Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2023 Fourth Quarter Conference Call. [Operator Instructions] 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, Danica, and welcome to PTC's 2023 fourth quarter conference call. On the call today are Jim Heppelmann, CEO; Neil Barua, CEO-elect; and Kristian Talvitie, CFO. 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, November 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 CEO, Jim Heppelmann.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. As usual, I will focus on constant currency results when discussing top line metrics, and Kristian will cover currency effects later in the call. I'm pleased to report that in the fourth quarter, PTC, again delivered solid financial results in terms of ARR and free cash flow, which are the most important metrics to assess the performance of our business. Reflecting on the full year, which will be my last year in the CEO seat, fiscal '23 has been one of PTC's best years ever. Despite a challenging economy, we delivered a seventh consecutive year of double-digit top line growth with ARR growing 23%, 13% organically and revenue crossing the $2 billion threshold. And on the bottom line, we delivered 41% growth in free cash flow. This performance is a great stepping off point for me as I hand the reins of the company to Neil Barua going forward. Given the CEO transition that's actively underway, during this call, I'll focus my comments on Q4 and fiscal '23 and let Neil take the lead on forward-looking commentary. Coming back to the Q4 results and turning to Slide 4. Though the manufacturing PMIs have indicated a sluggish global environment for many quarters now, our top line ARR continues to show good resilience. In Q4, we saw a broad-based ARR strength across our product groups and geographies. Our churn remained low. And for the full year, we did better than the churn targets we had shared previously. Customer demand was solid in Q4, up overall and on an organic basis, in line with the exceptional results we delivered in Q4 last year. Within this context, the portion of business that we signed in Q4, but that did not start in Q4…

Thanks, Jim. Hello, everyone. Let's turn to Slide 9. The CEO transition is progressing well and according to plan. I'm excited to soon step into the CEO role, and I appreciate everything Jim is doing to ensure a seamless transition. I spent much of the past quarter traveling with Jim to visit customers, employees and partners. These meetings have been good opportunities for me to listen and to build relationships with key stakeholders. These meetings have also reinforced how relevant our software is to our customers' digital transformation initiatives. PTC has established a strong position with customers, and it is clear to me that there continues to be a lot of opportunity ahead. I'm also starting to meet with investors and analysts, and I'm looking forward to continuing and deepening the 2-way dialogue. To that end, I'm looking forward to callbacks with many of you as well as some investor roadshows upcoming and conferences. And we are working on nailing down a date for an Investor Day, likely in the spring after the CEO transition. More broadly, I've been immersing myself in all aspects of PTC's business. As one example, I work closely with our team on the win at Volkswagen Group that we announced yesterday. This significant expansion of PTC's footprint at underscores the value PTC brings to customers and our customers rely on us to support their product development needs at scale. Our teams understand the digital transformation needs of our customers, and we have the right strategy and product portfolio to help them achieve their goals. There's no other company that can help manufacturers drive closed-loop product life cycle management across engineering, manufacturing, quality and service. PTC is in a very healthy position and I am energized by the business that has been built in a job…

Thanks, Neil, and hello, everyone. Starting off with Slide 14. In Q4 '23, our constant currency ARR was $1.941 billion, up 23% year-over-year and in line with our guidance range. On an organic constant currency basis, excluding ServiceMax, our ARR was $1.77 billion, up 13% year-over-year. In Q4, our as reported ARR was $38 million higher than our constant currency ARR. Also in Q4, ARR was impacted by $8 million due to start date timing. The key point is we contracted the overall amount of business that we guided to at the beginning of the quarter. At end year starts landed as expected, we would have been around the high end of our guidance range. Now with approximately $20 million more deferred ARR in fiscal '24 -- starting in fiscal '24 compared to what started in fiscal '23, we're increasing our fiscal '24 guidance range to 11% to 14%. Moving on to cash flow. Our results were solid and ahead of our guidance with Q4 operating cash flow of $50 million and free cash flow of $44 million. For the full year, our free cash flow was $587 million, up 41%. When assessing and forecasting our cash flow, it's always good to remember a few things. The majority of our collections occur in the first half of our fiscal year and Q4 is our lowest cash flow generation quarter. And on an annual basis, free cash flow is primarily a function of ARR rather than revenue. Q4 revenue of $547 million increased $39 million or 8% year-over-year and was up 6% on a constant currency basis. For the full year, revenue was $2.097 billion, up 8% or 12% on a constant currency basis. As we've discussed previously, revenue is impacted by ASC 606, so we do not believe that revenue…

Thank you, everyone, for joining us and for your -- for the time today. We're going to move to Q&A now, and then I'll give some closing remarks.

[Operator Instructions] Your first question comes from the line of Daniel Jester with BMO Capital Markets.

This is Kyle Aberasturi on for Dan Jester. In the prepared remarks, you hinted at better-than-expected churn this year, which is great to hear, obviously, could you dig a bit further into this, maybe what is driving the strength? And how you guys are thinking about the retention into fiscal year 2024?

Yes, sure. This is Kristian. So we've been on this journey really for a number of years now trying to drive programmatic change to help with the churn. And frankly, it's a few different things. One is we've been driving for longer term lengths, which has been helping. Two, we've had more commercial discipline particularly around price increase realization. Three, there has been a -- both market and product maturity have been improving in some of our segments that have higher churn such as IoT and AR. So those are some of the levers that we've been pulling on. I think we're in a great spot as it stands. Candidly, I'd say I think there's even more room to continue to improve from here, albeit it will be at a more muted pace than it's been over the past 3 years or so.

Next question comes from Ken Wong with Oppenheimer & Company.

This question is for Neil. So Neil, I think in the past, you had mentioned that you were very involved in the financial planning and obviously, plus the target out to fiscal '25. Perhaps there was some skepticism there, but with fiscal '26 introduced, I guess it's right to assume that you definitely put your stamp on that particular trajectory. Any specific nuances or refinements to the strategic road map that might have gone into that fiscal '26 number that you can perhaps share with us?

Yes. Ken, a few things, and I've got more to share, obviously, as the CEO transition comes to an end here in February, and we're planning on something at Investor Day for a more comprehensive update here. But couple of the themes that give me more confidence since the last time we spoke around the business and again, 90 days more of the transition. But around the PLM expansion capabilities is actually something that is very interesting, and some of the trends that we've seen this past year that I believe will continue. And the focus of the company on that is giving me confidence around supporting the guidance that we put out there for the multiple years that you indicated. As well as this ALM strength. I think that is something that we've shown momentum, and we're building more momentum given some of the things that we're seeing in the marketplace with that product and solutions have now augmented by Pure as well. And lastly, on the SLM piece and the cross-sell opportunities, not only within SLM, but connecting back to we're advancing those beyond what we were doing 90 days ago. And now given the fact that ServiceMax is in the quotas of the sellers, we've created enablement I see also that area to be an area that we'll focus in on to keep building on the sustainable growth levers that we've been showing, but continue to show that trend into '25 and '26.

We'll move to our next question. It's Jason Celino with KeyBanc.

Great. Kind of a follow-up on the Codebeamer strength, this momentum that we're seeing. And then with the Volvo deal, I don't know if any of us really knew what PTC was doing in ALM 2 or 3 years ago. So when I think about the Codebeamer pipeline and the ALM strength, how much of this is maybe from existing customers looking to upgrade existing legacy ALM products? Versus wins and displacements of other tools versus customers who may not even have an ALM product for, if that makes sense?

Yes. Let me take the front end of this. Thanks for the question. We indicated in a press release a large strategic relationship with Volkswagen across their entire enterprise where we are deploying code beamer to their enterprise users for all the use cases that we talked about. One of the themes that we're seeing is this is actually a tip of the spear and an enabler for getting into new logos, particularly in the automotive segment. What we're seeing is that a displacement of other tools in the marketplace that now Codebeamer with its differentiated capabilities with also the element of the tieback to PLM within PTC is actually creating the momentum that we spoke about, that will continue to push on over the course of this year as well.

Maybe I can add, Neil. Just if I could. In the fourth quarter, we actually did transactions with 5 auto OEMs. The big one with Volkswagen and then smaller, in some cases, foot-in-the-door type transactions with other global OEMs. And at least 3 of those, we have no meaningful CAD, PLM or ALM business with prior to this Codebeamer win. So I mean, certainly, we can upsell from the ALM position we had and sometimes from the PLM position. But what's really exciting is that we're knocking down big name new logos that we have no previous relationship with.

It looks like our next question comes from Saket Kalia with Barclays Capital.

Okay. Great. Nice to see the quarter and the guide in the new long-term framework. Neil, maybe for you a little bit of a higher-level question. I know that we've said that it's an oversimplification to focus on SaaS for PTC. But clearly, you come from a SaaS background with at least ServiceMax, if not your time before that as well, so maybe the question is, as you met customers intra-quarter, what do they think to you about taking PLM and CAD to the cloud?

Yes. Great question. So first off, there is continued interest in our SaaS offering, and it is an important layer of the cake that we mentioned in terms of the sustainable growth drivers. As a reminder, this is -- we expect an S-shaped adoption curve. We've also told you, and I agree with this is a decade-plus long journey. We continue on this journey into '24. And in regards to feedback from customers, we're seeing opportunities by which the roadmap, the ability for Windchill+, Creo+ for not only new logos by the way, but also conversions continues to be interesting. That being said, one thing's important here in my upfront here that I mentioned, the overall growth drivers of our ARR has very little right now, and quite frankly, into '24 to do with SaaS. That being said, we are making sure the SaaS opportunities we've already secured, the pipeline that we're working on, we're working hand in hand with those customers to ensure we're optimizing the conversion experience of those customers. Again, this will be a multiyear decade-plus long journey across the base of our existing customers plus those that were far new but is a key part of our focus. However, there are many other layers of the cake that are working extremely well right now that I'm going to help push the team even further to accelerate.

Got it. Got it. That makes a lot of sense. Kristian, maybe for my follow-up for you. And apologies, I joined the call a little late. Great to see the continued double-digit growth in ARR continue into next year and beyond that. Maybe the question is can you just talk a little bit about your level of visibility here? I know we've talked about ramp deals in the past. And I think you mentioned something on deferred ARR. Maybe going one level deeper into sort of the level of visibility or comfort that you have as you look out to '24, which is clearly another sort of uncertain year of macro.

Yes. I mean, again, I think we have a pretty good level of visibility. A lot of our contracts are multiyear contracts. So you don't -- they're not actually even coming up for renewal in fiscal '24. You have some portion that's coming up for renewal. But again, our retention rates at this point are already quite high. And then also, as you point out, we do have deferred ARR, we've had obviously deferred ARR for many years. But we have that, which also provides more incremental visibility.

Our next question comes from Andrew Obin with BofA.

Neil, Jim. Just a question on PLM and specifically Windchill. You guys have been very successful with growing the business. And I guess the question I have as your customers digitize their operation and there's this build-out of this digital value chain. What's the opportunity to monetize beyond sort of existing users, right, as more people touch the digital thread? What are the revenue opportunities? Are there sort of opportunities to sort of charge people for different services? If you could expand on that?

Yes. Let me take the front end and maybe Kristian and Jim could support here. As I mentioned, one of the drivers we've seen over many years right now is around Windchill's adoption within our customers. And what we've also seen is that expanding not only within engineering, but as you mentioned, it's now going to other groups that is tied closer to engineering, like supply chain, like quality as an example. And as Kristian said, we're seeing this migration of Windchill becoming more of an enterprise-wide system of record, that will take some time, but we are seeing the trends moving towards that, particularly as we think about model base and the digital thread that is pushing on this lever. To be clear, some of the economic points that you're asking about revenue potential outside of the already strong sustainable growth that we've been showing in Windchill, we're working on more of a metrics-driven approach to that within ourselves internally to think about how do we sustain that over the periods over the next medium and long term, that will be an area that we'll explain more in detail as we get into the Investor Day, hopefully, in early spring. Jim, Kris, do you want to add?

Maybe I would add that our rule of thumb has long been that when a customer first adopts an engineering and then expands to a broader enterprise deployment. There's generally 10x to 15x more users across the broader enterprise than there are in engineering. And so as companies digitize, they're basically saying, we need to have everybody in the enterprise logging into the system and getting real-time data as opposed to working with data that's been exported out of the system and passed on and maybe on a date may be wrong, et cetera, typically drawings and PDF files and so forth. So I think that there is a real opportunity. And yes, I think Neil is offering to quantify it a little bit more discretely at the Investor Day.

Our next question comes from Steve Tusa with JPMorgan.

Jim, congrats again. Great run for sure. Can you guys -- I think you guys said you would update us kind of annually on the SaaS trajectory? I think you had put out an illustrative model or at least like some sense of where you'd be as a percentage of ARR by year-end '23. Maybe if we could just get a little bit of color on how that turned out?

Yes. I mean -- I think what we had said was we plan to be in the mid-20s in '23, and that's where we ended.

Okay. Great. And then just a question on the long-term cash targets. You're kind of putting up some good numbers despite these other headwinds. I haven't gone back to the old model. But -- and anything incremental that moved around you on an operating basis because the numbers seem pretty strong despite the non-fundamental headwinds?

I'm not 100% sure I'm understanding the question, Steve. Like -- no, there isn't -- when we talked about some of the puts and takes, meaning the interest payments are going to come down. Cash taxes are going to go up. But otherwise, it's really just operating the business.

Thank you. Looks like our next question comes from Jay Vleeschhouwer with Griffin Securities.

One thing that PTC does that I think is important and does rather well, for instance, at LiveWorx, is you share in some detail your product road map for CAD, PLM and the other 3-letter acronyms. So with that in mind, for Jim and Neil, when you look into '24, what do you think are some of the principal product development or release executables that you're working on, whether it's developing Atlas further or new forms of packaging like DPM or anything else that you care to mention as far as the portfolio is concerned for '24? And then for Kristian, a question that's often come up in the past, which is about your our sales coverage, our customer account segmentation. Anything new that you've implemented for '24 in terms of channel programs, channel margins, anything of that kind out in the field that we should be aware of?

So Jay, thanks for the question. I'll start off and Jim could support here, too. On roadmap. First, on SLM, I'll take that since this was a question in the last call. We are working on a release in December that ties ServiceMax closer to Servigistics with a combined offering that we believe will have nice reception to the marketplace, as well as in the same release, a tie of ServiceMax to IoT for preventative maintenance use cases between the two capabilities. In terms of the broader portfolio, Windchill+, Creo+, Kepware+, as I said, this remains a strategic relevant area that will continue to grow and emphasize and we've got a number of leases for all the plus strategies that we have in '24. That includes, by the way, things that we're doing with Atlas in support of our Plus strategy. And then third, in an order of priority, by the way, here, Codebeamer, right, the ALM to scale and continue to capture what we're seeing is strong demand and pipeline we're making sure that we're taking Pure and Codebeamer and working through how that looks to the customer as well as augments to Codebeamer in general to make sure that it's enterprise scalable in the regard that companies like Volkswagen are needing us to deliver for them on the end user experience piece. Jim, anything to add?

Well, just maybe to observe, listen, you talk here, you kind of called out projects that drive cross-selling is a top priority projects that drive SaaS is a second priority, not far behind. And then functionality, scalability, whatever of certain products, in particular, like Codebeamer, where we have a tiger by the tail and want to make sure we're being responsive to it. I think that would be a way I could characterize it, just reflecting on what you said.

Jay, it's Kristian. So then to get the part 2 of your question. So yes, we actually have some incentives that we're rolling out to drive -- to help continue to drive growth in the channel as well as improved retention in that space. So there are some programs there, and that's also focusing on enabling them to obviously, they do a great job already at selling CAD, PLM. We want to enable them to cross-sell other parts of the portfolio better. And as we can see a focus on both on-prem and SaaS, particularly Windchill+, Creo+. And then on the direct side, I would say that is really just continued refinement of the territory coverage that we have. So that's where we are.

Our next question comes from Blair Abernethy with Rosenblatt Securities.

Just Jim, I wonder if you can just expand a little more on the Windchill+ in terms of -- what have you seen there so far? I know it's only been a few months that you've been pushing that out there. But just wondering if you've got any sense at all as to what the revenue uplift might be there? And also, how are you positioning Windshield+ versus, say, Arena in the market?

Yes. Kristian, do you want to address the what are we seeing in terms of uplift and then I can hit the differentiation versus Arena?

Yes. So from an uplift -- so from an uplift perspective, we're continuing to see at this point better than what we have modeled or communicated, right, that kind of 2x uplift. I think we'll see as we continue to progress through this I still think that's the right way to think about the long-term opportunity, but that's what we're seeing now.

And maybe I could add on the Windchill versus Arena positioning. So Windchill teams up with Creo and sometimes with other CAD systems to kind of enable this digital thread. So typically larger companies who have complex products, and they're more vertically integrated, so they're thinking how does this engineering data get used by manufacturing, get used again by service. And Windchill's orchestrating all that complexity up and down the value chain. Arena on the other hand, is teamed up with Onshape in this agile product development and typically sold to smaller, fast-moving high-tech companies. Typically, companies have a lot of electronics, a lot of software and a tremendous amount of contract manufacturing. So it's a different problem that Arena is trying to solve and Arena excels at how does an engineering team in one company work with a contract manufacturing team in another or perhaps even other suppliers involved to orchestrate that. It's much more -- Arena is much more focused on operations than on product configuration, much more well suited to a contract manufacturing type of setup that you see so frequently in the electronics industry, for example. So I'd say Arena is a little bit of a special purpose product that pairs very nicely with Onshape, sort of like a nice red line with a stake or something like that, and addresses this problem that a fair number of manufacturers have.

Thank you. We will wrap up our Q&A session now, and I will turn the call back over to Neil for closing remarks.

Sure. Thank you, everyone, for joining us and for your questions today. Kris and I will be both on the road in the weeks ahead, participating in investor conferences. Kristian will be at the RBC Conference in New York in mid-November. Kristian also will be going to London in early December, and will be at the NASDAQ and Berenberg conferences. I'll be at the Barclays Conference in San Francisco in early December. We also have 2 bus stores coming to visit us at our Boston headquarters in early November. Those visits will be hosted by Kristian and Mike DiTullio, reach out please to BofA or Baird if you're interested. And on behalf of the team, thank you again, and we look forward to engaging with you.

Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining.