Afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PPC 2015 4th Quarter Conference Call. During today's presentation, all parties will be in listen only mode. Following the presentation, the conference will be opened 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, Wanna. Welcome to PTC's 2015 Q4 conference call. On the call today are Jim Heppelmann, Chief Executive Officer Andrew Miller, Chief Financial Officer and Barry Cohen, EVP of Strategy. Today's conference call is being broadcast live through an audio webcast and a replay of the call will be available later today at www.ptc.com.
During this call, PTC will make forward looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward looking statements can be found in PTC's annual report on Form 10 ks, Form 10 Q and other filings with the U. S. Securities and Exchange Commission as well as in today's press release.
The forward looking statements, including guidance provided during this call, are valid only as of today's date, October 28, 2015, and PTC assumes no obligation to update these forward looking statements. During the call, PTC will discuss non GAAP financial measures. These non GAAP 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 website. With that, I'd like to turn the call over to PTC's CEO, Jim Happelman.
Thanks, Tim. Good afternoon, everyone, and thank you for joining us for a review of our Q4 fiscal 2015 results. There is a lot to talk about as we wrap up fiscal 2015 and transition into fiscal 2016, including some significant strategic and operational initiatives that we're driving. To be frank, it will be hard to squeeze it all into this one call. So I'd like to remind you that our Investor Day is scheduled for November 10 in New York.
We will touch on a few new topics today and then plan to go much deeper into those topics at the event in 2 weeks. Let me begin with a brief review of the 4th quarter. We were pleased to see fiscal 2015 end on a solid note. Q4 revenue of $313,000,000 was above the midpoint of our guidance, even with a significantly higher mix of subscription bookings than we guided, and our EPS of $0.67 was above the high end of our guidance range. Despite challenging macroeconomic conditions, in constant currency, our license and subscription bookings grew 3% over the prior year.
Our movement to subscription showed accelerated progress with 20% subscription mix in Q4 compared to just 4% in the Q4 of the prior year. Due to this significantly higher mix of subscription bookings, our recognized software revenue in constant currency declined 4%. I'll remind you though that this effect is par for the course with a subscription transition and a stronger subscription mix should be viewed as a good thing despite the pressure it puts on reported revenue and EPS in the near term. From a segment perspective, 4th quarter and full year results were somewhat mixed. IoT momentum continued with this segment performing well ahead of the expectations we had set, driven by strong growth in our new ThingWorx customer logos, follow on business with existing customers and our first significant deal for our new cold light predictive analytics or machine learning technology.
We far outpaced the target of 200 new IoT logos for the year with 108 in Q4 alone and a full year total of 290. That means that in one single year, we more than doubled the customer base built by both acquired companies during their ramp up phase prior to PTC's acquisition. Many of these new customers are blue chip names who are applying our IoT platform to many different use cases within their operations and of course across the range of verticals within discrete manufacturing and the broader market. There is no doubt at this point that our technology, thought leadership and business momentum is being recognized by a marketplace that's starting to see PTC emerge as a true leader. As a case in point, if you've read reports recently published by McKinsey and others, you know that manufacturing automation is projected to be amongst the most compelling value creation opportunities for IoT.
During Q4, we made significant progress on this front with General Electric announcing that the brilliant manufacturing component of their industrial internet strategy will leverage the capabilities of ThingWorx to enable customers, GE customers to run their factories more productively. This GE branded solution, which is powered by ThingWorx, will be implemented within GE's 400 or so internal manufacturing plants as well. The GE contract represents a significant financial commitment to PTC over the coming years and driving companies to rethink and transform their engineering, manufacturing, sales and marketing and service operations, I'd like to direct you to a newly published second article that I co authored with Professor Michael Porter of Harvard Business School. This article, which is titled How Smart Connected Products Are Changing Companies, was just recently published in the October 2015 issue of Harvard Business Review. It's probably not on the newsstands at this point, but you can find and download the official PDF reprints at our ptc.com website.
Along with the first article, it really lays out the case for why companies feel IoT is so strategic to them. Coming back to our core business, SLM was particularly strong with bookings growing 59% in constant currency, capping off total second half constant currency growth of 33% year over year. This improved result stems from our pipeline rebuilding efforts that we were talking about during the latter part of fiscal twenty fourteen and the first half of fiscal twenty fifteen. Extended PLM bookings returned to constant currency growth in the quarter, driven by double digit growth in our ALM segment, which offset a modest decline in traditional PLM. CAD results declined 22% in constant currency, due in part to a weaker manufacturing macro environment, especially in the Americas, where PLM was also weak.
As you know, our CAD and PLM businesses are a bit lumpy and the relatively fewer and smaller big deals in FY 2015 as compared to the prior year is a key factor in the cat decline. On the bottom line, operating margin and EPS exceeded the high end of our guidance range, despite a substantially higher mix of subscription. So all in all, we feel that Q4 financial results were solid. If we take a look at the full year, licenses and subscription bookings declined 5% in constant currency, due primarily to the tough manufacturing environment influencing a smaller number in size of big deals. Due to the increase in subscription mix of bookings from 8% in fiscal 2014 to 17% in fiscal 2015, license and subscription revenue declined 3% in constant currency.
However, strong support revenue, reflecting strong renewals and pricing actions resulted in total software revenue growth of 3% in constant currency, which would further increase to 5% if you also adjust for the increase in subscription mix. It's important to remember that as a rule of thumb, on an annual basis, every 1% change in subscription mix, just by mathematics, will raise or lower our recognized revenue by $3,000,000 our operating margin by 20 basis points and EPS by about 0.02 dollars So in total, FX impacted revenue by about $100,000,000 for the year. However, due to strong management of our cost structure, our operating margin ended above 24% and we delivered EPS of 2.23 percent, which was up 3% year over year. But excluding the dual impacts of currency and subscription bookings mix, EPS would have grown more than 40%, which far exceeds the strong performance we posted in terms of EPS growth in each of the prior 5 years. So looking forward, as we move into 2016, our primary focus is 3 fold.
Number 1, to focus on driving sustainable growth. Number 2, to more aggressively move toward subscription and number 3, to continue with cost controls and margin expansion. First, let me talk about growth. As we demonstrated with our performance in IoT in fiscal 2015, we believe that we are establishing PTC as a leader in the IoT software platform market, which is one of the highest growth and likely one of the largest software markets over the next decade. At the center of our leadership position, of course, is very strong technology.
We have the industry's most comprehensive and market validated technology platform that enables companies across many different verticals to rapidly implement their IoT strategies at scale. And with our acquisition of Vuforia, which we anticipate will close in the next few weeks, we will extend our technology lead by offering a new class of offerings that continue the trend of merging the digital and physical worlds. Vuforia is the industry's most advanced and most widely adopted augmented reality technology platform. So particularly, when Vuforia is coupled with our IoT and predictive analytics capabilities, it unlocks a world of possibilities for creating new ways to design, monitor, interact with and service products. You may actually have seen a peak of euphoria in use if you attended or watched online our LiveWorx events that happened in May in Boston or June in Nashville.
If you remember, we demonstrated our digital twin technology using a smart mountain bike demonstration. If you can recall, we used an iPad to augment a digital dashboard onto the mountain bike as it was being ridden around the stage. It turns out we were using Vuforia for that. So we'll be sharing more details at our upcoming Analyst Day and how we're coupling these exciting IoT, machine learning and augmented reality technologies together to create some truly transformational new possibilities for our customers. As a platform offering in its own right, Vuforia brings to PTC another substantial developer community, who could further leverage ThingWorx to extend and expand the value of the work that they're doing with their augmented reality offerings.
So while our new business appears to be hitting on all cylinders, we feel that our traditional core business, particularly CAD and PLM did not meet the expectations that we had established at the start of the year. We believe we have market leading products and strong customer references, and these are the key ingredients necessary to grow our business at market rates. In fiscal 2015, we faced macro headwinds, FX headwinds and business model changes. But after a lot of analysis, we also believe there's room to improve execution and therefore the growth in our core business. So with that objective in mind, we're implementing plans, which involve changes to both structure and talent.
Let me start with the structure point. As we build out our new technologies, our business is becoming more complex, because the new part of the business is different in important ways from the traditional core business. For example, the new IoT Analytics and Augmented Reality business has tremendous potential that best unlock through a large developer and partner ecosystem that's cultivated through marketing led approaches, whereas our traditional business is best optimized by leveraging direct sales executives who position themselves as a trusted guide to a customer's business transformation. So given the growth opportunities we see in both the core and the new business, we see that each business requires an appropriate focus to win. I believe that strategy should drive structure.
So going into fiscal 2016, we've reorganized the company into 2 main business units. Our core CAD extended PLM and SLM business, we will now call the Solutions Group and our new IoT Analytics and Augmented Reality Business, we will call the Technology Platform Group. Each of the 2 business groups will be led by a newly appointed Group President. Rob Grimlich, who has been driving the technology business for the last 2 years, has been appointed to be Group President of the Technology Platform Group. In the Solutions Group, where we feel the opportunity to improve execution is more pronounced, we've decided to go outside in order to bring proven new executive talent into the company.
We're well into a search for the Group President of Solutions with several talented candidates on the shortlist. And I look forward to announcing a new executive joining PTC in the near term. We are confident that this change over time will improve our execution. Each of these groups will have separate R and D and go to market teams, while our corporate infrastructure, of course, will support both. We're confident that this new structure will allow us to optimize our focus and our balance on each of these two businesses, while preserving leverage and efficiency wherever appropriate.
The takeaway for investors is that we're making important changes to the structure and talent at BTC with an eye toward providing strong focused leadership, improved execution and performance oriented accountability that will enable us to leverage our assets and capabilities to drive better growth from our business. Next, I want to talk about subscription. We launched subscription fees too 4 weeks ago with new pricing, packaging, business rules and new sales incentive compensations to drive our business aggressively towards subscription. We believe that we will transition 70% of our license bookings to subscription by FY 2018. The market studies we performed with McKinsey this past summer support that view, and we've now aligned all of our policies toward achieving that goal.
We'll be sharing more details about our subscription program at our Analyst Day, and in a few minutes, Andy will share some highlights on how we see the transition impacting our business model over the coming years. But this move is good for our customers and it's good for PTC. Our 3rd focus as we enter fiscal 2016 is cost control and margin expansion. This has been a key tenet of our commitment to driving shareholder value. In fact, in my time as CEO, we've taken BDC's operating margins from the low teens to the mid-20s through continued cost discipline and guided by a portfolio management process.
To that end, today we announced the realignment of our workforce as we continue to proactively manage our cost structure and move investment into the highest return opportunities in our business. Our goal is to drive continued margin expansion over the long term. While our reported results will be negatively impacted as we transition to subscription, we see a path to non GAAP operating margin in the low 30s once the business model normalizes from the transition effects in 2021. When combined with our commitment to return 40% free cash flow, believe we're well positioned to drive substantial value for our shareholders. So in conclusion, Andy and I and the executive team essentially have in our hand 3 levers, growth, subscription and profit that each independently could drive significant shareholder value.
On the growth front, if we continue to win in the new technology platform business, while improving execution in the core solutions business, we will drive a lot of value. On a subscription front, if we push aggressively toward the goal of 70% subscription by 2018, we will also create a lot of value. And on the margin expansion front, where we've already created a lot of value, our restructuring announcement today tells you that we know that our work on margins is not yet finished. So starting today and then with more detail at our Investor Day, you will see that we have a legitimate opportunity and a strong strategy to move the needle significantly on growth, on subscription and on margins. And as we do, our shareholders stand to reap substantial benefits.
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. Total 4th quarter revenue of $313,000,000 was down $55,000,000 year over year as reported. Year over year software revenue growth of $8,000,000 was offset by a $31,000,000 impact from FX, a $20,000,000 impact from a higher mix of subscription bookings and a $12,000,000 constant currency decrease in professional services revenue, consistent with our strategy to migrate more service engagements to our partners. In addition, recurring software revenue, which is 59% of our total revenue, was negatively impacted by 6 fewer days, which is 7% as compared to Q4 'fifteen.
Software revenue, which consists of license, subscription and support, was above the midpoint of guidance due to solid results for both LNS and support revenue in the quarter. On a reported basis, software revenue was down 12% year over year due to the impact of currency, a higher mix of subscriptions and fewer days in the quarter. Excluding currency and mix, software revenue was up 3%. It should be noted that we faced a tough Q4 license comparison, a quarter in which our CAD and EPLM license revenue grew in the mid teens year over year in addition to the tough Q4 support comparison due to fewer days. Approximately 59% of Q4 'fifteen revenue came from recurring business, up from 53% in the year ago period.
Clearly, this growth in recurring revenue represents a very positive trend in our business and will drive cash flow in subsequent quarters. Moving to the income statement, gross margin increased by 170 basis points sequentially and 190 basis points year over year. The key driver was the lower mix of professional services revenue in the quarter, which was 15% of revenue in Q4 'fifteen versus 18% in Q4 'fourteen, reflecting continued success growing our partner ecosystem. Operating expense in the 4th quarter was down 27,000,000 dollars or 15% from Q4 last year, primarily driven by lower performance based variable compensation and restructuring actions taken in Q2 'fifteen. The solid software revenue results, favorable services mix and tight operating expense controls yielded an operating margin of 28 as reported, up 3.90 basis points in constant currency and would have been up 800 basis points if adjusted for constant currency and the higher subscription mix.
EPS of $0.67 was above the high end of guidance and was up 1% year over year, but up 20% when adjusting for currency and would have been up 45% if adjusted for constant currency and the higher mix of subscription. Moving to the balance sheet, cash and investments were flat with Q3 at 273,000,000 dollars We spent approximately $15,000,000 repurchasing 434,000 shares in Q4. For the full year, share repurchases exceeded our commitment to return 40% of free cash flow to shareholders. One final comment before I turn to guidance. As Jim mentioned, at the beginning of FY 'sixteen, we launched the 2nd phase of our subscription program with the goal of accelerating the company's transition to a predominantly subscription based licensing model.
With an aggressive move to subscription, we will provide new disclosures in FY 'sixteen to enable you to better track the progress of our business. These new disclosures are important, because traditional financial metrics like revenue, operating margin and EPS may not reflect the underlying performance of the business during the transition. Simply stated, the more success we have in driving subscription adoption, the weaker our reported income statement results will be in the near term, effectively masking the significant underlying value being created. With this in mind, moving forward, we intend to disclose license and subscription bookings on a perpetual equivalent basis, subscription annualized contract value or ACV, subscription bookings mix, annualized recurring revenue or ARR, which will include subscription and support. Within our software revenue disclosures, we will separately disclose perpetual, subscription and support revenue.
We also intend to simplify our operating performance disclosures. Beginning next quarter, we will provide revenue results for our 2 business groups discussed above along with revenue performance by geography. We will also share additional commentary on the performance of the businesses within our solutions group. From a guidance perspective, in addition to the current metrics provided, we intend to guide total LNS bookings, subscription ACV, subscription bookings mix, operating expenses and annual free cash flow. Now turning to guidance, let me share some of the general considerations that are factored in.
First, as Jim highlighted, as we enter FY 'sixteen, we are in the midst of a significant reorganization and a workforce restructuring that could be disruptive, especially in the first half of the year. We have attempted to factor this into our guidance. 2nd, while our Q4 bookings results were near the high end of our guidance and while we continue to have momentum in our IoT business, we remain cautious of the macroeconomic environment, especially in the Americas and China. And finally, subscription is still new to much of our sales force and it tends to be a land and expand transaction model, different from the old big deal enterprise play, so we could see smaller deal sizes. With these caveats in mind, we expect bookings in the range of $320,000,000 to $350,000,000 for fiscal 2016.
We are assuming 25 percent of our bookings will be subscription. Based on this assumption, we expect total revenue in the range of $1,200,000,000 to $1,220,000,000 for fiscal 2016. Included in our revenue guidance, we expect subscription revenue of $90,000,000 perpetual license revenue of $240,000,000 to $260,000,000 support revenue of $670,000,000 resulting in total software revenue of $1,000,000,000 to 1,020,000,000 dollars We expect global services revenue of approximately $200,000,000 a decrease of $27,000,000 from FY 'fifteen as we continue to execute our strategy to transition more service engagements to our partner ecosystem. Note that FX compared to FY 'fifteen reduces our revenue guidance at the midpoint by 30,000,000 dollars A higher mix of subscription bookings reduces our midpoint revenue guidance by $24,000,000 and we are guiding a constant currency reduction of $21,000,000 in Global Services, a total reduction of $75,000,000 on revenue at the midpoint of our guidance as compared to FY 'fifteen. We expect an increase in our services margin by about 130 basis points to 16% and remain committed to a 20% services margin by FY 'eighteen.
With the restructuring discussed earlier, at the midpoint of guidance, we expect FY 'sixteen operating expenses to be down approximately $17,000,000 from FY 'fifteen. Our OpEx guidance assumes a significant increase in variable compensation predicated upon the achievement of our performance goals, as well as increases in our IoT spend. Accordingly, we are guiding to an operating margin of approximately 23% in FY 'sixteen. Note, however, that assuming the same subscription mix as FY 'fifteen, which was 17%, operating margin would have been 25% at the midpoint of our revenue guidance, up about 100 basis points. PTC remains committed to operating margin improvement and rigorous and disciplined management of our cost structure.
The restructuring we announced today should give you confidence in that commitment. We are assuming a tax rate of 15% to 20%, resulting in non GAAP EPS of $1.80 per share to $1.90 per share based upon approximately 116,000,000 shares outstanding. For the Q1, we expect bookings linearity at the lower end of our historical averages to account for disruption from the reorganization and restructuring. With this in mind, in Q1, we expect bookings in the range of $62,000,000 to $70,000,000 with about 18% subscription mix. We expect total revenue in the range of $290,000,000 to $295,000,000 for Q1.
Included in our revenue guidance, we expect subscription revenue of 20,000,000 dollars perpetual license revenue of $52,000,000 to $57,000,000 support revenue of $170,000,000 resulting in total software revenue of $242,000,000 to $247,000,000 We expect global services revenue of approximately 48,000,000 dollars a decrease of $17,000,000 from Q1 'fifteen. Note that FX compared to Q1 'fifteen reduced our midpoint revenue guidance by $20,000,000 and we are guiding a constant currency reduction of $13,000,000 in Global Services. Additionally, one less day in the quarter than last year results in about $2,000,000 less recurring software revenue for a total reduction of $35,000,000 on revenue guidance at the midpoint as compared to Q1 'fifteen. With the restructuring beginning in the middle of Q1, we expect an operating margin of approximately 22%. We are assuming a tax rate of 15% to 20%, resulting in non GAAP EPS of $0.40 to $0.45 per share based upon approximately 116,000,000 shares outstanding.
Finally, so that you can begin to refresh your models, let me provide some high level guidelines regarding our new long range target financial model. I will go into much more detail at our upcoming Investor Day. 1st, we believe that the initiatives we are driving in our solution group and the strong position we have established in our technology platform group together can drive approximately 10% bookings growth by FY 'eighteen. This is predicated on our solutions group growing in line with the market by FY 'eighteen, which we believe is approximately 6% and our technology platform group growing with the market, which most analysts believe is approximately 40%, although we grew much faster than this in FY 'fifteen. Next, exiting FY 'eighteen, we expect to see continued bookings growth at market rates, which in turn is anticipated to yield approximately 10% total revenue growth by FY 'twenty one when our subscription transition normalizes.
We expect our subscription bookings mix will accelerate throughout FY 'sixteen, averaging 25% for the full year and continue to grow through FY 'eighteen when we expect to achieve a steady state mix of 70% subscription. At this point, about 90% of our software revenue will be recurring. Based on these bookings, revenue and subscription mix assumptions, we expect our P and L and cash flow metrics to hit a trough in FY 'eighteen, begin to recover in FY 'nineteen and then normalize in FY 'twenty one, at which point we expect to achieve non GAAP operating margins in the low 30% range. One additional item, in our press release today, we provided an update concerning the China matter. Recall that in the Q3 of FY 'fifteen, we recorded a reserve of $14,000,000 associated with discussions with the SEC and DOJ to resolve our previously announced investigation in China.
That accrual represents the minimum amount of liability we expect to incur if we are able to reach a settlement in this matter and does not include any amounts associated with any fines by those agencies. We are involved in discussions with respect to potential fines and the amount of the accrual could increase by the time we file our 10 ks, resulting in a change to our reported 4th quarter fiscal year 2015 GAAP results. There can be no assurance that we will reach a settlement or that the cost of such settlement if reached would not materially exceed the existing accrual. With that, I'll turn it over to the operator to begin the Q and A.
Thank you. Thank you, sir. At this time, we will begin the question and answer session of today's conference. Our first question is from Mr. Steve Knipp of Wedbush Securities.
Sir,
The pace of subscription transitions next year looks realistic given the market you operate in, but maybe some folks might have expected a bit more aggressive upfront. Can you comment on that? Why not more next year? And then what are the factors that will will boost it up pretty significantly in the following years?
Yes. So we expect to average 25%, but we expect to exit the year at a higher percentage than that. Essentially, there are a couple of factors. As we look at Q1, clearly, what we did is October 1, we changed pricing, packaging, bundling and sales comps. So this was all introduced to the market and our sales reps just 4 weeks ago.
So the Q1 pipeline has a lot of deals that are perpetual based upon the fact that everything was different at that point in time. And there's probably not a great deal of time in the Q1 to get those deals changed into subscription. We're not assuming we're going to be able to do that, although clearly sales reps since they're going to be paid more are probably going to try if they can. At the same thing, as we look at our largest customers and 30% to 50% of our revenue comes from big customers doing big deals, They tend to have already completed their capital budgets and operating budgets at this point in time. So they may not be able to necessarily take a deal that they were expecting to be perpetual in FY 'sixteen and turn it to subscription.
So we've been somewhat cautious in our ability to get those 2 things flipped in the near term. Although clearly, we think we've got great opportunity in both FY 'seventeen and FY 'eighteen and our studies show that. So essentially, we're just being a bit cautious of how quickly we're going to be able to kind of change the model that both that our customers frankly operate in at this point in time.
That makes sense. And if I may ask one follow-up on the core business. Maybe can you give us a little more granularity on 2 things? One is, where are the cost cuts coming from? And secondly, what kind of issues do you see with the core business or any hypotheses you have on what can be changed by new senior management there?
Yes, maybe we'll each take a stab at that. Hi, Steve. It's Jim here.
Hey, Jim.
The general answer is we're moving investments from places of low return to places of higher return. The general answer is we're moving investments from places of low return to places of higher return. That's the general answer. I mean, at a high level, if you look at what are we doing, we're looking at R and D investments, we're looking at marketing programs, we're looking at do we have the right structures in our sales organization and so forth. So on the cost side, we're kind of going through the cost structures and saying, do all these investments make sense, because over here, there's some investments that are investment opportunities, let's say, that are really interesting.
If you go down to the second part of that question, which was what could we fix? I think one of the issues where we could fix is to be better balanced. We have a lot of people who wake up and decide what they want to do every day and do they want to participate in the new business or the old business or both. And these businesses are very different. And so it's just I think we need to focus more.
We need more segmentation. We need people who wake up and say, I'm a CAD person and other people that wake up and say, I'm an IoT person. And I think we got to be careful not to let too many people wake up and say, what do I want to do today, right. So I think it's really what we're trying to control for with this structural change is to have a group that lives and dies with the core business and a leader who lives and dies with the core business. And today, we don't really have that.
So that's that in a simple answer is the thing we're trying to aim for.
And the one thing that I would add is, when we did our operating plan this year, we did kind of a version of a zero based budget. What we actually did is we gave everyone a target that was about 80% of where they start of what they had this year. And we said go figure out how you do the most crucial important things to drive the business with that 80%. That freed up a huge pot of money that we then project by project, kind of function by function, invested in the highest return areas. So while there's some money moving from the solution part of the business to the IoT business, there's a lot of money moving around within the solution business As far as where the highest return R and D investments are, frankly, investments in more marketing in certain segments.
So there was a pretty strong exercise and this is my 1st year going through the planning process here and I was pretty impressed with how diligent everyone was frankly in really coming up with what are the right things that should be invested in and the things that where we should reduce cost. So the portfolio management process was executed probably about as good as I've seen in my career.
And I might add then a number of proposed investments did make the cut and that money became operating margin.
Yes, yes.
Got you.
Great. Well, congrats on the good finish to the year and we'll talk soon.
Great. Thanks, Dave. Thanks.
Thank you. Next question is from Mr. Sterling Auty from JPMorgan Chase. Sir, you may ask your question.
Thanks. So, last question started with why not more aggressive to begin the subscription transition. Let me flip to the other end of the spectrum. The 70% coming out, I understand you talked with McKinsey or you did focus groups. So curious what the customer feedback and what led to that 70% level given that we've seen other companies like Cadence and Aspen Technology that service pretty big companies like ExxonMobil, Samsung, Intel, etcetera get their mix to north of 90%?
Yes. So first what drove to the 70% why people are interested is number 1 is fundamentally the flexibility they get when they compare the two models at the right price point, as they look at kind of the length of the term of their business case. And so subscription, as long as you price it at a way like our pricing, we dropped the price from 60% of our perpetual license to 45%, which is right in the sweet spot and where you'd see most subscription offerings. And that means that you kind of breakeven at around 4 years or so, which is they get more flexibility at that and they like it. And the other thing we did is through business rules, we took out that flexibility that some might have been able to negotiate in their perpetual contracts.
We're not going to give it away for the flexibility comes with subscription, it doesn't come with perpetual. If you really want perpetual, it's a less flexible offering. Now, in the end, the market continues to move more subscription over time. At this point, the stake in the ground is 70%. We're going to drive as high as we can get.
But if someone absolutely wants perpetual and values it, then at least at this point in time, we intend to let them have it. Of course, they'll pay for what they value.
Got it. And then the comments that you made on the macro in terms of how you put together the fiscal 2016? I want to make sure that I understand. Given the uncertainty, U. S, I think you mentioned China, Japan, etcetera, It seemed like you factored in some of the macro squishiness.
I wanted to ask it this way. If the economy stays exactly the same as where we see right today, should that mean that you actually outperform the guidance that you've given, meaning that you've factored in a little bit of extra squishness? Or would it be in line?
So the one thing I'll tell you is that, it's never of course, you always want to be able to meet consensus and meet your guidance when you put it in there. So we clearly have an internal plan that is a bit higher than what we would guide and there's nothing unusual about that.
Yes. And to be frank, Sterling, we don't have a crystal ball. But what's happened, for example, if you look at the PMI indices regionally in the last quarter is several of them fell quite dramatically. So we're kind of locking in at least on that deal that they're at least worse than they were a quarter ago, maybe with the exception of Europe, which is actually a little bit better. But when we look at China, the news has gotten markedly more difficult there.
The U. S. Situation really, really dropped there. The U. S.
Situation really, really dropped precipitously in the PMI indices and so forth. So we're kind of locking in on today's view, not trying to prognosticate it will get better or worse, but realizing it just did get a lot worse and we have no reason to plan for it to get better. Right.
Got it. Thank you, guys.
Thank you. Our next question is from Saket Kalia from Barclays. Sir, your line is open.
Hi Saket.
Hey guys, how are you?
Thanks for taking my questions here. First for you, Andy, just a modeling question. Can you just review for us the mechanics of the metrics for us? Specifically, you're guiding to bookings and the mix, but can you just remind us how to sort of convert that to ACV? And then what sort of renewal rates you're expecting on the subscription?
I just want to make sure we're all sort of on the same page.
Okay. Well, we guided ACV for you. So we gave it to you. And the way to look at that is, we take the ACV as a subscription and we multiply it by 2 and that's what we say the booking is for subscription. And so for example, if you look at our guidance, I'll pick the high end of the FY 'sixteen full year guidance.
We've guided license and subscription bookings of 3.50. The subscription ACV is 45, which should mean that 3.50. Of the 3.50. Okay. So that's where you get the approximate 25%.
And the remainder is perpetual.
Okay.
And so if you look down at perpetual license revenue, you see $260,000,000 is $90,000,000 less than the $350,000,000
That makes sense. That makes sense. And then that $45,000,000 in ACV, is there a renewal rate that we should be assuming that? Because of course, we can model that out for 4 quarters, which is sort of the definition of ACV. But what sort of how does that play out?
How does that 45 sort of play out between now and 2021, if that makes sense?
Yes. So what I can share with you is, 1, we have very high maintenance renewal rates. McKinsey's studies show that subscription renewal rates are even higher than maintenance renewal rates. So you're talking about very, very low churn. In the low to mid single digit churn is the industry average.
Of course, we have limited experience with subscription, but our subscription renewal rates are actually higher than kind of that industry average right now, but there's limited experience with it.
Got it. Got it. And then for my follow-up for you, Jim, it sounds like you're doing a lot of the right things in terms of putting in place more favorable pricing and sort of the sales comp to drive that subscription mix. But I guess, what are you hearing from some of your existing customers that have sort of been born and bred on perpetual plus maintenance? Do you think that those that currently have maintenance actually shift to take advantage of that flexibility?
Or is there risk that maybe they consider other competitors in the market?
Well, first of all, Saket, our software is extremely sticky. And switching to other competitors would be a major expensive endeavor. And our software is pretty darn good. So it would be a big expensive investment to move sideways at best. So we've talked to many customers about this.
They're actually interested in restructuring maintenance contracts by and large. Maybe not every last one, but there is a significant percentage of our maintenance or support customer base, who is intrigued by the idea of taking a look at how would this work differently if I kind of traded it in and re bought it from you in a subscription model. So we have as part of our subscription Phase 2, a program to incent that to happen. So I think that between now, I don't know, Andy, if you had a specific number on that, but when we think out to 2018, we're actually assuming that not only did the new sales flip to subscription, but a substantial amount of the maintenance base became a subscription base as well.
Yes. We actually ran a pilot in the Q4 with a small number of customers. And of course, there wasn't much time to try to get the transaction done. We actually one, we did learn that they really like the flexibility of subscription. And so as a result of that, we actually converted at the very end of the quarter 3 customers.
They weren't huge customers, but we converted 3 of them to subscription at a higher annual contract value than they were under support, because they like just flexibility, the ability, they had some shelfware they didn't really want, they wanted a different configuration of some of their Creo seats, for example, and that was valuable. So we do have a program going and we have targeted deals this year, where we're going to try to get them to convert from support to subscription at a premium and we'll talk more about that at our Investor Day. In fact, we'll probably even give you an example of how it looks.
Yes. Just one point though to have in the back of your mind, which is this would normally happen coincident with the renewal. So we can't just go out to everybody and say, let's do it tomorrow. We'll do it as the renewals come up. And in some cases, there's multiyear contracts, we won't get a shot at them until maybe next year or whatever.
So keep that in mind,
Thank you. Our next question is from Mr. Matt Hedberg from RBC Capital Markets. Sir, your line is open.
Hi, Matt.
Hi, there. Thanks for taking my questions. Jim, you mentioned in your prepared remarks, but can you talk a little bit more in detail about importance of this new GE partnership? Is there a rev share in place? Are they retiring IoT pipeline?
And how should we think about it impacting 2016 revenue?
Yes. So basically, GE is licensing the technology from us, building it into a GE branded solution. We are then within our base, welcoming them into our customer base and giving our guys some incentives to do that. And of course, GE has a customer base distinct and separate from our customer base. So, they're going into their customer base by themselves.
But each time they take down a transaction for their brilliant manufacturing solution, they're going to turn around and cut us a royalty check. So it's an interesting agreement. There are sort of minimums to it. They're very committed to it. They're very excited about it.
We're very excited about it. We think that we have a legitimate play together with a strong partner in one of the biggest IoT playgrounds of all. So, we're pretty darn excited about it.
That's great to hear. Andy, circling back on some of the earlier questions on how you're influencing these changes, change in behavior of purchasing. Are you applying an increase in maintenance pricing this year to help influence that transition?
We did. We raised our maintenance pricing 4%.
And was that globally or was that?
Globally. Okay. And then The detail just to give everyone a little bit of detail, so we did 4 primary things. One is we differentiated the subscription offering through pricing, so by lowering the price to 45%. We did product differentiation, so we have repackaged and we have more repackaged solutions coming out in January.
It's actually simpler and we did a lot of analysis to figure out what would kind of make something more attractive, only available on the subscription side, not on the perpetual. There are services differentiation, including e learning into certain packages and there's new offerings that are coming out, many in PLM, for example, that are only available on subscription. We removed the subscription flexibility that people used to negotiate into their perpetual contracts, so there is no remix in perpetual, but you get remix in subscription. In fact, you can get extra remix multiple times a year in our subscription offering if you want. There is no more extended payment terms in perpetual.
By definition, you pay over time and there is no extraordinary support discounts in perpetual. And of course, there is support discounts don't apply to subscription, but there is no extraordinary support discounts moving forward. Our comp sales comp, the rep makes more money sell subscription than perpetual. And I heard an anecdote, it's only an anecdote, so I don't want to go too far, of a sales exec in one of the geos who is commenting that they're seeing some of their pipeline flip from perpetual to subscription and someone else said, well, it's interesting customers are finding it so attractive so quickly. And he said, well, to be honest, this is what we're selling to them.
So we're not giving them perpetual option. So I think the fact that so much of our revenue goes through our direct sales force does give us more control over the transition than some other players who sell primarily through channel. And then we've got this program to migrate the support customers to subscription. So that's kind of the four basics of what we're doing.
Let me add one thing that actually you covered, but just to be clear. We also took the IoT perpetual business off the table, right. The one caveat is a partner like GE could do a perpetual deal because that's how they do it, but PTC sales guys won't be doing a perpetual IoT business. It's not allowed.
That's great color guys. Thank you very much. Looking forward to the 10th as well.
Great. Thank you.
Thank you. Our next question is from Mr. Ed Maguire from CLSA. Sir, your line is open.
Hi, good afternoon. I was interested to get a little bit better color on the logo ads in IoT. How much of those are new customers to PTC? And as you realign the sales force, are you going is there going to be any cross selling that's encouraged? Or are you going to really just focus on platforms and technologies?
There will be a tremendous amount of cross selling, Ed, of the IoT into the strategic platform. So in the quarter, I don't have the exact data, but roughly half and half, roughly half of the IoT business was new IoT business and companies that we've done other business with and half of it was new IoT business from companies we've never done business with. So kind of a nice healthy mix. Within the last year, if I think of the 290 logos all in, we actually did really well in the strategic base. So there's definitely a huge cross sell opportunity here.
So if you were in the platform part of PTC, you'd say that those solution guys at PTC are a terrific partner. I'd like to go get some more partners like that, right? And if we can do that, then this business will really go somewhere. But in the meantime, and we'll make this crystal clear at Investor Day, our customers think the fit with IoT and analytics and augmented reality and SLM and CAD and PLM and ALM is magnificent. And we'll show you exactly why with that little interactive demonstration, we'll let you guys play with it yourself and it'll be crystal clear, I promise, on November 10, why a CAD and PLM customer would be very excited about IoT, analytics and augmented reality.
Great. And just a comment on the macro. I mean, clearly, you're seeing the weakness in the U. S. Market.
But as you roll out these model changes at the same time as there is different cyclicality and different macro conditions, do you anticipate any material differences in uptake of the subscription model across different regions based on the macro?
I wish we had a crystal ball and could tell on that. Subscription should because you take your you basically pay over time, it's less upfront investment that by definition that should be the type of thing that's easier for a company to do even when things are more challenging. There's less as their business cycles go, they're feeling like they're making less of a commitment than when you do a huge large enterprise big deal. But we'll have to see how frankly the transition plays out.
Great. Thank you very much.
Thank you.
Hey, Jay.
Our next question is from Jay Vleeschhouwer from Griffin Securities. Sir, your line is open.
Hi, Jay.
Hi, Jim. How are you? Hi, Andy. I'd like to ask first a product question. You made a, I think, pretty critical comment earlier that you expect your narrow solutions business to grow at the market rates.
And that kind of brings us back to, obviously, your product roadmap and what you're delivering in the core products. And you didn't really talk about that very much tonight, but could you comment on or reconfirm the very detailed and comprehensive product roadmaps that you articulated in Nashville? We wrote it up back in the summer and you've got a lot on your plate in of delivering new versions of windchill, X86 in December and Creo 4 and so on and so forth. So just to be clear, with everything that you're now talking about tonight, are you reconfirming the product release roadmaps that you've talked about and the timing and so forth that you've committed to?
Yes. So Jay, as you know, I used to be the Chief Technology Officer, but that was 5 years ago. So I'm a little less in the details of the roadmap. So I can tell you that by and large, I'm not aware of any substantial changes to what was talked about at the event in Nashville. The Windchill 11 release continues as planned with the role based apps, the connected PLM, the PLM, ALM integration, the BOM management, those types of things.
And our Creo 4 design or release is scheduled for 2016 model based design, digital twin, that's pretty much as I recall what we talked about at the event in Nashville. So I think I don't want to reconfirm at a detailed level, because I'm not at a detailed level at this point, but I can reconfirm at a general level that we're proceeding with the plans as we had outlined them.
Okay. 2nd, I'd like to ask about the conversion of the base, which was talked about a little bit earlier. But when we look at, for example, the Creo base, you have a very large number of customers with a pretty low seat count. And I think your average is similar to some of your competitors, roughly not quite 10 or less than 10 seats on average per customer in CAD anyway, probably more in PLM. The question there is if you could address how you're going to involve the channel in converting the base.
I can't imagine it's terribly cost effective for you to use your direct sales force to convert the customers with 1 or 2 or 3 seats.
Yes. So the same programs that we're offering on the direct side, we will then channelize them to make them simple, so that the channel could handle them and basically offer the same type of program. Because so much of our business does go direct, secondly on kind of the ability to move those who are on support. We also did make changes by the way to our support to basically mirror what you see in the industry that will also prompt people go to subscription. So things like if you fall off support, what it takes to get back on, you have to basically buy back all your prior support plus one full year going forward to get on support.
So same as SOLIDWORKS or Autodesk, we're limited how long people can come back on support before they have to buy a new seat with the idea that then we can give them an incentive to move to subscription. So all of the programs you'd see in our competitors, we basically
pretty interesting sounding partnerships, one with Salesforce, the other with ServiceMax, if you could comment on those progress in terms of business development, resources you're throwing at those and so forth?
Thanks. Yes. The ServiceMax partnership is much farther along and probably a tighter fit, because they are really in the SLM business. They don't call it SLM, but they are in the business that we call SLM. They would call it field service automation.
So there is a great fit there. We have now shipped the integrated product that combines what PTC would call SLM, what PTC would call IoT with what ServiceMax would call field service management. There are some customers who have already purchased it. There is a nice pipeline of customers who excited about it. In fact, I was in a customer meeting here at PTC with one of the executives of ServiceMax today.
So we're working closely together. That's going well. And on both sides, we're pretty excited because again, as I've said, service operational efficiency is really the killer app for IoT. And we know that and ServiceMax knows that. It turns out that this augmented reality stuff is also pretty darn important in service.
So that's exciting to both parties. With respect to Salesforce, that's a newer partnership. It's a more general partnership. Salesforce is doing less substantive things in IoT right now today. They're talking about what they want to do and they want to collaborate with people like PTC.
Not so exclusively with PTC maybe as ServiceMax. I mean, I don't think ServiceMax is contractually exclusive with us, but by God, they're working pretty close with us. So I think that the relationship with Salesforce over time could be bigger, because Salesforce is so much bigger. But I think a lot of times in working with ServiceMax, we'll end up at the customers who use Salesforce, who would be interested in IoT anyway. So, as you as probably everybody on the call knows, ServiceMax is built on Salesforce and it's the best selling service solution.
It's just a couple of different ways into that ecosystem and we're farther ahead because we're 6 months into the ServiceMax relationship and maybe 1 month into the Salesforce relationship. But yes, they're exciting. Hey, Jay, I also want to back up. One thing we didn't talk about, but I think it's worth sharing with you is that actually our channel had a pretty good year in CADFP alarm. I'm not sure that was in our prepared remarks.
But it's one of the reasons quite frankly why I know we need to work on execution, because our product in the mid market where the channel is selling did just fine. We performed as well as or perhaps better
than that. In that market.
In that space. It was really in the direct space where the big deal count and size went down and the IoT number went up and so forth that we really had the bigger issue with Cad and Peel Dom. So that's kind of the issue that we're moving to correct with structure and talent, as I said.
Thanks, Jim.
Thank you. Our last question is from Ms. Monica Garg from Pacific Crest. And you may ask your question.
Hey, Monica.
Hi. This is actually Jason. Thanks for squeezing us in. I was just wondering, since you talked about the channel, I mean, do you guys are you guys going to change the structure on how incentives work for that too? I know it's only 22%, but just wondering that?
Are you asking relative to subscription? So the channel partners will be will earn margin off the renewals, which is the big question. If they didn't earn margin off the renewal, they wouldn't sell subscription.
Is that
where you were going?
Yes. And then as far as the MC mix from the channel, are you expecting the channel to say relatively the same? Or are you guys going to be increasing or decreasing it?
The subscription mix or the general The
percent of revenue.
Oh, the percent of revenue. What I will share is we the year with about with almost 20% more capacity in the channel than we started. And as we highlighted, the channel actually grew faster than the market for the year. Great way to go after the mid market. We think we've got a great product for the mid market.
So we think there's an opportunity there.
Yes. Now I would counter that, Andy, with it depends a little bit on how we define the channel, is GE channel?
Well, I was talking specifically I was talking CAD, but you're right. If you look at TPG.
Right. So we look at the technology product group, that will be a new channel. Yes. And quite frankly, we expect big things from there. So I think maybe that's a question we should try to give you a follow-up answer on
Investor Day.
Yes. Investor Day, because depending upon if we're going with yesterday's definition of the channel or tomorrow's definition of the channel, we would have a slightly different answer probably. Yes.
Okay. That works. Thank you.
Okay, great. Well, it sounded like that was the last question. So I want to thank you all for going through this quite, quite fulsome disclosure here on the business and all the changing metrics and so forth. But we're at a point here where the management team is pretty excited. We really do think we have a strategy that's going to drive growth.
There's some things we need to do, but we can see it. I know from working with Andy that he is going to drive this subscription thing right through the company. I've been watching them do that day by day and it's like a train coming through town. Nobody's going to stop it. And then on this operating margin thing, I think we have a terrific track record there and we just took the next step when we announced this restructuring today, which is a difficult thing to do inside the company, but generally viewed pretty positively by our shareholders who see that, hey, these guys didn't give up on that.
They're not distracted by IoT or subscription. They're going to forge ahead as well with that. So, I really do think this company is going to create a lot of value and I thank you all for taking the time to hear our story and for sticking with us and we'll look forward to seeing many of you on November 10th at our Investor Day as well. All right. So with that, thanks a lot and have a good evening.
Bye bye.
Thank you. That concludes