As expected, PTC announced late yesterday that conditions during the December quarter
had deteriorated significantly, resulting in lower than anticipated revenue for the quarter and
dampening the outlook for the remainder of fiscal 2009. The company now sees FY09
revenue forecast reduced from $1.1 billion to $960 million, a decline of 10% rather than an
increase of 3%. For Q2, it now expects revenue of $220 million to $230 million, a decline of
about 13%.

None of this is surprising. Longer sales cycles will result as large expenditures come under
more scrutiny in a tough economy; PTC still relies on a direct sales force for over 70% of
revenue – reps who will be challenged to meet quota this year; its lack of emphasis on its
CAD products in favor of (longer sales cycle and implementation) PDM/PLM products will
cause that profitable revenue stream to slow. The good news: looking at the numbers
provided, it appears that PTC does see some improvement as the year progresses.

License revenue in the December quarter fell 29% year/year to $50.5 million, and fell 49%
from the September quarter. (A sequential decline is typical, but more likely to be around
30%.) These results led PTC to forecast that license revenue for fiscal 2009 could be down
35%, which, in turn leads me to wonder how long maintenance revenue can be maintained
at current levels. After all, if fewer new customers are buying new seats (metrics PTC did
not provide this quarter), and some existing customers are forced by economic pressure to
drop maintenance, won’t that lead to lower maintenance revenue in the future? PTC allows
that this may be true in a prolonged recession, but doesn’t believe this will be a near-term
concern.

That said, the anticipated lower revenue in F09 has led PTC to "size the business",
including layoffs, a hiring freeze, no merit raises in FY09, reduced travel, etc. CEO Dick
Harrison said on the earnings call that he "[didn’t] want to impact investment in R&D"; COO
Jim Heppleman said that PTC would continue to invest in Windchill to improve ease of
deployment and use and extend the new Sharepoint solution. In all, PTC plans to exit fiscal
2009 with 250 fewer employees than it had at the end of December.

PTC’s channel contributed almost $65 million in the quarter, or 27% of revenue, up from
$60 million a year ago. This increase is due to more accounts being handed over to the
channel, as well as the inclusion of CoCreate. Excluding CoCreate revenue, channel
revenue was down 3%. PTC had been targeting the channel to supply 25%-30% of total
revenue; it now sees the channel providing 35% to 40% of revenue in three years.
PTC’s large deal activity slowed significantly in FQ1, closing only 9 (vs. 12 in the prior two
FQ1, and 24 in FQ4 2008), totaling $24 million. As expected, PTC said that its direct
business to is challenged as more signatures required to close larger deals. It says that
lead times are lengthening and deal sizes are getting smaller. In fact, excluding a single,
very large deal in FQ1 2009, the average large deal was $1.8 million in the December
quarter, down from $2.5 million a year ago.

The company reports that maintenance revenue was up 13%, and that renewal rates are up
4%, as the number of seats under maintenance increased for all products for the 15th
consecutive quarter (including renewing CoCreate customers acquired a year ago).
On a geographic basis, North American revenue accounted for 35% of revenue and
declined 1% from a year ago (even as channel revenue was up 2%). Revenue from Europe
was 41% of total, down 3%; the channel saw a 10% increase including CoCreate but a 5%
decline excluding CoCreate. Finally, revenue from Asia was strongly affected by a weak
Japan (11% of total revenue; flat year/year; channel up 29% including CoCreate but down
13% excluding it). The rest of Pacific Rim contributed 13% of total revenue, up 6% with flat
channel revenue. PTC specifically mentioned China, saying that revenue there was up 7%.