Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2024 Third Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Neil Barua:

Thanks, Matt. In Q3, we again delivered solid constant currency ARR growth, up 12% year-over-year, demonstrating that our portfolio products is resonating with customers. Our Q3 free cash flow growth was also solid, rising 29% year-over-year. Kristian will take you through our quarterly results and forward-looking guidance in detail. Before we get into more detail, I want to recognize Mike DiTullio, who will transition out of the President and Chief Operating Officer roles at the end of the fiscal year and continue as an advisor to me into 2025. Mike's part in PTC success has been profound over his tenure of more than 25 years. We certainly wouldn't be the company we are today without him. In addition, he's been a great partner to me as I've stepped into the CEO role. We've been discussing his future plans and we both agree that it's the right time to start this transition process. When we start fiscal 2025, we'll no longer have the COO position within our leadership structure. At this stage of my CEO tenure, my approach is to be close to the business and be more directly involved with operations and execution, especially for our key priorities. Accordingly, I will be assuming many of Mike's responsibilities. Additionally, I'd like to reiterate what I said on last quarter's call, which is that I'm turning over lots of stones and looking at everything in this company in order to usher in a new phase of focus and effectiveness across the entire company. To that end, while Mike's change was externally visible because we filed an 8-K, there are numerous other changes that we have already made and are making across many different areas of the organization. This is an ongoing process that we're doing with the intent of driving more effectiveness in the pursuit of our incredible growth potential. Let's move down to slide 4, which highlights our product portfolio and strategy. As a reminder, our five focus areas are, one, PLM, which is driven primarily by our Windchill product; two, ALM, which is driven by our Codebeamer product; three, SLM, which is primarily driven by ServiceMax; four, CAD, which is driven primarily by Creo; and five, our continued focus on SaaS. These are the areas where we can create the greatest customer value and are the areas where we are focusing our resources and attention. At the most basic level, our customers need to introduce new products at a faster pace and with higher quality. It is not unusual to hear from customers that they need to shorten their new product introduction timelines in half. That's not possible without digital transformation across their workflows, which is exactly what our products enable. It's also worth highlighting that we are bringing our suite of software offerings together to help product companies improve their competitiveness. Given the unique breadth and openness of our portfolio, we can enable end-to-end digital threat initiatives, which leverage a connected flow of product data across design, manufacturing, service, and ultimately reuse. A digital thread enables product companies to break down silos, streamline workflows, and achieve interoperability across departments, functions, and systems, a single version of truth. It also secures the quality, consistency, and traceability of product-related data, ensuring that the data is up-to-date, accessible, reliable, and actionable. With a digital thread, the right data is delivered to the right people at the right time and in the right context across the value chain. The demand drivers for our core offerings are strong and our differentiated capabilities to drive digital thread initiatives are increasingly important to our customers. There is so much we can do to help our customers drive better business outcomes. To unlock this potential, I have started to focus on our operations, taking a fresh look at ways to continue driving improvements. On last quarter's call, we discussed rebalancing some R&D resources away from creating new standalone IoT and augmented reality applications to instead support growth of our core products. That was just the first step, putting in place an organizational design that enables us to scale more programmatically will set us up for continued success in the future. We are now primarily turning our attention to optimizing our go-to-market and G&A activities. As I mentioned upfront, we've leaned out the go-to-market management structure, so there are less layers between me and our customers. At this point, we are moving forward without the chief operating officer and chief revenue officer roles, and I will be working directly with our Head of Sales and Head of Customer Success. We are actively looking at every facet of our business to continue driving alignment and effectiveness across our entire company. It is about focusing on customer value and getting more effective with each dollar we spend to support them and capture that demand. The opportunities to achieve this are significant here at PTC. We are in the early innings of doing this work and we expect the heavy lifting to continue in fiscal 2025. I'd like to turn now to discuss three of our focus areas to illustrate the significant value we bring to customers. This quarter, I'll touch on what we have been seeing with customers of our Windchill PLM, Codebeamer ALM, and ServiceMax SLM products. Starting with PLM on slide 5, this is product lifecycle management, and Windchill is our flagship PLM product. PLM systems tend to be really sticky and are mission critical for our customers. This is software that historically had the function of helping CAD engineers keep track of their CAD files. Now PLM is at the epicenter of digital transformation initiatives at product companies. As I explained last quarter, product companies are increasingly focused on compressing the time it takes to get new products to market. And at the same time, their products continue to get much more complex, both to design and produce. The complexity becomes untenable. Quality and time to market gets impacted. Sooner or later, it becomes very clear that having an advanced PLM system is a strategic necessity. In general, manufacturing companies have a long way to go in terms of their digital transformation journeys. And when a product company gets really serious about optimizing and automating their design and manufacturing processes, we tend to see large PLM expansion projects and step function increases in ARR as customers expand their Windchill deployments in terms of both seats and functionality. A good example of this is our Q3 win at a supplier to the automotive industry that specializes in cabling and wiring harness solutions. Given the rise of software-defined vehicles and the importance of electronic wiring systems, the role of this company in the automotive supply chain has grown. It's interesting that this company already appreciated the value of leveraging their PLM system beyond engineering to drive better business outcomes. They are using Windchill within R&D, but they're currently using homegrown tools to drive collaboration across their engineering, supply chain, manufacturing, and quality assurance teams. Over time, maintaining their homegrown system became unsustainable from both a complexity and cost standpoint. They found it compelling that extending Windchill beyond engineering is easy to implement and provides quick time to value, and they decided to standardize on their Windchill system as their backbone for enterprise-wide collaboration around their product data. Turning to slide 6, the second customer example for today is a medical equipment customer that has been using our Creo CAD and Windchill PLM products for years now. What's interesting is that this customer wants to unlock value by going with the digital thread approach I highlighted a few minutes ago. Our Codebeamer ALM product helped to complete their digital thread vision. After being a Codebeamer customer for about a year testing out the product, they decided they were all in and ready to move forward with their digital thread initiative, and in Q3, they signed a deal with us that will expand their ARR by 190%. As a reminder, ALM, or Application Lifecycle Management, helps engineers keep track of product requirements and tests to ensure that all requirements are met. This traceability is very important in safety-critical and regulated industries, including the automotive and medical equipment markets, and is growing in importance across other industries because of the trend towards software-driven products of all types. Products now contain more embedded software than ever, and for many products, there's been an explosion in the number of unique software configurations that need to be developed and updated over time. Codebeamer is a next-gen platform that enables industrial companies to manage this increasing level of complexity. Codebeamer is differentiated from legacy ALM offerings in two key ways. First, Codebeamer has industry-leading traceability capabilities, and second, Codebeamer also helps with time to market by supporting Agile development processes. Consider, for example, what happens when a company has a product in the field that fails? Regulators immediately want to understand which version of the software that product had, and might even demand that more stringent new requirements be placed on new products the company makes. Codebeamer is becoming the solution of choice to deal with this new reality. Codebeamer is a big part of completing the digital thread vision for this customer because software plays such a critical role in their new product innovations. Before having Codebeamer, they face challenges managing their high volume of software requirements, which led to unnecessary delays in getting new products to market as well as exposure to risk. As a medical equipment company, software innovation and regulatory traceability are front and center for this customer and the value Codebeamer brought to them gave them the confidence to rely on PTC in a more holistic way. They are expanding their Windchill and Codebeamer deployments and will use Windchill as the foundation for their digital thread. The digital thread is becoming increasingly strategic to customers across many industries as product companies see the potential to improve their competitiveness by managing the complete lifecycle of their products in a more integrated manner. What is most important to thread together can be different for different customers. But having visibility to a more complete picture and being able to gain actionable insights through a digital thread of product data is becoming table stakes as the competitive environment continues to intensify across many industries. Turning to the third customer example for today, which is a ServiceMax SLM win on slide 7. SLM is Service Lifecycle Management and one of our main products here is ServiceMax, the industry leader in field service management for high value, long lifecycle products. In Q3, we landed a new PTC customer because of ServiceMax. This customer engineers, manufacturers and services industrial and electrical power systems around the world and they like that ServiceMax has become part of PTC. The drivers behind this win were similar in many ways to the elevator company when we highlighted on last quarter's call. The point is that many product companies are not only focused on managing complexity and accelerating time to market, they are also looking for new sources of top line and bottom line growth. In this example, the customer had a CEO led initiative to better leverage their install base to grow aftermarket revenue in a repeatable and cost-effective manner. Because of organizational silos, the customer currently has fragmented service business operation, which impacts their field service productivity and customer service. They struggle to compete with smaller local vendors for aftermarket contracts to service their own products. The customer made the strategic decision that it was time to transform their service operations and they selected ServiceMax. The ServiceMax system will be their software foundation and single source of truth for their aftermarket services and customer service initiatives. Before going out into the field, the ServiceMax application will help their service technicians understand everything they need to know about the specific product that needs servicing, so that they can bring the right parts with them. The ServiceMax application will also schedule and route the field technicians efficiently and guide the field technicians through complex procedures. As typical of ServiceMax deals, the selection process was very thorough and ServiceMax came on top based on product capabilities they're aligned with the priorities of the customer to drive more proactive customer service, improve visibility into their install base of products, drive higher aftermarket attach rates and improve field technician utilization. Lastly, we also remain encouraged by our other focus areas that they didn't provide examples for this quarter, which are CAD and SaaS. We have been reinvesting in our business, consistently growing our annual R&D investment footprint to provide greater value to our customers. In Q3, we made incremental progress in each of our five focus areas towards executing in a scalable fashion and focusing our investments on the product advancements that customers care the most about. As I emphasized earlier, you should expect to see a continued focus on aligning all our resources across all operational functions in this company behind our five focus areas. This is foundational work and we will be disciplined about seeing it through. It will take time and progress may not be linear, but we will leave no stone unturned, as I said, as we focus on scaling our business and further improving the consistency of our execution With that, I'll hand the call over to Kristian to take you through our Q3 financial results and future guidance.

Operator:

[Operator Instructions]. And with that, our first question comes from the line of Siti Panigrahi with Mizuho.

Neil Barua:

On the first question, in Q3, we saw very small puts and takes across all geographic regions and verticals. Absolutely no discernible change in any trend there. As we've been saying very consistently, the demand environment in Q3 was consistent with what we've seen over the past couple of years. Good thing, by the way, is our pipeline going to Q4 is strong. In terms of what I'm looking for, what Kristian and I are looking for in terms of areas where we would feel the environment's getting better, is how we think about close rates. And consistently, for the past few years, close rates have been difficult and challenged. Once those close rates on a growing pipeline become better, it is my indication of when the environment is better for PTC in terms of securing the deals in a more accelerated manner. But I absolutely feel good about the demand. In fact, our sequential growth and pipeline is increasing, and so we're focusing on closing deals and how they actually attribute to in-quarter ARR.

Tyler Radke:

I guess on the demand environment, understandably it's choppy out there. We heard from Microsoft yesterday talking about EMEA weakness. But could you just talk about the trends that you saw play out throughout the quarter? And I know that you're making some go-to-market tweaks as well with taking on more of the customer work, Neil. But how much of this do you think is kind of execution versus macro? And what are you kind of assuming on the environment here in Q4?

Operator:

Our next question comes from the line of Joe Vruwink with Baird.

Neil Barua:

A consistent theme from my prior calls around where are we putting wood behind which arrows and that is driven by our belief around where we could drive the most customer value and where we have the highest right to win. And so, that's how we set forward the five priorities of the company that I've been consistently talking about for the last couple of quarters. We did some repositioning of product and R&D capabilities in IoT ARR back to core products to reinforce those priorities to deliver a better outcome of those priorities over the next number of years. The same is happening now across all these other functions. In particular now, the focus is around the go-to-market function, by which it's not around efficiency. It is around are we using every person we have in this company effectively towards those five priorities. And so, we're working through making sure whoever is targeting PLM expansion capabilities is adequately enabled, is adequately incented, is structured in our go-to-market model by which they can be successful that delivers value to the customer and returns to the company. And so, that's what we're working through. And the other stones that we're kind of working through is because we've set these priorities very clearly, we're all really energized by these priorities because we're seeing, to your question, a lot of customer demand and pull from it. We're looking at anything we're spending money in that can be better utilized using that same dollar on things that could accelerate those priorities, whether it be greater R&D capabilities, which we've been doing it, whether it be making sure we position the rest of your organization to serve those customers towards those five priorities. So that's how we're looking at it currently. And again, much work to do, early innings and heavy lifting will continue into 2025.

Stephen Tusa:

Obviously, a lot of different cross currents here in the macro, whether it's the kind of budget questions around AI and things like that. Obviously, your key competitor had quite a significant miss. They talked about geopolitics a bit. I guess you guys aren't seeing that. Can you just remind us of maybe how you differ from Dassault [ph] and maybe what makes your model a bit more resilient perhaps? And are you seeing kind of geopolitical issues? Or when you talk about the macro, is it something just a bit more, I guess, financially or business related to customers being a bit more cautious on budgets like we've been hearing for the last year-and-a-half, two years?

Stephen Tusa:

I guess just a follow-up, great answer first of all, but just the follow-up. Looking at next year, obviously, you guys have pretty high confidence in, I guess, giving us a framework for next year in this environment. What kind of environment are we talking about to get below the double digit range in ARR? Secondarily, how close are you guys to having the playbook ready to respond on the cash side? Like you said, you would be able to in that environment. I don't think we're going to that type of scenario, but it seems like your model is very defensive from this perspective. It would take a lot to drive you to that point. Just curious what the mindset is around defending the cash at this stage.

Kristian Talvitie:

Again, I don't think we really want to get into the nitty gritty details of the guidance for next year. As I said, we're still working through the detailed planning process. That said, I think that we've seen our – we'll call it budgeting process, play out here this year. As we've articulated, we start the year with a range of expected outcomes on the top line. We start the year with a spend run rate. And as we progress through the year, as we get more comfortable, we release more incremental funding into the system. So that's how we try to gauge it and we would continue to try to do that and we're frankly doing it right now already in preparation for next year and that's how we're thinking about it. So we're really talking about modulating incremental expense into next year and hopefully not putting ourselves in a situation where we've got to actually pare back expense. I think we feel pretty comfortable about it.

Adam Borg:

Neil, maybe for you, it's great to hear the continued kind of turning over all the stones as you take a fresh look at the entire organization. As we think about go-to-market and potential changes there, how do we think about the potential risk of disruptions from those changes in the near term and how is that contemplated in guidance?

Adam Borg:

Maybe just a quick housekeeping for Kristian. I know we lowered the top end of the ARR range by $20 million and I apologize if I missed it. I think last quarter it was lowered due to some ARR contracts being renegotiated, more deferred ARR. Is that what we're talking about here or is there something different? And I apologize if I missed it.

Operator:

Our next question comes from the line of Joshua Tilton with Wolfe Research.

Kristian Talvitie:

It's a great question, Josh. No, and that actually is not the case at all. On free cash flow is actually simply timing. Just being completely candid, we had a bunch of collections that were due in the last two days of the quarter. The last two days of the quarter happened to be a Saturday and Sunday. We were hopeful that we were going to get that cash in on Friday or before, but obviously customers have a contractual right to actually pay it the following week. And so, that's what happened on the cash flow. We were hopeful that we were going to get it on the week before. We've now got that cash, so hence there's no change to the cash flow forecast for the year. That's the timing issue.

Kristian Talvitie:

Yeah, it was about half of it in last quarter and half of it this quarter. Sorry, I'll be more precise. Half of it in Q3 and about half of it in Q4.

Saket Kalia:

Neil, maybe for you, it feels like close rates is one of, if not maybe the major reason here for just the revised ARR guide. And so, the question is, can we maybe talk about that metric anecdotally, of course, for ServiceMax and Codebeamer cross-sell? I know the team really enabled PTC sellers to go after those opportunities this year. How has that sort of trended and kind of how are you feeling about those businesses when you think about kind of close rates?

Operator:

Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Neil Barua:

It's the first time in my career where I've been spending so much time with executives and customers across the world, and they ask me who's going to win the election in the US. It's a consistent and quite a confusing time for everyone around what happens in the US. That being said, I think for the most part, customers are understanding that whoever gets put in the office, a lot of things don't dramatically change depending on the composition, what happens across all different constituents of the US election. And so, part of what we're seeing and part of what we're continuing to assume and hearing, most importantly, for our customers is we got to get on with digital transformation, regardless of if this person's in office or that person's in office, because we are not becoming competitive if we can't deliver products faster, with better quality, and a more sustainable cost structure, given all the things that are happening around the world. I will say that geopolitics, the environment, the uncertainty, wars have been consistent for the last number of years, which is why we continue to say we've not said that the environment's getting better. We don't believe it's getting worse based on this. And we're going to navigate through this time period. And we've thought through that in the way in which we set the guidance here.

Michael Richards:

It's Mike Richards on for Matt. So I appreciate the early look into 2025. So maybe how should we be thinking about the drivers of that low double-digit growth and how that sort of evolves from this year as it pertains to the five focus areas? And even acknowledging that it's a decade-long journey for SaaS, maybe how that might contribute more to growth as we move forward.

Operator:

Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Neil Barua:

On the first part on CAD, we have two awesome ways in which we're addressing the market. As you know, Jay, we've got Onshape, industry's only cloud-native CAD application, and we got Creo, which is awesome, as you know. And so, those two together, we feel have competitiveness. I am not talking about Onshape. It's a great part of our business, building momentum. We feel very good about it, competitive positioning. It's starting to scale. I will talk about it when it has a meaningful impact at an aggregate level to the financials of the business. But, strategically, we continue to make sure our chips are being placed to ensure that Onshape is successful against some of the other solutions that are out there from our competitors. And then you've got Creo, which is a very strong tool. And our belief is the connection of Creo to Windchill and ultimately Codebeamer, the three together, is a very strong value proposition for many customers thinking about how they think about the digital thread. So, Jay, I would say in the CAD business, we're ready, we're competing, we're in several different dynamics of deals that might cause share shifts, might not. As you know, it's not an easy business to do share shifts, but we believe we have a very comprehensive offering on both fronts, industry leading, scale player in Creo, and Onshape, which is starting to hit their stride here and we're going to continue to focus in on it. On your point around turning over stones on R&D, what I'll say is we're focusing in particularly on go-to-market and G&A. We're making sure on R&D, we are focusing on making sure the team is aligned to deliver on the roadmap. Every single one of our customers, Jay, is saying, we love your products, we love where you're going in terms of building feature functionality, scalability of those products, just do it. And so, job number one for the R&D team is keep doing that and do it with precision, energy because our customers need it. So that's number one. Including by the way, the Atlas team, because that is a fundamental layer by which we have the ability to offer our SaaS offerings. And two, continue to build innovative offerings. We're continuing to build ways in which we could add generative AI into our products. We're continuing to do – we just released an awesome integration of ServiceMax to Windchill on-time with great quality on July 11th of this month. We have another release of a ServiceMax ability to – now have ServiceMax able to be sold alongside Windchill in the federal space. So we're continuing to build some of these innovations, including with Codebeamer, Windchill and Creo and Onshape to make sure we're at the best-in-class here. I'll pause there.

Clark Jeffries:

I wanted to ask Kristian, we're asking a lot of questions here about close rates and pipeline, but maybe going back to that framework that you've set around ARR and what you need to believe on a sequential ARR basis. I just wanted to maybe have the discussion on – in relation to that $85 million for Q4, you called out the $5 million related to some of those existing contracts. What is the percentage in that $85 million that's going to come from uplift or pricing, drivers that are relatively in-hand versus new sales or upsells that might be more sensitive to execution?

Operator:

Thank you. I will now hand the call back over to Neil Barua for closing remarks.

Kristian Talvitie:

Thanks, everybody.

Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2024 Second Quarter Conference Call. [Operator Instructions]

Matthew Shimao:

Good afternoon. Thank you, John, and welcome to PTC's Fiscal 2024 Second Quarter Conference Call. On the call today are Neil Barua, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com.

Operator:

[Operator Instructions] Your first question comes from the line of Nay Soe Naing from Berenberg.

Neil Barua:

Yes. Thanks for the question. I'll start with the first one and Kristian could add.

Kristian Talvitie:

Yes. I mean the only other thing that I would say is that every time we talk about mid-teens, we had to caveat the status of the economy and so on. So I think this is just cleaner way to do it.

Kristian Talvitie:

They were the best answers we've ever given.

Operator:

The next question comes from the line of Daniel Jester from BMO Capital Markets.

Kristian Talvitie:

It's Kristian. Thanks, Dan. So I think your question is around why are we not starting buybacks sooner? I guess that's maybe the gist of it. And I mean, I think I'll just try to hit it this way. Listen, we still have $2 billion-plus in debt outstanding. Interest rate environment is still not favorable. The rate on the revolving credit facility we have is almost 7%. And after today's comments by the Fed, it doesn't look like those are going to get any better anytime soon. We've got a couple of quarters left to get through the year here, and we'll revaluate.

Hoi-Fung Wong:

Great. This one is for you, Kristian. On the medium-term growth, I guess, we roughly estimate that maybe $100 million is coming out of ARR, yet you guys are still able to meet free cash flow targets. I guess, should we assume you guys have that same level of confidence in hitting those targets as you did previously?

Hoi-Fung Wong:

All right. Fair enough. And then for you, Neil, in terms of best practices that you're trying to implement here, I guess maybe this kind of piggybacks on what I just asked Kristian, but like what do you -- what should we expect in terms of driving that incremental operating leverage?

Andrew Obin:

So you mentioned on the call that the selling environment has been sluggish. Has this bottomed out? And any view on what needs to happen for a macro uplift in the software environment? And also for an industrial guy, if you can point out which verticals are particularly weak, I would imagine maybe life sciences, ag, machinery, but just any color there.

Kristian Talvitie:

No, I think that's right.

Neil Barua:

From our perspective, we are -- I feel good about the key industry verticals that you know we play in, Andrew, doing well. Some are doing better than others. I'd say, all are going through digital transformation in a very serious manner. So we feel good about our position in those verticals. It's a question of the largest deals in those verticals. How much can we actually execute and close within a certain quarter.

Saket Kalia:

Okay. Great. Neil, I'll keep it to one, just maybe for you. When you joined, I think one of the things that was really interesting that you talked about was just being more discerning about resource allocation. And maybe very specifically putting more wood behind the arrow for PLM, while maybe managing other areas like IoT and AR. And you correct me there if I'm wrong. But maybe the question is, what's the next step in that evolution. And as you think about sort of that investment in PLM, what are the areas that you want to bolster the most inside that business? Does that make sense?

Jay Vleeschhouwer:

Neil, your comments just now an answer to Saket's question, I think touched on an important point about the portfolio, where cross-selling necessarily has the corollary of increasingly integrating products across the portfolio. So more closely coupling the products rather than loosely coupling the products. So over time, what do you think that might mean in terms of, let's say, the regularity of the business.

Neil Barua:

Yes. Great question. Thank you for asking, Jay. It is a journey. And as a reminder, we've done a really nice job, and it will continue to have open integrations in the environment. We're not a closed system. And when a customer looks at us, they could see best-of-breed PLM, best-of-breed CAD, best-of-breed SLM, best-of-breed ALM, and we believe we have all of them, right? But the customer can choose from that and feel okay for the interoperability with other systems that they may choose for ALM, SLM, PLM or CAD. So that will be the philosophy we continue to have.

Jay Vleeschhouwer:

In the meantime, for, let's say, the remainder of this year or early next year, how would you describe your pipeline of large deals that might have, as you saw in Q2, significantly pronounced 606 effects? Incremental, obviously, in the case of Q2, apparently in Europe, especially. So is there any way to predict the 606 effects and fold that into guidance?

Jay Vleeschhouwer:

Understood.

Jay Vleeschhouwer:

Okay. Noted.

Kristian Talvitie:

And Jay, not trying to be snarky about the 606 thing. I mean you will remember that the main drivers are the kind of contract and there's the upfront contracts and there's the ratable contracts, the term length of the contract. So those are probably the 2 main drivers. Term length we can try and incent customers to move in a certain direction. But ultimately, they're going to make the right decision for them. And that includes both on new and renewal -- new and renewal transactions.

Operator:

[Operator Instructions] The next question comes from the line of Stephen Tusa from JPMorgan.

Kristian Talvitie:

So let's start the -- I guess, we'll go in reverse order. The $10 million of deferred is also split probably pretty evenly between Q3 and Q4. The other $10 million, let's just be clear, those are still contractual commitments that will -- that have just moved to a future period, right? So they haven't gone away. They've just gotten larger and moved to a future period.

C. Stephen Tusa:

And then just one last one on the -- in the appendix, you had in the last presentation, I believe, guided for like cash taxes in '25 and '26. I think it was -- that wasn't in the appendix this time around. Anything moving around on that cash tax guide for the next couple of years?

C. Stephen Tusa:

Sorry, one more just to get Neil involved. Is there a dynamic here where your customers are evaluating their IT budgets in regard to AI and that's slowing these pipelines from closing because they've obviously been faced with a different kind of choice that seems like a bit generational in nature. And so is that something you're seeing as far as these extended close rates that there's potentially a bit of reallocation into these new technologies?

Operator:

[Operator Instructions] Your next question comes from the line of Blair Abernethy from Rosenblatt Securities.

Neil Barua:

So on Onshape and Arena, I want to be clear. Those are very important parts of our business. I'm not talking to them on a call like this up until a question is asked. Because the 5 focus areas drive the greatest amount of customer value and ultimately, economic value for us currently.

Matthew Hedberg:

We've spent a lot of time in the past, it feels like several years talking about above-average PLM growth, but seeing CAD continued to grow double digits is really impressive. I guess when you think about -- obviously, macros remain still a bit uneven, but like what are the core drivers there beyond just SaaS, which Creo+ is still early. I guess what I'm trying to get is like this above pure growth rate. How do we explain it? Because it's a question that we often get from folks and it feels like you guys continue to outperform on that line item.

Matthew Hedberg:

Appreciate it, guys. Well done.

Arsenije Matovic:

This is Arsenije Matovic on for Joshua Tilton. Just a quick question on indirect performance versus direct channel. I think indirect was diluted from growth, about 2 points on a tougher comp. I guess, what's your expectations for the performance of the channel throughout the year? Are they facing any macro headwinds that direct channel isn't facing? And then one brief follow-up.

Operator:

The next question comes from the line of Adam Borg from Stifel.

Neil Barua:

Sure. Great question. It is a priority. We continue to build momentum there. We have not slowed down in terms of our approach, our customer conversations and our intensity to make sure we work through all the automation and back-office elements to make the experience really great. We're working through a number of conversions where we're learning a lot and making sure we continue to sharpen our sword, so to speak, to make sure the next conversion happens more seamlessly.

Joseph Vruwink:

Neil, just going back to the big deals in PLM, this is something we're hearing more regularly as well, particularly, it seems like it comes up as part of enterprise ERP decisions. But also, the feedback seems to be more recently that customers just need to end up spending more time studying what PLM can do and the studying process and I think appreciating the workloads that matter, it just contributes to longer sales cycles.

Neil Barua:

Yes. So we have a broad portfolio, not just large PLM expansion deals or displacements to be clear, right? And there's some parts of the portfolio are faster cycle, close rates, some are longer. Very large deals, to your point, like PLM deals take a while given some of the closing dynamics that we mentioned.

Neil Barua:

Thank you, everyone, for joining us today. Here's what's ahead specific to investor conferences. May 14, Kevin Wrenn, our CPO, will attend the Bank of America Industrials Conference in New York; May 20, KT and I will be at the JPMorgan Conference in Boston; Early June, KT will attend the Baird Conference on the 4th and the Wolfe Conference on the 5th in New York City. On June 4, I'll attend the Stifel Conference in Boston. PTC will also join 2 virtual conferences this quarter, KT at the BMO Conference on June 11, and Steve Dertien, our CTO, will attend the Rosenblatt Conference on June 12.

Kristian Talvitie:

Thanks, everyone.

Matt Shimao:

[Starts Abruptly] operating results, because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission, as well as in today's press release. The forward-looking statements, including guidance provided during this call are valid only as of today's date, January 31, 2024, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website. With that, I'd like to turn the call over to PTC's Chief Executive Officer, Jim Heppelmann.

Neil Barua:

Thank you, Jim. We're on slide five. Today, I'll focus my comments on three topics

Operator:

[Operator Instructions] And your first question comes from the line of Joshua Tilton with Wolfe Research. Joshua, your line is open.

Neil Barua:

Yes. Thanks for the question. This is Neil. We haven't seen any change. It's been a sluggish sales environment for a number of years now, particularly around the approval cycles of our customers. It's just taking a lot, and it has been for multiple years. Nothing has changed worse or better since I've been here during the transition time, and currently how we're looking at Q2.

Neil Barua:

Yes. I'll start, and Kristian could add if I missed anything. First of all, looking at the pipeline of opportunities, I feel confident around the number and the size of the deals, the criticality of the customers, the importance of the customers that we're working with hand-in-hand to get to a conclusion, to move them down this digital transformation journey. And so, when we look at that, that pipeline is interesting to us in a manner that gives us confidence around the guidance that we gave to you that we are now targeting. And so, that's an element of it. Again, to be clear, this doesn't assume that anything changes in the selling environment from now to the end of the year. There's just an element of pipeline and a seasonality that we've always had, quite frankly, in the second-half, where these types of deals we've historically been able to close out and our intent is to do the same this year.

Operator:

Thank you. Your next question comes from the line of Clark Jeffries with Piper Sandler. Clark, your line is open.

Neil Barua:

Yes, Clarke, great question. Thank you for asking it. Look, the first year -- since clearly, I'm very familiar with ServiceMax, given my background, the first year has been integration work and really getting to know the ways in which the ServiceMax team could interact in a precise way with the PTC team. We did that. We accomplished that. We had early success, which creates some momentum. Secondly, after we saw that, we've implemented a far more constructive and direct selling process by which the ServiceMax sellers are now very much tied into how the PTC sellers are going forward, in this fiscal year. And what that's caused is two things. The customer base is now understanding of the PTC broader value proposition of the digital thread and why ServiceMax is so critical to be part of that, number one. So that's creating a level of interest, engage rate and, quite frankly, momentum that we've already been seeing. And two, the sellers now have a familiarity of speaking the language that's necessary for ServiceMax to begin scale. I foresee this year to be a time period, given the sales cycles of ServiceMax, these are all new implementations for the most part, even if they are already existing PTC customers. That takes a bit of time. And I see this year as building that momentum by which, as we said when we made the ServiceMax acquisition, this is a mid-teens-plus grower. And my expectation is, this year is the building blocks by which the subsequent years really define that sustainable mid-teens growth over or above with ServiceMax.

Operator:

Your next question comes from the line of Yun Kim with Loop Capital. And Yun, your line is open.

Neil Barua:

Great question. And one of the great things with the transition with Jim is I'm far more well-versed in the amazing product that we have in Creo. And like you said, good performance from Creo. We expect that to continue. This is Creo on-premises, Creo throughout the course of this year, given the differentiation, given the strength of that product. And quite frankly, Creo+ is very limited, if at all, in terms of impacting our Creo results and the strength of it, in the near to maybe even the medium term. Like I said, that SaaS journey will be a 10-plus year journey. We're already seeing the strength of Creo on-prem, feel like that double-digit growth is sustainable. Creo+ over time, as the market adopts it, is cherry on the top.

Kristian Talvitie:

Yes. Hey, Yun, thanks for the question. Churn rate continues to be low and steady, so let's start with that one. And yes, we will continue to try and move contracts to longer-term contracts, which we believe is beneficial for our customers as well as actually for PTC. So we'll continue to try and move in that direction. And then lastly, I think, your question was around the average contract length, which as it stands right now, still hovers around a two-year term.

Operator:

And your next question comes from the line of Matt Hedberg with RBC Capital Markets. Matt, your line is now open.

Neil Barua:

Great question, Matt. Thanks for asking it. It's important to us. Let me just make sure I reiterate this. We have a view, I have a view, that was consistent with Jim's view that the industry will go do SaaS. That's an inevitability. As I said, we believe it's going to be, in my estimation, a 10-plus-year journey. It could be wrong, it could move faster, could take a little bit longer. But the way in which we're thinking about it here, with already some momentum built, particularly in Windchill+, Creo+ we launched a couple of quarters ago, we're building with customers already, the resilience, the scalability, the repeatability of a SaaS offering by which when other customers of similar complexity or size or segments are ready to take it on, we have built the strength and the capabilities to do that. And so, the way in which we're doing is, we're not taking any foot off the accelerator in terms of our focus, energy, investment into our plus strategy. But we do want to force customers, different than others out there, but it's very important philosophically as you ask for us to have a way in which we work with our customers as they need to migrate for their value prop to move from an on-prem system to a SaaS offering, we will be there hand-in-hand to do that. And our ultimate belief is, that will reward us in a meaningful way. When the dam breaks, we might -- we will not only get the conversion of our existing on-prem customers to the SaaS offering, but have a differentiated offer for those in other competitive environments that might want to move to the best-in-class solution at PTC.

Operator:

And your next question comes from the line of Adam Borg with Stifel. And Adam, your line is now open.

Neil Barua:

Yes. Very important question. And to be clear, I'm going to be very consistent around making sure, across the broad portfolio of capabilities we have, to make sure with all of you, we focus in not only internally, but as we report our messaging to you around the largest value creation from an aggregate dollar perspective, those priorities, which I made around PLM, SLM, with ServiceMax, ALM, the CAD piece of it as well as how we transition our customers to SaaS. That doesn't mean IoT, AR, Servigistics Arbortext, FlexPLM aren't important. I have and we have leaders there, capable leaders working through that, many of which are important to our digital thread, many of which of those products are important to industrial manufacturers going through a digital transformation. And what I meant by prioritization and focus is as a general way in which the company has done for many years now, during the planning process, I'm making sure with the team here that, like I said, we put more wood behind the arrows that create the highest value creation opportunities and make sure those that might not have as strong of an outlook or have a different investment profile, we look at that with the time horizon and make the right concise decision to prioritize where we put the investment dollars, and where we may want to de-prioritize a few of those based on the outlook of that business. Right now, we have a very broad portfolio, I feel good about it. But, we've been doing it consistently over the last three years just making sure we're placing the next incremental dollar in the highest value creation opportunities, going forward.

Kristian Talvitie:

Yes. Hey, Adam, it's Kristian. No, I mean, I think that our OpEx guidance for the year is pretty well in line -- it remains unchanged from really what we would have said 90 days ago. In terms of areas where we're investing incrementally this year, it's what we've been talking about. There's ALM in particular, there's some investments into SaaS, which includes Windchill+, includes Creo+, actually includes some Atlas those are areas where we've got incremental investment going this year. But in terms of change to the investment profile from last quarter, I'm not sure I'm tracking with you.

Operator:

And your next question comes from the line of Joe Vruwink with Baird. Joe, your line is open.

Kristian Talvitie:

Yes. Hey, it's Kristian. Thanks. Good question. So again, I think Q1, again, despite a challenging environment, I think we executed well. I think that across geographies, across product segments, hopefully, that showed through in our results. As far as the full-year is concerned, again, we are maintaining our full-year guidance, as we start looking at Q2 here. I think, we're just trying to be prudent on the immediate-term outlook. But as a reminder, I guess, for everybody as it gets back to the -- there's ARR and then there's cash flow. And on the cash flow side of things, whether there could be more volatility on ARR on the cash flow side of things, both from a quarterly and annual guidance perspective, I think, we feel very good about that guidance. But otherwise, I think seasonality is kind of in line with last year from an ARR perspective, taking into account the incremental deferred we've talked about ad Nauseam.

Operator:

And your next question comes from the line of Tyler Radke with Citi. And Tyler, your line is now open.

Neil Barua:

Hey, Tyler. So let me try, and then Kristian could add to this. The two actually are related, your two questions. And as you know, the on-prem business is delivering really solid growth. And one of the reasons why we talk about PLM, PLM expansion, we are still in the early innings of PLM, as I mentioned in the prepared remarks, in the early innings of being the system of record for product data across our customer base. It is happening in many cases. But there is, as far as the eye can see, in all the travels Jim and I have been doing to meet with customers, it is now happening. And so -- and this is based on our on-premise Windchill systems. So that gives the confidence as we think through structuring, scaling, enabling our sellers, the marketing around it, to make Windchill that system of record for product data that we're seeing in already some of our customers, that's why I have the confidence around really putting the wood behind the arrow around that initiative, combined with the ALM initiative that has a very interesting growth factor that we talked about, that is predominantly on-premise. It will move to cloud over time. But those two growth vectors are and the wood behind those two arrows are on-premise to be crystal clear. And then as a prior question asked, our Creo on-premise business is solid and rocking and rolling. So those three things combined, lastly, with the ServiceMax cross-sell, which is a SaaS product, as you know, Tyler, those give the confidence around the continuation and the types of guidance that we put out in the mid and long term. That being said, for the mid-teens and the -- midterm to long-term ARR guidance, there is an element of SaaS starting to transition into that ARR growth rate in the mid- to long-term. My point around the 10-year is the industry and all our customers will take, in aggregate, that long, but we already are taking Windchill+, some Creo+ customers along in the journey. And that should accrete in the mid and long term. And maybe we see the dam break earlier and it accretes faster, but our estimate is to be tempered here and to work with customers hand-in-hand to get that upside on the SaaS transition. Kristian, anything to add?

Neil Barua:

That's the first time Kristian Talvitie complimented me. Thank you, Kristian.

Neil Barua:

No.

Operator:

Yes. Your next question comes from the line of Matt Broome with Mizuho Securities. Matt, your line is open.

Neil Barua:

Yes. Look, Ansys has been a good partner of ours for many years and will continue to be a good partner. They are part of how we talk about and have a value prop around Creo and the added simulation capabilities. And we help them similarly, right, around what they're doing on simulation with ours. So it's a very good partnership for both sides and critical to both sides to a certain extent. To be clear, too, this is actually if the deal goes through, right? I'm not a regulator so I can't speculate on that. But if the deal goes through and Synopsys is the eventual owner of Ansys, the great thing for us is there's zero overlap that we have with Synopsys, which might, over time, I don't know yet, but might, over time, create an opportunity for us.

Neil Barua:

Yes. We haven't seen China be a drag on us.

Operator:

And your next question comes from the line of Stephen Tusa with JPMorgan. And Stephen, your line is now open.

Neil Barua:

Hey, Steve.

Kristian Talvitie:

I wanted to say it might be the first time I've complimented anybody.

Stephen Tusa:

I think just going back to the question on costs. I think in last quarter's presentation, you said that non-operating, kind of non-GAAP operating would be up 6% to 7% I think you're saying now 7% to 8% or something like that. I think that's what the prior question was referring to. Maybe that's 4 times or something like that. I think that was probably the source of that question. Just curious as well on that.

Stephen Tusa:

Yes, okay. That makes sense. And then just on your ARR kind of leverage down to free cash, you beat ARR this quarter by a little. You raised -- you beat cash by $3 million. It was like a 20% to 25% drop through on that ARR beat. Is there anything to that math? I know you guys have said with upside ARR, you'll probably invest some of that away so we should just keep an eye on your cash guidance. But is there anything to math like that, where if you get a little bit of that extra ARR, that like it's kind of hard to invest in a way that you will get some upside drop-through on that ultimately? Or am I thinking too much?

Stephen Tusa:

Yes. Yes, makes a ton of sense. One last one for you on cash. Last quarter, you said 55% of the year will come in the first half. I think this quarter, it's now 58%, so a little more front-end loaded. Again, anything going on there? I mean, it would, I guess, make us feel -- we all feel, I guess, better about the year when it's a little more front-end loaded. But anything going on there from a timing perspective that stands out?

Stephen Tusa:

Great. Thanks a lot. Appreciate the color.

Operator:

And your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Jay, your line is now open.

Neil Barua:

Yes. Thanks for the question, Jay. In terms of ServiceMax cross-sell, a key factor is having product companies, OEM manufacturers having long life cycle assets in the field. And if you want to double-click, critical assets within life sciences, electronics and high tech, the industrial manufacturing space, the ones that are in the field for a long time, the product companies are now needing service revenue to offset any declines or lack of new product innovation to make sure that they're getting a consistent durable revenue stream themselves. So that's a consistent correlation that we're seeing from a customer lens. Two is when a customer has Windchill, one thing that's really interesting is this past quarter, we won a very large industrial manufacturing win at ServiceMax, over a 7-digit-plus deal that, quite frankly, I was trying to win for five straight years at ServiceMax on our own unsuccessfully. And we were able to take this deal down because the customer has Creo and Windchill. And they, over time, as they implemented ServiceMax, want the asset field record, the system of record of the asset to actually flow back to their PLM system. So the combined solution, Jay, of -- and the correlation point of a customer with Windchill with long life cycle assets that they produce is a really nice makeup, which brings that math of 300 ServiceMax customers equated with 3,000 similar like-minded PTC customers. Last thing quickly on ALM, which is actually a big cross-sell for us as well, that's interesting to us on the other side of it. So as we mentioned I think last earnings call, we've been seeing Codebeamer as a tip of the spear where we're particularly in automotive, automotive suppliers where now we're getting in the conversation as we're showing them the Codebeamer value prop, we also have a PLM system that might not be PTC, how can the two work together with hardware configuration management, with software configuration management, Codebeamer. Should we actually look at PTC for the combined offering? That's interesting to us. We're starting to see it. I wouldn't call it a trend yet but it's another opportunity that might have a correlation that we're starting to see some early signs of, Jay.

Neil Barua:

Yes. I'm going to -- I'll take the Windchill piece, and maybe I could ask Jim as I'm getting deeper into the Creo piece to comment on that. But one of the interesting things we're seeing with our prioritization of putting wood behind more of the arrow in the PLM expansion category, which is predominantly Windchill, as you know, Jay, is when customers are going through an ERP migration, particularly SAP to S/4HANA, we're seeing that as a really interesting point where the customer is looking at what workflows belong in ERP system versus MBS versus a PLM system. And we're actually feeling advantaged when that introspection is happening to have more functionality being put within a PLM system, which makes Windchill far more important in the transition process. So that's a theme we're starting to see, number one. And number two, again to reiterate, the idea of having a broad portfolio not only on the SLM side, ALM side, I believe we're starting to have the customer conversations where having a Windchill PLM system becomes more critical to have a common data flow over time through the thread. And we'll see whether that amounts to competitive placements, but we see that as a continuation of some themes that are interesting for us for Windchill expansion. Jim, do you want to talk about Creo?

Jay Vleeschhouwer:

Very good, thank you.

Saket Kalia:

Okay great guys, hey thanks for squeezing me in here. I'll keep it to 1 question. Just first off, congrats, Neil, on the upcoming appointment, and Jim, tip my cap to you for all the years at PTC and the industry. The question I want to focus on here maybe for Kristian and Neil is just the ALM business overall, right, really spearheaded by Codebeamer. How do we -- can you just maybe give some contours on roughly how big that business is from an ARR perspective, how fast it's growing roughly? And Kristian, you talked about sort of the range of outcomes in sort of this ARR guide. How much can Codebeamer sort of affect that range of outcomes? Because it just sounds like there's a lot of excitement, a lot of product success there. I wanted to just put some numbers around it to the extent we could.

Jim Heppelmann:

Could I just add? It's also a very strategic high ground. It's an important piece of business to win.

Neil Barua:

Yes, here. So let's just try rough sizing and say it this way. This year, we ought to pass through the $100 million mark on ARR with our ALM segment.

Saket Kalia:

So like a total ALM portfolio would be $100 million by the end of this year?

Neil Barua:

Accretive to growth.

Saket Kalia:

Got it, got it. Guys, very helpful. Again, tip my cap to both of you. Well done.

Neil Barua:

Thanks, Jim, truly, and thank you, everyone, for joining us and for your questions today. In the weeks ahead, Kristian, Mike DiTullio, Matt Shimao and I will be on the road participating in investor conferences, and it would be great to keep the dialogue going. During the last week of February, Kristian will be at the JPMorgan Credit Conference in Miami. Matt will attend the Wolfe Conference in New York. During the first week of March, we'll be at the Morgan Stanley and KeyBanc conferences in San Francisco, then Mike DiTullio will attend the Virtual Loop conference during the second week of March. And also, we have two bus tours coming to visit us at our Boston headquarters next week. Those visits will be hosted by Kristian and me. Please reach out to JPMorgan or Piper Sandler if you're interested. And on behalf of the team, thank you, again, and we look forward to engaging with you.

Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2023 Fourth Quarter Conference Call. [Operator Instructions] Following the presentation, the conference will be open for questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Jim Heppelmann :

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. As usual, I will focus on constant currency results when discussing top line metrics, and Kristian will cover currency effects later in the call. I'm pleased to report that in the fourth quarter, PTC, again delivered solid financial results in terms of ARR and free cash flow, which are the most important metrics to assess the performance of our business. Reflecting on the full year, which will be my last year in the CEO seat, fiscal '23 has been one of PTC's best years ever. Despite a challenging economy, we delivered a seventh consecutive year of double-digit top line growth with ARR growing 23%, 13% organically and revenue crossing the $2 billion threshold. And on the bottom line, we delivered 41% growth in free cash flow. This performance is a great stepping off point for me as I hand the reins of the company to Neil Barua going forward. Given the CEO transition that's actively underway, during this call, I'll focus my comments on Q4 and fiscal '23 and let Neil take the lead on forward-looking commentary. Coming back to the Q4 results and turning to Slide 4. Though the manufacturing PMIs have indicated a sluggish global environment for many quarters now, our top line ARR continues to show good resilience. In Q4, we saw a broad-based ARR strength across our product groups and geographies. Our churn remained low. And for the full year, we did better than the churn targets we had shared previously. Customer demand was solid in Q4, up overall and on an organic basis, in line with the exceptional results we delivered in Q4 last year. Within this context, the portion of business that we signed in Q4, but that did not start in Q4 or fiscal '23 was greater than we had modeled. Since ARR only kicks in when the subscription starts, Q4 ARR was $8 million lower than we had modeled, while deferred ARR is consequently $8 million higher. With this influx, our total deferred ARR is now $20 million higher than it was at the beginning of fiscal '23. Kristian will explain that because of this added strength in deferred ARR, we are now guiding ARR to grow 11% to 14% in fiscal '24, higher than the 10% to 14% growth range we discussed previously. Moving to Slide 5 and switching to our bottom line view. We delivered $44 million of free cash flow in Q4, ahead of our guidance and up 52% year-over-year. For the full year, our free cash flow was $587 million, ahead of our guidance and up 41% year-over-year. Remember that ARR is the primary driver of cash flow. So this robust result was driven by a combination of strong ARR growth and higher operating efficiency. In fiscal '23, we delivered 38% operating efficiency which was 620 basis points higher than fiscal '22, well above our initial target that call for approximately 450 basis points of improvement in operating efficiency. We expect these operating efficiency improvements to be sustainable, and we think our subscription business model will continue to provide us with operating leverage. Turning to Slide 6. Let's look at ARR growth by geography. ARR growth in the Americas was 25%. In Europe, ARR growth was 24%, and in APAC, ARR growth was 18%. Regionally, compared to a quarter ago, the GAAP between as reported and constant currency ARR widened in Europe and narrowed in APAC. On a global basis in Q4, our constant currency ARR growth was 3% less than our reported ARR growth. Versus prior quarters, we saw improved demand in China and in our SMB reseller channel. All 3 regions benefited from inorganic growth to varying degrees due to the acquisition of ServiceMax. Next, let's look at ARR performance of our product groups on Slide 7. In CAD, we delivered 10% ARR growth in Q4. Within these results, the growth magnitude was primarily driven by Creo but supplemented by strong percentage growth in Onshape. PTC is taking share in different parts of the CAD market with both products, and we're excited about the potential of our new Creo+ SaaS offering as well as Onshape. We launched Creo+ at LiveWorx event this past May, and the initial customer demand for Creo+ has been encouraging. Regarding Onshape, with NPS scores that lead the industry by a considerable margin and solid retention rates, we see good opportunities to take share in the part of the CAD market that Onshape focuses on. Garmin's recent decision to replace their incumbent CAD system with Onshape speaks to the products maturing functionality and competitive differentiation. In PLM, our ARR growth rate in Q4 was 34% or 15% organic with the incremental inorganic growth coming from ServiceMax. ARR growth in Q4 was primarily driven by Windchill, but supplemented by strong organic growth in ALM, thanks to Codebeamer. Codebeamer has proven to be a great addition to our portfolio with strong demand coming from manufacturing companies that might already be profession at managing hardware development but are struggling to deal with a growing wave of software complexity. While demand is most notable in the automotive industry due to the rise of software-defined vehicles, we see customer demand for ALM tools expanding in other verticals as well, driven by the trend towards software-driven products of all types. Not only do manufacture products contain more software than ever, but there has been an explosion of software configurations that need to be developed and maintained across a company's different product lines, including across model years, sales options and cloud deployments. That's why we supplemented our Codebeamer ALM solution with the acquisition of Pure Systems. You probably know that on the hardware side of the manufactured product, configuration management has always been the special sauce of Windchill, now with the addition of the pure::variants solution, Codebeamer will be able to offer equally robust configuration management for the software side of the product. The Pure Systems company is relatively small, but their breakthrough pure::variants offering has already landed early wins at many of the same auto and industrial companies that are adopting Codebeamer. Introducing this key competitive differentiator and value proposition into Codebeamer makes our position in the ALM market even more promising. We've been taking significant share in the PLM market and are well positioned going forward with our strength in core PLM with Windchill Arena, complemented by strong positions in the faster-growing ALM and SLM parts of the market. Wrapping up my comments then. First, I'd like to say heartfelt thank you to all of you who have supported me and my team over the years. Your insights and support have helped us to transform PTC into the awesome company it is today, a $2 billion scale growth and profit leader with a unique product portfolio that helps our manufacturing customers digitally transform their businesses. I'm personally very proud of what the PTC team has accomplished during my 13 years as CEO and much longer tenure as the company's technology and strategy leader. I feel things are in good position to transition the leadership to Neil Barua. Neil will be supported by the same team who drove our transformation, including Kristian, Mike DiTullio, Aaron Von Staats, Kevin Wrenn, Steve Dertien, Catherine Kniker and thousands of other PTC employees. I wish them all the best as they evolve the business in pursuit of new ways to create value for our customers and shareholders under Neil's leadership just as they did during mind. I will remain in the background supporting Neil through February, but I plan to let him take the stage in investor discussions going forward. With that, I'll hand the call over to Neil to share his perspectives on the CEO transition and the future of the PTC business.

Kristian Talvitie :

Thanks, Neil, and hello, everyone. Starting off with Slide 14. In Q4 '23, our constant currency ARR was $1.941 billion, up 23% year-over-year and in line with our guidance range. On an organic constant currency basis, excluding ServiceMax, our ARR was $1.77 billion, up 13% year-over-year. In Q4, our as reported ARR was $38 million higher than our constant currency ARR. Also in Q4, ARR was impacted by $8 million due to start date timing. The key point is we contracted the overall amount of business that we guided to at the beginning of the quarter. At end year starts landed as expected, we would have been around the high end of our guidance range. Now with approximately $20 million more deferred ARR in fiscal '24 -- starting in fiscal '24 compared to what started in fiscal '23, we're increasing our fiscal '24 guidance range to 11% to 14%. Moving on to cash flow. Our results were solid and ahead of our guidance with Q4 operating cash flow of $50 million and free cash flow of $44 million. For the full year, our free cash flow was $587 million, up 41%. When assessing and forecasting our cash flow, it's always good to remember a few things. The majority of our collections occur in the first half of our fiscal year and Q4 is our lowest cash flow generation quarter. And on an annual basis, free cash flow is primarily a function of ARR rather than revenue. Q4 revenue of $547 million increased $39 million or 8% year-over-year and was up 6% on a constant currency basis. For the full year, revenue was $2.097 billion, up 8% or 12% on a constant currency basis. As we've discussed previously, revenue is impacted by ASC 606, so we do not believe that revenue or EPS are the best indicators of our underlying business performance. But would rather guide you to ARR and free cash flow as the best metrics to understand our business and cash generation potential. Moving to Slide 15. We ended the fourth quarter with cash and cash equivalents of $288 million. Our gross debt was $2.322 billion with an aggregate interest rate of 5.7%. During Q4, we paid down $43 million of debt and at the end of Q4, we had $1 billion in high-yield notes, a $500 million term loan and approximately $202 million drawn on our revolver. In October of '23, we made the final payment for the ServiceMax transaction totaling $650 million, including $30 million of imputed interest, which will be included in our Q1 '24 free cash flow. We funded this payment with cash on hand and our revolving credit facility. The deferred payment was also -- was included in debt on our Q4 balance sheet, and also factored into our debt-to-EBITDA ratio, which was 3x at the end of Q4. Also in October, we drew an additional EUR 85 million on the revolver related to the Pure Systems acquisition. We expect to be below 3x levered at the end of Q1 '24 and remain below 3x throughout the remainder of fiscal '24. We're prioritizing paying down our debt in fiscal '24. We expect to use substantially all of our free cash flow to pay down our debt this year and end the year with gross debt of approximately $1.7 billion. We've paused our share repurchase program, and we expect our diluted share count to increase by approximately 1 million shares in fiscal '24. Heading into fiscal '25, we'll revisit the prioritization of debt repay down -- of debt pay down and share repurchases. Our long-term goal, assuming our debt-to-EBITDA ratio is below 3x remains to return approximately 50% and of our free cash flow to shareholders via share repurchases while also taking into consideration the interest rate environment and strategic opportunities. Next, turning to Slide 16. Let's take a quick look at how we did against our initial guidance for the year. Summarizing our fiscal '23 financial results. In a challenging market environment, we executed well in all four quarters and consistently delivered solid top and bottom line growth. With that, let me move on to fiscal '24 guidance. Turning to Slide 18. We provide ARR on both a constant currency basis and on an as reported basis. You can see on the slide how FX dynamics have resulted in differences between our constant currency ARR and as reported ARR over the past 8 quarters. Clearly, as reported ARR embeds a lot of FX volatility. We believe constant currency is the best way to evaluate the top line performance of our business because it removes FX fluctuations from the analysis positive or negative. That's why we provide ARR guidance on a constant currency basis. For fiscal '23, we provided constant currency ARR guidance for the year and constant currency ARR results for all four quarters using FX rates as of September 30, 2022. For comparative purposes, we also provided constant currency ARR history at these FX rates. Next, on Slide 19, we're taking the same approach for fiscal '24. Our as reported Q4 '23 ARR was $1.79 billion based on actual FX rates as of September 30, 2023. That rate is our baseline for our fiscal '24 constant currency ARR guidance. For comparative purposes, we've recast our constant currency ARR history at these rates which you can see on the upper half of this slide and is also in the data tables posted on our website. With that, I'll take you through our guidance on Slide 20. For fiscal '24, we expect constant currency ARR to grow from $1.979 billion to $2.19 billion to $2.25 billion, which corresponds to growth of 11% to 14%. Our Q1 constant currency guidance range of $1.995 billion to $2.01 billion corresponds to year-over-year growth of 22% to 23%. Note that we closed the ServiceMax acquisition right at the start of Q2 '23, so Q1 will be the last quarter we exclude ServiceMax from our organic growth rate. On cash flows, we're guiding for free cash flow of approximately $725 million in fiscal '24. Note that our cash flow guidance is not on a constant currency basis, so FX fluctuations can have an impact in either direction. For fiscal '24, our guidance for operating cash flow is $745 million. We're assuming CapEx of approximately $20 million. It's worth noting how consistent and solid our free cash flow results have been since completing our transition to a subscription business model. In addition, we maintain consistent billing practices, and we've optimized our AR, AP and budgeting processes over the past few years. The predictability of our cash generation is tremendously helpful as we manage our business and invest for growth. For example, we're able to maintain core long-term investments even in a turbulent macroeconomic environment, which is great for customers and employees alike. Beyond our core investments, we adjust our shorter-term or more discretionary investments accordingly given our business performance and outlook. The net result is solid and consistent free cash flow growth. In fiscal '24, we expect approximately 55% or more of our free cash flow to be generated in the first half of the year, which is less than we've seen over the past 3 years. This is primarily because in Q1 of '24, our free cash flow of $180 million includes a $30 million imputed interest payment related to the deferred payment on our acquisition of ServiceMax. Finally, on this slide, we're continuing to provide revenue and EPS guidance to help you with your models. But as a reminder, ASC 606 makes revenue difficult to predict in the short term for on-premise subscription companies. More importantly, revenue does not influence ARR or cash generation as we typically bill customers annually upfront regardless of contract term lengths. Also, since revenue is impacted by ASC 606, it's important to remember that margins and earnings per share also impacted, so we do not view these as meaningful indicators of the performance of our business. Turning to Slide 21. Here, you can see how we're investing for growth while delivering solid free cash flow. On the slide in blue, you can see our absolute level of R&D spending, which has increased steadily over the years. But more importantly, you can see the slope of the blue line has inflected in recent years, along with our transition to a subscription model. As our free cash flows expanded, this has enabled us to reinvest greater amounts year after year into R&D to drive future growth despite the turbulent macro environment we've been in. Moving on to Slide 22. Here's an illustrative constant currency ARR model for fiscal '24. You can see our results over the past 3 years and the column on the right illustrates what's needed to get to the midpoint of our constant currency ARR guidance for fiscal '24. The illustrative model indicates that to hit $2.22 billion midpoint of our guidance range, we need to add $241 million of net ARR this year. While this is higher than the amounts we added in fiscal '23 and '22, there are some important drivers to consider. First of all, as we discussed earlier, we have more deferred ARR contractually committed to start in fiscal '24. In fact, that amount is approximately $20 million higher at the start of fiscal '24 compared to the start of fiscal '23. Secondly, we expect Codebeamer to be a tailwind for ARR growth in fiscal '24. While we currently expect Pure Systems to have de minimis impact on our ARR results in fiscal '24, given its overall size. We do expect that Pure Systems will help drive our Codebeamer momentum. Also, fiscal '24 will be our first full year of having ServiceMax under our roof. The broader PTC Salesforce has been equipped to sell ServiceMax, and they also have quotas now. All things considered. We believe we've set our fiscal '24 constant currency ARR guidance range prudently. Next, on Slide 23, here's a similar illustrative model for Q1. You can see our results over the past 8 quarters, and the column on the right illustrates what's needed to get to the midpoint of our constant currency ARR guidance. Because our ARR trends tend to see some seasonality, the most relevant comparison is the sequential growth in Q1 '23 and Q1 '22. The illustrative model indicates that to hit the midpoint of our Q1 guidance range, we need to add $24 million of net ARR on a sequential basis. We believe we've set our Q1 constant currency guidance range prudently. It's also worth mentioning that the incremental $20 million of deferred ARR we have starting in fiscal '24 is skewed to the second half of the year. Moving on to Slide 24. I know that most of you model free cash flow using the indirect method, which uses the P&L and balance sheet as a starting point. Given the complexities related to ASC 606, there are inherent challenges in using the indirect method to forecast free cash flow for PTC. The model on this slide is based on what we use internally. I know that looking at it this way, may be unfamiliar to some of you, so please feel free to reach out if we can help. Starting at the top for fiscal '24 ARR, we're using the midpoint of our constant currency ARR guidance range. Next, our perpetual revenue is primarily related to our Kepware business, which is moving to subscription over time. And the primary reason our professional services is modeled to decline in fiscal '24 is because a portion of our professional services revenue is transitioning to DxP over time. These 3 line items get us to our expected cash generation for the year. Moving down the model, you can see that even though we continue to reinvest in the business, we also see room to expand our operating efficiency due to our sticky products and subscription business model, combined with operational discipline. Continuing to move down the model, we provide guidance assumptions for stock comp, CapEx, interest payments. You can find these on Slide 29 of the earnings deck and also Pages 3 and 4 of the press release. Specifically, interest payments are expected to be approximately $135 million in fiscal '24, driven by an increase in debt, higher interest rates and the timing of our interest payments. Next, cash taxes are modeled higher in fiscal '24, reflecting higher taxable income as well as the impact of Section 174. And finally, let's take a look at the other category. In fiscal '23, the $72 million is related to FX movements, pre-acquisition ServiceMax collections and working capital. For fiscal '24, the main driver of the $19 million being modeled is working capital to support continued growth. All this sums up to expected free cash flow of approximately $725 million. If the demand environment is such that we're trending to the lower end of the ARR guidance range, we'll be more judicious in incremental investment decisions if the demand environment is such that we're trending to the higher end of the ARR guidance range, we would feel more comfortable increasing investments. We have a robust budgeting process internally and that helps us not only prioritize run rate spend but also prioritizes additional investments we might want to make. For example, even in a muted demand environment, we may want to increase R&D investments but it wouldn't necessarily make sense to increase sales and marketing spending. So turning to Slide 25. For fiscal '25, we're reiterating our previous targets, and for fiscal '26, we're providing targets that extend the trajectory that we're on. We provide these targets to help you understand the potential of our business. But I also want to remind you that the macroeconomic environment, FX rates and interest rates have been volatile in recent years and could positively or negatively impact our midterm targets. It's also important to point out that global tax law changes are expected to have a significant impact on our midterm free cash flow, which we've factored into our midterm targets. Next, on Slide 26, I'd like to explain the progression of our free cash flow, looking back 3 years and looking forward 3 years. Over the course of fiscal '21 to fiscal '23, we delivered a 40% 3-year free cash flow CAGR. Over that time period, we had solid ARR growth. And as expected, our non-GAAP OpEx growth was roughly 50% of our ARR growth. It was actually 46%. Looking forward, we're targeting FY '26 free cash flow of approximately $1 billion, which reflects a 3-year free cash flow CAGR of approximately 20%. This factors in a continuous of operational discipline, it also factors in a hefty step-up in cash taxes, particularly in fiscal '25 and '26 due to global tax law changes and the depletion of our deferred tax assets. We're focused on paying down our debt and while interest payments will increase in fiscal '24, we expect them to decrease in both fiscal '25 and $26 million. In summary, turning to Slide 27. First, we have a strong portfolio and strategy. We have a solid position in CAD with a long-term opportunity to disrupt this market with Onshape and Creo+. This year, we've expanded our category leadership in PLM which has become a technology backbone for digital transformation and industrial companies. The acquisitions of Codebeamer and Pure Systems significantly strengthens our ALM position, which is becoming increasingly important to our customers as their products add more software and complexity to their products. And the addition of ServiceMax further extends what was already a unique portfolio of interconnected digital thread capabilities across the full product life cycle. Second, our strong execution. With organic growth at double-digit levels already, we're in the early days of a major on-premise to SaaS transformation driven by the evolving needs of our customers. but it's an oversimplification to focus only on SaaS as the one and only major driver of growth for PTC. The delivery model is important, but it all starts with our robust software portfolio that meets the needs of industrial product companies. We continue to benefit from cumulative layers of PTC specific growth drivers, including driving customer expansion through cross-selling our differentiated portfolio and PLM expanding beyond the engineering department and becoming an enterprise-wide system of record. Fiscal '24 is forecasted to be our eighth consecutive year of double-digit constant currency ARR growth. Third, we have a well-earned reputation for driving margin expansion that goes back more than a decade. We've been demonstrating that we're judicious with our investments, being mindful of both long-term opportunities and near-term macro uncertainty. From a cost and operational perspective, we're lean and a continuous improvement mindset is part of PTC's culture. Fourth, with organic ARR growth in the low teens, juxtaposed PMIs that are generally in the mid-40s, I trust you would agree we're actively demonstrating that our business model is very resilient. We're targeting solid top line ARR growth and bottom line free cash flow growth. And finally, we're led by a team that has deep expertise and a proven ability to drive growth and margin expansion. And while I personally will miss Jim, I'm also excited to have Neil join the team and help continue to drive and evolve PTC. For sure, the environment around us will continue to change, and we will continue to adapt accordingly while still pushing the envelope of what we can do for our customers. With so many positive trends going our way, we continue to believe PTC has a tremendous opportunity to continue to create value for our customers and shareholders. With that, I'll pass it back to Neil for a couple of closing comments.

Operator:

[Operator Instructions] Your first question comes from the line of Daniel Jester with BMO Capital Markets.

Kristian Talvitie :

Yes, sure. This is Kristian. So we've been on this journey really for a number of years now trying to drive programmatic change to help with the churn. And frankly, it's a few different things. One is we've been driving for longer term lengths, which has been helping. Two, we've had more commercial discipline particularly around price increase realization. Three, there has been a -- both market and product maturity have been improving in some of our segments that have higher churn such as IoT and AR. So those are some of the levers that we've been pulling on. I think we're in a great spot as it stands. Candidly, I'd say I think there's even more room to continue to improve from here, albeit it will be at a more muted pace than it's been over the past 3 years or so.

Ken Wong :

This question is for Neil. So Neil, I think in the past, you had mentioned that you were very involved in the financial planning and obviously, plus the target out to fiscal '25. Perhaps there was some skepticism there, but with fiscal '26 introduced, I guess it's right to assume that you definitely put your stamp on that particular trajectory. Any specific nuances or refinements to the strategic road map that might have gone into that fiscal '26 number that you can perhaps share with us?

Operator:

We'll move to our next question. It's Jason Celino with KeyBanc.

Neil Barua :

Yes. Let me take the front end of this. Thanks for the question. We indicated in a press release a large strategic relationship with Volkswagen across their entire enterprise where we are deploying code beamer to their enterprise users for all the use cases that we talked about. One of the themes that we're seeing is this is actually a tip of the spear and an enabler for getting into new logos, particularly in the automotive segment. What we're seeing is that a displacement of other tools in the marketplace that now Codebeamer with its differentiated capabilities with also the element of the tieback to PLM within PTC is actually creating the momentum that we spoke about, that will continue to push on over the course of this year as well.

Operator:

It looks like our next question comes from Saket Kalia with Barclays Capital.

Neil Barua :

Yes. Great question. So first off, there is continued interest in our SaaS offering, and it is an important layer of the cake that we mentioned in terms of the sustainable growth drivers. As a reminder, this is -- we expect an S-shaped adoption curve. We've also told you, and I agree with this is a decade-plus long journey. We continue on this journey into '24. And in regards to feedback from customers, we're seeing opportunities by which the roadmap, the ability for Windchill+, Creo+ for not only new logos by the way, but also conversions continues to be interesting. That being said, one thing's important here in my upfront here that I mentioned, the overall growth drivers of our ARR has very little right now, and quite frankly, into '24 to do with SaaS. That being said, we are making sure the SaaS opportunities we've already secured, the pipeline that we're working on, we're working hand in hand with those customers to ensure we're optimizing the conversion experience of those customers. Again, this will be a multiyear decade-plus long journey across the base of our existing customers plus those that were far new but is a key part of our focus. However, there are many other layers of the cake that are working extremely well right now that I'm going to help push the team even further to accelerate.

Kristian Talvitie :

Yes. I mean, again, I think we have a pretty good level of visibility. A lot of our contracts are multiyear contracts. So you don't -- they're not actually even coming up for renewal in fiscal '24. You have some portion that's coming up for renewal. But again, our retention rates at this point are already quite high. And then also, as you point out, we do have deferred ARR, we've had obviously deferred ARR for many years. But we have that, which also provides more incremental visibility.

Andrew Obin :

Neil, Jim. Just a question on PLM and specifically Windchill. You guys have been very successful with growing the business. And I guess the question I have as your customers digitize their operation and there's this build-out of this digital value chain. What's the opportunity to monetize beyond sort of existing users, right, as more people touch the digital thread? What are the revenue opportunities? Are there sort of opportunities to sort of charge people for different services? If you could expand on that?

Jim Heppelmann :

Maybe I would add that our rule of thumb has long been that when a customer first adopts an engineering and then expands to a broader enterprise deployment. There's generally 10x to 15x more users across the broader enterprise than there are in engineering. And so as companies digitize, they're basically saying, we need to have everybody in the enterprise logging into the system and getting real-time data as opposed to working with data that's been exported out of the system and passed on and maybe on a date may be wrong, et cetera, typically drawings and PDF files and so forth. So I think that there is a real opportunity. And yes, I think Neil is offering to quantify it a little bit more discretely at the Investor Day.

Steve Tusa :

Jim, congrats again. Great run for sure. Can you guys -- I think you guys said you would update us kind of annually on the SaaS trajectory? I think you had put out an illustrative model or at least like some sense of where you'd be as a percentage of ARR by year-end '23. Maybe if we could just get a little bit of color on how that turned out?

Steve Tusa :

Okay. Great. And then just a question on the long-term cash targets. You're kind of putting up some good numbers despite these other headwinds. I haven't gone back to the old model. But -- and anything incremental that moved around you on an operating basis because the numbers seem pretty strong despite the non-fundamental headwinds?

Operator:

Thank you. Looks like our next question comes from Jay Vleeschhouwer with Griffin Securities.

Neil Barua :

So Jay, thanks for the question. I'll start off and Jim could support here, too. On roadmap. First, on SLM, I'll take that since this was a question in the last call. We are working on a release in December that ties ServiceMax closer to Servigistics with a combined offering that we believe will have nice reception to the marketplace, as well as in the same release, a tie of ServiceMax to IoT for preventative maintenance use cases between the two capabilities. In terms of the broader portfolio, Windchill+, Creo+, Kepware+, as I said, this remains a strategic relevant area that will continue to grow and emphasize and we've got a number of leases for all the plus strategies that we have in '24. That includes, by the way, things that we're doing with Atlas in support of our Plus strategy. And then third, in an order of priority, by the way, here, Codebeamer, right, the ALM to scale and continue to capture what we're seeing is strong demand and pipeline we're making sure that we're taking Pure and Codebeamer and working through how that looks to the customer as well as augments to Codebeamer in general to make sure that it's enterprise scalable in the regard that companies like Volkswagen are needing us to deliver for them on the end user experience piece. Jim, anything to add?

Kristian Talvitie :

Jay, it's Kristian. So then to get the part 2 of your question. So yes, we actually have some incentives that we're rolling out to drive -- to help continue to drive growth in the channel as well as improved retention in that space. So there are some programs there, and that's also focusing on enabling them to obviously, they do a great job already at selling CAD, PLM. We want to enable them to cross-sell other parts of the portfolio better. And as we can see a focus on both on-prem and SaaS, particularly Windchill+, Creo+. And then on the direct side, I would say that is really just continued refinement of the territory coverage that we have. So that's where we are.

Blair Abernethy :

Just Jim, I wonder if you can just expand a little more on the Windchill+ in terms of -- what have you seen there so far? I know it's only been a few months that you've been pushing that out there. But just wondering if you've got any sense at all as to what the revenue uplift might be there? And also, how are you positioning Windshield+ versus, say, Arena in the market?

Kristian Talvitie :

Yes. So from an uplift -- so from an uplift perspective, we're continuing to see at this point better than what we have modeled or communicated, right, that kind of 2x uplift. I think we'll see as we continue to progress through this I still think that's the right way to think about the long-term opportunity, but that's what we're seeing now.

Operator:

Thank you. We will wrap up our Q&A session now, and I will turn the call back over to Neil for closing remarks.

Operator:

Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining.

Operator:

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to PTC's 2023 Third Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Jim Heppelmann:

Thanks Matt. Good afternoon everyone and thank you for joining us. You probably noticed that we have some additional news regarding CEO succession to cover today. So, I'll kick off with an overview of Q3, but skip the normal customer commentary to allow time for the succession discussion. I trust that many of you had a good chance to interact directly with customers at a recent LiveWorx event and I hope that will carry you for a while. Starting with Q3 results then, I'm pleased to report that in Q3, PTC again delivered solid results. As you know, we feel that ARR and free cash flow are the best metrics to assess the performance of our business. In Q3, we exceeded our guidance on both metrics, and today, we are again raising our full year ARR guidance midpoint as well as our full year guidance for free cash flow. As usual, I'll focus my discussion on constant currency results when discussing topline metrics, and Kristian will outline currency effects later in the call. Starting with the topline metric of ARR on slide four. In Q3, we came in at $1.868 billion, which was above the high end of our guidance range and up 25% year-over-year. Organic ARR growth accelerated slightly to 14%. ServiceMax contributed the extra 11 points of inorganic growth to bridge us to the overall 25% growth rate. We passed the one-year anniversary of acquiring Codebeamer, so we're now counting Codebeamer in our organic ARR results. Though the manufacturing PMIs continue to indicate a sluggish environment globally, our topline ARR continues to show good resilience. In Q3, we saw broad-based ARR strength across all product groups and geographies and our churn results remain good. Given strong year-to-date results, together with a solid pipeline and outlook for Q4, we're raising our full year ARR guidance midpoint. As I mentioned, Kristian will provide the details later. Moving to slide five and switching to our bottom-line view, we delivered $164 million of free cash flow in Q3, ahead of our guidance and up 46% year-over-year. Remember that ARR is the primary driver of cash flow, so this result was driven by a combination of strong ARR growth and higher operating efficiency. We raised our key free cash flow guidance for the year. Kristian will elaborate on that as well. Turning to slide six. Let's look at ARR growth by geography. ARR growth in the Americas was 29%. In Europe, ARR growth was 24%. And in APAC, ARR growth was 16%. On a global basis, FX was neutral to our year-on-year growth in Q3, but regionally, FX continued to be a growth tailwind in Asia, whereas it's a growth headwind in Europe. All three regions benefited from inorganic growth to varying degrees due to the acquisition of ServiceMax. Speaking of ServiceMax, we saw our first cross-sell activity happened in the quarter and while it's still quite early in the integration process, there is a nice cross-sell pipeline building, which bodes well for the future. Next, let's look at the ARR performance of our product groups on slide seven. In CAD, which is those products that enable authoring of product data, we delivered 11% ARR growth in Q3 in a market that's been growing an estimated 7%. Within these results, the growth was primarily driven by Creo, but supplemented by strong percentage growth in Onshape. PTC is clearly taking share in different parts of the CAD market with both products. In PLM, which includes those products that enable data and process management, our ARR growth rate in Q3 was 36% and or 16% organic with the incremental inorganic growth coming from ServiceMax. In PLM, we continue to significantly outperform the market, which has been growing an estimated 8% in core PLL. ARR growth for PLM in Q3 was primarily driven by Windchill, supplemented by strong organic percentage growth in ALM and SLM. Clearly, we're taking significant share in the PLM market as well. Turning to slide eight, I want to double-click on our ARR growth strategy because we've been fielding many investor questions regarding how we've been able to perform so well on the growth front as compared to peers and whether this differential growth is sustainable. Some investors think we've shifted from one growth strategy to another over the years, but we see it very differently. In our view, we have consistently layered new growth strategies on top of existing growth strategies to create additional tailwinds that fuel faster growth. Let me explain. Our growth strategy starts at the bottom of the chart where we participate in CAD and PLM markets that are growing in the upper single-digit range. So, that is our baseline. On top of this, our products are very strong competitively, which has allowed us to take some incremental market share and outgrow our peers. Then back in fiscal 2014, we launched our IoT business, which will be more than $200 million of ARR this year and continuing to grow at a rate that's accretive to company growth. Perhaps the single biggest driver of growth was unleashed in 2015 when we launched the full-on transition from a perpetual and maintenance model to a subscription business model. This was a short-term pain for long-term gain type of strategy, and I'm pleased to say the pain bottomed out in fiscal 2017 and faded in fiscal 2019 and we've been enjoying the long-term gain and growth rate ever since. Simply put, a recurring model with sticky software creates much more growth than does a perpetual model even at the same level of new seed sales. That's why companies like PTC cross the Valley of Death to get there. You can refer to our FY 2021 investor deck where we took investors through the math model that shows how much easier it is to grow a sticky recurring business model than a perpetual one. Following that, we put a strong focus on commercial improvements, such as improved churn, improved discounting and price optimization. And then redoubled our efforts in these areas when we entered the COVID and inflationary periods. Collectively, these improvements have created incremental tailwinds to company growth rates, and we think there's more to be done here going forward. We could have been satisfied to stop there, but we didn't. We saw the CAD and PLM markets beginning to pivot towards SaaS, which led us to acquire the peer SaaS Onshape and Arena businesses. These businesses continue to be growth tailwinds as the growth is accretive to PTC's overall growth rate. Then in fiscal 2022, we decided to bring the SaaS phenomenon that was driving strong Onshape and Arena growth to our core CAD and PLM business, which we did using the Atlas platform that leveraged Onshape technology. This strategy allows us to land larger ARR run rates because we're selling both the software and the service to deliver it. And of course, now we can expand the existing on-premise customer base ARR run rates by shifting customers to SaaS and upselling to include the value of the delivery service the customer now gets from PTC. Frankly, this growth driver is in its early stages and its impact is minor right now compared to what it promises to contribute in the coming years. Because we already enjoy strong growth independent of this SaaS driver, you should consider that SaaS is not our growth strategy per se, it's just another tailwind that helps in our quest to drive our growth rates higher. Finally, during fiscal 2022 and 2023, we made smart acquisitions like Codebeamer for the ALM part of our PLM strategy and ServiceMax for the SLM part of our PLM strategy. On a standalone basis, these businesses are growing faster than PTC. And of course, these growth tailwinds will increase as we further develop the cross-sell synergies we're pursuing. Cross-sell is already becoming meaningful for Codebeamer now and looks very promising for ServiceMax where we're still quite early in the process. So, when an investor asks what is driving the 14% organic growth that PTC is reporting this quarter? The answer really is all of it, except of course, ServiceMax, which is not yet factored into the organic calculation, but will be in a few quarters. For those who questioned whether this level of ARR growth is sustainable, I'd first like to point out that fiscal 2023 will be the seventh consecutive year of double-digit ARR growth across good macro setups and bad. And indeed, ARR growth has generally been accelerating over that time as more of these growth drivers came into play. I'd also point out that several of these drivers should be more impactful going forward, whereas none of them show signs of fading away. The sluggish macro, no doubt has cost us a small amount of growth here in fiscal 2023, but past history suggests we'll get it back when macro conditions improve. Bottom-line is we feel very confident that PTC is positioned to deliver sustained double-digit ARR growth at or near the top of our peer group. Most importantly, please keep in mind that it is ARR, not revenue that drives free cash flow at PTC. On the subject of free cash flow, then, let's turn to slide nine where I'd like to double-click on the dramatic increase in margins that we've been driving, which raises similar investor questions of how and for how long. Our strong margin expansion, best measured using our operating efficiency metric, starts with the bottom four strategies we've been driving for many years. The first and biggest expansion driver has been the mix shift from professional services to software. Before this transformation, our revenue had a roughly 25% mix of low-margin professional services, whereas currently, we're at about 7% professional services mix on our way to a 5% mix thanks to the recent arrangement to sell a portion of our professional services business to ITCI in the form of DxP Services. In turn, the large system integrator partner ecosystem we built has become a critical part of our growth strategy as SIs help create software demand in order to drive demand for their own services. We've been backfilling the low-margin services mix with high-margin software all along. And by the time we get to our 5% services mix target, the cumulative effect of this mix shift will be about 10 points of margin expansion. We feel the negative impact to revenue growth from declining services revenue over the years has been more than justified by the positive impact of the higher profit software mix to our margins and free cash flow. Said differently, the quality of PTC's revenue has increased dramatically. At the next level, a second big driver of margin expansion has been our go-to-market improvements, which had dramatically increased the productivity of our salesforce over the years. In particular, our development of a strong cross-sell muscle has been very helpful to sales productivity and naturally, we leverage this key strategy whenever we bring acquired products into the mix like Codebeamer and ServiceMax. The third big driver in this group is our R&D offshoring program, which allows us to maintain relatively rich resourcing against more moderate spending levels. We tend to have a higher degree of offshoring than peers, and we have consistently proliferated this strategy across our portfolio and into acquisitions that we make. On a non-GAAP basis, year-to-date R&D spending is around 16% of revenue, but R&D accounts for 37% of our employee base. Our largest offshore site is the PTC R&D center in India that will celebrate its 30th anniversary next year. So, you can see we have an incredibly deep pool of talent and expertise there. The fourth item to point out is the portfolio rebalancing, we do as part of our planning every year to ensure that our resources are best positioned to drive growth while maximizing profitability. This strategy essentially boiled down to driving low-growth businesses at very high margins while driving moderate growth businesses at good margins, thus reserving sufficient dry powder to invest more aggressively to develop new high-growth businesses like Onshape, all while retaining an attractive and expanding company margin profile. The next layer, the margin strategy is to leverage the benefits of scale that a recurring subscription business offers. Because growth in ARR requires relatively little growth in terms of variable costs, we've been doing a good job following our rule of thumb that on average, our costs will rise at half the rate of ARR growth, helping to drive expanding margins year after year. The improving commercial discipline around churn, discounting and price optimization that I previously mentioned as a growth driver is obviously a margin driver, too, since our input costs are essentially the same independent of churn, discount and price levels. The incremental growth we get here comes at nearly 100% margin. Finally, the changes we made in fiscal 2021 to align our field organization to SaaS organizational principles, Together with the operational rebalancing we did in fiscal 2022 to better align spending with our growth outlook in IoT and ARR have been big margin drivers because they've allowed us to meet incremental resourcing needs without incremental hiring. Our IoT business, for example, now has mid-teens operating efficiency margins while being accretive to company growth. Similar then to what I said about ARR growth, the significant margin expansion we're delivering here in fiscal 2023 is really due to all of the above factors. In my view, these gains are fully sustainable with more to come in the future. As Kristian and I have said previously, we expect our operating efficiency margin to expand to 40% by fiscal 2025 and expect we can get to mid-40s longer term. So, we continue to have a lot of runway here. Moving on to slide 10 then. I'd like to discuss our plans for CEO succession. I feel the company is in great shape in terms of topline and bottom-line growth with multiple layers of initiatives that can sustain this performance well into the future. I trust you see we're continuing to demonstrate the resilience of our business as our growth powers on while PMI trends in the wrong direction. So, for me, with more than 25 years under my belt now at PTC, half that time as CEO, I think it's a perfect time to think about putting a new generation of leadership in place that can sustain this high level of success well into the future. I love this company, and I'm very proud of all that's been accomplished during my time here, but life is calling me to a new chapter in following the succession I plan to retire from traditional management roles. PTC's Board has given careful consideration to who should be PTC's next leader and how we could best transition this person into the role to preserve our strategy and momentum. Our Board engaged Korn Ferry's CEO succession practice to determine what characteristics were most important in our next CEO and to vet our internal candidates and to consider external candidates. That careful process led us to an ideal successor in Neil Barua, the former CEO of ServiceMax. Neil is smart in articulate and he knows our industry. He's been a CEO twice already, yet still has a lot of career runway. He has a finance background, but really leans in with customers and product strategies. He's developed great followership within PTC already. And by the time, Neil become CEO, he will have spent more than a year coming up to speed as a PTC insider. We are set up to have a seamless transition that offers complete continuity in the company's strategy and performance. So, effective now we've made a series of changes that initiate the transition process. I have been named Chairman and CEO and with plans for the CEO role to transfer to Neil on February 14th, 2024, which is the date of our next Annual Shareholders Meeting. Neil has been appointed to the Board and has been given the title of CEO Elect. Neil and I will work together over the coming six months to ensure Neil has ample opportunity to get to know our important customer, employee, and shareholder constituencies and to transition my knowledge, relationships, and responsibilities to him. Given that I'm a non-independent Chairman by definition, the Board has appointed experienced Director, Janice Chaffin, to be Lead Independent Director. Neil will inherit and be surrounded by an excellent team that fully supports him. Mike DiTullio, will continue to head our operations as President and COO. Kristian Talvitie will continue to head our financial strategy as CFO. Likewise, other PTC executives, such as our Chief Product Officer, Chief Technology Officer, Chief Strategy Officer, Chief Legal Counsel, and Chief Human Resources Officer, will remain in place throughout the transition and beyond. This transition should be very smooth. The bottom-line is that the Board chose a great successor whom I fully endorse and who has the support of the entire team. I'm very happy for Neil and for myself, I might add, that we could find such an elegant way to transition PTC leadership into what promises to be an exciting and successful next phase for the company. With that, I'd like to turn to slide 11 and ask Neil to spend a few minutes introducing himself before we move back to Christian for additional commentary regarding results and guidance. Neil?

Kristian Talvitie:

Thanks Neil. And let me start off by reiterating Jim's ringing endorsement. It's been great getting to know you and I'm looking forward to working with you to drive customer and shareholder value. Turning to slide 13, I'd like to note that I'll be discussing non-GAAP results and guidance, and ARR references will be in both constant currency and as-reported. In Q3 2023, our constant currency ARR was $1.89 billion, up 25% year-over-year and above the high end of our guidance range. On an organic constant currency basis, excluding ServiceMax, our ARR was $1.7 billion, up 14% year-over-year. In Q3, our as-reported ARR was $61 million higher than our constant currency ARR on a year-over-year basis, currency fluctuations were neutral to growth in Q3. As Jim explained, our solid topline in Q3 was broad-based across all geographies and product groups. I'm sure many of you have been following the manufacturing PMIs due to the historical correlation with our topline when we operated a perpetual business model many years ago. The global manufacturing PMI peaked in December 2021 and has been under 50 for almost a year now. The Eurozone PMI has been particularly weak. In contrast to those trends, our topline, including in Europe, has continued to grow. Our subscription business model and low churn rates make our ARR resilient and demand for digital transformation continues across our customer base. In Q3, our ARR benefited from some timing, which we factored into our guidance for Q4. Naturally, we also took the outlook for bookings, churn, start dates, deferred ARR into account when we raised the midpoint of our fiscal 2023 ARR guidance range. Moving on to cash flow, our results were strong with Q3 cash from operations of $169 million and free cash flow of $164 million, coming in ahead of our guidance. This performance was driven by continued strong execution based on our foundation of solid collections and cost discipline. In addition, we had a net timing benefit of approximately $5 million in Q3. So, keep that in mind as we go through our Q4 cash flow guidance in a few minutes. When assessing and forecasting our cash flow, it's always good to remember a few things. The majority of our collections occur in the first half of our fiscal year. Q4 is our lowest cash flow generation quarter, and on an annual basis, free cash flow is primarily a function of ARR rather than revenue. Q3 revenue of $542 million increased $80 million or 17% year-over-year and was up 21% on a constant currency basis. In Q3, recurring revenue grew by $83 million, partially offset by a $3 million decline in professional services revenue. The decline in professional services revenue is consistent with Jim's mix conversation, including our strategy to transition some of our professional services revenue to DxP Services, our partner for Windchill + lift and shift projects. As we've discussed previously, revenue is impacted by ASC 606, so we do not believe that revenue is the best indicator of our underlying business performance, but would rather guide you to ARR as the best metric to understand our topline performance and cash generation potential. Moving to slide 14, we ended the third quarter with cash and cash equivalents of $282 million. Our gross debt was $2.365 billion with an aggregate interest rate of 5.6%. During Q3, we paid down $180 million of debt and at the end of Q3, we had $1 billion in high-yield notes, a $500 million term loan, and approximately $245 million drawn on our revolver. We have a second payment for the ServiceMax transaction due in October 23 of $650 million of which $620 million is already reflected as debt on our balance sheet and $30 million of imputed interest will be reflected in our Q1 2024 cash flow. We intend to fund this payment with cash on hand and our revolving credit facility. The deferred payment is included in debt on our balance sheet, as I just mentioned, and is factored into our debt-to-EBITDA ratio, which was three times at the end of Q3. We expect to be at or below three times levered by the end of Q4 and below three times levered throughout fiscal 2024. Given the interest rate environment, we continue to prioritize paying down our debt in fiscal 2023 and fiscal 2024. We've paused our share repurchase program and expect our diluted share count to increase by approximately 1 million shares in fiscal 2023. We expect to have substantially reduced our debt by the end of fiscal 2024 and will then revisit the prioritization of debt paydown and share repurchases. Despite this interruption, our long-term goal, assuming our debt-to-EBITDA ratio is below three times remains to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic opportunities. Next, slide 15 shows our ARR by product group. In the constant currency section on the top half of the slide, we use FX rates as of September 30, 2022, to calculate ARR for all periods. You can see on the slide how FX dynamics have resulted in differences between our constant currency ARR and as-reported ARR over the past seven quarters. Based on exchange rates at the end of Q3 2023, our as-reported ARR at the end of fiscal 2023 would be higher by approximately $64 million compared to the midpoint of our constant currency guidance. We report both actual and constant currency results and FX fluctuations can have a material impact on actuals. But remember that we provide ARR guidance on a constant currency basis. If exchange rates fluctuate significantly between the end of Q3 and Q4, the impact to our as-reported ARR would also change. We believe constant currency is the best way to evaluate the topline performance of our business because it removes FX fluctuations from the analysis, positive or negative. With that, I'll take you through our guidance on slide 16. For all ARR guidance amounts, we are using our constant currency FX rates, which again, are as of September 30, 2022. For fiscal 2023, we expect constant currency ARR of $1.935 to $1.95 billion, which corresponds to constant currency ARR growth of 23% to 24%. We raised the low end of our guidance by $10 million, so the midpoint of our ARR guidance is up $5 million. On cash flows, we are again raising our fiscal 2023 cash flow guidance. We're now targeting cash from operations of approximately $605 million and free cash flow of approximately $585 million. As I pointed out last quarter, I think it's worth highlighting that we're raising our cash flow guidance for the year, while we have also been increasing investments in select growth opportunities for our business in the back half. The important point is that the resilience of our business model enables us to maintain core long-term investments even in a turbulent macro environment. In addition to that, as a baseline, we adjust shorter term investments accordingly, given our business performance and outlook. The result is solid and consistent cash flow growth. We maintain consistent billings practices, and we've optimized our processes around billings and payments over the past two to three years. Because of this, the quarterly seasonality of our free cash flow results has been very consistent over the past two years, and we're on track to deliver similar quarterly linearity in fiscal 2023 as well. For Q4, we're guiding to free cash flow of approximately $42 million. We expect approximately $2 million of CapEx in Q4, and therefore, our cash from operations guidance is approximately $44 million. Note, that we made acquisition and restructuring-related payments of $11 million through the first three quarters of the year, of which $3 million was paid in Q3. And we plan $11 million of payments in Q4, which we've also factored into our free cash flow guidance. Going forward, we also plan to provide full year and quarterly guidance for both revenue and EPS. We continue to believe that revenue and EPS are not good measures of our business performance. And internally, we look at ARR as our primary topline metric and free cash flow as our primary bottom-line metric. That said, the public scorecard is still often revenue and EPS. And while we have consistently met or beat on ARR and free cash flow over the past few years, we sometimes score a miss on revenue or EPS against metrics that we've not even guided to quarterly. So, now we're going to start guiding to both revenue and EPS on a quarterly basis. The EPS ranges we're providing are aligned with our revenue guidance ranges, which appropriately allow for a broad range of outcomes given ASC 606-related dynamics. For fiscal 2023, we've narrowed our revenue guidance range and primarily due to FX fluctuations, we lowered our revenue guidance midpoint by $5 million. Our fiscal 2023 revenue guidance range is $2.09 billion to $2.12 billion and for Q4, we're guiding to $540 million to $570 million. As a reminder, ASC 606 makes revenue fairly difficult to predict in the short term for on-premise subscription company. More importantly, revenue does not influence ARR or cash generation as we typically bill customers annually upfront regardless of contract term length. Moving on to EPS. For fiscal 2023, we expect GAAP EPS of $2.14 to $2.45 and non-GAAP EPS of $4.07 to $4.38. For Q4, our guidance range is $0.47 to $0.77 for GAAP and $0.95 to $1.25 for non-GAAP. Since revenue is impacted by ASC 606, it's important to remember that earnings per share is also impacted. Now that I've taken you through our guidance, let's quickly review how our guidance has progressed this year on slide 17. First, looking at ARR, as you'll recall, when we began fiscal 2023, we had a constant currency ARR growth range of 10% to 14%, given the uncertain macro environment. There's no doubt that we're operating in a difficult macro backdrop, but even still, we've been able to deliver solid results, taking the low end up every quarter this year. And now with our fiscal 2023 ARR guidance midpoint is for a 13% constant currency organic constant currency growth. As we begin to think about next year, while we're not guiding fiscal 2024 at this point. I think it's safe to assume that we will weigh our end market opportunity, pipeline, momentum and also try to consider the macro environment at the time. Assuming the current macro environment continues, I would not be surprised to see an ARR guidance set up similar to this year going into next year. And much like this year, I would think that we would expect to deliver a free cash flow result within our previously guided fiscal 2024 range regardless of the ARR outcome for the year in macro environment will be more judicious with our spending and in a more favorable topline environment, we are likely to invest more in the business. Because of the stability of the business model, we have a lot of room to match run rate topline inflows or cash generation with run rate expense investments, which are primarily headcount and COGS expenses related to SaaS delivery. I think we have proven that we will actively manage our investments in line with the macro and momentum -- business momentum we're seeing. Looking at our free cash flow guidance progression, we've been able to raise our guidance every quarter this year. We started the year guiding for 35% free cash flow growth and we're now guiding to 41% growth. Turning to slide 18, here's an illustrative constant currency ARR model. You can see our results over the past seven quarters, and the column on the right illustrates what's needed to get to the midpoint of our constant currency ARR guidance for Q4 of fiscal 2023. Because our ARR tends to see some seasonality, the most relevant comparison is the sequential growth in Q4 of 2022. The illustrative model indicates that to hit the midpoint of our Q4 2023 guidance range of $1.943 billion, we need to add $75 million of ARR on a sequential basis. This is $1 million less than the $76 million we added in Q4 of fiscal 2022. All things considered, we believe we've set our constant currency ARR guidance range prudently. Summarizing then on slide 19. First, we have a strong portfolio and strategy. This year, we've expanded our clear category leadership role in PLM, which has become a technology backbone for digital transformation and industrial company. The addition of ServiceMax further extends what was already a unique portfolio of interconnected digital thread capabilities across the full product life cycle. Second, our strong execution with organic growth at double-digit levels already. We're in the early days, but executing well against a major on-premise to SaaS transformation that should provide a multiyear growth tailwind. And as Jim explained, it's a massive oversimplification to focus only on SaaS as the growth driver for PTC. We continue to benefit from the cumulative layers of PTC-specific growth drivers, including driving customer expansion through cross-selling our unique portfolio. Third, we have a well-earned reputation for driving margin expansion that goes back more than a decade. We've been demonstrating that we're judicious with our investments, being mindful of both long-term opportunities and near-term macro uncertainty, from a cost and operational perspective, we're lean and a continuous improvement mindset is part of PTC's culture. Fourth, with the organic ARR growth in the low teens, juxtaposed against PMIs that are generally in the mid-40s. I trust you would agree that we're actively demonstrating that our business model is very resilient. Our topline growth and bottom-line profitability are approaching peer leadership levels. And finally, we're led by a team that has deep expertise and a proven ability to drive growth and margin expansion. For sure, the environment around us will continue to change, and we will continue to adapt accordingly while still pushing the envelope of what we can do for our customers. We're continuing to make progress towards our midterm guidance targets. In a challenging macro environment, we've been able to deliver solid ARR growth year-to-date in fiscal 2023. We have confidence in continued double-digit ARR growth and our free cash flow target for fiscal 2024 despite the macro uncertainty that continues to persist. We feel good about our midterm growth aspirations and cash flow targets as well. With so many positive trends going our way, we continue to believe PTC has a tremendous opportunity to continue to drive shareholder value. So, with that, I'll turn the call over to the operator to begin Q&A.

Jason Celino:

Hey guys. Lots of unpack here. Jim, it looks like we have a couple of more quarters with you. So, I guess this isn't a goodbye yet. And Neil, looking forward to working with you as well. But I guess my question will go to Kristian. But to clarify, I think you said similar guidance framework for entering 2024 on how you kind of entered 2023. So maybe can you just elaborate on this a little bit more because I know you entered this year with 12% guidance midpoint. Thanks.

Jim Heppelmann:

Yes, I think as we reflect on it, how we guided and how the year has transpired, we're pleased with the guidance. We're pleased with how resilient the business was. We're pleased with the fact that we've been able to ratchet the guidance up, but it feels like that was a good approach.

Operator:

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

Jim Heppelmann:

Yes, Kristian, why don't I take the first half of the question and the customer reaction and you take the uplift, part. So, yes, we have, I'd say, good momentum out of the blocks. I mean, in the first quarter, introducing it in the middle of the quarter, we didn't expect to necessarily do a lot of business. But actually, our first order came from a customer was at LiveWorx and said, wow, that's kind of what we're looking for. And that's a customer incidentally who was planning to add multiple CAD systems right now and was planning to standardize on 1 kind of had a preference for Creo and then came to LiveWorx and said, what we really want is Creo Plus. So, that example of a relatively short sales cycle from a company who was pretty impressed with the technology and some of the advantages it brings. So I think the reaction is good. I mean it's very, very early. And so we shouldn't get ahead of ourselves. But it's always good to get out of the blocks fast and I feel like we did with Creo Plus in the quarter.

Matt Hedberg:

Thanks a lot guys. Congrats again.

Operator:

Your next question comes from the line of Steve Tusa with JPMorgan. Your line is open.

Jim Heppelmann:

Hi.

Jim Heppelmann:

Well, thank you.

Kristian Talvitie:

Hey Steve. So, actually, we're trying to stay focused on ARR and free cash flow and really ARR and sequential ARR and thinking about that framework. The trick with bookings is there's so many different dynamics to it that you just got to keep you on back layers and layers and layers and to be honest, it all nets out in the ARR number and the ARR guidance anyways. So, I mean, as we evolve this guidance process, I think you'll remember what we said last year about -- or last quarter about expectations and where we think that would land us for the full year. Obviously, now we took the low end up for the full year. We mentioned some timing issues. You obviously saw that we beat the sequential ARR or the ARR guidance for Q3. So, I think all that nets out in how we're feeling about the business and the pipeline from that perspective.

Kristian Talvitie:

Yes, it was actually 10 to 14. And yes, that would be organic constant currency.

Kristian Talvitie:

Yes, that's exactly right. I mean, again, really, the way that we look at the business is ARR and free cash flow. Revenue is very volatile, not necessarily for performance reasons, but for accounting reasons. And it really doesn't tell you anything about the performance of the business in any given quarter or even trended just because varying term lengths caused so much volatility that you actually can't really use revenue and therefore, really the full P&L as barometer of business performance. But that said, we also recognize that the investment community when doing comparative analysis and so on, does actually still refer to revenue and EPS. And as I said, there's a scorecard out there, and we look at the ARR and free cash flow scorecard and say, hey, great, we're actually doing good. We're meeting or beating expectations. And then on revenue and EPS, where we don't provide quarterly guidance, then everybody's left up to their own devices to define what that might be on a quarterly or a quarterly basis for revenue and EPS. Sometimes we miss on the scorecard. We score a miss. And so we're really just trying to be more proactive about that and provide some -- provide some of our color to--

Kristian Talvitie:

Jim is always makes much more sense.

Jim Heppelmann:

All right. Thank you, Steve.

Matthew Broome:

Thanks very much and congratulations to Neil on your appointment and of course, to Jim, on your retirement. You'll certainly be missed. In terms of the timing benefits to ARR, just how big was that benefit? And what was the reason for that?

Jim Heppelmann:

Yes, I mean it's the start date phenomenon that Kristian always talks about sometimes it's pretty typical that we signed a contract in this quarter. Sometimes it starts in this quarter, sometimes it starts next quarter. Sometimes it then ramps or not. So, just what we call in-quarter starts if it started in Q3 rather than Q4, well, it had helped Q3, but then it came out of Q4. So, that's really what we're talking about.

Kristian Talvitie:

Yes, I mean, again, we're not really going to guide fiscal 2024 at this point, but we have mid-teens growth aspirations over the midterm. I think that Jim did a great job kind of outlining a lot of the various growth drivers that help stack up to delivering on that kind of growth, then you have to overlay the macro and understand how that's impacting in any given period. But as we said, I'd be surprised if we had a -- I wouldn't be surprised if we had a similar guidance set up to last year. So, we think that whatever low to mid-teens growth is sustainable.

Operator:

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

Jim Heppelmann:

Yes, I think we can talk about it. I mean, I think at a high level, in the past several quarters, three quarters probably, we've talked about SMB being a challenge, China being a challenge. I think that continues particularly pockets of SMB, our arena business is not at the growth level it was previously. But that's not new news. That's kind of been here for multiple quarters already. And I think in Europe, we're actually surprised at how well we're doing, given some of the macro data points, the PMIs, stuff like that. So, it's sort of the same story as before, inside an uncertain environment, there's a few pockets of weakness. Most of the GOs and products are kind of doing just fine, and then there's some real pockets of strength, too. Like we've said before, Aerospace and Defense, for example, happens to be pocket of strength, medical device happens to be a pocket of strength. So, it's kind of a mixed bag. I think it nets out for the year to less favorable than I want to be. And I said we did slow down a bit. I mean, we exited last year with 15% growth. And this year, at the midpoint, we're calling 13%, but the year is not over. So, it could be we lose a point, point and a half of growth this year, two points maybe, I don't know. But I'll tell you what, that's pretty darn good in this environment. And it's certainly better than any of our peers have been able to do in this environment. So, we feel proud about it and feel confident going forward that this is a very growth-oriented sustainable, resilient business and it's not likely to change dramatically from that. And one other thing I'd say, we've also experienced in the past that when there's a slowdown, for example, in some of these pockets like, let's say, arena, when the environment improves, we get a surge as all of that business come trickling in now because people have authorization to go forward with this project, they've had sitting on the shelf for a while. So, we saw this in 2009, we saw in 2020. In 2020 Q2 and Q3 were pretty weak, and we had a blockbuster Q4 and kind of made up for all of it. So, I also think our view is probably when the environment improves, and I'm not sure when that will be, probably, we'll get a surge of strength as some of these projects that have been held back by the customers get funded again.

Operator:

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is open.

Jim Heppelmann:

Yes, I think I'll take that one, Jay. It's probably not fair yet to pin on Neil, but maybe on the next call. But for this call, I'll take it. So, I think, first of all, I don't want to pick one thing, and that's kind of a message here is it's not like just one good thing happening at PTC. There's a whole stack of good things. But nonetheless, I think you would agree, we have a very strong PLM position and we've been taking share for years with PLM. In fact, you suggested it went from third place to second place and then I think we've gone the first place. So, PLM is a strength and I don't see that dying anytime soon. Now, that said, we acquired a real strength in ALM with Codebeamer, and that is a hot market. particularly in some places like automotive, which is a massive industry. I think most of you know, there's three to four software engineers per mechanical engineer in automotive development right now across all companies. So, that's a hot place to be, and we have a hot product in Codebeamer. And then I'd say in SLM, we have an offering that's pretty much unmatched. And particularly so when you take ServiceMax, the strategy we outlined at LiveWorx Service Max with Arbortext, with Servigistics, with ThingWorx, IoT with Vuforia ARR. There's just nothing to go against that, frankly, and certainly not anything model-based close-loop life cycle. I mean, the nearest thing we could point to in a competitor there would be like IFS, which is kind of a Swedish mainframe company. Not really over Siemens or anybody like that. So, I think we have some real strengths. But again, I don't think there's one. I think we have a portfolio of advantages we've been developing and will play out in our favor.

Jim Heppelmann:

Yes. Jay, my tenure is almost marked.

Jim Heppelmann:

Yes. Thank you.

Joshua Tilton:

Hey guys. Thanks for sneaking me in here and congratulations to both of you. Jim, you mentioned you have a hot product with Codebeamer. We keep hearing nothing but positive things. Any chance you could just give a little bit more color on how it performed in the quarter. And I understand that it's officially organic, for Kristian, maybe just any sense for how it contributed to ARR this quarter and what you guys are baking in for its contribution in 4Q? Thanks.

Operator:

Your next question comes from the line of Ken Wong with Oppenheimer. Your line is open.

Neil Barua:

Ken, thanks for the question. I appreciate it. And as a way of backdrop, and a reminder, I've been at PTC getting myself very much embedded here for the last 7 months. And so spending meaningful time here in Boston, moving the family out in the next few weeks out here. So, I've got a good -- the point being, I've got a really good context so far of the business. Clearly in this transition with all the great things Jim has done with this great executive team, I'm going to get to know the business a lot better. But that being said, I've been part of the framework with the executive team building the near-term and long-term plans for the business and feel really confident about what we have put forward based on the momentum based on what I see, I am very much supportive of how KT has put together is free cash flow framework around the levers we have around the resilient business and the layer cake growth opportunities we have that Jim articulated. So, from a perspective of me being new, it's actually me having spent meaningful time here making sure I was comfortable with the things that we heard on the call and the go-forward perspective of the business. So, feel good about that with the layer cake growth strategy as well as a very disciplined approach to make sure free cash flow is something we stay very much focused in on.

Kristian Talvitie:

And demonstrated you not to answer the previous question about which of Jim's children do you like.

Operator:

Your next question comes from the line of Daniel Jester with BMO Capital Markets. Your line is open.

Kristian Talvitie:

Great question. And the children over time will be constructively across the whole digital thread. But in this regard of ServiceMax and SLM the cross-sell value that we're seeing and the momentum that we're building in a material deal that we closed out this past quarter was an evolution of an already significant customer of PTC for a number of years. And quite frankly, for the last three years, we've been trying to win it as a stand-alone business at ServiceMax when we put the companies together, went through LiveWorx and explain the closed loop -- model-based closed-loop digital thread strategy with PLM and SLM and the things that we could do to provide value for the customer, it was a no-brainer and there's no competitor that the actual industrial manufacturer out of Europe here had a choice to actually go to someone different. And so that thread and what we're doing to answer your second part of your question is across the collective customer base that has PLM and all the other categories that PTC has sold, we're actually integrating in the SLM portfolio and really showing the customer value and we've only started, as Jim mentioned, again, a material deal, and we feel confident that we're building the right pipeline and the energy around the customer really seeing a differentiated offer across this closed loop that we've been articulating as our strategy.

Daniel Jester:

Great. Thank you very much.

Saket Kalia:

Awesome. Hey guys. Thanks for taking my question here and congrats Jim and Neil, on your respective next phases. Listen, most of my questions have been answered. But maybe one for Kristian. Anything to note on pricing here, Kristian. I know the last couple of years have been responsive to the macro backdrop, right? Like not necessarily using that as much during tough times, also responding with inflation during more inflationary times. Anything to note more recently on pricing? Or how are you thinking about pricing going forward?

Saket Kalia:

Understood. Thanks guys.

Andrew Obin:

Yes, hi. How are you guys?

Andrew Obin:

Jim, Neil, congratulations on the transition. Just a question. I know you guys have number of AI offerings, I think, co-generative AI design. I think you for expert capture, I think, uses semi AI. I think AI within ThingWorx -- you had this for a while. Are you getting more customer inquiries given we're in this AI news cycle? And is this enough to start moving the needle?

Andrew Obin:

Excellent. And just a follow-up question. What areas have you been adding incremental spending year-to-date?

Andrew Obin:

Excellent. Thanks a lot.

Nay Soe Naing:

Hi, thanks for taking my question and I'd like everyone else, congrats to Jim and will put your upcoming roles. -- for cost with a question on you mentioned that we're seeing the weakening macro numbers in the global manufacturing PMIs. I was wondering if and when we -- you do start to feel the pressure from those decline in macros, which aspects would you start to resume first deal the pressure? Would it be in new business? Or would it be when you renew contracts, customers are committing to a lower level of contract values than what you would have expected them to? And then in terms of growth percentage points, how much would be at risk if we start to see macro pressures in the performances?

Kristian Talvitie:

And I mean we're in a difficult environment right now.

Operator:

That is all. I'd like to turn the call back to Jim for closing remarks.

Operator:

This concludes today's conference call. You may now disconnect.

Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2023 Second Quarter Conference Call. During todays presentation all parties will be in a listen-only mode, following the presentation, the conference will be open for questions. I would now like to turn the conference over to Mr. Matt Shimao, PTC's Head of Investor Relations. Please go ahead, sir.

Jim Heppelmann:

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. I'm pleased to report PTC delivered strong results in our second fiscal quarter of 2023. As you know, we feel that ARR and free cash flow are the best metrics to assess the performance of our business. We exceeded our guidance on both metrics in Q2 and are at the midpoint, raising the full year guidance for both metrics. A reminder that as usual, I'll focus my discussion on constant currency results when discussing top line metrics and Kristian will expound on currency effects later in the call. Starting with the top line metric of ARR on Slide 4. In Q2, we came in at $1.814 billion, which was above the high end of our guidance range and up 26% year-over-year. Top line strength was broad based across all segments and geographies. Bookings were solid in Q2, and our churn results were outstanding. Organic ARR growth was 13%, with ServiceMax and Codebeamer, contributing the extra 13 points of inorganic growth to bridge us to that 26% growth rate. Given our strong first half results, together with a solid outlook for the second half, we are narrowing our full year ARR guidance range while slightly raising the midpoint. Kristian will provide guidance details later. Global PMIs continue to hover in the mid-40s to 50 range, suggesting the business environment remains challenging for industrial companies, but it does not appear to be getting much worse. Despite the sluggish macro, the solid organic bookings result we saw in Q2 was up nicely on a sequential and year-over-year basis, suggesting at this point that the softer booking result in Q1 was probably an anomaly, within the normal range of bookings volatility rather than the beginning of a more sinister trend. While we did see continued booking softness in small and medium business and in China, this was offset by notable bookings strength in Europe and in the U.S. and in particular, with Windchill and Codebeamer as well as with IoT and AR. Running counter to the SMB trend, Onshape had a record bookings quarter, helped in part by a large household name electronics company, making the decision to move away from SolidWorks and standardize instead on Onshape to gain the advantages of SaaS and agile product development. This key win represents a notable milestone for Onshape. In our core business, we saw a higher mix of ramp deals from companies choosing to proceed with large strategic programs but wanting to ramp their deployments over multiple years. This buying behaviour pushes more of the bookings into deferred ARR, which benefits fiscal '24 and fiscal '25 ARR growth more than it does fiscal '23. Deferred ARR is up sharply year-over-year. Naturally, we took the outlook for bookings, churn, start dates and deferred ARR into account when we adjusted our FY '23 ARR guidance. We landed a large and interesting PLM and ALM order from a European automotive OEM that included extension options for Windchill and Codebeamer to contemplate our relationship spanning 20 years. The fact that an automotive OEM wants to understand commercial terms over the next two decades, speaks to how sticky our software is. Clearly, they expect to have it for a while. A final top line observation is that organic growth arguably has a bit more momentum than the numbers on this slide suggests. That's because following the Codebeamer acquisition, our strategy has been to shift our organic ALM selling effort to the new Codebeamer technology platform. That strategy is working and Codebeamer is doing exceptionally well. Codebeamer is now the ALM standard at several of the largest European and Asian auto OEMs and at numerous suppliers. But the consequence of this shift in sales strategy is that some of the ALM business we would have likely transacted organically is now scored as inorganic Codebeamer instead. We estimate that excluding the impact of this mix shift factor in Q2 because this slide to show organic growth at 14%, with inorganic growth at 12. Codebeamer will become organic in Q3 when we pass the acquisition anniversary. Moving to Slide 5 and switching to our bottom line. We delivered $207 million of free cash flow in Q2, a record quarterly result that was ahead of our guidance and up 48% year-over-year. Note that in fiscal '22, we had $41 million of restructuring-related cash outflows for the full year and $18 million in Q2. Excluding the impact of restructuring payments in last year's compare, we still delivered 31% year-over-year free cash flow growth in Q2, driven by a combination of strong ARR growth and higher operating efficiency due to disciplined cost management. We raised our free cash flow guide for the year. Kristian will elaborate on that, too. To help you understand what's driving the big year-over-year increase in free cash flow, let me recap the margin expansion program that PTC management has been driving. First, I'll remind you that operating efficiency is our metric that measures the percentage of our billings that we're able to convert to cash flow each year. Margins have been expanding for many years now, but the organizational realignment we did at the end of fiscal '21, coupled with the resource rebalancing work we did during fiscal '22, have together created an organizational model for PTC that's efficient and sustainable. We delivered 300 basis points of expansion in fiscal '22. At the midpoint of our fiscal '23 ARR guidance range, based on actions that are well behind us now, we expect our operating efficiency to expand by at least another 450 basis points this year. Looking back, while other companies were hiring like crazy, the proactive work we did to optimize our cost structure proved prescient and is generating exactly the results we promised. Given the trends at PTC, we do not anticipate any need for the type of layoffs or restructuring that we've seen in the tech world around us. Indeed, we're still hiring and investing in the business, albeit conservatively, which Kristian will discuss later. Turning to Slide 6. A large driver of this margin expansion is the natural result of putting the business model transition behind us, traversing the valley of death in fiscal 2014 through '19 caused PTC to defer revenue recognition while retaining the same spending levels, which made our reported margins look much worse than they fundamentally were. The short-term pain we endured during that transition is long gone and now we're enjoying the fruits of the long-term gain we were aiming for, which is a resilient business that's tracking toward peer-leading performance. That's a good segue to Slide 7, where I'd like to share a view of PTC's combined top and bottom line performance in comparison to peers. Starting at the upper left, Autodesk recently showed this FY '23 Rule of 40 comparison at their Investor Day in March. Note that Autodesk's definition of the Rule of 40 uses free cash flow margin rather than operating margin, which is probably a good way to look at it given ASC 606 accounting noise. I'd prefer to use ARR rather than revenue growth for the same reasons but I realize that makes comparisons of actuals hard to do. So for today's purposes, we will embrace Autodesk's definition. That said, this chart showed PTC with an anemic 28% figure for fiscal '23, which didn't sound right to me given the margin expansion I just described. So moving to the upper right, our team looked up all the axles to reverse engineer the Autodesk chart and two things became clear

Operator:

[Operator Instructions] We'll go for to Jason Celino from KeyBanc.

Kristian Talvitie:

Yes. Jason, its Kristian. Yes, I think we actually are -- we would agree that we're also seeing a pretty good pipeline for large deals. And I would say that actually is across our major geos and the major verticals that we serve as well. We've seen good interest in FAD for sure, in automotive, industrial, med-device, life sciences or med devices as well, across all those, we continue to see good business momentum and good pipeline generation.

Nay Soe Naing:

Hi, thank you for taking my questions. Congrats on pretty good quarter. You mentioned a few times that you are winning in your core CAD and PLM markets. I just wanted to -- if you could share, where is it then you're seeing competitive wins? Is it in the call Creo or Windchill? Or is it in your cloud version of the CAD and PLM products? And then related to that, now that you now have the plus version of Windchill and Creo, how do you expect the competitive landscape to change going forward?

Operator:

And your next question comes from Steve Tusa, JPMorgan. Steve.

Jim Heppelmann:

Steve, I mean, we had a very good orders quarter and it wouldn't be fair for us to give the details when it's a good strong quarter when we didn't want to give them when it was a softer quarter last quarter. So I mean I think Kristian took you through the guidance changes. In general, we're tracking well. Renewals have been our friend all year. But as Christian said, in the first half, we have a number that doesn't compare too badly to a first half last year that was a record first half. So I think it's strong, but it is complicated to understand how much is going into deferred and when does it come back out? And by the way, how much is coming out next quarter and the quarter after that, it just requires a level of disclosure that seems a little bit inappropriate for an earnings call. So that's why we're just trying to back off and give you directional commentary on bookings and churn and much more precise commentary around ARR guidance.

Ken Wong:

Great. I wanted to circle up on the ramp deals I guess how much of that was customer-driven versus maybe you guys are pushing more aggressively with kind of more add-ons, more attach, more cross-selling or just the sales force is maybe pushing in that particular direction. Any color there would be fantastic.

Operator:

And next, we'll hear from Adam Borg, Stifel.

Jim Heppelmann:

Yes. Codebeamer is both an upsell and a tip of the spear. So some amount of the Codebeamer success, we're cross-selling from Windchill because Windchill and Codebeamer sold together like the previous product integrity and Windchill frequently were. So we're cross-selling from a windshield position. But for example, in some of these automotive accounts, we don't have a windchill position. And Codebeamer is a very compelling product, and then we'll leave with it. And we'll see if we get Codebeamer installed. Can we cross-sell from there? I don't know. We haven't had really enough time with it yet. But certainly, we've penetrated some accounts or Codebeamer where we had no significant windchill position, and that's good news.

Operator:

We will move on to Jay Vleeschhouwer, Griffin Securities.

Jim Heppelmann:

Yes. I mean I think there's a couple of words that go together here. There's the digital thread idea, which means data created upstream is used multiple times downstream. Then there's the model-based idea, which says, by the way, let's make sure this data is 3D models, not 2D drawing, so model-based digital thread and then closed loop means, let's make sure that things we find in the manufacturing process, for example, using DPM get reflected into changes upstream, either in the product itself or in the manufacturing plan. And then let's make sure that what we find when the products all the field at the customer site, for example, IoT, smart connected products, that is likewise being funnel back end, ultimately, upstream, maybe into the product, maybe into the manufacturing process, maybe into the service process. But let's have these feedback loops. So I think this concept PTC has of a model-based closed-loop digital thread is very powerful, and I'd say pretty unique. And yes, I'll talk a lot about that at LiveWorx. If I know it will be a kind of theme throughout. So it allows us to cross-sell in a lot of directions. We talked about Codebeamer and Windchill. Well, there's going to be a similar conversation between Windchill and ServiceMax and between ServiceMax and Servigistics and ServiceMax and ThingWorx IoT. So we like this idea of a lot of products that are very compelling could be sold stand-alone as the tip of the spear but then integrated into this digital thread so that they could -- kind of better together. Better together, but you don't have to buy it all. If you want to use ServiceMax with some other PLM system, fine, we know how to make that work. And you have to be that way because it's practical. Customers don't throw out all their technology and switch like stock and barrel. They look at what they have and they want to systematically over time, upgrade it. And so we get in there, we might win with Windchill and then we might win with Codebeamer, and then we might introduce ServiceMax, and that's kind of how we've built our whole growth story over the last decade is by really perfecting these cross-sell motions.

Jim Heppelmann:

Okay. Well, great. Thank you, Lisa. And for anybody who has more questions that maybe we didn't have time to get to, please come to LiveWorx, you're going to get lots and lots and lots of information. You're going to get a firehose -- promise. So the real day we have set up for investors is May 16. You're welcome to stay longer, if you want, but that's where we had this sort of investor track that was on the slide. Otherwise, if you can't come to LiveWorx, there will be a couple of other opportunities to catch us. I know that Kristian, myself and Mike DiTullio, are going to the JPMorgan conference in Boston on May 22. We're hosting a Bank of America roadshow here at PTC on June 5. And then Christian, our Chief Product Officer, Kevin Ren, are participating in the Stifel conference in Boston on June 6. So lots of opportunities to engage us with more questions and get more information across all those different events I spoke of. So thanks for your time today. Really appreciate it, and look forward to talking to you during the course of the quarter or in 90 days as the case may be.

Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2023 First Quarter Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Jim Heppelmann:

Thanks, Matt. Good afternoon, everyone and thank you for joining us. Turning to slide 4. I'm pleased to report that despite seeing some incremental macro softness, PTC delivered a solid first quarter to kick off fiscal 2023. On the top-line metric of ARR we came in at $1.603 billion, which was above the high end of our range and up more than 15% year-over-year. The strength was broad-based across all product groups and geographies. Sorry about that, a little interference. The strength was broad-based across all product groups and geographies. Organic ARR growth was 14% with Codebeamer then contributing that extra point of inorganic growth. The strong Q1 ARR results put the company in a position to narrow our original 10% to 14% full year ARR guidance to 11% to 14% as we feel that the 10% outcome has become increasingly implausible with a solid Q1 behind us. Switching to our bottom-line metric of free cash flow we delivered $172 million ahead of our guidance and up 28% year-over-year. We raised our free cash flow guidance for the full year by $15 million. Currency had little impact to free cash flow in Q1, but it is expected to be incrementally helpful as the year progresses. On the subject of currency, I'll remind you that Kristian will cover the ongoing effects of foreign exchange fluctuations later in the call. So to simplify things I'll focus my discussion on constant currency results when discussing top-line metrics. Turning to slide 5. Shortly after our first quarter close we completed the acquisition of ServiceMax. ServiceMax is not included in the Q1 results we reported though we did incur some acquisition-related costs that we're a headwind to our nevertheless strong free cash flow results in Q1. With the deal now closed ServiceMax will be included in our guidance going forward. To recap the highlights of this business as now part of PTC, ServiceMax is used to manage the service processes for high-value long life cycle products. Think of products like an MRI machine in a hospital, a machine tool in a factory or pumping equipment at a refinery. This has always been a sweet spot for PTC and we have many customers matching this profile. Referring to the infinity diagram on slide 5, many of you know that PTC's logo represents the interplay of physical and digital and that logo provides a good way to explain the fit with ServiceMax. The digital part of our logo refers to when products are under development. At this point, they exist in a purely digital form which is authored in Creo and managed in Windchill. Being purely digital at this stage products are easy to change and highly configurable. Each time our customers get an order their factories take a configuration of the digital product data that matches the order and use it as the recipe to produce the physical product, which is then delivered to the end customer. That's where the physical part of our logo fits in. Physical products are very different. If you want to change them for example, you need to dispatch a truck to the customer site carrying a technician and spare parts. Spare parts are managed in our Servigistics software. The technician will need access to similar types of digital product information, as what the factory used when creating the product. This service information is created using Arbortext and Vuforia. High-value products are operated by the customer for years or even decades. These products require regular service to keep them up and running, and this service is typically provided by the manufacturer, who views the recurring service contracts and spare part sales as a highly desirable source of revenue and profit. ServiceMax helps the manufacturer manage their entire installed base of physical product instances and orchestrates all the necessary service activities. By monitoring the installed base of products, ThingWorx adds a lot of value to ServiceMax because it allows service to be more proactive and preventative in nature. And sometimes the service can even be done remotely thereby canceling the need for a truck roll. As you can see ServiceMax has great synergy with Creo and Windchill, because on one hand the service process consumes the digital product data created in engineering in the form of parts catalogs and service instructions. And on the other hand, the service process is the primary source of feedback that drives ongoing product improvements through engineering change orders or ECOs. Windchill serves as the system of record for the digital definition of all possible product configurations and ServiceMax serves as the system of record for the actual physical instances of products that exist, each of which may have a slightly different configuration. As the infinity diagram implies, there is a digital thread of product information flowing between these key systems in both directions throughout the product life cycle. Aligning ServiceMax with PTC's various offerings will lubricate this flow of data creating tremendous business value. No competitor has a solution comparable to this. Equally important, as the service system of record, ServiceMax knits together our existing SLM products, allowing PTC to now offer the industry's first truly comprehensive offering for service management optimization. You can think of our new SLM offering as a hub-and-spoke model with ServiceMax as the hub and PTC's various other service solutions as spokes. For example, ThingWorx IoT connects to and monitors the vital signs of installed products to enable preventative remote service. Arbortext dynamically publishes technical service information to match each product configuration in the installed base. Vuforia AR enables this technical service information to be augmented onto each installed product to make service technicians more productive. And Servigistics allows customer service level agreements to be met, while carrying the smallest possible inventory of spare parts. With the acquisition now closed work is underway to enable deeper integration between ServiceMax and these various PTC offering. I'm pleased to announce that Neil Barua the CEO of ServiceMax is joining PTC and will preside over this expanded SLM business that now exceeds $300 million of combined ARR. Neil and team will unveil a broad new SLM vision at our LiveWorx conference in May. And based on the number of inquiries we're getting, I expect it to be one of the highlights of the conference. The strategic fit with ServiceMax is excellent and we're excited about the synergies we can generate by cross-selling from engineering to service and vice versa and also cross-selling between our various SLM offerings within the service domain. The financial fit is excellent too as the transaction is expected to be accretive to PTC's growth rate as well as the PTC's cash flow and this drove part of today's guidance raises. ServiceMax also increases PTC's total addressable market. The ServiceMax business has been growing in the mid-teens which is a few points faster than the market, but we see potential for the business to accelerate to high-teens growth over time as synergistic cross-sell opportunities are realized. Turning to Slide 6. Given the elevated focus on profitability that investors all share in today's market, I want to reiterate the margin expansion program that PTC management has been driving. The organizational realignment we did at the end of fiscal 2021 and the resource rebalancing work we did during fiscal 2022 have created an organizational model for PTC that's both highly efficient and fully sustainable. When we made these changes, we were not addressing a problem per se, but simply pursuing margin expansion opportunities that we had identified. The actions we took proved prescient, as we're now well-positioned for a macro downturn. While many notable tech companies are announcing layoffs to come to terms of bloated cost structures, thanks to our proactive actions, we're entering this period of uncertainty with a very lean cost structure and we do not anticipate any need for layoffs or restructuring. In Q1, non-GAAP operating margin expanded to 36% compared to 35% a year ago. That sounds like progress, but due to ASC 606 noise, it doesn't fully capture the full magnitude of improvements we've made. We prefer to assess our margin progress by focusing on a more meaningful metric we now call operating efficiency. Operating efficiency is the same metric that we previously called cash contribution margin, but we're changing the name of the metric to be more precise that it is an operating metric, not a non-GAAP financial measure. This is a change in name only. The metric is still calculated the same way and still measures how much of our billings we're able to convert to cash flow each year. At the midpoint of our ARR guidance range, based on actions already taken, we continue to expect this operating efficiency to expand by another approximately 450 basis points in fiscal 2023, following the 300 basis point improvement we delivered last year. The significant operating efficiency improvement when layered on top of double-digit ARR growth is what drove the strong Q1 free cash flow result and is what will drive the 38% free cash flow growth we're guiding to for fiscal 2023. Kristian will elaborate further. Turning to slide seven. As you're aware, our FY 2023 ARR guidance range, has from the start, contemplated the possibility of a potential macro downturn. In Q1, we saw further signs of a downturn in the form of incrementally softer bookings. At the same time, we were comforted by strong renewals, which actually improved slightly year-over-year, reinforcing just how sticky our software is. The net impact of these softer bookings and stronger renewals was a slowdown of about 0.5 percentage point from last quarter's 16% ARR growth rate, taking the Q1 ARR growth rate down to about 15.5%. This was obviously less than we had allowed at the high end of our Q1 ARR guidance range, so ARR results landed $3 million above the range. The softness was relatively consistent across various dimensions of the business, suggesting it was macro related, rather than any type of competitive issue. The summary is that, after posting 15.5% growth in Q1, we remain well positioned to perform against our financial targets and indeed, have raised our guidance accordingly. Turning to slide eight. With Q1 behind us, as compared to our original guidance, we're now on track to deliver ARR growth results within a narrower 11% to 14% range in fiscal 2023, with the low end having been raised, because the 10% outcome is less plausible now, given that solid Q1. Keep in mind, the addition of ServiceMax to our portfolio happens here in Q2 and the inclusion of ServiceMax will recalibrate the ARR growth range upward. In a few minutes Kristian will outline a new guidance range, that's essentially 11% to 14% plus 1,100 basis points more from ServiceMax added on top. Across this range of ARR outcomes, we've also raised the original cash flow guidance we provided a quarter ago by $15 million to $575 million, which now represents 38% growth for the full year. The raise is powered in roughly equal parts

Operator:

[Operator Instructions] And your first question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Jim Heppelmann:

Yes. Well, let's say, certainly the Plus strategy and SaaS here at PTC is helpful to the pipeline, because first of all when deals come in at SaaS, they come in twice the size as they would have been had they've been on-premise, so right away you have a factor there. But I'd also say, the interest level is quite high. I mean, I think if you come to LiveWorx, you're going to see lots of customers are going to come, just to learn about SaaS because they're interested. We're at that phase where everybody is interested. Some people will bite sooner than others, but everybody wants to hear about it, start thinking about it and understand how it plays into their future. Then on the competitive replacement opportunity, I do think that some of our competitors are laggards with SaaS or they're doing SaaS in a pretty hokey way. For example, we have a French competitor, who is trying to become a hyperscaler. And when you place an order with them they turn around by hardware to host it on. And between you and me I don't really think that's the right strategy. And I think a lot of companies are going to say, "I don't actually want to buy into a strategy like that because the day it all collapses I'm a little bit out in the cold." So I do think that people are going to say, "We need to go to SaaS. If my vendor doesn't have a good story, I should shop around." And at PTC, we have mature proven products like Creo and Windchill, that will be available in an honest-to-god true SaaS form not unlike for example Microsoft Office 365. And then on the other hand, if you want to go full bore, clean slate, right from the start pure SaaS, well we have Onshape and Arena, which are the SaaS-est products in our entire industry. So I do think we're going to get some amount of people moving to SaaS and switching vendors at the same time. And as you said, we're way out there ahead of people with a pretty serious well-thought-out strategy.

Operator:

Your next question comes from the line of Matt Broome from Mizuho Securities. Your line is open.

Jim Heppelmann:

Hi, Matt.

Jim Heppelmann:

ThingWorx growth was pretty steady. No doubt that reallocation of resources isn't actually helpful to just standalone ThingWorx growth, but I think it's actually been quite helpful to PTC growth and very, very helpful to PTC cash flow, because instead of hiring new resources that would consume cash flow, we moved resources around and let that fall to the bottom line. So I think probably not helpful to ThingWorx, although ThingWorx is clipping along at a decent growth rate but very helpful to PTC altogether kind of neutral to growth altogether very helpful to cash flow.

Jim Heppelmann:

Well, I think they simply are more impacted by the macro situation. When the economy was strong our channel was growing faster than direct. And I think small companies have less room if you will less capacity to weather a downturn, so they're more conservative. So I think in a downturn situation, small and medium businesses, which is what our channel cover they're the first ones to start getting conservative on spending. And I mean we've seen that. I think for example, a lot of the start-up companies aren't hiring. And if they're not hiring they don't need expansions and so forth. So I would attribute that the channel is relatively more macro sensitive than the direct sales force. Now on the rebound it goes the other way of course.

Jim Heppelmann:

Thank you.

Jim Heppelmann:

Hey, Tyler.

Jim Heppelmann:

Yes, Tyler, so we thought a lot about how to describe this. And what we really owe you is transparency to how bookings and macro affect ARR because ARR is the key metric. And we're in this funny situation, where what happened in the quarter didn't align to any of our scenarios because bookings was a little softer and churn frankly was shockingly good. So what we decided is if we really want to tell you what exactly happened to bookings we're going to tell you exactly what happened to churn and we probably ought to tell you what happened to deferred and then maybe we ought to get into year-over-year comps because as you know bookings is where the volatility is. So we decided, we'll disclose it, we'll quantify it, as 0.5 percentage point of slowdown. So 0.5 percentage point you can do the math it's about $8 million on $1.603 billion. So we had $8 million less in bookings than what it took to maintain a 16% growth rate, but $3 million more in bookings than what it took to hit the high end of the guidance range we gave you. So, I think if you look at it that way, in the year now we've lost $8 million and that will show up four quarters. And it won't compound but the $8 million will show up in the next four quarters. I think as we look forward the pipeline looks pretty decent. The forecast looks good. The real question will be, post rates, does the business come in or not. And that's sort of an unknown. But to us, Q1 while it was a little bit softer than the previous two quarters, actually it was not a bad quarter.

Jim Heppelmann:

Yes. I mean nothing changed materially in the quarter. But to kind of remind you, just in general what's happening. SAP has given up share, Oracle has given up share. In our view, Dassault has given up quite a bit of share, because we passed them in the last year and we're opening up quite a gap now. And we think Siemens has given up some share. Siemens has been posting actually negative numbers in terms of PLM growth of late, and it will be interesting to see at the next earnings report. I encourage you all to dig in and try to parse it apart, because I think Siemens is losing a lot of momentum. They have some structural changes happening, so it's a little hard to kind of tease it all out and they don't provide much disclosure. But I think you’re going to see -- Siemens would be our toughest competitor and you're going to see us post growth rates approaching 20% and it wouldn't surprise me if theirs has a negative number on the front of it when they report this quarter.

Operator:

And your next question comes from the line of Steve Tusa from JPMorgan. Your line is open.

Steve Tusa:

Hey, guys. Thanks for taking my questions. Sorry, I'm kind of new to covering you guys and so the math maybe is a little bit tricky. But like you said last quarter that I think it was a low-single-digit constant currency bookings growth year-over-year. I'm kind of having trouble putting what you just said kind of altogether. What does that actually mean on a year-over-year constant currency bookings growth rate for this quarter?

Steve Tusa:

Yes. Okay, got it. That's helpful. And then just lastly on free cash flow, pretty strong even seasonally even how you talk about it with a decent amount coming here in the first half of the year assuming you hit the $200 million. Receivables were a big positive at least on a GAAP basis. Anything else moving around in working capital that kind of overdrove at all or is this kind of bang in line with what you guys were expecting?

Steve Tusa:

Yeah. Okay.

Steve Tusa:

Yes. Congrats on the good result. Thanks.

Operator:

Your next question comes from the line of Saket Kalia from Barclays. Your line is open.

Saket Kalia:

Hey, Jim. Hey, Kristian. Thanks for taking my question here. Jim, maybe just -- I'd love to dig one level deeper just into sort of that dichotomy, right, the softer bookings but then also the lower churn. Maybe just on the softer bookings piece, are those deals that are pushing? Are those deals that are still in the pipeline, or are they ones that you think just get pushed indefinitely? And then on the lower churn piece, that is great to hear, particularly with the hiring environment how much is maybe some of the price adjustments that we did last year maybe factoring into that as well?

Saket Kalia:

Makes a lot of sense. Thanks, Jim.

Jay Vleeschhouwer:

Thank you. Good evening. Jim for you first, over the last couple of years at least to the active bases for both Creo and Windchill have seemingly grown at least a mid-single-digit rate, at least by our calculation, which corresponds to the share gain for each we've been able to document. How are you thinking about the active base growth from here for both those products? And perhaps more broadly, since we've gone through so many evolutions of both those markets over the last many years, what from here do you think are the critical functionalities within CAD and PLM to continue or sustain the growth in those businesses, maybe GD or something else that you care to mention? And then secondly, maybe for Kristian you've done well in terms of product releases, adhering to the road map, but you do have the smallest R&D budget in your peer group. So, how are you thinking about orchestrating or managing R&D productivity from here to keep executing on that road map in the context of containing your expenses?

Jay Vleeschhouwer:

Thank you very much, Jim.

Operator:

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

Jim Heppelmann:

Yeah. So on the first question, how's Q2 looking, at the start of the quarter here, we're more or less still at the start of the quarter because if you look at our quarter, a majority of our business is done in the third month of the quarter. So it's very difficult in the first month to really understand how things are trending. I mean we're starting the quarter with a decent pipeline. We're starting the quarter with a decent forecast. The real question will be in the last week or two of the quarter, are we able to close these deals or do they slide. If they slide, bookings will be soft again. If they close, actually we'll have a pretty stellar bookings quarter based on how things are forecasted at the moment or maybe we'll end up somewhere in between. What was the second question? Sorry, I didn't write it down.

Jim Heppelmann:

ServiceMax, yes. So ServiceMax, I mean you see I'm very excited about it. You can probably sense that through the call here. That's because customers are very excited about it. I mean, we had a thesis of what this was going to mean. We've gotten into it. We found how many customers had independently purchased software from both of us, but also how many customers ServiceMax has that looked like PTC customers and how many customers PTC have that look like they should be ServiceMax customers. And a lot of common customers immediately contacted me, immediately contacted Neil and said "Hey can we get together? Can you fly out and see us? Can we come visit you? We want to hear this story." To be honest, we're pushing back a little bit on them saying "Could you just give us a little bit of time to figure out the details?" So we're really targeting that for LiveWorx. I mean obviously, we'll talk to a lot of customers before LiveWorx, but that will be kind of the grand unveiling of that sort of infinity concept that I had on that slide. And I think it will be very exciting. I think there'll be many, many excited customers.

Operator:

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open.

Jim Heppelmann:

Yeah. I think maybe a couple of thoughts. One thing I said Jason is that PLM is moving from a nice-to-have to a must-have, and for example, this concept I was talking about earlier model-based enterprise where you're going to interact with 3D models. And 3D models are too big to e-mail around. By the way, when you're interacting with a 3D design, it's not one file, it can be dozens, hundreds or thousands of files and you need a system to find them all and fit them together and present it to you so that you can understand what's going on. So, I think what's happening this is all forms of digital transformation is that companies are saying, we're going to get rid of paper drawings and PDF files. We're going to go to 3D. Therefore everybody in the company who interacts with product data is going to need a PLM seat and they're going to need some type of a 3D seat. It might be a Viewer, it might be CAD, whatever. But it's driving proliferation of PLM out from the engineering department, where it's always been into purchasing into manufacturing now into the service technicians. We pretty quickly envision service technicians out in the field on their phone interacting with 3D models when they're standing in front of a piece of equipment if not augmenting it right onto the piece of equipment. So, I think that's what's happening is it's becoming a true enterprise system versus a departmental system, while at the same time it's becoming a must-have rather than a nice-to-have. I think it's those trends that are really driving this proliferation of PLM, which frankly is good for the whole industry, but I think PTC is taking share in the industry at the same time.

Jim Heppelmann:

Great. Okay. So, let me just wrap up here. Thank you all for spending time with us. In the next quarter, we have quite a busy investor schedule. So, I just want to share with you some of the things happening in case you want to participate. So, Kristian and I together are going tomorrow and Friday, we’re going to -- tomorrow at dinner and Friday in the morning we're going to participate in an RBC roadshow in New York. Then on February 27th, we're hosting a headquarters visit that JPMorgan is conducting here in Boston. On March 8th, we're both going to the Morgan Stanley TMT Conference in San Francisco. Meanwhile on my own behalf, I'm going to the Wolfe Conference in New York on February 28th. Kristian additionally is going to the Baird Conference in Utah on March 2nd; to the JPMorgan Global High Yield Conference in Miami on March 6th. And Kristian's going on a Barclays Virtual Bus Tour or probably hosting a Barclays Virtual Bus Tour on March 15th. And then one of our executives Kevin Wrenn, who's our Chief Product Officer is doing the Loop Virtual Conference on March 13th. So, lots of IR touch points here in the coming quarter. Hope to see many of you in the course of one or more of those events. And if not hope to catch you again in about 90 days on our Q2 earnings call. So, thanks again and have a good evening everybody.

Company Representatives:

Jim Heppelmann - Chief Executive Officer Kristian Talvitie - Chief Financial Officer Matt Shimao - Head of Investor Relations

Matt Shimao:

Good afternoon. Thank you, Angela, and welcome to PTC’s fourth and fiscal 2022 conference call. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Today’s conference call is being broadcast live through an audio webcast and a replay of the call will be available later today at www.ptc.com. During this call PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, after results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC’s Annual Report on Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission, as well as in today’s press release. The forward-looking statements, including guidance provided during this call are valid only as of today’s date, November 2, 2022, and PTC assumes no obligation to update these forward-looking statements. During the call PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s press release made available on our website. With that, I’d like to turn the call over to PTC’s Chief Executive Officer, Jim Heppelmann.

Kristian Talvitie:

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 ARR references will be in both constant currency and as reported. Turning to slide 19. In fiscal ‘22 our ARR grew 16% on a constant currency basis and exceeded guidance. On an organic constant currency basis excluding Codebeamer, our ARR was $1.61 billion, up 15% year-over-year. As Jim explained, our top line strength in Q4 was broad-based. We’re executing well against our strategy and we’re continuing to improve upon our strong market positions. Our SaaS businesses across our Digital Thread and Velocity groups saw continued solid ARR growth in Q4. On an as reported basis we delivered 7% ARR growth, 6% organic due to the impact of FX headwinds, which were $134 million, substantially higher than the approximately $85 million of FX headwinds that we would have expected assuming Q3 ending exchange rates and at the midpoint of our guidance for Q4. Moving on to cash flow. Despite the FX headwinds, our cash flow results were strong, with Q4 and full year results coming in ahead of our guidance across all metrics. Solid collections performance and slower hiring helped to offset the incremental headwinds that materialized in Q4 and for the full year our restructuring cost controls and above planned perpetual license revenue primarily from Kepware also helped to offset the FX headwinds. When assessing and forecasting our free cash flow, it’s also important to remember a few things. FX rates were more favorable in the first half of fiscal ‘22 and the majority of our collections occur in the first half of our fiscal year. Q4 is our lowest cash flow generation quarter and free cash flow is primarily a function of ARR rather than revenue. In fiscal ‘22 FX fluctuations created a headwind of approximately $30 million to our free cash flow results. Q4 revenue of $508 million increased 6% year-over-year and fiscal ‘22 revenue was $1.933 billion, up 7%. As we’ve discussed previously, revenue is impacted by ASC 606, so we do not believe that revenue growth rates are the best indicator of our underlying business performance, but would rather guide you to ARR as the best metric to understand our top line performance and cash generation. On a constant currency basis, our Q4 revenue was up 12% year-over-year and our fiscal ‘22 revenue was up 11%. Before I move on to the balance sheet, I’d like to provide some color on our non-GAAP operating margin as I did last quarter. We continue you to caution, because revenue is impacted by ASC 606. Other derivative metrics such as gross margin, operating margin, operating profit and EPS are all impacted as well. Still, it’s worth mentioning that we’re benefiting from the work that we’ve done to optimize our cost structure. Our non-GAAP operating margin expanded by approximately 300 basis points to 38% in fiscal ‘22. Moving to slide 20, we ended the fourth quarter with cash and cash equivalents of $272 million. Our gross debt was $1.36 billion with an aggregate interest rate of 3.9%. During Q4 we repaid $75 million on our revolving credit facility. Regarding our share repurchase program, as we’ve communicated previously, we completed $125 million of repurchases at the front end of this fiscal year. Our long-term goal, assuming our debt to EBITDA ratio is below 3x, is to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic opportunities. Next, slide 21 shows our ARR by product group. In the constant currency section on the top half of the slide, we use rates as of September 30, 2021 to calculate ARR for all periods. You can see on the slide how FX dynamics have resulted in differences between our constant currency ARR and as reported ARR over the past eight quarters. I provided a reminder on the previous call that when we set ARR guidance for fiscal ‘23, we would be providing that at the September 30, 2022 FX rates and restating history assuming those rates. Let’s turn to that now. Here on slide 22 we show the new reporting categories that Jim took you through with historical ARR results recasted using our FY ‘23 plan rate for all periods. We post a set of financial data tables to our IR website that has our financial statements, as well as these ARR tables. For comparative purposes, the constant currency historicals are at FY ‘23 plan rates and should be used when forecasting PTC’s constant currency ARR results. This is important to consider in context of our guidance, because we provide ARR guidance on a constant currency basis. If exchange rates fluctuate significantly between the end of Q4 and the end of Q1, that would be reflected in our as reported ARR. We believe constant currency is the best way to evaluate the top line performance of our business, because it removes FX fluctuations from the analysis, positive or negative. Given the sharp moves in FX that we’ve seen recently, I thought it would be useful to provide an updated ARR sensitivity rule of thumb here on slide 23, and as you can see, in addition to the U.S. dollar we transact in euro, yen and more than 10 other additional currencies. Using our Q4 FX rates, the impact of a $0.10 change in the euro would be approximately $38 million positive or negative and the impact of a ¥10 change would be approximately $7 million, again positive or negative, and of course the estimated dollar impact to ARR is dependent on the size of the ARR base. Turning to slide 24, since most of the sell-side forecasts have been built assuming September 30, 2021 rates, I thought it would be helpful to provide this slide as a reference point before I take you through our actual guidance on slide 25. Slide 24 illustrates what our guidance would have looked like if calculated using our fiscal ‘22 plan rates. The year-over-year growth rate for ARR is the same 10% to 14% that you’ll see on slide 25; however, the absolute values for ARR are higher given the FX rates versus the FY ‘23 plan rates. For revenue, the actuals we report and the guidance we provide are on an as reported basis, not on a constant currency basis. For illustrative purposes this slide shows our fiscal ‘22 revenue on a constant currency basis, assuming our fiscal ‘22 plan rates. On this basis the illustrative year-over-year growth rates for fiscal ‘23 are about 6% higher than the comparable numbers you’ll see on the next slide. The range of revenue growth is lower on slide 25, because our reported revenue is based on monthly FX movements rather than a point in time set of rates, and we faced some tough comps in fiscal ‘23, particularly in the first half of the year. With that, I’ll take you through our guidance on slide 25. Today I’ll focus on FY ‘23 and Q1. In a couple of weeks when we have our Investor Day, we’ll focus more on the medium term. For all ARR guidance amount, we’re using our fiscal ‘23 plan rates, the rates as of September 30, 2022. For fiscal ‘23 we expect constant currency ARR growth of 10% to 14%, which would make this the sixth consecutive year of double-digit growth. This corresponds to fiscal ‘23 constant currency ARR of $1.73 billion to $1.79 billion. Churn is a key component of our ARR guidance and we significantly outperformed our churn guidance in fiscal ‘22 and ended the year with organic churn at 5.6% using our fiscal ‘22 plan rates. Our medium term target as stated back in 2019 was to get to the 6% level by fiscal ‘24, and we achieved this earlier than expected. Going forward, I think there’s still room to improve our churn rate, but at the same time I want to be cognizant of the macro environment, and that’s the rationale behind keeping our churn assumption essentially flat for fiscal ‘23. Next, on cash flows for fiscal ‘23, we expect free cash flow of approximately $560 million, up about 35% and adjusted free cash flow of $562 million, up about 20%. This includes an estimated $60 million of headwind caused by FX impacts on our operations as compared to FY ‘22 FX rates. Our fiscal ‘22 restructuring is substantially behind us, so the difference between free cash flow and adjusted free cash flow is small for fiscal ‘23. Our CapEx assumption for fiscal ‘23 is approximately $20 million, and therefore relative to free cash flow guidance of $560 million, we’re guiding for cash from operations of $580 million. In a few minutes I’ll take you through an illustrative FY ‘23 free cash flow model in more detail. Moving on to revenue guidance, for fiscal ‘23 we expect revenue of $1.91 billion to $1.99 billion, which corresponds to a growth rate of negative 1% to positive 3%. ASC 606 makes revenue fairly difficult to predict in the short term for on-premise subscription companies, hence the wide range. And remember, revenue does not reflect cash generation as we typically bill customers annually upfront regardless of contract term lengths. It’s worth taking a few minutes to explain this. So let’s go on a short detour from guidance and turn to slide 26. This slide shows a hypothetical example with 10 contracts and different assumptions for four variables. Software type, which can be either on-premise subscription, perpetual support or cloud/SaaS. Number two, upfront recognition percentage. To keep this model simple, we’ll just assume that 50% of the on-premise subscription total contract value is recognized upfront under ASC 606. To be clear, this varies by company and even by product within each company, but here we’re just trying to keep this simple to illustrate the point. Number three, term length. This example uses term lengths ranging from one to four years; and four, contract size. This is really total contract value or TCV. In this example, TCV ranges from $1,000 to $4,000, but note, all of these contracts have the same ARR of $1,000. Moving to slide 27, for certain contract types, namely SaaS and cloud and on-premise support contracts, revenue recognition is ratable over the term of the contract. For these contracts, term length and contract value do not have impact on revenue recognition and revenue aligns with ARR on an annual basis. You can see this here with $250 being recognized every quarter. On the next slide, slide 28, here is an example of a one year on-premise subscription that renews annually. Due to ASC 606, half of the contract value is recognized as upfront revenue and the remaining half is recognized ratably over the contract term. Since this is a one year subscription, revenue aligns with ARR on an annual basis. However, on a quarterly basis there is a difference because of the upfront revenue recognition was $625 in the first quarter and $125 in the next three quarters. Turning to slide 29. Here we’re highlighting an example of a four year on-premise subscription. Again, under ASC 606, half the contract value is recognized as revenue upfront. However, ARR and cash invoicing are both done on an annual basis. In this example the amounts would be 1,000 per year. In contrast, as this example shows, we would recognize $2,000 of revenue upfront and the remaining $2,000 will be recognized ratably over the 16 quarters of the term. Moving to slide 30. The graph compares ARR and revenue for these 10 hypothetical contracts over a 12 year period. Over the 12 years this model assumes no growth, no price increases nor churn. There’s no changing of term lengths, no migrating from support to on-premise subscription or from on-premise subscription to SaaS. Of course as you know, we actually have programs in place that actively drive each of these dynamics, but it would be much too complicated to start adding these kinds of dynamics into this super simple example. The green line which is ARR appropriately shows flat business performance, 10 contracts at $1,000 each for $10,000 in ARR each year, zero percent growth, whereas the blue line, which is revenue, shows a lot of volatility from year-to-year. Revenue growth rates vary from negative 33% to positive 69% in any given year, and again, while this example is overly simplistic, hopefully you can see why we keep saying that you can’t really look at revenue to understand the underlying performance of our business, nor is it helpful when trying to understand free cash flow dynamics. What is important to remember is that over the term of the contract, over the term of each contract, every dollar of ARR becomes $1 of revenue. However, how and when revenue is recognized is dependent on the mix of contracts starting and/or renewing in any given year and can vary significantly from period-to-period, and you can imagine what happens to margins and EPS under this kind of scenario. Next, on slide 31 is the conclusion. Due to ASC 606, the revenue trend is noise for companies like PTC that sell on-premise subscriptions. But the point here is, don’t worry, because free cash flow is really a function of ARR, and this is why we focus on ARR and free cash flow and believe it to be the best way to assess our fundamental business performance. Now returning from that fun side trip to guidance on slide 32. For Q1 we’re guiding for cash from operations of $170 million, free cash flow of $165 million and adjusted free cash flow of $166 million. There’s one additional item worth noting related to the cash flow in Q1 and fiscal ‘23. In Q1 we expect to make a $10 million foreign tax payment related to changes to the withholding tax policy of a foreign country. Since we also expect this to be substantially – substantially all of this to be refunded before the end of fiscal ’23, there is no expected impact to the full year financials and we will not adjust for this. Aside from this item, as you model the quarters of fiscal ‘23, keep in mind that we expect the quarterly distribution to follow a similar pattern as in fiscal ‘22 and fiscal ‘21 for the cash flow metrics, with over 60% of our cash flow coming in the first half of the year and Q4 being our lowest cash flow generation quarter. Next, on slide 33, let’s take a look at an illustrative model that uses the assumptions that Jim described earlier and illustrates what you need to believe to achieve the midpoint of our fiscal ‘23 constant currency ARR guidance at the midpoint of $1.76 billion. In this illustrative model, which is for 12% constant currency ARR growth, we’ve assumed that churn worsens by approximately 100 basis points and we kept new ACV flat. While new ACV is not exactly the same as bookings due to dynamics such as ramp deals and in-year starts which we discussed before, it’s a close enough proxy for this exercise. I would point out that while the churn increase looks high, that is in fact the math of an approximate 100 basis point increase that we outlined earlier in the discussion, and while the macro environment may increase churn as you can see on the page, a 100 basis point increase would push absolute churn level – churn dollars above levels that we have not seen for quite some time, and we have some tailwinds on the churn front which include term lengths lengthening. In fact our expiring base in fiscal ‘23 is only slightly higher than in fiscal ’22, despite more than $200 million of beginning ARR. The price increase we implemented in May should also provide some tailwind throughout the year, and importantly our product portfolio continues to mature and some of the product segments that have higher churn like IoT and AR have seen steady improvement in churn over the past three years and still have lots of room for improvement to get to renewal rates more in line with for example, Creo and Windchill. On the flat new ACV assumption, I would also point out that we have slightly more deferred ARR starting in fiscal ‘23 than we did in fiscal ‘22. We will have a full year of new sales from Codebeamer versus the two quarters worth that we had in fiscal ’22, and the price increases that went into effect should provide a modest tailwind on the new sales front as well. You can see that to hit the midpoint of $1.76 billion, we need to add $188 million of ARR in fiscal ‘23. Balancing potential macro uncertainties with the momentum we’ve been seeing in our business, our forecast, and given some of the considerations I just mentioned, we believe our fiscal ‘23 guidance is prudent. Turning to slide 34, here’s an illustrative constant currency ARR model for Q1. You can see our results over the past eight quarters. In the far right column we’ve modeled the midpoint of our constant currency Q1 ARR guidance. Because our ARR tends to see some seasonality, the most relevant comparison is Q1 ‘21 and Q1 ‘22. The illustrative model indicates that to hit the midpoint of our Q1 ‘23 guidance of $1.59 billion, we need to add $18 million of ARR on a sequential basis. This is less than the $40 million we added in Q1 of ‘21 and the $37 million we added in Q1 of fiscal ‘22. Again, for the reasons I mentioned just a minute ago, we believe we’ve set our Q1 ‘23 constant currency ARR guidance range prudently. Let’s move on to slide 35, which shows an illustrative free cash flow model for fiscal ‘23. I know that most of you model free cash flow using the indirect method, which uses the P&L and balance sheet as a starting point. Given the complexities related to ASC 606 that we spent some time on earlier on this call, there are inherent challenges in using the indirect method to forecast free cash flow for PTC. The model on this slide is based on what we use internally. I know that looking at it in this way, may be unfamiliar to some of you, so please feel free to reach out if we can help. Starting at the top with ARR, note that the FY ‘22 ARR has been – is at the September 30, 2022 rates, and that for fiscal ‘23 we’ve used the midpoint of our constant currency ARR guidance. Moving down the model, the primary reason why FY ‘23 professional services revenue is down is because of unfavorable FX developments we’ve seen over the past year. In addition, we expect roughly a third of our professional services revenue to transition to DxP over time. Moving to cost of revenue and operating expenses, the FX developments over the past year have the opposite effect here. Compared to revenue for costs and expenses, the FX moves are beneficial. You can see the powerful leverage on our cash contribution, which is a characteristic outcome of a sticky recurring subscription business model, combined with operational discipline. As you can see, expected restructuring payments are materially lower in fiscal ’23, because as Jim explained earlier, we completed the work related to the operational optimization announced a year ago and the related cash restructuring payments are now substantially behind us. We’ve also completed the work to rebalance resources across the company to align with our growth opportunities and we did this without a restructuring charge. Moving on, you will see that other expense is higher in fiscal ‘23 compared to fiscal ’22. This is primarily due to higher interest rate on our revolver given the higher interest rate environment. Cash taxes are also higher in this model and reflect both higher taxable income, as well as the impact of Section 174. And finally, the other category is also higher in FY ‘23. The main driver here is higher working capital to support continued growth. FY ‘22 also includes the impact of FX movements. All this sums up to expected free cash flow of $560 million, inclusive of the $134 million ARR headwind that materialized and consequent $60-ish million headwind to free cash flow. Jim explained earlier, we expect to deliver approximately $560 million under the most plausible ARR growth scenarios and I’d like to reiterate that. If the macro situation gets worse and our cash generation is impacted, you can expect us to moderate our spending. On the other hand, if the macro situation improves or the dollar strength reverses, this would be favorable for our cash generation, and in that scenario we’d likely invest more aggressively in our business. As we start the year, we believe $560 million is a good target. And that’s a good segue to slide 36. First of all, we are prepared for a storm and expect to be resilient in the face of one. From a top line perspective, we serve industrial product companies and R&D at those companies tends to be quite resilient, so we have a supportive top line backdrop. We’ve also transitioned successfully to a subscription business model and our products are very sticky with our customers. Just as importantly from a cost and operational perspective, we have done a lot of optimization in 2022 that will serve us well going forward; we’ve already battened down the hatches. Nevertheless, as we’ve said in the past, we do not have a Pollyanna type view when it comes to the macro situation. We have a strong track record of disciplined operational management, and in the event of a meaningful downturn, we are prepared to pull additional spending levers to mitigate the impact on our cash flows. Variable compensation would automatically adjust and depending on the magnitude of the downturn, we would also curtail plant hires, look at backfilling attrition, marketing spend, travel spend, etc. So with that, I’d like to wrap it up here and turn it over to the operator to begin Q-&-A.

Jim Heppelmann:

Hello Steve!

Jim Heppelmann:

Good.

Jim Heppelmann:

Yes. So first again, I want to remind you we had record sales in Q4. So while we saw some minor slowdowns, we also saw strength that more than offset in other places. But you know to answer your question, in China you know it’s really COVID, it’s geopolitical, it’s all those kind of things and China is 5% of our business, so we don’t have a lot of exposure there. In Europe it tends to be smaller companies, who are themselves battening down the hatches and they are trying to kick the can down the road and get a little bit more insight into what’s going to happen to the economy. But I mean I know this is a general question for everybody, so let me elaborate a little bit. It’s a funny time, because you know on one hand you have the PMIs coming down and normally that slows down our bookings, but it hasn’t here. We certainly read the papers like the rest of you do, but we also have customers everywhere who can’t keep up with demand. I mean, we have a customer visit center here at PTC on the 17th floor, and it was completely packed today. We had six day-long meetings going on in parallel. We only have the capacity for six. I’m on the board of an automotive supplier and recently we were reviewing the IHS forecast, and IHS is forecasting the auto industry to grow 2% to 6% next year. We’re a big supplier to the defense companies. In fact, two of the companies that were here today were defense companies, and they can’t keep up with the volume and you know their customers are asking for more and more and more. I was in Europe last week and I visited a couple of clean energy companies, and again, because of what’s going on in the energy industry, whether it’s clean energy or not clean energy, there’s a lot of action happening. You know people who used to ship gas through pipelines now need to ship it through ships and so that creates a whole bunch of new demand. For example, big compressors that sit on ships, we have a customer who makes those. I visited a wind turbine company and they think their sales are going to triple over the next 10 years, because of their desire for clean energy. I went to a truck company, and they can’t keep up with demand for diesel trucks, meanwhile they have enormous demand for electric trucks, because all these e-commerce companies, Amazon, Target, whatever, really want their packages delivered in electric vehicles and so all these fleets are trying to move to electric. So I’m just saying Steve, like there’s the headlines and then there’s everything else we see and the everything else really is quite encouraging. But we’re trying not to be Pollyanna; we’re trying to be aware of the headlines that could in fact impact us, so we tried to model it in.

Jim Heppelmann:

Yes Kristian, have you tried to size it all, the impact of the price increase since Q2?

Jim Heppelmann:

So that would be 0.5 percentage point of growth, let’s call it.

Jim Heppelmann:

Yeah, thank you.

Ken Wong:

Great! Just a quick question. I realize macro is going to get beat like a horse here, but you saw a little bit of SMB weakness in Europe. I guess what – has that been baked into potentially spreading elsewhere or are you guys fencing it off in Europe for now in terms of the guidance?

Ken Wong:

Got it. Okay, really appreciate that Jim. I’ll circle back in the queue. Thanks again.

Jim Heppelmann:

Yes, thanks Angela. So listen everybody, I’m sorry we didn’t give more time for questions today. We had a lot of content. We allowed Kristian to spend a little bit of time on an accounting lesson there, because you know we think people are going to ask the question, ‘how do you get a 35% free cash flow growth of flat revenue and flat margins?’ And the simple answer is revenues noise. Free cash flow at PTC is based on ARR and we have substantial increases in our free cash – you know our cash contribution margins against growing ARR. So the math works, but we want to make sure you understood that, so it didn’t leave lingering questions. But anyway, we’ll hopefully see most of you or all of you in two weeks when we have our Investor Day. We’ll go a little bit deeper into the business strategy as I said, and then we’ll get into some mid-term guidance. You know we’re going to guide fiscal ‘23, ‘24 and ‘25. And again, I don’t want to preview that content now, but I think it’s a positive story. You probably can sense that we feel good about the business. So thanks a lot for your time. Sorry, we didn’t have more time for questions, and you know we look forward to following up with you in two weeks or in whatever forums and venues happen before that. Thanks a lot.

Operator:

This concludes today’s call. You may now disconnect.

Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2022 Third Quarter Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. And I would now like to turn the call over to Matt Shimao, PTC’s Head of Investor Relations. Please go ahead.

Jim Heppelmann:

Great. Thanks, Matt. Good afternoon, everyone and thank you for joining us. I’m pleased to report that PTC delivered an outstanding third quarter, with top line ARR results and bottom line free cash flow results above our guidance, and we’re raising our guidance for the third time this year. Before I dive in, I’d like to point out that Kristian will cover the effects of the strengthening dollar later during his section of the call. So to simplify things, I will focus my discussion of top line growth metrics on constant currency results. Turning to Slide 4, ARR and free cash flow results were very strong and the strength was broad-based across all segments and geographies. Of particular note, we saw organic ARR growth further accelerate to 15%, driven by the acceleration we saw across the board in Digital Thread Core, Digital Thread Growth, FSG and Velocity units. ARR growth was helped by the lowest churn the company has seen in many quarters. I’m pleased to see PTC’s organic growth rate move into that mid-teens range we’ve been targeting. We closed the Intland acquisition during Q3. I’ll refer to this business as Codebeamer going forward, because that is the product name we will retain. Codebeamer had an outstanding first quarter at PTC and added a point of inorganic ARR growth, taking PTC’s ARR to $1.63 billion, up 16% year-over-year. In Q3, we complemented our top line growth with even stronger bottom line growth. Despite strong FX headwinds and nearly $20 million of restructuring and M&A transaction payments, our free cash flow performance was strong at $112 million, which was ahead of our guidance and up 33% year-over-year. Remember that the restructuring we implemented at the end of last fiscal year was designed to drive a more aggressive and efficient SaaS strategy. At the time it was announced, we viewed the charges as short-term pain for long-term gain. Now, we’re at the inflection point where most of the pain is behind us, leaving us with a cost structure that’s in great shape, while the operational changes continue to generate the positive results we expected. I’m going to circle back on the margin topic in a few minutes when I reflect on macro scenarios. Moving to Slide 5, despite the scary headlines we read every day, we’ve continued to see solid global demand for our offerings. We did see some minor indications of macro-related softness in smaller European reseller accounts and in China due to COVID-related lockdowns, but this proved immaterial as organic bookings were up 29% year-over-year, roughly double the organic ARR growth rate. Europe bookings grew 20%. As I mentioned, renewals were also strong and we’re raising our FY ‘22 organic churn guidance as we’re trending slightly better than expected. Growth was strong in both Digital Thread and Velocity units and across all three geographies. Q3 was the seventh consecutive quarter that bookings have grown faster than ARR, which together with improving renewal rates is driving the accelerating ARR growth we’ve been delivering all year. To help you appreciate the resilience of PTC, as you think about any potential macro volatility that may lie ahead. On Slide 6, I’d like to briefly again review our business model dynamics to help investors understand why, despite the uncertainty, we have confidence in our financial targets for the remainder of the year. On the left-hand of the slide, you can see that the 16% ARR growth we delivered in Q3 was based not just on our Q3 performance, but performance over the prior three quarters as well. Given our definition of ARR is the annualized value of the book of active recurring software contracts, ARR growth is effectively a trailing four-quarter metric. When we say ARR grew 16% in the third quarter, we mean that on average ARR has now grown 16% over each of the past four quarters, because the entire book of active recurring businesses now 16% larger than it was at this time last year. While this trailing dynamic serves to dampen the impact of bookings in any single quarter, such as the strong results in Q3 where bookings grew roughly twice the speed of ARR. It also provides a tremendous foundation of stability for the company. We are raising our ARR guidance for the full year, because three of the four quarterly results that will comprise FY ‘22 ARR growth are already known. And we feel sufficiently confident about Q4. Kristian will elaborate during his guidance reveal. As you think about macro scenarios and their effect on PTC, remember the basic rule of thumb that’s a longest bookings exceed churn over the trailing four quarters, ARR will grow and so too should free cash flow. Bookings currently exceed churn by a wide margin, roughly 3:1. To demonstrate the resilience of our model, I’ll quickly review the same big round directionally accurate numbers I supplied last quarter for you to run scenarios against. Think of PTC having around $1.5 billion in ARR and on a run-rate basis we’re adding $300 million in annual bookings, while seeing $100 million in annual churn. That’s the 3:1 ratio I spoke of. Over the next year, the $1.5 billion of ARR would step up by $300 million in bookings, and step down by $100 million in churn to grow to $1.7 billion, which is 13% growth. That’s roughly consistent with our current run rate performance though our actual 15% ARR growth level reflects that we’re running slightly favorable on both bookings and churn. I’ll skip the details this time around, but on the right-side of the slide, let me remind you of the hypothetical scenarios I shared last quarter. The first scenario has booking slow 30% for four quarters, like we experienced in 2009. And the second scenario has booking slow 30% for two quarters, like we experienced in 2020. In both cases, churn has held flat, consistent with experience in both periods. Across those scenarios, ARR grows upper single-digits to low-teens. Now, to understand profitability in a downturn, let’s take a fresh look at Slide 7, which I burrowed and updated from our December Investor Day presentation. Whether top line growth remains strong as it has been or slows a bit due to macro developments, we expect to see significant margin expansion going forward. Margin expansion starts with the scale advantages we get by growing the top line faster than spending. Fiscal year-to-date, ARR is up 16%, while non-GAAP OpEx is basically flat, but we have several margin expansion programs that go further. The first margin expansion program is reflected in the actions we successfully implemented at the end of FY ‘21, which is shown on the left half of the page. Those changes that worth several hundred basis points of margin expansion, once the restructuring is complete, and it now largely is. By the time we enter FY ‘23, we have the bulk of the operating costs and the restructuring costs removed from our results. In addition to that, we’ve also initiated a second margin expansion program, which is shifting resources within our portfolio in a way that addresses key staffing needs, while driving up the profitability of our J-Curve businesses as shown on the right half of the slide. By reassigning some sales in R&D resources, and I’m talking about the actual people from IoT and AR, where growth has been lower than expected into other parts of the portfolio like CAD and PLM, where growth has been exceeding expectations, we’re able to accommodate much of the company’s resourcing needs, while canceling more than half of the 800 open positions we had a quarter ago. This program will not involve layoffs or restructuring charges, just new assignments for existing employees. The avoidance of new hires and their previously budgeted costs is expected to yield a couple hundred basis points of margin expansion over time. Note that a nice side effect of these resourcing shifts is that the Digital Thread growth unit comprised of IoT and AR is now crossing into profitability. We expect to see further margin expansion that comes naturally, as these businesses continue scaling beyond the current $214 million in ARR. In addition to the margin expansion programs that are well underway, there’s a third margin expansion opportunity. If we were to encounter signs of a significant macro slowdown, like the scenarios I mentioned, we would quickly implement new hiring restrictions against the balance of the open positions we have, as well as other spending restrictions. This too would further help margins. The summary is that our cost structure is in great shape as we contemplate scenarios of what might lie ahead. Given the cost lever we’ve already pulled with the restructuring at the end of last year, the lever we’re pulling now by rebalancing resources within the portfolio and the additional lever that remains incrementally available to us if we see signs of a downturn, we’re looking at substantial margin expansion drivers that make us confident, we can deliver free cash flow growth in the mid-20s or better at Q3 FX levels and across most plausible ARR growth scenarios. A mid-20s free cash flow growth rates supports the longer-term free cash flow guidance we currently have out there. So we continue to feel good about that even in this shaky environment. Because we have products that are compelling and sticky, sold into good markets using a recurring revenue model, coupled with a longstanding reputation for spending discipline, PTC is in a good position to drive differentiated free cash flow growth no matter what macro scenario plays out. Getting back to Q3, let’s take a quick look at our ARR performance by geography on Slide 8, before turning to our business units. In Q3, we again saw a strong ARR growth across all geographies. ARR growth in the Americas was 14%. In Europe, our ARR growth was 17% despite the Russia exit in Q2, which still affects the growth rate, given the trailing nature of our ARR metric. Our ARR growth in APAC was 16%. Knowing that investors are concerned about the macro environment, I’d like to reiterate that we are continuing to see strong bookings and renewal performance globally and in Europe, and giving our recurring business model, ARR is likely to grow in all, but the most extreme downturn scenarios one can imagine. Next, let’s take a look at the ARR performance of our business units starting with Digital Thread on Slide 9. In our largest product segment, Digital Thread Core, we delivered another strong double-digit growth performance in Q3 with 14% ARR growth. Within this, once again, CAD grew low double-digits, while PLM grew 17%. Bookings grew faster in both cases. Q3 was the best performance yet across the known 19 consecutive quarters of double-digit ARR growth we’ve seen in the Core CAD and PLM business. On the SaaS transformation front, Windchill+ is in its early days, but we had a solid SaaS quarter for Windchill based primarily on a good mix of SaaS in new projects. We continue to expect to see a growing SaaS impact from lift and shift conversions as that phenomenon ramps in FY ‘23 and beyond. A reminder too that Windchill+ is the tip of the iceberg of a bigger plus strategy and you’ll see us follow with Creo+ and similar premium SaaS offerings in FY ‘23 and beyond. In Digital Thread Growth, which is IoT and AR, we were pleased to see ARR growth accelerate to 19%. In the neighborhood of that two-handle growth rate we’re targeting. ThingWorx DPM had a solid quarter, including a multimillion dollar ramp deal with a leading global contract manufacturer for a 30 factory DPM rollout following a successful proof of concept. With ThingWorx DPM, we believe we have a turnkey IoT solution with strong product market fit and this deal represents an excellent proof point. FSG posted great results again in Q3, accelerating to 9% ARR growth organically and growing 17% inclusive of Codebeamer. Within FSG, retail PLM, Arbortext and Servigistics all performed notably well, driven by solid results in terms of both bookings and renewals. Let’s turn to Slide 10 and double-click on Codebeamer. As the driver of the inorganic growth of FSG, Codebeamer had an outstanding quarter, beating its plan even before landing a mid seven-figures ramp deal with a European automotive supplier that’s standardizing on Codebeamer across its thousands of software engineers. This transaction was actually the largest order PTC booked in the third quarter, which is quite an accomplishment for a business that currently represents 1% of our ARR. The Codebeamer product has best-in-class ALM capabilities, and is seeing high demand because these capabilities are critical to manufacturers whose products contain embedded software. That’s especially true in industries like automotive and medical devices that are regulated, because an errant software chain – change somewhere in the supply chain could lead to an unexpected product behavior that might kill people. Codebeamer is often an amazing start and early returns are very encouraging. We have combined Codebeamer with our previous ALM offering called Integrity and elevated this consolidated ALM business to be a key product line alongside CAD, PLM, IoT and AR in the Digital Thread portfolio. Codebeamer will continue to be sold standalone and will sell it with PLM as well. In addition to the strong standalone ALM sales that Codebeamer has been experiencing, adding it to PTC’s portfolio, is expected to drive incremental revenue and cost synergies. To keep our reporting simple in the near-term, we will continue to report the ALM business in the FSG line item, placing the high-growth Codebeamer business in the FSG reporting line item should take FSG from being a low single-digit grower to a sustainable mid single-digit grower going forward, which of course helps to elevate PTC’s overall growth rate as well. Before I turn to our Velocity business unit, let me run through a customer story on Slide 11 that illustrates how customers are leveraging our digital transformation capabilities. With more than 29,000 employees, Vestas is a key global provider of sustainable energy solutions to the energy industry. Vestas is a great PTC customer, and they use our software across their Digital Thread, as they design, manufacture, install and service onshore and offshore wind turbines around the globe. To meet the unique needs of each customer and each deployment, Vestas has embraced digital transformation. Vestas has literally taken an electrical mechanical wind turbine and turned it into a highly tailorable software controlled, connected powerhouse of clean and affordable energy. For Vestas, the first step was to establish a strong PLM foundation in engineering. Now Vestas is leveraging the end-to-end configuration management capabilities of Creo, Windchill and ThingWorx to drive process improvements across engineering and manufacturing. By eliminating manual handoffs and redundant work, Vestas is unlocking a step function improvement in product and process quality, while shortening lead times. Vestas is driving closed-loop innovation using data from a large number of connected wind turbines in the field to generate engineering insights. PTC’s unique portfolio was well aligned to support Vestas along their digital transformation journey, and their future plans include increasing use of ThingWorx and Vuforia as they continue to develop their best-in-class wind power solutions. Turning to the Velocity business unit on Slide 12, year-over-year ARR growth for our Velocity unit accelerated slightly to 29% in Q3, with Onshape and Arena again, growing multiple times faster than their market. These cloud-native businesses each a pioneering leader in its respective category continue to give us proof points that suggest the future of the product lifecycle software market will be SaaS. With Velocity, PTC has the best pure-play SaaS strategy in our market. It really is the industry benchmark for how SaaS should be done. And with the Atlas platform, born of Onshape and now powering Windchill+ in the broader plus strategy, we are implementing SaaS across the entire portfolio. We expect the SaaS strategy to create strong growth tailwinds in the Core business for years to come. Let’s move to Slide 13, where I’d like to take you through a Velocity customer story. Wavemaker Labs is a product development accelerator known for product development excellence in automation applications. They have a portfolio of companies and they help these companies build disruptive technologies. Photo you see on the slide is the Flippy 2 Automated Frying Robot from Miso Robotics, which is one of Wavemaker’s portfolio companies. Miso Robotics is leveraging automation to revolutionize commercial food service, and their customers include Jack in the Box, Chipotle and White Castle, all favorites of Kristian Talvitie I’m sure. To help Miso Robotics and their portfolio companies drive high velocity product development, Wavemaker Labs has chosen Onshape and Arena. Speed, agility and flexible scalability are top priorities for Wavemaker Labs, making Onshape and Arena a natural fit. The unique analytics and management reporting capabilities of Onshape helps Wavemaker Labs to better understand the efficiency and the engagement of their engineers. Also with their high velocity mindset, Wavemaker Labs is focused on driving frictionless collaboration from start to finish. They’re looking forward to being one of the first customers to deploy the new Onshape-Arena connection feature, which is in customer test now and will be released shortly. This connector will launch the industry’s first integrated pure-SaaS, CAD and PLM suite, which enables improved collaboration and a seamless flow of product data across engineering, supply chain and manufacturing or contract manufacturing activities. For a final topic, turning to Slide 14, there are two upcoming investor events I want to raise to your attention. First, we plan to hold a Virtual FY ‘23 Investor Day event on November 17th, where we’ll give you a deeper view into PTC’s financial plans for FY ‘23 and beyond. Second, we plan to host a large LiveWorx Ecosystem event on May 15th and 16th of 2023, that assuming COVID cooperates, we expect will bring together thousands of customers, partners, investors and employees in a live event at the Boston Convention and Expo Center near our Seaport headquarters. We’re hoping that many of you will attend the LiveWorx event where we’ll have a dedicated investor track that allows you to participate in keynotes and investor sessions, plus gives you ample opportunity to interact directly with management, customers and partners across the PTC ecosystem. To make it easier for you, we plan to make the November event both shorter and virtual, with the intention to give you what you need for your models to tide you over to the bigger LiveWorx event in May, where you can get a full dose of strategy and customer exposure. Please watch for our Hold the Date invitation from our Investor Relations Team regarding both events. To wrap up on Slide 15, demand remains strong in Q3 and we’ve seen only minor signs of a macro slowdown. But we’re watching diligently and we’re well prepared for whatever lies ahead. Because of our resilient business model and spending discipline, we expect to deliver solid top and bottom line growth across any of the more plausible macro scenarios. Overall, I’m very pleased with PTC’s position, our strategy is working well. We’ve driven both our growth and profitability to levels that are near the top of our peer group and I’m excited about the opportunities to do even better as we push ahead in parallel with a growth and margin expansion initiatives. Throughout the first three quarters of FY ‘22, bookings and renewals have been very strong. Growth has been accelerating all year, which is why we’re raising our guidance for the third time. And we’re entering the fourth quarter of what will be our fifth consecutive year of double-digit organic ARR growth. I think the company’s never been in better position to create shareholder value. And with that, I’ll turn it over to the Kristian for more details on the financial results.

Operator:

Thank you. [Operator Instructions] We do ask that you can limit yourself to one question only and then you rejoin the queue for additional questions. Our first question will come from Matthew Broome with Mizuho Securities. Please go ahead.

Jim Heppelmann:

The pipeline is quite good. I mean, there’s a lot of interest in this solution. And in fact, we’ve already had a couple of follow-on orders from some of the earliest orders we received. So, I think it’s a good solution. You know there’s a lot going on in the world of manufacturing these days. So there’s a lot of competition for mindshare, but I think we have a very good solution and there’s a lot of interest in it.

Operator:

Our next question will come from Saket Kalia with Barclays. Please go ahead.

Kristian Talvitie:

Yeah, sure. Hey, a second. Thanks for the question. So you know like most of our peers, we evaluate pricing typically on an annual – annual basis and you know generally contemplate price increases around the October, kind of November timeframe. That’s been our pattern here for the past – past few years, depending on the overall macro environment and you know competitive environment, we try to take those things into consideration, as we – as we think about price increases. So for example you know, during COVID, we actually did a much smaller price increase than we normally would. And – and this year, we actually given the macro environment, we actually pulled the price increase forward a little bit. So you know effective in May, we did a price increase that was also slightly larger than normal, reflecting the macroeconomic situation that we’re all in right now. In terms of its impact to this year’s guidance and performance, I would say it’s been a modest, if you will, at best tailwind for fiscal ‘22. But we think that it’s one that will persist in the fiscal ‘23. And I think the way to think about that is if the price increase was effective in – you know effective in May, any quotes that were already in play would have had old pricing and so on. So you’re – you’re really talking about quotes that are going out after the price increase. So primarily impacting you know Q4 and beyond.

Saket Kalia:

Okay, got it. Very helpful, guys. Thank you.

Kristian Talvitie:

Thanks, Saket.

Andrew Obin:

Yes, good afternoon. Good afternoon.

Andrew Obin:

Hi. Jim, Kristian. Just the question on Windchill-SaaS transition. Sounds like Windchill+ is more attractive to new logos versus lift and shift existing clients. How is the pipeline for lift and shift building relative to your expectations?

Andrew Obin:

Thanks a lot.

Operator:

And our next question will come from Blair Abernethy with Rosenblatt Securities. Please go ahead.

Jim Heppelmann:

Yeah, sure. Blair. So yeah, I mean, I think all year you know we’ve over-performed in a long list of things. And there’s – and there’s one part of the business has a little bit underperformed, even though it’s growing at a rate that’s accretive to company growth. But that’s IoT and AR. And I think it’s really a – mostly a market issue, not a competitive issue. In fact, I’d say it’s not at all a competitive issue. There’s this factor that I call the hair-on-fire factor, which is a lot of this stuff is sold into environments that are in chaos right now. You know, if you run a factory, and we’re trying to tell you how we can make it more productive, you say, well, it’s shut down, because I don’t have any inventory. Or I’m in a lockdown mode or – or I have too much inventory or you know there’s just a lot of noise right now that, again, is competing for mindshare, and it’s not just competing for PTC’s mindshare, it’s competing for competitors’ mindshare too. So I’m unaware of anybody we compete with who has higher performance than we do in this environment. I think this environment will pass and we’ll get more momentum down the road. But meanwhile, what we said is, we have you know, we – we put our resourcing plans in place according to our growth plans. And the places that are surpassing that growth plan need more resources and the places that are behind I mean, honestly, we have too many resources stacked in there. So we’re just moving them around, it doesn’t mean we’re given up on anything we – we hope to get to and achieve this 20% growth rate, but I think as we look to next year, I think we feel like 20% would be a pretty good growth rate for next year. I’m not guiding to that here, but I’m just saying I don’t think the market supports more than 20% growth rate at this point in time, because of those hair-on-fire issues I’m talking about.

Operator:

And our next question will come from Adam Borg with Stifel. Please go ahead.

Jim Heppelmann:

Yeah, for sure. I mean, I think it’s the absolute most effective and efficient way to bring more resources to bear, because these are people who are already in the PTC sales organization, they already know the management team, they already know the customers, we’re just saying, hey, sell this product instead of that one to the same people in many cases. Not in every case, but certainly to the same types of people in every case. So I think it’s quite – it’s quite an effective way to ramp new capacity. And meanwhile, I don’t see much risk on the IoT and AR side, because we have ample capacity left to keep up with the demand we see. We simply or have too much capacity to be frank in IoT and AR selling. And so we’re shifting that over putting a couple of different products in their big and send them back onto the playing field. So I think it’s – it’s smart. I think it’s going to work well. And I think there’s very little risk.

Jim Heppelmann:

Thank you.

Jay Vleeschhouwer:

Yeah, okay. Thank you. Hello, Jim. Hello, Kristian. Jim, you alluded in your comments to share gain in your Core CAD and PLM businesses. And I think that’s a reasonable observation. In addition to which you noted the strength in ALM, at least with the acquisition. And if perhaps raises a larger question of how the technical software market is evolving yet again, perhaps moving beyond what has historically been very [technical difficulty] centric industry to increasingly now with a – I think it’s simulation-centric industry in terms of revenue and process. So you know if that evolution continues you know where the world becomes simulation-driven, plus CAD and PLM. You know how do you – how do you think that positions or leaves PTC in terms of you know your growth, your – your competitiveness, your resource allocation et cetera?

Jay Vleeschhouwer:

Thank you, Jim.

Operator:

[Operator Instructions] And again, we do ask that you limit yourself to one question and rejoin queue for follow-up. Our next question will come from Joe Vruwink with Baird. Please go ahead.

Jim Heppelmann:

Well, first of all, I think, Joe, that your thesis is at least directionally correct, that there certainly is a lot of interest amongst the larger enterprises, in digital transformation and in cloud. And those are places where PTC is well positioned. And you know kind of historically, we’ve had more exposure to the enterprise market than to the SMB market. You know, Creo and Windchill kind of don’t have near the representation in the SMB market that other products have from say, you know, Dassault or – or Autodesk or whomever. Now, with – with our Velocity unit, that’s really an SMB business. And that’s doing pretty well. And I think that’s all cloud-driven. You know what I mean? That’s – that’s a subset of the market who says, I really want to go to cloud, and PTC’s Onshape and Arena Solutions are virtually unmatched for those types of customers. But I think in general, yeah, the enterprise market really is leaning into digital transformation. I think COVID was very helpful for this. And I think it’s most helpful to PLM, because you just really can’t have a hybrid workforce. If people working at home can’t find the data, they need to do their work today, and they can’t walk down the hall to talk to somebody, because they’re not in the building. And even if they were in the building, the person they want to talk to is not in the building. So you really need a system, a system of record, and a system of engagement to allow you to you know do your job from anywhere in the office today, from home tomorrow, whatever. And – and PLM is that system. So you know, Dassault’s PLM results are pretty good. And ours were even better. And I think that’s indicative of you know a market that’s pretty healthy, which I think was the basic thesis, you know of your question.

Operator:

Our next question will come from Matt Hedberg with RBC Capital Markets. Please go ahead.

Jim Heppelmann:

We are definitely overcoming it. And even with IoT and AR, we did see a nice acceleration in the quarter. So I think if you look at our bookings, they were up strong sequentially. They were up strong year-over-year. You know if I think ahead to our Q4 forecast that is very strong sequentially. It’s not up year-over-year, because as Kristian said, we have a monster comparison in the – in the prior year, but it’s up quite strong sequentially from quite a strong quarter this quarter. So, right now our forecast looks good. Now, Kristian, and I say okay, I mean, I hope it comes in like that. But you know, if it doesn’t, we’re prepared for that, too. And that’s a little bit why I took you through the business model and the margin programs and so forth, because we want to win no matter what happens. But so far, honestly, the news is all pretty good. It’s just we don’t want to be a Pollyanna here. And you know, say this downturns never going to touch us. I mean, maybe it will, and if it does, I tried to show you we’re ready for it.

Operator:

Our next question will come from Jason Celino with KeyBanc Capital Markets. Please go ahead.

Jim Heppelmann:

Yeah. The strength, first of all was in our Core CAD and PLM business you know the so called Digital Thread Core, which is doing well everywhere. And we did see some, I mentioned this in the commentary, we did see some China lockdown issues, where you know companies just for whatever reason didn’t want to talk to us. But nonetheless, results were still good. You know we kind of had other good news to offset that. I think the key thing in China to know, if you don’t know this now is it’s now 5% of our business, 5% of our ARR. So we have very little exposure. It had previously been as high as I don’t know, 7% or 8%. But you know when President Trump was in the office, he went to war, as you know with our, let’s say, battle with our largest customer, which was Huawei. And by the time the dust settled on that, Huawei was Dassault’s customer. And you know because they pretty much got the message not to do business with American companies. And that hurt us in China, generally, all the – you know a large amount of the Chinese manufacturing market is state-owned. And having watched what Trump was doing with Huawei, an American suppliers like us that was not helpful. But you know good news is, we’re down to 5% exposure. And China’s not that material to PTC, which I actually feel kind of good about right now given you know, the – the scariness and the outlook of what might happen there in the coming years.

Jim Heppelmann:

Hey, Yun.

Jim Heppelmann:

Yeah, well, Yun, those are good questions. So first on the specific question about cross-sell. I mean, that’s actually a pretty well developed muscle inside of PTC. You know, we built our PLM business largely by cross-selling from CAD and – and then other things we’ve sold have kind of been cross-sold from PLM. So definitely, we’re trying to make IoT and AR more focused on what we call the Digital Thread story, which is, it’s not only about solving problems with IoT, but it’s about solving problems with IoT using PLM data, which would include of course, CAD, digital markups and visualization and so forth. And then our Augmented Reality, of course, is a huge consumer of 3D data, because it trains its computer vision models against 3D, digital markup configurations, not to get too technical on you guys. But anyway, there’s a great cross-sell opportunity. It’s a – it’s a big, big focus. But you know, one thing I did want to say, your – your comment at the beginning said that our guide suggests we’re not that affected by the macro. I actually just want to say to all of our investors, you need to reconfigure your opinion of PTC a little bit, because we’re not a cyclical name anymore. And in fact, our guide, the low end of our guide contemplates a 30% decline in new sales in Q4. It’s just that our model is so resilient, that even a 30% decline in new sales still lands with 13% ARR growth. So like sometimes I read in a report that PTC is a cyclical name, and I say, show me a piece of data that supports that, because for five years, we’ve been steady as she goes, in good times and bad. And I just feel like we have a business model that’s underappreciated. And you know the worst that downturn is going to get, the bigger performance differential you’re going to see between us and people you compare us to you know particularly in our own industry here, because we’re – you know, our software’s 98% recurring, that’s substantially greater than ANSYS, than Dassault, than Siemens then basically any of the companies you might directly compare us against you know in the same market, let’s say.

Operator:

Our next question will come from Tyler Radke with Citi. Please go ahead.

Jim Heppelmann:

Let – let me hit the first question and you can take the second one. So the first question was about, was there any pricing tailwind? Yeah, sure, but it just was not significant. So there was a little bit of pricing tailwind. But again to go back through the kind of calculations here, only a small amount of our book of business came up in Q3 for renewal and most of these contracts have pre-negotiated price increases that we would get, despite whatever level of inflation is out there. There is a minority that you can argue, we have rights to raise the prices higher, and then some are actually tied to CPI, but most of our contracts are actually pre-negotiated fixed – fixed price increases. So we’d get them no matter what the economy and the inflation was. And then again, on the new sales, it’s just that our sales cycles are longer than two months. And so when you put a quote in front of a customer and you raise the price, you can’t take that quote back and stick a more expensive quote in front of them, because they get kind of angry. If they don’t take that deal. Well, now you can raise it or when you go meet the next customer, you can go in with a higher quote. But it’s just that we didn’t have enough time to work that price increase through our sales cycle, to have it be meaningful to what happened you know in terms of new sales. So you know like for example, Pepsi raised the growth rate by two points, because they raised the price of potato chips, and you walk in the store and they’re more than they used to be and you pay it, but we’re not selling potato chips, we’re selling complex software that has multi-quarter sales cycles.

Tyler Radke:

Okay, thank you.

Kristian Talvitie:

Hello, Ken.

Jim Heppelmann:

Yeah. It’s a good question, Ken. Because we did set an expectation, low single-digit growth and now it’s kind of put along in pretty high single-digit growth. I think you know we’ve just seen better demand than we had anticipated. So for example, if you look at some of the building blocks, Servigistics is a service parts management software and they’re having a great year. And then there’s what we call, FlexPLM, which is a special version of Windchill that we sell to retail companies, big box stores and clothing and you know apparel and footwear companies. And win rates been good and the demand has been good. There’s Arbortext you know our technical documentation type of technology that does structured documents and automated publishing and so forth, and that’s performed well. So I think there’s actually some good demand and frankly, pretty good execution. The renewal rates in all cases have improved too. So that’s also helpful. So, I don’t know maybe – maybe we shouldn’t say that FSG will be able to perform in mid single-digits, you know post-Codebeamer when it’s already doing better than that pre-Codebeamer. But you know we’ll try not to get ahead of ourselves. We’re pleased with what’s going on and with Codebeamer in there, you know we’re pretty sure it’s going to be kind of mid single-digits at least going forward.

Jim Heppelmann:

Okay, is that the last question? All right, so Matt’s given me the – give me the signal here. I just want to thank everybody for spending time with us today. Appreciate you know you hanging in there and we look forward to seeing you in 90 days, if not before. Hopefully the economy will kind of – the macro situation will stay as it has been and we’ll have some really great news for you and if not, you know, I think will be – will be okay anyway. So I look forward to seeing you and have a good evening.

Operator:

And that will conclude today’s conference. Thank you for your participation and you may now disconnect.

Operator:

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the PTC's 2022 Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode, and following the presentation, the conference will be open for questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Jim Heppelmann:

Thanks Matt. Good afternoon everyone and thank you for joining us. To simplify things, please note that throughout my commentary I will be discussing all growth rates in constant currency. Turning to slide 4. I'm pleased to share that PTC delivered another strong financial performance in fiscal Q2. All of our metrics came in above our guidance and the strength was broad-based across all segments and geographies. Of particular note, we saw organic ARR growth accelerate to 13% despite the self-inflicted churn caused by our decision to exit the Russian market. We ended Q2 with $1.56 billion of ARR. Bookings grew faster than ARR and renewals were very strong. We also continued our track record of translating top line growth into even better bottom line growth. In Q2 our adjusted free cash flow performance was strong at $158 million, up 22% year-over-year and ahead of our guidance. The non-GAAP operating margin of 42% in the quarter was the highest we've seen. The margin expansion strategies we outlined at our December Investor Day are generating the results we expected. Moving to slide 5. While we're monitoring the global macro and geopolitical situation carefully, we continue to see strong global demand environment for our offerings. Driving digital transformation across the product life cycle remains an important priority for our customers. Bookings were up mid-teens year-over-year and the strength was broad-based. Growth was strong in both digital thread and velocity and across all three geographies. Q2 was the sixth consecutive quarter that bookings have grown faster than ARR, which together with improving renewal rates, creates an acceleration bias for ARR growth. To help you understand the resilience of PTC as you think about any potential macro volatility that may lie ahead, I'd like to expand on our business model dynamics, to ensure you appreciate why our business model provides us with confidence in our ability to achieve our financial targets in the back half of the year. Let's take a look at slide 6. On the left-hand side of the slide, you can see that the 13% ARR growth we delivered in Q2 was based, not just on Q2 performance but also on the momentum we built over the previous three quarters as well. ARR growth is a rolling four-quarter metric. So when we say ARR grew 13% in the second quarter, we mean the entire book of recurring business is now 13% larger than it was at this time last year. While this rolling dynamic dampens the impact of bookings in any single quarter, such as the strong results in Q2, it also provides the foundation of stability and resiliency for the company. Remember that, so long as bookings exceed churn ARR will grow. Bookings currently exceed churn by a wide margin. To help you run your own scenarios, let me simplify the math, by giving you some big round directional numbers to work with. Let's say PTC has around $1.5 billion, in ARR. And on a run rate basis, we're adding $300 million in annual bookings, while seeing $100 million in annual churn. Over the next year the $1.5 billion of ARR would step up by $300 million and stepped down by $100 million to grow to $1.7 billion, which is 13% growth. That's consistent with our run rate performance. Note that, because PTC provides sticky enterprise software, our history in 2009 and again in 2020, shows renewals remain steady through a macro downturn. To better understand the sensitivity then of ARR to macro changes, let's start with a hypothetical scenario where bookings stopped growing and remained flat indefinitely at $300 million. In that case, with churn being steady, ARR would experience double-digit growth for several years and high-single digit for several more years after that. If you're concerned about a downturn in Europe which represents 40% of our business, you could create an alternate model where 40% of our bookings declined by 25% for two quarters and then bounced back, in which case we'd still deliver 12% ARR growth over the forthcoming year. If you want to run a more draconian global macro downturn scenario, you could model a 25% reduction across all bookings for the next four quarters, in which case you still get 8% ARR growth over the next year. Frankly no matter what scenarios you might model, you'll consistently see that PTC has a very resilient business. Keep in mind that those were hypothetical examples, because the actual results are considerably better. When bookings grow faster than ARR, as we've seen quarterly since the COVID rebound, it creates an acceleration effect for ARR. Improvement in renewal rates, which we've also been seeing are helpful as well. PTC is experiencing the benefit of these dual acceleration effects right now, which is why we're raising our ARR guidance for the full year. In summary, while the company is in position to accelerate ARR growth assuming conditions remain as they have been, we're also in good position to power through any potential macro slowdown with strong results, as we did in 2020, when bookings design declined sharply for several quarters due to the pandemic before rebounding again. PTC's FY 2020 ARR growth of 11% compared very favorably to our more cyclical industry peers, who don't have the same recurring business model. Some of whom even experienced top line declines in their comparable business lines. The takeaway from this discussion is that our subscription model, which took us years of hard work to put in place is a wonderful thing, and it will keep PTC in a growth leadership position in our industry for years to come. Moving on, let's take a quick look at our Q2 ARR performance by geography on Slide 7 before turning to our business units. In Q2, we saw strong ARR growth across all geographies. Our ARR growth in Americas was 12%. All product segments grew with the main growth drivers being continued strength in our core PLM and CAD segments and another strong contribution from our Velocity business. In Europe, our ARR growth was 15% despite the Russia exit. We saw strong results across the board in Europe with growth primarily driven by our core PLM and CAD businesses and strong growth in the IoT and AR segment. In addition, our velocity and FSG businesses delivered solid growth in Europe in Q2. Europe has the largest mix of channel versus direct and the resellers continue to perform well. I know that investors are concerned about exposure to Europe and the macro environment there, so I'd like to reiterate that

Operator:

[Operator Instructions] And our first question will come from Joe Vruwink with Baird. Please go ahead.

Jim Heppelmann:

Yes. I mean absolutely Joe, Jim here. Keep in mind that PTC is really helping customers plan and engineer and plan the production processes for products. We're not helping them to actually by and large we're not helping them much to produce the product. So the supply chain problems really are production problems. And if you're having production problems, most companies don't see that as a reason to stop planning the next generation of products because suddenly a production problem will be solved at some point. And then you'll be competing for who has the best next-generation product and I hope you didn't take the year off. So we don't really see any connection. And frankly, we didn't see much connection in 2020 either in that particular way. So I think the pandemic in 2020, put a lot of momentum into digital transformation. People realize you can't execute a hybrid work for us for example, without a system of record for product data. It just doesn't work. So that momentum is carrying through and people are forging ahead with their strategies to implement for example PLM and CAD to advance their digital transformation initiative even if their factories are idle because they're waiting on semiconductors or in some cases wire harnesses that used to come from Ukraine and all that type of stuff. So actually I was in Germany, in the last week of the quarter. And the customers I talked to were full speed ahead as it related to the PTC project. And we mentioned that we had a very strong bookings quarter in Europe. And again that's net of a fairly if you put all that churn from Russia in Europe it's material. It's like probably a point of growth I'm just in for Europe. So I think we're doing well and sort of feel like actually conditions look pretty good. And at the same time we can withstand a lot and still really deliver some impressive growth and free cash flow numbers.

Jim Heppelmann:

Yes. If you go back to our Investor Day I'll remind you that we really feel like we're starting the third phase of our SaaS project. And the Windchill part of it started back in the first phase. So for us we've had a lot of success with cloud. And it's one of the growth drivers for Windchill. It has been over the last 18 quarters. I think the difference is, we didn't like the profitability of the cloud part of the Windchill cloud business as we used to do it. So this Windchill+ is really our shift to the multi-tenant model, which to the customer doesn't look much different. But to PTC it looks quite a bit different and produces quite a different outcome in terms of profitability. So, I think, customers like the Windchill in the cloud before. They still like Windchill in the cloud, because PTC likes Windchill in the cloud better now. And that's causing us to open the floodgates a little more, because it's a more attractive business for us now.

Jim Heppelmann:

Next question.

Jim Heppelmann:

Hello, Adam.

Jim Heppelmann:

Yes. I mean, the key thing -- let's focus mostly on IoT, because it's much larger. The key thing is there's two key use cases for IoT -- three key use cases actually. One is smart connected products, which are the products you manufacture. The second one is smart connected factories or we call it, smart connected operations. That's the products you buy and operate in your factories. And then the third one is, really this Navigate strategy of bringing in information from a lot of different systems, kind of, an environment that just makes lightweight users more productive and so forth. But anyway, all of our discrete manufacturers produce products and they all operate factories. So what we really said is, for efficiency reasons and success reasons, all that stuff, we ought to focus on selling to our customer base with more veracity than just selling to anybody. And so Troy Richardson put in place a stronger focus on cross-sell. And we're starting to see some, let's say, green shoots, particularly in DPM, Rockwell sold through the Rockwell base, but all the deals we sold really came from the customer base in PTC. That's good. And we think there's something there. So, keep in mind, when we think about IoT and AR in Q3 and Q4, there's a couple of things I want to point out. First of all ARR is a rolling four-quarter metric. So three of the four data points that say what's going to happen in Q3 are already in. And two of the four data points that say what's going to happen in Q4 are already in. So we have some visibility. But now, what we -- what the rest of it hinges on is, bookings churn and backlog or deferred ARR. And so, we're looking at all this stuff. We look at the pipeline, we look at the forecast. We try to estimate bookings. And we don't have a crystal ball. And sometimes we're not perfectly right. But anyway, we have a read on what we think churn will be and that's what we're looking at. And we're confident that that's going to get us to that two handle by the end of the year.

Jim Heppelmann:

Yes. Well, coincidentally Scott Genereux, the Chief Revenue Officer from Rockwell happened to be at PTC today, so I had lunch with him and we talked it over. And the truth is, DPM is a better fit for Rockwell than is ThingWorx as a platform, an IoT platform. And -- so, Rockwell is leaning in and their consulting arm Calypso is really leaning in and PTC is leaning in. So I think there's some promising again green shoots there. We were pleased to see Rockwell participate in DPM success right from the start. And I think, it gives us a better foundation, if you will to build success. It's a better fit for what both PTC and Rockwell are capable of. We're both solution providers. This is a solution versus a platform.

Operator:

Our next question will come from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Jay Vleeschhouwer:

Hi, Jim, Kristian how are you? Jim, starting with you on the Intland acquisition, could you contrast the rationale for that acquisition and the addressable market from that acquisition as compared with the rationales you spoke of 11 years ago almost at a day when you bought MKS, which ultimately became a relatively small part of the business. So what's different now in terms of let's say an ALM arms race that makes Intland genuinely compelling and perhaps put it in the context of the overall closed-loop life cycle management strategy. And then secondly for you Kristian by the end of the fiscal year when you net out the effects of the restructuring particularly in the field, minus a service headcount with the ITC transaction, the add back from Intland, where do you think your headcount ultimately lands at the end of the fiscal year?

Kristian Talvitie:

Yes. Hey, Jay. Given all the moving parts and it's obviously difficult to pinpoint precisely, but I'd say we're probably somewhere in the 6,700 range.

Kristian Talvitie :

Should be -- do you mean flat year-over-year?

Kristian Talvitie :

Yes, that's right. And I mean I'm also trying to factor in the somewhat challenging hiring environment. If possible we'd like to see that we could say 6,700 to 6,800. I'm just trying to be pragmatic.

Jim Heppelmann :

Yes. I mean, Jay, you look at this data, you know we have a lot of positions open on one hand. We have attrition on another hand and then we're spending some employees out through this transaction. So it is a little hard to net those out, because it's difficult to pin down attrition and pin down hiring success. But headcount won't go up dramatically here in the context of all that, it will probably be flattish. I mean, as a reasonable approximation.

Operator:

Our next question will come from Yun Kim with Loop Capital. Please go ahead.

Jim Heppelmann:

Hey, Yun.

Jim Heppelmann:

Yes. So I think we have tremendous scalability in ecosystem. But just for the benefit of everybody, let's turn the clock back a little bit. If you go back 10 years about a third of our revenue was services. And now it's 9% going to, I don't know, 6% or so as a result of this transaction. And what happened over those years in our quest for margins, which was very successful, we said, let's stop chasing services. Let's give it to the ecosystem. The ecosystem took that differential from us and added 10 times that on their own. So literally the ecosystem is doing billions of dollars of services around our stuff. It's not a one partner. It's in many, many, many partners. With some of them having names like Accenture and Deloitte and Cognos and not Cognos, Cognizant and Calypso and on and on and on many having smaller firms you never heard of. So there's a lot of capacity out there. The thing is these projects we can't just give to a partner, because in the end we're taking the systems into our running system. It has to be done very carefully. We have for many, many years subcontracted work to ITCI. We could have subcontracted these projects to ITCI, but I said, I don't really want that in our P&L, because subcontracted projects tend to have even less margin than projects we do with our own employees, of course, there's two margins there. So rather than build up a subcontracting business, because we didn't really want to go hire all those people, we just entered into this arrangement. It's a great win-win-win. ITCI is happy to grow the services business. That's the business they're in. By the way, they're fundamentally an Indian company. So they have a deep reservoir of access to lower-cost labor in India and that – a lot of these projects will end up being done in India with their Indian capacity. And it will give us the talent, because we're seeding DxP with the best in the industry which are PTC's own services employees. So DxP could have been a joint venture or something like that, could have been a subcontracting approach. We just said, you know, what we're a software company. We want to be high margin, high-growth software, let's PTC focus on that and this is a good way to solve that lift and ship service to pave new problem.

Jim Heppelmann:

Well, we've been doing a lot of adoption of Windchill in the cloud that phase one offering. So we're just going to pivot that to Windchill+ now. Windchill+ by the way, so is not just Windchill in the cloud. It's Windchill+ a bunch of things plus cloud plus all the Atlas benefits plus single sign-in across the suite plus our workflow engine, our BPM workflow engine, plus our visualization in the cloud capabilities. So we're really trying to create a differentiated offering in part to help justify the higher price point, but also to make it more attractive to go to the cloud. Just for fun I tell people think of like a first class seat then in an airplane versus a coach seat. It isn't just at the seats bigger. And you wouldn't want somebody to say, well, I want to sit in coach but have a bigger seat at a lower price point. That's sort of like saying could I have a system integrator put my Windchill system into cloud for me? So what we're doing is offering a bundle of things. It's a bigger seat. It's a bigger TV, it's better food. You get to board first. You got plenty of room for your luggage, quicker access to the restroom. I mean, all those stuff that would be associated with a first-class seat and can't be unbundled and bought off a Chinese menu. So that's really what we're doing with Windchill+ and then we're going to follow the same strategy with the rest of the products as we're ready.

Jim Heppelmann:

Yeah. Thank you, Yun.

Jason Celino:

Great. Thanks for fitting me in. When I think about PTC's main segments on the SaaS acquisitions that we've seen over the last few years, we saw in Shape for CAD arena for PLM and no influence for ALM. What other areas may PTC need to upgrade via make or buy for SaaS?

Matt Shimao:

And Savannah, we'll take our final question for today.

Jim Heppelmann:

Hey, Matt.

Matt Broome:

Hey, Jim and Kristian. Thanks for -- thanks following me up a question. I guess where are you in terms of expanding tape and arena sort of go-to-market activity across your reseller channel globally. And does that become easier now that SaaS is sort of going more mainstream, so to speak now that Windchill Plus is here.

Matt Broome:

Perfect. Thanks very much.

Kristian Talvitie:

Thanks everybody.

Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC's 2022 First Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I'd now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

James Heppelmann:

Thanks, Matt, good afternoon, everyone and thank you for joining us. Turning to slide three, I'm pleased to share that PTC delivered another strong financial performance in fiscal Q1. We executed very well building on the momentum we saw in Q4. To simplify things, please note that throughout my prepared commentary, I will only discuss growth rates in constant currency. ARR came in at $1.507 billion, which was better than the $1.5 billion we had guided to at the recent Investor Day. that represents 16% growth, 11% of which was organic. Adjusted free cash flow was also strong at $145 million, which was up 20% year-over-year and better than the $140 million expectation we set at the Investor Day. We're off to a very strong start in fiscal 2022. Turning to Slide four, of particular note was our booking strength. Bookings were up double digits organically and high teens overall against the very strong COVID bounce back quarter we saw in Q1 of fiscal '21, when bookings grew more than 30% over the prior year. To put it in perspective, given the tough comparison against Q1 of last year, we had planned bookings to actually be down slightly inclusive of Arena. So this performance was more than 20% above plan. I know that some analysts and investors had voiced concern that the restructuring work we did in late Q4 and throughout Q1 would distract us, but obviously we didn't see that. The strength was broad based across direct sales and resellers and was achieved with no mega deals. Rockwell came in ahead of their part of our plan too, which was great to see and suggest my concerns of them being distracted may prove overstated. Arena contributed the inorganic element of bookings growth with another strong bookings quarter coming in above plan as well. With the Arena acquisition getting round tripped here in Q2, Arena becomes part of the organic results going forward and their low twenties growth rate will then add another tailwind to the organic results. Arena's been a great acquisition. Bookings growth was particularly strong in PLM and in both Europe and Americas. From a macro perspective, global PMIs remain in expansion territory while digital transformation in SaaS continue to grow an importance as secular drivers. The interest in digital transformation in SaaS has been driving strong bookings for what is very sticky software, which when layered into a recurring revenue model that is atypical of industry peers has allowed PTC to deliver performance in excess of market growth rates. This happened right through the pandemic, especially in the large core business that represents about 70% of our ARR and we fully expected to continue going forward. These factors gave us to raise the lower end of our ARR guidance range, which at the new midpoint basically means we rolled our Q1 beat forward. Now let's take a look at the ARR performance by geography on Slide five, before turning to business units. In Q1, we saw strong ARR performance across all geographies. Our ARR growth in the Americas was 19%. All product segments grew with key growth drivers being the acquired arena contribution and the velocity business unit overall layered on top of another strong quarter in the core CAD and PLM business. In Europe, our ARR growth was 13%. We saw strong results across the board in Europe, with the strongest drivers of the growth being our Digital Thread growth and core businesses. Europe has the largest mix of channel versus direct and the resellers continue to perform well. Our ARR growth in APAC was 14% with growth, primarily driven by our Digital Thread core business. Next, let's take a look at the ARR performance of our various business units, starting with the Digital Thread group on Slide six. In our largest product segment, Digital Thread core, we delivered yet another double digit performance in Q1 with 11% growth. Within this, CAD and PLM both grew double digits with strong growth across all three geographies. This is the 17th consecutive quarter of double digit ARR growth in the core business and as we roll out our more aggressive SaaS strategy, I expect we'll see many more. In the Digital Thread growth, which is IoT and AR, we saw ARR growth of about 14% consistent across both elements. This was in line with our plan and the mid-teens near term growth expectation we set at the recent Investor Day. While this level of growth remains accretive to company growth, we continue to expect an acceleration of growth into the twenties as we get into the back half of the year. The biggest driver of growth in Q1 was from expansions, especially in Europe and APAC. We believe market conditions in IoT improving, and we like the way the pipeline for a new DPM offering is developing through both PTC and Rockwell channels. For AR, we continue to see a tremendous level of interest, but the market remains nascent. Perhaps most importantly, the formation of the Digital Thread business unit at the start of F Y '22 has driven important initiatives to increase our focus on cross-selling of IoT and AR into the core CAD and PLM customer base. FSG had a great Q1 with 6% ARR growth. The expansion deal we recently announced with the US Air Force, both increases and extends this key relationship for up to five more years. Contracts like this demonstrate the value that our customers are realizing from served logistics and other FSG products, such as retail PLM and ALM. You may remember I noted at our Investor Day that having FSG grow in the mid single digits rather than flat would be a helpful upside growth driver. So I'm pleased to see FSG post another strong quarter. Let me run through a couple of quick customer anecdote to give you a sense for our Digital Thread customers and how they rely on us. On Slide seven MAN Energy Solutions is the world's top provider of large bore engines and turbo machinery for the maritime and energy industries. The company manufactures complex parts and nearly every engine they make must meet unique customer requirements. Before implementing Creo, they relied on manual outdated processes that slowed design and production. With Creo, they've been able to transition from 2D to a full 3D model-based approach. Creo's broad range of toolpath automation capabilities enable them to save time in the programming of the tool pass used to machine the large complex engine parts greatly increasing efficiency in transitioning from design to production. Turning to Slide eight, you may have noticed we announced a deal with the -- we announced that the German company Sheffler has expanded its relationship with PTC and I'd like to share a bit of the backstory. Sheffler has been a long time Creo customer and has successfully deployed wind Welsh within engineering. But back in 2017, one of our PLM competitors announced large PLM deal with Sheffler that appeared to cap PTCs expansion opportunity. But that system didn't ultimately stick as Sheffler has now decided to consolidate on PTC systems with Welsh [ph] being the backbone and is broadly deploying our solutions in their standard out of the box fashion so that Sheffler can participate in the full power of our Digital Thread portfolio. I'm very excited about this collaboration and the further expansion that Sheffler is exploring with our IoT and ARR offerings. On Slide nine, you'll see how EMA [ph] Group a global business that delivers packaging machines, services, and solutions to a wide variety of industries was looking for a way to expand their control room offering to help their customers improve overall equipment effectiveness and reduce downtime. As long-time users of PTCs Creo and windshield, EMA decided that ThingWorx was the ideal IoT solution for their initiative, and that Kepware could provide connectivity only to their machines, but to the other vendor's machines deployed alongside them. EMA has successfully launched new revenue streams by enabling 24 7 monitoring of customer production lines and improved OEE by up to 16%. Euphoria integrated with ThingWorxs is the platform of choice for the US Air Force training initiatives. Slide 10 highlights the work that PTC partner Vektrona has done with the US Air Force. With finite training resources and limited capacity, the US Air Force set out to incorporate augmented reality into their maintenance and munitions training. Vektrona using [indiscernible] studio worked with US Air Force to create immersive 3D AR experiences for phones, tablets and the HoloLens 2, that are designed to accelerate learning, improve work performance and facilitate remote training. The improved training shows better engagement and information retention with continuous and repeatable task training available regardless of the system or aircraft type. Turning to Slide 11, the velocity we use ARR growth in Q1 was more than 650% due to the inclusion of Arena and 53% organically, which would be on shape. If you were to add Arena's pre-acquisition results into the prior year to get a better pro forma comparison, then you'd have the velocity business unit growing at 28% in Q1. That 28% is a mix of Onshape growing at 53% in the large Arena business growing in the low twenties. Growth of both Onshape and Arena is multiple times higher than market rates clearly demonstrating that industrial companies see the benefits of SaaS. We continue to ramp investments to expand technology leadership and to broaden the geographic presence of our Velocity businesses. On Slide 12, Beta Technologies, a leading developer of next generation electric aircraft for the cargo and logistics market, sought a cloud native product development platform where everyone would be working with one single source of truth without the workflow restrictions of traditional file based design systems. Beta turned to Onshape because of how it enables real time collaboration, allowing the engineering team to work from any location while streamlining their communications during the design process. To profile an Arena customer, Potrero Medical on Slide 13 is a predictive health company developing the next generation of medical devices, leveraging smart sensors and artificial intelligence. Potrero needed a scalable quality management system to support its growing product development and compliance needs, including satisfying FDA audit requirements. Arena was the right solution offering a cloud native QMS with a quick implementation, leading to ECO cycle time reduction of 30% and non-conformance improvement of 20%. As a final topic, I'd like to give you a quick update on our SaaS acceleration initiative on Slide 14, we've made tremendous progress in the past 90 days since we announced the more aggressive strategy. We've launched our SaaS program management office, which was modeled after the very successful approach we used to drive our subscription transition several years back. Our field organizations transitioned to the new two in a box customer success organization model without missing a beat. We converged our cloud and tech support organizations with product development to deploy the DevOps type of approach you see in virtually all SaaS companies. We've made good progress advancing our offerings, especially the windshield multi-tenant version, which will go into production shortly this quarter and we made good progress preparing the SaaS conversion offerings that will power the hundreds of lift and shifts that will happen in the coming quarters and years. We have more work to do, but we're certainly off and running. The time for SaaS has arrived in our industry and PTC is very well positioned. We're already the SaaS leader in our space with continued strong SaaS growth in windshield and FSG and high levels of growth in our cloud native Velocity Business unit. Sharing the Atlas SaaS platform, we have a dual strategy to win with Onshape and arena powering a new agile product development approach while we transition our Digital Thread portfolio and existing customer base to SaaS, to elevate the platform strategies that so many larger companies have. To wrap up on Slide 15, I'm pleased with PTC's position and the opportunity that lies ahead. Q1 gave us a strong start to what we expect to be our fifth consecutive year of double digit ARR growth. Our portfolio of products is unique and compelling and obviously aligns well to customer demand. Our results have been consistently strong for many quarters, but we're poised to accelerate growth as the SaaS tailwind blows harder in coming quarters and as we gain more momentum with our IoT and ARR initiatives in the back half of the year. We're poised to drive higher levels of profitability too following the organizational changes we've already implemented and as our start-up businesses continue to mature up their J-curves [ph]. The company has never been in a better position to create shareholder value. With that, I'll turn it over to Kristian for more details on the financial results.

Operator:

[Operator instructions] Your first question will come from Andrew Obin from Bank of America. Please go ahead. Your line is open.

James Heppelmann:

Andrew it's Jim? No, actually it's not really, it's not really a frequent topic in our conversations because well, first of all, since you said you missed the first minutes, one of the things I pointed out is that our bookings came in very, very strong and I explained about 20% higher than plan. So we had a very, very strong booking quarter and notable in that was PLM although frankly, the strength was broad based. I think the key thing to remember is that PLM is really associated with preparing product data in engineering that will then subsequently be used in manufacturing and perhaps in aftermarket service and it's collecting data from supply chain partners and so forth, but production problems in a supply chain don't necessarily impede the collaboration during the engineering and the preparation for production process. So I think people are saying like, maybe I can't get chips to complete the product, but that doesn't mean I should stop designing the next one because if it does then I'll fall behind. So I think that, our view would be that the product development process has largely been unaffected by the supply chain process. Now, some other, we talked about how perhaps COVID had an impact on IoT. Perhaps the supply chain a little bit, although I think muted compared to COVID. So to me, the supply chain thing is fairly small factor in our results. We just see very little correlation between what's happening out there with supply chain problems and what's happening with our pipeline and frankly, with our bookings,

Yun Kim:

Hi, Jim. Can you just talk about IoT business in terms of the large deal activity, what kind of trends are you seeing there? Obviously, you are expecting that business to accelerate in the back half, second half of the year. If you can talk about whether that confidence is coming from the, improvement in the large activity, or is it just the overall volume of the activity around IoT and then also if you can just come in around deal size activity around the ARR business as well. Thanks.

Operator:

Your next question comes from Jason Celino from KeyBanc Capital Markets. Please go ahead. Your line is open.

James Heppelmann:

No, we for sure started talking about it with customers, ramping up that process, we got to educate a lot of people and they in turn have to educate customers, but we've certainly made some progress and I can tell you the customer interest is actually quite high. You should know that actually customers were pushing us a little bit to get going with such initiative. So, I feel like the demand is there, and in fact, again, just reflecting on what we told you, that business has been growing about 30% and Christian mentioned, we posted another quarter just like that without us really invoking the new strategy yet. So there's lots of demand. We're just looking for a model where we can promote the demand because we like the margin profile better and that's, what's coming into place here in Q2.

Adam Borg:

Great. Thanks so much. And maybe just two quick ones. Just on the Sheffler win that you announced yesterday and highlight on the call earlier, one of the things I thought was really interesting in the press release was this opportunity around some more vertical specific or market specific solutions targeting either automotive or industrial companies. So maybe Jim, you could just talk about that. And maybe just as a quick follow up just maybe for Christian, anyway, you could talk about this transit, it's great to hear the early feedback on the SaaS application efforts, but anyway to comment on how much this has contributed to bookings or the pipeline at least qualitatively. Thanks so much.

Adam Borg:

Exactly. Yeah. Any way to qualitatively comment from both, either bookings or a pipeline perspective.

Kristian Talvitie:

Maybe Adam, I could just add, we launched this phase three strategy 90 days ago on the earnest call. And there's nothing we've seen since that makes us any less bullish than we were back then. It looks like a really nice opportunity for PTC and we're pushing forward ahead as aggressively as we can, because we'd like to bring that very upside growth driver, closer in. So it has a bigger impact on '23 and '24 and so forth than it would otherwise have had.

Jay Vleeschhouwer:

Okay. Thank you. Hello. Hi, Jim. Hi, Christian. Couple things with regard to the strength you noted for PLM at your partner conference six months ago, back in the summer management presented to the channel, your concept that PLM was no longer just an engineering vault that it was becoming a more, what you call multi-system multi-discipline concept. And the question is to what extent is that broader, more diverse view of PLM a current part of new business or in the pipeline for new business as compared to the more conventional historical way of of thinking about PLM? By our calculation, you were already the second largest brand by revenue in PLM and maybe talk about what some of the drivers are to that? And then just a quick clarification you referred earlier to cross sell at the Analyst Meeting last month in the slide deck you referred to cross sell 10 times and relatedly account based selling PTC has often over the years, talked about cross sell, but maybe talk about what's different this time in terms of resources and programs across your various segments in your new customer segmentation model.

Operator:

Your next question comes from Ken Wong from Guggenheim Security Partners. Please go ahead. Your line is open.

James Heppelmann:

Yeah, the let me, let me tell you, none of that actually contributed to the double digit growth because that was a Q4 deal. We released it when we had approval to release it and I commented on it because it was an important customer and so forth. And let me say that deal again, that was closed in Q4 both represented five years of extension, but also about a 50% growth in a ramp that happens over I think it's three years. So it roughly goes from a $10 million run rate to a $15 million run rate over three years and stays there for a couple more that's what the contract contemplates. So some of that will come into ARR in Q4 this year, but the bookings actually were in Q4 last year. So that strength the strength we saw in Q1 was exclusive of that air deal, which just means was really great strength. So, anyway it was hard to pin down where'd the strength come from because it came from CAD, it came from PLM, the the IoT number was actually pretty decent. It didn't all go into ARR. And then of course the velocity numbers and the FSG numbers. So it was broad based in all geographies and really in all product lines.

Matthew Broome:

So Jim I mean, just, I guess, just on that so just deal that I can just mention get given the importance of supply chain management right now, are you seeing like ramping demand to the solution elsewhere and following on from that, is there a chance that FSG AR growth could actually accelerate on the back of that demand beyond the sort of the mid single digit level and actually come sort of more strategic in a way?

Operator:

Your next question comes from Matt Hedberg from RBC Capital Markets. Please go ahead. Your line is open.

James Heppelmann:

Yeah. for sure. So the standard thing, I think maybe over the last couple years industrial companies have realized that they should be using software and not developing it. And so we saw this in our IoT business, and it's been why we've been heading up the stack with solutions like DPM is customers would like to buy the software and use it, not buy some kind of a platform and create it, because they just don't really know how to create it if I'm frank. So Sheffler had gone down the path of kind of like I said, low code environments and came back to standard products and then they end to end thing, for sure the CAD data that's created in Creo and managed in windshield, gets used, for example, in augmented reality manufacturing and service instructions, much later and in a different part of the company, if it's all well managed and that connectivity from IoT, well, let's say from CAD to PLM to IoT to AR is what we call the digital thread. And so we actually see so much interest in this that we kind of organized around that principle. Let's stop presenting these products as kind of independent things and let's shine a light on how well they work together in an end to end solution. And by the way, how they're all ready to go that this is something you just turn on and use. And that's really what one Sheffler over, but I can tell you Sheffler is not unique at all and it's really we're organizing to respond to that. SaaS is helpful by the way, because if you want a lot of technology working end to end, it'd be better not to ship it all to the customer site because it gets complicated. The customer would like to just use it, not, set it all up and care and feed for it on, on premise.

Q - :

Okay, great. Hey guys. Thanks for taking my question here. Hey Jim, Hey Jim, maybe, Hey Christian, Jim, maybe for you. it was great to hear the PLM strength this quarter in bookings. with other companies that have done shifts like this, there's always a risk, I guess, of customers behaving differently, right? Whether that's slowing purchases to see what's coming or maybe pulling forward purchases before something new comes out now. Now just to be clear, it doesn't sound like that happened here, but can you just stress test that for us a little bit and what you sort of look at to sort of manage what is, more choices for our customer to make. Does, that make sense?

Q - :

Yeah, that's right. Windshield, no windshield specifically.

Operator:

Your next question comes from Joe Vruwink from Baird. Please go ahead. Your line is open.

James Heppelmann:

Christian, let me again, take a stab at that and maybe you'll find things to add. So I think if you look at the bookings again, they were phenomenal and it's hard to pin down. It wasn't one geography, it wasn't one product, it was all geographies, all products. So I think it tells us that the end market is very healthy. And I would say for two different reasons. On one hand, the PMIs are in good shape. That's helpful. On the other hand the interest they have in the digital thread, digital transformation story in the interest they have in SaaS is secular. That interest is not related to the PMIs. It's kind of independent of them and so I think that we're just in a very healthy situation where industrial companies are leaning in on trying to get more digital. They see PTC as having a fairly unique and compelling portfolio and their interest in engaging and trying to make their companies more efficient. I can tell that Sheffler, for example, it's one of the top initiatives in the company is to get more digital and as it relates to the whole product life cycle, the partners PTC, and we see that kind of phenomenon happening in a lot of places in the industrial world. So I think it's just good, strong secular and as well, macro environment out there right now. But I'll remind you that we've had good performance, even when the macro environment wasn't so strong. So all things being equal, I like the strong macro, but we're 17 quarters in with double digit growth in the core business. And there were a lot of bad macro quarters over the course of those 17. So I think it really is the secular driver Kristian, do you want to take?

James Heppelmann:

Yeah. Well, keep in mind, perpetual drove bigger upfront purchases. That's right and subscription or SaaS tends not to.

James Heppelmann:

Yeah. It's good. Healthy business. Okay. Next question.

Blair Abernethy:

Thanks very much. Guys, just maybe a quick question on around partnerships in particular, if you just give us a little a little deeper dive into how things are going with Rockwell and as well on the simulation side with Ansys.

Operator:

Your last question comes from Sterling Auty from JPMorgan. Please call ahead. Your line is open.

James Heppelmann:

Yeah. Christian, I'm thinking the numbers were largely done, but not completely 80%, 90% done.

James Heppelmann:

Yeah. we'll be hiring people throughout the year, so, but in terms of the people who are exiting they're largely exited by now that largely happened within the first quarter.

James Heppelmann:

Okay. Well thank you all. There's a lot of good -- lot of good questions and I think good answers because the business is performing very well right now. ARR is doing well. Bookings are doing well. Free cash is doing well. I think we executed through good times and bad. We executed through the changes we made over the last quarter and we're set up to do pretty well for the balance of the year. So we very confident and look forward to talking to you all in 90 days. If we don't happen to cross paths with you sooner in an investor event or what have you. So thanks a lot for joining us and have a good evening.