The Daily Magic Formula Stock for 02/09/2009 is Parametric Technology Corp. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is >100%.
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Parametric Technology Corporation (PTC) develops, markets and supports product lifecycle management (PLM) software solutions and related services that help companies improve their product development processes. Our software solutions help customers decrease time to market, improve product quality, increase innovation and reduce product development cost.
The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) market and the collaboration and product data management (PDM) solutions market, as well as many previously isolated markets that address various phases of a productâ€™s lifecycle. These include:
component and supplier management,
visualization and digital mockup,
enterprise application integration,
program and project management, and
after-market service and portfolio management, requirements management, customer needs management, manufacturing planning, and technical and marketing publications.
Our software solutions include:
a suite of mechanical computer-aided design, engineering calculation, and XML-based document authoring tools (MCAD solutions); and
a range of Internet-based collaboration, content and process management, and publishing technologies (data management and collaboration solutions).
These software solutions enable companies to:
create digital product content as represented by product designs and component-based documents (collectively, â€śdigital productsâ€ť);
collaborate globally on the development of content with cross-functional teams consisting of members within an organization and from the extended enterprise;
control content and automate processes over the course of a productâ€™s lifecycle;
configure content to match products and services; and
communicate relevant product information across the extended enterprise and to customers through multiple channels using dynamic publications.
Our PLM software solutions suite provides our customers with a product development system that permits individualsâ€”regardless of their roles in the commercialization of a product, the computer-based tools they use, or their location geographically or in the supply chainâ€”to participate in the product development process. We have devoted significant resources to developing our data management and collaboration solutions and integrating them with our MCAD software solutions. We continue to integrate our products more tightly and make them easier to deploy. We believe this will create significant added value for our customers.
An extension of our PLM solutions, our product information delivery solutions, enable our customers to address significant inefficiencies in cross-functional or complex documentation development processes. Today, most companies use traditional publishing tools that involve a significant amount of manual work to maintain accurate documentation. This causes considerable additional work where multiple authors contribute to the development of content, content changes frequently, multiple organizations within a company have specialized requirements but use similar content, or regulatory compliance requires standardization across all information outputs. Our product information delivery solutions allow customers to create compound documents from reusable content components, leverage CAD in the creation of technical illustrations, manage the content and processes to enable teams to work together, and configure and publish the information for a variety of uses and audiences in multiple formats.
Our solutions are complemented by our experienced services and technical support organizations, as well as resellers and other strategic partners. Our services and technical support organizations provide training, consulting, implementation and support services to customers worldwide. Our resellers supplement our direct sales force to provide greater geographic and small- and medium-size account coverage, primarily for our MCAD solutions. Our strategic partners provide complementary product and/or service offerings.
We are continuing to expand our business through acquisitions and we acquired three businesses in 2008, all of which were acquired in the first quarter.
CoCreate Software GmbH. We purchased CoCreate Software GmbH for approximately $247.5 million (net of cash acquired and including $4.8 million of acquisition-related transaction costs). We financed this acquisition with $220 million borrowed under our revolving credit facility and $27.5 million of cash. CoCreate was a privately-held company based in Sindelfingen, Germany, with approximately 280 employees. CoCreate provided CAD and PLM tools, predominantly to customers in the high-tech and electronics and heavy machinery industries. CoCreate had revenue of approximately $78 million for the twelve months ended October 31, 2007 and operating margins that historically exceeded our own operating margins. CoCreate has contributed to revenue growth and operating margin improvement in 2008. Further, because CoCreateâ€™s revenues were concentrated in Europe and Japan, we have benefited from increased presence in those markets and we expect to continue to leverage our sales force and reseller channel to increase sales of CoCreate products in North America and Asia.
Logistics Business Systems Ltd. (LBS). We acquired LBS for approximately $13.1 million in cash (net of cash acquired and including $0.2 million of acquisition-related costs). A privately held company based in the United Kingdom, LBS provided integrated logistics support solutions for the aerospace and defense and civil aviation industries. LBS had approximately $5 million in annual revenue and approximately 45 employees. This acquisition strengthens our publishing solutions because LBS solutions help customers deliver product support information that is compliant with specified industry standards, such as S1000D and S2000M. The combination of PTC and LBS facilitates the reuse of both product design and configuration data such as CAD files, bills of material, change management information and logistics information.
Digital Human, Inc (DHI). We acquired DHI for $1.0 million in cash. DHI was a development stage company based in Canada developing ergonomic simulation technology.
The acquisitions of LBS and DHI did not contribute significantly to revenue or earnings in 2008.
Our Principal Products and Services
As we describe above, we develop and sell PLM software solutions and related services that enable companies to optimize their product development processes.
Our product development system architecture is:
integral, sharing a common database schema, common business objects and seamless user interface;
Internet-based , enabling our product development system to deploy across existing Intranet and Internet infrastructures to accommodate a distributed value chain; and
interoperable , integrating with other systems using standard protocols and integration approaches.
We describe our portfolio of PLM Solutions in more detail below.
Our MCAD solutions include our integrated CAD/CAM/CAE software as well as document authoring tools. Our principal MCAD solutions are described below.
Pro/ENGINEER Â® is a family of three-dimensional product design solutions based on a parametric, feature-based solid modeler that enables changes made during the design process to be associatively updated throughout the design. Designers can use Pro/ENGINEER for detailed design (CAD), manufacturing/production (CAM), and simulation/analysis (CAE), as well as for exchanging CAD data with a multitude of sources and in varied standard formats, allowing them to create more innovative, differentiated and functional products quickly and easily. Pro/ENGINEER can improve product quality and reduce time to market by enabling end users to evaluate multiple design alternatives and to share data with bi-directional associativity.
CoCreate Â® is a family of explicit CAD, PDM and collaboration software that enables customers pursuing a lightweight and flexible design strategy to meet short design cycles and to create one-off product designs quickly. CoCreateâ€™s explicit modeling approach enables product development teams quickly to create and modify 3D product designs. This fast and lightweight design approach gives designers flexibility to make changes to a product design late in the development process and the ability to work with multi-source CAD data. CoCreate enables users to reduce design cycle time, improve workgroup collaboration through an integrated data management system and decrease product development costs.
Mathcad Â® is an engineering calculation software solution that combines a computational engine, accessed through conventional math notation, with a full-featured word processor and graphing tools. Mathcad allows our customers to determine their Pro/ENGINEER designs and predict the behavior of a Pro/ENGINEER model, which can then be validated using our Pro/ENGINEER CAE solutions. This approach can help our customers speed time to market by significantly reducing the number of iterations necessary to complete a design. In addition, when combined with our Windchill solutions, the valuable intellectual property captured in Mathcad can be managed and shared securely with others for reuse and regulatory compliance.
Arbortext Â® products Arbortext Editorâ„˘ and Arbortext IsoDraw Â® are designed to help customers improve documentation accuracy, speed time to market, and lower publishing costs.
Arbortext Editor is a component-based authoring tool used to create dynamic content for multiple output types. Arbortext Editor looks and works like familiar word processing software but is able to create reusable content components, which can be aggregated into dynamic, customized publications. With Arbortext Editor, documents can be created by multiple contributors and the document components are reusable. Consequently, when changes to content are made, those changes will be reflected wherever that content is used.
Arbortext IsoDraw Â® is a technical illustration solution that enables companies to create both 2D and 3D technical illustrations and animations from scratch or from existing CAD data. Because customers use the solution to create technical illustrations from existing CAD data, they can develop technical publications and engineering designs concurrently, link technical illustrations and animations to engineering designs, and automatically recreate both illustrations and animations when CAD files change through direct integration with Pro/ENGINEER or transfer in multiple supported formats. Illustrations and animations created using Arbortext IsoDraw can be embedded in the Arbortext documents resulting in rich technical publications.
Data Management and Collaboration Solutions
Our suite of Windchill, Arbortext and ProductView solutions is designed to help companies manage the process of developing products and documentation across an extended enterprise. These data management and collaboration solutions help customers leverage product development content not only for the engineering processes, but also for use in other processes, such as manufacturing, procurement, technical publications and after market services. With our data management and collaboration solutions, our customers can improve time to market, increase the number of new products they introduce, improve product quality, reduce product cost, reduce development cost, and improve content reuse.
We describe our principal Data Management and Collaboration Solutions below.
Windchill Â® is a family of sophisticated, Internet-based content and process management solutions for managing complex data and relationships, processes and publications, including:
Windchill PDMLink Â® , a product content management solution that is used to control information by facilitating data accessibility and automating and managing the product development process throughout the life of a product. Windchill PDMLink is fluent with workgroup level CAD content management as well as complete enterprise-wide product content management and enables document management, change management and configuration management. Optional modules of Windchill
PDMLink include Windchill MPMLinkâ„˘, which enables companies to concurrently develop manufacturing process plans as they develop products, Windchill PartsLink Â® Classification and Reuse, which enables companies to organize internal design libraries to enable part reuse, and Windchill Supplier Management, which enables companies to develop approved manufacturer and vendor lists.
Windchill ProjectLinkâ„˘, a collaborative project management solution that enables companies (including their employees, partners, suppliers and customers) to work together on projects through Internet-based compartmentalized workspaces. Windchill ProjectLink also has capabilities for project plan development, milestone and deliverable tracking, activity assignment and management, and on-line discussion forums.
Pro/INTRALINK Â® , a Windchill-based Pro/ENGINEER workgroup data management solution that provides centralized vaulting and revision control of Pro/ENGINEER models, relationships, and capabilities for improved information security and accuracy. A subset of the capabilities found in Windchill PDMLink, Pro/INTRALINK is used for Pro/ENGINEER-only data management within the engineering department.
Arbortext solutions enable our customers to manage complex information assets and to streamline their product information delivery processes. Optimized for managing XML documents authored using Arbortext, these solutions support collaboration of geographically dispersed teams, and manage critical processes such as configuration management and release of publications. The solutions consist of a Windchill-based content and configuration management system that assembles Arbortext-authored XML and SGML content components and automatically publishes audience-specific content in both print and electronic forms, with high-quality layout and formatting.
ProductView â„˘ solutions enable enterprise-wide visualization, verification, annotation and automated comparison of a wide variety of product development data formats, including MCAD (2D and 3D), ECAD, and documents. This solution provides internal and external participants in the process with lightweight access to product designs and related data without requiring the original authoring tool.
We offer maintenance support plans for our software products. Participating customers receive periodic software updates. Active maintenance plan customers also have direct access to our global technical support team of certified engineers for issue resolution. We also provide self-service support tools that allow our customers access to an extensive amount of technical support information.
Consulting and Training Services
We offer consulting, implementation and training services through our services organization, as well as through third-party resellers and other strategic partners. These services enable our customers to adopt and use our solutions more effectively.
Geographic and Segment Information
Financial information about our international and domestic operations, including by segment and principal products, may be found in Note N of â€śNotes to Consolidated Financial Statements,â€ť which information is incorporated herein by reference.
Research and Development
We continue to invest in research and development to improve the quality and functionality of our products.
Our research and development expenses were $182.0 million in 2008, $162.4 million in 2007 and $147.0 million in 2006. Additional information about our research and development expenditures may be found in Item 7. â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€”Results of Operationsâ€”Costs and Expensesâ€”Research and Development.â€ť
Sales and Marketing
We derive most of our revenue from products and services sold directly by our sales force to our end-user customers. We also offer products through third-party resellers. Our direct sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market.
Within our direct sales force, we have both strategic accounts and general business accounts units. The strategic accounts unit is further divided into vertical groups, such as aerospace and defense, automotive, consumer products, electronics and high technology, industrial products and life sciences. This vertical orientation is mirrored in our services delivery organization and, increasingly, in the products we deliver to strategic accounts. The general business account unit is organized geographically. In addition, we continue to broaden our indirect distribution channel through alliances with third-party resellers and other strategic partners who provide products and/or services that complement our offerings. Our resellers distribute our products and provide related services throughout North America, Europe and parts of Asia-Pacific; and our other strategic partners complement our product development system with ancillary offerings.
We compete primarily in the PLM market, including the CAD/CAM/CAE market. We compete with a number of companies that offer solutions that address specific functional areas covered by our solutions, including: Dassault Systemes SA and Siemens AG (as a result of its acquisition of UGS Corp in 2007) for traditional MCAD solutions, PDM solutions, manufacturing planning solutions and visualization and digital mock-up solutions; and Oracle Corporation (as a result of its acquisition of Agile Software Corporation in 2007) for PDM solutions. In addition, we compete with SAP AG, which has entered the PLM market and offers a solution that controls product data within the larger framework of its Enterprise Resource Planning solution. We believe our PLM solutions are more specifically targeted toward the product development processes within manufacturing companies and offer broader and deeper functionality in those processes than are ERP-based solutions.
We also compete in the CAD/CAM/CAE market with design products such as Autodesk, Inc.â€™s Inventor, Siemens AGâ€™s Solid Edge and Dassault Systemesâ€™ SolidWorks for sales to smaller manufacturing customers.
Our software products and related technical know-how, along with our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection. We also use license management and other anti-piracy technology measures, as well as contractual restrictions to curtail the unauthorized use and distribution of our products.
Our proprietary rights are subject to risks and uncertainties described under Item 1A. â€śRisk Factorsâ€ť below. You should read that discussion, which is incorporated into this section by reference.
PTC, the PTC Logo, Parametric Technology Corporation, The Product Development Company, Create Collaborate Control Configure Communicate, Pro/ENGINEER, Wildfire, Pro/INTRALINK, Optegra, CADDS,
Name, Age, Principal Occupation, Business Experience and Directorships
Class III Director Nominees:
Robert N. Goldman, age 58
Private investor since January 2003. Mr. Goldman was Chairman of the Board of eXcelon Corporation, a software developer, from September 2001 to December 2002 and Chief Executive Officer and President of eXcelon Corporation from November 1995 to September 2001.
C. Richard Harrison, age 52
Chief Executive Officer and President of PTC since March 2000. Mr. Harrison was President and Chief Operating Officer of PTC from August 1994 to March 2000. Mr. Harrison joined PTC in 1989.
MANAGEMENT DISCUSSION FROM LATEST 10K
Statements in this Annual Report about anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. â€śRisk Factorsâ€ť of this report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
In 2008, we reported revenue of $1,070 million and operating income of $125 million, a 180 basis point improvement in operating margins from 2007. Our acquisition of CoCreate Software GmbH (acquired on November 30, 2007) and favorable foreign currency exchange rate movements were significant contributors to our operating results for the year. Largely due to these factors, we experienced revenue growth in Europe and Asia-Pacific. We also generated over $222 million of operating cash flow, an increase of over $90 million from 2007, as a result of improved profitability and strong customer collections with days sales outstanding improving to 61 days at the end of 2008 versus 74 days at the end of 2007.
We see the most significant risks for 2009 to be the macroeconomic climate, which could cause our customers to delay, forego or reduce the amount of their investments in our solutions or delay payments of amounts due to us, and the recent decline in foreign currency exchange rates, particularly the Euro, which could adversely affect our reported results as amounts earned in other countries are translated into dollars for reporting purposes.
We have been, and expect to continue, investing in our product portfolio, through both internal development and strategic acquisitions. We have also undertaken a number of initiatives to enhance our long-term business model, including significant steps toward globalizing our work force, evolving our distribution model, enhancing the efficiency and scale of our services business and growing our base of maintenance-paying customers.
The most recent releases of our two core productsâ€”Windchill 9.0, which was released in the fourth quarter of 2007, and Pro/ENGINEER Wildfire 4.0, which was released in January 2008â€”included significant functionality enhancements that we believe will create additional revenue opportunities. We also continue to migrate our customers on non-Windchill-based versions of Pro/INTRALINK to the new Windchill-based Pro/INTRALINK. The number of customers that have completed this migration has increased with the release of Windchill-based Pro/INTRALINK 9.0 and we expect this to continue. We believe this will result in increased services revenue and generate future license and maintenance revenue as we expect our installed base will then expand their Windchill use. We also expect to release Windchill ProductPoint in December 2008. Windchill ProductPoint is targeted at the small- and medium-size business (SMB) market, which we believe represents a growth opportunity over the longer term.
As part of our continuing efforts to increase profitability, we have relocated business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower. As part of this globalization initiative, as well as the integration of CoCreate, we incurred restructuring costs of $20.1 million in 2008. We believe that by moving certain business functions to these locations we have increased both our strategic presence and our ability to add cost effective resources as our business grows. We do not expect to incur restructuring costs related to these initiatives in 2009.
A significant element of our growth strategy is to acquire strategic companies and technologies that expand our solution footprint and/or our distribution model. We have made a number of strategic acquisitions that add to and expand elements of our solutions. Each of our acquisitions has helped us to extend our product development system, which we consider to be a significant competitive advantage for us. You can find more information about these acquisitions under the subheading â€śAcquisitionsâ€ť of Item 1. â€śBusinessâ€ť of this Annual Report, which begins on page 1, and in Note E to the accompanying â€śNotes to Consolidated Financial Statements.â€ť
Fiscal Year 2009 Strategies and Risks
In 2009, our revenue and operating results will be impacted by currency fluctuations (the U.S. dollar strengthened relative to the Euro and the Yen in the first two months of 2009) and the impact of a slowing worldwide economy. Balancing a difficult near-term economic situation with the longer-term opportunity for the business, we are modestly increasing our investments in the business.
Our primary strategic initiatives for 2009 are to:
â€˘continue to invest in research and development to further improve the breadth and competitiveness of our product portfolio, potentially supported by modest acquisitions;
â€˘ continue to evolve our distribution model through increased investment in support of our reseller channel and investment in developing a network of enterprise reseller partners;
â€˘enhance and leverage the value of our services business through expansion of our services ecosystem, including the addition of strategic services partners; and
â€˘continue the globalization of our workforce, primarily through investments in emerging economies, particularly China.
Our success will depend on, among other factors, our ability to:
â€˘ execute strategic and business initiatives;
â€˘ encourage our customers to expand their product development technology infrastructure to a more robust PLM product development system in order to further their global product development initiatives;
â€˘differentiate our products and services from those of our competitors to effectively pursue opportunities within the small- and medium-size business market as well as with strategic, larger accounts;
â€˘optimize our sales and services coverage and productivity through, among other means, effective use and management of our internal resources in combination with our resellers and other strategic partners and appropriate investment in our distribution channel;
â€˘ manage the development and enhancement of our expanding product line using our geographically dispersed development resources;
â€˘ manage our operations in non-U.S. locations where we are expanding our operations, such as China and Russia; and
â€˘integrate acquired businesses into our operations and execute future corporate development initiatives while remaining focused on organic growth opportunities.
We discuss additional factors affecting our revenue and operating results under Item 1A. â€śRisk Factors â€ť of this Annual Report.
Results of Operations
Explanatory Note about Our Revenue Reporting
As of the first quarter of 2008, we have been reporting revenue by line of business (license, maintenance and consulting and training service) and by geographic region. We previously also reported our revenue in two product categories, Enterprise Solutions and Desktop Solutions. We no longer use these product categories to report revenue. The discussion below gives effect to this change for the periods presented.
Impact of Foreign Currency Exchange on Results of Operations
Approximately two thirds of our revenue and half of our expenses are transacted in currencies outside of the U.S. Because we report our results of operations in U.S. dollars, currency translation affects our reported results. On a year-over-year comparative basis, our revenues for both 2008 and 2007 benefited as a result of changes in currency exchange rates, primarily the Euro and the Japanese Yen. Conversely, our expenses were higher as a result of changes in these rates. If 2008 and 2007 actual reported results were converted into U.S. dollars based on the corresponding prior yearâ€™s foreign currency exchange rates, revenue would have been lower by approximately $57.8 million and $21.2 million, respectively, while expenses would have been lower by approximately $37.7 million and $17.2 million, respectively. The net impact on year-over-year results would have been a decrease in operating income of $20.1 million and $4.0 million in 2008 and 2007, respectively. The results of operations, revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.
Impact of Reversal of Valuation Allowance
Net income for 2007 was significantly higher year over year due to a non-cash tax benefit of $58.9 million recorded in the third quarter of 2007 primarily associated with our reversal of valuation allowances against certain deferred tax assets in the U.S. and a foreign jurisdiction.
Revenue increased from 2007 to 2008 primarily due to revenue from the CoCreate business, which we acquired on November 30, 2007, and the favorable impact of foreign currency exchange rate movements, as well as organic growth in maintenance and consulting and training service revenue.
Revenue increased from 2006 to 2007 primarily due to organic revenue growth, the favorable impact of foreign currency rate movements and a modest contribution from acquired businesses.
Costs and expenses increased from 2007 to 2008 primarily due to costs of the CoCreate business, the impact of foreign currency exchange rate movements, measured spending increases to support planned revenue growth, restructuring charges from our cost reduction and globalization measures, and increased amortization of intangible assets and in-process research and development charges associated with our acquisitions.
Costs and expenses increased from 2006 to 2007 primarily due to the impact of foreign currency exchange rate movements, measured spending increases to support planned revenue growth and restructuring charges from our cost reduction and globalization measures.
The provision for (benefit from) income taxes in 2007 and 2006 includes tax benefits totaling $62.8 million and $6.1 million, respectively. The 2007 benefit includes a $58.9 million tax benefit due to the reversal of a significant portion of our valuation allowances against deferred tax assets in the U.S. and in a foreign jurisdiction and a $3.9 million tax benefit from the favorable outcome of a tax refund claim in the U.S. The 2006 benefit resulted from favorable resolutions of tax audits with the Internal Revenue Service in the U.S.
License revenue accounted for 30%, 31% and 31% of total revenue in 2008, 2007 and 2006, respectively.
2008 compared to 2007
License revenue in 2008 reflects growth in Europe and Japan, partially offset by declines in North America and the Pacific Rim. Growth in license revenue in 2008 was primarily due to sales of acquired products, mainly CoCreate products, and the impact of favorable currency movements.
In 2008, Pro/ENGINEER new seat license revenue growth was offset by a decrease in revenue from Pro/ENGINEER upgrades and modules. We believe that our Pro/ENGINEER upgrades and modules license revenue in the first half of 2008 was negatively impacted by the end of the Pro/ENGINEER Wildfire 3.0 product cycle and the launch of Pro/ENGINEER Wildfire 4.0 in January 2008 as customers may have deferred purchases of those items until they have implemented Wildfire 4.0. License sales of our data management and collaboration products were up 7% in 2008, primarily due to higher sales of PDMLink. Total Windchill license revenue relative to the number of new seats varies quarter to quarter based on the type and volume of seats sold. In 2008, we sold proportionately more light user seats, which have a lower price than heavy user seats. We believe this reflects increased adoption of Windchill beyond the engineering organization as heavy user seats are used by engineers while light user seats are used outside the engineering function.
2007 compared to 2006
The growth in license revenue in 2007 compared to 2006 reflected increased revenue from customers of all sizes and across both product categories. Growth in license revenue from our data management and collaboration products was primarily due to growth in sales of Windchill PDMLink Â® , our core Windchill content and process management solution. We believe growth in the number of new Windchill seats sold in 2007 reflected our success in marketing incremental adoption of our solutions as well as our improved and expanded product offerings.
License sales of our MCAD solutions products grew in 2007 primarily due to sales of Mathcad and Arbortext IsoDraw. Revenue from sales of Pro/ENGINEER was relatively flat from 2007 to 2006, with increases in new seat revenue offset by declines in sales of upgrades and modules.
Maintenance revenue represented 46%, 43% and 44% of total revenue in 2008, 2007 and 2006, respectively. Growth in our maintenance revenue was primarily due to sales of acquired products and the impact of favorable foreign currency exchange rate movements, as well as a higher number of seats under maintenance agreements. Although the number of seats under maintenance has been increasing, this trend may not continue in the current macroeconomic climate and may be adversely affected to the extent customers do not continue maintenance for seats currently under maintenance due to layoffs or otherwise.
2008 compared to 2007
The growth in maintenance revenue in 2008 reflects a 28% increase in seats under maintenance, including a 4% increase in Pro/ENGINEER seats and a 28% increase in Windchill seats. In addition, the growth reflects favorable foreign currency exchange rate movements and the addition of CoCreate maintenance customers.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and growth, the development of our products and markets, and adoption of our solutions are forward-looking statements that are subject to the inherent uncertainties in predicting future results and conditions. Risks and uncertainties that could cause actual results to differ materially from those projected include the following: we may be unable to increase revenues or successfully execute strategic and other business initiatives while containing expenses; our efforts to globalize our workforce will cause us to incur additional restructuring charges and could disrupt our business operations; our ability to successfully differentiate our products and services from those of our competitors and otherwise compete could be adversely affected by changes in the competitive landscape that have increased both the size and number of companies with which we compete, some of which have larger operating budgets on an absolute and relative basis; as well as other risks and uncertainties referenced in Part II, Item 1A. â€śRisk Factorsâ€ť of this report.
We develop, market and support product lifecycle management (PLM) software solutions and related services that help companies improve their processes for developing physical and information products. The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) market and the collaboration and product data management solutions market, as well as many previously isolated markets that address various other phases of a productâ€™s lifecycle. These include but are not limited to component and supplier management, visualization and digital mockup, enterprise application integration, program and project management, after market service and portfolio management, requirements management, customer needs management, manufacturing planning, and technical and marketing publications.
Our PLM software solutions provide our customers with a product development system that enables them to create digital product information, collaborate internally and externally, control content and automate processes, manage product configurations, communicate product information to people and systems across the extended enterprise and design chain, create compound documents from reusable content components, and configure and publish the information for a variety of uses and audiences in multiple formats. We have devoted significant resources to developing our PLM offerings into an integrated product development system.
(1) On a consistent foreign currency basis, compared to the year-ago periods, total revenue for the third quarter and first nine months of 2008 increased 13% and 8%, respectively.
(2) On a consistent foreign currency basis, compared to the year-ago periods, total costs and expenses for the third quarter and first nine months of 2008 increased 11% and 8%, respectively.
(3) Net income in the third quarter and first nine months of 2007 includes a tax benefit of $58.9 million due to the reversal of the valuation allowance.
Revenue increased primarily due to revenue from the CoCreate business, which we acquired on November 30, 2007, and the favorable impact of foreign currency rate movements, as well as organic growth in maintenance and consulting and training service revenue.
Costs and expenses increased primarily due to costs from the CoCreate business, the impact of foreign currency rate movements, restructuring charges from our cost reduction and globalization measures, and increased amortization of intangible assets and in-process research and development costs and expenses associated with our acquisitions.
Operating income improved due to a combination of the net impact of foreign currency rate changes of approximately $7.2 million and $14.6 million for the third quarter and first nine months of 2008, respectively, the margin accretion from the CoCreate business and our on-going efforts to improve our sales distribution model, globalize our workforce and improve our services business model, partially offset by the incremental costs and expenses described above.
Net income in the third quarter and first nine months of 2008 reflects the operating margin impacts described above, as well as a higher effective tax rate due primarily to our decision in the third quarter of 2007 to reverse a substantial portion of the valuation allowance recorded against net deferred tax assets in the U.S and a foreign jurisdiction. Net income in the third quarter and first nine months of 2007 includes a tax benefit of $58.9 million due to the reversal of the valuation allowance. Net income in the third quarter and first nine months of 2008 includes a non-cash loss of $6.2 million, recorded as a non-operating loss in other income (expense), related to the liquidation of certain legal entities.
Cash provided by operating activities was $181.1 million in the first nine months of 2008, which was $66.0 million higher than the first nine months of 2007.
We believe our recent releases of our two most significant productsâ€”Windchill 9.0, which was released in the fourth quarter of 2007, and Pro/ENGINEER Wildfire 4.0, which was released in January 2008â€”will create additional revenue opportunities as customers upgrade to these releases over the next two years. We also continue to migrate our customers on non-Windchill-based versions of Pro/INTRALINK to the new Windchill-based Pro/INTRALINK. The number of customers that have completed this migration has increased with the release of Windchill-based Pro/INTRALINK 9.0 and we expect this will continue throughout this year. We believe this will result in increased services revenue and generate future license and maintenance revenue as we expect our installed base will then expand their Windchill and Arbortext use.
As part of our continuing efforts to increase profitability, we are relocating business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower. As part of this globalization initiative, as well as the integration of CoCreate, we incurred restructuring costs of $3.8 million and $15.4 million in the third quarter and first nine months of 2008, respectively, and we expect to incur additional restructuring costs of approximately $5 million during the remainder of 2008.
Fiscal Year 2008 Strategies and Risks
Our goals in 2008 are to increase revenue and profitability. Increasing profitability while also increasing revenue is challenging as decisions we make to reduce or contain costs and expenses can adversely affect our ability to grow revenue, especially license revenue.
Explanatory Note about Our Revenue Reporting
Since the beginning of the first quarter of 2008, we have been reporting revenue by line of business (license, maintenance and consulting and training service) and by geographic region. We previously also reported our revenue in two product categories, Enterprise Solutions and Desktop Solutions. We no longer use these product categories to report revenue. The discussion below gives effect to this change for both periods presented.
Impact of Foreign Currency Exchange on Results of Operations
Approximately two thirds of our revenue and half of our expenses are transacted in currencies outside of the U.S. Because we report our results of operations in U.S. dollars, currency translation affects our reported results.
Year over year, third quarter and year-to-date revenue benefited as a result of changes in currency rates by approximately $18.7 million and $43.5 million, respectively, while expenses were negatively impacted by approximately $11.5 million and $28.9 million, respectively. The net result was an increase in operating income of $7.2 million and $14.6 million in the third quarter and first nine months of 2008, respectively.
Impact of Reversal of Valuation Allowance
Net income for the third quarter and first nine months of 2007 was significantly higher year over year due to a non-cash tax benefit of $58.9 million recorded in the third quarter of 2007 primarily associated with our reversal of valuation allowances against certain deferred tax assets in the U.S. and a foreign jurisdiction.
Results of Operations
We discuss our results of operations for the third quarters and first nine months of 2008 and 2007 in detail below, beginning with a table showing certain consolidated financial data as a percentage of revenue, followed by a discussion of revenue and costs and expenses. Our results of operations include the results of operations of companies we acquired beginning on their respective acquisition dates.
Our revenue consists of software license revenue and service revenue, which includes software maintenance revenue (consisting of providing our customers software updates and technical support) as well as consulting and training revenue (including implementation services).
(1) On a consistent foreign currency basis from the comparable year-ago period, in the third quarter and first nine months of 2008 total revenue increased 13% and 8%, respectively.
Revenue growth in the third quarter and first nine months of 2008 reflects both organic growth and revenue from recently acquired businesses, particularly CoCreate. As a stand-alone company, CoCreate generated revenue of approximately $78 million for the twelve months ended October 31, 2007. CoCreate revenue has been included in our results of operations since December 1, 2007. Accordingly, results for the first nine months of 2007 did not include CoCreate revenue while results for the first nine months of 2008 include seven months of CoCreate revenue.
License revenue in the third quarter of 2008 reflects increased year-over-year license sales in every region except the Pacific Rim, with particular strength in Europe and Japan. License revenue for the first nine months of 2008 reflects growth in Europe and Japan, partially offset by declines in North America and the Pacific Rim. Growth in license revenue in the third quarter and first nine months of 2008 reflects both sales of acquired products, particularly CoCreate products, and the impact of favorable currency movements and, in the third quarter of 2008 includes organic license revenue growth.
License revenue attributable to new license sales grew across most of our major products in the third quarter of 2008, while in the first nine months of 2008, Pro/ENGINEER new seat license revenue growth was offset by a decrease in revenue from Pro/ENGINEER upgrades and modules. We believe that our Pro/ENGINEER upgrades and modules license revenue in the first half of 2008 was negatively impacted by the end of the Pro/ENGINEER Wildfire 3.0 product cycle and the launch of Pro/ENGINEER Wildfire 4.0 in January 2008 as customers may have deferred purchases of those items until they have implemented Wildfire 4.0. License sales of our data management and collaboration products were up 44% and 16% in the third quarter and first nine months of 2008, compared to the third quarter and first nine months of 2007. This growth reflects a 112% and 43% increase in the number of new Windchill seats in the third quarter and first nine months of 2008, respectively, compared to the third quarter and first nine months of 2007. Total Windchill license revenue relative to the number of new seats varies quarter to quarter based on the type and volume of seats being sold. In the third quarter and first nine months of 2008, as compared to the first nine months of 2007, we sold proportionately more light user seats, which have a lower price than heavy user seats. We believe this reflects increased adoption of Windchill beyond the engineering organization as heavy user seats are used by engineers while light user seats are used outside the engineering function.
Maintenance revenue represented 48% and 46% of total revenue in the third quarter of 2008 and 2007, respectively, and 47% and 45% of total revenue in the first nine months of 2008 and 2007, respectively. Maintenance revenue growth in the third quarter and first nine months of 2008 reflects growth in the number of both Pro/ENGINEER and Windchill seats on maintenance year-over-year, as well as favorable currency movements and the addition of CoCreate maintenance customers. We believe the increase in Pro/ENGINEER and Windchill seats on maintenance is the result of license revenue growth in recent quarters and continued improvements in customer satisfaction.
Thank you and good morning everyone, and thanks for joining us today. Before we get started, I just wanted to quickly cover a couple of housekeeping items.
First, as you may have noted there is a type error [ph] related to the dial-in number. It is for the replay of this call in the press release we issued last night. So, our (inaudible) release went out and the correct replay number is now on our web site, on Yahoo Finance and so on. Apologies for that and second as you also know we have postponed our 2009 investor day originally scheduled for next week to February and more details on the exact date of this event will be forthcoming when it is finalized.
Before we get started with the call, I would like to remind everyone that during the course of the conference call, we will make projections and other forward-looking statements regarding future financial performance, business trends and other future events. We caution you that such statements are only predictions and that actual results might differ materially from the results projected in these statements. We refer you to the risks detailed in yesterday's press release, the company's annual report on Form 10-K and in the company's other reports filed with the SEC from time to time. Participating on todayâ€™s call are Dick Harrison, President and Chief Executive Officer; Neil Moses, Executive Vice President and Chief Financial Officer; and Jim Heppelmann, Executive Vice President and Chief Product Officer. I'll now turn the call over to Dick.
Thanks, Kristian. So, just a few remarks. Again we had a â€“ we are pretty excited about the year. We had in the quarter â€“ it was a record quarter in terms of revenue in the history of the company and a record year. So, we are excited about our ability to build on that. We had some major wins in the marketplace during the year. Many of you know about the EADS win and we can talk more about that, but I will also say that as we look at the pipeline which is very solid we think there are going to more wins like that coming during the balance of the year and some maybe as soon as this first quarter.
We have done a nice job in the last 12 months of building out capacity both in terms of our direct sales force and our channel, and our products have never been in a stronger position in the history of the company. So, let us move into Q&A and we will take the first question.