PTC Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2020 First Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Thank you, Sheila. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our fiscal Q120 results. On the call today are Jim Heppelman, Chief Executive Officer, and Christian Talatia, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As a reminder, we'll be referring to operating and non-GAAP financial measures during today's call. Discussion of our operating metrics and these items excluded from our non-GAAP financial measures and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related Form 8-K. Lastly, references to growth rates will be in constant currency unless otherwise noted. And with that, let me turn the call over to Jim.

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. I'm pleased to share that our solid Q1 performance puts us right on track to deliver against our fiscal 20 targets and our attractive long-term financial ranges. ARR, which is our key top-line metric, grew 11% in Q1. As Christian will detail later in the call, we are raising our fiscal 20 ARR guidance based on our Q1 performance, our visibility into the balance of the fiscal year, and favorable currency tailwinds. We're also raising revenue, EPS, and adjusted free cash flow guidance for the year. At the midpoint of our guidance, we're now expecting fiscal 20 ARR growth in the mid-teens, revenue growth approaching 20%, and EPS growth above 40%. The benefits of all the hard work we've done in the past year is to expand our profitability, to increase our growth rate, and to convert to a subscription model are really starting to show because PTC truly is emerging as one of the world's premier public software companies. Before digging into the details, I'd like to share some observations about broader industry trends and PTC's unique position in terms of helping customers thrive during this period of rapid change in the industrial world. Similar to other industries like entertainment, hospitality, or transportation that have been disrupted by digital technologies, industrial companies are now facing new challenges from traditional competitors that are embracing digital technologies across their value chains, and from new entrants exploring new business models. Digital transformation has become a wave that's sweeping across the industrial market, enabling companies to better differentiate their products and services while simultaneously optimizing their engineering, manufacturing, sales, and service processes. As the only company out there who has a suite of CAD, PLM, IoT, AI, and AR capabilities, PTC has a unique ability to help customers pursue their digital transformation ambitions. Every day, we're helping customers to do things like implement AI-driven product design, or to create a digital thread to leverage product data across their value chain, or to gain operational insight from their products in the field and their assets in their factories through our leading IoT and AI technology, and to drive significant improvements to worker productivity through our AR technology. I host many customer meetings, and I can tell you that PTC solutions really resonate with our customers because they align with their high priority initiatives. Nobody else looks like PTC, and with the opportunity in front of us, it's a very exciting time to be here. Given our performance and forward-looking momentum, one should take note that traditional economic measures, like the PMI index, are now much less correlated with PTC business trends. As we all learned in the Great Recession of 2009, recurring revenue streams are impacted much less by economic fluctuations than is perpetual license revenue. This suggests that our subscription-based business model, coupled with growing secular dynamics of our business that I described earlier, have to a large degree driven a decoupling from traditional cyclical measures like PMI. We are guiding the strong ARR growth against the backdrop of some of the most lackluster PMI numbers in recent memory. Of course, we remain mindful of these external measures, but this negative sentiment has been around for some time now. This decoupling gives us even more confidence in our ability to drive sustainable growth going forward. Turning now to some highlights in the quarter, I'll begin with our growth business that now includes ThingWorx IoT, Vuforia AR, and Onshape SaaS. ARR growth for our IoT solutions accelerated quarter over quarter, and our augmented reality solutions once again outpaced high market growth rates, thanks to a continuation of the trend of customers introducing AR into their manufacturing and service environments. In addition to healthy new logo activity, Q1 expansion bookings represented about 65% of IoT and AR bookings, primarily driven by customers shifting from pilots to to production at an accelerating pace. The number of six-figure deals in the quarter more than doubled versus a year ago. When viewed through an ARR lens, trends across our customer cohorts are impressive. Relative to Q1 of last year, the number of IoT and ARR customers with ARR greater than 500K grew by over 50%. One of these customers, Thermo Fisher, is a great example of how enterprises are transforming their business with PTC solutions. Thermo Fisher is a global leader in the biotech space who's leveraging ThingWorx to offer new value-added services to further differentiate themselves in their competitive end markets. In their chemical analysis division, for example, Thermo Fisher embeds ThingWorx within their products, allowing end customers to remotely capture and analyze test data from these products. Thermo Fisher is also leveraging ThingWorx for predictive maintenance and to provide feedback loops to their product development teams. Thermo Fisher is representative of the trends we're seeing where customers are expanding their digital footprint across product lines and use cases and into their production environments as well. Given the broad scope and global nature of the digital transformation opportunity within the industrial market, we knew it would be challenging to pursue this alone. Of course, that's why we formed strategic alliances with industry leaders like Rockwell Automation and Microsoft. Both of these alliances, again, delivered the goods in Q1. In our Rockwell Automation Alliance, Q1 provided a strong start to the year with robust New Deal activity, plus a meaningful uptick in expansions as pilot projects that were kicked off earlier in FY19 moved into production. The Rockwell Alliance team delivered new deals across the broad cross-section of vertical markets and in 15 different geographies, which highlights both the deep industrial domain expertise and the global reach that Rockwell Automation brings to this relationship. In our Microsoft Alliance, Q1 also marked a strong start to the year with new ACV bookings well above plan. Geographically, the Americas continues to be the main driver of growth, however momentum in Europe is building. and the Microsoft Alliance has a robust pipeline heading into Q2. We're also pleased to see that demand continued to expand beyond the smart connected product use case into factory and even AR solutions, which represented more than a third of the Alliance bookings in Q1. A great proof point of the power of our Microsoft Alliance is a recent win at Johnson Controls, who's a leading global provider of building control systems. It turns out that PTC, Microsoft, and Accenture were independently supporting JCI's digital transformation efforts from different angles. Too many cooks in the kitchen ran the risk of slowing things down, so PTC, Microsoft, and Accenture joined forces and approached the C-suite with a unified strategy for their smart factory initiatives. Together, we landed a deal to deliver a fully cloud-based smart factory solution that has Accenture deploying PTC's ThingWorx on Microsoft's Azure. Before I leave the growth discussion, let me share that we're making great progress integrating the Onshape team. In fact, the Onshape team moved into our seaport headquarters earlier this week. I like to think of Onshape as the proverbial iceberg. What you see above water, the 5%, looks a lot like a next gen CAD and PLM system. But what's below the water, the 95%, is PTC's new peer SaaS platform. We have big plans for Onshape and for SaaS, and I'm convinced this will become another major growth engine for PTC. While it's too early to say much yet, I look forward to updating you on our SaaS progress in coming quarters. Our core product group delivered strong Q1 performance as well. Core business ARR growth of 10%, outpaced market growth again in the quarter. It was led by very strong performance in PLM, which delivered mid-teens ARR growth that reflected broad-based strength across all major geographies. In my view, the strong performance in PLM is indicative of the growing strategic role that PLM technology now plays in our customers' digital transformation strategies. Any industrial company who wants to undertake a digital transformation quickly realizes that PLM will need to be one of their anchor tenant systems of record. Take Group Beneteau, a French manufacturer who's a leader in luxury sail and powerboats. By leveraging PTC's windchill, along with Creo and ThingWorx and Vuforia, Beneteau is delivering product and service differentiation together with engineering excellence and operational efficiency. Their PLM technology roadmap began with foundational capabilities such as bill of material management and change management. then extended into the factory with concurrent engineering and manufacturing instructions, and from there into leveraging AR functionality for shop floor operators and dealership scenarios. This powerful combination of highly differentiated technologies is truly unique to PTC. We're using it to win new business and to expand relationships with existing customers as they seek to modernize their business processes. Altogether, we're seeing more and more evidence of a rejuvenation of PLM that makes the long-term growth opportunity that much more attractive for PTC. Our CAD team had a solid start to the year, too, again delivering high single-digit ARR growth with notable strength in Asia Pacific and in our global reseller channel. On the Creo simulation live front, which is the starting point for our Ansys partnership, interest remains high. Adoption, particularly in the enterprise space, continues to ramp nicely with average deal sizes continuing to grow. Our focus on Creo Simulation Live, or CSL as we call it, in FY20 is on driving adoption in the channel, which generates about half of our CAD business. We're kicking off new channel enablement and promotional programs in Q2 and remain bullish on the long-term opportunity for significant CSL penetration in our install base. While CSL is the tip of the spear, and our partnership with ANSYS, we're also making good progress bringing the broader Discovery AIM suite into the CREO fold as well. To wrap up my comments, I'd like to reiterate PTC's full commitment to driving mid-teens ARR growth and generating significant free cash flow in the coming years. Our strong performance in CAD and PLM, plus our leadership positions in the high-growth IoT and ARR markets, and more new opportunities for growth in the SaaS-based product development market with Onshape gives us strong confidence that our growth will remain both significant and sustainable over the long term. With our subscription transition in the rearview mirror and our ongoing focus on disciplined cost and portfolio management, we're firmly on track with our plans to transform PTC into one of the premier public software companies in the world. With that, I'll turn it over to Christian to comment on financials and guidance.