PTC Inc (PTC) 2017 Q4 法說會逐字稿

Thank you for standing by, and welcome to the PTC 2017 Fourth Quarter Conference Call. (Operator Instructions) I'd now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Good afternoon. Thank you, Jenny, and welcome to PTC's 2017 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 most recent annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the U.S. 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 25, 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 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'd like to turn the call over to PTC's CEO, Jim Heppelmann.

Thank you, Tim. Good afternoon, everyone, and thank you for joining us. Let me begin with a review of the fourth quarter and provide some perspectives on the significant milestones we achieved in fiscal 2017. Q4 was a strong quarter, capping off a strong year for PTC. In Q4, we continued our momentum by executing well across our key strategic and operational objectives. Bookings of $144 million were $14 million or 11% above the high end of our Q4 guidance. While bookings were relatively flat as reported in comparison to Q4 of last year, they were up 18% if you exclude the $20 million booking from a mega deal in the year-ago quarter.

We delivered a subscription mix of 72% for the quarter, which was above our guidance target of 68%. Our subscription program progressed nicely throughout 2017. And as of now, we very nearly achieve the original goal of 70% subscription bookings a year early, so our focus has shifted to reaching the new elevated goal of 85% of bookings being subscription.

Q4 revenue and EPS were both within our guidance range despite the higher subscription mix in the quarter, and both would have exceeded the high end of our guidance at the lower subscription mix that we guided to. Momentum around our recurring revenue model progressed further in Q4, with total deferred revenue both billed and unbilled of $1.1 billion, growing 40% year-over-year. Our annualized recurring revenue, or ARR, was $905 million, growing 12% year-over-year. With these metrics, we've established a very solid growth platform for the business going forward.

To guide my commentary on our Q4 and fiscal 2017 results, I'll once again frame my discussion around the 3 key initiatives that we're executing to maximize long-term shareholder value, which are: #1, to increase our top line growth; #2, convert to a subscription model; and #3, expand our margins. So let me start by discussing our progress on the growth front.

After factoring out the SLM megadeal from Q4 of '16, Q4 '17 bookings grew 18% year-over-year, and the full year bookings grew 10% despite the challenges in Japan that we discussed with you last quarter. Including the mega deal in Q4 '16, bookings were about flat for the quarter and up 4% for the full year. Bookings performance in Q4 and for fiscal '17 generally reflects broad-based strength across IoT, CAD and PLM. From a geographic perspective, Europe and Americas were very strong, with full year bookings growth of 29% in Europe and 15% in the Americas if you exclude that megadeal last Q4. We were pleased to see progress in Japan in the fourth quarter where bookings grew 80% sequentially to approximately $8 million, but we still have a lot of work to do in Japan to get back to the levels we would be satisfied with.

From a segment perspective, it makes sense to start by discussing IoT, which is obviously our highest growth business. The fourth quarter capped off a strong fiscal '17, with full year bookings growth that again exceeded the 30% to 40% estimated IoT market growth rate. Customer expansion activity grew in the quarter, accounting for over 75% of our bookings, and a number of six-figure deals grew 40% year-over-year, primarily driven by these expansions. For the full year, expansions comprised 70% of ThingWorx bookings, which is a clear indication that IoT adoption is gaining momentum as customers derive increasing value from their initiatives. IoT bookings continue to come from a wide variety of vertical markets and use cases, led now by the Industrie 4.0 factory operations use case, where we landed 45 new customers in the quarter followed by the service optimization use case for smart connected products. We also saw a continued strength in engineering use cases with ThingWorx Navigate. Because many of these use cases are not necessarily always thought of as being IoT by our customers, you'll hear us referring more and more to ThingWorx as an industrial innovation platform where IoT is one of the key use cases but so is Industrie 4.0, engineering innovation, retail innovation and more.

Let me share some customer examples though from our success in the Industrie 4.0 factory setting. During the quarter, we closed a large expansion deal with a leading Japanese automotive OEM who's leveraging ThingWorx across its engineering, manufacturing -- or engine manufacturing operations, enabling them to fuse 3D design data managed in Windchill with OT data to optimize plant utilization. While PTC's heritage has been in discrete manufacturing, 2 large process manufacturing customers, one in consumer packaged goods and one in food and beverage expanded their use of ThingWorx in the factory during the quarter. One of these firms has now grown its deployment to 100 factories worldwide while the other is at 70.

In another example coming from the high-tech electronics market, LG Display, the world's largest manufacturer of LCD displays adopted ThingWorx, including ThingWorx Studio, to drive efficiencies across their manufacturing operations.

On the IoT ecosystem front, the ThingWorx partner team delivered some key wins in Q4, including an agreement with SoftBank who's launching ThingWorx-based IoT service solutions for property owners and managers; and Flowserve, who selected ThingWorx for their next version of remote industrial equipment monitoring software to enable predictive aftermarket services. These wins represent just a small sampling of PTC's global IoT partner ecosystem that's leveraging ThingWorx across a wide range of used cases and industries, including smart city applications, utilities, health care, energy and communications.

Our ability to access these opportunities through a partner ecosystem expands our addressable market and adds to our exciting long-term growth opportunity in IoT. The market momentum we're experiencing in IoT reflects our unique position with highly differentiated technology and solutions. ThingWorx is consistently recognized as a market-leading solution by industry analysts, including the latest report, which we acknowledged in a press release last week. Nowhere is this differentiation more evident than with our augmented reality technology delivered via our horizontal Vuforia AR engine and our vertical ThingWorx Studio AR content authoring suite for industrial enterprises. Vuforia is for developers of all types who want to build applications that can see using computer vision, and Vuforia is also built into ThingWorx Studio, which in turn enables enterprise customers to create and share scalable AR experiences without writing any code. We recently announced that both the Vuforia SDK and ThingWorx Studio now support Apple's ARKit and Google's ARCore in addition to previously announced support for Microsoft's HoloLens and Windows ML. Vuforia's developer ecosystem has passed 350,000 developers and is growing fast, while ThingWorx Studio, our enterprise solution, now has over 4,500 enterprises who have purchased or are test driving this technology for a broad range of industrial use cases, including augmented service and maintenance instructions, operator instructions and product demonstrations. ThingWorx customers are delivering these AR experiences they've authored using iOS and Android phones and tablets and wearables like the Microsoft HoloLens. There's several other big developments happening on the AR front right now. In early October, we launched a new product called Chalk, which is available on the Apple App Store as Vuforia Chalk. This app allows you make a video call to a remote Chalk user and then mark up objects that you see in their remote environment using AR. In other words, it's an app that lets me see what you see and gives you guidance using markups that I can do with my finger. But the markups attached to the objects in the background, not to the screen in your hand, which, trust me, is a real breakdown. Our customers see this as a transformational moment for customer support and remote service because now, the experts can provide immediate visual guidance to consumers or service technicians from thousands of miles away. I recommend you download Vuforia Chalk and try it out with a friend or family member. It's free for consumer use but it has to be licensed for enterprise use. The second piece of big news is that just yesterday, Harvard Business Review published a blockbuster series of articles written by Professor Michael Porter and me, titled 'Why Every Organization Needs an AR Strategy.' This article series, what HBR calls a showcase, has a downloadable companion app that I promise will amaze you as it works with the print article to open your mind to the possibilities of AR in the enterprise. You can find this November-December HBR in newsstands now or soon and we'll make reprints available on our Investor website as soon as we can get our hands on the PDF version.

Across the board, I trust you can see there's lots of energy and enthusiasm building around our ThingWorx industrial innovation platform, but I'm pleased to report that our Solutions business is doing well, too. I'd like to preface my comments here by reminding you that we had a very strong Solutions booking performance in Q4 '16 when we had a growth of 27% year-over-year, due in part to the $20 million booking from an SLM megadeal. That strong year-ago quarter creates difficult compares for our core business. But excluding the SLM megadeal, Q4 '17 bookings grew an impressive 16% year-over-year in the Solutions business, well ahead of our long-term target growth rate. The strength in our Solutions business was driven by our CAD and core PLM business. CAD continues its streak of above-market growth, growing multiple times faster than the market in the quarter and delivering 14% growth for the full year. Our CAD business has now delivered 2 consecutive years of double-digit constant currency bookings growth. The Creo business has a rock-solid product that continues to benefit from our go-to-market improvement initiatives evidenced by 7 consecutive quarters of double-digit bookings growth in our reseller channel. In core PLM, Q4 bookings were up 9% year-over-year, resulting in 4-year growth -- a full year growth of 6%, which is in line with market growth rates. PLM continues to benefit from sales of ThingWorx Navigate where in Q4, we closed transactions across a variety of vertical markets, including automotive, aerospace, med device and high-tech, which supports our view that this offering will resonate across thousands of enterprise Windchill customers, creating a significant long-term opportunity to drive continued PLM growth.

We also secured several major strategic PLM wins in the Americas and Europe during Q4, including a competitive displacement with a leading global medical devices company, and a new customer win with semiconductor manufacturer, Infineon Technologies AG who chose Windchill for enterprise-wide PLM.

Ever since we began our aggressive move into IoT back in fiscal 2014, we've been hoping that our IoT strength would circle back and play a synergistic role in strengthening growth in our core CAD and PLM business. Looking back at FY '17 data, I see that ThingWorx played a big role in most large PLM deals, and it's increasingly impacting CAD purchases as well. Last week, for example, we held our FY '18 sales kickoff. I used the opportunity to collect first-hand feedback from numerous direct sales reps, and I also had a chance to talk to the principals of several big resellers from the U.S. and Europe. It is interesting to see how excited the resellers were about their business and ours and to hear their views about how much more differentiated our CAD and PLM offerings are, thanks to our industrial innovation platform. Both direct sellers and resellers talked about their ability to position themselves to the customer CxOs as a guide through digital transformation involving smart products and smart operation. Traditional competitors, especially in the reseller space are left pushing feature function and price point arguments around CAD and PLM and fortunately, our story is pretty strong there, too. Many of you heard me take the case at various events like our LIBOR conference that IoT really is just the next generation PLM concept. Our bookings data suggests that this is an argument we're starting to win.

To close out on the growth front, we're very pleased with the impressive bookings performance by our sales organization in Q4, capping off a strong fiscal '17. For the second year in a row, the team has delivered bookings growth that beats market growth and exceeds the needs of our long-term model.

Let me turn now to our second top-level initiative to drive shareholder value, which is our transition to a subscription model. The Q4 '17 mix of 72% subscription bookings was 400 basis points ahead of our guidance, reflecting continued strong demand for our subscription offerings around the globe and in our channel. With our plans to move to a subscription-only model in the Americas and Western Europe at the start of our fiscal 2018, and with additional subscription programs coming online each quarter, we remain confident in our long-term subscription mix and recurring software revenue targets.

Let me finish the outline by discussing our third top-level initiative to drive shareholder value, which is to further increase our operating margins. In Q4, our operating margin was within our guidance range with operating expenses declining $3 million from last year and fiscal '17 operating margin improving over 100 basis points from fiscal '16. This confirms fiscal '16 was the trough for full year operating margins. As Andy will detail in our guidance discussions, we expect to deliver continued operating margin expansion in fiscal '18 and then rapidly accelerating margin expansion in fiscal '19 and beyond as the compounding benefit of multiple years of our maturing subscription model's realized. Illustrating this compounding benefit of subscription, in fiscal '18, we expect recognized subscription revenue to exceed subscription bookings for the first time.

Let me summarize then where we are as we transition to fiscal '18. PTC has a long-range plan that will transform our company into one of the premier industrial software companies in the world by 2021, a subscription company with recurring revenues approaching $2 billion with double-digit growth rates and with margins in the low 30s. Our program to get there is not easy, but it's straightforward. We simply have to increase our growth rate by establishing ourselves as a winner in IoT while holding our own in the core business. We need to finish our subscription transition and we need to continue our spending discipline while letting revenue grow faster. FY '17 was another solid year of execution across the 3 dimensions of that program. It's another great year that goes into the win column. We're confident about our FY '18 plan, and that outlook keeps us right on track for our long-range plan. We still have challenges like Japan and SLM that we're working hard to address, but the largest contributors to our business like our CAD and PLM and IoT segments and our U.S. and Europe geographies are working very well, and we're beginning to enter the more exciting growth phase of the subscription transition. Everybody in my team is proud of the track record of years of progress we've made in our transformation already. We really like where we are right now, and we love where the company is headed. We're focused and committed and confident that PTC will emerge as that premier industrial software company.

With that, I'll turn the call over to Andy who will review some of the financial highlights with you.

Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non-GAAP results and guidance. Also, all year-over-year bookings growth comparisons exclude the Q4 '16 $20 million SLM Air Force booking.

Q4 bookings of $144 million were more than $14 million above the high end of guidance and grew 18%, driven by broad-based strength across CAD, core PLM and IoT. Regionally, Europe delivered especially strong results with bookings growth of 39%. The Americas grew bookings 10% and APAC bookings growth was back in positive territory, with Japan showing some encouraging progress, growing bookings sequentially 80% to approximately $8 million. Our channel grew double digits for the seventh consecutive quarter. For the full year, bookings of $419 million increased 10%.

I do want to share that fourth quarter bookings included an almost $7 million conversion deal in Europe that closed earlier than expected and is a pull-in from Q1 of fiscal '18. The conversion start date is January 1, 2018. Even without this deal, Q4 bookings were more than $7 million above the high end of our guidance, showing the broad-based strength in our business. However, as you see when I discuss guidance, this early close does impact Q1 and fiscal '18 expected growth rates, but we were glad to take this very attractive conversion deal off the street early.

Total deferred revenue billed plus unbilled increased year-over-year by $310 million or 40% to $1.09 billion as of the end of Q4 '17. Billed deferred revenue was up $45 million or 11% year-over-year. We believe total deferred revenue, billed and unbilled combined, is the most relevant metric as there is a seasonality to the timing of our recurring revenue billings throughout the year and due to the timing of our fiscal quarter end.

Average contract length for Q4 and the full year was 2 years, the same as last year. ARR grew 12% year-over-year to $905 million. Subscription adoption trends remain strong, especially in EMEA, the Americas and Japan. Our support conversion program continued to gain traction. In the fourth quarter, 38 enterprise customers converted their support contracts to subscription at an average ACV uplift that was once again over 50% above the prior annual support amount. For the full year, the average ACV uplift from conversions was over 50%. In our channel where we introduced a new CAD conversion program during Q4, early results were promising, with over 130 conversions booked with an ACV uplift of 30%. Additionally, for those large enterprise customers who did not convert this quarter and signed new support contracts instead, their support ACV increased 20%. And I'll remind you that we do not include this increased support ACV in our bookings results.

We believe that the conversion opportunity within our customer base is substantial and will continue to play out over many years as we introduce new programs, including a new conversion program targeting our enterprise customer base that just launched at the beginning of fiscal '18. One last point about conversions. Recall that we include only the incremental ACV in our bookings results, not the full contract value of the new subscription contracts.

Turning to the income statement. Total fourth quarter revenue of $307 million was at the high-end of our guidance range and up 6% year-over-year despite a decline in professional services revenue of $7 million. At our guidance subscription mix, our revenue would've exceeded the high end of our guidance. Q4 was the third quarter of year-over-year revenue growth since launching our subscription program at the beginning of fiscal '16, highlighting that we have exited the subscription trough.

Software revenue was at 10% year-over-year despite an increase in our subscription mix, including 105% growth in subscription revenue and 13% growth in total recurring software revenue. Approximately 85% of Q4 software revenue was recurring, up from 83% a year ago.

Operating expense in the fourth quarter of $181 million was down $3 million from last year, and Q4 operating margin was within our guidance range of 18% to 19% despite the higher subscription mix. The strength in Q4 bookings resulted in higher commission expense than planned, driving total OpEx slightly above our guidance.

EPS of $0.34 was within our guidance range and would have been above the high end of guidance at $0.39 at the guidance mix is 68%.

Moving to the balance sheet. Cash and investments of $330 million were up $19 million from Q3 '17, driven primarily by $28 million of adjusted free cash flow. During the quarter, we repurchased $16 million of stock.

Now turning to guidance. For fiscal '18, we expect bookings in the range of $446 million to $464 million, which is growth of 7% to 11% year after -- year-over-year, and 10% to 14% when factoring in that $7 million conversion megadeal that I previously highlighted. We expect subscription mix to increase 1,100 basis points year-over-year to 80% for the full fiscal year and expect to exit the year in the 85% range, which is consistent with our long-range subscription mix target. We expect fiscal '18 total revenue in the range of $1.225 billion to $1.24 billion, growth of 5% to 6% year-over-year, including $440 million to $450 million of subscription revenue, growth of approximately 60% year-over-year. Note that given our progress in our subscription transition, for the first time, subscription revenue is expected to exceed subscription bookings by more than 20%, illustrating the compounding benefits of a subscription business model as the model matures, and recognize that FY '18 is only the third year of our subscription program. Fiscal '18 recurring software revenue is expected to grow 13% to 14%, total software revenue is expected to grow 7% to 8%, and ARR is expected to grow in the mid-teens. Note that we expect recurring software revenue to exceed 90% of our total software revenue in fiscal '18. We expect our services margin to be 20% and we expect OpEx in the range of $723 million to $733 million, up 5% to 6.5% year-over-year, including about 140 basis points from currency.

You'll note our OpEx guidance is in line with our long-term model to grow OpEx at no more than half the rate of bookings growth. This results in operating margin of approximately 17% to 18%, an improvement of 100 to 150 basis points year-over-year. As Jim mentioned, we expect rapid acceleration in margin expansion beginning in fiscal '19 in the 400 to 600 basis point range, as the compounding benefit of multiple years of our maturing subscription business model is realized. We are assuming a tax rate of 9% to 11% for the full year, resulting in EPS of $1.27 to $1.37, which is growth of 13% at the midpoint.

Fiscal '18 adjusted free cash flow is expected to grow 31% at the midpoint of our guidance to $190 million to $200 million. We've included about $40 million of CapEx in fiscal '18, up from $25 million in fiscal '17, primarily due to the buildout of our new Boston headquarters. We expect CapEx to decline to historical levels when the buildout is complete, which is likely Q2 of fiscal '19. As with operating margin, we expect free cash flow to accelerate significantly in fiscal '19 as the subscription model matures.

Turning now to Q1 '18 guidance. We expect bookings in the range of $82 million to $92 million, a modest year-over-year decline at the midpoint of guidance, due primarily to timing of a couple of megadeals. As you will recall, Q1 last year benefited from a $12 million megadeal. And as previously mentioned, Q1 '18 does not include the $7 million conversion that we closed early at the very end of Q4 '17. Excluding the impact of these 2 transactions, Q1 trends are in line with our historical patterns.

Total revenue is expected to be in the range of $297 million to $302 million, which at the midpoint, represents 4% growth and includes subscription revenue growth of approximately 80% and total recurring software revenue growth of 12% at the midpoint.

Q1 operating expenses are expected to be $176 million to $180 million, resulting in operating margin in the range of 16% to 17%, representing a 100 to 200 basis point improvement in operating margin over last year. We are assuming a tax rate of 9% to 11%, resulting in EPS of $0.28 to $0.32, an increase of 13% at the midpoint.

Finally, before I turn the call over to the operator, I would like to address our long-term financial targets that we provided you last November. Based on our strong fiscal '17 results and our positive outlook for 2018, we are reaffirming our prior fiscal '21 financial targets, which I will remind you, call for $1.8 billion in total revenue, growing double digits, with $1.6 billion of software revenue, growing double digits; 85% subscription mix yielding 95% recurring software revenue; operating margin in the low 30% range; EPS of $4.15; and free cash flow of $525 million. Given the compounding benefit of a subscription business model, operating margin, EPS and free cash flow growth all accelerate significantly beginning in fiscal '19. We have included a long-term operating model presentation with our earnings documents posted to our Investor Relations website. Since we are not making any changes to our long-range targets today, we will not be hosting a separate investor webcast as we have in the past. Looking ahead, we do plan to expand our investor program at LiveWorx, which is next June in Boston. And we are on the road throughout this quarter, starting next week in New York and Boston.

With that, I'll turn the call over to the operator to begin the Q&A.

(Operator Instructions) First question comes from the line of Sterling Auty with JPMorgan.

So noticed in the guidance for the first quarter that actually, it seems like the upfront or perpetuals is stronger in terms of mix and in terms of total dollars than I would've expected. Is that just in preparation of the elimination of subscription? And then the follow-on so I can squeeze 2 into one question, Japan improved to $8 million in bookings. People really want to know, how do you think the improvement should kind of scale out from here?

Yes. So the lower subscription mix of 68% in the first quarter contemplates frankly what's in our pipeline now. We instead contemplate that perpetually it's still available in the Americas and Europe in the first quarter, and there's a step function increase in the subscription mix starting in the second quarter, and we expect to hit 85% subscription by the fourth quarter. Regarding the...

Japan.

Japan. So Japan, as far as what we -- we've been cautious relative to what we factored into our guidance for fiscal '18. In fact, while we do have growth factored in there from fiscal '17, if you look at the actual bookings number in our operating plan, it is lower than our bookings in fiscal '14, '15 and '16. So we've been cautious about what we put in Japan as we continue to kind of work the plan there to bring that back -- performance back in line.

But just to add, I mean, we do think it will take multiple quarters to kind of get back to a new normal, but we're making good progress.

Our next question comes from the line of Ken Wong from Citi.

So Andy, I think one area that I wanted to touch on is just this free cash flow this year. It seems like it was a little lighter than the guidance range you guys have provided. Just wondering what some of the puts and takes there are.

Yes, so we came in $9 million below the low end of our guidance, $149 million versus $158 million. It was release and collection timing. We actually collected $44 million in the first 3 weeks of this quarter, so that was unfortunate. We're off to a good start this quarter but it was frankly, just some collection timing.

Got you. And then I guess on -- I guess this will be deferred and cash a little bit but in terms of having 1 fewer day in Q1, how should we think about what the impact would be on the balance sheet?

Yes so, basically, we're rousing December 31 as compared to last year, and so we look at that -- if you look year-over-year, that's going to impact the growth of our deferred -- billed deferred revenue by about 200 basis points. It's roughly $6 million range that we -- when we look at what's expected to bill on December 31 based upon our recurring revenue billing. The other thing I'll remind you is last year, we had a reduction in billed deferred revenues from Q4 to Q1 because we didn't have the big billings of January 1 and 2. Of course, this year again, we don't have the big billings of January 1 and 2, which of course, are even bigger now with subscription. So we do expect a step down from Q4 to Q1 in billed deferred revenue, however, not as big of a step down that occurred last year, given the progress on subscription. Again, we think you should look at total deferred revenue as opposed to billed deferred revenue because that is contractually committed and that removes this volatility as far as what day the quarter ends as well as the timing of when billings actually happen.

Our next question comes from the line of Steve Koenig from Wedbush.

Sincere congratulations on a very good quarter. I want to ask you on -- I want to talk about partnerships and what you're doing. So there's been news about a large industrial tech company partnering with a horizontal tools vendor like Microsoft in that case. I know you're working on partner applications and you talked a little bit about ThingWorx-based applications. Can you give us an update on what you're doing in the partnering front? And with these ThingWorx applications, anything exciting going on there?

Yes, I mean I think we're working the partnership angle in a couple of different vectors, Steve. One I talked about, which is we're signing up partners who are in various forms, ultimately resellers or OEMs of ThingWorx. But if I come back to the large industrial firms, what's interesting, there's been about, I don't know, 6, maybe 7 analyst reports published that show a cluster of leaders, typically PTC, Microsoft, Amazon, sometimes IBM and GE, depends a little if it's a U.S. or European report. But when we find ourselves in this cluster of leaders, we look at everybody else and we see that they're really offering a horizontal column strategy, and we're really offering a vertical application building and running tool. So in fact, we think that Microsoft, Amazon, to a large degree, IBM and, of course, GE for previous announcements, really are complementary to what we're doing. You can build really great ThingWorx apps that run on Amazon or Azure or Predix and maybe at least in theory, on IBM's cloud. So we are investing in those relationships and we think that anybody who signs a partnership with Microsoft remains a good candidate to be a partner of ours. In fact, we would say ThingWorx is the very best way to build an Azure IoT application, especially one in an industrial world where you walk into a factory, that factory is different from every other factory you've ever set foot in, even in the same enterprise. And now, you're supposed to build an application quickly. You're going to have to figure out how to connect to all these different PLCs and so forth, gather data together. You're going to want to build applications for the plant manager, for the operator, for the service technician. And to a degree, they're unique because this is a special situation, a snowflake, if you will, that is different from every other one. When you run into an environment like that, I mean, ThingWorx just sings. So we feel actually that Microsoft could and I hope, will emerge really as one of our most important partners. I'll tell you, I'm personally investing some energy in that because I think that should happen, it makes sense. And I think it's not just ThingWorx, it's the HoloLens and all the stuff we're doing there. It's the connection between PLM and IoT and dynamics for ERP and CRM. So lots of good stuff could happen there, and we're trying to invest some energy to become partners with Microsoft and partners with everybody who is partners with Microsoft.

And Jim, since it was part of my original question, I'm going to go back to any update on the ThingWorx-based manufacturing app? I know you're working on a portfolio of apps, I believe, with partners. Any progress report there to stay tuned?

Yes. I mean, we did ship the first 3 at our LiveWorx conference or shortly thereafter, I guess be it was. That would be maybe just prior to this last quarter. They are very, very helpful, both for securing business and we had a blockbuster quarter selling ThingWorx into factories and then of course, getting ThingWorx deployed because rather than starting with a great application building tool but no applications, now we're starting with a great application building tool in a prebuilt set of applications which you might just deploy or maybe tweak them a little bit using a tool and you're much closer to value, and the value is much more clear and obvious to the buyer. So I think those applications are doing well and contributing to really surprisingly good results for PTC in the world of factory automation.

Our next question comes from the line of Jay Vleeschhouwer from Griffin Securities.

First on the product front, just could you comment on the adoption of ThingWorx 8 thus far since its launch a few months back? And then similarly, are you expecting that when Windchill 12 will ship as expected in December? At least that was the schedule given out at LiveWorx. And then on the selling front, you highlighted the continued momentum in the channel, which is actually quite interesting to see. And in that respect in terms of maintaining that into fiscal '18, could you comment on some of the initiatives you have in terms of what you call your CPQ initiative, get active, reassigning mid-market accounts back to the channel, that sort of thing? If you could talk about some of those accumulated efforts you have to continue to drive your indirect business.

I'll take the first part of that first. So on the product front, of course, any new sale we're doing right now is using ThingWorx 8. And that's important because, as you know, we acquired numerous technologies, and ThingWorx 8 is where they all converged into one seamless architecture, one seamless experience. So we would not talk to any new customer nor would any new customer want to hear any story other than the ThingWorx 8 story. Now that's not to say that every past customer has already upgraded. That tends to happen around certain milestones or convenient times and whatnot, and that depends too on how eager they are to get to new capabilities. But I think the organization and all the pipeline and so forth has 100% converted over to ThingWorx 8. And I forgot to check on Windchill 12 but so far as I know, it's on track for December and coming along nicely.

All right. And then the channel question?

Andy, you want -- anything you want to add on that?

Well, our channel organizations make great progress over the past few years. We actually have 50% more feet on the street than we did 3 years ago, and the productivity for each of those feet on the street has gone up. The program has matured tremendously and has a road map of continuing initiatives so that it's a peer of kind of the best-in-class channels that are out there in our markets today. The channel is one, they've grown 7 quarters double-digit, high double digits in the fourth quarter of fiscal '17. As far as transferring accounts, that was an activity that happened in the past. It's not really happening more in the future but the focus right now is frankly, just continuing to mature the kind of how we manage the channel, which is doing quite well right now.

Yes, I mean, it really -- the channel I don't think we would say it's best-in-class yet, but it seems to be headed there. And it's really different people with professional programs and we're doing the right things, and those things are producing results. So the story there is very, very good and I will tell you personally first hand, our channel partners are very happy right now.

Our next question comes from the line of Saket Kalia from Barclays.

So 2, if I can squeeze them in. First, maybe for you, Andy. Can you just talk about the fiscal '18 bookings guide qualitatively? And I guess, what I mean by that is it seems like maintenance is going to decline a pretty healthy amount despite more favorable FX. So can you just talk about the double-digit bookings growth next year? Maybe talking about it from a maintenance conversion perspective versus, let's call it, fundamental growth. That's the first question for you, Andy. And then the second question for you, Jim, is I just want to re-ask a question that was asked earlier about partners, but just specifically zero in on General Electric. Very important partner, obviously, from an IoT perspective. We all saw the leadership changes in there and some of the commentary on GE Digital. The question for you, Jim, is can you level set for us how you expect that GE relationship to evolve, if at all, in 2018?

Yes. So, let me address your first question. So we guided 13% to 14% recurring revenue growth most -- that's accelerating with ending ARR growth in the mid-teens, again accelerating. So that certainly looks great. And I'm pretty sure you have a detailed model so you'll see that, that actually played out nicely. Now what happens as far as the dynamic between moving from support to subscription? When a conversion has already happened in the past, then the run rate of support for that gets moved up into the subscription line and out of the support line. So for example, the guidance we gave does have the fourth quarter conversions that the support run rate is out of support and into subscription. Now...

To be clear, without a booking.

Without a booking being recorded. So that's why one goes down, the other one goes up. But then subscription also goes up on top of that movement for in the case of a conversion for the incremental ACV that we earn. So that's how that one grows at a faster rate than the support goes down for a conversion. FX is a modest tailwind for us this year. You can probably get some idea of the overall sizing of that, given the -- and that's because it's not as big as you might think because we've already hedged much of the year when FX rates were not so strong. So when the dollar was actually stronger than it is today, we hedged much of next year. So sometimes hedging helps you, sometimes it hurts you. We don't know what's going to happen to currencies for the rest of this year, so who knows if it'll end up helping us or hurting us. We did highlight that FX impacts our OpEx by about 140 basis points. India and Israel, the big drivers for that, and there was a much more substantial move of those currencies than the euro, for example. So you can get some idea that it's a modest tailwind for us. When you look at EPS, it's not really a tailwind at all for us for FY '18.

And maybe I can pick up on the GE question. So let me first say, GE is a very important customer and partner. And of course, they're our CAD and PLM customer but let's set that aside. On the IoT side, they're a very important customer, deploying ThingWorx in their factories. And of course, they're an important partner reselling some of our technology as part of solutions they deliver. So we're probably reading the same headlines you're reading about how Flannery's going to transform GE in profound ways, but he hasn't told us what those ways are yet, and I'm assuming he hasn't told you. So I think we're all standing on the sidelines. Maybe we'll learn more in November, but I don't think we have any basis to speculate at this point. It's just steady as she goes. We're working hard on the deployments, we're doing what we can to nurture the partnership, and we'll wait and see if anything changes based on this new strategy.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets.

This is actually Matt Swanson on for Matt. So this has been a really strong year for Europe. I know it kind of reflects on the PMI results we've seen lately. Is there anything going on there beyond kind of the general macros?

Well, I mean the PMI is strong in Europe and that's been helpful, probably has shifted over the last, I don't know, 1.5 years, 2 years from being a headwind to at least, neutral if -- it's not a tailwind. But I actually would attribute it to the strength of our organization there. We have some of our best accounts and we have some of our best field resources in Europe. The guy we got running Greater Europe based out of France is phenomenal. The guy we have running Germany is phenomenal. These guys are building great relationships, they're winning really good deals. We mentioned Infineon, for example. That was a substantial deal coming out of the semiconductor space. Infineon, of course, was spun on Siemens some time ago and uses lots of Siemens' technology, so I'm sure they got a look. But anyway, we have a really strong organization and really good solutions, and I think we're just executing very well in Europe.

Our next question comes from Gabriela Borges from Goldman Sachs.

Andy, maybe just a little bit more on the maintenance conversions. You mentioned 2 data points in the prepared remarks. One on the average ACV uplift being in the order of 50%, and then another on the CAD conversions there, just sort of being in the order of over 30%. Could you just explain what the nuance between the 2 types of conversions are? And then as we look at the longer-term model and we think about layering the benefit of maintenance conversion into the longer-term model, how should we think about the incremental EBIT contributions that you could get out of deals there?

Yes. So again, the 50% ACV uplift, about half of that typically has been just a like-for-like conversion. So same products, same -- I should say same value, dollar amount value or their building materials they do get to restack and remix. And they're doing the conversion for that restack and remix and just the ongoing flexibility of having the subscription contract. So that's about half of it. They're in a buying motion, they've probably just inventoried their people on what they would like to have as well as what they actually already have. And so we're able to sell them incremental software at the same time, and that's what brings the ACV up to over 50% Q4 and actually, every quarter this year. Last year it was just over 40% in total, with about 25% like-for-like. Now the CAD was a new programs that we offered this year where you could turn in your perpetual license, convert it to subscription, and you would get a choice of 3 of 4 extensions, CAD extensions. And you would get those for free in the conversion, which essentially costs you 25% more on average. So that program was just launched. The channel partners had to learn about it. And really, we saw some really nice progress in the Americas and Europe, predominantly with 130 of those, I believe, during the quarter. It turned out we actually got 30% more, not the 25% like-for-like, and that was actually because they bought a little bit more at the same time as they did the conversion. We introduced a new conversion program for the enterprise. It's really where we don't have a stick like where the support is currently at market rates. We did that because of the 212, I think it is, enterprise conversions we've done life to date. About half of them, we did not have a stick. Their support was already at the market rate. And frankly, they did it for the flexibility, the restack and the remix. So we actually have come up with a new program that is less art and more kind of here's how it works, and that launched at the start of October. And our pricing studies show that there should be some real demand for that. And again, we would expect to get like-for-like about 25% more in that conversion program. Now as you look at our long-term model, of course, conversions are always in our current year guidance because they're in our pipeline. And our sales reps work a conversions the same way they work a new deal, okay? They're trying to get incremental value from the customer and also sell some more software at the same time. But we have not put them in our long-term model which for -- that would mean FY '19 to '21. So you could simply look at our installed base, make assumptions on what penetration you think we're going to get of our support base. And pretty much close to 80% of our support comes from the enterprise customers, and about 20% comes from the channel customers, so you could easily add assumptions your model for that. The last thing I was going to say, we see this playing out for a very long time. If you look at the 200 enterprise customers we have now, about half of them are in the top 500 that have below-market support. We're only 20% penetrated through that 500 and about half, 100 of them roughly are from the next 1,000 customers. So only 10% penetrated of the kind of next cohort of customers.

Our next question comes from Ken Talanian from Evercore ISI.

So I was wondering if you could give us a sense for some of the drivers of CAD and PLM growth that you're factoring into your F '18 bookings guidance. And specifically, this is a question I get all the time is how should we think about the difference between volume or seat growth versus pricing?

Okay. I can try out first and then you can add anything I might happen to miss. I think if you look at our CAD business and quite frankly, our PLM business, too, you start with really great products. And maybe in the past, we've had some focus or distribution challenges, but our products are very good. You add on to that this ThingWorx story around industrial innovation platform and some of the really interesting capabilities that, that brings to Navigate and to augmented reality, virtual reality, and it actually makes the CAD story and the PLM story both much more compelling. Then you layer in the improvements we've made in go-to-market and distribution, both the direct side where we have a CAD overlay force in place that's working and of course, the channel, all the channel improvements we've been making over the past few years, and you've got a business that's just starting to work well. Now, I think it's both volume and price in the sense that we're selling more capabilities. When we sell a seat of Navigate, you remember, we allocate half of that seat to ThingWorx and half of that seat to PLM. So selling that capability into a PLM account helps drive PLM revenue. And I think probably, the bigger part there was volume. We're selling more seats into more accounts, especially in the channel that would be true, and a lot of our strength here really is coming from the channel space.

And what I would say is if you look at our guidance growth rate, it's pretty much in line with market growth rates for -- even for FY '18. So it's not like achieving our FY '18 plan requires us to grow CAD double digits or PLM above-market growth rates. It's basically CAD growing at roughly market growth rates, PLM growing at roughly market growth rates and IoT growing at market growth rates.

That's not to say we won't try to grow it but to Andy's point, we're not all out on a limb with guidance. We're not trying to do something that should be impossible. We're trying to do something that's really pretty middle-of-the-road. Keep up with the market and we could deliver that guidance range.

The only other thing I'd add is specifically in PLM in addition to what Jim highlighted around how ThingWorx and augmented reality are actually helping us differentiate both our CAD and PLM products. In PLM specifically, we're seeing strength in retail and med device where we're quite focused, and we're also frankly seeing strength in cloud, where we grew in FY '17 our cloud PLM over 50%. And we believe we're by far, the largest cloud vendor. Many of our new customers simply go straight to the cloud and we've seen many of our -- even our large, older customers, frankly, move more.

Yes, rehost...

Into the cloud. Yes, I should've mentioned that.

Just on the cloud point, to give a little more data. No doubt, PLM and maybe even more so CAD, have been legging categories in terms of movement to the cloud, but that seems to be happening now. And you may remember, we acquired a little company back, I think it was in 2011 already, NetIDEAS, who had created a cloud business around Windchill. So we basically brought that business in house and put more resources behind it, and it's prospered. And we think you can compare us to any pure play or any other PLM vendor, we think we're doing more business in the cloud than anybody, and it's becoming a big proportion of the business we're doing every quarter. So that's definitely a key driver as well.

Our next question comes from Monika Garg from KeyBanc Capital.

The first is Andy, you talked about like the enterprise customers who do not upgrade to subscription and renew support ACV that increased that 20%. Maybe just talk about what led to such high growth in support ACV.

Well basically, these are the enterprise customers who are paying below market support. So we basically first give them a quote to take them up to market rates, which tends to be about a 20% or so increase, and then we offer them the opportunity to instead convert to subscription for just a little bit more. So that's the sales play we do for those top 500 accounts where they're below market, and most go to subscription or intend to go to subscription. So when we looked at this quarter, 60% of those that we ran that play with chose to convert to subscription. The rest -- most of the rest actually ask for a bridge agreement to give them just a little bit more time, and we do that at a premium, give them a short-term bridge agreement. And then there were a handful that basically couldn't get it done within a year. I mean, it's going to take them a year, so they just signed up for another year of support, and their ACV for that went up 20%. So that's essentially how that played out.

Then you reiterated fiscal 2021 targets. How was fiscal '20 target, which was $450 million free cash flow, $1.6 billion revenue?

Could you restate that question? The 2021 target is $1.6 billion of software, $1.8 billion of total revenue, both growing double digits.

Right. So you reiterated 2021 targets but remember, there was also fiscal 2020 targets which was...

We put a presentation on the Investor Relations website, and I think you can see 2020 pretty clearly on that one.

That's our last question. I'll turn the call back to Jim Heppelmann.

Okay, great. Well, thank you, Jenny. So I want to thank everybody who joined us on the call here, for spending your time with us this afternoon. I trust you will agree that our Q4 and fiscal '17 results validate that we're executing against these 3 pillars of growth, subscription and profitability expansion. And I trust you further agree that if we do that and continue doing that, that's going to create a lot of long-term shareholder value. So we're happy with where we are and hope you are, too. We look forward to seeing you at an upcoming investor event. And if not, I look forward to talking to you on the call again in 90 days. So thank you very much for joining us. And Jenny, that concludes our call.

Thank you. And that concludes today's conference. Thank you for your participation. You may now disconnect.