Afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2015 Second Quarter Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. Today's conference is being recorded.
If you have any
Good afternoon. Thank you, Bob, and welcome to PTC's 2015 Q3 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 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. Forward looking statements, including guidance provided during this call, are valid only as today's date, July 29, 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 financial measures are not prepared in accordance with general 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 Heppelmann.
Thanks, Tim. Good afternoon, everyone, and thank you for joining us for a review of our Q3 2015 results. Our Q3 revenue of $304,000,000 was in line with our July 9 announcement of preliminary results and slightly below our guidance range. EPS of $0.53 exceeded the pre announced range and was above the high end of our guidance range. We believe that the challenging macroeconomic conditions, particularly in the Americas and China, impacted our ability to close large deals in our core business, which as you know is sensitive to changes in the manufacturing economy.
While we remain confident about the long term growth prospects of our core business based on a broad solutions portfolio and new customer wins and engagements, the current macro climate is proving to be more difficult to navigate than we anticipated. On a positive note, however, we delivered very strong growth in our Internet of Things closing a number of significant deals amongst large industrial companies that are adopting our platform for their IoT initiatives. In fact, 3 of our 8 large deals in the quarter were IoT deals. IoT license revenue represented more than 20% of our total license revenue and we added a record number of new IoT customers. Despite macroeconomic headwinds, results so far this year have been better than the headlines would suggest.
In constant currency, our software revenue has grown 6% for the 1st 9 months of FY 2015. And even with professional services down 9% year to date due to our strategy to shift more of our lower margin professional services engagements to our partner ecosystem, our total revenue is up 2% in constant currency year to date. Also, despite a modest shortfall in our license and subscription solutions revenue relative to guidance, we were able to achieve a Q3 operating margin of 24%. On a constant currency basis, Q3 operating margin would have been 26%. We continue to make progress with subscriptions, which comprise 16% of our license and subscription solutions bookings in the quarter.
This was slightly below guidance due to several sizable IoT deals coming in as perpetual and a few larger subscription deals in our core business slipping from the quarter. The subscription Phase 2 team continues to make good progress and I'll let Andy provide additional color on our efforts later in the call. In terms of geographic performance, we believe macroeconomic challenges in the Americas are impacting our ability to close large CAD and extended PLM deals, which given the maturity of these markets tend to be more cyclical. Yet strong performance in IoT and solid SLM performance enabled us to deliver double digit software revenue growth in the Americas. In Europe, when adjusting for currency, we saw modest software revenue growth driven by extended PLM, IoT and SLM with a decline in CAD and all of that against a tough compare from the year ago period.
Asia Pac software revenue declined modestly when adjusting for currency due to weak results in CAD, extended PLM and SLM that were primarily impacted from the overall slowdown in China. Japan results were down from Q3 of last year, also owing to a very tough comparison in the prior period. Turning to segment performance. When adjusting for currency, our core businesses' 3rd quarter results were mixed. CAD and extended PLM declined year over year primarily due to large deals slipping out of the quarter and a very tough compare given the 40% bookings growth these segments delivered in Q3 of last year.
Despite the environment, SLM fared better with modest software revenue and bookings growth over last year. The clear standout in the quarter was the IoT segment, which performed well ahead of our expectations, highlighted by 3 7 figure deals with major industrial customers, including a large follow on transaction with Diebold, who uses IoT to improve the service and uptime of their ATM machines. In addition to very strong revenue performance, we made further progress towards achieving our target for new IoT logos this fiscal year. During Q3, we added 78 new IoT customers, bringing the total to 182 for the year and putting us on pace to significantly exceed the target of 200 that we communicated to you at the beginning of the year. Once again this quarter, the new logos we're attracting come from a variety of verticals that are applying our IoT platform to many different use cases within their business.
As a reminder, at this stage of our IoT growth, our primary goal is to win new logos and then to expand within these customers. Our experience is that the initial IoT platform win is analogous to a design win in the semiconductor world. The first booking may not be large, but after demonstrating success with the initial IoT project, we can then expand within the account as we scale to greater volume within and across product lines. For example, if you look at our Q1 2015 IoT wins, we are forecasting or have already closed follow on expansion deals at about half of them. Today, our largest IoT customers represent subscriptions in the range of 500,000 to more than $1,000,000 per year.
So with the influx of new logos, as well as the 3 large 7 figure orders this quarter, you can see how this business could become quite significant very quickly as we move past the proof of concept into wider usage. However, at this stage of the business, you should take into account that large deals like the 3 we closed in Q3 will add variability to our quarterly bookings results. And therefore, while we expect Q4 bookings to be up substantially over Q4 of last year, they're likely to be down sequentially from Q3. The customer momentum we're experiencing in our IoT segment is a testament to our industry leading IoT technology portfolio, which has been further enhanced with the addition of Coldlight, our automated predictive analytics platform. The ability to predict outcomes has incredible value for our customers, especially in the context of ensuring product performance and preventing product failure and downtime.
This new technology along with ThingWorx Converge, our new IoT integration hub that has enhanced out of the box application and integration capabilities puts us in an even stronger competitive position in the market. Lastly, we continue to expand our ecosystem of now more than 160 IoT partners. Just this week, for example, we added Analog Devices, a leading supplier of IoT sensors and signal chains, who wishes to use ThingWorx to provide cloud based connectivity to their sensors. It's clear that the IoT business is in a strong position and is starting to become material to PTC. I'd like to make a few comments on our broader product roadmap and outlook for Q4.
On the product front, we remain on track to deliver Windchill 11 later this calendar year and Creo 4 in mid-twenty 16. In addition to continued investment in the core, we're very excited about the opportunity to further differentiate our CAD, PLM, ALM and SLM solutions by enhancing them with connected technologies. For those of you who were able to join us at either LiveWorx or PTC Live Global, we demonstrated our concept of the digital twin, a very interesting idea that leverages our industry leading IoT platform 20 Turning to our outlook for Q4 of fiscal 2015. While we have a lot of momentum in our IoT business and feel good about the progress we're making on subscription Phase 2, we expect that we'll continue to encounter headwinds in our reported results due to a combination of currency exchange rates, plus a manufacturing economy that appears to be more challenging than last year and more challenging than what we'd anticipated earlier this year. We've adjusted our FY 2015 revenue guidance to factor in a more cautious macroeconomic outlook, particularly in the Americas and China, as well as lower professional services revenue, driven primarily by an acceleration in transitioning some of our customers' engagements to our partner ecosystem.
And while we're reducing our EPS outlook for the year by about 2% at the midpoint, we continue to target 15% growth in non GAAP earnings this year on a constant currency basis. And if you mix adjust and FX adjust to get true apples to apples, it would be well more than 20% EPS growth. We remain on track to deliver solid earnings this year with an opportunity to drive increasing growth and value to customers through a combination of our core product focus with many innovative enhancements coming over the next 12 to 18 months, our leadership position in IoT and the acceleration of our transition to subscription. We remain on track to achieve our 2018 target business model and we'll continue to proactively manage our cost structure. When combined with our commitment to return 40% of free cash flow, we believe we're well positioned to drive substantial value for our shareholders.
With that, I'll turn the call over to Andy Miller.
Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non GAAP results unless otherwise specified. Total third quarter revenue of 304,000,000 dollars was down $33,000,000 year over year as reported, dollars 31,000,000 of the decrease was driven by FX and $7,000,000 of the decrease was lower professional services revenue, consistent with our strategy to migrate more service engagements to our partners. On a reported basis, software revenue, which consists of license, subscription and support, was down 7% year over year. However, after adjusting for currency, we delivered 2% year over year growth.
Support revenue was up 6% on a currency adjusted basis. This was partially offset by license revenue that was just below the low end of our guidance and down 6% year over year constant currency. It should be noted that we faced a tough Q3 'fourteen license comparison, a quarter in which our CAD and extended PLM license revenue grew more than 20% year over year and in which we had 21 large deals. In our core business, most notably in the Americas and China, we saw deal sizes compress and deals delayed at the end of the quarter. While we entered the quarter with caution about the macroeconomic environment, Q3 results suggest potentially greater challenges than we had anticipated and we entered Q4 with greater caution about the manufacturing economy.
Approximately 60% of our Q3 'fifteen revenue came from recurring business, up from 53% in the year ago period, reflecting growth in our ratable revenue streams, including subscription, cloud and support revenues. Clearly, the growth in our recurring revenue represents a very positive trend in our business and will drive cash flow in subsequent quarters. Turning to our subscription licensing model. Our subscription offering has now been available for 3 quarters. As we discussed last quarter, we currently have underway a company wide initiative, which we call subscription phase 2.
We believe that we can provide our customers more differentiated solutions through subscription offerings that in turn will enable us to increase customer license model for PTC by market and by customer segment and then to drive a rapid transition to that end state. In this initiative, we're making good progress. We have Mackenzie in house supporting almost 30 work streams. We are now completing market and pricing studies by customer and product segment and we've begun to define differentiated subscription and perpetual offerings within each of our segments, differentiating on price, license features, support features and product bundling. We continue to target completion of our subscription Phase 2 program so that we can launch new offerings by the start of the next fiscal year.
Thus far, our market survey work shows a general preference for subscription offerings across all of our customer segments and markets, as it provides customers greater value through flexibility, ramping capability, pain over time and usage of operating versus CapEx budgets. You can expect us to share more with you as we wrap up the initiative towards the end of this fiscal year. Moving to the income statement, gross margin increased by 130 basis points on both the sequential and year over year basis. After adjusting for currency, gross margin increased 140 basis points year over year. The key driver was improvement in professional services gross margin, which was 16.5 percent in Q3 2015, above our 15% target for the year despite the impact of FX.
Operating expenses in the 3rd quarter were down $4,000,000 or 2.5% from last quarter, primarily driven by our restructuring and by lower incentive compensation accruals, offset by higher marketing costs with both LiveWorx and PTC Live last quarter. The strong gross margin performance coupled with tight operating expense controls resulted in an operating margin of 24% in Q3 within our guidance range despite revenue coming in slightly below the range. Overall, net income for the Q2 was $61,700,000 or $0.53 per share, above the high end of our guidance. Our EPS growth rate was flat year over year, but up more than 20% when adjusting for currency. Note that a slightly lower tax rate and share count in our Q3 relative to guidance added approximately $0.02 to EPS.
Also note that our GAAP results include a $14,000,000 accrual associated with the pending China matter. Discussions regarding resolving that matter are still open and we refer you to our press release and SEC filings for further details. Moving to the balance sheet, cash and investments were $275,000,000 up $7,000,000 from last quarter, including 87,000,000 dollars of cash flow from operations and a drawdown of $94,000,000 on our credit facility to fund the acquisition of Coldlight. We spent approximately $50,000,000 repurchasing 1,200,000 shares in Q3. For Q4 2015, we expect to repurchase additional shares such that total repurchases for the fiscal year will amount to approximately 40% of free cash flow, consistent with our capital return policy.
Moving to guidance. Based on a more cautious outlook manufacturing economy and the expectation of a slightly lower mix of subscriptions in the back half, we are adjusting our top line guidance. Our full year top line guidance factors in current exchange rates and 15% subscription license bookings mix, down from a 17% assumption last quarter. Additionally, we are reducing our professional services guidance by $3,000,000 dollars as we continue the transition of certain customer engagements to our partner ecosystem. With this in mind, we are now 1,250,000,000 to 1,265,000,000 dollars or flat to down 1% year over year on a constant currency basis.
Note that a greater mix of subscription in fiscal 2015 negatively impacts our growth by about 100 basis points. This compares to our previous revenue guidance of $1,280,000,000 to $1,295,000,000 Our guidance includes software revenue of 1 point $21,000,000,000 to 1.036 1000000000, constant currency growth of 2% to 4%, A higher mix of subscription bookings in fiscal 2015 negatively impacts constant currency growth by just over 100 basis points. Within our software guidance range, we expect license revenue in the range of $340,000,000 to $355,000,000 and we expect support revenue of approximately $681,000,000 For professional services, we now expect revenue for the year of approximately $229,000,000 As a final note, I want to quantify the expected full year impact of currency. Given our current assumptions, we expect FX will negatively impact our revenue by approximately 100,000,000 dollars as compared to last year. And we expect that a greater mix of subscription will negatively impact our total revenue by $14,000,000 as compared to last year.
A total year over year impact of approximately 112,000,000 dollars Moving to margins. We are targeting a full year operating margin of approximately 24%, due to the restructuring actions initiated in Q2 and significantly lower incentive compensation accruals. And we continue to target 15% professional services gross margin in FY 2015. Notably, after the restructuring action is completed in Q4, we expect to exit 2015 with operating margins that position us well toward our 2018 targets. Turning to the bottom line, on a constant currency basis, we continue to expect to deliver at least 15 percent EPS growth in fiscal 2015, in line with our prior guidance.
We are now forecasting full year EPS in the range of $2.15 to $2.23 compared to our previous guidance of $2.18 to $2.30 We are forecasting a full year tax rate of 10% to 11%, benefiting from certain discrete items in the Q4. For the Q4, we are forecasting total revenue in the range of 304 $1,000,000 to $319,000,000 software revenue in the range of $254,000,000 to 269,000,000 a subscription bookings mix of 14% based upon our current view of the deals in the pipeline. License revenue expected to be between $90,000,000 $105,000,000 and support revenue is expected to be approximately $164,000,000 dollars Professional services revenue is expected to be down sequentially to approximately 50,000,000 26%, yielding EPS of $0.59 to $0.66 With that, I'll turn it over to the operator to begin the Q and A process. Thank
Our first question is from Mr. Matt Hedberg from RBC Capital Markets. Sir, your line is open.
Hey, thanks guys. Thanks for taking my questions. I just want to start off, you guys made some comments that there's a strong preference towards subscription pricing.
And I'm curious when you look
at your core CAD and PLM, is there a way to think about the percentage of subscription bookings coming from the core at this point?
So I'll take that question. So we recently conducted studies with actually well over 300 of our customers. McKinsey did this for us and identified across all of our segments of the business that there was a preference for subscription and it was pretty much the same preference in every single division, the core divisions as well as the rest. One of the primary drivers is as they evaluate the business case over perpetual. 1 is the relationship between the two prices and the other is the term of their business case.
And they tend to use business cases in the 4 to 4.5 year range. So for us with customers that are very, very sticky, you can see how we can substantially increase the customer lifetime value, offering something that's economically quite attractive to them over their business case.
And then maybe a follow-up to that. There were several IoT deals that went perpetual this quarter. I'm curious, what drove that behavior this quarter? And would you expect that option to go away here potentially past the end of this fiscal year?
It was primarily customers that have historically always purchased perpetual with us and essentially that was their preference. And so we offer up through the end of this quarter, we offer perpetual and subscription in our price book for IoT. We are moving more aggressively to subscription only in IoT as we move forward.
Yes. Jim here. Let me just add a little more color on that, because I think this is a point of some confusion. I think we were clear that we told our sales guys you can sell it either way this 1st year and we're going to kind of measure customer reaction. If you look at the vast majority of transactions have been subscription, but then a couple of big ones came in perpetual.
So we didn't really foresee that coming, but these were customers that we have relationship with. They love the technology. They wanted to buy it perpetual. And quite frankly, we had a situation in place where the sales guys were allowed to sell it that way, so they did. I think that as part of helpful, Jim.
And then maybe one last one.
That's helpful, Jim. And then maybe one last one for Andy. As the transition accelerates here, you just talked about your long term margin targets intact. But I'd assume if this transition accelerates operating margins might come down in the short term. I guess first of all is that correct?
And second, how should we think about cash flow through this transition? I assume that would fare better, but maybe just a little bit of color on that would be helpful.
So we've laid out 2018 operating margin targets of 20% to 30% with a subscription mix assumption in that year of 30%. So clearly, as we're going through the transition, if it's more than 30% that would impact revenue and operating margins. However, you can count on us that we're going to be 1, giving you guideposts, you can see kind of what the revenue would have been. And 2, we're going to be managing the cost structure of the business as if it were still a perpetual business. So we're not going to that the expenses are going to basically track to the same margin target.
So as we exit the transition, you'll see us right back on track. The other point I'd make is that cash flows tend to catch up, come out of the trough of the transition earlier than the revenue does, simply because depending upon the average length of your subscription contract, they at least make annual payments in advance. So generally you come out of it faster. Thank you, Mike. We'll give you a whole lot more on this as we basically lay out what next year is going to look like and what the subscription transition is going to look like.
Helpful. Thanks guys. Our next question is from Sterling Auty from JPMorgan. Your line is open.
Yes. Thanks. Two questions guys. So first on the macro part, that's the one that I'm getting the most pushback from investors looking at the results from some of the industrial companies. But more importantly looking at what of their results, how do we characterize what you're seeing relative to the strength that they kind of put up in their results?
Is there any type of maybe market share shift
or anything else that we need to worry about?
Sterling, Jim here. How are you doing? I don't think there is any competitive dimension in this discussion here.
I think that we're in
a series of businesses and Dassault is in a series of businesses. Our CAD and PLM businesses most directly correlate to Dassault's CATIA and Innovia businesses. And I think over the last 3 years, the growth rates of those have been remarkably similar. Now Dassault is in some higher growth businesses like SOLIDWORKS and we're in some higher growth businesses like IoT. But I think you can't really compare this was structured differently than we are.
And I think that that's helped them in this quarter, because the SOLIDWORKS business performed well. And like you saw, so did our IoT business. But we have a big exposure of course on the CAD and PLM.
So maybe just a follow-up to that one just real quick. So as you look at the Americas Industrial, is there anything that you can do, any levers that you can pull to help improve? Or do we just kind of have to for that part of the business kind of ride it out?
Yes. I mean, I think, you know, we're somewhat in these more mature businesses correlated, for example, to the PMI index. And that fell a fair amount in the U. S. Within the quarter.
And in China, it's kind of been in negative, that is to say, less than 50 territory for a couple of quarters in a row now. So just let me hit China first. It wasn't that long ago when the China manufacturing economy was growing double digits and now it's contracting. And on top of that, there's some political things going on that make it difficult for U. S.
Technology companies. So China is a difficult environment for virtually every American technology company right now, selling into the manufacturing industry. I think in the U. S, we do a lot of business with global industrial companies and the strengthening of the dollar has made it very difficult for them to export. And their own results look comparatively bad, much worse than at the beginning of the year.
So I think that they're retrenching a little bit and that's causing some pain for us. So I think that that's really behind what's going on. It's just the big deals. If you look at the big deal volume year over year, the big deals are substantially less. And so I think companies have just been reticent.
Now, I think we're still doing smaller deals. And I think that as the cycle moves through and so forth, I think we'll see that pick up again.
And I have two things I want to add. One is, we had the macro challenges and we also had a really tough compare. And while I don't want to overplay it, it is important to note that Q3 a year ago, our core business bookings in cabin PLM grew over 40% and our revenue grew over 20%. So that was an extremely tough compare that even with our guidance, we were not going to be putting that strong number. So you can look at 1 quarter of us versus 1 quarter of Dassault without kind of looking under the covers at how those compares existed.
The second thing is that one thing I think you can count on from PTC is that if we assess that there is a trend in the whether it's a macro trend or a market trend that we have to adjust to deliver a consistent earnings growth, you can pretty much count on the fact that we will definitely look at our cost structure as something that we may consider adjusting if we need if need be to continue to drive earnings growth.
Got you. And then the other question that we're getting a lot of is on the subscription transition, as you're looking at the different pricing dynamics, do you think there's going to be the opportunity to take legacy customers that are paying maintenance and getting them on to a subscription format? As well as are you going to consider at least in some areas because it sounds like IoT you are, are you going to consider the elimination of perpetual altogether?
So we actually have a work stream focus on our existing customers and how we transition them both their new bookings to that often are under volume agreement, how we transition them to subscription. And we're also assessing how we might transfer their maintenance spaces potentially to subscription. So that is something that we're focused on and we're actually looking kind of deal by deal at the new ones coming up on what could the offer be that would be something that would be good for them and good for us. So that is part of it. But at this time, I do want to highlight that the focus is the license bookings moving to subscription.
But we are assessing how we could leverage support as well
on that. And Jim here again. I just want to go back to just to kind of remind you what we told you last November and so forth at our Investor Day. We said for the 1st year, we want to just measure and get to know this a little bit. And then I think the whole purpose of subscription phase 2, as Andy said, is to figure out what does it look like at steady state and how fast can we get there.
So there's a lot of very good analytics happening. And we're just not quite done, so we're not ready to tell you the answer here on the call. But I think that as we go into next year, we're going to outline a pretty good program here like to get to the destination as fast as possible, we don't linger in this transition period unnecessarily long.
Great. Thank you.
The next question is from Steve Koenig from Wedbush Securities. Your line is open.
Hi, gentlemen. Thanks for taking my question. Maybe I've got a follow-up or housekeeping item too. I'm wondering with the macro environment that you're seeing in manufacturing, are you seeing conditions continue to deteriorate from I mean Q2 and I mean Q3 was worse than you thought it would. But I guess where I'm headed with this is, would you expect the business to the core business in constant currency to stabilize by the time this annualizes for example in Q2 next year?
Or are you seeing the macro just continue to deteriorate so that we can't know if that annualizing of the comps is going to stabilize things?
Yes. I'll take it past Andy you can add. I mean, I think again if you look at the big deal count, the number of large deals we did a year ago, the number of large deals we did this year, It only takes a couple of handfuls of transactions to slide and you get a material difference with these big transactions. So I think that what's happened is the bigger transactions are getting a lot more scrutiny and people aren't saying no, they're just saying not quite yet and then it flies into the next quarter. So I think as we look at Q4, we expect to get and in fact already have closed a number of the Q3 transactions that slid.
But then we're left with a concern might Q4's transaction slide into Q1 if we continue to have the same sort of backdrop. But yes, I don't think this is necessarily just getting worse and worse and worse. I think that there was a huge change in currency, if I recall, in our Q2 that is still kind of a shock factor as we go into Q3. I don't think it's worse. I just think that when our big deals start sliding, then it's hard to post the type of numbers that we want to post.
Yes.
Okay. That makes perfect sense, Jim. Then I wanted to add
The one thing I'd add to that is, what we're seeing is the pipeline looks very strong, but the on time close rate actually has gone down. So that's actually what we're seeing.
Yes.
It's taking a bit longer to close them this quarter than it did last quarter for example. The close rate ticked down just a little bit.
Got it. Okay. Thanks, Andy. That's helpful too. I wanted to ask in terms of a follow-up on just 2 quick ones.
One is you have done some subscription deals in the core business. Are those generally a multi year some kind of multi year deal that then renew? Or is it some kind of different structure? And would you expect a radically different structure in Phase 2? And then one last housekeeping question.
We would expect subscription deals in the
quarter to be 1,000,000,000 we would expect subscription deals in the quarter to be 1, 2 or 3 year deals generally. That's typically what you see. Our average length, because we have a lot of IoT deals now that are shorter, is somewhere between 12 at this point and holding pretty consistently.
And Andy, have those been every quarter or is there a lot of how those get recognized?
It's ratable.
It's ratable. Yes. And it sounds like the Phase 2 could be pretty similar?
As far as the length of the subscription offering? Yes, very likely we'll offer 1, 2 and 3 year. That's pretty standard to
offer
those and the longer it is, you get a little bit better price essentially.
Got it. Okay. And last question is kind of a housekeeping one. Can you give us any sort of color on as we try to look at organic on Atego and Xcedo, which were not present in the prior period, any sense of the contribution there?
Yes. So organically, year to date, we're low single digit down in software revenue. Now the way the company calculates that is we actually we tend to grow those acquisitions, but the way that the company has always historically calculated that is we assume that growth is inorganic. And so if you
actually look until 4 quarters have actually passed.
So to put it in perspective, for example, we're expecting this year to grow the IoT bookings by more than 150 percent on an apples to apples basis compared to having exceeded in last year. So but that's the way we report organic, inorganic, we would be telling you that acceleration in growth and that more than doubling of the customer base is all acquisition related when truly it's organic. So we'll revisit how we actually should share that with you probably as we enter next year. And
just to clarify the organic software year to date low single digit down that is that constant currency?
Yes. Yes.
Got it. Okay. Great. Thanks a lot gentlemen.
Thank you. Bob, I think
we've got time for maybe one more question please.
Okay. The next question is from Saket Kalia. Your line is open.
Hey, guys. Thanks for fitting me in here. Appreciate it. First for Jim. Jim, can you just maybe dig into not to beat a dead horse, but can you just dig a little bit deeper into the macro headwinds that that you felt like you faced in the core business?
Is this the sort of behavior where customers are just pausing? Or is this something where you can maybe see headcount cuts down the road in engineering headcount?
I don't have a crystal ball socket. I think that the U. S. PMI, a quarter ago was 55.7%, which is a decent number and within a single quarter it fell to 53 6. That's not a disaster, but it's a bad trend.
And I think that causes people to just take stock for a minute and say, hey, let's call a time out and figure out what we're doing here. I also think a similar result, Andy shared with me a statistic from about a week ago that said of the S and P 500 companies that had reported roughly 2 thirds had beat on earnings only 1 third had beat on revenue. And the average revenue, if I remember correctly, was down 5%. 4.1%. 4.1%.
So when companies that's our typical customer. And when our typical customer looks at their revenue as reported, thanks to currency being down 4.1% and somebody's got a big transaction they want to pull the trigger on, they might just say, hey, let's just call a time out and kind of reconnoiter here a little bit. I don't think the U. S. Economy is in crisis.
I think it just went through a shock factor associated with FX and people have to process that a little bit and then hopefully we'll go back to business. But Andy said this and I said this, this management team has a good reputation for managing our cost structure. And we posted pretty good earnings results. And quite frankly, if not for FX and mix change this year, this would be the best year of all. So we've been committed to that.
We've always stepped up when we had to to make sure that the company was generating profits a little bit independent of what was happening in 1 geo or one segment or what have you. So I think you should expect and you should see the credibility here that we'll continue to manage that as best we can. We can't react within a quarter. But certainly, we're sensitive to that the company needs to continue to increase its earnings sort of independent of what's happening in the moment out there in the outside world.
Got it. That's really helpful. And then just one follow-up. Andy, you mentioned sort of the 4 to 4.5 year kind of business case that I guess the customers that you're surveying are kind of looking at. As you revisit your subscription pricing kind of later on this year, do you anticipate that breakeven point for perpetual versus subscription to be significantly different than what maybe other software 2 sort of revenue streams kind of equate to each other?
Or how do you sort of think about that?
Okay. So I don't want to give you the answer yet because we're not done, okay? First off, we are we actually have some very good analysis that kind of shows exactly basically kind of the demand elasticity of at what point people prefer subscription over perpetual and how it falls off. I will share that our current pricing at 60% only really attracts people who absolutely, absolutely want subscription. But there we have what I will share is that we have the opportunity given stickiness of the software, frankly, to tremendously increase the lifetime value of the customer, easily in that 20% to 40% range that you hear most software companies talk about.
So we're feeling good about that based upon the studies that have been done so far, but we're not quite done. So I don't want to give you the answer yet.
Got it. Fair enough. Thanks very much. We'll wait.
Thanks. Okay. I guess that brings us to the end of the call. But thank you all for joining us here again this afternoon. And just sort of in summary, there was some good news in the quarter and some things that we're not happy with and then some external pressures on us from macro and FX and so forth.
I think we are pretty proud though of the earnings results and we're extremely proud of the IoT results. And I think we need to continue to work hard on the core business to make sure that that performs as well as possible sort of given the environment that we're in. So we look forward to talking to you again in 90 days. And in 90 days, of course, we'll have a much better look into FY 2016 and into subscription phase II and a lot of other things I know you're interested in. So look forward to talking to you then.
Thank you and goodbye.
That concludes today's conference. Thank you for participating.