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PTC Inc (NASDAQ:PTC)
Q2 2020 Earnings Call
Apr 29, 2020, 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 PTC 2020 Second Quarter Conference Call. [Operator Instructions] Following the presentation, the conference will be open for questions.

I would now like to turn the conference over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Tim Fox -- Vice President of Investor Relations

Great. Thank you, Valerie. Good afternoon, everybody, and thank you for joining us today on PTC's conference call to discuss our fiscal Q2 2020 results. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial 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 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. As a reminder, we'll be referring to operating and non-GAAP financial measures today during the call, discussion of operating metrics and items including excluded from our non-GAAP financial measures, and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related Form 8-K. And lastly, references to growth rates will be in constant currency unless otherwise noted.

With that, let me turn the call over to Jim.

James E. Heppelmann -- President and Chief Executive Officer

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. I hope you and your families are safe and well during this crisis. Before I jump into review of our quarter, I'd like to start by thanking our tens of thousands of customers around the world for their continued support and loyalty. Many of our customer relationships date back two and three decades now, which shows how important the relationships have been to both parties. We've been through several crises together, and we'll get through this one too. I'd also like to thank PTC's 6,000 employees around the globe for their hard work and commitment during the crisis. The way our team has embraced the remote work environment, while pushing forward to strategic initiatives and leaning in to support our global customer base, is a testament to the great culture we've built here at PTC. Overall, we are very pleased with our fiscal Q2 results. We delivered 11% ARR growth, 25% revenue growth and 170% EPS growth.

We did experience some bookings pressure related to the pandemic in the final weeks of the quarter, resulting in new ACV bookings being down mid-teens year-over-year. The impact came late in the quarter and was greater in Europe and Asia and within our smaller channel customers. Renewals were essentially unaffected by the crisis in Q2. Looking ahead, we're mindful of the pressure that the pandemic will place on new bookings, and our guidance reflects that. Still, we continue to target double-digit organic growth in ARR, revenue and EPS for the full year despite factoring in the potential of severe demand challenges and modest renewal headwinds as well. I'm very pleased that PTC remains able to provide such a strong outlook given the very conservative guidance assumptions that Kristian will outline later in the call. Our strong Q2 results and outlook are not due to luck or happenstance, but are attributable to several successful strategic and operational initiatives we've executed over the past few years. These actions were initially taken to position PTC as a premium software company in a timeless manner, but they're proving to be particularly fortuitous in the current crisis environment.

I'm referring to our business model transition, our successful expansion into high-growth IoT and AR markets, our recent embrace of a pure SaaS future through the Onshape acquisition, and the restructuring we did earlier this year before the pandemic arrived. Because of these changes, PTC is positioned to hold up well during the downturn, and we're very well positioned to drive even stronger growth and shareholder value creation once this crisis passes. Q2 ARR growth rates were 10% for the core business, 30% in the growth business, and low single digits in the Focused Solutions group. Each business performed just modestly below the level we would have expected without the crisis. The data is in the prepared remarks, and there's nothing particularly notable there, so instead of going deeper on Q2 results, let me instead use my time to take you through the strategic changes we've made to transform PTC into a company that's well positioned for this downturn. Understanding these changes will help illuminate the confidence we have in our guidance and in our longer-term future.

The biggest change has been our successful transition to a subscription business model that was completed last fall as we wrapped up fiscal 2019. Today, over 95% of our software revenue is recurring. In stark contrast to the 2009 financial crisis, where double-digit bookings declines led to double-digit revenue and earnings declines for PTC, our fiscal 2020 guidance is targeting double-digit organic ARR growth with even higher levels of revenue growth plus expanding margins that drive strong EPS growth and solid free cash flow. This is despite Q2 new bookings declines and the assumption of more significant year-over-year bookings declines in Q3 and Q4. The recurring nature of our business model is allowing us to largely protect earnings and cash flow without materially impacting our ability to make key investments in our growth businesses to further extend our competitive positioning. The second big challenge or the second big change over the past few years has been the expansion of the markets we serve, enabled by strategic changes in our product portfolio.

I think there's broad consensus that inside this terrible crisis, it is digital technologies that are coming to the rescue and keeping many of us productive to avoid a much worse situation. As we've seen with video calls, anything digital that empowers a distributed workforce and embraces remote work is the most compelling of all. Fortunately, for PTC, IoT, AR and PLM are all about remote work, digitizing product data and factory data and worker expertise so that it can be used by a distributed workforce is the very point of these technologies. We expect that the new normal that follows this crisis will create stronger tailwind to the already high-growth IoT and AR markets, and will make PLM more relevant than ever. Let me double-click on augmented reality. PTC's Vuforia AR suite allows companies to capture and digitize human expertise for purposes of collaborating with, training, and supporting remote frontline workers. We've all seen Zoom, Teams and GoToMeeting usage explode for knowledge workers, but these tools don't bring any value to frontline workers. Vuforia does essentially what Zoom does but for frontline workers, and there are three times more frontline workers than knowledge workers on the world.

Vuforia is a strong leader in industrial AR, and PTC really stands to benefit as enterprise AR adoption accelerates. Here's an interesting proof point. In response to the crisis, we decided to provide free access to Vuforia Chalk, the entry-level capability of the Vuforia Suite. Think of Vuforia Chalk as like a Facetime call that allows you to see and mark up the real-world environment at the frontline workers' factory or work site. It's incredibly helpful for remote support and problem solving. By making Chalk free for the crisis period, we eliminated sales friction and quickly introduced AR for the first time to thousands of companies who are desperate for an immediate solution. Rockwell Automation and other companies partnered with us in promoting this initiative. Here in the U.S., the National Association of Manufacturers embraced AR as a key strategy for their manufacturing constituents and promoted our free Chalk initiative. The NAM went a step further and published a paper that Prof. Michael Porter and I coauthored on the topic of using AR to drive frontline worker productivity, which you can find on our investor website.

The adoption of Chalk has been amazing, and daily Vuforia Chalk AR collaboration traffic soared to levels 10 times higher than it was before the crisis. These companies using Chalk represent a big upsell pipeline to pursue in Q4 and beyond. Please check out ptc.com/freechalk to learn more, including a nice case study that discusses Toyota's use of Chalk to provide remote support to factory workers. Toyota incidentally is currently our largest Chalk customer. Moving on to IoT. From the beginning, PTC's IoT story has been about remote monitoring of smart connected products and remote monitoring of smart connected factories. Many medtech companies use PTC IoT solutions, and we've already experienced large spikes in IoT usage, as several medical diagnostics customers rush to launch new smart and connected diagnostics and treatment equipment to respond to the COVID crisis. Because IoT and AR are both such strong drivers of digital transformation, ThingWorx and Vuforia solutions are frequently used together to allow customers to remotely monitor and diagnose assets, and then to allow remote experts to collaboratively troubleshoot with frontline workers even from the safety of their homes. In a joint study that PTC and BCG recently published, we found that 81% of IoT projects see added value in AR, while 76% of projects that started with AR see real value in adding IoT.

There's an important takeaway here. IoT and AR together form the foundation for a new era called spatial computing. This wave will be big, but it's just starting to form. Last week, PTC launched our first spatial computing offering called Vuforia Spatial Toolbox. I'm very excited about the possibilities for spatial computing in the industrial world of plants, factories and work sites, and with best-in-class IoT and AR solutions to build on, PTC has a real competitive advantage as this wave comes together. Our Windchill software has been a real hero during the COVID crisis too. Because Windchill has been a pure web application from the start, it doesn't matter where you are or what device you have, you still have full access to product data and full ability to participate in the process. We received accolades from numerous Windchill customers regarding how effective the software has been in their transition to a work-from-home environment. Because every manual or paper-based process at their site came to an abrupt stop, many customers have asked us to help accelerate and broaden their deployments because there was no hiccup in any process where PLM was used. PLM is more in fashion now than it ever has been.

While AR, IoT and PLM are all about remote work, CAD is a different story. Mainstream CAD is an on-premise market today with 99% of current professional CAD seats installed on desktop workstations. These CAD environments proved more challenging in a work-from-home scenario because engineers were denied access to their workstation at the office that contain both their applications and data. This situation will have to change in a new normal that embraces remote work, which brings me to the next PTC strategic change I'd like to highlight, which is our effort to transition the engineering software industry to full SaaS, leveraging our Onshape acquisition. Working from home is more difficult with CAD because engineers don't have the big workstations at home to load the software on. No matter which mainstream CAD tool they use, many industrial companies have been forced to implement painful workarounds, like using Citrix to gain access to the CAD software and data on the workstation back in the office. I talked last week to the CIO of a major automotive OEM.

He said that he now has thousands of knowledge workers working from home, and his biggest challenges have been in engineering. His company uses a competitor's PLM system, that, unlike Windchill, has a fat client. So even his PLM system isn't readily accessible from home. He was exasperated by the state of engineering software and in complete agreement that we really need to bring the engineering world to SaaS so it can enjoy the benefits we now take for granted across the rest of our business systems. Frankly, our acquisition of Onshape could not have been timelier. If you want SaaS and engineering, Onshape is the only native SaaS product development platform on the market. Onshape users thrived during work from home. Because all their functionality and data lives in the cloud at all times, they can easily access their work from home at any time on any device, including a MacBook, Chromebook, phone or tablet. It's hard to if it's hard to imagine what true SaaS means to CAD, take this 15-second test. Fire up a web browser and go to our Investor Relations website, and then click on the Onshape link you see there.

In about 15 seconds, you'll be in a full-blown professional CAD system, interacting with a 3D model of a ventilator or a robot, you pick. That's it. The implementation is done, you're in production. There's nothing like that in the industry. And because it took the veteran Onshape team six years and more than $100 million to build the platform, PTC has a major lead as we enter this phase of SaaS acceleration. Onshape's not a big business yet, but of all our product lines, it had the best performance relative to plan in Q2, and showed strong year-over-year bookings growth. As the crisis deepen, the level of Onshape interest grew commensurately, and the pipeline is very strong going forward. Because it's so easy to get started with, more than a dozen community-based emergency response programs aiming to develop new personal protection equipment and ventilators adopted Onshape globally. These efforts typically involve some combination of academic, commercial and government entities joining forces to quickly design and manufacture a novel approach to respond quickly to emergency shortages. This is a perfect fit for Onshape. Teams discuss that we can either go implement a common CAD system or we can just start using Onshape right now. It's like calling an Uber rather than buying a car and securing a place to park it.

The level of innovation and speed observed in these community projects is causing industrial companies to rethink their rigid supply chain strategies, and instead look for technologies they can use to encourage and lubricate impromptu collaboration. We saw a related phenomenon happen in the education market. Many universities and many high schools have a 3D CAD curriculum in their engineering or STEM programs, most frequently using SolidWorks. Because all major CAD systems like SolidWorks run exclusively on Windows workstations, and students generally have MacBooks, Chromebooks or iPads, students are forced to provide a special PC computer room on-campus where all CAD work must be done. The computer work the computer room has always been a pain because a lot of extra work and money for the school, and students can't work from their dorm or classroom. But in this crisis, the computer room has become a showstopper because it's simply inaccessible.

Because schools needed an immediate work-from-home solution to get back on track, Onshape education sign-ups have soared to levels never seen before, especially during the middle of a school year. Likewise, because of the coronavirus, the popular FIRST robotics program had to cancel their physical robot building season, but we worked with FIRST to offer a virtual Robots to the Rescue program, and more than 400 virtual student teams quickly sprang back to life and joined this online CAD-based robot competition. We estimate that Onshape has taken five to 10 points of education market share already in the past two months, and I expect things to really heat up during the summer back-to-school planning season. Winning in education is really important because infusing college new hires with the latest thinking so that they can influence the commercial companies that hire them is a proven sales and marketing approach in the CAD industry. We believe that COVID crisis will accelerate the SaaS tipping point for the engineering software industry by several years. With this belief, we've been thinking about SaaS more broadly. For example, what about our installed customer base?

What can we do there? As we mentioned in November, our acquisition thesis viewed Onshape as a CAD application built on a multipurpose SaaS platform. We saw the underlying SaaS platform as big a prize as the new CAD system, and we've been investing heavily there. We'll be shining a light on this platform at LiveWorx, and introducing it using the code name Atlas. We think that Atlas will carry the PTC SaaS world on its shoulders. We're making great progress to extend Atlas more broadly across the PTC portfolio, and we're deep into the work required to have it carry the Frustum generative design capabilities and the Vuforia AR suite. I expect that we'll have the first brand-new Atlas-based deliverables in the market yet in calendar 2020. The long-term goal at PTC is to have a broad and seamless portfolio sharing a common SaaS infrastructure. We'll have more info at LiveWorx, which, by the way, has been converted to a virtual event that you're all welcome to attend. The bottom line is that I really like the Onshape acquisition back in November, but I like it even more now.

The timing could not have been better. The work-from-home genie won't go back in the bottle, and it's now clear that we will need to embrace a more distributed and agile workforce than we've ever known before. That future will need SaaS-based PLM, IoT, AR and CAD more than ever, and PTC is years ahead of competition across this waterfront. The last change I want to talk about is restructuring and cost management. As we entered fiscal 2020, we announced a restructuring plan to shift resources into our SaaS initiatives. As we executed that strategy throughout the fall and winter, we reduced costs more than the original plan, which you can see in our higher restructuring costs. This, coupled with lower travel costs, plus an intentional slowdown in hiring and cancellation of various live events like LiveWorx, has us tracking toward a spending number that's well below our plan for the year. Even as we continue to invest aggressively in new technologies like SaaS and AR, we still expect to deliver strong operating margin expansion in fiscal 2020.

Before I wrap up, I'd like to share one other piece of important news, which is that PTC just launched Creo 7.0 in the market two weeks ago during the work-from-home period. This is a huge release for us because it brings to market our Frustum generative design technology; it adds fluid dynamics to the ANSYS live simulation capabilities and lays the groundwork for the mainstream AM simulation suite to ship with Creo this fall; it introduces multi-body design and has a host of improvements related to additive manufacturing and more. While I'm excited about our opportunity to take share in the transition to SaaS, that's a long-term strategy. In the meantime, Creo 7.0 is a big advancement in terms of our ability to continue to win and renew Creo customers with this flagship product line. In summary, because of the tough decisions PTC previously actioned to change our business model, to expand in the growth markets like IoT and AR, to launch into SaaS with Onshape, and to work on our cost structure, we're very well positioned to perform during the downturn and to thrive in the new normal the inevitable turnaround will bring. It's a difficult market out there, but I couldn't be more pleased with PTC's positioning in it.

And with that, I'll turn it over to Kristian to take you through the quantitative results.

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

Thanks, Jim, and good afternoon, everyone. Before I begin our 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. Let me start off with a brief review of our second quarter results, and then spend the balance of the call on our outlook for the remainder of the year. Q2 ARR was $1.18 billion, representing 11% year-over-year growth, which is consistent with the guidance commentary we provided last quarter, and slightly better than on our March 10 business update call. Similar to other software peers, we did see a deterioration in new bookings in the last few weeks of the quarter. However, due to factors such as backlog and timing of start dates, we still achieved strong new ACV growth. And as Jim mentioned earlier, Q2 churn came in essentially on plan, so the net result of all that was 11% ARR growth. Q2 revenue of $360 million was up 25% year-over-year, driven by 35% recurring revenue growth.

Operating margin of 29% increased 1,400 basis points over Q2 of 2019, and lastly, non-GAAP EPS of $0.59 increased almost 200% year-over-year. Q2 free cash flow of $82 million was within our expectations, and included $18 million of restructuring payments primarily associated with the workforce reduction actions we began in Q1 2020 and $2 million of acquisition-related payments. Moving on to our balance sheet. We ended Q2 with $1.6 billion of debt, including $1.5 billion of senior notes and $148 million outstanding on our revolving credit facility. And we had cash and marketable securities of $884 million. And as you know, in January, we announced that we will redeem the $500 million of 6% notes due in 2024 on May 15 this year. Following this redemption, we will have $1 billion of senior notes with a weighted average cost of debt of 3.8%. It's also worth noting that the maturity dates on these new notes extended to 2025 and 2028, respectively, and will have approximately $350 million of cash and marketable securities.

We believe this is a very attractive and stable capital structure, especially in light of the current economic backdrop. Now turning to guidance. Let me begin by providing some context on our outlook and our underlying guidance assumptions for the balance of the year. As Jim discussed earlier, while we were pleased with our Q2 results, we did see some pressure on new bookings in the final weeks of the quarter. Conversely, renewal activity was strong throughout Q2. In addition, the majority of our Q3 renewals take place during the first month of the quarter, and April renewal rates were largely on track. Given the uncertainty around the duration and depth of the current economic slowdown, we've revised our fiscal 2020 outlook to assume continued deterioration in the demand environment for the remainder of the year. From a demand perspective, you'll recall that a certain portion of our new ACV is backlog, meaning it was previously committed in a prior period, and therefore, not really impacted by a macroeconomic-induced downturn. And our new bookings assumption relates only to the new business that has not been yet committed. At the same time, only the contracts that are up for renewal in any given period can experience churn, not the full ARR base.

While we do not share the specifics of new deals sold or proportion of expiring contracts, I do think it's important to outline this nuance so you can understand how our guidance range contemplates end market demand at both the high and low end of the ARR range. So with that as a backdrop, let me share with you our thinking on ARR for the remainder of the fiscal year. At the low end of the range, we assume a severe disruption in new bookings growth in Q3 and Q4, with both quarters down approximately 50% year-over-year. To be clear, this level of deterioration is not what our internal forecast is calling for, but given the uncertainty of the environment, we wanted to provide an appropriately conservative outlook for the low end. The midpoint of the range assumes new bookings are down about 30% in the back half. This is in line with the commentary we've provided on March 10, as well as in line with our performance in fiscal 2009, but it's also well below what our internal forecast is calling for. The high end of the range assumes new bookings are down 30% year-over-year in Q3 and modest sequential improvement in Q4, but still down about 20% year-over-year. Again, this scenario also is modestly below internal expectations. In addition, to account for the possibility of lower retention rates in the back half of the year, we've increased our churn rate assumptions on both the low and the high end of the range.

Now instead of assuming a modest year-over-year improvement in churn, we're factoring in a churn rate of approximately 8% for fiscal 2020. Through Q2, approximately 20% of our churn was related to customer loss, primarily smaller customers in the channel, with the remainder of the churn related to downgrades. Lastly, we're anticipating our professional services business will face headwinds over the next few quarters. We're seeing regions like Southern Europe, where projects are being paused or postponed, and industries like automotive and retail and footwear and apparel are more heavily impacted. On the positive side, our professional services teams in most geographies are able to continue their work remotely, so the slowdown is primarily related to new implementation where the potential deals are being pushed out and, to a lesser extent, a temporary pause for ongoing projects. We also saw a strong move of training to a virtual format, even in more conservative areas such as the CAD and PLM markets, and in countries like Germany and Italy.

What is particularly noteworthy, as Jim mentioned earlier, is that the strength of the recurring business model could not be more evident. Even with these declines in new bookings and increased churn, we're still targeting double-digit ARR growth for the year. Now for the specifics. We're expecting fiscal 2020 ARR of $1.22 billion to $1.26 billion, that's a growth rate of 9% to 12%. Relative to Q2, our ARR guidance includes approximately $7 million of negative FX impact, and we expect Q3 ARR growth to be in the high single digits, with ARR growth accelerating in Q4. This increase is driven primarily by both normal seasonality of our business and our backlog of new deals booked in prior periods. Now turning to free cash flow. For fiscal 2020, we're expecting to deliver approximately $200 million, which is down about $30 million from our prior guidance, and includes $10 million of additional restructuring charges related to our reorganization in the first half, and a $5 million negative FX impact. And even though we haven't seen a material change in customer payment activity, we've also built some caution into our collections forecast for the back half of the year.

For the full year, free cash flow guidance includes $45 million in restructuring costs, approximately $10 million of acquisition-related payments, $65 million of interest payments and capex investments in the low to mid-$20 million range. Now turning to the P&L guidance. We're expecting fiscal 2020 revenue of $1.40 billion to $1.43 billion. That's a decrease of about $70 million at the midpoint of guidance. Again, revenue is somewhat funny concept for an on-prem subscription company under ASC 606. So while our ARR, which is essentially our subscription and support billings on a trailing 12-month basis is down about $45 million at the midpoint, revenue will be down $70 million, reflecting an additional $17 million reduction in professional services, $5 million reduction in perpetual license revenue, and shorter expected contract durations as we're seeing more customer opt for one-year terms given the macro backdrop. The resulting revenue range is growth of 11% to 14%. As I mentioned earlier, to ensure we can mitigate the impact of lower top line growth on earnings and cash flow, we're taking additional steps beyond our early restructuring actions to control expenses by limiting new headcount additions to critical roles in our growth businesses.

That, in conjunction with lower travel expense, lesser spend on events such as LiveWorx, and lower expected variable compensation expense, sets us up well to deliver on the margin front despite a $70 million reduction in revenue at the midpoint. The result is that we expect a tighter operating margin range of 27% to 28% compared with our previous guidance of 26% to 29%. This is an increase of 700 to 800 basis points year-over-year. Non-GAAP EPS is now expected to be $2.20 to $2.35, which is only a decrease of $0.12 at the midpoint of guidance and represents 34% to 43% growth year-over-year. So to sum up, we feel our guidance has an appropriate and prudent amount of conservatism. Considering all the current exogenous factors, we've taken measures to control expenses and protect earnings without impairing our ability to make key investments in our growth businesses and to further extend our competitive positioning. And lastly, we have a strong and stable capital structure to support our profitable growth strategy going forward. While we're not providing fiscal 2021 guidance at this time, it is worth noting that even under a scenario of economic softness, we still expect ARR to grow.

And with spending control that PTC has demonstrated for many years, we also expect to generate free cash flow growth. Bear in mind, there will be some free cash flow tailwinds in fiscal 2021, and while we expect that capex will continue in the same mid-20s ballpark, interest expense is expected to decrease roughly $25 million compared to the fiscal $20 million outlook given the debt structure we put in place, and assuming no new restructuring, we would expect approximately $30 million less of restructuring payments and, assuming no acquisitions, another approximately $10 million less of acquisition-related payments in fiscal 2021. So wrapping up, we had a solid quarter, but recognize the market is changing rapidly. We believe we're well positioned to perform during the downturn and continue delivering significant value to our customers, which will, in turn, drive ARR and free cash flow growth well into the future.

So with that, I'd like to thank everyone for their time, and I'll turn the call over to the operator to begin the Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Saket Kalia of Barclays Capital. Your line is open.

Saket Kalia -- Barclays Capital -- Analyst

Hey Christian thanks for taking my questions here. Okay, great. Jim, maybe first for you. Can you talk a little bit about the pipeline in the IoT business? I think we said in the prepared remarks, clearly, not a lot of big deals being signed there in this environment, particularly closer to the end of the March quarter. But how about interest/pipeline for IoT for the remainder of this year?

James E. Heppelmann -- President and Chief Executive Officer

Yes, Saket, just this morning, actually, we did go through the pipeline kind of in preparation for the call. And the IoT pipeline is pretty strong. The question for us is close rates and the risk that some of that pipeline pushes back a quarter or whatever, from Q3 to Q4 and Q4 to Q1. So we have plenty to work with. Plenty to support our forecast that, as Kristian said, is well above the guidance range we've given you. We're being conservative around close rates in the forecast and being double conservative in the guidance, because we're worried about software that has to be implemented in bigger ticket purchases might get delayed. I doubt it's going to get canceled. But it's just what we saw at the end of the quarter was, if you needed to buy software, you had to implement, but everybody is being sent home and you don't know how to implement it, we'll then want to just wait until we all come back to the office and buy it then. And so that to me is the risk. But it's not really a question of pipeline, it's really a question of close rates. And that's generally true across the board.

Saket Kalia -- Barclays Capital -- Analyst

That makes a lot of sense. Kristian, maybe for my follow-up for you, can you just talk a little bit about the slightly higher churn assumption? You talked about sort of whether that comes from downgrades versus smaller customers. But I'm curious, as you think about that assumption in the guide, are you starting to see any headcount reductions at your customers that would maybe contribute to that forecast? Or is that maybe another element of conservatism?

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

Yes. So again, here, we haven't really seen major headcount reductions in our customer base. But in an effort to, again, provide a prudent and conservative outlook, we thought that was the right thing to do to factor in some extra churn. It's a dicey market environment right now.

James E. Heppelmann -- President and Chief Executive Officer

Yes, Kristian said this, but to reiterate, we've not seen COVID-related churn thus far.

Saket Kalia -- Barclays Capital -- Analyst

Got it. Very helpful guys. Thanks very much for the color thanks.

James E. Heppelmann -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Joe Vruwink of Baird. Your line is open.

Joe Vruwink -- Baird -- Analyst

Hey.

James E. Heppelmann -- President and Chief Executive Officer

Hello.

Joe Vruwink -- Baird -- Analyst

I just wanted to be clear on, I guess, guidance versus internal expectations. So are your internal expectations that you referred to closer to what you're actually seeing in the market today and guidance presents a dramatically, I'll say, worse scenario ultimately? Is that a fair characterization?

James E. Heppelmann -- President and Chief Executive Officer

Yes. I mean we have a forecast. That's our internal expectation. Keep in mind, new bookings were down 16% last quarter. Going forward, our forecast would have it down more than 16%, but still above the entire range that Kristian gave you. So the truth is none of us know what's going to happen in the coming quarters. We just don't. So rather than assume it's going to be good and get surprised when it's bad, we're assuming it's going to be kind of bad. And hopefully, if there's a surprise, it will be to the good side. But certainly, we're looking at a forecast that's above the high end of the guidance range.

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

And again, just a follow-on to that, just to put the guidance range, the midpoint where new bookings down, call it, in the 30% range in Q3 and Q4. That's the kind of the levels of deterioration that we saw back in 2009, right? We've provided that even at our Analyst Day scenario. And the low end contemplates something even more difficult than that environment.

Joe Vruwink -- Baird -- Analyst

Okay. That's helpful. And then a lot of companies seem to be going back to the 2009 playbook. Obviously, PTC has provided a lot of detail with the mid-March update, and now just in regards to how new ACV trended during that period of time. I guess when you compare and contrast the pieces of the portfolio that were around in '09, has anything held up, I guess, surprisingly better? And then when you look at the pieces that have been added, and obviously, you spoke to Onshape and the strength there, but with some of the newer pieces over the last decade, can you maybe speak to how that's helping provide the resiliency or helping provide the offset, given this is a pretty tough environment your customers are going through?

James E. Heppelmann -- President and Chief Executive Officer

Yes. I mean, for sure. I think if you look at 2009, we were really a CAD and PLM company. And those businesses combined those markets combined were growing single digits, probably upper single digits at the time. We didn't have the growth engines we have now. And I spent a lot of time upfront to say, actually, this COVID crisis will probably create a substantial tailwind for our SaaS business, our IoT business and our AR business. Maybe not immediately, but definitely, some of it is happening immediately. Our AR pipeline is off the charts. So it's hard to know for sure how to compare this to 2009. I would say we definitely have a growth year portfolio and a more relevant portfolio in the context of this crisis than we had in the context of that crisis. And then as Kristian said, the high end of our guidance sort of assumes it's as bad as 2009, and the low end of our guidance assumes it's much worse than 2009.

Joe Vruwink -- Baird -- Analyst

Okay great that's very helpful.

James E. Heppelmann -- President and Chief Executive Officer

Thank you.

Operator

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

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey guys thanks for taking my questions. Really do appreciate a lot of the detail that you guys gave. That's super helpful. Jim, I'm wondering, your guidance outlines a variety of new booking scenario, which I think is helpful relative to ARR. Now given this is it's clearly back-end loaded quarters, I'm wondering though if you can comment on new booking trends you're seeing thus far in April. It sounds like renewals, I think Kristian said, remained strong this month. But wondering if you're seeing any signs of change in new bookings, maybe beyond what you saw in Q2.

James E. Heppelmann -- President and Chief Executive Officer

Yes. I mean, as you said, we do have relatively back-end loaded quarters. And that said, we do track what we call the done number, which is what percent done are we versus this point in a typical quarter? And relative to the forecast, the done number is just fine. But it's early and it's not that meaningful when it is early.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's helpful. And then I like the done number. We got to use that more often. And then I guess in terms of your global model, obviously, you've got a very diversified model globally. And I think in your prepared remarks, you noted some new bookings weakness in Europe and Asia, in particular, this past quarter. I'm wondering, though, if you can comment on if you're seeing any signs of improvement or stabilization in some of these pockets internationally that are showing signs of reopening. I'm thinking like China, maybe pockets of Asia, anything of note there as some of those economies start to open up a little bit?

James E. Heppelmann -- President and Chief Executive Officer

Yes. I mean, in China, in particular, even by the end of the last quarter, we saw hints of a comeback, and definitely, when we look at the forecast for this quarter, it's up quarter-over-quarter. It's up nicely. So I think we do see China coming back online and spending coming back into the system. The U.S., of course, is two steps behind that, right? So last quarter, Europe was in a deeper funk than the U.S., and maybe by the end of the quarter, we'll see Europe improving. I don't know. And part of the problem right now is none of us know. None of us know what's going to happen. So what we try to do is give guidance with a lot of prudence, as Kristian said, and then be transparent on the level of prudence we put in the guidance so that you can decide if it should be more or less based on your own view of what's going to happen in the world.

Matt Hedberg -- RBC Capital Markets -- Analyst

Sounds good. Thanks luck. Thanks for all the detail.

James E. Heppelmann -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Adam Borg of Stifel. Your line is open.

Adam Borg -- Stifel -- Analyst

Great thanks for taking the question guys. And again, appreciate all the commentary as well. Just real quickly on ARR. So in the past, Kristian, you've talked about ramp deals in the back half of the year. Just curious, I want to confirm that those committed ramp deals that we've talked about, you haven't seen any impact to that. Or have some of those ramp deals been renegotiated? And I have a follow-up.

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

No. We're not seeing, at this point, meaningful changes to the previously committed ramps. I mean I think well, I mean...

James E. Heppelmann -- President and Chief Executive Officer

The thing you have to understand is they're contracts. And once you sign a contract, if somebody comes and said, hypothetically, we'd like to renegotiate that. Our reaction is, well, we wouldn't. There's a whole lot of contracts we have to that we'd like to renegotiate. We have a lease on a brand-new headquarters. It's been empty for six weeks. I'd like to renegotiate that, but the vendor doesn't seem to want to renegotiate it with me. So I'm just saying these are contracts. There isn't renegotiation unless there's something in it for us too and simply taking them down would just be a win loss and difficult to get us to sign up for that.

Adam Borg -- Stifel -- Analyst

Perfect. I appreciate that. And just as a quick follow-up. I don't think I heard anything yet about the partnerships with Rockwell, ANSYS, we talked a little bit about Creo Simulation Live, but any color you can provide on how Rockwell Creo Simulation Live and even the Microsoft partnership did in the quarter?

James E. Heppelmann -- President and Chief Executive Officer

Yes. I passed on that simply to save time because I want to talk about the strategic perspectives. But all three main partnerships did OK in the quarter. Probably of them all, Microsoft was the strongest. But with Rockwell, we had some great wins. Rockwell had some great wins. Rockwell has taken us into some amazing new accounts, and I'll let them speak about their accounts. But and then with ANSYS, we also had some good sales. I don't think we probably were on plan with ANSYS, but in general, we weren't on plan with anything. So I think all three partnerships posted a decent quarter. None of them particularly notable in either direction. All of them suffered a little bit in the context of what happened to everybody late in the quarter.

Adam Borg -- Stifel -- Analyst

Great thanks again.

Operator

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

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Okay thanks. Good evening Jim. Your comments on product strategy were quite interesting, including the reference to the forthcoming Atlas release. My question there, before my follow-up for Kristian, is could you put all of those comments and your strategic outlook in the context of the closed-loop life cycle management strategy that we've talked about, that you've talked about? But what are perhaps some of the metrics or milestones that you would think about to validate that the strategy is viable, that it is having an impact in the marketplace? And maybe throw in some Onshape road map comments into that.

And then secondly, for Kristian, your cost containment efforts were certainly quite apparent from the very large reduction in your open positions over the last few months, down over 60% since the end of 2019 for all open positions. In that number, there was an especially large decline in sales openings, which I suppose is understandable given the bookings outlook. But is there some longer-term implication in there in terms of how you're thinking about your sales structure maybe driving to more of an inside sales structure in support of Onshape and SaaS generally, and your thinking perhaps about any kind of further R&D or even product line consolidations maybe end-of-lifing anything or anything along those lines?

James E. Heppelmann -- President and Chief Executive Officer

Yes. So Jay, I'll take the first one. Just to share with people some terminology. So rather than say Vuforia will be based on Onshape, which sounds funny, let's say, Onshape is based on Atlas and Vuforia will also be based on Atlas. And we will bring other technologies onto the Atlas platform. And this Atlas platform will evolve over time, and at some point, it actually will look materially different than what we acquired from Onshape because we've taken it in other directions as well. For example, Vuforia needs a Computervision engine in the platform and Onshape didn't. But that's OK. Now Atlas will have a Computervision engine for anything that needs it and then AI engine for IoT and so forth. But to get to the gist of your question, today, we have a closed-loop life cycle management story with significant properties being subscription but on-premise, in particular, Creo. And Windchill has a lot of on-premise, but we also do sell that as SaaS. And so what we'd like to do is, somewhere down the road, have a complete 100% SaaS-based closed-loop life cycle management suite that passes that 15-second test.

You click on a link, and within 15 seconds, you're in any part of the suite doing anything the suite can do. We're not there today, but and the industry is far from there, by the way. And so I think that what PTC has is a lead. And now we see an exogenous factor, as Kristian said, that's a wake-up call that this industry has to move to SaaS pronto. And pronto won't be quick, but it's going to be a lot quicker than I might have thought it was three months ago. And so PTC is going to press our advantage as hard as we can and try to be the company that brings this industry to SaaS. And it's going to require a lot of work from us in the coming quarters and even years. But I think it could represent a significant share shift. Because if the industry goes to SaaS, and we're far ahead of everybody, pulling the industry there, we might definitely benefit from that. And we're seeing it happen in education. That's why I served up that story. So imagine taking five or 10 points of educational market share in two months, I couldn't have dreamed of that, but I can now in the context of this crisis.

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

And Jay, then to answer the second through seventh questions that you sneakily wrapped all into one. Let me try to sum it up this way. To a certain degree, PTC was fortunate with the timing of the reorganization that we did in the first half, which was actually pre-global pandemic, and therefore, unrelated. It was really more around reorganizing around the growth businesses. And now as this struck, we had actually taken out more cost than perhaps originally anticipated. But that now puts us in a position where, as we start looking at the back half, much of that cost control, we can really just think about as how and when we want to release the spicket. We all want to get back to a stage where we're all hiring and growth is happening. So we want to be mindful of that. We're watching carefully what's going on in the market. But in the meantime, we're it's more like a slow drip on when and where we're hiring, and we're trying to be pretty thoughtful about where we're adding capacity right now to take most advantage of the situation.

James E. Heppelmann -- President and Chief Executive Officer

Yes. Maybe I can add two tidbits to that, that might be helpful. One is, when we did this restructuring, we set out to do a reduction in force. But then we said, you know what, we've moved to this new headquarters, and that might be causing some pressures associated with the commute and so forth to some people. And they might leave any way if it's a problem. So why don't we have a voluntary program? And by the way, an early retirement program. And so we served those two programs up with really only but an estimate of what might happen, and we had fairly good adoption of the voluntary and early retirement programs. So we ended up taking out more people than we probably would have taken out by a reduction in force. We said, OK, that's fine. We'll hire them back. But guess what? We're not going to hire them back. So you might say it's almost like we've done a reduction in force by going below the headcount we intended to be at, and then electing not to go back up. So that's a little bit why our cost structure has come down so much. And then we definitely are still hiring. I can tell you what, we're hiring developers for sure in our AR business, in our SaaS business, and we're making selective hires here and there.

And we're also doing portfolio work within the portfolio. So for example, based on the demand we've seen for Onshape, we've shifted a fair amount of inside sellers into selling Onshape. Just did that recently, so don't yet have results, but we're responding to what we see as interest and demand in the market. We also did something else. We turned our premier channel resellers, loose or we're just doing that now, turning them loose with the right to sell Onshape. We hadn't intended to do that. But we said, "Hey, wait a minute. If the industry suddenly wants SaaS-based CAD and we alone have it, let's not miss this opportunity. Let's put capacity on it." So think of that as just within the headcount and within the ecosystem, we're also doing some portfolio management to move resources to where the demand is the strongest.

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Thank you.

James E. Heppelmann -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Sterling Auty of JPMorgan. Your line is open.

Jackson Ader -- JPMorgan -- Analyst

Great thanks. This is Jackson Ader on for Sterling tonight. A question from our side, maybe on the go-to-market motion. Jim, you explained how any of us can go to ptc.com, a couple of clicks for using Onshape. So I was just curious, the required legwork for maybe an Onshape net new logo relative to on-premise world. Can you just give us a flavor for just how much easier or less friction there is with an Onshape onboarding relative to the on-premise?

James E. Heppelmann -- President and Chief Executive Officer

Yes. Well, again, there's no software and there's no data at the customer side. So we skip all those phases of installation and so forth. And then as you might expect with a SaaS product, all demonstrations and so forth are done digitally, virtually over the web. So definitely, Onshape is set up for a digital go-to-market process. And that's really what we're trying to leverage. Now that said, if you want to get in bigger deals where there's more switching costs, more perceived risk in switching no matter what you're switching to, you might have to call on people and have live conversations with them and so forth. So I think it's definitely more than just selling over the web. But it's not at all like pounding the pavement and making cold calls and stuff like that, kind of the old-fashioned direct sales way. So I think it's somewhere in the middle, and that's why we're pulling more of our inside sales and more of our resellers into the game.

Jackson Ader -- JPMorgan -- Analyst

Okay. Great. And then the follow-up question on services. So you mentioned services were cut, but which services are still happening and which services were maybe cut the most? What types of services?

James E. Heppelmann -- President and Chief Executive Officer

Well, let me just say, it's probably hard to categorize it by type, but let me do my best. So any services work that has to be performed on-site is a problem, because generally speaking, we're not allowed to go on-site, we're not allowed to travel there. And by the way, if we went on-site, probably the customer wouldn't be there anyway. So I would say, as a characterization, on-site work is where the problem is. Now a good amount of our work is done off-site, and really has been for years, in part to take advantage of lower cost labor and so forth. So if you give us a project in Europe, we're probably going to do it in Romania, even if the actual project is in France or something like that. So that kind of work has gone full speed ahead, but it's really services work that requires on-site. For example, if you're going to stand up IoT in a factory, somebody really has to go to the factory and assess all the physical assets that are there and determine how to connect to them. And it's hard to do that project without ever being in the factory. You maybe don't have to be in the factory all the time, but you at least have to go there to kick off the project. So I think it's those projects, in the near term, while we're in lockdown mode that require on-site work that are most challenged.

Jackson Ader -- JPMorgan -- Analyst

Thank you.

James E. Heppelmann -- President and Chief Executive Officer

Thanks.

Operator

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

Steve Koenig -- Wedbush -- Analyst

Hey thanks for taking my question. I'll just make it one question. So and I apologize if this is repetitive with either scripted or Q&A remarks. I'm curious, I heard the remarks on your guidance and how you're thinking about it in comparison with '09, and that sounds sensible and it sounds pretty robust. I'm wondering, though, the composition of particularly by vertical, Jim, I'm curious on your view as you look out across your verticals, kind of the relative maybe resilience of the verticals. And maybe one way to do it is to stack rank them if you wanted to. But kind of any generalizations you can make regarding the financial crisis and the relative impact on your verticals versus this crisis and any relevant supply chain disruptions or other factors that affect those verticals.

James E. Heppelmann -- President and Chief Executive Officer

Yes. Well, maybe I could start by saying where we have the highest concentrations would be what I'm going to call generalized industrial. That would be everything from John Deere to machine tools and factories to Carrier air-conditioning equipment. That's our biggest vertical at this point in time. Our second vertical is aerospace and defense, which, by the way, particularly on the defense side, is where we're strong, is not really suffering that much. The U.S. government is not dialing back. They're leaning in. The third thing would be electronics and high tech, but that's not really consumer electronics. It's really more business-to-business type of electronics equipment. So those would be our three biggest exposures. And then if you get down to places like automotive, you're talking single digit, which is good, because automotive is a tough industry. If you get into commercial aviation, it's not that big. Again, we're much bigger in defense. If you think about places like you know, there's been questions about airlines.

Well, airlines are less than 5%. I think airlines and retail together are less than 5% of our ARR. And by the way, the business we do with airlines is around spare parts management, and we don't so much it's not about new sales, it's more about renewals. And as long as they own those airplanes, they're going to own spare parts for them whether they're flying them or not. And I don't think any airline that's still in business is going to stop managing spare parts because they won't be able to get back in the business. They'll never put those airplanes in the air again if they give up on the spare parts. So it feels like the parts of this particular economy that hit the worst really are not the places where PTC has the deepest exposure, and in particular, I'm probably referring to automotive here, which I think is probably one of the toughest places to be.

Steve Koenig -- Wedbush -- Analyst

Got it. Great. Well thanks Jim.

James E. Heppelmann -- President and Chief Executive Officer

Thanks.

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

Thank you.

Operator

Thank you. I would now like to turn the conference back over to Tim for any closing remarks.

Tim Fox -- Vice President of Investor Relations

Thank you, and thanks, everybody, for joining us today. So in addition to LiveWorx going virtual, a lot of investor events are going virtual as well. We're going to be at a bunch of them this quarter, beginning with JPMorgan's Global TMT Conference on May 14. So look out on our website for the other events as they get posted. So we do look forward to seeing you on the conference circuit, hopefully. And if not, hopefully, you can join us at the LiveWorx event. Information is up on the website for that as well. And lastly, thank you for your interest in PTC, and have a great and safe evening. See you all later. Bye-bye.

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

Thank you.

Operator

[Operator Closing Remarks].

Duration: 63 minutes

Call participants:

Tim Fox -- Vice President of Investor Relations

James E. Heppelmann -- President and Chief Executive Officer

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

Saket Kalia -- Barclays Capital -- Analyst

Joe Vruwink -- Baird -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Adam Borg -- Stifel -- Analyst

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Jackson Ader -- JPMorgan -- Analyst

Steve Koenig -- Wedbush -- Analyst

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