Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2019 First 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. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. 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. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our fiscal Q1 2019 results. On the call today are Jim Heppelmann, Chief Executive Officer, Andrew Miller, Chief Financial Officer, and Barry Cohen, Chief Strategy 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 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 January 23rd, 2019. PTC disclaims any obligation to update these statements to reflect future events or circumstances.
As a reminder, we'll be referring to some non-GAAP financial metrics during today's call. I'd also like to remind everyone that starting with the first quarter of fiscal 2019, we adopted the new revenue recognition accounting standard, otherwise referred to as ASC 606, on a modified retrospective basis. In our press release and prepared remarks, which have been posted to our investor relations website, as required when adopted under the modified retrospective approach, we have provided results under both 606 and 605, as well as reconciliations between the two. We have also provided guidance under both standards. Please note that the SEC requires the presentation of 605 results for comparability with prior year results. Thus, for such comparability, our discussion on this call will focus on 605 results unless otherwise stated, since we have no baseline for last year under 606.
Also, please note that certain operating metrics such as bookings, ACV, and non-GAAP financial measures such as free cash flow, are the same under both 606 and 605. A discussion of these items that are excluded from our non-GAAP financial measures and a full reconciliation of GAAP to comparable non-GAAP financial measures under both ASC 606 and 605 are included in this afternoon's earnings release and related Form 8-K. With that, let me turn the call over to Jim.
Thanks, Tim. Good afternoon, everyone, thank you for joining us. Before we discuss our results for the first quarter, I want to start with the other press release we issued this afternoon, which is the announcement of Andy Miller's intention to retire as our CFO later this fiscal year. Andy joined us four years ago, he's played an integral role in PTC's transformation. He's been a great CFO overall, his most important accomplishment, the one we were recruiting for back when we hired him, has been leading PTC's transition to a subscription business model. I'm pleased to say that with the last round of changes made on January 1st, we have implemented all of the subscription transition program elements, they have achieved their desired effects, the subscription transition program is now effectively complete.
As of now, with the small exception of Kepware, we only sell subscription software across our mainstream product lines and geographies. This was a critical milestone for us, one that we achieved relatively quickly as compared to similar transitions done by our software peers. While we have ongoing work to do to further optimize our subscription business model, I trust you would agree that we can officially declare victory on the very large and strategic transition program. If you know Andy Miller, you know he's a proud Silicon Valley native, having accomplished this big milestone at PTC and following more than three decades as a successful finance leader, Andy's decided to retire and move back to California to spend more time with his family and friends and do board work going forward.
To ensure an orderly transition, Andy has offered to continue as CFO until his successor is fully in place through the balance of the fiscal year if needed. A comprehensive search for his replacement has already started. With the business model transition behind us, we'll focus on finding a seasoned subscription software growth CFO who has what it takes to help us to continue to optimize and evolve our business and to execute on the growth and profitability expansion strategy characterized by our attractive 2023 long-range plan. Andy will be around for a while, we'll save the thank yous and goodbyes for a future earnings call down the road. Turning to our Q1 results. Our financial performance in the quarter was strong we made important strides against our major strategic initiatives during the quarter.
Revenue, operating margin, EPS each came in well above the high end of our guidance. Software revenue was well above our guidance, driven in part by strong recurring software revenue, more so from higher than expected last-time perpetual license purchases in APAC, Asia Pacific. Keep in mind that the past quarter represented the final last-time buy opportunity across all of our geographies, this earnings call should be the last time we discuss subscription mix in a meaningful way going forward. In Q1, even after adjusting back to the subscription mix we guided to, revenue would still have been in our guidance range, EPS would have exceeded the high end of the range. Bookings of $101 million was within our guidance range, albeit toward the lower end.
We had nine larger subscription deals in the Americas and EMEA that pushed out Q1, including a strategic IoT mega deal in Europe, and altogether, these deals totaled over $20 million. This includes around $2 million in larger U.S. government deals that slipped because of the government shutdown that began on December 22nd, simply because there was nobody there to process the deals. Partially offsetting the slippage was tremendous strength in Asia Pacific, driven in part by the last-time perpetual buys I noted earlier, but also some large competitive wins in the region, including a major enterprise win at Huawei, who at $100 billion of revenues, is the largest private company in China.
As we've shared with you in the past, timing of large deals can be unpredictable, and getting large deals across the finish line in the Americas and Europe proved to be more challenging in Q1 than we had anticipated. While it would be convenient to blame the slipped deals on the economy, after analyzing each of them in depth, we don't really believe that to be the general case. With hindsight, it appears more likely that the go-to-market realignment that we announced last quarter impacted our sales organization's ability to get a fast start in the new fiscal year, and then we simply ran out of time in a quarter that for PTC closed already on December 29th. Outside our large deal performance, our base business, which represents our channel business, along with small and medium-sized direct bookings, grew in the mid-teens, which I view as a positive macro sign.
In the past, there have been times when slippage of big deals was an indicator of emerging macro challenges. Naturally, we are alert to that. While global PMIs are generally still in positive territory, they have been softening, and the overall macro environment appears more uncertain than it did just 4- 5 weeks ago, thanks to a combination of factors such as weakness in Germany and China, ongoing trade tensions, the government shutdown, and significant stock market volatility. Taking all of this into consideration, we are a notch more cautious about the macro environment than we were previously and will continue to keep a close eye on it. You will note, however, that we are not changing our full-year total bookings guidance. The one change we are making is related to the mix.
We now expect slightly more perpetual bookings based on Q1's over-performance, and this perpetual upside will offset a more cautious view of the macro, resulting then in slightly lower subscription bookings guidance on balance. The net effect is that the total bookings guide remains the same, but with a slight change in subscription mix for the year. Even though the slipped subscription deals are forecasted to close in Q2, and some would appear imminent, we do not believe it'd be prudent to assume we fully catch up such that we deliver our prior subscription bookings guidance, especially with the current uncertainty around the macro. Instead, the math in our guidance suggests that we're assuming we catch up a little under half of the slipped deals in the balance of the fiscal year.
Given our subscription business model, where most of the revenue is recurring, this modest change in the mix of bookings slightly benefits the current year financial performance or guidance, where we've raised revenue, EPS, and free cash flow for the year, but it does not have a significant impact on our long-range targets. We're confident that our workforce realignment activities in the field are behind us now and see several positive tailwinds developing in our business, such as our alliances with Rockwell Automation and Ansys, which, as they mature, could help cushion against a potentially softer demand environment. Andy will, of course, discuss our guidance in more detail later in the call.
Turning now to some additional details on our quarterly performance, I will once again orient my discussion around our three strategic initiatives that maximize long-term shareholder value, which are, first, to increase our top-line growth, second, convert to a subscription model, and third, to expand our margins. Let me start by discussing our progress on the growth front. Bookings in Q1 were flat year-over-year on a constant currency basis. As I mentioned, there were several puts and takes that factored into our Q1 performance. From a geographic perspective, APAC was the clear standout region in the quarter, with bookings benefiting in part from last-time perpetual purchases, but also from strong underlying performance in both core solutions and IoT. Even after normalizing for the last-time perpetual buys, we estimate that APAC bookings would have grown in double digits.
Bookings performance in the Americas and Europe were down year-over-year due to impacts from the large deal slippage. From a business unit perspective, Q1 IoT performance, inclusive of our AR business, was solid, with recurring software revenue growth of 35% constant currency year-over-year, reflecting the strong bookings growth we've delivered over the past two years and the compounding benefit of our maturing subscription model. IoT bookings continue to benefit from a healthy mix of new customer acquisition and from expansions, with the latter accounting for 60% of Q1 ThingWorx bookings. During the quarter, deals spanned the three major industrial IoT use cases we focus on across geographies and across a broad set of vertical markets. Let me begin with SCO, or smart connected operations, which is one of the faster-growing subsegments of the IIoT market.
We closed many new and expansion deals in both discrete and process manufacturing. Examples of some of the wins include in diversified consumer manufacturing with Kohler, in aerospace with Pratt & Whitney and UTC Aerospace, in industrials with Manitowoc, and in the semiconductor space with Micron Taiwan. Elsewhere in SCO, we were pleased to see our strategic alliance with Rockwell Automation continue to take shape across several important dimensions. On the enablement front, there was a surge of training and workshop activity in sales, pre-sales, and services, together reaching well over 500 Rockwell Automation employees across the globe, including in regions where PTC has limited SCO resourcing or market presence, like China, the South Rim, Korea, and the Middle East.
After closing its first set of deals in our fiscal fourth quarter, including an initial pilot with Ford's truck division, Rockwell Automation closed 12 Q1 deals, many in verticals that are not in PTC's traditional end markets, like food and beverage, mining, pharmaceutical, and consumer packaged goods. Importantly, Rockwell Automation's pipeline is growing rapidly, with hundreds of opportunities now being worked across the globe. With solid progress on product integration and sales enablement, the velocity of transactions is picking up and an impressive pipeline is already forming. We're even more confident today that this strategic alliance will be a key element of our growth story in the coming years.
I've been on a few sales calls with Rockwell Automation's CEO, Blake Moret, lately. I can tell you that Rockwell's customers are very receptive to hearing what the joint PTC and Rockwell FactoryTalk InnovationSuite can do for them. In the SCP, or Smart Connected Product market, we recorded new wins and expansions across a broad range of industrial companies, such as diversified manufacturing and services company, Jabil Circuit, and electric motor and power generation manufacturer, Regal Beloit, and mining and drilling manufacturer, Boart Longyear. On the Microsoft alliance front, which is an important element to our SCP strategy, we closed 10 deals in Q1, and at this point, there are more than 210 active co-sell opportunities in the global pipeline. In IoT, we had some nice wins in smart connected systems, which is underpinned by our Navigate offering.
As further evidence that industrial IoT is going global, we secured a major strategic IoT win in Q1 with Huawei. Huawei has begun a series of digital initiatives intended to fundamentally transform its processes and systems to improve time to market and collaboration efficiency across their organization. A critical component of this transformation is building a digital thread platform. We are very pleased that after an in-depth competitive process, Huawei chose ThingWorx to be the foundational technology underpinning this initiative. Turning briefly to augmented reality, which is the other high-growth business within our portfolio, we delivered another strong quarter with AR bookings growth of over 75% versus Q1 of 2018. The main use cases for AR in the industrial world are service and maintenance work instructions, factory operator instructions, and virtual product demonstrations. While it's still early, AR commercial adoption within the industrial market is broadening.
Examples of customers adopting Vuforia include heavy equipment manufacturers like John Deere here in the U.S., automotive companies like Sinotruk in China, and electronics companies like Sony in Japan. One of the key drivers of industrial AR adoption is the functionality and form factor of AR headsets. As the next generation of headsets are launched, we believe this will be a significant market catalyst, and given our strong leadership position, we're confident AR will become increasingly material to PTC's growth rate over time. To summarize on IoT and AR, Q1 was another strong data point suggesting that adoption of these technologies continues to accelerate across a range of vertical markets, geographies, and use cases. Let me turn now to our solutions business. Q1 was another great quarter for our CAD business.
Following two years of high single-digit growth, in Q1, the CAD team delivered bookings growth well in excess of market growth rates. The last time Perpetual buys in APAC certainly contributed to Q1 bookings, but we were pleased to see continued solid performance from our indirect channel on a global basis. We are very excited about our strategic alliance with Ansys, which officially kicked into gear in Q1 with the preview release of Creo Discovery Live on December 19th. We completed the first round of development work to build Ansys' real-time simulation technology into Creo. The preview was released on schedule, and we remain on track for a broader commercial release in February.
Given the truly groundbreaking functionality Creo Simulation Live delivers to the market and the significant efficiencies CAD customers can achieve by leveraging this powerful solution, we were pleased to see strong uptake of the preview release, including initial orders from 20 customers during Q1. Because this software frankly sounds too good to be true, we expect that customers will generally purchase a small quantity of licenses to prove it out before returning for larger purchases that would be necessary to support broader rollouts. The near-term impact overall bookings won't be significant, but with more than 160 customers already in the pipeline for Q2, we expect to be planting a lot of seeds.
We're very excited about this partnership and look forward to providing you more color on commercial adoption in the coming quarters. Turning to PLM, following solid fiscal 2018 performance, results in Q1 were impacted by the large deal slippage I mentioned, which includes a large component of PLM. We received further validation on our strong PLM market position in Q1 with a sizable new competitive win at BMW that followed an earlier strategic win on a different program a year ago. This time, BMW chose Windchill and our Navigate solution over Aras to become the backbone for their worldwide light vehicles test procedures. This system will enable BMW's engineering department to implement a standard process to handle test data and provides fast and easy ecosystem access to product data.
Also in Q1, the market research firm Quadrant Knowledge Solutions issued its PLM Market Outlook report, in which they cited PTC as the clear PLM technology leader, stating, quote, "PTC, with its comprehensive solution portfolio, has received strong ratings for its sophisticated technology platform, competitive differentiation strategy, application diversity, ease of deployment and use, and overall customer impact." Unquote. Clearly, we have good reasons to be bullish about our leading market position in PLM. Let me turn now to our second top-level initiative to drive shareholder value, which is our transition to a subscription model. As I mentioned in my opening remarks, the global end- of- life for perpetual licensing on January 1st was a critical milestone, and it represented the final step in our subscription transition.
While the Q1 subscription mix was well below our expectation due to strong demand for last-time perpetual licenses and overall strong performance in APAC, combined with large subscription deal slippage, we remain confident in achieving our long-term target of mid-90s% subscription mix, which of course benefits our financial model over the long term. Let me discuss our third top-level initiative to drive shareholder value, which is to further increase our operating margins. Our Q1 reported non-GAAP operating margin of 28% was well above our guidance and benefited from the higher mix of perpetual licenses and by lower spending, both OpEx and cost of goods sold. However, even on a mix-adjusted basis, we would have delivered 24% non-GAAP operating margin, 200 basis points above the high end of guidance.
Our Q1 results give us a great head start on delivering substantial margin improvement in fiscal 2019, which is an inflection point in our model. As Andy will detail later in the call, we now expect 500 basis points of non-GAAP margin improvement in 2019. We believe we're squarely on track to deliver the long-term margin targets we shared with you last year at LiveWorx. To wrap up my comments, I'd like to reiterate PTC's commitment to our exciting long-range plan, including delivering $850 million of free cash flow in FY 2023. While we're disappointed in the deals that slipped from Q1, and we factored more macro caution into our guidance, our overall outlook for the rest of this year remains substantially unchanged.
Our leadership position in the high-growth IoT and AR markets, together with exciting new opportunities for growth in our core business and underpinned by key strategic alliances, gives us confidence in driving sustained long-term growth. With our subscription transition fading in the rear-view mirror and our focus on disciplined cost and portfolio management, we are firmly on track with our plans to transform PTC into one of the premier software companies in the world. 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 four years, and I want to thank Jim, the rest of the executive team, and the PTC board for the opportunity. I intend to stay here at PTC until a successor joins and a smooth transition has been completed. 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. As Tim mentioned earlier, we adopted the new Rev Rec standard ASC 606 under the modified retrospective method on October 1st, 2018. Since we have no baseline for last year under 606, for comparability purposes, I will be discussing 605 results unless otherwise stated.
Also, please note that certain operating and non-GAAP financial metrics, such as bookings, ACVs, and free cash flow, are the same under 606 and 605. Moving to our first quarter results. As Jim outlined, our Q1 financial performance exceeded the high end of our guidance on revenue, operating margin, and EPS, driven by higher perpetual revenue and by lower spending, both in cost of goods sold and OpEx. Adjusting our Q1 results for our guided subscription mix, revenue would have been within our guidance range, and EPS would have exceeded the high end of our range. Q1 bookings of $101 million were near the lower end of our guidance range, impacted by nine deals that slipped to Q2, totaling more than $20 million, including about $2 million of larger U.S. government deals that slipped due to the shutdown.
This, combined with the $15 million of perpetual upside, resulted in a subscription mix of 58%, much lower than our guidance. However, now that our subscription transition is complete, we expect a subscription mix well into the 90s for the rest of the year. Moving to the income statement for the first quarter of 2019, under the new revenue standard, ASC 606, total revenue in Q1 was $335 million, operating margin was 27%, and EPS was $0.56, all above our guidance. Under ASC 605, total revenue in Q1 was $339 million, up 12% year-over-year, and software revenue was $299 million, an increase of 15%. Subscription revenue grew 50%, and total recurring software revenue grew 13%. Note that Q1 this year was one day shorter than last year, so revenue growth figures are negatively impacted by just over 100 basis points.
Also, please refer to our prepared remarks document on our website where we reconcile our 606 results to our 605 results. Total deferred revenue, billed plus unbilled, increased year-over-year by $191 million or 16% to $1.36 billion. Billed deferred revenue was up $64 million or 15% year-over-year. We believe total deferred revenue, billed and unbilled combined, is the most relevant metric as there is a seasonality to the timing of our recurring revenue billings throughout the year and due to the timing of our fiscal quarter ends. ARR grew 13% year-on-year to $1.05 billion. Our support conversion program continues to progress well with 21 direct customers converting their support contracts to subscription at an ACV uplift of approximately 60%. We continue to make progress with our channel conversion program with 59 conversions in the quarter.
Continuing through the 605 P&L, Q1 operating margin of 28% was 600 basis points above the high end of guidance, driven by the perpetual upside and by lower spending, both in cost of goods sold and operating expense. On a mix-adjusted basis, normalizing for the perpetual upside, operating margin would've been 24%, 200 basis points above the high end of guidance, and an increase of 800 basis points year-over-year. EPS of $0.57 was $0.15 above the high end of guidance, again benefiting from perpetual license upside and lower spending. On a mix-adjusted basis, EPS of $0.46 was $0.04 above the high end of guidance. 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 continue to expect bookings in the range of $500 million-$520 million. This represents growth of 10%-14% constant currency year-over-year. We have factored in the perpetual bookings upside, offset by more caution on the economic backdrop, resulting in a $12 million increase in perpetual bookings and a $12 million decrease in subscription bookings. While the slipped deals are in our Q2 pipeline, and some of the expected close dates appear imminent, we do not believe it would be prudent to assume we fully catch up on our subscription bookings. Essentially, we are factoring in a catch-up of a little under half of the $20-plus million of slipped subscription deals from Q1.
We now expect a full-year subscription mix of 86% to take into account Q1. There is no change to our mix assumptions for the balance of fiscal 2019, and we expect to exit the year in Q4 with a 94% mix. We are raising fiscal 2019 total revenue by about $3 million at the midpoint to a range of $1.33 billion-$1.34 billion, which represents constant currency growth of 8%-9% year-over-year, driven by software revenue constant currency growth of 10%-11%. Recurring software revenue is now expected to be $1.10 billion-$1.11 billion, a decrease of $9 million at the midpoint versus our previous guidance, reflecting slightly lower expected subscription bookings and the later timing of those bookings in the year.
This represents constant currency growth of 15%-16%, and recurring software revenue is expected to be 94% of total software revenue for the year. We are raising our fiscal 2019 operating margin guidance by 100 basis points to 23%, reflecting the upside in revenue and tighter spending control, representing a year-over-year increase of approximately 500 basis points. Our effective tax rate is still expected to be 18%-19%, resulting in a non-GAAP EPS range of $1.75-$1.85, an increase of $0.10 for the year, which is approximately 24% growth at the midpoint. We are also raising our free cash flow guidance by $10 million to $265 million-$275 million and raising our adjusted free cash flow guidance, which excludes cash payments for restructuring of $25 million, to a range of $290 million-$300 million.
Cash restructuring payments include approximately $17 million related to the workforce realignment we announced on our Q4 2018 call and $8 million of net cash payments related to our Needham facility lease. We continue to expect CapEx of around $40 million this fiscal year, and we expect CapEx to decline back down to historical levels of around $30 million in fiscal 2020. As with operating margin, we expect free cash flow to accelerate significantly in fiscal 2020 as the subscription model matures. We remain committed to a balanced capital strategy for fiscal 2019. In addition to the $1 billion ASR we entered into in Q4 of 2018, we intend to repurchase shares equal to at least 40% of our FY 2019 free cash flow. We expect to begin such share repurchases this quarter. Turning now to Q2 guidance under ASC 605.
We expect bookings in the range of $107 million-$120 million. Total revenues are expected in the range of $310 million-$315 million. Q2 operating expenses are expected to be $179 million-$182 million resulting in operating margins in the range of 19%-20% and EPS of $0.31-$0.36.
I'll turn the call over to the operator to begin the Q&A.
Thank you. We will now begin the question-and-answer session. Please limit yourself to one question only. If you have additional questions, please return to the queue. At this time, to ask a question, please press star one and record your name when prompted. Our first question comes from Saket Kalia with Barclays Capital.
Hello, Saket.
Hi, guys. Hey, Jim. Hey, Andy.
Hi.
Thanks for taking my questions here.
Sure.
Maybe I'll stick to the one-question rule here. Maybe for you, Jim. I think you mentioned that one of the nine deals that slipped in the quarter was a mega deal in the IoT space. Can you just remind us how we define a mega deal again in terms of size? And without naming the customer, how do you think this particular customer balanced macro concerns with perhaps some of the sales changes at PTC, again, specific to that IoT deal?
Yeah. Just in terms of terminology for everybody's benefit, we define a large deal as more than $1 million in bookings, PEB bookings, and a mega deal as more than $5 million in PEB bookings. This particular deal actually had nothing to do with the macro. You could call it a sales execution issue, I suppose. What really happened is that the approval process ended up being different than we understood it to be, and we ran out of time trying to execute the newly understood approval process. I think the deal's in good shape. We are hopeful we're going to get it this quarter, actually. We'll see. It really wasn't a macro situation. Would be a convenient excuse, but it wouldn't be an honest one.
Thank you. Our next question comes from Steve Koenig with Wedbush Securities.
Hello, Steve.
Hi, gentlemen. Thanks for taking my question. Thanks to Andy for all your work. I won't say goodbye just yet.
Good to be here.
Hey, can you all remind me about the sales realignment in Q1? Was that mostly the geographical realignment related to the reorg, or were there other factors there? Maybe just related to that, when you think about the guide here, the caution that's built into your guide, maybe help us understand how much of that comes from any compensation or execution that you've built into your guide versus macro weakness versus any other factors as well. Thanks, guys.
Steve, I'll take the first part of that, which was asking about the realignment or you even used the word reorganization. We've tried not to use the word reorganization because actually the org chart doesn't look so much different. It was a movement of resources into the growth businesses. To do that in the context of our margin goals, we took down resourcing in some areas and took it up in others. In some cases, we moved from one segment of the business to another, and in some cases, we moved from one geography to another. Of course, we're working around the strength of some of our partners like Rockwell and so forth. It wasn't really a reorganization per se, but it did involve a lot of people with new territories and new quotas and getting a feel for the business.
I think that was really sort of the issue is that we did something that disturbs a little bit and then just didn't get a fast enough start processing all that and putting it behind us, so we were talking about it too deep into the quarter. Of course, when people are talking about territories and accounts and quotas, they're not out selling. That really was the key issue.
Yeah. As we talked about last quarter, we expected the restructuring to impact a little over 200 people who would no longer be with the company. Then we opened a number of recs, obviously, in the markets and geographies and territories, where we're investing for IoT and AR, which tend to be Americas and EMEA.
Thank you. Our next question comes from Sterling Auty with JPMorgan.
Yeah, thanks.
Hey, Sterling.
Hi, guys.
Hello, Sterling.
Looking at it from a very high level, you're taking the sales execution into account, but you are factoring in some macro caution. I'm curious, how much of that macro caution is specific things that you're hearing directly from sales and end customers now versus looking at kind of the macro picture through the news and other headlines, whether it be shutdown, trade, et cetera?
Yeah. Sterling, I think from our perspective, there's not a lot of specific caution. There's not a lot of specific issues. It's just we read the newspapers like everybody else does, and it just feels a little reckless at this point, given the stuff happening out there, PMI coming down and so forth. It feels reckless to take guidance up. What we basically said is, "Let's hold it where it is, and we'll trade off some of that upside in last time buy for a more cautious posture on the subscription side in the balance of the year." Again, it's not specific. It's just a general concern about what's happening out there and knowing that PMI have been, in the past, somewhat indicative of spend in our markets. We just think we should be a bit cautious.
Yeah. Next question comes from Ken Talanian with Evercore ISI.
Hi, guys.
Hi, Ken.
Thanks for taking the question. I was wondering, are you seeing any extended sales cycles, any deal downsizing, any deals falling out of the pipeline? Related to the slipped deals, have you actually closed any of them or can see a closure within the next week?
Yeah, on the second question, there are several that are very close, and we do hope to close in the next week, maybe even this week yet, if we're fortunate. I think extended sales cycles, yes. Again, hard to pin that on macro. Like I said, in one case, there was a misunderstanding about the approval process. When we thought we had the necessary approvals, we then found out actually the customer misunderstood the process, and there's a different process, and we're out of time to go run that different process, and people have left on vacation and so forth. Extended sales cycles, but it's hard to pin down exactly why, and there were different reasons. There wasn't uniformity. Like I said, there were a couple of government deals. Okay, we understand those. There's a misunderstanding of a process here.
Just in general, we kind of ran out of time on a few other ones.
Thank you. Our next question comes from Matthew Hedberg with RBC Capital Markets.
Hello, Matt.
Hey, guys. Thanks for taking my question. Obviously, your subscription mix was a little bit lower this quarter. You had sort of last-gasp license deals. Can you talk, though, about the effectiveness of the maintenance to subscription sales overlay team that was new in Q1? I know it's probably going to take some time. Would love an update on that. It seems like an incremental opportunity for you guys.
Yeah. As you know, we have a new leader who joined us. He's pulled his team together, and they've developed kind of their focus areas and are beginning to drive programs. We think that should really benefit us probably more so in the second half of the year. At this point, if you think of where our focus has been on the largest accounts, the ones where we had those VPAs we've talked about before, we're only about halfway through those VPAs, so we still have the other half of those. We've done in the enterprise space 345 conversions at this point out of probably a potential pool of about 2,000. There's a lot of opportunity, frankly, in the channel with CAD, and there's a lot of work being done to really formulate what those programs should be.
Thank you. Our next question comes from Jay Vleeschhouwer with Griffin Securities.
Thanks. Good evening. Jim, a technology adoption question for you. Are you able to discern any influence of the momentum you're seeing with IoT on the CAD or Windchill businesses? I recognize that CAD's doing well and has been for a while, but that could be specific to what's going on in that market. Are you seeing any direct link to suggest that your closed-loop lifecycle management strategy that you articulated is in fact working and generating incremental business by pulling through more Creo, more Windchill, or perhaps even more SLM at this point, that you're making the case that you're solving broken tool chains and driving business that way?
Yeah. I'd say definitely influence. I'd maybe be a little softer on cross-sell. I think that companies like, say, BMW. BMW sees PTC as the BMW of our marketplace because we have great products, great technology, and they know they can turn to us for PLM, for IoT, for AR. In the case of BMW, there are Vuforia projects going on, in parallel to ThingWorx projects going on, and we're winning PLM deals. I think that whole package has positioned us very nicely. Now, if I said they bought Windchill because of Vuforia or ThingWorx, I'm not sure that's true. I think that they put PTC on a decent platform because they see us as a provider of very good package of technologies that make sense together. In the case of Huawei, we do have a sizable PLM implementation at Huawei.
They began what fundamentally was an IoT project. When the project started, Huawei did not really get the connection between PLM and IoT. Of course, we went in and sold that hard and walked out of there with a very nice IoT deal and a recommitment to PLM and some more CAD business and everything else. Certainly, the package is starting to make a lot of sense to people. I think another thing that's happening is they're also starting to say, "Hey, maybe what I use in the factory and what I use with my products ought to be the same platform.
PTC help me understand the advantages of moving data back and forth and so forth." Again, I don't want to oversell it because I don't think we're really cross-selling, but I think with our major accounts, we're positioning ourselves as having a really important and powerful portfolio of technologies that if you're an industrial company and you want to do digital transformation, we can help you change your products, we can help you change your production and service processes, and we can actually help you change the productivities of your workers and your factories and out on service calls and so forth with AR. That whole digital transformation story, I think, is one that people are really starting to appreciate.
Thank you. Our next question comes from Adam Borg with Stifel.
Great. Thanks for taking the question.
Yeah.
Hey, guys. Just in terms of the Rockwell partnership, I think you talked about 500 reps being trained. I guess, when do you expect the remainder of the Rockwell reps to be fully trained and selling the combined product? Thanks.
Yeah. I don't have a specific schedule for it, but we trained 500 in the quarter, and there were actually people trained prior to that. By the way, they weren't just reps, just to be clear. They were reps and generally, let's call them field resources. There are a lot of people at Rockwell that are trained. There have been many sales calls made. There are many opportunities in the pipeline now being managed and so forth. I think, in the case of Rockwell, we feel pretty good about that. I have to tell you, the fit with Rockwell between PTC and Rockwell feels pretty good. Blake and I have a great relationship. I think at every level of the org chart, people are working together productively. Rockwell is putting a tremendous amount of energy into this alliance. They're not just paying lip service to it.
They're out there making sales calls. Blake's making sales calls. I think it's going very well. I think it'll take a while to get to everybody, but we don't need to get to everybody either. Even Rockwell realizes that we probably ought to focus on the most important accounts. There are some that are more low-hanging fruits than others, and I think they have a list of 400 accounts, if I remember correctly, that they're prioritizing, and tremendous amount of business could come out of those 400 accounts. That's where we'll put our first energy, but there's a lot more behind that. I think if I remember correctly, they have about 35,000 total accounts that ultimately we could sell into with them.
I think our next question comes from Monika Garg with KeyBank.
Well, hi, Monica.
Hi, thanks for taking my question. Just as a follow-up, you talked about they are targeting 400 accounts. It seems like they must be very large accounts. As a kind of percentage of revenue, what would you say these 400 accounts would be for Rockwell? Just trying to gauge. They have 35,000 customers, but they're targeting 400. How big base that would be?
Well, probably at the top of the food chain there, you're going to find the big North American automotive companies. You're going to find the biggest oil and gas companies in the world, around the world. You're going to find the biggest pharmaceutical companies, the biggest chemical companies, the biggest mining and materials companies. There are some very big accounts there. Now, I'm sure within the 400, they start graduating down. We're talking some behemoth accounts and some very large accounts and probably you're just getting down to large accounts and you're still in the 400. Yeah.
I think our next question comes from Alex
As you know.
I'm sorry, go ahead.
No, I was just going to say, as you know, there's an 80/20 rule to everything, and 400 accounts is more than 10% of theirs, so it's probably quite a sizable piece of their revenue.
Yes. Go ahead, Alex.
Our next question comes from Alex Tout with Deutsche Bank.
Go ahead.
Yeah. Hi, guys. Thanks for taking the question. Could you just say what actions you've taken to scrub the pipeline for 2Q and the rest of the year, given the very large magnitude of the slippages, i.e., have you done a wholesale reevaluation of close rates, et cetera, given the experience this quarter? Or have you just really taken a view specifically on the deals that slipped? Just an idea of the actions.
We have spent more time reviewing this pipeline than I think we ever have.
We called all of our, what we call our executive VP and our divisional VPs, so these would be the geography leaders. We called them all into a meeting, along with various lieutenants of theirs. We went through each of the slipped accounts one by one to really understand what is the reason this deal slipped. Then we went through the pipeline and talked about what do they have in the pipeline and where does it stand.
The maturity and
Right.
Yeah.
So-
We did a deeper dive. We do a deep dive every quarter, to be perfectly frank. We don't just rely on a forecast coming in on a piece of paper. We review the analytics in depth, and then we go deal by deal, because large deals for us typically represent 20%-40% of our bookings. That's a big range. Understanding where those deals stand and the multiple paths to get to our operating plan and to our forecast, and thus to what we disclose as our range, it's not a single path. It is a multiple path, and we surround it, and we did it more so at the start of this quarter than we have done in the past since I've been here.
I think your next question comes from Ken Wong with Guggenheim Securities.
Hi, guys.
Yes.
Andy, maybe a question for you. When looking at the total deferred revenue growth, there was a deceleration from 29% last quarter to 60% this quarter. Is that consistent with what you're expecting? Was there some seasonality there that we should be aware of? Just trying to get a sense for what the approximate levels are appropriate going forward.
There are two factors that I want to call to your attention. First off is the unbilled deferred is getting to be a bigger and bigger number. Just law of large numbers. It grew $191 million year-over-year. That's a big number, but it's now a much lower percentage because of that. The other factor is the timing of the renewals under 605, because we recognize the revenue ratably. Q1 was not a big renewal quarter for us, especially because it ended on December 29th, which actually affected the billed piece of that deferred revenue.
For total deferred revenue, the fact it's not a big renewal quarter for us means we recognized more revenue in the quarter or the relationship of what we recognized during the quarter versus what was up for renewal was different than it's been in prior quarters, like for example, in Q4.
I think our next question comes from.
Yes
Gabriela Borges with Goldman Sachs.
Hello.
Hi. Good afternoon. Thanks for taking the question. Maybe for Andy, I'd love to get a sense for how customers are responding to some of the new subscription pricing that you implemented on October 1st. If you could remind us, what are the typical subscription contract terms? How often can you get in and renegotiate on this pricing? Is it every year, or are some customers under longer contracts? One last clarification. I think you called out a 60% ACV uplift on conversions this quarter. That's a little more than I think the 40%-50% range historically. A little color there would be helpful. Thank you.
Okay. Yeah. First off, our average term for subscription contracts is two years. It's been that from the start. That's the average length. Second thing is the 60% uplift. We've averaged in the past more than 50%. We have been at 60% before. This was a nice ACV uplift on those 21 accounts. There was one more. What was the third one?
Well, let's see, how often is subscription pricing terms?
Oh, there's been no noise about the price increase, let's put it that way. There's been no noise, no change in realized discounts. It's been adopted without any impact. By the way, it's a normal price increase for our markets. Our competitors tend to raise their prices 3% - 5% a year, so it's not something. We have been doing it with perpetual up through from fiscal 2014 all the way through fiscal 2018, so it's not an out-of-line price increase from our customer's perspective.
I think our next question comes from Shankar Subramanian with Bank of America Merrill Lynch.
Hello, Shankar.
Hi. Thanks for taking the question. I have a question on just on your PLM business, you made a point that on the BMW side, you won a competitive bake-off with Aras. If you could help me understand, apart from the fact that you had IoT and AR that helped you partly, was there any technical difference between your Windchill and Aras that helped you win it? As you look into the next few years with BMW, where are the other areas of opportunity for you as it relates to PLM?
Yeah. Okay, let me separate a few things. In general, BMW has a high opinion of PTC because they like our PLM technology, they like our IoT technology, they like our AR technology. Frankly, they really like our generative technology too. Take that as a general statement. On this specific deal that we closed in the quarter where we were competing against Aras, this really was a deal where they needed a system to manage test data against different configurations of vehicles. On one hand, you have to have the test data, on the other hand, you have to understand the configuration that you tested. It's a place where we got to pull in a lot of data from other systems. It turns out that ThingWorx is exceptionally good at that. In Aras's case
Navigate is built on ThingWorx.
Yes. Right. Navigate/ThingWorx is particularly good at that. Funny enough, Aras frequently uses this term meta PLM, which kind of means a PLM of PLM systems. This BMW deal was exactly a meta PLM system. At the thing that Aras feels most confident about, we beat them. We beat them because actually we have a very good solution there. It takes a customer to look deeply at both and then we came away with the deal. It really was configuration management, data management, and then system integration, bringing data from many different systems into the one that's managing the full picture, the 360-degree view of what happened in the testing process.
Thank you. Our next question comes from Sterling Auty with JPMorgan.
Yeah, thanks. Hi, guys. Just a quick follow-up. Andy, didn't get a chance to touch upon your announced retirement. Congratulations on the great tenure. It does say in the press release that you're looking to move back to California and sit on boards. I do know I will get the question very frequently tomorrow. Are you done and retiring from being in an operating role? Or should we think that this is just partly a transition-
No, I'm
To join boards, but we'll see you in an operating role again?
I'm done being involved in an operating role after I finish at PTC. I'm done with that. I'm on one board now, I look to join probably one or two more.
Just some color commentary here. Andy, he almost has his own talk show circuit now, talking to other software companies about how to do subscription transitions. I think every company out there that's thinking about doing a subscription transition is going to want him on their board, he's probably going to be turning boards down left and right here in no time. I think he likes doing that. I certainly observed, I sat through many meetings where he's coached other software companies on what we did and what they should do and so forth, I can imagine he's looking forward to doing that.
Thank you. Our next question comes from Saket Kalia with Barclays Capital.
Hello again, Saket.
Hey, thanks for getting me back in the queue. Maybe just for you, Jim, a quick follow-up. Can you talk about just linearity in the quarter? It felt like maybe kind of exiting last quarter when we sort of finished up the earnings call. We sounded good. Obviously, you pointed to the idea that maybe the macroeconomic conditions have maybe changed pretty dramatically in the last four to six weeks. Can you just talk a little bit about linearity in the quarter in terms of sentiment? Maybe Andy, for you, just in terms of bookings.
Yeah, I think your question is how did the quarter develop? I really think it got away from us in the last two weeks. That was in part because we realized this mega deal was in a different place than we thought it was, and we began to see Of course, the government shutdown happened, and a couple deals popped out, and so forth. I think it was mid-December that we really said, "Oh, wow, we got some challenges here.
Yeah.
So
The one thing I would add is actually some of those deals were in there up till, including the mega deals, were in there in the forecast up to the very last day of the quarter, Saturday.
Yeah
December 29th, when we got the word that it needed another approval, and that person who needed to approve it was on vacation.
Yes. Okay, Tim's given me the word here that we probably don't have time for any more calls. I want to thank you all for spending an hour of your time with us here this afternoon. Q1 did shape up to be a little different than planned. Nonetheless, we had outstanding financial performance on revenue, on earnings, on margin. We feel like there was a little downside on subscriptions, some slippage, but on the other hand, some upside that came in, thanks to the last time buy on perpetual. The year looks for us the same as it ever did. Slightly different mix, but mix is fundamentally unimportant from this point forward. It's really a non-issue because we're not selling perpetual anymore, with the one small exception that is sort of a single-digit exception.
I think we're very quickly going to get to steady state and a mix in the 90s, and it'll get boring, and we'll stop talking about it. I think we feel good about where we are competitively with IoT and AR, which are strong growth markets. Our CAD business did phenomenal. Our PLM business, of course, was part of the big deal issue, but that business is strong, and we're winning competitively, and we're winning analyst awards. We feel good about where we are, and we look forward to seeing you on the road over the next quarter, and if not, we'll talk again in 90 days. Thanks, and have a good evening. Bye-bye.
Bye.
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