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.