Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2023 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 would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, Rob and welcome to PTC's first quarter 2023 conference call. On the call today are Jim Heppelmann, Chief Executive Officer; Kristian Talvitie, Chief Financial Officer; and Mike DiTullio, President of our Digital Thread Group. 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 be making 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, February 1 2023 and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted 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 4. I'm pleased to report that despite seeing some incremental macro softness, PTC delivered a solid first quarter to kick off fiscal 2023. On the top-line metric of ARR we came in at $1.603 billion, which was above the high end of our range and up more than 15% year-over-year. The strength was broad-based across all product groups and geographies. Sorry about that, a little interference. The strength was broad-based across all product groups and geographies. Organic ARR growth was 14% with Codebeamer then contributing that extra point of inorganic growth. The strong Q1 ARR results put the company in a position to narrow our original 10% to 14% full year ARR guidance to 11% to 14% as we feel that the 10% outcome has become increasingly implausible with a solid Q1 behind us. Switching to our bottom-line metric of free cash flow we delivered $172 million ahead of our guidance and up 28% year-over-year. We raised our free cash flow guidance for the full year by $15 million. Currency had little impact to free cash flow in Q1, but it is expected to be incrementally helpful as the year progresses. On the subject of currency, I'll remind you that Kristian will cover the ongoing effects of foreign exchange fluctuations later in the call. So to simplify things I'll focus my discussion on constant currency results when discussing top-line metrics. Turning to slide 5. Shortly after our first quarter close we completed the acquisition of ServiceMax. ServiceMax is not included in the Q1 results we reported though we did incur some acquisition-related costs that we're a headwind to our nevertheless strong free cash flow results in Q1. With the deal now closed ServiceMax will be included…

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 15. In Q1 2023 our constant currency ARR was $1.6 billion, up 15% year-over-year and exceeded guidance. On an organic constant currency basis excluding Codebeamer, our ARR was $1.59 billion, up 14% year-over-year. As Jim explained our top line strength in Q1 was broad-based. We're executing well against our strategy and we're continuing to improve upon the strong market position that we have. Our SaaS businesses saw continued solid ARR growth in Q1 as well. On an as-reported basis we delivered 11% ARR growth, 10% organic due to the impact of FX headwinds. Currency fluctuations were positive in Q1 of 2023 and our as reported ARR was $60 million higher than our constant currency ARR. However, on a year-over-year basis currency fluctuations were still a meaningful headwind. Moving on to cash flow. Our results were strong with Q1 coming in ahead of our guidance across all metrics. While it was great to see favorable FX movements during Q1, there was no impact to free cash flow from FX. Our free cash flow performance in Q1 was driven by strong execution based on a foundation of solid collections and cost discipline. Our cash from operations also came in ahead of guidance by $11 million, due to a combination of free cash flow outperformance and the timing of capital expenditures which were $9 million in Q1, compared to our guidance of $5 million. When assessing and forecasting our cash flow, it's important to remember a few things. The majority of our collections occur in the first half of our fiscal year. Q4 is our…

[Operator Instructions] And your first question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Great, guys. Thanks for taking my question. Congrats on the strong results guys. Jim, you guys are pushing the envelope for SaaS beyond many peers that we talk to which is obviously, great. I guess a two-point question, do you think that's resulted in sort of a larger pipeline coverage ratio than maybe a year ago? And with your Plus strategy, do you think the opportunity for PLM and CAD replacements could accelerate as well?

Yes. Well, let's say, certainly the Plus strategy and SaaS here at PTC is helpful to the pipeline, because first of all when deals come in at SaaS, they come in twice the size as they would have been had they've been on-premise, so right away you have a factor there. But I'd also say, the interest level is quite high. I mean, I think if you come to LiveWorx, you're going to see lots of customers are going to come, just to learn about SaaS because they're interested. We're at that phase where everybody is interested. Some people will bite sooner than others, but everybody wants to hear about it, start thinking about it and understand how it plays into their future. Then on the competitive replacement opportunity, I do think that some of our competitors are laggards with SaaS or they're doing SaaS in a pretty hokey way. For example, we have a French competitor, who is trying to become a hyperscaler. And when you place an order with them they turn around by hardware to host it on. And between you and me I don't really think that's the right strategy. And I think a lot of companies are going to say, "I don't actually want to buy into a strategy like that because the day it all collapses I'm a little bit out in the cold." So I do think that people are going to say, "We need to go to SaaS. If my vendor doesn't have a good story, I should shop around." And at PTC, we have mature proven products like Creo and Windchill, that will be available in an honest-to-god true SaaS form not unlike for example Microsoft Office 365. And then on the other hand, if you want to go full bore, clean slate, right from the start pure SaaS, well we have Onshape and Arena, which are the SaaS-est products in our entire industry. So I do think we're going to get some amount of people moving to SaaS and switching vendors at the same time. And as you said, we're way out there ahead of people with a pretty serious well-thought-out strategy.

Thanks, Jim. Congrats.

Your next question comes from the line of Matt Broome from Mizuho Securities. Your line is open.

Thanks very much. Hi, Jim and Kristian.

Hi, Matt.

I guess firstly just how is ThingWorx growth during the quarter? Has it been impacted at all by the reallocation of resources there?

ThingWorx growth was pretty steady. No doubt that reallocation of resources isn't actually helpful to just standalone ThingWorx growth, but I think it's actually been quite helpful to PTC growth and very, very helpful to PTC cash flow, because instead of hiring new resources that would consume cash flow, we moved resources around and let that fall to the bottom line. So I think probably not helpful to ThingWorx, although ThingWorx is clipping along at a decent growth rate but very helpful to PTC altogether kind of neutral to growth altogether very helpful to cash flow.

Okay. Great. And if I could just also ask channel continues to lag direct AR growth on a constant currency basis, can you talk about why growth is a little bit slower in the channel I guess with your partners? And what might be done to sort of bring that more into line with your direct business?

Well, I think they simply are more impacted by the macro situation. When the economy was strong our channel was growing faster than direct. And I think small companies have less room if you will less capacity to weather a downturn, so they're more conservative. So I think in a downturn situation, small and medium businesses, which is what our channel cover they're the first ones to start getting conservative on spending. And I mean we've seen that. I think for example, a lot of the start-up companies aren't hiring. And if they're not hiring they don't need expansions and so forth. So I would attribute that the channel is relatively more macro sensitive than the direct sales force. Now on the rebound it goes the other way of course.

Right. Makes sense. Okay. Thanks, again and congrats on the results.

Thank you.

Your next question comes from the line of Tyler Radke from Citi. Your line is open.

Hey, Tyler.

Hey, hey, good evening, Jim. Good evening, Kristian. So a question just on the bookings commentary. So I think last quarter your base case was for flattish year-over-year bookings for the full year to kind of get to that 12% ARR growth obviously, pre-ServiceMax. When you say you saw bookings weaken, did bookings go negative during the quarter? And where is kind of your underlying assumption for the full year on bookings?

Yes, Tyler, so we thought a lot about how to describe this. And what we really owe you is transparency to how bookings and macro affect ARR because ARR is the key metric. And we're in this funny situation, where what happened in the quarter didn't align to any of our scenarios because bookings was a little softer and churn frankly was shockingly good. So what we decided is if we really want to tell you what exactly happened to bookings we're going to tell you exactly what happened to churn and we probably ought to tell you what happened to deferred and then maybe we ought to get into year-over-year comps because as you know bookings is where the volatility is. So we decided, we'll disclose it, we'll quantify it, as 0.5 percentage point of slowdown. So 0.5 percentage point you can do the math it's about $8 million on $1.603 billion. So we had $8 million less in bookings than what it took to maintain a 16% growth rate, but $3 million more in bookings than what it took to hit the high end of the guidance range we gave you. So, I think if you look at it that way, in the year now we've lost $8 million and that will show up four quarters. And it won't compound but the $8 million will show up in the next four quarters. I think as we look forward the pipeline looks pretty decent. The forecast looks good. The real question will be, post rates, does the business come in or not. And that's sort of an unknown. But to us, Q1 while it was a little bit softer than the previous two quarters, actually it was not a bad quarter.

That's super clear. Thank you. And just a follow-up, so going back to one of the questions on the competition, maybe broader than just what you're seeing as it relates to SaaS. Can you just talk about maybe the strength you're seeing in PLM more broadly? And obviously the growth rates you're posting on an organic basis are kind of above market. Who do you see you're taking share from and anything from a product perspective you'd highlight?

Yes. I mean nothing changed materially in the quarter. But to kind of remind you, just in general what's happening. SAP has given up share, Oracle has given up share. In our view, Dassault has given up quite a bit of share, because we passed them in the last year and we're opening up quite a gap now. And we think Siemens has given up some share. Siemens has been posting actually negative numbers in terms of PLM growth of late, and it will be interesting to see at the next earnings report. I encourage you all to dig in and try to parse it apart, because I think Siemens is losing a lot of momentum. They have some structural changes happening, so it's a little hard to kind of tease it all out and they don't provide much disclosure. But I think you’re going to see -- Siemens would be our toughest competitor and you're going to see us post growth rates approaching 20% and it wouldn't surprise me if theirs has a negative number on the front of it when they report this quarter.

Thank you.

And your next question comes from the line of Steve Tusa from JPMorgan. Your line is open.

Hi, Steve.

Hey, guys. Thanks for taking my questions. Sorry, I'm kind of new to covering you guys and so the math maybe is a little bit tricky. But like you said last quarter that I think it was a low-single-digit constant currency bookings growth year-over-year. I'm kind of having trouble putting what you just said kind of altogether. What does that actually mean on a year-over-year constant currency bookings growth rate for this quarter?

Yes. Steve, I mean we don't disclose. We don't report bookings. We don't guide bookings. We provide color. And because, again, the scenario was a little strange compared to the guidance scenarios, softer on bookings, stronger on free cash flow to avoid having to disclose a lot more detail, we netted it out and netted it out as better than guidance but a slowdown of about $8 million for the year 0.5 percentage point.

Yes. Okay, got it. That's helpful. And then just lastly on free cash flow, pretty strong even seasonally even how you talk about it with a decent amount coming here in the first half of the year assuming you hit the $200 million. Receivables were a big positive at least on a GAAP basis. Anything else moving around in working capital that kind of overdrove at all or is this kind of bang in line with what you guys were expecting?

In general, I think it was largely in line with what we were expecting Steve. I mean again solid collections performance.

Yeah. Okay.

Yes, it’s little bit Steve, like with the ARR situation where our guidance contains a little bit of a buffer and we didn't need it.

Yes. Congrats on the good result. Thanks.

Great. Thank you.

Your next question comes from the line of Saket Kalia from Barclays. Your line is open.

Hello, Saket.

Hey, Jim. Hey, Kristian. Thanks for taking my question here. Jim, maybe just -- I'd love to dig one level deeper just into sort of that dichotomy, right, the softer bookings but then also the lower churn. Maybe just on the softer bookings piece, are those deals that are pushing? Are those deals that are still in the pipeline, or are they ones that you think just get pushed indefinitely? And then on the lower churn piece, that is great to hear, particularly with the hiring environment how much is maybe some of the price adjustments that we did last year maybe factoring into that as well?

Yes. Well, let me address the churn piece first and I'll circle back to the push or cancellation on bookings. On churn, you remember that we gave you scenarios that had churn getting worse, when we were clear, we have no evidence that that is happening or will happen, it just seems prudent to allow for the possibility. So, we're allowing for a possibility that would require a reversal in trend, but we did not get the reversal in trend. We got actually more of the same improving trend. And I think we were clear that certainly pricing helps, but it doesn't really account for the strength we're seeing. I mean the strength we're seeing is fundamentally just good renewals. And to put it in perspective, Creo and Windchill, represent roughly 70% of our ARR just those two products. And if you took the churn rate for Creo and Windchill in the quarter and you annualized it for the entire year, it would be less than 3% churn on those two massive product bases. So I mean, we're talking about fundamentally strong adoption of our technology, mission-critical technology. You can't switch from it. You can't stop using it. You can't stop paying for it, I mean unless you're winding your business down. So, I think it's just good fundamental sticky software that people are continuing to use. And I think there's not really a lot of layoffs happening in our marketplace right now our customers. A lot of layoffs happening in tech, but I don't think so many engineers in the world of product development for physical products are getting laid off. And then coming back to the push and cancel, I mean, I think it's mostly push. What happens is typically you've got a purchase order and it needs some level of approval. Maybe last quarter, it needed a higher level of approval, another signature maybe somebody sat on that signature because they're saying, couldn't we do this next quarter? Couldn't we start this project a little later? So I think it's pushing. There's no competitive dynamics. And generally it's not being canceled, because companies do need this technology. They're just delaying a little bit. The second factor would be expansion, sometimes are driven by hiring. If a company is hiring a lot of engineers, well, now they need to go back and buy more CAD and PLM seats for those engineers. There probably is a slowdown in hiring, which is slowing down expansions, but nothing structural happening. It's just sort of the natural delays the cholesterol if you will that gets in the way of doing deals when people are getting nervous about the economy.

Makes a lot of sense. Thanks, Jim.

Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open.

Thank you. Good evening. Jim for you first, over the last couple of years at least to the active bases for both Creo and Windchill have seemingly grown at least a mid-single-digit rate, at least by our calculation, which corresponds to the share gain for each we've been able to document. How are you thinking about the active base growth from here for both those products? And perhaps more broadly, since we've gone through so many evolutions of both those markets over the last many years, what from here do you think are the critical functionalities within CAD and PLM to continue or sustain the growth in those businesses, maybe GD or something else that you care to mention? And then secondly, maybe for Kristian you've done well in terms of product releases, adhering to the road map, but you do have the smallest R&D budget in your peer group. So, how are you thinking about orchestrating or managing R&D productivity from here to keep executing on that road map in the context of containing your expenses?

Yes. Okay. You've got a couple of different questions for me there. Let me say, the wildcard Jay is what happens with the economy. There's nothing again structurally happening that would cause our share gain or our seat growth to differ from the trend as it has been other than just a macro slowdown. And in the past, like in 2020, when there was a macro slowdown then we had an acceleration on the back end of it. We had a tough quarter, I think it was Q3 right Kristian, yes, Q3 of 2020 and a monster quarter in Q4 and it was like a snapback to where we work. So, even if there's a slowdown, we might get that effect, but that's the wildcard. Otherwise nothing in the industry is happening that would in my view change the trend. In terms of some of the critical functionality, yes, generative design is important. The ANSYS simulation is important. But the thing I think is really carrying the day is this concept that our guys call model-based enterprise. And what that really means is, companies are trying to make 2D drawings go away. In the world of engineering, there has been forever a really messed up process, where engineers create 3D models to really conceptualize the parts and how they fit together and to simulate them with technologies like ANSYS and everything is done in 3D. And then the very last step is, they convert that all to 2D drawings. They dumb it down and leave a lot of information behind and the drawings get sent out to the supply chain and to the factory and everything else. And then, for example, at suppliers they get these drawings and they turn around and remodel them in 3D. And the factory gets…

Thank you very much, Jim.

Thanks.

Your next question comes from the line of Adam Borg from Stifel. Your line is open.

Awesome. Thanks so much for taking the question. Maybe just two quick ones. Just first, Jim, just on the incremental softness you noted on the macro, it doesn't sound like things gotten any softer in the month of January. And of course, January is a smaller month to begin with, but just any commentary there on how demand trends have started so far in the month of January. And maybe just as a follow-up on ServiceMax, obviously it seems really compelling, just curious now that the acquisition closed, how early customer feedback is from both customers and prospects? Thanks so much.

Yeah. So on the first question, how's Q2 looking, at the start of the quarter here, we're more or less still at the start of the quarter because if you look at our quarter, a majority of our business is done in the third month of the quarter. So it's very difficult in the first month to really understand how things are trending. I mean we're starting the quarter with a decent pipeline. We're starting the quarter with a decent forecast. The real question will be in the last week or two of the quarter, are we able to close these deals or do they slide. If they slide, bookings will be soft again. If they close, actually we'll have a pretty stellar bookings quarter based on how things are forecasted at the moment or maybe we'll end up somewhere in between. What was the second question? Sorry, I didn't write it down.

No worries, just on ServiceMax.

ServiceMax, yes. So ServiceMax, I mean you see I'm very excited about it. You can probably sense that through the call here. That's because customers are very excited about it. I mean, we had a thesis of what this was going to mean. We've gotten into it. We found how many customers had independently purchased software from both of us, but also how many customers ServiceMax has that looked like PTC customers and how many customers PTC have that look like they should be ServiceMax customers. And a lot of common customers immediately contacted me, immediately contacted Neil and said "Hey can we get together? Can you fly out and see us? Can we come visit you? We want to hear this story." To be honest, we're pushing back a little bit on them saying "Could you just give us a little bit of time to figure out the details?" So we're really targeting that for LiveWorx. I mean obviously, we'll talk to a lot of customers before LiveWorx, but that will be kind of the grand unveiling of that sort of infinity concept that I had on that slide. And I think it will be very exciting. I think there'll be many, many excited customers.

Rob, we have time for one final question today.

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open.

Hey, Jim, hey, Kristian. Thanks for fitting me in. Maybe just a quick one. We've been hearing different customers and organizations trying to use PLM more within their organizations. When we think about the expansion, is it expanding to different departments and teams, or is it product development, just becoming a more critical role within an organization? I guess, how would you kind of quantify this secular dynamic?

Yeah. I think maybe a couple of thoughts. One thing I said Jason is that PLM is moving from a nice-to-have to a must-have, and for example, this concept I was talking about earlier model-based enterprise where you're going to interact with 3D models. And 3D models are too big to e-mail around. By the way, when you're interacting with a 3D design, it's not one file, it can be dozens, hundreds or thousands of files and you need a system to find them all and fit them together and present it to you so that you can understand what's going on. So, I think what's happening this is all forms of digital transformation is that companies are saying, we're going to get rid of paper drawings and PDF files. We're going to go to 3D. Therefore everybody in the company who interacts with product data is going to need a PLM seat and they're going to need some type of a 3D seat. It might be a Viewer, it might be CAD, whatever. But it's driving proliferation of PLM out from the engineering department, where it's always been into purchasing into manufacturing now into the service technicians. We pretty quickly envision service technicians out in the field on their phone interacting with 3D models when they're standing in front of a piece of equipment if not augmenting it right onto the piece of equipment. So, I think that's what's happening is it's becoming a true enterprise system versus a departmental system, while at the same time it's becoming a must-have rather than a nice-to-have. I think it's those trends that are really driving this proliferation of PLM, which frankly is good for the whole industry, but I think PTC is taking share in the industry at the same time.

Okay. Great. I guess we'll look forward to more at LiveWorx. Thanks.

Great. Okay. So, let me just wrap up here. Thank you all for spending time with us. In the next quarter, we have quite a busy investor schedule. So, I just want to share with you some of the things happening in case you want to participate. So, Kristian and I together are going tomorrow and Friday, we’re going to -- tomorrow at dinner and Friday in the morning we're going to participate in an RBC roadshow in New York. Then on February 27th, we're hosting a headquarters visit that JPMorgan is conducting here in Boston. On March 8th, we're both going to the Morgan Stanley TMT Conference in San Francisco. Meanwhile on my own behalf, I'm going to the Wolfe Conference in New York on February 28th. Kristian additionally is going to the Baird Conference in Utah on March 2nd; to the JPMorgan Global High Yield Conference in Miami on March 6th. And Kristian's going on a Barclays Virtual Bus Tour or probably hosting a Barclays Virtual Bus Tour on March 15th. And then one of our executives Kevin Wrenn, who's our Chief Product Officer is doing the Loop Virtual Conference on March 13th. So, lots of IR touch points here in the coming quarter. Hope to see many of you in the course of one or more of those events. And if not hope to catch you again in about 90 days on our Q2 earnings call. So, thanks again and have a good evening everybody.

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