PTC Inc (PTC) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2015 second-quarter conference call.

(Operator Instructions)

This call is being recorded. If you have any objections, you may disconnect at this point.

I would now like to turn the call over to Tim Fox, PTC's Vice President of Investor Relations. Sir, please go ahead.

Thank you, Tori. Good afternoon, and welcome to PTC's 2015 second-quarter conference call. On the call today are Jim Heppelmann, Chief Executive Officer; Andrew Miller, Chief Financial Officer; and Barry Cohen, EVP of Strategy.

Today's conference call is being broadcast live through an audio webcast, and a replay the call will be available later today at www.PTC.com. During this call, PTC will make forward-looking statements, including guidance, as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q, and other filings with the US Securities and Exchange Commission, as well as in today's press release. The forward-looking statements, including guidance provided during this call, are valid only as of today's date, April 29, 2015, and PTC assumes no obligation to publicly update these forward-looking statements.

During the call, PTC will discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with General Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most direct -- comparable to GAAP measures can be found in today's press release, made available on our website.

With that, I'd like to turn the call over to PTC's Chief Executive Officer, Jim Heppelmann.

Great, thank you, Tim. Good afternoon, everyone, and thank you for joining us here on the call for a review of our second-quarter 2015 results.

We've changed some aspects of our earnings release process this quarter in an effort to better-meet your needs, and I hope you'll appreciate this new approach. Also, given the complexity that currency and our subscription transition have introduced this quarter, our remarks are probably longer today than we would intend to do in the future.

Overall, our Q2 results demonstrated solid execution across the business, despite the very tough currency environment and somewhat uncertain macro economic conditions. Revenue was above the mid-point of our guidance range, and we delivered EPS above the high-end of our guidance range, which reflects our continued commitment to driving margin expansion and earnings growth.

Once again this quarter, results were better than the headlines would suggest, given the combined effects that foreign currency, our license model transition and our strategy to shift our professional services growth toward the partner ecosystem have on our announced results.

If you normalize for foreign exchange rates and for subscription mix, then on an apples-to-apples basis, our year-over-year license revenue would've grown 8%, and our software revenue would've grown 10%. With our professional services results included, total revenue grew 5%, operating income grew 14%, and earnings per share grew more than 20%. These results are very consistent with the performance that you've been seeing from PTC for some time now.

While the FX headwind, our business model and the professional services strategy make our headline results appear less attractive, we know that shareholders appreciate the longer-term positive effects of the license transition and the services strategy. Then, consistent with the commitment I made 90 days ago, PTC has now taken action to address what we believe is the new normal in the currency environment. So before going any deeper into second-quarter results, I'd like to provide more context around that corporate alignment that we announced three weeks ago.

In addition to mitigating the impact of foreign currency and potential macro economic headwinds, we also saw the opportunity to expand on our leadership and momentum in our Internet of Things business, by increasing investments in sales and marketing, and in product development. While also accelerating some of the IoT-related development work in our core CAD and extended PLM solutions.

We see a great opportunity to further differentiate our industry-leading CAD, PLM, ALM and SLM solutions by enhancing them with a connected approach. We'll be sharing more details about that connected strategy in the core business at our LiveWorx event in Boston next week, and even more so at our PTC Live Global event in June.

But probably you can imagine the value the engineers can unlock by understanding how their products are being used in the field, and how the products are performing, relative to their design intent and quality expectations. Or for service technicians to proactively know what service the product will need, even before they actually need it. And to avoid the downtime by fixing the problem before the product actually fails.

Simply put, in an industry that uses the phrase -- lifecycle management -- a lot, PTC stands alone at this point, with the connectivity that enables true lifecycle management to continue after the product leaves the factory and enters what is the longest phases of its lifecycle. We have had some remarkable customer meetings on the closed-loop lifecycle management topic lately. But it's important to know that we remain fully committed to executing on our core CAD and PLM solution road maps, with the next major release of Windchill coming this later calendar year and the Creo 4.0 targeted for release in mid-2016.

Coming back into our second-quarter results, we're pleased with the early progress and customer feedback on our subscription licensing program, with strong attach rates in our IoT business that is primarily subscription-based. And emerging customer interest across our core business, including the new offerings for channel partners.

While the subscription bookings mix of 14% in the second quarter was slightly below our previous 15% estimates, subscription bookings in aggregate remain above 15% for the first half of 2015. And based on a profile of our current pipeline, we see the pace of subscription adoption ticking up slightly in the second half of the year. Recall that subscription offerings provide greater flexibility and value for many customers, and in turn, will drive significant long-term value for PTC.

You'll note in our financial disclosures that we're now highlighting the performance of total software revenue, which is the combination of license, subscription solutions -- including cloud services -- and support revenue. Consistent with our strategy for professional services revenue to trend flat to down over time as we grow our service partner ecosystem, we believe that this software revenue measure better-reflects our top-line progress.

During the second quarter, the high-margin software revenue grew 8% year-over-year on a constant currency basis, and would've grown 10% if further adjusted for the subscription bookings mix. The strong performance in software revenue was then offset by a 12% year-over-year constant currency decline in the lower-margin professional services business, consistent with our strategy. Service partner bookings have actually been stronger through the first half of the year than we had anticipated, as our partners continue to develop their PTC practices. So overall, we're pleased with our progress here.

In terms of geographic performance, when adjusting for currency, we delivered very strong performance in Japan -- including a mega deal -- mid-single-digit software revenue growth in the Americas and Europe, and flattish results in Asia Pac. Software revenue results benefited from strong support revenue growth in all regions, tempered by a year-over-year decline in license revenues in the Americas and Europe.

Recall that we closed three mega deals in these two regions in Q2 of 2014, which makes for a tough year-over-year comparison. In addition, we did see pockets of cautious buying behavior later in the quarter, which impacted large-deal close rates and timing.

Economic reports have been mixed over the past few months, especially for manufacturers with significant currency exposures. Many of our largest customers, in the US in particular, are multi-nationals that rely heavily on exports, so the rapid strengthening of the US dollar could be impacting their business. We're watching this closely.

Turning to segment performance, when adjusting for currency, our core business second-quarter results were somewhat mixed. CAD and SLM delivered solid results, in line with our targets, while extended PLM was at the lower-end of our target range, primarily due to a few large deals slipping out of the quarter.

So starting with SLM, we were encouraged to see SLM post double-digit constant currency license growth in Q2. We entered the year with a much stronger pipeline that we believed would enable our SLM business to return to growth in the second half. And while it's still too early to declare victory, we're encouraged by the performance this quarter, and by the stronger pipeline as we enter the second half of the year.

During the quarter, we closed a number of strategic SLM transactions, including commitments from Dell, which continues to expand its SLM footprint with PTC. Lockheed Martin, who is a large PLM customer, also made a sizable SLM purchase in the quarter. This demonstrates one of the key growth drivers for our SLM business, which is our ability to leverage deep customer relationships to cross-sell into PTC's large CAD and PLM installed base, where penetration of our SLM solution is still in the early stages.

We're excited about last week's launch of our in-service technology. This is our next-generation solution for technical and service parts information. This new software is based on the Enigma technology that we acquired in 2013, and then leveraged in our Caterpillar engagement.

The in-service software significantly enhances our service information solution capability by extending a customer's CAD investment to deliver graphics to downstream service technicians. And by extending a customer's PLM investment to deliver product structures and service parts information downstream into service as well.

The ability of downstream service departments to get as much utility out of CAD and PLM data as the manufacturing organization already does, is a powerful idea. And there's nothing quite like this in the market. It creates a powerful cross-sell to PTC's sizable CAD and PLM installed base. But the solution also inter-operates with competitors' CAD and PLM systems.

If you have a chance to come to our LiveWorx event next week, you're going to see some great examples of closed-loop capability, where we take an existing manufactured product, add sensors to it after the fact, then use our IoT platform to connect that product and sensors to the cloud. We feed the sensor streams into CAD to analyze the fitness of the design during the actual product use. We also analyze the sensor data with big data, predictive analytics.

And then finally, we leverage PLM configuration data to deliver CAD graphics as work instructions through augmented reality into the hands of service technicians in the field. That's quite a mouthful, but when you see it all running, it's really a truly amazing capability that can only be delivered when you combine our new technology platforms with our core enterprise applications.

Turning now to the other core businesses. CAD constant currency software growth was up 5%, was in-line with our expectations, driven by new seats, modules and upgrades of Creo. Extended PLM had more mixed results, where our performance appears to have been impacted by several large deals slipping out of the quarter, as I mentioned. Nevertheless, we continue to win new PLM customers, to extend our footprint within existing customers, and to cross-sell adjacent solutions into our bases.

During the second quarter, for example, we closed an enterprise-wide PLM deployment with Nordex Energy, a German-based global leader in high-efficiency wind turbine technology. And we secured a seven-figure PLM expansion with Brother Industries, who you know as a leading electronics manufacturer in Japan. We also secured a follow-on ALM commitment with a leading major automotive customer in Japan, who continues to expand PTC's footprint across this growing software engineering group.

The Q2 IoT results were stellar. Our IoT business once again delivered very strong performance, and is already approaching 10% of our license revenue in the quarter. While we're certainly pleased with our revenue performance, I'll remind you again that at this stage, our primary goal is to win new logos, and then to expand within these customers.

Our experience suggested the initial IT platform win is analogous to a design win in a semiconductor world. The first booking is not large, but after demonstrating success with the initial IoT initiative, we can expect to expand within the account as we scale across product lines, departments and business units.

Today some of our largest IoT customers represent subscriptions in the range of $500,000 to more than $1 million per year, and they're still at partial penetration. So with the influx of new logos, you can see how this business could become quite significant very quickly, as we began to move past the proof-of-concept phase and into the phase of wider production usage.

Then following a strong Q1 performance on the logo front, where we secured 42 new IoT logos in Q1, we closed 62 new IoT logos in Q2, which is a sequential increase of 48%. To put this in perspective, 62 represents one significant new IoT logo win every business day during the second quarter. We believe we're on pace to exceed our target of 200 new IoT customers in FY15, and we might actually approach this goal by the end of Q3.

As was the case in Q1, we again had a healthy mix of contribution from all of our go-to-market channels. With our new dedicated IoT sales force delivering about 60% of the new logos, our strategic account reps delivering about 25%, and our go-to-market partners about 15%.

The new logos we're tracking come from a variety of vertical industries that are applying our IoT platform to many different use cases within their operations. One new logo customer, for example, Instron, is using our platform to develop remote service and remote access capabilities, as well as to deliver automated software updates to their equipment in the field. Instron manufactures and services high-end test equipment that's sold in over 40 countries. And by leveraging PTC's IoT platform, Instron plans to significantly reduce on-site service calls and the associated costs.

While we believe that service remains the killer app for IoT, we also landed a new commitment from one of the leading US-based aerospace and defense manufacturers for a more advanced application of IoT. They are pursuing five separate IoT initiatives, where they're innovating around new revenue-producing services for their customers.

In addition to new logos, we measure IoT leads as an early indicator of business momentum. Here we continue to track over 1,000 opportunities in the global pipeline that could be worth $100 million in revenue. Given the early nature of this market, we don't expect closed rates against this pipeline to be as high as in our core business, but we have the capacity in place to execute on this significant rate of lead generation. And as mentioned before, we believe we're on track to meet or even beat our new logo target for the year.

PTC's growing leadership position in IoT will be on full display next week in Boston at our LiveWorx event, where industry experts will be sharing the latest updates on IoT technology, product capabilities and business models. We have a number of great keynote speakers lined up, including Steve Wozniak, the co-founder of Apple and Professor Michael Porter from Harvard Business School, who, as many of you know, co-authored with me the cover story in last November's Harvard Business Review that talked about the impact of IoT on competition.

LiveWorx attendees will have access to more than 50 sessions hosted by technology and business leaders who are sharing their challenges and successes across a broad range of IoT topics. Including analytics, big data, security, connected health, global connection and deployment strategies. The response to this event has been a bit overwhelming, as we initially targeted 1,000 attendees, but now expect around 2,000. Which has caused us to need to scramble to find a bigger venue for the all-in keynote audiences. This means that the attendance has increased more than 500% over last year's LiveWorx event.

You're all invited to join us at this event to hear some other exciting news on PTC's products and partnerships. But please do reach out to the IR team for details, and to ensure that we know you're coming, so that we can hold a premium spot for you in the venue in case things get crowded.

We also invite you to consider attending our PTC Live Global event in early June, which this year is going to be held in Nashville. Whereas LiveWorx is more focused on IoT, PTC Live Global is more focused on the traditional core business. In addition to offering insights and perspective, product road maps, and customer case studies around our core products, there'll be many opportunities as well to learn about our Smart Connected Product strategy, and the role of IoT in our core products. Companies are excited to learn and to take advantage of what's being called the most disruptive technology of our time.

Before I turn the call over to Andy, let me comment on our outlook for the balance of FY15. I think we have a lot of momentum in the business, and on balance we feel good about the progress we're making on many fronts. We're creating value for customers and for PTC as we move aggressively into an IoT leadership position and plan to enable our core products with conductivity-driven enhancements as well. We're also creating value for both our customers and for PTC by embracing the subscription business model.

We expect, however, that we'll continue to encounter headwinds in our business, due to a combination of currency exchange rates, our evolving license business model and a manufacturing economy that is potentially softer than what we saw in FY14. We've adjusted our FY15 guidance for further depreciation on foreign currency, and for a slightly higher mix of subscription bookings, which we now expect to be 17% of total license bookings for 2015.

Besides currency and mix, we've also adjusted our revenue outlook to factor in a somewhat more cautious macro economic outlook. As well as lower professional services revenue, driven by the acceleration of the transition of our customer engagements to our partner ecosystem.

Nonetheless, we're maintaining our guidance for 15% growth in non-GAAP earnings this year on a constant currency basis, due in part of our portfolio management approach to the business and our recent realignment actions. We remain on track to deliver a solid year, with opportunity to drive increasing growth and value to customers through a combination of our core product focus, our leadership position in IoT, our business model transition.

We remain on track to achieve our 2018 target business model. And when combined with our commitment to return 40% of free cash flow to shareholders, we believe we're well-positioned to drive substantial value for our shareholders over time.

Now I'd like to introduce for the first time, PTC's new Chief Financial Officer, Andrew Miller, who will be a key partner of mine as we look to drive value for customers and shareholders going forward. Andy brings a truly unique skill set to PTC, having experienced driving both growth and shareholder value at his previous companies. This experience is already paying dividends in driving constructive change internally here at PTC. With that, I'll turn it over to Andy.

Thanks, Jim. And good afternoon, everyone. Please note that I'll be discussing non-GAAP results unless otherwise specified.

Total second-quarter revenue of $315 million was down $13 million year-over-year, driven entirely by lower professional services revenue, consistent with our strategy. After adjusting for currency, total revenue increased 4% year-over-year, and when further adjusted for subscription mix, revenue would've grown 5% year-over-year.

On a reported basis, software revenue -- which consists of license, subscription and support -- was flat year-over-year. However, after adjusting for currency, we delivered strong software performance, with 8% growth. Further adjusting for license mix, software revenue would've grown 10%.

Our strong software revenue performance was driven by support, which was above our guidance, and would've been up 10% year-over-year on a currency and mix-adjusted basis. This was partially offset by license revenue that was slightly below the mid-point of guidance, but would've been up 8% year-over-year on a currency and mix-adjusted basis.

As Jim noted earlier in his opening remarks, we faced a tough Q2 2014 license comparison -- a quarter in which we had 17 large deals, including three mega deals. We also believe some of the Q2 2015 large-deal softness could be related to potential economic uncertainty. Especially in the Americas, but also in Europe, we saw deal sizes compressed, and in some cases, deals were delayed.

Approximately 59% of Q2 2015 revenue came from recurring business, up from 52% a year ago, reflecting growth in subscription and support. Clearly, the growth in our recurring revenue represents a very positive trend in our business.

Turning now to our subscription licensing model. Our subscription offering has been available for two quarters, and we are pleased with the early indicators. We currently have underway a company-wide initiative, which we call Subscription Phase 2.

We believe that we can provide our customers more differentiated value through subscription offerings, that in turn will enable us to increase customer lifetime value. Our program objective is to define the optimal license model end-state for PTC, and then to drive a rapid transition to that end-state model.

In this initiative, we are focused on completing marketing and pricing studies, and then defining differentiated subscription offerings which will enable us to determine and then rapidly drive to our end-state. We are targeting completion of our program so that we can launch new pricing, licensing and product feature offerings by the start of the next fiscal year.

Thus far, our work shows many customers in many markets prefer a subscription offering, as it provides greater value through flexibility, ramping capability, paying over time, and usage of operating versus CapEx budgets. You can expect us to share more with you as we progress through our program during the second half of the year.

Moving to the income statement, gross margin increased by 120 basis points on a sequential basis, and 150 basis points year-over-year, and was at the high-end of our guidance. After adjusting for currency and subscription mix, gross margin would have increased 210 basis points. The key driver of our improved gross margin was our mix of software business, which was 81% of total revenue this quarter, up from 78% a year ago. We are pleased to see a sequential improvement in professional services' gross margin, which was 16% in Q2 2015, above our 15% target for the year.

Operating expenses in the second quarter were down $8.7 million or 5% from last quarter. The strong gross profit performance, coupled with tight operating expense control, resulted in an operating margin of 23.4% in Q2, 140 basis points above the high-end of our guidance.

Overall, net income for the second quarter was $61.4 million or $0.53 per share, above the high-end of our guidance. Our EPS growth rate was 11% year over year, and more than 20% when adjusting for currency and license mix. Note that net income benefited by a lower tax rate and share count in our second quarter, relative to guidance, which added approximately $0.02 to EPS.

Moving to the balance sheet, cash and investments were $268 million, up $7 million from last quarter, including $92 million of cash flow from operations and $75 million repayment on our credit facility. Relative to soft repurchases, now that the ASR is complete, we intend to begin repurchases again during Q3 and Q4. And expect to be on track by the end of the year with our goal of returning 40% of free cash flow to shareholders.

Moving to guidance. Based on the continued appreciation of the dollar against foreign currencies and the expectation of a higher mix of subscriptions in the back-half, we are adjusting our top-line guidance. Our top-line guidance factors in current exchange rates, 17% subscription license bookings mix, up from 15% assumption last quarter, and also a slightly more cautious outlook on the near-term economy. Additionally, we are reducing our professional services guidance by $18 million, as we continue the transition of certain customer engagements to our partner ecosystem.

With this in mind, we are now forecasting full-year revenue in the range of $1.28 billion to $1.295 billion, or 2% to 3% year-over-year growth on a constant currency basis. This compares to our previous revenue guidance of 4% to 6% constant currency growth. On a license mix-adjusted basis, our FY15 revised guidance would imply approximately 4% growth year-over-year at the mid-point in total revenue. And approximately 8% growth year-over-year at the mid-point in software revenue.

As you consider the change in our full-year top-line guidance, note that $23 million of the change is due to new assumptions regarding currency and subscription license mix. And $18 million of the change is due to our lower professional services expectations. Together, these factors represent a $41 million decrease in our revenue guidance.

Our guidance include software revenue of $1.048 billion to $1.063 billion, which when adjusted for FX and license mix, is in the lower-half of our prior guidance range. Note that our current assumptions around currency and subscription mix are negatively impacting our software revenue guidance by about $20 million.

Within our software guidance range, we expect license revenue in the range of $360 million to $375 million. And we expect support revenue of approximately $688 million. For professional services, we now expect revenue for the year of approximately $232 million.

As a final note, I want to quantify the expected full-year impact of currency and the license model transition on our 2015 top-line results. Given our current assumptions, we expect FX will negatively impact our revenue by $100 million as compared to last year. And we expect the transition to subscription will negatively impact our revenue by $22 million as compared to last year -- a total year-over-year impact of approximately $122 million on the top line.

Moving to margins. Despite the change in our revenue guidance, we continue to target full-year operating margin of 24% to 25%, due to the restructuring actions initiated in Q2. And we continue to target 15% professional services gross margin in FY15. Notably, after the restructuring action is completed in Q3, we expect to exit 2015 with operating margins that position us well towards our 2018 targets.

Turning to the bottom line, on a constant currency basis, we continue to expect to deliver at least 15% EPS growth in FY15, in line with our prior guidance. We are now forecasting full-year EPS in the range of $2.18 to $2.30. Note that our current assumptions for currency and subscription license mix are negatively impacting our EPS guidance by approximately $0.08 as compared to last quarter. So absent these changes to our assumptions, our EPS guidance would actually be higher than our prior guidance, due to a lower tax rate assumption of 14%.

For the third quarter, we're forecasting total revenue in the range of $307 million to $312 million, software revenue in the range of $253 million to $258 million, and a subscription bookings mix of 18%. License revenue is expected to be between $85 million and $90 million. And support revenue is expected to be approximately $168 million.

Professional services revenue is expected to be down sequentially, to approximately $54 million. Operating margin is expected to be in the 22% to 23% range, given timing of expenses, yielding EPS of $0.47 to $0.50.

Lastly, as it relates to our third quarter, it's important to recall that Q3 2014 was a very strong bookings quarter for both perpetual license and subscriptions, with 21 large deals, including two mega deals in the quarter. As such, we will again be facing a very tough year-over-year comparison, both on a reported basis and viewed on a constant currency mix-adjusted basis.

One additional item. In our press release today, we provided an update concerning the China matter. We have begun negotiations with the SEC to reach a resolution of its investigation, and we expect to begin negotiations with the Department of Justice in the near future.

At this time, we are not able to estimate the possible loss associated with resolving this matter. As settlements are reached, the amount could be material to our results of operations for the applicable fiscal period. I refer you to our SEC filings and to today's press release and prepared remarks for additional information.

Before I wrap up my commentary, let me we share some of my thoughts on why I joined PTC, and why I'm very excited about the opportunity that's in front of us to drive value for shareholders. In PTC, I saw a Company and a management team that had demonstrated the will to transform its business, by expanding operating margin 1,200 basis points and growing EPS and cash flow north of 20% over the last five years.

And in doing my diligence on the Company, I became convinced of two substantial opportunities for PTC to drive improving growth over the coming years. I believe PTC remains extremely well-positioned in its core CAD and PLM markets, with a deep and loyal customer base. But now I have the opportunity to deliver more value, and by extension, higher growth, by leveraging new licensing and delivery models.

Now add to this the early lead PTC has taken in IoT software platforms, which I believe is one of the most exciting software markets of the past 15 years, and I see PTC's next great growth opportunity. IoT has the potential to not only accelerate growth in a new software market, but over time, to enhance the differentiation and value proposition of PTC's core solutions.

I'm excited to be part of the team here at PTC, and look forward to meeting all of you as we accelerate our investor outreach over the coming quarter. With that, I'll turn it over to the operator to begin the Q&A.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Thank you, sir. Our first question comes from the line of Mr. Sterling Auty from JPMorgan. Sir, your line is now open. Please proceed.

Thanks very much, and Andy, welcome to the team. Had one question and one follow-up. Jim, on the IoT side, when you look at the 62 logos that you brought in, what I'm curious is about is, what does the IoT stack look like for those companies?

Meaning, what portion of the IoT solution are you bringing to the table, and what commonly are you connecting it? Meaning, is it Broadcom [chints] being provisioned by Jasper Wireless or Synchronoss, and then you're getting the data feeds? What does the total solution look like in a -- as much as you can say -- a most common architecture within these companies?

Yes, I think if I were to generalize it, what we are selling to them is the software that -- a little module of software that would go into their product. So assuming the product has a wired or a Wi-Fi or a cellular ability to connect, it needs a piece of software to then carry on the conversation with the cloud. So we're selling that little module that goes into their product -- the so-called edge agent.

And then we're selling the cloud piece that the edge agent talks to. So the cloud, the database, the capacity to receive this data, and to carry on the conversation from the cloud end. And then we're selling, what we call the application enablement platform, which is the plumbing to both build and run applications on that cloud, talking bi-directionally with that product. So we're actually selling quite a bit of technology stack.

Now, in terms of what does that product have inside it already in terms of hardware and software? Well, I'd say, all over the map, from products that have the ability to connect but didn't know what to connect to, to in some cases, people who are slapping a raspberry pie onto a product that never had the ability to connect, and giving it the ability to connect.

So it varies a lot in terms of what's inside the product. But our solution to go from product to cloud, and then to build, and then to run applications against that product, is fairly consistent. Though of course, it would vary a little.

Okay. And then separately, when you talk about the uncertain economic environment, we understand the exporting and the dollar-euro exchange, but when we look at some of the PMIs coming out of Europe, it feels like investors are more looking at the possibility of recovery in Europe, so the timing of when you're talking about squishiness is a little bit confusing. So maybe you can help clarify that?

Yes, I mean, certainly my view is that the Europe situation is okay and mostly stable. The PMI data I'm looking at says it just ticked down a tiny bit, from 52 and change to 51 and change, in the last month. I think the bigger difference and the bigger risk for us is in the US, where the PMI has been pretty strong, but I think is coming down quickly. Tick-down much more.

And what we really saw was, particularly in the month of March, is customers panicking a little bit. Because they were looking at their own forecast and seeing what currency was doing to their top line and their bottom line, and they were just slapping the brakes on everything. So we saw, in particular, in the US.

Now, I wouldn't have characterized the US economy as difficult. I don't think I did on the previous earnings call. But I think that, that currency swing was so far and so abrupt that it just left people in a bit of a deer-in-the-headlights, or a panic mode, saying like, let's just stop and try to figure out where this is going.

Maybe it will stabilize and we'll go back to business as usual. That would be nice. Maybe it won't. I think we've just tried to hedge a little bit, saying there probably is a situation here where the average US-based global company now has a different looking set of guidance in front of their investors. And they're trying to figure out what to do about it, much as we were.

Got you, thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Mr. Matt Hedberg from RBC Capital Markets. Sir, you may now proceed.

Yes, guys, thanks for taking my questions, and congrats on the margins this quarter -- really nice to see. And I know you talked about the move to subscription revenue is still early. I think Andy indicated in the prepared remarks that you might consider a more rapid transition. I'm wondering, does this imply a scenario where license revenue wouldn't be an option at all in the future?

Well, I think our program, right now, is to figure out what that end-state is. So we're looking at it by customer segment, both size of customer, the markets they're in, and also by product segment, to really figure out where the -- what offering makes sense for each customer. And then we're going to design the offering, differentiating the pricing, when they pay, and frankly, the feature sets that are offered there.

We're going into it with an open mind, but I think if you look at what's happening broadly in software, you see that there are so many market segments and customer segments, it is the preferred way to buy, and it continues to move in that direction. We're doing a number of marketing and pricing studies now to come up with that end-state. And I would expect that we'll tell you more as we complete these studies over the next few months. And then our goal is to actually launch new offerings at the start of next fiscal year.

Good, that's great, thanks, Andy. And then I'm curious if you could give us a sense for what percentage of your subscription bookings was from core CAD PLM this quarter versus the past several quarters?

Yes, the IoT business remains primarily subscription. We saw some of the core business go subscription, but it was actually less than last quarter. There's variability in these early stages. As we look at the pipeline next quarter, we're seeing a little bit more go subscription. But I think at this stage, there's variability.

And frankly, I think we can -- the reason we're doing work on really the packaging aspect of it is so that we really have very differentiated offerings. Those people who care about the total cost of the product over, say, a 4- to 5-year timeframe, will want a different offering than that person who is trying to optimize it over 10 years.

The one who wants more flexibility to ramp and exchange product; exchange [feet] will probably prefer subscription. So that's really what we're assessing at this point in time. And then to have truly two distinct and different offerings, with little overlap between the two.

Great, thanks. And maybe if I could squeeze one last one in here. I'm curious what percentage of your L&SS bookings came from large deals? I think last quarter, it was maybe 32%. I think the year before, it was maybe 42%. And I think in the prepared remarks, you talked about in-line with your historic average. I'm curious, what historic average are you using there for that assumption?

It's somewhere in the 30%s. Yes, it's basically somewhere in the 30%s. It was clearly a little bit less this time because of the fact that we only had 13 of them.

Got it, okay, thanks a lot, guys.

Thank you. Our next question comes from the line of Mr. Steve Koenig from Wedbush Securities. Sir, your line is now open; kindly proceed.

Hi, guys, thanks for taking my questions. I've got a few questions that are all pretty short, hopefully. One is, can you all disclose -- so that we can do an organic calculation -- the revenue contribution from Atego and Axeda, which I don't believe were present a year ago?

Yes, what I can share with you, that organically, the constant currency mix-adjusted business grew just above the mid-single digits, as opposed to the 10% of the total. We're only going to disclose revenue contribution from acquisitions if they're material to our results. But it was just above the mid-single digits, in the 6% range, this quarter.

6%, okay. So Andy, on that number, since the mix -- a lot of that mix is from the new business that's been additive. Can you possibly disclose just the constant currency-adjusted organic contribution?

I don't have that number in front of me. It's -- yes, sorry.

It's okay. Let's see, can you tell us -- last quarter, you told us a very useful statistic, which was the L&SS bookings per sales and marketing spend, was part of your prepared remarks. You wouldn't happen to have that again this quarter would you?

It was up 7%, and it's in the prepared remarks, I believe.

Okay.

1.12. And that's 7% year over year.

Okay. I failed my Evelyn Wood course, so thanks (laughter).

That's the downside of the new process, Steve.

That's okay, we'll get used to it. Just a couple of quick ones, then a couple more. Do you believe you're still on track to achieve $40 million to $50 million in IoT revenue and subscription bookings?

Yes. We haven't changed that guidance. We didn't mention it in this particular script, but yes, that would be correct. That remains our guidance there.

Okay. And the mega deal in Japan -- what product areas was that in?

That was three.

CAD and PLM primarily. Probably majority CAD, the minority PLM. There might have been some other stuff in there.

And did you say what vertical that was?

No, we didn't.

Okay. Last question. Progress -- a little more strategic here. Can you talk a little bit about the progress integrating SLM with the IoT technology? And when the application integrations will be available as a turnkey solution for field sales?

Yes, let me say we'll have some big announcements on this front next week. And I hate to scoop them here in this call. But we are making good progress, and it's quite exciting. And we're making some interesting progress with partners in that area too -- other companies who might like similar strategies.

Terrific. Okay thanks a lot, gentlemen, I appreciate it.

Yes, you're welcome, Steve.

Thank you.

(Operator Instructions)

Thank you. Our next question comes from the line of Saket Kalia from Barclays Capital. Sir, your line is now open; kindly proceed.

Hi, guys thanks for taking my questions, and welcome, Andy.

Thank you.

So first on the services business, Andy, how much of that is now consulting versus training? And where do you see that mix in your first few days here on job? Where do you see that mix going in the long-term model?

Well, it's the consulting piece that is being moved to partners. We still do the training piece, so you'll see that become a smaller piece of the total.

Yes, in fact, Saket -- Jim here -- if you look at our IoT business, there's almost no consulting in that business. So we kind of like the idea of moving to a business that's either rich in subscription or rich in software -- however you want to measure it. But really focused on software, with -- that would give us a path to much higher margins than we've been talking to you about here today.

The other positive thing that's also driving the lower professional services numbers as we move forward is, we've got more of these VRDs, more these basically out-of-the-box solutions, consulting offerings, so that the customers are bringing their products up much faster, with much smaller engagements than they had in the past. So that's a positive for them and a positive for us -- they're higher-margin that way as well.

Got it. That makes sense. And then for my follow-up, Jim, outside of IoT, where is subscription pricing resonating most in your customer base? Is it with a particular vertical? A particular product? Maybe SMB versus large? Just any color on where those preliminary marketing studies are showing subscription being a successful offering?

Yes, we're one quarter into the offering of subscription into the SMB space, and we did do a number of transactions there. I think it's interesting to that space, because a lot of those SMB companies are, let's say, cash-challenged. And this gives them an on-ramp without having to commit all the cash up front. Then I think if you go into the bigger accounts, to be frank, it's probably not -- I'm not sure there's a strong association to a vertical or a geography.

I think it's really more to a financial strategy of the customer. Some customers don't like capital commitments and they'd rather buy everything on an OpEx basis, and so forth. So I think it's really down more to the financial strategy of the company than whether they're automotive, industrial or retail.

Got it. Thanks, guys.

Thank you. Our next question comes from the line of Mr. Matt Williams from Evercore. Sir, your line is now open; please proceed.

Thanks very much. And thanks for taking the question, guys, and welcome, Andy. I'm curious -- with IoT getting as much attention as it is from a budgeting standpoint, with the customers that you're talking to, are they trying to carve out budget for IoT from existing budget? Or are you starting to see instances where they're setting that aside and allocating dedicated resources towards trying to build out an IoT strategy? And just any color around how they're thinking about that from a budgeting standpoint.

I think they're thinking about it very differently, Matt, from how they would think about CAD and PLM. CAD and PLM are somewhat mature markets, and budgets are set well in advance, and tend to have some kind of cyclical effect tied to PMIs, or macro economic, or whatever.

I think this IoT discussion is completely different than that. This is a very strategic initiative. The CEOs are involved. It's a corner office topic. They're doing it for strategic reasons. They would cut other budgets to make room for it if they have to. I think it's that level.

In fact, an interesting little story from this past quarter. Professor Porter and I held an event around the HBR article, in Chicago. And it was co-sponsored by the NAM, the National Association of Manufacturers, who was eager to be associated with the topic. And they actually had asked us, could we co-sponsor that event, because, quite frankly, we were going to do it anyway. And we said -- sure, but can you help us with audience acquisition? And they said -- we'd love to.

So this was an event where we targeted 75 CXOs, with an emphasis on CEOs. And as the registration started coming in at 120, we had to say -- I'm sorry, there's just no room in the room. We made the PTC people and the NAM people stand against the wall at the edge of the room, so all the customers could take every last spot at the tables in the theater room, and that was that.

So I'm just saying, it just shows the level of interest here. I've never seen a topic, in my time at PTC, that so quickly was something that would get you to the corner office and in a very strategic conversation. So, I don't think we are drawing from the CAD and PLM budget. I think we're on to something that's acyclical because of how strategic it is.

Great, that's helpful. I appreciate the color. And just one quick follow-up on the SLM business. Obviously, a little bit better result there. You guys had talked in the past that the pipeline seems to be there, and there's been a mix of some execution and deal cycles elongating a little bit.

So could you give any update around the SLM pipeline, number one? And then what you're seeing in terms of deal cycles? Is it shortening at all? And just a general update there?

Yes, I think we framed up that our SLM sales cycle -- these are enterprise initiatives -- sold top-down and consulted it way around business process transformation. And those are never short processes -- sales processes. I would put them in the four- to six-quarter range.

So just to remind you of what the story we've been sharing with you over the past few quarters is, in 2013, we didn't have a dedicated selling organization for SLM. And we felt like we didn't have enough attention on it, and the pipeline got a little soft, because we didn't have enough expertise, enough focus. In 2014, we put out a dedicated sales force, but we said it will take some time to build up the pipeline and to run these deals through the cycle. And if you look at four to six, seven, whatever, quarters of sales processes, that means it should start to show up in the back half of 2015.

So the pipeline does look quite robust now. We feel good about that. We did see a better result here in the past quarter. Like I said, I don't think we want to declare victory on that. One quarter doesn't make a trend. But that quarter is consistent with the trend we would expect to see, based on the actions we've taken and the pipeline that we've developed.

Great. I appreciate it, Jim.

Thank you. Our next question comes from the line of Mr. Jay Vleeschhouwer from Griffin Securities. Sir, your line is now open; kindly proceed.

Hi, thanks, this is Zack Ajzenman in for Jay. Wanted to start with the press release about the restructuring and expense reductions, where you referred to assessing your pricing and packaging practices. Did you mean something short term, such as raising local non-US prices to offset currency? Or did you mean something more substantial and longer term than that?

We're basically assessing our pricing in these studies we're doing relative to the perpetual and the subscription offering, and the feature offerings as well -- coming up with a good, better, best-type of strategy for various products, for example. That's pricing strategic -- you don't want to just do a quick knee-jerk reaction to something going on in the market.

We compete against German companies, frankly, who have much less US-based business than we do. So they're actually seeing -- you saw some of our competitors, that their reported results are higher than their constant currency results, so kind of the inverse of us. So we're doing it from a more strategic perspective.

Yes, and I can say, one of the great things is, Andy's got a lot of experience here. It's great to have him on the team, because he's one of these guys who came into the office filled with great ideas and lots of execution energy and so forth. So we're off executing vigorously subscription phase 2 and strategic pricing and things like that, that I think we always wanted to do, and now we've got the talent to do it.

Okay, good. And under what circumstances would you foresee increasing the expected or targeted proportion of subscription licenses to, say, 25% or more?

Basically, it's going to drive greater overall value to us from the customers. We're going to get more revenue from the customer, because that's a more valuable offering to the customer than we're going to drive there.

Yes, if I could add here. When we launched into this program at the beginning of the year, we said -- we want to run this for one year without trying to steer it, so that we can hear the voice of the customer, and then we'll want to steer it. So when Andy talks about subscription phase 2, he means grabbing the controls and steering this to some destination that we think is the right destination, so that we move through this process and there's an end to it. That's really what we're talking about.

We're collecting data and beginning now to say -- okay, what is the data telling us, and what's the destination, and how quick can we get there? So that we come through the valley of the transformation and come out the other side with the benefits. So that's what we're working on.

Understood. Is it feasible to re-invest most, if not all, of the expense savings from the restructuring layoffs back into the IoT business?

I mean, in gross terms, we re-invested half. So we took some money out and put half back in, and the other half fell to the bottom line. Is it feasible? I mean, could we spend more money? Let me tell you, we're spending a lot of money. I don't know that we need to spend any more money.

I will tell you, we're playing to win. And when somebody has a good idea and a good initiative, or if we see a need for sales capacity, we're funding it. So there's nobody going hungry here in the IoT business. We're trying not to be cavalier, but we're playing to win, and we do intend to win in this business. I think quite frankly, the data suggests and the analysts are starting suggest that we are winning.

Okay, great. And lastly, in terms of cash flow, what is your estimated FY15 operating cash flow? And is it possible that your FY16 cash flow can return to FY14 levels or more?

I'm not going to guide FY16 today. FY15 -- it tends to follow non-GAAP pre-tax earnings. We do have two unusual items that we've disclosed, and it's in the prepared remarks. One is the computer vision pension that is closing out this year. We don't have a final estimate on the amount, but it's roughly $45 million. And the other is, of course, the restructuring, which is in that $40 million range.

Got you. Thanks, guys.

Thank you.

(Operator Instructions)

Okay. Tori, can I assume there's nobody else in the queue? Because it's been more than an hour now, and just to be respectful of everybody's time, if there's no other questions, we should probably thank you all for participating. And we look forward to talking with you again in the next 90 days, and hopefully we'll have a good solid report for you then as well. Thank you.

Thank you. And that concludes today's conference. Thank you all for joining. You may now disconnect.