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

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2022 Fourth 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. [Operator Instructions]. I will now like to turn the call over to Matt Shimao, PTC’s Head of Investor Relations. Please go ahead.

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

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. I’m pleased to report that PTC delivered an outstanding fourth quarter, which capped off a record year in fiscal ‘22. Our top line metric of ARR and bottom line metric of free cash flow, both came in above the guidance ranges we issued 90 days ago. Execution was strong throughout fiscal ‘22 as full year results align well to the growth and margin expansion strategies we outlined at last December’s Investor Day. Relative to top line and bottom line metrics across both absolute and relative improvement measures, fiscal ‘22 was PTC’s best year in decades. Before I dive in, I’d like to point out that Kristian will cover the ongoing effects of the strong dollar later during his section of the call. So to simplify things, I’ll focus my discussion on constant currency results where applicable. Turning to slide fourth, ARR and free cash flow results for Q4 were very strong and the strength was broad based across all segments and geographies. A particular note, we saw organic ARR growth continue at the accelerated pace of 15%, driven by strong performance across the board in Digital Thread Core, Digital Thread Growth, FSG and Velocity. Our Codebeamer acquisition had another strong quarter and contributed a point of inorganic ARR growth, taking PTC’s total ARR to $1.71 billion, up 16% year-over-year. Our top line ARR growth was helped by the lowest churn the company has seen in many quarters, even better than last quarter. Organic churn, excluding the impact from Russia, improved by 193 basis points, well better than the 100 basis points we guided to at the start of the year. Despite churning the entire Russian business, churn was lowest in Europe for both Q4 and the full year. Price…

Thanks, Jim, and good afternoon everyone. Before I review our results, I’d like to note that I’ll be discussing non-GAAP results and guidance, and ARR references will be in both constant currency and as reported. Turning to slide 19. In fiscal ‘22 our ARR grew 16% on a constant currency basis and exceeded guidance. On an organic constant currency basis excluding Codebeamer, our ARR was $1.61 billion, up 15% year-over-year. As Jim explained, our top line strength in Q4 was broad-based. We’re executing well against our strategy and we’re continuing to improve upon our strong market positions. Our SaaS businesses across our Digital Thread and Velocity groups saw continued solid ARR growth in Q4. On an as reported basis we delivered 7% ARR growth, 6% organic due to the impact of FX headwinds, which were $134 million, substantially higher than the approximately $85 million of FX headwinds that we would have expected assuming Q3 ending exchange rates and at the midpoint of our guidance for Q4. Moving on to cash flow. Despite the FX headwinds, our cash flow results were strong, with Q4 and full year results coming in ahead of our guidance across all metrics. Solid collections performance and slower hiring helped to offset the incremental headwinds that materialized in Q4 and for the full year our restructuring cost controls and above planned perpetual license revenue primarily from Kepware also helped to offset the FX headwinds. When assessing and forecasting our free cash flow, it’s also important to remember a few things. FX rates were more favorable in the first half of fiscal ‘22 and the majority of our collections occur in the first half of our fiscal year. Q4 is our lowest cash flow generation quarter and free cash flow is primarily a function of ARR rather than…

[Operator Instructions] Your first question comes from the line of Steve Tusa with JPMorgan. Your line is open.

Hello Steve!

Hi! Good evening. How are you guys?

Good.

Quite a comprehensive rundown there. Thanks for that, yeah. So the message is that you guys are ready, I guess that’s the message. Just on this customer behavior, I mean you went to great lengths once again to highlight how you’re ready for whatever comes your way with the business model, and you know in those parts of the business that you did see, you know perhaps not as much growth in bookings in Europe and China. I mean there are obvious reasons for that probably. But what are you seeing in customer behavior there? Is it just kind of like deferrals of budgets, is it longer cycle times to close and how do you expect this to kind of progress here into the fourth quarter?

Yes. So first again, I want to remind you we had record sales in Q4. So while we saw some minor slowdowns, we also saw strength that more than offset in other places. But you know to answer your question, in China you know it’s really COVID, it’s geopolitical, it’s all those kind of things and China is 5% of our business, so we don’t have a lot of exposure there. In Europe it tends to be smaller companies, who are themselves battening down the hatches and they are trying to kick the can down the road and get a little bit more insight into what’s going to happen to the economy. But I mean I know this is a general question for everybody, so let me elaborate a little bit. It’s a funny time, because you know on one hand you have the PMIs coming down and normally that slows down our bookings, but it hasn’t here. We certainly read the papers like the rest of you do, but we also have customers everywhere who can’t keep up with demand. I mean, we have a customer visit center here at PTC on the 17th floor, and it was completely packed today. We had six day-long meetings going on in parallel. We only have the capacity for six. I’m on the board of an automotive supplier and recently we were reviewing the IHS forecast, and IHS is forecasting the auto industry to grow 2% to 6% next year. We’re a big supplier to the defense companies. In fact, two of the companies that were here today were defense companies, and they can’t keep up with the volume and you know their customers are asking for more and more and more. I was in Europe last week and I visited a…

One last quick one. On a look back to 2Q and any kind of impact from the price increases that you saw and kind of a postmortem on that?

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

Yes, you know I think it’s probably high single-digit million worth of impact in fiscal ‘22.

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

Okay great! Thanks a lot guys. I really appreciate all the detail. Very helpful. Thank you.

Yeah, thank you.

Your next question comes from the line of Ken Wong with Oppenheimer & Co. please.

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

No, no. I think we’re – if you look at our guidance scenario, the best case shows a substantial slowdown in bookings momentum, and the worst case shows a substantial decline in bookings. And that would have to happen somewhere and I could imagine it would start in SMB globally and work its way into bigger accounts. So we’re giving you a guidance range that the entire range is well below sort of the level of performance we’ve had for a while now, and again, it’s really just based on conservatism. There’s not a lot of science though behind it, because like I said, there’s no science, there’s no data actually that supports taking the range down that low. It’s just being prudent because of everything we read and everything we hear.

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

That is all the time we have for questions today. I will now turn the call back to Jim Heppelmann. I do apologize.

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

Thanks all.

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