PTC Inc (PTC) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's first-quarter fiscal year 2014 results conference call. After brief comments by management, we will directly go to the question-and-answer session. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce James Hillier, PTC's Vice President of Investor Relations. Please go ahead.

Thank you, Shirley. Good morning everyone and thank you for joining us on today's Q1 results and outlook call.

As a reminder today's call and Q&A session may include forward-looking statements regarding PTC's products, our anticipated future operations or financial performance. Any such statements will be based on the current assumptions of PTC's management and are subject to risks and uncertainties that could cause actual events or results to differ materially. Information concerning these risks and uncertainties is contained in PTC's most recent form 10-K on file with the SEC.

Unless otherwise indicated all financial measures in today's call are non-GAAP financial measures. Reconciliations between the non-GAAP measures and the comparable gap measures is located in the Q1 2014 press release and prepared remarks documents on the investor relations page of our website at www.PTC.com.

With us on the call this morning is Jim Heppelmann, our President and CEO; Jeff Glidden, our CFO; and Barry Cohen, EVP of Strategy. With that, I would like to turn the call over to Jim.

Thank you, James Hillier. Good morning to all of you and thank you for joining us here on our first quarter of fiscal 2014 earnings call. We are pleased that Q1 landed in a good place with license revenue coming in near the top of the guidance range despite a lack of megadeals. As the revenue picture settled out following our preliminary announcement, we were pleased to see the service and support businesses both come in a little stronger than anticipated so the net result was a total revenue picture that was above the top of the guidance range.

We continued to exhibit excellent discipline on spending in the quarter as expenses again came in lighter than anticipated. Plus we made more progress on service margin expansion. The net result of all of that was that EPS was well above the guidance range so this past quarter we were able to demonstrate once again the earnings leverage we can achieve with our model as revenue picks up.

At the same time in my view, Q1 was not an easy quarter. As we discussed at our December 5 investor event, we had a strong pipeline going into the quarter such that we were able to land a good quarter even with close rates that were a bit softer than we would like to see and with a few disappointments along the way. The take away is that there is solid interest in our software but it is our view that the economy is not yet hitting on all cylinders which still colors our view of Q2 and the full year.

Taking a look at the business geographically, the Americas business had a solid quarter especially given the comparison to the year-ago period which included a megadeal where this quarter did not. The European business is demonstrating good improvement with a return to growth. Japan performance was acceptable if you look at constant currency data even though it doesn't necessarily appear that way as reported due to significant year-over-year currency fluctuations.

In China, we had a disappointing quarter which seems consistent with a lot of other data points coming out of the technology industry.

Looking across our segments, we had another good CAD quarter particularly in licensed sales. I think this reflects the momentum we have seen building with Creo now that the base is well into the migration process and passing the 50% tipping point. At this point you are in the minority if you are not on Creo.

Contrary to the general experience of the CAD industry, the major upgrade from ProE to Creo has gone relatively flawlessly for customers because while we made major improvements to the functionality and the user experience of the product, we maintained a nearly perfect level of data compatibility. Customers' commodity upgrade generally in quite a good mood which is helpful when talking about what they might do next.

The extended PLM business more or less followed the general revenue trend of the Company and moved back into positive growth territory. In my view of the SLM business did relatively well but the year-over-year comparison is a bit unfair as we are effectively comparing a seasonally weaker Q1 now to a seasonally stronger Q4 on the Servigistics side a year ago. Keep in mind we acquired Servigistics a year ago at the start of what was our Q1 but their Q4. At this point, Servigistics has now switched to our fiscal calendar so they effectively had only three quarters in their fiscal 2013 and therefore this past quarter was a real Q1 for both Servigistics and PTC.

That is a one-time anomaly that will wash through the system and if you look through that, the SLM business did relatively well.

The good news on revenue overall is that PTC has crossed back into positive territory in terms of constant currency organic growth which is an important milestone in terms of our ability to deliver the plan in FY 2014 and beyond.

So overall the economy remains a bit difficult and uncertain but Q1 was a good quarter and it gave us a good start to the fiscal year and we have a good pipeline coverage again going into Q2 and really for the balance of the year.

Changing gears, I couldn't be happier with the reaction we received on the ThingWorx acquisition. Obviously the level of buzz around the Internet of Things is very high. Internet of things was the theme as salesforce's most recent dream force event and ThingWorx was featured in the Internet of Things track. Internet of Things was also the theme of the massive consumer electronics show in Las Vegas earlier this month.

We received a tremendous amount of positive press and media coverage about the acquisition itself. After the announcement, we put out an invitation to industry analysts to join a briefing where we could tell the story in a bit more detail. We ended up briefing 79 industry analysts, either live or virtually, which is multiple times more analyst attention than we have ever experienced on any other topic. The industry analysts clearly understood what we are trying to do and I think it makes a lot of sense to them.

Denise Lund, a research director at IDC, summed it up when she wrote that this acquisition was one of the most exemplary strategic moves that IDC has seen.

Customers are excited too and of course that is even more important. I personally reached out to around a dozen executives of Fortune 500 companies to tell them about the acquisition and all were intrigued to the point of wanting an in-depth follow-up session to learn more. This isn't just a tool we are talking about, it is a way to completely transform their business.

The product itself is really special. We just completed our normal integration summit and in the broader group of PTC technical leaders who were not part of the acquisition process were seeing the product for the first time and they were drooling over the ThingWorx technology in terms of its architecture, its functionality and its usability.

The general theme across R&D, sales, services and marketing coming out of that summit was that we should push forward aggressively because this is one of those rare and special situations where we seem to be in the exact right place at the right time and with the right product. I'm sure there will be many players with an Internet of Things angle but our strategy of using the Internet of Things technology to build applications that transform the way products are created, operated and serviced is both highly valuable and it is unmatched.

I look forward to sharing more with you as the situation unfolds in the coming months and quarters. With that, I will turn it over to our CFO, Jeff Glidden, for a financial review.

Thank you. As Jim said, we are pleased with our Q1 financial results. On January 30, we had announced that we expected to be near the high end of our revenue guidance range. As cited in our earnings release last night, we delivered revenue of $325 million with a $5 million in over performance coming from services revenue. Our favorable revenue performance in Q1 coupled with lower spending increased operating margins to 25% and we delivered EPS of $0.50 for an increase of 37% year-over-year.

Turning to the balance sheet, we continue to have very good cash collections from our customers and generated $36 million in cashflow from operations. We ended the quarter with cash of $371 million as we had borrowed $110 million on our credit agreement to fund the acquisition of ThingWorx which closed on December 30. So all in, we delivered strong financial results and completed a very strategic acquisition as we closed out the calendar year.

Now looking at your outlook for Q2 and FY 2014, macro indicators suggest a moderate modest recovery in the manufacturing economy is likely in 2014. Most expected the first turn to be driven by consumer spending and we are hopeful that this will translate into higher levels of industrial output and spending later in the year. Given this background, we expect Q2 revenue to be in the range of $320 million to $330 million and we expect to deliver non-GAAP EPS of $0.43 to $0.48.

For the fiscal year 2014, we expect revenue to be in the range of $1.330 billion to $1.345 billion and our non-GAAP EPS to be in the range of $2.03 to $2.13.

In Q2, we are planning to expand our credit facility from $450 million to a range of $750 million to $1 billion. We expect the terms to be substantially similar to our current facility with a maturity in 2019.

During FY14, we also plan to repurchase $75 million in PTC stock and to repay $100 million of outstanding debt.

Again we appreciate you joining us today and with that, I will turn the call back over to Jim Hillier.

Thank you, Jeff. Shirley, can you begin the Q&A process please?

Raimo Lenschow, Barclays.

Thank you and congrats again on the quarter and the good start of the year. Just briefly, can you talk a little bit about a dynamic you see in the market. We saw your CAD CAM business doing better in terms of license sales actually with some very strong growth numbers and PLM not quite kind of working just yet. Can you talk how you see the dynamic evolving there? Is that CAD CAMs or Creo or is that economic recovery in there? If it is economic recovery, is that kind of a lag effect between CAD/CAM and PLM? Just help us understand the dynamic there a little bit.

First of all, good morning and thanks for joining us. It is an interesting question because I think that you are onto the right point which is as it relates to PLM, there is an economic effect, slow modest improvement. As it relates to CAD, there is both an economic effect and there is a new product cycle on top of that which is the Creo software and all of the new capabilities that we can sell to a customer who goes through this upgrade process and comes out with a smile on their face.

So I think that is really why the Creo software is perhaps picking up faster.

The other thing that maybe we should point out in the year-over-year comp last year in Q1, we mentioned we had this megadeal and it was pure PLM so that also made the PLM comp look a little bit worse. If you either backed that megadeal out or kind of normalized it to be a normal big deal, then I think you would have seen some pretty impressive growth levels in our PLM business year-over-year.

Perfect, okay. And then just one follow-up, how do you see -- I mean if you look into your pipeline now, what is the trend around megadeals, is that something that is something of the past or do you see that slowly coming back into the pipeline as people are feeling better about themselves? Is that kind of something you still hope you will see eventually or is that something we should kind of say goodbye to?

I'll don't think you should say goodbye to them. I think we actually have a number of them that we have a bead on this year. I think we learned -- I don't know, six, seven whatever quarters ago to be a little bit more cautious in how we plan them, how we would guide around them and so forth. So I think there's some megadeals out there. We expect to close some of them but I think we are being relatively conservative because they could push, they could get downsized, what have you but there is a couple of handfuls that we have got our eye on.

Perfect. Okay, thank you.

Matt Hedberg, RBC Capital Markets.

Thanks for taking my questions and I will echo my congratulations on the great start to the year.

On your fourth-quarter call, you talked about implementing solutions that require shorter sales cycles, less services so I guess said differently, more out of the box functionality. Can you guys give us an update on that initiative?

Yes. In fact that was the major focus of our sales kickoff back in early October so we have ruled that out. It is kind of working its way through the system. It takes awhile because we don't sell those solutions until they get baked into a sales cycle and so forth so that all takes awhile. But I think we have done a good job in moving that into the water supply, training people that this is how you should position it, here is the value, here is the services program that would go along with it, here is the pricing, etc.

So I think we're making good progress but it really takes awhile for that to kind of kick in and transform the actual deals we are doing.

That is great. Then I guess on SLM, it was down for the first time in over a year obviously very difficult comp. Comps do remain difficult throughout the entire year and I think in your prepared remarks you talked about achieving strong SLM growth this year but that is a business that grew north of 120% last year. What sort of growth are you assuming in that business this year?

Just to comment on last year's growth, recognize above -- a significant portion of that was related to the Servigistics acquisition so organically the growth was probably in the 20s and so I think as we look at that business, we see the market growing probably in the midteens to 20% and we think we can outgrow the market. So I think we feel very good, the pipeline is building, the level of activity both on the core products and I think now with the Internet of Things with ThingWorx, there is a big, big play that I think is ahead of us to really accelerate that business based on what we have done with what we think we can do with ThingWorx.

Maybe I could add, if you were to look at the license revenue sort of quarter to quarter over the last eight quarters, you would see that this quarter -- like let's compare Q1 of 2014 to Q2 or Q3 of 2013 where we didn't have that anomaly and you are looking at really strong license growth. So I think if you back out that anomaly this was not a bad quarter certainly on the license front which is obviously the thing that matters most.

That is great, guys. Thanks again.

Steve Koenig, Wedbush.

Good morning. Thanks for taking my questions. I would like to ask you guys if you can give us a bit more color on the weak close rates. Maybe some granularity either GL, product, deal size any particular areas and what is behind this? And then if you don't mind, I've got one follow-up.

Yes, I mean I think if you remember when we had the Investor Day, we talked about pipeline coverage and that we actually have pretty good pipeline coverage. So I think our guidance contemplated the idea that we could have a weak close rate and therefore still deliver a good number because quite frankly if you had applied a strong close rate to a strong pipeline you would have calculated stronger numbers than we did. So I think we were ready for that.

Now where did it come from? I mean all over. Probably the worst place was China where I think deals pushed but I think elsewhere I think some companies are starting to feel good about the economy and they were starting to spend money. Other companies we are saying let's close out this year without spending that money to make our numbers look a little better so I think it is kind of all over to be fair.

Okay, great. Thanks, Jim. And I guess for the follow-up here, I would like to ask you guys on ThingWorx, could you give us a bit more -- maybe just some thoughts now on what the revenue synergy is with PLM and to your earlier point, how could it accelerate SLM? More generally, what is the impact on this business beyond the $5 million to $7 million immediately in ThingWorx revenue?

I think at the end of the day, ThingWorx is really interesting independently but we are going to use it to rework everything else we have to make that more interesting too. Let me try a quick pass through PLM, ALM, SLM.

Let's start with SLM because that is the most obvious use case. The way you would service a product that you are in daily communication with and know everything about is quite different than the way you would service a product you haven't seen in five years and have no clue what's its status or its current configuration or how it was used or anything else. So how would you change things? Well in the service world, you would try to move from a reactive break/fix mode to a proactive preventative medicine type of mode. You would try to prevent things from breaking as opposed to fixing them after the fact.

The second thing is when it is time to fix something or even make a preventative intervention let's say, you would go there knowing exactly what needs to be done. If you've ever been in your own home and your oven doesn't work and you called the repair man, he comes out. He looks at it and he says okay, now I know what oven you have, I have an idea what is wrong with it so I will be back tomorrow with all of the parts. That means you've got to pay the guy to spend two days, make two trips, everything. That is just a really expensive service call. If he could've actually called you up and said hey, I'm going to come out and do something to your oven to prevent a problem and shows up with everything.

So trying to get to the punch line here. The way we do field service would change. The way we do spare parts planning would change. The way that we do what we call knowledge management -- knowledge management is the process of going from a problem to a solution, the way we would do that would change because we would bring in all of the data from the product into the process of determining what is the root cause of the problem and therefore what should we do to solve it.

So there are three or four really obvious high-value use cases in SLM.

If I move to ALM quickly, the really obvious high-value use case is to be able to maintain the software that is in that connected product. If you have an automobile right now and you have a software problem -- and by the way, half of the problem with automobiles right now are software problems literally. If you have a software problem and your car is not connected, you need to bring that car to the dealer and they are going to treat it just like you have a crank shaft problem. They are going to take the car out of your hands and they are going to use it for a couple of hours. You are going to get a temporary car or sit in the lobby and have a doughnut, whatever. But they are going to fix it in the dumbest way possible.

In the new world, they are just going to push a button or click on an icon and that software is going to be pushed down into your product and implemented and that is not just fantasy. I mean that is the way Tesla upgrades an entire fleet of automobiles all at once. It is really incredible.

So that is coming and that is really Internet of Things meets ALM which is you are doing active management of the software in the entire fleet of products, understanding what problems there are with security issues maybe, your push and patch is down -- just like what happens in a datacenter. You start to think of the car as a computer in the datacenter as opposed to some remote distant chunk of iron.

In PLM, the best use cases I think are in two areas. One is let's say in requirements management to understand how does the customer actually use this product. That is pretty informative and today people they start out with requirements which are sort of like a hypothesis of how the product will be used but it is very hard short of putting some people in some kind of a laboratory, sterile environment where you monitor them. It is hard to know what they actually do with your products. But with the Internet of Things, you are gathering data you know how it was used, how many hours per day, how many duty cycles, at what levels of speed and performance and whatever.

A second great PLM example would be quality management. If you think of the way that products are developed today you have these requirements, you go through an engineering process, you maybe even produce a limited production run and you test the heck out of these products because you're never going to see them again.

But what if you actually were going to continue to see them every day and you could do continuous testing. What that means is that when you went beyond the limited production run and the problems start to show up because maybe the customer is actually using it a little different than you thought they would, you are seeing that and you are seeing what the problems are and you are fixing these problems quickly before you replicate them hundreds of thousands of times and then produce hundreds of thousands of warranty issues you are going to have to deal with later.

So quality management, one of our solutions there is windshield quality solutions. I think that is another great place where we are going to be able to use this data.

I mean that is all really exciting and then the customers say if I had an Internet of Things platform where I could build all of the applications that are unique to my world and then park next to that on the same platform all of the applications that PTC has for SLM, ALM, PLM -- my God, I would have this incredibly powerful platform and I would really think about doing things differently in my business and that is where it is getting really exciting.

Great. Thanks a lot for the color, Jim.

Ross MacMillan, Jefferies.

Thanks a lot and my congratulations as well on the quarter. I just wanted to go back, Jim, on the pipeline and your approach to thinking about close rates and thinking about large deals. It certainly sounds like although the close rates were not what you would have liked to have seen you still arrived at the high end of your license revenue range. So it strikes me that you are taking a relatively prudent approach to close rate assumptions.

I'm just curious as you think about either Q2 or the rest of the year what are your assumptions around close rates? Are they similar to Q1, are they incorrectly more cautious, are they incrementally a little bit more optimistic?

And then just on large deals, how do you actually think about megadeals in your forecast now? Are they in the forecast but at very low probability, are they in there at all? I'm just curious as to how we should think about that as well? Thanks.

Okay. I'm just taking a note here on the second question. If I think about the close rates, when you were here on December 5, as I remember, we showed you a coverage rate that was greater than 3 to 1. For every dollar that we are trying to do in our plan or our guidance, we have at least $3 in the pipeline. I think I also told you at some point here that last year we closed 32% of the pipeline.

So I think our plan and our guidance for the year probably actually contemplates we close less than 32% of the pipeline. Now there are some really big deals in that pipeline and they are huge swing factor which is sort of leading into the second part of your question.

So I mean I think our view on the economy, it has not really changed yet. There are some promising signs. Q4 actually was -- felt like a pretty easy quarter compared to Q1 so I think we are still conservative and feel like that is the right place to be right now until things are more consistently positive. So somewhat conservative close rate assumptions in that pipeline in part because of the megadeals.

Now if we go to the megadeal, second question in the context of a given quarter, we watch the megadeals separately and we generally have learned our lesson not to have a forecast that predicates a megadeal being done. In fact, one of our Board members, Ron Zambonini, gave me a good lesson one day when he said Jim, there's no such thing as a 90% deal. They go from 70% to 100%. So don't ever think of something being 90% share. It is either done or it is only 70% share because as long as it is not done, there is actually a longer list of problems that could come out than you are probably are thinking of or aware of so think of it that way and that is a little bit the approach we have been taking as we forecast in a given quarter.

That is really helpful. One quick follow-up. Great job on costs again and I noticed your headcount in sales were down sequentially again but you are also saying that you are going to be adding 20 to 30 reps as you position for fiscal 2015 and beyond and I think you have taken that into account in your guidance.

I still calculate that you are running maybe 10% to 15% below the productivity level of 2011 so I'm just trying to understand the thought process about beginning to hire again and to direct sales capacity versus just allowing that productivity to move higher before that hiring starts if that makes sense.

Can I get the first part, Jeff, and maybe you can comment on productivity? Just so you understand, the main reason we are hiring more sales people right now is we simply have fallen under our plan. Everybody has been busy, they were busy with sales kickoff now they are all excited about ThingWorx and so forth and there's a certain amount of attrition that happens on a natural consistent basis. I don't believe it is abnormally high at all right now but it is just we have fallen behind in hiring. So we have sort of attrited down to a place where we don't want to be at.

That happened to be helpful to the quarterly results last quarter but I don't think it is helpful to running the business for the balance of the year or into next year. So that is the main reason right now we are adding headcount. It is not that there is some great big growth spurt we are planning for. It is more that we are simply below plan actually for fiscal FY14.

I would just add that at our Investor Day I think Bob Ranaldi did a great job just kind of laying out his key initiatives and the focus has been clearly on both building capacity and driving productivity so they are related and we are going to drive productivity for the existing group and we're going to build more capacity for the future.

So both of those are really at the top of his list and I think we are driving those as hard as we both need to and should.

But just to verify a point that you made, of course all of that hiring assumption is in the guidance that we will give you for the quarter and the year that we have given you.

That is perfect. Thank you so much for the color.

Matt Williams, EverCore.

Thanks so much. Good morning, guys. Congrats on the quarter. I just wanted to spend a little bit more time on the Internet of Things opportunity and realizing it is still very early days I think here but when you are talking to customers, do they have the people and processes in place to really sort of take advantage of all the advances in connectivity and the amount of data that is now flowing through these products? And I guess to that end, how does ThingWorx enable them to sort of capitalize on that data and I guess maybe just briefly relative to the competition that is out there, how well positioned do you think you guys are?

It is a great question, Matt, and good morning to you. I think right now there is a lot of people thinking about Internet of Things, talking about Internet of Things, getting that aha moment about the Internet of Things. That said, they have never done it before. However, I would tell you they are prioritizing it very, very high. I mean there is a Fortune 100 customer I visited in December and he said the bad news is our earnings performance weren't quite what we wanted it to be this year so we didn't get much IT money at all for 2014. The good news is there was one $45 million project that was funded which was Internet of Things. And that is a little bit how I feel. As everybody is saying, we have got to go figure this out and we had better get moving.

So it is prioritized very high. That said, they are not sure exactly what to do.

So what happens is if you go try to build an Internet of Things application the old-fashioned way, you grab yourself a compiler and an integrated development environment, IDE type tool and you start writing code -- oh my God -- it is a slide. In comes ThingWorx and you watch one demo on that product and you say I would literally be 10 times more productive using that approach to build this and it just makes these visions so much more real, so much faster. It is rapid prototyping, it is highly graphical, etc.

So I think that right now ThingWorx helps in the most important way possible which is it lowers the barrier to entry to building an Internet of Things application literally by a factor of 10. And even when we go to companies that are already doing something and there are a fair number of those, they look at ThingWorx and say wow, we've got to switch because the way we are doing it is just silly compared to that. So tell me more.

That is the kind of conversation we're having right now as you can tell from my tone here, really very exciting.

Great, that is very helpful. Maybe just a quick follow-up if I could and sort of switching gears a little bit to the CAD business but in the past, you have talked about some of the increased functionality and module sort of attached to Creo and I am just wondering obviously the results have been much better in that business the last two quarters. Are you seeing the sort of adoption, the type of traction within some of the modules and increased functionality in that business that you expected?

Yes, in fact the new stuff has a much higher growth rate than the old stuff. So I think when you look at the license number that we had this quarter in CAD for instance, and I should point that out. That is against a weak comp from last year so I don't want you to think that is the new normal. But none the less, it was a good quarter.

If you look at where did the goodness come from, a disproportionate amount of the goodness in that good quarter came from the new stuff and we have seen people move through that upgrade process like I said pretty happy how that went, users love the new software. They are in a good mood at that point to take a serious look at all of this new stuff and then many of them end up writing a purchase order.

Great. Thanks so much.

Sterling Auty, JPMorgan

Thanks. Jim, I wanted to also follow up on the commentary that you just had on ThingWorx. I guess it was my impression that ThingWorx was kind of the data capture, data management application that sits on top of it, not necessarily the embedded functionality that goes in the products whether it is a washing machine or a refrigerator or a car or something else.

So my question is when you talk about it is 10 times quicker, are you saying just to build out that capability? And I'm also wondering when you guys looked at the competitive landscape is there a common embedded module if you will or embedded technology or a company that is doing that side of the Internet of Things?

Okay, there is a series of interesting questions there, Sterling. I will do my best to hit them. First of all, what ThingWorx really is is two things. It is a platform to run -- a run time platform for Internet of Things applications and then secondarily, it is a highly productive development environment to create those run time applications. So if you are looking at a product and you say if I connected it, there is five different applications I could envision. How would I create those five applications and run them?

The answer is with ThingWorx, you would create the five very quickly and with ThingWorx, you would run all five and serve them out to the user community. So that is fundamentally what it does. It is listening to these data streams that are coming off products and issuing commands to the products and so forth.

Maybe I will give you an example of a fun little application here in a minute.

But then the second question you were asking is is there anything ThingWorx embedded in the actual product? And there is a module for doing that so that you can have a certain amount of smartness actually a certain amount of application smartness running inside the product itself without always having to go back to the cloud. But that is kind of optional, that is not required. It is called an edge server. It lives out there at the edge in the device itself as opposed to a cloud server which lives back in the cloud. But that is optional and there is a lot of cases where people won't use that.

ThingWorx also has a machine to machine connectivity capability so if there is a question, what protocols and so forth do you use to get the data from the sensor on the machine to the cloud? ThingWorx does that. Some customers already have that infrastructure and that is okay too because ThingWorx really is kind of agnostic as to where the information is coming from and how did it get there. In fact, it doesn't really care if it is coming from a sensor and a remote device or SAP, the question is how to put it all together quickly into an application.

Let me give you a fun example of a ThingWorx application that is actually outside our space but I think it helps you sense what is possible here.

They created with a partner a parking application in San Francisco kind of a city pilot project I guess and the idea was they put sensors in all of these streetside parking spots that simply indicated to a smart parking meter nearby the spot is occupied or it is not. It is all it knows, yes or no. But that smart parking meter then is connected to the Internet so maybe it is Bluetooth to the parking meter, the parking meter somehow connected to the Internet and that data comes up to the cloud. So there is two really interesting things you could do.

First, you can create an application for drivers -- did they run on their android or iPhone device that says I am here, where are the closest open parking spots? That is actually pretty useful because you don't just have to circle block after block after her block looking for one. You just go to where they are.

And then to fund this, they created an application for the meter maid to say where are all of the expired meters because if this street has one expired meter and that street has nine, I am going to that street because I can write the most amount of tickets and generate the most amount of revenue. Everybody wins.

From a simple little Internet of Things application that has nothing to do with PTC but ThingWorx would go after that opportunity again because if you are going to build an application for a meter maid and an application for a driver, you're going to need to figure out how to do it and ThingWorx is the perfect answer. On a competitive front, we don't think there is anything like it. That is one of the reasons we had to pay a decent price for the product is it is pretty special.

Other things will come along I am sure but at this point in time, we are out in front, we are going to move fast, we are going to invest a lot in this business and we are going to try to develop a really solid leadership position.

Maybe one follow-up for Jeff. When you look at the margin side both in the quarter and I heard you comment about the sales [tags], would you say that we are at a point where the savings from the restructurings that you have done over the last 18 months are just kind of rolling forward or what additional efficiencies and cost savings moves are you making that maybe are not headcount even at this point that is going to drive that incremental margin from here?

So obviously the things that we did last year helped set us up very much for 2014 and we explained that I think in a positive way. So we are starting with a lower cost base. That also gives us more room to hire the additional sales capacity and things like that we have talked about. The margin story let's go to gross margin first. We are on that path, we are ahead of plan and that is positive and I think as we cited here, we are in the mid-15% range. Our longer-term goal is 20%. So we still have things to do and we are working on that and so we will continue to drive that I think would be pretty comfortable. Our guidance was to get to 15% for the year. I think there is upside in that so we will continue to work it.

On the spending side, we recently hired a VP of Purchasing that I think is at the early stages of helping us find other opportunities and ways just to save money on things we are already doing. I think you know the diligence that the financing, the management team, Christian and his team put together on this where we are effectively looking for our 10 basis points here, 50 there. So the good news is we have made good progress, Sterling. The even better news is there is more ahead.

So it is really looking at spending areas and all areas whether it is critical or not, driving gross margin and driving productivity really in all areas.

I think, Sterling and everybody else, you should take note though that we have a plan to increase our operating margin for the full year by 300 basis points. In Q1, we were up by 700 basis points so there were some kind of one-time anomalies in Q1 that you should realize we didn't ever intend to carry through the full year. Our guidance doesn't reflect that we are going to try to raise the annual operating margin by 700 basis points, it is 300 basis points in our target and clearly we are ahead of that target in Q1.

So I would just add and say it gives us some confidence in the 25 points for this year and clearly what we will do this year is also set ourselves up for improving it again in 2015, 2016 and 2017 with a long-term goal to push into the high 20%s to 30% so I think we have committed, we have delivered and we will continue to do that.

Got it. Thank you.

Jay Vleeschhouwer, Griffin Securities.

Thank you. Good morning. Jim, Jeff, at the analyst meeting last month you mentioned that yours is an 80% installed base revenue business. I think, Jeff, you made that comment. Could you talk about how that proportion of installed base versus new business has progressed over the last number of years and more importantly, how are you thinking about that over the next number of years in terms of your long-term goals? Do you expect a material change in that mix of installed base proportionality?

Secondly for Jim, could you give us an overview of how you are seeing conditions in end markets right now particularly your traditional markets of industrial equipment and aero and auto?

And one question I would like to ask about auto as well is we are seeing what seems to be some improving momentum by the automotive companies in terms of investing in your type of technology and there seems to be some of what I would call ferment among a number of the automotive companies in terms of selections and new investment. So if hypothetically there were to be some large new selections in auto let's say among any Japanese or German or French car companies, could you talk about the kinds of resources or investments that you might need to invest to support such a large Hyundai-like deal or something like that to occur for you?

And then a follow-up on ThingWorx.

Okay. I hope I got all of those listed here. So on the installed base percentage, I think you are right. We are 80%, maybe 85% of our revenues come from customers we already know looking backwards when you look in the rearview mirror. When you look out the windshield, I think a brand new picture is developing. If you think about we had CAD and we cut quite a nice base and then we had PLM and the natural way to sell PLM is to attach it to CAD. That is kind of how the business ran for the last decade.

But when you start talking about ALM, SLM, Internet of Things, who cares what your CAD and PLM system is. It is useful, very useful for us to go in there and explain to these customers why SLM and PLM have some good synergy, you maybe ought to buy them both from us if you already have PLM. But if you remember the Renault use case, let's be fair, Renault loves Dassault for CAD and PLM but they bought our SLM because they need SLM, there is a great value proposition and Dassault doesn't have it so end of discussion, let's go.

So I think that -- it's one of the themes we talked about at our Investor Day with every passing day, we look more different from Dassault and from Siemens. They have kind of stayed in that world of CAD, PLM maybe gone a little deeper in 3D in the case of Dassault, maybe a little deeper in the manufacturing in the case of Siemens. But as we went to ALM then to SLM then to IOT, they are not following us and I don't know why. But it is great because that gives us ways to penetrate every account.

We don't say well, they used somebody else's CAD, so drive or by. We say pull in and go right up to the top of the Company and talk about transforming their whole business before they are out of business. That is a pretty interesting discussion at a very high level and tends to be around servitization and the impact of new technologies like IOD and so forth.

I think it is kind of interesting, somebody pointed out to me a day or so ago that one of our competitors had a job listing on their website for an IOT expert to develop a strategy around IOT that might lead to R&D or M&A type projects. I just thought it was kind of funny. We are deep into this and they are saying I wonder what that is, maybe we should hire somebody to go look at it. It just sort of speaks a little bit to what is happening out there and it is very exciting for us.

Second question was verticals. I think the only notable thing -- I have to find that data here.

I can probably jump in and then Jim can add some color. If we look at verticals generally, we saw increases in really core industrial, high-tech and electronics and med devices. I would describe automotive as roughly steady. It wasn't up significantly in the quarter but it has been pretty steady at a higher rate than it was perhaps a year or two ago and the only area really of softness would be in the federal market which would be as expected.

I would also say aerospace was lower this quarter than it was a year ago quarter because of a large megadeal that did close but excepting that, I would say fundamentally that was also a pretty good business for us. But softness in federal and the strength we just described and stead in automotive.

Okay. I had that question about (inaudible) deal in auto but we can take that off-line. (multiple speakers)

No, let me just address it at least at a certain level because as you were asking the question, I wanted to ask you, are you talking about CAD deals, are you talking about PLM deals? (multiple speakers)

More of the traditional business kind of question, Jim. It is not the new stuff.

So I think that there are some customers out there who are thinking particularly about PLM, that is what is most interesting to us. So I think Hyundai did switch to our technology, our position in Volkswagen has grown stronger. All of the Volkswagen truck families are headed our way, Scania, MAN. As you know, Volvo came our way so we have been chipping away at that and Embraer is another example of a big CATIA Dassault customer who came our way.

So I think that people see a notable difference in the strength of our PLM technology versus what they might get from their CAD vendor assuming it is somebody else and that creates opportunities for us.

Now those things are slow to develop and mature and so forth but no doubt having an SLM, ALM and IOT strategy is pretty interesting to these guys because keep in mind software it isn't a point in time, it is a journey. So when you buy enterprise software you are asking two questions. One question is right now who has the best stuff? And the second question is how will it involve over time and over time will it become more interesting to me because they are headed in the same direction that we are or is it going to become less interesting because I'm going places that that vendor doesn't intend to follow?

If you are talking to an automotive company and it is all about manufacturing efficiency and/or it is all about 3D, that is one story. But if you are talking to them about cars becoming smart, they are becoming connected, you're going to transform the way you create, operate and service them, that is a very differentiated story.

So I think that is useful for us but this stuff takes time and we will continue to sort of harvest those opportunities when we get a chance to go compete for them.

Okay. The ThingWorx question is when we think about the broader context of what we saw for example at CES a few weeks ago and your comments about smart products and connected products and so forth, in addition to which you are expanding your credit line, could you talk about how you are thinking about investing in or partnering in the nontraditional non-mechanical non-apps development world? Do you think you need to have something a bit complementary that is outside of what you already have in ALM and CAD? And now with ThingWorx to fully round out the picture either in terms of owning something untraditional for you in the portfolio or how are you thinking about at least partnering with established companies in that world?

I think if we take ThingWorx and IOT first, ThingWorx has an ecosystem strategy. They have sort of an app store kind of concept -- I'm not going to call it an app store but for example if you want to create an application that talks to your products but it also talks to your ERP system and to your Philips view light bulb so every time there is a problem on the shop floor, the lights in your office blink, well it would be nice to have a pre-developed connector to the Philips light bulbs and a pre-developed connector to the SAP system and a pre-developed connector to some kind of a system that would issue alerts through text messages and how about a system that looks at the weather and so forth.

That is the kind of thing that ThingWorx does so they are building a nice ecosystem of let's say Lego blocks, of building blocks of technology, a building block for example that would connect to a Philips light bulb just being fun with it. That is a literal example though of one that exists. SAP would be another one. salesforce.com might be another one.

And you can quickly put these Lego blocks together into all kinds of interesting applications. Google acquired Nest for a lot of money and Nest is a smart connected thermostat and there is limited amount of applications. If you ask what else might you do with the data you could get from a Nest thermostat and/or the controls you could send to it and so forth and how might you mash that together with other things? Let's say Google wants to go to smart homes from smart thermostats to smart homes maybe they do and this is a hypothetical example.

Probably the tools the Nest guys use to develop that one application really are kind of old-fashioned tools. They grab the copy of Eclipse and they grab Java and they grab an Oracle database and away they went. We are going to go show them ThingWorx and they're going say you know what -- if you go from one application to 100, you are going to need a whole different approach here and this idea of a platform, a series of prebuilt connectors and oh by the way, applications like ALM, PLM and SLM, that is a very interesting approach to combine the best of what is proprietary to us and the best of stuff we would just like to buy from somebody else and reuse.

I think that that ecosystem idea is very important there and of course as we look at CAD and PLM, the acquisition opportunities are less numerous as we move to ALM, then to SLM, then to IOT, they continue to just explode. So I think we will continue to try to cherry pick those most important pieces of technology that we want to own and have right in our technology stack as well.

Thanks, Jim.

At this time I will turn the call back over to the speakers.

Thank you, operator.

Okay, so maybe just to close it out here, thank you all again for spending your time with us here this morning. I think we feel like this is a good quarter where as you see being prudent not to get ahead of ourselves but yet at the same time, there is some really interesting things developing here. There is evidence that the economy might get better. I wouldn't say it is better but the (inaudible) is a good one.

We are in a good place now with our business model, 25% operating margins makes things really interesting when revenue grows as you have seen the last two quarters. And I think from a growth standpoint, we've got the Creo product cycle. We are seeing some impact from that. We have SLM, now we have IOT. I mean I think the people sitting here around the table on this call here at the PTC site really have never felt better about the future of PTC. So I hope some of that is coming through but we are trying to balance that with sort of a prudent let's be careful not get ahead of ourselves sort of attitude as we guide you through the balance of the year.

Okay, with that thank you very much and I appreciate the time you spent with us today. Bye-bye.

This does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.