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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: December 29, 2001
Commission File Number: 0-18059
-----------------
Parametric Technology Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-2866152
(State or other (I.R.S.
jurisdiction of Employer Identification
incorporation or Number)
organization)
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
There were 259,988,968 shares of our common stock outstanding on December 29,
2001.
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PARAMETRIC TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended December 29, 2001
Page
Number
------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and December 29, 2001................ 1
Consolidated Statements of Income for the three months ended December 30, 2000 and
December 29, 2001....................................................................... 2
Consolidated Statements of Cash Flows for the three months ended December 30, 2000 and
December 29, 2001....................................................................... 3
Consolidated Statements of Comprehensive Income for the three months ended December 30,
2000 and December 29, 2001.............................................................. 4
Notes to the Consolidated Financial Statements............................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 21
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
Signature...................................................................................... 21
ii
PART I - FINANCIAL INFORMATION
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 29,
2001 2001
----------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents................................................ $ 217,369 $ 203,036
Short-term investments................................................... 13,906 13,644
Accounts receivable, net of allowance for doubtful
accounts of $5,635 and $5,640.......................................... 185,444 166,132
Other current assets and prepaid expenses................................ 98,969 113,062
----------- -----------
Total current assets............................................... 515,688 495,874
Marketable investments...................................................... 17,823 11,040
Property and equipment, net................................................. 91,501 91,283
Goodwill and other intangible assets, net................................... 92,838 83,001
Other assets................................................................ 79,988 89,513
----------- -----------
Total assets........................................................ $ 797,838 $ 770,711
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 28,640 $ 29,514
Accrued expenses......................................................... 55,016 60,111
Accrued compensation and severance....................................... 68,936 52,189
Deferred revenue......................................................... 207,044 201,831
----------- -----------
Total current liabilities........................................... 359,636 343,645
Other liabilities 38,500 36,643
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued... -- --
Common stock, $0.01 par value; 500,000 shares authorized; 276,053 shares
issued................................................................. 2,761 2,761
Additional paid-in capital............................................... 1,643,626 1,643,628
Treasury stock, at cost, 15,515 and 16,063 shares, respectively.......... (173,504) (178,085)
Accumulated deficit...................................................... (1,045,096) (1,048,196)
Accumulated other comprehensive loss..................................... (28,085) (29,685)
----------- -----------
Total stockholders' equity.......................................... 399,702 390,423
----------- -----------
Total liabilities and stockholders' equity.......................... $ 797,838 $ 770,711
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
1
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three months ended
---------------------------
December 30, December 29,
2000 2001
------------- -------------
Revenue:
License.............................................. $ 101,300 $ 64,343
Service.............................................. 133,644 134,262
------------- -------------
Total revenue.................................... 234,944 198,605
------------- -------------
Costs and expenses:
Cost of license revenue.............................. 3,807 4,364
Cost of service revenue.............................. 60,086 50,329
Sales and marketing.................................. 92,433 84,511
Research and development............................. 35,809 34,689
General and administrative........................... 17,369 15,370
Amortization of goodwill and other intangible assets. 9,439 9,165
Nonrecurring charges................................. -- 6,089
------------- -------------
Total costs and expenses......................... 218,943 204,517
------------- -------------
Operating income (loss)................................. 16,001 (5,912)
Other income, net.................................... 1,256 255
------------- -------------
Income (loss) before income taxes....................... 17,257 (5,657)
Provision for (benefit from) income taxes............ 5,003 (2,708)
------------- -------------
Net income (loss)....................................... $ 12,254 $ (2,949)
============= =============
Earnings (loss) per share (Note 3):.....................
Basic................................................ $ 0.05 $ (0.01)
Diluted.............................................. $ 0.05 $ (0.01)
The accompanying notes are an integral part of the consolidated financial
statements.
2
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended
----------------------------
December 30, December 29,
2000 2001
------------- -------------
Cash flows from operating activities:
Net income (loss).......................................................... $ 12,254 $ (2,949)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities:
Depreciation and amortization............................................ 18,881 18,342
Provision for loss on accounts receivable................................ 496 655
Changes in assets and liabilities which provided (used) cash:
Accounts receivable.................................................... (4,238) 14,090
Accounts payable and accrued expenses.................................. (1,410) 3,025
Accrued compensation and severance..................................... (8,080) (16,747)
Deferred revenue....................................................... (24,919) (5,213)
Income taxes........................................................... 1,777 (5,130)
Other current assets and prepaid expenses.............................. (8,303) (12,365)
Other noncurrent assets and liabilities................................ (2,861) 733
------------- -------------
Net cash used by operating activities....................................... (16,403) (5,559)
------------- -------------
Cash flows from investing activities:
Additions to property and equipment........................................ (19,454) (10,095)
Additions to other intangible assets....................................... (238) (411)
Purchases of investments................................................... (7,190) (14,526)
Proceeds from sales and maturities of investments.......................... 952 21,633
------------- -------------
Net cash used by investing activities....................................... (25,930) (3,399)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock..................................... 1,767 269
Purchases of treasury stock................................................ (46,846) (4,998)
------------- -------------
Net cash used by financing activities....................................... (45,079) (4,729)
------------- -------------
Effect of exchange rate changes on cash..................................... (2,234) (646)
------------- -------------
Net decrease in cash and cash equivalents................................... (89,646) (14,333)
Cash and cash equivalents, beginning of period.............................. 325,872 217,369
------------- -------------
Cash and cash equivalents, end of period.................................... $ 236,226 $ 203,036
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three months ended
----------------------------
December 30, December 29,
2000 2001
------------- -------------
Net income (loss)............................................................... $ 12,254 $ (2,949)
------------- -------------
Other comprehensive income (loss), net of tax provision (benefit):
Foreign currency translation adjustment, net of tax of $(872) and $(840),
respectively................................................................. (1,618) (1,560)
Unrealized gains (losses) on securities and derivatives, net of tax of $238 and
$(22), respectively.......................................................... 441 (40)
------------- -------------
Other comprehensive loss........................................................ (1,177) (1,600)
------------- -------------
Comprehensive income (loss)..................................................... $ 11,077 $ (4,549)
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
4
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Parametric Technology Corporation and its wholly owned subsidiaries
and have been prepared by management in accordance with generally accepted
accounting principles. Unless otherwise indicated, all references to a year
reflect our fiscal year, which ends on September 30. The year end consolidated
balance sheet was derived from our audited financial statements. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all adjustments, consisting only of those of a normal recurring nature,
necessary for a fair presentation of our financial position, results of
operations and cash flows at the dates and for the periods indicated. Certain
reclassifications have been made to the 2001 financial statements to conform to
the fiscal 2002 presentation. While we believe that the disclosures presented
are adequate to make the information not misleading, these financial statements
should be read in conjunction with the consolidated financial statements and
related notes included in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2001.
The results of operations for the three months ended December 29, 2001 are not
necessarily indicative of the results expected for the remainder of the fiscal
year.
2. Nonrecurring Charges
In the first quarter of 2002, we recorded nonrecurring charges of $6.1 million
for severance and termination benefits associated with a reduction in force of
approximately 70 people who were notified or terminated during the quarter.
This nonrecurring charge is the continuation of a program begun in the fourth
quarter of 2001 to reduce our headcount to approximately 4,250. Although no
nonrecurring charges were incurred in the first quarter of 2001, we recorded
total nonrecurring charges of $42.6 million in 2001. The 2001 nonrecurring
charges were comprised of $25.7 million for severance and termination benefits
of approximately 720 people who were notified or terminated in 2001, $9.9
million for facility consolidations, and $7.0 million primarily for a
write-down of assets related to a focus shift in certain products.
In the first quarter of 2002, we had cash expenditures of $16.1 million for
nonrecurring charges. Amounts not yet paid at December 29, 2001 related to the
2001 and first quarter of 2002 nonrecurring charges were $19 million. We expect
to pay approximately $15 million of these nonrecurring charges within the next
twelve months. Amounts not yet paid at December 29, 2001, which primarily
relate to facility consolidations for pre-2001 nonrecurring charges, were $20.3
million. We expect to pay approximately $5 million of these nonrecurring
charges within the next twelve months.
3. Earnings Per Share
Basic earnings per share (EPS) is calculated by dividing net income by the
weighted average number of shares outstanding during the period. Diluted EPS is
calculated by dividing net income by the weighted average number of shares
outstanding plus the dilutive effect, if any, of outstanding stock options
using the "treasury stock" method. The following table presents the calculation
for both basic and diluted EPS:
Three months ended
------------------------
December 30, December 29,
2000 2001
------------ ------------
Net income (loss)........................ $ 12,254 $ (2,949)
======== ========
Weighted average shares outstanding...... 267,034 260,353
Dilutive effect of employee stock options 3,382 --
-------- --------
Diluted shares outstanding............... 270,416 260,353
======== ========
Basic EPS................................ $ 0.05 $ (0.01)
Diluted EPS.............................. $ 0.05 $ (0.01)
5
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Options to purchase 39.4 million and 58.3 million shares for the first quarters
of 2001 and 2002, respectively, were outstanding but were not included in the
computations of diluted EPS because the price of the options was greater than
the average market price of the common stock for the period reported. Due to
the net loss for the first quarter of 2002, the dilutive effect of an
additional 2.1 million options were excluded from the computation of diluted
EPS as the effect would have been anti-dilutive.
4. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that certain intangible assets other than goodwill be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The provisions of SFAS No. 142 will
be effective for fiscal years beginning after December 15, 2001. We will adopt
SFAS No. 142 in the first quarter of our next fiscal year. We currently
estimate that, upon the adoption of SFAS No. 142, quarterly amortization of
goodwill and intangible assets related to goodwill will be reduced by
approximately $7 million.
5. Segment Information
We operate within a single industry segment--computer software and related
services. Within this single segment we have two software product categories:
(1) our computer aided design, manufacturing and engineering solutions (Design
Solutions), including our flagship Pro/ENGINEER(R) design software, which
provides engineering solutions to our customers and (2) our Windchill(R)
software (Collaboration and Control Solutions), which provides collaborative
information management solutions to our customers using Internet technologies.
Services related to both of these software products (including consulting,
implementation, education and technical support) are performed by our Global
Services Organization.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our chief operating
decision-making group is our executive officers.
Effective in 2002, following the combination of our Windchill and MCAD business
units under a common product strategy, our internal financial reporting now
focuses on the following operating segments: (1) our software products,
including license and maintenance revenue; and (2) global services, including
consulting, implementation, education and technical support revenue. We do not
allocate certain sales, marketing or administrative expenses to our operating
segments, as these activities are managed separately. We have reclassified the
2001 segment disclosure to conform with our 2002 internal financial reporting.
6
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The revenue and operating income (loss) attributable to these operating
segments are included below:
Three months ended
------------------------
December 30, December 29,
2000 2001
------------ ------------
Revenue:
Software products:
Design solutions........................ $157,039 $126,150
Collaboration and control solutions..... 29,767 26,477
-------- --------
Total software products revenue..... 186,806 152,627
Global services:
Design solutions........................ 27,515 23,812
Collaboration and control solutions..... 20,623 22,166
-------- --------
Total global services revenue....... 48,138 45,978
Total revenue:
Design solutions........................ 184,554 149,962
Collaboration and control solutions..... 50,390 48,643
-------- --------
Total revenue....................... $234,944 $198,605
======== ========
Operating income (loss): (1)
Software products......................... $124,070 $ 93,430
Global services (4)....................... 1,733 5,759
Distribution expenses (2) (4)............. (92,433) (88,724)
Unallocated expenses (3) (4).............. (17,369) (16,377)
-------- --------
Total operating income (loss)....... $ 16,001 $ (5,912)
======== ========
- --------
(1) The operating income (loss) reported does not represent the total operating
results for each operating segment as it does not contain an allocation of
sales, marketing, corporate and general administrative expenses incurred in
support of the product categories.
(2) Distribution expenses represent all sales and marketing expenses not
directly controlled by the operating segments.
(3) Unallocated expenses represent all corporate and general administrative
expenses not directly controlled by the operating segments.
(4) In the first quarter of 2002, global services included $0.9 million,
distribution expenses included $4.2 million and unallocated expenses
included $1.0 million of the $6.1 million nonrecurring charge,
respectively. There were no nonrecurring charges in the first quarter of
2001.
Data for the geographic regions in which we operate is presented below:
Three months ended
-------------------------
December 30, December 29,
2000 2001
------------ ------------
Revenue:
North America........... $107,026 $ 84,320
Europe.................. 77,028 70,363
Asia/Pacific............ 50,890 43,922
-------- --------
Total revenue..... $234,944 $198,605
======== ========
Total long-lived assets by geographic region have not changed significantly
from September 30, 2001.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q about our anticipated
financial results, 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 certain factors that may cause our actual results to differ
materially from these statements are contained below and in "Important Factors
That May Affect Future Results" beginning on page 15.
Business Overview
Parametric Technology Corporation (PTC), founded in 1985 and headquartered in
Needham, MA, develops, markets and supports product lifecycle management (PLM)
software solutions that help manufacturers improve the competitiveness of their
products and product development processes. Our solutions, which include a
suite of mechanical computer-aided design tools (our design solutions) and a
range of Internet-based collaboration technologies (our collaboration and
control solutions), enable manufacturing companies to create virtual computer
based products (digital products), collaborate on designs within the enterprise
and throughout the extended supply chain, and control the digital product
information throughout the product lifecycle. This results in streamlined
engineering processes, improved product quality, optimized product information
management and reduced cost and time-to-market cycles. Our PLM software
solutions are complemented by the strength and experience of our Global
Services Organization, as well as systems integrators, resellers and other
strategic partners, who provide training, consulting, ancillary product
offerings, implementation and support to customers worldwide.
Our PLM software and services solutions permit individuals - regardless of
their roles in the commercialization of a product, the computer-based tools
they use, or their location geographically or in the supply chain - to
participate in and impact the product development process across the
manufacturing value chain. The PLM market covers many smaller, previously
isolated markets that address various phases of the product lifecycle, such as
product data management (PDM), component and supplier management (CSM),
visualization and digital mockup, enterprise application integration (EAI),
program and project management, manufacturing planning and maintenance, repair
and overhaul (MRO).
Historically, our core business focus has been to provide design solutions to
customers through our flagship Pro/ENGINEER(R) design software, and we continue
to provide our customers with industry leading product development,
manufacturing and engineering design solutions based on this software. We
believe, however, that there is opportunity for growth in the collaboration and
control solutions market, whereas the growth in the discrete computer-aided
design market for design solutions has slowed considerably. Accordingly, over
the past two years, we have channeled significant resources into our
Windchill-based collaboration and control solutions technology. Our product
strategy is to increasingly integrate our design and our control and
collaboration solutions.
In line with our common product strategy, we have announced a plan to introduce
a family of interactive solutions designed to address specific business
critical manufacturing functions. These solutions include pre-configured, fully
integrated applications that utilize the web-based Windchill architecture, as
well as components of our design solutions. The solutions require little
customization and can be implemented quickly. During fiscal 2001, we introduced
the first two of these solutions, PTC(R) ProjectLink(TM), a web-based workspace
tool that advances the ability of geographically and organizationally dispersed
project teams to collaborate on highly iterative design projects, and PTC(R)
PartsLink(TM), a web-based interactive product catalog solution, that gives
8
suppliers of electronic and mechanical products the ability to publish and
distribute technical product information, including product design models,
directly to their customers in an interactive, web-based catalog environment.
In the first quarter of 2002, we introduced PTC(R) DynamicDesignLink(TM), a
web-based collaborative application engineering solution that enables a
manufacturer's application engineers, sales representatives, distributors,
dealers and even customers the ability to customize engineered products over
the web.
These three solutions are part of our overall PTC solutions strategy to provide
a complete portfolio of PLM solutions that address specific business challenges
that occur at various points in the product lifecycle along with service
offerings from our Global Services Organization, designed to meet the
implementation, education, consulting and technical support requirements of our
customers. We expect to introduce additional software and service solution
offerings in 2002.
All of our solutions continue to be distributed primarily through our direct
sales force. In tandem with our direct sales force, we utilize both an inside
sales group focused predominately on telesales and existing accounts and an
indirect distribution channel. Our indirect distribution channel has been
broadened over the last 18 months through alliances with systems integrators,
resellers and other strategic partners. The systems integrator partners work
with our direct sales force to locate and target major account opportunities.
We also have increased the number of distributors for our design solutions to
provide greater geographic coverage. While we do not expect these distributor
relationships to have any significant immediate impact, we expect the
broadening of our distribution channel will, over time, yield greater market
penetration.
Results of Operations
The following is an overview of our results of operations in the first quarter:
. Total revenue was $198.6 million for the first quarter of 2002 compared to
$234.9 million for the first quarter of 2001.
. Our year-over-year first quarter revenue declined 15% reflecting a 36%
decrease in software license revenue and flat service revenue.
. Collaboration and control (Windchill-based) solutions revenue decreased to
$48.6 million for the first quarter of 2002 from $50.4 million in the
first quarter of 2001.
. Design solutions revenue decreased to $150.0 million in the first quarter
of 2002 from $184.5 million in the first quarter of 2001.
. Nonrecurring charges were $6.1 million in the first quarter of 2002. There
were no nonrecurring charges in the first quarter of 2001.
. Net income decreased from $12.3 million for the first quarter of 2001 to a
net loss of $(2.9) million for the first quarter of 2002.
. Pro forma net income, which excludes the amortization of goodwill and
intangible assets and nonrecurring charges, decreased from $19.0 million
for the first quarter of 2001 to $6.8 million for the first quarter of
2002.
9
The following table shows certain consolidated financial data as a
percentage of our total revenue for the first quarters of 2001 and 2002.
Three months ended
--------------------------
December 30, December 29,
2000 2001
------------ ------------
Revenue:
License............................................................... 43% 32 %
Service............................................................... 57 68
--- ---
Total revenue....................................................... 100 100
--- ---
Costs and expenses:
Cost of license revenue............................................... 2 2
Cost of service revenue............................................... 26 25
Sales and marketing................................................... 39 43
Research and development.............................................. 15 17
General and administrative............................................ 7 8
Amortization of goodwill and other intangible assets.................. 4 5
Nonrecurring charges.................................................. -- 3
--- ---
Total costs and expenses............................................ 93 103
--- ---
Operating income (loss)................................................ 7 (3)
Other income, net..................................................... -- --
--- ---
Income (loss) before income taxes...................................... 7 (3)
Provision for (benefit from) income taxes............................. 2 (1)
- --
Net income (loss)...................................................... 5% (2)%
=== ===
Pro forma, excluding amortization of goodwill and intangible assets and
nonrecurring charges:
Operating income....................................................... 11% 5 %
Net income............................................................. 8% 3 %
Revenue
Total Revenue
Our revenue consists of software license revenue and service revenue. Overall,
our total revenue decreased 15% in the first quarter of 2002 compared to the
first quarter of 2001. Total revenue in the first quarter of 2002 reflects a
decrease in our total Windchill-based solutions revenue of 3% and a decrease in
our total design solutions revenue of 19% from the first quarter of 2001. Total
revenue was adversely affected by increased weakness in the global
manufacturing economy, particularly in North America and Japan. We derived 58%
and 54% of our total revenue from sales to international customers in the first
quarters of 2002 and 2001, respectively. This percentage increase is due
primarily to a larger decrease in North American revenue relative to
corresponding decreases in international revenue.
Total license revenue decreased 36% in the first quarter of 2002 compared to
the first quarter of 2001. Service revenue, which is derived from the sale of
software maintenance contracts and the performance of training and consulting
services, accounted for 68% of total revenue in the first quarter of 2002 and
57% in the first quarter of 2001. Service revenue, which has a lower gross
profit margin than license revenue, increased slightly in the first quarter of
2002 compared to the first quarter of 2001.
10
Collaboration and Control (Windchill-based) Solutions Revenue
Total revenue from our Windchill-based collaboration and control solutions
decreased 3% in the first quarter of 2002 compared to the first quarter of
2001. License revenue for our collaboration and control software decreased 22%
in the first quarter of 2002 compared to the first quarter of 2001. License
revenue was adversely affected by the decline in larger customer commitments
beginning in the second half of fiscal 2001 and continuing into the first
quarter of 2002, reflecting the impact of the weakness in the global
manufacturing economy. Service revenue increased 13% in the first quarter of
2002 compared to the first quarter of 2001. While we continue to derive our
overall license and service revenue primarily from our design solutions, our
collaboration and control solutions are continuing to comprise an increasing
percentage of revenue. Total Windchill-based solutions revenue as a percentage
of total revenue was 24% in the first quarter of 2002 and 21% in the first
quarter of 2001. Moreover, due to our growing installed customer base for our
Windchill-based solutions, related service revenue has increased in both
absolute terms and as a percentage of overall service revenue.
Since introducing our Windchill technology to the market in 1999, we have
focused on offering enterprise-wide solutions. This emphasis has resulted in
longer and less predictable sales cycles and more complex service engagements.
In order to most effectively deploy the resources needed to distribute and
implement our collaboration and control solutions, we have started to develop
and introduce Windchill-based point solutions targeted at specific business
critical PLM processes. These point solutions will allow us to offer software
solutions that can be both easily and quickly implemented. Our transition to
these point solutions is still underway with three such software solutions
being introduced to date. Therefore, we still rely on our enterprise level
offerings for much of our collaboration and control related revenue. We have
also entered into business relationships with leading systems integrators and
other strategic consultants. While these initiatives may limit opportunities
for additional services revenue growth, we believe that offering such point
solutions and entering into these relationships will best serve to expand the
coverage of our PLM software solutions, generate additional license revenue and
provide necessary expertise for their implementation and support.
Design Solutions Revenue
Total revenue from our mechanical and engineering software tools (our design
solutions) decreased 19% in the first quarter of 2002 compared to the first
quarter of 2001. Total license revenue for our design solutions decreased 41%
in the first quarter of 2002 compared to the first quarter of 2001.
Pro/ENGINEER software unit sales decreased by 37% in the first quarter of 2002
compared to the first quarter of 2001 and the average selling price of this
software decreased 6% in the first quarter of 2002 compared to the first
quarter of 2001. Service revenue decreased 3% in the first quarter of 2002
compared to the first quarter of 2001. Reasons for the decrease in our design
solutions revenue include: increased competition in the industry from native
Windows(R)-based products offering more limited functionality at lower cost, a
decline in large dollar license transactions with existing customers largely as
a result of weakness in the global manufacturing economy, and a decrease in
service revenue attributable to a decline in license sales. This, in turn, has
contributed to a loss of market share.
As part of our continued efforts to improve profitability, over the past
several quarters we entered into arrangements with over 180 new distributors
and agents for our design solutions. The utilization of distributors and agents
that focus on smaller businesses provides an efficient means to reach these
customers while allowing our direct sales force to focus on higher impact sales
opportunities. We expect the percentage of our design solutions that we license
through third-party distributors and agents to increase in the future as we
continue to enter into new reseller and other distribution agreements. In the
first quarters of 2002 and 2001, we licensed approximately 75% and 87%,
respectively, of our design solutions products directly to end-user customers.
The balance was licensed through third-party distributors. On an absolute
dollar basis the revenue licensed through third-party distributors remained
flat in the first quarter of 2002 compared to the first quarter of 2001.
Concentration of credit risk with respect to trade receivables is not
significant except for a receivable from our largest distributor, which
accounts for 10% of total receivables as of December 29, 2001. Failure of this
distributor to perform its obligations could have an adverse effect on our
results of operations.
11
[CHART]
Q1 01 Q1 02
North America $107.0 $84.3
Europe $77.0 $70.4
Asia/Pacific $50.9 $43.9
Revenue by Geography (in millions)
Outlook
Looking forward, our overall performance will depend on our ability to
successfully execute our common product strategy and provide an integrated,
rapidly deployable and easily usable suite of PLM software solutions that
enable creation, collaboration and control across the extended design chain
with a proven return on investment. These solutions must address the growing
demand that we see for overall PLM solutions. Our PLM solutions provide the
foundation for future growth as they expand upon traditional design solutions,
for which market growth has slowed. Our success also depends on other factors,
including our ability to optimize our sales coverage through, among other
things, employment of our systems integrator partners, resellers, strategic
partners and inside sales teams, and our ability to further improve customer
satisfaction and build customer references. We believe we have made progress on
these initiatives since their implementation in 2001. We expect, however, that
the weakness in the global manufacturing economy will likely continue to impact
our revenue by causing our customers to reduce or defer their expenditures for
software or services. Additional factors affecting our revenues and operating
results are identified under "Important Factors That May Affect Future Results"
below.
Costs and Expenses
All cost and expense categories in the first quarter of 2002 were impacted by
the nonrecurring charges taken in 2001 and in the first quarter of 2002. See
Note 2 of "Notes to Consolidated Financial Statements". Our operating expenses
are based on anticipated future revenue and are largely fixed for the short
term. Given the lower than expected revenues in the latter part of 2001, we
reduced our headcount to approximately 4,240 by the end of the first quarter of
2002. As a result, we recorded a nonrecurring charge of $6.1 million in the
first quarter of 2002 to complete the restructuring initiatives commenced in
2001. This headcount reduction along with previous restructuring initiatives
implemented in 2001, partially offset by a planned increase in marketing
programs, are expected to result in a fixed cost savings of approximately $60
million in 2002.
Costs and expenses, excluding amortization of goodwill and other intangible
assets and nonrecurring charges, decreased 10% to $189.3 million in the first
quarter of 2002 from $209.5 million in the first quarter of 2001.
Cost of License Revenue
Our cost of license revenue consists of costs associated with reproducing and
distributing software and documentation and the payment of royalties. Cost of
license revenue was $4.4 million or 7% of license revenue in the first quarter
of 2002 and $3.8 million or 4% of license revenue in the first quarter of 2001.
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Cost of Service Revenue
Our cost of service revenue includes costs associated with training and
consulting personnel, such as salaries and related costs and travel, and costs
related to software maintenance, including costs incurred for customer support
personnel and the release of maintenance updates. Cost of service revenue as a
percentage of service revenue was 37% and 45% in the first quarters of 2002 and
2001, respectively. Service-related employee headcount decreased 18% in the
first quarter of 2002 from the first quarter of 2001. Our continued investment
over the last year in our systems integrator alliances and programs has allowed
us to reduce the staffing necessary to support our product offerings.
Sales and Marketing
Our sales and marketing expenses primarily include salaries and benefits, sales
commissions, travel and facility costs. These costs decreased 9% in the first
quarter of 2002 compared to the first quarter of 2001, primarily due to lower
commissions as a result of lower license revenue and more cost-efficient sales
coverage due to the broadening of our indirect distribution channel through
alliances with systems integrators, resellers and other strategic partners,
partially offset by an increase in marketing programs. Total sales and
marketing employees decreased 11% from 1,662 at December 30, 2000 to 1,483 at
December 29, 2001.
Research and Development
Our research and development expenses consist principally of salaries and
benefits, expenses associated with product translations, costs of computer
equipment used in software development and facility expenses. These costs
decreased 3% in the first quarter of 2002 compared to the first quarter of
2001. Research and development expenses as a percentage of total revenue were
17% and 15% for the first quarters of 2002 and 2001, respectively. The decrease
in research and development expense is primarily due to a 7% decrease in
headcount at the end of the first quarter of 2002 compared to the first quarter
of 2001.
General and Administrative
Our general and administrative expenses include the costs of our corporate,
finance, information technology, human resources and administrative functions.
These costs decreased 12% in the first quarter of 2002 compared to the first
quarter of 2001. General and administrative expenses as a percentage of total
revenue were 8% and 7% for the first quarters of 2002 and 2001, respectively.
The decrease in general and administrative expense is primarily due to a 7%
decrease in headcount at the end of the first quarter of 2002 compared to the
first quarter of 2001.
Amortization of Goodwill and Other Intangible Assets
These costs represent the amortization of intangible assets acquired, including
developed technology, goodwill, customer lists, assembled work force and trade
names. Amortization of goodwill and other intangible assets as a percentage of
total revenue was 5% and 4% in the first quarters of 2002 and 2001,
respectively. The amortization of goodwill and other intangible assets is
principally from our 1999 acquisitions of Division Group plc and auxilium inc.
We currently estimate that, upon the adoption of SFAS No. 142 in the first
quarter of 2003, quarterly amortization of goodwill and intangible assets
related to goodwill will be reduced by approximately $7 million.
Nonrecurring charges
In the first quarter of 2002, we recorded nonrecurring charges of $6.1 million
for severance and termination benefits associated with a reduction in force of
approximately 70 people who were notified or terminated during the quarter.
This nonrecurring charge is the continuation of a program begun in the fourth
quarter of 2001 to reduce our headcount to approximately 4,250. Although no
nonrecurring charges were incurred in the first quarter of 2001, we recorded
total nonrecurring charges of $42.6 million in 2001. The 2001 nonrecurring
charges were comprised of $25.7 million for severance and termination benefits
of approximately 720 people who were notified or terminated in 2001, $9.9
million for facility consolidations, and $7.0 million primarily for a
write-down of assets related to a focus shift in certain products.
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In the first quarter of 2002, we had cash expenditures of $16.1 million for
nonrecurring charges. Amounts not yet paid at December 29, 2001 related to the
2001 and first quarter of 2002 nonrecurring charges were $19.0 million. We
expect to pay approximately $15 million of these nonrecurring charges within
the next twelve months. Amounts not yet paid at December 29, 2001, which
primarily relate to facility consolidations for pre-2001 nonrecurring charges,
were $20.3 million. We expect to pay approximately $5 million of these
nonrecurring charges within the next twelve months.
Other Income, Net
Our other income, net includes interest income, interest expense, costs of
hedging contracts, the gain or loss from the translation of results for
subsidiaries for which the U.S. dollar is the functional currency and other
charges incurred in connection with financing customer contracts. For the first
quarter of 2002, we reported other income of $255,000 compared to $1.3 million
for the first quarter of 2001. This decrease is due primarily to lower interest
income from lower average cash balances and lower average yields.
Income Taxes
Our effective tax rate was 48% for the first quarter of 2002 and 29% for the
first quarter of 2001. The difference between our effective tax rate and the
statutory federal income tax rate of 35% in the first quarter of 2002 was due
primarily to the non-deductibility of certain acquisition-related amortization
and foreign operating losses that could not be benefited. The difference in the
first quarter of 2001 was due primarily to a decrease in deferred tax
liabilities related to foreign subsidiaries, partially offset by the
non-deductibility of certain acquisition-related amortization and foreign
operating losses that could not be benefited.
Employees
The number of worldwide employees was 4,240 at December 29, 2001 compared to
4,754 at December 30, 2000. The decrease over the prior year is primarily a
result of terminations associated with the reductions in force in the fourth
quarter of 2001 and the first quarter of 2002 to improve profitability.
Liquidity and Capital Resources
Our operating activities, the proceeds from our issuance of stock under stock
plans and existing cash and investments provided sufficient resources to fund
our employee base, capital asset needs, stock repurchases and financing needs
in the first three months of both 2002 and 2001. Our investment portfolio is
diversified among security types, industries and individual issuers. Our
investments are generally liquid and investment grade. The portfolio is
primarily invested in short-term securities to minimize interest rate risk and
to facilitate rapid deployment in the event of immediate cash needs.
As of December 29, 2001, cash and investments totaled $227.7 million, down from
$249.1 million at September 30, 2001. The decrease in cash and investments
during the first quarter of 2002 consisted of $5.0 million for the repurchase
of treasury stock and $10.5 million in expenditures to acquire property and
equipment and other intangible assets. In addition, in the first quarter of
2002, we used $5.6 million of cash for operating activities, which consisted of
cash expenditures for nonrecurring charges of $16.1 million and $4.9 million
for other assets and liabilities, offset by $15.4 million of net income
generated before depreciation and amortization.
In the first quarters of 2002 and 2001, we acquired $10.5 million and $19.7
million, respectively, of capital equipment and other intangible assets. The
capital expenditures for the first quarter of 2001 include approximately $14.0
million for tenant improvements and furniture and fixtures related to our
facility consolidation into our Needham, Massachusetts facility. The remaining
expenditures in both periods consisted primarily of computer equipment,
software and office equipment.
We used net cash for financing activities in the first quarters of 2002 and
2001 primarily to repurchase $5.0 million and $46.8 million, respectively, of
our stock. These expenditures were partially offset by proceeds of $269,000 and
$1.8 million in the first quarters of 2002 and 2001, respectively, from the
issuance of our common stock under our stock plans. Through the first quarter
of 2002, we had repurchased, at a cost of $366.7 million, 31.1 million shares
of the 40.0 million shares authorized by the Board of Directors to be
repurchased under our repurchase program initiated in 1998. The repurchased
shares will be used for stock option exercises, employee stock purchase plans
and acquisitions. At December 29, 2001, 16.1 million shares were held in
treasury.
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We believe that existing cash and short-term investments together with cash
generated from operations and the issuance of common stock under our stock
plans will be sufficient to meet our working capital, financing and capital
expenditure requirements through at least 2002. Our cash position could be
adversely affected should operating losses continue and we continue to invest
in our collaboration and control business without realizing business growth.
New Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be
required to comply with certain changes in accounting rules and regulations.
See Note 4 to the unaudited consolidated financial statements included herein.
Important Factors That May Affect Future Results
The following are some of the factors that could affect our future results.
They should be considered in connection with evaluating forward-looking
statements contained in this Quarterly Report on Form 10-Q and otherwise made
by us or on our behalf, because these factors are among those that could cause
actual results and conditions to differ materially from those projected in
forward-looking statements.
I. Operational Considerations
Our operating results fluctuate within each quarter and from
quarter-to-quarter making our future revenues and operating results difficult
to predict
While our sales cycle varies substantially from customer to customer, we
usually realize a high percentage of our revenue in the third month of each
fiscal quarter, and this revenue tends to be concentrated in the later part of
that month. Our orders early in a quarter will not generally occur at a rate
which, if sustained throughout the quarter, would be sufficient to assure that
we will meet our revenue targets for any particular quarter. Moreover, our
transition from a one product to a multi-product company, our increased
utilization of distributors, resellers, agents and systems integrators and our
shift in business emphasis to a more solutions-oriented sales
process--undertaken in part to increase our average order size--have resulted
in more unpredictable and often longer sales cycles for products and services.
Accordingly, our quarterly results may be difficult to predict prior to the end
of the quarter. Any inability to obtain large orders or orders in large volumes
or to make shipments or perform services in the period immediately preceding
the end of any particular quarter may cause the results for that quarter to
fall short of our revenue targets. In addition, our operating expenses are
based on expected future revenue and are relatively fixed for the short term.
As a result, a revenue shortfall in any quarter could cause our earnings for
that quarter to fall below expectations as well. Any failure to meet our
quarterly revenue or earnings targets could adversely impact the market price
of our stock.
Other factors that may also cause quarter-to-quarter revenue and earnings
fluctuation include the following:
. our sales incentive structure is weighted more heavily toward the end of
the fiscal year, and the rate of revenue growth for the first quarter
historically has been lower and more difficult to predict than that for
the fourth quarter of the immediately preceding fiscal year;
. variability in the levels of professional service revenues and the mix of
our license and service revenues;
. declines in license revenue may adversely affect the size of our installed
base and our level of service revenue; and
. our increased utilization of third parties, such as systems integrators,
resellers, strategic partners and application service providers, as
distribution mechanisms for our software products and related services,
which may lessen the control we have over any particular sales cycle.
In addition, the levels of quarterly or annual software or service revenue in
general, or for particular geographic areas, may not be comparable to those
achieved in previous periods.
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General economic and political conditions may impact our results
Our revenue growth and profitability depends on the overall demand for software
and related services. This demand can be adversely affected by unfavorable
economic conditions, as customers reduce or defer spending on information
technology improvements. We may be especially prone to this as a result of the
relatively large license transactions we have historically relied upon.
Accordingly, general economic and business conditions may affect our future
operating results. If the recent unfavorable economic conditions continue, the
economic slowdown has the potential to materially and adversely affect us. A
softening demand for software caused by a prolonged slowdown of the economy
would result in decreased revenue or lower revenue growth rates.
Recent political/social events, including the September 11, 2001 tragedy, have
put further pressure on economic conditions both domestically and
internationally. The potential turmoil that may result from such events
contributes to the uncertainty of the economic climate, further reducing
predictability and our ability to develop and implement long-term strategies
and business models. In light of the foregoing, the impact of these or future
similar events may have a materially adverse impact on our business, operating
results, and financial position.
We may not be able to implement new initiatives successfully
Part of our success in the past has resulted from our ability to implement new
initiatives. Our future operating results will continue to depend upon:
. the successful implementation of a unified PLM product strategy, including
the realignment of internal functions, the management of multiple
development and distribution processes and effective mitigation of
disruption that may result from organizational change;
. our ability to deliver an integrated and comprehensive suite of solutions
and to capitalize on existing synergies through a common product strategy;
. our ability to appropriately allocate and implement cost cutting measures
that increase profitability while maintaining adequate resources for
effective and coordinated organizational performance;
. the success of our sales force reorganization initiatives, including:
-- the effectiveness of our organizational sales model,
-- the ability of our sales reps to learn and sell our products, and
. Rand A Technology Corporation, our largest distributor, as well as our
other distributors' ability to perform;
. our ability to anticipate and meet evolving customer requirements in the
PLM arena and successfully deliver products and services at an enterprise
level;
. our ability to broaden indirect distribution channels through alliances
with systems integrators, resellers, strategic partners and application
service providers and our effective management of a balanced sales model
that optimizes sales coverage and most effectively utilizes these third
parties;
. our ability to develop rapidly implementable point solutions that
adequately address specific business challenges;
. our ability to identify and penetrate additional industry sectors that
represent growth opportunities; and
. our ability to execute on customer satisfaction initiatives and programs
in order to retain our customer base.
We may not be successful in integrating recently acquired businesses or
products
We have increased our product range and customer base in the recent past due in
part to acquisitions. We may acquire additional businesses or product lines in
the future. The success of any acquisition may be dependent upon our ability to
integrate the acquired business or products successfully and to retain key
personnel and customers associated with the acquisition. If we fail to do so,
or if the costs of or length of time for integration increase significantly, it
could negatively affect our business.
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We are dependent on key personnel whose loss could cause delays in our
product development and sales efforts
Our success depends upon our ability to attract and retain highly skilled
technical, managerial and sales personnel. Competition for such personnel in
the high technology industry is intense. We assume that we will continue to be
able to attract and retain such personnel. The failure to do so, however, could
have a material adverse effect on our business.
We must continually modify and enhance our products to keep pace with
changing technology, and we may experience delays in developing and debugging
our software
We must continually modify and enhance our products to keep pace with changes
in computer software, hardware and database technology, as well as emerging
standards in the Internet software industry. Our ability to remain competitive
will depend on our ability to:
. enhance our current offerings and develop new products and services that
keep pace with technological developments through:
-- internal research and development,
-- acquisition of technology, and
-- strategic partnerships;
. meet evolving customer requirements, especially ease-of-use;
. provide adequate funding for development efforts; and
. license appropriate technology from third parties.
Also, as is common in the computer software industry, we may from time to time
experience delays in our product development and "debugging" efforts. Our
performance could be hurt by significant delays in developing, completing or
shipping new or enhanced products. Among other things, such delays could cause
us to incorrectly predict the fiscal quarter in which we will realize revenue
from the shipment of the new or enhanced products and give our competitors a
greater opportunity to market competing products.
We may be unable to price our products competitively or distribute them
effectively
Our success is tied to our ability to price our products and services
competitively and to deliver them efficiently, including our ability to:
. provide products with functionality that our customers want at a price
they can afford;
. build appropriate direct distribution channels;
. utilize the Internet for sales; and
. build appropriate indirect distribution channels through Rand or others.
We depend on sales from outside the United States that could be adversely
affected by changes in the international markets
A significant portion of our business comes from outside the United States.
Accordingly, our performance could be adversely affected by economic downturns
in Europe or the Asia/Pacific region. Another consequence of significant
international business is that a large percentage of our revenues and expenses
are denominated in foreign currencies that fluctuate in value. Although we may
enter into foreign exchange forward contracts and foreign exchange option
contracts to offset a portion of the foreign exchange fluctuations,
unanticipated events may have a material impact on our results. Other risks
associated with international business include:
. changes in regulatory practices and tariffs;
. staffing and managing foreign operations, including the difficulties in
providing cost-effective, equity based compensation to attract skilled
workers;
. longer collection cycles in certain areas;
. potential changes in tax and other laws;
. greater difficulty in protecting intellectual property rights; and
. general economic and political conditions.
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We may not be able to obtain copyright or patent protection for the software
products we develop or our other trademarks
Our software products and our other 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, as well as restrictions on
disclosures and transferability contained in our agreements with other parties.
Despite these measures, there can be no assurance that the laws of all relevant
jurisdictions will afford adequate protection to our products and other
intellectual property. The software industry is characterized by frequent
litigation regarding copyright, patent and other intellectual property rights.
While we have not, to date, had any significant claims of this type asserted
against us, there can be no assurance that someone will not assert such claims
against us with respect to existing or future products or other intellectual
property or that, if asserted, we would prevail in such claims. In the event a
lawsuit of this type is filed, it could result in significant expense to us and
divert the efforts of our technical and management personnel, whether or not we
ultimately prevail. Certain of our products also contain technology developed
and licensed from third parties. We may likewise be susceptible to infringement
claims with respect to these third party technologies.
II. Design Solutions Related Considerations
Increasing competition in the computer aided design marketplace may reduce
our revenues
There are an increasing number of competitive design products. Some competitive
products have reached a level of functionality whereby product differentiation
is less likely, in and of itself, to dislodge incumbent design systems, given
the training and other startup costs associated with system replacement.
Increased competition and market acceptance of these competitive products could
have a negative effect on pricing and revenues for our products, which could
have a material adverse affect on our results.
In addition, our design software is capable of performing on a variety of
platforms. Several of our competitors focus on single platform applications,
particularly Windows(R)-based platforms. There can be no assurance that we
will have a competitive advantage with multiple platform applications.
We continue to enhance our existing products by releasing updates. Our
competitive position and operating results could suffer if:
. we fail to anticipate or to respond adequately to customer requirements or
to technological developments, particularly those of our competitors;
. we delay the development, production, testing, marketing or availability
of new or enhanced products or services;
. customers fail to accept such products or services; or
. we fail to execute our common product strategy initiative.
Growth in the computer aided design industry has slowed
Growth in certain segments of the computer aided design solutions industry has
slowed and, coupled with decreased functional differentiation among flexible
engineering tools, may adversely affect our ability to penetrate the market for
new customers and recapture our market share. Over the long term, we believe
our emphasis on PLM solutions will allow us to differentiate our design
solutions from the competition and invigorate sales of those products. However,
the strategy may not be successful or may take longer than we plan. There could
be a material adverse affect on our operating results in any quarter if these
assumptions prove to be incorrect.
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III. Collaborate & Control Solutions and Overall PLM Related Considerations
We are attempting to capitalize on a web-based, business-to-business market
opportunity known as Product Lifecycle Management (PLM). It may be that our
assumptions about this market opportunity are wrong, which could adversely
affect our results
We have identified PLM as a new market opportunity for us, and have devoted
significant resources toward capitalizing on that opportunity. Our PLM
solutions are targeted at this market and include software and services that
utilize Internet technologies to permit employees, customers, suppliers and
others to collaboratively develop, build, distribute and manage products
throughout their entire lifecycle. Because the market for software products
that allow companies to collaborate on product information on an
enterprise-wide level is newly emerging and because companies have not
traditionally linked customers and suppliers in this process directly, we
cannot be certain as to the size of this market, whether it will grow, or
whether companies will elect to utilize our products rather than attempt to
develop applications internally or through other sources.
In addition, companies that have already invested substantial resources in
other methods of sharing product information in the design-through-manufacture
process may be reluctant to adopt a new approach that may replace, limit or
compete with their existing systems or methods. We expect that we will continue
to need to pursue intensive marketing and sales efforts to educate prospective
customers about the uses and benefits of our products. Demand for and market
acceptance of our products will be affected by the success of these efforts.
Our Windchill technology, which is central to our PLM strategy, is not yet
well established in the marketplace
The success of our PLM strategy will depend in large part on the ability of our
Windchill-based solutions to meet customer expectations, especially with
respect to:
. measuring and understanding the benefits of Windchill, including return on
investment and value creation;
. ease and rapidity of installation;
. ease of use;
. full capability, functionality and performance;
. ability to support a large, diverse and geographically dispersed user
base; and
. quality and efficiency of the services we perform relating to
implementation and customization.
The software is still relatively new. If our customers cannot successfully
deploy large-scale implementation projects or if they determine that we or our
partners are unable to accommodate large-scale deployments, our operating
results may be affected. We are also pursuing a strategy to provide a series of
easily deployable PLM point solutions that address specific business
challenges. With this strategy, PTC is converging Pro/ENGINEER and Windchill
technologies to develop solutions that help manufacturers create, collaborate,
and control product information throughout the entire product lifecycle. If we
are unable to provide these solutions or are unable to meet customer
expectations, our overall revenue may be adversely impacted.
Further, our software must integrate with existing computer systems and
software programs used by our customers and their partners. Because we are one
of the first companies to offer PLM solutions, many customers will be facing
these integration issues for the first time, particularly in the context of
collaborating with members of the extended enterprise, including customers and
supply chain partners. Our customers could become dissatisfied with our
products or services if integrations prove to be difficult, costly or time
consuming, and our operating results may be affected. Moreover, due to the
emerging nature of the industry and technology, reference accounts become
essential to the sales process. Accordingly, if our customers become
dissatisfied, future business and revenues may be adversely affected.
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We intend to utilize third parties, such as systems integrators, resellers,
strategic partners and application service providers, for the distribution
and implementation of Windchill-based software solutions, which may result in
management difficulties and customer retention problems
As an enterprise solution, Windchill may require large-scale organizational
implementations that in today's marketplace are often performed by third
parties. We have entered into and are currently developing additional
relationships with third parties and intend to continue to do so. Using third
parties to both implement and promote our products can result in a reduction in
our control to both drive the sales process and service our customers. In
addition, the successful utilization of third parties will depend on:
. our ability to enter into definitive agreements with appropriate third
parties that can deliver our products in appropriate markets;
. the third party's ability to learn, promote and implement our products; and
. the effective coordination and management of joint activities (including
sales, marketing, development, implementation and support) in order to
deliver products and services that meet customer requirements.
Competition may increase, which may reduce our profits and limit or reduce
our market share
The market for our PLM software solutions is new, highly fragmented, rapidly
changing and increasingly competitive. We expect competition to intensify,
which could result in price reductions for our products and services, reduced
gross margins and loss of market share. Our primary competition comes from:
. in-house development efforts by potential customers or partners;
. other vendors of engineering information management software; and
. larger, more well-known enterprise software providers seeking to extend
the functionality of their products to encompass PLM.
In addition, our Global Services Organization may face increasing competition
for follow-on customization and training services from other third-party
consultants and service providers.
If use of the Internet does not continue to develop or reliably support the
demands placed on it by electronic commerce, we may experience a loss of
sales.
Our success depends upon continued growth in the use of the Internet as a
medium of commerce. Although the Internet is experiencing rapid growth in the
overall number of users, this growth is a recent phenomenon and may not
continue. Furthermore, the use of the Internet for commerce is still relatively
new. As a result, a sufficiently broad base of companies and their supply chain
may not adopt or continue to use the Internet as a medium of exchanging product
information. Our PLM strategy would be seriously harmed if:
. use of the Internet does not continue to increase or increases more slowly
than expected;
. the infrastructure for the Internet does not efficiently support
enterprises and their supply chain partners;
. the Internet does not create a viable commercial marketplace, thereby
inhibiting the development of electronic commerce and reducing the demand
for our products; or
. concerns over the secure transmission of confidential information over
public networks inhibit the growth of the Internet as a means of
collaborating across enterprises and/or conducting commercial transactions.
Our PLM strategy will also be seriously harmed if the Internet infrastructure
is not able to support the demands placed on it by increased usage or the
limited capacity of networks to transmit large amounts of data, or if delays in
the development or adoption of new equipment standards or protocols required to
handle increased levels of Internet activity, or increased governmental
regulation, cause the Internet to lose its viability as a means of
communication between manufacturers and their customers and supply chain
partners.
Certain of our Windchill-based solutions provide PLM capabilities on Internet
exchanges, portals and marketplaces. Accordingly, their success will be highly
dependant upon the success of the Internet as a viable collaboration medium and
on our successful development and integration of the technologies necessary to
offer tools for exchanges, portals, and other forms of Internet marketplaces
that are acceptable to customers and suitable for the evolving nature of the
Internet.
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IV. Other Considerations
Our stock price has been highly volatile; this may make it harder to resell
your shares at the time and at a price that is favorable to you
Market prices for securities of software companies have generally been
volatile. In particular, the market price of our common stock has been and may
continue to be subject to significant fluctuations.
In addition, our expanded focus on delivering web-based solutions may cause us
to be viewed, in part, as an Internet company. Until the third quarter of 2000,
the trading prices of Internet stocks in general were unusually high under
conventional valuation standards such as price-to-earnings and price-to-sales
ratio. Since then, they have experienced fluctuations unrelated or
disportionate to the operating performance of these companies. The trading
prices and valuations of these stocks, and of ours, may not be predicted.
Negative changes in the public's perception of the prospects of Internet or
e-commerce companies, or of PTC as an Internet company, could depress our stock
price regardless of our results.
Also, a large percentage of our common stock traditionally has been held by
institutional investors. Purchases and sales of our common stock by certain of
these institutional investors could have a significant impact on the market
price of the stock. For more information, please see our proxy statement with
respect to our most recent annual meeting of stockholders and Schedules 13D and
13G filed with the SEC with respect to our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than as disclosed in this report on Form 10-Q, there have been no
significant changes in our market risk exposure as described in Item 7A:
"Quantitative and Qualitative Disclosures About Market Risk" to our 2001 Annual
Report on Form 10-K.
PART II-- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 29,
2001.
SIGNATURE
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
By: /s/ Edwin J. Gillis
-----------------------------
Edwin J. Gillis
Executive Vice President, Chief
Financial Officer and
Treasurer (Principal Financial
Officer)
Date: February 12, 2002
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