Item 1. Business

PTC is a global software and services company that, together with a partner ecosystem, drives digital transformation for industrial companies. We serve a broad range of these companies, including discrete manufacturers (industrial machinery & components, aerospace & defense, automotive, and electronics & high technology), process/continuous manufacturers (life sciences, energy & resources, and consumer packaged goods), and operators. Our technology enables customers to improve operational efficiency, accelerate product and service innovation, and increase workforce productivity.

We go to market with four technology platforms, consisting of and supported by products that enable 3D modeling (CAD), lifecycle management (PLM), data orchestration (IIoT), and experience creation (AR). Together, these technologies power the digital thread across industrial enterprises.

We continue to expand our solution offerings to address the most pressing business problems our customers confront. These solutions are being designed to aggregate products and technology from our portfolio as well as from other companies, including our key partners.

Our business is based on a subscription business model, which provides flexibility to customers and increases predictability and consistency of billings to PTC. Our customer success program partners with customers to enable successful deployment and utilization of our solutions.

We generate revenue through the sale of software subscriptions, which include license access and support (technical support and software updates), support for existing perpetual licenses, professional services (consulting, implementation, and training), and cloud services.

Recent Events

On November 1, 2019, we acquired Onshape, creators of the first Software as a Service (SaaS) product development platform that unites robust CAD with powerful data management and collaboration tools, for approximately $470 million, net of cash acquired. The acquisition is expected to accelerate our ability to attract new customers with a SaaS-based product offering and position the company to capitalize on an industry transition to SaaS. In connection with the acquisition, we borrowed $455 million under our existing credit facility.

On November 13, 2019, we also increased the revolving loan commitment under the credit facility to $1 billion and made other amendments to the credit facility.

Our Principal Products and Services

3D (CAD)

Our 3D platform enables 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 3D product is described below.

Our Creo® interoperable suite of product design software 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. Our Creo solutions include augmented and virtual reality through a native cloud dependent integration with our Vuforia® augmented reality (AR) solution. With every seat of Creo, our customers can create and publish AR experiences and share their design instantly to collaborate with anyone across the entire enterprise around the world on any device. Creo also now includes the Discovery Live real-time simulation technology from ANSYS. This solution offers customers a unified modeling and simulation environment and provides design engineers with an interactive design experience that will enable them to create higher quality products, while reducing product and development costs.

Lifecycle Management (PLM)

Our PLM platform enables efficient and consistent product data management from inception through design, as well as communication and collaboration across the entire enterprise, including product development, manufacturing and the supply chain. Our principal Lifecycle Management product is described below.

Our Windchill® suite of PLM software provides product lifecycle management capabilities - from design to service. Windchill offers a single repository for all product information, thus providing 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. As the “single source of truth,” Windchill provides the digital thread that connects the full product lifecycle. Our Windchill product now also includes augmented reality (AR) capabilities, enabling customers to build a digital product definition and publish the representation of the resulting product in AR. Using AR in the product development process connects the digital model to the physical product to determine real-time behavior, conduct product design reviews in real-world environments, and share the product definition with disparate stakeholders.

Data Orchestration (IIoT)

Our data orchestration platform delivers tools, technologies, and solutions that empower companies to rapidly develop and deploy powerful industrial IoT applications, enabling them to transform their operations, products, and services - and unlock new business models. Our principal data orchestration product is described below.

Our ThingWorx® product enables customers to reduce the time, cost, and risk required to build and deploy IoT applications; connect devices, systems, and applications; manage connected products; and analyze industrial IoT data. ThingWorx includes cloud-based tools that allow customers to easily and more securely connect products and devices to the cloud, and intelligently process and store product and sensor data. ThingWorx Solution Central is a centralized portal in the cloud that allows users of ThingWorx to efficiently discover, deploy, and manage ThingWorx applications across the enterprise from a single location, which allows for cost-effective, efficient, and version controlled management of applications. ThingWorx contains integral communications connectivity to industrial automation environments through our ThingWorx Kepware® product, which enables users to connect, manage,

monitor, and control disparate devices and software applications. ThingWorx also offers sophisticated artificial intelligence and machine learning technology that enables customers to simplify and automate complex analytical processes that enhance industrial IoT solutions through real-time insights, predictions and recommendations from information collected from smart, connected products. ThingWorx also includes AR capabilities that superimpose IoT digital information on a human’s view of the physical world, enabling valuable insights.

Experience Creation (AR)

Our Experience Creation platform offers a way to capture, create, and deliver content for industrial augmented reality experiences. Our principal experience creation products are described below.

Our Vuforia Studio™ product is a powerful, easy-to-use, cloud-based tool that enables industrial enterprises to rapidly author and publish augmented reality experiences. These augmented reality experiences overlay important digital information from IoT, CAD, and other sources onto the view of the physical things on which users work. Our Vuforia Expert Capture™ product chronicles the real-time movements of a person wearing an AR headset by monitoring the individual both audio-visually and spatially in three dimensions. Vuforia Expert Capture supports a variety of industrial use cases, such as creating step-by-step operating or repair instructions, procedural guidance, and hands-on training. The Vuforia suite also includes the Vuforia Engine™ technology for application development and Vuforia Chalk™ collaboration and remote assistance solution.

Strategic Partners

Building an ecosystem of partners is becoming increasingly important as we expand the capabilities of our core solutions, and IoT offerings and as we expand our addressable markets by leveraging our partner sales and services distribution channels. With this in mind, in 2018, we entered into the three strategic alliances described below.

We partnered with Rockwell Automation to align our respective smart factory technologies to address the market for smart, connected operations, with particular focus on the plant and factory setting. As part of this strategic alliance, we have aligned our ThingWorx® IoT, Kepware® industrial connectivity, and Vuforia® augmented reality (AR) platforms with Rockwell Automation’s FactoryTalk® MES, FactoryTalk Analytics, and Industrial Automation platforms, and we both offer these solutions in the market. This suite is now launched and marketed as FactoryTalk Innovation Suite Powered by PTC. Rockwell Automation has exclusive rights to resell certain of our solutions to certain customers and geographic regions. In connection with this strategic alliance, Rockwell Automation made a $1 billion equity investment in PTC.

We partnered with Microsoft to make the ThingWorx® Industrial Innovation Platform available on the Microsoft Azure cloud platform as our preferred cloud platform. By partnering with Microsoft, we are able to leverage the two companies’ complementary technologies and together pursue opportunities in industrial sectors. This integration enables us to deliver a combined and connected solution for industrial IoT and digital product lifecycle management that enable companies to bring new products to market faster, enhance customer service, and introduce new revenue streams, while reducing operating costs.

We partnered with ANSYS to enable us to embed Ansys' Discovery Live real-time simulation within Creo, enabling us to offer a fully-integrated CAD and real-time simulation solution.

Our Markets and How We Address Them

We compete in the Industrial IoT (IIoT) and augmented reality markets and the CAD and PLM markets. The markets we serve present different growth opportunities for us. We see greater opportunity for market growth for our IIoT and AR solutions for the enterprise, followed by more moderate market growth for our CAD and PLM solutions.

We derive most of our sales from products and services sold directly by our sales force to end-user customers. Approximately 20% to 30% 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 IIoT business, we expect our go-to-market strategy will rely more on partners, including the types of strategic partners described above, and marketing directly to end users and developers.

Additional financial information about our segments and international and domestic operations may be found in Note 18. Segment and Geographic Information of Notes to Consolidated Financial Statements in this Annual Report, which information is incorporated herein by reference.

Competition

We compete with a number of companies that offer solutions that address one or more specific functional areas covered by our solutions. In our IIoT business, we compete with large established companies like Amazon, IBM, Oracle, SAP, Siemens AG, and GE. There are also a number of small companies that compete in the market for IoT products. We believe our ThingWorx IoT platform and solutions are complementary to the offerings of many of our competitors, and we have partnered with many of the named competitors. For enterprise CAD and PLM solutions and for discrete desktop CAD products, we compete with companies including AutoDesk, Dassault Systèmes SA and Siemens AG. For PLM solutions, we also compete with Oracle and SAP, but 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.

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 - Executive Overview” below. You should read that discussion, which is incorporated into this section by reference.

Employees

As of September 30, 2019, we had 6,055 employees, including 1,889 in product development; 1,674 in customer support, training, consulting, cloud services and product distribution; 1,777 in sales and marketing; and 715 in general and administration. Of these employees, 2,203 were located in the United States and 3,852 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 our 2020 Proxy Statement.

Corporate Information

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