Q1 2020 Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the PTC 2020 first quarter conference call. During todays presentation, all parties will be in listen only mode.
Following the presentation. The Congress will be open for questions. Today's conference is being recorded if you have any objections you may disconnect at this time.
I would now like to turn the call over to Tim Sox Ptcs Senior Vice President of Investor Relations. Please go ahead.
Thank you Sheila good afternoon, everyone and thank you for joining Ptcs conference call to discuss our fiscal Q1 20 results on a call today, our Jim Heppelmann, Chief Executive Officer, and Christian top tier Chief Financial Officer.
Before we get started please note that today's comments include forward looking statements, including statements regarding future financial guidance. These forward looking statements are subject to risks and uncertainties animal factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in ptcs filings.
With the FCC, including our annual report on Form 10-K , and quarterly reports on Form 10-Q .
As a reminder, we'll be referring to operating and non-GAAP financial measures during today's call.
Yes, one of our operating metrics and these items excluded from our non-GAAP financial measures and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related form 8-K.
Last week references to growth rates will be in constant currency unless otherwise noted.
And with that let me turn the call over to Jim.
Thanks, Jim.
Good afternoon, everyone and thank you for joining us.
I'm pleased to share that are solid Q1 performance puts us right on track to deliver against our fiscal 2000 targets and our attractive long term financial ranges.
Our our which is our key topline metric.
As Christian will detail later in the call we are raising our fiscal 20 ear our guidance based on our Q1 performance our visibility into the balance of the fiscal year unfavorable currency tailwinds.
We're also raising revenue EPS and adjusted free cash flow guidance for the year.
At the midpoint of our guidance, we're now expecting fiscal 20 or our growth in the mid teens.
Revenue growth approaching 20% and EPS growth above 40%.
The benefits of all the hard work we've done in the past years to expand their profitability to increase our growth rate and to convert to subscription model are really starting to show because PTC truly is emerging as one of the worlds Premier public software companies.
Before digging into the details I'd like to share some observations about broader industry trends and ptcs unique position in terms of helping customers thrive. During this period of rapid change in the industrial world.
Similar to other industries like entertainment hospitality or transportation that have been disrupted by digital technologies industrial companies are now facing new challenges from traditional competitors that are embracing digital technologies across the value chains.
And from new entrants exploring new business models.
Digital transformation has become a wave the sweeping across industrial market, enabling companies to better differentiate their products and services.
While simultaneously optimizing their engineering manufacturing sales and service processes.
As the only company out there who has a suite of CAD PLM.
T.
Hi, and our capabilities PTC has a unique ability to help customers pursue their digital transformation ambitions.
Every day, we're helping customers to do things like implement AI driven product design.
More to create a digital thread to leverage product data across the value chain.
Or to gain operational insight from their products in the field in their assets in their factories through our leading aiotv and AI technology.
And to drive significant improvements to worker productivity.
Our technology.
Hi host many customer meetings and I can tell you that PTC solutions really resonate with our customers because they are aligned with their high priority initiatives.
Nobody else looks like PTC and with the opportunity in front of us, it's a very exciting time to be here.
Given our performance and forward looking momentum.
Once you take note that traditional economic measures like the PMI index are now much less correlated with PTC business trends.
As we all learned in the great recession of 2009 recurring revenue streams are impacted much less by economic fluctuations that is perpetual license revenue.
This suggests that our subscription based business model, coupled with growing secular dynamics of our business leg described earlier.
Now to a large degree driven a decoupling.
Traditional cyclical measures like BMI.
We're guiding to strong air our growth.
Against the backdrop of some of the most lack luster PMI numbers in recent memory.
Of course remain mindful of these external measures, but this negative sentiment has been around for sometime now.
Decoupling gives us even more confidence in our ability to drive sustainable growth going forward.
Turning now to some highlights in the quarter I'll begin with our growth business that now includes thing works I LG.
Euphoria aer and on shape SaaS.
Air our growth for our I O T solutions accelerating quarter over quarter, and our augmented reality solutions once again outpaced hi market growth rates.
Thanks to a continuation of the trend of customers introducing a our into their manufacturing and service environments.
In addition to healthy new logo activity.
Q1 expansion bookings represented about 65% of Aiotv and air bookings, primarily driven by customers shifting from pilots.
Production and accelerating pace.
The number of six figure deals in the quarter more than doubled versus a year ago.
When viewed through an A.R.R. lens.
Trends across our customer cohorts are impressive relative to Q1 of last year, the number of Aiotv and our customers with a our are greater than 500 K grew by over 50%.
One of these customers Thermo Fisher is a great example of how enterprises and transforming their business with PTC solutions.
Thermo Fisher's a global leader in the biotech space, who is leveraging thing works to offer new value added services to further differentiate themselves and their competitive end markets.
In their chemical analysis Division for example, Thermo Fisher Embeds thing works within their products, allowing end customers to remotely capture and analyze test data from these products.
Thermo Fisher is also leveraging thing works for predictive maintenance.
And to provide feedback loops to their product development teams.
Well Fisher is representative of the trends, we're seeing where customers are expanding their digital footprint across product lines and use cases and into their production environments as well.
Given the broad scope and global nature of the digital transformation opportunity within the industrial market. We knew it will be challenging to pursue this alone of course, that's why we performed strategic alliances with industry leaders like Rockwell automation and Microsoft.
Both of these alliances again delivered the goods in Q1.
And our Rockwell automation Alliance Q1 provided a strong start to the year with robust new deal activity.
Plus a meaningful uptick in expansions as pilot projects that were kicked off earlier in F. Why 19 moved into production.
The Rockwell Alliance team delivered new deals across a broad cross section of vertical markets and in 15 different geographies, which highlights both the deep industrial domain expertise and the global reach that Rockwell automation brings to this relationship.
In our Microsoft Alliance Q1 also marked a strong start to the year with new ACB bookings well above plan.
Geographically the Americas continues to be the main driver of growth. However, momentum Europe is building and the Microsoft Alliance has a robust pipeline heading into Q2.
We're also pleased to see that demand continued to expand beyond the smart connected product use case into factory and even our solutions.
Which represented more than a third of the alliance bookings in Q1.
Great proof point of the power of our Microsoft Alliance as a recent win at Johnson controls.
As a leading global provider of building control systems.
It turns out that PTC, Microsoft and Accenture were independently supporting JC guys digital transformation efforts from different angles.
Too many cooks in the kitchen ran the risk of slowing things down so PDC, Microsoft and Accenture joined forces and approach the C suite with a unified strategy for their smart factory initiatives.
Together, we landed the deal to deliver a fully cloud based smart factory solution that has accenture deploying pdcs thing works on Microsoft's Azure.
Before I leave the growth discussion, let me share that we're making great progress integrating the on shape team.
In fact, the on shape team moved into our support headquarters earlier this week.
I'd like to think of on shape as the proverbial iceberg.
What do you see above water, the 5% looks a lot like an nexgen CAD and PLM systems.
But what is below the water the 95% is ptcs, new pure SaaS platform, we have big plans for on shape and for SaaS and I'm convinced this will become another major growth engine for PTC.
While it's too early to say much yet I look forward to updating you on our SaaS progress in coming quarters.
Our core product group delivered strong Q1 performance as well core business air our growth of 10% outpaced market growth again in the quarter. It was led by very strong performance in PLM, which delivered mid teens here our growth the reflected broad based strength across all major geographies.
In my view the strong performance in PLM is indicative of the growing strategic role the PLM technology now pleasing our customers digital transformation strategies.
Any industrial company, who wants to undertake a digital transformation.
Weekly realizes that PLM, we'll need to be one of their anchor tenant systems of record.
Take group Bennettsville, a French manufacturer, who is a leader in luxury sale and Powerboats.
By leveraging Ptcs winchell, along with Creo and Thingworx and Vuforia.
Benito is delivering product and service differentiation together with engineering excellence and operational efficiency.
They're PLM technology roadmap.
Again with foundational capabilities, such as bill of material management and change management.
Then extended into the factory with concurrent engineering and manufacturing instructions.
And from there into leveraging HR functionality for shop for operators and dealership scenarios.
This powerful combination of highly differentiated technologies is truly unique the BDC, we're using it to win new business into expand relationships with existing customers as they seek to modernize the business processes.
Altogether, we're seeing more and more evidence of a rejuvenation of PLM. The makes the long term growth opportunity that much more attractive for PTC.
Our cat team had a solid start to the year to again delivering high single digit growth with notable strength in Asia Pacific and in our global reseller channel.
On the Creoles simulation life front, which is the starting point for answers partnership interest remains high.
Adoption, particularly in the enterprise space continues to ramp nicely with average deal sizes continuing to grow.
Our focus on Creo simulation live or CSL as we call. It in F. Why 20 is on driving adoption in the channel, which generates about half of our CAD business.
We're kicking off new channel enablement and promotional programs in Q2 and remain bullish on the long term opportunity for significant CSL penetration in our installed base.
While CSL is the chip will disappear and our partnership with answers.
Also making good progress, bringing the broader discovery aim sweet into the crippled as well.
To wrap up my comments I'd like to reiterate pdcs full commitment to driving mid teens air our growth in generating significant free cash flow in the coming years.
Our strong performance in CAD and PLM.
Yes, our leadership positions in the high growth I OTN Aer markets.
More new opportunities for growth in the SaaS based product development market with on shape.
Gives us strong confidence that our growth will remain both significant and sustainable over the long term.
With our subscription transition into real via Rearview mirror and our ongoing focus on disciplined cost and portfolio management, we're firmly on track with our plans to transform PTC into one of the Premier public software companies in the world.
With that I'll turn it over to Christian to comment on financials and guidance.
Thanks, Jim and good afternoon, everyone.
Before I review our results I'd like to note that I'll be discussing non-GAAP results and guidance and all growth rate references will be in constant currency.
Let me start off with a review of our first quarter results again this quarter I'm going to keep my remarks brief hitting just some key highlights and ask investors to revert refer to our press release in prepared remarks document available on our IR website for additional details.
Q1, our AR was 1.16 billion, representing 11% year over year growth.
Which is consistent with the guidance commentary, we've provided last quarter.
Hey are in our growth product group was up 36% year over year, and we continue to expect our growth to be above market growth rates of 30% to 40% in fiscal 2000.
Hey are in the core was up 10% year over year, which was also above market growth.
Consistent with our outlook for fiscal 20.
Our our Fs GE was up 1% year over year, primarily due to the timing of deal and we expect our our growth to be in the low to mid single digits for MSG for fiscal 2000.
Total Q1 revenue of 356 million was up 8% year over year.
Fight, a 78% year over year decrease in perpetual license revenue driven by the end of perpetual license sales on January Onest 2019.
Operating margin of 26% increased 200 basis points over Q4, 19, and declined 100 basis points compared to Q1, 19, where we experienced higher than expected perpetual license revenue, resulting from the perpetual end of life program.
And lastly, non-GAAP EPS of 57 cents increase.
<unk> percent year over year against the perpetual heavy comparison of last year.
And as you'll recall revenue and operating expenses and consequently, as can be impacted positively or negatively by as ceasing so six.
Major drivers impacting revenue includes term length changes and support to subscription conversion.
And on the Opex side commissions are obviously also impact.
Finally, our Q1 adjusted free cash flow of $12 million was within our expectations and sets us up to achieve our full year guidance.
Now turning to the guidance.
Beginning with our our for fiscal 20, we're increasing our guidance to a range of 1.27 billion to 1.29 billion or 14% to 16% year over year growth.
In 13% to 15% on a constant currency basis.
Our our guidance includes approximately 15 million of positive FX.
And already embedded in our original guidance for the year is approximately $10 million of our our or one point of growth from the on shape acquisition.
Consistent with our prior guidance commentary, we expect to Q2 constant currency, our our growth to be in line with Q1 results.
Our our growth rates accelerating in the back half the year.
This increase is driven by both normal seasonality of our business and our backlog.
Deals booked in prior periods.
Now turning to adjusted free cash flow for fiscal 20, we're expecting a range of 260 280 million, reflecting the positive FX impact of 5 million.
Now turning to PNM guidance.
We're now expecting fiscal 20 total revenue.
1.45 billion to $1.53 billion.
The increase of 25 million at the midpoint of guidance, reflecting our Q1 performance our outlook for the remainder of the year and approximately 15 million of FX.
non-GAAP EPS is now expected to be $2 in 15 cents to $2.65 an increase of 12 cents at the midpoint of guidance, reflecting our Q1 performance and outlook and five cents of FX.
We continue to expect fiscal 20 operating expenses to grow approximately 9%.
With that.
I'll turn the call over to the operator to begin the Q1 day.
Thank you we will now begin the question and answer session. Please limit yourself to one question only if you have additional questions. Please return to the Q. If you would like to ask a question. Please press star one on mute your phone and record your name clearly if you need to withdraw your question Prestart Q again, you asked a question.
Please press star one.
Our first question comes from Matt Hedberg with RBC capital markets. Your line is open.
Hi, guys great. Thanks for taking my question.
Yes, Peter lending our growth mid teens constant currency was pretty good I know you called out.
Pretty good geographic success, winning in your press release, you talked about China, and Europe in particular, and Jim you mentioned digital transformation.
Being a real tailwind here could you talk about the sustainability of this PLM World I know, we spent a lot of time on some of the growth or growth your businesses, but.
The durability of PLM as we look forward through this year.
Well I think we're going to have a very strong year this year for sure.
I think if you remember back to September Christian said over the coming five years, we would expect our PLM a our growth rate to slow down to the market growth rate, which I think you had at 8%, yes, yes. So we're sort of mid teens and we think over the five years that will slow to eight.
Now that's based on a number of factors one thing is our renewal rates and PLM are very high. This is very very sticky software and relative to the base of VR AR, we're selling a lot of it. So we're really in a in a strong good situation, where there is strong demand because of digital transformation.
Product is ranked number one by every analyst report I've ever seen and so we're in a good strong position, where we get that we get a chance to meet that demand with our product and high renewal rates and thats bodes well for long time to come.
Thanks, Jim.
Thank you. Our next question comes from Jason we shall or with Griffin Securities. Your line is open.
Thank you good evening, Hey, Jim Christian Tim.
With regard to PLM.
Following up on that subject, we think back over the last 12 to 15 years or more there seems to be the pendulum of adoption among customers in other words.
In times when PLM only companies.
Seem to have had momentum and then there are times when integrated engineering software companies that have CAD and PLM and perhaps other products have had momentum.
The question. Therefore is what are you seeing in terms of.
Drilling business or CLM business across your three letter acronyms you know how much of the PLM business is just for PLM versus youre being able to can drilling pad or anything else to that.
Either as a beneficiary or driver to the PLM business.
Yes, I think.
There have been pendulums for share and one of the strong upswings was wind PTC, who will at that point had a CAD footprint brought PLM into the picture and cross sold a lot of PLM to the get.
Audience now I think what's happening. This time is a couple of different drivers. One is we're doing a lot more engineering into manufacturing data transformation.
We have the software module of our PLM system called MPM link as in manufacturing process management, and it's used to convert and engineering design and engineering bill of material into a manufacturing process design and instructions and the manufacturing bill of material in a very systematic configured.
Ration managed sort of way so that if somebody later decides to change the engineering design, we can pinpoint what they need to update in the manufacturing process very quickly and if the engineering design is highly configurable well turns out so are the manufacturing instructions in the in the embalmed. So today, we're selling a lot into that that's become a new driver.
On incremental new driver and then the other thing is.
Customers are really realizing for example.
This augmented reality technology.
Which we have best in class customers love, it and selling like crazy that stuff needs configuration management of its content. So a lot of customers and I'm thinking of a great big.
I won't name them, because they didnt I didn't I didnt ask if I could but a great big truck company in Europe .
Really as excited about our HR technology and it what is produced is a PLM project.
Because they say alright, that's great, but we'll never really be able to do augmented reality without configuration management of the content. So let's go do this broader.
11 projects. So I think that's another driver I put that was also in front of the digital transformation category. So I think there's definitely an upswing, but it's really brought by people, saying how could you have a digital transformation strategy without having that digital descriptions of your products and manufacturing processes under control.
This should lead to even talk about that so I think this is definitely produced a tailwind that's generating momentum for PLM.
Thanks, Jim.
Our next question will come from Ken Talanian with Evercore ISI. Your line is open.
Okay. Thanks, Alex Thanks for taking the question.
Could you give us a sense for how your net retention rate trended in the quarter for for core gross and FSC compared to last year.
Yes, Hey, Ken it's Christian.
I think.
We're not going to get into though.
Quarterly variability again, just given the reporting framework that we have.
I think suffice it to say that given the.
Instead, we have for the year.
We're expecting.
Continuing to expect a modest improvement.
In net retention here in fiscal 2000.
Great and I guess as a follow up looks like the gross portfolio saw some good traction in both Europe and Asia Pac could you give us a sense for how we should think about the sustainability of that gross portfolio in both those regions.
Yes, I mean, I think what what normally happens here at PTC, maybe elsewhere, but here at PTC, when we launch of business and new business. It gets traction first in the U.S. and then over time and gains more and more traction in Europe in apex, and so I think thats just a natural way that these business.
This is develop and we see an happening here. So a lot of times they get stronger first in the U.S. and then without the use necessarily weakening Europe and in Asia come on stronger a little bit later that that's what I would attribute that to.
Great. Thank you.
Our next question comes from second Kellyanne with Barclays. Your line is open.
Hey, Jim Hey, Christian Thanks for taking my question here.
Question, maybe maybe for you.
But of a mechanical question.
Can you just talk a little bit about ramp deals, we talked about them a little bit last quarter.
You've talked a little bit about sort of the the back half strength that we should see in a are.
For a variety of reasons it sounds like ramp deals are part of it can you just touch on what parts of the business or are you seeing these these types of deals. These ramp deals and then just for the benefit of the broader group can you just talked about how the impact or or that sort of different points in that ramp does that make sense.
Yes sure second is.
Good question. So so thanks.
If we just delve into the mechanics of it.
How ramp deals impact our.
We will add things too.
Our our.
On start date of the contract not booked a start date.
And in the case of a ramp deal where you have in essence kind of multiple start dates. So you have year one of whatever yes.
Can I give an example, and then you talk about the mechanics sure.
Let me just lay out example, let's say a customer loves our smart factory solution and they have 20 factories and so they say I want to really understand what is going to cost me across all 20 factories. So I'd like to negotiated deal for 20 factories, but I can only get about five deployed in the first year, let's say another five in the second year and tenants.
Third years, they're going to do a ramp.
Thats a commitment to five in the first year five plus five the second year in five plus five plus 10, the third year. So thats the ramp of the commitment not moving and unit that and so the way that that would flow in the air. Our is we would take the first five factories were in year one.
In say year to when the next five come comes on we would take the incremental five factories and then in the third year, we would take the incremental 10, so that's the mechanics of it.
Our our flows in on start date of the contractual commitments.
In terms of where we're seeing.
Where we're seeing ramp deal.
Yes, that's right.
We see.
I would say.
More of them in the growth.
Product group.
Ian.
And then we still actually.
You see some in core as well, but to a lesser extent.
And.
Leased six cents in any of the MSG.
Products.
Got it that's very helpful I'll get back in queue. Thanks, guys.
Okay.
Our next question comes from Matthew Broome with Mizuho Securities. Your line is open.
Thanks, Hi, Hi, Hi, Jim because Canada, and then just curious how are you talking for testing so far of US is youre hiring plans this year and.
So give us any kind of update on what's sort of petsense. Each of you total past season, now focused on I O C and all ventures reality.
So if the question sorry, I'm, just going to repeat it to answer that I understood. It I think the question was how are we tracking in terms of.
Sales capacity was step one and then step too.
How is that capacity divided between.
Growth in or and NFS G.
Yes, exactly thanks.
Yes, great. So in terms of tracking the capacity I think we are on track.
For hiring.
Right, where we would like to be at this point.
Given our plan.
In terms of the spread.
Frank them and have to get back to you on specific details but.
The majority is actually so on the core product set which is.
Understandable.
Increasing amount on Aiotv and then and then still specialist is focused on the various yes, I mean, that's another way to look at it would be to look at sales productivity.
Which would be lowest in the growth business because growth, you're bringing a lot of new capacity and it's it's doing a lot of land and expand deals and so forth.
Would be significantly higher in the core and maybe even higher yet in the focus solution group. It gets a little more complicated where you have.
We also have.
Product line reps right reps, who are focused on major accounts and they sell everything in the bags. So like how you want to break that out.
But.
Basic takeaway would be that capacity.
His overrepresented for the growth business.
Right, which is what we need to do that to deliver the growth and you know back to the hiring thing I can certainly understand when that question comes from.
You should know we after about a year ago, when we when we didnt get behind the capacity we changed the way we looked at this we used to think of capacity as being a fiscal year thing and now we think of it really is every quarter.
So it's not like this year, we have this many heads, but it's more like a constant every quarter, we need to be bringing on more capacity. So that we don't end the year and then have a big step function that capacity, we have to ramp going into the next year. So I think our our processes are vastly improved in this area.
Okay perfect. Thanks very much.
Our next question comes from Andrew Degasperi with Berenberg. Your line is open.
So thanks for taking my question, maybe if I could ask about the our guidance increase can you maybe explain to us the components of that I guess on shape is a big one but.
They are deal timing it.
Push outs that happens from Q4 to Q1.
FX can maybe quantify that will further.
Yes sure.
So this is Christian.
Let's start with on shape on shape was already embedded in our initial guidance, which we provided.
Last quarter. After the acquisition was announced after the acquisition announcement provided in the initial guidance. So it's about 10 million.
From on shape.
There is.
About a $15 million.
Increase from favorable.
Correct.
As well.
And then just.
We're now a quarter or the way through the year.
And we delivered what we believe are very solid results for Q1 and feel that much more comfortable with the range that we have out there. So in essence, what we did was tighten up the bottom end of the range from 12 to 15 13 to 15, and then increase the range from 13.
In the 15 to 14 to 16 really based on.
FX impact.
So hopefully that helps.
Thanks.
Our next question comes from Ken Wong with Guggenheim Securities. Your line is open.
Okay. Thanks for taking my question, guys, Hey, How's it going good afternoon.
You are very positive on just the trajectory of on shape and obviously you guys have more things to common announced.
Sounds like so far we've had a lot of feedback in terms of how maybe your customers are receiving it can you give us a little bit a color in terms of how the on shape side of the the installed base is looking at the the PTC portfolio.
Yeah, I mean, I think the first.
Thing, we focused on was to make sure that the on shape customers.
I felt that there was a good thing that PTC acquired on Jay just just even if they stop there and I think we've been very successful there.
The messaging, we put out there was very supportive of on shape and its importance to our future strategy and of course.
CAD is very sticky software that companies tend to use for a lot of years. So if you're using non shape you want to make sure. It's in a sustainable place so that you don't.
And finding its being shut down some years down the road or something like that you got to go find a new Kansas them. So I think.
I think the general message.
It was well received that on shape has a great home within PTC, that's been a big success.
Now as it goes to cross sell I mean honestly, it's it's too early I do have a few anecdotal stories, but not enough to really drive any meaningful meaningful conclusions, but I would say this.
We certainly think there are.
Complimentary use cases.
For example, we're going to bring our HR technology close to on shape actually use much of down shape platform and that'll make that an easy cross sell and then we're also exploring coexistence strategies with Creo and windchill as well so that we could both up sell from on shaped agreeable windchill and before you but also.
Cross sell in those accounts to bring on shape in for peripheral or let's call. It adds use cases, so it's too early though to be honest I'm very optimistic, but we've only owned it for about two months and we're past the phase where people are looking for the bathroom, although we had to start over this week when they move to the headquarters.
No.
But I mean, it's just it's obviously too early.
Great. Thanks, Thanks for the color Jim.
Next we'll hear from hadn't block with Stifel. Your line is open.
Hi, guys and thanks.
Thanks for the for the question, maybe just talk a little bit more inhaler. So you talked about reality growing above market rates and opportunities PLM, but just wanted to dig in a little more on the cross sell opportunity with Aiotv just given all complimentary at a thing works and maybe talk more about that cross sell opportunity with an installed base. Thanks.
Yes, I mean I think at.
You have to think about it as we're trying to connect the physical and digital worlds together.
Like in our logo right in I O T is one form a connection and aer as another and when you connect them together you can then have a our experiences.
That contain aiotv data, meaning I can use a are in the physical world to tell you about the physical world because I know about the physical world. Thanks to Aiotv. So these are definitely PS and applied it's a wonderful beautiful combination products are very well integrated in fact, if you remember for a while we called.
For your studio thing works through the sale.
But these are very complimentary technology, and what's really great that both best in class and there is no. Other Aiotv company, who has a our technology and there's no. Other a our company was multi technology. So this is a very compelling story and it's completely unique to PTC.
Great and maybe just as a quick follow up.
I think this year you guys are focusing on increasing deal duration, both for new deals and renewals and I'm. Just curious I know, it's still early in the year, but what's customer receptivity towards that thanks again.
Yeah, I think it's early in the year to really comment on that.
Great. Thanks, so much.
With that later.
Thank you.
Our next question comes from Sterling Auty with JP Morgan Your line is open.
Yes, Thanks, Hi, guys, Jim you mentioned that.
Things really change in the economic backdrop that you're still dealing with the challenging PMI numbers. So with that is the constant what would you say is the biggest change in the business and based on your tone are you, suggesting that the core of the business sorry, I don't mean cores in that label, yes, the most of the business.
Has fundamentally changed for the better and if so what are the main factors that have caused.
Yes, Okay. So yes, let me say first of all.
The PMI is what it is it's not in a good place in yet we're in a good place. So clearly something's changed and I would submit that two things have changed number one we've changed our business model and metrics and where a recurring revenue company versus a perpetual and I want to come back to that and then number two we have a growth business.
And as many growth businesses are they're not cyclical or secular.
Companies want to do digital transformation, even when they are laying off workers in fact, it might even connect those strategies together. So I think the secular piece is very important but frankly its overwhelmed by the business model change and so if we go back to the great recession of 2009 lets reveal what happened that PTC, we had a.
Perpetual stream of licenses and we have a recurring stream of maintenance the bottom fell out on the economy. The perpetual license sales decline if I remember correctly, 32% in 2009.
And what happened is the maintenance stream, which had been growing mid single digits basically went flat.
In 2010, it actually went down 2% and after that and grew every year since so what happened actually is the effect on a recurring revenue stream is very much muted.
And you can see this in the sensitivity analysis, we gave you some quarters ago, where we showed you that for every five points that bookings drop it would only bring our are down one point.
So if bookings dropped.
30% it would put six points of pressure on they are but that would be 2009, all over again. So we're in a situation where actually bookings aren't dropping they're going up because of the secular thing.
And therefore, a arm is going up with it. So I just think the days when PTC was highly correlated the PMI or simply behind us.
Thank you.
Our next question comes from Steve Koenig with Wedbush Securities. Your line is open.
Well, Steve Great. Thanks, guys and congratulations on a very good quarter.
So.
Let's see my question here.
Yes on the.
You had your revenue growth in your growth business. This quarter mast your air our growth or action that it was a point above and you mentioned that expansion deals were something like two thirds of your aiotv our bookings.
How did that latter metrics compared with other quarters and how is that trend.
And then more generally you expect revenue growth is going to be more parity with bookings growth there going slower than I have a really quick housekeeping follow up if you don't mind.
Yes, I can take part of that because I've commented on this many quarters and as always in many recent cores. It's been in the 60 some percent range of.
Of bookings was from expansions.
So again, where we've been following a land and expand model, which is a beautiful thing when you get into work and I think ours is really starting to work because you have a lot of accounts out there that you sold and they haven't contributed much to revenue, but then they come back and expand and expansions are really interesting and they may come back several tranches of expansion.
So that's been happening.
Have many aiotv and they are customers in particular, we have come back one or more times for expansions and.
I think I'd need to defer to Christian.
If if you can talk at all.
Play in the correlation between bookings and revenue growth rates I.
I think it's complicated.
Yes, it's pretty complicated.
And again I'll, just remind everybody it depends a lot on Dart day.
As long term length.
It depends on.
Yes renewal activity et cetera. So it's not just term length of new deals, but term length together could I just interrupt the real question isn't revenue, but revenue recognition.
So you get a booking maybe you can recognize it may be a cat maybe maybe it starts next month, which means next quarter, maybe it's a ramp deal. So yes. It is a murky correlation between bookings growth and and revenue growth.
Which is why we're trying to focus on a ARR, which had a much cleaner and.
Better proxy in that.
Cash generation for the business.
We still continue to expect.
You know the growth businesses to deliver.
North of market growth rates for for fiscal 20, we would also expect there to be strong revenue growth attendance that as well.
Okay.
That's helpful.
I guess, maybe it's a recap that question a little bit how are you seeing.
Sterne or the inverse kind of renewal and expansion expansion activity trending in that business.
And then I'll just toss out the housekeeping question here, which is.
Your.
Am I correct, new a our guidance.
Now not new now, giving that nominally and that's 14% to 16%, but the comparison with 12 to 15, that's prior guide.
Segment constant currency compared to 13 to 15 is that is that right.
That's correct Yep, we tightened up the low end of the range and then raise the entire range because of FX.
100% agrees.
Then in terms of.
Churn.
Uh huh.
Continue to see churn.
In the growth businesses.
Higher.
Than in.
The core.
Fiveg.
Percentage perspective.
And we also continue to expect that that will trend down overtime. So yes. It has been improving consistently for a long period of time and we expect that to continue yet. So I don't think there's anything notable really to point out there other than those factors remain.
Gotcha.
Well, thank you very much guys and congrats again.
Great.
Next we will hear Simeon Kim with Rosenblatt Securities. Your line is open.
Thank you.
Hey, guys. Congrats on a solid quota just want to talk about some of the ASP trends you may be seeing out there obviously you guys talked about.
Peak trend I'm assuming is.
Increasing in the.
The growth products group.
Hello study is trending versus your core products group and obviously, Jim you talked about land and expand model working very well has done minimize the overall ppas as percent of business coming from large deals despite.
Assuming a increase any as Pete coming from Europe growth business.
Okay by ASP, you really mean deal size, yes transactions actually.
Yeah I mean.
Average deal size.
In the growth business I'd have to check because while we're getting.
More big deals, we're also getting more small deals.
I'm not convinced I don't have the data in front of me, but my intuition would be SP is actually not changing lunch.
But of course, the business is growing fast.
And then in any case.
It would generally be smaller than the core business because of this land and expand motion that we adopted in the growth business and Didnt really adapso much ever in the core business. So the core business tends to be bigger transactions, although there's a lot of add ons.
Modules here in there.
PLM for example would tend to have.
Larger Sps, because theres, not really a land and expand model.
Got it okay that makes sense things right, that's not a perfect answer, but hope although smaller than they were when they when they were perpetual Oh, yes for sure.
Okay, Great and Jim also will quick question around more of a thematic stuff.
So not shown here I'm going to running into this but we are hearing a lot about fiveg technology potentially accelerating the market adoption of aiotv out there, especially in the stocks. We automation market do you see that or do you expect fiveg technology to be meaningful for you.
The business.
The too early to tell.
Well I definitely think it's important to our aiotv customers.
It's too early to know if it would cause our business to grow fast or not but but certainly in factories people want to adopt fiveg to have.
Hi speed.
Low latency wireless communications for their machines in their augmented reality devices and so forth.
So it's definitely important and.
I can tell you know we are engaged in discussions with several different Fiveg partners I think one of a might end up being a big sponsor lied works and I see it at this point as an ecosystem play, which is I want to make sure that.
You know fiveg companies help promote our I O T technology and that our I O T technology can create opportunities for fiveg companies and so forth I think it's too early to say it's accelerator.
It's definitely important.
Okay great.
I think thats it so clinically quarter great. Thank you.
Our next question comes from Jason Celina with Keybanc capital markets. Your line is open.
Hey, guys. Thanks for taking my question it looks like expense growth in the quarter was around 5%.
Thank you guys are guiding warrant to 9% growth for the full year can you just talk about what or maybe some another big investments that you will be making or integration costs.
As we go through the year.
Yes, so I think expense growth has a little bit to do and timing of.
Upon shape right as we only had a couple of months.
Yes.
Fourth quarter.
Okay.
And then there.
Kind of normal hiring plan.
And.
Yes.
Backend loading to that hiring.
Okay.
Great. Thanks.
Next we'll hear from Alex cap with Deutsche Bank. Your line is open.
Okay.
Yeah, Hi, guys. Thanks for taking the question.
I would just be interested in your comments on the automotive end market, specifically seems like it's.
Probably the one of the most if not the most challenged manufacturing end market at the moment I know you exposure isn't huge but interested to see what youre seeing in sums us because I guess on the one how do you have.
Secular and cyclical challenges in the industry verticals. So it needs in a bite at the same time, so what kind of the nets of those dynamics that youre seeing in your customers in the automotive space right now thanks.
Yes, we're seeing actually relatively strong demand for Aiotv factory projects.
Because I think you know in a downturn people are looking for efficiency and taking a dumb factory and making it smart ought to make it most people would believe 510, 15% more more efficient and across the level of spend that people have in their production processes. Those are very big numbers.
So aiotv demand is good and then I'd also say a PLM demand is good I mentioned a truck company.
Theres another big European automotive OEM, where we're working on some big PLM projects and and probably looking at an expansion on that to a next phase pretty soon and so for us. So I think the PLM is really coming from digital transformation and I OTI is coming from let's try to find more productivity in our factories.
I would say CAD not so much probably probably we're not getting a lot of demand on the can front right now, but good demand for PLM and royalty.
Great Thanks to the call us.
Thanks all.
Thank you. Our next question comes from Tyler Radke with Citi. Your line is open.
Hey, Thank you very much taking my question.
It looks like on the guidance you.
The guidance raise on on most metrics was driven by combination of currency as well as.
Solid execution in the quarter.
On line item that Didnt see a raise appeared to be free cash flow.
Maybe just help us understand why given the solid fundamental performance in the quarter and you know your improved outlook on the year, why you're not expecting more free cash flow than than you previously guided thank you.
Yeah sure. So I think we should.
Look at both adjusted free cash flow and free cash flow and I'll start with just free cash flow first so.
We did take the adjusted free cash flow for currency free cash flow, we did not just highlighting put in the prepared remarks, but when we put out the initial restructuring estimate for the year.
That was based on an estimate.
Current estimates actually have that about 5 million higher so that actually offsets.
Favorable currency impact on free cash flow.
For.
Adjusted free cash flow, we did raise that by 5 million, which again is largely the.
The FX impact.
And what I would say here is it's just early in the year and we're just being.
Of course will revisit this as we.
Continue to move through the year.
But.
Yes.
Great. Thank you.
Thank you.
We have for questions. Please remain on the line picking boxes closing remarks.
Hi, Thanks, Sheila and thanks, everybody for joining us today on the call Rpcs, he's going to be participating in three conferences in March starting with Morgan Stanley 's Global TMT Conference in San Francisco, followed by their Merck's design conference in RBC is one on one conference.
Both in New York, and Additionally, we're going to be sending a save the date for our 2020 Liveworx event, which will be here in Boston of course from June 8th see 11, So watch that in your in box.
And so we look forward to seeing on the conference circuit in coming months and if not we'll be for an update you on our Q2 call in April again. Thank you for your interest in PTC and have a great evening, everyone. Thanks, everybody Thanksgiving.
That concludes today's conference. Thank you for participating you may disconnect at this time.