PTC Inc (PTC) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2017 first-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.

Good afternoon. Thank you Sarah, and welcome to PTC's 2017 first-quarter conference call. On the call today are Jim Heppelmann, Chief Executive Officer; and Andrew Miller, Chief Financial 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 the 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 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, January 18, 2017. And PTC assumes no obligation to update these forward-looking statements.

During the call PTC will discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with 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.

Before I jump into the quarterly results I'd like to take a moment to congratulate Tim and his Investor Relations team on the award they received in November from Institutional Investor, who named PTC as the best IR Company in Mid-Cap Software. I certainly appreciate the great work that Tim and his team have done under Andy's direction to ensure that our investors understand our business as we go through our subscription transition.

Based on the voting results it appears that many of you feel the same way. So thank you for your support, and congratulations to Tim and the team.

Coming back to the quarter then, our Q1 results represent a very strong start to FY17 and continue the momentum we built over the last year. In Q1 we executed very well across our key strategic and operational objectives.

Bookings of $90 million were $10 million, or 13%, above the high end of the Q1 guidance range we provided last October. We had particularly strong IoT results, but also solid execution in our Solutions business as well.

On the subscription front, the 65% subscription mix for Q1 was well above our guidance of 55%. Both bookings and mix benefited from an IoT subscription megadeal, but even without this deal bookings and mix still would have performed well compared to the guidance. We will provide additional details on the subscription transition throughout the call, but suffice it to say our program continues to gain traction in the market.

Once again the strong subscription mix in the quarter had the effect of dampening our reported revenue results, and this was further exacerbated by significant currency headwinds. Nonetheless, Q1 revenue, operating margin, and EPS were all within our guidance ranges.

In fact had our subscription mix been the 55% we guided to, our revenue margins and EPS would have been well above the high end of their respective guidance ranges. All in all this was a strong start to the year.

To summarize our progress this past quarter, I will again frame my discussion around the three key initiatives that we focus on to maximize long-term shareholder value. As a 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.

Let me start by discussing progress against our growth ambition. As we outlined during our financial outlook webcast last November, our goal is to achieve 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 IoT business grow in the 30% to 40% range consistent with the fast growing IoT market. The combination would create low double-digit overall growth for PTC.

So against that goal Q1 was another outstanding bookings quarter, with year-over-year total bookings growth of 31% reflecting strong execution in both parts of the business. In IoT we had a record bookings quarter, growing many times faster than the market.

Expansions accounted for over half of our bookings. We more than doubled the number of six-figure deals, primarily driven by expansions and we had one large deal, defined as greater than $1 million, and one megadeal, defined as greater than $5 million.

Even if you exclude the megadeal and exclude Kepware, which was not in Q1 of last year, bookings were up over 90%, more than double market growth rates. I think this clearly demonstrates the value that customers are driving from IoT initiatives, even though these customers are generally still in the early days of their IoT journeys. It also provides a quantitative basis for the numerous industry analyst reports and awards that consistently position PTC as a strong leader in the IoT software platform market.

Last quarter I discussed the launch of ThingWorx Studio pilot program, which enables perspective customers to engage with this powerful new tool for authoring and publishing augmented reality experiences. Studio blends PTC's AR, IoT, and CAD visualization and illustration technologies to overlay important digital insights gained from IoT and analytics onto your view of the physical things you are working with.

Starting this quarter we had more than 500 industrial companies participating, and during the quarter we added another 500 companies to the pilot program. These large numbers speak to the growing interest in AR across industrial enterprises.

ThingWorx is the only IoT platform that allows customers to offer user experiences using web, mobile, and AR technologies. And of the three, AR is the most powerful. And we believe over time more and more companies want to head in that direction with their IoT applications.

As a proof point of customer interest, some of you may have noted how we helped our partner, GE, to deliver a very impressive AR-based keynote demonstration at GE's Mines and Machines event in October. This demo, a replay of which you can access via our investor website, showed a GE locomotive engine going through an optimized service process. PTC and GE created the demo together, using both Predix and ThingWorx for Predix technology that we announced at the show.

ThingWorx for Predix is a configuration of ThingWorx that connects to Predix in order to gain access to information about connected access, like the locomotive, so that users can quickly build web, mobile, and AR-based apps to interact with such an asset. We are excited because this approach allows both parties to further expand the successful relationship we've developed together.

From a technology, strategy, and market leadership perspective, I'm delighted to see PTC continue to gain recognition across the industry. In a November Wave report on IoT platforms, the top-tier analyst firm, Forrester Research, identified PTC as having the most complete IoT platform offering on the market, positioning us squarely in the leadership category next to some impressive names like IBM, GE, and Microsoft, the latter two of whom we view as partners.

Likewise, just this past week, we were placed in the IoT Leadership Quadrant by the Experton Group for the second year in a row. Then, at the big CES show in Las Vegas, PTC was named the Industrial Internet of Things Company of the Year by IoT Breakthrough, which is an international organization that identifies the best IoT products and companies in the industry. Chosen from over 2,000 nominations by an independent panel of journalists, analysts, and technology executives, PTC was selected for having the most creative and technologically advanced products and services, and for delivering breakthrough connected technologies to the market.

To sum up on the IoT front, we believe the clear leadership and market momentum we've established were once again validated by our very strong Q1 performance. And we look forward to providing further insight into our IoT business during our IoT Focus webcast planned for later this quarter. Stay tuned for more details on that.

Turning now to the performance of our Solutions business, improved operational execution once again drove solid Q1 results. CAD led the way with double-digit bookings growth, primarily driven by strength in Europe and strength in the Americas channel where go-to-market initiatives launched in FY16 are beginning to bear fruit.

Solid PLM bookings benefited by another strong quarter for Navigate, which is under our -- which is our ThingWorx-based PLM offering launched in early FY16. As a reminder, Navigate provides a broad range of enterprise users with expanded access to the digital design content traditionally held captive within the customers' engineering departments.

A great example of Navigate's growing traction in the market is the Q1 deal we signed with Raytheon, which many of you know is a long-time strategic PTC customer with over 30,000 Windchill seats in use today across the enterprise. That deal is the largest Navigate transaction we've closed to date.

For Raytheon the key value drivers were the ability to create easy to use Navigate apps for a broad set of end users that enable access to multiple enterprise information systems. We believe these value drivers will resonate across thousands of enterprise Windchill deployments in our customer base, creating a significant long-term opportunity to drive continued PLM growth. Lastly, in our Solutions business we saw some variability again in SLM, as we've seen in the past, with SLM bookings down year over year primarily due to a number of large deals in Q1 of 2016 when SLM posted a 50% growth rate.

So to summarize our progress relative to bookings growth, with a strong technology advantage and an exciting high-growth market, our IoT growth plans are on track. And with continued improvements and focus and execution, as well as the leverage of our new technologies, we are seeing continued progress in our core Solutions business.

Building on the strength shown throughout FY16, Q1 was the fourth consecutive quarter where we significantly exceeded our bookings growth targets. We hope to keep that going, but naturally our guidance is a little more cautious.

Let me turn now to our second top-level initiative to drive shareholder value, which is to further increase our operating margins. In Q1 our operating expenses were within our guidance range, and despite subscription mix coming in well above guidance we also delivered operating margin within our guidance range, a testament to the operational discipline you've come to expect from PTC.

Moving forward, as you know the dollar has strengthened substantially since last October when we provided FY17 guidance. In fact we estimate that FX changes will negatively impact revenue by $32 million for the full year.

However even in the face of these currency headwinds, for FY17 we expect to achieve the 17% to 18% operating margin target we provided you last October based on the 65% subscription mix assumption. We are committed to staying on the long-term margin expansion path we outlined for you last November, and have adjusted our spending plans accordingly. Andy will take you through the guidance details and currency impacts later in the call.

So turning now to our third key top-level initiative, which is our transition to a subscription model. The Q1 2017 mix of subscription bookings was again well ahead of our guidance, even if we excluded the subscription megadeal.

We saw strong adoption in every segment, in every region, and in both our direct and indirect channels. I will leave it to Andy to elaborate further on how our subscription program is evolving to the next level later in the call.

Before I conclude, let me address the global macroeconomic backdrop. Recent PMI data does point to some potential modest improvements in North America and Europe.

However, it's too early for us to say that this has translated into a change in buying behavior within our customer base. As of now we believe that our recent performance has been driven by improved execution in an essentially mediocre macro-environment. Our guidance assumes that this will be the environment we face going forward.

To wrap up, here at PTC we continue to focus on three levers to drive significant shareholder value: top-line growth, profit expansion, and a subscription transition. On the growth front our momentum and market position in IoT highlights 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 non-GAAP operating margin into the low 30%s post-transition. And on the subscription front, following exceptional performance in FY16, Q1 was another strong step towards transforming our business model. And 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 $90 million were $10 million above the high end of guidance provided last October. On a year-over-year basis bookings increased 31%, and 23% if you exclude Kepware.

Subscription comprised 65% of total bookings versus our guidance of 55%, and would have been above guidance even excluding the subscription megadeal. Subscription ACV in the quarter was $29 million, well ahead of our guidance of $19 million to $22 million.

Once again this quarter the strong subscription results contributed to a significant increase in our total deferred revenue, billed plus unbilled, which increased year over year by $248 million, or 43%, to $825 million as of the end of FY17 Q1. Subscription adoption trends were consistent with Q4 2016, where we saw strong performance in every segment, every geography, and in both our direct and indirect channels.

IoT led the way, with subscription mix in the high 70% range, despite Kepware being virtually all perpetual at this time. In our Solutions business, PLM continue to outpace the other segments in the low 60% range and CAD was in the mid-50% range, due in part to continued progress in our channel.

In our direct business, subscription mix was 73%. And in the channel, subscription mix increased 200 basis points sequentially to 43% led by the Americas, where close to two-thirds of the channel bookings were subscription. Regionally, the Americas, Europe, and Japan far outpaced the Pac Rim, where adoption trends continued to lag the other geos.

Q1 subscription mix benefited from our support conversion program, and the incremental ACV from conversions drove a portion of our bookings over-performance. In the first quarter 30 customers, including some very large customers, converted their support contracts to subscription at an ACV uplift that averaged 53% above the prior annual support amount.

We believe that the conversion opportunity within our customer base is substantial and will play out over many years. However, you should expect quarterly variability as this program continues to ramp and mature.

For conversions, I will also remind you that one, we only include the incremental ACV in our bookings results, not the full contract value of the new subscription contract. And two, 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 first quarter revenue of $287 million was down $4 million year over year. We estimate that subscription mix negatively impacted total revenue by about $18 million compared to last year and professional services decreased about $3 million, consistent with our strategy to migrate more service engagements to our partners.

Adjusting for these items revenue would have grown by about $20 million, or 5%, despite the fact that we had two fewer days in the quarter which negatively impacts recurring revenue by about 220 basis points. Compared to our guidance we estimate that adjusting for the higher mix of subscription our total revenue would have been approximately $297 million, which would have been above the high end of our guidance of $290 million. In addition, currency negatively impacted reported revenue by just over $3 million relative to the FX guidance we provided last October.

On a reported basis, software revenue was down 1% year over year due to the higher subscription mix. Adjusting for mix and currency, we estimate software revenue would have increased 6% year over year, despite the fact we had two fewer days in the quarter, which impacted software revenue by about 190 basis points. Approximately 86% of Q1 software revenue was recurring, up from 80% a year ago.

Operating expense in the first quarter of $170 million was at the midpoint of our guidance range, including about a $1 million benefit from currency which offset higher commissions and bonuses from the over-performance in this quarter. Q1 operating margin of 15% was within our guidance range of 15% to 16%, despite the higher mix of subscriptions due to strong bookings performance and cost discipline.

We estimate that adjusting for the higher mix compared to our guidance, operating margin would've been 18%, above the high end of our range. And adjusting for the year-over-year change in mix, operating margin would have been about 24%, a 300 basis point improvement over Q1 2016.

EPS of $0.26 was at the midpoint of guidance. We would have beaten our high end guidance by $0.06 at our guidance mix, with lower income taxes contributing $0.01 offsetting $0.01 negative currency impact.

Moving to the balance sheet. Cash and investments were down $105 million from Q4 2016 as expected, driven primarily by: the payment of FY16 bonus and year-end commissions of about $64 million, debt repayment of $20 million, the first interest payment on the bond of $15 million, restructuring payments of $16 million, and a foreign exchange impact on cash of $10 million.

Now turning to guidance for FY17. Let me remind you of some of the general considerations we have factored in. First, while we are pleased with our bookings performance in Q1, we attribute our performance primarily to improved execution, our growth initiatives, and our support conversion program, and remain cautious of the global macroeconomic environment.

Second, while subscription results have been very strong in recent quarters, it remains challenging to forecast the pace of our transition and the resulting impact to near-term reported financial results. Third, our FX assumption in our guidance now assume dollar to euro at $1.05 and yen to dollar at $1.16.

As Jim mentioned, I'd like to provide some additional color on FX and its impact on our guidance. For the full year, relative to our previous FX guidance, we estimate that currency will negatively impact bookings by approximately $12 million and total revenue by approximately $32 million. Due to the natural hedge afforded by our international spending base, cost of goods sold and operating expenses will benefit by approximately $17 million, resulting in an EPS impact of about $0.12.

With this in mind, despite the FX headwinds, for the full year FY17 we are maintaining our bookings guidance range of $400 million to $420 million. This represents 5% to 10% growth, excluding the $20 million SLM megadeal we closed in Q4 2016. In constant currency this represents 7% to 12% growth, an increase.

From a subscription perspective we continue to expect FY17 mix to be approximately 65% for the full year. As we discussed last quarter, we continue to analyze and explore the phasing out of perpetual licenses within certain geographies and product segments where penetration is running in the 80% to 90%-plus range, and we will share more details in the future. We remain confident that we can achieve our FY18 subscription mix target of 85%.

For FY17 we expect total revenue in the of range of $1.17 billion to $1.18 billion, which represents 3% growth year over year at the midpoint and 4% growth in constant currency. This includes subscription revenue growth of approximately 120% and total recurring software revenue growth of 9% year over year at the midpoint. In constant currency this represents recurring software revenue growth of 11% 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 now expected to be $670 million to $680 million, a decrease of $10 million from our previous guidance and a decrease of 1% year over year at the midpoint of guidance.

Despite the significant negative FX impact on revenue relative to our previous guidance, we are maintaining our FY17 operating margin guidance of 17% to 18% representing a 200 to 300 basis point improvement over last year, reflecting our commitment to long-term margin expansion. On a mix-adjusted basis, we are targeting an operating margin improvement of about 100 basis points to about 28%.

We are now assuming a tax rate of 8% to 10% for the full year, resulting in non-GAAP EPS of $1.20 to $1.30 per share based upon about 117 million shares outstanding, which is a decrease of just under $0.03 from our previous guidance at the midpoint. We estimate that FX relative to our previous guidance is a negative impact of $0.12 for the full year, so we are offsetting a good portion of the FX impact to improved performance on the top line and rigorous cost management. In addition, our guidance now includes about a $0.05 benefit from a lower tax rate and from a one-time gain of $3.5 million from an investment we have made in a private company that was acquired this month.

We continue to expect adjusted free cash flow between $170 million and $180 million. Adjusted free cash flow excludes about $40 million of FY16 restructuring payments and a $3 million FY16 litigation settlement payment.

For the second quarter we expect bookings in the range of $80 million to $90 million, which at the midpoint of guidance represent a 1% decline year over year and 3% year-over-year growth on a constant currency basis. I will remind you that we had very strong bookings performance in Q2 2016, where we exceeded the high end of guidance by $5 million, creating a tough comparison for Q2 2017, especially in our Solutions business.

On the subscription front we expect 60% of bookings will be subscription, with subscription ACV of $24 million to $27 million, an increase of approximately 9% at the midpoint of guidance. We expect total revenue in the range of $280 million to $285 million for Q2, including $64 million of subscription revenue, an increase of approximately 160% year over year.

We expect OpEx in the range of $161 million to $166 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 $0.26 to $0.31 per share based upon approximately 117 million shares outstanding, and including about a $0.03 benefit from the investment gain.

Before we move to Q&A, I went to update you on our stock repurchase plans. As a reminder, returning capital to shareholders is a fundamental element of our capital strategy, and based on our current forecast we continued to intend to resume purchases in the second half of 2017 when cash and our borrowing capacity begin to return to more normal levels after passing through the subscription trough. With that, I will turn the call over to the operator to begin the Q&A. Operator?

(Operator Instructions)

Sterling Auty, JPMorgan.

Hello, Sterling how are you doing?

I'm good. I'm good. Thanks. Hi, guys.

Because everybody's going to wonder, is there any additional details you can give on the subscription megadeal, whether it was new or expansion? What industry, or any other color you can provide?

We don't have a lot of detail, Sterling, but it was a well-known, global industrial company who had expanded a previous deployment. We don't yet have their permission to disclose who and why. I hope we get that, and if we do we will talk about it at the upcoming webcast.

The other popular question I get is around the maintenance conversions that you mentioned that definitely helped in bookings. Is there a way for us to quantify what the ultimate potential is in terms of the contribution?

And I think traditionally we think about your top 400 customers on the maintenance side and support side being critical, Where are we in the penetration of those in terms of conversions?

So, a few highlights for you. First off, the top 400, 500 represent probably just over 40% of our maintenance base, and they are the ones that we are targeting the most now. As in prior quarters we actually have number of customers that are not in that cohort that are actually converting.

And in fact, this quarter it was about half of them were not among those largest customers. And the average ACV increase was actually greater among those. And they did it, frankly, to get the benefit of remix and restack, and at the same time they bought some more software.

That was actually -- it has always been -- there's been always been a part of them that have been from that cohort, but it increased this particular quarter. And that drove the overall ACV increase from what had been in many quarters in the lower to mid-40% range as far as an increase in ACV up to 53% this quarter.

As far as the larger customers go, we are about one-quarter through the largest customers. But the thing to realize is, we actually just engaged [Franklin] Consulting Firm to help us test offers for other cohorts of our customer base, frankly, to come up with a conversion program that would address the entire install base.

We think the entire base is an opportunity at different ACV uplifts, depending upon their current situation, what their current support rate is relative to market, et cetera. We are pretty optimistic about this. But it will be variable because, frankly, the timing of renewals varies quarter by quarter, as you can imagine.

Great. And one last one, if I could slip it in. I just want to make sure to clarify and I understand the message. It sounded like around the macro you have elements that maybe could point to things getting better but you haven't factored them into your guidance.

But Jim, I thought in your prepared remarks, right at the end I thought you said something like, but of course we're being more cautious in our outlook. I just want to make sure that wasn't something that was misspoke or that I misinterpreted?

I'm glad (multiple speakers) I'm glad you asked the clarifying question. What we are saying is that particularly since the election the PMI index has shown some interesting looking improvements, particularly in US and Europe, and historically we've had some relatively strong correlation to the PMI index.

That said, it's a forward-looking index based on emotion, and we didn't see any of that emotion specifically contribute to orders in Q1. Maybe it will in Q2, Q3 or Q4, I don't know. We're not banking on that. We're essentially ignoring the PMI data until we can see in the rearview mirror as opposed to through the windshield.

Now, what I said, your second comment, is that we have significantly exceeded our bookings guidance for four quarters in a row. But that gives one the temptation to say how great we are, but we're not going to try to be a hero.

We're going to stick to what we see in the pipeline, what we see in the forecast and not let what's happened in the past somehow color our future, or our view of what is likely to happen this quarter or for the rest of the year.

So, I was basically saying, just because we've exceeded significantly four quarters in a row doesn't mean we will in the fifth, sixth or seventh.

All right. Maybe the right term is conservative rather than cautious?

Yes.

Got it. Thanks, guys. I appreciate it.

Thanks, Sterling.

Shateel Alam, Goldman Sachs.

Thanks for taking my question. Hey, guys. Andy, first one for you on deferred revenue.

That was down 2% year over year, down 9% quarter for quarter. I'm sure FX was an impact. Could you quantify that?

And then on this quarter, just explain what some of the dynamics are. Going forward, how do you see deferred revenue tracking throughout the year?

I know you sign maintenance deals in January and April. How does that help?

So as we did in the fourth quarter, we've added new disclosures to our prepared remarks. It's on page 7, so I'd refer all of you to that.

And essentially that is where we show the unbilled deferred revenue and the billed deferred revenue. Because there's variability in the bill deferred revenue, frankly driven by the timing of billings and the timing of our quarter ends.

So specifically, let me give you a total deferred revenue actually went up $248 million to $825 million. That's a 43% increase. Now, the billed deferred revenue on the balance sheet went down from Q4 from $414 million to $375 million.

What happened was, a year ago the quarter ended January 2, and we bill a lot of support and subscription on January 1 and 2, which is -- that's just the timing of that billing. So last year, that was in the first quarter.

This year the quarter ended December 31, so it wasn't in the first quarter. That was $64 million of billings we made on January 1 and 2.

That explains why the balance sheet deferred revenue fluctuated down. It actually would have been up if the quarter ended two days later. So, that's why we think it's important to look at both unbilled and billed.

The other thing that I will highlight is the fact that, because we did get a question off-line so I want to make sure we answer it, that the increase in deferred revenue, that $248 million, is not being driven by length of subscription contracts. Our subscription contacts are a maximum of three years, except for the occasional exception. And by the way, the megadeal that we signed was a three-year contract.

So it is not being driven by length, it's being driven by increased subscription bookings. So, great sign every way you look at it. Does that help?

Yes, that's very helpful. Thank you. And I had a follow-up on -- .

One more thing can I point out? That $64 million would have all been in current deferred revenue had the quarter ended two days later.

That was another question someone emailed us they wanted addressed. Okay?

Great. Yes, that's helpful. And just a follow-up on IoT. I know you can't specifically talk about those megadeals, but maybe some color on the sales cycles around those megadeals?

How long they take? Do you have any more megadeals assumed in your guidance for the year?

First of all, I think you know, we are in a land-and-expand model here with our IoT revenue. And in fact we've changed it to make the first phase a land-and-expand be a premium-based model.

In this case, this was, I'm trying to remember, probably the fourth transaction we did with this customer, as we went from a small one to try it, a bigger one to roll it out a little bit more broadly, another one to increase it, and then this one to increase it significantly more. We've been talking to this customer for a couple years as we moved through those, let's say, four different orders.

And I think that's the way you should expect it to be. That's why every time we win somebody at the front of that land-and-expand process and get them engaged, we are pretty excited because we think we're planting a seed that could bear some pretty significant fruit down the road, just as this one did.

That said, there are no assumptions of any megadeals in IoT or otherwise in the balance of the year. We tend not to put them in any kind of guidance. And quite frankly, sometimes we don't put them in the forecast because we don't want to be operating with such wild swings either in what we're telling each other or what we're telling you.

The one thing I would add to that, though, is that a megadeal is anything over $5 million. And so it would be possible that there would be a deal that was just over $5 million that would be in our guidance but maybe not in our guidance at the full $5 million.

(Multiple speakers) get smaller. We triangulate around the pipeline and all the deals in the guidance and what could happen and what could fall out so many different ways. It's very difficult to say what specifically was in or out given how we develop guidance.

Great. Thank you. Very helpful.

Saket Kalia, Barclays.

Hey, guys. How are you. Thanks so much for taking my questions here.

First, not to harp on the large IoT deals, but they are very interesting. Totally understand you can't talk about who they are and what they encompass.

But maybe more broadly, is the pricing on these deals conceptually similar to what we've talked about in the past where pricing was based on the number of connected things and their associated chattiness? Or are you seeing the pricing structure for these IoT deals maybe change based on metrics as maybe this becomes more common?

Well, Saket, when we are connecting things for purposes of monitoring them and servicing them better and so forth, then we do tend to have a pricing model based on how many things and how chatty. When we do factory projects we tend to do it, particularly if we end up getting into multiple factory projects, we tend to settle down to a per factory charge because it's just too darned difficult to inventory all the things in all the factories in the larger companies.

So this was the later case. And it was the per factory price. It was actually a combination of the two, to be frank, but mostly the latter.

Got it, got it. And then CAD growing double digits was great to see. Can you talk about anything that you think drove that?

Significantly stronger than the overall market growth. And can you remind us what CAD grew year over year last quarter, just for basis of comparison? Thanks.

I'll get the first question while working on the second one, Andrew. To me, the big thing that happened in CAD is that our North American channel, which had been for years kind of a perennial weakness, has really stepped up, and that's a trend. We are looking at four consecutive, really strong channel growth quarters in North America.

Our channel in Europe is very strong, but our channel in North America had been comparatively weak. But we made a lot of investments and program changes, and even some personnel changes dating back a few years, and those persons drove the program changes.

And the channel in North America has responded well. They've also done a good job adopting subscription, they quite like that program. I think to me that's the single biggest factor. Not the only factor, but the single biggest factor in what's improving our CAD business.

Yes, it's funny because if you look at the people running our channel, it's made up of people whose career has been in running channel businesses, frankly in our competitors. And they know how to do it.

And every year they've been methodically maturing our channel management practices. And now we've got a good go-to-market play every quarter. There's a marketing program for the channel that is a call to action, and that's working out well.

The win-back program is working out well also. We have CAD customers who have gone off maintenance, and they have an opportunity to come back on -- back into the fray, basically but go on subscription instead.

And so we had another good quarter in the win-back program. And that program we're expecting to continue much of this year as the final chance to basically come back into maintenance or subscription and not have to buy a new seat next time you want to upgrade.

And just to hit the first part of your question. This is the third consecutive quarter of double-digit CAD growth, CAD bookings growth and the fourth consecutive quarter of positive CAD bookings growth. And it mirrors what I said about the general improvement in North America. I don't have an analysis in front of me, but I'm going to reasonably conclude here that the biggest factor is the improvements in channel performance in North America.

Very helpful. Thanks, guys.

Steve Koenig, Wedbush

Hi, there. Thanks for taking my questions. Let's see, I wanted to ask you maybe a big picture question on IoT, Jim. Maybe just generalizing a little bit.

If you look at the traction you're getting in IoT, and it looks to be increasing and accelerating, can you give us some color, and maybe a little bit more granularly by maybe breaking down a little bit by use case and/or channel, direct versus partner? And related to that, how is customer acquisition in the low-touch sales model working out in that business, too?

Yes. Well, I'd say -- let me answer your specific questions and give you some other big picture comments. On the channel, in general, we've been a model where the PTC channel, both direct and resellers, were doing about half the bookings and new channels that were brought on to support IoT distribution only were doing about one-third of the bookings. And then everybody else, and that means mostly e-commerce, was doing the balance, which would be one-sixth.

Now, the megadeals sway that, though. That's roughly what it would look like if the megadeal either did not happen or was a normal-sized deal. That's a good trend, again that, that one-third that's coming from channels other than PTC and the one-sixth that's coming from e-commerce, those are things we did not have a couple years ago.

Now if you said, what's creating the momentum? The main thing that's creating momentum is seeds that we planted one and two years ago coming back to buy more, and doing substantially larger second and third transactions then they did the first time around.

That led us to open the aperture and say, well, if that's the model, then we should have even more seeds and a premium model would give us even broader exposure. A good example is the 1,000 accounts now playing with our IoT plus augmented reality technology. That's very, very interesting, to get 1,000 companies playing with it, knowing that some amount of them will matriculate into real and then increasingly larger customers down the road.

I think we have good traction. I just ran across a little anecdote this afternoon by accident. We put a IoT class in Udemy, if you're familiar with that. That's the online education system.

And just in the last little over two quarters we've had more than 4,000 people go through it. And the reviews are phenomenal. I encourage all of you to go to Udemy and look at the ThingWorx IoT course and read the reviews.

That's 4,000 people who educated themselves in IoT with our technology and said -- wow, this is a big concept and that's a great technology and quite frankly that was a great course. I'm glad PTCU introduced me. And several of them write a comment saying, how can I learn more about this. And of course there are ways to do that online.

So, anyway, I think we're very excited that the land-and-expand model is working. We've opened the aperture at the front end with a premium program. I don't think that yet has influenced any of the success we had, say, this quarter or last quarter, but we're hoping it'll keep the momentum going kind of as we move into maybe the back part of this year, but for sure next year and the year after and so forth.

Fantastic. Jim, that was a detailed answer. So I'm going to end my quiz early. Thank you. (Laughter).

Thanks, Steve. I will remember that for next time.

Ken Wong, Citi.

Hey, Jim. Hey, Andy. I think we can all see how the strong dollar would keep you guys from bumping up full-year bookings, but why wouldn't we see you guys raise that bookings mix from 65% considering how strong you guys have started off the year, and just given the channel uplift that we've seen early on?

Why didn't we raise the bookings mix? We're only one quarter into the year. And if you actually do the math it's -- it would've been a trivial increase to what had happened just in the past. And we basically base our guidance on what's in the pipeline, which I think is the smart thing to do at this point.

Ken, I'm sure this is at least the fifth quarter in a row we've been asked that question. (Laughter). We'll just keep sticking to our guns here, which is we're going to forecast against the data we have in our system.

And if it turns out better than that, that's fine. But we don't want to just start making it up, and for us to raise the mix for the year would be to step out on a limb and start inventing numbers that aren't supported by data. So this model has worked reasonably well for us, I think we'd prefer to stick with it.

Got it. Fair enough, guys. And then Andy, in the past you guys had talk a little bit about the uplift you guys were seeing with maintenance contract renewal. I think it was in the 20%-ish. Is that consistent with what you guys are still seeing now?

You mean the ones that decided not to convert? I'll be honest, I've not seen that analysis yet. So I don't have an answer for you on that.

I know that operationally the business practice is that if they don't convert they have to basically go to support at we have a minimum, what do we call that? What does Tony call it?

The bridge or something that we --

There is like a BSEO rate. Fundamentally there is a support (multiple speakers) standard -- yes, there's a standard policy of what support has to be, which is that a significant uplift. And it depends upon whether, again, it was a customer that was, if they were 20% below than the uplift is going to get them back up to that rate. But I'll be honest, I have not seen that analysis yet.

Got you. No worries then. Okay. And I guess with that, I will pass the baton.

Great, thanks.

Ken Talanian, Evercore ISI.

Hi, guys. Thanks for taking the questions. Wanted to go back on the IoT business again. You noted that you saw a number of six-figure deals more than double in the quarter.

And I know you talked about some of the pricing on those IoT deals being on a per factory basis. But just looking at that expansion base, could you give us a sense for whether the drivers were more seat oriented, more expansion to other product lines within the Company, or even more asset-based growth?

Yes. I think it's probably three things. Some of it is seat based. When we sell IoT along with say, Navigate, to Raytheon, that anecdote I gave you was probably seat based.

If we sell it to factories, it tends to be factory based because there are so many assets of all different sizes, mixed mode there, very heterogeneous environment. And then when it's more service based, I'm a company who makes things and makes expensive long-lived assets and they are out in the field at the customer site and I wish I could connect them back to me so I can monitor my fleet of things and service them better, monitor customer success and so forth; that tends to be thing based, asset-based.

So to be frank, it's a combination of the three and it really, it depends on the use case, how we're going to price it. Obviously people that are managing a fleet want it priced as per the fleet, how big is the fleet? How sophisticated are these assets?

People who are buying it for users, like with Navigate, want to do it per user. And people who are implementing it across their factories say it's too darn complicated to inventory and figure out how chatty every asset in my factory would because quite frankly I don't make them. Could we just arrive at a per factory price? And there may be some negotiation in that, depending upon the sophistication of the factories and so forth. But it's really all three at this point.

Okay. And just for a second question, you mentioned that you continue to see support contracts convert over to subscription.

And if I look at FY16 results, you actually saw a decline in the support deferred, I believe, at around $34 million. Is there any way we could use that as a proxy to take a look at what the ACV -- or the decline is relative to the ACV as a support conversions?

No. No, because you have the perpetual license revenue going down. That's not the right way to look at it.

Andy, you're saying that (multiple speakers) the less support we have. The more we convert, the less support we have.

Exactly.

(Multiple speakers) unwind all that.

Unwind the two, yes. Sorry, it's too hard to unwind the two.

Okay. All right, great. Thank you.

Matt Hedberg, RBC.

Hello, Matt.

Hi, Matt. Are you there?

Got to unmute your phone, Matt. Operator, I would go to the next person.

Jay Vleeschhouwer, Griffin.

Thanks, good evening. Jim, let me start with you on a technology or portfolio question. Then I will turn to Andy.

So, you've spoken in the past of your view that -- or the equivalent of IoT and PLM. And more broadly you have your overall closed-loop lifecycle management strategy where you're integrating across the various segments.

The question is, do you have examples you can share where customers are, in fact, agreeing with you with regard to the equivalent of IoT and PLM? And more broadly, are you in fact seeing multi-segment deployments in new business where you are seeing the effects of the integrated segment strategy actually converting into new business?

Okay. Let me say, ThingWorx really at some level is an orchestration engine that can pull data from things, it can pull data from systems, it can run analytics against that data. It can put that in some kind of a business process and then deliver it in role base user interfaces to people on web, mobile, and AR devices.

The first thing is, we have sold now a tremendous amount of ThingWorx in just four quarters to our PLM customers in this product called Navigate. So if you have to question how many of them are using Navigate to orchestrate data from things versus things and systems versus just systems? I would say a lot of them have started with systems and are playing with things to bring data from products in the field back into engineering so that they can get a better understanding of what's going on.

Now, it's a powerful idea. We use it here at PTC. We have stuck ThingWorx inside of Creo. ThingWorx, these are our assets that are deployed largely on premise out on the field. Creo, Windchill, and even ThingWorx because we want to be able to monitor how much success a ThingWorx customer is having with ThingWorx using ThingWorx.

And that's the basis for how we do customer success management now. Because without that data, we are kind of blind. If it were SaaS we'd have it running in our data centers or in data centers that we control or monitor or whatever.

But when it's on premise, you don't know anything. So this kind of data is pretty important. Our engineering team uses it a lot.

Decisions made about Creo, which bugs to prioritize and fix and so forth are all based on what do we see customers doing out in the field, what kind of problems are they running into with what frequencies, using what configurations of hardware and so forth? It's a big, powerful idea.

I think the idea of an orchestration engine to get data to pull into PLM is proving to be a big idea. I think we're in double-digit license revenue in the first work orders. Again, how much of it is coming from things at this point it's probably a minority, but everybody is pretty interested in that idea and quite frankly sees the value that we've achieved and using software they are familiar with and we can use that as a benchmark.

Okay. For Andy, just two things. One, how are you thinking now about the profitability, or eventual profitability of the IoT business? When you look at your numbers in FY16 according to the 10-K on a direct cost basis, IoT for the year had 116% of revenue in cost but for the fourth quarter it was only 104%, which suggests you're getting a lot closer on that basis to profitability for the IoT business. So if you could comment on that.

And then lastly, just following up with some of the early questions on deferred. When we think about your model expectations and guidance out through FY21, is it necessarily the case that deferred would be going up every year? Set aside the upside from conversions and so forth, but as guided would you deferred necessarily go up every year through 2021 and so forth?

Let me take the first question. The profitability of IoT, we basically think that as a software business, exceeds that roughly $200 million in revenue. That's really the point in time that, assuming it's still very high-growth, that's the point in time you tend to cross over into profitability.

And we manage the business model that way and we will continue to manage it that way, pretty much the way, frankly a BC or a small public software company would be managing their own business model. We do internally an estimated, fully allocated P&L which of course has a lot of assumptions in it. But that's how we really track the profitability of each of our businesses from a portfolio management perspective.

For SEC reporting and the segment reporting, we don't -- if something like our salesforce or much of our marketing spend goes across all segments, we don't allocate that for SEC segment reporting because we don't want to put just an assumption out there. We basically follow the rules for how you do segment reporting.

So, it looks like we are approaching that profitability according to the segment reporting. But, of course, there's a lot of expenses that haven't been allocated to either IoT or Solutions that are in the unallocated bucket.

Okay. Then the long-term deferred question, if you're putting -- .

The long-term deferred question. Yes, long-term deferred should continue to increase, frankly driven by new bookings every year, which should far exceed any churn.

Okay. Great. Thanks, Andy. Thanks, Jim.

Sarah, I think we have time for just one more question before we run up against the hour.

Ed Maguire, CLSA

Hi, good afternoon. I was wondering if you could discuss whether your customers are -- your conversation with the customers regarding potential legislative changes regarding trade in the US may be changing some of the conversations you may be having, or their thinking about their own investment? I know that's pretty broad, but I was interested in your initial take.

Yes. Ed, my initial take is probably uncertain. Trump's made a lot of promises. We will see which ones he implements and which ones he doesn't in which time frames and so forth.

Obviously we are dealing with a lot of global companies. Most of them would like to see well-lubricated trade, but it's just very hard to see.

On one hand the PMI is up sharply in the US, suggesting these companies can't be too concerned about trade. Their optimism around things other than trade apparently surpasses their pessimism around trade.

So, I don't know. It's very difficult for me to decode. I'm going to stand back in the bleachers and watch it for a while and see what happens.

Okay. One final question. Since GE acquired ServiceMax, I you guys had been working pretty closely with them on connected field services. Has there been -- can you comment on any developments on that partnership, and whether the acquisition of GE alters that or improves it in any way?

Yes. I think if you look at the scenario that we showed at the Minds and Machines event, that was using ThingWorx with Predix in a service scenario. And it was very similar to the demos that we had been doing with ServiceMax except, quite frankly, it did not include ServiceMax because GE probably wasn't ready to show that card.

But I think, number one, PTC has a very good relationship with ServiceMax. We've had some success together and built some great relationships. And I think that having ServiceMax acquired by GE reinforces a new dimension in our partnership with GE that we were working on anyway, which is -- hey, let's not just be partners in the factory and compete in the service bay. Why don't we make ThingWorx works with Predix and then we can be partners across the waterfront, both factory and service scenarios?

Now you add our friends at ServiceMax into that scenario, and I think it's just helpful. I don't think anything -- that deal just closed last week. We have some work to do, but I think that on balance it's a net positive, a reasonably strong net positive for us and our relationship with GE.

Great. Thank you.

Thanks, Ed.

Okay, Tim? Did you want to -- ?

Yes. Operator, I'll just close out. I've got a few programming notes before I hand back to Jim.

We will be hosting this IoT webcast, as Jim mentioned, on February 22 at 1:00 Eastern. Look forward to having you join us for this event.

On the conference front, we're going to be attending JPMorgan's High Yield Conference on February 27, in Miami. Then moving to the Morgan Stanley TMT conference on March 2, in San Francisco.

In the meantime if you have any follow-up questions post this call, please contact Investor Relations. With that, I will turn it over to Jim for some closing remarks.

I just wanted to thank everybody for joining us again here and spending your time with us today. I think when I look at the quarter, it wasn't the perfect quarter but it was a very good quarter. And across our three strategic missions of increasing growth rate, increasing profitability, and switching to subscription, this quarter really moved the ball forward on all of those initiatives.

And as such, it's another great win in the record book and we are pleased to deliver it. We hope to talk you again and 90 days, if not sooner. And hopefully we will have good news again for you. So thanks a lot. Thanks for joining us.

That concludes today's call. Thank you all for your participation. You may now disconnect.