Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2023 Second Quarter Conference Call. During todays 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 conference over to Mr. Matt Shimao, PTC's Head of Investor Relations. Please go ahead, sir.

Good afternoon. Thank you, Lisa, and welcome to PTC's Fiscal 2023 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 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, April 26, 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 the common 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 PTC delivered strong results in our second fiscal quarter of 2023. As you know, we feel that ARR and free cash flow are the best metrics to assess the performance of our business. We exceeded our guidance on both metrics in Q2 and are at the midpoint, raising the full year guidance for both metrics. A reminder that as usual, I'll focus my discussion on constant currency results when discussing top line metrics and Kristian will expound on currency effects later in the call. Starting with the top line metric of ARR on Slide 4. In Q2, we came in at $1.814 billion, which was above the high end of our guidance range and up 26% year-over-year. Top line strength was broad based across all segments and geographies. Bookings were solid in Q2, and our churn results were outstanding. Organic ARR growth was 13%, with ServiceMax and Codebeamer, contributing the extra 13 points of inorganic growth to bridge us to that 26% growth rate. Given our strong first half results, together with a solid outlook for the second half, we are narrowing our full year ARR guidance range while slightly raising the midpoint. Kristian will provide guidance details later. Global PMIs continue to hover in the mid-40s to 50 range, suggesting the business environment remains challenging for industrial companies, but it does not appear to be getting much worse. Despite the sluggish macro, the solid organic bookings result we saw in Q2 was up nicely on a sequential and year-over-year basis, suggesting at this point that the softer booking result in Q1 was probably an anomaly, within the normal range of bookings volatility rather than the beginning of a more sinister trend. While we did…

Thanks, Jim, and good afternoon, everyone. Before I get into it, I'd like to note that the non-GAAP results and guidance and ARR references I'll be discussing will be in both constant currency and as reported. Turning to Slide 16. In Q2 of '23, our constant currency ARR was $1.81 billion, up 26% year-over-year and above the high end of our guidance range. On an organic constant currency basis, excluding ServiceMax and Codebeamer, our ARR was $1.63 billion, up 13% year-over-year. As Jim explained, our solid top line in Q2 was broad-based across all geographies and product groups. Our pipeline development also continued over the past three months in a solid and consistent way, and our outlook was steady all quarter long. In Q2, our organic top line continued to show good resilience. I'm sure many of you have been following the manufacturing PMIs due to the historical correlation with our top line when we operate a perpetual business model. The PMIs have been soft over the past year, particularly in Europe where factory orders have been down 11 months in a row and where the Eurozone PMI was a little over 47 in March. In contrast to those trends, our top line, including in Europe, has continued to grow. Our subscription business model makes our ARR resilient and demand for digital transformation continues across our customer base. In fact, Q2 was one of our best bookings quarters in Europe ever. On an as-reported basis, we delivered 23% ARR growth, 11% organic. In Q2, our as reported ARR was $68 million higher than our constant currency ARR. Remember that for our constant currency reporting, we use rates as of September 30, 2022, for all periods, forwards and backwards. On a year-over-year basis, currency fluctuations were still a meaningful headwind in…

[Operator Instructions] We'll go for to Jason Celino from KeyBanc.

Thanks guys. Cleaner quarter here. Maybe just my one question. This morning, your French competitor talked about a really strong pipeline for the year for them. I'm curious on what you're seeing from a pipeline, large deal pipeline perspective, for yourself? And if you are, what types of end markets we're seeing strengthen?

Yes. Jason, its Kristian. Yes, I think we actually are -- we would agree that we're also seeing a pretty good pipeline for large deals. And I would say that actually is across our major geos and the major verticals that we serve as well. We've seen good interest in FAD for sure, in automotive, industrial, med-device, life sciences or med devices as well, across all those, we continue to see good business momentum and good pipeline generation.

Next, we'll hear from Nay Soe Naing, Berenberg.

Hi, thank you for taking my questions. Congrats on pretty good quarter. You mentioned a few times that you are winning in your core CAD and PLM markets. I just wanted to -- if you could share, where is it then you're seeing competitive wins? Is it in the call Creo or Windchill? Or is it in your cloud version of the CAD and PLM products? And then related to that, now that you now have the plus version of Windchill and Creo, how do you expect the competitive landscape to change going forward?

Yes. Good question. So we believe that we're taking share with both products because both products are growing double digits. I mean, Creo is growing low double digits and Onshape growing at a multiple of that. So I think we're taking share of them in different parts of the market. Creo is a little bit in the upper half of the market. And today, Onshape is typically a little bit in the bottom half of the market. They're both, for example, competing against SolidWorks but perhaps at different ends of the SolidWorks base. Creo might be taking customers that have kind of outgrown SolidWorks and Onshape's taking customers that, for example, might feel like SolidWorks is too heavy, too expensive, too complicated, requires a system administrator. They just -- they really like the idea of the pure web-based technology. So both products are doing very well. And in order to sustain that level of performance. Keep in mind for Creo, we're talking 22 quarters, 23 quarters now in a row we've had a double-digit growth rate, one of those numbers right now. You can't do that unless there's something good happening. And I mean, part of it is the business model, we're clear on that. But part of it is we're winning a lot of new orders as well. Now what would the advent of Creo Plus deal. First of all, it's not yet in the market, but we're launching it at LiveWorx in a couple of weeks. That should be helpful. It should be helpful for two reasons. One is it's more compelling, some of the advantages that are present in Onshape will become present in Creo. Some of the same characteristics. There won't be -- it won't be exactly like Onshape because it's fully Creo plus is fully compatible with Creo, and that's a fixed requirement. But I think some of the real advantages of always being on the latest version and so forth will accrue to Creo as well. And then second all, we will ultimately lift and shift Creo customers to the cloud, and there will be an uplift there as well. So it's only helpful, it's only helpful.

And your next question comes from Steve Tusa, JPMorgan. Steve.

Congrats on the execution on the quarter and looking forward to LiveWorx for sure. So just on this orders commentary. So were orders -- so were orders actually down in the first quarter? I'm still we're still -- I think there are still people trying to kind of pencil that out. You mentioned these ramp orders several times in this presentation, which I'm sure influences the actual number that you're kind of reporting and why it may not line up directly with the change in ARR. And then I guess as you look out and you say they're going to be flat for the year, does that imply they're going to be down at all at any point in the second half for bookings?

Steve, I mean, we had a very good orders quarter and it wouldn't be fair for us to give the details when it's a good strong quarter when we didn't want to give them when it was a softer quarter last quarter. So I mean I think Kristian took you through the guidance changes. In general, we're tracking well. Renewals have been our friend all year. But as Christian said, in the first half, we have a number that doesn't compare too badly to a first half last year that was a record first half. So I think it's strong, but it is complicated to understand how much is going into deferred and when does it come back out? And by the way, how much is coming out next quarter and the quarter after that, it just requires a level of disclosure that seems a little bit inappropriate for an earnings call. So that's why we're just trying to back off and give you directional commentary on bookings and churn and much more precise commentary around ARR guidance.

We'll go next to Ken Wong, Oppenheimer.

Great. I wanted to circle up on the ramp deals I guess how much of that was customer-driven versus maybe you guys are pushing more aggressively with kind of more add-ons, more attach, more cross-selling or just the sales force is maybe pushing in that particular direction. Any color there would be fantastic.

Well, first thing to know, Ken, is there's nothing but goodness in ramp deals. They make it a little bit more difficult for us to predict ARR though because, for example, if we were to get a very large order, I suppose we could take a smaller one that started all at once and go get another order later to grow it. But yes, in that environment, we'd rather take the larger order now with a ramp because it's got the customer locked in, ramps are irrevocable. It's not something Kristian talked earlier about churn, but just to be clear, you can only turn at the end of a ramp, not during one. So we like the commitment. And if a customer is willing to make a commitment, we want to take it. But it just makes it a little harder for us to predict. And as Kristian said, in Q4, it's really hard because sometimes a ramp in Q2, the first tranche might start in Q3 or Q4. But in Q4, if it's a ramp, anything that's not in Q4 is in the next fiscal year. So that makes it a little tricky to predict. But in general, ramps are great. And we do reward our sales team for getting them, but we also have a strange incentive that they get a little bit more credit for dollars to come in, in the front part of a ramp than they do for dollars to come in, in the back part of the ramp. But they still get credit for dollars that grow as the ramp goes on. So we want the bigger deals, the bigger commitments. And of course, we want them to start as soon as possible and grow as soon as possible. And that's all a point of negotiation with the customers.

And next, we'll hear from Adam Borg, Stifel.

Great. Just for Jim on Codebeamer, it's nice to see the continued traction there. Is this more of an upsell motion or is this really tip of spear and maybe just as a quick follow-up on question on the incremental investments in the back half of the year. Just where are you making them in R&D as the sales and marketing? Any color there?

Yes. Codebeamer is both an upsell and a tip of the spear. So some amount of the Codebeamer success, we're cross-selling from Windchill because Windchill and Codebeamer sold together like the previous product integrity and Windchill frequently were. So we're cross-selling from a windshield position. But for example, in some of these automotive accounts, we don't have a windchill position. And Codebeamer is a very compelling product, and then we'll leave with it. And we'll see if we get Codebeamer installed. Can we cross-sell from there? I don't know. We haven't had really enough time with it yet. But certainly, we've penetrated some accounts or Codebeamer where we had no significant windchill position, and that's good news.

And then on the -- just on the sneaky follow-up question. The second question on the investments. What I would say is it's probably, again, the primary areas are Codebeamer, Windchill Plus and Atlas. And in terms of where it is organizationally, it's probably, I don't know, 75% to 80% R&D, 20% and 25% sales and marketing.

We will move on to Jay Vleeschhouwer, Griffin Securities.

Good afternoon. Jim, you mentioned the PLM-ALM selection at a European auto. Could you speak more broadly about multisolution sales, PLM with SLM, for example, as examples of the implementation of closed loop? And you're probably talking about LiveWorx, but maybe speak about what you're seeing already in that regard.

Yes. I mean I think there's a couple of words that go together here. There's the digital thread idea, which means data created upstream is used multiple times downstream. Then there's the model-based idea, which says, by the way, let's make sure this data is 3D models, not 2D drawing, so model-based digital thread and then closed loop means, let's make sure that things we find in the manufacturing process, for example, using DPM get reflected into changes upstream, either in the product itself or in the manufacturing plan. And then let's make sure that what we find when the products all the field at the customer site, for example, IoT, smart connected products, that is likewise being funnel back end, ultimately, upstream, maybe into the product, maybe into the manufacturing process, maybe into the service process. But let's have these feedback loops. So I think this concept PTC has of a model-based closed-loop digital thread is very powerful, and I'd say pretty unique. And yes, I'll talk a lot about that at LiveWorx. If I know it will be a kind of theme throughout. So it allows us to cross-sell in a lot of directions. We talked about Codebeamer and Windchill. Well, there's going to be a similar conversation between Windchill and ServiceMax and between ServiceMax and Servigistics and ServiceMax and ThingWorx IoT. So we like this idea of a lot of products that are very compelling could be sold stand-alone as the tip of the spear but then integrated into this digital thread so that they could -- kind of better together. Better together, but you don't have to buy it all. If you want to use ServiceMax with some other PLM system, fine, we know how to make that work. And you have to be that way because it's practical. Customers don't throw out all their technology and switch like stock and barrel. They look at what they have and they want to systematically over time, upgrade it. And so we get in there, we might win with Windchill and then we might win with Codebeamer, and then we might introduce ServiceMax, and that's kind of how we've built our whole growth story over the last decade is by really perfecting these cross-sell motions.

And everyone, at this time, that does conclude our question-and-answer session. We ask that you please you remain on the line for any additional remarks as I hand the conference back to Mr. Jin Heppelmann

Okay. Well, great. Thank you, Lisa. And for anybody who has more questions that maybe we didn't have time to get to, please come to LiveWorx, you're going to get lots and lots and lots of information. You're going to get a firehose -- promise. So the real day we have set up for investors is May 16. You're welcome to stay longer, if you want, but that's where we had this sort of investor track that was on the slide. Otherwise, if you can't come to LiveWorx, there will be a couple of other opportunities to catch us. I know that Kristian, myself and Mike DiTullio, are going to the JPMorgan conference in Boston on May 22. We're hosting a Bank of America roadshow here at PTC on June 5. And then Christian, our Chief Product Officer, Kevin Ren, are participating in the Stifel conference in Boston on June 6. So lots of opportunities to engage us with more questions and get more information across all those different events I spoke of. So thanks for your time today. Really appreciate it, and look forward to talking to you during the course of the quarter or in 90 days as the case may be.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today.