PTC Inc.
Q3 2019 Earnings Call Transcript

Published: 24 Oct 2019

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC, 2019 Fourth Quarter Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.I would now like the turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. You may begin.

[Tim Fox:]

Thank you. Good afternoon everyone and thank you for joining PTC's conference call to discuss our fiscal Q4 '19 results. On the call today are Jim Heppelmann, Chief Executive Officer; Kristian Talvitie, Chief Financial Officer and a special guest with us today Jon Hirschtick CEO of Onshape.Before we get started, please note that today's comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements.Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included on this call represent the company's view on October 23, 2019 and PTC disclaims any obligation to update these statements to reflect future events or circumstances.As a reminder, we will be referring to operating and non-GAAP financial metrics during today's call. The discussion of our operating metrics and the items excluded from our non-GAAP financial measures and a full reconciliation of GAAP to comparable non-GAAP financial measures under both 606 and 605 are included in this afternoon's earnings release materials and related Form 10-K.And I'd also like to remind everyone that starting with the first fiscal quarter of 2019, we adopted ASC 606 on a modified retrospective basis. In our earnings documents we provide the results under both ASC 605 and 606.Please note that the SEC requires the presentation of 605 results for the comparability with the prior year results. As such our discussion on this call will focus on 605 results, unless otherwise stated. Also please note that certain operating metrics such as bookings and ACV are under the same, both for 606 and 605.And with that, I’d like to turn the call over to PTC’s CEO, Jim Heppelmann.

[Jim Heppelmann:]

Thanks Tim. Good afternoon everyone and thank you for joining us. As Tim mentioned, we're very excited to have Jon Hirschtick joining us this afternoon, to help me usher in what we believe is a new era of software as a service or SaaS in the product development industry.PTC and Onshape share a common vision around helping organizations transform the way they develop products. Onshapes peer multi-tenant SaaS platform is a perfect complement to our market leading on-premise product development solutions and coupled with our industrial IoT and AR solutions, we can address an even broader part of the waterfront of digital transformation that’s sweeping across the industrial market.Before Jon and I provide you with some additional color on our combined vision for PTC and Onshape, I want to provide highlights of our fourth quarter and fiscal year 2019 performance, and discuss progress against key strategic initiatives.Given all the news and updates we're planning to share today, we know there's a lot to absorb and I'm guessing that we’ll run out of time before we run out of questions. So to help further unpack all the moving parts, we're hosting an Investor webcast on November 18 where we will reveal our long term financial targets, show you how we plan to get there and provide more insight as to how Onshape plays in the picture. Stay tuned for more details on that event coming from PTC's IR team.On our Q3 earnings call, I characterized fiscal 2019 as a transitional year, where we achieved some important milestones like going global with subscription licensing, while navigating through some short term challenges in the business, including a lackluster macro situation in the industrial world.With that as context, I'm very pleased with our Q4 results and confident that we've established a strong foundation for accelerated growth going forward. Our Q4 financial performance was solid with revenue, operating margin and EPS, all within our guidance range. Q4 bookings of $150 million was above the high end of the guidance range, thanks to our core business delivering above planned results and very strong performance in our growth businesses.Despite a challenging macro situation and a global PMI that’s been below 50 for nearly six months now, both Q4 and fiscal ‘19 bookings represented record sales for PTC.ARR which is the key top-line metric we’ll be focusing on going forward, grew 12% year-over-year in constant currency, right in-line with the target we outlined in early September. With PTC now firmly established as a double digit grower, you'll see in our guidance later that we're lifting our sites a bit and aiming toward our mid-teens ARR growth rate in fiscal ‘20.Drilling first into highlights within our core business, PLM had a strong bookings quarter and came in ahead of plan, while CAD bookings showed a strong sequential increase, thanks in part to a rebound both in the channel and in the geography where bookings had dropped significantly following the last time buy and termination of perpetual licenses. We are not yet back to where we were in those deals, but the trend is good and we recaptured some ground.In our growth businesses IoT had a very strong quarter, which included a mega deal with Rockwell Automation.Excluding the mega deal, IoT still delivered one of the strongest expansion quarters to-date, with over 70% of the bookings driven by a record number of six figure deals, which highlights the momentum we are seeing in the business.Our augmented reality business delivered another strong quarter with six figure AR deals accelerating once again, driven in part by continued traction with a newer solution, Vuforia Expert Capture.Fiscal ‘19 was a pivotal year for AR with Industrial Enterprise Adoption clearly gaining traction across a wide range of vertical markets, including medical devices, pharma, aerospace and defense, high-tech and automotive.Two analyst reports covering the AR market were published in the quarter and we were pleased to see Vuforia declared the clear leader in each. With AR delivering strong growth in Q4 and a strong pipeline headed into fiscal ’20, we're confident that AR is emerging as another exciting and dependable long term growth engine for PTC.Turning now to our three strategic alliances, we're pleased to see continued traction in Q4 with the pace of business accelerating in each. Beginning with Rockwell Automation, following strong Q3 performance the Rockwell team capped off the first year of our alliance by delivering a 75% sequential increase in new deals. For the full year our alliance delivered nearly 100 transactions in 21 different countries across the broad cross section of vertical markets, highlighting the deep, industrial domain expertise and brand recognition that Rockwell Automation brings to the relationship.This synergy is great because 70% of the accounts that Rockwell has sold to represent new logos for PTC. With a large and growing pipeline of opportunities, expansion deals accelerating and over 2000 employees trained globally, we're more confident than ever about the success of this key strategic alliance.In our Microsoft alliance, Q4 performance was once again strong with 72 deals closed in the quarter, double the number of deals closed in Q3 and bookings ended the year well above planned. Geographically the Americas continues to be a main driver of growth, however the European team had their strongest performance to date and inked their first seven figure transaction. Overall we're very pleased with the momentum of this alliance and we're excited to be so closely aligned with Azure IoT and mixed reality and with Microsoft generally in the manufacturing space.Lastly on the alliance front we continue to see emerging signs of traction for Creo Simulation Live, our CAD solution that uses real-time simulation technology from our strategic alliance with ANSYS. We closed 126 transactions in the quarter, a 66% sequential increase from Q3 and we landed a number of follow-on expansion deals. With Live Simulation now available in Creo 4, 5 and 6, we expect adoption to further accelerate in fiscal ‘20.To summarize on the growth front, Q4 was a strong quarter that wrapped up a solid year. Despite the challenging macros situation, our CAD and PLM businesses saw combined constant currency ARR growth of 11%.Our focused solution growth, what I’ve referred to at times as our productivity zone closed the year stronger than expected, delivering 10% constant currency ARR growth for the year, and our IoT and AR growth engines delivered 28% constant currency ARR growth.With the combination of IoT and AR exiting fiscal ‘19 at greater than 12% of total ARR and above one third of total bookings, these businesses represent a growing slice the PTC pie as we enter fiscal ’20, which bodes well for our growth rates going forward.Now if you step back and look at the PTC portfolio in fiscal ’19, you see that on top of a strong and stable core business, we have two great growth engines in ThingWorx IoT and Vuforia AR. As we head into fiscal ‘20 with the Onshape acquisition, we're now bringing on a third growth engine.As part of our diligence process, we commissioned a market study from McKinsey that suggested the SaaS based CAD market would grow more than 35% year-over-year and represent nearly 20% of the total CAD market in five years. While Onshape is new, it sure feels familiar to us, because Onshape lives in the same CAD and PLM market space as our core business. It's simply a next generation SaaS version of a technology concept the PTC itself pioneered 30 years ago.Onshape is not a distraction for us, but rather a doubling down on CAD and PLM to ensure that these core businesses will continue to grow and thrive over the longer term as the industry moves to SaaS.As you know, we at PTC have been talking about the renaissance of CAD for some time. We realize that along with generative design, real-time simulation, augmented reality, IoT and Azure manufacturing, SaaS will surely play a role in this industry renaissance.Once you realize how important SaaS will be and why, then you can't avoid the realization of how important Onshape, the only peer SaaS player will be to this industry. Onshape is the first and only from-scratch native SaaS product development platform that unites CAD, data management and collaboration tools in the next generation package.Onshape is a very unique asset, because of the incredibly high cost of entry into the well-established CAD market, you simply won't find another CAD, SaaS start-up out there. The only people who could even attempt to start up this bold are those with the track record so strong that they could raise nine digit amounts of venture funding and pull in some of the industry's best talent, which brings me to Jon Hirschtick, John McEleney and Dave Corcoran who founded Onshape and run the company today.I think it's fair to say that Jon, John and Dave are some of the most accomplished entrepreneurs in the history of the CAD industry. They created SolidWorks to capitalize on the Microsoft Windows wave in the mid-1990s and then turned it into a grand slam after it was acquired by Dassault, helping to still position SolidWorks as the primary growth engine over the past two decades.Ultimately these guys came to the understanding that SaaS would be as disruptive to the CAD establishment as windows was and that the CAD and PLM industry would surely move to SaaS just as nearly all other software industries already have.I agree with their premise that SaaS is inevitable in our world and there are many strong reasons why. Onshape is a bonafide growth engine that will allow PTC to take share in the growth-iest parts of the CAD market. I'm eager to share the benefits that SaaS brings to the world of CAD and PLM, but since we have Jon Hirschtick here with us, I'd like to give him a chance to tell you first-hand what he and his team have been working on.Jon, can you share a little bit about your team and the work that brought you here to PTC?

[Jon Hirschtick:]

Happy too. Thank you, Jim. Let me first say how excited I am today. I've spent my entire career since the 1980s in our industry working on CAD and other software for product development. I've been lucky enough to be part of some of the biggest moments in the past in our industry and I feel like today is perhaps the biggest moment I've experienced in our industry.When Jim and I met earlier this year, it was so exciting to me that he had this strong clear vision we share for the power that a pure SaaS platform could bring to the product development world. It was so refreshing for me to see also Jim's understanding of and commitment to pure SaaS, pure Cloud since so many others in our market are pursuing partial Cloud approaches and frankly partial Cloud has been shown to fail time and time again in other markets.Beyond just Jim’s vision, he also obviously has resolved to take bold action to pursue his pure SaaS vision. And thank you Jim for the kind words about me and my fellow Onshapers. I'm very fortunate to be working with a lot of the great team that was with me when I founded and was CEO of SolidWorks. My Onshape Co-founder John McEleney has also worked in our industry since the 80s, most notably as my business partner and another former CEO at SolidWorks.Another Onshape Co-founder Dave Corcoran is a former VP of R&D at SolidWorks and is one of the key minds that shaped several of the greatest products in our industry, including SolidWorks and of course Onshape. I wish I had the time here to tell you more about each of the rest of the100 or so people on the Onshape team, the fantastic group.We founded Onshape because we saw the problems product development teams have with installed software applications and sharing data by copying files, often thousands of files among different people and tools. Whether product developers realize it or not, they are all losing time, efficiency and innovation to these problems. At the same time we saw how companies using pure cloud, pure SaaS technology like Salesforce, Workday, NetSuite, Zendesk, basically everyone were reinventing other software markets.We saw that we could solve many of the problems in product development, but we would need as Jim said, to build a clean sheet, new generation system to do it, and that's what we've built with Onshape. Today we have thousands of customers using Onshape with story after story of them developing products faster than they ever could, being more innovative. The great products that they are developing with Onshape is our ultimate reward.So it's probably easy for you to see why I'm excited to be partnering with PTC. PTC is going to help us dramatically grow the number of customers we can reach with Onshape. PTC is also going to draw on their strong technical breadth and depth to further broaden the scope of what we offer on the Onshape platform. Thank you.

[Jim Heppelmann:]

Great! Thanks Jon. I can't tell you how excited I am to have you and your team on my side this time around, as we head into another wave of industry change and transition.Let me share a few important thoughts about how Onshape fits with PTC's core CAD and PLM strategy. Our near term goal is to increase our participation in the growth-iest part of the CAD and PLM market, which really represents an adjacency to where Creo and Windchill play today.Jay Vleeschhouwer have pointed out in a recent report that last year there were 174,000 new seats of CAD solid in the market globally, with Dassault SolidWorks business taking about 80,000 and Autodesk Inventor business capturing about 40,000. Creo, CATIA and NX fit the bulk of the rest.In the near term and midterm it is that 70% of the market drove by SolidWorks and Inventor that’s most interesting to pursue with Onshape. Onshape gives us an opportunity to both participate in and then disrupt this part of the market and we can enter and play with a very strong hand.Thanks to the massive advantage in Innovation Velocity that Jon spoke up, plus some great new technology like Generative Design that PTC can share within the portfolio. We expect Onshape will quickly mature into a full featured SaaS CAD Solution. There will be no glass ceiling on Onshape capabilities like SolidWorks endured over the years, because PTC's positioning will be that we have the best of two different worlds. Creo and Windchill are best in class in the On Premise world and Onshape CAD and PLM are best in class in the peer SaaS world.It’s happened time after time that disruptive new technologies gain traction first in the SMB space, where customers generally have more flexibility to switch and then proceed up market over time. We expect that any SMB buyer who looks at Onshape will stop dead in their tracks due to its amazing capabilities, plus all the fundamental SaaS advantages it offers.I'm referring to cost of ownership, support for any type of client device, including phones and tablets, ease of getting started, collaboration that works like Google Docs, and plus no need for upgrade the patches, no file servers and software.Of course in addition to SMB customers Jon’s going to take orders from companies of any size, because in the long run the SaaS benefits are even more pronounced at the high-end. Like salesforce.com, we expect to get there overtime and believe the high-end competition will be very vulnerable to what Jon and his team of built. That's why we all have the axiom that death comes from below in the software industry.I want to stress that PTC remains 100% committed to long-term aggressive development of Creo and Windchill. We want to be best-in-class with either deployment model. So we will continue our pursuits of real time simulation, generative design, additive manufacturing, IoT and AR infusion and all the other great things that we've been working on with Creo and Windchill.But in parallel I expect you'll see many of the same capabilities that appear on Onshape and surprisingly quickly, giving the fundamental innovation velocity of a SaaS model. When the day comes that any Dassault, Siemens, Autodesk or PTC customer wants to move to SaaS, we will be there ready to guide them.But our real focus in the near term and midterm is on playing are strong to hand in the growth-iest part of the market where we simply don't show up today. If you back up to 50,000 feet, you can see that Onshape represents a huge and invaluable injection of SaaS technology, business processes, know-how and culture in the PTC. Onshape will dramatically expedite PTC's own transformation to SaaS. The industry is most certainly headed there and PTC is now positioned to pave the path with Jon and his team up front leading the way.I think this acquisition, PTC's biggest ever will transform the industry, while both solidifying and accelerating PTC long term growth opportunity in CAD and PLM. We are excited to welcome the Onshape team to PTC.And with that, I'll turn it over to Kristian to comment on financials and guidance.

[Kristian Talvitie:]

Thanks Jim, thanks Jon and good afternoon everyone.Before I review our results, I'd like to note that I will be discussing non-GAAP results and guidance and all our growth rate references will be in constant currency. And as Tim mentioned earlier, we adopted the new revenue recognition standard ASC 606 under the modified retrospective method on October 1, 2018.For year-over-year comparability purposes I will be discussing our results under ASC 605 unless otherwise stated. Please note that this will be the last quarter we report results under both accounting standards and the guidance provided today will be under the ASC 606 standard. Lastly, our guidance assumes that the Onshape acquisition closes in November, following normal regulatory approval and certain closing conditions.Let me start off with the review of our fourth quarter results. I'm going to keep my remarks brief, hitting just some key highlights and ask investors to refer to our press release and prepared remarks documents available on our IR website for additional details.Q4 booking of $150 million were above the high-end of guidance and included a mega-deal with Rockwell Automation. Excluding the mega-deal, bookings would have been well within our guidance range.Q4 ARR for the new definition was $1.116 billion and at our guidance FX rate was $1.134 billion, representing 12% year-over-year growth, which was in line with the guidance we outlined in our September preview. Our fiscal ‘19 new ACV and churn results were also consistent with the guidance provided in the preview.As Jim mentioned earlier, ARR in our growth businesses was up 28% year-over-year at constant currency, which was slightly below the outlook we provided in September. It's important to note that bookings in our growth businesses were up over 50% year-over-year in Q4, but because we closed a higher number of ramp deals than anticipated and had a number of other deals with fiscal ’20 start dates, our Q4 ARR growth was slightly below our target. However, we now have even more IoT and AR back log to support what we are expecting to be ARR growth well above market growth rates in fiscal ‘20.Total Q4 revenue of $335 million was up 9% year-over-year despite a 1,300 basis point increase in subscription mix, operating margin of 22% was at the high-end of guidance and was an increase of 100 basis points year-over-year, and lastly EPS of $0.45 was within our guidance range.Moving on to the balance sheet. In Q4 we used $25 million to repurchase 378,000 shares and we repaid $30 million on our revolving credit facility. Finally on our Q4 results, FY ‘19 adjusted free cash flow of $245 million was $15 million below guidance due to several onetime items, including FX impact of approximately $6 million, collections received on October 1 versus the September 30 of about $5 million and taxes associated with increased invoicing of about $6 million.Now turning to guidance, and as a reminder we provided changes to our new reporting and guidance approach in the FY ‘20 reporting metrics preview, we filed in our September 5, 8-K which you can also find on our IR website.The primary motivation for the changes was our subscription business model transition. We completed the transition of our selling motion early in fiscal ‘19 and we still have work to do and opportunity for improvement as we continue to transition our customer engagement model to the subscription mould.A secondary motivation was the adoption of ADC 606, which for on-premise subscription companies reduces the utility of traditional financial measures for understanding business performance. As such, we encourage investors to accept PTC's business performance using ARR and free cash flow as the primary top-line and bottom-line measures. We will be providing annual guidance for these measures.From an income statement perspective, we're also providing annual guidance, but due to a number of factors that can drive significant revenue and therefore EPS variability, you should expect wider than normal guidance ranges. These factors include subscription term lengths, timing of new and renewal bookings, the quarterly spread of new and renewal bookings, conversion of radical support streams to subscription contract subject to ASC 606 revenue recognition and any potential changes in revenue recognition under 606 for more up-front to rabble recognition resulting from continued investments in cloud related functionality in our products.Again, just to highlight the point that we believe ARR is a more meaningful measure than revenue on how the economics of the business work, at the midpoint of our guidance range we are expecting an approximately $150 million increase in ARR, which will result in a revenue increase of approximately $250 million in recurring software revenue. To the extent that we recognize more up-front revenue in fiscal ’20, we would expect revenue to decrease in fiscal ‘21.Now for the specifics. Beginning with ARR for our new definition, for FY ‘20 we’re expecting a range of $1.25 billion to $1.28 billion or 12% to 15% growth. ARR guidance includes approximately $10 million of ARR or one point of growth from the Onshape acquisition, and seasonally we expect ARR growth to be below the low end of the guidance range in the first part of the year and increased throughout the year. This increase is driven primarily by our backlog of committed ramp deals, booked in prior periods.Turning now to adjusted free cash flow, for fiscal ‘20 we are expecting a range of $255 million to $275 million, which includes approximately $65 million of short term cash related items impacting fiscal ‘20 results. These factors include an increase of approximately $25 million in cash taxes related to the significant projected increase in fiscal ‘20 operating income, under ASC 606, an increase of approximately $25 million in interest, related to the debt associated with the Onshape acquisition and currency headwinds of approximately $15 million.While these incremental cash items are near term headwinds to our normalized free cash flow targets, they are transitory and we do not expectant them to impact our long term targets. We will provide more detail on our long range plan in just a few weeks at our November financial update webcast.Now turning to the P&L guidance for fiscal ’20, we're expecting total revenue of $1.41 billion to $1.51 billion and non-GAAP EPS of $1.95 to $2.60. Operating expenses are expected to grow approximately 9% year-over-year, and while this is slightly above our normal rule of thumb where we target OpEx growth at about half the rate of ARR growth, the slightly elevated expense run rate is due to the Onshape acquisition and we expect the run rate to decline in the latter half of fiscal ‘20 following realization of cost energies and operational efficiencies that will be implemented in our second fiscal quarter.With that, I'll turn the call over to the operator to begin the Q&A.

[Operator:]

[Operator Instructions]. First question comes from Matt Hedberg from RBC Capital Markets. Your line is open, sir.

[Matt Hedberg:]

Hey guys, thanks. Congrats on Onshape. I just had two some somewhat related questions on the deal. First of all, do you have a sense for how many of your customers have expressed interest in a SaaS based offering? I'm trying to get a sense for you know that customer migration over time from Creo and Windchill to Onshape. And secondarily, I think you noted, you're going to continue to invest in CAD and PLM on your sort of legacy products or your core products. How should we think about that gap in functionality closing over time, if in fact that these SaaS based CAD market is growing as rapidly as you suggest?

[Jim Heppelmann:]

Yeah Matt, so Jim here. We did as I mentioned, commissioned McKinsey to do a study during our diligence phase here, and you know to replace let's say anecdotal data with quantitative data and McKenzie did a study of around 230 customers. They reported very strong interest in the concept of SaaS. You know some concerns that SaaS products weren't mature enough yet, always some concerns about switching costs and the larger the enterprises the stronger their concern, but huge amount of interest. And now I would say, you know one of the things PTC came to realize is that this Onshape product is actually much better than we thought it was, much more advanced than we thought it was.So we sort of think that the world hasn't process how fast this product changes. You know while we PTC, we're talking to the Onshape guys, they did their 101, 102 and 103 upgrade of the entire customer base. So there's an innovation velocity here that's amazing and I think it's probably fair to say that you know Onshape is a mid-range product today, but on a very fast improvement vector, and you know we at PTC would be incented to offer up any of the great technology we might have to put into that improvement vector.So this is a product that is better than what most people think it is and improving extremely fast and there's a very large amount of interest. So again, the resulting – you know the kind of punch line result of the study if you will from McKinsey was that they think that we see a 35% CAGR over what's there today and that would lead to slightly under 20% market penetration by True SaaS [ph] in the next five years.

[Operator:]

Next question comes from Jay Vleeschhouwer from Griffin Securities. Your line is open.

[Jay Vleeschhouwer:]

Thank you and good evening. Hey John! How are you?

[Jim Heppelmann:]

Great!

[Jay Vleeschhouwer:]

A question for you Jim; tying back to your keynote address at LIBOR back in June and the Onshape acquisition is fascinating for any number of reasons and I'd like to put it in the context of what you spoke about four months ago. Mainly you are closed loop, lifecycle management strategy which you've talked about for a number of years, you've made some progress there, but how do you see Onshape fitting into that larger vision that you expressed at that time, not just for CAD, but perhaps for the broader portfolio in terms of technology and customers processes.

[Jim Heppelmann:]

Yeah, I think Jay is in simple terms, we will you know attempt to create two versions of that strategy; one that runs on premise and one that runs in the cloud, and of course we already have the one on premise.So as Onshape matures, we will try to you know create all the goodness that PTC has on premise in that SaaS world as well, and at some point when customers say, hey, I want to learn a little bit more about SaaS, you know we want to be head and shoulders ahead of everybody in terms of providing a very mature, proven, full function capability. Not just for CAD and PDM and collaboration, but the closed loop ideas, augmented reality ideas, the IoT ideas that you saw us, saw me show in that keynote by the way.So, it's very exciting. In fact that keynote you might have noticed on me, visionary of the year designation from one of the analysts in this market and we just want that visionary capability to embrace the SaaS model; that's really where we're going with this.

[Operator:]

Next question comes from Ken Wong from Guggenheim Securities. Your line is open.

[Ken Wong:]

Great! Thanks for taking the question guys. Hey, how is it going Jim? I had just kind of a clarification question. I just want to understand the dynamics of that Rockwell mega deal. I think it mentioned those were kind of credited against kind of the minimum for fiscal year ’20. Just wondering kind of how we should interpret that? Does that mean the relationship and if its tracking below the minimum there’s an ability to get that back on track or am I interpreting that wrong?

[Kristian Talvitie:]

Yeah, hey Ken, it’s Kristian. Yeah, I actually – you can't infer much from that transaction other than actually things are going well, and to infer more than that isn’t possible and because of confidentiality agreements we have with Rockwell, we don’t really intend to disclose more. Partnership is going well.

[Operator:]

Next question comes from Ken Talanian from Evercore ISI. Your line is open.

[Ken Talanian:]

Hey, thanks for taking the question. I was wondering if you could give us a sense for how you are thinking about growth in CAD, PLM and separately IoT relative to the high and low end of year fiscal ‘20 in our guidance.

[Jim Heppelmann:]

Sure. So I mean I think in general we would expect that CAD and PLM will continue to outpace market growth rates and we actually expect IoT to end up significantly outpacing market growth here in fiscal ‘20 again due to some of the factors that I outlined in my prepared comments.Right, so I think probably CAD and PLM growth you know in the range, perhaps a little less than where they are this year, but you know to be – to add some conservatism and if you take that IoT business growing much faster, you know growing kind of at the rate we guided. If you add in a point from Onshape, you take down probably the 10% in the FSG Group. I'm not sure we're planning to do 10% again. I hope we do, but I don't know if we’d guide to that.You run some models around that and you're going to land kind of in that range and maybe even near the upper end of it. So our view is that range contains a notch or two of conservatism in case the economy actually gets worse than it is you know at this moment and then that it has been in 2019.

[Operator:]

Next question comes from Saket Kalia from Barclays Capital. Your line is open.

[Jim Heppelmann:]

Hey Saket.

[Saket Kalia:]

Hey Jim, hey Kristian, thanks for taking my question here. Congrats on the deal. Kristian maybe just one for you. I hate to bring in the 606 accounting item, but you know obviously 606 Redbrook [ph] here is going to make revenue a little lumpier to your point and that can be you know even more magnified by large multiyear deals.You know I think you talked about the wider range for income statement guidance which we've seen other companies do as well, but can you just touch broad brush on some of the assumptions that you made in the revenue guide, as it relates to sort of some of those large multi-year deals, which again can be very magnified when it comes Redbrook.

[Jim Heppelmann:]

Yes, so I think as it relates to the – we’ll call it the large portion. I don't – we're not really anticipating any significant change in the overall, we'll call it size of those businesses and I think that probably the bigger question is what happens to the term length, particularly on both new and renewal bookings. You know the assumption that we're using in the guidance is that we would expect modestly increasing length of term, of contract particularly on the renewal side. You know that's probably you know one of the bigger factors is really the term of length.And then of course as you know Saket, by eliminating that cancellation clause, which you know we think was an appropriate move, that immediately doubled the length in effect of all new transactions. So it kind of took those things from one year to two and in some cases into three.So I think the key thing is just that this number is going to jump around a lot. We're going to have a bang up year in revenue growth and I promise you, we're not going to brag about it, because the better we do this year, the more it's going to come out of the future, and in the end the business is the same. It's just moving it from year-to-year based on revenue recognition roles.So I promise we won't gloat this year and then you've got to promise to remember next year that we didn't gloat this year.

[Operator:]

Next question comes from Joe Vruwink from Baird. Your line is open.

[Joe Vruwink:]

Good afternoon and congrats both teams on the acquisition. Jim, your commentary was interesting just in the context PLM was a strong quarter, CAD having a sequential rebound mega deals and IoT, and all of this is coming in the context of a weakening macro. I'm just wondering if you could maybe reconcile the two dynamics, and then as a quick follow-up, whether you saw any change in customer spending behavior as the quarter went on? Thank you.

[Jim Heppelmann:]

Yeah, actually Joe it’s interesting, because the PMI number as you probably know is in the worst place it's been since 2009, but it doesn't feel like that out there. You know unemployment’s at a – I don’t know, I think I heard 50 year low, which doesn't reconcile with the PMI being where it was in 2009.So number one, this downturn feels a little different somehow; and then the second factor is that we are convinced our growth businesses are secular, not cyclic. So we also think a growing amount of what we sell is potentially more interesting when faced with a difficult spending environment you know.When companies by our IoT technology or AR technology and deploy it for example in a factory, they do that to save money and so I think that won’t go out of style in a downturn. But you know it is a bit inexplicable, but feels quite good that you know in the face of what really looks like a difficult economy, PTC just posted the best year in the 21 years I've been here. So I feel good about that and we've allowed for some conservatism in our guide just in case, but you know I hope we don't need it.

[Operator:]

Next question comes from Adam Borg from Stifel. Your line is open.

[Adam Borg:]

Hey guys, and thanks for taking the question. Maybe just want to dig into Creo Simulation Live; it's great to see continued progress there, and just maybe two parts. One, is there an opportunity to embed that into Onshape; and then two, as you think about the overall CAD installed base and design engineers, what percent do you think is really addressable by a technology such as this? Thanks so much.

[Jim Heppelmann:]

Yeah. So, let me take a stab and it and maybe Jon you can add some thoughts on the second one. So with respect to Creo Simulation Live for everybody's benefit, you know that’s ANSYS technology embedded in Creo and t's really start to get some momentum. Of course we've not been able to talk to ANSYS about it, because you know you can't really do that before you announce such an acquisition, we only announced that this afternoon.So it’s certainly a conversation, we should go have with ANSYS and I can't comment we would need their, permission to extend that right, so on and so forth. But definitely helping capabilities like Creo Simulation Live in Onshape I have to think would be very interesting, you know let’s call it Live Simulation.And then the second thing, the installed base. What the McKinsey study told us was that there's about 35% of the market that wouldn't finds SaaS interesting at all, meaning 65% of the market actually have some level of interest.Now we think of that two things

[Jon Hirschtick:]

I think that was a great answer.

[Jim Heppelmann:]

Right.

[Operator:]

Next question comes from Steve Koenig from Wedbush Securities. Your line is open.

[Steve Koenig:]

Thanks for taking my questions. I’ll just focus here on Onshape, and welcome to Jon. Maybe just a few, I'll call them a set of related question that creates one question.So on Onshape, on the guidance for one point of contribution to air our growth. Is that somehow – is that a pro-forma – I mean is there more revenue there that’s somehow not getting counted next year. I'm trying to relate that to your purchase price and if not, then are we – you know your conversation about 35% growth rate in the market, should we expect that? Onshape is ramping significantly faster than that.And then I'll just put it out there; any comment on how Onshape competes or differentiates with Autodesk fusion and also comment on what channel would you use to see it, and is there an existing Onshape channel or will be building one what’s the go-to-market going to look like.Thanks and that’s all I have. Thanks very much guys.

[Jim Heppelmann:]

Okay, no problem. Jon, let me hit the first couple and then maybe you can pick up the competitive one. So 1% ARR is AR growth, you know 100 basis points is taking what Onshape is already doing, plus the growth we are projecting and simply adding it into PTC’s plan for what, 11 months Kristian, so you're right about that math.Now Onshape has been growing much faster than 35% and frankly I hope they continue to do so. So within the market that’s growing 35%, of course we are in a position I think to take quite a bit of share. So I don’t think you should think that our plan would necessarily be 35%, but you should think that the market for this one study would support aggregate growth of 35%. You want to hit the competitive?

[Jon Hirschtick:]

Yeah, happy to Steve. You mentioned cut competitive position with Autodesk. I think their vision aligns with ours. They say that the cloud future SaaS, in the futures its just – they don't back it up with the goods yet. I mean our view as Jim said, we align completely on the idea that you have to have a pure cloud, pure SaaS platform and offering. Autodesk today offers a partial solution, you know where mixing installed software with cloud, partial cloud services and so forth. You know those strategies are not things that we believe are, way to deliver the value we seek to deliver to customers and so we think we have a big advantage there.

[Jim Heppelmann:]

Yeah, let me add to that. Our studies showed that Onshape pretty much goes toe to toe with features and functions against SolidWorks, but beats then for anybody who wants SaaS, because SolidWorks doesn’t have SaaS. And our studies said that against Fusion it’s a better, much cleaner better more complete SaaS model and blows them away on functionality. So we think we're in a very good strong competitive position against both of those with the Onshape Technology.And then with respect to the channel, you know one thing that PTC has which could prove very helpful here is a channel that lives in the bottom half of the at least kind of, let’s say in the middle part of the market and could go down market.So you know under NDA, I've had the luxury of running the Onshape technology past some of our channel partners, you know as part of our diligence and they're very, very excited. They feel like – you know sort of like once upon a time Dassault had SolidWorks in one hand and CATIA in the other and that was a tough, left right punch against PTC. We sort of have that against SolidWorks now. You want to go simple SaaS. You know that model we've got a great product, you need more features. We have Creo and all the wonderful things that we have been doing there.So I think we need more time to plan what role our channel will play here, but I think it's definitely an asset that is going to prove to be very, very important as this picture unfolds over time.

[Operator:]

Next question comes from Yun Kim from Rosenblatt Securities. Your line is open.

[Jim Heppelmann:]

Hey.

[Yun Kim:]

Thanks. Hey guys, congrats on the deal Jim. On your core business how much – I’m just going back to the basics here, but on your core business how much of your IoT and AR business is generated within you’re – the core CAD and PLM Installed base and along the line, if you can just give us at a high level at least, how much of your IoT and AR business is driven by the Rockwell Automation partnership today? Just trying to get a better understanding of where these IoT and AR growth opportunity is in the near term.

[Jim Heppelmann:]

Kristian, do you have data on the first one.

[Kristian Talvitie:]

We’ll actually come – we’ll get that data.

[Jim Heppelmann:]

I mean, think I can only give you estimates on both of those, I probably know the second one. But on the first question how much of IoT and AR is sold into our installed base again, I'm going to probably say 60%, yeah 50%, 60%. I mean on one hand we have those relationships, they are extremely useful. On the other hand we're winning in all kinds of accounts because we're a little bit uncontested right now. So we are also trying to go and having success going well beyond the installed base, and of course as I mentioned, what Rockwell sells is well beyond the installed base.And then on the second question, how important Rockwell. Rockwell would be a single digit percentage of what we're doing right now, but growing quickly. So they've gone from not part of our strategy to you know a small part at this moment, but it’s a small part growing at a higher rate and you know should become increasingly material as we as forward.I can imagine Rockwell getting up to be double digits and I don't know, maybe down the road somewhere, quarter of our business. They have a massive installed base, they have a very high win rate, they have a good deployment success, you know the future with Rockwell looks very, very promising.

[Operator:]

Next question comes from Sterling Auty from JP Morgan. Your line is open.

[Sterling Auty:]

Yeah thanks. Hi guys. Hey, I want to go back and put a finer point on Steve Koenig question. So with Onshape if its 1%, it sounds like this is about a $10 million revenue generator in terms where Onshape is and if I take 5,000 or so subscribers times you know the printed pricing that kind of support that idea. You know for $470 million net cash, it’s a big multiple to pay. And I don’t think anyone disagrees that they've got the leading technology on the market, but you know they’ve been around for a number of years and we're seeing you know slow adoption at this point. You know just to play devil's advocate, what was the buy versus build you know decision, you know $470 million invested internally.

[Jim Heppelmann:]

Sterling, that’s a good and fair question and the buy versus build is a good place to start. It costs Jon, with an incredible team of the best guys in the industry, you know six or seven years and $100 million to get to where he is right now. So for me, you know it would be a little harder to do that entrepreneurial efficient thing. So our estimate is it would take us at least five years and several $100 million to build what he has. So there are several $100 million of synergy here.Now the second thing I’d tell you about the price is you know, this is a unique asset. It’s the only one out there, which gives Jon of course some negotiating leverage. Another point is it's the same revenue multiple that we paid for ThingWorx and it’s the same revenue multiple that [Dassault] paid for SolidWorks at the same size if you adjust the difference between multiples on perpetual versus multiples on subscription revenue streams, ARR streams.So I think you and I both would agree that $100 million ARR stream is worth more than $100 million perpetual one-time stream. So if you take the difference in those multiples and gross up what [Dassault] paid for SolidWorks by that factor, you get to what we paid for Onshape. So I think I can triangulate on this many different ways, and I think this is a very good buy at this price. It's a win-win for both parties.

[Operator:]

Next question comes from Tyler Radke from Citi Investments. Your line is open.

[Jim Heppelmann:]

Hey Tyler. You might be muted.

[Tyler Radke:]

Sorry about that. Can you hear me now?

[Jim Heppelmann:]

Yeah.

[Tyler Radke:]

Sorry about that. Hey, thanks for taking my question. I got two questions; I’ll try to fold it into one here. But I guess just at a high level, Jim obviously nice to see kind of some of the reported metrics come in line or ahead of plan this quarter. I guess just more broadly, how do you feel about, execution and sales capacity. And then as a follow-up for Kristian, I think you mentioned kind of a gradual ramp in the ARR growth as we go into next year. Just curious if that’s a function of what you're seeing in the macro environment or that has – or if there's something else we should be thinking about? Thank you.

[Jim Heppelmann:]

I think on the execution side, Q4 was a solid quarter. We didn't have to make a lot of excuses. You can take the mega deal out and it is still a solid quarter. So I think we feel pretty good about no surprises in Q4. It went more or less like we expected it to and I think we feel pretty good about the forecast going forward. We have strong pipeline, lots of momentum, lots of good stuff happening, so I don't know, I think we were all stressed particularly 90 days ago, but certainly the past 90 days have been a good 90 days. Kristian?

[Kristian Talvitie:]

Yeah and again just on the seasonality, on the ARR remembering that that is the entire, we'll call it stack of customer arrangements that we have. And as such you need to consider, we’ll call it rate of new booking, the expiring base, kind of churn and looking at those variables and then also understanding the committed ramps as those layer in throughout the year, and even deals that were booked with start dates throughout the year, understanding how those later in. That’s how we get to that range, 12% to 15% for the year. And as I said, I think we're going to start the year below that range, and it will ramp throughout.

[Jim Heppelmann:]

Right and I want to add, maybe just some color to something Kristian said. He used this term backlog, and what he's referring to is we are sitting on signed contracts right now that for example may ramp up a big notch in Q3 or Q4. We don’t have to go win that business; we just have to wait for Q3 or Q4 to get here and it kicks in.So that’s one of the reasons why we see this ramp, is because we're sitting on a fair amount of already closed business that does not count in Kristian’s new definition of ARR, because it hasn't started yet. So it's really a combination of overlaying the backlog we are sitting on, with the forecast we're looking at and seeing that seasonal shape.

[Operator:]

This will be the last question. After the question, all callers please remain on the line for closing comments from CEO Mr. Jim Heppelmann.The last question coming from Jason Celino from KeyBanc Capital Market.

[Jason Celino:]

Hey guys, thanks for fitting me in. I wanted to kind of unpack the IoT, ARR growth in the quarter. You know 28% constant currency, still very good, above market rate, but a little bit more deceleration than expected and I appreciate the full backlog we have and that’s encouraging, but can you just kind of unpack your Q4 a little bit.

[Kristian Talvitie:]

Again, if really you have to unpack bookings from ARR and again remembering that for our definition, ARR is again the full annualized contract value, all the contracts that we have at the end of the period that are active and if – that’s what we ended up with in terms of the year-over-year growth, the 28%.Now also remember that what I said was, we had a very good bookings quarter for IoT in Q4 and a good chunk of those bookings have start dates that are in fiscal ‘20 and then in addition to that we also have previously committed ramp deals, as well as some other ramp deals that were booked in Q4, which pushes the ARR really into ‘20 and we would expect a pretty significant increase in ARR above market growth rate in ’20 as a result of the timing of how that ARR flows through.

[Jim Heppelmann:]

Yeah I think just if I could add two sentences to that Jason. Kristian mentioned very strong bookings, but if you remember our business is really back-end loaded in the quarter. So if we do a good sized deal in the last week of the quarter, it's highly unlikely that deal going to start in that same week. If it starts next week, I'm sorry its backlogged.So really what we need to do is to try to estimate how much of the deals will start in the same quarter they are purchased. First, we have to win the deals, but secondarily we have to try to estimate the start date in order to understand will it be in the ARR or will it be backlogged and it will jump into the ARR in the coming quarter. And what really fundamentally is a deal here is more of it ended in backlog then in ARR, but that sets us up nicely for next year.

[Jim Heppelmann:]

Okay, I think that’s the end of that. So I want to thank everybody for joining the call and spending you know an hour with us this afternoon. So again in summary, it's a challenging macro environment, but we closed a strong year of ARR growth. The IoT and ARR business are working well; the core CAD and PLM business are working well; the Focus Solution Group business had pretty strong year actually and all that against this backdrop.So on top of that Onshape has entered our lives here in it is clearly going to be a new growth engine, but also a longer term path to SaaS future. So there's a lot here at PTC that we're proud and excited about and if you get a chance to join us on the November 18 webcast, we're going to take you into much deeper detail, particularly around the long range plan and free cash flow and all the puts and takes and assumptions and sensitivities and so forth.So we'll try to give you a good clear view on how doable that is and I think you'll like the answer. But if you can't join then, I’ll look forward to talking to you in 90 days if we don't happen to cross paths sooner. So thanks for joining us. Bye-bye.

[Operator:]

That concludes today's conference. You may disconnect at this time and thank you for joining.