Afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2015 Second Quarter Conference Call. Questions. This call is being recorded. If you have any objections, you may disconnect at this point.
I would now like to turn the call over to Tim Fox, PTC's Vice President of Investor Relations. Sir, please go ahead.
Thank you, Tore. Good afternoon and welcome to PTC's 20 15 Q2 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. Additional 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, April 29, 2015, and PTC assumes no obligation to publicly 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 Chief Executive Officer, Jim Heppelmann.
Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining us here on the call for a review of our Q2 2015 results. We've changed some aspects of our earnings release process this quarter in an effort to better meet your needs and I hope you'll appreciate this new approach. Also given the complexity that currency and our subscription transition have introduced this quarter, our remarks are probably longer today than we would intend to do in the future.
Overall, our Q2 results demonstrated solid execution across the business despite the very tough currency environment and somewhat uncertain macroeconomic conditions. Revenue was above the midpoint of our guidance range and we delivered EPS above the high end of our guidance range, which reflects our continued commitment to driving margin expansion and earnings growth. Once again this quarter, results were better than the headlines would suggest, given the combined effects that foreign currency, our license model transition and our strategy to shift our professional services growth toward the partner ecosystem have on our announced results. If you normalize for foreign exchange rates and for subscription mix, then on an apples to apples basis, our year over year license revenue would have grown 8% and our software revenue would have grown 10%. With our professional services results included, total revenue grew 5%, operating income grew 14% and earnings per share grew more than 20%.
These results are very consistent with the performance that you've been seeing from PTC for some time now. While the FX headwinds, our business model and the professional services strategy make our headlines results appear less attractive, we know that shareholders appreciate the longer term positive effects of the license transition and the services strategy. Then consistent with the commitment I made 90 days ago, PTC has now taken action to address what we believe is the new normal in the currency environment. So before going any deeper into 2nd quarter results, I'd like to provide more context around that corporate alignment that we announced 3 weeks ago. In addition to mitigating the impact of foreign currency and potential macroeconomic headwinds, we also saw the opportunity to expand on our leadership and momentum in our Internet of Things business by increasing investments in sales and marketing and in product development, we're also accelerating some of the IoT related development work in our core CAD and extended PLM solutions.
We see a great opportunity to further differentiate our industry leading CAD, PLM, ALM and SLM solutions by enhancing them with a connected approach. We'll be sharing more details about that connected strategy in the core business at our LiveWorx event in Boston next week and even more so at our PTC Live global event in June. But probably you can imagine the value that engineers can unlock by understanding how their products are being used in the field and how the products are performing relative to their design intent and quality expectations, or for service technicians to proactively know what service the product will need even before they actually need it and to avoid the downtime by fixing the problem before the product actually fails. Simply put in an industry that uses the phrase lifecycle management a lot, PTC stands alone at this point with the connectivity that enables true lifecycle management to continue after the product leaves the factory and enters what is the longest phases of its life cycle. We have had some remarkable customer meetings on the closed loop lifecycle management topic lately, but it's also important to know that we remain fully committed to executing our core CAD and PLM solution roadmaps, with the next major release of Windchill coming later this calendar year and the Creo 4.0 target targeted for release in mid-twenty 16.
Coming back into our 2nd quarter results, we're pleased with the early progress and customer feedback on our subscription licensing program with strong attach rates in our IoT business that is primarily subscription based and emerging customer interest across our core business, including the new offerings for channel partners. While the subscription bookings mix of 14% in the second quarter was slightly below our previous 15% estimates, subscription bookings in aggregate remain above 15% for the first half of twenty fifteen. And based on the profile of our current pipeline, we see the pace of subscription adoption ticking up slightly in the second half of the year. Recall that subscription offerings provide greater flexibility and value for many customers and in turn will drive longer significant long term value for PTC. You'll note in our financial disclosures that we are now highlighting the performance of total software revenue, which is the combination of license, subscription solutions, including cloud services and support revenue.
Consistent with our strategy for professional services revenue to trend flat to down over time as we grow our service partner ecosystem, we believe that this software revenue measure better reflects our top line progress. During the Q2, the high margin software revenue grew 8% year over year on a constant currency basis and would have grown 10% if further adjusted for the subscription bookings mix. The strong performance in software revenue was then offset by a 12% year over year constant currency decline in the lower margin professional services business, consistent with our strategy. Service partner bookings have actually been stronger through the first half of the year than we had anticipated as our partners continue to develop their PTC practices. So overall, we're pleased with our progress here.
In terms of geographic performance, when adjusting for currency, we delivered very strong performance in Japan, including a mega deal, mid single digit software revenue growth in the Americas and Europe, and flattish results in Asia Pac. Software revenue results benefited from strong support revenue growth in all regions, tempered by a year over year decline in license revenues in the Americas and Europe. Recall that we closed 3 mega deals in these two regions in Q2 of 2014, which makes for a tough year over year comparison. In addition, we did see pockets of cautious buying behavior later in the quarter, which impacted large deal close rates and timing. Economic reports have been mixed over the past few months, especially from manufacturers with significant currency exposures.
Many of our largest customers in the U. S, in particular, are multinationals that rely heavily on exports, so the rapid strengthening of the U. S. Dollar could be impacting their business. We're watching this closely.
Turning to segment performance. When adjusting for currency, our core business second quarter results were somewhat mixed. CAD and SLM delivered solid results in line with our targets, while extended PLM was at the lower end of our target range, primarily due to a few large deals slipping out of the quarter. So starting with SLM, we were encouraged to see SLM post double digit constant currency license growth in Q2. We entered the year with a much stronger pipeline that we believed would enable our SLM business to return to growth in the second half.
And while it's still too early to declare victory, we're encouraged by the performance this quarter and by the stronger pipeline as we enter the second half of the year. During the quarter, we closed a number of strategic SLM transactions, including commitments from Dell, which continues to expand its SLM footprint with PTC Lockheed Martin, who is a large PLM customer, also made a sizable SLM purchase in the quarter. This demonstrates one of the key growth drivers for our SLM business, which is our ability to leverage deep customer relationships to cross sell into PTC's large CAD and PLM installed base, where penetration of our SLM solution is still in the early stages. We're excited about last week's launch of our in service technology. This is our next generation solution for technical and service parts information.
This new software is based on the Enigma technology that we acquired in 2013 and then leveraged in our Caterpillar engagement. The in service software significantly enhances our service information solution capability by extending a customer's CAD investment to deliver graphics to downstream service technicians and by extending a customer's PLM investment to deliver product structures and service parts information downstream into service as well. The ability of downstream service departments to get as much utility out of CAD and PLM data as the manufacturing organization already does is a powerful idea and there's nothing quite like this in the market. It creates a powerful cross sell to PTC's sizable CAD and PLM installed base, but the solution also interoperates with competitors CAD and PLM systems. If you have a chance to come to our LiveWorx event next week, you're going to see some great examples of closed loop capability, where we take an existing manufactured product, add sensors to it after the fact, then use our IoT platform to connect that product and sensors to the cloud.
We feed the sensor streams into CAD to analyze the fitness of the design during the actual product use. We also analyze the sensor data with big data predictive analytics. And then finally, we leverage PLM configuration data to deliver CAD graphics as work instructions through augmented reality into the hands of service technicians in the field. That's quite a mouthful, but when you see it all running, it's really a truly amazing capability that can only be delivered when you combine our new technology platforms with our core enterprise applications. Turning now to the other core businesses.
CAD constant currency software growth was up 5%, was in line with our expectations, driven by new seats, modules and upgrades of Creo. Extended PLM had more mixed results, where performance appears to have been impacted by several large deals slipping out of the quarter, as I mentioned. Nevertheless, we continue to win new PLM customers to extend our footprint within existing customers and to cross sell adjacent solutions into our base. During the Q2, for example, we closed an enterprise wide PLM deployment with Nordex Energy, a German based global leader in high efficiency wind turbine technology, and we secured a 7 figure PLM expansion with Brother Industries, who you know is a leading electronics manufacturer in Japan. We also secured a follow on ALM commitment with a leading major automotive customer in Japan, who continues to expand PTC's footprint across its growing software engineering growth.
The Q2 IoT results were stellar. Our IoT business once again delivered very strong performance and is already approaching 10% of our license revenue in the quarter. While we're certainly pleased with our revenue performance, I'll remind you again that at this stage, our primary goal is to win new logos and then to expand within these customers. Our experience suggests that the initial IT platform win is analogous to a design win in the semiconductor world. The first booking is not large, but after demonstrating success with the initial IoT initiative, we can expect to expand within the account as we scale across product lines, departments and business units.
Today, some of our largest IoT customers represent subscriptions in the range of $500,000 to more than $1,000,000 per year and they're still at partial penetration. So with the influx of new logos, you can see how this business could become quite significant very quickly as we begin to move past the proof of concept phase and into the phase of wider production usage. Then following a strong Q1 performance on the logo front, where we secured 42 new IoT logos in Q1, we closed 62 new IoT logos in Q2, which is a sequential increase of 48%. To put this in perspective, 62 represents one significant new IoT logo win every business day during the Q2. We believe we're on pace to exceed our target of 200 new IoT customers in fiscal 2015, and we might actually approach this goal by the end of Q3.
As was the case in Q1, we again had a healthy mix of contribution from all our go to market channels with our new dedicated IoT sales force delivering about 60% of the new logos, our strategic account reps delivering about 25% and our go to market partners about 15%. The new logos we're attracting come from a variety of vertical industries that are applying our IoT platform to many different use cases within their operations. 1 new logo customer, for example, Instron is using our platform to develop remote service and remote access capabilities, as well as to deliver automated software updates to their equipment in the field. Instron manufactures and services high end test equipment that's sold in over 40 countries. And by leveraging PTC's IoT platform, Instron plans to significantly reduce on-site service calls and the associated costs.
While we believe that service remains the killer app for IoT, we also landed a new commitment from 1 of the leading U. S.-based aerospace and defense manufacturers for a more advanced application of IoT. They are pursuing 5 separate IoT initiatives where they are innovating around new revenue producing services for their customers. In addition to new logos, we measure IoT leads as an early indicator of business momentum. Here we continue to track over 1,000 opportunities in the global pipeline that could be worth $100,000,000 in revenue.
Given the early nature of this market, we don't expect close rates against this pipeline to be as high as in our core business, but we have the capacity in place to execute on this significant rate of lead generation. And as mentioned before, we believe we're on track to meet or even beat our new logo target for the year. PTC's growing leadership position in IoT will be on full display next week in Boston at our LiveWorx event, where industry experts will be sharing the latest updates on IoT technology, product capabilities and business models. We have a number of great keynote speakers lined up, including Steve Wozniak, the Co Founder of Apple and Professor Michael Porter from Harvard Business School, who as many of you know co authored with me the cover story in last November's Harvard Business Review that talked about the impact of IoT on competition. LiveWorx attendees will have access to more than 50 sessions hosted by technology and business leaders who are sharing their challenges and successes across the broad range of IoT topics, including analytics, big data, security, connected health, global connection and deployment strategies.
The response to this event has been a bit overwhelming as we initially targeted 1,000 attendees, but now expect around 2,000, which has caused us to need to scramble to find a bigger venue for the all in keynote audiences. This means that the attendance has increased more than 500% over last year's LiveWorx event. You're all invited to join us at this event to hear some of the exciting news on PTC's products and partnerships, but please do reach out to the IR team for details and to ensure that we know you're coming, so we can hold a premium spot for you in the venue in case things get crowded. We also invite you to consider attending our PTC Live global event in early June, which this year is going to be held in Nashville. Whereas LiveWorx is more focused on IoT, PTC Live Global is more focused on the traditional core business.
In addition to offering insights and perspectives, product roadmaps and customer case studies around our core products, there'll be many opportunities as well to learn about our smart connected product strategy and the role of IoT in our core products. Companies are excited to learn and to take advantage of what's being called the most disruptive technology of our Before I turn the call over to Andy, let me comment on our outlook for the balance of fiscal 2015. I think we have a lot of momentum in the business and on balance, we feel good about the progress we're making on many fronts. We're creating value for customers and for PDC as we move aggressively into an IoT leadership position and plan to enable our core products with connectivity driven enhancements as well. We're also creating value for both our customers and for PTC by embracing the subscription business model.
We expect, however, that we'll continue to encounter headwinds in our business due to a combination of currency exchange rates, our evolving license business model and the manufacturing economy that is potentially softer than what we saw in fiscal 2014. We've adjusted our fiscal 2015 guidance for further depreciation on foreign currency and for a slightly higher mix of subscription bookings, which we now expect to be 17% of total license bookings for 2015. Besides currency and mix, we've also adjusted our revenue outlook to factor in a somewhat more cautious macroeconomic outlook, as well as lower professional services revenue, driven by the acceleration of the transition of our customer engagements to our partner ecosystem. Nonetheless, we're maintaining our guidance for 15% growth in non GAAP earnings this year on a constant currency basis, due in part to our portfolio management approach to the business and our recent realignment actions. We remain on track to deliver a solid year with opportunity to drive increasing growth and value to customers through a combination of our core product focus, our leadership position in IoT, our business model transition.
We remain on track to achieve our 2018 target business model and when combined with our commitment to return 40% of free cash flow to shareholders, we believe we're well positioned to drive substantial value for our shareholders over time. Now I'd like to introduce for the first time PTC's new Chief Financial Officer, Andy Miller, who will be a key partner of mine as we look to drive value experience driving both growth and shareholder value at his previous companies. This experience is already paying dividends and driving constructive change internally here at PTC. With that, I'll turn it over to Andy.
Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non GAAP results unless otherwise specified. Total second quarter revenue of $315,000,000 was down $13,000,000 year over year, driven entirely by lower professional services revenue, consistent with our strategy. After adjusting for currency, total revenue increased 4% year over year and when further adjusted for subscription mix, revenue would have grown 5% year over year. On a reported basis, software revenue, which consists subscription and support was flat year over year.
However, after adjusting for currency, we delivered strong software performance with 8% growth. Further adjusting for license mix, software revenue would have grown 10%. Our strong software revenue performance was driven by support, which was above our guidance and would have been up 10% year over year on a currency and mix adjusted basis. This was partially offset by license revenue that was slightly below the midpoint of guidance, but would have been up 8% year over year on a currency and mix adjusted basis. As Jim noted earlier in his opening remarks, we faced a tough Q2 'fourteen license comparison, a quarter in which we had 17 large deals including 3 mega deals.
We also believe some of the Q2 'fifteen large deal softness could be related to potential economic uncertainty. Especially in the Americas, but also in Europe, we saw deal sizes compressed and in some cases deals were delayed. Approximately 59% of Q2 'fifteen revenue came from recurring business, up from 52% a year ago, reflecting growth in subscription and support. Clearly, the growth in our recurring revenue represents a very positive trend in our business. Turning now to our subscription licensing model.
Our subscription offering has been available for 2 quarters and we are pleased with the early indicators. We currently have underway a company wide initiative, which we call subscription Phase 2. We believe that we can provide our customers more differentiated value through subscription offerings that in turn will enable us to increase customer lifetime value. Our program objective is to define the optimal license model end state for PTC and then to drive a rapid transition to that end state model. In this initiative, we are focused on completing marketing and pricing studies and then defining differentiated subscription offerings, which will enable us to determine and then rapidly drive to our end state.
We are targeting completion of our program so that we can launch new pricing, licensing and product feature offerings by the start of the next fiscal year. Thus far, our work shows many customers in many markets prefer a subscription offering as it provides 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 progress through our program during the second half of the year. Moving to the income statement, gross margin increased by 120 basis points on a sequential basis and 150 basis points year over year and was at the high end of our guidance. After adjusting for currency and subscription mix, gross margin would have increased 210 basis points.
The key driver of our improved gross margin was our mix of software business, which was 81% of total revenue this quarter, up from 78% a year ago. We are pleased to see a sequential improvement in professional services gross margin, which was 16% in Q2 2015, above our 15% target for the year. Operating expenses in the 2nd quarter were down $8,700,000 or 5% from last quarter. The strong gross profit performance coupled with tight operating expense controls resulted in an operating margin of 23.4% in Q2, 140 basis points above the high end of our guidance. Overall, net income for quarter was $61,400,000 or $0.53 per share above the high end of our guidance.
Our EPS growth rate was 11% year over year and more than 20% when adjusting for currency and license mix. Note that net income benefited by a lower tax rate and share count in our 2nd quarter relative to guidance, which added approximately 0.02 dollars to EPS. Moving to the balance sheet. Cash and investments were $268,000,000 up $7,000,000 from last quarter, including $92,000,000 of cash flow from operations and $75,000,000 repayment on our credit facility. Relative to stock repurchases, now that the ASR is complete, we intend to begin repurchases again during Q3 and Q4 and expect to be on track by the end of the year with our goal of returning 40% of free cash flow to shareholders.
Moving to guidance. Based on the continued appreciation of the dollar against foreign currencies and the expectation of a higher mix of subscriptions in the back half, we are adjusting our top line guidance. Our top line guidance factors in current exchange rates, 17% subscription license bookings mix, up from 15% assumption last quarter and also a slightly more cautious outlook on the near term economy. Additionally, we are reducing our professional services guidance by $18,000,000 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 $1,280,000,000 to $1,295,000,000 or 2% to 3% year over year growth on a constant currency basis.
This compares to our previous revenue guidance of 4% to 6% constant currency growth. On a license mix adjusted basis, our FY 2015 revised guidance would imply approximately 4% growth year over year at the midpoint in total revenue and approximately 8% growth year over year at the midpoint in software revenue. As you consider the change in our full year top line guidance, note that $23,000,000 of the change is due to new assumptions regarding currency and subscription license mix and $18,000,000 of the change is due to our lower professional services expectations. Together these factors represent a $41,000,000 decrease in our revenue guidance. Our guidance includes software revenue of $1,048,000,000 to $1,063,000,000,000 which when adjusted for FX and license mix is in the lower half of our prior guidance range.
Note that our current assumptions around currency and subscription mix are negatively impacting our software revenue guidance by about $20,000,000 Within our software guidance range, we expect license revenue in the range of $360,000,000 to $375,000,000 and we expect support revenue of approximately $688,000,000 For professional services, we now expect revenue for the year of approximately $232,000,000
As a final note,
I want to quantify the expected full year impact of currency and the license model transition on our 2015 top line results. Given our current assumptions, we expect FX will negatively impact our revenue by $100,000,000 as compared to last year. And we expect the transition to subscription will negatively impact our revenue by $22,000,000 as compared to last year. Impact of approximately $122,000,000 on the top line. Moving to margins.
Despite the change in our revenue guidance, we continue to target full year operating margin of 24% to 25% due to the restructuring actions initiated in Q2 and we continue to target 15% professional services gross margin in FY20 15. Notably, after the restructuring action is completed in Q3, we expect to exit 2015 with operating margins that position us well towards 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 FY 2015, in line with our prior guidance. We are now forecasting full year EPS in the range of $2.18 to $2.30 Note that our current assumptions for currency and subscription license mix are negatively impacting our EPS guidance by approximately $0.08 as compared to last quarter. So absent these changes to our assumptions, our EPS guidance would actually be higher than our prior guidance due to a lower tax rate assumption of 14%.
For the Q3, we are forecasting total revenue in the range of $307,000,000 to 312,000,000 dollars software revenue in the range of $253,000,000 to $258,000,000 and a subscription bookings mix of 18%. License revenue is expected to be between $85,000,000 $90,000,000 and support revenue is expected to be approximately $168,000,000 dollars Professional services revenue is expected to be down sequentially to approximately 54,000,000 dollars Operating margin is expected to be in the 22% to 23% range given timing of expenses, yielding EPS of $0.47 to $0.50 Lastly, as it relates to our Q3, it's important to recall that Q3 'fourteen was a very strong bookings quarter for both perpetual license and subscriptions with 21 large deals including 2 mega deals in the quarter. As such, we will again be facing a very tough year over year comparison both on a reported basis and viewed on a constant currency mix adjusted basis. One additional item. In our press release today, we provided an update concerning the China matter.
We've begun negotiations with the SEC to reach a resolution of its investigation and we expect to begin negotiations with the Department of Justice in the near future. At this time, we are not able to estimate the possible loss associated with resolving this matter. If settlements are reached, the amount could be material to our results of operations for the applicable fiscal period. I refer you to our SEC filings and to today's press release and prepared remarks for additional information. Before I wrap up my commentary, let me share some of my thoughts on why I joined PTC and why I'm very excited by the opportunity that's in front of us to drive value for shareholders.
In PTC, I saw a company and a management team that had demonstrated the will to transform its business by expanding And in doing my diligence on the company, I became convinced of 2 substantial opportunities for PTC to drive improving growth over the coming years. I believe PTC remains extremely well positioned in its core CAD and PLM markets with a deep and loyal customer base that now has the opportunity to deliver more value and by extension higher growth by leveraging new licensing and delivery models. Now add to this, the early lead PTC has taken in IoT software platforms, which I believe is one of the most exciting software markets of the past 15 years and I see PTC's next great growth opportunity. IoT has the potential to not only accelerate growth in a new software market, but over time to enhance the differentiation and value proposition of PTC's core solutions. I'm excited to be part of the team here at PTC and look forward to meeting all of you as we accelerate our investor outreach over the coming quarter.
With that, I'll turn it over to the operator to begin the Q and A.
Thanks, Karen.
Thank you. We will now begin the question and answer session. Thank you, sir. Our first question comes from the line of Mr. Sterling Auty from JPMorgan.
Sir, your line is now open.
Thanks very much. And Andy welcome to the team. Had one question, one follow-up. Jim on the IoT side, when you look at the 62 logos that you brought in, what I'm curious about is, what does the IoT stack look like for those companies? Meaning, what portion of the IoT solution are you bringing to the table?
And what commonly are you kind of connecting it? Meaning, is it Broadcom chips being provisioned by Jasper Wireless or Synchronoss? And then you're getting the data feeds. What does the total solution look like, Dana, as much as you could say a most common architecture within these companies?
Yes. I think if I were to generalize it, what we are selling to them is the software that a little modular software that would go into the product. So assuming the product has a wired or a Wi Fi or a cellular ability to connect, it needs a piece of software to then carry on the conversation with the cloud. So we're selling that little module that goes into the product, the so called edge agent. And then we're selling the cloud piece that the edge agent talks to.
So the cloud, the database, the capacity to receive this data and carry on the conversation from the cloud end. And then we're selling the what we call the application enablement platform, which is the plumbing to both build and run applications on that cloud talking bidirectionally with that product. So we're actually selling quite a bit of technology stack. Now in terms of what does that product have inside it already in terms of hardware and software, well, I'd say all over the map from products that had the ability to connect, but didn't know what to connect to, to in some cases, people who are slapping a Raspberry Pi on their product and never had the ability to connect and giving it the ability to connect. So it varies a lot in terms of what's inside the product.
But our solution to go from product to cloud and then to build and then to run applications against that product is fairly consistent. So of course it would vary a little.
Okay. And then separately, when you talk about the uncertain economic environment. I guess we understand kind of the exporting in like the dollar and euro exchange. But when we look at some of the PMIs coming out of Europe, it feels like investors are more looking at possibility of recovery in Europe. So the timing of when you're talking about squishiness is a little bit confusing.
So maybe you can help kind of clarify that.
Yes. I mean so certainly my view is that the Europe situation is okay and mostly stable. The PMI data I'm looking at says it just ticked down a tiny bit from 52 and change to 51 and change in the last month. I think the ticked down much more.
And what we're seeing
is that we're seeing a lot of ticked down much more. And what we really saw was particularly in the month of March is customers panicking a little bit because they were looking at their own forecasts and seeing what currency was doing to their top line and their bottom line and they were sort of just slapping the brakes on everything. So we saw in particular in the U. S. Now I wouldn't have characterized the U.
S. Economy as difficult. I don't think I did on the previous earnings call. But I think that that currency swing was so far and so abrupt that it just left people kind of in a bit of a deer in the headlights or panic mode saying like let's just stop and try to figure out where this is going. Maybe it will stabilize and we'll go back to business as usual.
That would be nice. Maybe it won't. So I think we've just tried to hedge a little bit saying there probably is a situation here where the average U. S.-based global company now has a different looking set of guidance in front of their investors and they're trying to figure out what to do about it much as we were.
Got you. Thank you.
Thank you. Our next question comes from the line of Mr. Matt Hedberg from RBC Capital Markets. Sir, you may now proceed.
Yeah, guys. Thanks for taking my questions and congrats on the margins this quarter. Really nice to see. And I know you talked about the move to subscription revenue still early. I think Andy indicated in the prepared remarks that you might consider a more rapid transition.
I'm wondering does this imply a scenario where license revenue wouldn't be an option at all in the future?
Well, I think our program right now is to figure out what that end state is. So we're looking at it by customer segment, both size of customer, the markets they're in and also by product segment to really figure out where the what offering makes sense for each customer and then we're going to design the offering, differentiating when they pay and frankly the feature sets that are offered there. And so we're going into it with an open mind, but I think if you look at what's happening broadly in software, you see that for so many market segments and customer segments, it is the preferred way to buy and it continues to move in that direction. So we're doing a number of marketing and pricing studies now to come up with that end state. And I would expect that we'll tell you more as we kind of complete these studies over the next few months.
And then our goal is to actually launch new offerings at the start of next fiscal year.
That's great. Thanks, Andy. And then I'm curious, if you could give us a sense for what percentage of your subscription bookings was from core CAD PLM this quarter versus maybe the past several quarters?
Yes. The IoT business remains primarily subscription. We saw some of the core business go subscription, but it was actually less than last quarter. There's variability in these early stages. As we look at the pipeline next quarter, we're seeing a little bit more go subscription.
But I think at this stage, there's variability. And frankly, I think we can the reason we're doing work on really the packaging aspect of it is so that we really have very differentiated offerings. Those people who care about the total cost of the product over say a 4 to 5 year timeframe will want a different offering than that person is trying to optimize it over 10 years. The one who wants more flexibility to ramp and exchange product, exchange fees will probably prefer subscription. And so that's really what we're assessing at this point in time.
And then had to have truly a 2 distinct and different offerings, with a little overlap between the 2. Great.
Thanks. And maybe if I could squeeze one last one in here. I'm curious what percentage of your L and SS bookings came from large deals? I think last quarter was maybe 32% and I think the year before was maybe 42%. And I think in the prepared remarks you talked about in line with your historic average.
I'm curious what historic average are you using there for that assumption?
It's somewhere in the 30s. Yes, it's basically somewhere in the 30s. It was clearly a little bit less this time because of the fact that we only had 13 of them. Got it. Okay.
Thanks a lot guys.
Our next question comes from the line of Mr. Steve Koenig of Wedbush Securities. Sir, your line is now open. Kindly proceed.
Hi, guys. Thanks for taking my questions. I've got a few questions that are
all pretty short hopefully. One is,
can you all disclose so that we can do an organic calculation the revenue contribution from Atego and Atego, which
I don't believe were present a year ago?
Yes. What I can share with you that organically, the constant currency mix adjusted business grew just above the mid single digits as opposed to the 10% of the total. We're only going to disclose revenue contribution from acquisitions if their materials are are results, but it was just above the mid single digits in the 6% range this quarter.
6%. Okay. So Andy on that number since the mix a lot of that mix is from new business of Fanatic. Can you possibly disclose just the constant currency adjusted organic contribution?
I don't have that number in front of me. It's yes, sorry.
No, it's okay. Let's see. Can you tell us last quarter you told us a very useful SS bookings per sales and marketing spend was part of your prepared remarks. You wouldn't happen to have that again this quarter, would you?
It was up 7% and is in the prepared remarks, I believe. 1.12 percent and up 7% year over year, yes.
Okay. I failed my Evelyn Wood course, so thanks.
That's the downside of the new process, Dave.
Yes. That's okay. We'll get used to it. Just a couple of quick ones and a couple more. Do you believe you're still on track to achieve $40,000,000 to 50 $1,000,000 in IoT revenue and subscription booking?
Yes. We haven't changed that guidance. We didn't mention it in this particular script, but yes, that would be correct. That remains our guidance there.
Okay. And the mega deal in Japan, what product areas was that in?
That was 3. CAD and PLM primarily. Probably majority CAD, minority PLM might have been some other stuff in there.
And did you say what vertical that was?
No, we didn't.
Okay. Last question. Progress a little more strategic here. Can you talk a little about progress integrating SLM with the IoT technology and when the application integrations will be available as a kind
of a turnkey solution for field sales?
Yes. I mean, let me say we'll have some big announcements on this front next week. And I hate to kind of
scoop them
here in the call. But we are making good progress and it's quite exciting and we're making some interesting progress with partners in that area too, other companies who might like similar strategies.
Terrific. Okay. Thanks a lot, Timna. I appreciate it. Yes.
You're welcome, Steve.
Thank you. Thank you. Our next question comes from the line of Saket Kalia from Barclays Capital. Sir, your line is now open. Kindly proceed.
Hey, guys. Thanks for taking my questions and welcome, Andy.
Thanks, guys.
So first on the services business Andy, how much of that is now consulting versus training? And where do you see that mix in your first kind of few days here on the job?
I mean, where you sort
of see that mix going in the long term model?
Well, the consulting piece that is being moved to partners. We still do the training piece. So you'll see that become a smaller piece of the total. Yes.
In fact Saket, Jim sorry, Jim here. If you look at our IoT business, there's almost no consulting that business. So we kind of like the idea of moving to a business that's either rich in subscription or rich in software, however you want to measure it, but really focused on software with that would give us a path to much higher margins than we've been talking to you about here today.
The other positive thing that's also driving the lower professional services number as we move forward is we've got more of these BRDs, more of these basically out of the box solutions consulting offerings, so that the customers are bringing their products up much faster with much smaller engagement that they had in the past. So that's a positive for them. It's a positive for us their higher margin that way as well.
Got it. That makes sense. And then for my follow-up, Jim outside of IoT, where is subscription pricing resonating most in your customer base? Is it with a particular vertical, a particular product, maybe SMV versus large? Just any color on sort of where those preliminary marketing studies are showing subscription being a successful offering?
Yes. So we're 1 quarter into the offering of subscription into the SMB space and we did do a number of transactions there. And I think it's interesting to that space, because a lot of those SMB companies are, let's say, cash challenged and this gives them an on ramp without having to commit all the cash upfront. Then I think if you go into the bigger accounts, to be frank, it's probably not I'm not sure there's a strong association to a vertical or a geography. I think it's really more to a financial strategy of the customer.
Some customers don't like capital commitments and they'd rather buy everything on an OpEx basis and so forth. So I think it's really down more to the financial strategy of the company than whether they're automotive, industrial or retail.
Got it. Thanks, guys.
Thank you. Our next question comes from the line of Mr. Matt Williams from Evercore. Sir, your line is now open. Please proceed.
Thanks very much. And thanks for taking the question guys and welcome Andy. Just I'm curious with IoT getting as much attention as it is. From a budgeting standpoint with the customers that you're talking to, are they trying to carve out budget for IoT from existing budget? Or are you starting to see instances where they're sort of setting that aside and dedicated allocated resources towards trying to build out an IoT strategy?
And I guess just any color around how they're thinking about that from a budgeting standpoint?
Yes. I think they're thinking about it very differently, Matt, from how they would think about CAD and PLM. CAD and PLM are somewhat mature markets and budgets are set well in advance and tend to have some kind of a cyclical effect tied to PMIs or macroeconomic or whatever. I think this IoT discussion is completely different than that. This is a very strategic initiative.
The CEOs are involved. It's a corner office topic. They're doing it for strategic reasons. They would cut other budgets to make room for it if they had to, but I think it's that level. In fact, an interesting little story from this past quarter, Professor Porter and I held an event around the HBR article in Chicago.
And it was co sponsored by the NAM, the National Association of Manufacturers, who was eager to be associated with the topic. And they actually had asked us, could we co sponsor that event, because quite frankly, we're going to do it anyway. And we said, sure, but can you help us with audience acquisition? And they said, we'd love to. So this was an event where we targeted 75 CXOs with an emphasis on CEOs.
And as the registration started coming in at 120, we had to say, I'm sorry, there's just no room in the room. We made the PTC people and the NAM people stand against the wall at the edge of the room, so all the customers could take every last spot at the tables in the theater room. And that was that. So I'm just saying, it just kind of shows the level of interest here. I've never seen a topic in my time at PTC that so quickly was something that would get you to the corner office and in a very strategic conversation.
So I don't think we're drawing from the CAD and PLM budget. I think we're on to something that's acyclical because of how strategic it is.
Okay, great. That's helpful. I appreciate the color. Maybe just one quick follow-up on the SLM business. Obviously,
a little bit better results there.
I know you guys have talked in the past that the pipeline seems to be there and there's sort of been mix of just some execution and maybe sort of deal cycles elongating a little bit. So could you give any update around the SLM, I guess pipeline number one? And then what you're seeing in terms of deal cycles? Is it shortening at all? And just a general update there?
Yes. I think we've sort of framed up that our SLM sales cycle, these are enterprise initiatives sold top down or consult way around business process transformation. And those are never short processes sales processes. So I would put them in 4 to 6 kind of quarter range. So just to kind of remind you of what the story we've been sharing with you over the past few quarters is in 2013, we didn't have a dedicated selling we didn't have a dedicated selling organization for SOM and we felt like we didn't have enough attention on it and the pipeline got a little soft because we didn't have enough expertise, enough focus.
In 2014, we put on a dedicated sales force, but we said it will take some time to build up the pipeline and to run these deals through the cycle. And if you look at 4, 6, 7 whatever quarter sales processes that means it should start to show up in
the back half of twenty fifteen.
So the pipeline does look quite robust now. We feel good about that. We did see a better result here in the past quarter. Like I said, I don't think we want to declare victory on that yet. 1 quarter doesn't make a trend, but that quarter is consistent with the trend we would expect to see based on the actions we've taken in the pipeline that we've developed.
Great. I appreciate it, Tim.
Thank you. Our next question comes from the line of Mr. Jay Plesshouwer of Griffin Securities. Sir, your line is now open. Kindly proceed.
Hi, thanks. This is Zack Avon in for Jay. Wanted to start in the press release about the restructuring and expense reductions where you referred to assessing your pricing and packaging practices. Did you mean something short term such as raising local non U. S.
Prices to offset currency? Or did you mean something more substantial and longer term
that? We're basically assessing our pricing in these studies we're doing relative to the perpetual and subscription offering and the feature offerings as well kind of coming up with a good, better, best type of strategy for various products, example. So that's pricing strategic. You don't want to just do a quick knee jerk reaction to something going on in the market. We compete against German companies frankly who have much less U.
S.-based business than we do. So they're actually seeing as you saw some of our competitors that their reported results are higher than their constant currency results. So kind of the inverse of us. So we're doing it from a more strategic perspective.
Yes. And I can say, one of the great things is Andy's got a lot of experience here. So it's great to have him on the team because he's one of these guys who came into the office filled with great ideas and lots of I think we always wanted to do and now we've got the talent to do it. I think we always wanted to do and now we've got the talent to do it.
Okay. Good. And under what circumstances would you foresee increasing the expected or targeted proportion of subscription licenses to say 25% or more?
Basically, if it's going to drive greater overall value to us from the customers. I mean, we're going to get more revenue from customer because that's a more valuable offering to the customer than we're going to drive there.
Yes. I just if I could add here. When we launched into this program at the beginning of the year, we said, we want to run this for a year without trying to steer it, so that we can hear the voice of the customer and then we'll want to steer it. So when Andy talks about subscription phase 2, he means grabbing the controls and steering this to some destination that we think is the right destination, so that we move through this process and there's an end to it. So that's really what we're talking about.
We're collecting data and beginning now to say, okay, what is the data telling us and what's the destination and how quick can we get there, so that we kind of come through the valley of the transformation and come out the other side with the benefits. So that's what we're working on.
Understood. Is it feasible to reinvest most if not all of the expense savings from the restructuring layoffs back into the IoT business?
I mean, in gross terms, we reinvested half. So we took some money out and put half back in and the other half fell to the bottom line. Is it feasible? I mean, could we spend more money? Let me tell you we're spending a lot of money.
I mean, I don't know that we need to spend any more money. I will tell you we're playing to win. And when somebody has a good idea and a good initiative or if we see a need for capacity, we're funding it. So there's nobody going hungry here in the IoT business. We're trying not to be cavalier, but we're playing to win we do intend to win in this business.
And I think quite frankly the data suggests and the analysts are starting to suggest that we are winning.
Okay, great. And lastly, in terms of cash flow, what is your estimated FY 2015 operating cash flow? And is it possible that your FY 2016 cash flow can return to fiscal 2014 levels or more?
So I'm not going to guide FY2016 2016 today. FY 2015, it tends to follow non GAAP pre tax earnings. We do have 2 unusual items that we've disclosed and it's in the prepared remarks. 1 is the computer vision pension that is closing out this year. We don't have a final estimate on the amount.
The but it's roughly 45,000,000 dollars And the other is, of course, the restructuring, which is in that 40,000,000 dollars range.
Got you. Thanks guys.
Thank you.
Okay. Torey, can I assume there's nobody else in the queue, because it's been more than an hour now? And just to be respectful of everybody's time, if there's no other questions, we should probably thank you all for participating. And we look forward to talking with you again in the next 90 days. And hopefully, we'll have a good solid report for you then as well.
Thank you.
Thank you. And that concludes today's conference. Thank you all for joining. You may