Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2019 First Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. Today's call is being recorded, if anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Thank you, good afternoon everyone, and thank you for joining PTC's conference call to discuss our fiscal Q1 2019 results. On the call today are Jim Heppelmann, Chief Executive Officer; Andrew Miller, Chief Financial Officer; and Barry Cohen, Chief Strategy Officer. Before we get started please note that today's comments include forward-looking statements including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in PTC's filings with the SEC including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included on this call represent the company's view on January 23, 2019. PTC disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial metrics during today's call. I'd also like to remind everyone that starting with the first quarter of fiscal 2019; we adopted the new revenue recognition accounting standard otherwise referred to as ASC 606 on a modified retrospective basis. In our press release, and prepared remarks, which have been posted to our Investor Relations website has required when adopted under the modified retrospective approach, we have provided results under both 606 and 605 as well as reconciliation between the two. We have also provided guidance under both standards. Please note that the SEC requires the presentation of 605 results for comparability with prior year results. Thus for such comparability, our discussion on this call will focus on 605 results unless otherwise stated since we have no baseline for last year under 606. Also please note that certain operating metrics such as bookings and ACV, and non-GAAP financial measures such as free cash flow are the same under both 606 and 605. A discussion of these items that excluded from our non-GAAP financial measures and a full reconciliation of GAAP to comparable non-GAAP financial measures under both ASC 606 and 605 are included in this afternoon's earnings release and related Form 8-K. And with that, let me turn the call over to Jim.

Thanks Tim. Good afternoon everyone and thank you for joining us. Before we discuss our results for the first quarter, I want to start with the other press release we issued this afternoon which is the announcement of Andy Miller's intention to retire as our CFO later this fiscal year. Andy joined us four years ago and he's played an integral role in PTC's transformation. He's been a great CFO overall but his most important accomplishment the one we were recruiting for back when we hired him has been leading PTC's transition to a subscription business model. I'm pleased to say that with the last round of changes made on January 1st, we have implemented all of the subscription transition program elements and they have achieved their desired effects, so the subscription transition program is now effectively complete. As of now with the small exception of Kepware, we only sell subscription software across our mainstream product lines and geographies. This was a critical milestone for us and the one that we achieved relatively quickly as compared to similar transitions done by our software peers. While we have ongoing work to do to further optimize our subscription business model, I trust you would agree that we can officially declare victory on the very large and strategic transition program. Now, if you know Andy Miller, you know he's a proud Silicon Valley native, so having accomplished this big milestone at PTC and following more than three decades as a successful finance leader, Andy, has decided to retire and move back to California to spend more time with his family and friends and do board work going forward. To ensure an orderly transition, Andy, has offered to continue as CFO until his successor is fully in place through the balance of the fiscal…

Thanks, Jim, and good afternoon everyone. I'd like to start by saying that it really has been a privilege to work at PTC for the past four years and I want to thank Jim, the rest of the executive team, and the PTC board for the opportunity. I intend to stay here at PTC until a successor joins and the smooth transition has been completed. Before I dive into our results, I'd like to note that I'll be discussing non-GAAP results and guidance and all growth rate references will be in constant currency. And as Tim mentioned earlier, we adopted the new rev rec standard to ASC 606 under the modified retrospective method on October 1, 2018. Since we have no baseline for last year under 606, for comparability purposes I will be discussing 605 results unless otherwise stated. Also please note that certain operating and non-GAAP financial metrics such as bookings, ACV, and free cash flow are the same under 606 and 605. Moving to our first quarter results, as Jim outlined, our Q1 financial performance exceeded the high-end of our guidance on revenue, operating margin, and EPS driven by higher perpetual revenue and by lower spending both in cost of goods sold and OpEx. Adjusting our Q1 results for our guided subscription mix revenue would have been within our guidance range and EPS would have exceeded the high-end of our range. Q1 bookings of $101 million were near the lower end of our guidance range impacted by nine deals that slipped to Q2, totally more than $20 million including about $2 million of larger U.S. government deals that slipped due to the shutdown. This combined with the $15 million of perpetual upside resulted in a subscription mix of 58% much lower than our guidance. However now that our…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Saket Kalia of Barclays Capital.

Hello, Saket.

Hi guys, hey Jim, hey Andrew thanks for taking my questions here. Maybe I'll stick with one question rule here maybe for you Jim; I think you mentioned that one of the nine deals that slipped in the quarter was a mega deal in the IoT space. Can you just remind us how we define a mega deal again in terms of size and without naming the customer, how do you think this particular customer balance macro concerns with perhaps some of the sales changes at PTC again specific to that IoT deal?

Yes, just in terms of terminology for everybody's benefit we define a large deal as more than $1 million in bookings, PEB bookings, and a mega deal is more than $5 million in PEB bookings. And this particular deal actually had nothing to do with the macro. What really happened is that the -- you can call it a sales execution issue, I suppose. What really happened is that the approval process ended up being different than we understood it to be and we ran out of time trying to execute the newly underserved approval process. So I think the deals in good shape. We are hopeful we're going to get it this quarter actually, we'll see but it really wasn't the macro situation. So it would be a convenient excuse but it wouldn't be an honest one.

Thanks. And our next question comes from Steve Koenig with Wedbush Securities.

Hello Steve.

Hi gentlemen, thanks for taking my question, thanks to Andy for all your work, I won't say goodbye just yet. Hey so, can you all remind me about the sales realignment in Q1, was that mostly the geographical realignment related to the reorder were there other factors there? And then maybe just related to that when you think about the guide here, the caution that's built into your guide. Kind of maybe help us understand how much of that comes from the execution that you've built any compensation of execution that you built in your guide versus macro weakness versus any other factors as well? Thanks guys.

Okay, Steve, I will take the first part of that which was asking about the realignment or you even use the word reorganization. So we tried not to use the word reorganization because actually the org chart doesn't look so much different, really it was a movement of resources into the growth businesses. Now to do that in the context of our margin goals, we took down resourcing in some areas and took it up in others. In some cases we moved from one segment of the business to another and in some cases we moved from one geography to another. And of course we're working around the strengths of some of our partners like Rockwell and so forth. So it wasn't really a reorganization per se but it did involve a lot of people with new territories and new quotas and getting a feel for the business. So I think that was really sort of the issue is that we did something that disturbs a little bit and then just didn't get a fast enough start processing all that and putting it behind us. So we were talking about it too deep into the quarter and of course when people are talking about territories and accounts and quotas, they're not all selling. So that really was the key issue.

Yes, as we talked about last quarter, we expected the restructuring to impact a little over 200 people who would be, who would no longer be with the company and then we opened a number of racks obviously in the market and geographies and territories where we're investing for IoT and AR which tend to be Americas EMEA.

Thanks. And our next question comes from Sterling Auty with JPMorgan.

Yes, hi guys.

Hello, sir.

So looking at from very high level you are taking the sales execution into account what you are factoring in some macro caution and I'm curious how much of that macro caution is specific things that you're hearing directly from sales and end customers now versus looking at kind of the macro picture through the news and other headlines whether it would be shutdown trade et cetera?

Yes, Sterling, I think from our perspective, there's not a lot of specific caution, there's not a lot of specific issues, it's just we read the newspapers like everybody else does and it just feels a little reckless at this point given the stuff happening out there PMI is coming down and so forth, it feels reckless to take guidance up. So what we've basically said is let's hold it where it is and we'll tradeoff some of that upside in less time by for a more cautious posture on the subscription side in the balance of the year. So again it's not specific, it's just a general concern about what's happening out there and knowing that PMIs have been in the past somewhat indicative of spend in our markets. So we just think we should be a bit cautious.

Our next question comes from Ken Talanian with Evercore ISI.

Hi guys, thanks for taking the question. So I was wondering are you seeing any extended sales cycles, any deal downsizing, any deals falling out of the pipeline, and then related to the slip deals have you actually closed any of them or concede a closure within the next week?

Yes, on the second question there are several that are very close and we do hope to close in the next week maybe even this week yet if we're fortunate. And then, I think, extended sales cycles, yes, but again hard to pin that on macro. Like I said, in one case, it was a misunderstanding about the approval process. And when we thought we had the necessary approvals, we then found out actually the customer misunderstood the process and there's a different process and we're out of time to go run that different process and people have left on vacation and so forth. So extended sales cycles but it's hard to pin down exactly why and there were different reasons. So there wasn't uniformity, like I said, there were couple of government deals, okay we understand those, there is a misunderstanding of a process here and then just in general we kind of ran out of time on a few other ones.

Thanks. Our next question comes from Matt Hedberg with RBC Capital Markets.

Hello, Matt.

Hey guys, thanks for taking my questions. Obviously you're making your subscription mix a little bit lower this quarter you had sort of last gas license deals, can you talk to us about the effectiveness of the maintenance to subscription sales over routine that was new in Q1, I know it's probably going to take some time but just would love an update on that, it seems like an incremental opportunity for you guys?

Yes, as you know, we have a new leader who joined us and he has pulled the team together and they've developed kind of their focus areas and are beginning to drive programs. So we think that should really benefit us probably more so in the second half of the year. At this point, if you think of where our focus has been on the largest accounts the ones where we had those VPAs we've talked about before; we're only about halfway through those VPAs. So we still have the other half of those. We've done in enterprise phase 345 conversions at this point out of probably a potential pool of about 2,000. And there's a lot of opportunity frankly in the channel with CAD and there's a lot of work being done to really formulate what those programs should be.

Thanks. Our next question comes from Jay Vleeschhouwer with Griffin Securities.

Yes, thanks, good evening. Jim, a technology adoption question for you. Are you able to discern any influence of the momentum you're seeing in IoT on the CAD or Windchill businesses, I mean I recognize that CAD is doing well and has been for a while but that could be specific to what's going on in that market but are you seeing any direct link to suggest that you're closed with lifecycle management strategy that you've articulated is in fact working and generating incremental business by pulling through more Creo or more Windchill or perhaps even more SLM at this point that you're making the case that you're solving broken toolchains and driving business that way?

Yes, I'd say definitely influence, I maybe a little softer on cross-sell, I think that companies like say BMW. BMW sees PTC as the BMW of our marketplace because we have great products; great technology, and they know they can turn to us for PLM, for IoT, for AR. So in the case of BMW, there are Vuforia project is going on, in parallel the ThingWorx project is going on and we're winning PLM deals. So I think that whole package has positioned us very nicely. Now if I said they bought Windchill because of Vuforia or ThingWorx I'm not sure that's true. But I think that they put PTC on a decent platform because they see us as a provider of very good package of technologies that make sense together. And then, in the case of Huawei, you know we do have a sizable PLM implementation at Huawei and they began what fundamentally was an IoT project. And when the project started BMW, I'm sorry Huawei did not really get the connection between PLM and IoT and of course we went in and sold that hard and then walked out with a very, very nice IoT deal in a recommitment to PLM and to more CAD business and everything else. So certainly the package is starting to make a lot of sense to people. And I think another thing that's happening is they're also starting to say hey maybe what I use in the factory and what I use with my products ought to be the same platform PTC help me understand the advantages of moving data back and forth and so forth. So again I don't want to oversell it because I don't -- I don't think we're really cross-selling, but I think with our major accounts we're positioning ourselves as having a really important and powerful portfolio of technologies that if you're an industrial company and you want to do digital transformation, we can help you change your products, we can help you change your production and service processes, and we can actually help you change the productivities of your workers in your factories and out on service calls and so forth where they are and that whole digital transformation story I think is one that people are really starting to appreciate.

Thanks. Our next question comes from Adam Borg with Stifel.

Great, thanks for taking the question. Hi guys, just in terms of the of the Rockwell partnership I think you talked about 500 reps being trained, I guess when do you expect the remainder of the Rockwell reps to be fully trained and selling the combined product? Thanks.

Yes, I don't have a specific schedule for it but we trained 500 in the quarter and they were actually people trained prior to that and by the way they weren't just reps, just to be clear they were reps and generally let's call them field resources. But there are a lot of people at Rockwell that are trained there have been many sales calls made, there are many opportunities in the pipeline now being managed and so forth. So I think in the case of Rockwell, we feel pretty good about that. I mean, I have to tell you the fit with Rockwell between PTC and Rockwell feels pretty good. Blake and I have a great relationship I think at every level of the org chart, people are working together productively, Rockwell is putting a tremendous amount of energy into this alliance, they're not just paying lip service to it, they're out there making sales calls, I mean Blake is making sales calls. So I think it's going very, very well. I think it'll take a while to get to everybody but we don't need to get to everybody either I mean even Rockwell realizes that we probably ought to focus on the most important accounts. There are some that are more low hanging fruits than other and I think they have a list of 400 accounts if I remember correctly that they're prioritizing and tremendous, tremendous amount of business could come out of those 400 accounts. So that's where we'll put our first energy but there's a lot more behind that, I think if I remember correctly they have about 35,000 total accounts that ultimately we could sell into with them.

Thanks. Our next question comes from Monika Garg with KeyBanc.

Hi, Monika.

Hi, Monika.

Hi, thanks for taking my question. Just as a follow-up you talked about like they're targeting 400 accounts, so it seems like there must be very large accounts like as a kind of percentage of revenue what would you say the 400 accounts would be for Rockwell? Just trying to gauge, I mean you have 25,000 customers but they are targeting 400. So how big these type would grow?

Well, I mean probably at the top of the food chain there, you're going to find the big North American automotive companies, you're going to find the biggest oil and gas companies in the world around the world, you're going to find the biggest pharmaceutical companies, the biggest chemical companies, the biggest mining and materials companies, so there are some very, very big accounts there. Now I'm sure within the 400 they start graduating down. But we're talking some behemoth accounts and some very large accounts and probably you're just getting down the large accounts and you're still in the 400.

Thank you. Our next question comes from Alex -- I'm sorry go ahead.

Well, I was just going to say as you know there is 80:20 rule to everything and 400 accounts is more than 10% of theirs, so probably quite a sizable piece of their revenue.

Thank you. And our next question comes from Alex Tout with Deutsche Bank.

Yes, thanks for taking the question. Could you just say what actions you've taken to screw up the pipeline for 2Q and the rest of the year given the very large magnitude of the slippages i.e. have you done a wholesale reevaluation of closed rates et cetera given the experience this quarter or have you just really taken a view specifically on the deal that slips, just an idea of the actions?

We have spent more time reviewing this pipeline than I think we ever have.

We called all of our, what we call our Executive VP and our Divisional VP, so these would be the geography leaders, we call them all into a meeting and along with various lieutenants of theirs. We went through each of the slipped accounts one by one to really understand what is the reason this deal slipped. And then we went through the pipeline and talked about what do they have in the pipeline and where does it stand right now.

Yes, we did a deeper dive; we do a deep dive every quarter to be perfectly frank. We don't just rely on a forecast coming in on a piece of paper. We review the analytics in depth and then we go deal by deal because large deals for us typically represent 20% to 40% of our bookings and so that's a big range and so understanding where those deals stand and the multiple paths to get to our operating plan into our forecast and what disclose in our range. It's not a single path, it is a multiple path and we surround it and we did it more so, it's on this quarter than we have done in the past since I've been here.

Thanks. Our next question comes from Ken Wong with Guggenheim Securities.

Hi guys. Andy, maybe a question for you when looking at the total deferred revenue growth, there was a deceleration from 29% last quarter to 6% this quarter, is that consistent with what you're expecting was there some seasonality there that we should be aware of just trying to get a sense for what the approximate levels are kind of appropriate going forward?

Yes. So there are two factors that I want to call your attention, first off is the unfilled deferred is getting to be a bigger and bigger number and so just large numbers, grew $191 million year-over-year but that's a big number but it's now a much lower percentage because of that. The other factor is the timing of the renewals under 605 because we recognize the revenue radically, so like Q1 was not a big renewal quarter for us especially because it ended on December 29 which actually affected the build piece of that deferred revenue. But for total deferred revenue, the fact is not a big renewal quarter for us means we recognized more revenue in the quarter than we -- or the relationship of what we recognized during the quarter versus what was up for renewal was different than it's been in prior quarters like for example in Q4.

Thank you. Our next question comes from Gabriela Borges with Goldman Sachs.

Hi, good afternoon. Thanks for taking the question maybe for Andy, I'd love to get a sense of how customers are responding to some of the new subscription pricing that you implemented on October 1st? And if you could remind us what are the typical subscription contract terms how often can you get in and renegotiate on this pricing, is it over a year or is it some customers on the longer contracts? And then one last clarification, I think you called out a 60% ACV uplift on conversions this quarter, that's a little more than I think the 40% to 50% range historically, so little color there would be helpful. Thank you.

Okay, yes. So first-off our average term for subscription contract is two years, it's been that from the start, so that's the average length. Second thing is the 60% uplift, we've averaged in the past more than 50% we have been at 60% before but this was a nice, a nice ACV uplift on those 21 accounts. There was one more, what is the third one.

Well let's say how often the subscription pricing terms?

And we haven't, there's been no noise about the price increase, let's put it that way, there's been no noise, no change in realized discount. So it's been adopted without any impact and by the way, it's a normal price increase for our market, our competitors tend to raise their prices 3% to 5% a year. So it's not something that and we have been doing it with perpetual up through from fiscal 2014 all the way through fiscal 2018. So it's not an out of line price increase from our customer's perspective.

Thank you. And our next question comes from Shankar Subramanian with Bank of America Merrill Lynch.

Hi, Shankar.

Hi, thanks for taking the question. I have a question on just from your PLM business and you made a point that on the BMW side, you won a competitive bid off of that, if you could help me understand apart from the fact that you had IoT and AR that helped you partly, was any technical difference between your Windchill and Aras that helped you win it and as you look into the next few years of BMW, where are the other areas of opportunity for you as it relates to PLM?

Yes, okay. So let me separate a few things. So in general BMW has a high opinion of PTC because they like our PLM technology, they like our IoT technology, they like our AR technology, frankly they really like our genitive technology too. So take that as a general statement. Now on this specific deal that we closed in the quarter where we were competing against Aras, this really was a deal where they needed a system to manage test data against different configurations of vehicles. So on one hand you have to have the test data on the other hand you have to understand the configuration that you tested. But it's a place where we've got to pull in a lot of data from other systems. And so it turns out that ThingWorx is exceptionally good at that. Now in Aras case --

And Navigate is built on ThingWorx.

Yes, right, right. So Navigate/ThingWorx is particularly good at that. So funny enough Aras frequently uses this term meta PLM which kind of means PLM of PLM Systems. And this BMW deal was exactly amid a Meta PLM system. So at the thing that Aras feels most confident about and we beat them. And we beat them because actually we have a very good solution there and it just takes a customer to look deeply at both and then we came away with the deal. So it really was configuration management, data management, and then system integration bringing data from many different systems into the one that's managing the full picture the 360 degree view of what happened in the testing process.

Thank you. And our next question comes from Sterling Auty with JPMorgan.

Yes, thanks, hi guys. Just a quick follow-up, Andy you just touched on your announced retirement congratulations on the great tenure. It just says in the press release that you're looking to move back to California and sit on boards; I do know I will get the question very frequently tomorrow, are you done in retiring from being in an operating role or should we think that this is just partly a transition in joint boards but we'll see you in operating role again?

No, I'm done being involved in an operating role after I came into PTC. I'm done with that, I am on one board now and I look to join probably one or two more.

I just have some color commentary here, Andy, has become, he almost has his own talk show circuit now, talking to other software companies about how to do a subscription transition. So I think every, every company out there that’s thinking about doing a subscription transition is going to want him on their board and he's probably going to be turning boards down left and right here in no time. So I think he likes doing that, I certainly observe us there are many meetings where he's coached other software companies on what we did and what they should do and so forth and I can imagine he's looking forward to doing that.

Thank you. And our next question comes from Saket Kalia with Barclays Capital.

Hello, again, Saket.

Hey, thanks for getting me back in the queue. Maybe just for you Jim a quick follow-up, can you talk about just linearity in the quarter. You know it sounds like maybe kind of exiting last quarter when we sort of finished up the earnings call, we sounded good I mean obviously you pointed to the idea that maybe closer I'm sorry that the macroeconomic conditions have maybe changed pretty dramatically in the last four to six weeks. But can you just talk a little bit about the linearity in the quarter in terms of sentiment maybe Andy for you just in terms of -- in terms of bookings?

Yes, I think your question is how did the quarter develop and I really think it got away from us in the last two weeks and that was in part because we realized this mega deal was in a different place than we thought it was and we began to see some of course the government shutdown happened and a couple of deals popped out and so forth. So I think it was kind of mid-December that we really said oh wow this is -- we had some challenges here.

So one thing I would add is actually some of those deals were in there up to the very -- including the mega deal were in there in the forecast up to the very last day of the quarter, Saturday --

Yes.

December 29th when we got the word that it needed another approval and that person needed to approve it was on vacation.

Okay. So Tim has given me the word here that we probably don't have time for any more calls but I want to thank you all for spending hourly time with us here this afternoon and Q1 did shape up to be a little different than planned. Nonetheless we had outstanding financial performance on revenue, on earnings, and margin. We feel like there was a little downside on subscriptions some slippage but on the other hand some upside that came in, thanks for the last time buying perpetual, the year looks for us the same as it ever did slightly different mix but mix is fundamentally unimportant. From this point forward, it's really a non-issue because we're not selling perpetual anymore with the one small exception that is sort of a single-digit exception. So I think we're very quickly going to get to steady state in the mix in the 90s and it will get boring and we'll stop talking about it. But anyway I think we feel good about where we are competitively with IoT and AR which are strong growth markets. Our CAD business did phenomenal, our PLM business of course was part of the big deal issue but that business is strong and we're winning competitively and we're winning analyst awards. So we feel good about where we are and we look forward to seeing on the road over the next quarter and if not we'll talk again in 90 days. So thanks and have good evening. Bye-bye.

Bye.

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