Tim Fox - SVP of Investor Relations Jim Heppelmann - CEO Andrew Miller - CFO Barry Cohen - CSO.

Sterling Auty - JP Morgan Ken Wang - Citi Steve Koenig - Wedbush Jay Vleeschhouwer - Griffin Securities Saket Kalia - Barclays Matt Swanson - RBC Capital Markets Gabriela Borges - Goldman Sachs Ken Talanian - Evercore ISI Monika Garg - KeyBanc Capital.

Thank you for standing by and welcome to the PTC 2017 Fourth Quarter Conference Call. During this presentation, all parties will be on a listen-only mode. Following the presentation, conference will be open for question. And now, I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead..

Good afternoon. Thank you, Jennie, and welcome to PTC's 2017 fourth quarter conference call. On the call today are Jim Heppelmann, Chief Executive Officer; Andrew Miller, Chief Financial Officer; and Barry Cohen, Chief Strategy Officer.

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 most recent annual report on Form 10-K, quarterly report on 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, October 25, 2017, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures.

These non-GAAP 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 Investor website. With that, I'd like to turn the call over to PTC's CEO, Jim Heppelmann..

Thank you, Tim. Good afternoon, everyone, and thank you for joining us. Let me begin with the review of the fourth quarter and provide some perspectives on the significant milestones we achieved in fiscal 2017. Q4 was a strong quarter, capping off a strong year for PTC.

In Q4, we continued our momentum by executing well across our key strategic and operational objectives. Bookings of 144 million were 14 million or 11% above the high end of our Q4 guidance.

While bookings were relatively flat as reported in comparison to Q4 of last year, they were up 18%, if you exclude the $20 million booking from the mega deal in the year ago quarter. We delivered a subscription mix of 72% for the quarter, which was above our guidance target of 68%.

Our subscription program progressed nicely throughout 2017 and as of now we very nearly achieved the original goal of 70% subscription bookings a year early. So our focus has shifted to reaching the new elevated goal of 85% of bookings in subscription.

Q4 revenue and EPS were both within our guidance range, despite the higher subscription in the quarter and both would have exceeded the high end of our guidance at the lower subscription mix that we guided to.

Momentum around our recurring revenue model progressed further in Q4 with total deferred revenue, both billed and unbilled of 1.1 billion, growing 40% year-over-year. Our annualized recurring revenue or ARR was 905 million, growing 12% year-over-year. With these metrics, we've established a very solid growth platform for the business going forward.

To guide my commentary on our Q4 and fiscal 2017 results, I once again frame my discussion around the three key initiatives that were executing to maximize long-term shareholders value which are; number one, to increase our top line growth; number two, convert to a subscription model; and number three, expand their margins.

So let me start by discussing our progress on the go front. After factoring out the SLM mega deal from Q4 of '16, Q4 '17 bookings grew 18% year-over-year and the full year bookings grew 10% despite the challenges in Japan that we discussed with you last quarter.

Including the mega deal in Q4, '16, bookings were about flat for the quarter and up 4% for the full year. Bookings performance in Q4 and for fiscal '17 generally, reflects broad based strength across IoT, CAD and PLM.

From the geographic prospective, Europe and Americas were very strong with full year bookings growth of 29% in Europe and 15% in the Americas, if you exclude that mega deal last Q4.

We were pleased to see progress in Japan in the fourth quarter where bookings grew 80% sequentially to approximately 8 million, but we still have a lot of work to do in Japan to get back to the levels we would be satisfied with. From a segment prospective, it makes sense despite by discussing IoT which is obviously our highest growth business.

The fourth quarter capped off a strong fiscal '17 with full year bookings growth that again exceeded the 30% to 40% estimated IoT market growth rate. Customer expansion activity grew in the quarter accounting for over 75% of our bookings, and the number of six figures deals grew 40% year-over-year, primarily driven by this expansions.

For the full year, expansions comprised 70% of ThingWorx bookings, which is a clear indication that IoT adoption is gaining momentum as customer derived increasing value from there initiatives.

IoT bookings continue to come from a wide variety of vertical markets and used cases, led now by the Industry 4.0 factory operations used case, where we landed 45 new customers in the quarter, followed by the service optimization used case for smart connected products.

We also saw a continued strength in engineering used cases with ThingWorx Navigate.

Because many of these used cases are not necessarily always thought out as being IoT by our customers, you will hear us referring more and more to ThingWorx as an industrial innovation platform where IoT is one of the key used cases, but so as Industry 4.0, engineering innovation, retail innovation and more.

Let me share some custom examples with all from our success in the Industry 4.0 factory setting.

During the quarter, we closed the large expansion deal with the leading Japanese automotive OEM, who's leveraging ThingWorx across its engine manufacturing operations, enabling them to use 3D design data, managed in Windchill with O2 data to optimize plant utilization.

While PTC's heritage has been in discrete manufacturing, two large process manufacturing customers, one in consumer packaged goods and one in food and beverage, expanded the use of ThingWorx in the factory during the quarter. One of these firms has now grown as deployment to 100 factories worldwide while the others have 70.

And another example coming from the high-tech and electronics market, LG Display, the world's largest manufacturer of LCD displays, adapted ThingWorx including ThingWorx Studio to drive efficiencies across their manufacturing operations.

On the IoT ecosystem front, the ThingWorx's partner team delivered some key wins in Q4 including an agreement with Softbank who's launching ThingWorx based IoT service solutions for property owners and managers and Flowserve who selected ThingWorx for their next version of remote industrial equipment monitoring software to enable predictive aftermarket services.

These wins represents just a small sampling of PTC's global IoT partner ecosystem that's leveraging ThingWorx across the wide range of use cases and industries including Smart City applications, utilities, healthcare energy and communications.

Our ability access these opportunities through a partner ecosystem expands our addressable market and it adds to our exciting long-term growth opportunity in IoT. The market momentum we're experiencing in IoT reflects our unique position with highly differentiated technology and solutions.

ThingWorx is consistently recognized as a market leading solution by industry analyst including the latest report, which we acknowledged in the press release last week.

Nowhere is this differentiation more evident than with our augmented reality technology delivered via our horizontal Vuforia AR Engine and our vertical ThingWorx Studio AR content offering suite for industrial enterprise.

Vuforia is for developers of all types who want to build applications that can see using computer vision and Vuforia is also built into ThingWorx Studio, which in turn enables enterprise customers to create and share scalable AR experiences without writing any code.

We recently announced that both the Vuforia SDK and ThingWorx Studio now support Apple's ARKit and Google's ARCore in addition to previously announced report from Microsoft's HoloLens and Windows ML.

Vuforia's developer ecosystem has tapped 350,000 developers and is growing fast, while ThingWorx Studio, our enterprise solution now has over 4,500 enterprises who have purchased or are test driving this technology for a broad range of industrial use cases including augmented service and maintenance distractions, operator instructions and product demonstrations.

ThingWorx customers are delivering these AR experienced they offered using iOS and Android phones and tablets and a wearable like the Microsoft HoloLens. The several other big developers happening on the AR front right now. In early October, we launched a new product called Chalk, which is available on the Apple Apps store as Vuforia Chalk.

This app allows you to make a video call to remote Chalk user and then mark up objects that you see in their remote environment using AR. In other words, it's an asset that let me see what you see and give you guidance using markups that I can do with my finger.

But the markups attached to the objects in the background, not to the screen in your hand, which trust me is real breakthrough. Our customers see this as a transformational moment for customers support in remote service because now the experts can provide immediate visual guidance to consumers or service technicians from 1,000 of miles away.

I recommend you download Vuforia Chalk and try it out with a friend or family member, it's free for consuming use, but it has to be licensed for enterprise use.

The second piece of news is that just yesterday, Harvard Business Review published a blockbuster series of articles written by professor, Michael Porter and me, titled Why Every Organization Needs an AR Strategy.

This article series what HBR calls a showcase, has a downloadable companion app that I promise will amaze you as it works with the print article to open your mind to the possibilities of AR in the enterprise.

You can find this in November and December HBR newsstands now or soon, and we will make reprints available on our Investor website as soon as we can get our hands on the PDF version.

Across the board, I trust you can see there is a lot's of energy and enthusiasm building around our ThingWorx Industrial Innovation Platform, but I'm pleased to report that our solutions business is doing well too.

I'd like to preference my comments here by reminding you that we had a very strong solutions booking performance in Q4 of '16 when we had a growth of 27% year-over-year to in part to the $20 million booking from an SLM mega deal. That strong year ago quarter creates difficult compares for our core business.

But excluding the SLM mega deal, Q4, '17 bookings grew an impressive 16% year-over-year in the solutions business, well ahead of our long-term target growth rate. The strength in our solutions business was driven by our CAD and core PLM business.

CAD continues its streak of above market growth, growing multiple times faster than the market in the quarter and delivering 14% growth for the full year. Our CAD business has now delivered two consecutive years of double digit constant currency bookings growth.

The Creo business has a rock solid product that continues to benefit from our go-to-market improvement initiatives, evidence by seven consecutive quarters of double-digit bookings growth in our retailer channel. In core PLM, Q4 bookings were up 9% year-over-year, resulting in full year growth of 6%, which is in line with market growth rates.

PLM continues to benefit from sales of ThingWorx Navigate, wherein Q4, we close transactions across the variety of vertical markets including automotive, aerospace, med devices and high tech, which supports our view that this offering will resonate across thousands of enterprise Windchill customers creating a significant long-term opportunity to drive continued PLM growth.

We also secured several major strategic PLM wins in the Americas and Europe during Q4 including that competitive displacement with a leading global medical devices company and the new customer win with semiconductor manufacturer Infineon Technologies Ag, who chose Windchill for enterprise wide PLM.

Ever since, we began our aggressive move into IoT back in fiscal 2014, we've been hoping that our IoT strength would circle back and play a synergistic role and strengthening growth in our core CAD and PLM business.

Looking back FY '17 data, I see that ThingWorx played a big role in most large PLM deals and it's increasingly impacting CAD purchases as well. Last week for example, we held our FY '18 sales kick off.

I used the opportunity to collect firsthand feedback from numerous direct sales reps and I also had a chance to talk the principals of several big resellers from the U.S. and Europe.

It was interesting to see how excited the resellers were about their business and ours and to hear their views about how much more differentiated our CAD to PLM offerings are. Thanks to our Industrial Innovation platform.

Both direct sellers and resellers talked about their ability to position themselves to the customer CSOs, as a guide through digital transformation involving smart products and smart operation. Traditional competitors especially in the reseller space are left pushing feature function and price point arguments around CAD to PLM.

And fortunately, our story is pretty strong there too. Many of you heard, we make the case at various events like our LIBOR Conference that IoT really is just the next generation PLM concept. Our bookings data suggest that this is an argument we're starting to win.

To close out on the growth front, we're very pleased with the impressive bookings performance by our sales organization in Q4, capping off a strong fiscal '17. For the second year in a row, the team has delivered bookings growth that meets market growth and exceeds the needs of our long-term model.

Let me turn now to our second top level initiative to drive shareholder value, which is our transition to a subscription model. The Q4 '17 mix of 72% subscription bookings was 400 basis points ahead of our guidance, reflecting continued strong demand for our subscription offerings around the globe and in our channel.

With our plans to move to a subscription only model in the Americas and Western Europe, at the start of our fiscal two of '18, and with additional subscription programs coming online this quarter, we remain confident in our long-term subscription mix and recurring software revenue targets.

Let me finish the outline by discussing our third top level initiative to drive shareholder value, which is to further increase our operating margins. In Q4, our operating margin was within our guidance range with operating expenses declining 3 million from last year, and fiscal '17 operating margin improving over a 100 basis point from fiscal '16.

This confirms that fiscal '16 was the trough for full year operating margins.

As Andy will detail in our guidance discussions, we expect to deliver continued operating margin expansion in fiscal '18 and then rapidly accelerating margin expansion in fiscal '19 and beyond, as the compounding benefit of multiple years of our maturing subscription models realized.

Illustrating this compounding benefit of subscription, in fiscal '18, we expect recognized subscription revenue to exceed subscription bookings for the first time. Let me summarize then where we are as we transition to fiscal '18.

PTC has a long range plan that will transform our company into one of the premier industrial software companies in the world by 2021, a subscription company with recurring revenues approaching $2 billion with double digit growth rates and with margins in the low 30s. Our program to get there is not easy, but is straightforward.

We simply have to increase our growth rates by establishing ourselves as a winner in IoT while holding our own in the core business. We need to finish our subscription transition and we need to continue our spending discipline while letting revenue grow faster. FY '17 was another solid year of execution across the three dimensions to that program.

It's another great year that goes win column. We’re confident about our FY'18 plan and that outlook keeps us right on track for our long range plan. We still have challenges like Japan and SLM that we're working hard to address, but the largest contributor to our business like our CAD and PLM and IoT segments. And our U.S.

and Europe geographies are working very well and we’re beginning to answer the more exciting growth phase of the subscription transition. Everybody on my team is proud of the track record of years of progress we made in our transformation already, we really like where we’re right now and we love where the Company is headed.

We’re focused and committed and confident that PTC will emerge as that premier industrial software company. With that, I'll turn the call over to Andy, who will review some of the financial highlights with you..

Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non-GAAP results and guidance, also all year-over-year bookings growth comparison exclude the Q4 '16, $20 million SLM air force booking.

Q4 bookings of $144 million were more than 14 million above the high end of guidance and grew 18%, driven by broad based strength across CAD, core PLM and IoT. Regionally, Europe delivered especially strong results with bookings growth of 39%.

The Americas grew bookings 10% and APAC bookings growth was back in positive territory with Japan showing some encouraging progress growing booking sequentially 80% to approximately 8 million. Our channel grew double digits for the seventh consecutive quarter. For the full year bookings of 419 million increased 10%.

I do want to share that fourth quarter bookings included in almost $7 million conversion deal in Europe that closed earlier than expected and is pull in from Q1 of fiscal '18. The conversion start date is January 1, 2018.

Even without this deal, Q4 bookings were more than 7 million above the high end of our guidance, showing the broad based strength in our business. However, as you see when I discuss guidance, this early close does impact Q1 and fiscal '18 expected growth rates, but we were glad to take this very attractive conversion deal of the street early.

Total deferred revenue billed plus unbilled increased year-over-year by $310 million or 40% to $1.09 billion as of end of Q4 '17. Billed deferred revenue was up 45 million or 11% year-over-year.

We believe total deferred revenue billed and unbilled combined is the most relevant metric, as there is a seasonality to the timing of our recurring revenue billings throughout the year and due to the timing of our fiscal quarter ends. Average contract length for Q4 and the full year was two years, the same as last year.

ARR grew 12% year-over-year to 905 million. Subscription adoption trends remains strong especially in EMEA, the Americas and Japan. Our support conversion program continues to gain traction.

In the fourth quarter, 38 enterprise customers converted their support contracts to subscription at an average ACV uplift that was once again 50% above the prior annual support amount. For the full year, the average ACV uplift from conversions was over 50%.

In our channel where we introduced a new CAD conversion program during Q4, early results were promising with over a 130 conversions booked with ACV uplift of 30%.

Additionally, for those large enterprise customers who did not convert this quarter and signed new support contracts instead, their support ACV increased 20% and I'll remind you that we do not include this increase support ACV in our bookings results.

We believe that the conversion opportunity within our customer base is substantial and will continue to play out over many years, as we introduced new programs including a new conversion program targeting our enterprise customer base that just launched at the beginning of fiscal '18.

One last point about conversions recall that we include only the incremental ACV in our bookings results, not the full contract value of the new subscription contract.

Turning to the income statement, total fourth quarter revenue of $307 million was at the high end of our guidance range and up 6% year-over-year despite a decline in professional services revenue of $7 million. At our guidance subscription mix, our revenue would have exceeded the high end of our guidance.

Q4 was the third quarter of year-over-year revenue growth since launching our subscription program at the beginning of fiscal '16m highlighting that we have exited the subscription trough.

Software revenue was up 10% year-over-year despite an increase in our subscription mix, including 105% growth in subscription revenue and 13% growth in total recurring software revenue. Approximately 85% of Q4 software revenue was recurring up from 83% a year ago.

Operating expense in the fourth quarter of $181 million was down $3 million from last year and Q4 operating margin was within our guidance range of 18% to 19% despite the higher subscription mix. The strength in Q4 bookings resulted in higher commission expense than planned driving total OpEx slightly above our guidance.

EPS of $0.34 was within our guidance range and would have been above the high end of guidance at $0.39, at the guidance mix of 68%. Moving to the balance sheet, cash and investments of $330 million were up $19 million from Q3, '17 driven primarily by $28 million of adjusted free cash flow. During the quarter, we've repurchased $16 million of stock.

Now turning to guidance, for fiscal '18, we expect bookings in the range of $446 million to $464 million, which is growth of 7% to 11% year-over-year and 10% to 14% when factoring in that $7 million conversion mega deal that I previously highlighted.

We expect subscription mix to increase 1,100 basis points year-over-year to 80% for the full fiscal year and expect to exit the year in the 85% range, which is consistent with our long range subscription mix target.

We expect fiscal '18 total revenue in the range of $1.225 billion to $1.24 billion growth of 5% to 6% year-over-year, including 404 million to 415 million of subscription revenue, growth of approximately 60% year-over-year.

Note that given our progress in our subscription transition, for the first time, subscriber revenue is expected to exceed subscription bookings by more than 20% illustrating the compounding benefit of a subscriber business model as the model matures. And recognize that FY '18 is only the third year of our subscription program.

Fiscal '18 recurring software revenue is expected to grow of 13% to 14%. Total software revenue is expected to grow 7% to 8% and ARR is expected to grow in the mid. Note that we expect recurring software revenue to exceed 90% of our total software revenue in fiscal '18.

We expect our services margin to be 20% and we expect OpEx in the range of 723 million to 733 million, up 5% to 6.5% year-over-year, including about 140 basis points from currency. You will note our OpEx guidance is in line with our long-term model to grow OpEx at no more than half the rate of booking growth.

This results in operating margin of approximately 17% to 18%, an improvement of a 100 to 150 basis points year-over-year. As Jim mentioned, we expect rapid acceleration in margin expansion begin in fiscal '19 in the 400 to 600 basis points range as the compounding benefits of multiple years of our maturing subscription business model is realized.

We're assuming a tax rate of 9% to 11% for the full year resulting an EPS of a $1.27 to $1.37, which is growth of 13% at the midpoint. Fiscal '18 adjusted free cash flow is expected to grow 31% at the midpoint of our guidance to 190 million to 200 million.

We've included about 40 million of CapEx in fiscal '18, up from 25 million in fiscal '17, primarily due to the billed out of our new Boston headquarters. We expect CapEx to decline to historical levels when the billed out is complete, which is likely Q2 of fiscal '19.

As with operating margins, we expect free cash flow to accelerate significantly in fiscal '19 as the subscription model mature. Turning now to Q1 '18 guidance, we expect bookings in range of 82 million to 92 million in modest year-over-year decline at the midpoint of guidance due primarily to timing of a couple of mega deals.

As you will recall Q1 last year benefited from a $12 million mega deal and is previously mentioned Q1 '18 does not include the $7 million conversation that we closed early at the very end of Q4, '17. Excluding the impact of these transactions, Q1 trends are in line with our historical patterns.

Total revenues expected to be in the range of 297 million to 302 million, which at the midpoint represents 4% growth and includes subscription revenue growth of approximately 80%, and total recurring software revenue growth of 12% after midpoint.

Q1 operating expenses are expected to be $176 million to $180 million, resulting an operating margin in the range of 16% to 17% representing 100 basis points to 200 basis points improvement in operating margin over the last year. We are assuming a tax rate of 9% to 11% resulting in EPS of a $0.28 to $0.32, an increase to 13% at the midpoint.

Finally, before I turn the call over the operator, I would like to address our long-term financial targets that we provided you last November.

Based on our strong fiscal '17 results and our positive outlook for 2018, we are reaffirming our prior fiscal '21 financial targets which I will remind you call for 1.8 billion in total revenue growing double digits with 1.6 billion of software revenue, growing double-digits, 85% subscription mix yielding 95% recurring software revenue, operating margin in the low 30% range, EPs of $4.16 and free cash flow of 525 million.

Given the compound in benefit of a subscription business model, operating margin, EPS and free cash flow growth all accelerate significantly beginning in the fiscal '19. We've included in the long-term operating model presentation with our earnings documents posted to our investor relations website.

Since we are not making any changes to our long range targets today, we will not be hosting a separate investor webcast as we have in the past. Looking ahead, we do plan to expand our investor program at LiveWorx, which is next June in Boston, and we are on the road throughout this quarter starting next week in New York and Boston.

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

Thank you. We will now start the question-and-answer session for this conference. [Operator Instructions] First question comes from the line of Sterling Auty from JP Morgan. Your line is open..

So noticed in the guidance for the first quarter that actually it seems like the upfront of perpetual is stronger in terms of the mix in terms of the total dollars than I would have expected, is that just in preparation of the elimination of subscription? And then the follow on, so I can squeeze two into one question.

Japan improved to 8 million in bookings, people really wanted to know, how do you think the improvement should kind of scale out from here?.

Yes, so the lower subscription mix 68% in the first quarter contemplates frankly within our pipeline now. We still contemplate that perpetual is still available in the Americas and Europe in the first quarter.

Then there is a fed function increase in the subscription mix starting in the second quarter and we expect to hit 85% subscription by the fourth quarter. Regarding the Japan, so Japan is far what we've been cautious relative to what we've factored into our guidance for fiscal '18.

In fact while we do have the growth factored in there from fiscal '17, if you look at the actual bookings number in our operating plans, it is lower than our bookings in fiscal '14, '15 and '16. So we've been cautious about what we put in Japan as we continue to kind a work to apply in there to bring that back performance back in line..

But just to add, I mean we do think it will take multiple quarters to kind a get back to a new normal. But we're making good progress..

Our next question comes from the line of Ken Wang from Citi. Your line is open..

Hey guys. So Andy, I think one area that I wanted to touch on is just free cash flow this year. It seems like it was a little lighter than the guidance range you guys had provided.

Just wondering what some of the puts and takes there are?.

Yes. So, we came in $9 million below the low end of our guidance, $149 million versus $158 million. It was related to some collection timing, we actually collected $44 million in the first three weeks of this quarter. So that was unfortunate, we're off to a good start this quarter but it was frankly just some collection timing..

Got you. And then I guess on I guess this will be deferred and cash flow little bit.

But in terms of having one fewer day in Q1, how should we think about what the impact would be on the balance sheet?.

Yes, so, basically we're losing December 31st as compared to last year. And so, we look at that that's, if you look year-over-year that's going to impact the growth of our billed deferred revenue by about 200 basis points.

It's roughly $6 million that we -- when we look at what's expected to build on December 31 based upon our recurring revenue billings. The other thing I'll remind you is last year we had reduction bill deferred revenues from Q4 to Q1 because we didn't have the big billing at January 1st and 2nd.

But of course this year again, we don't have the big billings at January 1st and 2nd, which of course are even bigger now with subscription. So, we do expect a step down from Q4 to Q1 in billed deferred revenue, however, not as big as step down has occurred last year, given the progress on subscription.

Again, we think you should look at total deferred revenue as opposed to billed deferred revenue because that is contractually committed and that removes this volatility as far as what day the quarter ends as well as the timing of when billings actually happen..

Thank you. Our next question comes from the line of Steve Koenig from Wedbush. Your line is open..

I want to ask you on -- I want to talk about partnerships and what you're doing. So, there has been news about a large industrial tech company partnering with horizontal tools like Microsoft in that case. I know you're working on partner applications and you talk a little bit about ThingWorx-based applications.

Can you give us an update on what you're doing in the partnering front and with these ThingWorx applications anything exciting going on there?.

Yes, I mean I think we're working of partnership angle in a couple of different vectors, Steve. One I talked about which is we're signing up partners who are in various forums ultimately resellers or OEMs of ThingWorx.

But I come back to the large industrial firms, it's interesting there is been about I don't know six maybe seven analysts reports published that show a cluster of leaders. Typically, PTC, Microsoft, Amazon, sometimes IBM and GE, depends a little if it’s a U.S. or European report.

But when we find ourselves in this cluster of leaders, we look at everybody else and we see that they're really offering a horizontal call strategy and we're really offering a vertical application building and running tool.

So in fact we think that Microsoft, Amazon to a large degree IBM and of course GE for previous announcements really are complementing of what we're doing. You can build really great ThingWorx apps that run on Amazon or Azure or Predix and maybe at least in theory on IBM's cloud.

So, we're investing in those relationships and we think that anybody who signed the partnership with Microsoft remains a good candidate to be a partner of ours. In fact, we would say ThingWorx is the very best way to build an Azure IoT application, especially one in an industrial world where you walk into a factory.

That factory is different from every other factor you ever set foot in even in the same enterprise.

And now you supposed to build an application quickly, you're going to have to figure out how to connect all these different PLC, and so forth gather data together you're going to want to build applications for the plant manager, for the operator, for the service technician.

And to a degree they are unique because this is a special situation, a snowflake, if you will, that is different from every other one. When you run into an environment like that, I mean ThingWorx just sings. So, we feel actually that Microsoft could and I hope will emerge really as one of our most important partners.

I tell you I'm personally investing some energy in that because I think that should happen it makes sense. And I think you know, it's not just ThingWorx, it’s the HoloLens and other stuff we're doing there. It's the connection between PLM and IoT and dynamics for ERP and CRM.

So, lots of good stuff could happen there, and we're trying to invest some energy to become partners of Microsoft and partners with everybody who is partners with Microsoft..

And Jim since that was part of my original question, I'm going to go, go back to any update on the ThingWorx-based manufacturing up. I know you're working on a portfolio of that.

I believe with partners, any progress report there to stay tuned?.

I mean we did shift the first three at our LIBOR's Conference or shortly thereafter I guess it was, so that would be may be just prior to this last quarter. They are very, very helpful both for securing business and we had a blockbuster quarter selling ThingWorx into factories.

And then of course getting ThingWorx deployed because rather than starting with the great application building tool, but no applications, now we're starting with a great application building tool and a pre-build set of applications, which you might just deploy or may be tweak them a little bit using tool, and you're much closure to value and the value is much more clear and obvious to the buyer.

I think those applications are doing well and contributing to really surprisingly good results for PTC in the world of factory automation..

Our next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open..

First on the product front.

Just could you comment on the adoption of ThingWorx 8 thus far, which is launched a few months back? And then similarly, are you expecting that Windchill 12 will ship as expected in December just scheduled given at LiveWorx? And then on the selling front, you highlighted the continued momentum in the channel which is actually quite interesting to see.

And in that respect in terms of maintaining that into fiscal '18, could you comment on some of the initiatives you have in terms of your what you call your CPQ initiatives, get active or reassigning midmarket accounts back to the channel, that's sort of thing, if you could you talk about some of those accumulated efforts you have to continue to drive your indirect business?.

Yes, I'll take the first part of that first. So, on the product front, off course any new sale we are doing right now is using ThingWorx 8 and that's important because as you know we acquired numerous technologies and ThingWorx 8 is where the all converged into one seamless architecture one seamless experience.

So, we would not talk to any new customer nor would any new customer want to hear any story other than the ThingWorx 8 story. Now that's not the same and every past customer has already upgraded. That tends to happen around certain milestones or convenient times and what not, and that depends too on how easy to get to new capabilities.

But I think the organization and all the pipeline and so forth has 100% converted over to ThingWorx 8. And I forgot to check on Windchill 12, but so far as I know it's on track for December and come along nicely..

Alright.

And then the channel question?.

Our channel organization has made great progress over the past few years. We actually have 15% more feed on the street than we did three years ago. And their productivity for each of those feed on the street has gone up.

The problem has matured tremendously and has a roadmap of continuing initiatives, so that it's a peer of kind of the best-in-class channels that are out there in our market today. The channel is one in the growing seven quarters double-digits, high double-digits in the fourth quarter of fiscal '17.

As far as transferring accounts that was an activity that happened in the past, it’s not really happening more in the future. But the focus right now is frankly just continuing to mature the kind of how we manage the channel, which is doing quite a well right now..

Yes, I mean it's really -- the channel, I don’t think we would say as best-in-class yet, but it seems to be headed there. And it's really different people with professional programs and we're doing the right thing, and those are things are producing results.

So the story here is very, very good and I will tell you personally firsthand, our channel partners are very happy right now..

Thank you. Our next question comes from the line of Saket Kalia from Barclays. Your line is open..

So, two, if I can squeeze them in. The first maybe for you, Andy. Can you just talk about the fiscal '18 bookings guide qualitatively? And I guess what I mean by that is, it seems like maintenance is going to decline a pretty healthy amount despite more favorable FX.

So can you just talk about the double digit bookings growth next year, maybe talking about it from a maintenance conversion perspective versus let's call it fundamental growth? That's the first question for you Andy.

And then the second question for you, Jim is, I just want to re-ask a question which was asked early about partners, but specifically [as you were in] on General Electric, very important partner obviously from an IoT perspective. We all saw the leadership changes there and some of the commentary on GE Digital.

The question for you Jim is, can you levels that for us how you expect that GE relationship to evolve, if at all in 2018?.

Yes, so let me address your first question. So we guided 13% to 14% recurring revenue growth and note that accelerating with ending ARR growth in the mid-teens, again accelerated. So that certainly looks great. And I'm pretty so you have a detailed model. So you'll see that that actually plays out nicely.

Now, what happens as far as the dynamics between moving from support to subscription, when a conversion has already happened in the past, then the run rate of support for that get moved up into the subscription line and out of the support line.

So for example the guidance we gave does have the fourth quarter conversions that the support run rate is out of support and into subscription. Now as if I talk be clear without a booking, without out a booking being recorded. So that's why one goes down the other one goes up.

But then the subscription also goes up on top of that movement for in the case of the conversion for the incremental ACV that we earn. So that's how that one grows at a faster rate than the support goes down for a conversion.

FX is a modest tailwind for us this year, you can probably get some idea of the overall sizing of that given the -- and that's because, [indiscernible] where I think because we've already hedged much of the year when FX rates were not so strong. So when the dollar was actually stronger than it is today, we hedged much of next year.

So, sometimes hedging helps you, sometimes it hurts you. We don't know what's going to happen with currencies for the rest of this year, so who knows will wind this, helping us or hurting us. We did highlight that FX impacts our OpEx by about 140 basis points.

India and Israel are big drivers for that and there was a much more substantial move of those currencies than the Europe for example. So -- and you can get some idea that it's a modest tailwind for us. When you look at EPS, it's not really a tailwind at all for us for FY'18..

And maybe I can pick up on the GE question. So let me first say, GE is a very important customer and partner. And of course, they're CAD PLM customers, but let's set that aside. On the IoT side, they're very important customer deploying ThingWorx in their factories.

And of course, they're important partner reselling some of our technology as part of solutions they deliver. So we're probably reading the same headlines you're reading about how [indiscernible] is going to transform GE in profound ways, but he haven't told us what those ways are yet. And I'm assuming he has told you.

So I think we're all setting in the sidelines, maybe we learn more learn in November. But I don't think we have any basis to speculate at this point, it's just steady as you go. We're working hard on the deployments. We're doing what we can to nurture the partnership and we'll wait and see if anything changes based on this new strategy..

Thank you. Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open..

Hey guys, this is actually Matt Swanson on for Matt. Congratulations on the quarter. So, this has really been a really strong year for Europe. And I know that kind of reflects in the PMI results we've seen lately.

Was there anything going on there beyond kind of the general macros?.

Well, I mean the PMI is strong here and that's been helpful. Probably has shifted over the last year and half two years from being headwind to it at least neutral, if that's not a tailwind. But I actually would attribute it to the strength of our organization there.

We have some of our best accounts and we have some of our best field resources in Europe. The guy we got running our greater Europe based out of France is phenomenal. The guy we have running Germany is phenomenal. These guys are building great relationships. They're winning really good deals.

We've mentioned Infineon for example that was a substantial deal, coming out of semiconductors space. Infineon of course was spun off Siemens sometime ago and uses lots of Siemens technology. So I'm sure they got to look. But any way we have a really strong organization and really good solutions and I think we're just executing very well in Europe..

Thank you. Our next question comes from Gabriela Borges from Goldman Sachs. Your line is open..

Andy, maybe just a little bit more on the maintenance conversion. You’ve mentioned two data points in the prepared remarks. One on the average ACV uplift being in the order of 50%, and then another on CAD conversion that I've just thought being in the order of over 30%.

Could you just explain what the nuance between those two types of conversions are? And then as we look at the longer term model and we think about layering the benefit of maintenance conversation into the full longer term model. How should we think about the incremental EBIT contributions that you could get as that deal flare in? Thank you..

So, again the 50% ACV uplift about half of that typically has been just a like-for-like conversation, so same products, same I should say same value dollar amount value of their billed materials.

They do get a restack and remix and they are doing the conversion for that restack and remix and just the ongoing flexibility of having the subscription contract. That's not half of it. They're in a buying motion. They're probably just inventory. They're people on what they would like to have as well as what they actually already have.

And so we’re able to sell them incremental software at the same time and that’s what brings the ACV up to over 50% Q4 and actually every quarter this year. Lastly, it was just over 40% in total with about 25% like-for-like.

Now, the CAD was a new program that we offered this year where you could turn in your perpetual license, convert it to subscription. And you'd get a choice of three or four extension, CAD extensions, and you would get those for free and the conversion which potentially cost you 25% more on average. So that program was just launched.

The channel partners had to learn about it. And really we saw, some really nice progress in the America and Europe predominantly with 130 of those, I believe during the quarter. It turned out. We actually got 30% more not the 25% like-for-like and that was actually because they bottled a little bit more at same time, as they did the conversion.

We introduced a new conversion programs for the enterprise. It totally where we don’t have it’s a stick like where the support is currently after market rate. We do that because of the 212 I think it is. Enterprise conversions, we done like today about half of them, we did not have a stick. Their support was already at the market rate.

And frankly they did it for the flexibility, the restack and the remix. So, we actually have come up with the new program that is less art and more kind of here how it works. And that launched the start of October and our pricing study shows that there should be some real demand for that.

And again, we would expect to like-for-like about 25% more in that conversion program. Now, if you look at our long-term model off course conversions are always in our current year guidance because they are in our pipeline and our sales reps working conversion the same way they work in new deal.

Okay, they are trying to get incremental value from the customer and also sell somewhere software at the same time. But there we have not put them in our long-term model which for that would mean FY '19 to '21.

So you could simply look at our installed base, make assumptions on what penetration you think we are going to get of our support base, and pretty much close to 80% of our support comes from the enterprise customers and about 20% comes from the channel customers. So you can easily add assumptions to your model for that..

That's helpful. Thank you..

The last thing I was going to say. We see this playing half for a very long time, if you look at the 200 enterprise customers we have now, about half of them are in the top 500. They have the low market support where we only 20% penetrated through that 500.

And about half a 100 out of them roughly are from the next 1,000 customers, so only 10% penetrated of the kind of next cohort of customers. Thank you, Gabriel..

Our next question comes from Ken Talanian from Evercore ISI. Your line is open..

So I was wondering if you can give us a sense for some of the drivers of CAD and PLM growth that you are factoring into your '18 bookings guidance.

And specifically there is a question I get all the time that, how should we think about the difference between volume or seat growth versus pricing?.

Yes, okay, I can try out first of them and then you can add anything, I might have missed. I think if you look at your CAD business and quite frankly our PLM still you start with really great products and maybe in the past, we've had some focus or distribution challenges, but our products are very good.

You add onto that this ThingWorx story around industrial innovation platform and some of the really interesting capabilities did that bring to navigate and to augment reality and virtual reality. And it actually makes the CAD story and the PLM story both much more compelling.

Then you layer into the improvements we've made in go-to-market and distribution, both the direct side where we have a CAD overly forced in place is working, and off course the channel all the -- channel talents improvements we've been making over the past few years. And you've got a business which just start to work well.

Now, I think it's full of volume and price in the sense that we're selling more capabilities. When we sell and see the navigate, you remember we allocate half of that seat to ThingWorx and half of that seat to PLM, so selling capability into a PLM account helps to drive PLM revenue. And I think probably the bigger part that was.

We're selling more seats in the more accounts especially in the channel that would be droving in lot of our strengths here really is coming from the channel space..

And what I would tell you, if you look at our guidance growth rate, it's pretty much in line with market growth rates for even for FY '18. So it's not like achieving our FY '18 plans requires us to grow CAD double-digits or PLM above the market growth rates.

It's basically CAD growing at roughly market growth where at PLM growing roughly market growth rates and IoT growing at market growth rates..

That's not the same where we won't try to grow it..

Absolutely, yes..

At any point, we're not all going to live with that guidance. We're not trying to do something that should be impossible. We're trying to do something that's really pretty middle of the road, keep up with the market, and we could deliver that guidance range..

The other thing I'd add is specifically in PLM, in addition to what PML added around, how ThingWorx and Augmented Reality actually helping us differentiate both our CAD and PLM products. In PLM specifically, we're seeing strength in retail and med device where we're quite focused.

And we're also franking seeing strength in the cloud where we grew in FY '17, our cloud PLM over 50%. And we believe we're by far the largest cloud vendor.

Many of our new customers simply go straight to the cloud and we've seen many of our even our large older customers frankly move more [indiscernible]?.

From unframed into the cloud..

Into the cloud..

Yes, I should have mentioned that. Just on the cloud point to give a little more depth. No doubt, PLM and maybe even more so CAD have been lagging categories in terms of movement to the cloud. But that seems to be happening now.

And you may remember, we acquired a little company back and it was in 2011 already Net Ideas, who had created a cloud business around Windchill. So, we basically brought that business in-house and put more resources behind it and it's prospered. And we think you can compare us to any pure play or any other PLM vendor.

We think we're doing more business in the cloud than anybody. And it's becoming a big proportion of the business we're doing every quarter. So that's definitely a key driver as well..

Our next question comes from Monika Garg from KeyBanc Capital. Your line is open..

Hi. Thanks for taking my questions. The first is, Andy, you've talked about like the enterprise customers who do not upgrade to subscription and renew support ACV that increased at 20%.

Maybe just talk about [indiscernible] like to search how you grow and support ACV?.

Well, basically, these are the enterprise customers who are paying below market support. So we basically first give them a code to take them up to market rates, which tend to about as 20% or so increase. And then we offer them the opportunity to instead convert to subscription for just a little bit more.

So that's the sales play we do for those top 500 accounts where they're below market. And most go to subscription or intend to go to subscription. So when you look at this quarter, 60% of those that we ran that play with, chose to convert to subscription. The most of the rest actually ask for bridge agreement to give them just a little bit more time.

And we do that at a premium get mature term bridge agreement. And then there were a handful that basically couldn't get it done within the year. I mean it's going to take them a year, so they just sign up for another year of support. And their ACV for that went up 20%. So that's essentially how that's played out..

Then you've reiterated fiscal 2021 target, how much fiscal '20 target which was $450 million and cash flow $1.6 billion in revenue?.

Could you restate that question, the 2021 target is $1.6 billion of software, $1.8 billion is total revenue, both growing double digits..

Right, so you've reiterated 2021 targets, but remember there was also fiscal 2020 target, which was….

We put a presentation on the Investor Relations website and I think you can see 2020 pretty clearly on that one..

That was last question. I will turn the call back to Jim Heppelmann..

Okay, great. Well, thank you, Jennie. So, I want to thank everybody who joined us on the call here for spending your time with us this afternoon. I trust you will agree that our Q4 and fiscal '17 results validate. They were executing again the three pillars of growth, subscription and profitability expansion.

And I trust you further agree that if we do that and continue to announce, that’s going to create a lot of long-term shareholders value. So, we're happy with where we're and hope you’re too. We look forward to seeing you at an upcoming investor event. And if not, I look forward to talking you on the call again in 90 days.

So thank you very much for joining us and Jennie that concludes our call..

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