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

Good afternoon. Thank you Savannah and welcome to PTC's 2022 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 US 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 27, 2022 and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in the quarters 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. To simplify things, please note that throughout my commentary I will be discussing all growth rates in constant currency. Turning to slide 4. I'm pleased to share that PTC delivered another strong financial performance in fiscal Q2. All of our metrics came in above our guidance and the strength was broad-based across all segments and geographies. Of particular note, we saw organic ARR growth accelerate to 13% despite the self-inflicted churn caused by our decision to exit the Russian market. We ended Q2 with $1.56 billion of ARR. Bookings grew faster than ARR and renewals were very strong. We also continued our track record of translating top line growth into even better bottom line growth. In Q2 our adjusted free cash flow performance was strong at $158 million, up 22% year-over-year and ahead of our guidance. The non-GAAP operating margin of 42% in the quarter was the highest we've seen. The margin expansion strategies we outlined at our December Investor Day are generating the results we expected. Moving to slide 5. While we're monitoring the global macro and geopolitical situation carefully, we continue to see strong global demand environment for our offerings. Driving digital transformation across the product life cycle remains an important priority for our customers. Bookings were up mid-teens year-over-year and the strength was broad-based. Growth was strong in both digital thread and velocity and across all three geographies. Q2 was the sixth consecutive quarter that bookings have grown faster than ARR, which together with improving renewal rates, creates an acceleration bias for ARR growth. To help you understand the resilience of PTC as you think about any potential macro volatility that may lie ahead, I'd like to expand on our business model dynamics, to ensure you…

Thanks, Jim, and good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance and ARR references will be in both constant currency and as reported. Turning to Slide 16. At the end of Q2, our constant currency ARR was $1.564 billion, up 13% year-over-year. Our SaaS businesses in both the digital thread and Velocity business groups saw continued solid ARR growth in Q2 and represented a larger mix of our overall business both year-over-year and sequentially. We delivered above the ARR guidance range we provided for Q2, which was for constant currency ARR of $1.54 billion to $1.55 billion. On an as-reported basis, year-over-year ARR growth was 11%. Foreign exchange was a $32 million headwind and our as reported ARR in Q2 was $1.532 billion. In March, following the Russian invasion of Ukraine, we announced that we would discontinue business operations and sales in Russia. Exiting Russia had a $4 million adverse impact on our Q2 ARR. We've accounted for the $4 million impact as churn in Q2. Cash from operations of $142 million in Q2 was in line with our guidance. Considering the $32 million foreign exchange headwind to ARR, this was a strong outcome reflecting expected seasonality and another quarter of solid collections performance. In Q2, free cash flow of $140 million grew 21% year-over-year and included $18 million in restructuring and other related payments. Adjusted free cash flow was $158 million, up 22% year-on-year. Free cash flow and adjusted free cash flow were both ahead of our guidance due to strong cash from operations and also because CapEx in Q2 came in slightly lower than we had anticipated. The main takeaway on cash flow is that despite the headwinds related to foreign exchange, we've been executing well…

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

Hey, thanks. Hi everyone. I guess I'll start with a question on macro and obviously I appreciate the backdrop as dynamic and your model at this point is built to a stand but withstand a lot of what I'm about to ask. But can you maybe just contrast how customers are maybe talking to you about strategic investments and some of your more complex implementation areas like PLM or IoT. Maybe contrast how this is different today than it would have been in mid-2020 or other periods that maybe have parallels to the past? And does it seem like customers are kind of separating strategic from the macro appreciating that the things they're committing to today do have longer-term benefits. And so that just kind of scope of conversation is different than it has been in the past?

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

Okay. That's great. One follow-up just on how your approach to the Windchill transition to SaaS might be evolving just as you publicly announced that now have had a chance to have conversations. It seems like a lot of your peers are talking about six up their own cloud migration efforts one specifically said things have accelerated recently. I'm just wondering if you're kind of getting the inkling that that could play out for PTC as you're dedicated to Windchill this point onwards?

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

Great. Thank you very much.

Next question.

Our next question Adam Borg with Stifel. Please go ahead.

Hello, Adam.

Hey, guys. Thanks so much for taking the question. Maybe just on IoT and AR, you talked about it last quarter and even in the slide deck today you talked about a continued focus on upselling and cross-selling the installed base. I love an update here on kind of what you're thinking about just the strategy going forward for upsells and cross-sells, as well as what -- just remind us of the synergies to customers in terms of combining PTC's core CAD and PLM with your IoT and ARR? Thanks, again.

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

That's great. And maybe just as a very quick follow-up. It's great to hear the early success on DPM and just on the Rockwell partnership as well and seeing some success there. Maybe just two seconds on the state of the union on where we are with Rockwell overall. Thanks, again.

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

Excellent. Thanks again.

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

Hi Jay.

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

Okay. I'll take the first one on Intland versus Integrity. I mean Jay it is fundamentally the same story. And I think we've had reasonable success with the Integrity product. But we had some challenges with the Integrity product that I think are fixed in this next-generation Codebeamer offering. Keep in mind that ALM is both a business by itself and it's a key subsystem of our PLM system, which therefore means it fuels our PLM success as well. But when I look at Integrity versus COVID there's a couple of things that stand out. Number one is SaaS. We didn't have a SaaS solution. We didn't have a path to a SaaS solution with integrity. It's much older technology. That's one thing. The second thing is Integrity had its own built-in source code management tools. And the entire development community has really shifted to tools like GitHub and so forth. It's very, very hard to sell against things like GitHub, which amongst other things tend to be free. So it turns out that the Codebeamer is designed to work with all these other modern tools out there. And then the third thing is Codebeamer is really viewed as a sexy, best-in-class user experience all that kind of stuff. So we're really with Codebeamer leapfrogging far ahead of where we were with Integrity, leapfrogging the competition and we now have an offering that allows us to go back on the offense, back into automotive companies, back into medical device companies, aerospace and defense companies, inning where people put safety critical or regulated software into products. The thing in an automobile setting and this is what I would have said 10 years ago is you got to manage the software very carefully in the context of the automobile. You have a set of requirements for a new automobile. Many of those requirements get implemented into mechanical systems, but a bunch of them and more every day get implemented into software. And a bug in the software is as bad or even worse than a failure in a mechanical part. And so this deep concern by these automotive companies and then there's regulations around it that says if anybody in the supply chain changes the line of code. You need to know, which line of code they change. You need to know why they changed it and you need to have a test approved they didn't break anything. And so it's a very, very difficult software management environment that frankly doesn't apply to a software company like PTC. We don't have any mechanical parts. So it's us, it's just software, but they're a software in the context of a physical product managed in CAD and PLM and that all needs to be integrated back together. So basically Intland is a next-generation leapfrog move within our ALM and PLM strategies. Kristian?

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

Okay. So headcount would probably end up being flat net by the end of the fiscal year, but on a larger base of revenue.

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

Right, right. Because you ended fiscal 2021 at 6,700, so that's where you think you'll end up, but you'll be a bigger company in terms of revenue.

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

Right.

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

Okay. Great. Thank you, both.

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

Great. Thank you.

Hey, Yun.

Jim -- hey, Jim. Hey. You expect the amount of professional services work to increase as part of the Windchill+ adoption over the next several years. Obviously, you are taking advantage of that opportunity and offloading some of the professional services business to partners and whatnot and your transaction with ITC illustrate that. But given the tight IT labor market out there, do you feel comfortable that you have enough professional services capacity to meet the potential demand for the - around the Windchill+ lift and ship adoption that you expect over the next several years? And overall, if you can just revisit the state of your partner ecosystem around implementation and deployment capacity? And if you have any kind of investments that you're making beyond this transaction you announced today?

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

Okay. Great. And then just a quick question, I don't think anybody asked yet, but Jim what is your expectation regarding the Windchill+ adoption at least the – over the next several quarters in terms of the pace of the adoption?

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

Okay. Great. Thank you so much.

Yeah. Thank you, Yun.

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

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

Well, keep in mind, there's a difference between things we have to do and being opportunistic when you find a really great company that's profitable and all that kind of stuff. I think that, the main basis of CAD and PLM are covered. And then our IoT and AR stuff is already quite savvy. About half of AR is sold as SaaS and more than half of -- I'm sorry about half of IoT is sold as SaaS and more than half of AR. You might remember, we announced the AR capabilities available on the Atlas platform some time ago. So I think – I don't think we need to acquire anything, there's no gaping holes. Probably integrity was the last important hole that we wanted to fill. And I don't think we would have bought Intland if it weren't such a strong company. It's disruptive in the market. It's growing fast, and it's highly profitable. And that allows us to bring it in, in a short-term free cash flow neutral, mid and long-term free cash flow accretive kind of way, which works for us. So, that's how we think about it, more strategic and opportunistic as opposed to its time to acquire something, what should we go get next?

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

And our final question will come from Matt Broome with Mizuho Securities. Please go ahead.

Hey, Matt.

Hey, Matt.

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

Yeah. Well, first let me say that most of Arena is sold direct, to be frank, with an inside sales model. So there's not a big outside for us. So what we've really been expanding to drive Arena sales with some success is to globalize that largely inside model. An inside model is a great thing if you can get it to work. And PLM's, particular big PLM systems are kind of complex and we probably require a higher touch model. But with Arena so far so good. We've been able to scale this inside model. And so that's really what we're doing. Now, our resellers are interested in selling it. And I think as Arena goes up market and the deals get more complex, there'll be a need for a higher touch selling process. And yes probably our existing resellers at some point will play a bigger role with Arena and Onshape. But right now, that low touch inside sales model is working and it's a great thing to -- it's a great model to have if you can make it work. And so far it sounds like we might be able to.

Perfect. Thanks very much.

Okay. I think that was our last question Matt, right? So thank you all for spending some time with us here today. And Matt tells me, we're going to be very active on the circuit here in the next 90 days. We're going to be at like half a dozen different conferences. I'm going to a few myself and Matt and Kristian will be at others. So we might see you on the road and I hope so I haven't seen a lot of you in a long time. It would be nice to see you face-to-face. And if not, we'll look forward to talking to you again in 90 days. As you can see we really feel good about the business. We've put in place a lot of strategic moves. They're mostly working. We've put in place profitability moves that are working pretty well and that's a good combination to have strong growth and strong profitability, and it bodes well for us, particularly given the resilience of our model in good times and in bad. So, I'll leave you with that thought and look forward to seeing you sometime in the next 90 days. Bye-bye.

Thanks everybody.

And that concludes today's call. Thank you for your participation and you may now disconnect.