PTC Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2020 First Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Thank you, Sheila. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our fiscal Q120 results. On the call today are Jim Heppelman, Chief Executive Officer, and Christian Talatia, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As a reminder, we'll be referring to operating and non-GAAP financial measures during today's call. Discussion of our operating metrics and these items excluded from our non-GAAP financial measures and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related Form 8-K. Lastly, references to growth rates will be in constant currency unless otherwise noted. And with that, let me turn the call over to Jim.

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. I'm pleased to share that our solid Q1 performance puts us right on track to deliver against our fiscal 20 targets and our attractive long-term financial ranges. ARR, which is our key top-line metric, grew 11% in Q1. As Christian will detail later in the call, we are raising our fiscal 20 ARR guidance based on our Q1 performance, our visibility into the balance of the fiscal year, and favorable currency tailwinds. We're also raising revenue, EPS, and adjusted free cash flow guidance for the year. At the midpoint of our guidance, we're now expecting fiscal 20 ARR growth in the mid-teens, revenue growth approaching 20%, and EPS growth above 40%. The benefits of all the hard work we've done in the past year is to expand our profitability, to increase our growth rate, and to convert to a subscription model are really starting to show because PTC truly is emerging as one of the world's premier public software companies. Before digging into the details, I'd like to share some observations about broader industry trends and PTC's unique position in terms of helping customers thrive during this period of rapid change in the industrial world. Similar to other industries like entertainment, hospitality, or transportation that have been disrupted by digital technologies, industrial companies are now facing new challenges from traditional competitors that are embracing digital technologies across their value chains, and from new entrants exploring new business models. Digital transformation has become a wave that's sweeping across the industrial market, enabling companies to better differentiate their products and services while simultaneously optimizing their engineering, manufacturing, sales, and service processes. As the only company out there who has a suite of CAD, PLM, IoT, AI, and AR capabilities, PTC has a unique ability to help customers pursue their digital transformation ambitions. Every day, we're helping customers to do things like implement AI-driven product design, or to create a digital thread to leverage product data across their value chain, or to gain operational insight from their products in the field and their assets in their factories through our leading IoT and AI technology, and to drive significant improvements to worker productivity through our AR technology. I host many customer meetings, and I can tell you that PTC solutions really resonate with our customers because they align with their high priority initiatives. Nobody else looks like PTC, and with the opportunity in front of us, it's a very exciting time to be here. Given our performance and forward-looking momentum, one should take note that traditional economic measures, like the PMI index, are now much less correlated with PTC business trends. As we all learned in the Great Recession of 2009, recurring revenue streams are impacted much less by economic fluctuations than is perpetual license revenue. This suggests that our subscription-based business model, coupled with growing secular dynamics of our business that I described earlier, have to a large degree driven a decoupling from traditional cyclical measures like PMI. We are guiding the strong ARR growth against the backdrop of some of the most lackluster PMI numbers in recent memory. Of course, we remain mindful of these external measures, but this negative sentiment has been around for some time now. This decoupling gives us even more confidence in our ability to drive sustainable growth going forward. Turning now to some highlights in the quarter, I'll begin with our growth business that now includes ThingWorx IoT, Vuforia AR, and Onshape SaaS. ARR growth for our IoT solutions accelerated quarter over quarter, and our augmented reality solutions once again outpaced high market growth rates, thanks to a continuation of the trend of customers introducing AR into their manufacturing and service environments. In addition to healthy new logo activity, Q1 expansion bookings represented about 65% of IoT and AR bookings, primarily driven by customers shifting from pilots to to production at an accelerating pace. The number of six-figure deals in the quarter more than doubled versus a year ago. When viewed through an ARR lens, trends across our customer cohorts are impressive. Relative to Q1 of last year, the number of IoT and ARR customers with ARR greater than 500K grew by over 50%. One of these customers, Thermo Fisher, is a great example of how enterprises are transforming their business with PTC solutions. Thermo Fisher is a global leader in the biotech space who's leveraging ThingWorx to offer new value-added services to further differentiate themselves in their competitive end markets. In their chemical analysis division, for example, Thermo Fisher embeds ThingWorx within their products, allowing end customers to remotely capture and analyze test data from these products. Thermo Fisher is also leveraging ThingWorx for predictive maintenance and to provide feedback loops to their product development teams. Thermo Fisher is representative of the trends we're seeing where customers are expanding their digital footprint across product lines and use cases and into their production environments as well. Given the broad scope and global nature of the digital transformation opportunity within the industrial market, we knew it would be challenging to pursue this alone. Of course, that's why we formed strategic alliances with industry leaders like Rockwell Automation and Microsoft. Both of these alliances, again, delivered the goods in Q1. In our Rockwell Automation Alliance, Q1 provided a strong start to the year with robust New Deal activity, plus a meaningful uptick in expansions as pilot projects that were kicked off earlier in FY19 moved into production. The Rockwell Alliance team delivered new deals across the broad cross-section of vertical markets and in 15 different geographies, which highlights both the deep industrial domain expertise and the global reach that Rockwell Automation brings to this relationship. In our Microsoft Alliance, Q1 also marked a strong start to the year with new ACV bookings well above plan. Geographically, the Americas continues to be the main driver of growth, however momentum in Europe is building. and the Microsoft Alliance has a robust pipeline heading into Q2. We're also pleased to see that demand continued to expand beyond the smart connected product use case into factory and even AR solutions, which represented more than a third of the Alliance bookings in Q1. A great proof point of the power of our Microsoft Alliance is a recent win at Johnson Controls, who's a leading global provider of building control systems. It turns out that PTC, Microsoft, and Accenture were independently supporting JCI's digital transformation efforts from different angles. Too many cooks in the kitchen ran the risk of slowing things down, so PTC, Microsoft, and Accenture joined forces and approached the C-suite with a unified strategy for their smart factory initiatives. Together, we landed a deal to deliver a fully cloud-based smart factory solution that has Accenture deploying PTC's ThingWorx on Microsoft's Azure. Before I leave the growth discussion, let me share that we're making great progress integrating the Onshape team. In fact, the Onshape team moved into our seaport headquarters earlier this week. I like to think of Onshape as the proverbial iceberg. What you see above water, the 5%, looks a lot like a next gen CAD and PLM system. But what's below the water, the 95%, is PTC's new peer SaaS platform. We have big plans for Onshape and for SaaS, and I'm convinced this will become another major growth engine for PTC. While it's too early to say much yet, I look forward to updating you on our SaaS progress in coming quarters. Our core product group delivered strong Q1 performance as well. Core business ARR growth of 10%, outpaced market growth again in the quarter. It was led by very strong performance in PLM, which delivered mid-teens ARR growth that reflected broad-based strength across all major geographies. In my view, the strong performance in PLM is indicative of the growing strategic role that PLM technology now plays in our customers' digital transformation strategies. Any industrial company who wants to undertake a digital transformation quickly realizes that PLM will need to be one of their anchor tenant systems of record. Take Group Beneteau, a French manufacturer who's a leader in luxury sail and powerboats. By leveraging PTC's windchill, along with Creo and ThingWorx and Vuforia, Beneteau is delivering product and service differentiation together with engineering excellence and operational efficiency. Their PLM technology roadmap began with foundational capabilities such as bill of material management and change management. then extended into the factory with concurrent engineering and manufacturing instructions, and from there into leveraging AR functionality for shop floor operators and dealership scenarios. This powerful combination of highly differentiated technologies is truly unique to PTC. We're using it to win new business and to expand relationships with existing customers as they seek to modernize their business processes. Altogether, we're seeing more and more evidence of a rejuvenation of PLM that makes the long-term growth opportunity that much more attractive for PTC. Our CAD team had a solid start to the year, too, again delivering high single-digit ARR growth with notable strength in Asia Pacific and in our global reseller channel. On the Creo simulation live front, which is the starting point for our Ansys partnership, interest remains high. Adoption, particularly in the enterprise space, continues to ramp nicely with average deal sizes continuing to grow. Our focus on Creo Simulation Live, or CSL as we call it, in FY20 is on driving adoption in the channel, which generates about half of our CAD business. We're kicking off new channel enablement and promotional programs in Q2 and remain bullish on the long-term opportunity for significant CSL penetration in our install base. While CSL is the tip of the spear, and our partnership with ANSYS, we're also making good progress bringing the broader Discovery AIM suite into the CREO fold as well. To wrap up my comments, I'd like to reiterate PTC's full commitment to driving mid-teens ARR growth and generating significant free cash flow in the coming years. Our strong performance in CAD and PLM, plus our leadership positions in the high-growth IoT and ARR markets, and more new opportunities for growth in the SaaS-based product development market with Onshape gives us strong confidence that our growth will remain both significant and sustainable over the long term. With our subscription transition in the rearview mirror and our ongoing focus on disciplined cost and portfolio management, we're firmly on track with our plans to transform PTC into one of the premier public software companies in the world. With that, I'll turn it over to Christian to comment on financials and guidance.

Thanks, Jim, and good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance, and all growth rate references will be in constant currency. Let me start off with a review of our first quarter results. Again, this quarter I'm going to keep my remarks brief, hitting just some key highlights. and ask investors to refer to our press release and prepared remarks document available on our IR website for additional details. Q1 ARR was $1.16 billion, representing 11% year-over-year growth, which is consistent with the guidance commentary we provided last quarter. ARR in our growth product group was up 36% year-over-year, and we continue to expect ARR growth to be above market growth rates of 30 to 40% in fiscal 20. ARR in the core was up 10% year over year, which was also above market growth and consistent with our outlook for fiscal 20. ARR in FSG was up 1% year over year, primarily due to the timing of deals, and we expect ARR growth to be in the low to mid single digits for FSG for fiscal 20. Total Q1 revenue of $356 million was up 8% year-over-year, despite a 78% year-over-year decrease in perpetual license revenue driven by the end of perpetual license sales on January 1, 2019. Operating margin of 26% increased 200 basis points over Q4-19, and declined 100 basis points compared to Q1-19, where we experienced higher than expected perpetual license revenue resulting from the perpetual end-of-life program. And lastly, non-GAAP EPS of 57 cents increased 5% year-over-year against the perpetual heavy comparison of last year. And as you'll recall, revenue and operating expenses and consequently EPS can be impacted positively or negatively by ASC 606. Major drivers impacting revenue include term length changes and support to subscription conversion. And on the OPEC side, commissions are obviously also impacted. Finally, our Q1 adjusted free cash flow of $12 million was within our expectations and sets us up to achieve our full-year guidance. Now, turning to the guidance. Beginning with ARR, for fiscal 20, we're increasing our guidance to a range of 1.27 billion to 1.29 billion, or 14 to 16 percent year-over-year growth, and 13 to 15 percent on a constant currency basis. ARR guidance includes approximately 15 million of positive FX, and already embedded in our original guidance for the year is approximately 10 million of ARR or one point of growth from the Onshape acquisition. Consistent with our prior guidance commentary, we expect Q2 constant currency ARR growth to be in line with Q1 results with ARR growth rates accelerating in the back half of the year. This increase is driven by both normal seasonality of our business and our backlog of deals booked in prior periods. Now turning to adjusted free cash flow for fiscal 20, we're expecting a range of $260 to $280 million, reflecting the positive FX impact of $5 million. Now turning to P&L guidance, we're now expecting fiscal 20 total revenue of 1.45 billion to 1.53 billion, an increase of 25 million at the midpoint of guidance, reflecting our Q1 performance, our outlook for the remainder of the year, and approximately 15 million of FX. Non-GAAP EPS is now expected to be $2.15 to $2.65, an increase of 12 cents at the midpoint of guidance, reflecting our Q1 performance and outlook, and $0.05 of FX. We continue to expect fiscal 20 operating expenses to grow approximately 9% year over year. With that, I'll turn the call over to the operator to begin the Q&A.

Thank you. We will now begin the question and answer session. Please limit yourself to one question only. If you have additional questions, please return to the queue. If you would like to ask a question, please press star 1, unmute your phone, and record your name clearly. If you need to withdraw your question, press star 2. Again, to ask a question, please press star 1. Our first question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Hey, guys. Great. Thanks for taking my question. Yeah, PLM ARR growth mid-teens, constant currency was pretty good. I know you called out pretty good geographic success, I think, in your press release. You talked about China and Europe in particular, and Jim, you mentioned digital transformation being a real tailwind here. Could you talk about the sustainability of this PLM growth? I know we spent a lot of time on some of the growthier businesses, but sort of the durability of PLM as we look forward through this year?

Well, I think we're going to have a very strong year this year, for sure. And I think if you remember back to September, Christian said over the coming five years, we would expect our PLM ARR growth rate to slow down to the market growth rate, which I think you had at 8%. Yeah. So we're sort of mid-teens, and we think over the five years that'll slow to 8%. Now, that's based on a number of factors. You know, one thing is our renewal rates in PLM are very high. This is very, very sticky software. And relative to the base of ARR, we're selling a lot of it. So we're really in a strong, good situation where there is strong demand because of digital transformation. You know, our product is ranked number one by every analyst report I've ever seen. And so we're in a good, strong position where we get a chance to meet that demand with our product and high renewal rates, and that bodes well for a long time to come.

Thanks, Jim. Thank you. Our next question comes from Jay Fleashour with Griffin Securities. Your line is open.

Thank you. Good evening. Hey, Jim, Christian, and Tim. With regard to PLM, following up on that subject, when we think back over the last 12 to 15 years or more, there seems to have been a pendulum of adoption among customers. In other words, there have been times when PLM-only companies seem to have had momentum And then there are times when integrated engineering software companies that have CAD and PLM and perhaps other products have had momentum. The question, therefore, is what are you seeing in terms of conjoined business or CLM business across your three-letter acronyms? How much of the PLM business is just for PLM versus your being able to conjoin CAD or anything else to that either as a beneficiary or driver to the PLM business?

Yeah, I think there have been pendulums for sure. And one of the strong upswings was when PTC, who at that point had a CAD footprint, brought PLM into the picture and cross-sold a lot of PLM to the CAD audience. Now, I think what's happening this time is a couple of different drivers have One is we're doing a lot more engineering into manufacturing data transformation. You know, we have this software module of our PLM system called MPM Link, as in Manufacturing Process Management, and it's used to convert an engineering design and an engineering bill of material into a manufacturing process design and instructions and a manufacturing bill of material in a very systematic, configuration-managed sort of way that so that if somebody later decides to change the engineering design, we can pinpoint what they need to update in the manufacturing process very quickly. And if the engineering design is highly configurable, well, it turns out so are the manufacturing instructions and the M-bombs. So today we're selling a lot into that. That's become a new driver, you know, an incremental new driver. And then the other thing is customers are really realizing, for example, this augmented reality technology, which we have best in class, customers love it, it's selling like crazy, that stuff needs configuration management of its content. So, you know, a lot of customers, and I'm thinking of a great big, I won't name them because I didn't ask if I could, but a great big truck company in Europe, you know, really is excited about our AR technology, and what it's produced is a PLM project. because they say, all right, that's great, but we'll never really be able to do augmented reality without configuration management of the content. So let's go do this broader PLM project. So I think that's another driver. I put that one also in kind of the digital transformation category. So I think there's definitely an upswing, but it's really brought by people saying, how could you have a digital transformation strategy without having the digital descriptions of your products and manufacturing processes under control? It's silly to even talk about that. So I think this has definitely produced a tailwind that's generating momentum for PLM.

Thanks, Jim.

Our next question will come from Ken Talanian with Evercore ISI. Your line is open.

Holly, thanks for taking the question. Could you give us a sense for how your net retention rate trended in the quarter for core growth in FSG compared to last year?

Hey, Ken, it's Christian. I think we're not going to get into the quarterly variability, again, just given the reporting framework that we have. But I think suffice it to say that given the guidance that we have for the year, we're continuing to expect a modest improvement. in net retention here in fiscal 20.

Great. And I guess as a follow-up, it looks like the growth portfolio saw some good traction in both Europe and APAC. Could you give us a sense for how we should think about the sustainability of that growth portfolio in both those regions?

Yeah, I mean, I think what normally happens here at PTC, maybe elsewhere, but here at PTC when we launch a business, a new business, it gets traction first in the U.S., and then over time it gains more and more traction in Europe and APAC. And so I think that's just a natural way that these businesses develop, and we see it happening here. So a lot of times they get stronger first in the U.S., and then without the U.S. necessarily weakening, Europe and Asia come on stronger a little bit later. That's what I would attribute that to. Great. Thank you.

Our next question comes from Sackett Callia with Barclays. Your line is open.

Hello, Sackett. Hey, Jim. Hey, Christian. Thanks for taking my question here. Christian, maybe for you, a bit of a mechanical question, but can you just talk a little bit about ramp deals? We talked about them a little bit last quarter. You've talked a little bit about sort of the back half strength that we should see in ARR for a variety of reasons. It sounds like ramp deals are a part of it. Can you just touch on what parts of the business are you seeing these types of deals, these ramp deals? And then just for the benefit of the broader group, can you just talk about how they impact ARR at sort of different points in that ramp? Does that make sense?

Yeah, sure, Saket. It's a good question, so thanks. If we just delve into the mechanics of it, how ramp deals impact ARR is we will add things to ARR on start date of the contract, right, not book date, start date. And in the case of a ramp deal where you have, in essence, kind of multiple start dates, say you have year one of whatever, 100,000.

Can I give an example and then you talk about the mechanics? Sure. Let me just lay out an example. Let's say a customer loves our smart factory solution and they have 20 factories. And so they say, I want to really understand what it's going to cost me across all 20 factories. So I'd like to negotiate a deal for 20 factories, but I can only get about five deployed in the first year. Let's say another five in the second year and 10 in the third years. So they're going to do a ramp that's a commitment to five the first year, five plus five the second year, and five plus five plus ten the third year. So that's the ramp of the commitment.

And so the way that that would flow into ARR is we would take the first five factories worth in year one. In, say, year two, when the next five comes on, we would take the incremental five factories, and then in the third year, we would take the incremental 10. So that's the mechanics of it. ARR flows in on start date of the contractual commitment. In terms of where we're seeing ramp deals, Yeah, that's right. We see, I would say, more of them in the growth product group, you know, IoT, AR. And then, you know, we still actually do see some in core as well, but to a lesser extent and to the least extent in any of the FSG products.

Got it. That's very helpful. I'll get back in queue. Thanks, guys. Great.

Our next question comes from Matthew Broom with Mizuho Security. Your line is open.

Thanks. Hi, Jim, Christina, and Tim. I'm just curious, how are you tracking for sales capacity so far versus your hiring plan for this year? And can you sort of give us any kind of an update on what sort of a percentage of your total capacity is now focused on IoT and augmented reality.

So if the question – sorry, I'm just going to repeat it to make sure that I understood it. I think the question was how are we tracking in terms of sales capacity was step one, and then step two, how is that capacity divided between growth – and Core and FSG.

Yeah, exactly. Thanks.

Yep, great. So in terms of tracking the capacity, I think we are on track for hiring, kind of right where we would like to be at this point given our plan. In terms of the spread, frankly, I'm going to have to get back to you on specific details, but You know, the majority is actually still on the core product set, which is understandable, an increasing amount on IoT, and then still specialists focused on the various components of FSG.

Yeah, I mean, another way to look at it would be to look at sales productivity, which would be lowest in the growth business because, you know, you're bringing on a lot of new capacity and it's, it's doing a lot of land and expand deals and so forth, it would be significantly higher in the core and maybe even higher yet in the focus solution group.

It gets a little more complicated where you have, we also have full product line reps, right? Reps who are focused on major accounts and they sell everything in the bag. So like how you want to break that out, it gets a little bit complicated.

But a basic takeaway would be that capacity is overrepresented for the growth business. which is what we need to do to deliver the growth. And back to the hiring thing, I can certainly understand where that question comes from. You should know, after about a year ago, when we did get behind in capacity, we changed the way we looked at this. We used to think of capacity as being a fiscal year thing, and now we think of it really as every quarter. So it's not like this year we have this many heads, but it's more like a constant every quarter we need to be bringing on more capacity so that we don't end the year, and then have a big step function of capacity we have to ramp going into the next year. So I think our processes are vastly improved in this area.

Okay, perfect. Thanks very much.

Our next question comes from Andrew DeGasperi with Barenburg. Your line is open.

Thanks for taking my question. Maybe if I could ask about the ARR guidance increase. Can you maybe explain to us the components of that? I guess Onshape is a big one, but are there deal timing pushouts that happen from Q4 to Q1? FX, can you maybe quantify that a little further?

Yeah, sure. So this is Christian. Let's start with Onshape. Onshape was already embedded in our initial guidance, which we provided last quarter. After the acquisition was announced. After the acquisition was announced, but provided in the initial guidance. So it's about $10 million from Onshape. There's about a $15 million increase from favorable FX as well. And then it just We're now a quarter of the way through the year, and we delivered what we believe are very solid results for Q1 and feel that much more comfortable with the range that we have out there. So in essence, what we did was tighten up the bottom end of the range from 12 to 15 to 13 to 15, and then increase the range from 13 to 15 to 14 to 16, really based on the FX impact. So hopefully that helps. Great. Thanks.

Our next question comes from Ken Wong with Guggenheim Security. Your line is open.

Okay. Thanks for taking my question, guys. Hey, how's it going? Good afternoon. You know, you're very positive on just the trajectory of Onshape, and obviously you guys have more things to come and announce. Sounds like, you know, so far we've had a lot of feedback in terms of how maybe your customers are receiving it. Can you give us a little bit of color in terms of how the Onshape side of the install base is looking at the PTC portfolio?

Yeah, I mean, I think the first thing we focused on was to make sure that the Onshape customers felt that it was a good thing that PTC acquired Onshape, just even if they stopped there. And I think we've been very successful there. The messaging we put out there was very supportive of Onshape and its importance to our future strategy. And, of course, you know, CAD is very sticky software that companies tend to use for a lot of years. So if you're using Onshape, you want to make sure it's in a sustainable place so that you don't, you know, end up finding it's being shut down some years down the road or something like that, and you've got to go find a new CAD system. So I think the general message was well received that Onshape has a great home within PTC. That's been a big success. Now, as it goes to cross-sell, I mean, honestly, it's too early. I do have a few anecdotal stories, but not enough to really draw any meaningful conclusions. But I would say this. You know, we certainly think there are complementary use cases. For example, you know, we're going to bring our AR technology close to Onshape, actually use much of the Onshape platform, and that will make that an easy cross-sell. And then, you know, we're off exploring coexistence strategies with Creo and Windchill as well so that we could both upsell from Onshape to Creo, Windchill, and Vuforia, but also cross-sell in those accounts to bring Onshape in for peripheral or let's call it edge use cases. So it's too early, though, to be honest. I'm very optimistic, but, you know, we've only owned it for about two months and, you know, we're past the phase where people are looking for the bathroom, although we had to start over this week when they moved to the headquarters. But, I mean, it's honestly too early.

Got it. Great. Thanks for the call, Jim.

Next we will hear from Adam Borg with Stiefel. Your line is open.

Hey, guys, and thanks for the question. Maybe just talking a little bit more in AR. So you talked about augmented reality growing above market rates and some opportunities in PLN, but just wanted to dig in a little more on the cross-flow opportunity with IoT, just given how complementary it is with ThingWorx, and maybe talk more about that cross-flow opportunity within the install base. Thanks.

Yeah, I mean, I think you have to think about it as we're trying to connect the physical and digital worlds together, like in our logo, right? And IoT is one form of connection. And AR is another. And when you connect them together, you can then have AR experiences that contain IoT data, meaning I can use AR in the physical world to tell you about the physical world because I know about the physical world thanks to IoT. So these are definitely peas in a pod. It's a wonderful, beautiful combination. The products are very well integrated. In fact, if you remember, for a while we called Vuforia Studio ThingWorks Studio. But these are very complementary technology. And what's really great, they're both best in class, and there is no other IoT company who has AR technology, and there's no other AR company who has IoT technology. So this is a very compelling story, and it's completely unique to PTC.

Great. And maybe just as a quick follow-up, I think this year you guys are focusing on increasing deal duration both for new deals and renewals. And we're just curious, I know it's still early in the year, but what's customer receptivity towards that? Thanks again.

Yeah, I think it's early in the year to really comment on that.

Great. Thanks so much.

Visit that later.

Thank you. Our next question comes from Sterling Oddy with J.P. Morgan. Your line is open.

Yeah, thanks. Hi, guys. Jim, you mentioned that, you know, nothing's really changed in the economic backdrop, that you're still dealing with the challenging PMI numbers. So with that as the constant, what would you say is the biggest change in the business? And based on your tone, are you suggesting that the core of the business – sorry, I don't mean core as in that label, but the bulk of the business has fundamentally changed for the better? And if so, what are the main factors that have caused that?

Yeah, okay, so yes. Let me say, first of all, the PMI is what it is. It's not in a good place, and yet we're in a good place. So clearly something's changed, and I would submit that two things have changed. Number one, we've changed our business model and metrics, and we're a recurring revenue company versus a perpetual, and I want to come back to that. And then number two, we have a growth business, and as many growth businesses are, they're not cyclical. They're secular. Companies want to do digital transformation even when they're laying off workers. In fact, they might even connect those strategies together. So I think the secular piece is very important, But frankly, it's overwhelmed by the business model change. And so if we go back to the Great Recession of 2009, let's review what happened at PTC. We had a perpetual stream of licenses, and we had a recurring stream of maintenance. The bottom fell out on the economy. The perpetual license sales declined, if I remember correctly, 32% in 2009. And what happened is the maintenance stream, which had been growing mid-single digits, basically went flat. And in 2010, it actually went down 2%. And after that, it grew every year since. So what happened actually is the effect on a recurring revenue stream is very much muted. And you can see this in the sensitivity analysis we gave you some quarters ago, where we showed you that for every five points that bookings drop, it would only bring ARR down one point. So if bookings dropped 30%, it would put six points of pressure on ARR. But that would be 2009 all over again. So we're in a situation where actually bookings aren't dropping. They're going up because of the secular thing. And therefore, ARR is going up with it. So I just think the days when PTC was highly correlated to PMI are simply behind us.

Thank you.

Our next question comes from Steve Koenig with Wedbush Securities. Your line is open.

Hello, Steve. Oh, great. Thanks, guys. Hey, congratulations on a very good quarter. So let's see. My question here is on the you had your revenue growth in your growth business this quarter matched your ARR growth or actually maybe was a point above. And you mentioned that expansion deals were something like two-thirds of your IOTAR bookings. How did that latter metric compare with other quarters, and how is that trending? And more generally, do you expect revenue growth is going to be more at parity with bookings growth here going forward? Then I have a really quick housekeeping follow-up, if you don't mind.

Yeah, I can take part of that because I've commented on this many quarters, and it's always – In many recent quarters, it's been in the 60-some percent range of bookings was from expansions. So, again, we've been following a land and expand model, which is a beautiful thing when you get it to work, and I think ours is really starting to work, because you have a lot of accounts out there that you've sold and they haven't contributed much to revenue, but then they come back and expand. And the expansions are really interesting, and they may come back several tranches of expansion. So that's been happening. We have many IoT and AR customers in particular who have come back one or more times for expansions. And I think I need to defer to Christian if you can talk at all, explain the correlation between bookings and revenue growth rates. I think it's complicated.

Yeah, it's pretty complicated. It depends, again, I'll just remind everybody, it depends a lot on start date. It depends on term length. It depends on renewal activity, et cetera. So it's not just term length of new deals, but term length of existing deals.

Could I just interrupt? The real question isn't revenue, but revenue recognition. So you get a booking. Maybe you can recognize it. Maybe you can't. Maybe it starts next month, which means next quarter. Maybe it's a ramp deal. So, yeah, it is a murky correlation between bookings growth and revenue growth.

Yeah, which is why we're trying to focus on ARR, which is kind of much cleaner and a better proxy in that sense of cash generation for the business. And we still continue to expect the growth businesses to deliver north of market growth rates. for fiscal 20. We would also expect there to be strong revenue growth attendant that as well.

Okay. That's helpful. I guess maybe to recast that question a little bit, how are you seeing, you know, churn or the inverse kind of renewal and expansion activity trending in that growth business? And then I'll just toss out the housekeeping question here, which is you're Am I correct that your new ARR guide is now not – you're now giving that nominally, and that's 14% to 16%, but the comparison with 12% to 15% as your prior guide, the constant currency compares 13% to 15%. Is that right?

That's correct. Yep. We tightened up the low end of the range and then raised the entire range because of FX. 100% agrees. Then in terms of, you know, churn, you know, we continue to see churn in the growth businesses higher than in the core in FSG from a percentage perspective. And we also continue to expect that that will trend down over time.

Yeah, it has been improving consistently for a long period of time, and we expect that to continue.

Yeah. So I don't think there's anything notable really to point out there other than those factors remain.

Gotcha. Great. Well, thank you very much, guys, and congrats again. Okay, great.

Next, we will hear from Yoon Kim with Rosenblatt Securities. Your line is open.

Thank you. Hi, guys. Congrats on a solid quarter. Just want to talk about some of the ASP trends that you may be seeing out there. Obviously, you guys talked about ASP trend. I'm assuming it's increasing in the growth products group. How is that ASP trending versus your core products group? And obviously, Jim, you talked about land and expand model working very well. Has that minimized the overall percent of business coming from large deals despite, I am assuming, increase in ASP coming from your growth business?

Okay, by ASP, you really mean deal size, right? Yes, transaction size. Yeah, I mean, average deal size in the growth business, I'd have to check because while we're getting – more big deals we're also getting more small deals so I'm not convinced I don't have the data in front of me but my intuition would be ASP is actually not changing much but of course the business is growing fast and then in any case it would generally be smaller than the core business because of this land and expand motion that we adopted in the growth business and didn't really adopt so much ever in the core business So the core business tends to be bigger transactions, although there's a lot of add-ons of, you know, modules here and there. But PLM, for example, would tend to have larger ASPs because there's not really a land and expand model. Got it. Okay, that makes sense. Sorry, that's not a perfect answer, but hopefully it's correct.

Although smaller than they were when they were perpetual.

Oh, yeah. Okay, great. And, Jim, also a real quick question around more of a thematic stuff. So not sure if you're running into this, but we are hearing a lot about 5G technology potentially accelerating the market adoption of IoT out there, especially in the factory automation market. Do you see that, or do you expect the 5G technology to be meaningful for you in your IoT business, or is it too early to tell?

Well, I definitely think it's important to our IoT customers. It's too early to know if it would cause our business to grow faster or not, but certainly in factories, people want to adopt 5G to have high-speed, low-latency wireless communications for their machines and their augmented reality devices and so forth. So it's definitely important, and I can tell you we are engaged in discussions with several different 5G partners. I think one of them might end up being a big sponsor of LiveWorks. And, you know, I see it at this point as an ecosystem play, which is I want to make sure that, you know, 5G companies help promote our IoT technology and that our IoT technology can create opportunities for 5G companies and so forth. I think it's too early to say it's an accelerator, but it's definitely important.

Okay, great. I think that's it. So I'll conclude on a great quarter. All right, great. Thanks, Jude.

Our next question comes from Jason Salino with KeyBank Capital Market. Your line is open.

Hey, guys. Thanks for taking my question. It looks like expense growth in the quarter was around 5%, but I think you guys are guiding more to 9% growth for the full year. Can you just talk about what are maybe some of the other big investments that you'll be making or integration costs as we kind of go through the year?

Yeah, so I think expense growth has a little bit to do with timing of on-shape, right? We only had a couple of months in the quarter, so we didn't have the full quarter's worth of on-shape. And then there's the kind of normal hiring plan, and we do have some back-end loading to that hire.

Great. Thanks.

Next, we will hear from Alex Tout with Deutsche Bank. Your line is open.

Hi, Alex. Hi, guys. Thanks for taking the question. I'd just be interested in your comments on the automotive end market specifically. It seems like it's probably one of the most, if not the most, challenged manufacturing end market at the moment. I know your exposure isn't huge, but be interested to see what you're seeing in terms of, because I guess on the one hand you have secular and cyclical challenges in that industry versus also a need to innovate at the same time. So what's kind of the net of those dynamics that you're seeing in your customers in the automotive space right now? Thanks.

Yeah, we're seeing actually relatively strong demand for IoT factory projects because I think, you know, in a downturn people are looking for efficiency and And taking a dumb factory and making it smart ought to make it, most people would believe, 5%, 10%, 15% more efficient. And across the level of spend that people have in their production processes, those are very big numbers. So IoT demand is good. And then I'd also say PLM demand is good. I mentioned a truck company. There's another big European automotive OEM where we're working on some big PLM projects in and probably looking at an expansion on that to a next phase pretty soon and so forth. So I think the PLM is really coming from digital transformation, and IoT is coming from let's try to find more productivity in our factories. I would say CAD, you know, not so much. Probably we're not getting a lot of demand on the CAD front right now, but good demand for PLM and IoT.

Great. Thanks for the call, Alex. Thanks, Alex.

Thank you. Our next question comes from Tyler Radke with Citi. Your line is open.

Hey, thank you very much for taking my question. It looked like on the guidance, the guidance raised on most metrics was driven by a combination of currency as well as solid execution in the quarter. The one line item that didn't see a raise appeared to be free cash flow. Maybe just help us understand why, given the solid fundamental performance in the quarter and your improved outlook on the year, why you're not expecting more free cash flow than you previously guided. Thank you.

Yeah, sure. So I think we should look at both adjusted free cash flow and free cash flow. And I'll start with just free cash flow first. You know, we did take the adjusted free cash flow up for currency. Free cash flow, we did not. I'm just highlighting. We put it in the prepared remarks. But when we put out the initial restructuring estimate for the year, that was, you know, based on an estimate. Current estimates actually have that about $5 million higher. So that actually offsets the favorable currency impact on free cash flow. Adjusted free cash flow, we did raise that by $5 million, which, again, is largely the FX impact. And what I would say here is it's just early in the year, and we're just being prudent. Of course, we'll revisit this as we continue to move through the year, but that's the answer.

Great. Thank you.

Thank you. That is all the time that we have for questions. Please remain on the line for Tim Fox's closing remarks.

Hey, thanks, Sheila, and thanks, everybody, for joining us today on the call. PTC is going to be participating in three conferences in March, starting with Morgan Stanley's Global TMT Conference in San Francisco, followed by Berenberg's Design Conference and RBC's one-on-one conference, both in New York. And additionally, we're going to be sending a save-the-date for our 2020 LiveWorks event, which will be here in Boston, of course, from June 8th to the 11th. So watch that in your inbox. And so we look forward to seeing you on the conference circuit in the coming months. And if not, we'll be sure to update you on our Q2 call in April. Again, thank you for your interest in PTC. And have a great evening, everyone. Yeah, thanks, everybody. Thank you. Bye-bye.

That concludes today's conference. Thank you for participating. You may disconnect at this time.