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

Good afternoon. Thank you, Jennie, and welcome to PTC's 2017 fourth quarter conference call. On the call today are Jim Heppelmann, Chief Executive Officer; Andrew Miller, Chief Financial Officer; and Barry Cohen, Chief Strategy Officer. Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today on our Investor Relations website. During this call, PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's most recent annual report on Form 10-K, quarterly report on Form 10-Q and other filings with the U.S. Securities and Exchange Commission as well as in today's press release. The forward-looking statements, including guidance provided during this call, are valid only as of today's date, October 25, 2017, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our Investor website. With that, I'd like to turn the call over to PTC's CEO, Jim Heppelmann.

Thank you, Tim. Good afternoon, everyone, and thank you for joining us. Let me begin with the review of the fourth quarter and provide some perspectives on the significant milestones we achieved in fiscal 2017. Q4 was a strong quarter, capping off a strong year for PTC. In Q4, we continued our momentum by executing well across our key strategic and operational objectives. Bookings of 144 million were 14 million or 11% above the high end of our Q4 guidance. While bookings were relatively flat as reported in comparison to Q4 of last year, they were up 18%, if you exclude the $20 million booking from the mega deal in the year ago quarter. We delivered a subscription mix of 72% for the quarter, which was above our guidance target of 68%. Our subscription program progressed nicely throughout 2017 and as of now we very nearly achieved the original goal of 70% subscription bookings a year early. So our focus has shifted to reaching the new elevated goal of 85% of bookings in subscription. Q4 revenue and EPS were both within our guidance range, despite the higher subscription in the quarter and both would have exceeded the high end of our guidance at the lower subscription mix that we guided to. Momentum around our recurring revenue model progressed further in Q4 with total deferred revenue, both billed and unbilled of 1.1 billion, growing 40% year-over-year. Our annualized recurring revenue or ARR was 905 million, growing 12% year-over-year. With these metrics, we've established a very solid growth platform for the business going forward. To guide my commentary on our Q4 and fiscal 2017 results, I once again frame my discussion around the three key initiatives that were executing to maximize long-term shareholders value which are; number one, to increase our top…

Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non-GAAP results and guidance, also all year-over-year bookings growth comparison exclude the Q4 '16, $20 million SLM air force booking. Q4 bookings of $144 million were more than 14 million above the high end of guidance and grew 18%, driven by broad based strength across CAD, core PLM and IoT. Regionally, Europe delivered especially strong results with bookings growth of 39%. The Americas grew bookings 10% and APAC bookings growth was back in positive territory with Japan showing some encouraging progress growing booking sequentially 80% to approximately 8 million. Our channel grew double digits for the seventh consecutive quarter. For the full year bookings of 419 million increased 10%. I do want to share that fourth quarter bookings included in almost $7 million conversion deal in Europe that closed earlier than expected and is pull in from Q1 of fiscal '18. The conversion start date is January 1, 2018. Even without this deal, Q4 bookings were more than 7 million above the high end of our guidance, showing the broad based strength in our business. However, as you see when I discuss guidance, this early close does impact Q1 and fiscal '18 expected growth rates, but we were glad to take this very attractive conversion deal of the street early. Total deferred revenue billed plus unbilled increased year-over-year by $310 million or 40% to $1.09 billion as of end of Q4 '17. Billed deferred revenue was up 45 million or 11% year-over-year. We believe total deferred revenue billed and unbilled combined is the most relevant metric, as there is a seasonality to the timing of our recurring revenue billings throughout the year and due to the timing of our fiscal quarter ends. Average contract length for Q4 and…

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

So noticed in the guidance for the first quarter that actually it seems like the upfront of perpetual is stronger in terms of the mix in terms of the total dollars than I would have expected, is that just in preparation of the elimination of subscription? And then the follow on, so I can squeeze two into one question. Japan improved to 8 million in bookings, people really wanted to know, how do you think the improvement should kind of scale out from here?

Yes, so the lower subscription mix 68% in the first quarter contemplates frankly within our pipeline now. We still contemplate that perpetual is still available in the Americas and Europe in the first quarter. Then there is a fed function increase in the subscription mix starting in the second quarter and we expect to hit 85% subscription by the fourth quarter. Regarding the Japan, so Japan is far what we've been cautious relative to what we've factored into our guidance for fiscal '18. In fact while we do have the growth factored in there from fiscal '17, if you look at the actual bookings number in our operating plans, it is lower than our bookings in fiscal '14, '15 and '16. So we've been cautious about what we put in Japan as we continue to kind a work to apply in there to bring that back performance back in line.

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

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

Hey guys. So Andy, I think one area that I wanted to touch on is just free cash flow this year. It seems like it was a little lighter than the guidance range you guys had provided. Just wondering what some of the puts and takes there are?

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

Got you. And then I guess on I guess this will be deferred and cash flow little bit. But in terms of having one fewer day in Q1, how should we think about what the impact would be on the balance sheet?

Yes, so, basically we're losing December 31st as compared to last year. And so, we look at that that's, if you look year-over-year that's going to impact the growth of our billed deferred revenue by about 200 basis points. It's roughly $6 million that we -- when we look at what's expected to build on December 31 based upon our recurring revenue billings. The other thing I'll remind you is last year we had reduction bill deferred revenues from Q4 to Q1 because we didn't have the big billing at January 1st and 2nd. But of course this year again, we don't have the big billings at January 1st and 2nd, which of course are even bigger now with subscription. So, we do expect a step down from Q4 to Q1 in billed deferred revenue, however, not as big as step down has occurred last year, given the progress on subscription. Again, we think you should look at total deferred revenue as opposed to billed deferred revenue because that is contractually committed and that removes this volatility as far as what day the quarter ends as well as the timing of when billings actually happen.

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

I want to ask you on -- I want to talk about partnerships and what you're doing. So, there has been news about a large industrial tech company partnering with horizontal tools like Microsoft in that case. I know you're working on partner applications and you talk a little bit about ThingWorx-based applications. Can you give us an update on what you're doing in the partnering front and with these ThingWorx applications anything exciting going on there?

Yes, I mean I think we're working of partnership angle in a couple of different vectors, Steve. One I talked about which is we're signing up partners who are in various forums ultimately resellers or OEMs of ThingWorx. But I come back to the large industrial firms, it's interesting there is been about I don't know six maybe seven analysts reports published that show a cluster of leaders. Typically, PTC, Microsoft, Amazon, sometimes IBM and GE, depends a little if it’s a U.S. or European report. But when we find ourselves in this cluster of leaders, we look at everybody else and we see that they're really offering a horizontal call strategy and we're really offering a vertical application building and running tool. So in fact we think that Microsoft, Amazon to a large degree IBM and of course GE for previous announcements really are complementing of what we're doing. You can build really great ThingWorx apps that run on Amazon or Azure or Predix and maybe at least in theory on IBM's cloud. So, we're investing in those relationships and we think that anybody who signed the partnership with Microsoft remains a good candidate to be a partner of ours. In fact, we would say ThingWorx is the very best way to build an Azure IoT application, especially one in an industrial world where you walk into a factory. That factory is different from every other factor you ever set foot in even in the same enterprise. And now you supposed to build an application quickly, you're going to have to figure out how to connect all these different PLC, and so forth gather data together you're going to want to build applications for the plant manager, for the operator, for the service technician. And to a degree they are unique because this is a special situation, a snowflake, if you will, that is different from every other one. When you run into an environment like that, I mean ThingWorx just sings. So, we feel actually that Microsoft could and I hope will emerge really as one of our most important partners. I tell you I'm personally investing some energy in that because I think that should happen it makes sense. And I think you know, it's not just ThingWorx, it’s the HoloLens and other stuff we're doing there. It's the connection between PLM and IoT and dynamics for ERP and CRM. So, lots of good stuff could happen there, and we're trying to invest some energy to become partners of Microsoft and partners with everybody who is partners with Microsoft.

And Jim since that was part of my original question, I'm going to go, go back to any update on the ThingWorx-based manufacturing up. I know you're working on a portfolio of that. I believe with partners, any progress report there to stay tuned?

I mean we did shift the first three at our LIBOR's Conference or shortly thereafter I guess it was, so that would be may be just prior to this last quarter. They are very, very helpful both for securing business and we had a blockbuster quarter selling ThingWorx into factories. And then of course getting ThingWorx deployed because rather than starting with the great application building tool, but no applications, now we're starting with a great application building tool and a pre-build set of applications, which you might just deploy or may be tweak them a little bit using tool, and you're much closure to value and the value is much more clear and obvious to the buyer. I think those applications are doing well and contributing to really surprisingly good results for PTC in the world of factory automation.

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

First on the product front. Just could you comment on the adoption of ThingWorx 8 thus far, which is launched a few months back? And then similarly, are you expecting that Windchill 12 will ship as expected in December just scheduled given at LiveWorx? And then on the selling front, you highlighted the continued momentum in the channel which is actually quite interesting to see. And in that respect in terms of maintaining that into fiscal '18, could you comment on some of the initiatives you have in terms of your what you call your CPQ initiatives, get active or reassigning midmarket accounts back to the channel, that's sort of thing, if you could you talk about some of those accumulated efforts you have to continue to drive your indirect business?

Yes, I'll take the first part of that first. So, on the product front, off course any new sale we are doing right now is using ThingWorx 8 and that's important because as you know we acquired numerous technologies and ThingWorx 8 is where the all converged into one seamless architecture one seamless experience. So, we would not talk to any new customer nor would any new customer want to hear any story other than the ThingWorx 8 story. Now that's not the same and every past customer has already upgraded. That tends to happen around certain milestones or convenient times and what not, and that depends too on how easy to get to new capabilities. But I think the organization and all the pipeline and so forth has 100% converted over to ThingWorx 8. And I forgot to check on Windchill 12, but so far as I know it's on track for December and come along nicely.

Alright. And then the channel question?

Our channel organization has made great progress over the past few years. We actually have 15% more feed on the street than we did three years ago. And their productivity for each of those feed on the street has gone up. The problem has matured tremendously and has a roadmap of continuing initiatives, so that it's a peer of kind of the best-in-class channels that are out there in our market today. The channel is one in the growing seven quarters double-digits, high double-digits in the fourth quarter of fiscal '17. As far as transferring accounts that was an activity that happened in the past, it’s not really happening more in the future. But the focus right now is frankly just continuing to mature the kind of how we manage the channel, which is doing quite a well right now.

Yes, I mean it's really -- the channel, I don’t think we would say as best-in-class yet, but it seems to be headed there. And it's really different people with professional programs and we're doing the right thing, and those are things are producing results. So the story here is very, very good and I will tell you personally firsthand, our channel partners are very happy right now.

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

So, two, if I can squeeze them in. The first maybe for you, Andy. Can you just talk about the fiscal '18 bookings guide qualitatively? And I guess what I mean by that is, it seems like maintenance is going to decline a pretty healthy amount despite more favorable FX. So can you just talk about the double digit bookings growth next year, maybe talking about it from a maintenance conversion perspective versus let's call it fundamental growth? That's the first question for you Andy. And then the second question for you, Jim is, I just want to re-ask a question which was asked early about partners, but specifically [as you were in] on General Electric, very important partner obviously from an IoT perspective. We all saw the leadership changes there and some of the commentary on GE Digital. The question for you Jim is, can you levels that for us how you expect that GE relationship to evolve, if at all in 2018?

Yes, so let me address your first question. So we guided 13% to 14% recurring revenue growth and note that accelerating with ending ARR growth in the mid-teens, again accelerated. So that certainly looks great. And I'm pretty so you have a detailed model. So you'll see that that actually plays out nicely. Now, what happens as far as the dynamics between moving from support to subscription, when a conversion has already happened in the past, then the run rate of support for that get moved up into the subscription line and out of the support line. So for example the guidance we gave does have the fourth quarter conversions that the support run rate is out of support and into subscription. Now as if I talk be clear without a booking, without out a booking being recorded. So that's why one goes down the other one goes up. But then the subscription also goes up on top of that movement for in the case of the conversion for the incremental ACV that we earn. So that's how that one grows at a faster rate than the support goes down for a conversion. FX is a modest tailwind for us this year, you can probably get some idea of the overall sizing of that given the -- and that's because, [indiscernible] where I think because we've already hedged much of the year when FX rates were not so strong. So when the dollar was actually stronger than it is today, we hedged much of next year. So, sometimes hedging helps you, sometimes it hurts you. We don't know what's going to happen with currencies for the rest of this year, so who knows will wind this, helping us or hurting us. We did highlight that FX impacts our OpEx by about 140 basis points. India and Israel are big drivers for that and there was a much more substantial move of those currencies than the Europe for example. So -- and you can get some idea that it's a modest tailwind for us. When you look at EPS, it's not really a tailwind at all for us for FY'18.

And maybe I can pick up on the GE question. So let me first say, GE is a very important customer and partner. And of course, they're CAD PLM customers, but let's set that aside. On the IoT side, they're very important customer deploying ThingWorx in their factories. And of course, they're important partner reselling some of our technology as part of solutions they deliver. So we're probably reading the same headlines you're reading about how [indiscernible] is going to transform GE in profound ways, but he haven't told us what those ways are yet. And I'm assuming he has told you. So I think we're all setting in the sidelines, maybe we learn more learn in November. But I don't think we have any basis to speculate at this point, it's just steady as you go. We're working hard on the deployments. We're doing what we can to nurture the partnership and we'll wait and see if anything changes based on this new strategy.

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

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

Well, I mean the PMI is strong here and that's been helpful. Probably has shifted over the last year and half two years from being headwind to it at least neutral, if that's not a tailwind. But I actually would attribute it to the strength of our organization there. We have some of our best accounts and we have some of our best field resources in Europe. The guy we got running our greater Europe based out of France is phenomenal. The guy we have running Germany is phenomenal. These guys are building great relationships. They're winning really good deals. We've mentioned Infineon for example that was a substantial deal, coming out of semiconductors space. Infineon of course was spun off Siemens sometime ago and uses lots of Siemens technology. So I'm sure they got to look. But any way we have a really strong organization and really good solutions and I think we're just executing very well in Europe.

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

Andy, maybe just a little bit more on the maintenance conversion. You’ve mentioned two data points in the prepared remarks. One on the average ACV uplift being in the order of 50%, and then another on CAD conversion that I've just thought being in the order of over 30%. Could you just explain what the nuance between those two types of conversions are? And then as we look at the longer term model and we think about layering the benefit of maintenance conversation into the full longer term model. How should we think about the incremental EBIT contributions that you could get as that deal flare in? Thank you.

So, again the 50% ACV uplift about half of that typically has been just a like-for-like conversation, so same products, same I should say same value dollar amount value of their billed materials. They do get a restack and remix and they are doing the conversion for that restack and remix and just the ongoing flexibility of having the subscription contract. That's not half of it. They're in a buying motion. They're probably just inventory. They're people on what they would like to have as well as what they actually already have. And so we’re able to sell them incremental software at the same time and that’s what brings the ACV up to over 50% Q4 and actually every quarter this year. Lastly, it was just over 40% in total with about 25% like-for-like. Now, the CAD was a new program that we offered this year where you could turn in your perpetual license, convert it to subscription. And you'd get a choice of three or four extension, CAD extensions, and you would get those for free and the conversion which potentially cost you 25% more on average. So that program was just launched. The channel partners had to learn about it. And really we saw, some really nice progress in the America and Europe predominantly with 130 of those, I believe during the quarter. It turned out. We actually got 30% more not the 25% like-for-like and that was actually because they bottled a little bit more at same time, as they did the conversion. We introduced a new conversion programs for the enterprise. It totally where we don’t have it’s a stick like where the support is currently after market rate. We do that because of the 212 I think it is. Enterprise conversions, we done like today…

That's helpful. Thank you.

The last thing I was going to say. We see this playing half for a very long time, if you look at the 200 enterprise customers we have now, about half of them are in the top 500. They have the low market support where we only 20% penetrated through that 500. And about half a 100 out of them roughly are from the next 1,000 customers, so only 10% penetrated of the kind of next cohort of customers. Thank you, Gabriel.

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

So I was wondering if you can give us a sense for some of the drivers of CAD and PLM growth that you are factoring into your '18 bookings guidance. And specifically there is a question I get all the time that, how should we think about the difference between volume or seat growth versus pricing?

Yes, okay, I can try out first of them and then you can add anything, I might have missed. I think if you look at your CAD business and quite frankly our PLM still you start with really great products and maybe in the past, we've had some focus or distribution challenges, but our products are very good. You add onto that this ThingWorx story around industrial innovation platform and some of the really interesting capabilities did that bring to navigate and to augment reality and virtual reality. And it actually makes the CAD story and the PLM story both much more compelling. Then you layer into the improvements we've made in go-to-market and distribution, both the direct side where we have a CAD overly forced in place is working, and off course the channel all the -- channel talents improvements we've been making over the past few years. And you've got a business which just start to work well. Now, I think it's full of volume and price in the sense that we're selling more capabilities. When we sell and see the navigate, you remember we allocate half of that seat to ThingWorx and half of that seat to PLM, so selling capability into a PLM account helps to drive PLM revenue. And I think probably the bigger part that was. We're selling more seats in the more accounts especially in the channel that would be droving in lot of our strengths here really is coming from the channel space.

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

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

Absolutely, yes.

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

The other thing I'd add is specifically in PLM, in addition to what PML added around, how ThingWorx and Augmented Reality actually helping us differentiate both our CAD and PLM products. In PLM specifically, we're seeing strength in retail and med device where we're quite focused. And we're also franking seeing strength in the cloud where we grew in FY '17, our cloud PLM over 50%. And we believe we're by far the largest cloud vendor. Many of our new customers simply go straight to the cloud and we've seen many of our even our large older customers frankly move more [indiscernible]?

From unframed into the cloud.

Into the cloud.

Yes, I should have mentioned that. Just on the cloud point to give a little more depth. No doubt, PLM and maybe even more so CAD have been lagging categories in terms of movement to the cloud. But that seems to be happening now. And you may remember, we acquired a little company back and it was in 2011 already Net Ideas, who had created a cloud business around Windchill. So, we basically brought that business in-house and put more resources behind it and it's prospered. And we think you can compare us to any pure play or any other PLM vendor. We think we're doing more business in the cloud than anybody. And it's becoming a big proportion of the business we're doing every quarter. So that's definitely a key driver as well.

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

Hi. Thanks for taking my questions. The first is, Andy, you've talked about like the enterprise customers who do not upgrade to subscription and renew support ACV that increased at 20%. Maybe just talk about [indiscernible] like to search how you grow and support ACV?

Well, basically, these are the enterprise customers who are paying below market support. So we basically first give them a code to take them up to market rates, which tend to about as 20% or so increase. And then we offer them the opportunity to instead convert to subscription for just a little bit more. So that's the sales play we do for those top 500 accounts where they're below market. And most go to subscription or intend to go to subscription. So when you look at this quarter, 60% of those that we ran that play with, chose to convert to subscription. The most of the rest actually ask for bridge agreement to give them just a little bit more time. And we do that at a premium get mature term bridge agreement. And then there were a handful that basically couldn't get it done within the year. I mean it's going to take them a year, so they just sign up for another year of support. And their ACV for that went up 20%. So that's essentially how that's played out.

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

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

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

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

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

Okay, great. Well, thank you, Jennie. So, I want to thank everybody who joined us on the call here for spending your time with us this afternoon. I trust you will agree that our Q4 and fiscal '17 results validate. They were executing again the three pillars of growth, subscription and profitability expansion. And I trust you further agree that if we do that and continue to announce, that’s going to create a lot of long-term shareholders value. So, we're happy with where we're and hope you’re too. We look forward to seeing you at an upcoming investor event. And if not, I look forward to talking you on the call again in 90 days. So thank you very much for joining us and Jennie that concludes our call.

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