Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2024 Third 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, Adam, and welcome to PTC's fiscal 2024 third quarter conference call. On the call today are Neil Barua, 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, July 31, 2024, 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 the 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, Neil Barua.

Thanks, Matt. In Q3, we again delivered solid constant currency ARR growth, up 12% year-over-year, demonstrating that our portfolio products is resonating with customers. Our Q3 free cash flow growth was also solid, rising 29% year-over-year. Kristian will take you through our quarterly results and forward-looking guidance in detail. Before we get into more detail, I want to recognize Mike DiTullio, who will transition out of the President and Chief Operating Officer roles at the end of the fiscal year and continue as an advisor to me into 2025. Mike's part in PTC success has been profound over his tenure of more than 25 years. We certainly wouldn't be the company we are today without him. In addition, he's been a great partner to me as I've stepped into the CEO role. We've been discussing his future plans and we both agree that it's the right time to start this transition process. When we start fiscal 2025, we'll no longer have the COO position within our leadership structure. At this stage of my CEO tenure, my approach is to be close to the business and be more directly involved with operations and execution, especially for our key priorities. Accordingly, I will be assuming many of Mike's responsibilities. Additionally, I'd like to reiterate what I said on last quarter's call, which is that I'm turning over lots of stones and looking at everything in this company in order to usher in a new phase of focus and effectiveness across the entire company. To that end, while Mike's change was externally visible because we filed an 8-K, there are numerous other changes that we have already made and are making across many different areas of the organization. This is an ongoing process that we're doing with the intent of driving more effectiveness…

Thank you, Neil. And hello, everyone. Starting off with slide 9, PTC again delivered solid financial results in terms of both ARR and free cash flow in a continued challenging selling environment. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business. To help investors understand our business performance, excluding the impact of foreign exchange volatility, we provide ARR guidance and disclose our ARR results on a constant currency basis. At the end of Q3, our constant currency ARR was $2.125 billion, up 12% year-over-year and within our guidance range. Our free cash flow results were also solid, up 29% year-over-year, while at the same time continuing to invest in our key focus areas. However, we came in a bit below our guidance of approximately $220 million due to timing. We have a high degree of confidence in our cash flow guidance and targets due to the predictability of our cash collections and the disciplined resource allocation structure we have in place. With the timing issues resolved, we continue to expect free cash flow of $725 million in fiscal 2024 million and continue to be confident that our business model positions us to deliver solid, predictable results. Turning to slide 10, let's look at our ARR growth in more detail. Starting with our product groups, in Q3, we delivered 10% constant currency ARR growth in CAD and 13% growth in PLM. Despite the overall demand environment, which has been sluggish for a couple of years now, our top line has shown good resilience. Our solid ARR growth is supported by our unique portfolio with a solid footprint in high growth segments of the market and the digital transformation journeys of our customers. These underlying strengths are further supported…

[Operator Instructions]. And with that, our first question comes from the line of Siti Panigrahi with Mizuho.

Neil, I want to ask about the demand environment. How has that changed over the past quarter? Has it gotten worse or still the same? And when you look at the environment turning around, what do you need to see on the macro data or which leading indicator you'd look at before you start feeling more confident about things turning around?

On the first question, in Q3, we saw very small puts and takes across all geographic regions and verticals. Absolutely no discernible change in any trend there. As we've been saying very consistently, the demand environment in Q3 was consistent with what we've seen over the past couple of years. Good thing, by the way, is our pipeline going to Q4 is strong. In terms of what I'm looking for, what Kristian and I are looking for in terms of areas where we would feel the environment's getting better, is how we think about close rates. And consistently, for the past few years, close rates have been difficult and challenged. Once those close rates on a growing pipeline become better, it is my indication of when the environment is better for PTC in terms of securing the deals in a more accelerated manner. But I absolutely feel good about the demand. In fact, our sequential growth and pipeline is increasing, and so we're focusing on closing deals and how they actually attribute to in-quarter ARR.

Our next question comes from the line of Tyler Radke with Citi.

I guess on the demand environment, understandably it's choppy out there. We heard from Microsoft yesterday talking about EMEA weakness. But could you just talk about the trends that you saw play out throughout the quarter? And I know that you're making some go-to-market tweaks as well with taking on more of the customer work, Neil. But how much of this do you think is kind of execution versus macro? And what are you kind of assuming on the environment here in Q4?

First of all, I'm actually pleased with the performance that we delivered in Q3. In terms of over the course of the quarter, again, very small puts and takes of any change in trend across geos and verticals. I think we've been focusing and executing quite well in this challenging environment. And again, to be clear, no real change in terms of what we're seeing in terms of customer behavior. And again, maybe different than others on other calls, but I've been very consistent around the environment has been challenged. Even post Q2, we mentioned its challenged and it remains as such because of this point around close rates. And going into Q4, the way in which we're thinking about this is, and I'll take the piece around guidance, the update to the high end of our guidance takes into account how the deals we landed in Q3 will show up in Q4 ARR. It also factors in the close rates we expect in Q4 based on the further maturation of deals in our pipeline. In our view, how those will impact Q4 in-quarter ARR. So that guidance range we feel is appropriate, balancing up the risks and opportunity from what we see from now to the end of the quarter.

Our next question comes from the line of Joe Vruwink with Baird.

Neil, maybe you can expand a bit on what you've observed at PTC and also maybe feedback from customers where ultimately operating a flat org structure and taking on the roles and responsibilities you outlined at the start where that makes the most sense and you see an opportunity to actually move results forward.

A consistent theme from my prior calls around where are we putting wood behind which arrows and that is driven by our belief around where we could drive the most customer value and where we have the highest right to win. And so, that's how we set forward the five priorities of the company that I've been consistently talking about for the last couple of quarters. We did some repositioning of product and R&D capabilities in IoT ARR back to core products to reinforce those priorities to deliver a better outcome of those priorities over the next number of years. The same is happening now across all these other functions. In particular now, the focus is around the go-to-market function, by which it's not around efficiency. It is around are we using every person we have in this company effectively towards those five priorities. And so, we're working through making sure whoever is targeting PLM expansion capabilities is adequately enabled, is adequately incented, is structured in our go-to-market model by which they can be successful that delivers value to the customer and returns to the company. And so, that's what we're working through. And the other stones that we're kind of working through is because we've set these priorities very clearly, we're all really energized by these priorities because we're seeing, to your question, a lot of customer demand and pull from it. We're looking at anything we're spending money in that can be better utilized using that same dollar on things that could accelerate those priorities, whether it be greater R&D capabilities, which we've been doing it, whether it be making sure we position the rest of your organization to serve those customers towards those five priorities. So that's how we're looking at it currently. And again, much work to do, early innings and heavy lifting will continue into 2025.

Our next question comes from the line of Stephen Tusa with J.P. Morgan.

Obviously, a lot of different cross currents here in the macro, whether it's the kind of budget questions around AI and things like that. Obviously, your key competitor had quite a significant miss. They talked about geopolitics a bit. I guess you guys aren't seeing that. Can you just remind us of maybe how you differ from Dassault [ph] and maybe what makes your model a bit more resilient perhaps? And are you seeing kind of geopolitical issues? Or when you talk about the macro, is it something just a bit more, I guess, financially or business related to customers being a bit more cautious on budgets like we've been hearing for the last year-and-a-half, two years?

Look, from a PTC standpoint, again, I just want to keep reiterating this. We did not see any discernible change in trend amongst geographies and verticals. Whatever our competitor mentioned, we didn't really see that same dynamic happen in that vertical at PTC. I'm not sure what we're doing different than them, in particular, but we didn't see that dynamic play out here. Partly, we've been very consistent around making sure everyone's clear in the way we're actually operating is within a challenging sales environment. And we've been seeing that and not getting ahead of our skis thinking it's going to change, but being operating under that environment. And I think that discipline with a great product portfolio, I think, is differentiated across the industry with a movement towards building the business towards these five priorities that is more consistent to create the execution. Kristian called, is why I believe we're continuing to deliver the types of results we are and why Kristian and I are looking at Q4 and making sure with this growing pipeline, we continue to make sure we deliver on the commitments that we're making and drive customer value.

I guess just a follow-up, great answer first of all, but just the follow-up. Looking at next year, obviously, you guys have pretty high confidence in, I guess, giving us a framework for next year in this environment. What kind of environment are we talking about to get below the double digit range in ARR? Secondarily, how close are you guys to having the playbook ready to respond on the cash side? Like you said, you would be able to in that environment. I don't think we're going to that type of scenario, but it seems like your model is very defensive from this perspective. It would take a lot to drive you to that point. Just curious what the mindset is around defending the cash at this stage.

You want to start, Kristian?

Again, I don't think we really want to get into the nitty gritty details of the guidance for next year. As I said, we're still working through the detailed planning process. That said, I think that we've seen our – we'll call it budgeting process, play out here this year. As we've articulated, we start the year with a range of expected outcomes on the top line. We start the year with a spend run rate. And as we progress through the year, as we get more comfortable, we release more incremental funding into the system. So that's how we try to gauge it and we would continue to try to do that and we're frankly doing it right now already in preparation for next year and that's how we're thinking about it. So we're really talking about modulating incremental expense into next year and hopefully not putting ourselves in a situation where we've got to actually pare back expense. I think we feel pretty comfortable about it.

[Operator Instructions]. Our next question comes from the line of Adam Borg with Stifel.

Neil, maybe for you, it's great to hear the continued kind of turning over all the stones as you take a fresh look at the entire organization. As we think about go-to-market and potential changes there, how do we think about the potential risk of disruptions from those changes in the near term and how is that contemplated in guidance?

One of the benefits of having been here now 18 months, maybe a little bit longer, is I've had the time to process, be part of the organization, to think through and observe. I'm part of a number of customer conversations, etc. I've had a great transition process with Mike DiTullio, as I mentioned, and I feel confident that my thoughtfulness, our thoughtfulness around what to change from position of strength, not a position of weakness, is actually a very exciting thing for many people here at PTC to make sure we're enabling them to be as successful as they can across these five priorities. So I actually believe that the work we're doing fundamentally is going to be a huge value to a lot of people here at PTC to unleash even greater work that they've been doing. And so, to that end, these are going to be very intentional moves. I've done it a number of times in my career and it's to drive more effectiveness and I feel really good about our ability to manage through these changes.

Maybe just a quick housekeeping for Kristian. I know we lowered the top end of the ARR range by $20 million and I apologize if I missed it. I think last quarter it was lowered due to some ARR contracts being renegotiated, more deferred ARR. Is that what we're talking about here or is there something different? And I apologize if I missed it.

No, there were no other changes to the deferred ARR, like we talked about last quarter. This was simply reflecting – this is I think what Neil was saying earlier, reflecting how our Q3 results came in and the composition of those deals and how they roll into ARR in Q3 and Q4 and beyond and the outlook to the best of our ability for Q4 as well, given the deals that are in play and the pipeline and expectations around what the composition of those deals is going to look like as they materialize into ARR.

Our next question comes from the line of Joshua Tilton with Wolfe Research.

I actually kind of want to follow up on that last question. I want to ask a little differently. Kristian, I always appreciate your cabin teach-ins. And one of the things you emphasize is kind of the relationship between ARR and free cash flow. And I guess if I look, free cash flow missed by $10 million in the quarter and you're also lowering the midpoint to the full year ARR number by $10 million as well. Kind of implies that there was a $10 million dollar deal or $10 million of ARR that should have landed this quarter and is no longer in the guidance. I guess, is that the right read? And if so, is that because the deal is going to close in later periods or is this just you guys being prudent? Any color there would be great.

It's a great question, Josh. No, and that actually is not the case at all. On free cash flow is actually simply timing. Just being completely candid, we had a bunch of collections that were due in the last two days of the quarter. The last two days of the quarter happened to be a Saturday and Sunday. We were hopeful that we were going to get that cash in on Friday or before, but obviously customers have a contractual right to actually pay it the following week. And so, that's what happened on the cash flow. We were hopeful that we were going to get it on the week before. We've now got that cash, so hence there's no change to the cash flow forecast for the year. That's the timing issue.

And just to confirm also, more of a clarification, I think heading into the second half, you guys still had $10 million more in deferred ARR in the balance this year versus last year. Is all $10 million of that remaining? Some of that recognized this quarter. Can you just help us understand that?

Yeah, it was about half of it in last quarter and half of it this quarter. Sorry, I'll be more precise. Half of it in Q3 and about half of it in Q4.

Our next question comes from the line of Saket Kalia with Barclays.

Neil, maybe for you, it feels like close rates is one of, if not maybe the major reason here for just the revised ARR guide. And so, the question is, can we maybe talk about that metric anecdotally, of course, for ServiceMax and Codebeamer cross-sell? I know the team really enabled PTC sellers to go after those opportunities this year. How has that sort of trended and kind of how are you feeling about those businesses when you think about kind of close rates?

Let me make a piece of this clear around close rates. Our assumption going into Q4 about close rates and looking at a deal by deal match ratio of the pipeline is no different than our view of close rates that have been evident for the most part in general for the last few years. The dynamic of what we're doing on Q4 right now in terms of guidance, how we think about it is we now know what happened in Q3. We now know the composition, meaning how the deals that we closed in Q3 are going to actually go into ARR, whether they all came into Q3 or whether part of it goes into Q4 ARR or part of it goes into the next subsequent years. So now we have that data point. We have now made the assessment around all the deals that are maturing in the pipeline and the close rates is consistent with what we've seen prior quarters and years. So it's continued challenge on the close rate, not worse, not better. And we've made assumptions around how that ARR when it closes actually comes into ARR. And that's the area where the precision is difficult for the company, given is it going to be a deal that ramps over time? Is it all going to come into one quarter? And looking at all those factors, we determined the guidance range that we put with the risk and opportunities balance. In terms of PTC and ServiceMax, Saket, what I will say anecdotally is we are continuing to be pleased, excited about the buildup in momentum of Codebeamer and the interest and reception we're getting from the market, the reception that we're getting from customers that are testing out like the example that I gave to you that are thinking about broadening the expansion of the utilization across the company in Codebeamer. And on ServiceMax, the business is starting to work in terms of continued buildup of really good pipeline as well as close that happened for the last year-to-date through Q3 and quite a lot of very interesting deals that we're assuming will close in Q4 to allow for a really strong jump off into next year that we will make sure we continue. So on both fronts, all systems go and we're very pleased so far with the momentum. We still have to close and continue that momentum sustained over the next number of years.

Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.

How are you baking in – well, let me rephrase, your customers' decision-making, whether it's close rates or pipeline or whether they want to expand, how are they baking in the US election into that process? You serve some industries like automotive and aerospace and defense that are sensitive to that. And then how are you baking that into the guidance framework, if at all?

It's the first time in my career where I've been spending so much time with executives and customers across the world, and they ask me who's going to win the election in the US. It's a consistent and quite a confusing time for everyone around what happens in the US. That being said, I think for the most part, customers are understanding that whoever gets put in the office, a lot of things don't dramatically change depending on the composition, what happens across all different constituents of the US election. And so, part of what we're seeing and part of what we're continuing to assume and hearing, most importantly, for our customers is we got to get on with digital transformation, regardless of if this person's in office or that person's in office, because we are not becoming competitive if we can't deliver products faster, with better quality, and a more sustainable cost structure, given all the things that are happening around the world. I will say that geopolitics, the environment, the uncertainty, wars have been consistent for the last number of years, which is why we continue to say we've not said that the environment's getting better. We don't believe it's getting worse based on this. And we're going to navigate through this time period. And we've thought through that in the way in which we set the guidance here.

Our next question comes from the line of Matthew Hedberg with RBC Capital Markets.

It's Mike Richards on for Matt. So I appreciate the early look into 2025. So maybe how should we be thinking about the drivers of that low double-digit growth and how that sort of evolves from this year as it pertains to the five focus areas? And even acknowledging that it's a decade-long journey for SaaS, maybe how that might contribute more to growth as we move forward.

Again, I think we'll get into providing more details when we give the official fiscal 2025 guidance next quarter.

Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Neil, Kristian, one of our observations about your largest market historically, namely the CAD market, is that over the last year, the share shifting that we have seen in the prior few years, which worked out to your benefit, has somewhat abated. In other words, share seems much more stable of late in that market. If it should turn out that the CAD market becomes increasingly competitive, how do you think about your competitive responses, perhaps in pricing or packaging or some other means? And again, if it were to become more competitive, how might that affect your broader cross-selling initiatives or ability to close cross-selling? And then secondarily, Neil, I liked your comments on the internal stone turning. Could you elaborate on the R&D changes that you're making, particularly in terms of the common platform that you've been working on, namely Atlas, which we frankly have not heard a good deal about lately?

On the first part on CAD, we have two awesome ways in which we're addressing the market. As you know, Jay, we've got Onshape, industry's only cloud-native CAD application, and we got Creo, which is awesome, as you know. And so, those two together, we feel have competitiveness. I am not talking about Onshape. It's a great part of our business, building momentum. We feel very good about it, competitive positioning. It's starting to scale. I will talk about it when it has a meaningful impact at an aggregate level to the financials of the business. But, strategically, we continue to make sure our chips are being placed to ensure that Onshape is successful against some of the other solutions that are out there from our competitors. And then you've got Creo, which is a very strong tool. And our belief is the connection of Creo to Windchill and ultimately Codebeamer, the three together, is a very strong value proposition for many customers thinking about how they think about the digital thread. So, Jay, I would say in the CAD business, we're ready, we're competing, we're in several different dynamics of deals that might cause share shifts, might not. As you know, it's not an easy business to do share shifts, but we believe we have a very comprehensive offering on both fronts, industry leading, scale player in Creo, and Onshape, which is starting to hit their stride here and we're going to continue to focus in on it. On your point around turning over stones on R&D, what I'll say is we're focusing in particularly on go-to-market and G&A. We're making sure on R&D, we are focusing on making sure the team is aligned to deliver on the roadmap. Every single one of our customers, Jay, is saying, we love your products, we love where you're going in terms of building feature functionality, scalability of those products, just do it. And so, job number one for the R&D team is keep doing that and do it with precision, energy because our customers need it. So that's number one. Including by the way, the Atlas team, because that is a fundamental layer by which we have the ability to offer our SaaS offerings. And two, continue to build innovative offerings. We're continuing to build ways in which we could add generative AI into our products. We're continuing to do – we just released an awesome integration of ServiceMax to Windchill on-time with great quality on July 11th of this month. We have another release of a ServiceMax ability to – now have ServiceMax able to be sold alongside Windchill in the federal space. So we're continuing to build some of these innovations, including with Codebeamer, Windchill and Creo and Onshape to make sure we're at the best-in-class here. I'll pause there.

Our next question comes from the line of Clark Jeffries with Piper Sandler.

I wanted to ask Kristian, we're asking a lot of questions here about close rates and pipeline, but maybe going back to that framework that you've set around ARR and what you need to believe on a sequential ARR basis. I just wanted to maybe have the discussion on – in relation to that $85 million for Q4, you called out the $5 million related to some of those existing contracts. What is the percentage in that $85 million that's going to come from uplift or pricing, drivers that are relatively in-hand versus new sales or upsells that might be more sensitive to execution?

I guess we could take a stab at it. I think I would think about it in a few different buckets. There is some benefit from pricing. As you know, we tend to be pretty customer friendly on that front, but there's certainly some benefit from that. I would say consistent with what's been in the past couple of years. Then I would probably start moving up the stack and thinking about the channel. The channel has been a pretty consistent performer really for a number of years now. And we haven't really seen any meaningful changes in one direction or the other that would indicate a change in the trend there. So that gives us some level of comfort. Then I would move up also more into our kind of base business and base transactions. And again, the kind of volumes that we've seen there have been pretty consistent. And then lastly, you get to the large deals and that's really where the volatility is in any given quarter. And of course, it's also those large deals where you see the other dynamics come into play. Not only is it going to close in the quarter, but if it closes, how much of it's in quarter start? Is it a ramp deal? Is it all starting in the quarter, et cetera? And that's the part that's on a quarter-by-quarter basis difficult to predict with a high degree of certainty.

Thank you. I will now hand the call back over to Neil Barua for closing remarks.

Thank you, everyone, for joining us today. Here's what's ahead specific to investor conferences. August 20th, Steve Dertien, our CTO, will join the Rosenblatt Virtual Tech Summit Conference. September 4th, Kristian will be at the Citi Global Tech Conference in New York. On behalf of the team, thank you again and we look forward to engaging with you.

Thanks, everybody.

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