Good afternoon, ladies and gentlemen. And thank you for standing by, and welcome to the PTC 2018 Fourth Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode and the conference is being recorded. Following the presentation, the conference will be opened for questions. 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, Gabriel. And welcome to PTC's 2018 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 forward-looking statements can be found in PTC's most recent Annual Report on Form 10-K, quarterly reports 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 and guidance provided during this call are valid only as of today's date, October 24, 2018 and PTC assumes no obligation to update these forward-looking statements. During the call today, 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 and made available on our Investor Relations website. With that, I'd like to turn the call over to PTC's CEO, Jim Heppelmann.

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. As usual, I'd like to begin with the review of the quarterly and annual results and then provide some perspectives on the significant milestones and progress that we achieved throughout fiscal 2018. Q4 of fiscal 2018 was another strong quarter and it closed out another strong fiscal year, where we demonstrated near flawless execution of our strategic and operational objectives. In the fourth quarter, we delivered record quarterly bookings of $149 million and ACV of $60 million, both at or near the high-end of our guidance range. We delivered a subscription mix of 81%, our highest level of subscription bookings to-date. Despite modest FX headwinds, total revenue was near the high-end of our guidance. Our operating margins expanded over 350 basis points year-over-year and EPS was at the high-end of guidance. In Q4, the momentum around our recurring revenue model continued with recurring software revenue growing 13% and ARR growing 12% year-over-year and crossing the $1 billion mark for the first time despite the FX headwind. This was the seventh consecutive quarter of double-digit ARR growth. Total deferred revenue grew 29% year-over-year and 90% of our software revenue was recurring this quarter. Essentially, all of the key Q4 metrics were positive, which again demonstrates the solid foundation for growth that we've established. If I look back to the fiscal 2018 guidance we gave you a year ago, our FY 2018 results were also very strong. We came in at the high-end of the bookings range and we landed above the high-end of our guidance ranges for revenue and EPS. As we close out 2018, we're right on track for the 2023 long range plan that we outlined in June at LiveWorx and squarely on track relative to our aspirations…

Thanks, Jim, and good afternoon, everyone. Please note that I'll be discussing non-GAAP results and guidance. Q4 bookings of $149 million were near the high-end of our guidance, representing year-over-year growth of 4% and 14% if you adjust for the $7 million megadeal that closed early in Q4 2017. For the full year, bookings grew 11% and 15% after adjusting for that megadeal. Despite FX, total revenue in Q4 was up 5% year-over-year and software revenue was up 7% despite a 900 basis point increase in our subscription mix. Subscription revenue grew 62% and total recurring software revenue grew 13%. Approximately 90% of Q4 software revenue was recurring. For FY 2018, total revenue grew 7%, driven by 10% total software growth despite an 800 basis point increase in subscription mix. Total recurring software revenue grew 14% and subscription revenue grew 70%. Total deferred revenue billed plus unbilled increased by $318 million year-over-year or 29%. Billed deferred revenue was up 9% year-over-year despite FX. ARR grew 13% year-over-year constant currency and exceeded $1 billion for the first time. Our support conversion program continues to progress well with 40 direct customers converting their support contracts to subscription at an ACV uplift of approximately 50%. Our channel program continues to gain traction with 106 conversions in the quarter. As we highlighted at LiveWorx in June, the like-for-like uplift from conversions are not factored into our growth assumptions beyond the current fiscal year. And given that we are still in the early innings from a penetration perspective, we believe that the conversion opportunity is substantial and will play out over many years. Continuing through the P&L, Q4 operating margin of 21% was within our guidance range and EPS of $0.45 was at the high end of our guidance. For FY 2018, operating margins expanded…

Thank you. At this time, we'll begin the question-and-answer session. Our first question comes from Ken Talanian with Evercore ISI. Your line is open.

Hi, Ken.

Hi, Ken.

Hi. Thanks for taking the question. So I guess first off, given your geographically diverse business, can you give us a sense for what assumptions around the global macro you're making for – in terms of demand for fiscal 2019 guidance?

Our current view of the global macro is that it remains stable. We're clearly aware of some of the trade concerns that are out there, but we haven't seen that reflected in our results. For example in the recent quarter we ended, a high number of large deals, the normal number of large deals in a fourth quarter, the deals tended to upsize. So we saw the same types of behavior we've seen in many quarters. We're watching, but the environment appears stable. If you look at the PMIs, they've ticked down a little bit except for North America has ticked up a bit, but they're still in solid growth territory. Do you want to add anything, Jim?

No, just that I don't think we have on over dependency on any one geo, we're coming off a pretty good year, where frankly Europe didn't perform super great and therefore we're not overly dependent on remarkable things coming out of Europe or anywhere else, we have a good balanced plan.

Okay. And could you give us a sense for how your fiscal 2019 IoT expansion pipeline compares to fiscal 2018? And what if any feedback your customers have given you in terms of a willingness to invest in IoT in the event that their business slows down or I guess in a more – in a worse scenario we go into a recession?

Well, I think, first of all, our IoT pipeline is quite strong and it's the reason we're plowing resources into this space is because we see the market is very interested in what we have to sell for IoT and AR, but also some of the things we're doing in Microsoft and ANSYS and so forth, Rockwell. So I think we feel good about the pipeline. We don't have a crystal ball to tell us if things would change. But I think right now we're feeling strong. We feel like our products are viewed as extremely important to end customers and there's a lot of demand for them and we're trying to make sure we have resources positioned to capitalize on that demand.

Great. Thank you very much.

Thanks, Ken.

Thank you.

Next question comes from Ken Wong with Guggenheim Securities. Your line is open.

Hello, Ken.

Hi, Ken.

Two if I can. So, Jim, you highlighted variety of partnerships and obviously we're probably most focused on what you guys are doing with Rockwell. As we think about fiscal year 2019, any help in terms of how that partnership is contributing to bookings growth?

Yeah. I mean, Rockwell is a significant company with a significant footprint in this SCO space. They have about 35,000 customers doing what you can loosely call smart, connected operations. It's really industrial automation, but SCO was sold into the industrial automation base and they have somewhere around 1,000 sellers. So it's a huge customer base with a huge distribution channel. They're very committed to PTC. I think we haven't disclosed the exact numbers, but we have said that Rockwell has made substantial commitments to PTC. So we know we're going to get a lot from Rockwell and they're putting their money where their mouth is. They're handing out the quotas to deliver against that. They're training the people, I mean they're taking it very, very seriously. So some good signs, we've landed a couple of accounts that we've been knocking on the door for decades already and we're pretty excited about the possibility here.

And then Andy, if I could just a quick kind of as we think about the changes in the long-term financial model. I mean obviously, you guys kind of gave some of these targets just a few months back. Is it really just the coming pipeline and just what you've seen after announcing the end-of-life, that's kind of reinforced your belief that subscriptions is moving along so much faster than expected?

Well, the main thing that happened we completed our operating plans, we have another quarter behind us where we saw subscription mix in both Americas, EMEA be well above the 85% in the quarter just ended. And we saw APAC subscription mix increase and so all those factors together reinforce our commitments that we are going to be fully subscription with the exception of Kepware. And so we've reflected that on long range plan, which is of course goodness for our long-term model, modest impact free cash flow in FY 2021 of $15 million, but clearly give us great tailwinds to that $850 million in FY 2023.

Got it. Thanks a lot guys.

Thank you.

Thanks, Ken.

So one – there's another comment I wanted to make about the long range plan. If you actually look at where we ended FY 2018 from all the metrics recurring revenue at the higher end of our guidance for example. It's clear that we start FY 2019 better positioned for that long range plan than we had laid out even back in June.

Okay. Operator, next caller.

Okay. Next question comes from Jay Vleeschhouwer with Griffin Securities. Your line is open.

Hi, Jay.

Thanks, good evening. Hi. I'm going to avoid the morass of the ASC 606 discussion, so let's talk about a couple of organic things. Jim, you highlighted again the resurgence of the CAD business, still your largest, and let me ask you about that, when you look back over the last couple of years and when you're thinking out over the next couple of years, can you comment on how much of that improvement is retooling or upgrading phenomenon within your base, which would ultimately be limited. Or are you in fact seen a growing contribution from new customers, if it works for Creo. And then similarly, how are you thinking about the increment from Discovery Live, you talked about some arithmetic on that at LiveWorx, was that just an example or when you talked about one quarter penetration of the Creo base or is that something you're explicitly aiming for, then I have a follow-up.

Yeah. Okay. Well, the first thing I would say on the retooling of the existing base versus new sales, our reseller channel has done really well in the past year.

More than double-digit growth for the past two years.

Right. So they are real – I mean none of us CAD vendors are flipping big accounts anymore. That ended some years ago, but there's a lot of new accounts coming in as startup companies and so forth and that's where our channel plays. And so the fact that the channel has done so well, but really it can only happen if we're taking a good amount of share in new customer pursuits. So I feel pretty good about that – less frankly because the product has improved so much, it always had a terrific engine, it just the user interface and so forth, got a little tired and that's all behind us now. Product looks great, works great, viewed as the premium product in the industry. Looking forward, we are exceptionally excited to bring this ANSYS stuff to market. I mean it is jaw dropping when people see the demonstrations of it. Particularly jaw dropping to see what ANSYS technology can do inside a CAD system Creo. And you just watch people, it's unbelievable. So we are very bullish, I don't want to give you specific guidance, but we do think that 25% penetration is a target that's achievable over some period of time. And it will be a big tailwind for what we're doing. Now further out beyond that, there's a couple other tailwinds that aren't quite as close in let's say the ANSYS stuff. To be clear, we're going to take orders for ANSYS in Q1 here in fiscal 2019, not a lot yet, because we're really doing a roll-out to preferred customers to make sure we get good feedback and tweak anything before we turn it loose and open the floodgates. But beyond ANSYS additive manufacturing, topology optimization and the bigger topic of generative design, there's a lot of stuff happening in the CAD world, that's this really changing kind of what people think of CAD. And I think PTC is very well positioned now with ANSYS and with other technologies we've been developing and talking about. So I actually think PTC is probably more bullish on CAD than we've been the decade or maybe even in two decades, frankly. This business feel like it's got a lot of legs and we'll continue to perform reasonably well, I'm not going to tell you it's going to be a double-digit growth business for a long period of time. But I think it's got a lot of momentum and there's a lot more opportunity because the industry is changing and creating this new opportunity and we're well positioned to capitalize on it.

And, Jay, one thing I'll add is while our aspirations are certainly very high and we're excited about it, we have a low single-digit growth factored into that long range plans.

A follow-up on support conversions. How are you thinking about that by geo? I mean, if my math is right, it looks like EMEA support revenue is at least as large as in the Americas. And would that then perhaps by geo suggest a substantial remaining support conversion opportunity there?

Yeah, there's a bigger support conversion opportunity in Europe than in the Americas, but it's still quite sizable in the Americas as well. The Americas has done more conversions as you would expect, the sales people that are closer to headquarters tend to jump on these things more aggressively, but EMEA actually has accelerated the last couple of quarters. And they are not that far behind as far as the number they've done in the enterprise space and then big opportunity in, frankly, Japan, where they have done only a handful, but quite sizable ones.

Thank you.

Thanks, Jay. Operator, next question please. Gabriel? Hello?

And our next question comes from Steve Koenig. Your line is open.

Hello, Steve.

Hey, thanks for taking my question guys. Hey thanks for sharing us the details of ASC 606 on the call back in Jay's remarks. So we do look forward to hearing that another time. I do want to ask you guys, so kind of like Q3 you skewed again a little heavier to Asia. ACV was okay, but it kept a lid on the subscription mix a little bit. What's your sense of what's happening in Europe and what are you doing about it execution wise or is it more of a macro issue? Any color there would be helpful. And then just to add on my quick follow on will be, can you discuss any – I know you are early days in seeking to move – new initiatives to move renewal rates up further and just any commentary there that would be helpful too? Thanks guys.

So first, Steve, I do want to clarify that it takes like one, small seven figure deal frankly in one geo versus another perpetual versus subscription to be that 1% difference in the subscription mix. And we've actually gotten smarter, you notice for FY 2019 we gave you a range for the subscription mix of 88% to 90%. So because it's not perfect, we don't close every large deal in the pipeline and we're trying to do our best to guess which ones are going to close and which ones aren't. Now APAC clearly was strong with growth more than 20% in bookings. EMEA, while down in fact if you look at the – EMEA down in the 10% range. If you actually adjust for that megadeal that closed in EMEA in Q4 2017 versus Q1 of 2018 then EMEA for the year just flipping it from one year to the next would have been almost flat, still not great performance. But we had 28% constant currency growth last year. And if you took that big deal out of last year, they still have low 20% constant currency growth. So EMEA has been executing fine. We always aspire to do better, but they actually – there's just lumpiness frankly by big deal contribution. We would never have an operating plan for example for EMEA to grow 28% constant currency.

Yeah, another thing I would point out, if you look at the PMIs Europe was superhot and they've cool down, but they have been throughout and remain well above the PMIs in Asia. So I think we're really talking about good situations versus great situations and maybe Europe schooling from really great, just good or something like that I don't know. But we don't feel right now concerned about what we see in terms of pipeline and opportunity in Europe.

So just to clarify, sorry. So you're not, there's lumpiness here and you're not seeing any sort of execution issues that need to be addressed. Is that a fair read?

That's a fair read, yes.

Okay. Got you. And then, you guys are doing some work on renewal rates. Any update there, any color you can give there?

Yeah, it would actually our best quarter ever when it comes to renewal rates. So we continue to progress ahead of our plans.

Awesome. Great. Thanks a lot guys.

Thanks.

Thanks, Steve.

Next question is coming from Matt Hedberg with RBC Capital Markets. Your line is open.

Hello, Matt.

Hey guys, this is actually Matt Swanson on for Matt. Andy, can you talk a little bit about how you're thinking about subscription price increases. I don't think you've done any since you've done the transition. And then just kind of elaborate on that, how important the innovation, the product portfolio is the company's pricing power.

Yeah, so we raised subscription prices by 5% on October 1, and in certain geos where the currency moved even more, we've raised it more aggressively than that. So we did our first subscription price increase. Our industry does tend to raise prices every year and we're no longer trying to promote subscription over perpetual as we only have, as we stand now just over two more months left of perpetual. So we've raised those prices. Of course they don't go into effect until a renewal comes around and their pricing is off of the new subscription price list. The second question, probably a good one for Jim, just as far as how innovation gives us pricing power. Fundamentally...

Well, I think what I would say is that innovation puts us in an opportunity to win the deal. And I don't think the price of the software is the key criteria...

No.

...in selecting a vendor, it's the fitness and the belief in the technology. And I think when it comes to fitness and belief in the technology, nobody wants to pick the wrong vendor. And I think PTC does not feel like the wrong vendor to anybody right now. We've got a lot of momentum, a lot of brand recognition. We do exceptionally well in all the big analyst reports from Gartner and Forrester and a bunch of other guys. So I think we have some flexibility not to play a price game, and still win the deal and not make it about pricing, it's about innovation and quite frankly the fitness of your product to solve the problem and to remain viable then for years to come because it's sticky stuff and you're not going to use it for just a couple of years. So you want to make sure that this vendor is going to be in the game for a long time and people feel good about us.

The one other thing I'll add around pricing efforts, so I'm going to start talk about pricing strategy and then pricing realization or discounting. Pricing strategy, we did a conjoint pricing study, and October 1, introduced new pricing and packaging for Creo, which we think gives us an opportunity frankly to drive people to higher price points and raise the overall average price of a Creo seat. So that was a study done last spring and effective October 1. The PLM Group has also done their first conjoint pricing study and they are pricing and repackaging Windchill and they think there's great opportunity as well to strategically realize more from customers. That study is done and January 1 pricing and packaging for PLM will – new pricing and packaging will roll out. And we've just embarked on ThingWorx and Vuforia Studio. We're embarking on a conjoint pricing study there as well. Again, to optimize pricing from a strategic perspective to make sure that we've got the right, kind of good, better, best types of offerings that enable us to optimize revenue. On discounting, we continue to drive lower discounts. And as we enter fiscal 2019, we told you about our deal scoring, where reps make more commissions if they give less discount to get an A deal versus a B, C, D or F. Well, we made it harder to get an A or a B or a C once again this year. So every year that has driven our average discount down and we expect it also to drive it down further in FY 2019.

Yeah, in fact, I mean we are talking about what, 15, 20 points?

Yeah.

...of improvement.

Yes.

Since we put this program in place a couple of years ago, saw dramatic improvement and one takeaway from that, is when the sales guys see differential comp, they don't discount much, which tells you we never had to discount in the first place. So it actually is a comment about pricing power, is that maybe some years ago, when we had a discounting problem, we were just frankly too willing to give away a discount that you didn't need to give away. Maybe it lubricated the deal, you got it sooner with less work, but frankly that extra little bit of work was worth it because the deal became substantially bigger. So I think it's a proof point that we do have some pricing power and that frankly we were misusing it in the past and we've made great progress. We really don't have a discounting problem anymore.

Yes.

It's a problem that dogged us for a decade and a half and it's kind of behind us now.

That's great. And then if I can ask one more to Jim, going to the workforce realignment, I guess when we talk about IoT being bigger than PLM next year, and I think we've talked about long-term IoT being the largest business. Is there a way to think how close the workforce would be ready for it being the largest business, is this one step in the right direction or do you think it will have to be kind of continuous changes to realigning the workforce further?

I think, you should think of this as almost like ASR on a stock buyback, one big upfront step and then the rest of them aren't such a big deal. So we've been making alignment but as we went into this new year and really looked at the size of growth, the opportunity we have with IoT and AR, we said, we've got to move a lot of resources and we've got to do it quickly. So we did take a restructuring charge. I don't think you should expect us to take a restructuring charge annually, but I think we will continue to migrate resources into the places where they get more growth. The amazing thing is we have 6,000 employees now and we had 6,000 employees a number of years ago, and it's the reason why we've been able to keep driving margins up, maybe we have a few more than 6,000, but relatively flat employment over a period of five years, while the growth really has materialized, it's how we've driven margins up, and it's a strategy we've got to remain disciplined and stick to.

The other thing I'll add is that, this past planning cycle, the sales and marketing team really did a much stronger portfolio analysis frankly to cutoff the long tail, which is where you get a lower return on your investment, to make sure that we had the right reps in the right geographies on the right products to drive the optimal growth, that is really our opportunity out there. And that's what drove a good piece of the restructuring charge. We looked at profitability in every single country and where the profitability didn't make sense, we basically moved resources out. Accepted that maybe we'll have a little bit lower bookings in that country, but we have a lot more opportunity by putting in those sales and marketing resources in an area where there's really growth for IoT and AR. So it was the type of portfolio management, that's easier to do in R&D around how many people you have working on a product. And we did that quite rigorously on the go-to-market side.

The other point just to add, it came up in the discussion, but we also solved for FX in our earnings program.

Right.

So we were even more aggressive on portfolio management because we said, we have to come out of this with the right configuration of resources and we have to solve for FX at the same time. So that's really why we took the restructuring charge. And again think of it like an ASR, it's the way that accelerates the first phase of something.

Yeah, when FX goes against you, we have two levers; pricing which we executed on and then frankly, how much we spent, so you have to adapt to the environment you're playing in, and so we did that.

And our next question comes from Saket Kalia with Barclays. Your line is open.

Hello, Saket.

Hey, Jim. Hi, Andy, thanks for taking my question here.

Hi.

I'll just keep it to one, in the interest of time. Andy, it was helpful commentary on the moving parts in the fiscal 2021 guide. But maybe just to dig a little deeper, it seems like the higher subscription mix call it 10 points is taking out, let's call less than $100 million in revenue. And it looks like we're taking about $15 million out of the free flow target for fiscal 2021 as well. My question is, can you just talk about that revenue dynamic a little bit as well as the associated cash flow and if we're sort of reading that correctly?

Yes. If you actually do the math it's less than a $100 million, but those targets are rounded. So the target before was rounded, the target now has rounded, so everything is rounded to $100 million all the revenue lines that we've done. We actually did the math, it's like $65 million or something is the actual difference on revenue, just 10% higher mix. So 10%, if you took our bookings that we just guided $500 million to $520 million, assume 13% CAGR moving forward take it to FY 2021 and then took 10% of that, that's how you get about $65 million difference in revenue. And the free cash flow is also frankly we had a little bit of cushion in there. So it ended up being just a small take down to the free cash flow with that higher mix. But it does give us frankly a tailwind to the FY 2023 free cash flow target.

Got it. Very helpful. Thanks, guys.

Yep, thank you.

Okay. And with that I'll turn the call back over to Jim Heppelmann for closing remarks.

All right, great. Thank you, Gabriel. Well, and I thank everyone for joining us on the call and spending an hour with us. I think if we all step back and look at fiscal 2018, it was a pretty good year. We did some amazing things on partnerships with Rockwell Automation, and the ANSYS, and Microsoft, our IoT and AR business did well. Our bookings and software revenue growth accelerated, customer success and renewal rates was a great story, conversions were good, cost management was great, margins were up. So it was a very good year. We're about 60 days from wrapping up the end of almost all perpetual licensing with one little exception. So we're almost done in terms of moving to subscription. We'll soon be there. And then it will take a while for it to catch up to us in terms of the profit and in revenue growth. But anyway we're in a great place. We're doing well on the growth front. We're doing well on the profit front. We're doing well on the subscription front. We're in a great place, we think we can and will drive a lot of long-term shareholder value. So thanks and have a good evening, talk to you in 90 days, if not sooner.

And with that, we'll conclude today's conference. Thank you for participating and you may disconnect at this time.