Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2019 Second Quarter Conference Call. This call is being recorded. For 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 to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.
Thank you, Sue. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our fiscal Q2 2019 results. On the call today are Jim Heppelmann, Chief Executive Officer and Andrew Miller, Chief Financial Officer. 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 a number of factors that could cause actual results to differ materially from those expressed or implied in such statements.
Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. The forward looking statements included on this call represent the company's view on April 24, 2019. PTC disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to and non GAAP financial metrics during today's call. 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 ASC 605 and 606 are included in this afternoon's earnings release materials and related Form 8 ks.
I'd also like to remind everyone that starting with the Q1 of fiscal 2019, we adopted ASC 606 on a modified retrospective basis. In our press release and prepared remarks, we've provided results under both 606 and 605 as well as reconciliations between the 2. We have also provided guidance under both standards. Finally, please note that the SEC requires the presentation of 605 results for comparability with prior year results. Thus, for comparability, 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 and non GAAP financial measures such as free cash flow are the same under both 606 and 605. And with that, let me turn it over
to Jim. Thanks, Tim. Good afternoon, everyone, and thank you for joining us. Before we discuss our results for the Q2, I want to start with the other press release that we issued this afternoon, which is the appointment of Christian Talbotti as our new Chief Financial Officer. I'm very pleased to have secured Christian as our new CFO, and I'm excited to work side by side with him as we pursue our long range plan.
Many of you already know Christian. He has a broad business background with more than 25 years of finance and sales and marketing experience. He previously worked at PTC from 2,008 to 2016, serving in various executive finance roles under CFOs, Jeff Glidden and Andy Miller. For years as our Corporate VP of Finance, Christian led our annual and long range financial planning efforts, including during much of that period where PTC's margins expanded dramatically while growth accelerated. Working for Andy, he led the team who put together our subscription transition plan.
Christian had been identified as our top internal CFO succession candidate for years, but unfortunately, he was poached away from us in the summer of 2016 when he left PTC to become the CFO of SaaS company, Sobo's. Christian later joined software company, SyncSort, as CFO in 2018. With the added experience Christian gained working for Andy and in these outside CFO roles, he emerged as a very strong leader when compared against dozens of alternative candidates that we considered in the search process. Christian is a known quantity. He's a proven leader who understands nearly every dimension of our growth strategy, our profit strategy and our subscription business model because he helped build and implement these strategies during his previous time here.
I think that at this time, he's the ideal CFO for PTC who can help us push forward without any disruption in pursuit of our long range plans. I'm very pleased to welcome Christian back to PTC as our new CFO when he starts on May 15. That means that this is the last time that Andy will be with us on an earnings call. So I want to take a moment to thank Andy for his significant contribution to PTC's success over the past 4 years. He's been a great partner to me and the management team.
And thanks to the very well managed subscription transition that Andy pulled off at PTC, the company has emerged now as a high growth, high profit subscription company with a bright and promising future. Andy will remain at PTC for a transition period and he and I will be on the road over the next couple of weeks, so many of you will have the chance to wish him well in person. Turning now to our Q2 results. Our financial performance was strong once again this quarter and we continue to make important strides against our major strategic initiatives across the growth margin and subscription fronts. Revenue, operating margin and EPS each came in above the high end of guidance.
The benefits of our maturing subscription business model were evident this quarter with Q2 ARR of $1,100,000,000 which showed year over year constant currency growth of 15%. Q2 bookings of $112,000,000 was a solid sequential improvement over Q1 and was near the midpoint of our guidance. On a constant currency basis, Q2 bookings grew 18% year over year and for the first half of fiscal twenty nineteen, bookings are up 9%. I trust you would agree that the single most important thing for PTC at this stage is for our high growth businesses to grow. And indeed, our IoT business had an exceptional quarter and appears to be on track to outperform the 30% to 40% market growth rate this year.
IoT bookings outperformed our CAD business in Q2 for the first time ever. I expect we'll see this develop into a trend over the coming quarters. With IoT on the verge of becoming the biggest piece of our total bookings pie, while delivering such strong growth, we feel confident that the target of sustainable double digit bookings growth is achievable. Andy will cover guidance in more detail later in the call, but I want to provide some initial context around our updated outlook for the year. We've trimmed our full year fiscal 2019 bookings guidance by $15,000,000 or 3% at the midpoint, reflecting 2 specific challenges we face, each contributing about half of the bookings reduction.
First, as part of our go to market transformation, we had planned for a certain level of new IoT and AR sales capacity to support accelerating market demand. Given the tight labor market, we've been operating in for some time now, particularly within enterprise software, competition for top sales talent has extended recruitment times and that's put us a bit behind in our hiring plans. We're very happy with the caliber of new talent coming on board, but the slower pace of hiring is modestly impacting bookings in the near term. We have amped up our recruiting efforts and we expect to close the gap in the back half of the year and exit the year on plan. And we still expect IoT bookings to grow at that high end of the 30% to 40% market growth rate this year.
IoT is showing very strong growth, but frankly, it's a bit behind our aggressive internal plan due to this shortfall in sales capacity. Secondly, you may recall that entering the fiscal year, we made the strategic decision to begin managing several of our smaller mature businesses like ALM and parts of SLM for profit growth rather than revenue and bookings growth. The dynamics of these markets and our position in them isn't nearly as strong as it is in our mainstream CAD and PLM businesses and nothing at all like the opportunities in high growth IoT and AR markets. This change was another logical portfolio move in our ongoing pursuit of higher growth at higher margins. We redeployed a fair amount of sales capacity out of these areas into IoT and AR and focused instead on providing great ALM and SLM solutions for a narrower set of customers' verticals and use cases.
The good news is that we're getting a good payback on the IoT and AR resources as both of those businesses showed outstanding success in Q2. But on the negative side, while we did plan for fiscal 2019 bookings to decrease in the ALM and SLM businesses, we're tracking to underperform that plan for the year and we've lowered our forecast accordingly. You need not be too concerned though about the long term effects because these businesses are fairly small. They currently represent only about 5% or $25,000,000 of our full year bookings forecast. They're just big enough to create a point or 2 of bookings growth headwind in the near term, but not big enough to be material to any long term plans around growth and free cash flow.
With a tighter and more focused forecast for the second half of the year, we've likewise tightened our related spend in these businesses, which is one of the contributors enabling us to maintain our fiscal 2019 operating margin, EPS and free cash flow targets despite modestly lower revenue. Before I provide additional detail on our quarterly performance, I'd like to stress that while we revised our top line outlook for the year for tactical reasons, there's nothing we're seeing in the business that changes the fundamental pillars supporting our long term financial targets. In fact, the performance of our growth business emboldens our belief in what's possible. Let me turn now to the significant progress we're making on key growth initiatives. I'll start by discussing IoT, which in terms of reporting includes our AR business.
Our Q2 IoT bookings performance was very strong. IoT benefited from the mega deal that had slipped from Q1, but also from 4 additional large deals greater than $1,000,000 2 of which were delivered by our AR team. Even excluding the mega deal, Q2 year over year IoT bookings was well ahead of the 30% to 40% estimated market growth rate, so it was a strong quarter. Consistent with recent quarters, IoT bookings came from a mix of new customer acquisitions and from expansions with the latter accounting for over 60% of Q2 ThingWorx bookings. Digging into the main use cases for Industrial IoT, let me begin with the fastest growing sub segment of the market, the manufacturing setting.
We closed many new and expansion deals in both discrete and process manufacturing. Examples of some wins include in automotive with Volvo and Bridgestone, in Aerospace and Defense with BAE Systems. 1 of our larger Q2 SCO or factory IoT deals was a follow on transaction with Colfax, who you may recall was an early joint customer we closed with Microsoft. The original use case that's in production today at Colfax was a smart connected product use case for aftermarket service optimization. The Q2 expansion was our first foray into Colfax's factory operations and it included both our ThingWorx SEO solutions and a 6 figure investment in AR.
Kofax is a shining example of an industrial company fully embracing digital transformation and PTC along with Microsoft being there to support them up and down the IoT technology stack and across the enterprise value chain. Elsewhere in SEO, we are pleased to see our strategic alliance with Rockwell Automation continue to gain momentum. On the enablement front, training and workshop activity accelerated in Q2 across sales, presales and services, together now totaling over 1500 Rockwell Automation employees. Many of these go to market resources are regions where PTC has limited SCO resourcing or market presence like China, the South Rim, Korea and the Middle East. The enablement activity is clearly beginning to bear fruit with the number of Rockwell Automation deals closed in Q2 doubling quarter over quarter and nearly 300 new deals added to the pipeline, many coming from places like food and beverage, mining, pharmaceutical and consumer packaged goods that lie beyond PTC's traditional end markets.
We were also pleased that in early Q3, Rockwell Automation closed its 1st expansion deal with Ford for 4 additional factories, just 2 quarters after launching the initial pilot. Ford is a good proof point for the rapid ROI that customers can achieve with the joint PTC and Rockwell FactoryTalk Innovation Suite. Our confidence around the success of this strategic alliance grows stronger every quarter and we're pleased with the commitment and focus from the Rockwell Automation executive team, plus their employees who are supporting our alliance across the globe. In the SCP or Smart Connected Products market, we recorded new wins and expansions across the broad range of customers, such as diversified industrial company, Stanley Black and Decker, medical device manufacturer, Varian Medical Systems and global telecom equipment provider, Ericsson. We also closed a large expansion deal with one of our earliest and most forward thinking SCP customers, Dysmex, who is a leading global manufacturer of medical diagnostics equipment.
The latest expansion included capacity to connect and service additional manufactured products and a 6 figure Vuforia studio investment to further refine and enhance their aftermarket service. We had a strong quarter on the Microsoft Alliance front. In Q2, we closed 35 deals, roughly tripled the deal count of Q1, and the active co sell pipeline has grown to 240. While Microsoft was initially envisioned to be an important element of our smart connected products go to market strategy, we're beginning to close a number of deals in factory and AR use cases with them. During the quarter, I traveled to Barcelona to join Satya Nadella, Alex Kipman and other Microsoft executives in launching their HoloLens 2 at Mobile World Congress.
Microsoft featured PTC's Vuforia AR software as their HoloLens 2 industrial showcase. The HoloLens 2, a second generation hands free wearable AR computing device is a big step forward. I expect there'll be strong demand from it for it from the industrial world when it starts shipping in volume this summer and there's no better software to power it than PTC's Vuforia. Drilling a bit more into augmented reality performance, we delivered another exceptionally strong quarter with bookings growth of over 100% versus Q2 of 2018. As I mentioned earlier, we closed our first ever 7 figure enterprise AR transactions in Q2, 2 of them in fact.
And similar to what we saw in our IoT business just a few years ago, the volume of 6 figure deals is accelerating, which is a clear indication that commercial AR adoption within the industrial market is broadening. This business is blossoming into a big hit for PTC. Just a few weeks ago, we announced our latest AR offering called Vuforia Expert Capture, which is a breakthrough solution that provides industrial enterprises with a faster, more efficient way to capture and transfer worker expertise in order to improve workforce productivity, quality, safety and compliance. With retiring worker demographics and other factors driving a major skills gap in the manufacturing industry, there's a critical need for more effective ways to capture and transfer knowledge from existing experts to new workers. Early customer feedback on Vuforia Expert Capture has been extremely positive.
For example, semiconductor manufacturer Global Foundries, who made a sizable Q2 investment in expert capture, recognized the significant ROI associated with empowering frontline workers with relevant information in context to get the jobs done quickly and accurately. With our growing portfolio of industrial AR solutions supported by next generation headsets like Microsoft's HoloLens 2, we're confident AR will become an increasingly material to PTC's growth rate over time. To summarize in IoT and AR, Q2 provided another strong data point suggesting that the adoption of both of these technologies continues to accelerate across the range of vertical markets, geographies and use cases. Let me turn now to our Solutions business. Q2 Solutions bookings, as expected, declined modestly year over year against a tough comparison in Q2 of 2018, with the biggest driver being the bookings declines in ALM and SLM that I discussed earlier, as well as the Q1 2019 end of life for perpetual in Asia Pacific.
Turning first to CAD. For the first half of the year, CAD bookings growth have been in low double digits on a constant currency basis, well above market growth rates and CAD is on track to meet or beat its plan for the year. Q2 marked the launch of Creo 6 and the official launch of Creo Simulation Live, our groundbreaking CAD solution with real time simulation coming from our strategic alliance with ANSYS. We inked deals with 70 customers across 9 of the 10 major geos in a wide variety of vertical industries and with a good mix of direct and channel distribution. As expected, customers are purchasing small quantities of licenses of Creo Simulation Live to prove out the technology.
So the near term impact to overall bookings won't be significant. Also, the new capability was initially released in a newer version of Creo and of course, many customers can't use this capability in production until they've upgraded their whole system to a version of Creo that has it. So to help speed adoption, we're taking the unusual step of back porting the live simulation capabilities into Creo 4 to allow customers to adopt the functionality of Creo Simulation Live without going through a major system wide Creo upgrade first. The Creo 4 based release of Creo Simulation Live will come out later this quarter. In summary, we built a very promising pipeline for Creo Simulation Live.
Initial customer feedback is good and we're looking forward to providing more color on commercial adoption in coming quarters. With so much new technology entering the picture, it feels like a renaissance moment is developing in the CAD market and PTC intends to leverage our improved innovation muscle to lead that renaissance. We believe that Creo is leapfrogging our competitors with important new capabilities like real time simulation, cloud based augmented reality design reveal, leading additive manufacturing capabilities and rapidly advancing generative design functionality. Our long term view of the CAD opportunity is more bullish now than it has been for years. Turning to PLM.
After getting off to a slow start in Q1 when performance was impacted by large deal slippage, we saw large deal activity return to more normal historical levels in Q2, resulting in a meaningful sequential improvement in this business and year over year growth ahead of market growth rates. We received further validation of our strong PLM market position in Q2 with a sizable new competitive win at Mitsubishi Heavy Industries. Mitsubishi is leveraging Windchill's open and configurable out of the box applications to reduce time to market, cut costs and improve quality across their product lines. With Wind Shell users across the value chain can interact with data dynamically in 3 d, both on a screen and through augmented reality. With deployment options including cloud and on prem, Windchill has the flexibility, performance and scale that companies like Mitsubishi require in their pursuit of industry leadership.
To summarize on the bookings front, the combined core CAD and PLM businesses are performing exceptionally well performing well, while the IoT and AR growth businesses are performing exceptionally well. This performance was offset to a degree by relatively poor performance in our smaller and less strategic ALM and SLM businesses. In combination, it produced a solid quarter with bookings up 11% sequentially and 18% year over year. On the margin front, we executed well in Q2 with margins coming in above guidance and up substantially year over year. On the subscription front, the Q2 subscription mix of 91% was aligned with the low 90s expectation we set years ago regarding what the exit of the transition would look like.
Anybody who might have been alarmed by Q1's surprisingly low subscription mix of 58% due to last time perpetual buys should now be comforted by the 3,300 basis points of sequential mix improvement from Q1 to Q2. Having achieved the expected exit mix, while maintaining solid performance on bookings, it should be clear that we've successfully transitioned to recurring software sales, while retaining the customer relationships and keeping our growth story intact. I think now for sure we can declare success on our transition to subscription, even though it will take more time for all the positive effects to fully catch up with us. To wrap up my comments, I'm excited to have landed Christian Talbotty as our new CFO and in the very same breath can reiterate PTC's commitment to pursuit of our long range plan, including delivering $850,000,000 of free cash flow in fiscal 2023. Christian has bought into our growth and margin strategies as he was one of the authors of the original 2021 long range plan that we presented in November of 2015.
We did make a modest reduction in our near term outlook for the balance of fiscal 2019 as we work through some growing pains, but we continue to forecast mid teens recurring software growth this year with no change to EPS or free cash flow and our long term outlook for revenue, margins, EPS and cash flow remains unchanged. Our leadership position in the high growth IoT and AR markets, together with exciting new opportunities for growth in our core business and momentum in our key strategic alliances, gives us confidence in our ability to drive sustained long term growth. It's my view that we remain firmly on track with our plans to transform PTC into one of the world's premier high growth, high profit recurring revenue software companies. With that, I'll turn the call over to Andy.
Thanks, Jim, and good afternoon, everyone. I'd like to start by saying that it really has been a privilege to work at PTC for the past 4 plus years, and I want to thank Jim and the Board for the opportunity. Christian and I worked together during my 1st year and a half at PTC, and I'm confident he'll take the ball and run with it. Christian joins in the middle of May and I'll be around to assist with a smooth transition. Before I dive into our results, I'd like to note that I'll be discussing non GAAP results and guidance and all growth rate references will be in constant currency.
And as Tim mentioned earlier, we adopted the new rev rec standard ASC 606 under the modified retrospective method on October
1, 2018. Since we
have no baseline for last year under 6 unless otherwise unless otherwise stated. Also, please note that certain operating and non GAAP financial metrics such as bookings, ACV and free cash flow are the same under 606 and 605. Moving to our Q2 results. Our Q2 financial performance exceeded the high end of our guidance on revenue, operating margin and EPS. Q2 bookings of $112,000,000 were around the midpoint of our guidance range, an increase of 11% sequentially over Q1 and 18% year over year.
Subscription mix of 91% was the highest level recorded since we began our subscription journey at the start of fiscal 2016. And with our subscription transition complete, we expect a subscription mix well into the 90s going forward. Moving to the income statement. Under the new revenue standard ASC 606, total revenue in Q2 was $291,000,000 operating margin was 15% and EPS was $0.22 all within our guidance ranges. Under ASC 605, total revenue in Q2 was 3 $1,000,000 up 6% year over year and software revenue was $277,000,000 an increase of 8% despite a 1300 basis point increase in subscription mix.
Subscription revenue grew 47% and total recurring software revenue grew 14%. Please refer to our prepared remarks document on our website where we reconcile our 606 results to our 605 results. ARR grew 15% year on year to $1,070,000,000 During Q2, we converted 15 direct customers from support to subscription at an ACD uplift of approximately 50%, and we continue to make progress with our channel conversion program with 93 conversions in the quarter. Continuing through the 605 P and L, Q2 operating margin of 21% was 100 basis points above the high end of guidance and an increase of 300 basis points year over year, despite a 1300 basis point higher subscription mix. We estimate the higher subscription mix negatively impacts operating margin by about 3.50 basis points as compared to last year.
EPS of $0.38 was $0.02 above the high end of guidance, reflecting continued discipline on total spending. Now let me turn to guidance. We have provided ASC 606 guidance in our press release and prepared remarks, Given we have no comparative historical results for 606, on this call, I'll focus my discussion on the highlights of our 605 guidance. For the full year, we now expect bookings in the range of $485,000,000 to $505,000,000 This represents growth of 7% to 11% year over year. As Jim described earlier, about half of the $15,000,000 decrease in our bookings guidance is being driven by a slower ramp in new IoT and AR sales capacity.
Yet even with the lower bookings forecast, we expect IoT and AR to grow at the higher end of the market growth rate of 30% to 40% this year. The other half is coming from lower bookings in ALM and parts of SLM, 2 mature businesses that are now being managed for profit as opposed to bookings and revenue growth. We continue to expect a full year subscription mix of 86% and to exit the year in Q4 with about a 94% mix. We are trimming fiscal 2019 total revenue by $13,000,000 the midpoint to a range of $1,310,000,000 to $1,330,000,000 which represents growth of 7% to 8% year over year, driven by software revenue growth of 9% to 10%, despite a 1,000 basis point increase in subscription mix. The $13,000,000 decrease in revenue reflects $6,000,000 less software revenues due to lower bookings, a $4,000,000 FX headwind relative to our prior guidance and $3,000,000 lower services revenue.
Recurring software revenue is now expected to be $1,090,000,000 to $1,100,000,000 growth of 14% to 15% and recurring software revenue is expected to be 94% of total software revenue for the year. We are maintaining our fiscal 2019 operating margin guidance of 23%, representing a year over year increase of approximately 400 basis points, reflecting tighter spending control. We now expect OpEx to increase only 3% year over year in constant currency, below our long range target of half the bookings growth rate. Our effective tax rate is still expected to be 18% to 19%, resulting in non GAAP EPS of $1.75 to 1 $0.85 no change from our prior guidance, which is approximately 24% growth at the midpoint. We are also maintaining our free cash flow guidance of $265,000,000 to $275,000,000 and our adjusted free cash flow guidance of $290,000,000 to $300,000,000 which excludes cash payments for restructuring of $25,000,000 As with operating margin, we expect free cash flow to accelerate significantly in fiscal 2020 as the subscription model matures and as our CapEx returns to historical levels of about $30,000,000 We remain committed to a balanced capital strategy In addition to the $1,000,000,000 ASR we entered into in Q4 of 2018, which we expect to close out this quarter, we intend to repurchase shares equal to at least 40% of FY 2019 free cash flow.
In Q2, we used $65,000,000 to repurchase 725,000 shares at an average price of $89.60 Turning now to Q3 guidance under ASC 605. We expect bookings in the range of $110,000,000 to 120,000,000 dollars Total revenue is expected to be in the range of $320,000,000 to $325,000,000 Q3 operating expenses are expected to be 190 $1,000,000 to $192,000,000 up sequentially primarily due to LiveWorx in June, resulting in operating margin in a range of 18% to 19% and EPS of $0.31 to 0 point
to Our first question comes from Saket Kalia with Barclays. You may go ahead.
Hey, good afternoon guys and thanks for taking my question here.
Hi Saket.
Hey, Andy. Hey, Jim. Jim, maybe just to stick to the one question rule here and ask you this. We talked about the sales capacity issues and the new strategy with ALM and SLM. But I'm curious what your latest thoughts on the macro backdrop are.
The last couple of quarters have been a little tougher on the bookings front, really at the same time that some of the PMI readings have been softening. How do you think about that visavis business? And what's the latest view from the ground now on the macro backdrop?
Well, first, I would acknowledge the PMIs have come down a little more. They weren't great and they've come down a little bit from where they were, let's say, 90 days ago. U. S. Is still better than the rest of the world.
But I think if we look back at our Q2, for example, we had a very strong quarter in Europe, and the VMIs say we shouldn't have. And if you go back to some of the Q1 deals that slipped, we ended up getting nearly 2 thirds of them in Q2 and the rest are still in place. So I think we own up to some sales execution issues related really to getting behind in the air and particularly in hiring and then some tactical issues around this ALM strategy, which I think we still made the right decision there because we're playing the long game. And we made a decision that has some short term risk, but should pay off in the long term. So I think we still feel like the headwinds that have knocked us a couple of points off plan really aren't macro related.
But that said, I acknowledge the macro situation is not great and it's not getting better, but it's not a disaster either. So I think we just feel like we're having a decent year, but we aimed higher than that. And if you look at the difference between what we're currently forecasting and what we had hoped to deliver, I think we own it as sales execution issues.
Saket, a couple of things I'd like to add. First off, during the quarter, large deals returned to like right around the midpoint of the normal level. We say it's 20% to 40% of our bookings. It was actually just above the midpoint of that. So a good number of large deals.
The other thing that I would highlight also is that with IoT actually this quarter being our biggest business from a bookings perspective, actually by a substantial amount, it does show the fact that high growth secular market definitely is less impacted than others by macro. So anyway, we feel good about the fact that the biggest piece of the business is a high growth secular market that we lead today.
Got it. Very helpful. Thanks, guys. I'll get back in queue.
Thank you. And the next question comes from Matt Hedberg with RBC Capital Markets. You may go ahead.
Thanks. This is actually Matt Swanson on for Matt. In the last two quarters, we've seen some different sales force challenges last quarter with restructuring, this quarter with the hiring. Is there anything else you would point to maybe with the expanding product portfolio specifically around sales cycles, pipeline management or the ability to ramp existing reps? Or do you feel like you've really zeroed in on those specific issues?
Well, let me say that the issue we had last quarter is actually pretty much related to the issue we had this quarter, which is we have 2 things happening here. 1 is we need more reps in general to support our growth, okay? The second thing is we made a conscious decision to take more risk in businesses whose futures aren't that promising in order to execute better on the businesses whose futures are extremely promising. So you could imagine we both shifted resources within last year's pool toward the direction of IoT and AR, while trying to add a substantial increment of new resources to support the incremental new growth over last year. And if you kind of think about this, we might say the IoT market is growing at 30% to 40%, but PTC aimed higher than that.
And why did we aim higher? Well, because inside of IoT, we have this AR thing that's growing triple digits. It did grow triple digits last year and I'm sorry, last quarter and close to that last year. So our view is, separate from what the long range plan says, we should be able to do better than the IoT market because we have this AR thing and this hot IoT thing. So we're pouring resources into that and hiring a lot and we're just we're behind.
Now, we've realized we got to ramp up our recruiting capacity and we need to get back on plan. So, there's a big effort to do that. But I think it's just a case of not moving fast enough to put in place the capacity needed to deliver on the growth. And I'll remind you, the capacity we did put in place delivered. So, we're pleased with what happened, but disappointed with what we didn't quite get done in time.
But it's not a new problem. It's kind of a maybe a hangover from that previous problem and the fact that we didn't get it completely buttoned up within the Q2.
Thanks. That's really helpful. And then Jim, it was great to hear it sound like it was a successful quarter for the Microsoft partnership. Microsoft made an announcement with BMW during the quarter about an open manufacturing platform. Do you just have any comment on that if that is any change in the relationship or is that something separate?
No material impact on the relationship. What they're trying to solve for is that when a company like BMW builds a new factory and brings in all this dissimilar equipment, it's frustrating to them that it doesn't work better together. Now, one strategy is to get everybody to agree on kind of a more open or standards based approach. The other strategy is wheel in cap wear and make it work anywhere. So, someday when the world's perfect and everybody supports standards and everybody threw away their old equipment, we won't need cap wear anymore.
But in the meantime, everybody needs it. So I think you should think that BMW is a bit frustrated with diversity that doesn't integrate. Microsoft would like to drive standards. They actually are already standards, but they'd like to push them harder. We actually support that.
But in the meantime, capware is very, very important because nobody has greenfield factories anyway.
Thank you. The next question comes from Steve Koenig with Wedbush Securities. You may go ahead.
Hi, gentlemen. Thanks for taking my question. Congratulations on getting Christian back to PTC. That will be a welcome addition to the team and thank you to Andy for the great work you've done on the subscription transition and everything else. I wanted to dig in, if you guys will allow me on IoT.
So some of the statements you made, I'm just trying to rationalize some of them. So if I heard you correctly, in Q2, you saw IoT bookings above 40% and you did see a number of expansions and some mega deals. But you also said you're short of your internal plan for IoT and you've taken down your bookings guide in part due to this being behind the sales hiring for IoT. Why I guess that begs the question, without giving numbers necessarily that you're not ready to give, what is your internal plan for IoT? I mean, how aggressive is it and have you now moderated it to something more realistic?
And I guess the other part of the question is, why not have confidence that you can continue to do some of these bigger IoT deals and make your resources have your resources that probably becoming more productive in IoT and you've got Rockwell. So I guess I'm trying to understand kind of the cut to the bookings guide in the context of the IoT contribution of that cut. Just given a real quick quarter, why is that?
Let me clarify a few numbers just because we repeated them, but just to make sure they stay hit home. So first off, for the full year, we expect IoT bookings at the high end of that 40% growth rate, even with the fact that we're going to have less firepower. In Q2, IoT bookings were not only above 40% in total, but even if you exclude the $7,500,000 mega deal, they were still above that 40% level. So it was a huge quarter for IoT in Q2, okay. So just so that the facts are out there.
Our bookings take down of 15,000,000 dollars 1,000,000 for that was basically FX and the rest about $7,000,000 a piece was a reduction in ALM and SLM and the other was a $7,000,000 reduction in IoT. So that's pretty small when you think about the size of our
IoT bookings. And I'm glad
you asked I'm glad you asked a couple hundred basis points.
I'm glad you asked the question, Steve, because I do think it's important to rationalize how you think about this versus how we think about it. See, we report IoT inclusive of AR to you. But internally, we have an IoT number and an AR number. And the IoT number is 30% to 40%, let's say, but AR number is more like triple digits. And that business is becoming big enough to move the needle.
So when you add them together, our internal plan is well more than 40%, simply because we're thinking of adding 2 strong growth things together. Now remember, we always said AR was a tailwind against our long range plans and we see it happening. If we put IoT and AR together and only aim for 30% to 40%, we'd be leaving business on the table, we'd be losing market share.
So we
aimed higher and we're actually coming in higher, but we're not coming in as high as we aimed because we're short of capacity to get there. Hopefully that cleans it up. Yes.
And Steve, I want to add the point. We're pretty disciplined in our forecast and our guidance. Our forecast and guidance is based upon the pipeline as we see it today, historic close rates, lots of analytics, sales firepower. And when we look at all that together, we felt it was appropriate to reduce the number by
Yes. But again, just the key point is, if we did 30% to 40% on the combo of IoT and AR, we would be disappointed.
Got it. Got it. If I may ask one corollary and then I'll pass the baton here. Can you give us any color on in terms of the sales hiring you want to do, I guess my read is you want to do a lot more Vuforia than you're doing given the growth rates there. Are those salespeople segmented by product AR versus IoT or do they pursue all opportunities?
Kind of maybe any of the dynamics there would be helpful. Yes.
I mean, it's a fairly sophisticated system. So there are full product line sellers who sell everything, including IoT and AR. There are some people who pursue IoT all day long. And yes, there is a new force just implemented in the last really this year that leads with AR because there are many AR opportunities that you wouldn't expect an IoT seller to find because they're kind of hunting in the wrong place. We have lots of different ways into an opportunity and some opportunities we start with IoT and bring in AR and others are just AR or frankly what we found some places I named one of the accounts is what starts as an AR opportunity actually ends up dragging in ThingWorx because they say we need to get more data in order to feed this AR machine.
And then we say, okay, well, we actually have a pretty nice product for that called ThingWorx. So, yes, we have dedicated sellers on both and of course full product line reps that can sell all of the above.
Got it. Okay, great. Well, thank you for answering my questions and congrats again on bringing Kristen on board.
Yes, great. Glad to see you as a supporter.
Thank you. And the next question comes from Jay Vleeschhouwer with Griffin Securities. You may go ahead.
Thank you. Good evening, Jim and Andy. Continuing on the line of questioning regarding sales or sales headcount, Can we just parse through a couple of things here? I appreciate what you said about the competition for labor because not only have you significantly expanded your aperture of Open Rex, your direct competitors have certainly done so, including in particular the sales. So I understand why it might be harder.
On the other hand, just doing the monthly checks that we do, your average number of sales openings for the year to date is double the number that you had on average open last year. So maybe you could talk a little bit in more detail about how many you've actually brought on. And you've also made the point over time, like other companies, that it always takes time anyway for sales to ramp up to productivity. So why would be a relatively short term impediment to hiring necessarily have had a significant effect on bookings since new salespeople wouldn't be that productive right away anyway?
Yes. I don't have the exact data in front of me. As I sit here in our studio, I looked at the data with Andy yesterday, but I don't have it here in the room with me. So I can't quote the numbers. But if you look at the IoT and AR capacity, we were mid quarter about 15% behind, but we're already catching up.
But the fact that we were behind will hurt us in the back half of the year against that very aggressive plan. And so we think that we'll be in a position where it won't hurt us next year. And anyway, we'll plan next year around the reality of where we are and we feel like we'll be in a good place. But we're really paying the penalty in the back half for having fallen behind previously even though we're already beginning to catch up. So it's sort of no easy fix for the fact that we didn't earlier in the quarter bring on enough people and though we're making progress now, no way to back up and make that problem go away.
Understood.
As follow-up on the CAD business, I like the fact that for the last number of months now starting with the Frustum acquisition, you sounded more positive about it. In terms of your thinking about where the business is going, for the last, let's say, 3 years, by my calculation, your compound growth rate for new Creo licenses has been at least in the mid single digits, maybe more versus low single digits in the prior 3 year period and you've regrown your active base. How are you thinking about the progression of the Creo business in that respect over the next number of years? Do you think mid single or better new license growth, a la SOLIDWORKS and others is sustainable? Or do you think you might end up reverting back to where you were?
So before you answer, Jay, I just want to put the facts out there. We disclosed that the last 2 years CAD grew high single digits and for the first half of the issue we've grown low double digits.
Yes. But getting to the gist of your question, our long range plan assumes CAD grows 4%, okay? We'd like to do better than that. We think we can do better than that. It's a bit like the IoT and AR discussion we were just having.
Just because that was our long range plan doesn't mean it's this year's plan. So, we're aiming higher and part of our confidence, which I think you realize is that our channel has done so much better. And we all know that the growth in the CAD market is in the low end. And for many years, PTC did not participate in this growth, and now we are and our channel is doing well and has been doing well for some time. In fact, if you look at the Creo Simulation Live transactions, if you look at it by transactions, you get one story.
If you look at it by dollar volume, you get a different story. But the transaction volume, the majority of it came from the channel, which means our channel is using Creo Simulation Live to differentiate and upsell and cross sell and so forth. And that's exciting because I think that will lift their win rate. And so, again, we have a long range plan that has, as Andy always said, remember with that shape of risk curve, there's risk and then there's some factors that could help us outperform. AR is not contemplated in that plan, but it's a smoking hot business right now.
And similarly, a higher win rate in the channel because of many improvements in Creo, including Creo Simulation Live is not really contemplated in the 4% growth plan. So that said, we have challenges too. So I think we feel like, yes, we have challenges, but we have some things that are really working and bode well for the future too. And so we feel confident that the plan, the long range plan is the long range plan. We feel
good about it. And Jim made one statement a couple of times in the prepared remarks, which was to achieve the long range plan, the most important thing is that our growth businesses grow. And that's what's happening right now and that's what we're forecasting for the rest of the year.
Okay. Thanks very much. Thanks, Andy.
Thanks Andy.
Thank you.
Thank you. Our next question comes from Sterling Auty with JPMorgan. You may go ahead.
Hello, Sterling. Great. Thanks. Hi, guys. This is Jackson Ader on for Sterling tonight.
Hi, guys.
Question from our side would be, have there been any attempts or can you give us any color as to maybe rather than going out and just flatly hiring brand new sales reps to try and go after the IoT and the AR opportunity, have you had much or any success shifting internal sales reps from maybe some of these businesses that aren't growing as quickly over to the high growth areas? Any color qualitatively you can give us on that?
Yes. Well, I mean, that's a little bit what we got burned on in this past quarter, I mean, if you want to call it that, is we did shift a lot of resources, which by the way meant that we had to double hire again. Because in general, we didn't shift. In general, we replaced because somebody selling a mature old legacy product isn't necessarily the exact same profile of a hunter who sells a hot new high-tech hot technology. They tend to be different profiles.
So we didn't shift. We shifted the headcount. We didn't so much shift the people. And I think it was not appropriate in general to shift the people. There's certainly exceptions to that.
So that put more burden on both higher incremental and rehire replacement capacity. So, I mean, it's a good strategy. We're executing that strategy. We knew there was some risk and we had pretty we had plans.
We had planned ALM and parts of SOM to be down.
Right. But the key thing to remember here, I said this, but I think it's worth reiterating, is that those are small businesses whose future is not that promising. And so rather than try to get one last year or so of growth out of a small business that's not that promising, we'd rather take even more share in places like IoT and AR, where our products are best in class and the markets are growing like a weed. And so we did that and it just put a lot of hiring pressure on us and we got behind in it. So that's kind of the story.
But again, it really comes down to not so much transferring people as transferring headcounts.
Okay. All right.
Thank you. There's one other thing that I want to also clarify and that is that this year 94% of our revenue is recurring, and that's growing our forecast. Our guidance is for that to grow at the 14% to 15% rate. So, while we had to trim a bit, it's still very strong performance.
Thank you. The next question comes from Ken Talanian with Evercore ISI. You may go ahead.
Hi, thanks for taking the question. So you had previously provided some pie charts in your source book way back that suggested that the combination of those ALM and SLM businesses were, I estimate something around 18% of bookings in fiscal 2015. And it sounds like it's a bit smaller today at 5%. But I'm curious, has that varied quite a bit year to year? And then going forward, how should we think about the rate of decline for those bookings and then the potential tailwind that those that you might have to margins from the change in strategy to those businesses?
1st, I want to clarify that we highlighted that it was ALM and parts of SLM. Okay. So there is variability in that.
But true enough, but let's just take the 18% and think about it. 18% in FY 2015, well our bookings have grown a lot since FY 2015 and this has not been a growth engine. A couple of 100,000,000 Right. So this has not been a growth engine. So what would have been 18% in FY 2015 is actually Probably 10%.
Probably 10% already. Yes. And now remember, we planned the year down. Yes. Okay.
So maybe if it was 10% and again, I'm just saying directionally here, maybe if it was 10%, we plan for it to be 7% or 8% and it ended up being 5%. Yes. Okay. So that's kind of the that's very crude back of the envelope math that gets you from your 18% to our 5%.
Got it. And how should we think about the potential tailwind to margins from?
Keep in mind, we're talking about bookings. This is very sticky software, highly renewed. So the revenue is not going down. The revenue is quite stable and maybe even growing. It's actually it's been consistently growing since FY 'fifteen.
Exactly. So, you shouldn't think of this as a headwind to bookings. And worst case, take the 5% to 0, write it off, and it doesn't really have a big impact on our 2021 2023 plans. I mean, it's a modest headwind for sure, but again, we have big tailwinds still and we're investing in the tailwinds and perhaps taking risks in places like this.
Yes. And actually, from an EPS and free cash flow perspective, it really it doesn't have any impact at all. We actually plan we did not plan that ALM or SLM were driving increases in free cash flow and EPS. So that's the important thing to realize. The drivers of increases in free cash flow and EPS are 1, the compounding benefit of the subscription in general and this is sticky software, so that continues.
And the second thing is really the biggest piece is IoT and AR. So that's why we've looked at our long range plan. We do not believe that this trimming of the top line impacts next year or frankly the years after that from a revenue, EPS, operating margin or free cash flow perspective. And the fact we're holding our EPS operating margin and free cash flow guidance for this year is the biggest indicator of that.
Very helpful.
The key point is that we've also taken cost out. You know what I mean? Yes.
So we're managing those business for profit expansion, not revenue expansion.
Yes. In fact, if you want, go read Geoffrey Moore's book called Zone to Win and read about the productivity zone. Those are in the productivity zone.
Very helpful. I appreciate the clarification.
Yes, thanks.
Thank you. The next question comes from Adam Borg with Stifel. You may go ahead.
Great and thanks for taking the question guys. It's just on Rockwell, it's nice to see continued progress and I guess just two parts. 1, how is Rockwell tracking versus your internal expectations? And I guess 2, how is it tracking versus the full year committed minimum? Thanks.
Yes. So it's early for Rockwell and I'll remind you the first transaction we ever did with Rockwell was Ford and that just upsold from 1 factory to now 5. So think about that as to this point we've been planting seeds and we're hopeful. The very first seed has matriculated and now we're hoping that more start while we continue to plant more. So certainly, we're still largely in seed planting mode with Rockwell, but they have some amazing customers and they are completely dedicated.
And I think I actually detect that they love selling our software because their competitors have nothing like it. And I think I pointed out to you guys before, the first factory we did at Ford did not have Rockwell equipment and it had a competitor's equipment. But now Rockwell is in a position to own the strategic high ground and an account like Ford and that's great for them and it's great for us. So I think it's going well, but you got to plant a lot of seeds and give them time to mature before you get the meaningful business, but that's apparently starting now.
Great. Thanks, Ken.
Thank you. The next question comes from Ken Wong with Guggenheim Securities. You may go ahead.
Great.
Hey, Jim, you mentioned that you guys closed 65% of the $20,000,000 in slippage. So, it's already well ahead of what you guys are expecting. I guess, one, how should we think about the remaining kind of roughly $7,000,000 Is that baked into guide? And then any impact from SLM, ALM on that potential extra $7,000,000
Well, everything's baked into guidance because we contemplate everything when we think about how best to guide. The $7,000,000 basically, I don't think any of it really went away. So, it's just business that slipped into later in the year, which as we said on the last call, means we're still spending energy on it. When you close a deal down, you can pass it off to the next group who implements and so forth and go on to selling something else. As long as you haven't closed it down, you're still wasting energy on it.
But I think that's all contemplated in what we said last quarter and then what we said this quarter.
Yes. A good piece of it is in the Q3 pipeline. And then I think there's a deal that's either Q3 or Q4 and it's kind of straddling when it might close.
Got it. Great. Thanks a lot for the clarity guys.
Yes. Thank you. Participants, please standby for closing remarks from Jim.
Okay, great. Well, thank you, operator. I'd like to thank you all for joining the call and spending an hour with us this afternoon. If I want to summarize, I think we had a solid quarter against all the key top and bottom line financial metrics. We landed a CFO who's going to hit the ground running in support of our long range plan.
I think the 3,300 basis points of sequential increase in the Q2 subscription mix proved that that transition is behind us. And now with the subscription mix stabilizing in the 90s going forward, this compounding benefit of the new business model will accelerate and start to catch up with us and revenue and earnings growth is going to happen in the back half of this year and throughout next year. Our CAD and PLM business was solid and our IoT and AR business outperformed any assumptions that people would have had about that 30% to 40% market growth rate, and we're on track to outperform that for the year. I think another important milestone that happened is the tipping point, the first sign of the tipping point where IoT becomes our biggest business was witnessed in the quarter. So I acknowledge that Q2 wasn't a perfect quarter because we trimmed our near term guidance on the top line.
But I trust you can see and I hope feel that we're in a good place overall. And hopefully you can see we're still pretty excited about and committed to that long range plan that lies ahead of us. So one last thing in closing, I want to extend an invitation for you to join our flagship technology event called LiveWorx. It's going to be held in Boston starting on June 11. I hope you can make it in person because in addition to be able to mingle with our ecosystem of customers and partners and employees, you're going to have access to an extended investor session again this year that we plan to host at the event.
It's a great event. People have come in the past, have loved it, and I promise it'll be worth your time if you come. So if you want to come, please reach out to the Investor Relations department and they'll help get you set up. So we hope to see you at LiveWorx or at some other upcoming investor event. And if not, look forward to talking to you in about 90 more days.
Thank you.
Thank you. And that does conclude today's conference call. All participants may disconnect.