Good afternoon ladies and gentlemen, thank you for standing by and welcome to the PTC 2021 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 Emily Walt PTC's Senior Director of Investor Relations. Please go ahead Ma'am.

Thank you, Peter. Good afternoon, everyone. And thank you for joining us for PTC's conference call to discuss our third quarter 2021 financial results. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Before we get started, please note that today's comments included forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As a reminder, we will be referring to operating and non-GAAP financial measures during today's call. Discussion of our operating metrics and the items excluded from our non-GAAP financial measures and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related Form 8-K. Lastly we’ll be referencing our earnings presentation today, which you can find posted on our IR website. And with that, let me turn the call over to Jim.

Thanks, Emily. Good afternoon, everyone and thank you for joining us. I hope you and your families are well during these continued uncertain times. I'm pleased to share that PTC has welcomed many of our vaccinated employees back to our offices where requirements allow and we look forward to the day when we can do this on a global scale. Meanwhile, we're monitoring the growing concern with the Delta variant of the virus and hoping this new development doesn't lead to another round of business lockdowns. Before I dive into the quarter, I want to share some important news on the Investor Relations front. Emily is been doing a great job holding down the fort since Tim Fox left. But keeping up with IR demands is a big job and Emily was happy to hear that reinforcements are on the way. I'm pleased to announce the hiring of Matt Shamal [ph] as our new Senior VP of Investor Relations. Matt came to us as a recommendation from one of our largest investors and he came out on top following a thorough search process. Matt comes to us with a finance background in several successful stints on both the corporate side and the sell side of investor relations. He's a strategic thinker, and we're excited to bring him on Board. Turning to Slide four, with three quarters behind us, our guidance for FY '21 has us right on track to deliver mid-teens ARR growth and $340 million of free cash flow this year. That would be a fourth consecutive year of double digit top line ARR growth. And I anticipate we'll be discussing a fifth consecutive year of double digit ARR growth when we guide fiscal '22 in 90 days or so. While the stronger PMI numbers that we're seeing, can…

Thanks, Jim. Good afternoon, everyone. Before I review our results I'd like to note that I’ll be discussing non-GAAP results and guidance and most of the growth rate references will be in constant currency. So let me start off with a review of our third quarter results, and then we'll review guidance for fiscal '21. Turning to Slide 23, fiscal Q3 ARR of $1.42 billion increased 15% year-over-year and on an organic basis ARR grew 11%. Q3 free cash flow of $85 million was solid and in line with our expectations. Q3 revenue of $436 million increased 24% year-over-year as reported, or 19% in constant currency. Revenue performance was driven by strong execution, and also reflects the impact of ASC 606 on revenue recognition, as well as a modest contribution from Arena. The strong revenue growth along with continued financial discipline resulted in non-GAAP EPS growth of 34% year-over-year. Turning to page 24, I’ll begin with the balance sheet. We ended Q3 with cash of $366 million and $1.5 billion of gross debt with an aggregate interest rate of about 3.1%. We paid down $30 million on our revolving credit facility during the quarter. With our leverage ratio, now less than three times which we told you as our goal, we expect to be in the market buying back shares in Q4. Now, turning to guidance, Slide 25 highlights a few of the key guidance assumptions and while our assumption on the impact of currency on ARR has changed from neutral to an approximately 60 basis point tailwind. The rest of our guidance assumptions remain the same as they have throughout the year. So putting our ARR guidance into perspective and turning to Slide 26. Last quarter, we told you that we expected fiscal '21 ARR to be 1.45 to…

[Operator Instructions]. And your first question will come from Saket Kalia with Barclays.

Hey, guys, good afternoon, and thanks for taking my questions here. I'll keep it to one maybe for you, Jim. Lots of fun stuff to talk about with the business this quarter. But maybe just to get it out of the way, I think we all saw some of the announcements by Rockwell and PTC inter quarter. So I was wondering if we could get maybe your perspective on how some of those changes maybe sort of impact the economic relationship between you two and how if at all it may be impacts long-term PTC's long-term strategy, in your view. Does that make sense?

Yes, sure. Well, the biggest piece of news, of course, was Rockwell acquiring Plex for $2.2 billion or so. So I would say first of all, everybody should know that Plex is 100% complimentary to PTC, we have never ever competed with Plex at all. And, in fact, new Plex is pretty well, because it's run by Bill Berutti, who's one of my better friends in life and reported to me for a dozen years or so. So, Plex is a great company. We know who they were, we kind of had decided that wasn't quite the right fit for us to acquire. But actually, we're pleased to see Rockwell acquire them. And I think there's actually some opportunity for synergies between what Plex does and what PTC does. You might almost think that Rockwell's adding Plex in a way from my perspective to the innovation suite we build together. So I don't see any conflict at all. I think Rockwell will be probably sharing some attention cycles with Plex that maybe had been previously committed to PTC, so we'll have to see how that plays out. But in general, Rockwell is an important partner, they won a Partner of the Year award after they acquired Plex. So I think that the partnership is important. It's sort of built into the business as we run it today, and I don't see anything dramatic changing there going forward. There was also a question somebody else asked me, is Rockwell going to sell their PTC shares? And I would say you probably should ask Rockwell, but certainly they have not suggested to us they're going to and I think their public announcement said they were going to fund the Plex acquisition with new debt and cash on hand. So I don't think anything really changes in the relationship other than something new came in and on one hand, it's bringing new capabilities that might help us against competitors collectively, and on the other hand we'll have to share attention cycles with it. So that would be my thought there Saket.

Got it, very helpful. I'll hop back in queue. Thanks, Jim.

Thank you.

And your next question will come from Matthew Broome with Mizuho.

Hi Jim and Kristian. I guess just on that, that general theme. It'd be interesting to see how you sort of updated thoughts on M&A and in particular given recent market events on how you view the electrical CAD market as an adjacent opportunity? Clearly you did make an acquisition in that space itself last year.

Yeah, so you're probably referring to some activity between Autodesk and Altium, I'm guessing. So Altium is one of three main printed circuit board designers -- software companies. And then of course, there are other companies that provide integrated circuit software. The integrated circuit software really doesn't have a touch point with our world of CAD and PLM, but the printed circuit board design software does. We have a partnership with Altium. I'd like to find ways to strengthen that partnership, I don't really see us trying to acquire them. For one thing, we'd have to top Autodesk price which I don't know that we're in the mood to do. And then secondarily, I don't think they want to be acquired. So I feel like there's a good opportunity there for us to do more in the partnership, both on one hand with Onshape and Arena, which are a nice fit in the lower part of the market with Altium, but also with Creo and Windchill, which are also a nice fit. So there are many Creo and Windchill customers who put circuit boards in there, otherwise mechanical products. And the same would be true of Onshape and Arena. So there's lots to do there in terms of a partnership, I don't see us trying to acquire them in the near term, given the circumstances, as I know them, We did make a small eCAD acquisition of actually a company called ECAD MCAD. But it really was a very small VL and it really was at the interface of ECAD and MCAD, it was not ECAD capabilities, but it was the ability to import in real time synchronizes between an MCAD product, like Onshape and an ECAD product like Altium. So it's actually going to prove useful in some of the integration activities that we want to do. But anyway, Altium is a good company, I'm perfectly happy if they remain standalone. And we PTC you know, look forward to strengthening our partnership, because there's lots of synergy on both sides of that partnership.

Got it, makes sense. And then I can maybe just quickly ask about, general interest and demand for generative design with the new customer base. Have you seen this option within Creo and how close are we to seeing GD become an integral part of any sort of mainstream design process for cars, and planes and so on?

Yeah, I think there's a lot of companies exploring it, trying it out, doing what ifs and proofs of concept. And frankly, they get some pretty good results. But you know, it is a very different way of doing engineering, we always thought of computer aided design, but actually, the computer wasn't so much aiding the designer, it was just simply documenting the ideas. But this really is computer aided design, where the software is providing ideas to the engineer, as opposed to just capturing the engineer's ideas. That's a different process that people wrap their head around, I'll follow AI around. But like I said, the results are pretty spectacular sometime. So there's definitely a lot of interest. I think it'll take a while to mainstream, but certainly, it's going to be a wave of growth in mechanical CAD over the next five years. I don't think it will come on super strong in the near term.

Alright, perfect. Thanks very much.

And your next question will come from Jason Celino with KeyBanc Capital. Your line is open.

Hey, thanks for taking my question. Jim Onshape and Video in gray [ph] 40% growth, very impressive. AR business doing also quite well. But the growth segment did beat salary the bit to that 23% organic constant currency growth level. Is the overhang spill on IoT side, what gets that the turnaround?

Yeah, well, if you look at scale, Jason about 75% of that growth segment in terms of scale as IoT. IoT is a much bigger business because we started bit sooner and really had a lot of success with it. So, in a way, right now, as IoT goes, it has a big influence on the overall performance of the overall gross segment. So most of the slower growth was in IoT and most of it is still related to hangovers from COVID. So if we kind of look at what's happening on the sales front with IoT, I mean, sales have improved year-over-year, they're still not back to where we want them to be. But in general, what we're seeing is a good quantity of deals, but smaller deal sizes, which I just attribute really conservatism around people doing IoT projects in factories, and in general as they come back to speed following COVID. You might remember to that, we mentioned clearly at the beginning of the year that we had a 2 point headwind to growth, in our deferred, what we at the time called backlog, but deferred ARR was a 2 point headwind. Well, a lot of that headwind landed in IoT, because that's the place where our sales were softest, last year. So some of that is now coming home to roost. Now it's not just what we sell in the quarter, but it's how much backlog did we also take advantage of maturing in the quarter, and that's another pressure that we'll work our way out of as we kind of round trip to COVID impacts of the back half of fiscal '20 and the front half of fiscal '21. Let's say mostly in fiscal '20.

Okay, great, excellent. Thank you for the call. I'll get back in queue.

And your next question will come from Andrew Obin with Bank of America. Your line is open.

Yes, good afternoon.

Hey Andrew.

Hey, how are you, Jim, Kristian. Question about actually, question about Onshape. You sort of talked about more mature model and sort of approaching larger enterprise customers? Can you just talk about where we are in sort of, A, how larger enterprises and where are you in sort of transitioning this product towards your more core customer base away from small and medium businesses? And if I understood you correctly. Thank you.

Okay, Andrew, those are good questions. So first of all, when I use the term enterprise, I was using it as defined by the Onshape team, which generally means an account would take 15 seats or more. It's kind of a small definition of enterprise, for the rest of us at PTC, but that's their definition. So I would say the definition of enterprise used by Onshape is a medium size company, and the commercial business is small companies. Now, I would tell you that it's just a different buying market. And our Creo software and our Windchill software for that matter, does not participate effectively in the market where Onshape and Arena are making hay right now. So it's all complimentary. And in fact, honestly, we're borrowing a page from the so strategy of 20 years ago when they had SolidWorks in the mid-market and CATIA and ENOVIA in high end of the market. And those two products prospered side by side for 20 some years until they both do a bit old retired. But it's a strategy that works its market segmentation. And so I don't think that you're going to see Onshape and Arena, put a dent into Creo and Windchill because amongst other things, Creo and Windchill are adopting the SaaS technology called Atlas that makes Onshape so special. So when Onshape stealing larger accounts, it's basically by and large stealing them from SolidWorks. And then cherry picking a few others here and there, but they're starting to get some accounts whose brands you recognize, you might remember we had Garrett Turbo present at an investor day, I believe it was, that's a pretty large company who went from CATIA to Onshape. And really went for all the qualities of SaaS that they love. And of course ease of use and other things of Onshape. So I think Onshape is an attractive product, it needs to mature more before it really could be a viable replacement for the high end products, generally speaking, but I think it'll start to pick of a lot of medium size accounts and an occasional larger account, who may be is over served by the more expensive, more complicated technology they're otherwise using.

That's a great answer. Thanks so much. I'll get back in the queue.

Thanks. Operator? Operator are you muted?

And your next question will come from Ken Wong with Guggenheim. Your line is open.

Operator came back just in time. Thanks for taking my question. I just wanted to circle back on Rockwell real quick. I saw you guys mentioned that Rockwell became the largest IoT reseller. Just wondering, is that a new dynamic there? And as we think through some of the earlier discussion points you had with Saket's question, is that a position that you think kind of sustains going forward, kind of based on what we know?

Yeah, well Rockwell as a reseller has been growing and growing and growing, and most of that reselling is in the field of IoT and AR, let's be clear on that. And we have many other resellers, but they're largely in CAD and PLM. So Rockwell has become an important reseller for sure of IoT and AR, and I don't see that ending. When I talked to Blake, about how this fits in with his strategy even post Plex. Blake says, Hey, I need an IoT platform, I need an AR platform, I even want to have a CAD and PLM platform available to me when required, because his competitor, Siemens has that stuff, but not all of IoT and AR, but some IoT and lots of CAD and PLM. So, we remain important to Blake and there's nothing he acquired in the Plex acquisition that supplants any of the capabilities that PTC brought up in the Factory Talk innovation suite. So I think its Blake and Rockwell strategy, as I understand it, to add Plex to what they're already doing with PTC. And I don't have any issue with that whatsoever, because I think it's complimentary and like I said, maybe even some upside opportunities. I just noted that we're going to be sharing some mindshare with Rockwell, who now has kind of another child in the family let's say, that's going to need some attention too. So I don't think it's going to materially change our partnership.

Got it. Thanks. Thanks for the insight there Jim.

And your next question will come from Blair Abernethy with Rosenblatt Securities.

Thanks. Hi, guys, Jim, nice quarter guys. Just want to dig in a little more on Arena, and now that you've ordered for 7ish months. Well, how are you thinking about the go-to-market there for the team? And as vis-à-vis Onshapes pipeline. Are you working those two in parallel, are they coming together. What sort of your thoughts there as we kind of move through into next year?

Okay, great question. So first of all, we're very pleased with the performance of Arena, it has, in fact, accelerated since required. Now, there are several things we're doing that I feel like, aren't fully in the game yet. One of them is a link to Onshape. And in fact, we've built some technical integration between the two products, which is easy to do, because they're both SaaS base. And that technical integration is generated some rave reviews from customers. And if you think about it, any customer who wants SaaS for PLM, they have the religion, and they really want SaaS for everything, including CAD, and vice versa. So we do think there'll be some cross selling there. That might that benefit might accrue more to Onshape in the near term, because Arena accounts tend to be a little bigger, like wanting to see CAD accounts, that might not need PLM. But arena accounts could generate a fair number of KNCs [ph] 15 or more. So I think there'll be some benefit in both directions, it might help Onshape first, but then the thing we can really do for Arena is to globalize the sales force, because Arena really is a U.S. based business, a tiny bit of business in Europe, and essentially none in Asia other than sometimes an American company might have some users nature, but they're not Asian companies. So we PTC, of course, are much more globally balanced and we have the capabilities to help them kind of spread their operation around the world pretty quickly. And that's underway and as I mentioned, we opened the European and sales operation. By the way, arena and Onshape both have basically inside sales go-to-market operations, they don't have sales reps, all over the place, you still need a European operation and the right time zones and all that but it's a cost effective go-to-market model, as opposed to kind of a PTC larger accounts where we have outside reps living in all the different countries around the world next to the customers and so forth. So I think we're going to be able to generate some acceleration for Arena to even higher levels next year. But we still need to plan all that out, but we certainly have something to work with.

Great, thank you.

And your next question will come from Adam Borg with Stifel. Your line is open.

Great. And thanks so much for taking the question. Maybe just first on the IoT business, can you talk a little bit about there being a hangover? Just curious if you could comment a little bit more about the pipeline as you head into the important fourth quarter?

Well, I think if you look at any ARR scream at PPC, its growth rate is a function of bookings, churn, but also start dates, backlog, price increases, and so forth. And again, where IoT has been held back is kind of in deal sizes on new bookings. And in sort of a softer, what we used to call backline -- backlog now called deferred ARR. So, when we look though, at the pipeline, the forecast, I mean, we feel pretty confident and it looks pretty good. So I think we're going to end the year on a strong note, I certainly expect that based on the forecast on the pipeline. And I think we're in better position going forward in the next year. Bookings certainly are up year-over-year. Like I said, just not back to where we want them to and that's more deal size than transaction count.

Super helpful. And maybe just as a quick follow-up, you talked to in earlier question about replatforming efforts in Creo and Windchill and obviously it’s the non-trivial undertaking. So just curious kind of how that going and what percent of your R&D efforts are really focused on replatforming today and how that should evolve? Thanks, again.

Yeah, well, this is not going to be a big bang approach, it’s going to be kind of a systematic module by module approach, and then in the end, we'll have it all replatform. But if you look at what we did with the generative design extension, that's a good model to explain what we're trying to do. And that is, we want to be able to take key subsystems from Creo, Windchill in particular, and build them on Atlas, and deliver better value, more capabilities, better cost profile to customers through SaaS, and then take another module. And so a customer might incrementally buy more and more SaaS from us over time and we envision this taking a few years. And then at some point, just flip the switch and see, I'll just take it all the SaaS. So again, don't think of it as Big Bang, think of it as incremental. Yes, it's a big development effort. The good news is, we're not trying to invent the platform, we're replatforming onto, that platform has been under development for seven or eight years for the Onshape guys, that's Atlas, and it's a fantastic platform, I mean, really great. So I feel like time will tell but in the end that Onshape we're going to get a really great SaaS base CAD system, but we're actually probably going to get something even bigger, which is the singular platform that powers PTC's next generation of software that's going to breathe another decade or so of growth into our Creo and Windchill product lines.

Excellent. Thanks so much.

Your next question will come from Matt Hedberg with RBC Capital.

Great. Thanks, guys. This is Matt Swanson on for Matt. So Jim really appreciated the commentary around the secular tailwinds towards digital transformation. But when we're starting to think about your customers, as they're presumably returning to on-premise, you've seen any changes in conversations around SaaS more broadly, and I guess, thinking more about, like, what's driving your customers towards that, and especially from that enterprise segment, so that might not be a good fit for Arena or Onshape? What those customers are kind of doing right now as maybe a long-term plan as they watch what you're developing on Arena?

Yeah, Matt, well, there's an interesting -- it's a good question and the interesting survey we do, where we reach out to our Creo and Windchill customers and test their receptivity towards SaaS and that receptivity expanded dramatically over last year, I mean, like, from a minority to a very strong majority of them are saying, I want SaaS. Now, if you think about it, Creo and Windchill are very sticky products. So they're saying like, I want SaaS, but I don't want to switch because switching CAD systems, especially when you're a big user of a high end CAD system, and you've got years and years' worth of data. I mean, that's a project. But if I could, within Creo go to SaaS, that'd be wonderful. If within Windchill I could go to SaaS, that'd be wonderful. Now, why did they want to go to SaaS? Well, they realize first of all, a mobile workforce and everybody have some hybrid working office strategy going forward. The thing is if the software, if your CAD software, for example, runs on a big desktop computer in the office, well then how do you work from home? Do you set up another big desktop computer at home? And then how do you shuffle the files back and forth. I mean, it's just hard, it'd be better if all this data was never on the desktop, it was always in the cloud, same with the application. So for example, during the COVID, initial shutdowns Windchill worked great, because Windchill is web based and the data actually is in some web server somewhere. So you just go home and you jump on whatever computer you have there, even a phone or tablet and you log into your web browser and you're doing Windchill stuff.…

Yes, that makes a ton of sense. It's a really compelling value proposition. If I can add one more on digital transformation. You mentioned PLM, as kind of part of that, of that growth group there. Can you talk a little bit about the progress and moving deeper into customers with PLM, kind of beyond those traditional use cases? It's something we've been talking about for a long time and I think it's always seemed really interesting?

Yes, I think what's really come into light, it always was true, but it's really much more appreciated now, is that PLM is the system of record for products. So PLM, in an industrial company, it's absolutely as important as your CRM system, which is the system of record for your customers, or your HR system for employees, or whatever. So, when companies think I really want these processes to be digitized and mobile, you become mobile and global and in all that. You realize, we need a reliable source of product data that everybody in engineering, manufacturing, service, marketing, sales, whatever can transact against. So we need one single system and we all need access to it. And so we're starting to hear that more and more that it's not about making the engineer's more efficient, which was kind of the first generation of PLM. This is more about making sure that everybody across the company has access to the right product data, because everybody is making decisions about products, pricing them, selling them, supporting them, manufacturing them, and we need to have accurate data and it needs to be two clicks away. And that's what PLM is, now being recognized as the system of record for products and industrial companies can't get very far down the journey of digital transformation without saying, hey, shouldn't we have a system of record for our products? I mean, honestly, they are product companies. So I think PLM is really emerging into something different. Quick example would be that maybe contract we won, it's about product support, it's about everybody supporting ships, having access to data of all ships in the systems they contain, support data. And so we're using PLM concepts to support the operation of ship, not the engineering of manufacturing, but actually, the operation of ships that were engineered, manufactured years ago. And it's kind of a good example of digital transformation versus engineering productivity.

Thanks for the time, guys.

Thank you.

Your next question will come from Jay Vleeschhouwer with Griffin Securities. Your line is open.

Thank you. Good evening. Jim, at your partner conference last week, aside from the sessions on sales programs and plans and the like it was a very interesting roadmap session, which is the thing I want to ask about. It noted that as part of your Creo strategy, you have what was called five dimensions and for Onshape, six dimensions to the strategy plus various dimensions for the strategy for PLM of course. The question I have about the Creo and Onshape strategies is that's a fairly good list of executables. So how do you think about the ones that are perhaps most important on those lists for you to achieve, or perhaps the most difficult to achieve, which aren't necessarily the same thing? And then secondly, you referred to Microsoft a number of times, they're on the cusp of launching their manufacturing cloud. And I'm wondering how you're thinking about the opportunity for you in terms of drafting along with what they do with manufacturing cloud?

Okay, so first on the priorities, Jay, I don't have those lists in front of me, and I hate that off the top my head, try to represent them all back to everybody. But what you should think of is, there are large engineering teams behind these products. In the case of Creo, 400 plus people working on it. In the case of Onshape, not near that many, because it's smaller tighter product, yet younger product. But there's room with the level of resources we have in these products, to have four or five priorities, that's down from 20 or 30 that they would otherwise do, they're trying to narrow down and focus on the key ones. So I think we have the capacity to execute four or five initiatives at a time in both of these products. We can't execute 10 or 20, but certainly four or five big ones. And I guess you were wearing your hat as a partner that day on that conference. But we're just trying to share with our partners where we're going what we think is important, and frankly where we think the money is. So that's what's going on there. With respect to Microsoft and their manufacturing cloud. There's a lot of conversations going on between PTC and Microsoft about how to align PTC with that manufacturing cloud, they want us to, we want to, it's just a question now of figuring out what to do to make that happen. The fact that our former Chief Strategy Officer, Kathleen Mitford, just went over there is actually quite helpful, because Kathleen and I are quite close and we've had some conversations since she's gone over there. And she's now able to help me, let's say, coach me, and I'm building culture to make the company’s better aligned together. So there's a lot of good stuff happening with Microsoft, again, three Partner of the Year awards. I think the manufacturing cloud will be good for us. But there's some work to figure out, once they put it out there, how do we tightly align with it.

Thank you, Jim.

And that is all for our question-and-answer session for today. I will now hand it back over to Emily Walt, for the closing comments.

Thanks Peter. I'd like to thank everyone for joining us on the call today. We'll be participating in a number of virtual investor events this quarter and you can find all the details on our investor website. We look forward to seeing you on the circuit in the coming months. And again, thank you for your interest in PTC and have a great evening.

Thanks, everybody.

Thank you. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.