Good 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 objections, you may disconnect at this time. 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, Bob, and welcome to PTC's 2015 third quarter 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. 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-K, 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, July 29, 2015. PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our 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 third quarter 2015 results. Our Q3 revenue of $304 million was in line with our July 9th announcement of preliminary results. 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 had anticipated.
On a positive note, however, we delivered very strong growth in our Internet of Things business, closing a number of significant deals amongst large industrial companies that are adopting our platform for their IoT initiatives. In fact, three of our eight 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 first nine months of FY 2015. 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.
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 Two 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.
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 for 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 business's third 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 three seven-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 first quarter 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 million per year. With the influx of new logos, as well as the three large seven-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 three 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-2016. 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 along with our core technology. The initial response from customers we've previewed this with is quite exciting, so stay tuned for more details in the coming months.
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 Two, 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. 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.
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 million was down $33 million year-over-year as reported. $31 million of the decrease was driven by FX, and $7 million 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 licensed 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 2014 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 enter Q4 with greater caution about the manufacturing economy. Approximately 60% of our Q3 2015 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 three quarters. As we discussed last quarter, we currently have underway a company-wide initiative, which we call Subscription Phase Two. We believe that we can provide our customers more differentiated solutions through subscription offerings that, in turn, will enable us to increase customer lifetime value. Our objective in Subscription Phase Two is to define the optimal end-state license model for PTC by market and by customer segment, then to drive a rapid transition to that end state. In this initiative, we're making good progress. We have McKinsey 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 Two 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, paying 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 a 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% in Q3 2015, above our 15% target for the year, despite the impact of FX.
Operating expenses in the third quarter were down $4 million 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 second quarter was $61.7 million 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 third quarter relative to guidance added approximately $0.02 to EPS. Also note that our GAAP results include a $14 million accrual associated with the pending China matter.
Discussions regarding resolving that matter are still open. We refer you to our press release and SEC filings for further details. Moving to the balance sheet, cash and investments were $275 million, up $7 million from last quarter, including $87 million of cash flow from operations and a drawdown of $94 million on our credit facility to fund the acquisition of ColdLight. We spent approximately $50 million repurchasing 1.2 million 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 on the near-term 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 million as we continue the transition of certain customer engagements to our partner ecosystem. With this in mind, we are now forecasting full-year revenue in the range of $1.25 billion-$1.265 billion, 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 $1.28 billion-$1.295 billion. Our guidance includes software revenue of $1.021 billion-$1.036 billion, constant currency growth of 2%-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 million-$355 million, and we expect support revenue of approximately $681 million. For professional services, we now expect revenue for the year of approximately $229 million. 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 million as compared to last year. We expect that a greater mix of subscription will negatively impact our total revenue by $14 million as compared to last year. A total year-over-year impact of approximately $112 million. 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. 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% EPS growth in fiscal 2015, in line with our prior guidance. We are now forecasting full-year EPS in the range of $2.15-$2.23, compared to our previous guidance of $2.18-$2.30. We are forecasting a full-year tax rate of 10%-11%, benefiting from certain discrete items in the fourth quarter. For the fourth quarter, we are forecasting total revenue in the range of $304 million-$319 million, software revenue in the range of $254 million-$269 million, and a subscription bookings mix of 14% based upon our current view of the deals in the pipeline.
License revenue is expected to be between $90 million and $105 million, and support revenue is expected to be approximately $164 million. Professional services revenue is expected to be down sequentially to approximately $50 million. Operating margin is expected to be approximately 26%, yielding EPS of $0.59-$0.66. With that, I'll turn it over to the operator to begin the Q&A process.
Thank you. If you would like to ask a question, just press star one, and please record your name when prompted. You may cancel your request by pressing star two. Our first question is from Mr. Matthew 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 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 % of subscription bookings coming from the core at this point?
I'll take that question. 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 for subscription over perpetual, one is the relationship between the two prices, and the other is the term of their business case. They tend to use business cases in the four to four and a half year range. For us, with customers that are very, very sticky, you can see how we can substantially increase the customer lifetime value while offering something that's economically quite attractive to them over their business case.
Maybe a follow to that. There were several IoT deals that went perpetual this quarter. I'm curious, what's role of 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, essentially that was their preference. Up to 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.
Yeah. 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 first year, we're going to kind of measure customer reaction." If you look at the vast majority of transactions have been subscription, a couple of big ones came in perpetual. We didn't really foresee that coming, these were customers that we have relationship with. They love the technology, they wanted to buy it perpetual, quite frankly, we had a situation in place where the sales guys were allowed to sell it that way, they did.
I think that as part of Subscription Phase Two, we'll revisit all that and try to steer it a little bit more in the future than we told you we were trying to do this year.
That's helpful, Jim. Maybe one last one for Andy. As the transition accelerates here, you just talked about your long-term margin targets intact. I'd assume if this transition accelerates, operating margins might come down in the short term. I guess, first of all, is that correct? Second, how should we think about cash flow through this transition? I'd assume that would fare better, maybe just a little bit of color around that would be helpful.
We've laid out 2018 operating margin targets of 20%-30% with a subscription mix assumption in that year of 30%. 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, one, giving you guideposts so you can see kind of what the revenue would have been. Two, we're going to be managing the cost structure of the business, as if it were still a perpetual business. The expenses are going to basically track to the same margin target. 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. Generally, you come out of it faster.
Thank you.
We'll give 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.
Yeah, thanks. Two questions, guys. 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 Dassault put up in terms 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 you doing? I don't think there's 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 ENOVIA businesses. I think over the last three 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. I think you can't really compare. Dassault is structured differently than we are, and I think that's helped them in this quarter because the SolidWorks business performed well, and like you saw, so did our IoT business. We have a big exposure, of course, on the CAD and PLM.
Maybe just the follow-up to that one, just real quick. 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?
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. 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. 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. On top of that, there's some political things going on that make it difficult for U.S. technology companies. 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.
Their own results look comparatively bad, much worse than at the beginning of the year. I think that they're retrenching a little bit, and that's causing some pain for us. I think 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. 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.
I have two things I want to add. One is, we had the macro challenges, and we also had a really tough compare. While I don't want to overplay it is important to note that Q3 a year ago, our core business bookings in CAD and PLM grew over 40%, and our revenue grew over 20%. That was an extremely tough compare that even with our guidance, we were not going to be putting up strong numbers. You can't look at one quarter of us versus one 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, 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 need be to continue to drive earnings growth.
Got you. 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 onto a subscription format? As well as, are you going to consider, at least in some areas, because it sounds like IoT you are you going to consider the elimination of perpetual altogether?
We actually have a work stream focused on our existing customers and how we transition them, both their new bookings that often are under volume agreements, how we transition them to subscription. We're also assessing how we might transfer their maintenance bases potentially to subscription. That is something that we're focused on, and we're actually looking kind of deal by deal at some new ones coming up on what could the offer be that would be something that would be good for them and good for us. That is part of it. At this time, I do want to highlight that the focus is the license bookings moving to subscription. We are assessing how we could leverage support as well on that.
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 first year, we want to just measure and get to know this a little bit. I think the whole purpose of Subscription Phase Two, as Andy said, is to figure out what does it look like at steady state and how fast can we get there. 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.
I think that as we go into next year, we're going to outline a pretty good program you're going to like to get to the destination as fast as possible so 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 a housekeeping item, too. I'm wondering, with the macro environment that you're seeing in manufacturing, are you seeing conditions continue to deteriorate from Q3 was worse than you thought it would. I guess where I'm headed with this is, would you expect the core business in constant currency to stabilize by the time this annualizes, for example, in Q2 next year? 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?
Yeah. I'll take it pass it, Andy. You can add. 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 handfuls of transactions to slide, and you get a material difference with these big transactions. 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 slides into the next quarter. 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. We're left with the concern, might Q4 transactions slide into Q1 if we continue to have the same sort of backdrop.
Yeah, I don't think this is necessarily just getting 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.
Yeah. Okay, that makes perfect sense, Jim. I wanted to ask.
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.
Yeah.
That's actually what we're seeing.
Yeah.
It's taking a bit longer to close them this quarter than it did last quarter, for example. 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, just two quick ones. One is, you have done some subscription deals in the core business. Are those generally 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? Then one last housekeeping question.
Some of the big deals in the past were multi-year, and we would expect subscription deals in the core to be one, two, or three-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 one and two, at this point, and holding pretty consistently.
Andy, have those been ratable every quarter, or is there a lump sum of how those get recognized?
Oh, it's ratable.
It's ratable.
Yeah.
It sounds like the Phase Two could be pretty similar?
As far as the length of the subscription offering? Very likely we'll offer one, two, and three year. That's pretty standard, to offer those and the longer it is, you get a little bit better price, essentially.
Got it. Okay. 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 Axeda, which were not present in the prior period, any sense of the contribution there?
Organically, year-to-date, we're low single digit down in software revenue. The way the company calculates that is we tend to grow those acquisitions, but the way that the company's always historically calculated that is we assume that growth is inorganic. If you actually look-
Until four quarters have passed.
Until four quarters have actually passed. To put it in perspective, for example, we're expecting this year to grow the IoT bookings by more than 150% on an apples-to-apples basis compared to having Axeda in last year. 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.
Okay.
We'll revisit how we actually should share that with you probably as we enter next year.
Okay. Just to clarify, the organic software year-to-date, low single digit down, is that constant currency?
Yeah.
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 you felt like you faced in the core business? Is this a sort of behavior where customers are just pausing, or is this something where you could maybe see headcount cuts down the road in engineering headcount?
I don't have a crystal ball, Saket. I think that the U.S. PMI a quarter ago was 55.7, which is a decent number. 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 timeout 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&P 500 companies that had reported, roughly two-thirds had beat on earnings, only one-third had beat on revenue. The average revenue, if I remember correctly, was down 5%.
4.1%.
4.1%.
Yeah. Mm-hmm.
That's our typical customer. 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 timeout and kind of reconnoiter here a little bit." I don't think the U.S. economy's 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. Andy said this, and I said this. This management team has a good reputation for managing our cost structure. We've 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. We've been committed to that.
We've always stepped up when we had to make sure that the company was generating profits a little bit independent of what was happening in one geo or one segment or what have you. 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. 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 break-even point for perpetual versus subscription to be significantly different than what maybe other software transitions have seen? I want to say, let's call it 2.5 to 3 years, kind of where the two sort of revenue streams kind of equate to each other, or how do you sort of think about that?
Okay. I don't want to give you the answer yet because we're not done. Okay? First off, 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 want subscription. What I will share is that we have the opportunity, given the stickiness of the software, frankly, to tremendously increase the lifetime value of the customer. Easily in that 20%-40% range that you hear most software companies talk about. We're feeling good about that based upon the studies that have been done so far. We're not quite done. I don't want to give you the answer yet.
Got it. Fair enough. Thanks very much.
You know you want it, but
We'll wait. Thanks.
Thanks, Saket. 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. 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. We look forward to talking to you again in 90 days.
In 90 days, of course, we'll have a much better look into FY16 and into Subscription Phase Two and a lot of other things I know you're interested in. Look forward to talking to you then. Thank you and goodbye.
That concludes today's conference. Thank you for participating.