Item 1. Business

PTC is a global computer software and services company. We offer a portfolio of innovative CAD modeling, Product Lifecycle Management (PLM) and Service Lifecycle Management (SLM) solutions for manufacturers to create, operate, and service products. We also offer a suite of Internet of Things (IoT) solutions that enables our customers to securely connect smart things, manage and analyze data, and quickly create applications. Additionally, our Vuforia Augmented Reality (AR) platform empowers developers and others in the industrial enterprise to build AR experiences that transform the way users create, operate, and service products.

As the IoT gains momentum. Software, sensors, and IP-enabled connectivity are increasingly embedded into the design and build of products and are becoming integral to the manufacturing process. This transformation is taking shape across all manufacturing sectors. With smart connected products, manufacturers can now experience true closed-loop, product lifecycle management where they can track, manage and control product information at any phase of its lifecycle at any time and any place in the world.

We are organized in two primary business units:

• the IoT Group comprised of our IoT, analytics and augmented reality software; and

• the Solutions Group comprised of our core CAD, PLM and SLM solutions and software.

Our two business units develop solutions and software products in the following areas:

IoT Group

IoT and Augmented Reality

Enabling connectivity, application development, analysis, and augmented reality software applications for smart, connected products and environments.

Solutions Group

Computer-Aided Design (CAD)

Effective and collaborative product design across the globe.

Product Lifecycle Management (PLM)

Efficient and consistent management of product development, including embedded software development, from concept to retirement across functional processes and distributed teams.

Service Lifecycle Management (SLM)

Planning and delivery of service, including product intelligence, connected service, predictive service, and remote diagnostics.

Business Developments

Important business developments for the year are described under “2016 Business Developments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview” below. You should read that discussion, which is incorporated into this section by reference.

Our Markets

The markets we serve present different growth opportunities for us. We see greater opportunity for market growth in our IoT solutions, followed by SLM, PLM, and then CAD solutions, which is a more highly penetrated and slower growth market.

Our Principal Products and Services

We generate revenue through the sale of software licenses, subscriptions (which include license access and support for a period of time and optional cloud services), support (which includes technical support and software updates when and if available), and services (which include consulting and implementation and training). We report revenue by line of business (subscription, support, perpetual license and professional services), by geographic region, and by segment (IoT Group and Solutions Group).

IoT Group

Our IoT products enable customers to design, connect, operate and service smart, connected products and to improve the user experience.

Our principal IoT products are described below.

ThingWorx® is a technology platform that enables users to create and deploy applications and solutions for today’s smart, connected world, enabling customers to transform their products and services and unlock new business models. ThingWorx allows customers to reduce the time, cost, and risk required to connect, manage, and develop applications for smart, connected products such as predictive maintenance, system monitoring, and usage-based product design requirements. Our ThingWorx solutions include cloud-based tools that allow customers to easily and more securely connect products and devices to the cloud, and intelligently process, transform, organize and store product and sensor data. Additionally, our ThingWorx offerings include a predictive intelligence tool that uses artificial intelligence technology to simplify and automate the processes of creating and operationalizing predictions inside ThingWorx-powered solutions and other systems of record. This machine learning tool complements our IoT portfolio by introducing data analytics to information collected from smart, connected products.

KEPServerEX® provides communications connectivity to industrial automation environments to connect disparate devices and control systems, providing users with a single source of real-time industrial sensor and machine data for operational intelligence to improve operations, accelerate troubleshooting, perform preventative maintenance, and improve productivity.

Vuforia Studio™ combines ThingWorx, Vuforia, and Creo technologies to bring AR and Virtual Reality into the world of industrial IoT. Studio, which is sold as part of our ThingWorx platform, is a powerful new tool for authoring and publishing augmented reality experiences. These augmented reality experiences overlay important digital information from IoT, onto the view of the physical things on which the user is working -- such as a dashboard of sensors and analytics data, or 3D step-by-step operating or repair instructions.

Vuforia® is an augmented reality technology platform that enables applications to see and interact with things in the physical world. Using computer vision technologies and building them for mobile platforms, the technology is accessible through an application programming interface and developer workflows.

Solutions Group

CAD

Our CAD products enable users to create conceptual and detailed designs, analyze designs, perform engineering calculations and leverage the information created downstream using 2D, 3D, parametric and direct modeling. Our principal CAD products are described below.

Creo® is an interoperable suite of product design software that provides a scalable set of packages for design engineers to meet a variety of specialized needs. Creo provides capabilities for design flexibility, advanced assembly design, piping and cabling design, advanced surfacing, comprehensive virtual prototyping and other essential design functions.

Mathcad® is software for solving, analyzing and sharing vital engineering calculations. Mathcad combines the ease and familiarity of an engineering notebook with the powerful features of a dedicated engineering calculations application.

PLM

Our PLM products are designed to address common challenges that companies, particularly manufacturing companies,

face over the life of their products, from concept to retirement. These software products help customers manage product configuration information through each stage of the product lifecycle, and communicate and collaborate across the entire enterprise, including product development, manufacturing and the supply chain, including sourcing and procurement.

Our principal PLM products are described below.

Windchill® is a suite of PLM software that offers lifecycle intelligence - from design to service. Windchill offers a single repository for all product information. As such, it is designed to create a “single source of truth” for all product-related content such as CAD models, documents, technical illustrations, embedded software, calculations and requirement specifications for all phases of the product lifecycle to help companies streamline enterprise-wide communication and make informed decisions.

Additionally, our Windchill product family includes supply chain management (SCM) solutions that allow manufacturers, distributors and retailers to collaborate across product development and the supply chain, including sourcing and procurement, to identify an optimal set of parts, materials and suppliers. This functionality provides automated cost modeling and visibility into supply chain risk information to balance cost and quality, and enables customers to design products that meet compliance requirements and performance targets.

Integrity™ enables users to manage system models, software configurations, test plans and defects. With Integrity, engineering teams can improve productivity and quality, streamline compliance, and gain greater product visibility, ultimately enabling them to bring more innovative products to market.

Navigate™, our new ThingWorx-based PLM offering launched in 2016, is a collection of focused, role-based applications that provides complete, contextual, up-to-date and accurate product information from Windchill and other systems of record. Leveraging ThingWorx technology, Navigate applications can easily be tailored and deployed to roles across an enterprise, and extended to include data from other systems of record and even data from smart, connected products.

Creo® View™ enables enterprise-wide visualization, verification, annotation and automated comparison of a wide variety of product development data formats, including CAD (2D and 3D), ECAD, and documents. Creo View provides access to designs and related data without requiring the original authoring tool.

SLM

Our SLM products help manufacturers and their service providers improve service efficiency and quality. These include capabilities to support product service and maintenance requirements, service information delivery, service parts planning and optimization, service knowledge management, service analytics, connected remote service, and predictive service. Our principal SLM products are described below.

Servigistics® is a suite of SLM software products that integrate service planning, delivery and analysis to optimize service outcomes. Servigistics products enable a systematic approach to service lifecycle management by providing a single view of service throughout the service network, enabling customers to continuously improve their products and services and increase customer satisfaction.

Arbortext® is an enterprise software suite that allows manufacturers to create, illustrate, manage and publish technical and service parts information to improve the operation, maintenance, service and upgrade of equipment throughout its lifecycle. These products are available in stand-alone configurations as well as integrated with our Windchill products to deliver dynamic, product-centric service and parts information.

Global Support

We offer global support plans for our software products. Participating customers receive updates that we make generally available to our support customers and also have direct access to our global technical support team of certified engineers for issue resolution. We also provide self-service support tools that allow our customers access to extensive technical support information. When products are purchased as a subscription, support is included as part of the subscription.

Professional Services

We offer consulting, implementation, training and cloud services through our Global Professional Services Organization, with approximately 1,100 professionals worldwide, as well as through third-party resellers and other strategic partners. Our services create value by helping customers improve product development performance through technology enabled process improvement and multiple deployment paths. Our cloud services customers receive hosting and 24/7 application management.

Geographic and Segment Information

We have three operating and reportable segments: (1) the Solutions Group, which includes license, subscription, support and cloud services revenue for our core CAD, PLM and SLM products; (2) the IoT Group, which includes license, subscription, support and cloud services revenue for our IoT, analytics and augmented reality solutions, and (3) Professional Services, which includes consulting, implementation and training revenue. Financial information about our segments and international and domestic operations may be found in Note O Segment Information of “Notes to Consolidated Financial Statements” in this Annual Report, which information is incorporated herein by reference.

Research and Development

We invest heavily in research and development to improve the quality and expand the functionality of our products. Approximately one third of our employees are dedicated to research and development initiatives, conducted primarily in the United States, India and Israel.

Our research and development expenses were $229.3 million in 2016, $227.5 million in 2015, and $226.5 million in 2014. Additional information about our research and development expenditures may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Costs and Expenses-Research and Development.”

Sales and Marketing

We derive most of our sales from products and services sold directly by our sales force to end-user customers. Approximately 20% to 25% of our sales of products and services are through third-party resellers and other strategic partners. Our sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market. Our strategic services partners provide service offerings to help customers implement our product offerings. As we grow our IoT business, we expect our go-to-market strategy will rely more on partners and marketing directly to end users and developers.

Strategic Partners

Building an ecosystem of strategic partners will become increasingly important as we expand our IoT offerings and seek to improve the efficiency with which we deliver our traditional products and services. With this in mind, we have recently entered into strategic partner relationships to jointly market, sell, and develop integrated products and services.

Competition

We compete with a number of companies that offer solutions that address one or more specific functional areas covered by our solutions. For enterprise CAD and PLM solutions, we compete with companies including Dassault Systèmes SA and Siemens AG; for discrete desktop CAD products, we compete with Autodesk, Siemens and Dassault Systèmes, and for PLM solutions and SLM solutions, we compete with Oracle Corporation and SAP AG. We believe our products are more specifically targeted toward the business process challenges of manufacturing companies and offer broader and deeper functionality for those processes than ERP-based solutions. In our IoT business, we compete with large established companies like IBM Corporation, Microsoft, Cisco, Oracle, SAP, and General Electric. There are also a number of small companies that compete in the market for IoT products.

Proprietary Rights

Our software products and related technical know-how, along with our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection. The nature and extent of such legal protection depends in part on the type of intellectual property right and the relevant jurisdiction. In the U.S., we are generally able to maintain our trademark registrations for as long as the trademarks are in use and to maintain our patents for up to 20 years from the earliest effective filing date. We also use license management and other anti-piracy technology measures, as well as contractual restrictions, to curtail the unauthorized use and distribution of our products.

Our proprietary rights are subject to risks and uncertainties described under Item 1A. “Risk Factors” below. You should read that discussion, which is incorporated into this section by reference.

Deferred Revenue and Backlog (Unbilled Deferred Revenue)

Information about Deferred Revenue and Backlog (Unbilled Deferred Revenue) is discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” below. You should read that discussion, which is incorporated into this section by reference.

Employees

As of September 30, 2016, we had 5,800 employees, including 1,875 in product development; 1,810 in customer support, training, consulting, cloud services and product distribution; 1,442 in sales and marketing; and 673 in general and administration. Of these employees, 2,122 were located in the United States and 3,678 were located outside the United States.

Website Access to Reports and Code of Business Conduct and Ethics

We make available free of charge on our website at www.ptc.com the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3, 4 and 5 also are available on our website. The reference to our website is not intended to incorporate information on our website into this Annual Report by reference.

Our Code of Ethics for Senior Executive Officers is embedded in our Code of Business Conduct and Ethics, which is also available on our website. Additional information about this code and amendments and waivers thereto can be found below in Part III, Item 10 of this Annual Report.

Executive Officers

Information about our executive officers is incorporated by reference from Part III, Item 10 of this Annual Report.

Corporate Information

PTC was incorporated in Massachusetts in 1985 and is headquartered in Needham, Massachusetts.