just come out no where as bluebirds, you worked them for a long period time. We have an incredible pipeline, we are going to elaborate on that next week as well, but we have an incredible pipeline here of PLM business.
Steven Koenig
Thanks guys.
Operator
Sasa Zorovic with Janney Montgomery Scott
Sasa Zorovic
Yes, thank you. A couple of questions, my first one would be regarding any sort competitive changes that you have seen here for the quarter or you would sort of say that, has there been any kind of market share shift here or you thought of this more like an economy coming back.
And then secondly would be specifically to products and sort of up here some of the maybe sort of slower start there. Obviously we have started seeing the acceleration towards the year end, what sort of the outlooks specifically there?
James Heppelmann
Okay, Jim here. So I think when we look at our results in 2010 in particularly at that 40% license growth, I always attributed to three factors.
One factor is, the economy go better. Our second factor is; there is genuine strong interest in PLM, above and beyond economic bounce back.
And the third factor is; PTC is taking more than our share of that strong interest and of that economic bounce back. So, its hard to know that these factors are equal, I suspect they probably are that as the economy reseeds maybe that one time economy improvement factor was started to dissipate, but we see no signs of the fundamental demand weakening and no signs of PTC’s market share graph dissipating.
These are very strong factors, and I think that will continue growing forward. So, will we have 40% license growth next year?
No. But I think our models says we’ll have something in the mid 20s which is suggesting that the economy was worth 15 points of that 40% license growth and that the other 25 is fundamental strength of business.
On the section of our ProductPoints; though ProductPoints is an exciting product, I think we had a pretty good year with it. I read one little report this morning that said we hit our amended goal of 300, but missed our original goal of 400 wins.
In fact, those are the same goal. We 100 followed by 300 more for a cumulative goal of 400.
So, we hit all of the goal, just in case anybody is unclear on that point. I think we had a pretty good year ProductPoint, it’s certainly an important market share trends developing.
I think, it’s a product’s starting with $0 in revenue and it takes a while for a product starting at zero to become meaningful, to say 1% level, 2% level. So it’s not yet that meaningful, but I’d say we’re very pleased with the trends; we’re very pleased with the products and the customer reaction to the product.
We did have a good lower rate wax, SMB PLM performance in the quarter and some of that definitely was on the bags of ProductPoint. We’ve also seen the trend where ProductPoint’s a great door opener and then as we get in the real conversation, some amount of those ProductPoint campaigns turn in to Windchill proper campaigns, which is great, even better.
So, I think we’re happy with the product and then I’d say is stay tuned because I think we’re probably two quarters away from pretty surprising announcement of our ProductPoint that we’re not quite ready to make here today.
Sasa Zorovic
Great, thank you very much.
Operator
Michael Olson with Piper Jaffray.
Michael Olson
Thanks good morning. It sounds like for the most part of the business is tracking at or better than expected in all geographies, but under that context which geography would say is improving relatively slower than the rest?
I guess, where as there still maybe some dry powders as that geography improves?
Jim Heppelmann
I’d say Japan probably is the place where we continue to feel like we have a lot of upside. Japan has stabilized.
I don’t think we’re happy yet with the growth rate, but we have some impressive new management on the ground in Japan, probably, what, six months ago. We reorganized the way we do business in Japan.
We have a Japanese president who manages the Japanese organization including sales, service, marketing and so forth. I think that’s important because it’s very difficult for American companies to do business in Japan the American way.
And so I think we have a better leader and a better organizational model, which would help us there a lot. I’d say the other place is Europe, which is probably not been bad, but it’s lagged the recovered that we saw in North America and China.
But I think our reported results in Q4 were 2% growth in Europe but on the constant currency basis it was 10. So, the Euro has been bouncing a little bit of place, but that’s a pretty good result to see 10% constant currency growth there.
So, it feels like that one is starting to come around again.
Michael Olson
Okay, and then assuming the improvement in demand continued are there additional investment that you are going to need make in fiscal ‘11 as far as sales headcount or just other investment to capitalized on the momentum?
Jim Heppelmann
I think we have fiscal 2011 fully funded in our plant included sales capacity. When we got a head up plan in 2010, we took the sort of bold move of pre-funding the 2011 investments at mid-year 2010, which meant that those sales reps are just coming on board now, they generally are on board, they have been through training and they are out on sales calls on October first here.
So, I think what you might see, if we got a head of plan again next may be we would start thinking about 2012, but I don’t feel like, I feel like 2011 at the plan and guidance we gave you is fully funded in our expense model.
Michael Olson
Thanks very much.
Operator
Blair Abernethy with Stifel Nicolaus.
Blair Abernethy
Thank you, nice quarter guys. Just a question on your domino implementations, looking back now ’08 one wind over fiscal ‘09 six winds.
Can you give us a sense as this backlog builds, would you give us some color on the stage of implementation of some of these early deals?
Jim Heppelmann
I would say most of them are early to mid stage. The earliest ones are mid stage meaning they’re probably in production, but we’ll expand from there, the more resent ones course, the one we just got early this quarter nothing is appreciably even started yet, but I think it takes a lot to implement this software and not just to implement the software but more importantly prepare the customer to work in a new set of business prophecies, right that take some time, it takes about a careful planning and holding.
You got to make sure you got buy in of the business to work that new way et cetera. So I would say some of these dominos, let me back up for a minute, when we look at these dominos we gave you a model for how they monetize over time and they generally start with a small order pilot projects, pilot project becomes a production project, the production now we are nears to three or four it’s expanding into new business units and it’s expanding into new product programs et cetera, and it becomes a very long-term annuity.
But when we reflect on the actual dominos we want probably three quarters of them follow that model and so much surprisingly one quarter of them have given up the big shopper or purchase order up front, which is fine to. That really locks them in and secures as big commitment to us.
So again I’m not sure there is exactly an average domino and if they were the standard deviation would be large because some gave us big license order up front others that big license order maybe a year or more away from us. I’d say though on this whole domino topic this has been a very good program for PTC and I think with this community on the phone here to help you understand kind of what’s happening beneath the water line on that iceberg as we discussed that originally.
I think over time we inside the company and we probably want to provide visibility to you we want to focus on the annuity streams we are getting from these customers, and we want to start thinking of, there are key assets is a portfolio of annuity account that are giving us revenue of greater than two million per year on a reliable basis greater than five, greater than 10 or greater than 20. And we’ll give you at our Investor Day next week a lit bit of our peak at what that portfolio currently looks like and I think over time a domino is very interesting because it represents competitive strength at the time you win it.
But to the extent, it becomes an annuity at the $2 million, $million, $10 million or $20 million level, then it’s really interesting. And so we want to sort of little bit shift all of our collective attention to what this is annuity portfolio look like because the PTC is going to be a $1.6 billion in 2014 like we think we’re going to.
It’s going to be on this bedrock of a growing list of annuity account and the account with in that list simultaneously growing themselves in terms of the revenue contribution, they’ve given to PTC. So I think we’re going to try to shift your attention a little bit overtime to this annuity discussion, but we won’t leave the domino discussion too quickly because I think it’s great indicator if you will of our competitive strength in the market.
Blair Abernethy
Okay, great, thanks very much.
Operator
Ross Macmillan with Jefferies & Company.
Ross Macmillan
Just a couple of questions. The first one just on your commentary around Q1, it’s sounds like you had the ability to maybe shift maybe one large domino deal, or maybe a sale in Q1, but an eight figure deal and that’s providing some of the confidence here for Q1.
Is it fair to say that your starting Q1 in a stronger position from what’s being signed already relative say to the last year when your Q1 was obviously a very strong quarter relative to Q4.
Jim Heppelmann
Okay.
Jeff Glidden
You have any contact for last year
Jim Heppelmann
Let Jeff take these questions more over time, but what I’d say first of all I don’t personal think we have an eight figure deals in the prior, I’m not sure. So, no mega deal here that gives us this components, so the general business strength.
I am trying to remember the exact timing, but last year in Q1 we had some nice deals coming early in the quarter two, which gave us confidence in Q1 and then subsequently we had some more big deals coming in if you remember, I think we over performed to that $220 million or something like that, which is almost 10% upside in our guidance last year. Keep that in mind by the way when you are evaluating whether or not our guidance is strong for Q1.
As if we’re comparing ourselves to a 10% over performance here last year, and in the quarter last year. But, I think again, these deals are big, we have a lot of them in the pipeline, and it’s hard to project exactly when that close.
I think at the end of every quarter we succeed in pulling some in from the next quarter. And then I feel leak out through the next quarter and at the end of day it probably cancel each other out and we’re sort out where we are.
So, I don’t think that any of our guidance is based on, specific big deals is based on a big pipeline of strong business with growing demand.
Ross Macmillan
That’s a great color, thank you. And then just one other one, just so I understand the merit increase that was implemented in Q4 was that already decided at the time of setting guidance or was that something that you implemented subsequently, such that, in effect, you managed to basically deliver the revenues X that merit increase on a lower cost base.
I am just trying to understand when that decision is made.
Jim Heppelmann
Yeah, it was sort of, it was not really baked in our guidance. Let me try to explain what we did here.
First, why we did it, last year when they started the year, we had a pretty conservative view of where the economy was and so forth and wanting to make sure we had our 20% earnings growth, we said sorry that would be no merit increase for employees, which seems, to be frankly you, added $0.04 of earnings to our mark, but it came out the package of our employees. Just to fast forward, we gave $0.01 back.
Then as we got into the year, things started looking good and of course our employees were saying hey what about us, and we began to believe that if we over perform and then some first chuck of that over performance, needs to go back to our employees, to make them to whole or at least partially whole, we are really talking partially whole. So our model was, there will be no merit until such time as we can pay it and remain at or above the dollars here.
So from that standpoint it wasn’t been our guidance, if we would have been at $0.99 or just a $1 without the merit payment or the profit shares I think we call that, there would have been no profit share. Obviously, we did better than that such that we could pay the profit share and still remain at a $1, so my view and you can reverse the engineers that we over performed, but when back in fixed and then equity from a prior time.
Barry Cohen
It’s Barry, I mean there is one modification, one Q4 was not a merit it was a spot owners based on over performance that we shared, it’s not a cross that we’re carrying forward and next year we do have a merit goes in to the plan and in the guidance and that’s already baked in and we will, we do not anticipate any spot owners in the coming year at all.
Jim Heppelmann
Let’s just elaborate on this a little more, because I think it’s important. Because people want to make sure that when we over perform some respectable amount of it falls though.
So what happen a couple of times in this bad economy period as we did not pay a merit and then I think at least two or may be three of the last four years we paid a spot bonus because we actually did better than we thought we would, when we took the merit away. But what we also did as we said hey, let’s go back to the drawing board on this whole merit program and think about it differently.
Lets start treating it not as fixed cost, but as a cost that’s part fixed and part variable. So I can tell you that there will be no discretionary profit share bonus paid next year, because next year it’s in the plan and we will accrue for it.
And if we over perform then any profit share will be accrued for in the numbers that we are posting. We didn’t have that program last year, we took it away and then over perform, so we thought we had to give it back.
Next year this need not be a discretionary decision because it’s all careful planned for in the cost reduction.
Ross Macmillan
That’s super, helpful thanks. And then one last one if I may, I am just curious Project Lightening you are going to talk about it tomorrow, but it sounds like the formal launch to GA if the product is still a bit away off, could you just help us understand that kind of interim period and what the plan is, is it educating customers or you still working through late stages of the beta program, if you could just provide some color, that will be great.
Jim Heppelmann
I don’t really want to give you all the big secrets from tomorrows lounge here today. But there is going to be some suppressing [inaudible] in what we announce tomorrow.
And hopefully you will come to understand why we are announcing it at this period of time and we will be then in a good position to discuss it in some details as the Investor Day for those of you who also choose to participate in that. But just before I go into that let me back up a second, you know what I’m excited about, what I’m excited about is that Kristian showed me yesterday and it was in our notes here that industry analysts are not forecasting the CAD market to grow at an average of 6% for the next whole year, and that surprises me a little bit because I tough we had all pretty much given up on growth in the industry.
So we though Lightning would help us post growth rates that were better in the industry bit we were sort of assuming that the industry growth rate is probably want that interesting. Now we think that’s still true but the industry growth rates suddenly look a lot more interesting.
Now I’m not sure these analysts actually have a crystal ball but certainly there is a lot of optimism that there will be fundamental growth in the industry and I think we have lot optimism that on the backs of what we’re going to launch tomorrow, we are going to get more than a fair share of it. So if we do that that would have a material positive impact on everything we’re telling you in our long-term plan, because none of that’s really contemplated or even required to perform against the 20% earnings growth we’ve been taking to you about now for some time.
Ross Macmillan
Great. Thanks a lot.
Good quarter, thank you.
Operator
Sterling Auty with JP Morgan.
Sterling Auty
Thanks. Let me actually start with Jeff.
This is the first quarter, technically for both CEO and CFO. It’s pretty typical that the first quarter out of box, you take a conservative outlook in terms of guidance, but you’re actually raising the numbers.
I’m kind of curious what you saw in terms of the forecast capability disturbing the pipeline that gave you the confidence. And then on the heels with that also, is there a strategy, kind of, for your first 100 days in office?
You mentioned some of the focus points in terms of business planning, cash and cash flow. But maybe a little bit more color in terms of what your approach is in your first 100 days in office.
Jeff Glidden
Okay, Sterling. Thank you very much.
I think being here at the end of the quarter, it was very important. Well I was only onboard for five days, as you know, I’ve got to sign-off on 10-K that represented 365 days.
So, in that week, I probably did five weeks worth the work of going through all of the major deals, major accounts, et cetera. And for us and for me, everything starts with our customers.
So, understanding the customers, the deals, the pipeline and so forth and I will just reiterate, I was very, very pleased with the way we closed the quarter and the momentum that continued in our ability and visibility into the business. So, I think as we see, I think Jim described it, the Q4 felt like a number of pieces of the business trend in a positive way and we expect that those will continue.
So, I think the trends from Q4 and the year should continue in Q1. So we gave the guidance we did and while we had a headwind, if you will, from FX, we’ll probably now have a little bit of that shifting and we’re giving constant currency, so currency does affect us and that can be give us and take it away.
So I just say, currently we have just sort of taken that off the table. It’s constant.
In terms of my own approach, again, I started with customers, I think I’ll just, a couple of work stories. I think I’ve onboard an hour and a half and Jim came in to my office and said we have a large customer downstairs; I’d like you to meet them and so on my first day, I spend two hours with a large customer.
I spent a good part of the week with our sales team. I met 1,100 new friends and drilled in to a lot of the accounts.
So I feel very good about the market and customer perspectives, and some of the sales teams. So, I think the sales teams are excited.
So, that feels good. I think the areas that we need to work on is really profitability and profit planning across the business and that relates to product line profitability, segment profitability and not in an accounting sense but in the way we look at our business, regional profitability.
So, start measuring there and another one that’s Sterling, is near and dear to my heart is cash and cash flow. We have, I think a very strong cash position and a great cash flow story and I think we can do better.
So, I would expect at the end of Q1, we should be able to and I should be able to give you a much crisper view of both the future in terms of margin expansion as well as cash and cash flow.
Jim Heppelmann
Hey Sterling, it’s Jim. Just a follow-on a little bit here.
I had ample opportunity to interview Jeff and talk philosophy and everything else. It’s actually kind of refreshing when you hire someone because you spend a lot of time on quality topics that when you get busy, you don’t talk about it again for a while.
But you all heard me, I hope by the time talked about my mantra of growth, leadership, efficiency and predictability. We want to be a growth company.
We think we can and need and want to be a leader, not just a player, but a leader on the back of growth and leadership, we can drive huge amounts of efficiency, healthy, natural efficiency that translate into operating margin expansion. And then we want to be predictable and really have a good solid grasp of where our business is and where to go and so none is surprised.
So I look at say, as the CEO, I will go on growth and leadership, that’s what I do. I am a vision guy, a customer guy, a strategy guy and I went out look for CFO who could really own efficiency and predictability.
And that’s sort of the partnership I have with Jeff. Let me cover the front half, you cover the back half, we’ll meet in the middle and really build a great company and I think Jeff’s the perfect guy to go do that.
Jeff Glidden
And I just add and you introduced as the pick of the litter or the new guy, and hopefully I be the guy that deliver, Sterling.
Sterling Auty
Sounds good. Jim, on that growth idea.
When you look at the PLM license revenue growth that you are looking for in 2011, can you give us a sense of how much of that you would expect to come from the existing domino deals that is already signed? Jim Heppelmann I have a good way to break that out, maybe third quarter, I don’t know.
Clearly if you just think of the life cycle of the deal, winning the deal a large percentage of the time it’s not a big licensed event. One way to look at it is the real potential of those 19 annuities has hardly been tapped with exception of those who might have given us, the minority who might have given us something license to the up front.
So, I think we want to keep adding dominos because they become the sort of long range annuity and we want to keep up selling the rest of them, but I am not sure I could put that in to a quantitative number for you just would be guessing.
Barry Cohen
One point, I think Barry, again here, is that the Dominos not only are source of annuity and growth, and we have a large and fuller base that accounts for our opportunity to grow our revenue going forward. So while we are emphasizing the Domino before its market shares implications, we don’t want anybody forget that we had a large same account program that produces a lot revenue and we’ll be part of our annuity program going forward.
Sterling Auty
Okay, and then last question, you touched upon a little bit in terms of the core CAD market in the 6% growth, but I am wondering qualitatively how much you’ve heard from customers. Now that Unigraphics have been in part of Siemens for a while now and looking at kind of the dynamics of investment in specially the mid to high end CAD, is there an opportunity that you are hearing from customers that, may be there is a potential upgrade or replacement cycle that might be in front of you?
James Heppelmann
Well, let me first say in the CAD industry if you take the [Inaudible] view and view it as mature industry one of things you concluded that the switching cost is so high that it’s very difficult for customers who become, just in franchisee switch anyway and therefore it’s very difficult to steal them and it’s very difficult to lose them. One of the biggest, mostly exciting breakthroughs I think we’re going to talk you about tomorrow is we think we have broken the back of the switching cost equation.
We think we’re going to produce a product here than it’s very compelling and relatively easy to switch to. I think it not necessary going to be easier to switch from, because the other product won’t have this characteristic that ours has, its special.
We’ll try to elaborate on that in some detail tomorrow, but if this works, as we think it well then we’re going to have CAD Dominos and I certainly don’t want to forecast that yet, and I would reiterate our hope out about 20% earnings growth doesn’t really require that, but if we are able to deliver on this initiative in a growing market and start taking share on top of that, its going to be a very exciting time.
Sterling Auty
Alright, great, thank you guys.
James Heppelmann
Okay, we have time, maybe one more question.
Operator
Thank you. Yun Kim with Gleacher
Yun Kim
Thank you. So first I’ll welcome Board Jeff and also to Jim as the new CEO.
Jeff Glidden
Thanks.
Jim Heppelmann
Thank you.
Yun Kim
So on Project Lightening how important if you are current network for resellers for getting you product offering, do you feel that you need to make considerable investments in terms of expansion in training for the new product launch or are you going to be more focused on selling the product through your direct sales force initially?
Jim Heppelmann
No, I think, the resellers are very important and they are very excited by the way we have given them a preview at our sales and reseller kick offs, a week before last. So they are very important.
I think if you go back to our core box we would characterize the reseller CAD business as a growth market, and we think this is going to help us significantly in that market because I talked earlier about switching cost. The real fundamental biggest break through here is usability and that that is all about usability in ease of years.
So, our resellers are pretty excited about this. Now, our resellers have a certain amount of coverage and I think within that coverage, they’ll do well with this lightening strategy.
If lightening becomes a strategy, they can start actually switching accounts then we’ll need more coverage. But, I think that’s a story that’ll play out over some period of time and we’ll have ample time to react to it and if we have to go recruit more resellers, because we don’t have an opportunity and displace auto works or audit those accounts, that would be a very good problem to have and we’ll cross that bridge when we get to it.
Yun Kim
Okay, great. And then Barry, I just want to make sure, with your guidance for fiscal year ’11 business.
Has there been a change? Because I thought initially maybe you were looking at growing that business in the mid-teen for the year, but it looks like you got it for 10% growth.
Is there something that I’m missing or I just miss something here?
Barry Cohen
You want to take that, Jeff?
Jeff Glidden
On the services business, I think we feel good about the growth in that. I will say one of the things we’ll focus on is efficiency and productivity in that, but I think the view currently is that’s a very important piece of the puzzle particularly as we deploy and basically, deploy the new products and technology.
So, I think we feel good about the opportunity for growth there, and I will say there’s opportunity for efficiency and productivity as well and we’ll address all of those.
Barry Cohen
And I think the view really of the service business is greater than 12% growth going forward after 2011 and that the 2011 looks like about 10% to 12%. So we’re guiding a little conservative upon the 10%, but we expect that to be a solid double digit growth.
Yun Kim
Okay. Great and then lastly Barry, obviously with the business booming here, has lot of these large deal deployments with Domino accounts happening.
Can you just talk about whether you’re getting more and more interest in large system inaugurators and can you just talk about just the overall status of your SI partnerships equity systems?
Barry Cohen
Yes, I can take that or Jim can take that, but I think that we’re seeing a lot more interest from the SIs and we’re targeting more and more accounts together than we ever did before. And we should, we will expect that that kinds of partnership in the eco system will grow in 2011 and beyond and both, yes, more interest and more pondering activity going on with the SIs.
Speaker
Okay, guys. So, I think we’re out of time here.
But, thanks a lot of time here. Thanks a lot, a lot of good questions.
Sort of in summary, it feels like we had a great Q4 that capped what in retrospect was a really great fiscal 2010, especially given sort of out though when we started the year versus where it actually ended. It feels we had pretty interesting situation right where we have most things working and a lot of momentum as we go in to next year, raise the guidance a little bit to reflect.
But confident that we could have a pretty good year in fiscal 2011 and that might be the first of many that would follow. So just sort of in closing, I invite you to all tune-in tomorrow to the virtual launch of our Lightening Strategy and then of course, hopefully we’ll get you live and in person next week, at our Investor Day at the Nasdaq site New York.
Okay.
Kristian Talvitie
Alright. Thanks a lot everybody.
Operator
This concludes today’s conference call. Thank you for attending.
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