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spk00: Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2020 fourth 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 Tim Fox, PTC Senior Vice President of Investor Relations. Please go ahead.
spk11: Thank you, Joelle. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our fourth quarter and fiscal year 2020 financial results. On the call today are Jim Heppelman, Chief Executive Officer, and Christian Talatia, Chief Financial Officer. Before we get started, we'd like to acknowledge that a table from our press release became public, and we're currently looking into how this happened. In the meantime, of course, the full set of earnings documents are available on PTC's Investor Relations website. Now, moving on to today's call, please note that our comments, including 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 filing with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As a reminder, we will be referring to operating and non-GAAP financial measures during today's call. Discussion of our operating metrics and the 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 8K. References to growth rates will be in constant currency unless otherwise noted. And lastly, we'll be referencing our prepared remarks document, which is in presentation form today, which you can find posted on our IR website. With that, let me turn it over to Jim.
spk01: Thanks, Tim. Good afternoon, everyone, and thank you for joining us. I hope you and your families continue to stay safe and well during this crisis. Before jumping into our quarter and year-end review, I'd like to begin by sharing several pieces of new news that we announced earlier this afternoon. Turning to slide four, we're very pleased to announce that PTC and Rockwell Automation have extended our strategic partnership by two additional years, which cements the alliance in place through fiscal 23. We have also broadened the partnership beyond IoT and AR to include PLM and Onshape. Back in May, Rockwell acquired Calypso, a professional services company who has been a strong PLM and IoT partner of PTC for years. Calypso gives Rockwell increased capabilities to pursue digital threat initiatives so the scope of our agreement has been broadened to embrace those pursuits. The agreement has other changes that better encourage sales cooperation, give PTC access to Rockwell's Emulate 3D factory simulation software, and naturally contemplates continued growth through fiscal 23. The alliance has expanded our reach and our capabilities as intended. While providing Rockwell with access to best-in-class Industry 4.0 software technology, The agreement has allowed PTC to address significant white space in the market. Rockwell has introduced PTC technology into more than 250 sizable companies across 45 countries to date, and 70% represent new logos to PTC. Rockwell has quickly become one of PTC's biggest and most important partners. Blake Moret, the Chairman and CEO of Rockwell Automation, shares my view that this extension is a big win for both companies. Turning now to slide five, we also announced earlier today that we'll be hosting a virtual investor day on December 15th. We'll be reviewing our strategy, secular growth drivers in our markets, our broad solutions portfolio, and how we're taking those solutions to market. Christian will also review progress of our very attractive financial model. Given that upcoming event, we plan to keep this call focused on Q4 and fiscal 20 results and on fiscal 21 guidance. We hope you can join us for the event in December. With that, I'd like to turn to slide six and spend a few minutes describing what we see as the three key elements of our strategy to deliver long-term shareholder value. It starts by aligning with market demand so we can build a strong pipeline. then optimizing new and renewal sales and customer success to power the top-line ARR growth. Finally, creating an efficient business model and operation that allows PTC to drive the bottom-line free cash flow growth even faster. This will be PTC's new framework for describing our business strategy, operations, and results here as we head into fiscal 21. First, on market demand. Fiscal 20 will no doubt be remembered as one of the most unique and challenging times PTC has faced over a 35-year history. I fundamentally believe we'll look back at the last fiscal year as a pivotal moment for PTC. Pivotal in the sense that our suite of software solutions, which have been driving significant value from customers before the pandemic, have now become even more mission critical. Years back, we had anticipated a growing need for the types of capabilities PTC has been investing in, but COVID has certainly accelerated demand for them. Digital transformation initiatives across the industrial space are accelerating as companies adjust to this new normal way of doing business. The importance of solutions that enable work from home, global team and supply chain collaboration, remote asset management, remote frontline worker training and support, have never been higher. For PTC, this translates into more demand for PLM, for IoT, for AR, and for SAS. What we're seeing in our pipeline, which stands at record levels, confirms that PTC is in a strong position. Regarding the top line, necessity is the mother of invention, and work from home has pushed PTC to dramatically accelerate our digital marketing and sales capabilities. I'm very pleased to report that we delivered strong Q4 bookings, up from the previous high-water mark in Q4 of 19, which is even more impressive when you consider the state of the global economy and the fact that our sales teams were constrained to virtual operations. I feel like we've made more progress adopting digital go-to-market in the last six months than in the previous five years. With the subscription transition in the rear-view mirror, we have successfully crossed the proverbial valley of death, and are back to record levels of ARR in revenue. Now we're enjoying the top-line stability and the higher rates of growth and higher margins that led us to undertake that difficult five-year journey. As proof, fiscal 20 marked the third consecutive year of double-digit ARR growth for PTC, despite the extreme volatility of PMIs and the macro environment that occurred during that same timeframe. Now more than 90% of our revenue is software and 98% of that software revenue is recurring. I'm so pleased with this outcome. It came just in time for COVID. Finally, in the bottom line category, our EPS and free cash flow were both above guidance. As Christian will detail a little later, our fiscal 21 free cash flow guidance represents another new high watermark for PDC. This is driven by strong ARR growth and the passing of several short-term free cash flow headwinds that held us back in fiscal 20, but are now fading as we go into fiscal 21, allowing our true earnings power to shine through. Altogether, PTC is very fortunate to have industry-leading technology that's well aligned with secular growth drivers, vastly improved digital go-to-market capabilities, and in a sustainable and efficient recurring software business model. With that, let me turn to slide seven and touch on a few key financial highlights. ARR of 1.27 billion represents growth of 14% or 11% at constant currency, which was the midpoint of our guidance range. To put the COVID-19 impact into context, fiscal 20 ARR growth was about 500 basis points below our pre-COVID internal plan, due to bookings pressures and modestly elevated churn resulting from the pandemic. At this point, we see a smaller 200 basis point headwind to fiscal 21 ARR growth, and as of now, no headwind to fiscal 22 and beyond. Overall, we're very pleased with our fiscal 20 financial results and excited about our fiscal 21 guidance, yet I believe that PDC is positioned to do even better in coming years. There's a lot of shareholder value creation that lies ahead of us. With that as context, let's take a look at the respective contributions of the FSG core and growth business segments of our portfolio. Moving to slide eight, you'll see that ARR growth declined modestly in our FSG business, but was strong in our much larger core business and accelerated in our fast-growing growth business. Recall that our focus solutions group, which we position as a lower growth cash cow, has exposure to industries heavily impacted by COVID-19, in particular retailers and airlines. Our FSG products remain very competitive, and we're expecting FSG to recover to low single-digit growth again in fiscal 21 as economic conditions in those segments improve. At the same time, we're very pleased with the 11% growth of our core business, which continues to materially outpace the market growth rate. Q4 was the 12th consecutive quarter that our core ARR growth rate has been in double digits. Meanwhile, our growth business had a very strong quarter in a year, with growth trending back to the levels we want to see. Thingworks, Vuforia, and Onshape all posted impressive results in Q4, but Vuforia and Onshape have really been strong all year. It's worth noting that ARR of our growth business has now surpassed that of FSG, which creates a tailwind of growth for the entire portfolio. Let's go a click deeper into the main elements of our core and growth segments. Turning to slide 9, our CAD team delivered a solid quarter with ARR growth in the high single digits. Across GEOS, APAC once again delivered strong results, and the overall demand environment improved sequentially in the Americas and stabilized in Europe. Overall, CAD renewals remain healthy, with churn improving quarter over quarter. We're excited to be launching the next release of Creo 7 in the coming months, which incorporates our first Atlas-based offering. Creo Generative Design Extension, or GDX as we call it, leverages our frustum generative design technology with the compute offloaded to a peer SaaS Atlas environment from where it is served to both Creo and Onshape. Also in this next Creo release, we'll be launching the mainstream high-fidelity simulation capabilities from ANSYS fully integrated with Creo, creating another highly differentiated leg of growth for our CAD business. Speaking of ANSYS, we had solid results from Creo Simulation Live, our CAD solution that embeds real-time simulation from ANSYS, which delivered its second-highest bookings quarter to date. We continue to see interest across a wide variety of verticals, like automotive, medical device, industrials, and in the high-tech space. On slide 10, we highlight a great high-tech CSL win with NVIDIA. This is a classic example of how traditional design and simulation processes impact time to market. Creo Simulation Live provides NVIDIA engineers with real-time control of design direction, allowing a more refined design handoff to analysts, resulting in reduced rework, faster time to market, and improved work processes. We're pleased with CSL's traction in the market and look forward to launching new marketing programs in the coming quarters. Moving on to slide 11 in our PLM business, you'll see that PLM continued to deliver strong performance with mid-teens ARR growth in Q4 and for the full year. In fact, the PLM team beat their pre-COVID sales goal for the full year. From a geographic perspective in Q4, PLM performance was broad-based with double-digit growth across all three major geographies led by the APAC region. From a vertical perspective, our PLM team continues to win big in medical device space and in A&D. Turning to slide 12, a great proof point in the life sciences arena was a major competitive displacement at Baxter International. What started as a point solution opportunity for product requirements management expanded into a full-blown digital thread enterprise engagement. Baxter was operating with disparate independent systems and processes, which was negatively impacting regulatory cycle times. By adopting PTC's broad suite of windshield PLM solutions, Baxter's consolidating its footprint into a single enterprise system and transforming from document-centric to part-centric processes, resulting in a 4,500-seat competitive displacement. You'll see on slide 13 that we had a great win at TE connectivity. In this case, TE was using a highly customized incumbent system for technical document distribution. By leveraging ThingWorx Navigate and seamlessly integrating with Windchill PLM and other enterprise systems, TE will deliver content to 20,000 users across functions like purchasing, supply chain, planning, and manufacturing planning. Moving on to our growth business, I'll begin with IoT on slide 14. While IoT ARR was impacted in fiscal 20 from the new logo headwinds we described earlier in the year, we were pleased to see IoT bookings double sequentially in Q4, which benefited from some pent-up demand following macro slowdowns mid-year, but also benefited from a number of significant wins in the quarter. Once again, the standout IoT vertical in the quarter was medical device industry, which has experienced less economic disruption during the crisis. We also had very strong performance in the Americas with bookings more than doubling sequentially. We were also pleased to receive further validation of PTC's strong IoT market position by the industry analyst community. Just last week, PTC was named a leader in the 2020 Gartner Magic Quadrant for industrial IoT platforms. This is a particularly special award given Gartner's rigorous and in-depth evaluation process and the strong influence that Gartner has in our market. On slide 15, we have an example of ThingWorx in action at Stanley Black & Decker, one of the most venerable manufacturing brands in the industrial tool and hardware markets. Stanley's been on a multi-year digital transformation journey with BTC. and we were pleased to expand this relationship in Q4. Leveraging ThingWorx applications to expose data across previously disconnected assets, Stanley's driving significant improvements in OEE, overall equipment effectiveness, across their global manufacturing footprint. Turning to slide 16, Bridgestone is another SCO customer that's had great success leveraging ThingWorx analytics, the embedded machine learning engine, to provide real-time insights into its production environment to drive operational efficiencies, improve throughput, and improve quality all at scale. Let me shift to our AR business on slide 17. The Vuforia augmented reality team delivered very strong results in Q4 with bookings up 50% year over year. The AR team landed a nice seven-figure deal and the largest deal to date in Europe. We also saw a significant increase in the number of six-figure deals with 18 in the quarter, doubling the previous high-water mark. The large deal acceleration is a testament to the success of our upsell strategy. Customers are starting to adopt our entry-level AR solution, Vuforia Chalk, and then identifying more sophisticated AR use cases, which we address with Vuforia Studio and Vuforia Expert Capture. These advanced solutions are tailor-made for the remote work situation that our industrial customers are currently navigating. We had two notable wins in Q4 that highlighted the value of our broader AR suite. The first on slide 18 is at Jabil, a major global contract manufacturing company with 260,000 employees in 30 countries. Jabil operates in a highly competitive market where margins are paramount. One of the biggest cost inputs is, of course, human capital. So finding new transformative solutions to improve onboarding and training and increasing frontline worker efficiency can have huge returns. PTC's AR team, leveraging existing CAD and PLM relationships at Jabil, introduced the Vuforia suite to their manufacturing team and landed a seven-figure AR starter deal. Turning to slide 19, a second great AR success story in the quarter was with Nordex, one of the world's leading wind turbine manufacturers. As the COVID-19 pandemic unfolded, Nordex was planning to ramp new production capacity in India. However, the COVID-related travel restrictions kept their German-based technical experts grounded, which stalled the commissioning of new production facilities. By leveraging Vuforia Expert Capture, local technicians recorded training instructions in context, then automatically published that content to headsets and mobile devices used by the production teams on the ground in India. Turning now to slide 20, I'll wrap up my comments on our growth business by discussing Onshape, which delivered another strong quarter as they wrapped up their first year as part of the PTC family. Onshape had a record quarter with bookings up more than 80% year-over-year and with 70% growth in new logos. During fiscal 20, Onshape landed over 700 competitive displacements, the majority coming from SOLIDWORKS. I see this as clear evidence of the disruptive nature of Onshape's SaaS-based solution in what has been a competitive, mature market with entrenched incumbent players. The investments we're making in Onshape's global market expansion is starting to pay early dividends in Europe, which is a large market for design software. The PTC reseller channel, while still early in its Onshape journey, is gaining traction and opens up another exciting vector of growth for the Onshape business. Lastly on Onshape, I'd like to update you on the exciting trends we're seeing in the education market. On slide 21, you'll see that education sign-ups during the back-to-school season have been growing nicely for years, but they have literally exploded this year due to COVID. Let me explain why. Mainstream CAD systems run exclusively on Windows workstations, but students generally have MacBooks, Chromebooks, or iPads, So schools have always been forced to provide a special PC computer room on campus for any CAD-related work. Because of the pandemic, most schools now require work-from-anywhere solutions, so they're increasingly turning to Onshape, which runs on any of the devices students typically have. Schools are realizing that they don't even need the expensive PC room anymore, so I don't see the situation reverting. Winning in education is really important because students represent the workforce of tomorrow. Winning them over while setting the bar at a new level has proven to be a winning long-term sales and marketing technique in the CAD industry. We believe the rapid adoption of Onshape in education provides a template for SaaS adoption to follow in the commercial market. Our manufacturing customers have the same needs for real-time collaboration and access to data from anywhere and on any device. I believe the COVID crisis is accelerating the SaaS tipping point for the engineering software industry by several years. Bottom line is that one year into it, Onshape looks to be another excellent acquisition. To wrap up on our growth business, I think it's pretty clear that the COVID crisis has only amplified long-term growth opportunities for PDC. Let me provide some color on geographic performance. On slide 22, you'll see that APAC had strong performance with ARR growth of 14%. reflecting the earlier reopening of those economies, and much healthier churn rates on subscription licenses, particularly in China, where our subscription model seems to be gaining a foothold. America's ARR growth of 11% was driven by mid-teens PLM growth and strong growth across our ARR suite, but partially offset by softness in FSJ. Europe ARR growth of 8%, while benefiting from solid PLM performance, lagged other regions primarily because of the higher mix of CAD and pressure on new logo activity in IoT. Before I wrap up, let me turn to slide 23 and touch on our other key alliance partner. I've already spoken of the strength of the Rockwell and Ansys alliances, but our partnership with Microsoft had another strong quarter. With bookings increasing around 20% from Q3, with momentum building in Europe, which comprised 30% of the bookings in Q4, With a solid pipeline heading into FY21 and field engagement strengthening across the globe, we remain bullish on the Microsoft Alliance opportunity. To wrap up and summarize, turning to slide 24, we're seeing strong demand from secular drivers like digital transformation, work from home, the need for remote monitoring solutions for asset management, remote support of frontline workers, and growing interest in SaaS. We're in the right place at the right time. We've executed well during a challenging environment, delivering solid ARR growth and record bookings to close out the year. Our subscription transition is complete with a return to record ARR and revenue in FY20. And we're expecting a free cash flow inflection in fiscal 21 with continued strong free cash flow growth thereafter. We're confident that by aligning with market demand to build a strong pipeline and Improving our execution to convert that pipeline to robust ARR growth and leveraging scale and business model efficiencies to drive even higher free cash flow growth is a recipe that will continue to create significant shareholder value for years to come. With that, I'll turn it over to Christian, who will take you through more details on the financial results and guidance.
spk10: Thanks, Jim, and good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance and all growth rate references will be in constant currency. Let me start off with a brief review of our fourth quarter and full year results, and then spend the balance of the call on our outlook for fiscal 21. Turning to slide 26, fiscal 20 ARR of $1.27 billion increased 14 percent year over year, or 11 percent on a constant currency basis which was at the midpoint of guidance. As Jim noted earlier, we had very strong bookings performance in Q4, and consistent with recent trends, we did see an uptick in ramp deals, which we believe reflects a level of customer conservatism on the pace of their software deployment plans, given the current environment. The takeaway here is that even though our strong Booking's outperformance didn't represent a meaningful change to fiscal 20 ARR. It contributed to backlog in future periods, primarily fiscal 22 and beyond. Fiscal 20 new ACV grew 10 percent despite a year-over-year bookings decline in the high single digits due to the backlog we had entering the year. Churn of 8.6 percent was slightly higher than expected. Fiscal 20 free cash flow of $214 million was slightly ahead of guidance. Note that free cash flow for the year includes approximately $52 million of restructuring and acquisition-related payments, as well as approximately $8 million of incremental interest paid before we retired the $500 million of 6 percent notes back in May. It's also worth pointing out that interest payments on our bonds are now in our second and fourth quarters while previously they were in our first and third quarters. Fiscal 20 revenue of $1.46 billion increased 17 percent year over year and was above guidance, driven by 27 percent recurring revenue growth. As we've discussed previously, revenue is impacted by ASC 606 and related business policy changes. For example, In Q4, contract durations were slightly longer than forecasted and we had stronger than expected conversions, both of which positively impacted the amount of upfront subscription revenue recognized in the quarter. FX was also a modest revenue tailwind. Fiscal 20 operating margin of 29% increased approximately 870 basis points over fiscal 19. And lastly, EPS of $2.57 increased almost 60% year-on-year. Turning to page 27, I'll begin with our balance sheet. We ended fiscal 20 with cash and marketable securities of $335 million and $1.02 billion of gross debt, including $1 billion of senior notes and $18 million outstanding on our revolving credit facilities. Note that that outstanding balance of $18 million was paid down on October 27th. We believe that this is an attractive and stable capital structure, especially in light of the current economic backdrop. Also, please note that for your financial modeling, the beginning in fiscal 21, we have adopted a calendar quarter and financial reporting. Now, turning to guidance. On slide 28, we highlight a few of our key guidance assumptions. In essence, based on Q4 performance and current outlook for 21, we're expecting the macro environment to remain stable in the near term with conditions improving in the second half of the fiscal year. So, with that as context and turning to slide 29, we're expecting fiscal 21 ARR of 1.39 to 1.42 billion. That's a growth rate of 9 percent to 12 percent on a constant currency basis. And regarding ARR seasonality, we would expect the growth rates to be fairly consistent each quarter throughout fiscal 21. Free cash flow is expected to be approximately 340 million for the full year. growth of approximately 60% year-over-year. As we've said previously, fiscal 21 free cash flow growth benefits from reduced interest, restructuring, and acquisition-related payments. And regarding the linearity of free cash flow in fiscal 21, we expect to generate more than 60% of our annual free cash flow in the first half, as collections are stronger in the first half. It will be offset by expenses increasing as we ramp hiring throughout the year. We expect Q1 free cash flow north of $100 million. With the incremental revolver debt paid off and free cash flow accelerating, we plan to address the stock repurchase program with our board at our upcoming board meeting in November. And as a reminder, fiscal 21 free cash flow includes approximately $15 million of restructuring payments related primarily to the headquarter relocation as well as to the cost actions we took early in fiscal 20. Now, turning to P&L guidance, we're expecting fiscal 21 revenue of $1.55 to $1.6 billion. That's a growth rate of 6 percent to 10 percent. The decline in the revenue growth rate relative to fiscal 20 is related to the impact of ASC 606 and related business policy changes that benefited revenue growth last fiscal year. It has no impact on ARR or free cash flow as we continue to bill customers annually up front. On the expense front, We're expecting operating expense growth of approximately 10% in fiscal 21. We plan to start filling open headcount roles at a more normalized pace after hitting the pause button last year while tightly managing expenses throughout fiscal 20. We also expect other expenses like travel to increase as the global economy reopens. and we also expect some increase in variable compensation expense. Non-GAAP EPS is expected to be $2.65 to $2.85. That's growth of 3% to 11%. So wrapping up, we had solid financial performance in fiscal 20. We delivered our third consecutive year of double-digit ARR growth, while maintaining discipline on our expense structure, and we are successfully navigating a very challenging macro environment. We begin fiscal 21 in a strong position to continue driving attractive top-line growth and very strong free cash flow growth. With that, I'll turn the call over to the operator to begin Q&A.
spk00: Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question only. If you have additional questions, please return to the queue. Our first question comes from Jay Bleashour with Griffin Securities. Your line is now open.
spk06: Thank you. Good evening. Hey, good evening. Jim, let me start with you and ask about what I think are still the two largest sources of revenue for you, namely your CAD active base and your PLM active base. And this is an industry trend question. Over the last couple of years, there's been a very interesting phenomenon with Creo growing as quickly in terms of its active base as your principal peers have been doing after lagging your peers' growth as far as active base is concerned. So you're now, you know, with the rest of the group in that respect in the mid-single digits for CREO-based growth. And so the question is, how are you thinking about the growth from here in the active base for CREO And then a similar question for Windchill, which has also been growing its base, it seems, in about the mid-single digits. Would you expect some acceleration in 21 and beyond in the base? And then for Christian, since you referred to hiring, I can't help but ask about that. It's been very clear that your open RECs are well up from the trough back in the spring, particularly for sales and service and R&D. Maybe walk us through how you're thinking about that reopening of the hiring aperture in terms of functions and geos and what it might mean for OpEx growth.
spk01: Okay, Jay, I'll take the first part of that. So we showed last November, was it, when we had our investor day, we showed a model that said if our bookings for CAD and PLM were to be flat, then over the course of five years, our growth rates would slow down from that low double-digit number to the kind of upper single-digit, almost mid-single-digit growth rate of the industry. That's if the bookings numbers are flat. But I think we do see an opportunity to do better than flat. We're winning. We have very strong competitive products. We have new things to sell. For example, in Creo, we have the Creo Simulation Live, and pretty soon now the whole ANSYS suite behind that. We have this generative design stuff. We have AR, you know, augmented reality technologies built into both Creo and Windchill. So, I mean, I think we feel like in the near term, we could slow down a bit in the next couple years. But I think then once you get to the midterm, you know, this Atlas project could be a real tailwind for growth. So I think that scenario that we showed last fall of slowing down to market growth probably won't happen because I think that – This Atlas sassification, we call it, of Creo and Winchell will actually be a growth driver, you know, using this Atlas platform that's kind of shared with Onshape. So we'll talk more about that naturally in the November timeframe, but I think, you know, when you look at our growth rate versus others, and, you know, one of our European peers reported results that were materially weaker than ours, I think we have really strong competitive products. I think we're in better verticals. For example, aerospace and defense is really defense for us in a strong way. We're in the medical device arena. And we have a business model that's terrific. It doesn't leak so much as others who don't have a recurring revenue model like we do. So I think there's just a collection of advantages that are allowing us for the third consecutive year and, frankly, forecasted into next year, to continue to grow at rates materially higher than the balance of the market we compete against. You want to take the head count question?
spk10: Is this part seven of the first question? Nine. Part nine. You just put out a report. Was it yesterday or two days ago that laid out all the head count? Like, I don't even understand what the question is. I have to go to you to get the data on our own hiring plan.
spk06: Well, no, the question is... Let me try and articulate it this way.
spk10: We are continuing to invest in the business. You know, there's a fair amount of, we'll call it go-to-market related, which includes customer success, sales, and marketing resources. And additionally... Jim talked a lot about some of the future technology that's being developed. That obviously requires talent as well, so R&D talent is really also a large pool of hiring for us for the year. I think at the same time, we are cognizant of what's going on in the world around us, and we're We've got plans to hire them throughout the year, but I think we'll maintain flexibility as well, depending on how the macro environment continues to evolve and how that impacts us in the short term. But that's generally what we're trying to hire is folks that can build cool products for our customers and folks who can help customers extract value from that.
spk01: Yeah, I think, too, let me add, when you look at our OPEX increase in fiscal 21, it seems higher than you might expect. But frankly, a lot of that is just cost that fell out of 20 because of COVID. We're allowing room for it to come back in. So let me give you an example. We spend $40 to $50 million a year in travel, and that just went to zero. So most of FY20 had zero travel. But we're assuming in FY21 that, yeah, we'd be back calling on customers and stuff like that, and that that would ramp. So a lot of the cost increase makes more sense if you take the two years and average them, right? If you take the 2% or 3% OPEX growth in FY20 and the 10% in 21, you add it together, you get, let's call it 13, okay, average is 6.5. Well, 6.5 makes sense against the guidance of 9% to 12% ARR growth. That's the way you ought to look at it. It's not so much that we're spending a lot more, but that we're returning some of the spend or actually planning for some of the spend to come back as we go into FY21.
spk06: Thanks very much.
spk00: Thank you. Our next question comes from Saket Kalia with Barclays. Your line is now open.
spk08: Okay, great. Hey, guys. Hey, Christian. Hey, Jim. Thanks for taking my question here. I'll just keep it to one. Jim, maybe for you, you know, how did the IoT and AR businesses sort of trend towards the end of Q4? And to the extent you can, sort of comment here at the beginning of Q1. I guess, you know, exiting last quarter, it sounded like, you know, just like everybody else, it was kind of difficult to sell into some of your end customers just because of things like factory closing. So curious how things sort of evolved at the end of Q4 and how they're sort of looking now.
spk01: Well, let me tell you, when we started Q4, what we call the beginning of quarter forecast had – had what we call a wedge in it versus a hedge. No, I'm sorry, it had a hedge versus a wedge. I said that wrong. Meaning we were actually taking it down from the roll-ups and saying the roll-ups look nice coming from the field, but we have this COVID thing going out there and we should be conservative. But actually the roll-ups were higher than the forecast. And what happened throughout the course of the quarter is we raised the forecast four times. So I think we saw building strength throughout the quarter. It wasn't just like a Hail Mary pass at the end, although, frankly, a lot of business did come in at the end. But, you know, we had raised the forecast three times in the month of September alone, you know, prior to the last week. So I think we just saw building strength. And, yeah, a lot of it was IoT and AR, but, frankly, a lot of it was PLM as well. I mean, we had a bang-up PLM quarter, but we also had very, very good IoT and AR quarter.
spk08: Got it. Makes sense. Thanks guys.
spk00: Thanks. Thank you. Our next question comes from Jason Selena with Q bank capital markets. Your line is now open.
spk04: Hey, thanks guys for my, uh, uh, the question here. Um, so you, we, we talked a little bit about the funnel for the, for IOT and, and AR, and it seems like it's really ticked up at least at the beginning of the pandemic. and it looks like Q4 things are back on track. Maybe can you talk about how we should think about sales cycles? You know, what does the typical sales cycle look like, and now that things might be opening up, you know, would that be any different?
spk01: Yeah, I think most of our AR sales cycles are less than two quarters, and then most of our IoT sales cycles, you know, tend to be more three and four because it's a kind of bigger, more complex enterprise process. you know, system. It's a system of record. It requires some amount of implementation and weaving into the physical side of the business and so forth. So, you know, let me just say, though, the IoT pipeline is good and the AR pipeline is fantastic. And part of the places that some of those sales and marketing resources are going to is to make sure, for example, in AR, that we can actually keep up to that pipeline because there's so much interest And our competitive advantage is so strong. I mean, if you go look at the magic quadrant type reports, which we'll show you in December if you haven't seen them recently, I mean, we are miles ahead of everybody in this field of industrial AR. And there's just a huge level of interest. So we just want to make sure we're in place actually to execute on it because, you know, again, that interest won't hang around forever if we don't service it. So that's where some of the investment is going.
spk04: Great. Thank you. I'll keep it to one.
spk00: Thank you. Our next question comes from Adam Borg with Stifel. Your line is now open.
spk13: Hey, guys, and thanks for taking the question. Maybe just two quick ones for me. First one, Jim, maybe a bigger picture question. So nice to see the Rockwell partnership being extended another two years. It would be great if you could comment on maybe the one or two focus areas for the partnership for this year and how you're thinking about that playing out. And then maybe just for Christian, churn, obviously you're talking about 100 basis point of improvement next year off of some worsening churn this year. Maybe talk about what are the low-hanging fruit and what are the drivers of the churn improvement? Thanks so much.
spk01: Yeah, on the Rockwell contract, just to add a little more color, I mean, we extended that early because, you know, both salespeople and customers want certainty that by the time a campaign completes that the partnership's still in full force, right? I mean... you wouldn't want to start a three-quarter sales cycle in the back half of the year if that contract wasn't extended. So we really did it just to take any fear out, and because it's a great partnership and we're both committed to it. There were some other changes we wanted to make while we had the hood open, for example, throwing some more products in there and so forth. But the real thing was it's a great partnership. Let's not scare anybody by letting it come too close to the sun here where it looks like it might expire. So where are we going to focus? I think it's the same place we've been focusing. Rockwell – has some real momentum with our products, and they're really selling them into their strong suites. You know, their food and beverage, their North American automotive, their various different materials and oil and gas. You know, probably that's a little more challenged at the moment. But it's really Rockwell taking our technology into their very large customer base and, you know, really doing the smart factory kind of thing where they add software. you know, this IoT and AR type of software to all the other products that Rockwell has, both software and hardware, and really, you know, build the whole smart factory strategy. So I think that's where we'll continue to focus. It doesn't represent a change. You know, adding PLM and Onshape, I think, is interesting. I don't think that'll become central to the partnership. It really is an IoT and AR partnership, but they see some opportunities around Onshape. You know, we showed some examples of how You could use Onshape for factory design during our LiveWorks presentation during my keynote. And then for PLM, you know, they have a PLM capability now that's quite impressive in Calypso, and they see some opportunities they want to be able to go after.
spk10: Hey, Adam. It's Christian. So on the churn question, you know, I think first I'd start off by saying, you know, relative to last year in fiscal 20, we only saw about a 100 basis point degradation in churn, which I think in general speaks to the very sticky nature of the software that we sell, right, and the value that customers are getting from it. And frankly, even a significant piece of that increase was really down to a couple of customers, larger customers that were known churn that went into this year. So, you know, point number one being we don't We didn't really see any meaningful change in churn activity as a result of the pandemic, at least not yet. Number two, as we were talking earlier about the hiring plans, one of the things that I mentioned was customer success. That's one area that we are going to be continuing to invest in, and we expect that that will also have a positive impact throughout the year. And then, you know, additionally, we started late this or late in fiscal 20 actually offering multi-year renewal terms to customers, which previously had not been a policy. It's one of the policies when we talk about AST 606 and the related business policy changes. That's another example of a business policy change, which we believe also would continue to help reduce churn. So when we talk about 100 basis points of churn improvement, that's really just getting us back to last year's levels, and we think that's an achievable target.
spk13: Great. Thanks so much.
spk10: Thank you.
spk00: Thank you. Our next question comes from Matthew Broome with Mizzouho. Your line is now open.
spk03: Thanks very much. Hi, Jim, Christine, and Tim. And congrats on the results, by the way. So just on the Rockwell partnership, will Rockwell be increasing the number of quota-carrying reps assigned to selling PTC solutions? And then will there be any changes to PTC sales organization now that it sounds like you'll be selling more of Rockwell software?
spk01: Yeah. So let me say, you know, Rockwell's earnings call is next week or maybe even the week after. And, you know, I'd probably prefer to defer to them, but let me say – Certainly the partnership contemplates strong continued growth, and normally associated with strong continued growth, one would continue to make go-to-market investments. But let me defer that question to them so I don't steal any of their thunder. And then on the PTC side, I mean, I think what we really have gained access to is this Emulate 3D. I don't think that's central to what we're trying to do, but I think we are interested in trying to figure out how to better integrate that with Onshape and, you know, at least have it as a weapon in the arsenal, but I don't think we're going to pivot hard toward that. I think we have more pipeline than we can keep up with in CAD, PLM, IoT, and AR and Onshape. But anyway, it's a weapon in the arsenal that we can pull out if we find the right opportunity, and we've certainly seen such opportunities over time, you know, This company, Emulate 3D, that Rockwell acquired actually had been on our acquisition list, too. So it's technology we're interested in, but we've got a lot on our plate at the same time. So we'll call on it opportunistically.
spk03: Okay. Makes sense. Thanks very much.
spk01: Thank you.
spk00: Thank you. Our next question comes from Joe Rulink with Baird. Your line is now open.
spk02: Hey, Joe. Great. Hi, everyone. I just wanted to maybe talk about the recent bookings environment. And if we had maybe gotten the forecast for fiscal 2021, I don't know, a month or two ago, what would have been different about it? So in other words, it sounds like your internal plans have moved up as the quarter went on. you're getting some recovery in pieces of the business that were negatively impacted in FY20. That all seems to be good. At the same time, we might be about to revisit an environment with certain economies closing that could have an impact on new bookings activity. So I'm just wondering kind of the puts and takes in arriving at ARR growth of 9% to 12%. which is kind of a similar number, Christian, I think you were even talking about at the beginning of September, just the give and take and how you think about FY21.
spk01: Okay, Joe. This is Jim. Let me take a high-level, let's call it qualitative pass at this, and Christian, if you want to add any quantitative numbers to it, you can. In the case of FSG, that's a business where, for example, one of the big properties is servogistics, spare parts management, and airlines is the largest industry we sell into, or one of the largest. So that's had some pressure, you know, as airlines were in deep trouble and whatnot. You know, I think if we see modest, low single-digit improvement in ARR for servogistics, or let's say for all of FSG, FSG will still be down versus 2019. So we're not really expecting miracles there. We're just saying we see some things happening that will be slightly helpful. Now, as you go to the rest of it, the real thing is the pipeline. First of all, we've become much better at managing the pipeline, and right now we have a very optimistic-looking pipeline, and not just for Q1. I mean, really for the whole year and really for each of the main segments, CAD, PLM, IOT, and AR, and really for each of the main geographies. So we have a lot of pipeline. Now, we don't have a crystal ball as to what could happen with COVID. Lockdowns could hurt, although, honestly, we feel like we're locked down, and I think most of our customers feel to me like they're locked down already. I mean, their production people are showing up to work in the factories, but the people we're selling to really are pretty much working from home, you know, and more, let's say, on the knowledge worker side of the business. So I don't know what lockdowns will mean. I kind of think we're in lockdown mode. You know, yeah, restaurants are open, but that's fine. We're not selling the restaurants. We're selling the manufacturing companies. So I don't know what that will mean. I think Christian was clear, though, that, you know, our assumption is that life will be kind of like it is now in the near term and improving somewhat in the back half of our year. If COVID does something radical – you know, and it's radically different than that, yeah, okay, we're going to have to have a different set of assumptions, but we're only working with, you know, kind of what we have.
spk10: Yeah, I don't, I mean, I don't have anything to add to that, Jim. Okay. Unless there's a specific question, Joe, that you're trying to get at.
spk02: No, no, just looking for more color. If I can squeeze one more in, and it goes back, Jim, to a comment you made at the very beginning about You know, we don't see your backlog, but it sounds like there's actually a pretty high amount of visibility in the backlog just given some of the ramp field structures that give you confidence. And the question, you know, you talked about this year being a 500 basis point departure from plan, you know, next year a 200 basis point departure, and then FY22 having no departure. So is that –
spk01: Let me link those comments to backlog. I was really talking about backlog as I look forward to 21 and beyond. What I said is there's a 200 basis points or two percentage points headwind to our growth in FY21, which is contemplated in their guidance, by the way, really because the backlog's down entering the year. But if you look at the backlog for the year after that, it's right where it should be, in part because of the booking strength we saw, you know, particularly in the fourth quarter. So right now we don't have a FY22 deficit in our backlog chart, but we do have one that will cost us about two points in FY21. Two points of growth, you can run the math. That's what the backlog differential is.
spk02: Okay.
spk01: Thank you.
spk02: Thanks, sir.
spk00: Thank you. Our next question comes from Andrew Obin with Bank of America. Your line is now open.
spk07: Hi, guys. Good afternoon.
spk10: Hey, Andrew. Hello. Hey, Andrew.
spk07: Just a bigger picture question. I guess you're starting to talk about adding sort of Atlas functionality to Creo and Windchill. So as you sort of think over the next couple of years, what is the investment cycle? What does the rollout look like? You know, when should it peak? When should it start? moving the needle in terms of the numbers, because we've been getting a lot of questions on that particular area, actually.
spk01: Yeah, I mean, we're going to give you a little more insight again in December, but let me kind of just paint the highest level picture. You know, we think the industry is going to SaaS. And with Onshape, we're leading the charge. But we'd like to bring our customer base that's on Creo and Winchell along for the ride. So we're saying, what if we developed, using the Atlas kernel, if you will, or architecture of Onshape, what if we developed versions of Creo and Windchill that kind of acted a lot like Onshape in terms of being true multi-tenant, multi-user SaaS, but at the same time were compatible so that you could do a lift and shift of an on-premise deployment into the SaaS cloud? Now, that will take us a couple of years to build, to be frank, because... If you're talking about compatibility, then you need pin-for-pin feature capability, right? We're not talking about building a new product with limited functionality. We're really talking about full-on versions of Creo and Winchell so that you could lift the production employment, shift it into the SaaS cloud, and never miss a beat. Why it's interesting is because that lift and shift typically doubles the ARR because a subscription on-premise seat... generally doubles in value when it becomes a subscription SaaS seed because you save the servers and the administration and the upgrades and lots of different things. So I think you should model that kind of in the back half of a five-year window and well beyond, by the way. I think it's something that would probably run for, I don't know, could be a decade, but it'll take us a while to get it going. Okay. I'm not counting on anything there in 21 and probably not even anything in 22, you know, and we'll keep you posted. We've got a lot of work to do.
spk07: Gotcha. And just a follow-up question on site access. So you did highlight that, you know, you started seeing better results in industrial IoT in September. How related was it to actually being able to gain site access to your customers and and are you seeing any impact, particularly in Europe, from sort of denouncements of lockdowns in Europe in terms of actual site access?
spk01: Well, the lockdowns in Europe, of course, happened just lately, so I wouldn't have seen that in Q4 in any case. But I think it was helpful. Now, you know, we did have a pickup in Europe, but the real pickup was in the U.S., And, you know, we were able to reengage customers, and customers sent people back into their plants to get these projects going and so forth. And, you know, it was based a lot on expansions, but also we called out, you know, some real interesting new wins, competitive wins, where companies said, okay, let's get this initiative going and make a selection and get back to work. So we did see some of that in Q4. Again, the interest level in our IoT software remains very high. And what happened in the fourth quarter is the close rate went up to a more kind of normalized close rate than we were seeing, let's say, in Q2 and Q3.
spk07: Great momentum. Thanks for answering my question. Thanks a lot.
spk01: Thank you.
spk00: Thank you. Our next question comes from Sterling Audie with J.P. Morgan. Your line is now open.
spk12: Yeah, thanks. Hi, guys. You mentioned improvement in pipeline management. I'm curious, what were the changes that you made that drove the improvement? And now that you're in the new fiscal year, what are the biggest changes that you've made to the sales and go-to-market motion for this fiscal year?
spk01: Yeah, well, on the pipeline thing, about a year ago, we hired a chief pipeline officer, which really was somebody whose job it is. to really watch the pipeline and make sure we're doing the right things to build it out. So this chief pipeline officer maintains a six-quarter rolling view of the pipeline by segment, by geo, by sales channel, you name it. So at any point in time, I have a dashboard that says, how does the pipeline look for CAD in Europe three quarters from now? I can tell you that. And there's a goal for how CAD in Europe three quarters from now should look as compared to what is the forecast or the plan for CAD in Europe three quarters from now. So we really have a level of data that is unprecedented here at PTC, and therefore we have a level of proactiveness that's unprecedented because we know, for example, we might say PLM in Japan is soft four quarters out. Get on it. We need to run some marketing promotions. We need to do this. We need to do that. We also know where to put resources, so, you know, in terms of hiring and whatnot. We've done a lot of hiring, for example, into AR because this pipeline is so big, and we're worried about whether or not it will age out and disappear if we can't tend to it. But let me say, going into the year in terms of go-to-market configuration, no big changes. No big new players, no big reorganizations. It's really just keep doing what we're doing because it's working pretty well. Came off the best quarter of sales we ever had. And it's working well, you know, to link sales and marketing in a digital go-to-market motion. We learned a lot last year. It wasn't wasted at all in that respect.
spk10: Yeah, just adding on that, you know, I think the go-to-market teams have done a remarkable job of figuring out how to, you know, leverage the virtual selling environment, right, and actually adapt and thrive in it. So I think that will be a complementary model going forward.
spk01: Yeah, much more efficient. I think you all know this, but if you travel with airplane tickets and rental cars and hotel rooms to make sales calls, you don't get that many sales calls made. And to the extent you can do that through a video call, it's very, very productive. And we came up with some really interesting ideas. For example, we've shifted our customer experience center, which was designed for customers to come to, into more like a broadcast studio so that we could do high-quality events with the customer online, but us not in our living rooms at home, but actually like you're watching the TV news practically. I mean, it looks really impressive, and then if you're there, it looks kind of strange because you realize it's a studio. But we're doing things like that that really make it a much more powerful, scalable, and efficient go-to-market model. I really want to stress, you know, for years I was pushing – so is Christian, for selling to be more digital. And, you know, it was hard, but it suddenly got very easy, and everybody embraced it because their options were taken away.
spk12: Yeah, exactly. Thank you, guys. I appreciate it. Yep. Thank you.
spk00: Thank you. Our next question comes from Rich Valera with Needham & Company. Your line is now open.
spk09: Hey, Rich. Thank you. Hi. Hi, guys. So, Jim, when we were talking – Back in the, I guess, sort of mid-fourth quarter, you talked about the pipeline for your AR products being multiples of historical levels. I think at that point it maybe wasn't clear what your close rates were going to be on this very strong pipeline. And based on how the quarter turned out, it sounds like maybe they started to accelerate and were pretty good. So just wondering if you can provide any color on sort of the AR pipeline buildup, you know, where it stands versus historical, and then maybe what you've learned and how you've, you know, started to close on that pipeline.
spk01: Yeah, well, Rich, I mean, if you've been in and around enterprise software for a while, you know that kind of like rule of thumb is that for every dollar you have in the forecast, you ought to have $3 in the pipeline. And sometimes it's two and sometimes it's four. If you have numbers that are closer to 10, it tells you something. It tells you either you don't have enough capacity or you're not qualifying enough or you have product problems or, I mean, whatever. So, uh, it also tells you, you have low close rates, right? Because if you didn't take the forecast up and you sit there with all that coverage, somehow you buy mathematically, you're not doing an effective job closing that pipeline. So, uh, we have very high levels of coverage in AR. I mean, and by the way, in Onshape too, very high. And so, um, we are trying to both, uh, understand what it takes to, uh, increase the close rate and we made some progress, but it isn't near that three to one ratio. but we're also bringing in more resources. So we're making good progress, and it led to pretty good results all of last year, especially in Q4 of last year, and we have a strong plan for AR this year. I mean, this is a business. It's a hyper-growth business that has some real legs, and we're pretty excited about it, just trying to figure out how to make sure we don't leave anything behind.
spk09: Great. And just for Christian, quick clarification. The reason you're able to close that 200 basis point headwind, growth headwind in F22 is because of the ramp deal. Is that right, why you've got the 200 basis point headwind F21 but not in F22? I just wanted to clarify that.
spk10: Yeah, and I think we tried to articulate that a lot of the overperformance that we saw even in Q4 relative to our original forecast actually created backlogs primarily for fiscal 22 and beyond. So, yes, it's ramp deals going out that far as customers.
spk01: Yes. Let me just step you through that. If a sales rep closed a deal late in Q4 that was a ramp, a little bit in the first year, a little bit more in the second, more in the third, well, if they closed it in Q4, the start date is almost certainly in Q1. And then the ramps would typically ramp on the anniversary of the start date. So that deal closed in Q4 of 20 did nothing for 20. It will do a little bit for 21 and a lot for 22 and possibly even more for 23. I mean, that's how these ramps work. So what we're saying is we have a two-point, you know, two percentage points against the billion-two-ish, you know, billion-250 of ARR, 25 million, air gap, if you will, in pipeline going into fiscal 21. But if you say, well, how does the pipeline look for fiscal 22 compared to how it should look right now, the answer is it looks fine.
spk09: Makes sense. Thanks, gentlemen. Thank you.
spk00: Thank you. This concludes the question and answer session. I would now like to turn the call back over to Tim Fox for closing remarks.
spk11: Thanks, Joelle, and everybody, thanks for joining us today on the call. PTC will be participating in a number of virtual events this quarter. We'll be posting those details on our investor website, and we hopefully look forward to seeing you on the conference circuit or at our investor day on December 15th. And once again, thanks for your interest in PTC, and have a great evening. Thank you, everybody. Bye-bye.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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