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PTC Inc (NASDAQ:PTC)
Q4 2019 Earnings Call
Oct 23, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC2019 Fourth Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. You may begin.

Timothy M. Fox -- Vice President of Investor Relations

Thank you. Good afternoon everyone and thank you for joining PTC's Conference Call to discuss our fiscal Q4' 19 Results. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer and a special guest with us today Jon Hirschtick, CEO of Onshape. 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 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. Forward-looking statements included on this call represent the Company's view on October 23rd 2019 and PTC disclaims any obligation to update these statements to reflect future events or circumstances.

As a reminder, we will be referring to operating and non-GAAP financial metrics during today's call. Discussion of our operating metrics in the items excluded from our non-GAAP financial measures and a full reconciliation of GAAP to comparable non-GAAP financial measures under both 606 and 605 are included in this afternoon's earnings release materials and related Form 10-K.

I'd also like to remind everyone that starting with the first fiscal quarter of 2019, we adopted ASC 606 on a modified retrospective basis in our earnings documents we provided results under both ASC 605 and 606. Please note that the SEC requires the presentation of 605 results for the comparability with the prior year results as such our discussion on this call will focus on 605 results unless otherwise stated.

Also, please note that certain operating metrics such as bookings and ACV are under the same both for 606 and 605. And with that, I'd like to turn the call over to PTC's CEO Jim Heppelmann.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Thanks, Jim. Good afternoon everyone and thank you for joining us. As Tim mentioned, we are very excited to have John Hirschtick joining us this afternoon to help me ushering what we believe is a new era of Software as a Service or SaaS in the product development industry. PTC and Onshape share a common vision around helping organization's transform the way they develop products. Onshape's peer, multi-tenant SaaS platform is a perfect complement to our market leading, on-premise product development solutions and coupled with our industrial IoT and AR solutions, we can address an even broader part of the waterfront of digital transformation that sweeping across the industrial market.

Before John and I provide you with some additional color on our combined vision for PTC and Onshape, I want to provide highlights of our 4th quarter and fiscal year 2019 performance and discuss progress against key strategic initiatives. Given all the news and updates we're planning to share today, we know there is a lot to absorb and I'm guessing that we will run out of time before we run out of questions. So to help further unpack all the moving parts, we're hosting an investor webcast on November 18th where we will review our long-term financial targets, show you how we plan to get there and provide more insight as to how Onshape plays in the picture. Stay tuned for more details on that event coming from PTC's IR team.

On our Q3 earnings call, I characterized fiscal 2019 as a transitional year where we achieved some important milestones like going global with subscription licensing while navigating through some short-term challenges in the business including a lackluster macro situation in the industrial world. With that as context, I'm very pleased with our Q4 results and confident that we've established a strong foundation for accelerated growth going forward.

Our Q4 financial performance was solid with revenue, operating margin and EPS, all within our guidance range. Q4 bookings of $150 million was above the high end of the guidance range. Thanks to our core business delivering above plan results and very strong performance in our growth businesses. Despite a challenging macro situation and a global PMI, this has been below 50 for nearly six months now both Q4 and fiscal '19 bookings represented record sales for PTC. ARR, which is the key top-line metric will be focusing on going forward grew 12% year-over-year in constant currency, right in line with the target we outlined in early September.

With PTC now firmly established as a double-digit grower, you'll see in our guidance later that we're lifting our sites a bit and aiming toward a mid-teens ARR growth rate in fiscal '20.

Going first in the highlights within our core business, POM had a strong bookings quarter and came in ahead of plan while CAD bookings showed a strong sequential increase., thanks in part to a rebound of both in the channel and in a geography where bookings have dropped significantly following the last time buy and termination of perpetual licenses. We are not yet back to where we were in those deals but the trend is good and we recaptured some ground.

In our growth businesses, IoT had a very strong quarter, which included a mega deal with Rockwell Automation. Excluding the mega deal, IoT still delivered one of the strongest expansion quarters to date with over 70% of the bookings, driven by a record number of six figure deals which highlights the momentum we're seeing in the business.

Our augmented reality business delivered another strong quarter with six figure ARR deals accelerating once again driven in part by continued traction with our newest solution Vuforia Expert Capture. Fiscal '19 was a pivotal year for ARR with industrial enterprise adoption clearly gaining traction across a wide range of vertical markets including medical devices, pharma, aerospace and defense, high-tech and automotive. Two analyst reports covering the AR market were published in the quarter and we were pleased to see Vuforia declared the clear leader in each. With ARR delivering strong growth in Q4 and a strong pipeline headed into fiscal '20, we're confident that ARR is emerging as another exciting and dependable long-term growth engine for PTC.

Turning now to our three strategic alliances, we pleased to see continued traction in Q4 with the pace of business accelerating in each. Beginning with Rockwell Automation, following strong Q3 performance the Rockwell team capped off the first year of our alliance by delivering a 75% sequential increase in new deals. For the full year, our alliance delivered nearly 100 transactions in 21 different countries across the broad cross-section of vertical markets highlighting the deep industrial domain expertise and brand recognition that Rockwell Automation brings to the relationship.

The synergy is great because 70% of the accounts that Rockwell has sold to represent new logos for B2C. With a large and growing pipeline of opportunities, expansion deals accelerating and over 2000 employees trained globally, we're more confident than ever about the success of this key strategic alliance.

In our Microsoft Alliance, Q4 performance was once again strong with 72 deals closed in the quarter, double the number of deals closed in Q3 and bookings ended the year well above plan.

Geographically, the Americas continues to be a main driver of growth, however the European team had their strongest performance to date and Inc their first seven figure transaction. Overall, we're very pleased with the momentum of this alliance and we're excited to be so closely aligned with Azure IoT and Mixed Reality and with Microsoft generally in the manufacturing space.

Lastly, on the Alliance front, we continue to see emerging signs of traction for Creo Simulation Live, our CAD solution that uses real time simulation technology from our strategic alliance with ANSYS. We closed 126 transactions in the quarter, a 66% sequential increase from Q3 and we landed a number of follow on expansion deals. With live simulation now available and Creo 4, 5 and 6, we expect adoption to further accelerate in fiscal '20.

To summarize on the growth front, Q4 was a strong quarter that wrapped up a solid year. Despite the challenging macro situation, our CAD and PLM businesses saw combined constant currency ARR growth of 11%. Our focus solutions group what I referred to at times as our productivity zone close the year stronger than expected, delivering 10% constant currency ARR growth for the year. And our IoT and ARR growth engines delivered 28% constant currency ARR growth.

With the combination of IoT and AR, exiting fiscal '19 at greater than 12% of total ARR and above 1/3 of total bookings, these businesses represent a growing slice of the PTC pie as we enter fiscal '20 which bodes well for our growth rates going forward. Now if you step back and look at the PTC portfolio in fiscal '19, you see that on top of a strong and stable core business, we have two great growth engines in ThingWorx IoT and Vuforia AR. As we head into fiscal '20 with the Onshape acquisition, we're now bringing on a third growth engine. As part of our diligence process we commissioned a market study from McKinsey that suggested the SaaS-based CAD market would grow more than 35% year-over-year and represent nearly 20% of the total CAD market in five years. While Onshape is new it sure feels familiar to us because oshape lives in the same CAD and PLM market space as our core business. It's simply a next generation SaaS version of a technology concept the PTC itself pioneered 30 years ago.

Onshape is not a distraction for us but rather a doubling down and CAD and PLM to ensure that these core businesses will continue to grow and thrive over the longer term as the industry moves to SaaS.

As you know, we at PTC have been talking about the renaissance of CAD for some time. We have realized that along with generative design, real time simulation, augmented reality, IoT and additive manufacturing SaaS will surely play a role in this industry renaissance. Once you realize how important SaaS will be and why then you can't avoid the realization of how important Onshape the only pure SaaS player will be to this industry. Onshape is the first and only from scratch native SaaS product development platform that unites CAD, data management and collaboration tools in the next generation package.

Onshape is a very unique asset, because of the incredibly high cost of entry into the well-established CAD market you simply won't find another CAD SaaS start up out there. The only people who could even attempt to start up this bold are those with a track record so strong that they can raise 9 digit amounts of venture funding and pull in some of the industry's best talent which brings me to Jon Hirschtick, John McEleney and Dave Corcoran who founded Onshape and run the company today.

I think it's fair to say that John and Dave are some of the most accomplished entrepreneurs in the history of the CAD industry. They created SolidWorks to capitalize on the Microsoft Windows wave in the mid 1990s and then turn it into a grand-slam after it was acquired by Dassault helping to solve position SolidWorks is the primary growth engine over the past two decades. Ultimately, these guys came to the understanding that SaaS would be as disruptive to the CAD establishment as Windows was and that the CAD and PLM industry would surely move to SaaS just as nearly all other software industries already have.

I agree with their premise that SaaS is inevitable in our world and there are many strong reasons why.

Onshape is a bona fide growth engine that will allow PTC to take share in the growth as parts of the CAD market. I'm eager to share the benefits the SaaS brings to the world of CAD and PLM but since we have Jon Hirschtick here with us, I'd like to give him a chance to tell you firsthand what he and his team have been working on. John, can you share a little bit about your team in the work that brought you here to PTC?

Jon Hirschtick

Happy to. Thank you, Jim. Let me first say how excited I am today, I've spent my entire career since the 1980s in our industry, working on CAD and other software for product development. I've been lucky enough to be part of some of the biggest moments in the past in our industry and I feel like today is perhaps the biggest moment I've experienced in our industry.

When Jim and I met earlier this year, it was so exciting to me that he had the strong clear vision that we share for the power that a pure SaaS platform could bring to the product development world, it was so refreshing for me to see also Jim's understanding of and commitment to pure SaaS, pure cloud since so many others in our market are pursuing partial cloud approaches and frankly partial cloud has been shown to fail time and time again in other markets.

Beyond just Jim's vision, he also obviously has to resolve to take bold action to pursue his pure SaaS vision. And thank you Jim for the kind words about me and my follow-on shoppers. I'm very fortunate to be working with a lot of the great team that was with me when I founded and with CEO at SolidWorks.

My Onshape Co-founder John Maclean is also worked in our industry since the '80s most notably, as my business partner and another former CEO at SolidWorks. Another Onshape Co-founder Dave Corcoran is a former VP of R&D at SolidWorks and is one of the key minds that shape several the greatest products in our industry, including SolidWorks and of course Onshape.

I wish I had the time here to tell you more about each of the rest of the 100 or so people on the Onshape team, a fantastic group. We founded Onshape because we saw the problems product development teams have with installed software applications and sharing data by copying files often thousands of files among different people and tools. Whether product developers realize it or not, they're all losing time, efficiency and innovation to these problems.

At the same time we saw how companies using pure cloud pure SaaS technology like Salesforce, Workday, NetSuite Zendesk basically everyone who are reinventing other software markets. We saw that we could solve many of the problems in product development but we would need as Jim said, to build a clean sheet new generation system to do it and that's what we've built with Onshape. Today we have thousands of customers using Onshape with story after story of them developing products faster than they ever could be more innovative, the great products that they're developing with Onshape is our ultimate reward.

So it's probably easy for you to see why I'm excited to be partnering with PTC. PTC is going to help us dramatically grow the number of customers we can reach with Onshape. PTC is also going to draw in their strong technical breadth and depth to further broaden the scope of what we offer on the Onshape platform. Thank you.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Great. Thanks, Jon. I can't tell you how excited I am to have you and your team on my side this time around as we head into another wave of industry change in transition. Let me share a few important thoughts about how Onshape fits with PTC's core CAD and PLM strategy. Our near-term goal is to increase our participation in the growth as part of the CAD and PLM market, which really represents an adjacency to where Creo and Windchill play today. Jay Vleeschhouwer pointed out in a recent report that last year there were 174,000 new seats of CAD sold in the market, globally with the SolidWorks business taking about 80,000 and Autodesk inventor business capturing about 40,000. Creo, CATIA and NX put the bulk of the rest. In the near-term and mid-term it is that 70% of the market served by SolidWorks and inventor that's most interesting to pursue with Onshape.

Onshape gives us an opportunity to both participate and then disrupt this part of the market and we can enter and play with a very strong hand. Thanks to the massive advantage and innovation velocity that John spoke of, plus some great new technology like generative design that PTC can share within the portfolio, we expect Onshape will quickly mature into a full featured SaaS CAD solution. There will be no glass ceiling on shape capabilities like SolidWorks do it over the years because PTC's positioning will be that we have the best of two different worlds. Creo and Windchill our best-in-class in the on-premise world and Onshape CAD and PLM our best-in-class in the pure SaaS world.

It's happened time after time that disruptive new technologies gain traction first in the SMB space where customers generally have more flexibility to switch and then proceed up market over time. We expect that any SMB buyer who looks at Onshape will stop dead in their tracks due to its amazing capabilities plus all the fundamental SaaS advantages it offers. I'm referring to cost of ownership, support for any type of client device including phones and tablets, ease of getting started collaboration that works like Google docs and plus no need for upgrades and patches no file servers and so forth.

Of course, in addition to SMB customers, John is going to take orders from companies of any size because in the long run the SaaS benefits are even more pronounced at the high end. Like Salesforce.com, we expect to get there over time and believe the high-end competition will be very vulnerable to what John and his team have built. That's why we all have the Axiom that debt comes from below in the software industry.

I want to stress that PTC remains 100% committed to long-term aggressive development of Creo and Windchill. We want to be best-in-class with either deployment model so we will continue our pursuits of real-time simulation, generative design, additive manufacturing IoT and AR infusion in all the other great things that we've been working on with Creo and Windchill.

But in parallel, I expect you'll see many of the same capabilities appear Onshape, and surprisingly quickly giving the fundamental innovation velocity of the SaaS model, when the day comes that Dassault, Siemens, Autodesk or PTC customer wants to move to SaaS we will be there ready to guide them but, our real focus in the near-term and mid term is on playing our strong new hand in the growth as part of the market where we simply don't show up today. If you back up to 50,000 feet, you can see that Onshape represents a huge and invaluable injection of SaaS technology, business processes know-how and culture in the PTC. Onshape will dramatically expedite PTC's own transformation to SaaS, the industry is most certainly headed there and PTC is now positioned to pave the path with Jon and his team are leading the way.

I think this acquisition PTC is biggest ever will transform the industry were both solidifying and accelerating PTC's long-term growth opportunity in CAD and PLM. We're extremely excited to welcome the Onshape team to PTC.

And with that, I'll turn it over to Kristian to comment on financials and guidance.

Kristian P. Talvitie -- Executive Vice President and Chief Financial Officer

Thanks, Jim. Thanks, John, and good afternoon everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance and all growth rate references will be in constant currency. And as Tim mentioned earlier, we adopted the new revenue recognition standard ASC 606 under the modified retrospective method on October 1, 2018. For year-over-year comparability purposes, I will be discussing our results under ASC 605 unless otherwise stated.

Please note that this will be the last quarter we report results under both accounting standards and the guidance provided today will be under the ASC 606 standard. Lastly, our guidance assumes that the Onshape acquisition closes in November following normal regulatory approvals and certain closing conditions.

Let me start off with a review of our fourth quarter results. I'm going to keep my remarks brief hitting just some key highlights and ask investors to refer to our press release and prepared remarks documents available on our IR website for additional details.

Q4 bookings of $150 million were above the high end of guidance and included a mega deal with Rockwell Automation, excluding the megadeal, bookings would have been well within our guidance range. Q4 ARR for the new definition was $1.116 billion and at our guidance FX rate was $1.134 billion representing 12% year-over-year growth, which was in line with the guidance we outlined in our September preview. Our fiscal '19 new ACV and churn results were also consistent with the guidance provided in the preview.

As Jim mentioned earlier ARR in our growth businesses was up 28% year-over-year at constant currency which was slightly below the outlook we provided in September. It's important to note that bookings in our growth businesses were up over 50% year-over-year in Q4, but because we closed a higher number of ramp deals than anticipated and had a number of other deals with fiscal '20 start dates, our Q4 ARR growth was slightly below our target. However, we now have even more IoT and AR backlog to support what we are expecting to be ARR growth well above market growth rates in fiscal '20.

Total Q4 revenue of 335 million was up 9% year-over-year despite a 1300 basis point increase in subscription mix, operating margin of 22% was at the high end of guidance and was an increase of 100 basis points year-over-year and lastly EPS of $0.45 was within our guidance range.

Moving on to the balance sheet, in Q4,we used 25 million to repurchase 378,000 shares and we repaid 30 million on our revolving credit facility. Finally, on our Q4 results, FY '19 adjusted free cash flow of 245 million was 15 million below guidance due to several one-time items including FX impact of approximately 6 million, collections received on October 1st versus September 30th of about $5 million and taxes associated with increased invoicing of about $6 million.

Now turning to guidance and as a reminder, we provided changes to our new reporting and guidance approach in the FY '20 reporting metrics preview we filed in a September 5, 8-K which you can also find on our IR website. The primary motivation for the changes was our subscription business model transition. We completed the transition of our selling motion early in fiscal '19 and we still have work to do and opportunity for improvement as we continue to transition our customer engagement model to the subscription mould.

A secondary motivation was the adoption of ASC 606 which for on-premise subscription companies reduces the utility of traditional financial measures for understanding business performance. As such, we encourage investors to assess PTC's business performance using ARR and free cash flow as the primary top line and bottom line measures. We will be providing annual guidance for these measures.

From an income statement perspective, we're also providing annual guidance but due to a number of factors that can drive significant revenue and therefore EPS variability, you should expect wider than normal guidance ranges.

These factors include subscription term length, timing of new and renewal bookings, the quarterly spread of new and renewal bookings, conversion of ratable support streams to subscription contracts subject to ASC 606 revenue recognition and any potential changes in revenue recognition under 606 from more upfront to ratable recognition resulting from continued investments in cloud related functionality in our products.

Again, just to highlight the point that we believe ARR is a more meaningful measure than revenue on how the economics of the business work, at the midpoint of our guidance range we're expecting in approximately $150 million increase in ARR, which will result in a revenue increase of approximately $250 million in recurring software revenue. To the extent that we have recognized more upfront revenue in fiscal '20, we would expect revenue to decrease in fiscal '21.

Now for the specifics. Beginning with ARR per our new definition for FY '20 we're expecting a range of 1.25 billion to 1.28 billion or 12% to 15% growth. ARR guidance includes approximately 10 million of ARR or one point of growth from the Onshape acquisition and, seasonally we expect ARR growth to be below the low end of the guidance range in the first part of the year and increase throughout the year. This increase is driven primarily by our backlog of committed ramp deals booked in prior periods.

Turning now to adjusted free cash flow for fiscal '20 we're expecting a range of 255 million to 275 million which includes approximately 65 million of short-term cash related items impacting fiscal '20 results.

These factors include an increase of approximately 25 million in cash taxes related to the significant projected increase in fiscal '20 operating income under ASC 606, an increase of approximately 25 million in interest related to the debt associated with the Onshape acquisition and currency headwinds of approximately $15 million. While these incremental cash items are near-term headwinds to our normalized free cash flow targets, they are transitory and we do not expect them to impact our long-term target.

We will provide more detail on our long-range plan in just a few weeks at our November financial Update Webcast.

Now turning to the P&L guidance. For fiscal '20 we're expecting total revenue of 1.41 billion to 1.51 billion and non-GAAP EPS of $1.95 to $2.60. Operating expenses are expected to grow approximately 9% year-over-year and while this is slightly above our normal rule of thumb where we target opex growth at about half the rate of ARR growth, the slightly elevated expense run rate is due to the onShape acquisition and we expect the run rate to decline in the latter half of fiscal '20 following realization of cost synergies and operational efficiencies that will be implemented in our second fiscal quarter.

With that, I'll turn the call over to the operator to begin the Q&A.

Questions and Answers:

Operator

Now it's time for the question-and-answer session of today's call. [Operator Instructions]

Thank you. First question comes from Matt Hedberg from RBC Capital Markets. Your line is open sir.

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey guys, thanks. Congrats on Onshape. I had two somewhat related questions on the deal. First of all, do you have a sense for how many of your customers have expressed interest in a SaaS-based offering? I'm trying to get a sense for that customer migration over time from Creo and Windchill to Onshape and secondarily, I think you note you're going to continue to invest in CAD and PLM in your legacy products or your core products, how should we think about that gap in functionality closing over time if the SaaS-based CAD market is growing as rapidly as as you suggest?

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Matt, Jim here. We did, as I mentioned commissioned McKinsey to do a study during our diligence phase here and to replace anecdotal data we have quantitative data and McKinsey did a study of around 230 customers. They reported a very strong interest in the concept of SaaS. Some concerns that SaaS products weren't mature enough yet always some concerns about switching costs in the larger the enterprise that the stronger that concern but huge amount of interest and now I would say one of the things PTC came to realize is that this Onshape product is actually much better than we thought it was much more advanced than we thought it was, so we sort of think that the world has it processed how fast this product changes. While we PTC, we're talking to Onshape guys, they did their 101st,102nd 103rd upgrade of the entire customer base. So there is an innovation velocity here that's amazing. And I think it's probably fair to say that Onshape is a mid-range product today. But on a very fast improvement vector and we at PTC would be incentive to offer up any of the great technology we might have to put into that improvement vector.

So this is a product that's better than most people think it is and improving extremely fast and there is a very large amount of interest. So again, the kind of punch line result of the study if you will from McKinsey was that they think that we see a 35% CAGAR over what's there today and that would lead to slightly under 20% market penetration by true SaaS in in the next five years.

Operator

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

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Thank you, good evening. A question for you. Jim, time back to your keynote address at LiveWorx back in June and the Onshape acquisition is fascinating for any number of reasons and I'd like to put it in the context of what you spoke about four months ago, namely your closed loop lifecycle management strategy which you've talked about for a number of years, you've made some progress there, but how do you see Onshape fitting into that larger vision that you expressed at that time, not just for CAD perhaps for the broader portfolio in terms of technology and customers' processes?

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

I think Jay, in simple terms, we will attempt to create two versions of that strategy one that runs on premise and one that runs in the cloud, and of course we already have the one on-premise. So as OInshape matures we will try to create all the goodness the PTC has on-premise in that SaaS world as well and at some point when customers say, I want to learn a little bit more about SaaS we want to be head and shoulders ahead of everybody in terms of providing a very mature, proven full function capability, not just for CAD in PDM and collaboration but the closed-loop ideas, augmented reality ideas, the IoT ideas that you saw, I mean show in that keynote by the way. So it's very exciting, in fact that keynote, you might have noticed one me visionary of the Year designation from one of the analysts in this market and we just want that visionary capability to embrace the SaaS model. That's really where we're going with this.

Operator

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

Ken Wong -- Guggenheim Securities -- Analyst

Thanks for taking my question guys. How is going to Jim? I had a kind of a clarification question, I just want to understand the dynamics of that Rockwell mega-deal. I think that mentioned those kind of credit against the minimum for fiscal year '20 Just wondering kind of how we should interpret that? does that mean the relationship is tracking below the minimums? Is there an ability to get that back on track or am I interpreting that wrong?

Kristian P. Talvitie -- Executive Vice President and Chief Financial Officer

Ken, it's Kristian. You can't infer much from that transaction other than actually things are going well. And to in for more than that isn't possible and because of confidentiality agreements we have with Rockwell, we don't really intend to disclose more. Partnership goes well.

Operator

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

Ken Talanian -- Evercore ISI -- Analyst

Thanks for taking the question. I was wondering if you could give us a sense for how you're thinking about growth in CAD, PLM and separately IoT relative to the high and low-end of your fiscal '20 ARR guidance.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Sure. I think in general, we would expect that CAD and PLM will continue to outpace market growth rates and we actually expect IoT to end up significantly outpacing market growth here in in fiscal '20 again due to some of the factors that I outlined in my prepared comments.

Kristian P. Talvitie -- Executive Vice President and Chief Financial Officer

So I think probably CAD and PLM growth in the range, perhaps a little less than where they are this year but to add some conservatism and if you take that IoT business growing much faster, growing kind of at the rate we've guided you add in the point from Onshape, you take down probably the 10% in the FSG Group, I'm not sure, we're planning to do 10% again, I hope we do, but I don't know if we guide to that. You run some models around that and you're going to land kind of in that range and maybe even near the upper end of it. So our view is that range contains, I'm not sure to a conservatism in case of the economy actually gets worse than it is at this moment and then that it has been in 2019.

Operator

Next question comes from Saket Kalia from Barclays Capital, your line is open.

Saket Kalia -- Barclays Capital -- Analyst

Hey, Jim. Hey. Kristian. Thanks for taking my question here. And congrats on the deal. Kristian. Maybe just one for you. I hate to bring in the 606 accounting item, but obviously 606 rev rec here is going to is going to make revenue a little lumpier to your point, that can be even more magnified by large multi-year deals. I think you talked about the wider range for for income statement guidance which we've seen other companies do as well. But can you just touch broad brush on some of the assumptions that you've made in the revenue guide as it relates to sort of some of those large multi-year deals, which again can be very magnified when it comes to rev rec.

Kristian P. Talvitie -- Executive Vice President and Chief Financial Officer

yeah. So I think as it relates to the, we'll call it, the large portion. I don't, we're not really anticipating any significant change in the overall, we'll call it size of those businesses. And I think that probably the bigger question is what happens to the term length particularly on both new and renewal bookings and the assumption that we're using is in the guidance is that we would expect modestly increasing length of term of contract, particularly on the renewal side. That's probably the one of the bigger factors is really the term length.

Unidentified Speaker

and then of course as you know Saket by eliminating that cancellation clause which we think was an appropriate move that immediately delaying for the effect of all new transactions. So it kind of took those things from one year to two, and in some cases will be 3 . So I think the key thing is just that this number is going to jump around a lot. We're going to have a bang-up year, and revenue growth. And I promise you we're not going to brag about it, because the better we do this year, the more is going to come out of the future and in the end, the business is the same, it's just moving it from year to year based on revenue recognition rules.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

So I promise. We won't growth this year. And then you've got to promise remember next year that we didn't growth this year.

Operator

Next question comes from Joe Vruwink from Baird. Your line is open.

Joe Vruwink -- Baird -- Analyst

Good afternoon and congrats both teams on the acquisition. Jim, your commentary was interesting just in the context PLM with a strong quarter CAD having a sequential rebound megadeals and IoT and all of this is coming in the context of a weakening macro. I'm just wondering if you could maybe reconcile the two dynamics and then as a quick follow-up whether you saw any change in customer spending behavior as the quarter went on. Thank you.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Joe, it's interesting because the PMI number as you probably know is in the worst place it has been since 2009 but it doesn't feel like that out there. Unemployment at. I don't know, I think I heard 50-year low which doesn't reconcile with the PMI being where it was in 2009. So number one this downturn feels a little different somehow and then the second factor is that we are convinced our growth businesses are secular not cyclical. So we also think that a growing amount of what we sell is potentially more interesting when faced with a difficult spending environment, when companies by our IoT technology or AR technology and deploy it for example, a factory, they do that to save money. And so I think that will go out of style in a downturn but it is a bit inexplicable but feels quite good that in the face of what really looks like a difficult economy PTC just posted the best year in 21 years I've been here. So, I feel good about that and we've allowed for some conservatism in our guide just in case but I hope we don't need it.

Operator

next question comes from Adam Borg from Stifel. Your line is open.

Adam Borg -- Stifel -- Analyst

Thanks for taking the question. Maybe just want to dig into Creo Simulation Live, it's great to see continued progress there. And just maybe two parts, one is there an opportunity to embed that into Onshape and then two, as you think about the overall CAD installed base of design engineers, what percent do you think is really addressable by a technologies such as this. Thanks so much.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

So, let me take a stab and then maybe, John, you can add some thoughts on the second one. So with respect to Creo Simulation Live, for everybody's benefit that's ANSYS technology embedded in Creo and it's really starting to get some momentum. Of course, we have not been able to talk to ANSYS about it because you can't really do that before you announce such an acquisition we only analysis this afternoon.

So it's certainly a conversation, we should go have with ANSYS and I can't comment, we would need their permission to extend that right and so on and so forth, but definitely having capabilities like Creo Simulation Live and Onshape, I have to think it would be very interesting. Let's got live simulation and then the second thing, the installed base what the McKinsey study told us was that there is about 35% of the market that wouldn't find SaaS interesting at all, meaning 65% of the market actually has some level of interest.

Now two things. number one the growth as part of the market where the most new seats are sold is really the SMB space where PTC doesn't play is the domain a SolidWorks and the vendor and I think Onshape in a good position to win a good share going forward expanding over time but we're in a good share of those new seats being sold. And then the second thing is I think Onshape it goes beyond that and is a disruptive technology, a technology that will convince people to switch and of course, smaller companies have more flexibility to switch but arguably larger companies have more reason to switch. But you got to balance, sort of the goodness of switching with the switching costs and and so forth to execute this wedge and that's why I think that comes from below disruption tends to happen lower in the market and move up over time as people get more comfortable with it. Jon, anything you want to add to that.

Jon Hirschtick -- Chief Executive Officer Onshape

I think it was great answer.

Operator

Next question comes from Steve Koenig from Wedbush Securities. Your line is open.

Steve Koenig -- Wedbush Securities -- Analyst

Thanks for taking my question. I'll just focus here on OnShape and welcome to Jon, maybe just a few, I'll call them a set of related questions that creates one question. So on Onshape, on the guidance for one point contribution to ARR growth is that a pro forma, is there more revenue there that somehow not getting counted next year? I'm trying to relate that your purchase price and if not then your conversation about 35% growth rate in the markets that we expect that onShape is ramping significantly faster than that?

And then I'll just put it out there, any comments on how Onshape competes or differentiates with audited fusion and also comments on what channel will you used to sell it. And is there an existing Onshape channel or will you be building one? What's the go-to-market going to look like? Thanks. And that's all I have. Thanks very much guys.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

John, let me hit the first couple one and then maybe you can pick up the competitive one. So the 1% ARR is AR growth 100 basis points is taking what Onshape is already doing plus the growth we're projecting in simply adding it in the PTC's plan for what 11 months question. So. But you're right about that Matt now Onshape has been growing much faster than 35% in frankly I hope they continue to do so.

So within the market that's growing 35% of course we are in a position I think, to take a quite a bit of share. So I don't think you should think that our plan with necessarily be 35% but you should think that the market for this one study would support aggregate growth of 35%. You want to hit the competitive?

Jon Hirschtick -- Chief Executive Officer Onshape

Yeah, happy to Steve you mentioned competitive position with Autodesk I think their vision aligns with ours, they say that the future SaaS as a future. They don't back it up with the goods yet, I mean our view as Jim said, we aligned completely on the idea that you have to have a cloud pure SaaS platform and offering, Autodesk today offers a partial solution that we're mixing installed software with cloud -- partial cloud services and so forth. Those strategies are not things that we believe are way to deliver the values, the value we seek to deliver to customers and so we think we have a big advantage there.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Yes and let me add to that. Our studies showed that Onshape pretty much goes toe to toe with features and functions against SolidWorks but beats them for anybody wants SaaS because SolidWorks don't SaaS and our study said that against Fusion, it's a better -- much cleaner better and more complete SaaS model and blows them away on functionality. So we think we're in a very good strong competitive position against both of those with the Onshape technology and then with respect to the channel, one thing that PTC has which could prove very helpful here is a channel that lives in the bottom half of the market or at least, kind of in the middle part of the market and could go down market so under NDA, I've had the luxury of running the Onshape technology past some of our channel partners as part of our diligence and they are very, very excited. They feel like a sort of like once upon a time to so had SolidWorks in one hand and Catia in the other and that was a tough left right punch against PTC we sort of have that again SolidWorks now.

You want to go simple SaaS that model we've got a great product, you need more features we have Creo, one of the things wonderful things we've been doing there. So I think we need more time to plan, what role our channel will play here, but I think it's definitely an asset that is going to prove to be very, very important, as this picture unfolds over time.

Operator

Next question comes from Yun Kim from Rosenblatt Securities. Your line is open.

Yun Kim -- Rosenblatt Securities -- Analyst

Congrats on the deal, Jim. On your core business, I am just going back to the basics here, but on your core business how much of your IoT and AR business is generated within your core CAD and PLM install base and along that line if you can just give us at a high level, at least how much of your IoT and AR business is driven by the Rockwell Automation partnership today. Just trying to get a better understanding of where do the IoT and AR growth opportunity is in the near term?

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Kristian, do you have data in the first one? I can only give you estimates on both of those. I probably the second one. But on the first question, how much of our IoT and AR is sold into our installed base again PLM? I'm going to probably say 50%, 60%. I mean, on one hand we have those relationships that are extremely useful. On the other hand, we're winning in all kinds of accounts. Because we're a little bit uncontested right now. So we're also trying to go and having success going well beyond the installed base and of course, as I mentioned what Rockwell cells is well beyond the installed base.

And then on the second question, how important is Rockwell, Rockwell would be single digit percentage of what we're doing right now, but growing quickly. So they've gone from not part of our strategy to a small part at this moment but it's a small part growing at a high rate and should become increasingly material as we go forward.

I can imagine Rockwell getting up to be double-digits, and I don't know, maybe down the road somewhere quarter of our business. They have a massive installed base, they have a very high win rate they having good deployment success the future with Rockwell looks very, very promising.

Operator

Next question comes from Sterling Auty from JP Morgan. Your line is open.

Sterling Auty -- JP Morgan -- Analyst

I want to go back and put a finer point on Steve Koenig's question. So with Onshape if it's 1%, It sounds like this is about a $10 million revenue generator in terms of where onShape is and if I take 5,000 or so subscribers times the printed pricing that kind of supports that idea for 470 million net cash, it's a big multiple to pay and I don't think anyone disagrees that they've got the leading technology on the market but they've been around for a number of years and we're seeing slow adoption at this point, just to play devil's advocate, what was the buy versus build decision? $470 million just invested in internally.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

That's a good and fair question in the buy versus build a good place to start. It cost Jon with the incredible team of the best guy in the industry 6 or 7 years, $100 million to get where he is right now. So for me, it would be a little harder to do that our entrepreneurial efficient thing. So our estimate is it would take us at least five years in several hundred million dollars to build what he has, so there are several hundred million dollars of synergy here.

Now the second thing I'd tell you about the price is if this is a unique asset is the only one out there which gives Jon of course some negotiating leverage. Another point is it's the same revenue multiple that we paid for ThingWorx and it's the same revenue multiple that the sole paid for SolidWorks at the same size. If you adjust the difference between multiples on perpetual versus multiples on subscription revenue streams, ARR streams. So I think you and I both would agree that $100 million ARR stream is worth more than $100 million perpetual onetime stream. So if you take the difference in those multiples and gross up what the whole paid for SolidWorks by that factor you get to what we paid for OnShape.

So I think I can triangulate on this many different ways and I think this is a very good buy at this point, it's a win-win for both parties.

Operator

Next question comes from Tyler Radke from Citi Investments. Your line is open.

Tyler Radke -- Citi Investments -- Analyst

Sorry about that. Can you hear me now.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Yes.

Tyler Radke -- Citi Investments -- Analyst

Thanks for taking my question. I have two questions, I will try to fold it into one here, but I guess just at a high level Jim, obviously, nice to see kind of some of the reported metrics come in line or ahead of plan this quarter, I guess more broadly, how do you feel about execution and sales capacity and then, is a follow-up for Kristian. I think you mentioned kind of a gradual ramp in the ARR growth as we go into next year. Just curious if that's a function of what you're seeing in the macro environment or if there is something else we should be thinking about. Thank you.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

I think on the execution side Q4 was a solid quarter. We didn't have to make a lot of excuses, you can take the megadeal and all of those but still a solid quarter. So I think we feel pretty good, no surprises in Q4, it went more or less like we expected to and I think we feel pretty good about the forecast going forward. We have strong pipeline, lots of momentum, lots of good stuff happening, so I think we were all stressed particularly 90 days ago, but certainly the past 90 days have been a good 90 days. Kristian?

Kristian P. Talvitie -- Executive Vice President and Chief Financial Officer

Yeah. And again, just on the seasonality on the ARR remembering that that is the entire we'll call it stack of customer arrangements that we have and as such, you need to consider, we'll call it rate of new bookings the expiring base kind of churn and looking at those variables and then also understanding the committed ramps as those layer in throughout the year and even deals that were booked with start dates throughout the year, understanding how those layer in that's how we get to that range 12% to 15% for the year.

And as I said, I think we're going to start the year below that range. And it will ramp throughout.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

And I want to add. Maybe just some color to something Kristian said, we used this term backlog and what he is referring to is, we are sitting on signed contracts right now that for example may ramp up a big notch in Q3 or Q4. We don't have to go win that business, we just have to wait for Q3 or Q4 to get here and it kicks in, so that's one of the reasons why we see this ramp is because we're sitting on a fair amount of already closed business that does not count in Kristian's new definition of ARR because it hasn't started yet so it's really a combination of overlaying the backlog we are sitting on with the forecast we're looking at and seeing that seasonal shape.

Operator

This will be the last question. After the question all callers please remain on the line for closing comments from CEO, Mr Jim Heppelmann last question comes from James Jason Celino from KeyBanc Capital Market.

Jason Celino -- KeyBanc Capital Markets

Thanks for fitting me in. I wanted to kind of unpack the IoT, ARR growth in the quarter. 28% constant currency still very good above market rate but a little bit more deceleration I expected I appreciate the full backlog we have and that's encouraging, but can you just kind of unpack Q4 a little bit.

Kristian P. Talvitie -- Executive Vice President and Chief Financial Officer

it really, you have to unpack bookings from ARR and again remembering that for our definition ARR is again the full annualized contract value of all the contracts that we have at the end of the period, that are active and that's what we ended up with, in terms of year-over-year growth the 20%.

Now also remember that what I said was we had a very good bookings quarter for IoT in Q4 and a good chunk of those bookings have start dates that are in fiscal '20 and then in addition to that we also have previously committed ramp deals as well as some other ramp deals that were booked in Q4 which pushes the ARR really into '20 and we would expect a pretty significant increase in ARR above market growth rate in '20 as a result of the timing of how that ARR flows through.

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

If I could add two cents to that Jason Kristian mentioned very strong bookings but if you remember our business is really back-end loaded in the quarter. So if we do our good-sized deal in the last week of the quarter it's highly unlikely that deal is going to start in that same week if it starts next week. I'm sorry it's backlog.

So really what we need to do is to try to that estimate how much of the deals will start in the same quarter they are purchased, first we have to win the deals but secondarily, we have to try to estimate the start date in order to understand will it be in the ARR, or will it be backlog and it will jump into the ARR in the coming quarter and what really fundamentally is a deal here is more of it ended in backlog then in AR but that sets us up nicely for next year.

Timothy M. Fox -- Vice President of Investor Relations

Okay. I think that's the end of that, so I want to thank everybody for joining the call and spending an hour with us this afternoon. So, again in summary, it's a challenging macro environment, but we closed a strong year of ARR growth. The IoT and ARR business are working well, the core CAD and PLM business are working well, the focus Solutions group business had a pretty strong year actually and all of that against this backdrop. So on top of that Onshape has entered our lives here, and it is clearly going to be a new growth engine, but also longer term path to a SaaS future.

So there is a lot here at PTC that we're proud and excited about. And if you get a chance to join us on the November 18 webcast, we're going to take you into much deeper detail particularly along around the long-range plan and free cash flow and all the puts and takes in assumptions and sensitivities and so forth. So we'll try to give you a good clear view on how doable that is and I think you like the answer. But if you can't join then I look forward to talking to you in 90 days if we don't have in the past cross paths sooner. So, thanks for joining us. Bye bye.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Timothy M. Fox -- Vice President of Investor Relations

James E. Heppelmann -- President, Chief Executive Officer, Director and Member of National First Executive Advisory Board

Kristian P. Talvitie -- Executive Vice President and Chief Financial Officer

Unidentified Speaker

Jon Hirschtick -- Chief Executive Officer Onshape

Matt Hedberg -- RBC Capital Markets -- Analyst

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Ken Wong -- Guggenheim Securities -- Analyst

Ken Talanian -- Evercore ISI -- Analyst

Saket Kalia -- Barclays Capital -- Analyst

Joe Vruwink -- Baird -- Analyst

Adam Borg -- Stifel -- Analyst

Steve Koenig -- Wedbush Securities -- Analyst

Yun Kim -- Rosenblatt Securities -- Analyst

Sterling Auty -- JP Morgan -- Analyst

Tyler Radke -- Citi Investments -- Analyst

Jason Celino -- KeyBanc Capital Markets

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