PTC Inc (PTC) 2016 Q2 法說會逐字稿

Thank you for standing by and welcome to the PTC 2016 second-quarter conference call.

(Operator Instructions)

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

Thank you, Cindy, and welcome to PTC's 2016 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 call is being broadcast live through an audio webcast, and a replay of the call will be available later today on our investor relations website. 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.

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 20, 2016, and PTC assumes no obligation to update these forward-looking statements.

During the call, PTC will discuss non-GAAP financial measures, and all measures discussed are non-GAAP unless otherwise noted. These non-GAAP measures are not prepared in accordance with generally accepted accounting principals, and a reconciliation of the non-GAAP measures to the most directly comparable 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 CEO, Jim Heppelmann.

Thank you, Tim. Good afternoon, everyone, and thank you for joining us.

I'd like to begin with a brief review of the second quarter results. Following on the heels of our solid performance in Q1, we delivered strong Q2 results by executing well across all of our key operating and strategic initiatives. Bookings of $86 million were $5 million above the high end of our guidance range, and we delivered a subscription mix of 54% which was more than double the guidance target for the quarter.

We'll provide additional details on the subscription transition throughout the call, but suffice it to say that our program appears to be hitting on all cylinders, and based on our updated guidance, we are effectively a full year ahead of our subscription transition plan.

Given the significant upside we delivered on subscription mix, naturally our reported revenue and EPS were below our guidance range, because we deferred more license revenue into future quarters than we had projected in our guidance. This dynamic is likely to persist as we aggressively drive our subscription model. However, the long-term value that the subscription model yields for our business and for our shareholders far outweighs the short-term optics in our reported results.

At our last Investor Day, we laid out three key initiatives that we're focused on to maximize long-term shareholder value. As a reminder, they are: first, to increase our topline growth; second, to continue our margin expansion; and third, to convert our business to a subscription business model.

Let me touch on each of these within the context of our second-quarter results, and I'll start with growth. PTC extended our early market leadership position in the high-growth IoT market with continued momentum this quarter. As part of our land and expand strategy, we've now implemented a Freemium model for our ThingWorx technology, in order to open our aperture beyond what we could reach with just a direct sales force in a partner ecosystem.

Both we and our solution partners also signed a number of six-figure expansion deals with existing customers we've landed across the variety of verticals in the quarter.

Of particular note, we continue to make progress with our Industry 4.0 Smart Manufacturing strategy, and together with GE we landed a significant Q2 transaction with one of the world's largest multinational consumer goods manufacturers, who will be using GE's ThingWorx-based solution to drive their connected factory floor strategy.

We acquired Kepware in Q2, and this business provides a further boost to our Smart Manufacturing strategy, because the KEPServerEX technology gives us instant connectivity to nearly all types of industrial automation equipment that one would encounter in a factory or plant or industrial site. KEPServer makes connection easy, so that we can quickly progress toward applying analytics, and developing new applications that unlock business value across a diverse set of equipment that you'll find in each factory.

In its first quarter with PTC, Kepware delivered solid [tube] results, and we see significant cross-sell opportunities as we both work together to help organizations gain enterprise-wide insight, and to proactively optimize the critical industrial processes they execute, which is the basis for improving their own operational performance.

A second area of growth we're focused on is the opportunity to reinvigorate our traditional core solutions with the ThingWorx and Vuforia technology platforms. The PTC Navigate software, which is powered by ThingWorx, shipped with Windchill 11 in late Q1, and provides a great example of how we're leveraging ThingWorx in our core solutions.

We have seen a lot of Navigate interest building already, and in Q2 we closed a 5,000-seat order with General Atomics Aeronautical Systems. General Atomics will be leveraging ThingWorx role-based apps to drive a broader and deeper implementation of PLM throughout the enterprise. So while it's early days for Navigate, given the relatively low current penetration of PLM outside of core engineering processes in organizations, we see a significant opportunity to drive incremental seats and revenue.

On top of that, there were numerous great customer examples showing how we're marrying our core CAD, PLM, and SLM solutions with ThingWorx, and with our new Vuforia AR/VR technology at PTC's ThingEvent in January. I hope you had a chance to attend the event live, or to watch the replay on ThingEvent.com, which is still available by the way.

For those wondering how enterprises will use augmented reality technology for business benefit, this event set a high bar. It was PTC's most successful marketing event ever, with more than 14,000 global attendees either in the studio, or online, including the Who's Who of the industry analysts that cover markets related to CAD and PLM, to IoT, and as well to augmented and virtual reality. We received many rave reviews regarding both Vuforia and the augmented reality for the enterprise strategy that we unveiled. I can't wait to formally launch in a few weeks the breakthrough of Vuforia-based ThingBuilder, ThingServer, and ThingBrowser technologies that we showcased and demonstrated at the event.

Each customer example at the ThingEvent was a live demonstration showing how augmented reality and IoT, coupled with CAD and PLM and SLM, promises to completely change the way we'll interact with things in the future. These demonstrations were really just the tip of the iceberg of what's possible, as we're only at the beginning of an incredible era where IoT, machine learning, and augmented reality will join forces with today's solutions to create next-generation approaches to how products are created, operated, and serviced.

Following the ThingEvent, many tens of thousands more viewers had another look at Vuforia working with Creo CAD data, this time from caterpillar, when Microsoft used the Vuforia platform to demonstrate their HoloLens during the keynote at their massive build developers conference on March 31. Our IR team can provide you with access to a replay of the Vuforia part of the conference if you wish to see it.

There's a great natural synergy between IoT and analytics and AR/VR, and together these are the key technologies being used to drive convergence of digital and physical worlds. And PTC is excited to have maneuvered into such a pivotal role in these fast-growing markets.

To gain deeper insight into where this new technology is headed, and how it intersects with our core business, and how customers and partners are putting it to work in their business, I encourage you to join us at our big LiveWorx event this June in Boston, where we're hosting what we believe will be the preeminent event in the connected world. Again, please reach out to the IR team for details if you're interested.

So, coming back to the core of ThingWorx offering, we landed 66 new logos in the quarter, bringing our first-half total to 131, which is a 26% increase year-over-year. We'll continue to update you on this new logo metric as it's currently defined throughout the balance of the fiscal year.

But at that point, the metric will need to be remodeled a bit because it does not reflect customers who start with Kepware or Vuforia, of which there are many, nor does it now reflect the new way we engage accounts via the Freemium Program that we recently put in place. So while we want to report a metric that reflects momentum, this metric as currently defined is starting to fall out of alignment with how we run the technology platform business.

Last, but certainly not least as it relates to growth, we're focused on improving execution in our traditional solutions business. You'll remember that we reorganized the Company last fall, and in the Thanksgiving timeframe, brought in Craig Hayman as the new Solutions Group president. Craig, in turn, has brought in some key new talent under him. Leveraging his deep operational expertise, and with a particular focus in the near-term on go-to-market activities, Craig is driving a renewed sense of discipline, focus, and execution.

Along with our subscription program, our support conversion program, and our discounting and pricing initiatives, we believe our strong Q2 results are a promising indicator that our early efforts are beginning to show results. We look forward to sharing more details in coming quarters.

Let me now turn to the second top-level initiative to drive shareholder value, which is to further increase our margins. In Q2 of 2016, we continue to demonstrate our commitment to driving long-term margin expansion, with operating expenses at the low end of our guidance range. And we are reiterating our full-year operating expense guidance absent a modest uptick from currency. In fact, after factoring in currency and mix, we expect to deliver more than 100 basis points of operating margin expansion in FY16 versus FY15, on an apples-to-apples basis.

As I discussed earlier my comments, our accelerated transition to a subscription model will have a near-term impact on our reported margins, as we defer revenue recognition into the future. Yet we continue to see a path to non-GAAP operating margins in the low 30%s, once the business model fully normalizes from the subscription transition.

Our third key top level initiative is our subscription business model transition. In Q2 of 2016, the mix of subscription bookings was well ahead of our guidance, and nearly 4 times the year ago, Q2 of 2015 mix. Andy will elaborate further on our subscription program in a few minutes, but let me reiterate my earlier observation that, based on our revised FY16 guidance of a 44% subscription mix for the year, we are on a pace to essentially reach our current FY17 target a year early.

So to wrap it up, at PTC we continue to focus on these three key levers that can drive significant shareholder value: topline growth, margin expansion, and the subscription transition. On the growth front, we remain committed to winning in the new technology platform business, and encouraged by early signs of improved execution in the core solutions business.

On the margin expansion front, financial discipline will remain one of our cornerstones as we drive margins into the low 30%s, post- transition. And on the subscription front, we're off to an exceptional start in the first half of FY16, well ahead of our original plan and aggressively pushing forward.

With these three levers, combined with our commitment to stock buybacks, we believe we're well-positioned to drive substantial value for our shareholders.

So with that, I'll turn the call over to Andy.

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

Bookings of $86 million were $5 million above the high end of guidance. We believe the upside was driven by improved go-to-market execution and a strong contribution from our support conversion program. On a year-over-year basis, bookings increased 8% in constant currency, in the low single-digits excluding Kepware. Subscription comprised 54% of total bookings, versus our guidance of 26%, and [burst] 14% in Q2 2015. Subscription ACV in the quarter was $23 million, well outpacing our guidance of $10 million.

Subscription adoption accelerated broadly across the business, with the upside coming from our Solutions Group. Every segment, every geography, and both our direct and indirect channels saw a marked increase in subscription mix from Q1 to Q2. PLM and SLM continued to lead the pack, and adoption in the Americas, Europe, and Japan far outpace the Pac Rim, where sales enablement activity is still ramping up. We saw continued progress in our channel as well, where subscription mix is six times greater than a year ago.

Q2 subscription performance benefited from further progress from our support conversion program that we launched in Q1. In fact, a good portion of our bookings upside this quarter was driven by the incremental ACV from these conversions. In the second quarter, 25 customers, including some very large customers, converted their support contracts to subscription, at an ACV uplift that, once again, generally ranged from 25% to more than 50% above the prior annual support amount.

I'll remind you that the long-term business model we presented at our Investor Day did not include any assumption that our large support revenue base would transition to transcription. So this could represent a big upside to our long-term business model. And, at the beginning of April, we announced a support win back program in the channel that converts customers to subscription.

Turning to the income statement, total second-quarter revenue of $274 million was down $42 million year-over-year as reported. The decrease in total revenue was driven by a $30 million impact from a higher mix of subscription bookings, a $9 million impact from FX, and a $9 million constant currency decrease in professional services, consistent with our strategy to migrate more service engagements to our partners. The decrease in total revenue is partially offset by revenue from Kepware of about $5 million. Compared to our guidance, adjusting for the higher mix of subscription, our total revenue would have been approximately $298 million, which would have been above the high end of our guidance.

On a reported basis, software revenue was down 12% year-over-year, due to the higher mix of subscriptions and the impact currency. Excluding mix and currency, software revenue would have increased 3%. Approximately 82% of Q2 software revenue was recurring, up from 73% a year ago. Clearly this growth in recurring software revenue represents a very positive trend in our business, and will drive cash flow in subsequent quarters.

Operating expense in the second quarter of $164 million was at the low end of our guidance range, and was up only $2 million, or about 1% from last year, with significantly higher incentive compensation driven by overperformance on subscription. Q2 operating margin of 14% was below our guidance of 19%, and down from Q2 last year, due to the higher subscription mix. Adjusting for this, operating margin would have been 21%, exceeding our guidance.

EPS at $0.23 was below guidance, also due primarily to a higher subscription mix,which negatively impacted EPS by about $0.16. We would've beat by a penny at our guidance subscription mix assumption.

Moving to the balance sheet, cash and investments were up $71 million from Q1 2016, at $368 million. We had strong adjusted operating cash flow in the quarter of $102 million, and adjusted free cash flow of $97 million. As we stated on our Q1 2016 earnings call, we remain committed to returning cash to shareholders, but expect buybacks to be in the back half of FY16.

Now turning to guidance, let me remind you of some of the general considerations that are factored into our guidance. First, while our Q2 booking results were above the high end of our guidance, we attribute our solid performance primarily to improved execution, and our support conversion program, and remain cautious of the global macroeconomic environment.

Second, we are only two quarters into our subscription program, and while results have been tremendously strong, subscription is still new to much of our sales force and thus, it is challenging to forecast the rate of customer adoption, the pace of our transition, and the overall impact to near-term reported financial results.

Third, our guidance assumes current foreign currency exchange rates. With this in mind, we now expect bookings in the range of $357 million to $377 million for FY16. This is up $13 million from our prior guidance at the high end, $6 million to factor in current foreign currency rates, and $7 million due to better performance.

We have also narrowed the range from the bottom. We now expect 44% of our full-year bookings will be subscription, versus our previous guidance of 30%. This means we expect to basically achieve our FY17 goal in FY16. We expect subscription ACV of $79 million to $84 million. This is up $29 million from our prior guidance.

We expect total revenue in the range of $1.16 billion to $1.175 billion for FY16. This is down from our prior guidance due to the higher mix of subscription bookings, and a change in our support win back program in the channel to subscription, both offset by a small amount of FX benefit. We have historically recognized about $20 million per year in win backs in support.

We continue to expect an increase in our services margin by about 130 basis points to 16%, and remain committed to a 20% services margin by FY18. FY16 operating expenses are expected to be $656 million to $660 million, an increase of $4 million on the high end to reflect current foreign currency rates. With the higher mix of subscription, we are now guiding to an operating margin of approximately 18% to 19%.

We are now assuming a tax rate of 8% to 10% for the full year, resulting in non-GAAP EPS of $1.52 to $1.62 per share, based on approximately 116 million shares outstanding.

We continue to expect adjusted free cash flow of $215 million to $225 million for the year. For the third quarter, we expect bookings in the range of $90 million to $100 million, with about 48% subscription mix. We expect total revenue in the range of $287 million to $292 million for Q3.

We expect OpEx in the range of $167 million to $169 million, and an operating margin of approximately 16% to 17%. We are assuming a tax rate of 8% to 10% resulting in non-GAAP EPS of $0.31 to $0.36 per share, based on approximately 116 million shares outstanding.

With that, I will turn the call over to Cindy the operator to begin the Q&A.

(Operator Instructions)

Sterling Auty, JPMorgan.

Hi guys. How are you? I think it be helpful for all of us on this side of the call, if Andy, you could take the subscription mix, the big [feel] that you had and maybe go one layer deeper in terms of the impact on the P&L. So in other words, how should we think about how that big mix be impacted, license and subscription, software, and support for each of the revenue line items. But also separately, you know, what did it also do on the expense side of P&L?

Yes, okay, so one thing I will share with you is on our investor relations website we have posted prepared remarks where we compare the quarter at our guidance mix percentage. So it kind of does this translation for you. Let me take you to a few of the highlights here.

So again, remember, we achieved 54% subscription mix versus a guidance mix of 26%. So what that did was, if you take a look at software revenue, it brought it down by $24 million which was principally the perpetual piece. So software revenue actual was $225 million. At our guidance subscription mix, it would have been $249 million, versus our high end of our guidance we gave which was $246 million.

If you take back the total revenue, our $274 million actual would've been $298 million, at the 26% guidance mix, versus our high end of our guidance of $295 million.

OpEx no impact, however we did incur substantially higher incentive compensation expenses, commission, and bonuses, within that number. But still came in at the low end of our range, and so still manage our expenses aggressively.

So just if I could, Andy, so it's a conservative assumption to say expenses are the same either way.

Yes, yes, exactly. Because of the higher subscription mix, we had more comp, we didn't adjust that in our as-adjusted EPS. Yes.

So if you move down that means our operating margin which, as reported, was 14% would have been 21%, versus our high end of our guidance of 19%, and our EPS of $0.23 as reported would have been $0.16 higher or $0.39, versus our high end of our guidance at $0.38.

And the one other thing I'd highlight is we did have a tax rate of 21% in the quarter, so this time that actually hurt our EPS by about a penny.

Got it. That's very helpful. And maybe one follow-up. You know, I think it's obvious the success in traction you're getting in IoT, but the biggest pushback that we received as you're beginning the model transition, is kind of the assumptions on the improvement in the Solutions Group. Then could you get the CAD and PLM up to the growth rates over the long-term that you had built into your assumptions?

I wonder if you could give maybe a little bit more color because it sounded like that area saw good adoption, decent demand, you know, on the surface, but also supports subscription conversions which is the other area that we got a lot of pushback on. So any additional color in terms of geography or industry or company type that you are seeing that improvement would be helpful.

Okay, sure. So let me give you a few highlights. The upside in the subscription mix came from our Solutions Group, where we actually were more than 50% subscription in the Solution Group this quarter, versus single-digits a year ago. Okay, so to put that in perspective, America's led the pack. I'll share with you that, excluding Kepware which is all perpetual, that America is what at about 70% subscription in the quarter, followed by Japan in the mid-60s and Europe in the mid-50s.

Pac Rim lagged substantially, down in the mid-20s, as we're really just getting the enablement activities off the ground. However, that's up from low single-digits a year ago.

The other big change is in the channel, where they were also in the mid-20s, which is more than six times higher than a year ago. Again, in the channel which is primarily CAD, it seems to be starting to take off, and yet this was not the focus of our early enablement activities.

The other thing that was a nice, extremely good, nice result was seeing the 25 conversion deals. So there were some very large established customers who converted and, as I mentioned, the range of incremental ACV/[JTV] tended to be from about 25% to more than 50% higher.

We also saw some customers actually not only do a like to like conversion, but also buy some additional software. So it seems like the subscription, under a subscription offer, and it seems like this really does potentially reduce the friction of buying. So rather than that big deal that they wait for, they're buying in smaller bite-size land and expand type of model.

So it seems like it's off to a very strong start as we stand right now.

Great, thank you.

Steve Koenig, Wedbush Securities.

Hi, gentlemen, good afternoon. Thanks for taking my question, and then just one follow-up as well. So first off, yes, congrats on the good execution and the maintenance conversion, you know, the subscription transition looks like a very well-thought-out program. I'm wondering if you could just add some color here on what's driving the better than expected customer uptake?

I think for years customers have been wanting to buy under subscription and our market studies showed that more than 70% of our customers preferred to buy subscription. We were probably like many other software companies, forcing to try to get a perpetual license without front revenue. And they were asking for things like extended payment terms and remix.

With subscription they naturally pay over time. They get remix as part of it. So it's an offer that is preferable for them. And of course, our sales reps are pushing our strategy. So we're aligning the offer with what the customer wants, and that's I think what's driving the traction. They're still learning to do, frankly, within our sales force, how to sell subscription. But I think they're going after it pretty aggressively in all our geos, and Pac Rim is really kind of more at the beginning stages.

Great, thanks for the color, Andy. You know, for the follow-up here, I just want to dig into the numbers a little bit for your guidance. So if I use your heuristic of $3 million of revenue impact for every point of mix shift, and I apply it to the change in the guidance, what it looks like, if I've done my math right, is that the top end of FY16 revenue guidance is relatively unchanged.

Now currency has improved a bit. Our channel checks were saying that channel partners were having better outlooks at least in North America. And it looks like you're improving your execution, so a lot of things going the right way for you. So maybe help me reconcile this with the guide. Are you derisking, or is the macro impacting, continue to impact the large deals? Maybe, help me make sense of that.

So a couple of factors. First I do want to address that I've read all be notes about FX being a tailwind moving forward. The thing to realize is that we do hedge and other companies hedge which means we've locked in less favorable FX rates at this particular case. So that means that it actually is a pretty insignificant impact on our revenue for the rest of this year, given how much of it is already hedged. So that's one thing that's not a headwind.

The other factor is, when you do that rule of thumb, that would have been if the subscription transition were a perfectly linear way throughout the year. We went from 28% in the first quarter to 54% in the second quarter, so we're more impacted. So we added a few million to that. So I think those are fundamentally the drivers.

Now, we're pleased with our execution but it still is early days, and we don't want to declare victory too early. And so we're seeing a lot of the right actions happening, and starting to see very good outcomes, but it's still early days. So it's promising, but we don't want to declare victory yet, and that's what's reflected in the guidance. The macro remains consistent with our view of the macros past.

Got it. Great, thanks a lot.

And one other thing I do want to highlight, we did raise booking guidance. So we raised not just for currency, but for performance. So $6 million for currency, $7 million for performance at the high end. We also narrowed from the low end. So it's pretty significantly moved to midpoint.

Right. Thanks again.

Saket Kalia, Barclays.

Hi guys, how are you? Thanks a bunch for taking my questions here. So again, reiterate a nice bead on subscription mix, I think in your prepared remarks you said we're still excepting that 70% mix in FY18. On the off chance that you were to get to that mix earlier, how long after that should it take to reach those normalized metrics? Maybe Jim, you touched on this earlier, when you said you're a full year earlier, but I just wanted to ask the question in that way.

Let me take a first stab then Jim will follow up. So first off, the change in the subscription mix percentage is what drives the drop the greatest, so getting further faster definitely helps. So that's the key thing there, which means you get the benefit sooner, okay? Even if you only end at 70% after three years. So that's one thing when you put the numbers in your model you'll notice that you come out of the trough a bit earlier.

The other comment is we do feel like we're a year early. We haven't done our business planning yet for next year, so it's too early to give updated guidance for next year. We certainly feel good about where we are, and while we haven't raised the FY18 number, it certainly appears quite possible that that 70% will go up.

Yes, I just wanted to give kind of simple commentary on that, which is it's really a question of how far are we going, and how fast will we get there. And if we're only going as far as 70%, then things would normalize a year earlier, it would appear.

But the fact that we're at 70%, or I mean that the fact that, for example, in North America we're at 70% in the second quarter, begs the question of, should we stop at 70% or could we get to 80%, 90% or God forbid, 100%. I don't know and that's the planning we haven't done, so anything we say here we'd just be kind of making it up off the cuff. But you know definitely as we plan next year, and kind of do our annual update of this whole program, we're going to be asking that question, how far, how fast.

And that will affect when is the bottom of the trough. Because the bottom of the trough would come sooner if we go faster but not farther, but if we go faster and farther, then it will move it again a little bit. So we're in a complicated spot right now, but it's basically a good problem to have.

Absolutely, absolutely. My follow-up is, again, realizing it's early -- you know, Andy, could you just maybe talk about some of the big deals in the quarter, actually all of the big deals I believe were subscription. I think you mentioned remix was a big reason why some of those large fields opted for subscription or converted from maintenance to subscription?

Is that the main reason why you feel like those larger customers are going for subscription? Is there anything else that you're finding, maybe some of your follow-up, that's maybe driving them there? I'm guessing it's not financial flexibility. So just any more color on why the success in subscription in the large customer base.

I don't think it's any single factor. We took really a holistic approach at the packages, so that we would provide them the flexibility that they want, in the offering, in a simple and easy way to digest it. And that flexibility is remix is one of the key factors.

They pay for it over time, they consume it over time. The life, when they do their, you know, financial analysis of subscription versus perpetual, the crossover is at right around four years. They see the benefit to subscription. So I think it's, and they buy a lot of things subscription. They've gotten used to buying things subscription. There's the old OpEx versus CapEx. It's all of those reasons that we shared at our Investor Day, wrapped up in total makes the subscription offer more attractive.

So I think that's why it's moving, and I think it's moving rapidly because of the fact that we do control our direct sales channel, so we're able to get that message out there in a way that we can show the customer how subscription better meets their needs. And it's better for them and it's better for us. So I think that's what's actually going on here.

Makes sense. Thanks a bunch, guys.

Matt Hedberg, RBC Capital.

Hi guys. So I know in Q1 you had about 12 customers renew early, and 25 this quarter. I know there's been some changes to sales compensation. Was there anything different from Q2 to Q1? And I guess if not, are there any other changes that can be made to further accelerate this transition from an incentives perspective?

So first off, I think the incentives are lined up and just about right. I think what happened is sales reps learned that there was an opportunity here. They learned what it was, and I think frankly, you still only have a small number of our sales reps who have actually done it.

Clearly, I think it's spreading through the sales organization that, here's an opportunity for them to go bring value back to PTC and make some money by converting customers to subscription. And they're learning the plays, they're learning, you know we post on our sales enablement internal system, you know, how they do it, how they won, how they faced these objections.

So that's all actually still in pretty early days, but I think it's pretty clear that it's starting to spread, that there's an opportunity here for the sales force, one that they can go after. So I think that's all good, but I think it's just a matter of, it's time. We just introduced it.

Matt, just if I could add, you know, 12 in Q1, and 25 in Q2, that's 37 of well more than 25,000 maintenance paying customers. So we have a long way to go here. Obviously, those are some of the larger ones, I'm sure.

But if we could take our whole $650 million to $700 million maintenance business and recast it with that amount of upside, it's a huge growth opportunity for the company. So that takes some years of time to do.

But I think there is a good value proposition for the customer, for the company, and for the sales rep, and you know it's a system that I think is going to work for us.

The one thing we do have that's new starting in Q3 is the WinBack Program in the channel. So especially with our CAD customers, there were some that would go off maintenance, and then just before they wanted to upgrade, they would come back on. And in the past, we charged them a fee to come back live, and then they would try to go back off [maint] after they got their upgrade. We would recognize that WinBack in our support revenue, but we'd would recognize it all at once.

So what we now have is a program that's more attractive, that gets them to move on to subscription. So it's actually little cheaper to move on to subscription, than to just do a one time WinBack. And we'll be recognizing that revenue moving forward. But the thing is, once they move to subscription, they can't use the software unless they stay on subscription. So that's the benefit for us. So it's a benefit for them, as far as it's easier to come back on, a benefit for us as once they're on subscription they have to stay on it to use the software.

And you heard me refer to the notes, that's one of the things that is a change in our support guidance. We used to get about $20 million a year on those WinBacks that we would have in the support, and now that's going to be recognized forward, as opposed to up front.

That's extremely helpful, guys. Maybe as a follow-up then, you referenced 70% of customers prefer subscription offerings, obviously good success so far. I'm curious, if you're talking to a customer that either doesn't want to convert early, or chooses license over subscription, sort of the inverse of what you been seeing here, what are the main reasons they go that route?

Probably inertia.

Yes, I was going to say, they're adding more to a contract relationship they already have. There are some companies who have CFOs or whatever that say we're better off in the long run with an asset purchase. So there are those out there, but I think inertia is the main reason.

Great. Thanks a lot, congrats, guys.

Ed Maguire, CLSA.

Hi, good afternoon. I was curious what your take would be on the competitive landscape, with Cisco having acquired Jasper, which really takes out one of the premier peer play IoT platforms, and whether that's had any impact on your conversations with customers so far.

No impact. Jasper is complementary to what we do in our suite. We do not complete with them. We viewed them as a partner before Cisco acquired them and we view them as a partner afterwards. So what they do is a very important, it's a very nice company, they do a very important specialty item in the kind of value chain of IoT, which is commissioning the new cellular devices, which is something we don't do actually. So, no impact at this point on the competitive situation.

Great. And a question on the field service offering with ServiceMax, I mean it was an impressive demonstration. I'm curious at this point, you know, how far along you may be at least with some of the initial implementations, and whether you ultimately see this tying back to across really the whole portfolio. I mean, how long do you think it'll take before you get customers fully engaged with the solution to the point where that can start to have an organic impact on the -- across platforms and solutions?

Yes, so with ServiceMax specifically, we have a couple of customers in production now. You know, you put the product in the market, and a couple lighthouse customers now have it production. It's a big part of the ServiceMax story right now, so they're out there advocating for the vision of connected service, and that vision then pulls our conductivity and analytics, and now AR/VR technologies into their stories, so that's great.

If you look at the rest of our suite, there's the rest of our SLM suite, and the rest of our Solutions suite. The ThingWorx and Vuforia technologies are starting to poke up all over the place, and in fact if you look at SLM, you know analytics is going to play a huge role in our SLM suite around predictive analytics, and more thoughtful algorithms for spare parts inventory optimization.

We're seeing that AR/VR stuff is going to have a huge role in terms of delivering techno-documentation out to the field, you know, along with ServiceMax. So I think that it's starting to show up all over in SLM.

I mentioned this Navigate product we shipped with Windchill 11. That's like a new user interface for Windchill, especially for casual users beyond the hard-core engineering users. It's basically built on ThingWorx. And we're now, we're going to bring to market a technology we demonstrated at the ThingEvent. It wasn't part of the broadcast, but it was there, which was augmented and virtual reality design reviews which show up in Windchill, and that is just jaw-dropping, sexy, powerful stuff. So that sort of Vuforia joining ThingWorx in the PLM suite.

And then of course all the authoring of this 3D content is done in CAD. You know, every single demonstration that was done in the ThingEvent, and the one that Microsoft did in their keynote, was Creo CAD data, you know, put to work in field service scenarios, or the HoloLens demo that Microsoft did was actually a sales and marketing scenario, you know. Let me bring a piece of equipment in the room here and show it to you, as if we were in a sales studio or what do you call when you sell cars -- showroom. Thank you, Brian. So let me turn this room into a showroom and I'll bring whatever piece of equipment you want and I'll put it as a hologram in the room and we'll talk about it. I mean, it's really cool stuff.

But the thing driving that is CAD data, and of course you can't get the CAD data without understanding the configuration, so we have to turn to Windchill, hey what's the configuration of that piece of equipment? Turn to the Creo, how would you put all those parts together in three-dimensional space? Then turn to VR, and Vuforia and say, okay, make a hologram with that, and then, you know, Microsoft's HoloLens helps you to see it.

So it's pretty exciting stuff. And I think that the world's starting to really get it, that IoT, and AR, VR, and analytics is peas in a pod, with CAD and PLM and ALM and SLM, so it's starting to make a lot of sense. It will really resonate on that point at our LiveWorx event. That will be kind of the key message, because the LiveWorx event will take the historical core customer base and the new technology base and bring them together in a single event for the first time.

Great, thank you very much.

Jay Vleeschhouwer, Griffin Securities.

Thank you, good evening. Jim, Andy, I'd like to ask if you could talk about how you're balancing the strategic initiatives you talked about in your opening remarks, versus the cost management and restructuring that you've recently done.

So for example, we notice just doing a quick spot check on your website that there was recently a reasonably significant increase in the number of open positions you're looking to fill, particularly for services, which was really interesting, big increase in cloud openings, which makes sense of course, and even marketing.

So I'm just wondering how you're thinking about adding to your headcount behind the key initiatives, versus balancing costs as you've done with the restructuring. And also, your sales headcount has been pretty flat now for a number of quarters. Are you at the point where you're prepared to start rebuilding that sales headcount number?

Yes, okay, you've got a series of questions there. I mean, what I think the main answer to your question is portfolio management. I think for decades, Jay, every year we just kept doing what we were doing the previous year. And right now we're being a lot more dynamic about it. We're saying, what's the best way to use these resources? And we're moving them around. We're taking people, we're doing something that wasn't generating that much value in its 10th, 20th, 30th year, and we're putting them on things that are sort of jaw-dropping, new concepts for R&D.

And we're looking at sales and marketing, and we're saying the way to really grow this company is to figure out how to do it without having to have commensurate growth in the sales force. Why don't we figure out how to tap into marketing ideas, better lead to revenue programs, new forms of selling that every other software company on the planet uses?

And you know some interesting things have happened with the acquisitions we've made. If you look at, for example, the Kepware business, they only have three sales reps, and the productivity per rep is off the charts, you know, it's many, many millions of dollars per rep. And that's because they basically have perfected a marketing-led, low touch sales model.

And then if you look at Vuforia, Vuforia has, last time I saw the number, 210,000 quote unquote customers, and zero sales reps. Well, now they have one.

So we're acquiring companies who are teaching us new things, and we're hungry for knowledge now, because we've got a different attitude than we had for decades. We have an attitude that we're going to win as a high-tech company, and we're going to do it by growing, but we don't have to get fat to grow. Because there's plenty of portfolio management opportunity in a company this size. We just have to be smarter about how to deploy our resources, sometimes into marketing versus sales, sometimes into new ideas versus old. But you know, make sure the whole portfolio works.

I know that maybe behind your question, you know there's questions like, are we spending enough money on CAD? And sometimes I laugh because, you know, companies I think about a lot are companies like [OnShape] and I say, I wonder how many developers they have? Like 20, 30 maybe? I mean, I only have 400.

So you know, I'm worried about somebody who has substantially less resources, but I'm worried because they might be innovating more. So then I ask my question, I'm not going to win the battle by putting the largest army on the field, I'm going to win the battle by innovating more, and now we're back to portfolio management. Is it better to write a line of code in Vuforia or in Creo? They're all 3D products.

So let's look for the way to innovate most, and we can, like I said, we can aim to innovate and grow without aiming to get fat in the process.

All right, that's fair, that actually wasn't my hidden question but I understand what you mean. Just a follow-up then on IoT, to what extent can you characterize the multi-product or multi-brand sales you're doing within IoT, you know, where two or more of the various acquired brands are part of the transaction?

Yes, so, that is a good thoughtful question. So let me talk a little bit about that. So in general, we want to present to the world an integrated platform called ThingWorx. Now that said, there's a couple of elements of ThingWorx that have independent brand equity which is substantial, and behind that substantial customer bases or developer communities, and that's Kepware and Vuforia.

So I think that what's going to happen is, we're going to have a Kepware and Vuforia presence that's standalone for people who have been buying it that way. And then those are going to come together with ColdLight and ThingWorx in a integrated platform called ThingWorx, if that makes sense.

Yes. Okay. Thanks.

Monika Garg, Pacific Crest.

Hi, thanks for taking my question. You know, first on the mix adjusted basis, your revenue for the quarter would have a higher than upper end of the guidance. Was the better results mainly due to moving maintenance customers, some of those to the subscription, or was the strength due to something other as well?

Well on the, it's a combination of both because basically it was the go-to-market improved executions, and then secondly, the incremental ACV from conversions. Those were the two upside elements.

Right. And then IoT revenue, except for the Kepware revenue in it, which you said is about $5 million, is the rest of it mainly subscription or is there some perpetual part in it? And then the GE deal what you talked about with ThingWorx, is that on perpetual basis or that's on subscription side?

So excluding Kepware, it's principally subscription, occasionally there can be a perpetual deal, usually it's a large customer that would drive perpetual --

Yes, I think it was 90%-ish.

Yes, but it's principally subscription -- 96% [actually].

As it relates to the GE deal, I'm actually not sure if that was perpetual or subscription.

I don't know the answer to that

Yes, sorry, Monika.

Thank you so much.

Gal Munda, Berenberg.

Thank you for taking my question. For the first one, can you just talk a bit about the sales channeling IoT, is it mainly direct or do you sell it through partners now as well?

Yes, that's a good question, Gal. There's sort of two channels, so our technology platform group is not selling direct, it's selling through channels, and it views the PTC solution sales force as one of its channels.

So at is a level of the CEO and the CFO, you know, we would say we have a direct channel selling it in multiple indirect channels. The direct channel today is bigger than the other indirect channels. But they're gaining momentum, and at some point in time, and I can't say precisely when, but at some point in time we would expect those curves to cross.

We are having a good amount of success and a growing amount of success selling the IoT platform through channels other than the PTC direct sales force.

Okay, great. My other question is just linked to the split of bookings between solutions and the [TPC], I know you don't really disclose that but can you say at least where the [beat] of that extra, you know, $5 million on top of end of the guidance came from, was it mainly solutions, is it safe to assume that?

Yes, that's primarily solutions.

Okay, good, thank you.

Josh Sullivan, Sterne Agee.

Good afternoon. Hello. Maybe just a follow-up to the multi-product question, you know, you mentioned the land and expand premium model. Can you help us frame that, maybe what's the percent upside from when you land a client in IoT, to the full expansion premium?

Yes, so Josh, to be frank we're in the midst of changing that model which is a little bit what I said about the logo number being a funny number now. We used to land with the direct sales force, and then expand also with the direct sales force. And, you know, landing with a direct sales force is a fairly expensive proposition.

So what we'd like to do is land in the low touch manner, let the customers convince themselves how great the technology is, and call us up when they want to expand. So that model is changing and there's some pretty exciting numbers. For example, there's about 10,000 new developers who have joined our ThingWorx developer community since the beginning of the fiscal year, and about 4,000 of them have downloaded software and done something with it.

So you know, that's what I mean about opening the aperture. I now have 4,000 people playing with it. There'll be a hit rate, but I'd like for many thousands of people to play with it. Some subset of those people to convince themselves it's pretty good, and then send the direct sales force in to grow the deal. I think that's a more efficient model than using a direct sales force to land the first transaction.

On the logo metric, though, I didn't say that we had 4,000 new logos, because that wouldn't be credible. And that's why I'm saying that, that metric kind of is funny now because we've changed the way we operationalize the business, but we're using the metric that, you know, we've been using it and probably need to continue for the balance of the year. But that's what's going on there.

Okay. Well, okay. And then maybe just a follow-up, you know, is there any way to break down how many of those customers are just kind of in the land stage, versus how many have moved up the ladder?

Yes, I don't have that because this program's quite new. I know how many have entered it. You know, not that many since the beginning of the fiscal year. It would be a fairly small number that we've landed through this low touch model, have expanded anything. So most of the expansions that are happening now are things we probably landed last fiscal year, you know, with a more direct approach.

We need more time to get to the point where we can provide any meaningful commentary on that.

Okay, thank you.

Again though, what I would tell you is it's a proven model in the Kepware and the Vuforia business. It works beautifully and so we're copying from ourselves here.

Thank you. At this time, there are no further questions. I would now like to hand the call back to Mr. Tim Fox.

Thanks, Cindy. I'd like to thank everybody for joining us on the call today. We do have a very busy tech conference lineup this quarter as well as ThingWorx -- I'm sorry, LiveWorx in June, as Jim mentioned.

We look forward to seeing you at one or more these upcoming events. If we don't, we'll update you certainly on our next quarterly call in July. In the meantime, if you have any questions please follow up with the investor relations team here at PTC, and I will hand it back to Jim for some closing thoughts.

Yes, so thanks for joining us. I just want to say you know on behalf of myself and the management team, you know, we have a bold vision for the company we're trying to create here.

We're trying to create a company that's a respected technology leader. It's got a subscription business model with double-digit organic growth and margins in the 30s.

And I think that we have some distance to go, but given the progress we're making on all of these fronts, we're at the point where we're starting to see a glimmer of light at the end of the tunnel, and it's pretty exciting. So if we do that, we're going to create a lot of value for you and for everybody and it'll be a great thing. So thanks for joining us and look forward to talking to you 90 days from now, if not sooner. Bye-bye.

Thank you, and that concludes today's conference. Thank you for participating. You may now disconnect.