Welcome to PTC's fiscal 'sixteen Investor Day. Glad you could make it. Jim and I were just commenting on how we're sort of tightly packed in here. We actually had somewhere around 40 or 50 people we had to turn away. So consider yourselves lucky that you got into the building.
But we do appreciate you joining us here today live and on the webcast. I'm going to walk through the Safe Harbor statement briefly here, then walk through the agenda, then turn it over to Jim. We will be making forward looking statements regarding PTC's future financial performance and outlook and expectations, so I refer you to our 10 ks and 10 Q on file. We'll also be discussing non GAAP financial measures. All of these reconciliations are in the presentation you have today and on our website.
Today, we're going to have Jim kick off the session with a strategy piece, a fresh look at things, followed by Mike Campbell, who's going to do a pretty cool demo of some revolutionary technology that we're rolling out. Rob Gremley will then finish up the morning early morning session talking about the IoT growth opportunity. And then Christian will discuss the subscription model, some of the things we're doing to drive adoption there. He's been sort of the quarterback running that program for the past year. And then Andy will finish things up to discuss shareholder value around growth and margins and our capital structure.
And then we'll have a break Q and A session and then we'll actually have lunch up on the 42nd floor in this building, take the elevators out here as you came in. We'll have a management team there to sit and chat for about an hour. So with that, I'll turn it over to Jim.
Thank you, Tim, and good morning, everybody. I just want to start out by looking a little bit at this phrase, a fresh look at things, because it's kind of a vision statement for PTC in general, and it really refers to the fact that the things that our customers make, the products that they make are changing, they're becoming smart and connected and that brings us to the Internet of Things which is a terrific opportunity for BDC and you'll hear something about that today. But the second play on a fresh look at things is PTC taking a fresh look at itself and reconsidering some of the premises that we held and saying how can we really change our company both to respond to this opportunity in the market we serve, but to drive more shareholder value for the audience that's here in the room as well. And so really that's what I want to focus on the latter part and you'll hear more about the Internet of Things when Rob Gremling comes up, but I want to focus on PTC's perspective on what we could do to create a lot of shareholder value. And it's really three basic things we're going to talk about today.
So unlike past Investor Days, we're not going to tell you about every dimension of the business. We're really going to focus on 3 themes. First is what we're doing with Internet of Things and otherwise to increase our growth rate. We really believe that as we come out of this subscription transition, we can be a 10% CAGR or better grower, and we'll take you through the logic and the mathematics behind that. The second thing we're committed to is increasing our operating margins.
We have a long track record of doing that, but the management team doesn't feel like we're done. We're on record saying that. And we think that by the time we come through the subscription transition, we should be operating with an operating margin in the low 30% range. And then the third thing is our conversion to a subscription oriented business model. This is something you're going to hear a lot about today.
We're sort of shifting into high gear, punching the accelerator and trying now to move through this transition to subscription as fast as possible. And our goal is to get to 90% of our software revenue that would be supportmaintenance plus anything we do perpetual plus anything we do in subscription, we want 90% of that combination to be recurring revenue. Now today, we've been talking about 70%, but we mean 70% of new bookings, 90% of the total mix when you bring the support maintenance component into the mix. So we really do think that by 2021, we're going to be a subscription company with a strong growth rate and pretty high margins and between here and there a lot of shareholder value will be created. So this is really my agenda for my short kickoff speech this morning.
Let me step into the elements of it. So first of all, on the strategy for growth, there's a couple of elements to it. Number 1, we want to capitalize on this very high growth IoT market. And I'm going to show you it's more than just an adjacency. It's a business that we have a right to play in and quite frankly need to play in, because it's all about products and how products are changing and the life cycle management of products and so forth.
So we think that this new market is a very interesting opportunity by itself, but it also is one of the ways that we can reinvigorate the core business as well. And there's a couple of other things that we're going to do to reinvigorate the growth in the core business. And then one key element of that is improve our focus and execution. So let me step into these pieces, I got a little bit more information on each. So in the IoT this is a market that's growing at roughly 38% according to most analysts.
We posted a year that was a multiple of that 150 ish percent growth in a 38% growth market. It's still small numbers, but they're not that small anymore. Approaching 10% of our license revenue is now coming from this IoT business. And for us, this IoT business is almost 100% license revenue. There's just a tiny sliver of services in that, but it's really a license heavy type of business.
If you look at the offering that we've assembled by acquiring ThingWorx and Exida and Coldlight and then Vuforia and then a huge infusion of energy and intellect from PTC, we have created today a portfolio that is just unmatched. We truly have the best in class product to go to market with in Internet of Things. So Rob Gremlins is going to take you a little bit deeper into this story, so I don't need to at the moment. But let me just say, we are very proud and very confident in the product that we have. Now when we look at the market, I want to use a depiction from McKinsey.
So this particular picture came from a McKinsey Global Institute report published in June and they said that the Internet of Things will play out in 9 different settings. So a setting is where the things live when they're connected and value is being created. And Mackenzie said that across all these settings somewhere between $3,900,000,000,000 $11,100,000,000,000 of economic value per year will be created in 2025. So a tremendous amount of value and we're talking trillions here really big numbers if they were off by order of magnitude they'd still be huge numbers. So really, really big opportunity.
And then McKinsey ascribed that value out to these 9 different settings and it's very interesting when you look at it. The biggest one by far is factories. So about 30% of the total Internet of Things opportunity is going to happen in industrial environments like factories and they have a pretty broad definition of factories by the way. If you look at where else retail environments and worksites and cities and logistics, these are also big plays for the Internet of Things. What's kind of interesting is how small the consumer element is, because almost everybody in the room probably thinks of Internet of Things and the consumer element, wearables and home automation and so forth.
But if you look at home automation, it's tiny piece of the value that will be created by Internet of Things. Wearables is also a tiny piece, although it gets bigger when you start thinking of it as medicine and healthcare rather than just gadgets and trinkets and so forth, watches and whatnot. But if you look at PTC now, where are we set to play? Well, we're focusing our energy, of course, on the B2B aspects of the Internet of Things, but that's really where all the value is going to be created according to McKinsey. And if you look at some places like in factories and retail, that's areas where PTC has a large presence with our traditional core PLM business and we can leverage that presence to go after that opportunity.
In factories as well, you'll hear more about our GE relationship, where GE is actually taking our ThingWorx technology, building it into their industrial Internet suite and taking it to market with us. But separate from where PTC has traditionally been with our core solutions, Rob Gremlin will tell you about the ecosystem of partners we're building to get to market in all these other opportunities. We have partners building smart city solutions on the backs of ThingWorx. We have partners doing work in the field of logistics. We have partners building home or not home, but office security and building management type of solutions with ThingWorx.
So it really is for us a terrific market opportunity and we feel like much of it is addressable and fits well with our technology and then both PTC as a core partner and other partners that Rob will talk about. So we think that this IoT opportunity is a huge opportunity for PTC, but it also relates back to our core business in much stronger ways than you would imagine. It isn't just an adjacency or just a new opportunity. It really feels pretty core. So let me try to explain to you why I think IoT is core to our core business, PLM.
So PLM or product lifecycle management, if you just look at a definition from Wikipedia, it means managing the entire lifecycle of a product through the design and manufacturing phases into the sales and distribution, then at the customer site and ultimately until the product is retired and taken out of commission. So managing the definition of the product all through that lifecycle. Now what's kind of interesting is the customer piece at the sort of 6 o'clock position on this diagram here is actually much bigger in terms of time relative to the other pieces than is depicted in this chart. So an automobile takes a couple of years to design and manufacture and then lives for 10. But a piece of heavy construction equipment from Caterpillar takes maybe a couple of years to come to market, but lives for 30.
So that customer element is a huge part of the product lifecycle. And it's a part of the product lifecycle that PLM systems have a hard time reaching today. So let's look at PTC's core business. So this is our business before IoT. We really have a CAD business, which is all about authoring the design, particularly the mechanical aspects of the design.
So you come up with 3 d models to describe the product and how it all fits together. Then we have our Windshield PLM business, which is really managing the configurations and the engineering bills of material, EBOMS, the manufacturing bills of material, the manufacturing work instructions, everything that you would need to take that design, understand how each instance of it will be a little different because of different customers, different uses and then how would you manufacture each of those configurations. Now because a product is both hardware and software, we have a software PLM business, which we call ALM and we historically have broken that out to show you that it's a better growth opportunity and also to differentiate because our core PLM competitors don't have this ALM offering. They also don't have SLM or PLM for service. So what we call service lifecycle management is simply PLM used by the service department, okay.
And again, we break that out because it's a growthier opportunity than core PLM and because our PLM competitors don't have it, okay? So this is a very interesting broad view of PLM out there in the market. But what it's missing is an understanding of what's happening in the product or with the product after the product leaves the factory. We don't know. That's where Internet of Things enters the picture because Internet of Things says I'll stay in touch with the product and I'll help you manage that product lifecycle.
I'll help you have feedback loops from the product back to its design, from the product back to its configuration and changes that should be implemented, from the product back to its software and bug fixes and new versions of software that could or should be downloaded into the product And of course, a huge loop back to the service organization to help them understand when the product needs service even before the product needs service to help them perhaps remotely service that product to be very efficient if they have to dispatch a truck and so forth. Now before I move on, I want to point out that that thing in the middle is this box and the elements around it are elements of the design of this piece of equipment which will show up in a demonstration little bit later. So kind of remember that in the demonstration later, we're going to show you and I won't steal the thunder from the demonstration, but we're going to show you how this piece of equipment by being connected really then interacts with CAD, PLM, ALM, SLM and other things that are very interesting, okay? So we think sort of in summary here that the Internet of Things is all about the things.
The things of course are products. So it's the Internet of products. The reason you connect products or things to the Internet is so that you can remotely monitor them, you can control them, optimize them for purposes of improving the service, the operation and the design. Internet of Things is product lifecycle management. It's the exact same concept.
So we feel like we have an enlightened view of product lifecycle management which happens to include Internet of Things and we have the industry's best Internet of Things platform. So it's not a different strategy. The reason we got to Internet of Things is following this line of thinking and so forth. It just happens to be kind of a gold mine sort of opportunity for a PLM company. We have though tremendous synergy and leverage.
So the fact that we are a PLM company helps us win IoT business. The fact that we have a great IoT platform helps us win PLM business and when the customer joins us in a minute to take us through this little demonstration, you'll see and hear and feel that that's the case. Okay. So it's not just Internet of Things that's going to bring more growth to the core. There are other things that we are doing and need to be done.
So first of all, we now have a play in the manufacturing automation space. So this is a place where Dassault, our French competitor and Siemens, our German competitor had gone much deeper into factory automation than PTC had. So whereas we have PLM for software and we have PLM for service, they had PLM for the factory at a deeper level. But now the heritage of ThingWorx it turns out is factory automation. The founders who created the ThingWorx business were factory automation experts.
ThingWorx is an excellent tool for factory automation, which is what led GE to license ThingWorx from us. GE knows a little bit about the industrial Internet. GE had options, including the one they've developed themselves at great investment. But they selected ours because it is a fantastic fit for factory automation. So knowing what a big opportunity that is, we feel like we now have a legitimate play there and you'll hear about how we're organizing to go after that.
The second thing you're going to hear is that the subscription model will substantially increase our value capture. So what Andy will tell you about is after year 4, you get more revenue in a subscription model. So if your customers last with you for a long time, subscription model is a much growthier model for the business. Now our customers are forever. I mean that in the sense that none of them have ever timed out.
Some of them have been acquired by somebody else or there have been some special circumstances. But our first ever customer, John Deere, circa 1987 is still one of our largest customers, nearly 30 years later. So our software lasts a long, long time. And in those long lived relationships, we will generate far more business in a subscription model. So we like this.
The third thing is that we've added in the past couple of years more and more cloud and SaaS options. And of course, when we sell software in a SaaS configuration, we're selling not just the right to use the software, but the right to use the infrastructure behind it, that's a much bigger deal. So we have a bigger growth opportunity by selling a complete SaaS solution as opposed to just selling software. And then on the 4th thing, our new CFO, Andy Miller has brought a lot of discipline around pricing and discounting. And the whole tone of how we think about that and the programs behind it have changed dramatically in the, what, 7 or 8 months that Andy has been here.
So we've made a lot of progress there. And I think we're going to continue to make progress. The other thing we've been doing or talking about anyway is committing to recognize and improve some executional issues that we have. So I want to talk about the organizational and talent changes that we've made. I alluded in the earnings call a week or so ago, 2 weeks ago, that we would make changes to structure and to talent.
And then yesterday, you may have seen we put out a press release announcing that we have hired a new Group President. So the first thing we did is we said we should think of ourselves as 2 different businesses, a technology platform business and Rob Gremley has been elevated to become the Group President of the Technology Platform Business And we are a solutions business, a product lifecycle management solutions business with the big picture definition of product lifecycle management. And we just hired Craig Hammond to come in and run that business. Now the reason we want to do that is because those two businesses have fundamentally different go to market models, fundamentally different technology strategies and so forth. And we felt like we had too many people in PTC trying to do both and maybe not doing both of them well enough.
So in fact, we're separating them a little bit. We're saying to Rob Gremley, you should develop a terrific technology platform and you should go find partners that take you to new markets like smart cities and so forth. And the rest of you under Craig Heyman should forget about smart cities, you should go own a reinvention of PLM, big picture PLM that includes IoT. And you should go own that in discrete manufacturing and in retail, the places where you already have customers and market access and so forth. So Craig is a great hire.
He grew up much of his career within IBM. So he's been well educated in the IBM processes. He ran the WebSphere business at IBM for a while. He ran the IBM Cloud Business for a while. And then he went to work for eBay and at eBay ran the eBay Enterprise Business.
So Craig is steeped in general management of large software businesses. He's steeped in cloud, he's steeped in subscription, really a terrific find to bring into PTC to help bring some new talent into this new structure. And then the other person I want to call out is our new CFO and he's not that new, but he's new since the last time we had this type of meeting, which is Andy Miller. And some of you know when our previous CFO, Jeff Gliddon retired because he was 65 ish. I said I think this could be a real opportunity to go find a CFO for the future and bring him back here and help us navigate our way to the future.
And that's what we found with Andy Miller. So Andy is all about subscription. He's all about pricing strategy. He's all about discount control. He's all about the kinds of things that PTC really needs to have in place to achieve the potential that we feel like we have.
So anyway, I think these changes in structure, these changes in talent are going to be fundamental drivers in helping us achieve the shareholder value that we've been talking about. So the next thing I want to talk about, leaving the growth topic for a minute is operating margin expansion. And there's really 3 sub elements of operating margin expansion. So first of all, ongoing portfolio management. You probably noticed we announced the restructuring in the last earnings call 2 weeks ago.
That was because of portfolio management and we're probably guilty of having a fair number of restructurings over the last 5 or 6 years as we've tried to reshape the company and put our resources more aligned with the future and less aligned with sort of the glorious past. So I think you will see us continue to do that. We have plenty of room to run a fast startup company. The ThingWorx business inside of PTC, so long as we remember that the rest of the business if it doesn't grow at the rate we like it to grow then we need to invest a little bit less into it commensurate with the growth level that we actually think we can get out of it. So I think you'll see us continue to do that.
We're not going to use this exciting new growth business as a reason to de commit from margins. In fact, we're going to stay committed to margins and to cost discipline. On the cost discipline point, I would just point to our track record. In the 6 years I've been running the company, our margins have increased from 13% to 24%, 25%, 2 points a year on average over those 6 years. In the next 6 years that would take us out to 2021, we think there's 6 more points of margin we should go get roughly 1 per year and we're going to do that.
Now subscription is going to confound that a little bit and I'll come to that in a second. Now on the scaling the technology platform group, the point there is that this is a small business. We're investing heavily in it today. It's sort of a number of startup companies that we brought together into this incredible platform, but it's growing fast. And at this point, the revenue growth is outstripping the cost growth.
And so as that business gets larger and larger, it will become more and more profitable. And at some point, we'll be a contributor to profit as opposed to a detractor to profit. I wanted to talk though about this point about margin expansion versus subscription because what feels to me like margin expansion will be reported to you as something else And that's because of the effect of subscription. So as we go through subscription, we stop recognizing revenue transactions in the near term and we start pushing them out into the future and recognizing them over time. That has a depressive effect on our near term revenue and a depressive effect on our near term bookings.
But what I would tell you is that you should expect that while our revenue and reported margins will decline through this valley in 2018 that if you were to mix adjust that there will be steady progress in increasing our operating margins throughout. So after we get through this valley of the subscription transition, we will come back then quickly to that 30% plus operating margin that we expect to be able to sustain on a go forward basis. You'll hear a lot more about this valley through Christian and Andy's talk as well. So let me switch then to the 3rd final topic for me this morning, which is accelerating our subscription adoption. So if you look at what's happened here, in 2015, we decided to test the waters.
And we put in place a program that allowed subscription, but didn't necessarily encourage or drive it. So we allowed our sales guys to sell that way if the customer preferred to buy, we made a commission compensation neutral and so forth, but we didn't push it. But what we did in 2015, in addition to that, is we hired Andy Miller. And so Andy said, okay, that's fine to test the waters, but now we need to commit and move. And we need to move as fast as we can through this transition.
So Andy has now put in place a very aggressive program. You'll hear about it from Christian that really went live on October 1, 2015, 1st day of fiscal 2016, so just a month or so ago. But in that program, we have made many dramatic changes to try to drive our business now as aggressively as possible over to a subscription dominant model. Maybe a peer subscription model, but a model that's at least 90% of our software revenue coming in on a recurring basis. So what will happen as a consequence, which you saw in the previous slide is that the P and L will bottom out in fiscal 2018 and then by 2021 we'll be through any of the effects, we'll be comparing a new year to a previous year that was basically consistent with it in terms of the subscription mix and so forth.
So anyway, this is an exciting part of our story. So kind of to summarize, we think we have a serious opportunity to increase our growth rate and increase it to a respectable level, double digit growth. We think we will and have a good track record of increasing our margins. We expect to get them into the 30s. And we think that we'll make a lot of progress here in the next year or 2, 3 as we move toward this fully subscription oriented type of business model that we're aiming for.
Okay, so that's my kind of kickoff presentation to set the tone for the day. What I want to do next is we want to show you a demonstration using this equipment up here that connects the past, the core, the heritage of PTC around CAD and PLM and SLM into the future of ThingWorx and Vuforia and all this new exciting technology to show you just how well that all fits together in a seamless story. So in order to do that, I want to introduce 2 people. 1 is Mike Campbell, who is the EVP of Digital Twin component of our ThingWorx offering and you'll understand digital twin by the time we're done here. And then Herve Corral, who is one of our customers.
Herve is the Chief Information Officer of Schneider Electric, the very large French company. And so I'll turn it over to you guys and let them introduce what they're going to show you and this will be a fairly quick, but trust me, very interesting demonstration.
So hello, everybody. So my name is Herve. I'm the CIO for Schneider Electric. Very briefly, Schneider Electric is a very large company, €25,000,000,000 more or less. It's 170,000 employees, very global.
We have a specialist in energy management and automation. We operate in a number of segments, industrial segments, buildings, homes, infrastructures and actually data centers. And we're going to speak a little bit more about data centers today through this demonstration. Before doing so, quick word with a partnership between PTC and Schneider Electric. We started we're a long time customer of PTC.
We started in the world of CADs. Then we moved with product life cycle management and windshield. And very recently, we've been working very closely with PTC on what we call the closed loop concept, which is what I will be presenting now. So I was speaking about data centers, right? Just a few words on this product.
This is what we call the MDC of the micro data center. This is actually something that is used for edge computing when companies need to have some fair amount of computing power on the edges, meaning in a retail store, in a bank branch, in a refinery, for instance, for an oil and gas customer. So we have an entire range of products that are actually, as the name says, microdata centers. So this is an entry version. You can have a very heavy ruggedized version for harsh environments.
So you have a number of servers. And here you have another product that is called Smart UPS, which is really the uninterrupted power supply that will power all the racks and all the servers inside. So again, this is an offer that is real that we use in the context of edge computing with a lot of large companies.
Great. So with that setup, what we'd like to show you is this smart UPS that is in this device is of course connected to the Internet. And what we're showing here is a dashboard, which is a ThingWorx dashboard. This is a dashboard that a We've filtered our display to show you just a few of them. And We've filtered our display to show you just a few of them.
And there are a few that are up in the Boston area. 1 is at Google and 1 is at MIT. You see those highlighting on the map. And then of course, our third one here is sitting right here with us in New York. So this smart UPS is right here in the Park of Meridian.
Now this dashboard provides us quite a bit of information about the UPS. We can get can get a set of highlights that will tell us how much power has been consumed, the fact that this is actually online, it's plugged in and receiving power at this time. We can dig in and take a look at some of the other details. So there are many, many sensors in the device, sensors that tell us about the power level, they tell us about the temperature, they tell us about the useful remaining life of the device, for example. In addition to this information about the product itself, the physical product, we also have access to data and information that might come from other systems.
So here we're looking at the design info for this particular device. This information is actually being pulled out of Schneider's Windchill PLM system and presented here in the dashboard for us right now. So we can of course see a rich 3 d interactive model. We've also got the product structure that may have been that actually is managed inside of Windchill. So we can see the various components that are part of this design.
So that's a nice example of one integration with another enterprise system. Another great example is the service information. So here we're looking at a set of information that is important for the service technician. For example, we see again exactly where this server is here in New York. We also see surrounding traffic.
That's the red and green telling us how difficult it might be to get to the device. And on the right hand side, we see information such as current service contract and warranty coverage status. So what entitlements does the customer that owns this particular device have? So that information is coming from ServiceMax as is a collection of other information that's down here at the bottom. So we said there are tens of thousands of these up and down the East Coast.
Here we have a look at some of the open service calls that may be related to those devices. These are service calls that may automatically device itself. We also see the current work orders. So what technicians are out servicing the devices, what devices have been brought into a depot, what severity they are, so on and so forth. Now while those products are being serviced, we may identify we may create enhancement requests, We may define problem reports that we want to send back into Windchill, back into engineering.
So those are conveniently presented here and I could create another one if I liked. And then finally, we've also highlighted cross sell opportunities. Now this UPS has voltage coming into it. And this chart is showing surges in the voltage. And there's actually been an automated workflow that's been set up that says if there are too many surges in too short a period of time, maybe this is an opportunity for Schneider to sell a surge suppressor.
So if that happens, an opportunity will interesting information about the product. And it's interesting to look at this information about the product in a dashboard like this that was created again by Schneider and presented for the technician. But a more interesting way to look at that information since we have one right here is of course augmented reality. So Herve why don't you take us through that part?
Sure. So we can role play a little bit and assume for a second that I'm a field service technician in a customer site, in a branch, for instance. So here you go. You made things very simple for me, just one app. Here you go.
So the first thing, what you see here with Schneider Electric actually is a barcode. So I'm going to here we go, go in front of it. And here you go. You see here like an x-ray, a first vision, right, of smart UPS actually, which is inside the machine. You saw it in a while.
Actually, if you go here as a service technician, you would have my warranty information, is the product in warranty, etcetera. So now this is live data, right? If I actually not yet, sorry. If I go here, you can see that I have a number of information that are available. Now if something happens, you did it already?
So
we've unplugged the device.
So you hear a little alarm and it will take a little while, a few seconds, but this will be actually retranscribed on the virtual reality on the iPad. And this will hopefully become yellow pretty soon.
Some of you in the room also should expect to get a text message as well, notifying that the devices become disconnected.
I can try to rescan it another time.
So you may some of you may in the front may have just heard an alarm that's going off in the machine indicating that there's no power?
Always a nice live demo effect.
We worked 64 times yesterday.
Yes, here we go.
Okay. So we'll give some of you the chance during the break to come up and interact with it, and we'll have it behaving then.
Right. So now if I'm a service field service technician, I'm going to open this. I have a procedure to perform. So here you have a second actually barcode that I will scan nicely. And here you have again the same X revision of a product, right?
Here, you have things like heat and here it comes. You can see that you have this red thing that shows that actually the battery is end of life. So if I touch now the little estimation point, it's going to tell me what are the current alerts and it tells me maintenance is required. So I will say yes now. And here you're going to have are we still unplugged?
No, you're plugged in again.
All right. Here you're going to have actually the maintenance routine that will appear on screen. So if I move here, it will tell me, okay, to remove a front. And as you can see, it's really virtual reality, then to take the screws out, then to remove some of the gears so that finally I can take the battery out. So we thought that was a pretty good example, right, of and I'll come back at it in a little while, but how we close the loop between service information, connected product on making the work of our field service engineers safer and more
efficient. Great. Thank you, Aravind. So if we can send the display back to the laptop, what I will show you is some of what went into making that experience happen there. So let's just walk through technically what you just saw.
The first thing that you saw was Vuforia Technology. So our recent acquisition technology for computer vision recognizing this tag, which Windchill, which reconciles the specific configuration, the specific structure for what's in this particular box right here next to us. That bill of material then is combined with 3 d data from PTC Creo, 3 d geometry that will allow us to create the right geometric configuration. And then ThingWorx with through our digital twin approach combines that definition, the definition of the data related to this device to its information up on the cloud streaming off of the device itself. So we have ThingWorx connected to the Schneider digital service platform that's performing that binding, that connectivity between what's here and the data that's been streamed.
We then use the ThingWorx web dashboard. So that initial dashboard that I showed you with the map, that's actually exposing that product information. That's the way that we presented it to the user. And that presented information not only from the device itself, but from other enterprise systems like ServiceMax as well. And then finally, you saw the service procedure.
Now that was developed and created in our Surrogistix suite of products, our SLM tools to convey exactly what the procedure would be. And then it was presented, of course, in augmented reality, again, with the Vuforia technology. So that's the process that we went through and there were many PTC technologies at play there. Of course, 1st and foremost, windchill is the back bone here, right? Windchill is managing the configuration.
Windchill is managing the complete bill of materials. So all of the electrical components, mechanical components, even things as detailed as the software that may be on that particular device as you can see here, that's all tracked in Windchill. Creo was used to model the 3 d geometry, okay. So here we see the design inside of PTC Creo. We'll take a look inside it.
But what I want you to know is that the data may have been authored in Creo or it may have been authored in any other CAD system. Some of you that were at our event last year may remember me telling you about our Unite technology in Creo that allows you to natively open data from any CAD system from SOLIDWORKS, CATIA, NX. So that data could come from anywhere and very easily become be managed in Windchill and become part of this story. And then finally, our Creo Illustrate tool was used to author that disassembly sequence. This is a purpose built tool for a technical illustrator whose job is to communicate sequences and steps to perform maintenance.
So you can see the authoring environment here where he would define exactly what pieces to be careful of to be careful of electric shock and discharging himself before he touched the next piece. All of that is authored in the Creo Illustrate tool. Now that's a lot of information related to the product itself. Let's talk a little bit about the connected experience that you saw. So first, let me begin with the ThingWorx mashup builder.
Now this is a tool that developers would use to create the dashboard that you saw. In the middle of the screen, you see something that looks like the dashboard that I showed you. It's actually been partially completed. And what we're doing here is we're adding, for example, the table, the grid that listed the 3 UPSs that I showed. And we're binding into that table data from the UPSs that are out there in the world.
Now as you see there are many, many columns. There's lots and lots of information that these devices are streaming off. So as I define my dashboard, I'm going to select a few of those columns and I'm going to present those. And there you see an initial draft. So you begin to see some of that data showing up.
Let's do a little bit more work and make it a little bit more presentable. So we'll shift the order of those columns and we will format it to make it look a little bit more presentable. This is a very natural and intuitive environment for developers to work in. You should contrast this with editing manually typing lines and lines of JavaScript. This is a very, very high productive way to drag and drop these components together to bind them to real data from the machine or from other enterprise systems and very quickly create that dashboard that you saw.
The last thing that I did there is I just added the map and then of course again bound the data from the devices to the map so that we see those showing up here. Okay. So that was the first part of the demonstration that we showed the dashboard. The second thing that we showed you though the AR experience is built with a different tool called the 3 d Mashup Builder. Now again, the premise is the same.
In the middle of the screen is the palette, if you will. And this tool can be used to build mobile applications. So your palette might be a tablet or a mobile phone that kind of a form factor. But in this case, the experience we had here, the palette is actually 3 d geometry. So in this experience, we'll define that we want to work in 3 d, we'll bring in the model of the UPS, again, that came from the CAD system, And we will use this as our content that we are decorating, okay?
So we're going to again drag elements from the list of widgets here. So we're going to place, for example, the AR tag that will locate the information in the physical world. And then we're going to begin decorating it with icons and labels and other user interface elements that we want to expose in the app that Herve showed you. Now initially, we're just placing graphical images here, but those images actually have intelligence. We want them to be associated with intelligence.
We don't just want a picture of a thermostat. We want to know what the temperature is. We don't just want a picture of a battery level indicator. We want that to be driven by data that comes from the device. So very quickly, we'll go into a separate environment here and bind data that's coming off of the UPS.
So here we're searching for the UPS's. We're getting properties off of it. And we're getting properties that are being streamed off of it like battery level, like temperature. And we're using that information and driving it into the graphics that are shown on the screen. This app that we're showing here, the process of creating it took about 25 minutes to build using traditional methods, using traditional augmented reality approaches without even binding the data to real data in the field would literally take days.
So there's a huge productivity gain to be realized for people that want to build these kinds of solutions using the PTC approach that we've presented here. So huge productivity gain for developers. Urbane, maybe you can talk about some of the productivity gains for the consumers of this information.
Sure. So what you just saw is actually proof of concept that we worked on our labs. And we have this is what we call the closed loop project because we believe that for company like ours with IoT, a lot of work should be around connecting Vodots. And a lot of my work is about connecting Vodots. So you have a number of connected loops.
You can have a connected loop that is about subscribing for instance to an additional services on top of a product. You can have a closed loop that is about upsell and cross sell and you saw an example of that earlier with a surge arrestor. You can have a closed loop that is about servicing the product, which is what we've been demonstrating here. And you can have a 4th type of closed loop around enhancing the design and improving the design of a product. So again, this is very new.
This is some of the emerging thing we are working on as proof of concept. But we see it very interesting because we do indeed start to connect with us and look at those 4 different type of closed loops in order to really create business values for the company.
Great. Eiry, thank you very much for coming and sharing your story with the audience. We will be back for Q and A. But at this point, I'd like to invite up Rob Gremley. We've shown you some of the technology and now Rob will take you through the business update.
Thanks so much.
It's a tough act to follow. I don't have demos like that unfortunately. Well, good morning, everybody, and thanks for the opportunity to spend some time with you this morning. It's been a year since I stood in front of you and talked a little bit last year about what we were doing with this technology platform, this portfolio of developer tools. And it's been a very, very busy and very, very productive year and I'm excited to share a little bit with you over the next say 20 or 25 minutes.
I'm going to take you through 4 sort of big topics. Number 1 is a little bit of a deeper dive into the market opportunity that we see in the Internet of Things. Obviously, it's huge and I want to parse it for you a little bit and show you where I think PTC plays in particular unique ways. Number 2, I want to talk to you about our leadership position that we've staked out both from a technology standpoint and from a thought leadership perspective. Thirdly, dive a little bit into the customer momentum that we've created.
I think we put in the prepared remarks the fact that we've generated just shy of 300 new customers that have joined the company over the last 12 months. We're very proud of that and I want to share some of those customer stories with you, maybe bring to life what we're doing with our customers. And then 4th, talk about this ecosystem that is building up around the ThingWorx platform and some very, very exciting things that are going on both in the developer community as well as in the partner community. Okay. So as Jim said earlier, we think there is a tremendous opportunity to connect this digital and physical world.
That's exactly what we just showed you here with this Schneider demonstration. The fact that while I have physical proximity to this data center, I also have a tremendous amount of digital information that's streaming off of that data center. And if we can be the company that provides the types of tools that allow developers to build applications and solutions that start to bridge this divide that has historically happened between the digital and physical world, we think we've staked out a very, very interesting opportunity for our customers and for PTC. But it's going to take new technologies to be able to do that. That's the wheel that Mike just took you through there.
Some of those technologies are brand new being developed today. Some of them PTC is acquiring, some of the very, very best companies that are on the leading edge of the types of tools and technologies that will be required to pull this off. And some of them are pulling forward in sort of reinvigorating PTC's core solutions as well. I want to point out here in this mission statement that we absolutely want to make ThingWorx the preferred software platform for the developers that are developing the applications and solutions that bridge this digital and physical world. And that term developers, the title, the role developer is critically important to my business, the technology platform business at PTC, whereas historically, I've spent many years inside of PTC working on the solution side of the house where we sell, first develop and then sell software to end users.
In this technology platform business, I am fundamentally building a portfolio and selling to developers. Now those developers might be developers that exist quite honestly right on the other side of PTC in the solutions group that are consuming the capabilities of the platform and as Mike showed sort of reinvigorating PLM and CAD and so forth. But those developers live well outside of PTC as well. They live in our partner economy. They live in ISVs.
Other ISVs just like PTC, they live in system integrators. They live in telcos. They live in small application companies that see a unique opportunity in the Internet of Things. And our job fundamentally is to get to every single one of them and to support them with great developer tools and a great developer ecosystem that shows them that this platform is fast, it's simple, it's easy to consume, it can build fantastic applications and solutions on top of it. Okay.
Jim showed this slide a little bit earlier. I want to just take you through it one more time maybe through my eyes when I see this set of settings that McKinsey has delineated sort of the places in which IoT is going to create economic value. I look at this really from through the eyes of the technology platform group, whereas the PTC Solutions Group is a route to market, if you will, for the technology platform group. In other words, the technology platform group is providing our technology to the PTC Solutions Group. They're building solutions on top of it.
In some cases, they're even reselling the raw capabilities of the platform. And they get the technology platform group, my business into a couple of these settings, certainly into the factories. As Jim mentioned, that's fully 1 third of the economic opportunity as staked out by McKinsey here in IoT. Also into the retail environment, we've had a retail footwear and apparel business for quite some time. So that gets 2 settings.
So I see the PTC Solutions Group as a route to market here for 2 of these settings. The other interesting thing is that all of these settings in some way have a common thread, which is there are products, the things connected to the Internet of Things that are resident in every one of these settings. So PTC as a way is a nice horizontal play to get to all of these settings as well. But I also want to make sure that I've got an ecosystem of partners that are driving pervasiveness, ubiquity really for ThingWorx across all of these different environments. And as Jim mentioned a little bit this morning, we're building out an ecosystem of partners, I'll take you through that in a little bit more detail in a minute, that get us into places like smart cities or smart offices or work sites or even the smart human or human setting.
So this set of settings for me is much more than simply the smart connected things, but it's about all of the opportunity that present itself, all of the developers that are going to build applications and solutions for these settings that make up close to $11,000,000,000,000 of economic opportunity, are potential customers for the ThingWorx platform and our job is to get to every single one of them. Again, Jim mentioned this a little bit this morning, but I want to go into a little bit more detail about the platform that we are building because it's coming together in a very, very sort of unique way, a roll up of startups, if you will, but also I think in a very elegant way in the way that it's been architected and brought together as one cohesive platform. Developers in our experience that are developing applications and solutions here need a broad and differentiated set of capabilities. And that's exactly what we're offering now with this ThingWorx platform. These are simple, fast and easy to use tools for the developers to start to basically give themselves a kick start in the development of those applications and solutions so that they don't have to develop natively many of these capabilities themselves.
They can spend their time adding the very specialized IP that they bring to the table, the solution builder that fundamentally understands what drives a smart city can focus on that part of the solution rather than the underpinnings or infrastructure that's required to build these types of connected solutions. So let me take you through this in a few pieces. So the first over on the left is Connect. That's fundamentally making a connection to the edge being able to grab that sensor information from a connected device, securely bringing it up to the cloud and storing it in a device cloud. I would say that the Internet of Things can be sort of broken down into this is my cocktail conversation around IoT, kind of 2 simple things.
1 is get the data and the second is do something with the data. So this first part is the get the data piece. I have to be able to connect to 100 or 1000 or 100 of 1000 or millions of connected devices just like this Schneider data center and be able to get the sensor information off of that product and get it securely into a cloud. So we have a fantastic opportunity to be able to do that both through ThingWorx and our Xcede acquisition. We have device cloud sort of options, if you will, for how you might want to store that connected information.
We will sell you the software and you can stand up your own private cloud, if you desire to do that. We'll sell it to you a SaaS environment or you can take that software and put it in your own 3rd party environment as well. So plenty of opportunities sort of flexible deployment options if you will for how you might want to deploy your own device cloud. Okay. The second is analyze.
You have to do something with all of that data once you have it. And we've had some, I would say capable, but heretofore somewhat rudimentary tools for being able to set alerts and rules inside of ThingWorx. And that's think of those as sort of if then statements. If the battery level goes below a certain level on the data center here, send a text message to someone and tell them that they should do something about it. That's a simple alert.
But the fact is with the reams of data that we're collecting off of these millions of connected devices, we have to have a way, a much more sophisticated way to be able to see what's happening across a portfolio of connected products. So that means things like predictive analytics, machine learning, being able to do very sophisticated models. But again, if the mantra here is do it simply and easy, what we can't say is go get a busload of data scientists. We have to make it easy and that in fact was the very premise of Coldlight, the company that we acquired to do this is that they said there has to be a way to be able to apply technology to this problem of big data analytics, predictive analytics, machine learning without needing deep and very sophisticated highly educated data scientists. So that's the analyze part of the platform.
The third thing that we allow developers to be able to do is to create. That's to create the applications that expose all of the interesting information that's inherent in this machine data, be able to turn raw data, sensor information from these connected products into real sort of actionable realizable applications and information. Mike showed a fantastic example of that earlier with the application that was built for Schneider and talked about how easy it is in this simple sort of WYSIWYG drag and drop codeless mashup environment that can very quickly build applications. Okay. And then 4th is this notion of experience, being able to provide very visual, very sort of natural ways to be able to visualize digital information even when I have physical proximity to the device.
And that's this notion of augmented reality. So we just a week ago today in fact closed on the acquisition of Vuforia. And I spent the last week in fact in Europe with all the Vuforia developers. I can tell you that this is an extremely excited and extremely capable group that is they just couldn't be more excited about joining PTC and being able to bring the capabilities of augmented reality, which heretofore have sort of lived on the consumer side and bring that to the enterprise. We think the Vuforia team thinks we obviously think that there is a tremendous opportunity to start to present this type of visualization, this type of augmented reality capability in the enterprise or B2B setting, whereas Jim pointed out earlier, that's where all of the economic opportunity is.
And then lastly, we have this notion of share, which are some capabilities that allow the developers, number 1, to get a head start, move quickly by being able to consume extensions and applications from our marketplace, our online marketplace. And then lastly, be able to share in the developer community, share ideas and support and collaborate and so forth. So as I said earlier, the platform is fundamentally come together through a series of acquisitions and then some big doses of organic development as well to make sure that these businesses are running well together, that we are integrating these well together. Coldlight and ThingWorx are already working. I can expose Coldlight data directly into ThingWorx.
The ThingWorx business runs on top of the Exceeda Machine Cloud. So for customers that were Exceeda customers that didn't have the application enablement capabilities that they wanted, we now can put ThingWorx fundamentally right on top of the Exceeda machine cloud. In fact, ThingWorx is fairly portable from device cloud to device cloud. It certainly has its own device cloud top to bottom. But as I said, as I just said, we can put it on top of the Exceeda machine cloud to expose AEP type capabilities to Exceeda customers.
And in fact, just here with this demonstration, we're fundamentally running on the Schneider data center and the Schneider device cloud rather than ours. So I like the portability of the ThingWorx AEP. Just a quick note about that picture in the upper right hand corner, the guy with the funny looking glasses on there, that was a project that Vuforia did with the Mini division of BMW. BMW in their Mini wanted to have a heads up display capability, but the geometry of the car in the windshield is such that they couldn't actually fit the componentry that was necessary to have an appropriate heads up display experience. So they said, boy, what if we could actually just put it on the glasses?
What if we could use see through augmented reality glasses to give the driver the same experience? And so they partnered with a company called ODG, makes a set of glasses not unlike Google Glass, but in this case very, very capable for this type of environment. So you see the guy with the glasses on, he's obviously having a pretty good time driving the Mini and seeing this augmented reality data. And then you can see in the lower right there what he sees, which is things like speed, available parking, right turn, left turn, all the types of things that you would see in a heads up display environment. Okay.
So we're really, really excited about the capabilities of the platform. I feel like we've put together some of the very, very hottest technology. Now even though this has come together as a set of disparate acquisitions and organic development, the objective here and quite honestly we're doing it beautifully is to deliver this as one cohesive extensible platform. To the developer, this should not feel like individual acquisitions and development. It should feel like and it does a very integrated set of capabilities, very integrated set of tools that you could have multiple on ramps into.
If you were a developer mostly interested in our analyze capabilities around predictive analytics, you can consume just that and then move sideways as your solutions grow. Same thing with the ThingWorx capabilities for connectivity and creating an application. If that's what you were most interested in, you could simply consume those and then again broaden your consumption, if you will, of the platform as the solutions growth that you're developing. So really excited about the sort of elegance and cohesive nature of the platform and the way that developers can get started on it. We're winning awards.
We have consistently won awards quite honestly over the last couple of years with the capabilities of ThingWorx and the entire platform. That includes at CES here in 2015 and includes the sort of user write in awards or survey based awards like was done with this Internet of Things awards where we basically ran the table for best IoT platform, best IoT technology, so on and so forth. But it's not just sort of the accolades and awards that we're getting for the technology, it's for the perspective that we have on what to do with the technology as well. And many of you know and in fact, I think they were on the chairs when you walked in this morning that Jim and Michael Porter from Harvard Business School have now co written 2 articles for the Harvard Business Review. The first one on this notion of how do smart connected products or the Internet of Things affect competition in manufacturing?
And then the second on how does it affect the organization? What new roles and responsibilities and organizations emerge? And should companies be tackling if you want to be a leader and get ahead of this notion of connectivity in IoT. And then obviously, we're a little bit of darling of the press and the analyst community right now. We at when I can remember back many years ago, when we would have maybe 15 industry analysts that were following us in our CAD and PLM business, now we regularly hold webcasts and physical meetings for industry analysts where we have north of 100 people that are following the company.
So really, really exciting. And we're proud of the fact that not only we're working hard to make the platform developer community and the industry at large. Now all of that is kind of translating into some business success as well, something I'm sure you're interested in and excited about. We absolutely crushed our goal of 200 new logos here. That was a number that we had put out saying at the beginning of FY 'fifteen, we'd add 200 more customers.
It was in the prepared remarks that we generated 290 new customers during the year. So just shy of 300 new logos acquired, those are people that evaluated the technology against other opportunities, other sort of options that they might have had in the market and decided ThingWorx is the platform for me. And then the requisite bookings that have gone along with that have risen nicely as well. Now you might notice that there is a disparity, if you will, between the logo growth and the bookings growth. And that's because we are executing this land and expand strategy and I'll hit on that in a second.
But we think that the opportunity here is a market share sort of land grab. The idea to get as many people as possible to be working with the platform, to be working with the technology, even if they're doing it in small doses and that those will expand quite nicely over time. So that's why some of these deals might be smaller perhaps than what they will be in the future, but that's perfectly part of our strategy. The customer base now is inching up on 500 customers, fantastic sort of marquee names from all different industries. Many of these generated by the PTC sales force, many of them generated outside of the PTC sales force.
And in fact, about a third of the customer base now you would say was generated by the PTC Solutions Group sales force, a third of it generated outside of the strategic accounts and the traditional accounts that PTC has called on because now IoT opens up new opportunities to be able to maybe break open some new doors for us and then a third of it generated by our partner economy. And so we think that's a fantastic mix and a way to be able to grow the customer base. We've had again some really marquee wins, both new customer wins and some expanding customers. And again, that's an important part of the strategy as well is that we continue to win new customers, continue to expand the number of logos that are trying the platform for the first time. But then we have to be paying attention quite honestly to are they expanding over time, both from an asset perspective and from a bookings perspective.
I'll hit on just a few of these. We have 7 different projects underway at Airbus right now. 1 in the area of smart tools for the manufacturing floor to make sure that assembly techniques are done appropriately. Think about torquing a bolt or putting a rivet in and keeping a database of the mechanics of how that happens on the factory floor. You know exactly how an airplane was put together.
EMC, we got a nice expansion deal from Diebold, where we are monitoring ATMs on behalf of their banking clients. Nice expansion deal from Diebold. Stanley Black and Decker interesting use case there around security for schools in their door division. So really, I think it's just an interesting way to look at all of the different places that IoT and connectivity can present itself in many different verticals, many different size of customers. The use cases, I've been at this now for about a year and a half in this business and the use cases just continue to surprise me.
All of the places that people will think about where connectivity could be instrumental in differentiating to their business. Now this is translating into fantastic opportunities. We obviously watch carefully the number of opportunities that are being captured in our salesforce.com system. Today, there are over 1300 what I would consider to be sort of meaningful opportunities that are being tracked in salesforce.com. And by meaningful, I mean, the types of opportunities that we look at that would say this is a marquee name and has platform extension potential, platform expansion potential and has asset expansion potential as well.
And so this isn't actually the sum total of all opportunities that we're watching at salesforce.com, but the ones that I would say are sort of truly special and meaningful opportunities. So really, really excited about the fact that we've got another year under our belt of pipeline development and expansion opportunities. This land and expand strategy, I believe is still absolutely the right one for us to continue to execute. It worked great for us in FY 'fifteen. It will work great for us in FY 2016.
We see customers going through 4 fairly important distinct phases in their lifecycle with us. The first is typically a paid but small proof of concept. Think of this as starting to exercise and understand the capabilities of the platform. We like those to be fairly contained so that they can move quickly into a longer probably more rigorous pilot program where we're actually starting to connect to their edge devices. We're using their data.
We're connecting to their machines and so forth. We're building applications as part of that pilot program. We're showing them the rapid application development capabilities of ThingWorx. We're doing some analytics with the CoLite business. That then leads to an initial production rollout perhaps in one model or one division and then eventually to a production expansion whether you just continue to add more and more products to it.
So that's this notion of asset expansion. First part of my equation there, asset expansion is just the number of connected devices that they have connected to the system. And our pricing is such that as they connect more and more assets, the value to PTC goes up and extensively the value to the customer goes up as well. But there's also now that that capability, there is platform expansion as well. As we see customers that might have gotten started that on ramp that I talked about with one particular area of the platform, we can now go back and expand their use into analytics, expand their use into augmented reality, so on and so forth.
So 2 interesting levers that we can pull as we expand the value both for them and for us. We love this land and expand strategy. In practice, it looks like this. Here is one particular company, Tyco Fire and Safety. They make sort of commercial security and fire systems that you might find in a building like this, monitored using our Exceeda system actually, they were an Exceeda customer going back to fiscal year 'ten and you can see they started out with about $100,000 ARR based on the number of assets that they were connecting to the system.
And over time, over a number of years, they've continued to go on the steady diet of expanding their assets now up to about 7,000 assets and an annual recurring revenue rate of about $350,000 So this is a nice expansion. They just keep adding more and more capabilities as they're either delivering new products out into the market that have connectivity inherently built into them or they're retrofitting some of their old products as well. So this is pretty typical. Even better would be a story like Caterpillar, where we did a fantastic job over the last 12 months working with Caterpillar, What started as almost they're sort of a textbook land and expand case study here as I laid out those four phases of land and expand because they did start out with a small paid proof of concept, working with a dealer quite honestly that is in this cat rental power area to connect some of these generators, these portable generators then moved to a more significant sort of 6 figure pilot project, took longer, a couple of months and then eventually to a 7 figure deal for a particular division, this energy and transportation division inside of Caterpillar.
So this is a fantastic story of a very large existing PTC customer that saw the capabilities inside of the platform, knew of PTC quite honestly because of our history with Caterpillar, exercise the technology over time, put some fairly stringent and very difficult requirements in front of us. We are quite honestly replacing an existing technology here at Caterpillar. So they did go many years ago, go down the homegrown route and have realized now that it's time to come back and replace all of that homegrown technology with something much more sophisticated and off the shelf and allow them to focus on the areas of the solution development I said earlier that where they can bring special IP and leave the infrastructure if you will to us. So we think there's fantastic asset expansion potential here, 200,000 quite honestly of these assets just inside of Energy and Transportation and then even more beyond that as we think about the rest of Caterpillar. As Jim mentioned earlier, another fantastic win for us in the GE business.
Again, a third of the economic potential opportunity in IoT exists inside of the factory. We think this combination of GE and PTC together is really, really very, very powerful as the platform becomes quite honestly the underpinnings of their brilliant factory initiative. We took an initial order for 80 of the internal GE factories that's on our way to a potential 400 GE factories. And then a go to market partnership between the two companies that allows us to start to take these solutions around operational efficiency and to take that to companies outside of GE as well, where PTC has fantastic entree into discrete manufacturing, GE has fantastic entree into process manufacturing. So a really, really fantastic partnership that's brewing here.
We're already stood up in some of these factories. So the solution has proven to be very rapid in its ability to build solutions. The factory is a messy place from an infrastructure and system standpoint and this is where the sort of rapid application development capabilities of Windchill really, really shine. The ability to drop into a fairly complicated mix of both machines and systems and to provide a backbone, if you will, to expose information to the plant manager is really what ThingWorx is so fantastic out here. Now to keep all of this success going, we're doubling down on our go to market initiatives here.
I'll take you through just a few of them. So we recognize that in a strange way we've had tremendous success and we all know it internally. Unfortunately, I'm not sure the market understands exactly the tremendous amount of success that we've had. So we are putting a big initiative on upping the volume of marketing. Charlie Onggeshek, who originally joined PTC as our Chief Marketing Officer, is kind of hopped the fence to the technology platform group.
We're going to apply him and his talent specifically on the platform business, giving him a fairly large checkbook to be able to go out and really reach developers. So that means social, online presence, developer events, hackathons and so forth. All the places where developers hang out is where Charlie is going to make sure that people understand the capabilities of the platform. We're tweaking a little bit the PTC Solutions Group direct sales organization to make sure that their talents are applied in the right places with a real focus on those PTC strategic accounts and a specialized sales force that will go call on the factory working together with GE. And then a third group, which is an overlay group that really make sure that as PTC reps find opportunities for the platform, they've got an overlay organization that they can call in.
They're really adept and experts at being able to sell the capabilities of the platform to these kind of internal solution developers. So fantastic sort of tweak, if you will, to what we're doing with the PTC direct sales force. And then lastly, as I said earlier, PTC sales represents one avenue to market for me, not all avenues. And so we're building out a much larger partner ecosystem and focusing on having more business development, more sales enablement, more programs that are built for partners to be able to take this technology to market as well. Now specific to the partner economy, we've had a really, really fantastic year with new partners.
We categorize partners into different types of partners, starting with ISVs, independent software vendors. Now the perfect example of an ISV that's consuming the capabilities of the platform is PTC. Everything that Jim and Mike talked about earlier this morning, where we can reinvigorate or enhance, let's say, the capabilities of our CAD software, our PLM software and so forth by consuming capabilities from the platform. That's really, really powerful. I say they're kind of IoT izing their existing software categories and software offerings.
So PTC is a great example there. I'm going to take you through a couple more in a minute. In the system integrator space, again, the system integrators have taken great notice of the platform, many of them focused on in areas outside of discrete manufacturing and that's the power of the partner economy here outside of the manufacturing space. So Dell Services thinking about healthcare, Pactera thinking about smart cities, Pactera is a system integrator based in China, where they see fantastic opportunity for smart cities. Telco operators have a role to play here.
We'll see how that shakes out over time, but they don't want to be simply the connectivity carrier. They would like to have solutions to bring to market as well, many of them making investments and partnerships to be able to do that. Alisa is a good example of a telco that we've been successful with this year in the Finnish territory. So they're Finnish telecom, dollars 2,000,000,000 Finnish telecom, closed 15 deals for us recently. So they're really getting going here after only having the platform for about 9 or 10 months.
Solution builders, these are companies that see a vertical application opportunity. They have the IP about the application of IoT in an industry, but they don't have the capability of building the platform themselves, writing all of that native code themselves. So they're looking for a platform to be able to put their vertical specific IP on top of build an application then take that to market. A great example is On Farm in the agricultural space, Railcom, in the rail management space, all of which are building applications for very specific vertical industries and use cases and doing it on top of the platform. And then lastly, edge and connectivity providers, companies like analog devices that have this, they are basically sell sensors on a chip.
And again, they have an IoT play here as well, which is that they are creating a sensor to cloud service. So they won't just sell you the sensor, they'll sell you the entire sensor to cloud stack such that rather than selling you the sensor, they'll sell you a URL where you can simply go and get the sensor information. And so we're partnering with them around an initiative like that. So fantastic partner economy and partner ecosystem that's really taken notice of the capabilities here. I'll take you through just a couple.
This is ServiceMax. You've heard that a couple of times, in fact, part of the demo here this morning. So ServiceMax has a leading field service management solution that's built on top of Salesforce quite honestly. That's why this screenshot here looks a little bit like a Salesforce UI because fundamentally the field service management solution from ServiceMax is built on top of the Salesforce platform. Now ServiceMax wanted connectivity to the edge.
They wanted to be able to expose machine data from connected products to their technicians, technicians that might work in a sort of a call center, a management area as well as technicians that were out in the field. And they had quite honestly on their roadmap projects to be able to go build that. The CTO and his team had already built out a roadmap for how to go do this. Then they got exposed to the ThingWorx platform. And they said, we would be crazy, quite honestly, to try to build all of that ourselves when we can simply partner with PTC, they're 5 to 7 years ahead of us here.
And so we now have an integration between ServiceMax and ThingWorx that exposes ThingWorx machine data, machine data that's collected through the ThingWorx platform and exposes that machine data that's collected through the ThingWorx platform and exposes that into the ServiceMax environment, both on the desktop for a manager that's trying to decide which technician should I send, as well as the technician with a mobile device that's standing in front of a piece of equipment like this. And we can expose not only machine data but then service procedures out of our Surrogistix software from the PTC Solutions Group. So really tight interesting integration there and again I call that kind of IoT izing an existing piece of software. One more note about partners. We sometimes we see partners working together.
This is in Japan where NTT DOCOMO, the wireless division of NTT has now partnered with NSW which is about a $250,000,000 system integrator and they bring complementary skills to a joint solution. So what NTT Docomo brings to the table is a big customer base, a big sales force and all the connectivity that's required, all the transport that's required to get machine data from connected devices into the cloud. What NSW brings to the table is experience in building solutions on top of ThingWorx as well as hosting. And so these 2 organizations now building on top of ThingWorx are developing solutions for the Japanese market. They've closed 15 deals together so far.
When I was in Japan 2 weeks ago, they showed me that they have 75 proposals in front of Japanese customers right now. They're fundamentally built those proposals are fundamentally built around these types of solutions built on the platform. So really, really interesting, they took me through a customer they disclosed called Taguchi Denki, which is a solar energy management company. They had very quickly built a solution for solar energy management, delivered it to Toguchi Denki. That's 10,000 assets in the original deal on its way to 50,000 assets.
And when I asked them, are you going to productize that and think about other kind of energy management companies that you could take that through in the Japanese market, they got big grins on because that's exactly their strategy. So really interesting when we see partners coming together with complementary skills. I think in this case the telco knows I don't really have the skills to be able to develop solutions myself. I should partner with somebody that allows me to be able to do that. And what NSW sees in NTT DOCOMO is scale, big, big reach, that's a $35,000,000,000 wireless carrier in Japan.
So interesting combo there. We're really focused on making the developer experience simple and fast and easy. Charlie and his team have done a fantastic job of upping our online presence and our online developer support, including how to get access to certified products, how to go get a guided experience if you're entering the use of the platform for the very first time, how to get tutorials and online community for support and collaboration from developer to developer. A lot of these developers hang together and spend a lot of time online helping each other. I think with this acquisition of Vuforia, which by the way, Jay Wright is in the back of the room, Jay Wright is the General Manager of that business that we just acquired from Qualcomm and he is here today.
I would urge you to spend some time with him. Jay and his team have built and are supporting I think a very, very large 175,000 developers, very, very large developer community and they are experts at how to do this. How to reach out to developers, how to acquire developers, how to get them on boarded, how to get them to be successful, how to get them working together, all the back end systems that support that to be able to keep track with them and so forth. He really has done a fabulous, fabulous job with that. And we're going to take quite honestly take a lot of stuff that he's figured out ahead of us and we're going to go bring it to the rest of the platform.
Okay, last slide here that we also think that there's an unbelievable opportunity to get after the academic area where IoT developers of the future are now learning all of these connectivity and IoT skills. So we have a dedicated program to make sure that ThingWorx is ubiquitous throughout the entire academic community. We added 374 universities in the last 12 months that have decided to put ThingWorx in as part of their curriculum, including 11 of the top 15 engineering schools. My alma mater is up there, which I'm proud of. But I think that there is a tremendous opportunity.
This number should double quite honestly as we get going here over the next 12 months as more and more of these schools continue to see progressive technology like the Internet of Things as an opportunity for them to differentiate against other universities. And quite honestly, they will graduate students that will know more about the Internet of Things than the companies that they are hired into. And that's the exact strategy here. It's a fantastic seeding strategy for sort of IoT managers and directors of the future. Okay.
So just to wrap up here, I'll drive home a few points. Number 1, we continue to believe that bridging this divide between the digital world and the physical world is a huge opportunity for our customers and our partners and a huge opportunity for us. With the capabilities of the platform that we have the thought leadership that Jim and others have brought to the table, we've got, I think, an unbelievable technical and thought leadership stance in a crowded market. We've got fantastic customer momentum, 2.90 new customers joining us in the last 12 months and a big expansion opportunity as we keep that land and expand strategy going. And then this energized growing sort of further that's going on inside of the partner ecosystem is really great as well.
Okay. So hopefully that was quick. I don't know how quick that was, brush through the platform, but I'll be around for the balance of the day. Thank you very much. I'll turn it over to
Tim. So we're going to do a Q and A with the folks that have presented this morning and we have microphones so we can get them on the webcast.
Take this one.
Thanks. It's Ed McGuire from CLSA. I had actually a question for Rob and the others just about what competition you're seeing in the IoT platforms market? And secondly, as you get past the proof of concept stage with a lot of these customers, How much domain expertise is do you feel you need to generate in order to be able to drive these further solutions? Because there's clearly a lot of business involved or their business logic that's involved in the sale rather than just a technology sale?
And as you move there, what do you need to put in place in order to advance that?
Yes, good question. So in the area of competition, the primary competition continues to be do it yourself. I mean, I think in a very, very hot space like this, the natural tendency in a let's take a typical manufacturing company is to say, okay, here in engineering, we don't have the capabilities to be able to create connectivity to the edge. We've never done that before. So their first place to turn, quite honestly, is the IT department.
And the IT department says, well, this looks pretty cool, right? This is a way for me to expand my value to the company. Rather than just running the data center, I can now build solutions and I can develop all this infrastructure. So the natural inclination is, hey, let's roll our own. We can do it ourselves.
We sell against that all day long. We expose them to the capabilities of the platform. We tell the story of how you should be focusing on developing your own IP and lead the infrastructure to the experts like us. I would say, 99% of those cases we win when we can sell against the idea of an internal rollout like that, but not every time for sure. The other competition are the big guys that are kind of, let's call it, reconstituting older technology and throwing some services at it.
Many of them focused on simply that get the data part of the stack rather than to do something with the data part of the stack. And that's where we really feel we're differentiating our offering versus some of the offerings from particularly some of the bigger players, because in a way we're almost in a very early market, we're almost rewriting what IoT means or should mean to mean that you have to do something with all this data. And then smaller companies, smaller IoT platform providers, which are popping up all over the place, which I don't think have long term viability and I think they get washed out of deals pretty quickly.
I think if I could add, the most serious competitor we would have, does not do it yourself would be IBM. IBM. IBM has spent a fortune on this whole IoT strategy and the smarter planet strategy that got them to the IoT strategy. But I think we have some real advantages. We're moving faster.
IBM started years ago, years before us, but already I don't think you could do this kind of a demonstration with IBM's technology. So I think there's some very interesting things happening and we're moving at a pace and a clock speed that I don't think IBM will be able to sustain for years to come. So maybe IBM will be the big winner in IoT, but I'm not convinced of it.
Jay, please. Howard Griffin Securities. This will be only a 2 part question. So, first, I'd like to reconcile something that Jim said about the IoT revenue mix, which is mostly licensed as you said. And however, the equivalence to PLM, you said IoT is a PLM imperative.
Yes. As you know, PLM historically for the last 20 years or so has been heavily services based, which has impaired the deployments and profitability, etcetera, over time. By making IoT a PLM relationship, does that imply that IoT in future will have similar heavy services requirements?
No, I think it's a good interesting question, Jay, but in fact, the opposite is happening, which is we're rethinking our approach to PLM. So if you look at the tools we have in the ThingWorx world for quickly configuring a solution, in the windshield world, we didn't have tools like that. But now we do because we're bringing those tools and just like GE is embedding ThingWorx into their brilliant factory solution. In our company, Brian Shepherd, who's in the room somewhere, his guys are embedding ThingWorx into Windchill for PLM, into Integrity, into our SLM offerings to really try to make those offerings so much more configurable, upgradable, to really solve some of the kind of deep rooted problems that I think have driven a lot of that services capability in the past.
Okay. And you may have touched on this, but this is the second question. At the LiveWorx Investor lunch back in May, we talked about the propensity for customers to sit on older versions of software, particularly in aero and auto and so forth. But the question is, you specifically said that you would expect to retrofit or backstitch the new technology back into the installed base, the large number of windshield seats, large number of ProE seats, etcetera. Is that implicit here in what you're talking about?
Or could you talk about how you could enable your installed base for these new technologies?
Yes, I mean, when we take ThingWorx that broad portfolio that Rob talked about and we take that to an existing PTC customer, Some people see in ThingWorx the ability to connect things and Internet of Things. Some people see in Windchill or in ThingWorx an incredible capability to do those kind of dashboard, mash up dashboards and so forth. And so I'd say that we released the, Brian, I'm trying to remember exactly what we call it, the ThingWorx for wind chill solution adapter extension. And so that's actually been kind of nice seller now because people are saying that what ThingWorx really does is brings information from systems and things together. And sometimes it's mostly things and sometimes it's mostly systems, but it can be any combination.
So yes, we're seeing quite interesting pull from the base. In fact, if I could just say we just had our user group meeting in Japan. Yes. And 60% of the attendees, it was record attendance by a mile, 60% of the attendance said they came 1st and foremost to hear about IoT. Now that's the traditional base we're selling to there.
So I think that sort of speaks to whether we're talking to Toyota or to Airbus, there's a huge amount of interest and tell me more about ThingWorx both for things and for that great development environment.
I would also add, we've retrofitted older releases of Creo with technology called the Creo Performance Advisor, which is built on ThingWorx. Something like 60% of our customers are using that technology in Creo II and in Creo III releases. So that's another example of that retrofitting idea.
I think just if I could, just while we're switching speakers here. One of the things I think you saw from Herve, he didn't explicitly say this, but it's implicitly said is that it would make sense to Schneider to turn to a company like PTC for the type of closed loop strategy because we're involved in the development of products, we're involved in the servicing of products. We have this great technology. So that's kind of my point is that, it's not like we're a PLM company who dreamed of some faraway market called IoT. We're a PLM company who in the pursuit of where do we go with PLM realized that path takes us to IoT and to augmented reality, into analytics and it makes all kinds of sense and our customers I think fundamentally see it the same way.
Rob Sterling, Audio JPMorgan. I wasn't 100% clear through the presentation. If you could help us understand is all the infrastructure in place in terms of who's actually generating the IoT leads? Is the sales not only quota carrying heads, but is all of the sales operations and sales infrastructure in place? And if not, what are the next steps that need to be accomplished, so you're fully built out given the new kind of division?
Okay. Good question. So, yes, I would say that we are continuing to improve the capabilities of our kind of end to end lead to revenue process. I think having Charlie focused 100% of his time now on demand generation, both for developers and what we would consider to be sort of non developers, those would be business buyers that are probably inside of the PTC base. He has marketing programs, people, money that are dedicated to go after both of those.
Charlie, after having been on board now for 10 months, I think, has done a fantastic job of upping the infrastructure. Basically, the underlying systems that we use for demand generation and lead capture and so forth, getting those into the hands of the right sales reps. So I think we've done a nice job tuning that up. Now on the that's in the platform group. So Charlie has jumped the fence now.
He lives inside of the platform group, reports to me, has a set of marketers and money to be able to do that. Most of his energy is being spent on getting after developers, because that we see as really a very, very primary audience for us to get to. Now those developers could live in many different places, as I said earlier, Sterling. They could live inside of ISVs. They live inside of the PTC customer base, quite honestly.
And that's where we get sort of a groundswell, if you will, developers that are pulling on capabilities. Developers, just to be honest, they don't want to talk to salespeople. They want to go cruise the web at night. They want to find interest when I ran R and D at PTC, I was always on the receiving end of developers coming to me and saying, hey, we found an interesting technology and we think it would be great for UI development or for testing. They find these capabilities themselves.
That's fundamentally Charlie's job is to be in the places that developers are, make sure that they can get their hands on this technology, exercise it and then run it up the flagpole, if you will. That's a marketing thrust. But IoT quite honestly is a top down sale as well, right? It has inherent that's the $11,000,000,000,000 of economic opportunity. There are business leaders that are tasked to go figure out how is my company going to get my share of the $11,000,000,000 That's Herve and his boss.
So, at the same time, we're selling bottom up, we're selling top down with the PTC sales force into a couple of those settings then hopefully with partners into a whole lot of those other settings with a separate demand generation capability as well. So, am I going to say it's all tuned up and polished and perfect? No. Do I feel like we've made tremendous headway as a marketing and demand generation organization over the last 11 months or 10 months since Charlie's has been on board, I think absolutely. So I don't know if you guys want to add anything to that.
Saket Kelly from Barclays. One quick question. So it feels like to me the mashup builder that analytics part is the most interesting piece for you guys, presumably the largest piece of the IoT revenue business as well. And correct me if I'm wrong there. But I guess the question is, what do you feel like are the barriers to entering that mash up builder sort of tool versus like an analytics company for example?
Is it the binding to the data that you have in a box like that? Is it the ability to sort of create that dashboard without coding? What do you feel like is sort of the barrier to entry within that part of the business? Herve, do you
want to answer that? I think it would be interesting from a customer perspective.
For us, the big I mean, I really see the Mashup Builder as a rapid deployment to as rapid application deployment toolkit. So it's really about speed. And yes, how quickly you can grab the data you have in your models. But for us, it's speed. It's one of the interesting parts of things works for us definitely.
And really we see it as a way to accelerate the development of apps on top of an IoT platform.
I might add also, I think that there's an advantage of that tool in the context of PTC because what we bring to that story, what we bring to augmented reality, what we bring to what you saw here is a tremendous wealth of content, right? The augmented reality has been around for a long time, but it's always suffered from a lack of easy access to content. And with PTC's 3 d heritage, the SLM perspective, the knowledge and configuration management, and then the data streaming off of the devices, we bring all of that together. And that's really what you see happening in that mashup builder. So I think that's a big differentiator, an important point around the value of that kind of an approach.
Gentlemen, Steve Koenig from Wedbush. Just looking for a little more clarity on your primary use cases versus your direct and indirect go to markets. So, that kind of maybe the my understanding is for factories, you're going to go through GE. Is any part of that going to be direct? Secondly, for field service, are you going to go entirely through ServiceMax or which pieces of the field service use cases will go through ServiceMax versus Servagistix?
And then lastly, of all those different settings that your direct channel can work on, what are the primary use cases that you'll be going after yourself?
Yes. Okay, that's good question. Herve mentioned, he wanted to have a closed loop with services, with service organization, a closed loop with sales and marketing around the cross sell, up sell, a closed loop with engineering around product improvements. And then he also talked about our closed loop way to bring new capabilities to market, new service oriented capabilities that would follow the product. Incidentally, that's what that second HBR article is all about.
So it's kind of like spelled out for you in business pros. So I think what PTC is looking at saying, we fundamentally understand the design of products, including the design of connected products. We know a lot about closed loops that would improve the design. We know a lot about closed loops that would improve the service. And the capabilities we demonstrated in this augmented reality demo, for example, that 3 d disassembly process, I mean, we had that technology years ago.
We just didn't have the ability to augment it. And furthermore, we didn't have the ability to know when it was time to augment it. But IoT tells us there's a problem, Vuforia gives us the technology to augment it. We connect the dots, as Herve says, and create a lot of value. So I think you'll see PTC proper focusing on companies that make and service things.
That's the heritage of PTC proper. Now within that heritage, we didn't have as much expertise in factory automation as some of our competitors did. Dassault had acquired this company, DELMIA and others. Siemens had acquired the company Siemens acquired, UniGraphics had acquired the company Technomatics, which did factory automation. So we didn't we weren't quite as deep as those 2 competitors.
And therefore, we don't have as much domain expertise, but we have this partner called GE, who has a huge business there and huge amount of domain expertise and 400 of their own factories as reference cases and so forth. So with GE, we're saying, hey, GE, we'll bring you into our accounts and our combined sales forces will sell a combined solution. And in fact, for the factory automation piece, GE, you take the order and pay us a royalty and we'll compensate our guys on it. So we will, in PTC accounts, be selling with GE. In GE accounts and process manufacturing, the PTC reps won't add much value, so GE will just take that by themselves.
But GE is a full on OEM reseller of ThingWorx at this point. The relationship with ServiceMax is a little different. What we've said there is add customers who happen to like both of us, for example, at Schneider. Schneider quite likes ServiceMax and Schneider quite likes PTC. Why don't we collaborate together so that we both win more business.
So there we're doing a revenue share, but they're not a full on reseller at this point. We might be interested in seeing if we could change that. But at this point, they're a sell with, but not a sell without like GE is. So where I don't want the PTC direct sales force going is calling on cities, trying to do smart cities because we don't have enough institutional DNA in that. So a partner like Pactera, they love that idea, they'll take that.
So we're trying to divvy it up in those different settings and say where we can follow our products and our expertise, we should send in PTC direct sales people where we can't, we should look for partners to carry the flame for us. A question for Herve, more of a general question from a customer's perspective about this. How do you think customers will view paying PTC over time for the value they're bringing, especially as the number of connected devices and applications, obviously, we hope explodes. It's going to be a quite a large bill to have to pay for the platform. So I'd like to get your opinion on that and how you envision that playing over time.
Well, yes, I think there's a couple of probably of entry to that, right? I think we're clearly and we see that with most of our vendors moving more towards subscription type model. Then the question is on which kind of driver do you attach a subscription? Do you pay per number of connected points? Do you pay per number of customers?
And this is more of a conversation we like to have is subscription is more and more for us kind of a given and most of the new thing we're doing. And then we're trying to build long term partnership with our suppliers and think about what are the drivers that make more sense. And that's the conversation we'd like to have.
We'll have one more and then a 15 minute break. We'll have an opportunity of the day to do another set of
questions with these folks. Although we may lose Herve. So this might be the last shot with Herve.
Good idea.
Yes. We potentially see that in factories too. I think we are at the beginning really of understanding that on services was probably an easy way service and sort of upsell cross sell was an easy way to get started. But definitely, yes, we would look at that for maintenance in factory, our own, etcetera. So yes, this is something which would be definitely in scope.
Again, we started with service because you need to find something that's easy to get started with. But that could definitely be one of the next things we look at.
Okay, great. Thank you. Again, 15 minutes, we'll reconvene back here. Thanks, everybody, on the panel.
Thank you.
Hello. Folks, if we could grab our seats, we're going to get restarted here momentarily. We're going to start at the beginning here. Okay, folks. We're going to kick off the rest of the morning here with leading off with Christian Talatilla, who, as I mentioned earlier, was the quarterback of the subscription program over the past year, probably seems like 5 years.
And he'll walk through what we've done heading into fiscal 'sixteen to take what was really a pilot in 'fifteen and put it into what we call production. So with that, I'll turn it over to Christian Tavalaty.
So a lot of familiar faces here today. Hello, thanks to everybody for coming. For those of you who I don't know, my name is Christian Talbotia. I'm a Corporate Vice President of Finance here at PTC. I've been with the company for a little over 7 years.
Just a little bit of background on today's discussion. We've actually been contemplating this transition to a subscription model for the past 2 or 3 years. It started off studying the market, looking what other companies who have gone through similar kinds of transitions have done. We actually went out and visited with the leadership of a number of these companies to understand from their perspective what they did well, what they would have done differently. We brought in outside consultants to help validate some of our own thinking, to help validate some of the key learnings that we learned from these companies.
And of course, along the way, we also had a lot of input from you, investors, analysts, shareholders. And all of this work actually culminated in us launching the pilot program in fiscal 2015, which we think was a great success and I'll come back and talk a little bit about that more later. So today's discussion, we're going to provide an overview of the customer perspective. We actually conducted or had an outside firm conduct market studies, talking to companies getting their perspective on subscription offerings. We actually just heard a brief comment from Herve, the CIO of Schneider.
You know, he's seeing a lot of new vendors moving to subscription. We'll come back and talk about why we think this transition is good for PTC and ultimately good for shareholders. We'll talk a little bit about the pilot program, what we did in fiscal 'fifteen and the kind of results that we achieved. And then importantly, we'll talk about what's new in fiscal 'sixteen and specifically what we're doing differently to aggressively drive this transition to a subscription model. And then we'll end up talking about what we think adoption will look like over the next 2 to 3 years.
So the market clearly prefers subscriptions. The data on this slide is the result of a study that we had a consulting firm do over the summer. They talked to a few 100 customers companies, excuse me, of all sizes across multiple geographies where we have a major presence and in fact across all of our core segments as well. As you can see on the slide, in all of our segments, companies have indicated a 70% or greater likelihood of preferring a subscription offering. This holds true for both large and small enterprises.
Now obviously there's some caveats to this. The offering needs to be right. Importantly, the pricing needs to be attractive. We'll come back and talk about that. But in addition, I think there's a number of things that we can do and that we are doing to help drive the transition, including changes to our offerings, changes to sales incentive plans, etcetera.
So this same study not only asked companies do they would they prefer subscription but why. And you can see a lot of the top value drivers that they came back with here on this slide. No surprise, flexibility was at the top of the list. Flexibility comes in many forms from our customers. The ability to scale up over time, the perceived ability to actually be able to scale down if things in their business go bad, the flexibility of paying over time, which is obviously inherent in the subscription model.
As you know, most enterprise software companies that do subscriptions bill annually upfront just for the subscription portion. There's no large upfront perpetual purchase required. So flexibility of payment terms is important to many companies. The ability in some cases to use OpEx budgets as opposed to CapEx budgets was important to some customers. But the bottom line is that customers believe that this flexibility will result in a lower total cost of ownership for them over their investment horizon.
Assuming and as I mentioned earlier that one of the critical things that's right here is that sorry, push the button assuming that the price is right. So this was also a result of the market study that we did was trying to gauge customer perception on kind of what is the right price for a subscription versus a perpetual purchase. And what this study indicated was that the sweet spot for companies was somewhere between 40% 50% of the perpetual purchase. So let me just who's I did not push that button. I'm going to hold it like this.
So let me just clarify a couple of points. When we talk about 40% to 50%, using an example, if a perpetual license was $100 with 20% of net pretty standard for support, so $20 of support. So the 1st year purchase on the customer would make would be $120 with $20 a year in support. The 40% to 50% relates to the $100 portion. So they would expect to pay somewhere between $40 $50 annually for a subscription and for most companies that was an extremely attractive subscription price point.
So we took this input. We did a lot of our own internal competitive pricing studies to make sure that as we were pricing out our subscriptions, we were selecting a price point that was in the sweet spot for customers compared to both our own perpetual prices, but also compared to other competitive products and offerings that are in the market. So as we enter fiscal 'sixteen, the price point for the vast majority of the solutions that we have is right there in the middle. It's around that kind of 45% price point, which as again I think you can see should be attractive to most customers. And interestingly enough, as you can see on the slide after the 50% price point adoption drops off quite dramatically.
And in fact, we saw this in practice as well. You guys all know that in fiscal 'fifteen, about 17% of our new bookings came in subscription only, which is really kind of in line and I think helps validate a little bit this point about the pricing model. So why do we think this is a good thing for PTC if customers think that they're going to have a lower total cost of ownership over the life of their investment horizon. This slide here actually just shows the difference between a perpetual and subscription purchase over time assuming the 45% price point we just discussed. So again, in this example, in year 1, the perpetual purchase would be 100 plus 20 for support and 20 in year 2 and year 3 and so on.
And in the subscription purchase, it would be 45, 45, 45 and so on. So on a straight line basis, the breakeven is about 4 years and after that, we began to accrue more of that value. Over a longer period of time, we think we can drive up to 40% more value from a customer. Obviously, we need to provide value in order to receive that value. So flexibility again is a huge value driver, but as I'll discuss later, we'll also be doing things to our offerings that will make subscriptions even more attractive as well.
So fiscal 'fifteen, as I said earlier, was really about piloting the subscription program And as I'm sure that most of you can appreciate, this kind of transition is actually a pretty large undertaking for a company. There's systems and process changes that need to be worked through, transaction processing systems, bookings, billing, there's accounting changes as we move from upfront revenue recognition to ratable revenue recognition. You got to change customer contracts, you got to change vendor contracts, you got to change sales compensation. And importantly for us as well where we're living in this hybrid world where we're selling still perpetually as well as subscriptions, we also needed to come up with a methodology that would allow us I didn't do that. You guys saw I'm going to put it down.
We needed to come up with the methodology to forecast and report in this mixed environment where any given deal could come in as either perpetually or subscription. So just a simple example, if there was a deal in the forecast for $1,000,000 perpetual and it came in as a $600,000 subscription, We're going to miss the revenue forecast by $999,000 but did we meet or beat our bookings expectation or so that's the kind of question that we needed to be able to answer for ourselves to understand how the business is performing and importantly so that we could also communicate this dynamic to you all here in the room how the business is performing as well. As Jim mentioned earlier during his piece, the sales compensation, we opted to make that neutral. So essentially a sales guy was going to get paid where is the magic man? Sales guy is going to get paid the same amount for selling a perpetual deal as they would a subscription deal.
So again, given all of these systems changes, process changes, cultural change the company was going to, This is why we elected for the premium price point that we just showed on the previous slide. Essentially we didn't really want to flood the basement while all the plumbing work was being done. And I think that there was a ton of work done. There were a lot of people working on it. I think that now PTC is well prepared to handle subscription at volume, processes are in place, systems are working.
And so we'll move on next to talking about what we're going to do differently.
I'm going
to let somebody else advance the slides. Different one. Okay. So here we are. So over the next few slides I'm going to provide an overview of the things that we're doing differently to do exactly this drive aggressively drive to a subscription model.
As you know from the long term targets that we set out earlier, we anticipate that we can get to 70% of our new bookings coming in as subscription by fiscal 2018 and the initiatives that I'll walk through here shortly can be broken down into 4 key buckets. Number 1, differentiating our offerings. Number 2, appropriately incentivizing our sales force. Number 3, is changing the rules of engagement or the T's and C's with our customers and number 4 driving support migrations. So differentiated offerings, what do we mean by this?
How do we make the value of the subscription offerings better than the value of the perpetual offering? And over the summer, we actually spent a lot of time reworking the pricing and packaging of our offerings and we've developed what we believe to be very solid value based packages across all of our core segments CAD, PLM, ALM, SLM that are only available via subscription. Now remember we still offer all these products perpetually as well but there are certain offerings subscription and we think those drive a fair amount of value. As I think most of you know in fiscal '15 in Q4, we actually moved our IoT business or tech platforms business to really being 100% subscription. So that transition is kind of leading the charge and well underway.
The market I think is accustomed to buying that kind of technology
already via subscription. So that felt
like a natural way to lead the well as future incremental functionality that will increasingly come out and be available only in the subscription packages will continue over time to make the subscription solutions more and more attractive relative to the perpetual solutions. The next element that we talked about was altering the sales compensation, incentive compensation structure for the salespeople. As I said before, 'fifteen, we tried to keep it neutral. In 2016, we are decidedly not trying to keep it neutral. In fact, the sales guy stands to make considerably more selling a subscription deal than they do selling a perpetual deal.
There is higher quota retirement for subscription deals. There is kickers for multi year deals and so on and so on. And importantly here, I think given the difference in the land and expand nature of the subscription model versus the big upfront purchase in the perpetual world, one of the things that we want to be very mindful of is discounting practices. So we've also launched a program that links price performance or in essence essentially discounting with sales compensation. I think oversimplifying it dramatically, the lower the discount, the more comp the sales guy will receive.
So we think this is an important element here as well to help us migrate through the transition. 3rd bucket was clarifying the rules of engagement and making sure that we're really clearly differentiating subscription deals from perpetual and really making sure that we're really emphasizing the flexibility inherent in the subscription model. So for example, if a customer values extended payment terms, we actually have an offer for that. It's our subscription offering. If a customer values the ability to remix their software bill of materials that they've acquired from us over time, we have an offering for that.
It's our subscription offering. Actually, the ability to remix is somewhat inherent in the subscription model. At the end of each term, customer can choose to kind of resubscribe to whatever they want to resubscribe to. And actually, we've taken it a step further and for an additional premium, we'll offer the customer the ability to remix during the term of the contract. Another thing that we hear from customers is they want guaranteed future pricing.
We can actually do that in a multi year subscription. So we want to emphasize this kind of flexibility and request that customers have and steer them to the right solution and not offer any of these things. None of these things are available in our perpetual offering. And then lastly, we also want to talk about migrating customers who have existing support contracts to subscription offerings. We have a team of folks that are working on this, they're looking at upcoming renewal contracts, working with the sales force, trying to identify customers that would be good candidates for migrating to subscription and trying to put together good options to present to the customer in addition to all the other reasons on why they would want to move to subscription, how we actually migrate them from their existing perpetual ownership and support world into the subscription world.
So given again the market studies that we conducted all the stuff we talked about earlier, the things that we're doing to make subscriptions attractive, we believe that there's a good opportunity for us to migrate a significant portion of our base from support to subscription over the next couple of years. And I actually just have a quick example here on a customer that did exactly that. We had a pilot program to test out this kind of support to subscription migration in Q4 of last year. And during that pilot, we actually had a handful of customers that did do it. It wasn't broadly available.
This example is a fluid control design and manufacturing customer that had perpetually purchased CAD and PLM software from PTC previously. They found that this kind of remix feature was very appealing to them, the remix capability and the subscription offering. So that in conjunction with a trade in credit of sorts for their perpetual licenses. It made the migration to subscription very attractive for them and in fact they chose to do it. Let me actually just clarify one piece on this migration.
When customers opt to migrate, they'll also be giving up their right to their perpetual ownership. So they have to forego that right transition solely to a subscription model going forward. And this customer did that. And as you can see, their annual support run rate as we migrated from support to subscription the annual revenue run rate from this customer went up 27%. We think this is a win for the customer who's getting what they want, getting the advantage of flexibility of the subscription model and for PTC.
Obviously, there's incremental revenue run rate, but perhaps more importantly, we also think that we're now better positioned to continue to expand our relationship with this customer over time in a way that's mutually beneficial to both of us. So, wrapping up, as I think everybody here knows, our guidance for fiscal 2016 was to have 25% of our new bookings come in as subscription. Clearly, this is going to be off to a slower start at the beginning of the year. We still have sales guys that are internalizing their comp plans, internalizing the changes that we've made to the offerings. We're conditioning customers to the new opportunities and so on.
So in fact, our guidance for Q1 calls for in the high teens subscription mix and we plan to exit the year at a higher rate than that averaging 25% for the year. We have a preliminary target here of 45% for fiscal 2017. And again, as you can see, the target for new bookings in fiscal 2018 is 70%. So clearly, this is an important program for PTC, which we believe can drive a lot of value over the coming years. Andy is going to talk a lot more about this in his presentation.
There's no doubt that this is a massive change both culturally and operationally for PTC also for some of our customers who have been accustomed to buying from us perpetually for a long time. That said, we've seen from the market studies, we heard from Herve that customers are changing. What how they want to buy is changing and we're going to change with them. We think it's good for them. We think it's good for us.
We've had a sizable team both of internal PTC people as well as external expertise helping us put this program together over the past few months and I think we're pretty confident that we've put the right program in place to make this transition a success. So with that, I'd say thanks for your time and we look forward to updating you on progress on our progress as we migrate here over the coming quarters. With that, over to Andy. I don't know which one of these you want?
I want the one you were just using,
not the
first one.
Actually, I just have to think about the slide changing and it will change to the next slide. So thanks for coming here today. It's my first PTC Investor Day and I'm excited to see many people that I've been seeing over the past few months and excited to tell you about where we see PTC going from a business model perspective as we move forward. I am going to focus on 3 things. Number 1, I want to go back and highlight the progress PTC made over the past 6 years frankly, about the time Jim became CEO forward in driving value for you, shareholder value by driving continually improved financial performance.
I then want to talk about where we see ourselves headed for our long term business model for the coming 5, 6 years and how the subscription transition is going to play out as we go through that business model movement forward. And then 3rd, I want to spend some time and talk a little bit about our capital structure and our strategy around our capital structure. So I want to start with looking back. In 2,009, PTC said that we would improve our EPS by 20% a year moving forward. And if you look through 2014, the company actually exceeded that goal, improved EPS at a 22% CAGR and also improved free cash flow at a 34% CAGR.
Now FY 'fifteen, the company faced a business model change and pretty tough macros. Currency whacked $100,000,000 off of the top line revenue. And of course, the business model shift to 17% subscription from 4% in FY 2014 took another whack off the top line and frankly off the bottom line. So FY 2014 though the company didn't just stand still in the face of currency and frankly a tough macro economic headwind. The company adjusted its cost structure as you've seen it do before and actually returned 24% operating margin and also returned a bit of growth in EPS to $2.23 a share.
But if you actually look at FY 2015, absent the currency headwind and absent the shift to more subscription, there would have been $145,000,000 more revenue, 400 basis points more operating margin. It would have been 28%, not 24% and EPS would have been actually 0.75 dollars higher, almost $3 a share. So the company took the right actions and fundamentally as you look through the tough currency and as you look through the business model shift, the company continued to deliver on that EPS improvement. In fact, if you actually look mix adjusted, currency adjusted, EPS would have grown 29% in FY 2015, ahead of any of the prior years. So we growth in margin and EPS.
Thank you, growth in margin and EPS. In fact though, if you look underneath the covers of PTC, we have continually driven operating margin improvement from 13% back in 2,009 up to the mid-20s, continued to do that while also investing in IoT. And if you looked inside PTC, looked at actually the profitability of the different segments in PTC, you would see that our solutions division, our applications essentially, that actually has an operating margin pretty consistent with our peers, right around 30% in FY 2015, while at the same time investing heavily in our growth opportunity for IoT. The key is we have a portfolio management process and a rigorous investment management process inside the company. In fact, at break someone asked me about how do we actually achieve margin expansion while investing in IoT.
The key is every one of our businesses has to have the right business model for the growth opportunity that the market presents and we rigorously manage that. CAD is a tremendously profitable business appropriate for the growth opportunity in the CAD market. PLM and SLM, a little bit less profit and frankly moving toward a better steady state business model, moving closely toward it and that's part of where our progression over the next few years comes is having those deliberately move into the right business model for the growth opportunity in those particular segments. Meanwhile, with the fact that IoT is such a high growth market and frankly can be one of the largest software market segments, we're investing heavily to win in IoT. So it's the balance of these portfolios.
And then even within that, we introduced form of 0 based budgeting this year. We actually did 80% based budgeting, which is a hard thing to do in a company, frankly. We gave everyone 80% of their FY 2015 budget as a start. And we said, now you have to go and tell us what is everything you're going to do in FY 2016 with only 80% of the money you had last year, so that you can continue to deliver the business results that we expect from you in that business. So you couldn't say, I'll take my 80% budget, but I'm going to have horrible top line performance.
You had to still deliver to the top line performance goals. And then you had to rack and stack additional investments that you wanted. And frankly, those investments had to compete against all the other investments in the company. We actually had 3 days of organizations and segments presenting their investment requests and then we wrapped and stacked them and invested in the highest return items either they drove growth, profit, reduced risk, ensured that we could make our business plans and continue to perform within our markets. I'll be honest with you, it was the most productive planning session.
A there's $100,000,000 of requests and like $5,000,000 you could invest in. And what we did was free up a huge pot of money that we could invest in and then there was a competition for investment. And that's frankly how we are able to rigorously manage continual improvement in the performance of the business over time. At the same time that we are investing in IoT that we're also seeing that investment pay off and I'm not going to dwell on this slide. We basically grew our logos about 150% over frankly the history of the entire installed base of the acquired companies and we grew our bookings about 150% in a 40% growth market.
So that momentum is paying off and Rob has spent a long time sharing with you much more information about that. So we are pleased with how we are doing in IoT. So we're going to continue to invest in IoT as we continue to deliver the results there. So moving forward, as we look at our business model, by 2021, we believe that we can be $1,600,000,000 in revenue, top line growing at a sustainable 10% revenue growth rate and have just about 90% of that software revenue be recurring revenue. On the bottom line, we expect low-30s non GAAP operating margin for the whole company.
That will deliver about $3.75 in non GAAP EPS and about $450,000,000 of free cash flow. What I want to do now is take you through the details of how we deliver those results in 2021. It's fundamentally predicated on how we believe we can grow bookings, which we believe we can grow our bookings at market growth rates, which average about a 10% CAGR as we exit FY 2018 through FY 2021. And we believe that we not we believe, we are committed to rigorous management of our OpEx throughout this subscription transition. So I want to start with bookings.
I'm going to take you through this one piece at a time. I'm going to start with bookings in the solution division. So essentially, our just below the mid single digits. If you aggregate those, then in the and you look at the relative size of each of those, but in that period from FY 2018 on that combines to about a 6% growth rate. And we believe we can grow with the market and we should grow with the market And we're focused on making sure we deliver on those growth expectations.
Now as we look at FY 'sixteen, we basically are facing a tough macro. We also guided FY 2016 indicating that we could have some disruptions, especially in the early part of the year through our reorganization of the business and through the restructuring. So we are more cautious about our bookings outlook for FY 'sixteen, actually a slight decline from FY 'fifteen. We then have built into this plan about a 3% growth rate in this bookings in FY 'seventeen and FY 2018 on growing basically at the market rate of about 6%. Now one of the things the reasons we believe we can do this one is we think fundamentally the focus we're going to get through the new structure and the new talent we're getting in house.
We want people to wake up every morning, I'm responsible for the CAD business. I'm responsible for growing the market. We want people to live and breathe each of their markets every single day. And that's key to the reorganization we've done and the talent that we are bringing into the business at this point in time. The other drivers that we think subscription and pricing are real levers for us.
We're going to get more value per customer as we move to subscription. And frankly, many software companies begin to use pricing as a strategic lever to drive incremental points of growth and incremental points of margin. And we are aggressively moving down the path that many software companies have been doing frankly, over the past 5 to 10 years. There's actually a playbook for pricing strategy and pricing realization in software and we have started to execute that playbook. That aligning discounts or price realization with sales compensation is one of the critical drivers to that, one of the key early drivers.
But we also completely took a fresh look at all of our pricing and our bundling, implemented very basic value based pricing and that's how we're starting this particular year. We think frankly our products are very, very competitive. We've got great customer franchises. So with focus and execution, using pricing and subscription as a lever and then frankly with our products and customer franchise, there's no reason we should not be growing with the market in our core business. Now as you look at technology platforms, most analysts believe this is growing around 40%.
So if we were to layer that 40% on top of the solutions number I just gave you, you would actually get mid teens bookings growth and frankly out by FY 2021 it would be high teens. But we decided for our business model we wanted to take a little bit more cautious view of how that might play out and we tapered it down a bit. So we basically have factored in here the technology platforms group growing at about a 34% CAGR. And actually it's a step down every single year as markets scale, they tend to grow a little slower. So it's actually a high 20s growth as you get out there to FY 2021.
So that's what's factored into this year. And as a result of that, when you put those two models together, you end up with a 10% bookings CAGR over this horizon. You actually end up in that period from FY 2018 to FY 2021 in the low teens, actually around a 13% bookings CAGR is what you get over that horizon as the higher growth rate of the technology platform business begins to scale and have a more meaningful impact on the total bookings. So with that framework from bookings, I want to take you through the key elements of our long term financial model. So number 1, element 1 is this move to subscription.
You've heard a lot about it, 25%, 45%, 70% by FY 2018. Why do we think it's a 3 year transition? We have today 40% to 50% of our revenue out of our largest customers. And those customers, many of them are on 3 year volume agreements. So it's going to take us 3 years, frankly, to cycle through the customer base.
Now we're going to be as aggressive as we can and move as fast as we can, but we wanted to factor in the realities of how significant a transition this was for us and the fact that our customers actually already do have contracts that expire naturally at certain points in time. The second element that you can expect from PTC is continued cost discipline. And what this means is you can expect over the period from 2016 to 2018 low single digit OpEx growth. And remember that's after FY 2016 we guided OpEx down from FY 'fifteen. So low single digit OpEx growth and then it will follow on in FY 'eighteen through 'twenty to significantly lag revenue growth.
So you can expect OpEx growth to be less than half of revenue growth to drive that continued margin expansion. So service gross margins remains a lever for us. Those have improved substantially frankly from the single digits not that many years ago, up to 15% last year. We guided 16% in FY 2016. We expect 20% by FY 2018.
One thing that gives us confidence in that 20%, we actually have 2 very, very large multi year service engagements with large customers that are lower margin than the rest of our portfolio. Those engagements end during FY 2017 and those engagements last year for example were almost a hit or impaired our service margin by almost 300 basis points. So those are gone as we before we hit FY 2018. So that's why you see a bit more of a step up in FY 2018. On the OpEx side, I highlighted, you noticed the down from FY 2015 to 2016, very modest growth from FY 'sixteen through 'eighteen, low single digit and then growing just below half the revenue growth rate from that point forward to FY 'twenty one.
Sales and marketing productivity remains a key lever for us. We today are not as productive as our peers in the software world. And our goal is to move deliberately a little bit every single year toward the median level of productivity. That takes about a 7% productivity improvement for us over time. Now we actually made a lot of progress productivity in FY 2014, but we stepped back a bit in FY 2015.
Part of that was macro, okay. Part of that was FX, obviously FX just reduces your productivity right off the top. Part of that was frankly a tough manufacturing economy. In addition, we planted a lot of seeds in IoT. So our sales reps that were focused on the IoT opportunity actually were much less productive than the rest of our sales reps.
But we planted a lot of seeds that we expect to harvest over time. So the drivers for us to continually drive an improvement in sales productivity, one way you do it is you simply invest in territories more effectively. So it's your territory alignment. Your investment sales productivity is if it's low it's because you have sales reps focus on territories that aren't as productive. So part of this restructuring we did involves a good deal of territory realignment, making sure we had the right level of investment in the right territories.
You can expect that to continue to happen. In addition, we are further segmenting our sales force this year to drive focus within each of our segments. We want people to wake up and I'm a CAD seller or I'm a PLM seller or I'm an SLM seller and not wake up every morning and think, well, what should I sell today? Okay. They're going to sell today what they're supposed to be selling today.
And we actually have taken product line quotas down to our sales VPs and many of them have taken them down to either specific reps who will only focus on specific products for them based upon their own territories. So further segmentation, we think will drive focus. The other thing we've done in this restructuring frankly is a much better ratio of sales management and sales support to sales headcount. So our ratios were a bit off. We had too much sales support and sales management for every direct sales rep.
We've adjusted those to industry levels at this point in time by geography. So that's another way to improve the sales productivity. And frankly, as the technology platform business scales, especially with the contribution of being a partner, having partners contribute to that growth, that also will be a driver for the sales productivity. The third element of our business model is frankly that revenue, operating margin and EPS will hit the trough that you're all familiar with in FY 2018 and then it accelerates very, very quickly after that through 2021 when it's actually normalized. So here you can actually see how the software revenue plays out.
I've taken the services office to be easier to read. On the bottom is the support revenue and on the top is the subscription revenue. Okay. And the key thing to note here is that the subscription revenue actually in this model is growing frankly at a rate near 50% CAGR, that's tremendous growth. The support revenue as people transition from perpetual to subscription falls in the low single digits.
The software revenue growth CAGR over this entire horizon is about 5%, but actually from 2018 through 2021, it's in the low double digits as you come out of that trough. So that's where you get that rapid acceleration as that subscription piece where every year the new bookings are adding an additional level of revenue or ARR to that subscription piece, you can see how it just continues to grow from that point on. As you exit FY 'twenty one, you have this nice low double digit revenue growth. And the final element of course is as the revenue normalizes, the P and L normalizes. And here you can see how rapid the margin expansion is after FY 2018.
Jim showed you the dotted line that showed relatively about 100 basis point underlying margin if you eliminated the subscription transition, about 100 basis point per year operating margin improvement, give or take a few points. But as you actually layer in how you account for the revenue, it accelerates this way and you actually get more like 400 basis point improvements per year as you rapidly come out of that trough year for the subscription transition. One thing that many of you may be wondering about is that seems like a relatively shallow trough. So basically, if you look at PTC, our operating margin is going to at that 25%, 45%, 70% that we gave you, our operating margin trough is going to be in the high teens, only about 500 basis points, 600 basis points lower than what the peak was. So it's not much of a trough.
The reason for that is we already have a lot of recurring revenue. So when you add support to our subscription revenue that we already have, our software revenue today is almost 70% recurring already. So we're moving from almost 70% to almost 90%. So our trough is less than some of our peers, but also because of the fact that we're managing our OpEx so deliberately. So, Adobe that very successfully has gone through their transition, their peak to trough was about 1500 basis points And reading some reports about what's expected for Autodesk from reports from the sell side here, it looks like more like a 3 30 point peak to trough operating margin.
Ours is less and that's frankly just driven by the fact that we already have quite a bit of recurring revenue, which some of you may not have realized. The one other thing I want to highlight for you is that this opportunity that Christian talked about as far as moving our support base to subscription in to get incremental ARR, we have not factored that into these models. So that is a real opportunity we believe is out there, but we didn't want to get too far over the front of our skis and put that in our business models that we shared with you at this time. And we'll continue to let you know what kind of progress we're seeing as we make that transition over the next few years. So when you actually look at 2021, what does it look like under the covers?
So the first thing to realize is our solutions group is a business that will have modest growth, but very high margins and our technology platform group is a business that we expect to have very high growth and modest margins. We actually expect breakeven around 2020 for that business and margins accelerating into the mid teens in the 2021 timeframe. And that's actually based on an OpEx assumption that we grow OpEx in that business about half the rate of our bookings growth. So we're going to continue to fuel growth in that particular business, but disciplined investment. So when you look at the two models, what you end up with, while these are strategically attached at the hip, as you saw throughout the day, basically how our existing platforms with IoT are core to our vision of where PLM goes and frankly how our customers are such great opportunities, because so many have IoT strategies.
While they are strategically attached to the hip, we expect you will have a solutions group that frankly has an operating margin in the 36%, 37% range, appropriate business model for a business that's growing in the mid to just above mid single digits. And you'll have a technology platform group with very high growth, which has an operating margin of about the mid teens at that point in time. So the next thing I want to spend a few minutes on is to talk about our capital strategy. Okay. I was pleased when I joined PTC to see that they had a very an efficient way to return capital to shareholders.
But I want to talk a little bit more about what's the actual strategy underneath that. There's really 4 tenants. Number 1 is that we have returns based capital allocation. I'm going to go into each of these in more detail. The second thing is we think we should have a lean balance sheet with liquidity.
The third factor is we think it's appropriate for us to maintain a strong BB credit profile, whether we're rated or not, that that's the right leverage for us. And finally, we have a commitment to efficiently return capital to shareholders. Let me hit each of these. From a returns based capital allocation process, the important thing to realize is there is a hurdle rate for everything we invest in, whether it's organic investment or an acquisition. And as a result of that, you can see that our ROIC is well above our cost of capital for very, very many years now.
So the bottom line is, is we will not do an acquisition, we will not invest in an opportunity organically if it doesn't have returns far above our cost of capital. Now some of you may note that our IoT investments at this time, because they're super high in super high growth markets, the near term returns are a little bit less, but we believe the long term returns are significant. And as a result, we still have an overall ROIC for the business that's quite attractive. The second thing is, we think it's important to have a lean cash balance. So frankly, we know that you would be pretty upset at us if we had a lot of cash on our balance sheet earning returns right around LIBOR.
That is not very good for shareholders. That impairs shareholder value. So we have a much leaner balance sheet than most other software companies. And at the same time though, we make sure through our revolving credit facility, we make sure we have adequate liquidity so that we can handle working capital fluctuations or an acquisition that we may choose to do. We think this is the right fundamental strategy for our balance sheet.
But at the same time, we think that we need to ensure that we have access to additional liquidity or we have the flexibility, frankly, within our to borrow at attractive rates if we should need to borrow. We think permanent debt is appropriate for our balance sheet. So what that means is to ensure we have that flexibility and access, we believe we should maintain leverage that would be what you would get in a strong BB credit profile. That ensures that access to capital. We intend to maintain that level or better for the long term over time and we think that's the right strategy for our business over the long term.
And so when you put those things together, you end up returning for us, we are able to return 40% of free cash flow to shareholders. We have taken our share count down by about 5,000,000 shares from FY 'thirteen. You can expect it to come down about another 6,000,000 shares, of course, that's subject to our to our share price, but you can expect that to come down about another 6,000,000 shares through FY 2021. And we're confident that we can return 40% of free cash flow to shareholders, but we still have adequate investment capacity in our business at the same time and that that's a very efficient way to return capital to shareholders. Okay.
So with that, what we're going to do is move into Q and A and we're going to invite all the speakers back up onto the stage. Okay? And you guys can get your questions ready. I have to grab a stool. Rob, you want to join us?
Steve Carson.
Who has the first?
Oh, there we go.
Steve Wilson, Lapidus Asset Management. I'm curious, the one missing piece in that transition is how eager you are to convert existing clients from a perpetual model. And Christian, you talked about in the I think it was the one example where the revenues went up 27% that you gave them an inducement to walk away. Could you just talk about the economics that you're willing to use to get somebody who has been a perpetual licensee to give that up and accelerate their transition? Much of your conversation has been talking about new bookings.
I'm just trying to understand we've got obviously this large pool of existing clients under the old model.
So let me take that one. So first off, we think there's a real opportunity there, but there's an opportunity whether they stay on support with the perpetual licenses they have, and that's where we can adjust pricing. And there's also an opportunity to give them more flexibility. And for that more flexibility, we would to get an even greater premium. So many of you know we raised prices 4% at the start of October.
Last year, we raised them 3%. You can expect us to continue to raise our prices every single year. It's pretty much standard practice in the industry. Another thing we did relative to support is we closed some loopholes that enabled frankly some of our cat customers to move to newer versions of the software without having to buy a new seat. So they could go off support and then they could come back on and frankly just pay for 12 months and then 12 months back and move to a new seat.
So we closed that loophole like all of our competitors also did. And so as a result they will have an incentive to either stay on support or if they go off they'll to buy a new seat. The other thing that we're looking at is frankly we think there's a real opportunity to move much of that base. We just didn't want to bake it into our model at this point in time because it's too early to bake that additional upside into our model. But what we saw in that pilot that this idea that I could be a large enterprise customer and I may have a bunch of CAD seats, but they may not be quite the right mix of functionality that I really need today for what I want to do.
You think of all the modules that we have available for that. So we let them within product categories do that remix. We will let them bring theirs and if they have shelf where they can bring it back down. They get rid of their perpetual licenses. And for an appropriate return, which we think is at least in that 25% to 50% range, but potentially even greater, then we will give them an easy on ramp to subscription, because that's the way we want to do business with them going forward.
The other thing we have is we also have we believe in this carrot and stick. So there will be the carrot, the easy on ramp. We also have the stick, which frankly is what they're paying for support today. And many of you know in enterprise software, you pay support for support. So we've put in place certain sticks, which we can use, which will be kind of the incentive to move to subscription.
And then also we've
have done this.
And we've learned from them, but we need to play the program out within our own customer base a little bit more effectively before we kind of like hammer the nail all the way in.
So just to follow-up, I'm sorry, I just want to make sure. So if you had somebody who bought a license 3 years ago and gave you several $1,000,000 and you now have laid this new offer to them, I'm assuming you're not going to write them a check against that partial.
No, I was going to say it's conceptually, this doesn't work perfect, but conceptually like owning a car and trading it in for a better new leased car. Okay. When you're done, you have the new leased car, you're paying more, you don't own the old car anymore. Nobody would ever trade in the old one for more than the value of the new one, right. So we're saying that you at the end of the day, you don't want that asset that was perpetual if you now have the assets on subscription.
So we'll take them back and we will make you rebuy everything because we have to recognize that you actually did own it already. But in this transaction, the customer win is I get to reconfigure. The PTC win is we exit with a higher run rate in a true perpetual or a true subscription contract.
Right.
And so think about it, the customer had $1,000,000 of perpetual, then they're giving us $200,000 a year in support. So if we can turn that into 300 $1,000 and they still have the rights to the products they already had, essentially, they give us the perpetual rights back. We give them a subscription to those rights and rather than pay us $200,000 they pay us $300,000
Right, but I was just thinking versus your model where it's the 40%, 40%, 40%, in this case is year 1, 25% than 40%, forty, 40%, because you are giving them some kind of credit?
No. So those percentages are what percentage of our new license bookings we expect to be subscription. So this year, 25% of all of our new license bookings we expect to be subscription. Next year, 45% of revenue.
No, I wasn't talking about the percentage. I'm talking about the model where you say the crossover point. So as opposed to paying a full amount, you were going to do a subscription and then over 8 years, they pay 40% of its value. Is that in fact when it's one of these pre existing customers who are shifting from license to subscription that in their case, it's not 40 in year 1, it's something significantly less than that as the make good.
So let me try to stab at this. Again, back to that customer who's purchased $1,000,000 they're paying $200,000 in support. What we would say is, okay, if the price point for the subscription was this 45% price point, which I think you were alluding to, then what we would do is for your current support run rate, this $200,000 we would let you buy off of a discounted price book. So you would be able to reconfigure up to that $200,000 worth off of a discounted price book less than the 45% price point. But once you hit that threshold, then all new purchases are at 45%.
Obviously, if they wanted to enter into a transaction where the value for that was much less, it's much less than the $200,000 that they were paying, we wouldn't want to do that. But that's the I think that's what the question you're asking. We would offer them a pretty heavily discounted price book to use those funds against.
So, for example, in the example I gave, the software was $1,000,000 They were paying $200,000 of support. Let's say we said you could move that to subscription for $300,000 that's effectively 30% of the perpetual price as opposed to 45% just for what they already owned. Okay.
So maybe just in summary here, that was not a main point throughout our discussion today. It's really a point of upside. Yes. That in addition to converting the new bookings to subscription, if we can go back and convert maintenance or support to subscription at higher price point, that would be largely incremental to what we talked about today, which is really new bookings. We just didn't yet know how to model that because we're very new in this process, only have done it a couple of times, but it's an upside to the plan.
Yes. Jay, please, Howard, a couple of product related questions. Since you've compared yourselves to Autodesk and Adobe and their transitions, And the question has to do with your portfolio management. That is when Adobe went into their transition, they started with a relatively simple number of CS configuration previous week configurations, 4 or 5. Autodesk has, let's call it, somewhere between 80 100 SKUs in their price book, relatively low number.
Could you talk about what you've done to simplify your portfolio in terms of repackaging, reconfiguring, what is probably a much larger set of products going in than the other two had to make yourselves more saleable and cost effective in that respect. And then all of your competitors are also updating their software at least once a year. SOLIDWORKS has been doing that for a very long time in a perpetual model and the others on subscriptions models once a year. You're committing to 12 to 18 month major releases plus several maintenance releases a year. Is that a fast enough updating of your portfolio relative to your peers do you think?
Great. So I think there were a lot of questions embedded in that one, quick one. First, for example, we talked about the repackaging exercise that we did over the summer. We can use CAD as an example. And we took the number of in fact, the number of primary packages that are really being sold down to frankly 3 or 4 with dozens of kind of major extensions that are being sold.
And we took that down really to a bucket of about 10. So I think we've dramatically simplified the price book. And frankly, that goes across all of the segments. So hopefully, that answers some of the first part. I don't know if there was a middle part, but the last part was around release cycles.
Yes.
Jim will take that one.
I think that the customers' desire new releases varies largely based on the maturity of the product. So if Herve was up here, he would say, I don't want 3 or 4 CAD or PLM releases a year. What am I supposed to do with them, right? So I think that on the IoT side, we're off to the races. We're delivering new capabilities very frequently.
The product is expanding rapidly. As you switch over to CAD and PLM, CAD kind of being the opposite end, I think people are happy with a major new release every year, year and a half. It seems to be the right cadence for our customers. And I'd say that's largely irrespective of pricing model. Their desire to do upgrades doesn't really change if they go from subscription to perpetual or back.
It's more related to the process of doing an upgrade of a large system versus how much value has accrued in that next release that I what's my desire to get there, right. And when the releases are too small, then the equation doesn't work. So they kind of like media releases and even then, they might skip one every once in a while and go 2 or 3 years before they do a big upgrade.
Thanks. Rob Foraker, Loomisales. How do you get CAD back to 3% to 4% growth?
I think the simple answer is we put more focus on it. We have quite a good product. Our channel had quite a good year this past year.
High single digit growth in the channel.
So I think that our channel shows us what happens when you have a sales force that's focused on selling CAD, they actually have quite a good CAD product to sell and they do quite well, sort of over performed the market or certainly performed by anybody's benchmark well against the market. The problem we've had in direct space is that we don't have enough focus. So a given rep who is what we call a full product line rep could sell CAD or they could sell IoT and they've got a 100 reasons why they'd like to go make IoT calls. So they tend to spend too much time there. So the answer really is focus and segmentation and quotas and so forth.
So we've implemented a program that really requires dedicated resources to each of our main product lines and reinforce then either by job description, I only sell CAD, that's my job, or by quotas, which is I need to deliver a certain CAD number in order to make my overall numbers and go to President's Club and all that kind of stuff.
I would just also add in that the linking of price performance or discounting to incentives could also end up being a driver for growth. If we're able to reduce discounting by a point, that's already going to drive
That's $10,000,000 just in license, if you
look at the growth. Three points
of growth alone. So, I think there's a lot of levers.
Well, and then the subscription point that if you breakeven at year 4 and by year 8 you're 40% ahead, imagine where you are by year 'twenty 9 where John Deere is. I mean, I think we will drive a lot more revenue in this subscription model than we ever would have in the old model.
Sterling Auty with JPMorgan. Looking at the growth in bookings in the platform technology area that you've outlined, what I'm kind of curious about is when you look across the logos that you've brought in currently, what should we think about is a reasonable annual level of subscription for, let's say, somebody that's in the SMB category versus the enterprise. Are these guys, when you look across the portfolio, are they going to pay you $100,000 a year, $1,000,000 a year? What's the kind of ranges, so we can see how reasonable those growth assumptions might be?
You want to take that?
Yes. So, Sterling, I quite honestly, I think it's a little too early to call the ball. Because if you look at those logos, they are very widely disparate in terms of the types of companies and size of companies that we're selling to. Small companies doing small subscriptions, big companies like Caterpillar, that's a very, very big what would have been a very, very big subscription now, it happened to be perpetual. But I think we're going to see this year in particular, I think we'll start to see sort of settling, if you will, of the size of deals that we see per customer base, per size of customer.
I think you got to figure kind of 5 figure deals for smaller customers, maybe 6 figure deals like the deal that we showed for Tyco.
Yes, I was going to say Rob.
I was going
to say that
I think we're going to get to a point at a more steady state where we're not just planting so many seeds because right now the seeds keep averaging us down. But last year we did 5 figure ARR, 6 figure ARRs and a few 7 figure ARRs. So I think we're going to get to a bell curve where the middle of the bell curve is going to be a 5 I'm sorry, a 6 figure deal in the 100 of 1000. And then we're going to have a lot of seeds that are still ripening over here or small companies in the tens of thousands and then we're going to have a growing portfolio. Caterpillar is far from done.
That's we're 20% penetrated literally. Where we are with that account in GE, we mentioned 80 of 400 factories in the internal buy. So we're 20% there. So lots and lots of ceiling and we would end up in those kind of accounts with definitely with 7 figure run rates.
Hi, Saket Kalia from Barclays. Two questions, if I may. So first, maybe for Bob. Right now we're really in that land grab mode for IoT. What mode do we have to be in fiscal 2018 when it's driving that larger portion of growth?
Is it having a lot more assets in a device cloud? Is it I don't know what it is, right, because it's such new business, right? So that's the first question. The second is, and maybe this is for Tim or Andy, but just from a metrics perspective, it's been a year since we introduced the whole ACV and division by 2. With some of the new acquisitions that you've done, is that something that's going to change?
Can we just reevaluate if that how valid sort of that ACV that will kind of division by 2 thing is, if that makes sense?
I'll take that one.
All So, I'll talk a little bit about this land and expand. I think if you looked at FY 2015, it was largely land and a little bit of expand, because we did acquire customer bases from Exida and ThingWorx when we acquired those companies. So, companies like Diebold and EMC and so forth, were coming back and expanding even in FY 2015. But largely, if you just look at the types of deals that we're doing in FY 2015, they were land deals. You talked about FY asked about FY 2018.
I think in FY 2018, that's going to be defined by a lot more expansion. But I don't want to give up on the land either. And that's where that partner economy comes in. We've got a long, long, long road ahead of us in terms of people adopting IoT. The types of companies that we're dealing with right now are early adopters.
And so, do I think that we fundamentally shift to expand over time? No. I think expand layers in on top of a continuing just landing of the more and more new customers. So, the mix might change a little bit, but in terms of number of transactions that are land transactions, I think if we're doing our job right, particularly through the partners, that number just goes up and
and up in the out years.
And I will address your second point. So the important thing you guys need to know is ACV, okay, which is actually the ACV that we report, okay. The bookings or perpetual equivalent bookings is ACV times 2. We actually did analysis, that's actually conservative. But we didn't want to change it this year because frankly, it would make comparisons to last year difficult to do.
And we didn't want to change the last year booking. So we thought we'll just stick with 2 at this point in time and just let that play out even though the actual number is closer to 3, frankly, would be the appropriate thing at this point in time. At some point, frankly, we're doing it because we've got some perpetual, some subscription. And the other thing is, we want to help your ability to compare last year and the year before. And so that's why we're trying to disclose something that lets you have an idea of what bookings are, okay.
And that's basically what our goal is. But ACV is the actual ACV. Okay. The bookings number is the derived number. It's the perpetual actual bookings plus that ACV times 2, even if it was a 3 year contract.
We only count as the booking ACV times 2. Okay?
Hi, Ken Wong from Citi. Andy, you mentioned a pricing playbook and it sounds like you guys are probably a little behind the curve in terms of following that pricing playbook. I'm just wondering when you mentioned the 3%, 4% pricing increases over the last couple of years, is there upside to that number or is that actually you guys catching up to kind of where you guys should be? And then the second piece, you guys showed a slide up there where you get the mix of subscription, perpetual support and whatnot. It look like support, I mean perpetual starts to shrink and then all of a sudden it grows again.
I'm just wondering why that is? Yes.
So, the answer to the pricing question, I am sorry, I was jumping to the subscription question.
No, the question was on the playbook.
On the playbook. I am not going to when I came in, the company had already raised some board prices last year.
Let me take that one. I think we probably were behind. We did not have a very sophisticated pricing group and so forth. We had started doing CPI type increases in our maintenance contracts and so forth, just in the last few years. So that's a practice we will continue, but the more interesting practice is to actually go through the price book in scrub in each line.
How are you compared to market and where are you way under market and where is an opportunity and so forth. So we have a much more robust growth in the last year than we did for decades prior. So I think we'll be much smarter about it. And on discounting, it's night and day since Andy got here, because I think that sometimes a fresh look is a good thing. And Andy just said, I don't understand why you do things like that, why you allow discounts like that, I don't want to have discounts like that, we are going to stop allowing that kind of discounting and we did.
And sometimes that's what it takes. So kudos to Andy for bringing fresh discipline. Now you can take the second question.
Yes. I am sorry, go ahead. Oh, I know why does frankly, we wanted to hold to that 70% perpetual. So it's just showing that while it looks like it's modestly growing, frankly, it's kind of a steady.
What happens is the mix stabilizes. Yes. So then the 30% is growing a little bit.
Yes. I could have gone to 71% or 2% and no one would remember that, you can remember 70%.
Yes.
I want to play devil's advocate for just a second on the subscriptions. So, you have competitors that are trying to do this in the SMB market or a competitor. And they've had kind of mixed success at least until they decided, well, they just have to do away with perpetual licenses. You guys are doing it in the enterprise market where customers have a lot of cash and they can afford to make upfront payments. And you're showing how you can drive more customer lifetime value, yet you're also claiming lower customer TCO.
So my question really is?
No, we said lower perceived TCO over the duration of their investment case, which is a fallacy to be frank. If you run a 4 year investment case, this is a better answer. If you actually run a 29 year investment case, it's a terrible answer. But nobody runs a 29 year
investment case. They run. And what turns out is actually run between a 4 and like 4.5 year investment horizon. And that's how they compare perpetual subscription. That was part of our market studies.
Okay. But go ahead.
No, that's you pretty much addressed my question. So maybe I'll ask a follow-up, which is, how long will it take to get proof points that will make you comfortable with your ability to achieve those targets in your detailed
analysis kind of bottoms up like how much of different different segments of customers needed to move in what timeframe. So that was how we kind of we came up with those targets and the timing of those targets. We didn't just draw like a linear, something linear from 25% to 70%. The second thing is, is we're already actually seeing some early more anecdotal proof points. Realize that for us a much more significant percentage of our business is direct, where we directly drive the sales reps' behavior.
And we our change in sales comp has already when we look at the sales funnel, we're seeing a lot of early signs that sales reps are frankly leading with subscription. In fact, I would not be surprised if some of our customers think we don't even offer perpetual anymore based upon what the sales rep is leading with. So I think it actually helps us in this transition, the fact that we do distribute so much directly through our sales force, it gives us more control over the entire process.
Can I just add one point, Steve? You're talking about sophisticated enterprise buyers who may in fact have a long time horizon. And I guess I would just say that I think we may be underestimating the value of the flexibility for them. And I'll use an example, which as much as it pains me to use it because I'm from Finland. But 7 years ago, Nokia was the largest cell phone manufacturer on the planet.
Today, they're not even in the business, right? I mean, they have it's still a viable company. They're doing great. They're doing other things, but they're not in that business. They don't need the tools to run that business anymore.
They don't need to have invested perpetually everything. They'd be stuck holding the bag, which they don't want. So I think that actually even large sophisticated enterprises really do understand the value of flexibility in a world that's changing pretty rapidly.
The one thing I will add is that business case horizon of just over 4 years, a lot of people actually initially in PTC were a bit surprised by how short that was. But it actually didn't surprise me, because has anyone ever tried to take an investment case to their boss where the ROI isn't positive for 8 years, 9 years. I mean, that's not something you want to do. The bottom line is, is generally you want to get the fastest return on investment as possible. That means it's lower risk.
With subscription, your ROI kind of follows your cash outlays. It's the type of business model that most people would prefer to actually put forward, especially they're buying the software to get value out of it, to get some type of transformation in the case of PLM, but they're trying to get a return from that software.
Fatima Dikila Gota. CAD is a very sticky business. Will all these changes in how you pay for it not change anything in the market share? Will I mean within the next 5 years, everybody will be on subscription mostly. Will the PTC customers will be more to sell customers or vice versa?
How do you see opportunities for you or risk for you in that sense?
Yes, I can probably address that one. CAD is very, very sticky software. PLM is arguably even stickier. I don't think people are going to switch to get a different business model. The nature of stickiness means that the cost and agony of switching is super high.
So people aren't going to do that because they like a perpetual model versus subscription or vice versa. So I actually think that this discussion around perpetual versus subscription will have no impact on market shares in CAT and PLM. The question was, will the business generally be more volatile? I think no, the business generally be far less volatile. If you look at our maintenance business right now, which is 55 percent of our revenue, it's not volatile at all.
In fact, we joke is Tony Dibona in the room here? Yes, we joked that at the beginning of the quarter, he's only 99% loaded. He's got to go get 1% of his business. We joke about it because the sales guys are 0% loaded. They are starting with an empty sheet of paper at the beginning of every quarter.
Whereas in our maintenance business, Tony literally can forecast within 1% of where he's going to land. And the sales guys, of course, if they could forecast within 5%, they'd be rock stars, especially if they did it by not just sandbagging with low numbers, right? So I think it makes it much more volatile. Now that's sad and people know this. The volatility shifts to booking as opposed to reported results, right.
Revenue and EPS isn't volatile, but you still got to get the bookings.
Bookings. How should we think about longer term the relative attractiveness of right now sort of if I was licensed $100 the subscription is $45 Do you envision that changing as you drive price in support and then licenses? And so over time, will it get to the point where subscriptions are sort of substantially more attractive than say that 45% number? And is that sort of upside to the 70% bookings that you're targeting?
I'm not sure I understand the question. I know what you're asking.
I think
I do. What I'm saying is over time, they won't compare the $45 to the $1 or the $100 they'll compare it to somebody else's $45 right. That's what will happen is we'll end up comparing 1 subscription price to another. But that said, in our industry pricing hasn't shifted dramatically. And there was a period in the cat industry where pricing fell precipitously, but that was a decade ago.
It's kind of stabilized a little bit, maybe inched down a little. But by and large, our price points haven't moved around much.
So And as Christian highlighted, we actually as part of our pricing analysis, we actually went and made sure our subscription pricing made sense against all our competitors who also offer products under a subscription model.
Okay, great. So we are now going to head to lunch. Everybody is going to be here. So any follow ups, feel free to talk to the different executives at the tables that's up on the Thanks for coming. Thanks to you
on the webcast.
Yes. Thank you all very
much. Appreciate it.