Good afternoon, ladies and gentlemen, and thank you for standing by, and welcome to today's PTC 2024 Fourth Quarter Conference Call. During this presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for open questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Matt, please go ahead.

Good afternoon. Thank you, Aaron, and welcome to PTC's fourth quarter and full fiscal year 2024 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 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 6, 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 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. I've been traveling the globe, meeting with customers, listening to their perspectives and supporting the teams to close deals. I'm hearing one consistent theme from the companies that build the products the world relies upon, "Neil, we need to shorten our development time lines as quickly as possible with the highest quality to remain competitive. This includes our hardware, mechanical, electronic and embedded software processes that all need to come together for a final product. Please help us do this as PTC's core offerings are the key to unlock this value." This is PTC's North Star as we are best positioned across these critical dimensions to address the needs of our customers have. It is tangible of the momentum. And while it might not show up every quarter in a linear fashion, I'm orderly convinced of our long-term trajectory due to this tectonic shift happening within the key verticals we serve. In fiscal 2024, our free cash flow growth was solid, up 25% year-over-year. Our constant currency ARR growth was up 12% year-over-year. I am proud of the team as these results were driven in a selling environment that remain difficult, an environment that is consistent with what we have been articulating over the course of the past two years. We also delivered despite several organizational moves we made over the past two quarters. There were varying pockets of relative strength, such as areas in APAC and more broadly with our reseller channel. There are also pockets of relative weakness such as Western Europe. In summary, however, aggregate transaction volumes were in line with what we have been seeing over the past couple of years, which speaks to PTC's resilient business model and our diversification across the verticals and geographies we serve. This allowed us to report solid…

Thanks, Neil, and hello, everyone. Starting off with Slide 7, 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 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 Q4, our constant currency ARR using our fiscal 2024 plan FX rates was $2.207 billion, up 12% year-over-year. Deferred ARR came in as expected. Moving on to cash flow. In Q4, our free cash flow results were also solid as we resolved the collection timing issues we saw last quarter. For the full-year, our free cash flow was $736 million, up 25%. Over the medium term, we continue to expect our free cash flow to grow faster than our ARR, with our non-GAAP operating expenses expected to grow at roughly half the rate of ARR. A basic tenet of our subscription business model and budgeting process is that there's natural operating leverage we benefit from as our ARR grows. In fiscal 2024, our operating efficiency expanded by 370 basis points to 42% compared to 38% in fiscal 2023. Moving to Slide 8. There are a few key takeaways here. First, as I just mentioned, we expect that our OpEx will grow at approximately half the rate of ARR over time. You can see that on this slide. On the right-hand side, you can see our constant currency ARR CAGR from fiscal 2021 through fiscal 2025 is approximately 15%, and our expected OpEx CAGR is approximately 6%. This is the leverage I was mentioning on the previous…

Thank you. And ladies and gentlemen, as mentioned, we will begin our Q&A session now. [Operator Instructions] Our first question for today comes from the line of Ken Wong with Oppenheimer & Co. Your line is live.

Fantastic. I wanted to just ask a question in terms of the go-to-market disruption. Neil, you mentioned that Kristian has baked that into the guidance I guess, one, when would you assume that you hit sort of peak disruption. And then I couldn't help but notice that in Q1, you're growing 10.5% and 11% on an adjusted basis. Is that the right way to think about the growth rate, assuming you guys can manage through the disruption with minimal impact?

Let me take the – Ken, thanks for the question. Let me take the front end and Kristian could talk about the way in which we're thinking about the year. So we're not expecting disruption. In fact, we've been really thoughtful and have gone to already great lengths to prevent disruption. We've got a number of mechanisms. We've done it before to make sure that we prevent that disruption across the team as we're going through this transformation. At the same time, though, we are also recognizing that as in many go-to-market transitions that happen across every company, there can be some friction within the sales team. Just like all our best efforts, at the end of the day, these are people, not spreadsheets. Emotion is there and a lot of management that goes into them. But again, we're hyper-focused on making sure that we minimize it. But in contrast to your question to setting guidance conservatively to kind of artificially engineer a beat and raise cadence, we set our guidance in a way that gives us some room, Ken, in case we end up seeing any short-term disruptions over the course of the next number of quarters. Kristian, do you want to take the second piece?

I think you just did.

Okay. Good.

All right, perfect. Thank you, guys.

Thank you for your questions. Our next question is from the line of Daniel Jester with BMO Capital Markets. Your line is live.

Great. Thanks for taking my question. Maybe just on the market. I know there's five pillars on the product side of what you're really focused on. Maybe, Neil, we can have an update as to what you expect to see from maybe variation in terms of performance of the business and maybe double-click on ServiceMax and Codebeamer? Thank you.

Yes. Good question. So as you can see from the results from our PLM and CAD breakout, we continue to have strong performance across those categories across last year. And what's driving that is this – the Windchill proliferation, which will – the strategy of this go-to-market transformation is within the verticals that are using Windchill, how to continue to penetrate that more in a precise and consistent manner across the enterprise. So Windchill is something we continue to see momentum in. We're building more momentum. And with this vertical strategy, we'll have even more precision by the key verticals we already serve with nomenclature and examples of other customers in those verticals that are using Windchill at scale like we're seeing in many cases already. But we have plenty of wood to chop to take down all those dollars in ARR that we could have as we expand Windchill. So that's a category that we're really leaning into. Codebeamer, as you asked, last year, and particularly in Q4, two out of the 10 largest automotive OEM companies with revenue, two out of them are expanding Codebeamer even in Q4 at pace, and so that's good. Additional three-plus customers that have been using Codebeamer already in deployment have decided to expand that usage. So we're starting to see this element of Codebeamer as it gets deployed in the environment as software engineers are using it as they're seeing how software interacts with the hardware engineers, mechanical engineers, customers are saying, we want more Codebeamer. So we're going to press on that. You're going to see continued emphasis on how Codebeamer, Windchill work even more comprehensively together, which will continue to accelerate the PLM for us that we're starting to see in the market. And then lastly, I know I didn't talk about customers, as I mentioned on the call, but there's a great case study that we're seeing continued indications and customer deployments on with ServiceMax, to your question, around one of the largest manufacturers of cranes in the world has been a large Creo, Windchill customer for almost a few decades. And we've been working on this with the ServiceMax team for the last call it, 12 to 18 months with this customer, with our new release that I mentioned in the summertime around Windchill and ServiceMax connected on trouble tickets being able to flow back into Windchill from ServiceMax. That customer did a very comprehensive proposal and an RFP that looked at all the competitive offerings, and they chose us because of ServiceMax's integration with Windchill and the flow of product data from engineering to service and back, which was the key differentiator for us. So we see continued emphasis there. Momentum continues to build, and we look forward to a good year on both fronts.

Thank you very much.

Thank you for your question. Our next question is from the line of Saket Kalia with Barclays. Your line is live.

Okay. Great. Hey, guys. Thanks for taking my question here. Neil, maybe for you. I know you spend a lot of time with customers, and you called out Western Europe in your prepared remarks. So I'd love to just zoom into that geography a little bit. What are you hearing from customers there about willingness to spend right now? And how do you sort of envision 2025 in Europe from just a demand perspective?

Yes, great question. I have been spending a lot of time in Europe and rest of world and also here in North America meeting customers, as you mentioned. I think what we're seeing in the dynamic, we saw some of that in Q4. We delivered solid results, as we said, for ARR and really great results on cash flow for Q4. But in terms of having a blowout quarter for Q4 in ARR, we had a few deals in Western Europe, in particular, like we noted, that either pushed out or got smaller in the deal value that we're really pushing on getting done over the course of Q4, which I believe we'll still get in due time over the course of this year. And the dynamic that's happening – and at the same time, by the way, we won a number of deals that were at the same value that we thought in Western Europe and closed those in Q4. I think what we're working through is particularly within the automotive vertical in Germany, there is obviously a lot of pressure around just the cost structure, the speed in which they're developing cars, the Tier 1 suppliers that supply those folks, all those components of how do you really create competitiveness versus Chinese OEMs. We're seeing a lot of that pressure occur as we've all been reading in the press. I've been sitting in boardrooms with all of these customers. That's the bad news, kind of the highlights of the media reports. I believe that this is forcing our customers that we're serving in this specific vertical in Western Europe to rethink how they're actually operating as a business to remain competitive. And that comes down to, first, Codebeamer, was continue to blow momentum within Western Europe because software…

Makes sense. Thanks guys.

Thanks for your question. Our next question is from the line of Joe Vruwink with Baird. Your line is live.

Great. Thanks. On the go-to-market change, would you say that initiating the timing now means the structure is mature ahead of needing to be positioned for maybe any benefit from renewed spending that customers might pursue around macro improvement? And I guess, I ask because there's the potential always after a U.S. election that industrial orders pick up. If you did see an improvement in industrial sentiment vis-a-vis PMI, do you think there's a lag for your business? So you expect your pipelines to replenish maybe later in 2025? And that really simply lines up with when this new structure is going to be mature anyways? And so all of that is ultimately compatible with the changes you're now making?

Yes, great question. I would say that our teams are already underway and getting ready and executing across the plan. And there are several things we're working through around account plans, assignments, all that great stuff that every team needs to do to organize for being able to face the vertical opportunities that exist, and we're working through that. And that's the area that we believe we're not expecting disruption, but we're taking account that some things in other situations to adjust for that if something does happen. But what we won't have is not being ready for the opportunities that we see in the current pipeline. And if somehow or another, business actually changes versus the last two years of the sluggish sales environment, our vertical approach are ready with experience in these verticals at scale with big customers. We're primed to take advantage of incremental demand and being able to continue to be well versed to take advantage of that and not have as much of a lag. So I'm looking forward to if we could get manufacturing and PMIs to tick up, PTC is ready for that. We've been ready for a while, and we're going to be even more ready as we verticalize the business, which we're doing and it's underway. And we're looking forward to how that translates over the course of this year into next.

Thank you.

Thank you for your question. Our next line is from the line of Adam Borg with Stifel. Your line is live.

Awesome. Thanks so much for taking the question. Maybe for Neil, you talked a little bit about the go-to-market focus around five key verticals. And I believe Saket's question talked a little bit about what you're seeing in the automotive. I was hoping you could talk a little bit, is there anything else interesting happening in the other four verticals worth commenting, both positive or negative? And maybe, Kristian, if you could just remind us what the current ARR mix is for each of those top five verticals, that would be really helpful? Thanks so much.

I'll start with the one that's top of everyone's mind across the world. I was in India a couple of weeks ago. It's the same dynamic. Federal, aerospace and defense is just continuing to be an area that is facing significant backlog and demand, and they're trying to move that faster through their business to deliver the products that are being asked from their customers. And so in India, I was in U.K., here in North America spending a lot of time, that segment, I think, is continuing to be an area we're leaning into. We have a lot of experience. We have a lot of credibility there. We're going to continue to do that. I'm going out to Washington, D.C. to make sure we continue to promote this, again, in a vertical marketing perspective already going into that model. We believe there's a lot of really interesting dynamics happening in the federal, aerospace and defense across the world. We're very well positioned there. On med tech and life sciences, we're also seeing an interesting other dynamic where a lot of these companies have gotten very big through a lot of acquisitions, and they're now being forced to really develop products in a faster pace. That requires PLM at the heart of an epicenter of moving product data as fast as possible to manufacturing, and so we're seeing some really interesting trends occurring in med tech and life sciences. We had a couple of really interesting wins that happened in the last couple of quarters of 2024, and we expect that to continue because again, it's a survival and existence of their business to actually put these frameworks and systems together like Windchill, like Codebeamer, like Creo and ServiceMax to be able to deal with the competitive nature of their business. And then, Adam, getting back to your other question. If we talk about the vertical exposure across the major industries, the industrial space is kind of high 20s for us. FA&D is in the – around 15%. Electronics and high tech, also in that same mid-teens. Automotive, in the kind of low teens. Med tech, in the low teens. And then the other, what we would, I guess, call non-core verticals make up the difference, which is also around kind of 15-ish percent of the business.

Awesome. Thanks again.

Great. Thank you for your question. Our next question is from the line of Jay Vleeschhouwer with Griffin Securities. Your line is live.

Hi. Thank you. Good evening. With regard to the digital thread comments, maybe we could tie that into the vertical comments you had this evening. That is which verticals would you say are furthest along in terms of adoption – adopting three or more solutions or three or more of your various three-letter acronyms, as indicative of implementing closed loop life cycle management? And then with regard to auto, when you last reported your segments as a percentage of revenue, which was six years ago, it was mid-teens percent, but your exposure to auto was very different. Back then, it was largely powertrains, some supply chain, never really body. But would you say now that with the evolution of automotive systems requirements, that your whole exposure and delivery of software to automotive is going to be fundamentally different than your more limited exposure in the past?

Yes, great question, Jay. I'll start with the second one. On automotive, I think there's been a massive shift. And our determination and our foothold in that market, I think, is very different than whatever that prior stat was given. And the reason for it is it's predominantly the influx of Windchill and Codebeamer in that group. And this, as you know well, this includes the OEMs and Tier 1, Tier 2, Tier 3 suppliers. Codebeamer is taking hold on that, and we're just pushing all accelerators. Windchill is also right along for the ride, and you'll see more and more of that come into it versus the design guys, the factory guys, those are there. They're great competitors of ours. We're more focused on helping our customers deal with this entire problem statement of how to build software-defined vehicles at speed to compete against the Chinese. And our tools and our software, Jay, as you know well, is very well placed there. In some cases, by the way, they're looking at Creo. They're looking at other things that we have across the portfolio. But the majority of the strength in that group, and you'll see that continue – again, it might not happen in a linear fashion, but the ultimate over the medium and long-term will be you will see Windchill and Codebeamer really wrap their arms around that space in an aggressive fashion. That's the strategy and kind of direction that we've got. On your first part of your question on digital thread across verticals, there's not really one that's taken – I could say, wow, they've really taken on hold. And that's the amazing part of this business, Jay, which is we look at those verticals, and this is my point of we've got a lot of money on the table to go tell them around how Creo, Windchill, Codebeamer work together. And on the aftermarket service side, how does ServiceMax fit into it, across all the other things that we've got. But in those four core areas, we've got a real opportunity with – in certain segments, already customers using it, but let's promote it across the entire vertical. And that's the area that we're going to keep pressing on. We're going to build product integrations around. We're going to get our messaging consistent around. We're going to do customer reference-ability on. And that's where we think we've got the ability to have a sustainable, low double-digit growth rate in the medium and long-term. That's the goal that we're pushing for and from our perspective.

Great. Thank you.

Thank you for your question. Our next question is from the line of Andrew Obin with Bank of America. Your line is live.

Yes. Good evening.

Andrew.

Hey. How are you? So we're sitting here right after the election, and we ended up going to a bunch of industry shows. And it just seems a lot of uncertainty that we were picking up from election, this multiyear de-stock really impacting people's budgets that have disrupted operations. Post the election, do you feel there is more uncertainty than usual about 2025 calendar year budgets? Or because the comps have gotten so much easier and we are past the election that sort of created this uncertainty, that visibility has gotten better? Thank you.

Yes. To be fair, we're 24 hours post the election results. So I was with two customers today already. And what I will say is their commentary and their desires are similar to what it was 48 hours ago, which is around how to make sure we are set up to deal with all the complexities of the world, which includes geopolitical uncertainty. But that's only one facet of it. There is supply chain uncertainty. There is workforce disruption uncertainty and retirements, aging. There's complexity of products that consumers are demanding now as we – again, I'll note the Chinese OEMs. They have opened up the world to saying, let's give the users all this complexity and configuration of products in very different ways. And when you add all that together, what we're hearing from customers, again, 24 hours, but previous to that is we need technology that PTC provides to be relevant to have product data move faster through our organization through highly configured models and variances of their products. That includes software, that includes hardware, that includes electronics and mechanical, so that we could survive. And I think that's going to be, in any scenario, a need that will continue to accelerate regardless of administration and regardless of push in certain geographies versus the others. So that's why we're – what I said was, we're working through a tectonic shift. I'm utterly convinced around the long-term view of it. The linear nature of this on a quarterly basis, you can pick and choose that number. But this business is moving in these verticals because of the urgency of our customers to survive and to remain competitive. And I think those dynamics are perfectly suited for what PTC has to offer.

So realignment is a bigger source of uncertainty into 2025 versus macro. Is that fair to say?

I think Andrew, if I could say, I think it's everything. I don't think there's going to be, at least in the last 24 hours, less uncertainty. I think it's – we're going to see how the next couple of quarters play out, and we'll be ready for it. But right now, we're focused, Andrew, on delivering what our customers are needing from us. And depending on the changes in the environment, we'll be ready for it. We have been ready for it through multiple different administrations for 35-plus years, and we were successful as a company. And we're going to deal the same way going forward for the next 35 years.

That's a great answer. Thanks so much.

Thank you for your question. And ladies and gentlemen, a reminder to please stay on the call at the conclusion of today. Neil is going to be back on to close us out. We have a final question from today from the line of Jason Celino with KeyBanc. Your line is live.

Hey. I appreciate you fitting me in. Maybe for Kristian, if we play back the tape from 90 days ago, I think when you gave us an initial framework for FY2025, you technically said double digits for ARR growth. Now if I look at the guide, technically, it's single digits at the midpoint. So curious like what has changed in these 90 days. I don't know if it was macro or if it's just the incremental conservatism around the go-to-market kind of changes, but just curious on the hair that I'm splitting here.

Yes. I think it's the latter, Jason. I think it's just conservatism around potential impact of the go-to-market realignment.

Okay. Great. Thank you.

Thank you for your question. And ladies and gentlemen, as promised, that will wrap up our Q&A session for today. And I'd like to turn the line back over to Neil to close this out. Thank you.

Thank you, everyone, for joining us and for your questions today. Kristian and Matt will be both on the road in the weeks ahead, participating in investor conferences. Kristian will be in New York, mid-November, hosting a Mizuho dinner and attending the RBC conference. Kristian will also be going to London, while I'm in Asia in early December, and we'll be at the NASDAQ Conference. Matt will be at the Wells Fargo, UBS and Barclays conferences on the West Coast in early December. And thank you again, and we really look forward to engaging with you. Thanks.