8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported)	April 26, 2011
Parametric Technology Corporation
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts
(State or Other Jurisdiction of Incorporation)
0-18059	04-2866152
(Commission File Number)	(IRS Employer Identification No.)
140 Kendrick Street Needham, Massachusetts	02494-2714
(Address of Principal Executive Offices)	(Zip Code)
(781) 370-5000
(Registrant’s Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 2 - Financial Information

Item 2.02.                   Results of Operations and Financial Condition.

On April 27, 2011, Parametric Technology Corporation issued a press release announcing results for its second fiscal quarter ended April 2, 2011.  PTC also posted a copy of its supplemental prepared remarks with respect to the completed quarter on the Investor Relations section of its website at www.ptc.com.  A copy of the press release and a copy of the prepared remarks are furnished herewith as Exhibits 99.1 and 99.2, respectively.

Section 5 – Corporate Governance and Management

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

On April 26, 2011, Paul Cunningham, our Executive Vice President, Worldwide Sales, resigned effective November 15, 2011.  As of April 28, 2011, Mr. Cunningham will continue with PTC as Executive Advisor for the transition period.

Section 9 - Financial Statements and Exhibits

Item 9.01.                   Financial Statements and Exhibits.

(d)           Exhibits.

99.1   A copy of the press release issued by Parametric Technology Corporation on April 27, 2011 is furnished herewith.

99.2   A copy of the prepared remarks posted by Parametric Technology Corporation to its website on April 27, 2011 is furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Parametric Technology Corporation
Date:  April 27, 2011	By:	/s/ Jeffrey Glidden
		Jeffrey Glidden
		Executive Vice President and Chief Financial Officer

EX-99.1

PTC Announces Q2 Results and Initiates Q3 Guidance

NEEDHAM, Mass.— April 27, 2011 -- PTC (Nasdaq: PMTC), The Product Development Company®, today reported results for its second fiscal quarter ended April 2, 2011.

Highlights

·   Q2 Results: Revenue of $269.2 million and non-GAAP EPS of $0.26; GAAP EPS of $0.16

o   Non-GAAP operating margin of 15.7%; GAAP operating margin of 9.0%

o   Relative to Q2 guidance ($260 - $270 million in revenue with $0.22 to $0.26 non-GAAP EPS), currency fluctuations did not materially impact results

·   Q3 Guidance: Revenue of $275 to $285 million and non-GAAP EPS of $0.28 to $0.32

o   GAAP EPS of $0.16 to $0.20

o   Assumes $1.45 USD / EURO

·   FY’11 Targets: Revenue of $1,120 to $1,130 million and non-GAAP EPS of $1.20 to $1.25

o   GAAP EPS of $0.73 to $0.78

o   Expecting license revenue growth of 15% to 20%, low- to mid-teens services revenue growth, and high single-digit maintenance revenue growth

o   Non-GAAP operating margin of 17% to 18%; GAAP operating margin of 11% to 12%

o   Assumes $1.45 USD / EURO for H2’11

The Q2 non-GAAP results exclude $9.9 million of stock-based compensation expense, $7.6 million of acquisition- related intangible asset amortization, $0.6 million of acquisition-related expense, and $5.8 million of income tax adjustments.  The Q2 non-GAAP results include a tax rate of 25% and 122 million diluted shares outstanding.  The Q2 GAAP results include a tax rate of 19% and 122 million diluted shares outstanding.

Results Commentary

James Heppelmann, president and chief executive officer, commented, “PTC had a strong Q2, with revenue and EPS at the high-end of our guidance range.  Our license revenue of $74.2 million was up 15% on a year-over-year basis, and included 40% year-over-year growth in Desktop license revenue.  This was our 5th consecutive quarter of year-over-year improvement in Desktop license revenue and in our Channel business.  Our Enterprise license revenue was down 15% year-over-year, and was significantly impacted by lower than expected Federal, Aerospace & Defense revenue in North America, as well as the dilutive effect of the strong Desktop revenue on PLM sales capacity.  Overall, we delivered 12% total growth compared to the year ago period.”  On a constant currency basis, total growth was 11% and license growth was 13% compared to Q2’10.

“Our momentum in the PLM market continued with the announcement of 3 new strategically important ‘domino’ accounts during Q2,” Heppelmann continued.  “Since 2009, we have won 25 domino accounts and we continue to expect to win a cumulative total of 30 domino accounts by the end of FY’11.  Dominoes represent the largest of many competitive displacement opportunities, and we believe they demonstrate that PTC is gaining share and becoming recognized as the industry leader for both our technology and product development process expertise.”

Heppelmann added, “We had 24 large deals (license + services revenue of more than $1 million) in Q2’11, compared to 22 last quarter and 18 in Q2’10.  We believe this is an indicator of the strength of our pipeline for business opportunities with new and existing customers.  During the quarter we recognized revenue from leading organizations such as ITT Corporation, Liebherr, Bandai Co. Ltd., Target Corporation, Tata Motors Limited, TJX Companies, Toyota Motor Corporation, and Volkswagen.”

Jeff Glidden, chief financial officer, commented, “From a profitability standpoint we had a very strong quarter; we delivered $0.26 of non-GAAP EPS, up 30% from $0.20 per share in Q2 ‘10.  Our Q2 non-GAAP result includes approximately $3 million of severance expenses related to a strategic reprioritization effort to support our long-term market opportunity in the Automotive vertical.  We delivered $78 million in cash flow from operations during the quarter, and we ended Q2 with $260 million of cash, up from $183 million in Q1.”

(continues)

Outlook Commentary

“From a product portfolio perspective, FY’11 is an exciting year,” said Heppelmann.  “We have already launched Mathcad Prime 1.0 and Windchill 10, and will be launching Creo this summer.  In addition, our pending acquisition of MKS, which we expect will close in early June, adds important breadth and depth to an already robust product portfolio, and further extends PTC’s long-term growth opportunity.  Given the market momentum we are experiencing and the extent of our technology leadership position, we remain confident in our ability to achieve our longer-term goal of 20% non-GAAP EPS CAGR through 2014.”

“For Q3, we are providing guidance of $275 to $285 million in revenue with non-GAAP EPS of $0.28 to $0.32, excluding any impact from the acquisition of MKS,” Glidden added.  “From a revenue perspective, we are expecting approximately 15% to 25% year-over-year growth in license revenue in Q3, with our combined services and maintenance businesses up in the low teens, resulting in approximately 15% year-over-year growth in total revenue.  We expect to resume our stock repurchases in Q3, with the goal of repurchasing approximately $55 million in total in FY’11.”  For Q3, the GAAP EPS target is $0.16 to $0.20.

The Q3 guidance assumes a non-GAAP tax rate of 24%, a GAAP tax rate of 20% and 121 million diluted shares outstanding.  The Q3 non-GAAP guidance excludes approximately $11.3 million of stock-based compensation expense, $7.7 million of acquisition-related intangible asset amortization expense, any acquisition-related expenses, and their related income tax effects.

Glidden continued, “Looking to the full year FY’11, we are increasing the low end of our revenue growth target from 10% to 11% growth, or $1,120 million.  The mix of revenue is also changing, with lower license revenue growth being more than offset by stronger and more predictable services and maintenance revenue.  We are now expecting total revenue growth of 11% to 12% driven by license revenue growth of 15% to 20%, low- to mid-teens services revenue growth and high single-digit maintenance revenue growth.  We remain committed to achieving our FY’11 non-GAAP EPS target of $1.20 to $1.25, and will continue to balance investments to support future growth with our commitment to 20% non-GAAP EPS growth.”  For FY’11, the GAAP EPS target is $0.73 to $0.78.

The FY’11 targets assume a non-GAAP tax rate of 24%, a GAAP tax rate of 22% and 121 million diluted shares outstanding.  The FY’11 non-GAAP guidance excludes approximately $44.2 million of stock-based compensation expense, $29.9 million of acquisition-related intangible asset amortization, $0.7 million of foreign currency transaction losses, any acquisition-related expenses ($0.6 million through Q2), and their related income tax effects.

Q2 Earnings Conference Call and Webcast

Prepared remarks for the conference call have been posted to the investor relations section of our website.  The prepared remarks will not be read live; the call will be primarily Q&A.

What:	PTC Fiscal Q2 Conference Call and Webcast
When:	Thursday, April 28th, 2011 at 8:30 am (ET)
Dial-in:	1-800-857-5592 or 1-773-799-3757 Call Leader: James Heppelmann Passcode: PTC
Webcast:	www.ptc.com/for/investors.htm
Replay:	The audio replay of this event will be archived for public replay until 4:00 pm (CT) on May 3, 2011 at 1-866-509-3683 or 203-369-1910.  To access the replay via webcast, please visit www.ptc.com/for/investors.htm.

(continues)

Important Information About Non-GAAP References

PTC provides non-GAAP supplemental information to its financial results.  Non-GAAP operating expenses, margin and EPS exclude stock-based compensation expense, amortization of acquired intangible assets, acquisition-related expenses, foreign currency transaction losses related to a litigation resolution, and the related tax effects of the preceding items and any one-time tax items.  We use these non-GAAP measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals, communicated internally and externally, for managing our business and evaluating our performance. We believe that providing non-GAAP measures affords investors a view of our operating results that may be more easily compared to the results of peer companies.  In addition, compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.  However, non-GAAP information should not be construed as an alternative to GAAP information as the items excluded from the non-GAAP measures often have a material impact on PTC’s financial results. Management uses, and investors should consider, non-GAAP measures in conjunction with our GAAP results.   

Forward-Looking Statements

Statements in this press release that are not historic facts, including statements about our fiscal 2011 and other future financial and growth expectations and anticipated tax rates are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected.  These risks include the possibility that customers may not purchase our solutions when or at the rates we expect, the possibility the foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense, the possibility that we may not achieve the license, services or maintenance growth rates that we expect, which could result in a different mix of revenue between license, service and maintenance and could impact our EPS results, the possibility that strategic customer wins may not generate the revenue we expect, the possibility that new product releases may be delayed or may not generate the revenue we expect, the possibility that resource constraints could adversely affect our revenue, the possibility that our strategic investments may not generate the growth or revenues we expect, and the possibility that our proposed acquisition of MKS Inc. may not be consummated or that such acquisition may not generate the revenues we expect.  In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses (including restructuring charges) and profits and loans and cash repatriations from foreign subsidiaries. Other risks and uncertainties that could cause actual results to differ materially from those projected are detailed from time to time in reports we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.

PTC, The Product Development Company, and all other PTC product names and logos are trademarks or registered trademarks of Parametric Technology Corporation or its subsidiaries in the United States and in other countries. All other companies referenced herein are trademarks or registered trademarks of their respective holders.

About PTC (www.ptc.com)

PTC (Nasdaq: PMTC) provides discrete manufacturers with software and services to meet the globalization, time-to-market and operational efficiency objectives of product development. Using the company’s PLM and CAD and related solutions, organizations in the Industrial, High-Tech, Aerospace/Defense, Automotive, Retail/Consumer and Life Sciences industries are able to support key business objectives such as reducing costs and shortening lead times while creating innovative products that meet customer needs and comply with industry regulations.

(continues)

PARAMETRIC TECHNOLOGY CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
					Three Months Ended						Six Months Ended
					April 2,			April 3,			April 2,			April 3,
					2011			2010			2011			2010
Revenue:
	License				$	74,215		$	64,644		$	149,688		$	139,460
	Service					194,974			175,912			386,053			359,525
Total revenue						269,189			240,556			535,741			498,985
Costs and expenses:
	Cost of license revenue (1)					6,558			8,232			12,512			16,379
	Cost of service revenue (1)					75,213			68,934			155,320			139,458
	Sales and marketing (1)					81,163			75,137			165,684			153,735
	Research and development (1)					53,051			49,960			104,573			100,650
	General and administrative (1)					24,712			22,807			48,196			46,878
	Amortization of acquired intangible assets					4,266			3,975			8,120			8,033
Total costs and expenses						244,963			229,045			494,405			465,133
Operating income						24,226			11,511			41,336			33,852
	Other expense, net					(822	)		(605	)		(2,708	)		(1,129	)
Income before income taxes						23,404			10,906			38,628			32,723
	Provision for income taxes					4,387			1,904			6,351			5,858
Net income					$	19,017		$	9,002		$	32,277		$	26,865
Earnings per share:
	Basic				$	0.16		$	0.08		$	0.27		$	0.23
				Weighted average shares outstanding		118,194			115,951			117,501			116,104
	Diluted				$	0.16		$	0.08		$	0.27		$	0.22
				Weighted average shares outstanding		121,502			119,856			121,317			120,487
		(1	)	The amounts in the tables above include stock-based compensation as follows:
					Three Months Ended						Six Months Ended
						April 2,			April 3,			April 2,			April 3,
						2011			2010			2011			2010
	Cost of license revenue				$	3		$	2		$	6		$	19
	Cost of service revenue					1,583			2,241			3,720			4,821
	Sales and marketing					2,350			3,520			4,779			6,594
	Research and development					1,749			2,383			4,142			5,042
	General and administrative					4,186			4,146			8,251			9,671
				Total stock-based compensation	$	9,871		$	12,292		$	20,898		$	26,147

PARAMETRIC TECHNOLOGY CORPORATION
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
					Three Months Ended						Six Months Ended
					April 2,			April 3,			April 2,			April 3,
					2011			2010			2011			2010
GAAP operating income					$	24,226		$	11,511		$	41,336		$	33,852
	Stock-based compensation					9,871			12,292			20,898			26,147
	Amortization of acquired intangible assets
			included in cost of license revenue			3,339			4,928			6,702			9,826
	Amortization of acquired intangible assets					4,266			3,975			8,120			8,033
	Acquisition-related charges included in
				general and administrative expenses		608			-			608			-
Non-GAAP operating income (2)					$	42,310		$	32,706		$	77,664		$	77,858
GAAP net income					$	19,017		$	9,002		$	32,277		$	26,865
	Stock-based compensation					9,871			12,292			20,898			26,147
	Amortization of acquired intangible assets
				included in cost of license revenue		3,339			4,928			6,702			9,826
	Amortization of acquired intangible assets					4,266			3,975			8,120			8,033
	Acquisition-related charges included in
				general and administrative expenses		608			-			608			-
	Non-operating foreign currency transaction loss (3)					-			-			722			-
	Income tax adjustments (4)					(5,848	)		(6,696	)		(11,658	)		(14,073	)
Non-GAAP net income					$	31,253		$	23,501		$	57,669		$	56,798
GAAP diluted earnings per share					$	0.16		$	0.08		$	0.27		$	0.22
	Stock-based compensation					0.08			0.10			0.17			0.22
	Income tax adjusments					(0.05	)		(0.06	)		(0.10	)		(0.12	)
	All other items identified above					0.07			0.08			0.14			0.15
Non-GAAP diluted earnings per share					$	0.26		$	0.20		$	0.48		$	0.47
		(2	)	Operating margin impact of non-GAAP adjustments:
					Three Months Ended						Six Months Ended
						April 2,			April 3,			April 2,			April 3,
						2011			2010			2011			2010
	GAAP operating margin					9.0	%		4.8	%		7.7	%		6.8	%
				Stock-based compensation		3.7	%		5.1	%		3.9	%		5.2	%
				Amortization of acquired intangibles		2.8	%		3.7	%		2.8	%		3.6	%
				Acquisition-related charges		0.2	%		0.0	%		0.1	%		0.0	%
	Non-GAAP operating margin					15.7	%		13.6	%		14.5	%		15.6	%
		(3	)	Reflects foreign currency transaction losses related to a previously announced litigation settlement in Japan.
		(4	)	Reflects the tax effects of non-GAAP adjustments for the three and six months ended April 2, 2011 and April 3, 2010, which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above.

PARAMETRIC TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
	April 2,		September 30,
	2011		2010
ASSETS
Cash and cash equivalents	$	259,504	$	240,253
Accounts receivable, net		178,558		169,281
Property and equipment, net		55,780		58,064
Goodwill and acquired intangibles, net		541,753		546,440
Other assets		311,506		293,026
Total assets	$	1,347,101	$	1,307,064
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred revenue	$	300,269	$	245,840
Other liabilities		243,804		313,920
Stockholders' equity		803,028		747,304
Total liabilities and stockholders' equity	$	1,347,101	$	1,307,064

PARAMETRIC TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
		Three Months Ended						Six Months Ended
		April 2,			April 3,			April 2,			April 3,
		2011			2010			2011			2010
Cash flows from operating activities:
	Net income	$	19,017		$	9,002		$	32,277		$	26,865
	Stock-based compensation		9,871			12,292			20,898			26,147
	Depreciation and amortization		14,651			15,976			28,720			31,899
	Accounts receivable		16,857			4,550			15,899			8,761
	Accounts payable and accruals (5)		3,916			2,343			(25,317	)		(12,733	)
	Deferred revenue		34,594			32,440			27,169			16,453
	Income taxes		(7,129	)		(3,693	)		(9,198	)		(6,498	)
	Litigation settlement		-			-			(52,129	)		-
	Other		(13,501	)		(4,962	)		(8,081	)		(186	)
Net cash provided by operating activities			78,276			67,948			30,238			90,708
Capital expenditures			(6,148	)		(9,225	)		(11,560	)		(17,102	)
Acquisitions of businesses, net of cash acquired			-			(1,505	)		-			(2,087	)
Payments on debt			-			(19,720	)		-			(19,720	)
Repurchases of common stock			-			(40,000	)		-			(45,072	)
Other investing and financing activities (6)			(778	)		(1,460	)		(5,452	)		(12,901	)
Foreign exchange impact on cash			5,239			(4,490	)		6,025			(6,256	)
Net change in cash and cash equivalents			76,589			(8,452	)		19,251			(12,430	)
Cash and cash equivalents, beginning of period			182,915			231,144			240,253			235,122
Cash and cash equivalents, end of period		$	259,504		$	222,692		$	259,504		$	222,692
(5)	Includes accounts payable, accrued expenses, and accrued compensation and benefits
(6)	The three months ended April 2, 2011 and April 3, 2010 include $4.8 million and $4.6 million, respectively, for payments of withholding taxes in connection with the vesting of restricted stock units and restricted stock. The six months ended April 2, 2011 and April 3, 2010 include $22.0 million and $20.2 million, respectively, for payments of withholding taxes in connection with vesting of restricted stock units and restricted stock.

EX-99.2

Q2 FISCAL 2011 PREPARED REMARKS

THE LONG-TERM VIEW:  Technology leadership + winning in the market = 20% EPS CAGR

Our long-term financial goal is simple:  We intend to deliver 20% non-GAAP EPS growth annually through FY’14.  Our goal is to deliver this result through what we call our “Winning in the Market” strategy, which means primarily through accelerating organic revenue growth coupled with modest margin improvement.  The table below illustrates these goals.  Based on the strength of our FY’10 and our FY’11 outlook, we remain confident about our ability to achieve our FY’14 revenue growth and non-GAAP EPS growth targets.  For H1’11, our actual Fx rate was $1.36 USD/EURO.  Our guidance for Q3 and the remainder of FY’11 assumes $1.45 USD/EURO.  Our actual FY’10 Fx rate was essentially $1.37 USD/EURO.

We believe we are the technology leader in attractive growth markets.  We characterize the markets we participate in with the 4-box graphic below.  Industry analysts estimate that from 2005 through 2010 the PLM market (right half of the 4-box below) has grown in the high single digits, faster than the low single digit growth of the CAD market (left half of the 4-box below).  They expect this trend to continue through 2014, with the CAGR of both markets expanding over this time. We have seen our technology leadership position in the growth markets to translate into growth rates in excess of the market growth rates, especially in our PLM business, where we have had significantly higher than market growth rates.  We expect our overall revenue growth rates to accelerate over the next few years as our revenue mix continues to shift from ‘Desktop’ to ‘Enterprise.’

We provide data points such as “Domino Account Wins” in the pages that follow to enable investors to further evaluate our claims that we are the technology leader, that we are gaining market share, and that ultimately we are “Winning in the Market.”

Non-GAAP Supplemental Information

We provide non-GAAP supplemental information to our GAAP information.  PTC's reasons for providing this information are described at the end of this document.  GAAP information corresponding to the non-GAAP information provided is contained in “Q2 FY’11 Expenses Commentary and FY’11 & Q3 Outlook” below and in the attached tables, along with a reconciliation between the GAAP and non-GAAP information.

Q2 RESULTS VS. GUIDANCE: Revenue and EPS at the high end of our guidance

Total revenue for Q2 of $269 million was at the high end of our Q2 revenue guidance range of $260 million to $270 million.  Our Q2 non-GAAP EPS of $0.26 was at the high end of our guidance range of $0.22 to $0.26. Q2 non-GAAP results were not meaningfully impacted by foreign currency relative to the rates we used when we established our Q2 guidance ($1.37 USD/EURO).  Q2 GAAP EPS was $0.16, which was above our guidance range of $0.11 to $0.15.

We delivered $74 million of license revenue in Q2 (up 15% year over year), which was below our expected range of $78 to $82 million.  This is primarily due to lower than expected Federal, Aerospace & Defense revenue in North America.  Our commercial license growth (excluding Federal & Defense) was up 27% year over year.  We delivered stronger than anticipated maintenance revenue of $132 million (up 7%, compared to our guidance range of low to mid single-digit growth) and stronger than anticipated services revenue of $63 million (up 19%, compared to our guidance of up approximately 10%).  The performance of these lines of business was driven primarily by strong execution and was also impacted by annuity focused business policy modifications.

Q2 FY’11:  Overall strong performance

We delivered 12% year-over-year revenue growth, with license revenue up 15% (11% and 13% on a constant currency basis, respectively).  We delivered non-GAAP EPS of $0.26, up from $0.20 in Q2 ’10.  (GAAP EPS was $0.16 compared to $0.08 in Q2’10).

As is highlighted in the 4-box and domino account tables below:

1)   We are seeing a significant uptick in our CAD business (left half of the 4-box), with license revenue up 40% year over year, and are sensing a good market response to our Creo strategy.

2)   The large enterprise CAD market (upper left box) delivered significant year-over-year growth, with total revenue up 21% and license revenue up 57%.

3)   We are also seeing continued strength in our SMB business (bottom half of the 4-box), with year-over-year license revenue up 17%.  This is our 5th consecutive quarter of year-over-year license and total revenue growth in the Channel.

4)   Total PLM revenue of $114.4 million (right half of the 4-box), while down 5% sequentially, was up 8% year over year.

5)   Large enterprise PLM market (upper right box) license revenue was down 19% year over year.  We generated lower than expected Federal, Aerospace & Defense revenue in North America; additionally the strong Desktop revenue had a dilutive effect on PLM sales capacity; however this market continues to exhibit strength with 15% maintenance and 17% services revenue growth.

6)   We announced 3 new domino accounts in Q2 (current total of 25), one in the Industrial vertical, one in the Retail & Consumer vertical, and one in the Electronics & High-Tech vertical.

7)   We maintained our target of 30 domino account wins by the end of FY ’11 (an additional 5).

8)   We had 24 large deals (>$1M in license and services revenue), up from 18 in Q2 ’10, reflecting broader strength than a year ago.

Revenue by 4-Box

The horizontal axis highlights Desktop vs. Enterprise solutions

·   Desktop solutions include Creo Elements/Pro TM, Mathcad® and a portion of Creo Elements/Direct TM and Arbortext® revenue

·   Enterprise solutions include Windchill,Creo Elements/View, and a portion of Arbortext revenue

The vertical axis highlights Direct vs. Indirect go-to market strategies

·   Direct sales focuses primarily on the large enterprise market

·   Indirect sales (primarily our VAR reseller channel) focuses primarily on the SMB market

DOMINO ACCOUNT UPDATE:  25 down, 5 to go in FY’11 for a cumulative total of 30

At our June ‘09 investor event, we outlined what we call our “domino account strategy.”  Domino wins are defined as competitive wins for PTC product development solutions at some of the world’s largest discrete manufacturing companies.  Typically, these wins reflect companies whose incumbent PLM solutions are not PTC products.  These wins are important because we believe they signal the technological superiority of our products.  We believe the logical conclusion of winning in a significant number of ‘domino’ accounts is that PTC has become the unambiguous market leader.  As we demonstrate the real value of our technology in the initial installation phase, we expect these accounts will be significant annuity customers for years to come.

We announced an additional 3 domino accounts in Q2.  Of these, one is in the Industrial vertical, one is in the Electronics & High Tech vertical and one is in the Retail & Consumer vertical.

The table below outlines domino account announcements by major vertical since FY’08.

We believe our long-term PLM license revenue results and Domino account momentum continue to demonstrate what we believe is a fundamental shift in the competitive dynamic of our industry:  Our Windchill PLM platform is separating itself from the pack and we are in an increasingly clear technology leadership position.  In addition to domino account wins, we are also actively engaged in a significant number of important Windchill-led competitive displacement opportunities with other large companies around the world.

As we have stated previously, we intend to transition our Domino Account reporting into Annuity Account reporting in FY’12.

Q3 AND FY’11 OUTLOOK:  Solid Q3 outlook.  Increasing low-end of FY’11 revenue targets reflects revenue mix shift and favorable Fx; non-GAAP EPS target remains $1.20-$1.25.

In providing guidance for Q3 and setting targets for FY’11, we are weighing company specific factors such as our pipeline of opportunities and our maintenance and services base as well as external considerations, including the macroeconomic environment, currency, and visibility into customer spending patterns.  We are using the following currency assumptions in our guidance: USD / EURO rate of $1.45 and YEN / USD of 82.

For Q3, we are initiating revenue guidance of $275 to $285 million with non-GAAP EPS of $0.28 to $0.32.  (On a GAAP basis, we expect EPS of $0.16 to $0.20).  Our Q3 guidance includes target license revenue of approximately $77 to $84 million, which is approximately 15% to 25% growth on a year-over-year basis, with our combined maintenance and services revenue expected to be up in the low teens on a year-over-year basis, resulting in approximately 13% to 17% year-over-year growth in total revenue.

Looking to the full year FY’11, we are adjusting our revenue target to $1,120 to $1,130 million, which represents 11% to 12% year-over-year growth.  We are maintaining our non-GAAP EPS target of $1.20 to $1.25, but will

continue to balance our commitment of 20% non-GAAP EPS growth with investments to support future growth, especially given the dilutive effect of the strong Desktop revenue on PLM sales capacity.  For FY’11 the GAAP EPS target is $0.73 to $0.78.

The current 11% to 12% FY’11 revenue target reflects the following adjustments: License revenue growth of 15% to 20%; low to mid teens services revenue growth; high single digit maintenance revenue growth; Fx assumption of $1.45 USD/Euro.  We believe these adjustments result in lower risk relative to both the FY’11 revenue and EPS targets, given the implied smaller increase in Q4 license revenue, as well as the increasingly favorable mix of more predictable services and maintenance revenue.

Our product portfolio is being received very well in the market.  We continue to sense a lot of excitement in the market around Creo, our new CAD platform, which we intend to launch in the summer of 2011.  We believe Creo will be a significant enhancement over the functionality and usability of existing CAD products on the market.  Creo will leverage a core set of technology assets unique to PTC and is intended to address 4 critical issues still impacting the CAD industry: usability, interoperability, assembly management and technology lock-in.

Customers continue to expand their view of PLM from an engineering-centric CAD data management solution into a robust enterprise solution with thousands of users across the extended enterprise.  We launched Windchill® 10.0 in April, and have a significant new release of Arbortext® scheduled for the fall of 2011.  We also launched Mathcad® Prime 1.0 early in Q2.

We also recently announced that we have entered into a definitive agreement to acquire MKS, a global application lifecycle management (ALM) technology leader.  MKS Integrity™ coordinates and manages all activities and artifacts associated with developing software intensive products, including requirements, models, code and test, ensuring comprehensive lifecycle traceability.  By unifying MKS’s ALM solutions with PTC’s industry-leading product lifecycle management (PLM) solutions, PTC will enable manufacturers to better align the management of a product’s hardware components and related software.

We agreed to acquire MKS for an aggregate purchase price of approximately CDN$292.5 million in an all cash transaction.  We will finance the transaction by drawing on our existing credit facility in the amount of approximately $250 million and with cash on hand of approximately $54 million.  The acquisition is expected to close in early June 2011, subject to customary conditions, including approval of the MKS shareholders, Ontario court approval, and regulatory approvals. The acquisition is expected to be neutral to our non-GAAP financial results in fiscal 2011 and slightly accretive to our non-GAAP financial results in fiscal 2012.

We are very optimistic about the long-term opportunity for PTC and will continue to make strategic investments that we believe are critical to delivering value to our customers and to enabling us to gain market share and help us continue to drive toward our goal of low- to mid-teens revenue growth and 20% non-GAAP EPS CAGR over the 5-year period through 2014.

REVENUE TRENDS

Certain reclassifications between Direct and Indirect and Desktop and Enterprise revenue from previously reported results (Q1’09 through Q1’11) are reflected below.  Indirect revenue is comprised of revenue from our reseller channel and from customers classified as Indirect.  To the extent a customer changes between the Direct and Indirect classification, we reclassify their historical revenue to align to the current period classification.  The reclassifications of prior quarter and annual Direct and Indirect and Desktop and Enterprise revenue were not more than 2% for any single quarterly or annual reporting period.

DIRECT SALES:  Strong large deal activity, strong Desktop and solid Enterprise

Our direct sales force is primarily focused on large enterprise customers.  We have approximately 303 direct sales teams.  These teams are primarily focused on selling our Product Development System, which incorporates all of our primary product families, to large enterprise customers.  The table below shows direct revenue performance.  Key metrics we provide in addition to revenue regarding our Direct Sales / Large Enterprise Market performance also include Large Deal Activity and Domino Account wins.

Q2 direct account revenue was up 13% year over year.  As you can see from the 4-box detail on page 3, our growth in this space was driven by 21% growth in Desktop (CAD) revenue and 7% growth in Enterprise (PLM) revenue.  License revenue in the large enterprise CAD market (upper left box) increased 57% year over year.  License revenue in the large enterprise PLM market (upper right box) was down 19% year over year.  Our lower than expected PLM revenue in Q2’11 was primarily related to lower than expected Federal, Aerospace & Defense revenue in North America as well as the dilutive effect of the strong Desktop results on PLM sales capacity; however this market continues to exhibit strength with maintenance and services revenue, up 15% and 17%, respectively.

LARGE DEAL ACTIVITY: Customers continue to make significant PLM investments; CAD strong too.

Large deal activity is a significant growth driver and has historically tended to generate 15% to 20% of our total revenue in any given quarter, with the exception of Q4, which historically has been higher.  Large deal activity is driven primarily by direct sales teams.  We define “large deals” as recognizing more than $1 million of license and service revenue from a customer during a quarter.

In Q2 we had 24 large deals totaling $52.4 million.  11 of these customers were in North America, 8 were in Europe and 5 were in Asia.  Of the $52.4 million in license and service revenue, approximately $18 million was Desktop (CAD) related, compared to approximately $4 million in the year ago period.  Approximately $34 million was Enterprise (PLM) related, compared to $35 million in Q2’10.  We have a strong pipeline of large deals that we are working on worldwide.  We are winning competitive deals with large global companies (see ‘Dominoes’

above) and are actively engaged in a substantial number of competitive opportunities with other large global companies.

UPPER LEFT BOX (DIRECT SPACE / DESKTOP PRODUCTS)

Historically, this market has been a highly penetrated market with limited long-term growth opportunity.  Over the past 2 quarters, we have seen substantial year-over-year growth in this market.  In Q2, we delivered 21% total revenue growth and 57% license revenue growth.  We believe our results represent both the impact of macro factors (spending in this market had been muted since the end of 2008), as well as excitement about our new Creo CAD platform, which we believe will be a significant enhancement over the functionality and usability of existing CAD products on the market today.  We expect to launch the first version of Creo in the summer of 2011.  We believe this new platform could drive above industry average growth in our CAD business over the coming years.

Our primary products in this market are Creo Elements/Pro, Creo Elements/Direct and Arbortext authoring solutions.

UPPER RIGHT BOX (DIRECT SPACE / ENTERPRISE PRODUCTS)

From a near- to medium-term growth perspective, we believe this market offers the most significant opportunity for PTC.  Large enterprises are increasingly investing in PLM solutions and we believe Windchill is the premier PLM solution on the market today.  License revenue in Q2 was lower than expected, primarily due to lower than expected Federal, Aerospace & Defense revenue in North America as well as the dilutive effect of the strong Desktop results on PLM sales capacity.  Importantly this is our 4th quarter of consecutive services and maintenance revenue growth on a year-over-year basis.  The performance of these lines of business was driven primarily by strong execution and was also impacted by annuity focused business policy modifications.

Our primary products in this market are Windchill, Creo Elements/View, and Arbortext enterprise solutions.

INDIRECT SALES:  Strong maintenance base and continued signs of improving end markets

Our indirect sales are primarily from the Small and Medium Businesses (SMB) market.  Indirect revenue is comprised of revenue from our reseller channel and from customers we have designated as indirect.  We continue to have approximately 118 channel business development managers supporting more than 420 channel partners who are focused primarily on selling our MCAD products such as Creo Elements/Pro, Creo Elements/View and Mathcad, and Windchill PDMLink® into the SMB marketplace.  We began in fiscal 2009 to develop a network of enterprise resellers to further expand our core Windchill ecosystem.  This program is progressing well.

In Q2 indirect account revenue was up 9% year over year.  Given that this market is made up of SMB companies, we believe this market continues to be more heavily impacted by macroeconomic factors.  Importantly, as reflected in the 4-box detail, we are continuing to see an important sign of improvement in the SMB space: license and total revenue are up year over year in both the lower left and lower right boxes for the 5th quarter in a row.

LOWER LEFT BOX (INDIRECT SPACE / DESKTOP PRODUCTS)

We believe this market continues to offer long-term growth potential.  The customer base is primarily comprised of SMB customers which we believe are more heavily impacted by macroeconomic factors.  Importantly, we are seeing signs of improvement in new license sales and our maintenance paying base in this market remains stable.  This is our fifth quarter of total revenue improvement and 15%+ year-over-year license revenue improvement.

Our primary products in this market are Creo Elements/Pro, Creo Elements/Direct, Mathcad and Arbortext authoring solutions.

LOWER RIGHT BOX (INDIRECT SPACE / ENTERPRISE PRODUCTS)

From a medium- to long-term growth perspective, we believe this market offers a significant growth opportunity.  Again, the customer base in this market is primarily comprised of SMB companies, which we believe are more heavily impacted by macroeconomic factors.  Despite the soft macro-environment, this is our fifth consecutive quarter of year-over-year license revenue growth.  SMB customers are increasingly interested in PLM solutions and we believe we are well positioned to provide those customers with the right PLM technology to meet their needs.

Our primary products in this market are Windchill and Arbortext enterprise solutions.

REVENUE BY LINE OF BUSINESS

LICENSE:  Solid license quarter… Big Desktop revenue and Solid Enterprise revenue

License sales generate the highest gross margins, which are in the mid- to high 90% range on a non-GAAP basis.  License revenue historically has tended to represent 28% to 35% of our total revenues in any given quarter, with Q4 generally being our strongest quarter.  Given the macroeconomic environment in FY’09, license revenue was closer to 20% of total revenue, however, as expected, it has trended back towards 30% of total revenue in FY’10 and the first half of 2011.

Q2 License revenue of $74.2 million was up 15% year over year (13% on a constant currency basis).  We had 40% year-over-year growth in Desktop license revenue and a 15% year-over-year decline in Enterprise license revenue.  Q2 License revenue was lower than expected primarily due to lower than expected Federal, Aerospace & Defense revenue in North America.

Our products continue to perform very well in competitive benchmarks, as demonstrated by our domino account and large deal (>$1 M in license and service revenue) momentum.

Looking forward to Q3, we are expecting license revenue of $77 to $84 million, up approximately 15% to 25% on a year-over-year basis.  For FY’11, we are expecting license revenue growth of 15% to 20% on a year-over-year basis.

SERVICES:  Year-over-year growth momentum continues to build

Our services business provides significant value to our customers, helping them re-engineer their global product development business processes and implement our solutions, and providing them with training on our software. Services revenue has historically tended to represent 20% to 25% of our total revenues in any given quarter.

Q2 Services revenue of $63.0 million was up 19% year over year (up 17% on a constant currency basis), primarily due to strong license revenue and ongoing engagements with PLM customers.  Our training business, which typically represents about 15% of our total services revenue, was up 16% year over year.  Our consulting business, which primarily supports Windchill implementations, was up 19% year over year.  This is our 3rd consecutive quarter of accelerating services growth, suggesting that the impact of soft license revenue in FY’09 has bottomed.  Our services non-GAAP net margin of 7.7% in Q2’11 (compared to 2.7% in Q2’10) reflects solid execution during Q2.

Looking forward to Q3, we are expecting services revenue to be up approximately 15% on a year-over-year basis.  For FY’11 we are also expecting services revenue to grow in the low- to mid-teens on a year-over-year basis.  We have a solid backlog of services engagements that provides near-term visibility into our services business.  Relative to FY’10, we expect that our FY’11 services margins will be under pressure due to the impact of the contract accounting treatment related to our Hyundai Motor Company and Kia Motors Corporation win announced in Q1’11, as well as some investments we are making during FY’11 to enhance the longer-term profitability of our services business.

Our primary initiatives for the services business are to continue to enable our customers to realize value from their PLM implementations, improve our services net margins and expand our Windchill services ecosystem by adding Service Partners.  We launched the “Service Advantage Program” at the beginning of fiscal 2009 and we are making solid progress.  We already have a network of partners in North America and Europe, and are launching the program in Asia.

MAINTENANCE:  Strong first half sets the tone

Our maintenance business is an important barometer of customer satisfaction with our solutions.  It is also a strong source of recurring revenue for PTC.  Maintenance gross margins are in the mid- to high 80% range.  Maintenance revenue has historically tended to represent 45% to 50% of our total revenues in any given quarter, with Q4 usually being lower as a percent of total revenue due to historically strong performance of license sales in that quarter.

Q2 maintenance revenue of $132.0 million was up 7% year over year (also up 7% on a constant currency basis).  Q2 is traditionally one of our softer quarters from a maintenance perspective due to the timing of maintenance renewals.  Q2’11 was the first quarter since 2004 that our maintenance revenue is up sequentially from Q1 to Q2 (excluding Q2’08 which was the first full quarter of the CoCreate acquisition), reflecting strong execution and the impact of annuity focused business policy modifications.  We believe our maintenance business reflects a solid customer base and the importance customers attribute to our products.

Looking forward to Q3, we are expecting low double-digit growth of maintenance revenue on a year-over-year basis.  For FY’11 we are expecting a high single-digit maintenance revenue increase on a year-over-year basis, primarily due to improving license revenue, strong execution and annuity focused business policy modifications.

Active Maintenance Seats

We have more than 1.2 million active maintenance seats of PTC software in use today.  We believe the solid base of maintenance-paying customers is a testament to the quality of our products and we also view it as one of our most important assets.

Active Maintenance Seats

We experienced an increase in active maintenance seats across all major product families in Q2.  Our overall attach and renewal rates continue to remain strong.

REVENUE BY REGION:  Signs of global stability

Americas revenue in Q2 of $94.4 million was up 12% compared with last year, reflecting increases of 13% and 9% in direct and indirect revenue, respectively.  Q2 license revenue in the Americas was up 20% year over year, with direct revenue up 23% and indirect revenue up 8%.  Sequentially, total revenue was down 6% and license revenue was down 31%.  Our lower than expected revenue in the Americas reflects lower than expected Federal, Aerospace & Defense revenue in North America.  We believe this reflects recent uncertainty related to Federal and Defense budgets and program spending.

Europe revenue was $106.0 million in Q2, up 13% (14% on a constant currency basis) compared with last year, reflecting increases of 17% and 7% in direct and indirect revenue, respectively.  Q2 license revenue in Europe was up 26% year over year, with direct revenue up 30% and indirect revenue up 20%.  Sequentially, total revenue was down 2% and license revenue was down 5%.

Japan revenue was $32.6 million in Q2, up 10% (up 1% on a constant currency basis) compared with last year, reflecting revenue increases of 13% and 4% in direct and indirect revenue, respectively.  Q2 license revenue in Japan was up 16% compared with last year, with direct revenue up 23% and indirect revenue up 2%.  Sequentially, total revenue was up 31% and license revenue was up 264%, primarily due to seasonality and higher Desktop license revenue from large deals.

Pacific Rim revenue was $36.2 million in Q2, up 8% (6% on a constant currency basis) compared with last year, reflecting revenue increases of 3% and 23% in direct and indirect revenue, respectively.  Q2 license revenue in the Pac Rim was down 5% compared with last year, with direct revenue down 16% and indirect revenue up 29%.  (China, which represents a significant portion of our Pac Rim revenue, decreased 1% compared to Q2’10).  The year-over-year comparison was impacted primarily by a large Windchill order in the Pac Rim in Q2’10.  Sequentially, total revenue was up 8% and license revenue was up 21%.

CURRENCY IMPACT ON RESULTS COMPARED TO THE YEAR AGO PERIOD

Because we have a global business, with Europe and Asia historically representing approximately 65% of our revenue, our results are impacted by currency fluctuations.  On a constant currency basis, our revenue increased 11% year over year.  Currency fluctuations favorably impacted Q2 revenue by $2.7 million and unfavorably impacted Q2 non-GAAP expenses by $0.4 million compared to Q2’10.

Constant Currency (assumes Q2’10 currency rates)

Looking forward, the guidance we are providing assumes exchange rates of approximately 1.45 USD / EURO and 82 YEN / USD.  Our actual simple average FY’10 Fx rate was essentially $1.37 USD / EURO.  We do not forecast currency movements, rather we provide detailed constant currency commentary.  Currency can significantly impact our results. For example, in FY’10 currency was a modest tailwind for PTC when compared to FY’09: revenue was positively impacted by $15 million and non-GAAP expenses were negatively impacted by $10 million.  On the other hand, in FY’09 currency was a considerable headwind for PTC when compared to FY’08: revenue was negatively impacted by $39 million and non-GAAP expenses were positively impacted by $36 million.

As a simple rule of thumb, based on current revenue and expense levels, a $0.10 move on the USD/EURO exchange rate will impact annualized revenue by approximately $20 to $25 million and EPS by approximately $0.04 to $0.06.

Q2 FY’11 EXPENSES COMMENTARY AND Q3 & FY’11 OUTLOOK

Q2 non-GAAP results exclude $9.9 million of stock-based compensation expense, $7.6 million of acquisition- related intangible asset amortization, $0.6 million of acquisition-related expenses and $5.8 million of income tax adjustments.  The Q2 non-GAAP results include a tax rate of 25% and 121.5 million diluted shares outstanding.  The Q2 GAAP results include a tax rate of 19% and 121.5 million diluted shares outstanding.

Q3’11 non-GAAP guidance excludes the following estimated expenses and their tax effects:

·   Approximately $11.3 million of expense related to stock-based compensation

·   Approximately $7.7 million of acquisition-related intangible asset amortization expense

·   Any acquisition-related expenses

FY’11 non-GAAP guidance excludes the following full-year estimated expenses and their tax effects, as well as any one-time tax items:

·   Approximately $44.2 million of expense related to stock-based compensation

·   Approximately $29.9 million of acquisition-related intangible asset amortization expense

·   Any acquisition-related expenses (approximately $0.6 million through Q2)

·   Approximately $0.7 million of foreign currency transaction losses

INCOME STATEMENT

Our Q2’11 non-GAAP gross margin was $192 million, or 71.5%, up from $171 million, or 70.9% in the year ago period, reflecting stronger license and service revenue, as well as a 500 bps improvement in services non-GAAP net margin (7.7% compared to 2.7%), reflecting solid services execution.  Q2’11 GAAP gross margin was $187 million, or 69.6%, up from $163 million, or 67.9% in Q2’10.

Our Q2’11 non-GAAP operating expenses were $150 million, up from $138 million in Q2’10, reflecting investments we have made in the business to add sales capacity and to improve our product portfolio.   Our Q2’11 non-GAAP operating expenses also include approximately $3 million of severance expenses, primarily in R&D, related to a strategic reprioritization effort to support our long-term market opportunity in the Automotive vertical.

Total non-GAAP expenses were $226.9 million, up 9% (9% on a constant currency basis) from Q2 of last year.  Q2’11 total GAAP expenses were $245.0 million.  From an operating performance perspective, we achieved 15.7% non-GAAP operating margin in Q2’11, compared to 13.6% last year.  GAAP operating margin was 9.0% for Q2’11 compared to 4.8% in Q2’10.

Looking forward, we are expecting Q3 non-GAAP gross margins of approximately 72% and operating expenses of approximately $155 million, reflecting higher sales and marketing expense related primarily to higher sales expense (driven by higher commission expense due to higher anticipated license revenue, as well as costs related to planned hires), and costs related to our annual user event in June.  We anticipate modestly lower sequential R&D expense as a result of the strategic reprioritization initiative mentioned above.

Our total Q3 non-GAAP expenses are expected to be approximately $230 to $235 million, depending on amount and mix of revenue.  Q3 GAAP operating expenses are expected to be approximately $249 to $254 million, excluding any acquisition-related expenses.

For the full year, we are expecting non-GAAP gross margins of approximately 72% and non-GAAP operating margins of 17% to 18%.  As reflected in our EPS guidance for FY ’11 we are committed to achieving our non-GAAP operating margin and EPS targets for FY’11.

Over the longer-term we intend to deliver 20% non-GAAP EPS growth annually through FY’14.  Our goal is to deliver this result primarily through accelerating organic revenue growth coupled with modest margin improvement.  We have made significant investments in FY’09 and FY’10 that have helped us achieve a technology leadership position and have driven substantial revenue growth.

Our R&D and S&M expense as a percentage of revenue in FY’09 and FY’10 were higher than in previous years, reflecting our strategy to continue to invest in our business in order to better position PTC for the future.  Primary areas of investment in the business over this time included increased investment in our direct sales force and our reseller channel, investing in R&D to extend our technology leadership position, enhancing and leveraging the value of our services business, and expanding our services ecosystem.  Looking forward, we expect to continue to increase our R&D investments, while having R&D as a percentage of revenue to begin to trend toward more normalized historical levels beginning in the back half of FY’11.  We will continue to invest in initiatives to drive revenue growth and create further operating leverage opportunities over time.

NON-GAAP OPERATING EXPENSES

TAX RATE

Q2 non-GAAP tax rate was 25%, slightly above our expected non-GAAP tax rate of 24%.  Our GAAP tax rate was 19%.

Looking forward, the Q3 guidance assumes a non-GAAP tax rate of 24% and a GAAP tax rate of 20%.  The FY’11 target assumes a non-GAAP tax rate of 24% and a GAAP tax rate of 22%.

SHARE COUNT / SHARE REPURCHASE

We had 121.5 million fully diluted weighted average shares outstanding for Q2.  We did not repurchase any shares during the quarter.  Our repurchase authorization was increased in Q4’10 by $100 million through the end FY’11.  We have $118 million remaining under our current authorization to repurchase shares.

Looking forward, we expect to have approximately 121 million fully diluted shares outstanding for Q3 and for the full fiscal year.  We expect to resume our stock repurchases in Q3, with the goal of repurchasing approximately $55 million in total in FY’11.  Our long-term goal is to repurchase stock to offset dilution.

BALANCE SHEET:  Solid cash position and strong cash flow in Q2

CASH / CASH FLOW FROM OPERATIONS

For Q2’11, our cash balance was $260 million, up $77 million from the end of Q1’11.  Q2 cash flow included $78 million provided by operations; $6 million of capital expenditures; and favorable foreign currency impact of $5 million.

Looking forward, we expect to have approximately $260 to $265 million in cash at the end of Q3 and we currently expect to end the year with approximately $280 to $285 million in cash after stock repurchases, but excluding any corporate development activities (we expect to use approximately $54 million of cash on hand to finance our previously announced acquisition of MKS).

DSO

We continue to have strong DSOs of 60 days in Q2’11, compared with 60 days in Q1’11 and 57 days in Q2’10.

OUTSTANDING DEBT

At the end of Q2’11 we had no outstanding balance on our $300 million revolving credit facility.  We expect to draw approximately $250 million on our revolving credit facility in Q3 related to our acquisition of MKS.

MISCELLANEOUS COMMENTS

HEADCOUNT

Total headcount was 5,395 at the end of Q2, compared to 5,416 at the end of Q1, reflecting both planned hires as well as the strategic realignment initiative in Q2.  Headcount at the end of Q4’10 was 5,317.

M&A

We view M&A primarily as a strategic vehicle to further enhance our product portfolio and growth opportunity.  As previously announced, we have agreed to acquire MKS for an aggregate purchase price of approximately CDN$292.5 million in an all cash transaction.  MKS is a global application lifecycle management (ALM) technology leader.  By unifying MKS’s ALM solutions with our industry-leading product lifecycle management (PLM) solutions, PTC will enable manufacturers to better align the management of a product’s hardware components and related software.  We expect this acquisition to further extend PTC’s long-term growth opportunity.

We intend to remain opportunistic as it relates to M&A.  Historically, the majority of our M&A opportunities have comprised small, strategic technology tuck-ins.   For example, in FY’09 we acquired Relex to expand our quality lifecycle management capabilities and Synapsis (InSight) to build out our product analytics platform, and in FY’10 we acquired technology in the fast growing carbon information management market, further enhancing our product analytics platform with “green product development” capabilities. We will evaluate other strategic acquisition opportunities as they arise.

WRAP-UP

We are very optimistic about the long-term opportunity for PTC.  We are having a solid start to FY’11:  We have won a cumulative total of 25 domino accounts, and expect to have a total of 30 by the end of FY’11;  we had 24 large deals (>$1 M in license and service revenue) in Q2;  our pipeline remains very robust;  we are seeing significant year-over-year license growth in the CAD and SMB markets; we believe we have the best PLM technology platform on the market and we have very exciting opportunities with Creo and our Arbortext SIS strategy to continue to drive further growth in FY’12 and beyond.

We remain confident and committed to achieving accelerating revenue growth and our 20% non-GAAP EPS growth target through 2014.  We intend to continue to make prudent, strategic investments that we believe are critical to delivering value to our customers and gaining market share.

Thank you for your on-going support.

Important Information About Non-GAAP References

PTC provides non-GAAP supplemental information to its financial results.  Non-GAAP operating expenses, margin and EPS exclude stock-based compensation expense, gain on litigation resolution, foreign currency transaction losses related to a litigation resolution, amortization of acquired intangible assets, acquired in-process research and development expense, acquisition-related expenses, restructuring charges, and the related tax effects of the preceding items and any one-time tax items.  We use these non-GAAP measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals, communicated internally and externally, for managing our business and evaluating our performance. We believe that providing non-GAAP measures affords investors a view of our operating results that may be more easily compared to the results of peer companies.  In addition, compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.  However, non-GAAP information should not be construed as an alternative to GAAP information as the items excluded from the non-GAAP measures often have a material impact on PTC’s financial results. Management uses, and investors should consider, non-GAAP measures in conjunction with our GAAP results.   

Forward-Looking Statements

Statements in these prepared remarks that are not historic facts, including statements about our fiscal 2011 and other future financial and growth expectations, future product releases, anticipated tax rates, the expected impact of our planned strategic investments and product releases on our future success, expected market growth rates and the long-term prospects for PTC are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected.  These risks include the possibility that customers may not purchase our solutions when or at the rates we expect, the possibility the foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense, the possibility that we may not achieve the license, services or maintenance growth rates that we expect, which could result in a different mix of revenue between license, service and maintenance and could impact our EPS results, the possibility that strategic customer wins may not generate the revenue we expect, the possibility that our strategic investments may not have the effects or generate the revenue we expect, the possibility that we will experience a shortfall in revenue that causes us to decrease or eliminate planned strategic investments in our business, the possibility that we may be unable to attain or maintain a technology leadership position or that any such leadership position may not generate the revenue we expect, the possibility that planned product releases may be delayed or may not generate the revenue we expect, the possibility that resource constraints could adversely affect our revenue, and the possibility that our proposed acquisition of MKS Inc. may not be consummated or that such acquisition may not generate the revenues we expect.  In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses and profits and loans and cash repatriations from foreign subsidiaries. Other risks and uncertainties that could cause actual results to differ materially from those projected are detailed from time to time in reports we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.

NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
(UNAUDITED)
(in thousands)
GAAP OPERATING EXPENSES
	Q1 '09		Q2 '09		Q3 '09		Q4 '09		FY '09		Q1 '10		Q2 '10		Q3 '10		Q4 '10		FY '10		Q1 '11		Q2 '11
Cost of license revenue	$	7,584	$	6,976	$	7,644	$	7,758	$	29,962	$	8,147	$	8,232	$	7,621	$	7,047	$	31,047	$	5,954	$	6,558
Cost of service revenue		75,741		72,302		66,162		65,592		279,797		70,524		68,934		67,090		70,100		276,648		80,107		75,213
Sales & marketing		79,862		71,387		73,823		76,297		301,369		78,598		75,137		79,121		84,676		317,532		84,521		81,163
Research & development		48,361		44,752		46,562		48,826		188,501		50,690		49,960		50,597		50,320		201,567		51,522		53,051
General & administrative		21,437		17,693		19,245		22,295		80,670		24,071		22,807		22,755		23,242		92,875		23,484		24,712
Amortization of acquired
intangible assetes		3,868		3,815		3,827		4,110		15,620		4,058		3,975		3,836		3,736		15,605		3,854		4,266
In-process research &
development		-		-		300		-		300		-		-		-		-		-		-		-
Restructuring charge, net		-		9,788		6,609		6,274		22,671		-		-		-		-		-		-		-
GAAP Operating Expenses	$	236,853	$	226,713	$	224,172	$	231,152	$	918,890	$	236,088	$	229,045	$	231,020	$	239,121	$	935,274	$	249,442	$	244,963
ADJUSTMENTS TO DERIVE NON-GAAP MEASURES
	Q1 '09		Q2 '09		Q3 '09		Q4 '09		FY '09		Q1 '10		Q2 '10		Q3 '10		Q4 '10		FY '10		Q1 '11		Q2 '11
Cost of license revenue:
Acquired intangible
amortization	$	4,668	$	4,703	$	5,221	$	5,082	$	19,674	$	4,898	$	4,928	$	4,659	$	3,882	$	18,367	$	3,363	$	3,339
Stock-based
compensation		14		3		11		22		50		17		2		2		3		24		3		3
Cost of service revenue:
Acquired intangible
amortization		8		-		-		-		8		-		-		-		-		-		-		-
Stock-based
compensation		2,255		1,291		2,055		2,562		8,163		2,580		2,241		2,186		2,115		9,122		2,137		1,583
Sales & marketing:
Stock-based
compensation		2,908		2,193		3,491		4,205		12,797		3,074		3,520		3,471		3,367		13,432		2,429		2,350
Research & development:
Stock-based
compensation		2,258		1,566		1,986		2,404		8,214		2,659		2,383		2,252		2,186		9,480		2,393		1,749
General & administrative:
Stock-based
compensation		3,096		1,677		3,969		5,362		14,104		5,525		4,146		3,599		3,583		16,853		4,065		4,186
Acquisition-related costs		-		-		-		-		-		-		-		-		-		-		-		608
Amortization of acquired
intangible assets		3,868		3,815		3,827		4,110		15,620		4,058		3,975		3,836		3,736		15,605		3,854		4,266
In-process research &
development		-		-		300		-		300		-		-		-		-		-		-		-
Restructuring charge, net		-		9,788		6,609		6,274		22,671		-		-		-		-		-		-		-
Non-GAAP adjustments	$	19,075	$	25,036	$	27,469	$	30,021	$	101,601	$	22,811	$	21,195	$	20,005	$	18,872	$	82,883	$	18,244	$	18,084
NON-GAAP OPERATING EXPENSES
	Q1 '09		Q2 '09		Q3 '09		Q4 '09		FY '09		Q1 '10		Q2 '10		Q3 '10		Q4 '10		FY '10		Q1 '11		Q2 '11
Cost of license revenue	$	2,902	$	2,270	$	2,412	$	2,654	$	10,238	$	3,232	$	3,302	$	2,960	$	3,162	$	12,656	$	2,588	$	3,216
Cost of service revenue		73,478		71,011		64,107		63,030		271,626		67,944		66,693		64,904		67,985		267,526		77,970		73,630
Sales & marketing		76,954		69,194		70,332		72,092		288,572		75,524		71,617		75,650		81,309		304,100		82,092		78,813
Research & development		46,103		43,186		44,576		46,422		180,287		48,031		47,577		48,345		48,134		192,087		49,129		51,302
General & administrative		18,341		16,016		15,276		16,933		66,566		18,546		18,661		19,156		19,659		76,022		19,419		19,918
Amortization of acquired
intangible assetes		-		-		-		-		-		-		-		-		-		-		-		-
In-process research &
development		-		-		-		-		-		-		-		-		-		-		-		-
Restructuring charge, net		-		-		-		-		-		-		-		-		-		-		-		-
Non-GAAP Operating Expenses	$	217,778	$	201,677	$	196,703	$	201,131	$	817,289	$	213,277	$	207,850	$	211,015	$	220,249	$	852,391	$	231,198	$	226,879

PARAMETRIC TECHNOLOGY CORPORATION
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
					Three Months Ended						Six Months Ended
					April 2,			April 3,			April 2,			April 3,
					2011			2010			2011			2010
GAAP gross margin					$	187,418		$	163,390		$	367,909		$	343,148
	Stock-based compensation					1,586			2,243			3,726			4,840
	Amortization of acquired intangible assets
				included in cost of license revenue		3,339			4,928			6,702			9,826
Non-GAAP gross margin (1)					$	192,343		$	170,561		$	378,337		$	357,814
GAAP operating income					$	24,226		$	11,511		$	41,336		$	33,852
	Stock-based compensation					9,871			12,292			20,898			26,147
	Amortization of acquired intangible assets
				included in cost of license revenue		3,339			4,928			6,702			9,826
	Amortization of acquired intangible assets					4,266			3,975			8,120			8,033
	Acquisition-related charges included in
				general and administrative expenses		608			-			608			-
Non-GAAP operating income (2)					$	42,310		$	32,706		$	77,664		$	77,858
GAAP net income					$	19,017		$	9,002		$	32,277		$	26,865
	Stock-based compensation					9,871			12,292			20,898			26,147
	Amortization of acquired intangible assets
				included in cost of license revenue		3,339			4,928			6,702			9,826
	Amortization of acquired intangible assets					4,266			3,975			8,120			8,033
	Acquisition-related charges included in
				general and administrative expenses		608			-			608			-
	Non-operating foreign currency transaction loss (3)					-			-			722			-
	Income tax adjustments (4)					(5,848	)		(6,696	)		(11,658	)		(14,073	)
Non-GAAP net income					$	31,253		$	23,501		$	57,669		$	56,798
GAAP diluted earnings per share					$	0.16		$	0.08		$	0.27		$	0.22
	Stock-based compensation					0.08			0.10			0.17			0.22
	Income tax adjusments					(0.05	)		(0.06	)		(0.10	)		(0.12	)
	All other items identified above					0.07			0.08			0.14			0.15
Non-GAAP diluted earnings per share					$	0.26		$	0.20		$	0.48		$	0.47
		(1	)	Gross margin impact of non-GAAP adjustments:
					Three Months Ended						Six Months Ended
					April 2,			April 3,			April 2,			April 3,
					2011			2010			2011			2010
	GAAP gross margin					69.6	%		67.9	%		68.7	%		68.8	%
				Stock-based compensation		0.6	%		0.9	%		0.7	%		1.0	%
				Amortization of acquired intangibles		1.2	%		2.0	%		1.3	%		2.0	%
	Non-GAAP gross margin					71.5	%		70.9	%		70.6	%		71.7	%
		(2	)	Operating margin impact of non-GAAP adjustments:
					Three Months Ended						Six Months Ended
					April 2,			April 3,			April 2,			April 3,
					2011			2010			2011			2010
	GAAP operating margin					9.0	%		4.8	%		7.7	%		6.8	%
				Stock-based compensation		3.7	%		5.1	%		3.9	%		5.2	%
				Amortization of acquired intangibles		2.8	%		3.7	%		2.8	%		3.6	%
				Acquisition-related charges		0.2	%		0.0	%		0.1	%		0.0	%
	Non-GAAP operating margin					15.7	%		13.6	%		14.5	%		15.6	%
		(3	)	Reflects foreign currency transaction losses related to a previously announced litigation settlement in Japan.
		(4	)	Reflects the tax effects of non-GAAP adjustments for the three and six months ended April 2, 2011 and April 3, 2010, which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above.