Tim Fox - Vice President, Investor Jim Heppelmann - President & CEO Andrew Miller - EVP & CFO.

Matt Hedberg - RBC Capital Markets Sterling Auty - JPMorgan Steve Koenig - Wedbush Securities Saket Kalia - Barclays Capital.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2015 Second Quarter Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect this time. I would now like to turn the call over to Tim Fox, PTC's Vice President of Investor Relations.

Please go ahead..

Good afternoon. Thank you, Bob, and welcome to PTC's 2015 third quarter conference call. On the call today are Jim Heppelmann, Chief Executive Officer; Andrew Miller, Chief Financial Officer; and Barry Cohen, EVP of Strategy.

Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com. During this call, PTC will make forward-looking statements including guidance as to future operating results.

Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements.

Information concerning factors that could cause actual results to differ materially from those in forward-looking statements could be found in PTC's annual report on Form 10-K, Form 10-Q, and other filings with the US Securities and Exchange Commission, as well as in today's press release.

Forward-looking statements, including guidance, provided during this call are valid only as today's date, July 29, 2015, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures.

These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.

With that, I would like to turn the call over to PTC's CEO, Jim Heppelmann..

Thanks, Tim. Good afternoon, everyone, and thank you for joining us for a review of our third-quarter 2015 results. Our Q3 revenue of $304 million was in line with our July 9 announcement of preliminary results and slightly below our guidance range. EPS of $0.53 exceeded the preannounced range and was above the high end of our guidance range.

We believe that the challenging macroeconomic conditions, particularly in the Americas and China, impacted our ability to close large deals in our core business which, as you know, is sensitive to changes in the manufacturing economy.

While we remain confident about the long-term growth prospects of our core business based on our broad solutions portfolio and new customer wins and engagements, the current macro climate is proving to be more difficult to navigate than we had anticipated.

On a positive note, however, we delivered very strong growth in our Internet of Things business, closing a number of significant deals amongst large industrial companies that are adopting our platform for their IoT initiatives. In fact, three of our eight large deals in the quarter were IoT deals.

IoT license revenue represented more than 20% of our total license revenue, and we added a record number of new IoT customers. Despite macroeconomic headwinds, results so far this year have been better than the headlines would suggest. In constant currency, our software revenue has grown 6% for the first nine months of FY 2015.

And even with professional services down 9% year to date due to our strategy to shift more of our lower-margin professional services engagements to our partner ecosystem, our total revenue is up 2% in constant currency year to date.

Also, despite a modest shortfall in our license and subscription solutions revenue relative to guidance, we were able to achieve a Q3 operating margin of 24%. On a constant-currency basis, Q3 operating margin would have been 26%.

We continue to make progress with subscriptions, which comprise 16% of our license and subscription solutions bookings in the quarter. This was slightly below guidance due to several sizable IoT deals coming in as perpetual and a few larger subscription deals in our core business slipping from the quarter.

The subscription Phase 2 team continues to make good progress, and I will let Andy provide additional color on our efforts later in the call.

In terms of geographic performance, we believe macroeconomic challenges in the Americas are impacting our ability to close large CAD and extended POM deals which; given the maturity of these markets, tend to be more cyclical.

We had strong performance in IoT, and solid SLM performance enabled us to deliver double-digit software revenue growth in the Americas. In Europe, when adjusting for currency, we saw modest software revenue growth driven by extended PLM, IoT, and SLM with the decline in CAD, and all of that against a tough compare for the year-ago period.

Asia-PAC software revenue declined modestly when adjusting for currency due to weak results in CAD, extended PLM, and SLM that were primarily impacted from the overall slowdown in China. Japan results were down from Q3 of last year, also owing to a very tough comparison in the prior period.

Turning to segment performance, when adjusting for currency, our core businesses' third-quarter results were mixed. CAD and extended PLM declined year over year primarily due to large deals slipping out of the quarter and a very tough compare given the 40% bookings growth these segments delivered in Q3 of last year.

Despite the environment, SLM fared better, with modest software revenue and bookings growth over last year.

The clear standout in the quarter was the IoT segment, which performed well ahead of our expectations, highlighted by three seven-figure deals with major industrial customers, including a large follow-on transaction with Diebold, who uses IoT to improve the service and uptime of their ATM machines.

In addition to very strong revenue performance, we made further progress towards achieving our target for new IoT logos this fiscal year. During Q3, we added 78 new IoT customers, bringing the total to 182 for the year and putting us on pace to significantly exceed the target of 200 that we communicated to you at the beginning of the year.

Once again this quarter, the new logos we're attracting come from a variety of verticals that are applying our IoT platform to many different use cases within their business. As a reminder at this stage of our IoT growth, our primary goal is to win new logos and then to expand within these customers.

Our experience is that the initial IoT platform win is analogous to a design win in the semiconductor world. The first booking may not be large, but after demonstrating success with the initial IoT project, we can then expand within the account as we scale to greater volume within and across product lines.

For example, if you look at our first-quarter 2015 IoT wins, we are forecasting, or have already closed, follow-on expansion deals at about half of them. Today, our largest IoT customers represent subscriptions in the range of $500,000 to more than $1 million per year.

So with the influx of new logos as well as the three large seven-figure orders this quarter, you can see how this business could become quite significant very quickly as we move past the proof of concept into wider usage.

However, at this stage of the business, you should take into account that large deals, like the three we closed in Q3, will add variability to our quarterly bookings results. And therefore, while we expect Q4 bookings to be up substantially over Q4 last year, they are likely to be down sequentially from Q3.

The customer momentum we are experiencing in our IoT segment is a testament to our industry-leading IoT technology portfolio, which has been further enhanced with the addition of ColdLight, our automated predictive analytics platform.

The ability to predict outcomes has incredible value for our customers, especially in the context of ensuring product performance and preventing product failure and downtime.

This new technology, along with ThingWorx Converge, our new IoT integration hub that has enhanced out-of-the-box application and integration capabilities, puts us in an even stronger competitive position in the market. Lastly, we continue to expand our ecosystem of now more than 160 IoT partners.

Just this week, for example, we added Analog Devices, a leading supplier of IoT sensors and signal chains who wishes to use ThingWorx to provide cloud-based connectivity to their sensors. It's clear that the IoT business is in a strong position, and it's starting to become material to PTC.

I would like to make a few comments on our broader product roadmap and outlook for Q4. On the product front, we remain on track to deliver Windchill 11 later this calendar year and Creo 4 in mid-2016.

In addition to continued investment in the core, we are very excited about the opportunity to further differentiate our CAD, POM, AOM, and SOM solutions by enhancing them with connected technologies.

For those of you who were able to join us at either LiveWorx or PTC Live Global, we demonstrated our concept of the digital twin, a very interesting idea that leverages our industry-leading IoT platform along with our core technology.

The initial response from customers we have previewed this with is quite exciting, so stay tuned for more details in the coming months.

Turning to our outlook for Q4 of fiscal 2015, while we have a lot of momentum in our IoT business and feel good about the progress we are making on subscription phase 2, we expect that we will continue to encounter headwinds in our reported results due to a combination of currency exchange rates plus a manufacturing economy that appears to be more challenging than last year and more challenging than what we had anticipated earlier this year.

We have adjusted our FY 2015 revenue guidance to factor in a more cautious macroeconomic outlook, particularly in the Americas and China, as well as lower professional services revenue driven primarily by an acceleration in transitioning some of our customers' engagements to our partner ecosystem.

And while we are reducing our EPS outlook for the year by about 2% at the midpoint, we continue to target 15% growth in non-GAAP earnings this year on a constant currency basis. And if you mix-adjust and FX-adjust to get true apples to apples, it would be well more than 20% EPS growth.

We remain on track to deliver solid earnings this year, with an opportunity to drive increasing growth and value to customers through a combination of our core product focus, with many innovative enhancements coming over the next 12 to 18 months, our leadership position in IoT, and the acceleration of our transition to subscription.

We remain on track to achieve our 2018 target business model and will continue to proactively manage our cost structure. When combined with our commitment to return 40% of free cash flow, we believe we're well-positioned to drive substantial value for our shareholders. With that, I will turn the call over to Andy Miller..

Thanks, Jim, and good afternoon, everyone. Please note that I will be discussing non-GAAP results unless otherwise specified. Total third-quarter revenue of $304 million was down $33 million year over year as reported.

$31 million of the decrease was driven by FX, and $7 million of the decrease was lower professional services revenue, consistent with our strategy to migrate more service engagements to our partners. On a reported basis, software revenue -- which consists of license, subscription, and support -- was down 7% year over year.

However, after adjusting for currency, we delivered 2% year-over-year growth. Support revenue was up 6% on a currency-adjusted basis. This was partially offset by license revenue that was just below the low end of our guidance and down 6% year-over-year constant currency.

It should be noted that we face a tough Q3 2014 license comparison, a quarter in which our CAD and extended PLM license revenue grew more than 20% year over year and in which we had 21 large deals. In our core business, most notably in the Americas and China, we saw deal sizes compressed and deals delayed at the end of the quarter.

While we entered the quarter with caution about the macroeconomic environment, Q3 results suggest potentially greater challenges than we had anticipated, and we entered Q4 with greater caution about the manufacturing economy.

Approximately 60% of our Q3 2015 revenue came from recurring business, up from 53% in the year-ago period, reflecting growth in our ratable revenue streams including subscription, cloud, and support revenues. Clearly, the growth in our recurring revenue represents a very positive trend in our business and will drive cash flow in subsequent quarters.

Turning to our subscription licensing model, our subscription offering has now been available for three quarters. As we discussed last quarter, we currently have underway a Company-wide initiative which we call subscription phase 2.

We believe that we can provide our customers more differentiated solutions through subscription offerings that in turn will enable us to increase customer lifetime value.

Our objective in subscription phase 2 is to define the optimal end-state license model for PTC by market and by customer segment and then to drive a rapid transition to that end state. In this initiative, we are making good progress. We have McKenzie in-house supporting almost 30 work streams.

We're now completing market and pricing studies by customer and product segment, and we've begun to define the differentiated subscription and perpetual offerings within each of our segments, differentiating on price, license features, support features, and product bundling.

We continue to target completion of our subscription phase 2 program so that we can launch new offerings by the start of the next fiscal year.

Thus far, our market survey work shows a general preference for subscription offerings across all of our customer segments and markets, as it provides customers greater value through flexibility, ramping capability, paying over time, and usage of operating versus CapEx budgets.

You can expect us to share more with you as we wrap up the initiative towards the end of this fiscal year. Moving to the income statement, gross margin increased by 130 basis points on both a sequential and year-over-year basis. After adjusting for currency, gross margin increased 140 basis points year over year.

The key driver was improvement in professional services gross margin, which was 16.5% in Q3 2015, above our 15% target for the year despite the impact of FX.

Operating expenses in the third quarter were down $4 million, or 2.5%, from last quarter, primarily driven by our restructuring and by lower incentive compensation accruals offset by higher marketing costs with both LiveWorx and PTC Live last quarter.

This strong gross margin performance, coupled with tight operating expense controls, resulted in an operating margin of 24% in Q3, within our guidance range despite revenue coming in slightly below the range. Overall, net income for the second quarter was $61.7 million, or $0.53 per share, above the high end of our guidance.

Our EPS growth rate was flat year over year but up more than 20% when adjusting for currency. Note that a slightly lower tax rate and share count in our third quarter relative to guidance added approximately $0.02 to EPS. Also note that our GAAP results include a $14 million accrual associated with the pending China matter.

Discussions regarding resolving that matter are still open, and we refer you to our press release and SEC filings for further details.

Moving to the balance sheet, cash and investments were $275 million, up $7 million from last quarter, including $87 million of cash flow from operations and a drawdown of $94 million on our credit facility to fund the acquisition of ColdLight. We spent approximately $50 million repurchasing 1.2 million shares in Q3.

For Q4 2015, we expect to repurchase additional shares such that total repurchases for the fiscal year will amount to approximately 40% of free cash flow, consistent with our capital return policy.

Moving to guidance, based on a more cautious outlook on the near-term manufacturing economy and the expectation of a slightly lower mix of subscriptions in the back half, we are adjusting our top-line guidance.

Our full-year top-line guidance factors in current exchange rates and 15% subscription license bookings mix, down from a 17% assumption last quarter. Additionally, we are reducing our professional services guidance by $3 million as we continue the transition of certain customer engagements to our partner ecosystem.

With this in mind, we are now forecasting full-year revenue in the range of $1.25 billion to $1.265 billion, or flat to down 1% year over year on a constant-currency basis. Note that a greater mix of subscription in fiscal 2015 negatively impacts our growth by about 100 basis points.

This compares to our previous revenue guidance of $1.28 billion to $1.295 billion. Our guidance includes software revenue of $1.021 billion to $1.036 billion, constant currency growth of 2% to 4%. A higher mix of subscription bookings in fiscal 2015 negatively impacts constant-currency growth by just over 100 basis points.

Within our software guidance range, we expect license revenue in the range of $340 million to $355 million, and we expect support revenue of approximately $681 million. For professional services, we now expect revenue for the year of approximately $229 million. As a final note, I want to quantify the expected full-year impact of currency.

Given our current assumptions, we expect FX will negatively impact our revenue by approximately $100 million as compared to last year. And we expect that a greater mix of subscription will negatively impact our total revenue by $14 million as compared to last year, a total year-over-year impact of approximately $112 million.

Moving to margins, we are targeting a full-year operating margin of approximately 24% due to the restructuring actions initiated in Q2 and significantly lower incentive compensation accruals. And we continue to target 15% professional services gross margin in FY 2015.

Notably, after the restructuring action is completed in Q4, we expect to exit 2015 with operating margins that position us well toward our 2018 targets. Turning to the bottom line, on a constant-currency basis, we continue to expect to deliver at least 15% EPS growth in fiscal 2015, in line with our prior guidance.

We are now forecasting full-year EPS in the range of $2.15 to $2.23, compared to our previous guidance of $2.18 to $2.30. We are forecasting a full-year tax rate of 10% to 11%, benefiting from certain discrete items in the fourth quarter.

For the fourth quarter, we are forecasting total revenue in the range of $304 million to $319 million, software revenue in the range of $254 million to $269 million, and a subscription bookings mix of 14% based upon our current view of the deals in the pipeline.

License revenue is expected to be between $90 million and $105 million, and support revenue is expected to be approximately $164 million. Professional services revenue is expected to be down sequentially to approximately $50 million. Operating margin is expected to be approximately 26%, yielding EPS of $0.59 to $0.66.

With that, I'll turn it over to the operator to begin the Q&A process..

Thank you. [Operator Instructions] Our first question is from Mr. Matt Hedberg from RBC Capital Markets. Sir, your line is open..

Hey guys, thanks for taking my questions. I just wanted to start off -- you guys made some comments that there is a strong preference towards subscription pricing.

And I'm curious, when you look at your core CAD and PLM, is there a way to think about the percentage of subscription bookings coming from the core at this point?.

I will take that question. We recently conducted studies with actually well over 300 of our customers. McKenzie did this for us and identified across all of our segments of the business that there was a preference for subscription, and it was pretty much the same preference in every single division. The core divisions as well as the rest.

One of the primary drivers is as they evaluate the business case for subscription or for perpetual, one is the relationship between the two prices, and the other is the term of their business case. And they tend to use business cases in the four- to 4.5-year range.

So for us, with customers that are very, very sticky, you can see how we can substantially increase the customer lifetime value while offering something that is economically quite attractive to them over their business case..

And then maybe a follow-up to that, there were several IP deals that went perpetual this quarter.

I'm curious, what drove that behavior this quarter, and would you expect that option to go away here potentially past the end of this fiscal year?.

It was primarily customers that historically always purchased perpetual with us, and essentially that was their preference. And we offer -- up through the end of this quarter, we offer perpetual and subscription in our price book for IoT. We are moving more aggressively to subscription-only and IoT as we move forward..

Yes, Jim here. Let me just add a little more color on that because I think this is a point of some confusion. I think we were clear that we told our sales guys you can sell it either way this first year. We are going to kind of measure customer reaction.

If you look at -- the vast majority of transactions have been subscription, but then a couple of big ones came in perpetual. So we didn't really foresee that coming, but these were customers that we have relationship with. They love the technology, they wanted to buy it perpetual.

And, quite frankly, we had a situation in place where the sales guys were allowed to sell it that way, so they did. I think that as far as subscription phase 2, we will revisit all that and try to steer it a little bit more in the future than we told you we were trying to do this year..

That's helpful, Jim. And then maybe one last one for Andy. As attrition -- as the transition accelerates here, you just talked about your long-term margin targets intact. But I would assume if this transition accelerates, operating margins might come down in the short term.

I guess first of all, is that correct? And second, how should we think about cash flow through this transition? I would assume that would fare better. Maybe just a little bit of color on that would be helpful..

We've laid out a 2018 operating margin target to 20%, 30% with a subscription mix assumption in that year of 30%. So clearly as we're going through the transition, it's more than 30% that would impact revenue in operating margins. You can count on us that we're going to be, one, giving you guideposts so you can see what the revenue would've been.

And, two, we're going to be managing the cost structure of the business as if it were still a perpetual business. So we're not going to -- the expenses are going to basically track to the same margin target. So as we exit the transition, you'll see us right back on track.

The other point I would make is that cash flows tend to catch up -- come out of the trough of the transition earlier than the revenue does simply because, depending upon the average length of your subscription contract, they at least make annual payments in advance. So generally you come out of it faster..

Thank --.

We will give you a lot more on this as we basically lay out what next year is going to look like and what the subscription transition is going to look like..

That's helpful. Thanks, guys..

Our next question is from Sterling Auty from JPMorgan. Your line is open..

Yes, thanks, two questions guys. First on the macro part, that's the one that I'm getting the most pushback from investors looking at the results from some of the industrial companies.

But more importantly, looking at what the [settle] (inaudible) put up in terms of their results, how do we characterize what you are seeing relative to the strength that they had put up in their results? Is there any type of maybe market share shift or anything else that we need to worry about?.

Sterling, it's Jim here. How are you doing? I don't think there's any competitive dimension in this discussion here. I think that we are in a series of businesses and Dassault is a series of businesses. Our CAD and PLM businesses most directly correlate to Dassault's Catia and Enovia businesses.

And I think over the last three years, the growth rates of those have been remarkably similar. Now, Dassault is in some higher-growth businesses like SolidWorks, and we are in some higher growth businesses like IoT.

But I think you can't really compare -- Dassault is structured differently than we are, and I think that that has helped them in this quarter because the SolidWorks business performed well and, like you saw, so did our IoT business. But we have a big exposure, of course, on the -- in the CAD and PLM..

So maybe just the follow-up to that one just real quick -- as you look at the Americas, industrial, is there anything that you can do, any levers that you can pull, to help improve? Or do we just kind of have -- for that part of the business, kind of ride it out?.

I think -- you know we are somewhat in these more mature businesses correlated, for example, to the PMI index. And that fell a fair amount in the US within the quarter. And in China, it's kind of been in negative -- that is to say, less than 50 territory for a couple of quarters in a row now. So just let me hit China first.

It wasn't that long ago when the China manufacturing economy was growing double digits, and now it's contracting. And on top of that, there is some political things going on that make it difficult for US technology companies.

So China is a difficult environment for virtually every American technology company right now selling in the manufacturing industry. I think in the US, we do a lot of business with global industrial companies, and the strengthening of the dollar has made it very difficult for them to export.

And their own results look comparatively bad, much worse than at the beginning of the year. So I think that they are retrenching a little bit, and that's causing some pain for us. So I think that that's really behind what's going on. It's just the big deals -- if you look at the big deal volume year over year, the big deals are substantially less.

And so I think companies have just been reticent now. I think we're still doing smaller deals, and I think that as the cycle moves through and so forth, I think we will see that pick up again..

And I had two things I want to add. One is we had the macro challenges and we also had a really tough compare. And while I don't want to overplay it, it is important to note that Q3 a year ago, our core business bookings in CAD and PLM grew over 40% and our revenue grew over 20%.

So that was an extremely tough compare that, even with our guidance, we were not going to be putting up strong numbers. So you can't look at one quarter of us versus one quarter of Dassault without looking under the covers at how those compares existed.

The second thing is that one thing I think you can count on from PTC is that if we assess that there is a trend in the -- whether it's a macro tech trend or a market trend that we have to adjust to deliver a consistent earnings growth, you can pretty much count on the fact that we will definitely look at our cost structure as something that we may consider adjusting if need be to continue to drive from these growth..

Got you.

And then the other question that we're getting a lot of is on the subscription transition, as you look into different pricing dynamics, do you think there's going to be the opportunity to take legacy customers that are paying maintenance and getting them onto a subscription format? As well as, are you going to consider, at least in some areas, because it sounds like IoT, you are -- are you going to consider the elimination of perpetual altogether?.

We actually have a work stream focus on our existing customers and how we transition them, both their new bookings to that often are under volume agreements -- how we transition them to subscription. And we are also assessing how we might transfer their maintenance bases potentially to subscriptions.

So that is something that we are focused on, and we are actually looking deal by deal at the new ones coming up on what could offer be that would be something that would be good for them and good for us. So that is part of it. But at this time, I do want to highlight that the focus is the license bookings moving to subscription.

But we are assessing how we could leverage support as well on that. Jim here again. I just want to go back to -- just to kind of remind you what we told you last November and so forth at our investor day. We said for the first year, we want to just measure and get to know this a little bit.

And then I think the whole purpose of subscription phase 2, as Andy said, is to figure out what does it look like at steady-state and how fast can we get there. So there's a lot of very good analytics happening. And we're just not quite done, so we're not ready to tell you the answer here in the call.

But I think that as we go into next year, we're going to outline a pretty good program you're going to like to get to the destination as fast as possible so we don't linger in this transition period unnecessarily long..

Great. Thank you..

The next question is from Steve Koenig from Wedbush Securities. Your line is open..

Hi, gentlemen, thanks for taking my question, maybe I've got a follow-up or a housekeeping item too. I'm wondering with the macro environment that you're seeing in manufacturing, are you seeing conditions continue to deteriorate? Q2 and Q3 was worse than you thought it was.

I guess where I'm headed with this is would you expect the business -- the core business in constant currency to stabilize by the time this annualizes, for example, in Q2 next year? Or are you seeing the macro just continue to deteriorate so that we can't know if that annualizing of the comps is going to stabilize things?.

Yes, I'll take a pass, and Andy, you can (multiple speakers). I think, again, if you look at the big deal count -- the number of large deals we did a year ago, the number of large deals we did this year -- it only takes a couple handfuls of transactions to slide, and you get a material difference with these big transactions.

So I think that what's happened is the bigger transactions are getting a lot more scrutiny. And people aren't saying no; they are just saying not quite yet, and then it slides into the next quarter. So I think as we look at Q4, we expect to get and in fact already have closed a number of the Q3 transactions that slid.

But then we are left with the concern, might Q4's transaction slide into Q1 if we continue to have the same sort of backup. But, yes, I don't think this is necessarily just getting worse and worse and worse. I think that there was a huge change in currency, if I recall, in our Q2 that it's still kind of a shock factor as we go into Q3.

I don't think it's worse; I just think that when our big deals start sliding, then it's hard to post the type of numbers that we want to post..

Yes, okay, that makes perfect sense, Jim. You know, then, I wanted to [Multiple Speakers] --.

The one thing I would add to that is what we are seeing is the pipeline looks very strong, but the on-time close rate actually has gone down. That's actually what we're seeing. So it is taking a bit longer to close in this quarter than it did last quarter, for example. The close rate ticked down just a little bit..

Got it. Okay. Thanks, Andy; that's helpful, too. I wanted to ask in terms of a follow-up, just two quick ones. One is you have done some subscription deals in the core business.

Are those generally some kind of multi-year deal that then renew, or is it some kind of different structure? And would you expect a radically different structure in phase 2? And then one last housekeeping question..

Some of the big deals in the past were multi-year. And we would expect subscription deals in the quarter to be one-, two-, or three-year deals. Generally, that's typically what you see. Our average length, because we have a lot of IoT deals now that are shorter, is somewhere between one and two at this point and holding pretty consistently..

And Andy, have those been ratable every quarter, or is there a lot of (multiple speakers) just recognized?.

It's ratable..

It's ratable. And it sounds like the phase 2 could be pretty similar..

As far as the length of the subscription offering? Yes, very likely we will offer one-, two-, and three-year. That's pretty standard to offer those. And the longer it is, you get a little bit better price than short..

Got it, okay. And last question is kind of a housekeeping one. Can you give us any sort of color on as we try to look at organic on Atego and Axeda, which were not present in the prior period.

Any sense of the contribution there?.

Organically, year to date, we are low single-digit down in software revenue. Now, the way the Company calculates that is we actually -- we tend to grow those acquisitions, but the way that the Company has always historically captured that is we assume that growth is inorganic.

And so if you actually look [Multiple Speakers] four quarters have actually passed. So to put it in perspective, for example, we are expecting this year to grow the IoT bookings by more than 150% on an apples-to-apples basis compared to having exceeded it in last year.

So -- but that, the way we report organic, inorganic, we would be telling you that that acceleration in growth and that more than doubling of the customer base is all acquisition related, when truly it's organic. So we'll revisit how we actually should share that with you probably as we enter next year..

Okay.

And just to clarify, the organic software year to date, low single digit down, is that constant currency?.

Yes, yes..

Got it. Okay, great. Thanks a lot, gentlemen..

Bob, I think we've got time for maybe one more question, please..

The next question is from Saket Kalia. Your line is open..

Hey guys, thanks for fitting me in here, I appreciate it.

First, for Jim -- Jim, can you just maybe dig into it -- not to beat a dead horse, but can you just dig a little bit deeper into the macro headwinds that you felt like you faced in the core business? Is this the sort of behavior where customers are just pausing, or is this something where you can maybe see headcount cuts down the road in engineering headcount?.

I don't have a crystal ball, Saket. I think that the US PMI a quarter ago was $55.7 million, which is a decent number, and within a single quarter, it fell to $53.6 million. That's not a disaster, but it's a bad trend, and I think that causes people to just take stock for a minute and say hey, let's call a timeout and figure out what we're doing here.

And I also think a similar result -- Andy shared with me a statistic from about a week ago that said of the S&P 500, companies that have reported roughly two-thirds had beat on earnings, only one-third had beat on revenue. And the average revenue, if I remember correctly, was down 5%..

4.1%..

4.1%. So when the companies -- that's our typical customer. And when our typical customer looks at the revenue as reported thanks to currency being down 4.1%, and somebody has got a big transaction they want to pull the trigger on, they might just say hey, let's just call a timeout and reconnoiter here a little bit.

I don't think the US economy is in crisis. I think it just went through a shock factor associated with FX. And people have to process that a little bit, and then hopefully we'll go back to business.

But Andy said this and I said this, this management team has a good reputation for managing our cost structure, and we've posted pretty good earnings results. And, quite frankly, if not for FX and mix change this year, this would be the best year of all. So we've been committed to that.

We've always stepped up when we had to make sure that the Company was generating profits a little bit independent of what was happening in one geo or one segment or what have you. So I think you should expect and you should see the credibility here that we will continue to manage that as best we can.

We can't react within a quarter, but certainly we are sensitive to that the Company needs to continue to increase its earnings independent of what's happening in the moment out there in the outside world..

Got it. That's really helpful. And then just one follow-up. Andy, you mentioned sort of the four- to 4.5-year kind of business case that I guess the customers that you're surveying are kind of looking at.

As you revisit your subscription pricing later on this year, do you anticipate that break-even point for perpetual versus subscription to be significantly different than what maybe other software transitions have seen? I want to say let's call it 2.5 to 3 years, where the two sort of -- revenue streams kind of equate to each other? Or how do you think about that?.

Okay, I don't want to give you the answer yet, because we're not done. First off, we are -- we actually have some very good analysis that shows exactly -- basically the demand elasticity, at what point people prefer subscription over perpetual and how it falls off.

I will share that our current pricing at 60% only really attracts people who absolutely, absolutely want subscription. But there -- we have -- what I will share is that we have the opportunity, given the stickiness of the software, frankly to tremendously increase the lifetime value of the customer.

Easily in that 20% to 40% range that you hear most software companies talk about. So we are feeling good about that based upon the studies that have been done so far, but we're not quite done. So I don't want to give you the answer yet..

Got it, fair enough. Thanks very much, guys..

I know you want it, but --.

Thanks..

Okay. I guess that brings us to the end of the call, but thank you all for joining us here again this afternoon. And just sort of in summary, there was some good news in the quarter and some things that we are not happy with, and then some external pressures on us from macro and FX and so forth.

I think we are pretty proud, though, of the earnings results, and we are extremely proud of the IoT results. And I think we need to continue to work hard on the core business to make sure that that performs as well as possible given the environment that we are in. So we look forward to talking to you again in 90 days.

In 90 days, of course, we will have a much better look into FY 2016 and into subscription phase 2 and a lot of other things I know you're interested in. So look forward to talking to you then. Thank you and goodbye..

That concludes today's conference. Thank you for participating. You may now disconnect..