PTC Inc (PTC) 2016 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2016, fourth-quarter conference call.

(Operator Instructions)

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

Good afternoon, and welcome to PTC's 2016, fourth-quarter conference call. On the call today are: Jim Heppelmann, Chief Executive Officer, Andrew Miller, Chief Financial Officer, and Barry Cohen, Chief Strategy Officer. Today's conference 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, October 26, 2016, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures, can be found in today's press release made available on our Investor website. With that, I would like to turn the call over to PTC's CEO, Jim Heppelmann.

Thanks Tim. Good afternoon, everyone, and thank you for joining us. Let me begin with a review of the fourth quarter, and then provide some perspectives on the significant milestones that we achieved in FY16.

Those investors, analysts, and journalists who take the time to look beyond the headlines, and understand our business model transition, will see that by nearly any measure, Q4 was a very good quarter which capped off a very strong year for PTC. In Q4 we continued our momentum by executing well across all of our key objectives, both strategic and operational. Bookings of $142 million were $21 million, or 17%, above the high end of the Q4 guidance we provided in July.

Late in the quarter, we recorded an SLM subscription booking of $20 million that was not in our guidance, due to deal timing uncertainty, but please take note that even without this transaction, we still would have exceeded the high end of our bookings guidance. We delivered a subscription mix of 70% for the quarter, which would be 65%, excluding this $20 million deal, but either way, far ahead of our Q4 guidance target of 46%. We'll provide additional details on the subscription transition throughout the call, but suffice it to say our program gained further traction in Q4, and we are now more than a full year ahead of our transition plan.

Given the substantial upside we delivered this quarter on subscription mix, nationally, our reported revenue and EPS were below our guidance range because again, we deferred significantly more license revenue into future quarters than we had projected we would. 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. I know you all understand and appreciate that.

To summarize our progress this past quarter and year, I will frame my discussion around the three key initiatives that we're focused on to maximize long-term shareholder value. As a quick reminder, they are: first, to increase our top-line growth, second, to continue our margin expansion, and third, to convert to a subscription business model. That has been a very good program for our shareholders, and we remain fully committed to it in 2017, and going forward.

Let me start then with growth. Remember that our goal is to get to sustainable, double-digit growth, by having our core business return to mid-single-digit growth, consistent with the more mature CAD PLM market, while having our new technology platform business grow in the 30% to 40% range, consistent with the fast growing IoT market. The combination, of course, would create low-double-digit overall growth for PTC.

On that note, Q4 was an outstanding bookings quarter, with year-over-year total growth of 35%. Our performance certainly benefited from the $20 million mega-deal booking in the quarter, but excluding this mega-deal, Q4 bookings would still have grown 15% year over year, exceeding the high end of our original targets, and reflecting strong execution across the breadth of our business.

Our IoT business delivered solid results with Q4 bookings up 70% year over year, due in part to the contribution of Kepware, but also to a growing number of expansion deals with existing customers, from both our direct sales channel and from our partner Ecosystem. We landed 81 new ThingWorx logos in the quarter, bringing our full-year total to 275.

As we've discussed in the last few quarters, we provided this new logo metric over the past two years, actually, as a way to help gauge market traction with new customers. While I'm pleased with our new logo success rate, our pivot towards a premium program as a more efficient way to engage new accounts, makes this new logo metric a bit less meaningful, so we will also begin to share a few other key metrics around our premium program moving forward.

As important as the land part of our land-and-expand strategy is for our IoT business, we're also making meaningful progress on the expand part. In fact, for the full year, the number of six-figure deals for IoT grew by about 75%, as compared to FY15, with customer expansions driving about half of our FY2016 IoT bookings. I think that this clearly demonstrates the value customers are deriving from their IoT initiatives, even though customers are generally, still in the early days of their IoT journeys.

I'm delighted to see that our thought leadership and momentum in this exciting growth market is being recognized across the industry. PTC was recently named the IoT, Application Enablement Platform, Market Share Leader by BCC Research, who cited our 27% market share, which was double this year over the next largest provider.

Likewise, in another industry analyst report from IoT Analytics, PTC was recognized as the market share leader in the IoT Platform Market, crediting our end-to-end capabilities from connectivity to application enablement, analytics, augmented reality, and industrial automation, as well as the strength of our partner Ecosystem.

And PTC recently received the 2016 Compass Intelligence Award, for IoT Enablement Company of the Year, for the enterprise market, selected by more than 40 industry leading press journalists, thought leaders, and analysts who cover technology. This is the second year in a row that PTC was recognized by Compass for IoT leadership.

Compass also recognized PTC as the top vendor in application development for our Vuforia augmented reality platform, which is the most widely used AR platform in the market. Vuforia now has over 275,000 developers, and there have been 315 million installs of the apps, using our Vuforia technology. In fact, a third-party market study that analyzed the various augmented reality platforms underpinning applications available in the iOS and Android app stores, determined that Vuforia has 81% market share today.

Last quarter, I discussed the introduction of Vuforia Studio, a great new product that combines ThingWorx, Vuforia, and Creo Technologies to bring AR and VR into the world of industrial IoT. Studio, which is sold as party of our ThingWorx suite, is a powerful new tool for authoring and publishing augmented reality experiences, which overlay important digital information from IoT, onto the view of the physical things you are working with. Information such as a dashboard of sensors and analytics data, or 3D step-by-step operating or repair instructions. Studio is an amazing blend of PTC's AR, IoT, and CAD visualization and illustration technologies.

As part of this introduction, we launched the Studio Pilot Program, and in just the first few months of launch we've had over 500 industrial companies participating, which I think, speaks volumes about the growing interest in AR and industrial enterprises. We are excited to have such a strong position in this exploding market. To sum up on IoT, we believe 2016 will prove to be a tipping point for PTC, as our emergence as the clear leader in industrial IoT is being validated by our business performance, our growing market share, our expanding partner Ecosystem and industry recognition of our technology leadership.

While the growth opportunity and results in the new business are exciting, of equal importance of course, is our focus on improving execution in our traditional solutions business. Our Q4 performance cast off solid results for FY16, with bookings growth in the quarter up 30% year over year, and high-single-digit growth excluding the SLM mega-deal. For the full year of 2016, CAD and PLM bookings outpaced there respective market growth rates, and we were well ahead of our outlook at the start of the year.

SLM growth far outpaced the market. The renewed focus on go-to-market activities in our core business, coupled with increased rigor and sales and marketing management that were put in place during FY16 is already beginning to pay dividends. Performance in the year also benefited from our support conversion program, which is driving incremental customer adoption of our core solutions, from our pricing and discounting initiatives, and of course from our cloud offerings that represent an additional revenue stream accessible to us.

Along with these important growth initiatives, we continue to see rapid market adoption of Navigate, our new ThingWorx-based PLM offering, that was launched in early FY16. Navigate provides a broad range of enterprise users with expanded access to the digital design content, that's traditionally been held captive within the customers engineering departments.

For example, in Q4, Navigate allowed us to expand the number of rolls served, and therefore seats purchased at [zedeff], which led to a PLM mega-deal that we closed early in the quarter. In just the first three quarters since launching Navigate, PTC has generated over 10 million in license bookings, making it one of our most successful new product launches in the Company's history.

Speaking of mega-deals, I'd like to circle back and provide some additional color on the strategic SLM engagement that we won in Q4, which capped off a strong year for our SLM business. Following a comprehensive commercial and technical evaluation, a US government customer, in the aerospace and defense sector, selected a PTC-based solution to help transform its legacy part forecasting system, to our cloud-based service parts management solution.

This customer has one of the most complex supply chains in the world, with over 5,000 large assets and support systems in 1,500 locations around the globe, consuming upwards of 1 billion spare parts. This validates our solution as being the best in breed, and clearly illustrates that we are able to solve large, complex service logistics issues for the most demanding supply chains, and reinforces PTC's leading position in the federal aerospace and defense segment.

Overall, I'm very pleased with the progress that Craig Hayman and his team are making in solidifying our core solutions business, and I believe our FY16 results are a promising indicator that these growth initiatives are really beginning to show results.

Let me then summarize our overall progress on the growth front. Because we have a strong technology advantage in a booming growth market, our high-growth plans are on track in our new technology platform business. And because of dramatic improvement and execution, as well as leverage of new technologies, we are doing well in our core solutions business again, and significantly ahead of the long-range bookings growth plan we laid out for our core business.

Let me then turn to our second top-level initiative to drive shareholder value, which is to further increase our margins. In Q4, our operating expenses were above the high end of our guidance range. This was due primarily to higher sales incentive compensation, driven by continued over-performance on our key strategic objective of becoming a subscription company, as well as volume effects due to overall bookings of performance. With the progress we're making on subscription, we made a deliberate decision during the year, not to modify our sales commission plans, as we didn't want to risk impacting our momentum. Nobody likes it when you change the rules in the middle of the game.

But as we discussed last quarter, our sales incentive compensation plans and targets are reset at the start of each fiscal year so we've said, and you can see in our FY17 guidance that this OpEx variance will not be an ongoing aspect of our overall cost structure. In fact, we are right on plan in terms of our margin-expansion program. On an apples-to-apples basis, even with the higher sales commission, if we were to simply adjust for subscription mix our overall margin would have been approximately 27% in FY16, well on our way toward our goal of the low 30%s.

And as Andy will discuss in more detail later in the call, due to the acceleration of our subscription transition, along with our commitment to OpEx discipline, our reported operating margins are expected to recover sooner than we had previously anticipated. You will be pleased to hear that we now believe our operating margin trough from the subscription transition has already occurred in FY16, in the rear-view mirror, as opposed to the FY18 trough we have outlined at our Investor Day last year.

In FY17, we expect that our reported operating margin will increase between 200 and 300 basis points, as the recovery from the trough starts. You can count on the fact that we remain committed to margin expansion, and continue to see a path to non-GAAP operating margins in the low 30%s, once the business model fully normalizes from the transition.

As it relates to our third key top-level initiative, which is our transition to a subscription model, the Q4 2016 mix of subscription bookings, was again, well ahead of our guidance. Looking back in the year, I have to say that our performance against our subscription transition plan was nothing short of amazing. I'll leave it to Andy to elaborate further on how our subscription program is evolving to the next level, later in the call.

To wrap it up on my part, we at PTC continue to focus on three levers that can drive significant shareholder value: top-line growth, profit expansion, and the subscription transition. On the growth front, our momentum and market position in IoT highlight the tremendous opportunity in front of us, and we are encouraged by another quarter of improved execution in our core solutions business. On the margin expansion front, financial discipline remains one of our cornerstones, as we drive toward non-GAAP margins in the low 30%s post-transition. And on the subscription front, FY16 was an exceptional start in our journey to transform our business model ending far ahead of our original targets with plans to push more aggressively this coming year.

While the global-macroeconomic environment still remains challenging, particularly in the industrial segment, we remain focused on executing on these three levers that will drive substantial value for our shareholders. And with that, I will 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 $142 million were $21 million above the high end of guidance provided in July. On a year-over-year basis, bookings increased 34% in constant currency, and 29% excluding Kepware. Excluding the SLM mega-deal, which is not factored into our initial Q4 guidance, bookings still grew 15% constant currency. Subscription comprised 70% of total bookings, versus our initial guidance of 46%, and versus 20% in Q4 2015.

Excluding the SLM mega-deal, subscription mix of 65% was 19% points above guidance. Subscription ACV in the quarter, was $50 million, well ahead of our guidance of $25 million to $28 million, even after accounting for the SLM mega-deal ACV, of approximately $10 million.

I would like to highlight that the strong subscription results in the quarter, and for the full year, contributed to a significant increase in our total deferred revenue, billed plus unbilled, which increased year over year by $185 million or 31% to $783 million, as of the end of FY16. Subscription adoption trends were consistent with Q3, where we saw strong performance in every segment, every geography, and in both our direct and indirect channels.

In our solutions business SLM was 90% subscription, PLM was in the low 70% range, and CAD ticked up sequentially to the mid-50% range due in part to continued progress in our channel. In our direct business, subscription mix was 80% and excluding the SLM mega-deal was the 75%. And in the channel, subscription mix increased 600 basis points sequentially, to 41%.

Regionally the Americas, Europe, and Japan far outpaced the Pac Rim, where adoption trends continued to lag the other geos. Q4 subscription mix benefited from our support conversion program, launched in Q1, and the incremental ACV from conversions, drove a portion of our bookings over performance.

In the fourth quarter 33 customers, including some very large customers, converted their support contracts to subscription, at an ACV uplift that averaged 42% above the prior annual support amount. As expected, the volume of conversions increased from Q3, driven by the timing of large customer support renewals and customer budget cycle. And you should expect quarterly variability as this program continues to ramp and mature.

I'll remind you that we only include the incremental ACV in our bookings results, not the full contract value of the new subscription contract. Also, recall that our current long-term business model does not include any assumption that our large support revenue base transitions to subscription, so this represents upside to that model.

Turning to the income statement; total fourth-quarter revenue of $289 million was down $24 million year over year, as reported. We estimate that the subscription mix negatively impacted total revenue by about $63 million compared to last year, and currency was a $2 million benefit. Adjusting for these two items, revenue would have grown by about $37 million or 5%.

Compared to our guidance, we estimate that adjusting for the higher mix of subscription, our total revenue would have been approximately $324 million, which would have been well above the high end of our guidance of $310 million. On a reported basis, software revenue was down 10% year-over-year constant currency, due to the higher mix of subscriptions. Excluding mix, software revenue would've increased 10% constant currency.

Approximately 83% of Q4 software revenue was recurring, up from 69% a year ago. Operating expense in the third quarter of $183 million, was above the high end of our guidance range due to higher sales commissions, driven by over-performance on subscription and bookings.

Q4 operating margin of 11% was below our guidance range of 19% to 20%, and down from 28% last year, due to the higher subscription mix. We estimate that adjusting for the higher mix, compared to our guidance, operating margin would've been 20% at the high end of our range, and adjusting for year-over-year change in mix, operating margin would have been about 28%, flat with last year, despite the higher sales compensation expense.

EPS of $0.20 was below guidance, also due primarily to a higher subscription mix, which we estimate negatively impacted EPS by about $0.29, but also due to higher sales compensation expense. We would have beaten our high-end guidance by $0.08 at our guidance mix, with lower income taxes contributing $0.02, partially offsetting the higher sales commission expense.

Moving to the balance sheet, cash and investments were down $12 million from Q3 2016, as we repaid $20 million of debt. We have operating cash flow in the quarter of $14 million and adjusted free cash flow of $9 million. FY16 adjusted free cash flow was $240 million above the high end of our full-year guidance.

Now turning to guidance for FY17. Let me remind you of some of the general considerations that we factored in. First, while we're pleased with our bookings performance this year, we attribute our performance to improved execution, our growth initiatives, and our support conversion program, and remain cautious of the global-macroeconomic environment.

Second, while subscription results were very strong in 2016, it remains challenging to forecast the pace of our transition, and the resulting impact to near-term reported financial results, especially in areas of our business where subscription adoption lagged in FY16, such as the Channel and the Pac Rim. Third, our FX assumptions in our guidance assume dollar to euro at $1.10 and yen to dollar and $1.04.

With this in mind, for the full-year FY17, we expect bookings in the range of $400 million to $420 million, which represents 5% to 10% growth, excluding the SLM mega-deal from 2016 results. It's important to note, that while this $20 million SLM booking creates a tough comparison in FY17, unlike in a perpetual model, since this is a cloud-subscription deal, it is a gift that should keep on giving, and it does not create a tough revenue comparison. Within ACV of about $10 million, we expect this booking to produce $10 million of revenue annually, for many years to come.

Let me put FY17 bookings guidance in perspective. When compared to the long-term financial targets we laid out at last November's Investor Day, FY16 bookings were $66 million above the guidance in that model. And even excluding both Kepware and the SLM mega-deal, 2016 bookings were more than $30 million or 9% ahead of that model.

The bookings growth rate of 5% to 10% in our new 2017 guidance, excluding the SLM mega-deal from 2016, is consistent with the growth rate we outlined last November for FY17. As a result, our new 2017 bookings guidance approximates the 2018 target in the long-term business model from last November. So not only are we more than the year ahead of our subscription target, we're also about a year ahead of our bookings target as well.

From a subscription mix perspective, we are expecting FY17 mix to be approximately 65% for the full year. Approaching the 70% mix we originally targeted to achieve in 2018. Note that the 65% mix assumption for 2017, compares to a full-year mix of 54% in 2016, excluding the SLM mega-deal.

We continue to assess our subscription program, and are now analyzing and exploring the phasing out of perpetual licenses within certain geographies and product segments, where penetration is running in the 80%- to 90%-plus range, which we believe would drive the overall long-term subscription mix above our original steady-state target of 70%. We will be sharing more details on our long-term target model in early November, but in the meantime for modeling purposes, we recommend using 85% for the average FY18 subscription mix, which is our new steady-state target at this time.

For FY17, we expect total revenue in the range of $1.19 billion to $1.21 billion, which represents 5% reported growth year over year at the midpoint. This includes subscription revenue growth of greater than 110%, and recurring total software revenue growth of 12% year over year at the midpoint. We expect to increase our services margin by about 100 basis points, and remain committed to a 20% services margin by FY18.

FY17 operating expenses are expected to be $680 million to $690 million, an increase of just 1% at the midpoint, reflecting our commitment to expense discipline and long-term margin expansion. FY17 operating margin is expected to be between 17% and 18%, representing a 200 to 300 basis point improvement over FY16, and a reflection that the margin trough originally expected in FY18, has effectively been pulled forward by two years, into 2016. On a mix-adjusted basis, we are targeting an operating margin improvement of about 100 basis points to about 28%.

We are assuming the tax rate of 10% to 12% for the full year resulting in non-GAAP EPS of $1.20 to $1.35 per share, based upon about 116 million shares outstanding. We expect adjusted free cash flow between $170 million and $180 million, which includes: one, higher bonus payments in the first quarter of 2017 as compared to Q1 2016, when our FY15 bonus was not fully earned, two, increased debt interest payments of about $20 million, and three, a lower benefit from the collection of extended payment terms, as the Company eliminated extended payment terms at the start of last year with the introduction of subscription.

In total, as compared to FY16, these items negatively impact 2017 free cash flow by about $70 million. Adjusted free cash flow excludes about $36 million of FY16 restructuring, expected to be paid out in early FY17, and about $3 million of litigation payments accrued in FY16.

For the first quarter we expect bookings in the range of $70 million to $80 million, which at the midpoint of guidance is 9% growth year over year. On the subscription front, we expect 55% of bookings will be subscription, with subscription ACV of $19 million to $22 million, an increase of 90% year over year at the midpoint of guidance. We expect total revenue in the range of $285 million to $290 million for Q1, including $54 million of subscription revenue, an increase of 143% year over year.

We expect OpEx in the range of $169 million to $171 million and an operating margin of approximately 15% to 16%. We are assuming a tax rate of 10% to 12%, resulting in non-GAAP EPS of $0.23 to $0.28 per share, based upon approximately 117 million shares outstanding.

One final note on our guidance, as you model bookings across FY17, you should expect the growth in Q1 through Q3, but Q4 is likely to have lower bookings then Q4 2016 given the tough compare, due to the SLM mega-deal.

Before we move to Q&A, I want to update you on our stock repurchase plans. Given the significant over-performance of our subscription transition in FY16, our operating profit and EBITDA were lower than in the past, and lower than we had planned, as we started the year. This resulted in a deferral of stock purchases in FY16. Returning capital to shareholders is a fundamental element of our capital strategy, and based on our current forecast, we intend to resume repurchases in the second half of FY17, when cash and our borrowing capacity, return to more normal levels after exiting the subscription trough. With that, I'll turn the call over to the operator to begin the Q&A.

Thank you.

(Operator Instructions)

Our first question is from the line of Steve Koenig, of Wedbush.

Hi, Steve.

Hi, everyone. Thanks for taking my question, and congratulations on the quarter.

Thank you.

Maybe one question, and one follow-up if that's okay. It sounds like you'll have more detail on the long-term for us at your Analyst Day. The one thing I might ask you right now is, can you give us any color on the contribution from maintenance conversion, either in the quarter or how to think about that on a full-year or long-term basis, what's a good way to think about that?

At this point we've done 89 conversions this year, 33 in the fourth quarter, and we think that the first phase of this will play out over multiple years, and it's probably amongst the top 400 to 500 customers, where we expect to continue to be able to get from 25% to more than 50% as we convert them from maintenance to subscription.

Also frankly, a lower than market maintenance rate today. We are also analyzing the next group of customers that we could have an attractive subscription offer for, so we can continue to run this play for many years to come.

One thing that's interesting, is more than 25% of the conversions are customers that, frankly, you wouldn't expect would have converted. They converted simply for the flexibility that they got by moving to subscription. We didn't have a huge stick, for example, to help incent them to go ahead and convert, so that is interesting.

But we are currently doing the analysis to look at, -- obviously we have many years left to go, to run the 400 to 500 customers, and we think there is an opportunity, frankly, at different levels of incremental ACV, for much of our current 27,000 customers, and we are doing the work to analyze what that option might be, an what the offer might be that we could make. Even small customers, potentially, buy in through the channel, so we're doing a lot of work on that.

We clearly know how much we've booked from the subscription program, it is hard to say how much was incremental, because if the rest weren't selling conversions, they hopefully would be selling something else. But it is a great incremental value. It is a great long-term model for the company, and it certainly is something that is starting to get traction, primarily at this point in the Americas and Europe.

We still have the rest of the world, from a sales enablement perspective.

Steve, if I could give a completely different perspective, because I asked the same questions.

I think our bookings growth was strong, and we say, what are the primary factors and what are the secondary factors? I think the primary factors, of course, is what is going on in a macroeconomic world, and secondarily, our own execution against that opportunity. So, if you want to say what's the number one thing PTC did to drive pretty good year bookings growth? We executed better.

Now you drop down to secondary factors, and that is where you get pricing and discounting. We've discounted less, across-the-board, on average. We did have this conversion factor, and this new cloud factor, which is a stream of bookings and revenue we used to not get when we were selling perpetual on-premise licenses.

Again, I think the primary factors, the macroeconomic and our execution against it, and the secondary factors, there's a collection of them, one of which, is the fact you are asking, but as Andy said, it is very hard to assign a quantitative number to that one factor, but it is definitely a tailwind that is good to have. And we will be here for awhile, by the way.

Got it. Okay, great, that's helpful.

Maybe the one follow-up on that is, any sense of the size of the average maintenance contract for those top 400 to 500 customers? And then, if I may, in the follow-up, I did want to ask, as well was the guide for FY17. We had expected, that because of the heavy commissions for subscriptions this year there might be some pull-forward into Q4, say, from a Q1, and also any potential sales re-org in Q1 could be impactful, but your Q1 guidance looks pretty good.

How did you think about that when modeling it?

So, two things. First off, we've said in the past that we think these largest customers represent about 40% of our maintenance base. But, as I mentioned we see opportunities much more broadly in our maintenance base.

On the second question, we do our guidance, we do quite a bit of analytical work around historical close rates, every way you cut it, the maturity of the deal in the pipeline, and all that stuff. And we use that to come up with what our internal forecast is, which is our basis for the guidance. Our guidance to you on bookings is always very quantitatively based, looking at our sales funnel.

We take the forecast, we do a lot of analytics against the pipeline to make sure forecast is supported by the pipeline, and compare it to last year (Multiple Speakers) We triangulate -- I'm not sure triangulate is the right word, because there are more than three different angles on it, but we try to make sure it is a reasonable safe number to put out there, and the fact it looks good, that's your determination. I think it is simply because that is what the data shows us.

Very good. I appreciate the answers, and congrats again.

Thank you, Steve.

Our next question is from the line of Ken Wong of Citi; your line is open.

How's it going guys?

Good.

First question, as we think about the FY17 subscription mix of 65%, clearly last year you guys outperformed your initial target by 30 points there. How should we think about the level of conservatism you guys might have baked into that number? I'm sure the range isn't going to be that wide, but what was the thinking here?

As always, we base our subscription mix assumption on what we see in the pipeline. We don't think it's prudent to get over the front of our skis, so we base on what we see in our pipeline.

Our comp plans, are right now being -- at this point, being given to all of the sales reps, and we continue to have differential compensation for subscription versus perpetual. In fact frankly, the difference is a little bit bigger in FY17 than it was in FY16, so it favors subscription a bit more. In addition, the channel incentives favor subscription more than they did last year, so we're focused on both of those. We are -- basically give guidance based upon the data that we have.

Again, to give you a slightly different perspective on that, we can't likely, outperform by 30% again, because that would mean we get all the way to 95%, which is virtually impossible, so we don't have that much runway to outperform as we did in the past year.

And then, the other thing is, if you go back to the beginning of FY16, almost 100% of the pipe was perpetual, so there was a big skew to over-perform as these deals flip to subscription. But if you look at the pipeline right now, there is a fair amount of subscription in it. So there is a factor here, that we are starting from a baseline that is probably more accurate than we were working with last year, and with every passing quarter that should be increasingly true, to the point where at some point, it would be very difficult to outperform at all, because we would be very far down the runway.

But, to Andy's point, we are using the same formula we used last year, that formula served as well. It is a conservative approach, but it worked well last year so we're sticking with it.

Got it. That's perfectly fair. On OpEx, you guys are growing, like you said 1%, how should we think about the appropriate spend CAGR going forward? Did you get some benefit from the restructuring in 2017? And this ticks up higher in 18? Or is 1% about the right run rate?

What we're focused on is continually increasing that operating margin, when you look at a the mix-adjusted operating margin by 100 to 150 basis points, on the way to a low 30s operating margin, as we exit the transition. With definitely plan to go into this in more detail on November 8th, where we will lay it out for you, how the subscription transition impacts this, and what you can expect from both the reported and a mix-adjusted basis.

In general, what we said is, that in the core business -- we said the core business OpEx should grow in the low-single digits, and in the high-growth technology platform group for IOT business, it should grow at about half the rate of the bookings growth. And that will give us a very strong operating margin, double-digit revenue growth, and operating margins in the low 30s as we exit the subscription transition.

So stay tuned for November 8th, 2016, and we will give you more specific guidance around that.

Just to be clear, the 1% was in part because we're backing out this commission overspend and we won't have that luxury every year. (Multiple Speakers)

If we back out of last year's -- the commission overspend, then our growth rate would be around 3% in OpEx, which, on the midpoint of our software revenue growth of 7%, mix adjusted. Our whole thing is, that OpEx should grow much slower than the top-line.

That's always a good thing and I will let you guys save your thunder for November 8, 2016.

Okay. Thank you.

Our next question is from the line of Sterling Auty, of JPMorgan.

Hi Sterling.

Hey guys, it sounds like the stock saw some undue pressure due to the article that was in the Wall Street Journal. My take-away from reading it was an implication that the subscription transition is just a way of hiding a bad business, or business that is getting worse. Anything you can specifically point out, relative to how the article was written, versus the reality of what you are seeing in the metrics?

I thought somebody might ask about that article, so I have a copy of it sitting in front of me here. The premise of the article, is that we are obscuring weakness. In fact, the first sentence of the second paragraph says, we are putting a shine on a gloomy situation, and I just told you guys we had a fantastic quarter to wrap up a fantastic year.

And between Andy and I, we told you we are ahead of our long-term plan on growth. We are right on plan, maybe even ahead, on operating margin, because we're going to fix this commission program that cost us a couple of points last year, and we are well ahead on our subscription conversion. So, if you believe, that this business model creates long-term value for shareholders, and I think you do, then there is nothing gloomy about it.

I think it is just a case where, unfortunately, the reporter probably doesn't accurately understand what's going on here. She did not talk to us. I think she talked to a few of you, but maybe but didn't agree with what you told her, I don't know. She took a position that, because revenue, and therefore earnings, are going down and EPS is going down, it is a bad situation. I think, on the other hand, we were clear from day one that that would happen.

She says it's hard to compare the new model to the old model, and I think that many and of you have told me how much you appreciate all the transparency, the bridges we give you, the fact that we reported out in great detail in our prepared remarks, take you across the bridge. What if the mix as was as guided? What if the mix was like last year? Of course, we do that is currency, as well.

I think that's an unfortunate article, written by somebody who didn't spend enough time really understanding the fundamentals of what we are all talking about here. And I know, Andy, you have a long list, hopefully you can just give highlights on some of the points.

You just heard us talk about our bookings performance. Full-year bookings grew 18% in constant currency, 14% organically. Clearly, in the software business, your license bookings growth is the most important driver there.

While reported revenue is down, our mix-adjusted software revenue for the year grew 13%, so double-digit constant currency. The operating margins and EPS reported were down, but mix adjusted were at a 27% operating margin for the year, well on our way to the low 30%s. Our OpEx is tightly controlled, you can tell that by looking at the guidance for next year. 1% growth at the midpoint, 1% growth at the high-end of our OpEx guidance actually, it's still only 1% growth.

A couple of other things that you guys know, one of the hypotheses in the article was, frankly, that the subscription model is riskier because we're selling one- to three-year terms, and break even with the perpetuals at four years, completely ignoring our 30-year history with customers of sticky software, our very high maintenance-renewal rate, and frankly, ignoring just the standard subscription license-renewal rate in the industry that is higher than maintenance renewal rates even.

Probably, the only other thing is, the author did have a question on, are we really creating value, because our deferred revenue on the balance sheet wasn't increasing the way she had expected -- ignoring the fact that there is something called unbilled deferred revenue, which we shared with you today, and that has grown 31%, $185 million from last year, to almost $800 million -- $783 million of total deferred revenue, up from under $600 million. She didn't know that fact, but if she had waited until we reported, she would have found that out.

And the other thing is, I want to make sure you guys are clear, that high deferred revenue balance, billed and unbilled, is not due to duration of contracts, it's not like we're selling five-year contracts and putting five years into the unbilled deferred revenue. Our PEB which we outlined this on our prepared remarks today, our PEB of, two, actually is equivalent to our weighted-average contract length, for subscription contracts during FY16. It ended up being two years, on average.

You only have, basically one year of subscription in the unbilled deferred. Anyway, none of the facts, necessarily, support her hypothesis and I think it's hard to understand a subscription transition. All of you have put a lot of time into it, and you can't really get there unless you do put the time into it.

Great, I appreciate that. And just, a last follow-up question. I didn't quite catch if you said, looking at the Pac Rim, how much of what you are seeing in Pac Rim is just looked-by perpetual, versus what is happening on the macro side?

You mean, the mix? I think it is sales enablement. I think that's the primary thing. The Pac Rim did improve, it still lags significantly.

The bookings number in the Pac Rim was a fine number.

Yes. We had fine bookings, I'm talking the subscription mix. The subscription mix is at about 30% right now in the Pac Rim. It did improve by about 600 basis points, but it is moving slowly there. And I think it is fundamentally, a sales enablement.

Yes. Let's not call it a problem, though, because we're actually ahead of plan. The Pac rim is behind other regions, but completed the year ahead of plan. So, for us it's not a problem, we just didn't get as dramatic of over-performance there as we did elsewhere. But that's okay. We didn't expect we would.

I will give you a couple other subscription metrics that are interesting. Our large deals in the fourth quarter, so the deals that are over $1 million; over 90% subscription mix in the large deals. The channel, while the total channels at 41%, in the Americas, they are at 59% in the channel, in the fourth quarter. The channel is definitely making progress, especially in the Americas.

Actually, if I could add a little bit of color on that, a couple of weeks we had our sales kickoff as we frequently do in the first month of the new fiscal year. And this time, we invited quite a number of channel partners, so just during social times and whatnot, I had a chance to talk to many of them one-on-one, and I asked about what you think about the subscription model?

Everyone I talked to said at the beginning of the year we were pretty skeptical, but wrapping up the year, we love it, because it's allowed us to go after transactions that just were undoable in the perpetual model. A customer has a project, the project is going to run for year and a half, but they know that they've got to use the software for four years to justify a perpetual purchase. But in a subscription, I can subscribe to it for a while and if I don't need it anymore, I'll just terminate the subscription. That's an example of a transaction we simply would not have gotten.

Another example was, a small company might've tried to use fewer seats in multiple shifts, during a high-peak in workload, and now they say no, let's just so subscribe to a few more, we will get the project done during the day, which you'll all prefer as employees, and everybody will be happy. I was actually, very surprised -- and these were global channel partners, but I was very surprised with the bullishness. They were surprised, actually by how well this worked for them.

So, I certainly feel pretty good right now, about our ability to drive the channel to high levels of subscription. We didn't focus first on them, we focused on the direct guys that we have more direct control over.

Thanks, guys.

Thank you, Sterling.

Your next question is from the line of Matt Hedberg, from RBC Capital Markets.

Hi, Matt.

Hey guys, how are you?

Good.

Follow-up to an earlier question as it pertains to maintenance -- legacy license and maintenance contracts, switching over to subscription. When you look at FY17, is there a way to think of the relative size of some of these VPAs, or larger deals, up for renewal in 2017 versus 2016? Maybe just even generically, are there more? Is it less? The same?

We have roughly the same amount of VPA's, actually just a little more in 2017 than we did in 2016, that are up for it. We did see, in this year, that some of our customers couldn't make the decision to convert fast enough, so they took a year at a much higher maintenance rate.

We will go back to them again next year. So we actually have a number of customers from this year, that we can go back to and try to convert them again next year. So, if you look at that, there is probably a larger pool.

That's great. That's helpful.

I want to remind that, in our long-term business model, these conversions are not in there.

Correct, I know. That's helpful, too.

In your prepared remarks, you talked about potentially phasing out some license options, for, I think you said for particular products and geos. I'm wondering if you could, A, give us a little more color on your thoughts around that? And have you seen enough -- are we closer to a reality where a license option could be eliminated for all products and all geos, at some point in the future?

We are in the midst of the analysis. I think we will probably, internally, have a review and a recommendation to look at within the next four to six weeks. We are doing a lot of work on this. It is not a trivial decision.

I think within the next four to six weeks, internally, we will be up to make a decision around it. And, frankly, then of course you have to give appropriate customer notification which is a lengthy period of time. I'd say the underlying premise, that we have is that there is an 80/20 rule for everything. So, that last 20% if it's a lot of transactions, it is probably costing you a lot to have it. So it makes sense to get over the hump with that.

Of course, we will have to look at all of our products, in all of our markets, and do something that is prudent and makes sense. But we are seeing that it is getting to the point where we will be making a decision, sometime in the coming months and then we will let you know about it.

In the meantime we have been experimenting of ideas. For example, this Navigate product is only sold in subscription. There is no price point to buy it perpetual, and it is selling like hot cakes. So that gets every customer's interest in that product into a frame of mind, that okay, now I'm buying subscription, why not just switch? There some good experimentation happening that we are pleased with.

Great. Congrats on the quarter again, guys.

Thanks.

Our next question is from the line of Saket Kalia, of Barclays.

Hey guys, thanks for taking my questions. How are you?

Good.

One question, and one follow-up, maybe first for Andy. First off, thanks for that normalized 2017 bookings guide. Can you just talk about whether the tech platform business, so IOT, can we accelerate once we lap them of those tough perpetual comps? And then, if we think about sort of the longer-term model, if that business can drive acceleration in total bookings in 2018, which is what I think you're original model anticipated?

We did see a reacceleration in the fourth quarter, where there was only one large deal, which actually was ColdLight deal to one of their customers in a market that we don't play in, from the pre-acquisition that we closed. But even without that, we had high 20s bookings growth in TPG, and that was against a deal -- that deal was almost $3 million.

Just add, we are largely round-tripped on that, because we really did not sell ThingWorx in a perpetual mode, maybe a few small exception, in 2017. So you won't find big perpetual deals to comp against-- I'm sorry, 2017 versus 2016, because we did not do them in 2016, whereas we did do them in 2015.

And then the second part?

The second part is, the premise I think back in November of last year was, the tech platform business, because it is growing so much faster, can drive an acceleration in total bookings, in 2018. So, of course things, have changed around a little bit, but is that how you're still thinking conceptually?

The 2018 model that we laid out for you, had a solutions business growing at market rates, 6% basically, and the TPG growing in the 30%s. I think had a 34% CAGR, from 2015 through 2021, with it coming down a little bit each year.

We will update that on November 8th, 2016, but yes, we definitely see the high-growth as it scales at high-growth rates, along with the solutions business growing at the market rate, which it's grew faster than the market rate in FY16. We see that together, definitely driving double-digit revenue growth as we exit the subscription transition. So there is no change there. We try to put through a plan that was pretty balanced, and didn't take us having to jump over a 20-foot wall to get to it.

Well, in fact, we did. We did that this year. We actually did that this year. So we are feeling pretty good about the fact that we should be able to do a couple of years from now, because we actually did it this year, well ahead of schedule, more or less on that recipe.

And you can look at our bookings guidance for next year. At the high-end, it's a 10% bookings guidance growth rate. And we are still being cautious around the solutions business, while all the improved execution that we've seen, we believe that flywheel is starting to turn, and we are starting to see the outcomes, but we aren't declaring victory yet.

Andy, if I could elaborate a little bit on the $20 million booking that we had in Q4. That is a deal we had worked on for some time, and just didn't know exactly when it was going to close.

I actually wish it would have closed in October, because if you think about it, that one deal represent 5% annualized bookings growth in one deal. Had the deal not happened, we would still have had a good Q4, we would have still had a pretty good FY16, and we would be looking at 5% to 10% bookings. As it was, it happened in Q4, which takes us down from 5% to 10% down to 0% to 5%. Had it rolled forward three business days, we'd be talking about 10% to 15% bookings.

We really are in a good place. Let's not let one big deal, depending upon where it lands, then sour our perspective of something going forward, because we gave you, many times, in our discussion -- back that deal out, and everything still looks pretty darn good. So that is the perspective we've taken.

Absolutely. Totally agreed, and I think that's the right way to look at it. Maybe just a quick follow-up, off of Matt's question earlier. We talked about the possibility of phasing a perpetual, of course, probably with a long tail. But Jim, the question for you is, can you just talk about how that potential change would affect you competitively with the Dassaults and the Siemens out there still selling perpetual? How do you think, going to a subscription only, or some form of subscription only, in some markets would affect you competitively?

Thanks.

Thanks, Saket.

I really don't think it would affect us, because on one hand our customers in our upfront analysis, the majority of them told us they would rather buy that way. We then have really have positive reinforcement, because they are buying that way. We have Autodesk out there, a couple of steps ahead of us, already eliminating perpetual. So I think that this is a model, where our customers, no matter where they turn in terms of their software providers, everybody wants to talk subscription.

They can't actually hold out in the area of CAD and PLM, because they're not going under as it relates to ERP, and CRM, and marketing automation, and this that and the other thing. So I think they are just agreeing we'll go that way.

And I think that is one of the factors, we maybe underestimated when we thought about what would happen last year. I think we were surprised a little bit by how easy it was to sell subscription, because we actually expected more resistance than we ran into. So I don't really think it's going to be a factor, and SOLIDWORKS announced they're doing the same thing, and so forth. It is just the way the industry is going now.

I think at this point, we have a lot of data points to show that we are winning with our subscription offer. We're competing competitively, we're competitive in many of the deals, especially the large deals, and 90% of them were subscription.

Thanks.

Thanks, Saket.

At this point, we are wrapping up the question and answer session. I will be turning the call over, back to Tim Fox. Please go ahead. Thank you.

Great, thanks Kate. And I'd like to thank everybody for joining us on the call. As Andy stole my thunder a little bit earlier, the one programming note is that we're going to be hosting that webcast on November 11, 2016. It will be at 11:00 Eastern time -- November 8, 2016, sorry, at 11.00.

Look for details on the coming days, on the details. We look for you to you join us on that call. If not, we will update you on our Q1 call in January, and with that I'd like to toss it back to Jim.

I just wanted to say thank you to all of you, for your support. We feel good about the business. I'm looking at Barry here, and the way we changed the strategy and the strategic positioning of the company, and the way we pivoted into IOT and analytics, in a way that is supportive of the core business, it is really just phenomenal.

I think about how we're changing the business model, and I'm looking at Andy, and the progress we are making on discounting, and business model, and cost containment, margin expansion, it's really phenomenal.

The one problem I had a year ago was execution in the core business. And Craig isn't in the room with us here, but my God, that man has made such a difference in terms of improving our execution. He is like General Patton, rocking all of us here. Things get done and they get done well, and we have seen the results.

So I'm very pleased with the progress the Company has made in the last year. It's really been a phenomenal year. I'm sorry the Wall Street Journal didn't see it that way, but I'm confident that all of you here on the call do, and I certainly appreciate your support.

Thank you and have a good evening. Good-bye.

This does conclude today's conference. Thank you all for participating. You may now disconnect.