PTC Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2021 second 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 Emily Walt, PTC Senior Director of Investor Relations. Please go ahead.

Thank you, Abigail. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our second quarter 2021 financial results. On the call today are Jim Heppelman, Chief Executive Officer, and Christian Talbatia, 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 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 the 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. Lastly, we will be referencing our earnings presentation today, which you can find posted on our IR website. And with that, let me turn the call over to Jim.

Thanks, Emily. Good afternoon, everyone, and thank you for joining us. I hope that you and your families have continued to stay safe throughout the ongoing pandemic. I'd like to begin by congratulating Tim Fox, our longtime Senior VP of Investor Relations, who's left to pursue an exciting opportunity at ACV Auctions following the recent IPO. I worked closely with Tim for many years and feel he added tremendous value to our investor relations program. While we'll certainly miss Tim, we wish him all the best in his new role. Turning to slide four, I'm pleased to share that we delivered another strong performance in the second quarter. Bookings grew in the mid-30s as compared to a Q2 period from a year ago when bookings declined 15% as the pandemic set in. Organic bookings grew in the mid-20s. While much of the booking strength contributed to the second quarter's performance, some of the bookings have start dates and later periods and therefore went into backlog, or what we will call deferred ARR going forward. I'm pleased to see that with several consecutive strong bookings quarters, Deferred AR has returned to pre-COVID levels as customers continue to make commitments to invest in their digital transformation initiatives over the long term. This deferred AR gives PTC a foundation for growth going forward. The economic environment across the globe continues to improve with PMI numbers returning to or exceeding pre-COVID levels in many regions. This data, coupled with the steady increase of vaccinations and stimulus plans for the current administration is encouraging. From our perspective, demand we see for our core products and SaaS offerings combined with a strong pipeline heading into the second half of 2021 supports our outlook for the year. In the top line category, we had a very solid quarter with ARR growth of 18% or 15% in constant currency to 1.39 billion. Growth was driven by a combination of our growth business, which delivered strong results, by continued momentum in our core business, where we again outpaced market growth, and by strong performance from Arena Solutions in its first quarter being part of PDC. On an organic and constant currency basis, we had 11% ARR growth in Q2 of 21 in line with our guidance. If you flip to slide five for a minute, I'd like to remind you that when we use the term ARR, we are referring to the annualized run rate of the book of recurring revenue contracts that are currently active. So ARR really means active ARR, and this important metric is what drives our cash flow. On top of that, we have the deferred ARR I mentioned earlier. Given the strong bookings we've had over the past three quarters, our total ARR growth, which includes deferred ARR, is up 12% on a constant currency organic basis in Q2. As you know, timing of start dates and the nature of ramp deals can impact when a booking moves into active ARR. Therefore, we feel it's important to look at total ARR, again, the sum of active ARR plus deferred ARR. We've been guiding active ARR growth of 10% to 12%. And on top of that, we had been expecting approximately 80 million in deferred ARR as we exit fiscal 2021. We're now projecting more than 90 million in deferred ARR for the full year, which is because bookings in the first half of 2021 have been stronger than what you've seen reported in our reported active ARR results. Given the uncertainty around start dates and the magnitude of ramp deals, If a higher mix of our bookings were to flow into deferred ARR, rather than active ARR in future quarters, it could put some pressure on active ARR, even while total ARR would remain constant. And of course, it could go the other way too, with a mix that benefits active ARR. We think that by providing more insight into total ARR growth rate, we can help show the true underlying performance of the business. By the way, Anytime Christian or I say ARR without a qualifier, we'll be referring to active ARR by default. That remains the most important metric. We'll be careful to explicitly call out any references to deferred ARR or total ARR. Coming back to slide four for a moment, to close out the top line category, revenue growth of 28% was driven by strong execution as well as the impact of ASC 606 on revenue recognition, plus, of course, the ARENA contribution. Switching to the bottom line category, we delivered strong free cash flow of $116 million and non-GAAP EPS growth of 83%, reflecting a combination of strong top-line results combined with continued operating expense discipline. We did see unfavorable currency movement during the quarter, which impacts our guidance for the full year, but Christian will share more details on that later in the call. While the economic environment is improving, the big driver of PTC's growth continues to be our strong alignment with the digital transformation initiatives of our customers and prospects. As you can see on slide six, PTC's logo speaks directly to the idea that digital transforms physical, which is our simple way of saying that PTC's portfolio of digital solutions allow industrial companies to improve growth and profitability by making transformative changes to their physical products and to the physical processes of engineering, manufacturing, and servicing them. PTC's digital transformation story is deep and wide, and our portfolio is full of innovative digital capabilities that align with high-value customer use cases across our CAD, PLM, IoT, and AR segments. Our new SaaS strategy gives us another major vector with which to pursue new dimensions of digital transformation. With that as context, let's take a look at the respective contributions of the FSG core and growth segments of our portfolio. Moving to slide seven, you'll see that ARR in our focus solution group, or FSG, was essentially flat. But I'm pleased to share that we did see a couple of significant wins in retail and defense which will create a tailwind for ARR growth going forward. ARR growth for our core business in constant currency was in the double-digit range, and the 27% organic constant currency year-over-year growth of our growth business is consistent with our guidance for the year. With every passing quarter, the growth business is becoming a larger percentage of our ARR, and as we discussed at our investor day last December, this can be expected to drive higher growth rates for the company over time. With the inclusion of ARENA, our growth business now has more than $250 million of ARR. Let's go a click deeper into the main elements of our core and growth segments. Turning to slide eight, our CAD team delivered another impressive quarter with ARR growth in the high single digits. The rebound in the demand environment that we started to see in Q4 of 2020 continued this past quarter with strong performance across all our major geos. The response to the enhanced capabilities of Creo 7 and the growing interest in Creo Simulation Live and Creo Ansys Simulation that we're seeing clearly demonstrates that customers appreciate what optimizing design efficiency and accuracy can do for them. We're not stopping there. Just today, we announced Creo 8, which includes the Creo Generative Design Extension module called GDX, which is based on our Atlas SaaS platform. GDX on Atlas will deliver the most advanced AI-based generative design capabilities available, benefiting from elastic compute in the cloud with seamless integration to the desktop Creo CAD environment. Creo 8 also expands our model-based design capabilities, extends additive and subtractive manufacturing capabilities, and delivers improvements to the ANSYS-powered simulation offerings. The importance of a strong connection between design and simulation is illustrated by speed consulting on slide 9. When a large aerospace customer needed expert design guidance, the real-time design feedback, combined with full simulation capabilities, enabled the delivery of structural, thermal, and vibration analyses in record time. This customer is a long-time Creo customer, who immediately recognized the value of the deep integration of CAD and simulation that we're offering in partnership with ANSYS. Moving on to slide 10 in our PLM business, you'll see that PLM continued to deliver very strong performance with another mid-teens ARR growth quarter. From a geographic perspective in Q2, PLM performance was broad-based with solid growth across all three major geographies led by Asia-Pac. Thanks to the role it plays in digital transformation initiatives, PLM continues to be a major growth engine. From a vertical perspective, our PLM business was strong across a number of verticals, including medical devices, industrials, and FAND. Plus, we landed a few large wins in competitive displacements during the quarter. A competitive displacement was at Kimberly-Clark, seen here on slide 11. which is a new logo for PTC, who selected Windchill as their digital backbone for product development processes. The ability to tightly integrate Windchill with SAP allowed Kimberly Clark to optimize processes that span multiple systems. Moving on to our growth business, I'll begin with IoT on slide 12. IoT delivered a third consecutive quarter of improving year-over-year ARR growth. With strong new logo growth, and bookings up nearly 50%, while ARR increased 20% from a year ago, we're seeing a good rebound from the slowdown caused by COVID-related travel restrictions and lockdowns that we saw a year ago. Our pipeline remains strong and churn continues to modestly improve, putting us in a good position as we head into the second half of 2021. On slide 13, Strauma MPS, a provider of custom machinery and plant engineering, It's just one of many companies that pivoted to making PPE during the pandemic. With the challenge of moving from industrial machinery to delicate medical masks at high volume, ThingWorx was used to rapidly identify and fix anomalies on a lagging production line and help Strauma complete the changeover process within approximately one month. Let me shift to our augmented reality business on slide 14. The Vuforia augmented reality team again delivered very strong results in Q2, with ARR up 60% year-over-year, driven in particular by Vuforia Studio and Engine. Expansions drove over 50% of the bookings in the quarter. Traction outside the Americas continued to gain momentum with strong growth in both Europe and APAC. I'm also pleased to share that Vuforia Expert Capture has been successfully replatformed onto Atlas and now benefits from the operational and technical scalability of the Atlas multi-tenant SaaS architecture. Customers can now scale deployments across the enterprise, leverage the same collaboration, version control, content management, and approval workflows that you'd see in Onshape. This is functionality that would have taken much longer to deliver without Atlas. We'll be shipping another new Vuforia product called Vuforia Instruct here in Q2, and it too will be based on Atlas. Turning to slide 15, here's a great proof point regarding the power of Vuforia Chalk that's coming directly from our ecosystem. When a Rockwell customer needed to install new equipment to prevent a costly production shutdown during a time that Rockwell was constrained by travel restrictions, Rockwell engineers leveraged Vuforia Chalk to enable remote experts to see the equipment installation virtually and to provide digital coaching to the on-site engineers. As a result, the customer maintained production levels without any revenue loss. Turning now to slide 16, Onshape delivered a very strong quarter with strong bookings growth and a healthy mix of new logo activity and expansions. The bulk of the Onshape business continues to come from SolidWorks replacements. Our education adoption remains strong, and we're starting to see the first education enterprise renewals following the first year free education program that we initiated last year as the pandemic set in. Onshape's ability to deliver seamless, collaborative CAD capabilities is definitely meeting an unmet need in the market. On slide 17, Loop Medical is developing a painless blood collection technology needed for routine lab testing while making the collection process safer and more economical. Thanks to the peer SaaS Atlas platform that underlies Onshape, Loop can run their CAD and data management platform on their current Mac environment without having to invest in clunky virtualization technology. And perhaps more importantly, Loop can offer real-time collaboration capabilities to their distributed global teams and accelerate the design process. Finally, moving to ARENA on slide 19, it's exciting to see how well the ARENA team performed in their first full quarter as part of PTC. ARR growth was in the mid-teens, while bookings were up more than 50%. ARENA is seeing strong traction with upselling, while also increasing penetration into current customer environments, and at the same time, keeping retention rates high. The integration is going smoothly, and the roadmap to enable cross-sell programs to expand geographically and to move up market is on track. Arena is engaging some really innovative companies. On slide 19, you'll see that they've been working with Reflexion, who's creating the first biology-guided radiotherapy system. Reflexion needed a solution to scale and parallel with their medical device compliance and commercialization needs. By designating Arena as a system of record, charged with controlling product design and quality, and then integrating it with Reflexion's ERP platform, the company was able to create a single source product and quality solution. The momentum we're seeing in our growth business, both from an ARR standpoint and from a product innovation perspective, provides PPC with a great portfolio to drive long-term growth. Turning to slide 20, you've heard me reference our Atlas platform several times already with respect to Creo, to Vuforia, and to Onshape. What you're actually seeing are the first signs of our plan to SaaSify PTC's entire portfolio onto the Atlas platform over time. While we'll continue to offer on-premise versions of core products indefinitely, a growing number of our customers want to enjoy the great benefits of SaaS, but at the same time prefer not to switch off their current enterprise systems. PTC's essentially doing with Creo and Windchill what Microsoft has done with Office and 365 When an on-prem workload shifts to SaaS, the ARR of that workload roughly doubles. So this is expected to become a significant source of growth for PTC in the mid to long term, just as Office 365 has been for Microsoft. The introduction of this new growth driver gives us confidence that we can sustain strong levels of growth in the core business for years to come. Let me provide some color on geographic performance, which was strong across the globe, and as shown on slide 21, reflects continued recovery. America's ARR growth of 21% was driven by ARENA, augmented reality, and solid core performance. Europe ARR grew 8%, consistent with prior several quarters, with notable strength in AR and high teens growth in IoT. APAC delivered the third quarter in a row of mid-teens ARR growth, with strong performance across all segments. With that, now let me turn to slide 22 and touch on our key alliance partners. The Microsoft Alliance delivered year-over-year bookings of 30%, driven by demand for AR, and our joint deal count increasing 40% year-over-year, both of which are solid indicators that our alliance is further evolving. To support additional growth, we've also added PDC field resources in Asia-Pac and Americas. Before we move on from Microsoft, you probably saw the announcement yesterday that Kathleen Mitford is leaving PTC to join Microsoft. This is a great career opportunity for Kathleen, and I'm pleased she'll remain in our ecosystem. Fortunately, we had a successor ready to go, and we promoted Catherine Kinnicker, who goes by CK, to be our new Chief Strategy Officer. Congratulations to Kathleen and to CK. Moving on to Rockwell, we had one of the stronger bookings quarters to date in our alliance and showed significant growth year over year. It was a strong quarter for the Americas and APAC. More than 30% of the deals were net new logos to PTC, and top verticals included manufacturing, distribution services, and process manufacturing. Our ANSYS alliance continued its momentum in Q2 with double-digit ARR growth. Last week, PTC was named 2020 ANSYS Growth Partner of the Year at their Simulation World Conference. As I alluded to earlier, the customer sentiment around Creo Simulation Live and Creo ANSYS Simulation has been very positive. To wrap up and summarize my comments, turning to slide 23, we're in great shape at the midpoint of fiscal 21 as customers continue to embark on digital transformation initiatives, adopting more of the full PTC product portfolio as they proceed. In addition to being in great shape for FY21, the strong growth in deferred ARR means we're already laying the foundation for solid growth in FY22 and beyond. And with that, I'm going to turn it over to Christian, who will take you through a few more details on the financial results and guidance.

Great. 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 review of our second quarter results, then review our guidance for fiscal 21. Turning to slide 25, fiscal Q2 ARR of $1.39 billion increased 15% year over year, and organic ARR grew 11%. Strong Q2 free cash flow of $116 million was in line with our expectations. Q2 revenue of $462 million increased 22% year-over-year. The revenue performance was driven by strong execution and also reflects the impact of ASC 606 on revenue recognition, as well as a modest contribution from ARENA. The strong revenue growth along with continued financial discipline resulted in non-GAAP EPS growth of 83% year over year. Turning to page 26, I'll begin with our balance sheet. We ended Q2 with cash of $326 million and $1.5 billion of gross debt with an aggregate interest rate of 3.1%. We paid down $80 million on our revolving credit facility during the quarter. Now that our leverage ratio is below three times, which we told you was our goal, we're evaluating the timing of reinstating our share repurchase program. Now turning to slide 27, this slide really highlights a few of the key guidance assumptions. The only real change to our assumptions here is the impact of FX movements. And so with these assumptions as context, We're still expecting fiscal 21 bookings growth in the double digits year over year. And putting our ARR guidance into perspective and turning to slide 28, last quarter we told you we expected fiscal 21 ARR to be 1.47 billion to 1.5 billion, a growth rate of 16% to 18%. This assumed 10% to 12% organic growth 400 basis points from ARENA, and a 200 basis point tailwind from Currency. Our revised guidance range of $1.445 to $1.47 billion is 14% to 16%, which assumes 10% to 12% organic growth, same as before. 400 basis points from ARENA, same as before, and now no impact from FX. Regarding ARR linearity in fiscal 21, on an organic constant currency basis, we continue to expect the growth rates to be fairly consistent each quarter throughout fiscal 21. Free cash flow is still expected to be approximately $340 million for the full year. This is growth of approximately 60% year over year. And as we said at the beginning of the year, we expected more than 60% of this free cash flow to come in the first half. As we finished the first half, we've delivered two-thirds of that target. And just as a reminder, that $340 million free cash flow target also includes approximately $14 million of acquisition-related fees, an additional $7.5 million of incremental interest we expect to pay this year due to the ARENA-related debt, a $14 million unforecasted payment due to a foreign tax dispute, and also includes approximately $16 million of restructuring payments. This is offset by incremental cash flow from ARENA and a positive impact from FX as well of about $10 million. Free cash flow excludes about $25 million of capital expenditures as well. And as a reminder, collections are stronger in the first half and this is offset by timing of expenses and headcount ramping throughout the year. And as you all know, we have our next bond interest payment due in the fourth quarter. As such, we're expecting 65% to 75% of the remaining free cash flow for our target to come in the third quarter. Now, turning to P&L guidance, we're raising our revenue and EPS guidance for the year. Our original guidance was $1.69 billion to $1.73 billion, the growth rate of 16% to 19%. We're now expecting fiscal 21 revenue of $1.71 billion to $1.74 billion with a growth rate of 17% to 19%, which includes about 250 basis points from ARENA and no impact from or nominal impact, if you will, from FX. We're increasing our operating margin guidance on both a GAAP and non-GAAP basis. GAAP operating margin increases from 15% to 16% to 15% to 17%. and non-GAAP operating margin increases from 30 to 31% to 31 to 32%. Non-GAAP EPS guidance was $3.05 to $3.35. The revised guidance is now $3.18 to $3.39. That's growth of 24 to 32%. So wrapping up, we had strong financial performance again in Q2. We delivered double-digit ARR growth while maintaining discipline on our expense structure and continuing to navigate what's still a challenging macro environment. I think the first half positions us well to deliver attractive double-digit top-line growth and strong free cash flow for the year. With that, we'll turn it over to the operator to begin the Q&A.

And ladies and gentlemen, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Let's limit yourself to one question only. If you have additional questions, please return to the queue. Please stand by while we compile the Q&A roster. And our first question comes from the line of Sackett Kalia with Barclays. Your line is now open.

Okay, great. Hey, good afternoon here, guys. Thanks for taking my questions. Jim, I'd love to zoom in on slide 20 a bit. Very useful slide. You know, understanding that that diagram is a vision and not guidance per se, I'd love to hear how you sort of envision PTC's move to SAS. It looks like you'll have all your products available in a SAS form factor, all the major products available in a SAS form factor by fiscal 22. And so is the question, or rather the question is, is this something you perhaps drive your customer base to or encourage them to adopt, or is this something that you're going to let happen naturally? And maybe the follow-on to that for Christian is, Can you just talk about how this plan for satisfying the business long-term, of course, maybe plays into that fiscal 24 free cash flow target? Sorry, a lot there, but does that make sense?

Yeah, it does, and it's actually a good question. So, you know, there's a lot you can read into this slide, but if you notice, the other logos than Onshape and Atlas start a darker, greener color, and as they move to the right, become more or less the same color of Atlas and Onshape. And that's because we call this strategy an insidious sassification strategy, which means it happens step by step. And it's already started. Vuforia already has the first offerings on Onshape, like Expert Capture, which is one of the biggest ones. We're about to ship the second Vuforia product on Atlas, which will be called Vuforia Instruct, coming out later this quarter. We mentioned that Creo is shipping a capability on Atlas now for generative design called Creo GDX. And you'll start to see that coming from Windchill and coming from ThingWorx. So what we're going to do is begin to offer incremental or, in some cases, replacement modules on SAS. And then over time, the whole suite of each product line will become available on SaaS. So a customer could begin adopting part of it, get comfortable with the idea, start to generate some incremental revenue for us, and then in year two or three or four even, flip the switch and go 100% to SaaS. So that's what that diagram intends to show you is that these products are all climbing on board, but it's not an all or nothing. It's step-by-step development. moving toward that all state where they're fully based on Atlas. And we have, you know, really a dream unified SaaS portfolio. I'm so excited about that because, you know, a lot of these products have divergent heritages and they're on different architectures today, integrated together, but still on different architectures. And we have like a spring cleaning opportunity here, thanks to the power of Atlas to unify on a single platform. And everybody at PTC is aligned behind this. So we're making great progress. And, you know, if you think in a year or two, Windchill and Creo will have a billion dollars of ARR. So if we can get some even modest degree of penetration on a two-for-one ARR uplift, you know, it's a lot of growth in those businesses. So it's not going to be a lot here this year. It's not going to be a lot next year. But by the time we get out to 24, 25, it is going to be a lot. I will tell you, though, that any guidance we gave you doesn't really contemplate this. This is kind of a new factor. I mean, maybe moving into Christian's question here. But our original thinking on satisfaction would be there was more all or nothing, and then we decided that this so-called insidious strategy is much more interesting for everybody, customers and PTC. And so, you know, we're now factoring this into the next rev, if you will, of our long-range plan, And it's going to be impactful, but again, the real big impact is farther to the right, even in years yet to come on this chart. So it's going to be a big deal, but not a big deal in the near term. Anything you want to add to that? No. I answered your question for you. All right. Thanks, John. All right. I was on a roll. Okay. Next question?

Next question is from Matt Hedberg with RBC Capital Markets. Your line is now open.

Oh, hey, Greg. Thanks. Hey, guys. Thanks for taking my question. You know, Jim, you know, what really stood stands out to me the past several quarters, you've noted several CAD and PLM replacements, which is really great to hear. I'm wondering, can you talk a little bit more about what's driving that? Is it really kind of your SAS vision? versus other, even though a lot of these displacements are on-prem at this point. But is it the customers see where you're taking the portfolio? And then how do you think about the pipeline for these displacements? Could these even accelerate as we move on?

Yeah, I think there's a couple of factors. One is, all other things aside, Windchill's a very good PLM system. I mean, it works really well. It's best in class in every analyst survey. So it's just independently a really great system. The second thing, though, is it's part of a really interesting portfolio. I mean, if you go back to slide 9 where I was talking about the digital transforms physical conversation, I guess it was slide 6. On slide six, you see that our windshield solution lives in and amongst a portfolio that's very unique. You know, other PLM vendors don't really have IoT and AR, and they don't really have an open architecture PLM system either, like referring to DeSoto in particular. So I think that... People like the product because it's a great product, and they like it again because it's part of a great, larger portfolio. And then they like it because they do see PTC at the cutting edge of technology and now at the cutting edge of SaaS technology as well.

And your next question comes from Jay Bleashover. With Griffin Securities, your line is now open.

Thank you. Good evening. Hey, Jim. Hi, Christian. Following up on the earlier question from Sackett regarding portfolio development and evolution, When we think about the larger context of what's been going on now for a number of years in engineering software, we hear a great deal about so-called digital threads. But it would seem to be more interesting for a company to weave a digital fabric, to overdo the analogy, and maybe talk about how you think about that instead of thread but perhaps a more encompassing fabric of capabilities you know through or by the portfolio maybe this is another way of asking you to comment on your closed-loop management strategy yeah I mean gee I think I think you're absolutely right you know what's better than that than a thread is a bunch of threads working together in a fabric that's even stronger and covers more

And I think that really is an interesting strategy. You know, this closed-loop lifecycle strategy that you and I both talk about is very unique to PTC. It's CAD and PLM plus IoT and AR, and now this really interesting new dimension of SAS. That's a differentiated strategy. I always say... Our PLM competitors don't have IoT. Our IoT competitors don't have AR and so forth. And there's so much synergy between these products. We cross-sell all day long because customers like the value proposition. So I think it's a differentiated strategy. And the products are independently good, but they show up as a team, and the team is phenomenal, the portfolio. And I think it's just really helped us. We have a story that customers like. And it really relates, like you see on slide six, to their digital transformation strategies. They see in PTC a company who can solve a whole bunch or transform, if you will, a whole bunch of different aspects of their business in engineering, manufacturing, service, somewhat in sales and marketing, even the customer interaction with the product and the business model. There's a lot we can do that's unique to PTC.

And our next question comes from the line of Joe Brewink with Baird. Your line is now open.

Great. Hi, everyone. I just wanted to get your thoughts maybe on how this fiscal year is evolving relative to your initial expectation. You know, there's been quite a bit of upside in the first half so far. And just given the guidance update, it actually seems like the year is going to be pretty front and loaded in terms of growth. You know, we heard from Dusso this morning where they're seeing kind of this release of pent-up demand happening in 1Q and 2Q around large deals. And so maybe normal seasonality is changing for them as well. I guess, are you seeing things take place or transact in the first half where when you look to the second half, you're maybe mindful of things being pulled forward? Or is it just the case that you'd like to get a little bit closer to that timeframe before maybe making more meaningful revisions to the full year outlook?

Yeah, I think, honestly, like as we sit here at the midpoint of the year, performance to plan in bookings is really pretty darn strong in the forecast for the back half. Part of the reasons we want to share this deferred ARR thing with you is to show you that some of the great bookings we've been landing lands in deferred. And rather than give you caution that start dates matter, we said, why don't we just be transparent and show you the data? because it really is pretty impressive. And while we're at the midpoint of guidance on active ARR, we're kind of at the high end of guidance on total ARR as we sit here at the midpoint. So I think a lot of it just is this delicate balance of deferred versus active inside the total. And we're just going to give you transparency to it so you know where we're heading and you can see the business for what it is.

Hey, it's Christian. I mean, I think I'd add we've Started off the year saying 9% to 12% ARR growth and $340 million in cash flow. After Q1, we upped it to 10% to 12% organic constant currency, $340 million in cash flow. Now we're sitting here reiterating the same target. So I'm not 100% sure what changed. We've been saying that the linearity should be somewhere – should be pretty – consistent throughout the year, which if you take the midpoint of that, it's 11%. We just delivered 11% ARR growth, so I guess I'm not 100% sure.

One other thing I'd point out is our business performed pretty well last year, and some of our comps, DeSoto in particular, if you take out the metadata acquisition, posted some pretty negative numbers. in the parts of the business that compete with us. So they're showing less growth against serious declines. We're showing strong growth on strong growth. So I feel like some of the companies who fell into a deep hole during COVID, unlike BTC, will post bigger numbers as they just get back to where they were the prior year. But if you look at our two-year CAGR, everything's growing, even through the COVID period. And a lot of our comps really aren't growing. They're posting numbers now that are still less than they were back in 2019.

And our next question comes from the line of call Mundo with Barenburg. Your line is now open.

Hi, everyone. Thanks for taking my question. I just had a question around the generative design and the exciting news that you basically announced a couple of years after you acquired Presto. You launched it as part of Korea Extension now. What I'm thinking about is how do these modules effectively increase your addressable market in terms of the pricing, maybe how you're thinking about what proportion of your customers are realistically potential customers of it, And do you think that there would ever be a cross-sell into competitive code environments as well, or do you think that's more of a view into kind of potentially getting Creo replacements into, say, existing SOLIDWORKS? Thank you.

Yeah, there's a couple of different things happening with generative design. And just to be clear, we first released it as part of the desktop application. And for compute horsepower, use the graphics card, which, you know, that gets you quite a bit of compute horsepower for certain types of, you know, compute-intensive codes like generative design. But what we've done now in this second iteration is put it on Atlas where there's elastic computing. You have the biggest computer in the world running your generative analyses for you. Let me also say one of the next steps will be to pipe that generative design capability into Onshape. because it's actually running on the same platform as Onshape now. We've just got to build it out into the UI and the functionality of Onshape. So what we'll do with generative design is for sure we'll go back to the Creo base and we will upsell this new module that's a purchase you add on. And then we'll go into the Onshape base and we'll do the same thing. I think that generative design is a brand new idea. It's a transformational idea, but some of these ideas start a little slow and then really take off once people understand what they can do. So I expect we'll see that pattern. And then I do think it'll give us more competitive alternatives or opportunities because I think what we have is unique and special. And I think that if somebody's thinking about switching off SolidWorks, if they want to go to a high-end product, they'll be impressed by Creel. If they want to go to a simpler product that's, you know, simpler to own and so forth, they'll look at Onshape and say, wow. So I think it does give us an opportunity to take some market share. But the first and primary opportunity is the opportunity to drive more growth in the install base.

And our next question is from Ken Wong with Guggenheim Security. Your line is now open.

Great. Thanks for taking my question. Jim, there's been a lot of talk, I guess, within the design sector around infrastructure spend potentially being a tail end, especially for those of your peers that have AEC exposure. We'd love to get your perspective on whether or not this is something that PTC would also stand to benefit from. Yeah, I think... Not so much in the AEC field, but where AEC booms, so does construction vehicles and equipment like that. So about a third of PTC's business comes from a category we call industrial. And that would be everything from, you know, deer, caterpillar, bobcat-style equipment, you know, Volvo vehicles. I can go on and on, to, you know, carrier HVAC equipment or products that end up in new buildings and so forth. So I do think it'll be helpful. I think that our industrial customers in general are really seeing a surge of growth right now, in part on the rebound from COVID, and then might even see a little bit more with the infrastructure spending. So I think it'll be helpful, but we haven't factored a lot of that in. You know, we're kind of... sticking to the guidance we gave at the beginning of the year and executing well against it. Could prove to be a tailwind or an upside, but, you know, at this point we're not changing our guidance explicitly or specifically because of that factor.

And our next question comes from the line of Andrew Obin with Bank of America. Your line is now open.

Yes, good evening. Good evening.

Good evening.

Just a question about Onshape and Arena. What are the opportunities to accelerate ARRs from here? What steps can you take? And, you know, the bookings are good, so when could we see acceleration with the feedback from the customers? Thank you.

Yeah, I mean, I think with both Onshape and Arena, you know, Onshape actually has a very high growth rate both for bookings and for ARR. And, you know, so we just need to keep adding sales capacity and continue building out the product and do all the things you do with the growth businesses working. Arena is a little bit of a different story because almost all of their sales come from the United States. And so the first thing we're going to do is globalize Arena and sell it around the world, just like all of our products, including Onshape, are sold. A second thing we're going to do is integrate it to Onshape because customers that get excited about Onshape – also get excited about ARENA and vice versa. So I think there are some short-term investments, like in globalization, that we can do for ARENA that'll be productive quickly. And we're already moving to put those resources in place, you know, to open up branch offices, if you will, outside the U.S. and to add more sales capacity and so forth. ARENA was owned by a private equity company, and, you know, they were managing... it for cash flow, and I think you'll see us manage it for growth, knowing that the cash flow will follow. And, you know, we have the luxury and kind of know-how to build businesses like that. So that's what we're off doing right now with Arena.

And your next question is from Matthew Broom with Missoula Securities. Your line is now open.

Thanks very much. Hi, Jim and Christian. So we've had some optimism in the channel regarding the potential for 5G networks to facilitate sort of remote sensor enablement and ultimately drive more demand for ThingWorx over the next couple of years. Just how significant do you anticipate the 5G rollout could be to overall ThingWorx adoption in the near term?

Well, I think it's very helpful. It's one more reason why industrial companies should go back into their factories and look to make changes. If somebody's going to put in 5G, they're going to put in an application like ThingWorx at the same time, because if you suddenly have all this access to data and mobility and high-speed connectivity, well, what are you going to do with all the data? And that's really where Thingworks and ultimately Vuforia and products like that fit in. So I think 5G is helpful. It's a tailwind. You know, we've been building a decent business without 5G, but 5G is certainly in the category of nice tailwind, you know, more so than anything else.

And your next question is from Adam Ward with Stifel. Your line is now open.

Great. Hey, guys, and thanks for taking the question. Maybe for Jim, just on Rockwell, it was great to see the strength in the quarter on the partnership. And I was just curious, you know, it's only been a couple quarters since that new extended agreement that you guys have had expanding beyond IoT. And I'm just curious, was this strength that you've seen just focused on the IoT and AR side? Or was there any early green shoots around, you know, Rockwell being able to sell, you know, Windchill and Onshape? Thanks so much.

No, I mean, honestly, and I would characterize it as IoT and AR. You know, Rockwell, and I think I was transparent on this, that new agreement gave Rockwell the right to sell more products because sometimes they come across those opportunities, but it wasn't really changing the center of gravity of the partnership. I think if you look at what's driving a little more momentum with Rockwell, it's two things. You know, first of all, Rockwell brought in some new talent, and, you know, I'll just say, From the sidelines as a partner, these guys are making a difference. They're shaking some things up and really creating some energy. And then the second thing is Rockwell had a good quarter overall, particularly on the orders front. I saw they announced today in their order book was up double digits and so forth. So I imagine some of those orders ended up flowing our way. um so i think it's really more you know improving economic situation in the world of industrial automation coupled by uh new talent it's not it's not really a mixed shift in the product lineup to seller and next question is from sterling ot with jp morgan your line is now open hi this is maya on for sterling um i was hoping you could just give me give more of a

demand breakdown between CAD, PLM, IoT, and AR? And then are there any vertical end markets that you aren't seeing a bounce back in demand yet as the economy is reopening?

Okay, the first part of your question was breakdown demand between Creo and Winchell. Did I get that right? The whole portfolio? Well, I think the demand sort of mirrors the growth rates. You know, as you might expect, some of the products with the highest growth rate, of course, in order to sustain those growth rates, they have the highest bookings. And in some cases, higher churn as well, you know, with newer technologies and so forth. And then when you get to a product like Creo, churn's very low, so we can build a growth business off, you know, less aggressive bookings coming in the top. So I would say, you know, yeah, demand is strongest for Vuforia and Onshape. At the next level, it's really ThingWorx and then below that, PLM and below that, CAD, just in terms of demand. But it's, again, a function of the maturity of these products. It's a function of... you know, the growth rate of the markets, which is sort of a function of the maturity of the markets, and so forth. Hopefully that hit your question. I think it was the second part.

And for our last question, we have Jason Salino with KeyBank Capital. Your line is now open.

Great. Thanks, guys, for fitting me in. PLM. Very helpful slide, as always. It's been quite strong for a couple quarters now, but maybe taking a step down in terms of the strength, customer size-wise, any comments on is it enterprise, mid-market, SMB, or is it truly more broad-based? Thank you.

It truly is broad-based, and let me just say, Jason, that's 14 quarters in a row of double-digit growth in the core business, so it's not just a couple quarters. It's 14 now. and it's always been PLM leading CAD and the two together representing double digits, and double digits right through COVID, by the way, so that's impressive, certainly compared to some competitors who weren't posting numbers or anything like that. But I'd say it's broad-based. I mean, there's a few pockets, like medical device and med tech in general, you know, which is a regulated industry around the globe. We're especially good at that. Windchill tends to take a large percentage of those deals in the larger accounts. And believe it or not, Arena takes a lot of those deals in the smaller accounts. It's kind of more of a mid-market solution. But they, too, in their market space are particularly good at regulated markets. I mean, we've had good success in aerospace, good success in the automotive business. It's just really it's pretty broad-based. It's a It's a fair amount of expansions, but then, you know, a good number of new logos and competitive displacements thanks to a differentiated story as well.

And there are no further questions at this time. I will now turn it back over to Ms. Emily Waltz for any closing remarks.

Thanks, Abigail. I'd like to thank everyone for joining us on the call today. PTC will be participating in a number of virtual investor events this quarter, and you can find all the details on our investor website. We'd also like to highlight our LiveWorks series, which you can see the agenda and register for events at liveworks.com. We look forward to seeing you on the conference circuit in the coming months, and again, thank you for your interest in PTC. Have a great evening.

Thank you, everybody. We'll see you on the road or see you in 90 days. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.