Tim Fox – Vice President, Investor Relations James Heppelmann – President, Chief Executive Officer, Director Andrew Miller – Chief Financial Officer & Executive Vice President.

Sterling Auty – JPMorgan Securities Steve Koenig – Wedbush Securities, Inc. Saket Kalia – Barclays Capital, Inc. Matthew Hedberg – RBC Capital Markets Edward Maguire – CLSA Americas Jay Vleeschhouwer – Griffin Securities, Inc. Monika Garg – Pacific Crest Securities Gal Munda – Joh. Berenberg, Gossler & Co. Josh Sullivan – Sterne Agee.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2016 Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

I would now like to turn the call over to Tim Fox, PTC's Vice President of Investor Relations. Please go ahead..

Thank you, Cindy, and welcome to PTC's 2016 second 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 on our Investor Relations website. 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 the forward-looking statements can be found in PTC's Annual Report on Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission, as well as in today's press release.

The forward-looking statements, including guidance provided during this call, are valid only as of today's date, April 20, 2016, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures and all measures discuss are non-GAAP unless otherwise noted.

These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles and a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures can be found in today's press release made available on our website. With that, I'd like to turn the call over to PTC's CEO, Jim Heppelmann..

top line growth, margin expansion and the subscription transition. On the growth front, we remain committed to winning in the new technology platform business and encouraged by early signs of improved execution in the core solutions business.

On the margin expansion front, financial discipline will remain one of our cornerstones as we drive the margins into the low 30%s post-transition. And on the subscription front, we're off to an exceptional start in the first half of FY 2016, well ahead of our original plan and aggressively pushing forward.

With these three levers, combined with our commitment to stock buybacks, we believe we're well-positioned to drive substantial value for our shareholders. So with that, I'll turn the call over to Andy..

Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non-GAAP results unless otherwise specified. Bookings of 86 million were 5 million above the high-end of guidance. We believe the upside was driven by improved go-to-market execution and a strong contribution from our support conversion program.

On a year-over-year basis, bookings increased 8% in constant currency and low-single-digit excluding Kepware. Subscription comprised 54% of total bookings versus our guidance of 26% and versus 14% in Q2 2015. Subscription ACV in the quarter was $23 million, well outpacing our guidance of $10 million.

Subscription adoption accelerated broadly across the business with the upside coming from our Solutions Group. Every segment, every geography and both our direct and indirect channels saw a marked increase in subscription mix from Q1 to Q2.

PLM and SLM continued to lead the Pac and adoption in the Americas, Europe and Japan far outpaced the Pac Rim where sales enablement activity is still ramping up. We saw continued progress in our channel as well where subscription mix is six times greater than a year ago.

Q2 subscription performance benefited from further progress from our support conversion program that we launched in Q1. In fact, a good portion of our bookings upside this quarter was driven by the incremental ACV from these conversions.

In the second quarter, 25 customers, including some very large customers, converted their support contracts to subscription at an ACV uplift that once again generally ranged from 25% to more than 50% above the prior annual support amount.

I'll remind you that the long-term business model we presented at our Investor Day did not include any assumption that our large support revenue base would transition to subscription. So this could represent a big upside to our long-term business model.

And at the beginning of April, we announced a support win-back program in the channel that converts customers to subscription. Turning to the income statement, total second quarter revenue of $274 million was down $42 million year-over-year as reported.

The decrease in total revenue was driven by a $30 million impact from a higher mix of subscription bookings, a $9 million impact from FX and a $9 million constant currency decrease in professional services, consistent with our strategy to migrate more service engagements to our partners.

The decrease in total revenue was partially offset by revenue from Kepware of about $5 million. Compared to our guidance, adjusting for the higher mix of subscription, our total revenue would have been approximately $298 million, which would have been above the high-end of our guidance.

On a reported basis, software revenue was down 12% year-over-year due to the higher mix of subscriptions and the impacts of currency. Excluding mix and currency, software revenue would have increased 3%. Approximately, 82% of Q2 software revenue was recurring, up from 73% a year ago.

Clearly, this growth in recurring software revenue represents a very positive trend in our business and will drive cash flow in subsequent quarters.

Operating expense in the second quarter of $164 million was at the low-end of our guidance range and was up only $2 million or about 1% from last with significantly higher incentive compensation, driven by over performance on subscription.

Q2 operating margin of 14% was below our guidance of 19% and down from Q2 last year due to the higher subscription mix. Adjusting for this, operating margin would have been 21%, exceeding our guidance. EPS of $0.23 was below guidance also due primarily to a higher subscription mix, which negatively impacted EPS by about $0.16.

We would have beat by $0.01 on our guidance subscription mix assumption. Moving to the balance sheet, cash and investments were up $71 million from Q1 2016 at $368 million. We had strong adjusted operating cash flow in the quarter of $102 million and adjusted free cash flow of $97 million.

As we stated on our Q1 2016 earnings call, we remain committed to returning cash to shareholders, but expect buybacks to be in the back half of FY 2016. Now turning to guidance, let me remind you of some of the general considerations that are factored into our guidance.

First, while our Q2 booking results were above the high-end of our guidance, we attribute our solid performance primarily to improved execution and our support conversion program and remain cautious of the global macroeconomic environment.

Second, we're only two quarters into our subscription programs; and while the results have been tremendously strong, subscription is still new to much of our sales force, and thus, it is challenging to forecast the rate of customer adoption, the pace of our transition, and the overall impact to near-term reported financial results.

Third, our guidance assumes current foreign currency exchange rates. With this in mind, we now expect bookings in the range of $357 million to $377 million for fiscal 2016. This is up $13 million from our prior guidance at the high-end, $6 million to factor in current foreign currency rates and $7 million due to better performance.

We have also narrowed the range from the bottom. We now expect 44% of our full-year bookings will be subscription versus our previous guidance of 30%. This means we expect to basically achieve our FY 2017 goal in FY 2016. We expect subscription ACV of $79 million to $84 million. This is up $29 million from our prior guidance.

We expect total revenue in the range of $1.16 billion to $1.175 billion for FY 2016. This is down from our prior guidance due to the higher mix of subscription bookings and a change in our support win-back program in the channel to subscription, both offset by small amount of FX benefit.

We have historically recognized about $20 million per year in win-backs in support. We continue to expect an increase in our services margin by about 130 basis points to 16% and remain committed to a 20% services margin by FY 2018.

FY 2016 operating expenses are expected to be $656 million to $660 million, an increase of $4 million on the high-end to reflect foreign currency rates. With the higher mix of subscription, we're now guiding to an operating margin of approximately 18% to 19%.

We're now assuming a tax rate of 8% to 10% for the full-year, resulting in non-GAAP EPS of $1.52 of $1.62 per share, based upon approximately 116 million shares outstanding. We continue to expect adjusted free cash flow of $215 million to $225 million for the year.

For the third quarter, we expect bookings in the range of $90 million to $100 million with about 48% subscription mix. We expect total revenue in the range of $287 million to $292 million for Q3. We expect OpEx in the range of $167 million to $169 million and an operating margin of approximately 16% to 17%.

We're assuming a tax rate of 8% to 10%, resulting in non-GAAP EPS of $0.31 to $0.36 per share based upon approximately 116 million shares outstanding. With that, I'll turn the call over to Cindy, the operator, to begin the Q&A..

Thank you. We will now begin the question-and-answer session. [Operator instructions] And our first question is coming from Sterling Auty from JPMorgan. Your line is open..

Hello, Sterling..

Hi, guys.

How are you?.

Thanks, Sterling. Good..

I think it would be helpful for all of us on this side of the call, if Andy, you could take the subscription mix, the big beat that you had, and maybe go one layer deeper in terms the impact on the P&L.

So, in other words, how should we think about how that big mix be impacted, related to subscription, software and support, so each of the revenue line items.

But also, separately, what did it also do on the expense side of the P&L?.

Yeah, okay. So one thing I'll share with you is on our Investor Relations website, we have posted prepared remarks where we compare the quarter at our guidance mix percentage. So it does this translation for you. Let me take you through a few of the highlights here. So, again, remember, we achieved 54% subscription mix versus a guidance mix of 26%.

So what that did was if you take a look at software revenue, it brought it down by $24 million, which was principally the perpetual piece. So software revenue actual was $225 million; at our guidance subscription mix, it would have been $249 million versus our high-end of our guidance we gave, which was $246 million.

If you take that to total revenue, our $274 million actual would have been $298 million at the 26% guidance mix versus our high-end of our guidance of $295 million. OpEx, no impact; however, we did incur substantially higher incentive compensation expenses, commission and bonuses within that number, but still came in at the low-end of our range.

So we still manage our expenses aggressively..

So just if I could, Andy, so it's a conservative assumption to say, expenses are the same either way?.

Yeah. Yeah. Exactly. Because of the higher subscription mix, we had more comp, we didn't adjust that in our as-adjusted EPS. Yes.

So if you moved down, that means our operating margin, which as-reported was 14% would have been 21% versus our high-end of our guidance of 19%, and our EPS of $0.23 as-reported would have been $0.16 higher or $0.39 versus our high-end of our guidance at $0.38. And the one other thing I highlight is we did have a tax rate of 21% in the quarter.

So this time that actually hurt our EPS by about a $0.01..

Got it. That's very helpful. Maybe one follow-up. I think it's obvious the success in traction you're getting in IoT, but the biggest pushback that we received as you're beginning the model transition is the assumptions on the improvement in the Solutions Group.

Could you get the CAD and PLM up to the growth rates over the long term that you'd built into your assumptions? I wondered if you could give maybe a little bit more color, because it sounded like that area saw good adoption, decent demand on the surface, but also support subscription conversions, which is the other area that we got a lot of pushback on.

So any additional color in terms of geography, or industry, or company-type that you are seeing that improvement would be helpful..

Okay, sure. So let me give you a few highlights. The upside in this subscription mix came from our Solutions Group, where we actually were more than 50% subscription in the Solutions Group this quarter versus single-digit a year ago, okay, so to put that in perspective.

Americas led the Pac, I'll share with you that excluding Kepware, which is all perpetual, that America was at about 70% subscription in the quarter followed by Japan in the mid-60%s and Europe in the mid-50%s. Pac Rim lagged substantially, down in the mid-20%s, as we're really just getting enablement activities off the ground.

However, that's up from low-single-digits a year ago. The other big change is in the channel, where they were also in the mid-20%s which is more than six times higher than a year ago. Again, in the channel, which is primarily CAD, it seems to be starting to take off, and yet, this was not the focus of our early enablement activities.

The other thing that was a nice – extremely good nice result we've seen the 25 conversion deals. So there were some very large established customers who converted and, as I mentioned, the range of incremental ACV tended to be from about 25% to more than 50% higher.

We also saw some customers actually not only do a like-to-like conversion, but also buy some additional software. So it seems like under a subscription offer, and it seems like this really does potentially reduce the friction of buying.

So rather than that big deal that they're waiting for, they're buying in smaller bite-sized land and expand type of model. So it seems like it's off to a very strong start as we stand right now..

Great. Thank you..

Thanks, again..

Thank you. The next question is coming from Mr. Steve Koenig with Wedbush Securities. Your line is open..

Hi, Steve..

Hi, gentlemen. Good afternoon. Thanks for taking my question, and then just one follow-up as well. So first off, yeah, congrats on the good execution in the maintenance conversion. The subscription transition looks like a very well-thought out program.

I'm wondering if you could just add some color here on what's driving the better-than-expected customer uptake..

I think for years customers have been wanting to buy under subscription and our market studies showed that more than 70% of our customers preferred to buy subscription. We were probably like many other software companies forcing to try to get a perpetual license with upfront revenue.

And they were asking for things like extended payment terms and remix. With subscription, they naturally pay over time; they get remix as part of it. So it's an offer that is preferable for them. And, of course, our sales reps are pushing our strategy. So we're aligning the offer with what the customer wants.

And that's, I think, what's driving the traction. They're still learning to do, frankly, within our sales force how to sell subscription. But I think they're going after pretty aggressively in all our geos and Pac Rim is really cut more at the beginning stages..

Great. Thanks for the color, Andy. For the follow-up here, I just want to dig into the numbers a little bit on full-year guidance.

So if I use your heuristic of $3 million of revenue impact for every point of mix shift and I apply it to the change in the guidance, what it looks like, if I've done my math right, is that the top end of fiscal 2016 revenue guidance is relatively unchanged. Now currency has improved a bit.

Our channel checks were saying better – the channel partners were having better outlooks at least in North America. And it looks like you're improving your execution, so a lot of things going the right way for you.

So maybe help me reconcile this with the guide, are you derisking? Or is the macro impacting – continue to impact the large deals, maybe help me make sense of that?.

So a couple of factors. First, I do want to address I've read all the notes about FX being a tailwind moving forward. The thing to realize is that we do hedge and other companies hedge, which means that we locked in less favorable FX rates at this particular case.

So that means that it actually is a pretty insignificant impact on our revenue for the rest of this year, given how much of it is already hedged. So that's one thing that's not a headwind. The other factor is, when you do that rule of thumb that would have been if the subscription transition were at a perfectly linear way throughout the year.

We went from 28% in the first quarter to 54% in the second quarter, so we're more impacted. So it adds a few million to that. So I think those are fundamentally the drivers. Now, we're pleased with our execution, but it still is early days and we don't want to declare victory too early.

And so we're seeing a lot of the right actions happening and starting to see very good outcomes, but it's still early days. So it's promising, but we don't want to declare victory yet and that's what's reflected in the guidance. The macro remains consistent with our view of the macro in the past..

Got it. Great. Thanks a lot [indiscernible]..

We did raise booking guidance. So we raised not just for currency, but for performance. So, $6 million for currency, $7 million for performance at the high-end. We also narrowed from the low-end. So it's pretty significantly moved to the midpoint..

Right. Thanks, again..

Thanks, Steve..

Thank you..

Thank you. Next is coming from Saket Kalia, Barclays. Your line is open..

Hello, Saket..

Hey, guys. How are you? Thanks a bunch for taking my questions here. So again, reiterate a nice beat on subscription mix, I think, in the prepared remarks, you said that we're still expecting that 70% mix in fiscal 2018.

On the off-chance you were to get to that mix earlier, how long after that should it take to reach those normalized metrics? Maybe, Jim, you touched on it earlier when you said you're full-year earlier. But I just wanted to ask the question in that way..

So you're going to take it? Or you....

Go ahead. I'll make that....

Yeah. Yeah. Let me now take the first stab and Jim will follow that. So, first off, the change in the subscription mix percentage is what drives the drop the greatest, so getting further faster definitely helps. So that's the key thing there, which means you get the benefit sooner, okay, even if you only end 70% after three years.

So that's one thing when you put the numbers in your model, you'll notice that you come out of the trough a bit earlier. The other comment is we do feel like we're a year early. We haven't done our business planning yet for next year. So it's too early to give updated guidance for next year.

We certainly feel good about where we are and while we haven't raised the FY 2018 number, it certainly appears quite possible that that 70% will go up..

Yeah. I just wanted to give simple commentary on it, which is it's really a question of how far are we going and how fast will we get there. And if we're only going as far as 70%, then things would normalize a year earlier, it would appear.

But the fact that we're at 70%, the fact that – for example, in America, we're 70% in the second quarter begs the question of should we stop at 70%, or could we get to 80%, 90%, or God forbid, 100%. I don't know and that's the planning we haven't done. So anything we say here we'd just be making it up off-the-cuff.

But definitely, as we plan next year and do our annual update of this whole program, we're going to be asking that question how far how fast. And that will affect when is the bottom of the trough, because the bottom of the trough would come sooner, if we go faster but not farther. But if we go faster and farther, then it will move again a little bit.

So we're in a complicated spot right now, but it's basically a good problem to have..

Absolutely. Absolutely. My follow-up is, again, realizing it's early, Andy, could you just maybe talk about some of the big deals in the quarter that were – actually all the deals, big deals I believe were subscription.

I think you mentioned remix was a big reason why some of those large deals opted for subscription or converted for maintenance to subscription.

Is that the main reason why you feel like those larger customers are going for subscription? Is there anything else that you're finding maybe some of your follow-up that's maybe driving them there? I'm guessing it's not financial flexibly, so just any more color on why the success in subscription in the large customer base?.

So I don't think it's any single factor. We took really a holistic approach into packages. So that we would provide them the flexibility that they want in the offering in a simple and easy way to digest it. And our flexibility is, remix is one of the key factors.

They pay for it over time, they consume it over time, the life when they do their financial analysis of subscription versus perpetual the crossover is at right around four years. They see the benefit to subscription. And they buy a lot of things subscription. They've gotten used to buy things subscription.

There is the whole OpEx versus CapEx; it's all of those reasons that we shared at our Investor Day wrapped up in total mix the subscription offer more attractive. So I think that's why it's moving. And I think it's moving rapidly, because of the fact that we do control our direct sales channel.

So we're able to get that message out there in a way that we can show the customer how subscription better meets their needs. And it's better for them and it's better for us. So I think that's what's actually going on here..

Makes sense. Thanks a bunch, guys..

Thanks..

Thanks..

Thank you. The next question is coming from Mr. Matt Hedberg with RBC Capital. Sir, your line is open..

Hello, Matt..

Hi, Matt..

Hey, guys. So I know in Q1, you had about 12 customers renew early and 25 customers this quarter. I know there has been some changes to sales compensation.

Was there anything different from Q2 to Q1? And I guess, if not, are there any other changes that can be made to further accelerate this transition from an incentives perspective?.

So, first off, I think the incentives are lined up just about right. I think what happened is sales reps learned that there was an opportunity here, they learned what it was. And I think frankly, you still only have a small number of our sales reps who have actually done it.

Clearly, I think it's spreading through the sales organization that here's an opportunity for them to go bring value back to PTC and make some money by converting customers to subscription. And they're learning to place the learning we post on our sales enablement internal system, how they do it, how they want, how they face these objections.

So that's all actually still in pretty early days. But I think it's pretty clear that it's starting to spread that there is an opportunity here for the sales force one that they can go after. So I think that's all good. But I think it's just a matter of time. We just introduced it..

Matt, just so I could add, 12 customers in Q1 and 25 customers in Q2, that's 37 customers of well more than 25,000 maintenance paying customers. So we have a long way to go here. Obviously, those are some of the larger ones I'm sure.

But if we could take our whole $650 million to $700 million maintenance business and recast it with that amount of upside, it's a huge growth opportunity for the company. So that takes some years of time to do.

But I think there is a good value proposition for the customer, for the company, and for the sales rep, and it's a system, and I think it's going to work for it..

The one thing we do have that's new starting in Q3 is the win-back program in the channel. So especially, with our CAD customers, there were some that would go off maintenance, and then, just before they wanted to upgrade, they would come back on. And in the past, we charged them a fee to come back live.

And then, they would directly go back off again after they got their upgrade. We would recognize that win-back in our support revenue, but we'd recognize it all at one. So what we now have is a program that's more attractive that gets them to move on to subscription.

So it's actually a little cheaper to move on to subscription than to just do a one-time win-back. And we'll be recognizing that revenue moving forward. But the thing is, once they move to subscription, they can't use the software unless they stay on subscription. So that's the benefit for us.

So it's a benefit for them, it's probably easier to come back on, benefit for us is once they're on subscription, they have to stay on it to use the software. And so you heard me refer to the notes that's one of the things that is a change in our support guidance.

We used to get about $20 million a year on those win-backs that we would have in the support, and now that's going to be recognized forward as opposed to upfront..

That's extremely helpful, guys. Maybe as a follow-up then, Andy, I think you referenced 70% of customers prefer subscription offerings; obviously, good success so far.

I'm curious if you're talking to a new customer that either doesn't want to convert early or choose his license over subscription, so the inverse of what you've been seeing here, what are the main reasons they go that route?.

Probably inertia..

Yeah. I was going to say, they're adding more to a contract relationship they already have..

Yeah..

There are some companies who have CFOs or whatever that say we're better off in the long run with an asset purchase..

Yeah..

So there are those out there, but I think inertia is the main reason..

Great. Thanks a lot. Congrats, guys..

Yep. Thank you..

Thanks, Matt..

Thank you. Next question is coming from Mr. Ed Maguire, CLSA. Your line is open..

Hi. Good afternoon.

I was curious what your take would be on the competitive landscape with Cisco having acquired Jasper, which really takes out one of the premier pure-play IoT platforms and whether that's had any impact on your conversations with customers so far?.

No. In fact, Jasper is complementary to what we do in our suite. We do not compete with them. We view them as a partner before Cisco acquired them and we view them as a partner afterwards. So what they do is very important. It's a very nice company.

They do a very important specialty item in the value chain of IoT, which is commissioning the new cellular devices, which is something we don't do actually. So no impact at this point on the competitive situation..

Great. And a question on the field service offering with ServiceMax. It was an impressive demonstration.

I'm curious at this point, how far along you may be at least with some of the initial implementations, and whether you ultimately see this tying back to across really the whole portfolio? How long do you think it will take before you get customers fully engaged with the solution to the point, where they can start to have an organic impact across platforms and solutions?.

Yeah. So with ServiceMax, specifically, we have a couple of customers in production now. We put the product in the market and a couple of lighthouse customers now have in production. It's a big part of the ServiceMax story right now.

So they're out there advocating for the vision of connected service, and that vision then pulls our connectivity and analytics and now AR and VR technologies into their story. So that's great. If you look at the rest of our suite, there's the rest of our SLM suite and then the rest of our solutions suite.

The ThingWorx and Vuforia technologies are starting to poke up all over the place. And, in fact, if you look at SLM, analytics is going to play a huge role in our SLM suite around predictive analytics and more thoughtful algorithms for spare parts inventory optimization.

We're seeing that AR/VR stuff is going to have a huge role in terms of delivering technical documentation out to the field along with ServiceMax. So I think that it's starting to show up all over in SLM. I mentioned this Navigate product we shipped with Windchill 11.

That's like a new user interface for Windchill, especially, for casual users beyond the hardcore engineering users, that's basically built on ThingWorx. And we're going to bring to market a technology we demonstrated at the ThingEvent.

It wasn't part of the broadcast, but it was there, which was augmented and virtual reality design reviews, will show up in Windchill, and that is just jaw-dropping, sexy, powerful stuff. So that's sort of Vuforia joining ThingWorx in the PLM suite. And then, of course, all the authoring of this 3D content is done in CAD.

Every single demonstration that was done in the ThingEvent and the one that Microsoft did in their keynote was Creo CAD data put to work in the field service scenarios or the HoloLens demo that Microsoft did was actually a sales and marketing scenario.

Let me bring a piece of equipment in the room here and show it to you as if we were in a sales studio, or what you call, showroom. Thank you. So let me turn this room into a showroom, and I'll bring whatever piece of equipment you want and I'll put it as a hologram in the room and we'll talk about it. It's really cool stuff.

But the thing driving that is CAD data. And, of course, you can't get the CAD data without understanding the configuration.

So we have to turn to Windchill, hey, what's the configuration of that piece of equipment, turn to Creo, how would you put all those parts together in three-dimensional space, then turn to VR and Vuforia and say, okay, make a hologram of that, and then, Microsoft's HoloLens helps you to see it. So it's pretty exciting stuff.

And I think that the world's starting to really get it that IoT and AR, VR and analytics is peas in a pod with CAD and PLM and ALM and SLM. So it's starting to make a lot of sense. We'll really resonate on that point at our LiveWorx event.

That will be the key message, because the LiveWorx event will take the historical core customer base and the new technology base and bring them together in a single event for the first time..

Great. Thank you very much..

Thanks, Ed..

Thank you. Our next question is coming from Mr. Jay Vleeschhouwer of Griffin Securities. Your line is open..

Yes. Thank you. Good evening. Jim, Andy, I'd like to ask if you could talk about how you're balancing the strategic initiatives you talked about in your opening remarks versus the cost management and restructuring that you've recently done.

So, for example, we noticed just doing a quick spot check on your website that there was recently a reasonably significant increase in the number of open positions you're looking to fill, particularly, to services, which was really interesting, big increase in cloud openings, which makes sense, of course, and even marketing.

So I'm wondering how you're thinking about adding to your head count behind the key initiatives versus balancing costs as you've done with the restructuring? And also, your sales head count has been pretty flat now for a number of quarters.

So are you at the point where you're prepared to start rebuilding that sales head count number?.

Yeah, okay. You got a series of questions there. What I think the main answer to your question is portfolio management. I think for decades, Jay, every year we just kept doing what we were doing in the previous year. And right now we're being a lot more dynamic about it. We're seeing what's the best way to use these resources.

And we're moving them around. We're taking people; we're doing something that wasn't generating that much value in its 10th, 20th, 30th year and we're putting them on things that are jaw-dropping new concepts for R&D.

We're looking at sales and marketing and we're saying – the way to really grow this company is to figure out how to do it without having to have commensurate growth in the sales force. Why don't we figure out how to tap into marketing ideas, better lead to revenue programs, new forms of selling that every other software company on the planet uses.

And some interesting things that happened with the acquisitions we made, if you look at, for example, the Kepware business, they only have three sales reps and the productivity per rep is off the charge; it's many, many millions of dollars per rep. That's because they basically have perfected marketing-led, low-touch sales model.

And then, if you look at Vuforia, Vuforia has – last time I saw the number – 210,000, quote, unquote, customers, and zero sales reps. So now they have one. So we're acquiring companies who are teaching us new things and we're hungry for knowledge now because we've got different attitude than we had for decades.

We have an attitude that we're going to win as a high-tech company and we're going to do it by growing, but we don't have to get fat to grow, because there's plenty of portfolio management opportunity in a company of this size, we just have to be smarter about how to deploy our resources sometimes into marketing versus sales, sometimes into new ideas versus old; but make sure the whole portfolio works.

I know that maybe behind your question, there's questions like are we spending enough money on CAD, and sometimes I laugh because companies I think about a lot are companies like Onshape, and I say how many developers they have, 20, 30, maybe. I mean, I only have 400.

So I'm worried about somebody who has substantially less resources, but I'm worried because they might be innovating more. So then I ask my question, I'm not going to win the battle by putting the largest army on the field, I'm going to win the battle by innovating more, now we're back to portfolio management.

Is it better to write a line of code in Vuforia or in Creo? They're all 3D products. So let's look for the way to innovate most, and we can – like I said, we can aim to innovate and grow without aiming to get fat in the process..

All right. That's fair. That actually wasn't my hidden question, but I understand what you mean. Just a follow-up then on IoT.

To what extent can you characterize the multi-product or multi-brand sales you're doing within IoT, where two or more of the various acquired brands are a part of the transaction?.

Yeah. So that is a good thoughtful question. So let me talk a little bit about that. So in general, we want to present to the world an integrated platform called ThingWorx. Now that said, there was a couple elements of ThingWorx, it'd have independent brand equity, which is substantial.

And behind that substantial customer base is our developer communities; and that's Kepware and Vuforia. So I think what's going to happen is we're going to have a Kepware and Vuforia presence, the standalone for people who have been buying it that way.

And then those are going to come together with ColdLight and ThingWorx in an integrated platform called ThingWorx, if that makes sense..

Yes. Okay. Thanks, Jim..

Thanks, Jay..

Thank you. Next question is coming from Ms. Monika Garg with Pacific Crest. Your line is open..

Hey, Monica..

Hi. Thanks for taking my question. First on the mix-adjusted basis, your revenue for the quarter would have in higher than the upper-end of the guidance.

Was the better results mainly due to moving maintenance customers some of those to the subscription, or was the strength due to something else as well?.

Well, it's a combination of both, because basically it was go-to-market improved execution, and then, secondly, the incremental ACV from conversions. Those were the two outside elements..

Got it.

Then on the IoT revenue, except for the Kepware revenue in it, which you said is about $5 million, is the rest of it mainly subscription? Or is there some perpetual part in it? And then, the GE deal what you talked about with ThingWorx is that on perpetual basis or that is in the subscription side?.

So excluding Kepware, it's principally subscription occasionally there can be a perpetual deal; usually, it's a large customer that would drive perpetual [indiscernible]..

Yes, I think it was 90%-ish..

Yes, but it's principally subscription..

Yeah. As it relates to the GE....

96% [indiscernible]..

As it relates to the GE deal, I'm actually not sure. That was perpetual subscription..

I don't know the answer to that..

Yeah, sorry, Monika..

Okay. Thank you so much..

Yeah..

Thank you. Next is from Gal Munda of Berenberg. Your line is open..

Hey, Gal..

Thank you for taking my question.

For the first one, can you just talk a bit about sales channel in IoT? Is it mainly direct? Or do you sell through partners now as well?.

Yeah. That's a good question, Gal. There are two channels. So our technology platform group is not selling direct; it's selling through channels. And it views the PTC Solutions sales force as one of its channels. So it is a level of the CEO and the CFO. We would say we have a direct channel selling at in multiple indirect channels.

The direct channel today is bigger than the other indirect channels. But they're gaining momentum. And at some point in time – and I can't say precisely when, but at some point in time, we would expect those curves to cross.

We are having a good amount of success and a growing amount of success selling the IoT platform through channels other than the PTC direct sales force..

Okay. Great. My other question is just linked to the split of bookings between solutions and the TPC.

I know you don't really disclose it, but can you say at least where the beat of that extra $5 million on top end of the guidance came from? Was it mainly Solutions? Is it safe to assume that?.

Yes..

Yeah. That was primarily only Solutions..

Okay, great. Thank you..

Thank you. Last question in the queue is coming from Mr. Josh Sullivan of Sterne Agee. Your line is open..

Good afternoon..

Hey. Maybe just a follow-up to the multi-product question. You mentioned the land and expand premium model.

Can you help us frame that? Maybe what's the percent upside from when you land the client in IoT to the full expansion premium?.

Yeah. So, Josh, to be frank, we're in the midst of changing that model, which is a little bit what I said about the logo number being a funny number now. We used to land with the direct sales force and then expand also with the direct sales force. And landing with the direct sales force is a fairly expensive proposition.

So what we'd like to do is land in a low touch manner, let the customers convince themselves how great the technology is and call us up when they want to expand. So that model's changing. And there's some pretty exciting numbers.

For example, there is about 10,000 new developers who have joined our ThingWorx developer community since the beginning of the fiscal year. And about 4,000 them have downloaded software and done something with it. So that's what I mean about opening the aperture. I know we have 4,000 people playing with it. There will be a hit rate.

But I like for many thousands of people to play with it some subset of those people to convince themselves as pretty good, and then, send the direct sales force and to grow the deal. I think that's a more efficient model than using a direct sales force to land the first transaction.

On the logo metric, though, I didn't say that we had 4,000 new logos, because that wouldn't be credible.

That's why, I'm saying that that metric is funny now, because we've changed the way we operationalize the business, but we're using the metric that we've been using and probably need to continue through the balance of the year, but that's what's going on there..

Okay. Well, okay. And then maybe just a follow-up.

Is there any way to break down how many of those customers are just in the land stage versus how many of them have moved up the ladder?.

Yeah. I don't have that because this program is quite new. I know how many have entered it. Not that many since the beginning of the fiscal year. It would be a fairly small number that we've landed through this low touch model, have expanded anything.

So most of the expansions that are happening now are things we probably landed last fiscal year with a more direct approach. We need more time to get to the point where we can provide any meaningful commentary on that..

Okay. Thank you..

Again, what I would tell you is it's a proven model in the Kepware and Vuforia business. It works beautifully. So we're camping from ourselves here..

Okay. Thank you. At this time, there are no further questions. I would now like to hand the call back to Mr. Tim Fox..

Thanks, Cindy. I'd like to thank everybody for joining us on the call today. We do have a very busy tech conference lineup this quarter as well as LiveWorx in June, as Jim mentioned. We look forward to seeing you at one or more of these upcoming events. If we don't, we'll update you certainly on our next quarterly call in July.

In the meantime, if you have any questions, please follow up with the Investor Relations team here at PTC. And I'll hand it back to Jim for some closing thoughts..

Yeah. So thank you for joining us. I just want to say on behalf of myself and the management team, we have a bold vision for the company we're trying to create here. We're trying to create a company that's a respected technology leader. It's got a subscription business model with double-digit organic growth and margins in the 30%s.

And I think that we have some distance to go. But given the progress we're making on all of these fronts, we're at the point where we're starting to see a glimmer of light at the end of the tunnel and it's pretty exciting. So if we do that, we're going to create a lot of value for you and for everybody and it will be a great thing.

So thanks for joining us and look forward to talking to you 90 days from now, if not sooner. Bye-bye..

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