Afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2017 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. I would now like to turn the call over to Tim Fox, PTC's Vice President of Investor Relations.
Please go ahead.
Good afternoon. Thank you, Sarah, and welcome to PTC's 2017 Q1 conference call. On the call today are Jim Heppelmann, Chief Executive Officer and Andrew Miller, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast and a replay of the call will be available later today on our Investor Relations website. During the call, PTC will make forward looking statements, including guidance as to future operating results.
Because such statements deal with future events, actual results may differ materially from those projected in the forward looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward looking statements can be found in PTC's Annual Report on Form 10 ks and other filings with the U. S. Securities and Exchange Commission as well as in today's press release. The forward looking statements, including guidance provided during this call, are valid only as of today's date, January 18, 2017, and PTC assumes no obligation to update these forward looking statements.
During the call, PTC will discuss non GAAP financial measures. These non GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our investor website. With that, I'd like to turn the call over to PTC's CEO, Jim Heppelmann.
Thanks, Tim. Good afternoon, everyone, and thank you for joining us. Before I jump into the quarterly results, I'd like to take a moment to congratulate Tim and his Investor Relations team on the award they received in November from Institutional Investor, who named PTC as the best IR company in mid cap software. I certainly appreciate the great work that Tim and his team have done under Andy's direction to ensure that our investors understand our business as we go through our subscription transition. Based on the voting results, it appears that many of you feel the same way.
So thank you for your support and congratulations to Tim and the team. Coming back to the quarter then, our Q1 results represent a very strong start to FY 2017 and continue the momentum we've built over the last year. In Q1, we executed very well across our key strategic and operational objectives. Bookings of $90,000,000 were $10,000,000 or 13% above the high end of the Q1 guidance range we provided last October. We had particularly strong IoT results, but also solid execution in our solutions business as well.
On the subscription front, the 65% subscription mix for Q1 was well above our guidance of 55%. Both bookings and mix benefited from an IoT subscription mega deal, but even without this deal, bookings and mix still would perform well compared to the guidance. We'll provide additional details on our subscription transition throughout the call, but suffice it to say our program continues to gain traction in the market. Once again, the strong subscription mix in the quarter had the effect of dampening our reported revenue results, and this was further exacerbated by significant currency headwinds. Nonetheless, Q1 revenue, operating margin and EPS were all within our guidance ranges.
In fact, had our subscription mix been the 55% that we guided to, our revenue margins and EPS would have been well above the high end of their respective guidance ranges. All in all, this was a strong start to the year. To summarize our progress this past quarter, I will again frame my discussion around the 3 key initiatives that we focus on to maximize long term shareholder value. As a reminder, they are first to increase our top line growth 2nd, to continue our margin expansion and 3rd, to convert to a subscription business model. Let me start by discussing progress against our growth ambition.
As we outlined during our financial outlook webcast last November, our goal is to achieve sustainable double digit growth by having our core business return to mid single digit growth consistent with the more mature CAD and PLM market, while having our IoT business grow in the 30% to 40 percent range, consistent with the fast growing IoT market. The combination would create low double digit overall growth for PTC. So against that goal, Q1 was another outstanding bookings quarter, with year over year total bookings growth of 31%, reflecting strong execution in both parts of the business. In IoT, we had a record bookings quarter, growing many times faster than the market. Expansions accounted for over half of our bookings.
We more than doubled the number of 6 figure deals, primarily driven by expansions and we had 1 large deal defined as greater than $1,000,000 and 1 mega deal defined as greater than $5,000,000 Even if you exclude the mega deal and exclude Kepware, which was not in Q1 of last year, bookings were up over 90%, more than double market growth rates. I think this clearly demonstrates the value that customers are deriving from IoT initiatives, even though these customers are generally still in the early days of their IoT journeys. It also provides a quantitative basis for the numerous industry analyst reports and awards that consistently position PTC as a strong leader in the IoT software platform market. Last quarter, I discussed the launch of ThingWorx Studio pilot program, which enables prospective customers to engage with this powerful new tool for authoring and publishing augmented reality experiences. Studio Blend's PTC's AR, IoT and CAD visualization and illustration technologies to overlay important digital insights gained from IoT and analytics onto your view of the physical things you're working with.
Starting the quarter, we had more than 500 industrial companies participating. And during the quarter, we added another 500 companies to the pilot program. These large numbers speak to the growing interest in AR across industrial enterprises. ThingWorx is the only IoT platform that allows customers to offer user experiences using web, mobile and AR technologies. And of the 3, AR is the most powerful and we believe over time more and more companies want to head in that direction with their IOC applications.
As a proof point of customer interest, some of you may have noted how we helped our partner GE to deliver a very impressive AR based keynote demonstration at GE's Mines and Machines event in October. This demo, a replay of which you can access via our investor website, showed a GE locomotive engine going through an optimized service process. PTC and GE created the demo together using both PREDEX and ThingWorx for PREDEX technology that we announced at the show. ThingWorx for Predix is a configuration of ThingWorx that connects to Predix in order to gain access to information about connected access like the locomotive, so that users can quickly build web, mobile and AR based apps to interact with such an asset. We're excited because this approach allows both parties to further expand the successful relationship we've developed together.
From a technology strategy and market leadership perspective, I'm delighted to see PTC continue to gain recognition across the industry. In their November wave report on IoT platforms, the top tier analyst firm Forrester Research identified PTC as having the most complete IoT platform offering on the market, positioning us squarely in the leadership category next to some impressive names like IBM, GE and Microsoft, the latter 2 of whom we view as partners. Likewise, just this past week, we were placed in the IoT leadership quadrant by the Experton Group for the 2nd year in a row. Then at the big CES show in Las Vegas, PTC was named the Industrial Internet of Things Company of the Year by IoT Breakthrough, which is an international organization that identifies the best IoT products and companies in the industry. Chosen from over 2,000 nominations by an independent panel of journalists, analysts and technology executives, PTC was selected for having the most creative and technologically advanced products and services and for delivering breakthrough connected technologies to the market.
To sum up on the IoT front, we believe the clear leadership and market momentum we've established were once again validated by our very strong Q1 performance and we look forward to providing further insight into our IoT business during our IoT Focus webcast planned for later this quarter. Stay tuned for more details on that. Turning now to the performance of our solutions business, improved operational execution once again drove solid Q1 results. CAD led the way with double digit bookings growth, primarily driven by strength in Europe and strength in the Americas channel, where go to market initiatives launched in fiscal 2016 are beginning to bear fruit. Solid PLM bookings benefited by another strong quarter for Navigate, our ThingWorx based PLM offering launched in early fiscal 2016.
As a reminder, Navigate provides a broad range of enterprise users with expanded access to the digital design content traditionally held captive within the customer's engineering departments. A great example of Navigate's growing traction in the market is the Q1 deal we signed with Raytheon, which many of you know is a long time strategic PTC customer with over 30,000 windchill seats in use today across the enterprise. That deal is the largest Navigate transaction we've closed today. For Raytheon, the key value drivers were the ability to create easy to use Navigate apps for a broad set of end users and they enable access to multiple enterprise information systems. We believe these value drivers will resonate across thousands of enterprise windshield deployments in our customer base, creating a significant long term opportunity to drive continued PLM growth.
Lastly, in our solutions business, we saw some variability again in SLM as we've seen in the past with SLM bookings down year over year, primarily due to a number of large deals in Q1 of 2016 when SLM posted a 50% growth rate. So to summarize our progress relative to bookings growth, with a strong technology advantage in an exciting high growth market, our IoT growth plans are on track. And with continued improvements in focus and execution, as well as the leverage of our new technologies, we're seeing continued progress in our core solutions business. Building on the strength shown throughout fiscal 2016, Q1 was the 4th consecutive quarter where we've significantly exceeded our bookings growth targets. We hope to keep that going, but naturally our guidance is a little more cautious.
Let me turn now to our 2nd top level initiative to drive shareholder value, which is to further increase our operating margins. In Q1, our operating expenses were within our guidance range and despite subscription mix coming in well above guidance, we also delivered operating margin within our guidance range, a testament to the operational discipline you've come to expect from PTC. Moving forward, as you know, the dollar has strengthened substantially since last October when we provided fiscal 2017 guidance. In fact, we estimate that FX changes will negatively impact revenue by $32,000,000 for the full year. However, even in the face of these currency headwinds for fiscal 2017, we expect to achieve the 17% to 18% operating margin target we provided you last October based on the 65% subscription mix assumption.
We're committed to staying on the long term margin expansion path we outlined for you last November and have adjusted our spending plans accordingly. Andy will take you through the guidance details and currency impacts later in the call. So turning now to our 3rd key top level initiative, which is our transition to a subscription model. The Q1 2017 mix of subscription bookings was again well ahead of our guidance, even if we excluded the subscription megadeal. We saw a strong adoption in every segment, in every region and in both our direct and indirect channels.
I'll leave it to Andy to elaborate further on how our subscription program is evolving to the next level later in the call. Before I conclude, let me address the global macroeconomic backdrop. Recent PMI data does point to some potential modest improvements in North America and Europe. However, it's too early for us to say that this has translated into a change in buying behavior within our customer base. As of now, we believe that our recent performance has been driven by improved execution in an essentially mediocre macro environment.
Our guidance assumes that this will be the environment we face going forward. To wrap up, here at PBC, we continue to focus on 3 levers to drive significant shareholder value, top line growth, profit expansion and the subscription transition. On the growth front, our momentum and market position in IoT highlights the tremendous opportunity in front of us and we're encouraged by another quarter of improved execution in our core solutions business. On the margin expansion front, financial discipline remains one of our cornerstones as we drive non GAAP operating margin into the low 30s post transition. And on the subscription front, following exceptional performance in fiscal 2016, Q1 was another strong step towards transforming
our business model. And with that, I'll turn the call over to Andy. Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non GAAP results unless otherwise specified. Bookings of $90,000,000 were $10,000,000 above the high end of guidance provided last October.
On a year over year basis, bookings increased 31% and 23% if you exclude Kepware. Subscription comprised 65% of total bookings versus our guidance of 55% and would have been above guidance even excluding the subscription mega deal. Subscription ACV in the quarter was $29,000,000 well ahead of our guidance of $19,000,000 to $22,000,000 Once again this quarter, the strong subscription results contributed to a significant increase in our total deferred revenue, billed plus unbilled, which increased year over year by $248,000,000 or 43 percent to $825,000,000 as of the end of fiscal Q1 2017. Subscription adoption trends were consistent with Q4 2016 where we saw strong performance in every segment, every geography and in both our direct and indirect channels. IoT led the way with subscription mix in the high 70% range, despite Kepware being virtually all perpetual at this time.
In our solutions business, PLM continued to outpace the other segments in the low 60% range and CAB was in the mid-fifty percent range due in part to continued progress in our channel. In our direct business, subscription mix was 73% and in the channel, subscription mix increased 200 basis points sequentially to 43%, led by the Americas where close to 2 thirds of the channel bookings were subscription. Regionally, the Americas, Europe and Japan far outpaced the Pac Rim, where adoption trends continue to lag the other geos. Q1 subscription mix benefited from our support conversion program and the incremental ACV from conversions drove a portion of our bookings over performance. In the Q1, 30 customers, including some very large customers, converted their support contracts to subscription at an ACV uplift that averaged 53% above the prior annual support amount.
We believe that the conversion opportunity within our customer base is substantial and will play out over many years. However, you should expect quarterly variability as this program continues to ramp and mature. For conversions, I'll also remind you that 1, we only include the incremental ACV in our booking results, not the full contract value of the new subscription contract. And 2, our current long term business model does not include any assumption that our large support revenue base transitions to subscription. So this represents upside to that model.
Turning to the income statement. Total first quarter revenue of $287,000,000 was down $4,000,000 year over year. We estimate that subscription mix negatively total revenue by about $18,000,000 compared to last year and professional services decreased about $3,000,000 consistent with our strategy to migrate more service engagements to our partners. Adjusting for these items, revenue would have grown by about $20,000,000 or 5 percent, despite the fact that we had 2 fewer days in the quarter, which negatively impacts recurring revenue by about 2 20 basis points. Compared to our guidance, we estimate that adjusting for the higher mix of subscription, our total revenue would have been approximately $297,000,000 which would have been above the high end of our guidance of $290,000,000 In addition, currency negatively impacted reported revenue by just over $3,000,000 relative to the FX guidance we provided last October.
On a reported basis, software revenue was down 1% year over year due to the higher subscription mix. Adjusting for mix and currency, we estimate software revenue would have increased 6% year over year, despite the fact we had 2 fewer days in the quarter, which impacted software revenue by about 190 basis points. Approximately 86% of Q1 software revenue was recurring, up from 80% a year ago. Operating expense in the Q1 of $170,000,000 was at the midpoint of our guidance range, including about a $1,000,000 benefit from currency, which offset higher commissions and bonuses from the over performance this quarter. Q1 operating margin of 15% was within our guidance range of 15% to 16% despite the higher mix of subscriptions due to strong bookings performance and cost discipline.
We estimate that adjusting for the higher mix compared to our guidance, operating margin would have been 18%, above the high end of our range. And adjusting for the year over year change in mix, operating margin would have been about 24%, a 300 basis point improvement over Q1 'sixteen. EPS of $0.26 was at the midpoint of guidance. We would have beaten our high end guidance by $0.06 at our guidance mix with lower income taxes contributing $0.01 offsetting a $0.01 negative currency impact. Moving to the balance sheet, cash and investments were down $105,000,000 from Q4 'sixteen as expected, driven primarily by the payment of fiscal 2016 bonus and year end commissions of about 64,000,000 dollars debt repayment of $20,000,000 the first interest payment on the bond of $15,000,000 restructuring payments of $16,000,000 and a foreign exchange impact on cash of $10,000,000 Now turning to guidance for fiscal 2017.
Let me remind you of some of the general considerations we have factored in. 1st, while we are pleased with our bookings performance in Q1, we attribute our performance primarily to improved execution, our growth initiatives and our support conversion program and remain cautious of the global macroeconomic environment. 2nd, while subscription results have been very strong in recent quarters, it remains challenging to forecast the pace of our transition and the resulting impact to near term reported financial results. 3rd, our FX assumptions in our guidance now assume dollar to euro at 1.05 dollars and yen to dollar at 1.16 dollars As Jim mentioned, I would like to provide some additional color on FX and its impact on our guidance. For the full year, relative to our previous FX guidance, we estimate that currency will negatively impact bookings by approximately $12,000,000 and total revenue by approximately $32,000,000 dollars Due to the natural hedge afforded by our international spending base, cost of goods sold and operating expenses will benefit by approximately $17,000,000 resulting in an EPS impact of about $0.12 With this in mind, despite the FX headwinds, for the full year fiscal 2017, we are maintaining our bookings guidance range of $400,000,000 to $420,000,000 This represents 5% to 10% growth excluding the 20,000,000 dollars SLM mega deal we closed in Q4 'sixteen.
In constant currency, this represents 7% to 12% growth, an increase. From a subscription perspective, we continue to expect fiscal 2017 mix to be approximately 65% for the full year. As we discussed last quarter, we continue to analyze and explore the phasing out of perpetual licenses within certain geographies and product segments where penetration is running in the 80% to 90% plus range. And we will share more details in the future. We remain confident that we can achieve our FY 2018 subscription mix target of 85%.
For fiscal 2017, we expect total revenue in the range of $1,170,000,000 to $1,180,000,000 which represents 3% growth year over year at the midpoint and 4% growth in constant currency. This includes subscription revenue growth of approximately 120% and total recurring software revenue growth of 9% year over year at the midpoint. In constant currency, this represents recurring software revenue growth of 11% at the midpoint. We expect to increase our services margin by about 100 basis points and remain committed to a 20% services margin by fiscal 2018. Fiscal 2017 operating expenses are now expected to be $670,000,000 to $680,000,000 a decrease of $10,000,000 from our previous guidance and a decrease of 1% year over year at the midpoint of guidance.
Despite the significant negative FX impact on revenue relative to our previous guidance, we are maintaining our fiscal 2017 operating margin guidance of 17% to 18%, representing a 200 to 300 basis point improvement over last year, reflecting our commitment to long term margin expansion. On a mix adjusted basis, we are targeting an operating margin improvement of about 100 basis points to about 28%. We are now assuming a tax rate of 8% to 10% for the full year, resulting in non GAAP EPS of $1.20 to $1.30 per share based upon about 117,000,000 shares outstanding, which is a decrease of just under $0.03 from our previous guidance at the midpoint. We estimate that FX relative to our previous guidance is a negative impact of $0.12 for the full year. So we are offsetting a good portion of the FX impact through improved performance on the top line and rigorous cost management.
In addition, our guidance now includes about a $0.05 benefit from a lower tax rate and from a one time gain of $3,500,000 from an investment we had made in a private company that was acquired this month. We continue to expect adjusted free cash flow between $170,000,000 $180,000,000 Adjusted free cash flow excludes about $40,000,000 of fiscal '16 restructuring payments and the $3,000,000 fiscal 'sixteen litigation settlement payment. For the Q2, we expect bookings in the range of $80,000,000 to $90,000,000 which at the midpoint of guidance represents a 1% decline year over year and 3% year over year growth on a constant currency basis. I will remind you that we had very strong bookings performance in Q2 'sixteen, where we exceeded the high end of guidance by $5,000,000 creating a tough comparison for Q2 'seventeen, especially in our solutions business. On the subscription front, we expect 60% of bookings will be subscription with subscription ACV of $24,000,000 to $27,000,000 an increase of approximately 9% at the midpoint of guidance.
We expect total revenue in the range of $280,000,000 to $285,000,000 for Q2, including $64,000,000 of subscription revenue, an increase of approximately 160% year over year. We expect OpEx in the range of 161 to $166,000,000 and an operating margin of approximately 16% to 17%. We are assuming a tax rate of 8% to 10%, resulting in non GAAP EPS of $0.26 to $0.31 per share based upon approximately 117,000,000 shares outstanding and including about a $0.03 benefit from the investment gain. Before we move to Q and A, I want to update you on our stock repurchase plans. As a reminder, returning capital to shareholders is a fundamental element of our capital strategy.
And based on our current forecast, we continue to intend to resume purchases in the second half of fiscal twenty seventeen when cash and our borrowing capacity begin to return to more normal levels after passing through the subscription trough. With that, I'll turn the call over to the operator to begin the Q and A. Operator?
Yes. Thank you. We will now begin the question and answer Our first question comes from Sterling Auty of JPMorgan.
Hello, Sterling. How are you doing? Yes.
Hi, Sterling.
I'm good. I'm good. Thanks. Hi, guys.
Because everybody is going to wonder, is there any additional details you can give on the subscription mega deal, whether it was new or expansion, what industry or any other color you can provide?
We don't have a lot of details, Sterling, but it was a well known global industrial company who had expanded a previous deployment. We don't yet have their permission to disclose who and why. I hope we get that. And if we do, we'll talk about it at the upcoming webcast.
The other popular question I get is around the maintenance conversion that you mentioned that definitely helped in bookings. Is there a way for us to quantify what the ultimate potential is in terms of the contribution? And I think traditionally we think about your top 400 customers on the maintenance side and support side being critical. Where are we in the penetration of those and in terms
of conversion?
So a few highlights for you.
So first
off, the top 400, 500 represent probably just over 40% of our maintenance space and they are the ones that we are targeting the most now. But as in prior quarters, we actually have a number of customers that are not in that cohort that are actually converting. And in fact, this quarter was about half of them were not among those largest customers. And the average ACV increase was actually greater among those. And they did it frankly to get the benefit of remix and re stack and at the same time they bought some more software.
So that was actually it is always there's always been a part of them that have been from that cohort, but it increased this particular quarter. And that drove the overall ACV increase from what had been in many quarters in the lower to mid 40% range as far as an increase to ACV up to 53% this quarter. As far as the larger customers go, we're about a quarter through the largest customers, but the thing to realize is we actually just engaged pricing consulting firm to help us test offers for other cohorts of our customer base frankly to come up with a conversion program that would address frankly the entire installed base. So we think the entire base is an opportunity at different ACV uplifts, frankly, depending upon kind of their current situation, what their current support rate is relative to market, etcetera. So we're pretty optimistic about this, but it will be variable because frankly the timing of renewals varies quarter by quarter as you can imagine.
Great. And one last one if
I can slip it in. I just want
to make sure to clarify and I understand the message. It sounded like around the macro, you have elements that maybe could point to things getting better, but you haven't factored them into your guidance. But Jim, I thought in your prepared remarks, right at the end, I thought you said something like, but of course, we're being more cautious in our outlook. I just want to make sure that wasn't something that was misspoke or that I misinterpreted.
No, okay. I'm glad you We kind of kept things the same. Yes. I'm glad you asked the clarifying question. What we're saying is that particularly since the election, the PMI index has shown some interesting looking improvements, particularly in the U.
S. And Europe. And historically, we've had some relatively strong correlation to the PMI index. That said, it's a forward looking index based on emotion and we didn't see any of that emotion specifically contribute to orders in Q1. Maybe it will in Q2, Q3, Q4, I don't know, but we're not banking on that.
We're essentially ignoring the PMI data until we can see in the rearview mirror as opposed to through the windshield. Now what I said to your second comment is that we have significantly exceeded our bookings guidance for 4 quarters in a row. But that gives one the temptation to say how great we are, but we're not going to try to be a hero. We're going to stick to what we see in the pipeline, what we see in the forecast and not let what's happened in the past somehow color our future or our view of what is likely to happen this quarter or for the rest of the year. So I was basically saying, just because we've exceeded significantly 4 quarters in a row, doesn't mean we will in the 5th, 6th or 7th.
So maybe the right term is conservative rather than cautious? Yes. Got it. Thanks guys. I appreciate it.
Thanks, Sterling.
Thank you. Our next question comes from Shatil Alam of Goldman Sachs.
Hi. Thanks for taking my question. Hey guys. Andy, first one for you on deferred revenue. That was down 2% year over year, down 9% quarter over quarter.
I'm FX was an impact. Could you just quantify that? And then on this quarter, just explain what some of the dynamics are? And then going forward, just how do you see deferred revenue tracking throughout the year? I know you signed maintenance deals in January April.
How does that help?
So, as we did in the Q4, we've added new disclosure to our prepared remarks. It's on Page 7. So, I refer all of you to that. And essentially that's where we show the unbilled deferred revenue and the billed deferred revenue, because there's variability in the billed deferred revenue, frankly, driven by the timing of billings and the timing of our quarter ends. So specifically, let me give you a total deferred revenue actually went up $248,000,000 to $825,000,000 That's a 43% increase.
Now the billed deferred revenue on the balance sheet went down from Q4 from $414,000,000 to 3.75 dollars What happened was a year ago, the quarter ended January 2 and we bill a lot of support and subscription on January 1 and 2, which is I mean, that's just the timing of that billing. So last year, that was in the Q1. This year the quarter ended December 31, so it wasn't in the Q1. That was $64,000,000 of billings we made on January 1 and 2. So that explains why the balance sheet deferred revenue fluctuated down.
It actually would have been up if the quarter ended 2 days later. So that's why it's important to look at both unbilled and billed. The other thing that I'll highlight is the fact that because we did get a question offline, so I want to make sure I answer it, that the increase in deferred revenue, that 248 dollars 1,000,000 is not being driven by length of subscription contracts. Our subscription contracts are a maximum of 3 years except for the occasional exception. And by the way, the mega deal that we signed was a 3 year contract.
So it is not being driven by length, it's being driven by just increased subscription bookings. So great sign every way you look at it. Does that help?
Yes, that's very helpful. Thank you. And I just had a follow-up on
One more thing can I point out, That $64,000,000 would have all been in current deferred revenue, had the quarter ended 2 days later? So because that was another question someone emailed us, they wanted addressed.
Great. Yes, that's helpful. And just to follow-up on IoT. I know you can't specifically talk about those mega deals, but could you just maybe some color on the sales cycles around those mega deals? How long they take?
Do you have any more mega deals assumed in your guidance for the year?
So first of all, I think we are in a land and expand model here with our IoT revenue. And in fact, we've changed it to me to make the first phase of land and expand be a freemium based model. So in this case, this was I'm trying to remember, probably the 4th transaction we did with this customer as we went from a small one to try it, a bigger one to roll it out a little bit more broadly, another one to increase it and then this one to increase it significantly more. So have been talking to this customer for a couple of years as we move through those, let's say, 4 different orders. And I think that's the way you should expect it to be.
And that's why every time we win somebody at the front of that land and expand process and get them engaged, we're pretty excited because we think we're planting a seed that could bear some pretty significant fruit down the road just as this one did. That said, there are no assumptions of any mega deals in IoT or otherwise in the balance of the year. We tend not to put them in any kind of guidance and quite frankly, sometimes we don't even put them in the forecast, because we don't want to be operating with such wild swings either in what we're telling each other or what we're telling you.
Yes. The one thing I would add to that though is that a May deal is anything over $5,000,000 And so it would be possible that there would be a deal that was just over $5,000,000 that would be in our guidance, but maybe not in our guidance at the full $5,000,000
Yes, we might
have, but It can get smaller. So there is we triangulate around the pipeline and all the deals in the guidance and what could happen and what could fall out so many different ways. It's very difficult to say what specifically was in or out given how we develop guidance.
Great. Thank you. Very helpful.
Great to see you.
Thank you. Our next question comes from Saket Kalia of Barclays.
Hello Saket. Hi.
Hey guys, how are you? Thanks so much for taking my questions here.
Sure.
So first, just to not to harp on the large IoT deals, but they are very interesting. Totally understand you can't talk about who they are and what they encompass. But maybe just more broadly, is the pricing on these deals conceptually sort of similar to what we've talked about in the past where pricing was based on the number of connected things and their associated chattiness? Or are you sort of seeing the pricing structure for these IoT deals maybe change based on metrics as maybe this becomes more common?
Well, Saket, when we're connecting things for purposes of monitoring them and servicing them better and so forth, then we do to have a pricing model based on how many things and how jetty. When we do factory projects, we tend to do it, particularly if we end up getting into multiple factory projects, we tend to settle down to a per factory charge because it's just too darn difficult to inventory all the things in all the factories in a larger company. So this was the latter case and was a per factory price. It was actually a combination of the 2 to be frank, but mostly the latter.
Got it. Got it. And then CAD growing double digits was great to see. Can you just talk about anything that you think drove that? I mean, relatively stronger than the overall market growth.
And can you remind us what CAD grew year over year last quarter just for basis of comparison?
Thanks.
I'll get the first question while you're working on the second one, Anthony. I mean, to me, the big thing that happened in CAD is that our North American channel, which had been for years kind of a perennial weakness, has really stepped up. And that's a trend. We're sort of looking at 4 consecutive really strong channel growth quarters in North America. Our channel in Europe is very strong, but our channel in North America had been comparatively weak.
But we made a lot of investments in program changes and even some personnel changes dating back a few years. And those persons drove the program changes. And the channel in North America has responded well. They've done a good job adopting subscription. They quite like that program.
So I think to me, that's the single biggest factor, not the only factor, but the single biggest factor in what's improving our cab business.
Yes. It's funny because if you look at the people running our channel, it's made up of people whose career has been in running channel businesses, frankly, in our competitors. And they know how to do it. And every year, they've been methodically maturing our channel management practices. And right now we've got a good go to market play every quarter.
There's a marketing program for the channel. That's a call to action and that's working out well. The win back program is working out well. Also, we have CAD customers who have gone off maintenance and they have an opportunity to come back on come back into the fray basically, let go on subscription instead. And so we had another good quarter in the win back program and that program we're expecting to continue much of this year as kind of the final chance to basically come back into maintenance or subscription and not have to buy a new seat next next time you want to upgrade.
And just to hit the I think it was maybe the first part of your question. This is the 3rd consecutive quarter of double digit CAD growth, CAD bookings growth, and the 4th consecutive quarter of positive CAD bookings growth. And it mirrors what I said about the channel improvement in North America. So I don't have an analysis in front of me, but I'm going to reasonably conclude here that the biggest factor is the improvements in channel performance in North America.
Very helpful. Thanks, guys.
Thank you. Our next question comes from Steve Koenig of Wedbush. Your line is now open.
Hi, Steve. Hi, gentlemen. Hi there. Thanks for taking my questions. Let's see, I wanted to ask you maybe a big picture question on IoT, Jim.
Maybe just generalizing a little bit, if you look at the traction you're getting in IoT and it looks to be increasing and accelerating. Can you give us some color and maybe just a little more granularly by maybe break it down a little bit by use case and or channel, direct versus partner? And related to that, how is the how is customer acquisition in the low touch sales model working out in that business too?
Yes. Well, I'd say, well, let me answer your specific questions and give you some other high big picture comments. So on the channel, in general, we've been in a model where the PTC channel, both direct and resellers, were doing about half the bookings. And new channels that were brought on to support IoT distribution only, We're doing about a third of the bookings. And then everybody else, and that kind of means mostly e commerce was doing the balance, which would be a 6th.
Now the mega deals swayed that though. So that's roughly what it would look like if the mega deal either didn't happen or was a normal sized deal. So that's a good trend. Again, that the that third is coming from channels other than PTC and the 6th that's coming from e commerce, those are things we didn't have a couple of years ago. Now if you said what's creating the momentum, the main thing that's creating momentum is seeds that we planted 1 2 years ago, coming back to buy more and doing substantially larger second and third transactions than they did the first time around.
That led us to open the aperture and say, well, if that's the model, then we should have even more seeds and a freemium model would give us even broader exposure. And a good example is the 1,000 accounts now playing with our IoT plus augmented reality technology. That's very, very interesting to get a 1,000 companies playing with it knowing that some amount of them will matriculate into real and then increasingly larger customers down the road. So I think we have good traction. I just ran across a little anecdote this afternoon by accident.
We put IoT class in Udemy, if you're familiar with that, that's the online education system. And just in the last little over 2 quarters, we've had more than 4,000 people go through it. And the reviews are phenomenal. I mean, I encourage all of you to go on Udemy and look at the ThingWorx IoT course and read the reviews. I mean, that's 4,000 people who educated themselves in IoT with our technology and said, wow, this is a big concept and that's a great technology and quite frankly, that was a great course.
I'm glad PTC you introduced me and several of them writing a comment and see how can I learn more about this? And of course there are ways to do that online. So anyway, I think we're very excited that the land and expand model is working. We've opened the aperture at the front end with the freemium program. I don't think that yet has influenced any of the success we had, say, this quarter or last quarter.
But we're hoping that it will keep the momentum going kind of as we move into maybe back part of this year, but for sure next year or the year after and so forth.
Fantastic. Well, Jim, that was a detailed answer. So I'm going to end my quiz early. Thanks.
All right. Thanks, Steve. I'll remember that for next time.
Thank you. Our next question comes from Ken Wong of Citi. Your line is now open.
Hey, Jim. Hey, Andy.
Hi, guys. Hey. So I think we can all see how the strong dollar would keep you guys from bumping up full year bookings. But why wouldn't we see you guys raise that bookings mix from 65% considering how strong you guys have started off the year and just given the channel uplift that we've seen early on?
Why didn't we raise the bookings mix? We're only 1 quarter into the year. And if you actually do the math on it's it would have been a trivial increase to what had happened just in the past. And we basically base our guidance on what's in the pipeline, which I think is the smart thing to do at this point.
Ken, I'm sure this is at least the quarter in the role we've been asked that question. We'll just keep sticking to our guns here, which is we're going to forecast against the data we have in our system. And if it turns out better than that, that's fine. But we don't want to just start making it up. And for us to raise the mix for the year would be to step out on a limb and start inventing numbers that aren't supported by data.
So this model has worked reasonably well for us. I think we'd prefer to stick with it.
Got it. Fair enough, guys. And then Andy, in the past, you guys had talked a little bit about just the uplift you guys were seeing with maintenance contract renewals. I think it was kind of in the 20 ish percent. Is that consistent with what you guys are still seeing now?
You mean the ones that decided not to convert. I'll be honest, I've not seen that analysis yet. So I don't have an answer for you on that. I know that, but operationally, the business practices that if they don't convert, they have to basically go to support at, we've got a minimum, what do we call that, Tony call it? The bridge or something.
There's a like a VSOE rate. Fundamentally, there's a support rule. Standard
policy. Yes,
there's a standard policy of what support has to be, which is that a significant uplift and it depends upon whether again it was a customer that was if they were 20% below then the uplift is going to get them back up to that rate.
But I'll be
honest, I have not seen that analysis yet.
Got you. No worries then. Okay. And then I guess with that, I'll pass the baton. Great.
Thanks, Ken.
Our next question comes from Ken Talanian of Evercore ISI. Your line is now open.
Hi, guys. Thanks for taking the question. Just wanted to go back on the IoT business again. You noted that you saw a number of 6 figure deals more than double in the quarter. And I know you talked about some of the pricing on those IoT deals being on a per factory basis.
But just looking at that expansion base, could you give us a sense for whether the drivers are more, seat oriented, more expansion to other product lines within the company or even more like asset based growth?
Yes. I think it's probably three things. Some of it is seat based when we sell IoT along with, say, Navigate to Raytheon. That anecdote I gave you was probably seat based. If we sell it to factories, it tends to be factory based because there's so many assets of all different sizes, mixed mode there, very heterogeneous environment.
And then when it's more service based, I'm a company who makes things and makes expensive long lived assets and they're all in the field at the customer side and I wish I could connect them back to me, so I could monitor my fleet of things and service them better, monitor customer success and so forth. That tends to be thing based, asset based. So to be frank, it's a combination of the 3 and it really it depends on the use case, how we're going to price it. Obviously, people that are managing a fleet kind of want it priced as per the fleet, how big is the fleet, how sophisticated are these assets. People who are buying it for users like with Navigate want to do it per user and people who are implementing it across their factories say it's too darn complicated to inventory and figure out how chatty every asset in my factory will be because quite frankly, I don't make them.
So could we just kind of arrive at a per factory price? And there may be some negotiation in that depending upon sophistication of the factories and so forth. But it's really all three at this point.
Okay. And just for a second question, you mentioned that you continue to see support contracts convert over to subscription. And if I look at fiscal 2016 results, you actually saw a decline in the support deferred, I believe, around 34,000,000 dollars Is there any way we could use that as a proxy to take a look at what the ACV or the decline is relative to the ACV of the support conversions?
No, no, because you've got perpetual license revenue going down. That's not the right way to look at it.
So Andy, you're saying that
we sell, the less support we'll have. Yes.
And the more we convert,
the less support we'll have. Exactly.
It's very hard to unwind all that.
Unwind the 2, yes. Sorry, it's too hard to unwind the 2.
Okay. All right. Great. Thank you. Thanks, guys.
Thank you. Our
Can I unmute your phone, Matt?
Operator, why don't we go to the next person?
Our next question comes from Jay Vleeschhouwer of Griffin. Your line is now open.
Thanks. Good evening. Jim, let me start with you on a technology or portfolio question, then I'll turn to Andy. So you've spoken in the past of your view that or the equivalent of IoT and PLM. And more broadly, you've, of course, you had your overall closed loop life cycle management strategy where you're integrating across the various segments.
The question is, do you have examples you can share where customers are in fact agreeing with you with regard to the equivalent of IoT and PLM? And more broadly, are you in fact seeing multi segment deployments in new business where you are seeing the effects of the integrated segment strategy actually converting into new business?
Okay. Let me say, ThingWorx really at some level is an orchestration engine that can pull data from things, it can pull data from systems, it can run analytics against that data, it can put that in some kind of a business process and then deliver it in role based user interfaces to people on web, mobile and AR devices. So the first thing is we have sold now a tremendous amount of ThingWorx in just 4 quarters to our PLM customers in this product called Navigate. So if you ask the question, how many of them are using Navigate to orchestrate data from things versus things and systems versus just systems, I'd say a lot of them have started with systems and are playing with things to bring data from products in the field back into engineering, so they can get a better understanding of what's going on. Now, it's a powerful idea.
We use it here at PDC. I mean, we have stuck ThingWorx inside of Creo. ThingWorx, these are our assets that are deployed largely on premise out in field, Creo, Wind Shell and even ThingWorx, because we want to be able to monitor how much success the ThingWorx customer is having with ThingWorx using ThingWorx. And that's the basis for how we do customer success management now, because without that data, we're kind of blind. If it were SaaS, we'd have it running in our data centers or in data centers that we control or monitor or whatever.
But when it's on premise, you don't know anything. So this kind of data is pretty important. Our engineering team uses it a lot. Decisions made about Creo, which bugs to prioritize and fix and so forth are all based on what do we see customers doing on the field, what kind of problems are they running into with what frequencies, using what configurations of hardware and so forth. So it's a big powerful idea.
I think the idea of an orchestration engine to get data to pull into PLM is proving to be a big idea. I mean, I think we're in double digit license revenue in the first four quarters. Again, how much of it's coming from things at this point is probably a minority, but everybody is pretty interested in that idea and quite frankly sees the value that we've achieved using software they're familiar with and we can use that as a benchmark.
Okay. So Andy, just two things. 1, how are you thinking now about the profitability or eventual profitability of the IoT business? When we look at your numbers in fiscal 2016 according to the 10 ks, on a direct cost basis, IoT for the year had 116% of revenue and cost. But for the Q4, it was only 104%, which suggests you're getting a lot closer on that basis to profitability for the IoT business.
So if you could comment on that. And then lastly, just following up on some of the earlier questions on deferred. When we think about your model expectations and guidance out through fiscal 2021, is it necessarily the case that deferred would be going up every year? I mean, you set aside the upside from conversions and so forth. But as guided, would your deferred necessarily go up every year through 2020, 2021 and so forth?
Yes. Okay. So let me take the first question. So the profitability of IoT, we basically think that as a software business exceeds that roughly $200,000,000 in revenue. That's really the point in time that assuming it's still very high growth, that's the point in time you tend to crossover into profitability.
And we manage the business model that way and we'll continue to manage it that way, pretty much the way frankly a VC or a small public software company would be managing their own business model. We do internally an estimated fully allocated P and L, which of course has a lot of assumptions in it, but that's how we really track the profitability of each of our businesses from a portfolio management perspective. For SEC reporting and the segment reporting, there is a we don't it's something like our sales force much of our marketing spend goes across all segments, we don't allocate that for SEC segment reporting because it we don't want to put just an assumption out there. We basically follow the rules for how you do segment reporting. So it looks like we're approaching that profitability according to the segment reporting, but of course there's a lot of expenses that haven't been allocated to either IoT or solutions there in the unallocated bucket.
Okay. Then the long term deferred question through 'twenty one?
Long term deferred question, yes. Long term deferred should continue to increase, frankly, driven by new bookings every year, which should far exceed any churn.
Okay, great. Thanks, Andy. Thanks, Jim.
Sarah, I think we have time for just one more question before we run up against the hour.
Thank you. One last question comes from Ed McGuire of CLSA. Your line is now open.
Hi, good afternoon. I was wondering if you could discuss whether your customers are the conversations with customers regarding potential legislative changes regarding trade in the U. S. Maybe changing some of the conversations you may be having or they're thinking about their own investment? I know that's pretty broad, but I just was interested in your initial take.
Yes. Ed, my initial take is probably uncertain. I mean, Trump's made a lot of promises. We'll see which ones he implements and which ones he doesn't and which time frames and so forth. Obviously, we're dealing with a lot of global companies.
Most of them would like to see well lubricated trade. But it's just very hard to see. So on one hand, the PMI is up sharply in the U. S, suggesting these companies can't be too concerned about trade. Their optimism around things other than trade apparently surpasses their pessimism around trade.
So I don't know, it's very difficult for me to decode. I'm just going to stand back in the bleachers and watch it for a while and see what happens.
Okay. One final question. Since GE acquired ServiceMax, I know you guys have been working pretty closely with them on connected field services. There have been can you comment on any developments on that partnership and whether the acquisition for GE alters that or improves it in any way?
Yes. I think if you look at the scenario that we showed at the Mines and Machines event that was using ThingWorx with PREDIX in a service scenario. And it was very similar to the demos that we had been doing with ServiceMax, except quite frankly, it didn't include ServiceMax, because GE probably wasn't ready to show that card. But I think, number 1, PTC has a very good relationship with ServiceMax. We've had some success together and built some great relationships.
And I think that having ServiceMax acquired by GE reinforces a new dimension in our partnership with GE that we were working on anyway, which is, hey, let's not just be partners in the factory and compete in the service bay. Why don't we make ThingWorx work with PREDEX and then we could be partners across the waterfront, both factory and service scenarios. Now you add our friends at ServiceMax into that scenario and I think it's just helpful. So I don't think anything that deal just closed last week and we got some work to do. But I think that kind of on balance, it's a net positive, a reasonably strong net positive for us and our relationship with GE.
Great. Thank you.
Thanks,
Ed. Okay. Tim, did you want to
Yes. So operator, I'll just close out. I've got a few programming notes before I hand it back to Jim. We will be hosting this IoT webcast, as Jim mentioned, on February 20 2 at 1 Eastern. Look forward to having you join us for this event.
On the conference front, we're going to be attending JPMorgan's High Yield Conference on February 27 in Miami, then moving to the Morgan Stanley TMT Conference on March 2 in San Francisco. In the meantime, if you have any follow-up questions post this call, please contact Investor Relations. And with that, I'll turn it over to Jim for some closing remarks.
Yes. I just want
to thank everybody for joining us again here and spending your time with us today. I think when I look at the quarter, it wasn't a perfect quarter, but it was a very good quarter. And across our 3 strategic missions of increasing growth rate, increasing profitability and switching to subscription. This quarter really moved the ball forward on all of those initiatives. And as such, it's another great win in the record book and we're pleased to deliver it.
We hope to talk to you again in 90 days, if not sooner, and hopefully we'll have good news again for you. So thanks a lot. Thanks for joining us.
That concludes today's call. Thank you all for your participation. You may now disconnect.