PTC Inc (PTC) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2018 First Quarter Conference Call. Today's call is being recorded. If you have any objections, you may disconnect at this time. (Operator Instructions) I would now like to turn the call over to Mr. Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Good afternoon. Thank you, Michelle, and welcome to PTC's 2018 first 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

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Mr. Tim Fox, PTC's Senior Vice President of Investor Relations, rejoins the call.

Thank you again, Michelle, and apologies for the disconnect there. Welcome to PTC's 2018 First 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 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, January 17, 2018, 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 Relations website.

And with that, I'd like to turn the call over the PTC's CEO, Jim Heppelmann.

Thank you, Tim. Good afternoon, everyone, and thank you for joining us. And sorry once again for the gremlins that interrupted our start the first time. I'd like to begin today with a review of the first quarter results and then provide some perspectives on the significant accomplishments and milestones that we achieved in the quarter.

Q1 results represent a strong start to FY '18, and this continues the momentum we've built over the last several years really. Bookings of $104 million were $12 million or 13% above the high end of our guidance range, representing growth of 16%. PTC achieved an important milestone by booking more than $100 million in the first quarter, and it was driven by broad-based strength across our business.

Once again, we had strong performance in CAD, PLM and IoT and in the Americas, EMEA and the reseller channel.

On the subscription front, both bookings and ACV exceeded the high end of guidance. Q1 revenue was above the high end of our guidance range while EPS was near the high end, growing 17% year-over-year, reflecting the pattern of accelerating earnings growth we expect as our subscription model continues to mature. Momentum around our recurring revenue model progressed further in Q1 with total deferred revenue, both billed and unbilled, of $1.17 billion, growing $344 million or 42% year-over-year. Our annualized recurring revenue, or ARR, was $928 million, growing over $100 million or 13% year-over-year. This was the first quarter in -- or the fourth quarter in a row of double-digit growth and the highest growth rate to date. These metrics demonstrate that we have indeed established a very solid growth platform for our business going forward.

To summarize my commentary on Q1, I'll once again frame the discussion around the 3 strategic initiatives to maximize long-term shareholder value, which are, first, increasing our top line growth; second, converting to a subscription model; and third, expanding our margins.

Let me start by discussing our progress on the growth front. Q1 bookings grew 16% overall and 11% on a constant currency basis, once again reflecting broad-based strength across our major products and regions. From a geographic perspective, Europe and Americas continued to deliver a very strong results with constant currency bookings growth of 23% in Europe and over 30% in the Americas if you exclude the exceptional 8-figure IoT megadeal from the year-ago period. APAC also delivered strong Q1 results with constant currency bookings growth of 21% driven by strong results in China and Korea and a modest recovery in Japan, which grew over Q1 of 2017. In Japan, we still have work to do, but we're pleased to see things moving in the right direction over the last 2 quarters.

Let's start by discussing IoT, our highest growth business. The first quarter performance in IoT was another proof point that the market is rapidly developing, that adoption is accelerating and that this opportunity is global. If you exclude the 8-figure megadeal from Q1 of '17, then first quarter IoT bookings growth exceeded the 30% to 40% estimated IoT market growth rate, and recurring IoT software revenue grew 31% as the compounding benefit of our maturing subscription model begins to be realized. Customer expansions were once again a key growth driver, accounting for over 60% of our ThingWorx bookings, which is a clear indication that IoT momentum is increasing. In addition to strong 6-figure deal activity in Q1, we closed 5 7-figure deals, tying the record we set last quarter in Q4 of 2017. IoT bookings continue to come from a wide variety of vertical markets, geographies and use cases led now by the Industrie 4.0 factory operations use case followed by the service optimization use case for smart connected products.

Let me share some customer examples to illuminate our success in the Industrie 4.0 factory setting. During the quarter, we closed a major expansion deal in Korea with Hyundai Heavy Industries, who's deploying ThingWorx and ThingWorx Studio across their enterprise to power their global Smart Manufacturing initiative. Meanwhile in the Americas, the life sciences industry remains at the forefront of IoT adoption, a good example of which is the 15-site expansion we closed with one of the world's premier biopharmaceutical companies to deliver operational intelligence, analytics and predictive maintenance across their manufacturing footprint. In what is to us a greenfield market of process manufacturing, we continue to have a lot of success particularly in food and beverage and consumer products. In Q1, our process wins included a very large food and beverage company headquartered in Switzerland, a Danish global brewing company and a major U.S.-based producer of dairy nutrition products, all of which highlight the broad applicability of our industrial innovation platform. Back in discrete, a significant customer win was an expansion deal with Sealed Air, who is a global leader in the food and product packaging industry with brands you might recognize like Cryovac and Bubble Wrap. Sealed Air, who's an existing ThingWorx customer, signed a significant expansion with PTC, deploying our Kepware software to standardize edge conductivity for remote monitoring of packaging equipment in order to gain critical insights around the operational efficiency. Kepware's capability to enable remote connectivity of heterogeneous brownfield assets gives us a unique and significant cross-sell opportunity for ThingWorx in the smart connected operations use cases across a broad range of industries.

Turning to the smart connected product, or SCP, use case for IoT, I'd like to highlight one of our largest IoT deals in the quarter. Colfax, a global, diversified industrial technology company, selected ThingWorx to build out SAP use cases for remote monitoring and predictive service. Colfax is a great example of how ThingWorx complements the capabilities of large cloud players. In this case, our sales team collaborated with their Microsoft counterparts. Both teams landed a win as Colfax will deploy ThingWorx and Microsoft's Azure Cloud Services, capitalizing on the respective and complementary capabilities of both PTC and Microsoft IoT technologies.

On the IoT ecosystem front, the ThingWorx partner team inked a host of new OEM design wins and expansion deals across a diverse set of use 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 just the last few weeks, we've announced the opening of 4 new ThingWorx centers of excellence with Capgemini, Infosys, WiPro and Cognizant. These new centers add to the 3 existing centers previously established with L&T, Tech Mahindra and KPIT over the past year. Partnerships like these are critical to establishing a software growth business. And with PTC's momentum attracting more and more partners, the ThingWorx partner ecosystem remains the strongest in the industry.

Lastly, on the new technology front, I'd like to touch on the momentum we're seeing around our augmented reality technologies, which are highly differentiated elements of PTC's story and, importantly, are being put into production at an accelerated pace across a number of industrial use cases. As a reminder, the first part of our augmented reality story is delivered through our horizontal Vuforia AR engine, which is available to a wide range of developers who want to build applications that can see using computer vision. And the second part is delivered through our verticalized ThingWorx Studio, AR content authoring suite, which enables enterprises to create and share powerful AR experiences without writing any code. Vuforia's developer ecosystem has passed 400,000 developers and is growing fast, while the ThingWorx Studio now has over 6,000 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 virtual product demonstrations. While it's still early days for AR in the industrial setting, we have a very strong leadership position. Interest levels are sky high, and we're seeing commercial adoption accelerate with Studio bookings growth in Q1 up 20% sequentially from Q4 of 2017. We continue to innovate in AR, and the release of Vuforia 7 in December was our biggest and most powerful release ever. Key features in this release include Vuforia model targets that enable applications to see and recognize physical objects by their shape as determined by a CAD model. In addition, Vuforia's new spatial tracking capability enables virtual objects to be placed on the ground, on a floor or on a tabletop surface. This allows developers to build visualization apps that range from in-home furniture shopping to AR design reviews in the industrial setting. And they can run those same apps on Apple, or Windows Surface and HoloLens devices. These new features further differentiate our solutions from competing technologies and extend PTC's technology lead in AR and IoT.

Looking at these new technologies from a higher level, clearly, there's a lot of talk and hype around IoT and AR coming from various angles. And I realize that at this point, some investors still view our IoT business as an interesting option. But following a very strong fiscal '17 year, our Q1 performance gives another data point suggesting that the industrial IoT market is real and that PTC is winning in this market. PTC has been successfully building a real business for several years now, and our IoT software bookings are now approaching the size of our PLM and CAD businesses but with a growth rate that is multiple times higher. At current course and speed, it won't be long before IoT has to be viewed by all as equally core to PTC as CAD and PLM are today.

Now as excited as we are about our IoT businesses, I'm pleased to once again report that our Solutions business did extremely well. In Q1, Solutions bookings grew multiple times faster than the market, driven by our core PLM and CAD businesses. During the quarter, our leading position in the PLM market was reinforced by the Forrester Wave report on PLM that evaluated discrete manufacturing PLM vendors across a wide range of metrics measuring both strategy and the strength of current offerings in the market. Forrester is considered to be one of the most respected Tier 1 industry analyst firms and, as such, we're very pleased to secure the top spot in their PLM vendor analysis. In addition to the breadth and depth of our core PLM technology, Forrester cited PTC's move into IoT as a key strategic play, which is great evidence that this new IoT business is changing the rules of competition in the traditional PLM business as well. You can find a copy of this Forrester Wave report on our Investor website.

Now landing the top position in a top-tier industry analyst report is great, but landing a big win at a new top-tier customer is even better. This quarter, our PLM strength and differentiation was further validated by a major strategic win at BMW. PTC was selected, following a highly competitive process, to replace a legacy platform for manufacturing bill of material management, or what we call MBOM. Windchill will soon be the enabler for configuring and releasing car orders into production across BMW's 19 global automotive factories. We won this deal on the backs of our industry-leading PLM technology together with impressive out-of-the-box manufacturing capabilities. Navigate, which you know is our role-based PLM solution built on the ThingWorx innovation platform, was a key part of this solution. Needless to say, BMW represents a major new automotive customer for PTC, and we're pleased to be part of their strategic multiyear global digitization strategy.

Now not to be left out, our CAD team delivered another impressive quarter as well. We believe that CAD bookings benefited modestly from last-time perpetual purchases to the tune of about $4 million. But even excluding these last-time buys, CAD bookings still grew double digits year-over-year. Clearly, our Creo business has a solid product offering that continues to benefit from our go-to-market optimization initiatives evidenced now by 8 consecutive quarters of double-digit bookings growth in our reseller channel.

To close out my commentary on the growth front, following very strong performance in Q4 of last fiscal year, we're pleased this momentum carried into Q1, resulting in an impressive bookings performance by our sales organization that started fiscal '18 on such a high note.

Let me turn now to our second top-level initiative to drive shareholder value, which is our transition to a subscription model. Our subscription bookings in ACV were ahead of the high end of our guidance in Q1. The Q1 mix of 67% subscription bookings was just slightly below our guidance, but that is due to the effects of the last-time perpetual buys in the America and Western Europe regions, which totaled about $4 million. This negatively impacted the subscription mix by several percentage points. Now frankly, that's a good problem to have because with the Americas and Western Europe now fully subscription-based going forward and most of the rest of the world going subscription-only beginning January 1, 2019, we have high confidence in our long-term subscription mix and recurring software revenue targets.

Let me wrap up my comments by discussing our third top-level initiative to drive shareholder value, which is to further increase our operating margins. In Q1, our operating margin was at the midpoint of our guidance range despite higher commissions on bookings that came in well above guidance and was an improvement of 110 basis points over Q1 of '17. As Andy will detail in our guidance discussion, we expect to deliver continued operating margin expansion in fiscal '18 and then achieve rapidly accelerating margin expansion in fiscal '19 and beyond as the compounding benefit of multiple years of our maturing subscription model is realized. Illustrating this compounding benefit of subscription, in fiscal '18, we continue to expect that recognized subscription revenue will exceed subscription bookings for the first time. The subscription business model has been a long journey for PTC, but now we're starting to enter the most enjoyable phase where reported revenues and earnings begin to climb quickly on a year-over-year basis as we begin to harvest the benefit from all of that revenue that we previously deferred.

In closing, I'd like to reinforce our commitment to our long-range plan to transform PTC into one of the premier software companies in the world by 2021, a subscription company with revenues approaching $2 billion, with double-digit growth rates and margins in the low 30s. Q1 of '18 was another solid quarter of execution that crossed the 3 dimensions of that plan, and it sets us up for continued success in fiscal '18 and beyond.

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.

Q1 bookings of $104 million were $12 million above the high end of guidance and grew 16% as reported and 11% in constant currency driven by broad-based strength across the business. Total deferred revenue, billed plus unbilled, increased year-over-year by $344 million or 42% to $1.17 billion. Billed deferred revenue was up $56 million or 15% year-over-year despite having 1 less billing day in the quarter versus last year. We believe total deferred revenue, billed and unbilled combined, is the most relevant metric as there is seasonality to the timing of our recurring revenue billings throughout the year and due to the timing of our fiscal quarter-ends.

ARR grew 13% year-over-year to $928 million. Subscription bookings in ACV exceeded the high end of our guidance. However, subscription mix was 1 percentage point below guidance due to last-time perpetual buys in the Americas and Western Europe, which impacted mix by 3 percentage points. Excluding the last-time buys, subscription mix would have been about 70%, above our guidance.

Due to the continued strong adoption of our subscription offerings, we announced today that, with a few exceptions, as of January 1, 2019, new licenses will be subscription-only globally.

Our subscription conversion program continues to progress well, with 24 enterprise customers converting their support contracts to subscription. And in our channel, the new program launched in Q4 '17 is gaining traction with 134 conversions in Q1. We believe that the conversion opportunity within our customer base is substantial and will continue to play out over many years.

Turning to the income statement. Total first quarter revenue of $307 million was $5 million above the high end of our guidance range, up 7% year-over-year despite a decline in professional services revenue of $4 million. Q1 was the fourth 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 up 10% year-over-year despite a year-over-year increase in our subscription mix, including 82% growth in subscription revenue and 12% growth in total recurring software revenue. Approximately 87% of Q1 software revenue was recurring.

Operating expense in the first quarter of $183 million was $3 million above our guidance range driven primarily by higher commissions from our bookings overperformance. FX was also a factor. Q1 operating margin was within our guidance range of 16% to 17% despite higher commissions. EPS of $0.31 was at the higher end of our guidance.

Moving to the balance sheet. Cash and investments of $342 million were up $12 million from Q4 '17 driven primarily by $19 million of adjusted free cash flow, an increase of $57 million from Q1 '17. Collections were up $60 million from Q1 a year ago. You will recall that we have significant cash outflows in our first quarter when we pay our annual bonus, high Q4 commissions, withholding taxes on annual RSU grants and a 6-month bond interest payment.

Now turning to guidance. Based on our strong performance in Q1 and our outlook for the rest of the year, we are raising top and bottom line guidance as well as cash flow guidance. We now expect bookings in the range of $455 million to $475 million. This represents growth of 9% to 14% year-over-year. I would like to highlight that while we have increased the full year bookings outlook, we did not incorporate all of the Q1 bookings overperformance in the guidance, primarily reflecting a $3.5 million deal originally slated for Q2 that closed early. You'll note that this is the second quarter in a row where we've seen a handful of deals close earlier than expected, reflected in a nice uptick in our close rates. However, since it is only the first quarter and deals can move around, we think it's prudent at this point in the fiscal year to not be overly aggressive around our close rate assumptions.

We continue to expect a subscription mix of 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 of $1.235 billion to $1.250 billion, an increase of $10 million at the midpoint of our previous guidance. We've increased our subscription revenue guidance to $460 million to $470 million, growth of approximately 65%. Fiscal '18 recurring software revenue is expected to grow 13% to 15%, total software revenue is expected to grow 7% to 9% 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 $727 million to $737 million, a modest increase from our previous guidance, primarily reflecting higher commission expenses from higher forecasted bookings for the year along with a modest FX headwind. Fiscal '18 year-over-year OpEx growth of 5% to 7% includes about 200 basis points of 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% consistent with our prior guidance and an improvement of 100 to 150 basis points year-over-year. We continue to expect rapid acceleration in margin expansion beginning in fiscal '19 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 $1.29 to $1.39, an increase of $0.02 over our previous guidance, which is growth of 15% at the midpoint. We are raising our fiscal '18 free cash flow guidance to a range of $195 million to $205 million, which is year-over-year growth of 82% at the midpoint. As with operating margin, we expect free cash flow to accelerate significantly in fiscal '19 as the subscription model matures.

Turning now to Q2 guidance. We expect bookings in the range of $94 million to $104 million. Total revenue is expected to be in the range of $300 million to $305 million. Q2 operating expenses are expected to be $176 million to $179 million, down $4 million to $7 million from Q1 despite modest FX headwinds, resulting in operating margin in a range of 16% to 17%. We are assuming a tax rate of 9% to 11%, resulting in EPS of $0.28 to $0.32.

Before we wrap up and go to Q&A, I would like to discuss the impact of the recent U.S. tax reform legislation. We have recorded the impact in our Q1 GAAP earnings, resulting in a noncash benefit of approximately $7 million. We have excluded the Q1 tax benefit from our non-GAAP results and from our full year non-GAAP guidance. We continue to expect our FY '18 non-GAAP effective tax rate to be between 9% and 11%. Moving beyond fiscal '18, based upon our current analysis, we continue to expect our long-term non-GAAP effective tax rate to be between 15% and 20%. We also do not expect a change to our cash tax payments from the new legislation. For while we have accumulated earnings and profits outside the U.S. that would be subject to the new toll tax, we have offsetting tax attributes, such as NOL carryforwards, R&D tax credit carryforwards, AMT tax credit carryforwards and foreign tax credits.

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

(Operator Instructions) Our first question will come from Steve Koenig from Sterling Auty (sic) [Wedbush Securities].

I think I'll ask about IoT. So a lot of good developments in the quarter clearly. Maybe you can just remind us, about the 8-figure megadeal a year ago, was this a subscription deal? And any color on the nature of that deal that you can remind us? And bigger picture on IoT, when should we think about -- you commented in the prepared remarks, I believe, about expecting software revenue to accelerate there. Any sense of the cadence or timing on that? And any reason that we shouldn't get to 30% to 40% revenue growth to match the market growth rate at some point?

Yes. Why don't I take the first part, Andy, and you can take the second part. So yes, the deal last year we discussed at the time was with a large industrial firm who had made a enterprise-wide commitment to deploy our software into the smart connected operations types of use cases. So that was a great deal. It was a subscription deal. The size of that deal, though, in the context of the size of the business, especially at that time, was truly extraordinary. And so when we comp against that quarter, with a deal of that magnitude -- if you put the deal in last quarter, of course, you get one answer, which is flattish. If you take the deal out, you get a different answer, which is a heck of a lot bigger and really a strong quarter. So I think what you should see is that we kind of were able to basically, in terms of growth, represent and offset an 8-figure megadeal a year later without any such deals in this quarter.

And as far as the timing and cadence, Steve, it's really the same thing that's going on with our total revenue from a software perspective. We only have 2 years of the compounding benefit in our base. So now that we're getting to the point where we still are seeing a year-over-year increase for the full year in the subscription mix -- for example, for the total business, we're expecting it to go from 69% last year to 80%. So that is a headwind to overall revenue growth, and then you just don't have enough years in the base. So it's actually the same dynamic that you see for the total business. So you will see acceleration in FY '19 as we get a third year of subscription revenue that's more significant in our base.

And maybe I'll add a third part. I alluded to this in my comment, but if you extrapolate forward, given the relative sizes of the revenue bases -- well, not so much the revenue bases but the bookings, let me be clear here, it's not going to be long before IoT bookings pass PLM bookings. And by not long, I mean possibly in this year. And it wouldn't be too much longer after that at current course and speed before IoT bookings would surpass CAD bookings. So this is really becoming the most core of our core businesses if we can keep executing at the level that we are currently executing at. I should be careful, from a revenue standpoint, of course, there's a long tail of maintenance, which is now subscription recurring revenue associated with our CAD and PLM businesses that's built up over decades. And it will take us longer to build up that complete revenue picture. But certainly from a bookings standpoint, IoT is in the passing lane.

Our next question will come from Sterling Auty from JPMorgan.

If you look at the FX impact, Andy, can you help us on that front? I mean, we've seen some pretty big moves. But now that you've moved over to a subscription model, how does the FX changes now impact the revenue and business because I imagine the old formulas just don't hold anymore?

Well, so it's a modest tailwind right now. And we hedge our business and subscription, there's greater certainty of what those numbers are going to be, so we can start increasing the percentage of the business we hedge. So that means within typically 3 to 4 quarters' perspective, FX is not going to have a material impact. It would have to move a lot to have a material impact on our overall results because we can simply hedge more. The purpose of hedging, remember, is to give you time to react to changes in foreign currency rates not to try to make money off of them. And so we're trying to basically build a period of stability in our top and bottom line results that give us time to react to any material changes in FX rates. We've been doing that now for 2 years, increasing the number of currencies we hedge, and so FX tends to have less of an impact. Now when you look at bookings, if you look a year ago, the dollar, of course, moved substantially in about January of last year. And so there is more of an impact when you look at our bookings. You saw the 16% overall growth and the 11% constant currency, much bigger than the revenue impact.

That makes sense. I'm going to try to sneak one other one in. The maintenance to subscription conversion, I think you mentioned 24. Are those 24 conversions out of the top customers? And what was the uplift that you saw on those versus the 134 from the channel?

Yes. So it was about half and half out of the large customers and the -- that have VPAs, where we've got a carrot and a stick, and about half where we don't have a stick. There was one weird one in there that I'll talk about in a second. Exclude the weird one, the overall uplift was 50% basically, so in the same range as before. The one weird one was a very large customer that had very high support, and so we didn't quite get as much of an uplift on that one. But we -- it was -- they just saw the value of subscription, and we took them to the level that you would expect for that size customer as far as what their pricing should be. But they previously didn't have the same discount that others had.

Got it. You said 50, 5-0 uplift?

5-0, yes. That was the total uplift. In like-for-like, tends to be 25 to 30 percentage, it moves around. Total was about 50% -- was 50%.

Excluding the one deal.

Excluding the one deal, yes.

Our next question comes from Rob Oliver from Baird.

Can you hear me all right?

Yes, we do.

Yes.

Okay, great. Just maybe one for Jim. Obviously, great quarter on the IoT side for you guys. And maybe to follow-up on Steve's question earlier, to what extent do you guys think the embedded installed base of Creo and Windchill and SLM is a competitive advantage for you guys in these wins? I mean, clearly, these are competitive situations. And then given, as a follow-up, how important the customer expansions are, I think you said, Jim, it was 60%, how does the pipeline of kind of beta projects and stuff look for this year?

Yes. So on your first question, Rob, the installed base is a huge advantage and, in fact, we're doing very well within the installed base, but we're not limiting ourselves to it. I think there's a bit of a land grab opportunity here to sell in the base but outside the base, and we're doing both. But it is -- the fact we're in these accounts, we know them, we're already working on the design of their products maybe at the edges of the manufacturing process and now we're entering the manufacturing process, that's very advantageous. So our installed base has proven -- our original thesis when we entered the IoT-based business was that the CAD and PLM business was adjacent to IoT, and I think we feel like that's being validated. On your second question about customer expansion, we're really running a land-and-expand model. So in each quarter, we are planting a lot of seeds and then going back to seeds we planted in previous quarters and upselling them. So if you look at the transaction, the vast majority of the transactions are small. But if you look at the revenue, a majority of the revenue is coming from previous small transactions maturing. So yes, this business is going well. The installed base is an asset. The main asset though, of course, is the fact that we have a truly fantastic product, and we're able to go almost anywhere and beat almost anybody right now for smart connected product use cases, for smart connected operations use cases. And then for other use cases in engineering and elsewhere, where ThingWorx is more of an innovation platform than an IoT platform, where it's a data and analytics pipeline that's feeding information and new formats into business processes, that's really unlocking some operational advantage or what have you.

Our next question will come from Ken Wong from Citigroup.

Yes, let me dive in on that BMW transaction. Is it fair to assume that was one of your 8-figure deals? And then as we think more broadly about that deal, should we think about them potentially standardizing across your portfolio?

First, we had no 8-figure deals this quarter.

Yes. Yes, we -- that was not an 8-figure deal. It was, as we like to characterize it, a small megadeal. Megadeal, of course, being 5 million threshold, so meaning it was not too far over that. So it was a very good deal. I don't think we should get ahead of ourselves and suggest that BMW is going to standardize on our suite, although I think incremental opportunities will be presented to us. What we won really was the process for how does a design get built in a specific factory in relation to an order. So you can imagine, BMW makes lots of different types of automobiles and even motorcycles and stuff like that, and these products themselves are configurable. But then each of their 19 global factories has different equipment, processes, supply chains, and so the product is variable and then the process for making it is also variable. So you have like a variability times variability problem. So when you go to buy a BMW and they decide to make it in this factory, ThingWorx has to figure out how would you make that order -- I'm sorry, well, Windchill and ThingWorx, working together, have to figure out how would you make that order in that factory. And that's what we were selected for. That's a mission-critical system for BMW. We didn't displace every use of PLM and engineering. We didn't displace their CAD systems. We weren't selected as their one and only digitization platform. But we certainly won a very big piece of business right in the middle of their business process. We competed long and hard. And quite frankly, again, we technically won. They were impressed by our technology, both Windchill and ThingWorx, and they were impressed by our organization, which is particularly strong in Central Europe. So I think we did a good job. Our brand is improving a lot, and BMW was surprised by what we are capable of doing. And then we went from not being invited to the first round to winning the last one. And it was a great journey, and we're very proud of what we accomplished there. And I think lots of people will take notice in the automotive industry globally, and I think we'll get more opportunities presented to us over time by BMW. But then of course, we'll have to go win them.

Got it, got it. Impressive. And then a follow-up for Andy. You guys talked about $4 million in perpetual buys. Was that kind of roughly in line with what you guys are thinking? Better or worse? And then as we think about rest of world impact, how should we think about like the contribution? Is it similar to that $4 million?

Well, it was a little bit better than what we had expected. You can tell that by looking at the fact that our perpetual revenue was above the high end of our guidance. So it was a little bit better. Realize that Americas and Western Europe is 75-plus percent of our business, so I wouldn't expect as big of one when we end-of-life the rest of the world, although they do have fewer seats on maintenance in some of those countries, and a lot of people do the last-time buy to also purchase maintenance so they get access to upgrades on an ongoing basis. So as we get closer to the end of this calendar year, we'll have to assess that.

Our next question comes from Ken Talanian from Evercore ISI.

I was wondering if you could talk about what the pipeline of megadeals looks like for this year, at least from your current vantage point versus last year.

Well, I would broaden the discussion and say when we do look at -- and Jim, jump in. But when we do look at, frankly, the economy is -- a year ago, we were saying we felt it was still a bit of a headwind or it was too early to call it neutral, and now we're saying it really does seem to have improved. And we are seeing our close rates improve the last 2 quarters, frankly. We're seeing deals tending to upsize as opposed to downsize. So we're seeing all the trends that are supported by a stronger economy. It's only 2 data points, frankly. There could have been some euphoria around year-end tax legislation or people using up December budgets, realizing that this was the calendar quarter-end. So we don't want to get too far out over the head of our skis here, but we do have a better environment that we're selling into right now than we did a year ago clearly.

I don't have much to add to that.

Our next question comes from Matt Hedberg from RBC Capital Markets.

This is actually Matt Swanson on for Matt. First for Andy on the maintenance conversions, as the sales force has kind of become more experienced with this, has this started to kind of creep into guidance? Or is it still seen mostly as upside?

Well, we've said that much of a -- in the current year, much of the larger ones are already in our pipelines, they're already in our guidance. It's the out-years where more of it's not in the long-term guidance. Clearly, we have a market growth rate assumption in there in the long term, which would -- and whenever we do these conversions, we capture new bookings along with the conversion opportunity. So even in the long term, there's a piece that's in there, not necessarily the uplift for the like-for-like. I would say that we still have a good opportunity to have our -- more of our sales reps driving conversions. It's a play that is still our best reps are driving it. The rest are seeing what's happening, but it hasn't turned into kind of the sales play that really everyone out there in the field is taking advantage of. And you see it primarily in Americas and Western Europe with a few exceptions in Asia, I would say. So it's still a great opportunity, frankly, in front of us, and we're focused on enabling our sales reps, getting them focused on this opportunity.

All right, great. And then maybe one for Jim, just an update from LiveWorx. Could you talk about a couple of those Navigate-like products you introduced? The Controls Advisor, Asset Advisor and Production Advisor?

Yes, all of those products are what we characterize as starter applications in our factory -- Industrie 4.0 factory story. And they're all designed to make it much easier to see the value of ThingWorx and get it in place into production. And I think the fact that we're having so much success in this Industrie 4.0 space is helped by those applications. Rather than having a general platform that could be applied to a specific problem, we have a general platform with a series of specific applications that will accelerate its application to that specific problem. So I just think it makes it easier to sell, easier to buy, easier to implement. And the success we're having in that space, I think, is evidence that, that's been a good strategy for us.

Our next question comes from Monika Garg from Pacific Crest.

First is how are you thinking about expiration of perpetual license in other geographies? Also, any pushback commentary from customers due to expiration of perpetual license in Americas and Western Europe?

So we've taken a really measured approach around how we've end-of-life perpetual. A year ago, we announced end-of-life in Americas and Western Europe, no pushback like what you saw from others who have gone through this process before because we had already gotten so much of the business going subscription. The end-of-life announcement is, frankly, to break the inertia of the little orders that come in, someone's bought CAD from us, they buy another seat, they have always bought perpetual. They place a perpetual order for CAD and we take it. And no one's going to go back and try to convince them to do it subscription. So that was the -- that's the reason for the end-of-life. So we've been driving each of the geos to the point where it's predominantly subscription before we do the end-of-life. This quarter, almost all our large deals were subscription, almost all our large deal bookings were subscription. And Americas and Western Europe, even with the perpetual end-of-life, still have majority of the bookings coming in as subscription.

As a follow-up, at the midpoint of bookings guidance, it's about 11% growth. Can you talk about the confidence you have to achieve low double-digit bookings growth for the next 3 years?

Well, basically, you have the highest growth piece of the business getting bigger, so that actually makes it easier to achieve the low double-digit bookings growth. We had our long-range plan out there because we're confident in that long-range plan, that's the net.

Yes, and it's playing out. I mean, in the recent past and maybe even in the last 2 years, we've generally overperformed the plan by performing against very high expectations in the IoT business and overperforming in the CAD/PLM business. Now if the CAD and PLM business were to slow down and we keep -- to market rates and we keep performing as we have been and expect to in IoT, we'll still be in double digits...

From a bookings growth, which drives mid double digits -- mid-teens, I should say, revenue growth as we exit the subscription trough.

Right. So nobody has a crystal ball. But I mean, from where we sit and from what we see, we feel pretty good about those projections.

The one thing that you might have seen in the prepared remarks, we had $5 million or more IoT deals this quarter. We didn't have any huge IoT deals this quarter. So it was broad-based strength, which is the kind of thing you want to see. It was further expansions. 60% of bookings were from expansions. So for me, I'm feeling better and better about our ability to achieve our IoT objectives over the next few years because this is becoming real. This is my fourth software company. And I've been around this business for 30 -- this general business for 30 years. I've seen how these markets develop and grow.

Our next question comes from Saket Kalia from Barclays Capital.

First one, maybe for you, Andy. Maybe an expansion of what was asked before, but can you just talk about how much perpetual license revenue you expect to generate from the geographies where you'll continue to offer perpetual? Meaning in the countries like Russia, China, India and the like, how much perpetual should we see from those geographies this year just so we have an idea of how to model perpetual kind of longer term?

Yes. So I'm not going to say how much perpetual because we're driving those towards subscription as fast as we can. But I will tell you that, of our non-Kepware bookings, they together represent about 15% of our bookings. Now some of those geographies are already majority subscription, they just haven't reached that point yet where we were ready to announce an end-of-life. So as we believe a country has gotten to the point that, that it's -- the market's ready, we figured out the channel enablement, the direct sales enablement, the pricing, the packaging and the market, then we're going to go subscription-only. We just have taken a very measured approach, and it's worked for us so far.

Got it. Got it. And then maybe for either of you, Andy, you mentioned before that roughly half of the maintenance conversions in the quarter were -- you had a "stick" whereas -- and others you didn't, can you just talk about how the profile of maintenance to subscription conversions have changed in terms of mix of conversions where you have a stick versus where you don't have a stick and kind of how that pipeline, if that makes sense, kind of looks here in '18?

It's been about half and half ever since the beginning, which is why we introduced the enterprise conversion option, and it's why we're very focused on sales enablement so that our reps realize that there's a play out there that -- where they can really create some value in all of our enterprise accounts.

Could I try to fine tune your answer a little bit?

Yes.

I think it's half and half in the direct space, but in the reseller channel...

No, I'm not -- I'm not talking about the enterprise...

No, I know. But I'm just saying, there, it's all carrot, and the fact that we're actually, from a transaction count, starting to do, I think you said 130...

137, yes.

137 in the reseller space means that we're getting some traction where there is no stick whatsoever.

Yes.

And that's very promising in my view because that means that this -- we will play just based on carrot, which is, of course, what we'll need to do because we have many more carrots than we do sticks at this point.

Yes, exactly. And you'd like it to be a carrot.

Yes.

That means the customer's winning. We found something the customer values, and they're willing to pay more for it.

Our next question is from Jay Vleeschhouwer from Griffin Securities.

Jim, let's return to the subject of automotive. You and I have spoken about that periodically over the last few years in terms of the opportunities there for you. And you've now, in the space of a week, had 2 pieces of news on automotive, including Toyota. So could you perhaps speak a little bit more broadly about the reconsideration, let's call it, that the major autos might be going through as evidenced by BMW in terms of how they're thinking about PLM, thinking about that more broadly? Are you seeing business that is more or less classical PLM? Or do you think that there's -- the opportunity here for you is more along the BMW line where it fits in with your IoT equals PLM concept?

Yes, Jay, I mean I think that the automotive industry as a whole is going through a very big transformation. There's these mega forces out there around autonomy and electrification and sharing and mobility and so forth, and it's really causing changes in these automotive companies. And I think what this all comes back to is almost all those strategies have roots in digital. And so I think every company, every major automotive OEM is thinking through how do we use digital in more profound ways. And I think any company, any industrial company that goes through a strategy around digital sooner or later realizes that PLM is a very important system because it's actually the single source of the digital definition of things. And so I think -- and again, this really was our premise with IoT equals PLM is that these 2 things were not only adjacent but actually maybe IoT was the next generation of PLM. So I think that what got us in the door with BMW was not, hey, we need a pin for pin replacement of a legacy PLM system. They said, no, we're doing a digital transformation of BMW. And to transform BMW, we're going to need a new way, for example, to move designs into production. And who has a system that can do that? Now it turns out we do -- it's Windchill, with a bit of ThingWorx frosting on top, and that was a great system. So I think that, as I sit here now, I think that our opportunities will come from people taking a fresh look at what are our needs as opposed to who has the best version of yesterday's system. And that's what got us into BMW. And I will tell you we're having interesting conversations with numerous other automotive companies who are really stepping back and taking that fresh look at what really are our needs and our requirements, and then who in the vendor community is kind of out there thinking the same way we are. I think that's the big advantage for PTC because I think we're well ahead of our traditional CAD and PLM competitors in thinking about how the world is changing. And again, BMW is a great evidence of that.

The one thing I would add is if you take a look at that Forrester Wave, they actually highlighted the fact that PTC's strategy, though, was not really rip and replace, it was be open, be open to be able to take data from other systems, bring it in to other systems. And so very well -- the automotive companies could very well likely keep their product data management within their existing legacy systems but still leverage our capabilities in their digitization strategies without having to rip all that stuff out.

Yes, that's an important point I should maybe just elaborate on a little bit. The key thing for people to know, and Jay does know this, but for others who might not know it, we at PTC had no meaningful incumbency position at BMW whatsoever. We were on the outside looking in. And then there was a need, but we had to coexist between a couple of other systems, SAP systems, other PLM systems, legacy systems. And if we couldn't be open enough to come in there and use our data pipelining techniques and so forth to trade data with other systems but apply our value-add to it along the way, there's no way we could win that business. But in the end, we were the only company who had both the openness and the functionality to make that work. And that's actually why we rose from standing on the sidelines looking at the building to ultimately closing the order with them. So I think it's a very interesting time in the industrial world in general and in the automotive business being a very advanced industrial business. We're starting to see some interesting possibilities. We don't want to get ahead of ourselves, but we feel good about things.

A quick one for Andy, if I may. Would it be correct to say that conversions account for less than 1/10 of bookings? Or has that percentage been creeping up?

Less than 1/10 of bookings. That -- the like-for-like, yes, Absolutely.

Our last question will come from Gabriela Borges from Goldman Sachs.

Maybe for Andy, you mentioned explicitly the timing of the $3.5 million deal that closed in 1Q instead of 2Q. I wanted to revisit the full year outlook for bookings and the $10 million raise. Did anything change in your assumptions for FX or for the overall macro pipeline, given that commentary around that was a little -- still pretty positive through the call? Just wondering if that's being incrementally reflected in the guidance.

Yes, so FX is a small tailwind to bookings growth. It's a small one.

And in terms of the macro pipeline?

Macro? The macro, I would say, is a factor, too. We've had 2 strong quarters. We've had like 4 or 5 quarters with PMI looking pretty good. But it was really Q4 where we highlighted the fact that we felt that the economy was no longer a tailwind. So we had enough data points -- a headwind, I mean. So we had enough data points to say it's not a headwind, and another quarter makes us feel even better about that.

Right. But the uptick in guidance was really a function of...

The uptick in guidance...

Part Q1 rolling forward and maybe a little bit of currency.

Yes, yes.

Okay. Thank you, all. That's the end of our call. So let me just wrap up the call. I want to thank you all for joining and spending your time for us -- with us this afternoon. And apologize once again for the snafu at the start of the call. When we step back and look at what's going on here at PTC as we transform the company, we're proud of what we've accomplished so far and a lot of shareholder value that's already been created. I think our Q1 results validate that we're gaining ground on this 3-part strategy, and we're confident that we're going to be able to execute the growth, the subscription conversion and the margin elements of that strategy. And as we do, we'll drive substantial long-term shareholder value from this point forward. So thank you for joining. We hope to see you at an upcoming investor event. And if not, we'll look forward to speaking you -- with you on a call like this again in 90 days or so. So operator, that concludes our call. Thank you.

Thank you. This concludes today's conference. All participants may disconnect at this time. Thank you again for your participation.