PTC Inc. (PTC) Q1 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the PTC's First Quarter Fiscal Year 2015 Results Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce James Hillier, PTC's Vice President of Investor Relations. Please go ahead.

Thank you, Angela. Good morning, everyone, and thank you for joining us on today's first quarter fiscal 2015 earnings call. As a reminder, today's call and Q&A session may include forward-looking statements regarding PTC's products, our anticipated future operations or financial performance. Any such statements will be based on the current assumption of PTC's management and are subject to risks and uncertainties that could cause actual events and results to differ materially. Information concerning these risks and uncertainties is contained in PTC's most recent Form 10-K on file with the SEC. Unless otherwise indicated, all financial measures in today's call are non-GAAP financial measures. A reconciliation between the non-GAAP measures and the comparable GAAP measures is located in the Q1 2015 press release and prepared remarks documents on the Investor Relations page of our website at www.ptc.com. With us on the call this morning is Jim Heppelmann, PTC's President and CTO -- CEO; Jeff Glidden, our CFO; and Barry Cohen, our EVP of Strategy. With that, I'll turn the call over to Jim.

Great. Thank you, James Hillier. Good morning to all of you, and thank you for joining us here this morning. The Q1 results that we announced yesterday evening represent solid execution, as revenue was above the high end of our guidance range and EPS landed in the upper part of our guidance range. But the results were actually better than the headlines would suggest. As reported, our overall results look relatively flat year-over-year. But as you know, there have been several important changes within our business and in the external environment around us that make direct year-over-year comparisons challenging. For starters, one needs to take into consideration how we're transitioning our business model and that the strong mix of subscription bookings that we reported last night strengthens the future but yields much lower reported revenue and EPS in current periods than we would get with perpetual transactions. Similarly, we have a strong foreign exchange headwind versus last year. On the plus side, we had a one-time tax benefit from the reinstated R&D tax credit for 2014. So to really understand how PTC's business is performing on an apples-to-apples basis, you have to account for it and, to a certain degree, look through these factors. If you normalize for foreign exchange rates, for subscription mix and for the one-time R&D tax credit benefit, then our first quarter 2015 results show a 12% year-over-year increase in license and subscription solutions revenue, driving an 8% year-over-year increase in total revenue and a more than 20% year-over-year increase in earnings per share. That view, which best represents how the business is performing in the marketplace, is fairly consistent with the type of results you've been seeing from PTC for some time now. Q1 was a solid performance in a macroeconomic environment that external indicators suggest remains soft on a global basis. I believe that the effect of foreign exchange is well understood, but I'd like to again review with you the effects of subscription mix because this is a significant new phenomenon affecting our reported results. In fiscal 2013, about 1% of our license bookings came in the form of subscriptions, with 99% being perpetual contracts. In fiscal 2014, about 8% of our bookings were subscription-based. For fiscal 2015, having now implemented a new program to more fully embrace this business model, we guided to a mix of 15% of our bookings being subscription-based. In the first quarter of 2015, about 19% of our actual new software in subscription bookings came in the form of ratably recognized subscription business. Keep in mind that when a booking comes in as a perpetual license, we recognize 100% of that booking upfront in the same quarter. But if that booking comes in a subscription, then we recognize almost none of it in the current period, though it certainly helps the future revenue and profit grow, and we will likely recognize a higher net present value over the future periods. So the higher the subscription mix, the lower the revenue and EPS we would report in that quarter. Relative to the 15% mix we guided to, the effect of the higher 19% mix of subscription bookings cost us about $3 million of license and subscription solutions revenue and about $0.02 of earnings per share in the quarter. Relative to the actual subscription mix of Q1 of last year, this 19% subscription mix cost us about $7 million of revenue and about $0.05 of earnings per share versus last year. Based on the higher-than-anticipated subscription mix we saw in Q1, we clearly experienced a good start to our new business model, and we were pleased to see customers accepting this business model, not only in a new IoT business but also asking for it in our core business of CAD, PLM, ALM, and SLM. Given that it's early on this journey, we think it will be hard to predict the exact mix of subscription that we'll see throughout Q2 and the balance of the year. So rather than trying to predict accurately, we plan to tell you our guidance assumptions and then provide the appropriate level of transparency as to the calculated impact of the actual mix on our reported results. In terms of geography performance, when we adjust for currency and subscription mix, we were pleased with Europe, Japan, and Asia Pac results but a bit disappointed by our North American results. Our North American results had a strong year-ago comparable and were affected somewhat by deal timing, as we delivered a strong Q4 in North America and have a strong pipeline for the balance of the year. When we look across our segments, while our Extended PLM business was relatively flat overall, we had a strong quarter in the core PLM business, including landing a substantial new account win at a major Japanese automotive company. You may have also noted that we announced the availability of a full PLM SaaS solution today -- or last night, which introduces new pricing and packaging for the SMB space that's designed to lubricate the ability of our resellers to take SaaS PLM downmarket. Our CAD results were soft versus a year ago compare but look better when factoring in FX and business model shifts. While our SLM results were soft in a way that was consistent with the last few quarters, we expect a pick up in the balance of the year, particularly the back half, because our new selling organization that was commissioned in early 2014 has had very good success building a strong pipeline. And as that pipeline is now maturing, we'll be in a better position to close it over the next few quarters and develop more pipeline as these sales cycles finally run their roughly 6-quarter sales cycle course. Our Internet of Things or IoT business had a very strong quarter, and while that business is not yet large overall, the bulk of our IoT business is license and subscription solutions revenue, and because of this, our IoT business is already beginning to represent a material part of our total license and subscription solutions revenue. But in the near term, market share in IoT is even more important than revenue. And our primary goal is to gain market share by winning IoT platform selection processes across a high percentage of companies that are beginning their IoT journey. We expect that any company that starts their IoT journey on our technology is likely to end up with their full strategy deployed in our technology. From the experience base we've accumulated thus far, this typically means a small initial subscription booking on the order of 30k or so in annual contract value as the customer sets out to validate both their technical and business strategy. Our experience with ThingWorx and Axeda then suggests that over the following 6 months, give or take a quarter, customers complete these test projects and gain confidence in the technology and in the value proposition, and then they circle back and typically would invest another 100k or so to scale the number of connected assets. We would then expect to receive several more expansion orders on a periodic basis over the course of the next 2 years as the company deploys this technology across their broader product portfolio. We expect medium-sized customers to reach a typical run rate of $0.5 million or more in annual contract value, with larger customers pushing into the $1 million-and-above annual range. We have seen this pattern repeat itself with both Axeda and ThingWorx, and I will note that we did process one large $1 million-plus deal in Q1 that stemmed from an earlier Axeda win that had now reached scale. You can see that winning new IoT logos now means that we're planting the seeds for an exciting growth business in future years. We shared with you in November our goal to land 200 new IoT accounts in fiscal 2015. We feel that, that would be a major market share grab. As you might guess, with many of our IoT sales resources having just been deployed on or after October 1, our quarterly goals naturally ramped throughout the year as we've had more time to execute sales cycles start to finish. But already in Q1, we landed 42 new IoT accounts, which surpassed our Q1 target. About 60 of those -- 60% of those accounts came from our new dedicated IoT sales force, with nearly a dozen coming from IoT partners and the balance coming from the strategic sales force calling on the existing customer base. We feel that this new logo metric is one of the most important metrics because, as these accounts grow and develop, they represent a significant revenue opportunity for PTC that will materialize over the next year or 2. What's perhaps even more exciting is the level of interest and activity that we're seeing in this business. Our influx of IoT leads, is at least an order of magnitude higher than we've traditionally seen in our other enterprise businesses. A number of those leads ultimately graduate into sales opportunities, and roughly speaking, we're currently tracking around 1,000 opportunities globally that could be worth $100 million in revenue. This is an early market, and there are lot of tire kickers, so I don't expect high close rates against that pipeline, but I believe we have the means and are on track to achieve the 200 new logos that we're targeting this year. That represents 100% growth in accounts above and beyond what we acquired from Axeda and ThingWorx. If that happens, then I think we'll be off to the races with our IoT business. We're also getting an increasing amount of recognition in the IoT space. Last quarter's HBR article has become somewhat of an IoT blueprint for many companies and has already led to prominent placements at IoT events in Beijing, Munich, Davos, an Investor Conference in New York City and, next week, with the Brookings Institute in D.C. We've had a lot of great coverage from major publications, including a nice piece in Forbes that claimed that PTC was the Internet of Things's best kept secret. Of course, we don't want that to be a secret, but the best way to end a secret is to shine a light on it, as Forbes did. At the Consumer Electronics Show in early January, despite PTC's primary focus on the B2B space, we won 3 prestigious awards for Best Enabling Technology, Best Application Platform and Best Enabling Company. Then last week, we were the big winner at the IoT awards sponsored by Postscapes, where we took home 6 of the top awards, including Best Platform; Best Partner and Ecosystem Builder; Best Acquisition; Must-Follow IoT company; IoT CEO of the year, which was my favorite; and finally, runner-up for IoT Event of the year for our LiveWorx event. Incidentally, you're all invited to join us for that event, which will be held in Boston from May 4 to 7. Details about the LiveWorx event are available on our website, and you can find information about these 9 recent IoT awards across 2 different press releases that we've put out in last 2 weeks. All of the awards, leads, opportunities and new logos seem to confirm what one investor suggested to me recently, which is that PTC is beginning to gain recognition as the largest IoT pure-play. Certainly, we've always been a things company as we were helping customers to create things. But now we can help companies to engineer and manufacture things, connect them to the Internet, monitor and operate them remotely and keep them up and running and efficiently serviced. That puts PTC at ground zero of what the Internet of Things is all about. Looking forward now to the balance of FY '15, we have a lot of momentum in the business and, on balance, feel good about the progress we're making on many fronts. We're creating value by embracing subscription and transitioning the way we do business. And we're creating additional value by transitioning the very nature of our business as we move aggressively into an IoT-leadership position. We expect, however, that we'll continue to encount major headwinds in our reported results due to a combination of currency exchange rates and our evolving business model. We've adjusted our guidance for Q2 in FY '15, based primarily on the currency exchange rate. I expect, however, that if you look through these factors, you'll agree with us that we're on track to have a strong year. I'm happy to welcome our new CFO, Andrew Miller, to PTC. Andrew will be starting the week after next and brings some great growth experience to our company. Andrew is coming to us from Cepheid, a medical device company, but has good insight into our industry [indiscernible] at Autodesk and Cadence and the software industry. Andrew has a great track record driving growth and expanding profitability as well as successful experiencing -- experience helping drive the transition to a subscription-oriented business model, such as we are doing. Most importantly, Andrew has a strong track record helping companies similar to PTC to drive substantial shareholder value. I couldn't be more pleased with Andrew's decision to join PTC, and I look forward to introducing him at the next earnings call. Which brings us to Jeff Glidden. Jeff will be around in the background for a while yet while we're working our way through the transition, but this might be the last time many of you hear Jeff representing PTC on an earnings call. So once again, I want to publicly thank Jeff for his significant contribution to PTC. Since the day Jeff joined us in 2010, our operating margins have expanded by 10 percentage points, our revenue has increased by 35%, and our market cap has increased by 75% at today's prices. Those are great metrics, and I want to acknowledge and thank Jeff because his financial leadership contributed greatly to this level of success. Finally, I'd like to welcome Charlie Ungashick, our new Chief Marketing Officer. Like Andrew Miller, Charlie brings important experience to PTC that will help us to drive growth with a fresh new go-to-market approach that includes a bigger role for marketing and inside sales, particularly in our IoT business. This is the perfect combination to help us capture the substantial new opportunities that we're presented with. With that, I'm going to turn it over to our CFO of record as of today, Jeff Glidden.

Thank you, Jim. We've had a very busy and productive quarter and are pleased with our results. As Jim just discussed much of our performance for the first quarter, I will make a few additional comments and then provide a summary of our guidance for FY '15 and Q2. An additional highlight for the quarter was the performance of our support business, which increased 7% to $182 million and was up 11% on a constant-currency basis. Renewal rates remained strong, and we now have more than $2 million active seats under support. You will also note that our deferred revenue balance in the first quarter increased sequentially by $15 million to $398 million. This increase is attributable to continued strong support in our traditional support business, which also benefited by the additional billing days in the first quarter, which ended on January 3, coupled with growth in our new subscription solutions. For Q1 FY '15, our ratable revenue streams, subscription solutions and support revenues represented approximately 60% of total revenue as compared to 53% in Q1 of FY '14. Clearly, the growth in our referring subscription and support revenue streams represent very positive trends in our business and will drive cash and cash flow in subsequent quarters. We continue to make investments to grow our business. And while our current quarter expenses increased year-over-year, they were down sequentially from Q4, as we continued to integrate acquisitions and rationalize our expense base. During Q4 -- Q1, we had some unfavorable mix that cost us about 100 basis points on margin; we had some one-time expenses that generally occur in Q1, like our sales kick-off meetings; and we were also looking for the full impact of our restructuring that was initiated in Q4 to be completed in Q2. So as we look ahead to Q2, we would expect our expense base to be flat to slightly down from the Q1 expense levels. In our prior outlook for fiscal '15, we had estimated our full year tax rate to be approximately 18%. We now expect the full year tax rate to be 15%. This favorable tax outlook is based upon our estimated mix of business and profit by region, coupled with the reenactment of the U.S. R&D tax credit retroactively for calendar '14. This tax credit was recorded as a discrete item in our first fiscal quarter of '15 and contributed to our favorable non-GAAP tax rate of 11.4%. Turning now to our guidance for FY '15. We continue to be impacted by a strengthening U.S. dollar. Our current guidance assumes the U.S. dollar-to-euro rate of 1.14 and the yen-to-U.S. dollar rate of 118. When compared to our previous currency guidance, these current rates have the effect of reducing our FY '15 outlook by an additional $35 million and reducing our EPS by $0.10. When compared to FY '14 FX rates, the full year unfavorable swing in currency reduces our FY '15 revenue by approximately $85 million and our EPS by $0.25. Today, we are updating our full year guidance to be $1 billion -- on revenue to be $1,320,000,000 to $1,350,000,000 and our EPS guidance to be $2.20 to $2.35. On a constant-currency basis, this guidance would represent revenue growth of approximately 5% year-over-year and EPS growth of 15%. For Q2 FY '15, we expect revenue to be $305 million to $320 million and EPS to be in the range of $0.42 to $0.50. We have also indicated that we expect approximately 15% of our new bookings to come into subscriptions. It is important to note that, if a greater percentage of our new business is booked to subscription during the quarter, the majority of the related new billings would be deferred. This would reduce revenue recognized in the current period, and most of these billings would be included in deferred revenues at the end of the quarter. And as a final comment on our Q2 guidance, the current unfavorable FX rates have the effect of reducing our current revenue outlook, provided above, by approximately $10 million and our EPS by $0.03 when compared to the previous currency assumptions. Despite currency headwinds and macroeconomic uncertainty, we continue to deliver increasing value to a large and expanding customer base. And as Jim said, Andy Miller will be joining us in February. I look forward to a smooth transition of my responsibilities to our new CFO during the quarter. I have very much enjoyed working with Jim Heppelmann and the PTC team. And to all of you on the call with us today, I thank you for your support, your coaching and, at times, your challenging inputs and ideas. Together, we have built a better business. With that, I will now turn the call over to James Hillier.

Thank you, Jeff. Angela, can you please give the instructions to begin the Q&A process?

[Operator Instructions] Our first question comes from Saket Kalia with Barclays Capital.

First on margins, Jeff. I think you came in at about 21%, which is lower than what you'd guided despite what looked like a much healthier top line, and I think you said an unfavorable mix cost about 100 basis points. I'm sure FX also had something to do with it. So can you just maybe help us bridge the 21% that you reported to the 22% to 23% that you guided to?

Yes. Thank you, Saket, and thanks for the questions. Unfavorable mix, as I said earlier, was approximately 100 basis points or 1 percentage point. I would say the one-time expenses that are incurred in Q1, we had some additional expenses in the quarter above our original guidance. That cost us about 1 percentage point. And again, the full year impact of the restructuring that we took in Q4, a good portion of that was realized in Q1, with the full impact being realized in Q2. So I think that generally bridges that. I think if you look at our full year guidance, Saket, we're still really targeting, on a constant-currency basis, 26% operating margins. And if you look at the currency effect on the full year, it's about 1.5 percentage points from currency.

Got it. And then that's a great bridge into my second question, which is sort of that path to that 28% to 30% target in fiscal '17. With this year's target going down to 24%, how should we think about the expansion through 2017? Do you think it's going to be gradual, like maybe what we were expecting? Or do you think this is going to be a little bit more weighted closer to 2017?

Okay. So let me comment first on the guidance for this year or the outlook. Let's call it, today, we're guiding about 24.5%. Again, on a constant-currency basis, that would be 26%. So if we normalize for currency, because I can't predict what it will be in 2015, '16, '17 or '18, I think if you look at our bridge in terms of our goals and objectives, we're looking for about half of the expansion, let's call it 4 percentage points, about half of that to be in gross margin and about half of that to be leverage in operating expenses. And that story continues to be absolutely true, and we're committed to delivering that. I think you understand well the mix on -- of support business. We're continuing to build that partner ecosystem, drive the profitability of support, and I think we're very confident that, in a constant-currency basis, we can deliver comfortably 200-plus points on expansion on gross margin. And the rest is really leverage and operating margin, which is a combination of -- by the way, we're making additional investments both in sales and in R&D this year that will give us benefits next year. And as the productivity of the sales teams continue to increase and the new products flow through in R&D, we'd expect to see that leverage generally of another 200 basis points pickup in operating expense. And I think the timing, if it's on a constant-currency basis, I think it occurs -- as we've done each year, we're targeting essentially, I'll call it, 100 basis points to 150 basis points a year, and we'd be achieving that were it not for currency this year.

Yes, and maybe I can preempt a series of questions sort of related to "What are you going to do about currency?" because I think that's the big new variable since the last time we talked to you. None of us, 90 days ago, thought we'd be looking at the situation exactly as we are today. So I do think, from a PTC perspective, we need to process this and say, "Is, in fact, this the new normal?" or maybe, "What is the new normal? And how will we adjust to it?" And I think, if you look at our business in Europe, we probably have to make some adjustments if we accept a new normal in this range. One thing we might do is look to raise prices because our software is underpriced at today's exchange rates. Maybe we'd raise prices in maintenance or in software prices. I'm not sure what, but I think we have to look at that. And the second thing I think we'd have to do is look at our cost structure and say, maybe, given that is a new normal, we need to look at the dollars we're investing in different parts of the business and trim that back a little bit. So I think a lot of this has happened very recently, and we haven't determined what is the new normal. And to be frank, we haven't determined exactly how we'll react to it. But I think if we accept that this is a new normal, then we will, in fact, react to it in ways generally aligned with what I just described.

Next question comes from Matt Hedberg with RBC Capital Markets.

It seems like the transition to subscription is happening faster than you expected here. And I guess I'm wondering, outside of IoT, where are some of the biggest areas of interest in subscription sales, maybe from legacy products? And maybe as a follow-up, how lumpy should we expect the bookings on subscription to be, given you just did 19% and you expect it to be 15% for the year?

Yes. Matt, I want to take a first shot at that, if I could. If you remember, I said, 2 years ago, we had 1% subscription; 1 year ago, we had 8%; and this year, we're guiding to 15%. Well, 1 year ago, we didn't really have IoT, and it had already gone from 1% to 8% in our core business. So I think, really, there's 2 reasons why it became prudent for PTC to implement a subscription model: one is we have this new IoT business that is subscription, and we don't want to take it back to perpetual, but we need a way to provide appropriate reporting and transparency; and then the second reason is that our core business actually is moving towards subscription anyway, and I'm not sure we could or should try to prevent that. So I think in the quarter, really, the 19% was a combination of most of the IoT business coming in subscription and then a good chunk of the subscription revenue coming from the core business. There were a number of, let's say, good-sized deals, maybe even 1 large deal. We didn't have any mega deals, as you know, but a number of deals where the customer said, "Given the choice, I'm going to take subscription because I've been asking for that for years, and now that you finally offer it as an alternative, let's do it that way." So I think that we're going to see the core business also adopt subscription. I think we have been seeing the core business adopt subscription. Because the core business is lumpy, as a big transaction goes subscription versus perpetual, it will introduce that lumpiness into our bookings until such time as the IoT business gets bigger and bigger and -- anyway, that's my 2 cents on it. Jeff, I don't know if there's anything quantitive you want to add to that.

I think that's very consistent. And again, as the -- if it -- the mix shifts, we'll be very transparent about highlighting what that impact was, Matt.

Got it. Okay. And then you made comment on the SLM business, which was down in the quarter. It sounds like you're expecting the sales force maturation there to help that business. But I'm curious, was there -- is there a bit of macro as well going on there? Or is it -- it should just be sales productivity that turns that business around?

Yes. I think it's really sales productivity because, in fact, we have quite a strong pipeline now, and the growth rate of the pipeline has been increasing -- not increasing, but has -- the growth rate has been strong, and therefore, the pipeline has been increasing quarter-on-quarter now for a number of quarters in a row. So we're getting to the point where we need to go close that pipeline, and if we do, then the business would respond and the productivity metrics would respond and so forth. So I feel like, if you look at what's happening with the pipeline, it's a pretty good story. If you look at the results of last quarter and then you compare that to the quarter before and the quarter before, it's -- it didn't really change yet, last quarter, but I'm confident that we're going to see a tick-up as revenue follows a maturing pipeline in the back half of the year.

Got it. And then -- and maybe if I could just squeeze in one last one. It sounds like you plan to invest in sort of strategic customer-service projects. It sounds like that could put some pressure on margins -- service margins here. I'm wondering if you can give us a sense -- a bit more color on what some of these investments are and the benefits you'd expect there.

Yes, I mean -- let's be clear, we're not investing in services, per se. Sometimes, for example, when we take new technology to a strategic customer, we invest a little bit to make sure that our technology works as we expect that it should in that kind of an environment. We actually did talk about this last quarter. So this is not a new phenomenon. It's another quarter of a phenomenon that we first talked about last quarter. We're not investing in services. We're not investing in our services business unit, per se. We're investing in the customer, sometimes with services, sometimes actually with R&D work that gets accounted for as services. So I think you need to look at it that way, that we're investing in strategic projects that will become proof points that we'll use for the rest of the market, but that investment gets accounted for by the accounting department as services expense versus, say, R&D expense, and then it ends up showing up this way in the P&L, and then we end up having this conversation.

Next question comes from Matt Williams with Evercore Partners.

Just maybe 2 quick ones for me. On the product standpoint, you've got the launch of the PLM cloud. Two questions on that. #1, sort of how are you working with the channel to sort of make sure that, that offering sort of gets in front of the SMB customers that maybe traditionally haven't been a key focus of yours? Just a little bit more color on sort of how you're dealing with the channel there. And then sort of beyond that, now that PLM cloud is out there, are there any other offerings or products that seem to be a good fit for this type of offering?

Yes, Matt, and those are good questions I'd like to spend a minute on. So let me be clear what we had before and then what we've introduced now. So for some -- I don't know, probably more than a year now since we acquired this hosting company...

NetIDEAS.

Yes, NetIDEAS. It's PTC now. We've offered cloud services. So we go to a customer, and we say, "You can buy the software. You can buy it subscription or perpetual, and then you can either take an on-premise delivery and we'll ship it to you or you can place a second order for cloud services and we'll host it for you." And for the larger accounts, that's the right way to do it. For the channel accounts, we run into a couple of problems. That's a complex conversation. They typically want different packaging and pricing than the large accounts would work. We, on our side, if we're going to do small accounts, we need a multi-tenant type of approach and so forth. So what we're really saying here, this is a [indiscernible] on a multi-tenant architecture that we can offer in a simpler form at more attractive price points but still have the operational efficiencies to run a good profitable business for us and for our reseller partners. So I think it's kind of a win, win, win, a better configuration for the customer, a better configuration for the reseller partner and a better configuration for PTC to be profitable with in that space. So it's really pricing, packaging, some technology and then a new go-to-market approach that the resellers are quite happy about.

Great. That's helpful. And then maybe just a quick follow-up on the SLM side of the business. Obviously, it's been a little bit, I guess, sort of choppier than maybe you or us were expecting. But given the sort of natural linkage between SLM and IoT, are you getting any sense from your customers that they're maybe sort of pushing or postponing some SLM decisions until the IoT offerings in the SLM portfolio are a little bit more, I guess, better linked up and sort of beyond that? Could you give us an update on how you're processing or how far along you are on the IoT integration with some of the other offerings?

Yes. So first of all, you're right to say that many SLM conversations turn into IoT conversations because that story is very, very compelling. In fact, I've said many times here that SLM is the killer app for IoT, and I have generally brought agreement from people on that point. So I do think there is a bit of a distraction factor, that a company that we were working an SLM campaign with actually says, "Well, that's very compelling. Tell me more about IoT." And now we're a bit off on an IoT discussion that will loop back to the SLM discussion we were having. The integration is not yet in the market. We're going to make some announcements on that in the next quarter or maybe 2. But I think that it's a good thing that SLM and IoT get mixed together, but yes, it is probably a factor that distracts some SLM prospects into becoming IoT prospects first and so forth. But like I said, I don't think that's ultimately bad in the long run. It's probably not helpful in the short term.

Next question comes from Jay Vleeschhouwer with Griffin Securities.

Jeff, for you first on guidance for the year. If we take the midpoints of the second quarter and fiscal revenue forecast, it looks like you're anticipating that the second half revenues would be about $60 million above the first half revenues, again, at the midpoints. That compares with the first half to second half of '13 difference of up $26 million. And then last year, first half to second half was up $50 million. So particularly with the currency headwinds and the revenue shifting from the model, could you talk about the components of why the first half, second half increment would be more than the last couple of years?

So I'm actually going to take it. Jay, so I mean, I think when we put those kind of guidance and forecasts out there, we're looking at a number of data points, but the most important 2 is what is our pipeline telling us and what are our sales executives telling us. And I think both our pipeline and our sales executives are telling us that this year will be a little bit more back-end loaded than last year. And you're right that last year was substantially more back-end loaded than the year that proceeded it. So I mean, we're operating with that data. You know that we adjust our forecasts for currency all the time. So even when we look at our forecast adjustment for currency, that's what we see. So I think we're guiding according to the data we have in front of us, having already adjusted it for currency.

Okay. Longer-term question has to do with the correlation of the capital-allocation strategy that you announced last summer and the business model change -- or that is to say the manageability of the business model change. And what I mean is your capital allocation strategy implies a certain amount of cash flow over the next number of years to sustain the share repurchases that you've committed to making, and that, in turn, in order to get to that kind of cash flow, would seem to require a certain amount of substantial growth of deferred, which ties back to the model change. But could you talk about the manageability of that model percentage, in other words, the faster you go to subscriptions, of course, the more hits you take upfront -- to upfront revenues and near-term earnings. So is this, in fact, a manageable shift in terms of how you're thinking about near-term profitability versus longer-term cash flow needs?

Yes. So Jay, this is Jeff. The model that we set out was a multiyear 40% return of -- really from free cash flow to repurchase shares. So that model, I think, is intact. We've done very well. We did complete the ASI that we'd targeted or announced in August. That was completed in Q1. So I think we're -- and we'll continue to buy additional shares this year. So I think we're on track. And again, that will move, to some extent, based on the 40% of free cash flow. So I think that's -- model is intact and we'll continue to execute against that. I think when you look at the timing of cash flows, you see the billed and deferred, which represents cash flow, not in the current quarter but in the next quarter and the subsequent quarters. So I think while there may be a slight deferral of cash flow from the business model shift, in the near term, that generates incremental and more cash longer term over the life of that subscription program. So I think, just consider it as we're committed to it. It's intact. We've delivered against it so far. We're now -- you've seen the benefit. We ended this quarter at 117 million shares, down from 121 million. I think our outlook for the full year is to get to 116 million, as we have already taken a big bite out of it this year, and we'll continue that process. I think our target and expectation at the 40% was to take that down to about 112 million shares over the next several years.

All right. Lastly, if I could just squeeze in [ph] a few questions for Jim. You gave us what is essentially a rough equivalent between logos and revenue in terms of adding logos and, therefore, a certain amount of revenue [ph]. Is there a way to think about that in terms of volume or mix as well? In other words, for every million or bazillion IoT devices, is there some way to work that back into revenues? Or is it really just a logo-driven metric?

Well, it is relatively straightforward, and I did try to lay out, Jay, a bridge from logos to revenue, a loose bridge. It's get a little bit harder on assets because, in fact, revenue does scale with assets. But toothbrushes and jet engines are different things, and the revenue per asset is quite differently. So without getting into a mix of how many high-end assets, mid-range assets, low-end assets would you be talking about, it's hard to back-solve to a number of connected assets. But clearly, it is all based on the growth of connected assets. I think, though, if I reflect, maybe just to add some color, if I reflect on the 42 logos that we did land in the quarter, well more than half of them were substantial large companies making substantial large B2B-type assets. And then secondarily, a large majority of them were not existing large PTC accounts. They either weren't PTC accounts at all or they were PTC accounts to the extent that we have a minority position in them or an insignificant position. So I think that what's interesting is this story is appealing to the base and appealing very well outside the base. So that helps us to definitely expand our addressable market, and I think it's expanding, on one hand, to startup companies who are trying to do smart cattle management, but on the other hand, large industrial companies who are making assets that last for 20 or 30 years and would like to get a lot smarter in how those assets are operated and serviced and get more utilization and optimization out of them and so forth.

Next question comes from Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: So I actually wanted to circle back to Jay's question on kind of the first half, second half. I know this isn't the bulk of it, but isn't a contributing factor you're shifting more of your bookings to subscription? You don't get any benefit in the current quarter, but that starts to layer in, in the following quarter. So this quarter's bookings and subscriptions start to benefit June revenue. As the ball starts to get rolling, that's going to contribute to that SKU as well.

Yes. I don't know if you can quantify that, Jeff, but I would agree with that.

Yes, it certainly is a substantial factor. I mean, if you look at the seasonality, and we always do look at this, we have a back-ended, typically, back half of the year, but I think the points you're making are, while we're deferring some revenue out of the Q1 and Q2 right now, that starts to build in Q3 and Q4. And I think, historically, we've kind of been first half, second half in generally 45%, 55%. In some cases, it's been 42%, 58% of the year, and I think what you're describing is essentially the way it will build both in terms of, I think, the pipeline build but also the revenue recognition of deferrals, now recognizing and building revenue into the back half of the year from that. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. And then on the subscription side, can you give us a sense of what is the average term length that customers are choosing in that 19% of bookings?

I don't have that in front of me. We have focused ourselves on annualized contract value, which makes the term length a little unimportant to us. I think we're not doing many deals under a year. Maybe some IoT pilot projects would fit that. I know that we're doing a number of 1- and multi-year contracts. So I'm quite sure that the...

Yes, I don't have an average, but I think it does range from pilots, but the majority would be 1 and 2 years. There were some that are longer than that.

Yes. Certainly, on a weighted basis, the contract length would be well more than a year. But because we've focused on this annualized contract value, to be frank, we haven't focused that much on the average time duration of the total contract value. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Understood. And you talked about the lumpiness in terms of the bookings and subscription, but could you maybe characterize, when you look across the pipeline, what percentage of the pipeline is considering it? So in other words, there's going to be some that might choose to go that way, might choose not to. But just to give us a sense, what would you say the percentage of the pipeline that are at least thinking about it?

Yes. I mean, I think right now, we feel that the 15% we've guided to, 15% of bookings, is right, looking at the pipeline. But what can happen is a customer who's [indiscernible] perpetual deal, late in the game, could say, "Hey, maybe I should take this as subscription." That's a bit hard to predict, and we wouldn't stop it from happening either. So that's why it's hard to predict. But I think we looked at the 19% in Q1 and said, "Should we adjust our guidance range for the rest of the year, maybe up to 20%?" We looked at the pipeline and the forecast and said, "No, I think 15% is the right number for Q2, 3 and 4, so far as we currently understand. But of course, the fact that Q1 came in at 19% will, in fact, average up the course of the year if the rest of the quarters come in at 15%." So we're pretty early into this. It takes, actually, 2 data points to make for a trend, and we still only have 1. So bear with us. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Yes, no, understood. Last question there is the question about kind of the seasonality in terms of the margins. I think, Jeff, you mentioned Q2 would actually be down in terms of expense dollars. But as we look at the -- in the context of the full year guidance, could actual total expense dollars decline further as we go through the year as we think about the roll-off of FICA, et cetera? Or what should we think about the seasonality there?

So we're really reassessing that right now in this -- in the context of where we see the forecast and the currencies. But I would say, right now, I'd expect expenses to be flat to slightly down in Q2 and then largely to be similar going forward for Q3 and Q4, with some caveats that we might further reduce that as we look at the outlooks in Q3 and Q4. But...

Yes. And of course, there's some things like commissions that naturally scale the...

Right. Yes, commissions would go up, so the underlying expense levels -- as I said, we complete the implementation of the restructuring from Q4 that has heavily impacted positively in Q1, and then it's completed in Q2 as well.

I think it's safe to say that, barring an acquisition, headcount is more likely to be flat to down than it is to be up.

Yes. Yes.

Last question comes from Steve Koenig with Wedbush Securities.

I've got a number of questions on the metrics I'll save for a callback, so maybe 2 questions here. One is on the IoT business. So when you bought them, they were engaged in a lot of different kinds of opportunities. And clearly, your strategic focus is field-service related. Can you talk a little bit about -- I know it's very early days, but what portion of the new deals you're bringing in are field-service related? And how do you expect this to trend?

Yes, Steve, maybe I'll take that one. I think let's talk for a minute about our coverage model. We have 370 sellers, roughly. I think it was 366...

366.

366, okay. Let's call it 370. About 70 of those sell only IoT stuff, and the other 300, for the most part, also sell IoT stuff, but also as -- in addition to everything else they're selling. So I don't want to say it's field-service based. I'd really say it's more about connected products, where the use cases would be feedback loops to engineering, feedback loops to the remote operation and optimization of the product and feedback loops to service, specifically the field service piece. So -- but let's call that smart-connected product. So the 300 people are mostly selling to manufacturing companies who make things and want to connect those things to inform the making, the operating and the servicing of those things. The other 70 people can go wherever they want. They can go to companies who make things, a manufacturing company. They could go to companies who operate things, an energy company, a utility company, an airline that doesn't make anything, but they sure operate a lot of things and maybe service them as well. And they could go call on companies doing smart cities, smart farms, smart all kinds of stuff. So the 70 people have a broad sweep, and the 300 people really are in manufacturing. So clearly, we're weighted toward companies that make things, but not totally because the 70 people only sell IoT, and therefore they're much more focused on it. So I think, right now, we have a broad spread across the companies who make things, the companies who operate things and the companies who are building smart systems. I think that, clearly, PTC has the ability, with our footprint in the marketplace, our reputation and our complementary product suites, to do very well with companies that make and service B2B-type products that have long life cycles and so forth. So I'm sure we'll do well there, but in the meantime, we have a platform that scales well beyond that, and the 70 people are out there trying to make that platform the leading platform. And like I said, we're winning a lot of awards for it. So it's getting some recognition as -- if you're building turbines, that's the platform, but if you're trying to build smart cities or smart farms, that maybe is the platform too. So anyway, we're making good progress, and we're a little reluctant to narrow any earlier than we need to because the broader this play is, the more interesting it gets as it starts to work.

Yes. That makes sense. And if I could ask one follow-up, I just want to take a different angle on the fiscal '15 guide, which is intact constant currency despite more -- some weakening in macro data points and durable goods and PMIs, et cetera. The question is, does this introduce more risk? And if not, how should we think about -- what are the offsets incrementally to the incremental weakness we've been seeing in the macro over the last few months? What are the offsets? What are -- what's causing you to keep that guide intact?

Well, I think, first of all, the momentum in IoT, which I think is largely unaffected by PMI and macro and all the rest of that stuff. When you hutch -- hitch your wagon to a really hot trend, those hot trends continue in good times and in bad. The second thing, the service element of it, I've always felt that our service strategy, SLM, is and should be counter-cyclic or acyclic. So I feel like the pipeline we have in service is really about helping companies save money not making things, and if they're fearful about their ability to sell things, they stop making them and focus on servicing them. So I sort of feel like SLM should be acyclic or counter-cyclic, and I'm quite certain that IoT is acyclic. And to the point that I think Sterling made, if you look at the bookings we processed in Q1 but didn't recognize in Q1, they're going to add a couple of million to each of Q2, 3 and 4. And then if you look at the bookings we're going to process but not recognize in Q2, that's going to add even more to Q3 and Q4. And then the bookings we process in Q3 will add even more in Q4. So by the time you get to Q4, you get the revenue we did perpetually in Q4, plus the roll-forward of all the bookings from Qs 1, 2, 3 and actually prior periods as well. So I think that's a little bit how we can feel confident, even in the macro environment, about where the business is headed.

Thanks, Steve. Thank you, everyone. Jim, would you like to make some closing comments?

Well, just thank you all. Another great set of questions. I appreciate all your insights and confidence you have in our business. Clearly, this foreign exchange thing is a headwind. We wish that situation weren't out there. It is. In the near term, it will slow us down. I do think we're going to sit back and ask ourselves what is the new normal and how do we react to that, and we're going to stay committed. Even if we're slowed down a little bit in the short term, we're going to stay committed to our long-term objectives of growing the revenue and growing the operating margin and, together with that, delivering 15% earnings growth. If you take away the headwinds, we actually surpassed the 15% earnings growth in terms of the core businesses this past quarter. It's just, by the time we get to reporting that, factor in FX, factor in business model, it doesn't look that way. But we're going to keep working hard. We've had this train working well now for about 5 years in a row. We're not going to stop here. We're going to push on and adjust if we have to, to the FX situation and stay committed to our goals around margin and EPS expansion and so forth. So anyway, thank you all. And again, one more time, thanks to Jeff for all he's added here. And I'm looking forward, actually, to introduce Andrew Miller because I think he is equally as strong as Jeff, brings some different experiences as well. I think he's going to be a great fit and you're going to like him, and I know I already do. So thank you all very much, and look forward to talking to you in 90 days, if not sooner.

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