Earnings Call Transcript
Ptc Inc. (PTC)
Earnings Call Transcript - PTC Q1 2020
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2020 First Quarter Conference Call. I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.
Tim Fox, Senior Vice President of Investor Relations
Thank you, Sheila. Good afternoon everyone and thank you for joining PTC's conference call to discuss our fiscal Q1 '20 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 during today's call. Discussion of our operating metrics and these items 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. Lastly, references to growth rates will be in constant currency unless otherwise noted. And with that let me turn the call over to Jim.
Jim Heppelmann, CEO
Thanks, Tim. Good afternoon everyone and thank you for joining us. I'm pleased to share that our solid Q1 performance puts us right on track to deliver against our fiscal '20 targets and our attractive long-term financial ranges. ARR, which is our key top line metric, grew 11% in Q1. As Kristian will detail later in the call, we are raising our fiscal '20 ARR guidance based on our Q1 performance, our visibility into the balance of the fiscal year, and favorable currency tailwinds. We're also raising revenue, EPS, and adjusted free cash flow guidance for the year. At the midpoint of our guidance, we're now expecting fiscal '20 ARR growth in the mid-teens, revenue growth approaching 20%, and EPS growth above 40%. The benefits of all the hard work we've done in the past years to expand our profitability, to increase our growth rate, and to convert to a subscription model are really starting to show, because PTC truly is emerging as one of the world's premier public software companies. Before digging into the details, I'd like to share some observations about broader industry trends and PTC's unique position in terms of helping customers thrive during this period of rapid change in the industrial world. Similar to other industries like entertainment, hospitality, or transportation that have been disrupted by digital technologies, industrial companies are now facing new challenges from traditional competitors that are embracing digital technologies across the value chains, and from new entrants exploring new business models. Digital transformation has become a wave that's sweeping across the industrial market, enabling companies to better differentiate their products and services while simultaneously optimizing their engineering, manufacturing, sales, and service processes. As the only company out there that has a suite of CAD, PLM, IoT, AI, and AR capabilities, PTC has a unique ability to help customers pursue their digital transformation ambitions. Every day, we are helping customers to do things like implement AI-driven product design, create a digital thread to leverage product data across the value chain, gain operational insight from their products in the field and their assets in their factories through our leading IoT and AI technology, and drive significant improvements in worker productivity through our AR technology. I host many customer meetings and I can tell you that PTC Solutions really resonate with our customers because they align with their high-priority initiatives. Nobody else looks like PTC, and with the opportunity in front of us, it's a very exciting time to be here. Given our performance and forward-looking momentum, one should take note that traditional economic measures like the PMI index are now much less correlated with PTC business trends. As we all learned in the great recession of 2009, recurring revenue streams are impacted much less by economic fluctuations than is perpetual license revenue. This suggests that our subscription-based business model coupled with the growing secular dynamics of our business that I described earlier have, to a large degree, driven a decoupling from traditional cyclical measures like PMI. We are guiding strong ARR growth against the backdrop of some of the most lackluster PMI numbers in recent memory. Of course, we remain mindful of these external measures, but this negative sentiment has been around for some time now. This decoupling gives us even more confidence in our ability to drive sustainable growth going forward. Turning now to some highlights in the quarter. I'll begin with our growth business that now includes ThingWorx IoT, Vuforia AR, and Onshape SaaS. ARR growth for our IoT solutions accelerated quarter-over-quarter and our augmented reality solutions once again outpaced high market growth rates, thanks to a continuation of the trend of customers introducing AR into their manufacturing and service environments. In addition, the healthy new logo activity, Q1 expansion bookings represented about 65% of IoT and AR bookings, primarily driven by customers shifting from pilots to production at an accelerating pace. The number of six-figure deals in the quarter more than doubled versus a year ago. When viewed through an ARR lens, trends across our customer cohorts are impressive. Relative to Q1 of last year, the number of IoT and AR customers with ARR greater than 500K grew by over 50%. One of these customers, Thermo Fisher, is a great example of how enterprises are transforming their business with PTC Solutions. Thermo Fisher is a global leader in the biotech space who is leveraging ThingWorx to offer new value-added services to further differentiate themselves in their competitive end markets. In their chemical analysis division, for example, Thermo Fisher embeds ThingWorx within their products, allowing end customers to remotely capture and analyze test data from these products. Thermo Fisher is also leveraging ThingWorx for predictive maintenance and to provide feedback loops to their product development teams. Thermo Fisher is representative of the trends we're seeing where customers are expanding their digital footprint across product lines and use cases and into their production environments as well. Given the broad scope and global nature of the digital transformation opportunity within the industrial market, we knew it would be challenging to pursue this alone. Of course, that's why we performed strategic alliances with industry leaders like Rockwell Automation and Microsoft. Both of these alliances again delivered great results in Q1. In our Rockwell Automation alliance, Q1 provided a strong start to the year with robust new deal activity, plus a meaningful uptick in expansions as pilot projects that were kicked off earlier in FY '19 moved into production. The Rockwell alliance team delivered new deals across a broad cross-section of vertical markets and in 15 different geographies, which highlights both the deep industrial domain expertise and the global reach that Rockwell Automation brings to this relationship. In our Microsoft alliance, Q1 also marked a strong start to the year with new ACV bookings well above plan. Geographically, the Americas continues to be the main driver of growth. However, momentum in Europe is building and the Microsoft alliance has a robust pipeline heading into Q2. We're also pleased to see that demand continued to expand beyond the smart connected product use case into factory and even AR solutions, which represented more than a third of the alliance bookings in Q1. A great proof point of the power of our Microsoft alliance is a recent win at Johnson Controls, which is a leading global provider of building control systems. It turns out that PTC, Microsoft, and Accenture were independently supporting JCI's digital transformation efforts from different angles. Too many cooks in the kitchen ran the risk of slowing things down. So PTC, Microsoft, and Accenture joined forces and approached the C-suite with a unified strategy for their smart factory initiatives. Together, we landed the deal to deliver a fully cloud-based smart factory solution that has Accenture deploying PTC's ThingWorx and Microsoft's Azure. Before leaving the growth discussion, let me share that we're making great progress integrating the Onshape team. In fact, the Onshape team moved into our Seaport headquarters earlier this week. I'd like to think of Onshape as the proverbial iceberg. What you see above water, the 5%, looks a lot like a next-gen CAD and PLM system. But what's below the water, the 95%, is PTC's new pure SaaS platform. We have big plans for Onshape and for SaaS, and I'm convinced this will become another major growth engine for PTC. While it's too early to say much yet, I look forward to updating you on our SaaS progress in the coming quarters. Our core product group delivered strong Q1 performance as well. Core business ARR growth of 10% outpaced market growth again in the quarter. It was led by very strong performance in PLM which delivered mid-teens ARR growth that reflected broad-based strength across all major geographies. In my view, the strong performance in PLM is indicative of the growing strategic role that PLM technology now plays in our customers' digital transformation strategies. Any industrial company that wants to undertake a digital transformation quickly realizes that PLM will need to be one of their anchor tenant systems of record. Take Groupe Beneteau, our French manufacturer who is a leader in luxury sail and powerboats. By leveraging PTC's Windchill, along with Creo and ThingWorx and Vuforia, Beneteau is delivering product and service differentiation together with engineering excellence and operational efficiency. Their PLM technology roadmap began with foundational capabilities such as bill of material management and change management, then extended into the factory with concurrent engineering and manufacturing instructions, and from there into leveraging AR functionality for shop floor operators and dealership scenarios. This powerful combination of highly differentiated technologies is truly unique to PTC. We're using it to win new business and expand relationships with existing customers as they seek to modernize their business processes. Altogether, we're seeing more and more evidence of a rejuvenation of PLM that makes the long-term growth opportunity that much more attractive for PTC. Our CAD team had a solid start to the year too, again delivering high single-digit ARR growth with notable strength in Asia-Pacific and in our global reseller channel. On the Creo Simulation Live front, which is the starting point for our ANSYS partnership, interest remains high. Adoption, particularly in the enterprise space continues to ramp nicely with average deal sizes continuing to grow. Our focus on Creo Simulation Live or CSL, as we call it, in FY '20 is on driving adoption in the channel, which generates about half of our CAD business. We're kicking off new channel enablement and promotional programs in Q2 and remain bullish on the long-term opportunity for a significant CSL penetration in our installed base. While CSL is the tip of the spear in our partnership with ANSYS, we're also making good progress bringing the broader discovery aim suite into the Creo fold as well. To wrap up my comments, I'd like to reiterate PTC's full commitment to driving mid-teens ARR growth and generating significant free cash flow in the coming years. Our strong performance in CAD and PLM, plus our leadership positions in the high growth IoT and AR markets, and more new opportunities for growth in the SaaS-based product development market with Onshape gives us strong confidence that our growth will remain both significant and sustainable over the long-term. With our subscription transition and the rearview mirror and our ongoing focus on disciplined cost and portfolio management, we're firmly on track with our plans to transform PTC into one of the premier public software companies in the world. And with that, I'll turn it over to Kristian to comment on financials and guidance.
Kristian Talvitie, CFO
Thanks, Jim, 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. Let me start off with a review of our first quarter results. Again this quarter, 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 document available on our IR website for additional details. Q1 ARR was $1.16 billion, representing 11% year-over-year growth, which is consistent with the guidance commentary we provided last quarter. ARR in our growth product group was up 36% year-over-year and we continue to expect ARR growth to be above market growth rates of 30% to 40% in fiscal '20. ARR in the core was up 10% year-over-year, which was also above market growth and consistent with our outlook for fiscal '20. ARR in FSG was up 1% year-over-year, primarily due to the timing of deals and we expect ARR growth to be in the low to mid-single digits for FSG for fiscal '20. Total Q1 revenue of $356 million was up 8% year-over-year, despite a 78% year-over-year decrease in perpetual license revenue driven by the end of perpetual license sales on January 1, 2019. Operating margin of 26% increased 200 basis points over Q4 '19 and declined 100 basis points compared to Q1 '19, where we experienced higher than expected perpetual license revenue resulting from the perpetual end of life program. And lastly, non-GAAP EPS of $0.57 increased 5% year-over-year against the perpetual heavy comparison of last year. And as you'll recall, revenue and operating expenses, and consequently EPS can be impacted positively or negatively by ASC 606. Major drivers impacting revenue include term length changes and support to subscription conversion. And on the OpEx side, commissions were obviously also impacted. Finally, our Q1 adjusted free cash flow of $12 million was within our expectations and sets us up to achieve our full year guidance. Now turning to the guidance. Beginning with ARR. For fiscal '20, we're increasing our guidance to a range of $1.27 billion to $1.29 billion, or 14% to 16% year-over-year growth and 13% to 15% on a constant currency basis. ARR guidance includes approximately $15 million of positive FX and already embedded in our original guidance for the year is approximately $10 million of ARR or 1 point of growth from the Onshape acquisition. Consistent with our prior guidance commentary, we expect Q2 constant currency ARR growth to be in line with Q1 results, with ARR growth rates accelerating in the back half of the year. This increase is driven by both normal seasonality of our business and our backlog of deals booked in prior periods. Now turning to adjusted free cash flow. For fiscal '20, we're expecting a range of $260 million to $280 million reflecting the positive FX impact of $5 million. Now turning to P&L guidance. We're now expecting fiscal '20 total revenue of $1.45 billion to $1.53 billion, an increase of $25 million at the midpoint of guidance reflecting our Q1 performance, our outlook for the remainder of the year and approximately $15 million of FX. Non-GAAP EPS is now expected to be $2.15 to $2.65, an increase of $0.12 at the midpoint of guidance, reflecting our Q1 performance and outlook, and $0.05 of FX. We continue to expect fiscal '20 operating expenses to grow approximately 9% year-over-year. With that, I'll turn the call over to the operator to begin the Q&A.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Our first question comes from Matt Hedberg with RBC Capital Markets. Your line is open.
Matt Hedberg, Analyst
Hey, thank you for taking my question. The mid-teens ARR growth for PLM in constant currency was impressive, and I know you highlighted some strong performance in specific regions. You mentioned in your press release that China and Europe are doing well, and Jim noted that digital transformation is really benefiting this area. Can you discuss how sustainable this PLM growth is? We've spent a lot of time on the growth of your businesses, but I'm interested in the durability of PLM as we look ahead this year.
Jim Heppelmann, CEO
Well, I think we're going to have a very strong year this year for sure. And I think if you remember back to September, Kristian said over the coming five years, we would expect our PLM ARR growth rate to slow down to the market growth rate, which I think you had at 8%? Yes. So we're sort of mid-teens and we think over the five years that will slow to 8%. Now that's based on a number of factors. One thing is our renewal rates in PLM are very high. This is very, very sticky software, and relative to the base of ARR, we're selling a lot of it. So we're really in a strong good situation where there is strong demand because of digital transformation. Our product is ranked number one by every analyst report I have ever seen. And so we're in a good strong position where we get a chance to meet that demand with our product and high renewal rates, and that bodes well for a long time to come.
Matt Hedberg, Analyst
Thanks, Jim.
Operator, Operator
Thank you. Our next question comes from Jay Vleeschhouwer with Griffin Securities. Your line is open.
Jay Vleeschhouwer, Analyst
Thank you. Good evening. Hey, Jim. Hi, Kristian and Tim. With regard to PLM following up on that subject. When we think back over the last 12 to 15 years or more, there has seemed to be a pendulum of adoption among customers. In other words, there have been times when PLM-only companies seem to have had momentum. And then there were times when integrated engineering software companies that have CAD and PLM and perhaps other products that had momentum. The question therefore is, what are you seeing in terms of conjoined business or CLM business across your three-letter acronyms? How much of the PLM business is just for PLM versus your being able to conjoin CAD or anything else to that either as a beneficiary or driver to the PLM business?
Jim Heppelmann, CEO
Yes, there have definitely been shifts in momentum. A notable increase happened when PTC, which previously had a CAD focus, incorporated PLM and successfully marketed it to the CAD audience. Currently, several factors are driving this trend. One major factor is our enhanced focus on engineering within manufacturing data transformation. Our PLM system includes a software module called MPM Link, which facilitates the transition from an engineering design and bill of materials to a structured manufacturing process design and set of instructions, all while maintaining configuration management. This allows quick updates to the manufacturing process when there are changes in the engineering design. If the engineering design is flexible, we can easily modify the manufacturing instructions and bills of materials. We're experiencing significant sales in this area, which has become a new source of growth. Additionally, customers are increasingly appreciating our top-tier augmented reality technology. It’s gaining strong traction in the market and requires configuration management of its content. For example, a major truck company in Europe has shown great enthusiasm for our AR technology, recognizing that effective augmented reality implementation necessitates proper content configuration management. This realization is driving them to pursue broader PLM projects. Overall, I believe these factors are contributing positively to the momentum for PLM.
Jay Vleeschhouwer, Analyst
Thanks, Jim.
Operator, Operator
Our next question will come from Ken Talanian with Evercore ISI. Your line is open.
Ken Talanian, Analyst
Hi. Thanks for taking the question. Could you give us a sense for how your net retention rate trended in the quarter for core growth in FSG compared to last year?
Kristian Talvitie, CFO
Yes. Hi, Ken, it's Kristian. I think we're not going to get into the quarterly variability, again just given the reporting framework that we have. But I think, suffice it to say that given the guidance that we have for the year we're expecting continuing to expect a modest improvement in net retention here in fiscal '20.
Ken Talanian, Analyst
Great. And I guess as a follow-up, it looks like the growth portfolio saw some good traction in both Europe and APAC. Could you give us a sense for how we should think about the sustainability of that growth portfolio in both those regions?
Jim Heppelmann, CEO
Yes. I mean, I think, what normally happens here at PTC maybe elsewhere, but here at PTC when we launch a business, a new business, it gets traction first in the US and then over time, it gains more and more traction in Europe and APAC. And so I think that's just a natural way that these businesses develop, and we see it happening here. A lot of times they get stronger first in the US and then without the US necessarily weakening, Europe and Asia have come on stronger a little bit later. That's what I would attribute that to.
Ken Talanian, Analyst
Great. Thank you.
Operator, Operator
Our next question comes from Saket Kalia with Barclays. Your line is open.
Saket Kalia, Analyst
Hi, Jim. Hi, Kristian. Thanks for taking my question here. Kristian, maybe for you. Bit of a mechanical question. But can you just talk a little bit about ramp deals? We talked about them a little bit last quarter. You've talked a little bit about sort of the back-half strength that we should see in ARR for a variety of reasons. It sounds like ramp deals are part of it. Can you just touch on what parts of the businesses are you seeing these types of deals, these ramp deals? And then just for the benefit of the broader group, can you just talk about how they impact ARR at sort of different points in that ramp? Does that make sense?
Kristian Talvitie, CFO
Yes. Sure, Saket, it's a good question. So, thanks. If we just delve into the mechanics of it, how ramp deals impact ARR, is we will add things to ARR on start date of the contract, right, not book date, start date and in the case of a ramp deal where you have in essence kind of multiple start dates that you have year one of whatever 100,000...
Saket Kalia, Analyst
Can I give an example and then you talk about the mechanics?
Kristian Talvitie, CFO
Sure.
Saket Kalia, Analyst
Let me provide an example. Imagine a customer appreciates our smart factory solution and operates 20 factories. They express a desire to understand the total cost across all 20 locations. They wish to negotiate a deal covering all 20 factories but anticipate deploying only five in the first year, another five in the second, and ten in the third year. This results in a commitment that ramps up to five in the first year, five more in the second year, and five plus ten in the third year.
Kristian Talvitie, CFO
The way this would translate into ARR is that we would account for the first five factories in the first year. In the second year, when the next five are added, we would include those additional five factories. Then, in the third year, we would account for the incremental ten. This is how the mechanics work. ARR is recognized from the start date of the contractual commitment. Regarding where we are seeing ramp deals, we observe a greater number within the growth product group, specifically in IoT AR, while we still see some in core products, albeit to a lesser degree, and the least amount in any of the FSG products.
Saket Kalia, Analyst
Got it. That's very helpful. I'll get back in the queue. Thanks guys.
Operator, Operator
Our next question comes from Matthew Broome with Mizuho Securities. Your line is open.
Matthew Broome, Analyst
Thanks. Hi, Jim, Kristian and Tim. I'm just curious how you're tracking for sales capacity so far versus your hiring plan this year? And can you just sort of give us any kind of an update on what sort of percentage of your total capacity is now focused on IoT and Augmented Reality?
Jim Heppelmann, CEO
So if the question was how are we tracking in terms of sales capacity? That was step one, and then step two, how is that capacity divided between growth in core and in FSG?
Matthew Broome, Analyst
Yes, exactly. Thanks.
Kristian Talvitie, CFO
Yes. Great. So in terms of tracking the capacity, I think we are on track for hiring kind of right where we would like to be at this point given our plan. In terms of the spread, frankly I'm going to have to get back to you on specific details, but the majority is actually still on the core product set, which is understandable and the increasing amount on IoT. And then still specialists focused on the various compounds in FSG.
Jim Heppelmann, CEO
Yes. I mean another way to look at it would be to look at sales productivity which would be lowest in the growth business because growth, you're bringing on a lot of new capacity. It's doing a lot of land and expand deals and so forth. It would be significantly higher in the core and maybe even higher yet in the Focus Solution Group.
Kristian Talvitie, CFO
It gets a little more complicated where you have we also have full product line reps, right reps who are focused on major accounts and they sell everything in the bag. So, like how you want to break that out, it will be a little bit complicated.
Jim Heppelmann, CEO
But a basic takeaway would be that capacity is overrepresented for the growth business, right? Which is what we need to do to deliver the growth. And you go back to the hiring thing, I can certainly understand where that question comes from? You should know we after about a year ago when we did get behind capacity, we changed the way we looked at this. We used to think of capacity as being a fiscal year thing and now we think of it really as every quarter. So it's not like this year, we have this many heads. But it's more like a constant, every quarter we need to be bringing on more capacity, so that we don't end the year and then have a big step function of capacity we have to ramp going into the next year. So I think our processes are vastly improved in this area.
Matthew Broome, Analyst
Okay, perfect. Thanks very much.
Operator, Operator
Our next question comes from Andrew with Berenberg. Your line is open.
Unidentified Analyst, Analyst
So, thanks for taking my question. Maybe if I could ask about the ARR guidance increase. Can you maybe explain to us the components of that? I guess Onshape is a big one, but are there deal timing pushouts that happened from Q4 to Q1? FX, can you maybe quantify that a little further?
Kristian Talvitie, CFO
Yes. Sure. So this is Kristian. Let's start with Onshape. Onshape is already embedded in our initial guidance, which we provided last quarter. After the acquisition was announced, but provided in the initial guidance, so it's about $10 million from Onshape. There is about a $15 million increase from favorable FX as well, and then just we're now a quarter of the way through the year. And we delivered what we believe were very solid results for Q1, and feel that much more comfortable with the range that we have out there. So in essence, what we did was tighten up the bottom end of the range from 12% to 15% to 13% to 15% and then increase the range from 13% to 15% to 14% to 16% really based on the FX impact. So hopefully that helps.
Unidentified Analyst, Analyst
Great. Thanks.
Operator, Operator
Our next question comes from Ken Wong with Guggenheim Securities. Your line is open.
Ken Wong, Analyst
Okay. Thanks for taking my question guys. Hi, how is it going? Good afternoon. You're very positive on just the trajectory of Onshape and obviously you guys have more things to come and announce. It sounds like so far we've had a lot of feedback in terms of how maybe your customers are receiving it. Can you give us a little bit of color in terms of how the Onshape side of the installed base is looking at the PTC portfolio?
Jim Heppelmann, CEO
Yes, our primary focus was to ensure that Onshape customers viewed PTC's acquisition of Onshape positively. We have achieved success in this area, and our messaging has emphasized Onshape's significance to our future strategy. CAD software tends to be essential and often used for many years, so customers using Onshape need to feel confident in its continued availability. The general sentiment was that Onshape has found a great home within PTC, which is a major win. Regarding cross-selling, it's still early to draw substantial conclusions. While I have a few anecdotal examples, we believe there are complementary use cases. For instance, we plan to integrate our AR technology with the Onshape platform, facilitating an effortless cross-sell. We are also exploring coexistence strategies with Creo and Windchill, aiming to upsell from Onshape to those products while introducing Onshape for additional use cases within those accounts. However, it is indeed early days. I'm optimistic, but we've only had ownership for about two months and are just moving past the initial transition phase.
Ken Wong, Analyst
Got it. Great, thanks for the color Jim.
Operator, Operator
Next, we will hear from Adam Borg with Stifel. Your line is open.
Adam Borg, Analyst
Hi everyone, thank you for the question. I’d like to talk a bit more about Augmented Reality. You mentioned that it is growing faster than the market and noted some opportunities in PLM. I am curious to hear more about the cross-sell opportunity with IoT, especially since it complements ThingWorx. Can you elaborate on that cross-sell potential within our installed base? Thank you.
Jim Heppelmann, CEO
Yes. I mean, I think you have to think about it as we're trying to connect the physical and digital worlds together like in our logo, right? And IoT is one form of connection and AR is another. And when you connect them together, you can then have AR experiences that contain IoT data, meaning I can use AR in the physical world to tell you about the physical world because I know about the physical world, thanks to IoT. So these are definitely pieces in the pod. It is a wonderful beautiful combination. The products are very well integrated. In fact, if you remember, for a while, we called the Vuforia Studio, ThingWorx Studio, but these are very complementary technologies and what's really great is that they are both best-in-class and there is no other IoT company who has AR technology and there is no other AR company who has IoT technology. So this is a very compelling story and it's completely unique to PTC.
Adam Borg, Analyst
Great. And maybe just as a quick follow-up. I think this year, you guys are focusing on increasing deal duration both for new deals and renewals. And just curious, I know it's still early in the year but what's customer receptivity towards that? Thanks again.
Kristian Talvitie, CFO
Yes. I think it's early in the year to really comment on that.
Operator, Operator
Thank you. Our next question comes from Sterling Auty with JP Morgan. Your line is open.
Sterling Auty, Analyst
Yes, thank you. Jim, you mentioned that the economic situation hasn't really changed and you're still facing challenging PMI numbers. With that in mind, what would you identify as the most significant change in the business? Based on your tone, does it indicate that the main aspects of the business have improved fundamentally? If that's the case, what are the key factors contributing to that change?
Jim Heppelmann, CEO
Yes. Okay. So yes, let me say, first of all, the PMI is what it is, it's not in a good place and yet, we're in a good place. So clearly something has changed and I would submit that two things have changed. Number one, we've changed our business model and metrics and we're a recurring revenue company versus a perpetual, and I want to come back to that. And then number two, we have a growth business and as many growth businesses are, they're not cyclical, they are secular. Companies want to do digital transformation even when they're laying off workers. In fact, they might even connect those strategies together. So I think the secular piece is very important, but frankly, it's overwhelmed by the business model change. And so if we go back to the great recession of 2009, let's review what happened at PTC. We had a perpetual stream of licenses and we had a recurring stream of maintenance. The bottom fell out on the economy. The perpetual license sales declined, if I remember correctly, 32% in 2009. And what happened is the maintenance stream, which had been growing mid-single digits, basically went flat. And in 2010 it actually went down 2% and after that it grew every year since. So what happened actually is the effect on a recurring revenue stream is very much muted. You can see this in the sensitivity analysis we gave you some quarters ago, where we showed you that for every 5 points that bookings drop, it would only bring ARR down 1 point. So if bookings dropped 30%, it would put 6 points of pressure on ARR, but that would be 2009 all over again. So we're in a situation where actually bookings aren't dropping. They're going up because of the secular thing. Therefore, ARR is going up with it. So I just think the days when PTC was highly correlated to PMI are simply behind us.
Sterling Auty, Analyst
Thank you.
Operator, Operator
Our next question comes from Steve Koenig with Wedbush Securities. Your line is open.
Steve Koenig, Analyst
Thanks everyone. Congratulations on a very strong quarter. My question is about your revenue growth in your growth business this quarter, which seemed to overshadow your ARR growth or was actually slightly above it. You mentioned that expansion deals constituted about two-thirds of your IoT AR bookings. How does this compare with previous quarters, and what is the trend? More broadly, do you anticipate that revenue growth will align more closely with bookings growth moving forward? I also have a quick housekeeping follow-up, if that's alright.
Jim Heppelmann, CEO
Yes, I can address part of that because I've mentioned it in previous quarters. Recently, around 60% of our bookings have come from expansions. We have been implementing a land and expand strategy, which has been effective for us. Many accounts we've sold in the past have not contributed significantly to revenue initially, but they tend to return for expansions, which can occur in multiple stages. This trend has been particularly evident with our IoT and AR customers, who have engaged with us for expansions more than once. I think I should let Kristian elaborate on the relationship between bookings and revenue growth rates, as it is quite complex.
Kristian Talvitie, CFO
Yes, it's pretty complicated. And depends again, I'll just remind everybody, it depends a lot on start dates. It depends on term length. It depends on renewal activity, etc. So it's not just term length of new deals but term length of this new deal.
Jim Heppelmann, CEO
Could I just interrupt; the real question is it revenue but revenue recognition. So you get a booking, maybe you can recognize it maybe you can't, maybe it starts next month, which means next quarter. Maybe it's a ramp deal. So yes, it is a murky correlation between bookings growth and revenue growth.
Kristian Talvitie, CFO
Which is why we're trying to focus on ARR, which is kind of a much cleaner and a better proxy in that sense, cash generation for the business. And we still continue to expect the growth businesses to deliver north of market growth rates for fiscal '20. We would also expect there to be strong revenue growth attendance of that as well.
Steve Koenig, Analyst
That's helpful. To rephrase that question, how are you observing churn or the opposite of that, renewal and expansion activity, trending in your growth business? Additionally, is it correct that your new annual recurring revenue guidance is now between 14% to 16%, compared to your previous guidance of 12% to 15%, with constant currency comparisons at 13% to 15%?
Kristian Talvitie, CFO
That's correct. Yes, we tightened up the low end of the range and then raised the entire range because of FX. 100% agreed. Then in terms of churn, we continue to see churn in the growth businesses higher than in the core and FSG from a percentage perspective, and we also continue to expect that that will trend down over time.
Jim Heppelmann, CEO
It has been improving consistently for a long period of time and we expect that to continue.
Steve Koenig, Analyst
Got you. Great. Well thank you very much, guys and congrats again.
Jim Heppelmann, CEO
Okay, great.
Operator, Operator
Next we will hear from Yun Kim with Rosenblatt Securities. Your line is open.
Yun Kim, Analyst
Thank you. Hi guys. Congrats on a solid quarter. I just want to talk about some of the ASP trends that you may be seeing out there. Obviously, you guys talked about ASP trend, I'm assuming it's increasing in the growth products group. How is that ASP trending versus your core products group? And obviously, Jim, you talked about land and expand model working very well. Has that minimized the overall percent of business coming from large deals, despite I am assuming increase in ASP coming from your growth business?
Jim Heppelmann, CEO
Okay. When you refer to ASP, you really mean deal size. Specifically, I mean the average deal size in the growth business. I'd need to verify this, but while we are closing more large deals, we're also seeing an increase in smaller deals. Therefore, I'm not entirely convinced; I don't have the data readily available, but I have a feeling the ASP isn't changing significantly. Nevertheless, the business is growing rapidly. In any case, it is generally smaller than the core business due to the land and expand strategy we've implemented in the growth business, which wasn't as heavily applied in the core business. Thus, the core business usually involves larger transactions, although there are many add-ons of modules from time to time. For instance, PLM typically has higher ASPs because it doesn't really utilize a land and expand model.
Yun Kim, Analyst
Got it. Okay, that makes sense.
Jim Heppelmann, CEO
Sorry, that's not a perfect answer, but I hopefully it answers.
Kristian Talvitie, CFO
I think they were smaller than they were when they were perpetual.
Yun Kim, Analyst
Oh yes, sure. Okay, great. That's it. So congrats on a great quarter.
Jim Heppelmann, CEO
Right, great. Thanks, Yun.
Operator, Operator
Our next question comes from Jason Celino with KeyBanc Capital Markets. Your line is open.
Jason Celino, Analyst
Thanks for taking my question. It looks like expense growth in the quarter was around 5%. But I think you guys are guiding more to 9% growth for the full year. Can you just talk about what are maybe some of the other big investments that you'll be making on integration costs as we kind of go through the year?
Jim Heppelmann, CEO
Yes. So I think expense growth has a little bit to do with timing of Onshape right, as we only had a couple of months in the quarter. So we didn't have a full quarter's worth of Onshape. And then there is the kind of normal hiring plans. And we do have some back end loading to that hiring.
Jason Celino, Analyst
Great, thanks.
Operator, Operator
Next, we'll hear from Alex Tout with Deutsche Bank. Your line is open.
Alex Tout, Analyst
Thank you for taking my question. I'd like to hear your thoughts on the automotive end market specifically. It appears to be one of the most, if not the most, challenging manufacturing sectors right now. I'm aware that your exposure is limited, but I'm curious about your observations regarding the combination of ongoing and cyclical challenges in that industry, alongside the necessity for innovation. What are the overall dynamics you are seeing among your automotive customers at this time? Thank you.
Jim Heppelmann, CEO
Yes. We're seeing actually relatively strong demand for IoT factory projects. Because I think in the downturn, people are looking for efficiency and taking a dumb factory and making it smart ought to make it most people would believe 5%, 10%, 15% more efficient and across the level of spend that people have in their production processes, those are very big numbers. So IoT demand is good. And then I'd also say PLM demand is good. I mentioned a truck company. There is another big European automotive OEM where we're working on some big PLM projects and probably looking at an expansion on that to the next phase pretty soon and so forth. So I think the PLM is really coming from digital transformation and IoT is coming from, let's try they find more productivity in our factories. I would say CAD, not so much probably. Probably we're not getting a lot of demand on the CAD front right now but good demand for PLM and IoT.
Alex Tout, Analyst
Great. Thanks for the color.
Jim Heppelmann, CEO
Thanks, Alex.
Operator, Operator
Thank you. Our next question comes from Tyler Radke with Citi. Your line is open.
Tyler Radke, Analyst
Thank you for taking my question. It seems that the increased guidance on most metrics was influenced by a mix of currency effects and strong execution this quarter. However, free cash flow did not show a similar increase. Can you clarify why, despite the solid performance and your improved outlook for the year, you are not anticipating more free cash flow than previously indicated? Thank you.
Kristian Talvitie, CFO
Yes, of course. I think we should consider both adjusted free cash flow and free cash flow. I'll begin with free cash flow. We adjusted free cash flow for currency, but we did not do so for free cash flow. It's important to note that when we initially estimated the restructuring costs for the year, our current estimates are about $5 million higher. This effectively offsets the positive currency impact on free cash flow. For adjusted free cash flow, we did raise our estimate by $5 million, largely due to foreign exchange effects. I want to emphasize that it's still early in the year, and we are being cautious. We will reassess this as we progress through the year, but that's the situation.
Tyler Radke, Analyst
Great. Thank you.
Operator, Operator
Thank you. That is all the time that we have for questions. Please remain on the line for Tim Fox's closing remarks.
Tim Fox, Senior Vice President of Investor Relations
Hi. Thanks, Sheila. And thanks everybody for joining us today on the call. PTC is going to be participating in three conferences in March, starting with Morgan Stanley's Global TMT Conference in San Francisco, followed by Berenberg's Design Conference and RBC's one-on-one conference both in New York. Additionally, we're going to be sending a save-the-date for our 2020 LiveWorx Event, which will be here in Boston, of course from June 8 to June 11, so watch that in your inbox. We look forward to seeing you on the conference circuit in the coming months and if not, we'll be sure to update you on our Q2 call in April. Again, thank you for your interest in PTC and have a great evening, everyone.
Jim Heppelmann, CEO
Yes. Thanks, everybody.
Kristian Talvitie, CFO
Thank you.
Jim Heppelmann, CEO
Bye-bye.
Operator, Operator
That concludes today's conference. Thank you for participating. You may disconnect at this time.