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.

Hello. Thank you, Julian and welcome to PTC's results call for Q1 of fiscal '22. On the call today are James Heppelmann, Chief Executive Officer, and Kristian Talvitie, Chief Financial Officer. During this call, PTC will make forward-looking statements, including guidance on 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, quarterly reports on 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 the call are valid only as of today's date, January 26, 2022, and PTC assumes no obligation to publicly update these forward-looking statements. During the call, PTC will also discuss non-GAAP financial measures. These non-GAAP financial 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.

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…

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 growth rate references will be in both constant currency and at as reported rates. So turning to Slide 17, we delivered constant currency, ARR of $1.507 billion, which is 16% growth year over year, and slightly exceeded our Q1 guidance of $1.5 billion. On an organic constant currency basis, this is 11% growth. FX was an approximate $11 million headwind in Q1. So our as reported ARR was $1.496 billion. Our SaaS products in both the Digital Thread and Velocity business units saw continued strong growth in Q1 with growth rates, similar to what we discussed at our recent Investor Day. This is in combination with continued strong growth of our software-only sales. As of Q1, our SaaS portfolio is now 15% of our total ARR on a constant currency basis. Q1 free cash flow of $134 million grew 21% year-over-year and includes $11 million in restructuring and other related payments. Adjusted free cash flow was $145 million and was slightly ahead of the $140 million we discussed at our Investor Day. Q1 revenue of $458 million increased 7% year-over-year. As we've discussed, previously, revenue is impacted by ASC 606. So we do not believe that revenue growth rates are indicative of our underlying business performance, but would rather guide you to ARR as the best metric to understand our topline performance and cash collections. FX only impacted revenue by about $1 million in Q1. So our revenue on a constant currency basis was $459 million.# Q1 non-GAAP operating margin of 35% compared to 36% in Q1 of 2021. While, this is a strong result, it's still worth pointing out that because revenue is impacted by…

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

Just a bigger picture question, I apologize, I missed the first couple of minutes. We hear a lot about supply chain constraints and frankly, we're hearing that this might extend the run in terms of PMI expansion. So what are you hearing in terms of sort of, as you have convers about PLM and in terms of adoption, what kind of conversations are you having with your customers and do customers have awareness of supply chains being gummed up for longer and are you seeing this having any discernible impact on what kind of conversations you are having with people?

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,

Your next question comes from Yun Kim from Loop Capital. Please go ahead. Your line is open.

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.

Yeah I think deal sizes are sort of unchanged from previous trends. If, you think, what are we looking at when we project forward, how IoT and ARR will perform well, we're looking at the bookings. Let me say at the pipeline that will drive bookings and for IoT and ARR was quite strong. We're looking at the backlog. Last year bookings actually had improved over the prior year and bookings that went into backlog are what, I'm sorry, what we call deferred ARR were quite high. We were well ahead of our deferred plan number as we exited last year. So you could imagine we've got more, if you want to call it backlog waiting for us. And then what other initiatives are we doing? So for example, our DPM launch I think will be materially positive for our IoT results. It will drive bigger deals. It will drive better value propositions. It's really software that's ready to turn on and get value from as opposed to a platform. And then the other thing is Troy Richardson talked at our Investor Day about organizing better for cross sell. And I think if we look backwards, maybe we had pivoted too much towards new logos, which are great. New logos are a wonderful thing, but we probably have low hanging fruit yet to pick within our install base of CAD and PLM accounts. So I think it's really this combination of a strong looking pipeline, good looking trends, awaiting us in the deferred backlog and then these other initiatives kicking into place DPM and cross-sell but I think will all be very helpful as we proceed through the year. And again, I want to remind everybody, we set the expectation that the two handle would materialize in the back half of the year and that you wouldn't see it in Q1 and Q2. So we sort of feel like this was, as we had predicted just mid December a couple weeks ago,

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

So one question on maybe the fast Windchill, launch with seems like it's coming along nicely and we could see something maybe go GA this quarter. Have you had a chance to maybe, discuss this with customers, how's the pipeline shaving or is it maybe better to think that the pipeline might start to form once we do go live?

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.

Your next question comes from Adam Borg from Stifel. Please go ahead. Your line is open.

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.

Yeah. I'll get the first part of the question, Chris, and you can take the second part. Yeah. So Sheffler is a great account and as I mentioned back in 2017, it appeared they were going a different direction and now they've decided to come back into the fold. And honestly, they did that for two main reasons. One is that they really want off the shelf technology, the other competitor had told them this low code, no code story and they tried that out and decided that's not really what they want. They don't want develop their own solutions. They want to deploy standard out of the box software that all works together. And then they wanna engage in partnerships with the vendor in this case, PTC to talk about how those solutions should evolve to be, more and more powerful to meet their needs. So, yeah, I'm very excited. I'm in the middle of that relationship myself and yeah, what's going to come out of that is technology that fits better and better, for example, for the automotive supply chain which is a place where we have a lot of customers. So it's a great win or win back, maybe I should say and a great partnership going forward, that's going to produce a lot more bit for us in years to come. And sorry, the second part of the question was around the transition to SaaS and how that's manifesting itself in terms of pipeline and activity. Is that right? Just making sure I got that right,

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

Yeah, well remember, the bookings that we just reported were for Q1 and Q1 is really when we actually just announced the acceleration of it. So I would say there's actually limited impact in the actual bookings result here in Q1. That said, as I mentioned, we continue to see strong demand for the SaaS properties that we have. That's both in velocity and the digital thread and so those products continue to grow at a rate higher than our software only products. And, now a as the program is pushing ahead, we expect to see demand and pipeline generate, especially with the windshield -- with the new windshield launch coming out here and the program continuing to pick up speed internally.

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.

Your next question comes from Jay Vleeschhouwer from Griffin Securities. Please go ahead. Your line is open.

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.

Yeah. Well on your first question, Jay, you are always very pressy on, you've been watching this industry for a long time. When we say multi-system, multi-discipline, what we're really talking about is an enterprise system. And so what's happened in the last couple years is PLM has graduated from being an engineering data management system to being an enterprise system that contains the, it's the system of record for the product definition. And so if you're in manufacturing, well, you need to know the product definition. If you're in procurement, you need to know the product definition. If you're out on an installation or a support call, you probably need to know the product definition. So definitely what's happened is that the enterprise deployments of windshield are multiple times larger than the engineering deployments of windshield. So something that's been driving growth for some years now is that the new deals we're taking are more and more frequently enterprise deals in they're larger. You may remember last quarter, I told you we took the largest deal we had taken to date from a med device company. And the second thing that's happening is we're circling back to those companies who had deployed the engineering solution like Sheffler and we're up-selling them to the enterprise solution and turning that into a much bigger opportunity for us. So definitely that's a real thing and it's been driving the momentum we've seen in windshield for a year. And frankly, there's a lot of it out ahead of us. Even before we start talking about SaaS, the upsell from a departmental solution to an enterprise solution is a driver taking that whole enterprise solution to SaaS is a whole another growth driver, that's on top of that and sort of orthogonal to it.…

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

Thank you so much for taking my question. Jim or, or Christian. I wanted to perhaps dive into the double digit organic bookings growth couldn't help and notice you guys also had a very large service expansion deal with the air force because how much of that was already in expectations or did you get some, some boost there from timing shifts or anything of that nature?

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.

Your next question comes from Matthew Broome from Mizuho Securities. Please go ahead. Your line is open

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?

Yeah, that's one of the points Matt that I brought up at the recent investor day is that we've generally modeled FSG to be roughly flat, flat well, plus 1%, 2%, but it's actually been performing, I think last year, Christian was at up 7% FSG and it was up 6% here again in Q1. So yeah, we're overperform and serve logistics is one of the key drivers. And then the second one probably is retail PLM, which has also been doing fairly well. So definitely, there's some, I think we'll be conservative and, and leave the FSG guidance where it is in the near term, but, I do like overperforming it because it's a growth driver. The FSG business is about the same size as the IoT and ARR business. So every point of growth we get there is pretty meaningful.

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

Yeah. Thanks. This is Matt Swanson on for Matt. I'll kind of follow up on a piece of, both Adam and Jay's questions. So looking at the Sheffler announcement, I think the thing I was really interested in was the idea around standardization and the idea around end to end. So could you talk a little bit about your customer's desire around standardization and, clearly this product roadmap has really expanded your TAM, but I think one of the upside areas, something we, maybe the holy grail of the transition would be more competitive displacement. And I'm just curious if you're starting to hear, any early or more talk around that because you're building something so differentiated?

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.

Your next question comes from Saket Kalia from Barclays Capital. Please go ahead. Your line is open.

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?

Yeah. Are you referring just let me clarify, are you referring to like SaaS choices being new choices or..

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

Yeah So, keep in mind Saket, we have been selling wind shell as SaaS for some time. Remember the phase one phase two phase three thing. So since phase one, we've been selling wind shell and we showed you it's got a three year growth CAGR of 30% in SaaS. So the customer demand is strong. It's just on the PTC side. We need to pivot to multi-tenant because in the single tenant model, we just don't have the profitability we like. So the demand is strong, the customers are buying it. Christian mentioned we had another strong quarter. So it really is we'd like to meet that demand with a solution that's more efficient for us to operate on behalf of the customer. And that's what phase three multi-tenant really is all about. Now, when it becomes more efficient for us, we can then lean in on the promotion and marketing of it because we haven't really done that. So we've been servicing demand, not driving it and with phase three, we think there's an opportunity to drive demand and the preliminary data we've seen this quarter suggest customers are very responsive, both to buying new systems that way, but also to lifting and shifting the previous systems they bought and giving them to us to operate and serve back to them in a SaaS model.

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

Great. Hi, everyone. Just to go back to bookings, does the strength of score absent mega deals suggest anything about either the demand environments or maybe just the health of your mid-market and SMB customers and looking ahead, are there going to be certain things you think about or track when contemplating the probability of more mega deals or maybe the larger ARR contributors for PTC, maybe, being a bit more represented in future bookings?

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?

Yeah. I agree with all that. Actually just on the big deal dynamic, what we used to call mega deals. We haven't -- I think we've had four in the past four years.

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

Yeah. Which is my point that we've been seeing good strong bookings performance and bookings growth, even with the absence of what used to be a fairly regular occurrence back in the perpetual days. Like we really don't see a lot of those.

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

Your next question comes from Blair Abernethy from Rosenblatt Securities. Please go ahead. Your line is open.

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.

Yeah. So the state of the partner economy is good and Microsoft, I could put on that list is also strong. With Rockwell you'll remember in the past quarters I had said we should take a bit of a conservative posture as it relates to what Rockwell would contribute to PDCs numbers here in fiscal '22 and we did that because Rockwell had made a big acquisition. Rockwell never completely agreed with me on that. Their own public commentary kind of indicated they didn't worry too much about that. And in Q1 we're right. So we're pleased to see that Rockwell's contribution was solid in Q1 and starting to feel pretty good about the year. I'll tell you one thing is this DPM solution appears to be a very good fit with Rockwell. And in fact, their Calypso alarm is probably lined up to be our strongest partner in promoting DPM. So we're, very happy with that. Calypso has a long term relationship with PTC that even predates their acquisition by Rockwell. So great alignment around DPM. Again, DPM is a high value up to stack solution that drives bigger deal sizes and we think will be a very sticky solution. So lots of optimism around that. With Ansys, we continue to differentiate now with best in class simulation. So, whereas simulation, some years back, would've been viewed as a soft spot for PTC. Now it's a strength, if we're competing against Autodesk or Siemens or [indiscernible]. Nobody's going to have a better simulation story than PTC because nobody has a better simulation story than Ansys and Ansys products are built into PTC products. So that's been going well. And then of course, with Microsoft, that partnership is performing well and poised to get a lot bigger because as we bring more stuff aggressively to SaaS, a whole lot of that is going to land on Azure. So I think all three partnerships are alive and well, and as important as ever and, helping us achieve the kind of results that we're achieving.

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

Yeah. Thanks. Hi guys. Just wondering if you could characterize with the headcount changes that you pointed out are necessary to facilitate the acceleration to SaaS, where are you in that process what's left to go and kind of what's the timeframe that you expect to complete that over?

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

Exiting.

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.

We have no further questions. I'd like to turn the call back over to Jim Heppelmann for closing remarks.

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.

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