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..

Good afternoon. Thank you, Lisa, and welcome to PTC's Fiscal 2023 second quarter 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, 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, April 26, 2023, 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 the common 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..

First, Autodesk has a strange fiscal calendar, where 11 of the 12 months of their fiscal '23 actually happened in calendar '22. Most of the companies in this analysis, including PTC, I would say this is really a '22 comparison.

Second, there are some significant onetime factors involved here, too, because PTC's fiscal '22 cash flow was negatively impacted by the restructuring I mentioned, whereas Autodesk cash flow during this period was helped by their practice of building multiyear subscriptions upfront, which they've since committed to move away from.

Putting those points aside, obviously, the future matters more than the past. So it's interesting to consider the trajectory of companies in this peer group going forward. The two charts on the lower half of the slide have been created using consensus data pulled directly from FactSet.

In the current year, based on strong growth and significant free cash flow margin expansion that PTC has been delivering, we're expected to move to the middle of the pack while Autodesk recedes. Next year in 2024, based on continued growth and margin expansion, PTC is expected to lead this peer group in the Rule of 40 as Autodesk defines it.

Of course, these are just consensus models and not actuals, but we're comfortable with the expectations shown here for PTC because they align to the midterm guidance ranges we provided at our November Investor Day. We'll plan to revisit this useful chart periodically to track how PTC is doing as compared to peers. Turning to Slide 8.

Let's look at ARR growth by geography. ARR growth in Americas was 29%. In Europe ARR growth was 25% and in Asia Pacific, ARR growth was 19%. All three regions benefited from the acquisitions of ServiceMax and Codebeamer, albeit to differing degrees. Next, let's look at ARR performance of our product groups on Slide 9.

In CAD, which is those products that enable authoring of product data, we delivered 10% ARR growth in Q2 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.

Shave Blecher, recently noted in his research that Creo has been the fastest-growing major CAD system for 12 of the past 16 quarters. Onshape is growing at a considerably faster rate than Creo. So PTC is clearly taking shares in different parts of the market with both products. I feel we have a great hand to play in the CAD market.

In PLM, which includes those products that enable data and process management, our ARR growth rate in Q1 was 39% or 16% organic with the inorganic growth coming from both ServiceMax and Codebeamer, Codebeamer having enjoyed a tailwind from the ALM mix shift factor I previously mentioned.

In PLM, we continue to significantly outperform the market, which has been growing approximately 8% in core PLM, but more like 11% when you roll in the extended PLM categories of ALM and SLM. ARR growth for PLM in Q2 was primarily driven by Windchill, supplemented by strong percentage growth in arena, IoT and SLM.

PTC has a strong hand to play here, too. As clearly, we are taking significant market share in the PLM market as well. Turning to Slide 10. Now that 2022 is behind us, we thought it would be helpful to publish PTC's calendar year performance for those analysts who wish to make growth and market share comparisons on that basis.

As you can see, calendar 2022 was a strong year for PTC, and it was our fifth consecutive year of double-digit ARR growth in both our CAD and PLM segments.

In PLM, the addition of ServiceMax into our portfolio brings management of the customer's installed base of products into our product life cycle management offering and this significantly expands our category leadership. On a calendar 2022 basis, inclusive of the $153 million ServiceMax contributed on a pro forma basis, PLM revenue was $1.15 billion.

ARR growth was strong at 20%, with organic at 18%, which suggests we're widening the leadership gap. In Canada, results were all organic in calendar '22 and growth here too remains well ahead of the market. CAD revenue was $788 million in calendar '22 and the ARR growth rate was 10%. PTC's growth rate in CAD is best-in-class.

So while we're not the category leader, given the differential growth rates we are in the passing lane. Turning to Slide 11. In just a few weeks, we're hosting our big LiveWorx event on May 15 and 16 here in Boston. This is our flagship event dedicated to our customer and partner ecosystem, and we're also welcoming investors to join.

It's a great way to network and learn first-hand all things PTC. This year, we're excited to try a new approach to maximize the investor experience.

In addition to having an exclusive investor lunch session on sustainability as well as an executive Q&A session, we have organized an immersive investor track, which will enable you to attend our main keynote and our spotlight sessions on ServiceMax, Windchill and Creo Plus sitting alongside our customers and partners.

We will host a special demo tour for investors, and you'll be free to explore and learn more on your own too. There will also be opportunities to network with our executive team and our Board will be present as well. We would love to see you at LiveWorx. If you need registration details, please reach out to our IR team.

On Slide 12, one of the demos you can check out in the Windchill section will come from Fresenius Medical Care. Fresenius is the world's leading provider of products and services for individuals that need dialysis treatment.

Fresenius produces dialysis machines in over 40 manufacturing facilities around the globe and also runs a network of over 4,000 dialysis clinics. There's a lot of inherent complexity in their product life cycle.

Fresenius saw the opportunity to bring down treatment costs and improve their products by building a digital thread workflow across their engineering, manufacturing and service domains. Windchill was selected as the backbone to bring product data together and enable better collaboration across internal groups and with external partners.

Fresenius subsequently standardized on Creo and has since adopted ThingWorx for smart connected products and for smart connected factories. Currently, they're exploring how they might leverage ServiceMax in that digital threat. Fresenius is a great case study that shows the breadth of what PTC technology can enable.

For another teaser on Slide 13, one of the demos you literally can't missing is the Komatsu wheel loader. It's big and yellow and weighs 30 tons. Using Creo and Windchill Komatsu engineers and manufacturers' equipment that customers use for decades in the field.

Because Komatsu's aftermarket service business contributes significantly to their overall financial results, they've been investing in software to make the services business more efficient and productive.

Komatsu has been using PTC service life cycle management software, including Servigistics since 2006 to optimize spare parts inventory and Arbotex since 2015 to streamline the availability of service instructions. Last year, Komatsu expanded their investment in service technology by selecting ServiceMax.

Komatsu purchased software independently from PTC and ServiceMax when we are still separate companies, but represents a good example of the type of customer where we think we can be successful cross-selling because they really appreciate that 3D model-based digital threat.

Komatsu is also a poster child for my point that for every customer that ServiceMax currently has, PTC has 10 more that look like them. Companies that use Creo and Windchill to produce products that have long service lives. Summarizing then on Slide 14 and fiscal '23, we're continuing to make good progress toward our midterm guidance targets.

With solid first half results, we're well positioned to achieve our full year ARR and free cash flow guidance, which ticked upward this quarter. PTC has expanded our clear category leadership role in PLM, which has become a must-have technology backbone for digital transformation at industrial companies.

The addition of ServiceMax further extends what was already a unique portfolio of interconnected digital threat capabilities across the full product life cycle.

Second, with organic growth at double-digit levels already, we're in the early days, but executing well against the major on-premise to SaaS transformation that should provide a multiyear growth tailwind. You'll learn a lot more about our SaaS strategy at LiveWorx.

Third, we have a well-earned reputation for driving margin expansion that goes back more than a decade and the proactive changes we made are driving high levels of free cash flow growth through the midterm guidance period.

Fourth, with organic ARR in the low teens, juxtaposed on PMIs in the upper 40s, I trust you would agree we are actively demonstrating that our business model is very resilient. Q2 bookings were solid and churn outstanding. Top line growth and bottom line profitability are approaching peer leadership levels even in this challenging macro environment.

And finally, we're led by a team that has deep expertise and a proven ability to drive growth and margin expansion. I want to congratulate Mike DiTullio, who was promoted to President and COO in the quarter. Mike and I have decades of experience working together, and I'm very much enjoying this new division of labor.

Congratulations also to Neil Barua, who was previously the CEO of ServiceMax and joined PTC as the President of our SLM business that combines ServiceMax with PTC's broader suite of service-related technologies and use cases. We're pleased to have Neil join the team and love what he brings to the business.

With so many positive trends going our way, I continue to believe PTC has a tremendous opportunity to create shareholder value. With that, I'll turn it over to Kristian for his more detailed commentary on financial results and guidance..

first, whether organic bookings are flat or a little better or a little worse than that. Second, how inorganic bookings perform also matters. The scenarios we're showing on the bottom half of the page only contemplated organic bookings.

In addition to flattish organic bookings, we expect total bookings growth on a year-over-year basis, supported by bookings from ServiceMax and Codebeamer. Third, whether churn comes in flat or continues on the trend of slight improvement we've seen in the first half. Fourth, we saw in Q2, in particular, increased customer interest in ramp deals.

These are multiyear contractual commitments from customers where the ARR increases during the contractual term. In practice, what this means is that the amount of ARR we get in year one is smaller than the exit run rate, which is what creates deferred ARR for us.

These are great deals in the sense that they demonstrate significant customer commitments to PTC. And with low churn rates we have, these deals bode well for future ARR growth. And lastly, it probably goes without saying that the difference in timing of booking a deal and when the contract term actually begins, matters as well.

We count the booking when we sign the contract, but ARR and revenue start only when the contract term begins. We have consistently called this out as a factor in ARR, especially in Q4 when we may sign a contract in Q4, but for a variety of reasons, it doesn't actually start until Q1.

This also can create deferred ARR for us, but it's just short-term deferred and the timing difference is generally measured in days or weeks. A lot of moving parts for sure, but the net result of all of this is that we've raised the midpoint of our ARR guidance by approximately $8 million from when we started the year.

On the free cash flow side of the equation at the beginning of the year, we said we thought $560 million was a good target regardless of the ARR outcome as we would moderate or increase spending based on the environment as we saw. As you know, we were cautious on spending and hiring in the first half, and that has served us well.

We're comfortable increasing the target to $580 million for the year, given the results in the first half and the outlook for the back half. While there is a tailwind from FX to be expected for the year, I'll remind you that FX rates in the first half are still below the FX rates for the first half of last year.

So we've not really seen much of a year-over-year benefit from FX thus far this year. And I'll also remind you, we generate about 65% of our free cash flow in the first half. But if FX rates hold for the second half, we should see some pickup.

That said, this will be offset by higher-than-anticipated interest rates and the increased investments we're making in select growth opportunities, namely Codebeamer, Windchill Plus and Atlas in the back half, and this is all factored into our current guidance.

Hopefully, this slide helps clarify at a big picture level, how we've performed through the first half and our expected range of outcomes for the back half.

Summing all this up, in the first half of fiscal '23, we've been demonstrating the resilience of the model and the stickiness of our solutions or said another way, the value that customers are getting from our solutions in an uncertain macro environment.

On the top line, we think the combination of flattish organic bookings compared to record bookings last year with additional growth coming from our more recent acquisitions and churn that is flat to improving is a compelling outcome in a difficult macro.

On the bottom line, we're continuing to be judicious with our investments being mindful of both long-term opportunities and near-term macro uncertainty. Turning to Slide 22. Although we're not providing separate guidance on ServiceMax, I thought it would be helpful to summarize the financial disclosures we made on ServiceMax in one place for you.

These are the same numbers we provided previously with one exception. Since we focus on software ARR, we updated the geographic region chart to show the expected ARR mix instead of the expected revenue mix. As part of PTC, ServiceMax continues to trend toward the numbers we gave you. Turning to Slide 23.

Here's an illustrative constant currency ARR model for the back half of the year.

You can see our results over the past six quarters and the two columns on the right illustrate what is needed to get to the midpoint of our constant currency ARR guidance for Q3 and Q4 of fiscal '23 because our ARR tends to see some seasonality, the most relevant comparisons are the sequential growth in Q3 and Q4 of fiscal '22.

The illustrative model indicates that to hit the midpoint of our Q3 '23 guidance range of $1.85 billion, we need to add $36 million of organic ARR on a sequential basis. This is $7 million less than the $43 million we added in Q3 of fiscal '22.

And in percentage terms, we need 2% organic sequential ARR growth to hit our guidance midpoint for Q3, which is at the lower end of what we've delivered over the past six quarters. Next, to hit the midpoint of our full year guidance range of $1.938 billion, we need to add $88 million of organic ARR on a sequential basis in Q4.

While this is $12 million more than we added in Q4 of fiscal '22, we expect previously deferred ARR and sequential ARR growth from ServiceMax that we didn't have in Q4 of '22. We expect these 2 things will more than compensate for the additional $12 million sequential increase when compared to Q4 of '22.

All things considered, we believe we've set our Q3 '23 and full year constant currency ARR guidance ranges prudently. Turning to Slide 24. I'll conclude my prepared remarks today by highlighting that we prepared for a storm, and we're demonstrating resilience in the midst of one.

For sure, the environment will continue to change around us, and we will continue to adapt accordingly while still pushing the envelope of what we can do for our customers. 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 also have a subscription business model and our products are very sticky with our customers. Given our results in the first half and the pipeline and outlook for the second half, we expect to deliver flattish organic bookings in fiscal '23 in comparison to record bookings in 2022.

We also expect our ARR growth in fiscal '23 to benefit from incremental ServiceMax and Codebeamer contributions. And on the top line, we conservatively expect flattish churn from the already strong level of churn at the end of fiscal '22.

Just as importantly, from a cost and operational perspective, we are lean, having already battened down the hatches a while ago. In addition to the cost optimization work we did last year, we slowed planned hires and backfills in the first half of fiscal '23. We're well positioned to deliver on our updated cash flow targets for the year.

And now at a time when many other technology companies are cutting costs, we're capitalizing on the strength of our business model and outlook by increasing investments selectively in long-term growth opportunities. So with that, I'll turn the call over to the operator, and we can begin Q&A..

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

Thanks guys. Cleaner quarter here. Maybe just my one question. This morning, your French competitor talked about a really strong pipeline for the year for them.

I'm curious on what you're seeing from a pipeline, large deal pipeline perspective, for yourself? And if you are, what types of end markets we're seeing strengthen?.

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..

Next, we'll hear from Nay Soe Naing, Berenberg..

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?.

Yes. Good question. So we believe that we're taking share with both products because both products are growing double digits. I mean, Creo is growing low double digits and Onshape growing at a multiple of that. So I think we're taking share of them in different parts of the market. Creo is a little bit in the upper half of the market.

And today, Onshape is typically a little bit in the bottom half of the market. They're both, for example, competing against SolidWorks but perhaps at different ends of the SolidWorks base.

Creo might be taking customers that have kind of outgrown SolidWorks and Onshape's taking customers that, for example, might feel like SolidWorks is too heavy, too expensive, too complicated, requires a system administrator. They just -- they really like the idea of the pure web-based technology. So both products are doing very well.

And in order to sustain that level of performance. Keep in mind for Creo, we're talking 22 quarters, 23 quarters now in a row we've had a double-digit growth rate, one of those numbers right now. You can't do that unless there's something good happening. And I mean, part of it is the business model, we're clear on that.

But part of it is we're winning a lot of new orders as well. Now what would the advent of Creo Plus deal. First of all, it's not yet in the market, but we're launching it at LiveWorx in a couple of weeks. That should be helpful. It should be helpful for two reasons.

One is it's more compelling, some of the advantages that are present in Onshape will become present in Creo. Some of the same characteristics. There won't be -- it won't be exactly like Onshape because it's fully Creo plus is fully compatible with Creo, and that's a fixed requirement.

But I think some of the real advantages of always being on the latest version and so forth will accrue to Creo as well. And then second all, we will ultimately lift and shift Creo customers to the cloud, and there will be an uplift there as well. So it's only helpful, it's only helpful..

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

Congrats on the execution on the quarter and looking forward to LiveWorx for sure. So just on this orders commentary. So were orders -- so were orders actually down in the first quarter? I'm still we're still -- I think there are still people trying to kind of pencil that out.

You mentioned these ramp orders several times in this presentation, which I'm sure influences the actual number that you're kind of reporting and why it may not line up directly with the change in ARR.

And then I guess as you look out and you say they're going to be flat for the year, does that imply they're going to be down at all at any point in the second half for bookings?.

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..

We'll go next to Ken Wong, Oppenheimer..

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..

Well, first thing to know, Ken, is there's nothing but goodness in ramp deals. They make it a little bit more difficult for us to predict ARR though because, for example, if we were to get a very large order, I suppose we could take a smaller one that started all at once and go get another order later to grow it.

But yes, in that environment, we'd rather take the larger order now with a ramp because it's got the customer locked in, ramps are irrevocable. It's not something Kristian talked earlier about churn, but just to be clear, you can only turn at the end of a ramp, not during one. So we like the commitment.

And if a customer is willing to make a commitment, we want to take it. But it just makes it a little harder for us to predict. And as Kristian said, in Q4, it's really hard because sometimes a ramp in Q2, the first tranche might start in Q3 or Q4. But in Q4, if it's a ramp, anything that's not in Q4 is in the next fiscal year.

So that makes it a little tricky to predict. But in general, ramps are great. And we do reward our sales team for getting them, but we also have a strange incentive that they get a little bit more credit for dollars to come in, in the front part of a ramp than they do for dollars to come in, in the back part of the ramp.

But they still get credit for dollars that grow as the ramp goes on. So we want the bigger deals, the bigger commitments. And of course, we want them to start as soon as possible and grow as soon as possible. And that's all a point of negotiation with the customers..

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

Great. Just for Jim on Codebeamer, it's nice to see the continued traction there. Is this more of an upsell motion or is this really tip of spear and maybe just as a quick follow-up on question on the incremental investments in the back half of the year.

Just where are you making them in R&D as the sales and marketing? Any color there?.

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..

And then on the -- just on the sneaky follow-up question. The second question on the investments. What I would say is it's probably, again, the primary areas are Codebeamer, Windchill Plus and Atlas. And in terms of where it is organizationally, it's probably, I don't know, 75% to 80% R&D, 20% and 25% sales and marketing..

We will move on to Jay Vleeschhouwer, Griffin Securities..

Good afternoon. Jim, you mentioned the PLM-ALM selection at a European auto. Could you speak more broadly about multisolution sales, PLM with SLM, for example, as examples of the implementation of closed loop? And you're probably talking about LiveWorx, but maybe speak about what you're seeing already in that regard..

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..

And everyone, at this time, that does conclude our question-and-answer session. We ask that you please you remain on the line for any additional remarks as I hand the conference back to Mr. Jin 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..

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today..