PTC Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PPC 2021 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 Matt Schmell, PPC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, Paula, and welcome to PTC's 2021 fourth quarter conference call. On the call today are Jim Heffelman, Chief Executive Officer, and Christian Palpatia, Chief Financial Officer.

Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com.

During this call, PTC will make forward-looking statements, including guidance as to future operating results.

Because such statements deal with future events, as to results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause the dispatcher results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q, and other filings with the U.S. Securities and Exchange Commission, as well as in today's press release. The forward-looking statements, including guidance provided during the call, are valid only as of today's date, November 3rd, 2021, and PTC assumes no obligation to publicly update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures, These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.

With that, I'd like to turn the call over to PTC's Chief Executive Officer, Jim Eppelman.

Thanks, Matt, and welcome again to PTC. It's been great to get you on board, and thanks for your help in preparing for today's call. We have a lot of exciting news for investors today, so we plan to allow a little more time than usual for the call. No doubt there will be follow-up interest, so we've also scheduled our annual investor day in mid-December, and we expect to be active on the IR circuit in the weeks ahead. Starting then with slide four. Given the news, we're going to follow a somewhat different agenda for today's call. I'm going to start with highlights of our Q4 and fiscal 2021 performance. Then I'll take you through an abbreviated version of our product line results. Next, Christian will complete our discussion of Q4 and fiscal 21 with his financial reviews. Then, turning to the future, I'll address the changes we announced today, which are designed to accelerate our staff transition and margin expansion. Following that, Kristen will take you through our go-forward guidance and reporting structure. We've reserved extra time for your questions at the end. Moving to slide five. Q4 was an outstanding quarter for PTC, and it capped off another strong year. We came in at the high end of our guidance for ARR growth, and we exceeded our free cash flow guidance. Despite the pandemic, every part of the business performed well in fiscal 21, with growth in every product line and in every geography. Fiscal 21 was our fourth consecutive year of double-digit organic ARR growth, and we're guiding for Fiscal 22 to be the fifth. Furthermore, by continuing our strong focus on operational discipline, we've been able to translate our top-line growth into strong bottom-line free cash flow performance. Kristen will take you through free cash flow in more detail later in the call. Taking a look at the key factors driving our top line performance and turning to slide six, our Q4 bookings results were outstanding. Bookings were up mid-teens organically and high teams overall from the blockbuster Q4 we had a year ago. Remember that in Q4 of fiscal 20, bookings bounced back sharply following a downturn in Q2 and Q3 during the depths of the pandemic. Surpassing last year's strong Q4 number, is a great accomplishment. Bookings are strong across all product lines and geographies. Because Q4 of fiscal 20 had been such an outlier, our plan targeted Q4 21 organic bookings to be roughly flat to last year's number. CREO was slightly above plan, while everything else was well above. FSD and Onshape led the way with bookings growth of more than 90% and 70% respectively. IoT and AR bookings were both up mid-teens year-over-year to record levels for each, with IoT bookings growing more than 120% sequentially, while AR bookings grew more than 60% sequentially. PLM bookings were up high single digits year-over-year. Keep in mind that a good percentage of our Q4 bookings, especially those done later in the quarter, don't start until October or later. So they end up in what we used to call backlog, but now call deferred ARR. Deferred ARR ended the year 20 million above the original plan we had for fiscal 21. So in summary, not only did we hit the high end of our fiscal 21 ARR guidance range by delivering 12 points of organic ARR growth, We also booked about a point and a half more growth into deferred AR, which will benefit future periods. Turning to ARR on slide seven, on a top line basis, fiscal 21 was a big success. In Q4, we came in at 12% organic ARR excluding arena and 16% ARR growth overall. Looking at our core products in Q4, we continued to deliver market-leading growth. Creo came in at low double-digit growth, while Windchill grew mid-teens. According to data published by Jade Leishauer, Creo and Windchill have significantly outperformed Siemens and Dassault's CAD and PLM businesses lately, and they are relatively flat with 2019, while we're up more than 20%. We've been seeing this solid growth trend in our core CAD and PLM business for years now, and we expect this to continue. I'll come back to this important point during the second part of my prepared remarks. Next, looking at our growth products, IoT grew mid-teens, coming in below our target. However, bookings were strong in Q4, and we expect stronger ARR growth in fiscal 22 following bookings momentum and the launch of our new digital performance management solution. Vuforia ARR, Vuforia Augmented Reality, grew mid-teens, which is better than it sounds when you factor in that this growth came on top of very strong 77% growth in our previous Q4 that we're comparing against. I'm happy with the roughly 40% tagger over the past two years. In fiscal 22, we're positioned to continue good growth in AR based on our bookings momentum. Onshape grew over 50%. It's now been two years since we acquired Onshape, and we're very pleased with the acquisition and the progress made by the Onshape team. Alena grew over 20%. This represents good acceleration from mid-teens pre-acquisition growth rates, driven by go-to-market investments we made, coupled with synergies gained by being part of PPC. Turning to FSD, growth was 6%, primarily driven by strong performance of our systems and software engineering offerings, where we benefited from several large deals. Turning to slide 8. While Creo and Windchill are powerful independently, these products generate even more value when leveraged together. A great example of this integrated story can be found in a recent announcement that the entire Volvo Group will adopt PPC's Creo product as their primary CAD solution, mirroring what they did several years ago with their Windchill PLM solution. This is a big competitive displacement for Creo. In addition, our ANSYS-powered Creo Simulation Live technology, together with Creo ANSYS Simulation, continues to drive customer interest in simulation. I've been saying for some time that as the product system of record, PLM is a critical element of any manufacturing company's digital transformation strategy. This is exactly what led to our largest ever PLM order in Q4 of 21, a multi-year committed ramp deal coming from a large global medical device company. This too was a competitive displacement for Winshell. In PLM, we saw average deal sizes increasing with numerous expansions in the quarter. In IoT, this past week we launched our digital performance management or DPM solution at our manufacturing live event. If you missed the event, by the way, you can find the replay on our investor website. DPM is our new solution designed to be a comprehensive, turnkey, out-of-the-box solution that addresses our customers' biggest IoT value creation opportunities. It will be the perfect antidote to the so-called pilot purgatory problem the IoT industry has been discussing. You may have also noted separately the press release announcing that PTC is the only industrial IoT player recognized as a leader by all four major industry analyst firms. Also in the IoT space, Microsoft yesterday officially launched its cloud for manufacturing, and we're thrilled to be a lead partner. Our alliance with Microsoft continues to go well, with Q4 being our best quarter to date in terms of co-selling with Microsoft. Euphoria delivered a healthy mix of expansions, cross-sell, and net new logos. We landed our largest ever AR order from a large pharmaceutical company, which will use Vuforia to deliver augmented digital work instructions to improve the speed and quality of production line changeovers. Also, with all the buzz you hear about metaverse these days, you might enjoy watching the amazing live industrial metaverse demonstration that our CTO, Steve Patin, and I delivered as part of our manufacturing live keynote using our Vuforia Spatial Toolbox technology. If you look carefully at the graphic on the right side of slide eight, that is Steve and I standing in front of our anonymized digital representation whose movement and activity is being measured and analyzed in real time. This is a peek into our concept of digital Taylorism, named after the famous work of Frederick Taylor, who was the father of industrial engineering more than 100 years ago. Turning now to Onshape and Arena on slide nine. Onshape performance has been driven by strong win rates against competitors, coupled with solid expansion rates. Onshape captured nearly 1,000 new logos in fiscal 21. During the year, churn improved by 10 points, while net retention improved by 15 points. And these metrics now look quite strong compared to similar sized staff peers of all types. Naturally, smaller companies have been drawn to Onshape because its lightweight SaaS footprint enables agile hardware development processes. But thanks to 17 more product releases during the past year, Onshape's maturing functionality also led to several significant orders in Q4 from larger companies in the robotics and medical device fields who loved the product for similar reasons. The amazing adoption that Onshape experienced in the education market in fiscal 21 is icing on the cake. It contributed little to the financials, but set the stage for mass adoption by the next generation workforce in future years. ARENA saw numerous expansions driving larger deal sizes too. ARENA is also proving to be a great acquisition. Like Onshape, ARENA is the cloud-native market leader in PLM with particular strength in tech-centric markets such as electronics and medical devices. We're on track with the integration plan that we laid out for the acquisition of ARENA with new sales capacity coming online in the U.S. and Europe. The combination of Onshape and ARENA makes PTC the clear market leader in cloud-native PLM and CAD solutions, And these offerings make a great pairing for fast-moving, high-tech manufacturers who want to develop hardware using the same agile process methodology as software. Next, slide 10 shows our geographic ARR performance. America's was up 19%, led by double-digit growth in core products and arena. Europe was up 13% led by high single-digit and core products, low 40s growth in growth products and double-digit growth in FSG, and APAC was up 17% led by mid-teens growth in core products and low 30s growth in growth products. There are thousands of people at PPC that contributed to our outstanding fiscal 21, and I'd like to say thank you to all of them. With that, I'll hand it over to Christian to complete the portion of today's call focused on Q4 and fiscal 21. Thanks, Jim. Good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance later in the discussion, and all growth rate references will be in constant current. So turning to slide 12. We delivered ARR growth at the high end of our guidance range. Fiscal 21 ARR of 1.47 billion increased 16% year over year. Excluding ARENA, ARR growth was 12%. FX was a small $4 million headwind in fiscal 21 for us. As Jim highlighted earlier, our bookings were very strong in Q4. Within this, we had an uptick in rent deals, and that's why our bookings performance did not result in even stronger ARR growth. Instead, the vast majority of our bookings upside went into deferred ARR that will benefit future periods, primarily fiscal 23 and above. Organic, sure, improved approximately 130 basis points year over year, slightly ahead of our guidance for approximately 100 basis points of improvement, primarily driven by strong execution in CAD, PLM, FSG, as well as modest continued improvement in both IoT and AR. Fiscal 21, free cash flow. of $344 million grew 61% year-over-year and was slightly above our guidance. Note that our free cash flow for the year included an unforecasted $18 million outflow related to a foreign tax dispute, $15 million in acquisition-related fees, and $15 million in restructuring payments. These one-time headwinds were offset by other one-time tailwinds, including some one-time tax benefits, arena working capital, versus original expectations. Improvements in AR aging also helped drive a one-time uptick in pre-cash flow in 2021. Fiscal 21 revenue of $1.81 billion increased 24% year-over-year, as reported, or 20% in constant currency, and was above guidance. As we've discussed previously, revenues impacted by ASD 606 So in Q4 and throughout fiscal 21, longer than anticipated contract duration and support to subscription conversions positively impacted the amount of upfront subscription revenue recognized in the quarter and in the year. I'd like to remind you that over the long term, ARR and recurring revenue growth rates should be approximately the same. However, in any period, revenue is subject to much more volatility due to ASD 606, which is why we feel that ARR, our annual run rate, which is also a very close proxy for subscription billing, is a true and better indicator of PTC's growth. Fiscal 21 non-GAAP operating margins were at 35% and increased approximately 610 basis points over fiscal 20. This was due to the strong revenue performance I just mentioned, as well as maintaining good discipline on our operating expense structure. Non-GAAP EPS of $3.97 increased 58% year over year and was above guidance. I'd like to point out that our GAAP results reflect a gain of $69 million related to our investment in Matterport, which we mark to market. And as you may recall, Matterport went public and began trading on July 23rd. In addition, our GAAP results also included the release of $137 million valuation allowance related to our deferred tax assets and a tax benefit of $42 million related to the ARENA acquisition. Moving to the next slide, another way to think about PCE's performance is using the cash flow model we often share. As you can see here on slide 13, ARR plus perpetual revenue plus professional services revenue equals our cash generation, which was $1.455 billion, which is up about $200 million over fiscal 20. You can also see the total expenses of $1.173 billion. This was up about $138 million over fiscal 20, which leads to a net cash contribution margin of $473 million, an increase of about $62 million. Or if you think about cash contribution margin as a proxy for cash EBITDA, we delivered a 29% cash contribution margin, and this is up about 100 basis points compared to fiscal 20. In this format, you can see most of the one-time headwinds and tailwinds I discussed earlier are below the line in terms of cash tax, headwinds, tailwinds, M&A-related expenses, improvements in aging, which actually resulted in net positive working capital in fiscal 21, which one would normally expect to be negative in a growing business. Moving to slide 14, I'll begin with a balance sheet. We ended with fiscal 21 with cash and cash equivalents of $322 million. In addition, we had median term investments of $78 million, primarily related to our investment in Matterport. Our gross debt was $1.45 billion with an aggregate interest rate of about 3.2%. During Q4, we paid down $40 million on our revolving credit facility. and we also made our $19 million semi-annual bond interest payment. With our leverage ratio now less than three times, which we told you was our goal, we resumed our share repurchase program. The $30 million of cash we used to repurchase shares in Q4 was approximately equal to our free cash flow generation in the quarter. All in all, Q4 wrapped up a solid year for PPC from both an ARR and a pre-cash flow perspective. With that, I'll turn it back to Jim. Thanks, Christian. PPC is at an exciting point in our history. Despite bumpy macro conditions, we have established a four-year track record of double-digit, top-line organic growth based on a recurring revenue model and driven by widely recognized technology leadership positions in an industry increasingly motivated by digital transformation. In parallel, our decade-long track record of strong operational discipline has driven our margins up, enabling us to benefit significantly from leverage as we scale. You see that in the 61% free cash flow growth I highlighted at the start of the call. Given the strength of our financial performance in fiscal 21, the restructuring we announced today might come as a surprise to some of you, but sit tight because I think you will like what we're doing. For some time now, I've been telling investors about our plans to leverage the Atlas platform that we acquired with Onshape to pivot the whole company toward a SaaS future. As I had previously discussed it, much of the upside benefits of the SaaS pivot would come in fiscal 24 and beyond. Many of you have asked, why wouldn't we invest more to get to that SaaS upside more quickly? Frankly, that was a good question and one that we thought long and hard about. We even hired McKinsey to help us think through it and develop a strategy. Today, I will explain how, thanks to the changes we're making, we will invest substantially more in our SaaS initiatives while actually decreasing our overall run rate spending projection significantly. Let me hit the financial summary first on slide 16 and then explain the strategy and operational changes behind it. In terms of the financial view of the restructuring, we are reducing our spending run rate by approximately $60 million compared to fiscal 21 as we improve the efficiency of our organizational structure. We've also eliminated about $30 million of previously contemplated new spending run rate from our fiscal 22 plans. So compared to the plan for fiscal 22 that existed prior to the restructuring, we now expect to reduce our planned fiscal 22 run rate spending by approximately $9 million, and then reinvest about half of that into initiatives that accelerate our transition to SAS, with the other half following the bottom line. Key SAS investments will be used to increase capacity on Atlas, to accelerate work to adopt Atlas into our core products and to operate those products as fast and into on-shape and arena product development and sales capacity. Despite what will be a very significant investment, we expect to expand cash margins by approximately 400 basis points in FY22. So we are accelerating both growth and margin expansion at the same time. Restructuring-related cash outflows are expected to be approximately $50 to $55 million, with about two-thirds occurring in the first half of 2022, and the majority of the remaining payments to be made in Q3. In other words, the restructuring will obscure the great cash flow progress for the next two or three quarters, but the benefits will start shining through after that. Already by Q4 of fiscal 2022, we should be seeing a net free cash flow tailwind as a consequence of the restructuring. Then, as Christian will outline, fiscal 2023 and beyond will look great. Let's go to slide 17, and I'll start by explaining why a SaaS pivot is so interesting to PTC. There are three reasons why we think now is the time for PTC to align with and invest more in the SaaS transition. First, the industrial software market wants to go to SaaS. COVID has greatly amplified the interest in SaaS. PTC is already the recognized SaaS leader in our industry. Onshape and Arena have proven what's possible, and they've dramatically elevated PTC's credibility. We are far ahead of competitors in terms of understanding what SaaS is and what it is not. Customers are looking for PTC to lead the whole industry through a transition to SaaS. Second, based on growing customer demand, we see the need to accelerate SaaS initiatives while better aligning with SaaS best practices in order to meet the needs of the market. The investments we're making now will allow us to play offense to capture the market demand. Third, we believe our new SaaS strategy will accelerate a major growth driver for PPC, giving us more pathways to mid-teens growth in the midterm and helping to de-risk our growth ambitions. Meanwhile, cost savings from restructuring itself are expected to de-risk our free cash flow growth targets, even if the growth should prove slower to materialize than I expect. Turning to slide 18, owning the industry's only cloud-native CAD and PLM combo has been a big advantage. By comparing how our Onshape and RHNA businesses work as compared to the balance of PPC, we can see that certain ways in which PPC has been organized are quite inefficient. At the same time, we see an opportunity to serve customers better, too, and that's why we're choosing to evolve our organization to be more SaaS-like. I'd like to review several of the larger changes. Previously, in addition to working with sales, our customers would have more than a half-dozen touchpoints across our broad customer success organization, including renewal sales, pre-sales, post-sales consulting, customer success management, technical support, a cloud organization, a group called Customer Experience, and others. In comparison, most SaaS companies have a two-in-the-box model where each customer has just one sales and one customer success contact. Not only is PTC's current model inefficient, perhaps more importantly, customers hate being repeatedly passed from one contact to another as they proceed through their journey with PTC. So we are reconfiguring to deploy the same two-in-a-box model that SaaS companies utilize. This reconfiguration has no impact on the sales side of the equation. In fact, we're adding direct quota-carrying capacity into the current model. Aside from where we expand coverage, the vast majority of customers will retain the same sales contacts they know and love today. The bigger change for the customer will be that they now have one customer success contact rather than many. There's nothing but goodness here for everybody. Customers prefer this model, and it will save PPC a lot of money as it is much more scalable. The other major change is on the product development, delivery, and support side. With Onshape and Arena or any true SaaS company, this is all done by a single organization using modern DevOps practices. But within the core PDC product lines, the development, cloud delivery, and technical support organizations have been entirely separate, with the latter two belonging to the field organization. You simply can't get to SaaS that way. As part of our reorganization, we have merged our cloud delivery and technical support groups into the product organization to mirror the modern SaaS practices deployed by Onshape and Arena and everybody else in the SaaS world. This, too, will create significant operating efficiencies and a much improved customer experience at the same time. Nothing but goodness here, too. To better understand the demand drivers, let's take a look at an illustrative value proposition on slide 19, typical of what customers see in the transition from on-premise to SaaS. For every dollar a customer pays PPC or any other vendor for on-prem PLM, They have an estimated additional $2 to $3 in cost of ownership associated with on-premise servers and storage and system administrators plus SIs who help with on-site installations and upgrades and all that. Their total cost of ownership can be $3 to $4. When the deployment, maintenance, and delivery responsibility for the software is shifted back to PPC, we can leverage significant efficiencies to serve that same functionality back to the customer for roughly an incremental dollar at margins that are attractive to us. Therefore, each dollar of on-premise software ARR today represents potentially $2 of future SaaS ARR for PPC, plus a savings of $1 or $2 for the customer. The customer also gets to enjoy the many other benefits of SaaS, It is device agnostic. It's ideal for a hybrid work environment. Data is shared with employees and suppliers in real time. Plus, no more upgrades to do, and everyone is always on the latest version. This value proposition for SaaS is not really new news to any of you. It's what Mark Benioff at Salesforce.com has been espousing for two decades now. More than half the overall commercial software industry has already made this pivot. But that's not yet the case in our world of industrial software, where SaaS has low single-digit penetration. As Salesforce did in GRM, some company will have to lead the way to SaaS in the CAD and PLM industry. We think the time is right for industrial companies to move to SaaS, and PTC is best positioned to lead that transition. Turning to slide 20, we've been delivering more and more new PLM projects at SAS in recent years as customer preference has shifted there. But going forward, we'll make SAS our primary delivery model and deliver on-premise only when required by the customer. But we also have a large existing customer base with on-premise systems. In order for existing customers to get to SAS, each customer has to go through a lift-and-shift process. This process entails lifting the on-premise deployment, upgrading and decustomizing it as necessary to eliminate technical debt, and then shifting it into the PTC cloud from where we can serve it back to the customer as a service. We plan to focus the lift-and-shift program first on Winchell, where the biggest opportunity lies, and bring Creo and other products into the fold and subsequent phases over time. So you may be wondering, well, how will this help Accelerate grow? The answer is that our organizational changes and the associated wave of investment enable us to scale up to make SAS the default for new sales and to start the lift and shift process now, here in fiscal 22. Though the value proposition for transitioning to SAS is sound, we still have to go through a sales cycle with each customer. We're turning the sales teams loose now with this proposition, and we expect the first projects to begin showing up in the back half of fiscal 22. The windshield staff capability will be deployed into Azure and into the manufacturing cloud at that, so Microsoft is eager to help us sell this proposition. I like to think of this project as the last upgrade for each customer because when the Lift and Chef project is done, then PPC will take it forward from there. Therefore, a good time to sell this program is whenever customers start planning their next upgrade. Customers tend to upgrade windshield systems once every two or three years, so we'll get a shot at a good portion of the base each year and expect success to accelerate in fiscal 23 and beyond. There are thousands of windshield deployments out there, so I anticipate this process will take numerous years, perhaps a decade, and we won't get them all. Naturally, we'll focus first on the most ready customers and work on the long tail farther out. In the end, I expect we'll ultimately get about 75% of the customers to transition and we'll continue to offer on-premise variants of the product born of the same code stream on an indefinite basis for those who do not want SaaS. PTC is all in on SAS. The program we're launching is a major cross-functional effort on par with the highly successful program we executed to move from perpetual to where we are today with 98% of our software revenue now being subscription. Like that subscription program, the SAS transition program involves numerous changes to our offerings, to our pricing and packaging, to compensation, and more. We have the same program leader driving it. An important difference, though, is that the SaaS transition program is all about growth acceleration within the recurring software business model we currently have in place, which means we will not have the same so-called belly of death effect that our cash flow went through back then. Now we'll have all of the gain, but none of that pain. Taking you deeper into the elements of this program will be a key agenda topic at our December Investor Day. One last related change we're making is to organize into two main business units as shown on slide 21. With plans to leverage SAS now in place and underway across the entire company, it no longer makes sense to have a SAS business unit per se. Therefore, we plan to reunite Vuforia AR with the CAD, PLM, and IoT product lines into a business unit designed to promote higher levels of cross-selling across this integrated product portfolio. This new business unit, which focuses on the digital transformation driver, will be all about growing the base and leading them to SaaS. It will be called the Digital Thread business unit to reflect the highly integrated nature of its portfolio of products. Troy Richardson, who's been our chief operating officer for the past year, is being promoted to become president of this business unit. Troy has already been managing the go-to-market side of these businesses, but now the product development arm will report to him as well to drive tight alignment. Naturally, I'll stay involved in the technology roadmap because, as you probably know, that's where my passion lies. You'll get more time with Troy Richardson at the upcoming investor day. Onshape and Reno will remain together under their current president, Mike DiPilio. This will be called the velocity business units to reflect that the cloud-native, pure SaaS value proposition of Onshape and Arena is most attractive to companies who want to deploy agile product development processes and move fast. This business unit is all about disrupting the competition and landing new logos, which in many cases are SMB customers. But we're seeing larger companies being drawn to Onshape and Arena solutions, too, because their existing vendor simply doesn't have anything to compare. Companies like Garrett Motion, for example, the $4 billion automotive turbocharger company we profiled at our fiscal 20 investor day last year, who switched to Onshape from a high-end CAD competitor to gain increased business velocity. You'll have more time with Mike DiFuglio, too, at the investor day. Both business units' presidents report to me. I'll help drive their respective strategies while Troy and Mike preside over the operating cadence of each business unit. A related change is that the Atlas platform will move under our very capable CTO, Steve Zertine, who will develop the shared platform to meet the needs of both units. Steve will continue to report to me. I know that was a lot of information to take in. Turning to slide 22, let me summarize and then I'll hand it back to Christian for more specific go-forward guidance. First, from a top-line perspective, our SaaS acceleration pivot unlocks another powerful multi-year growth catalyst for PPC and our shareholders. Exiting fiscal 21, Creel and Windchill together represent more than one billion of ARR, growing double digits organically. This growth pattern has been in place for four years now, right through the pandemic, with a strong performance driven by the role both products play in the digital transformation strategies of industrial companies. With the SAS program that we're launching, we're layering an additional growth driver into this core business that we expect could last a decade. Therefore, in our core business, we see double-digit ARR growth being sustainable well into the future. Together with the growth drivers in IoT and AR, plus Onshape and Arena, we're creating more pathways to drive ARR growth to the mid-teens. In my view, PPC's growth story is alive and well. Second, from a bottom line perspective, the strategic improvements we're making will drive up our cash contribution margins considerably and help de-risk our cash flow targets under a broader range of ARR growth scenarios. Kristen will expand on this. Given our confidence in growth, coupled with the higher margins, we remain committed to the mid-term free cash flow targets that we set at our investor day last year. Recall that our guidance was for mid-term free capital growth of approximately 25 to 30%. After we get beyond the restructuring payments, we expect to perform in that range, perhaps earlier than you might have expected. Our guidance for fiscal 22 assumes we'll get a small positive impact from the SAS transition in the back half of the fiscal year. which is counterbalanced by slower assumed growth rates in FSG and somewhat conservative assumptions we have around Rockwell's contribution as they work their way through the Plex integration. Let me be clear that our commitment to the partnership with Rockwell remains as strong as ever and that we're energized to work together because of the great potential we see ahead. In particular, we see tremendous potential for the DPM offering sold through Rockwell and their Calypso consulting arm. Christian, back over to you. Thanks, Jim. I'll now take you through our financial guidance and go forward reporting structure. Turning to slide 24. First, let me reiterate how exciting a time this is for PTC. The restructuring that we're going through right now is really the single biggest thematic investment PTC has made that I can remember. This reorganization is designed to better align PTC to our staff's future, and as an interesting consequence, it should also de-risk our path towards delivering on the midterm ARR and cash flow growth targets we discussed at our Investor Day last November. Starting with guidance on slide 24, we continue to target PTC. Mid-teens ARR growth in the midterms, Jim did a good job of outlining the many pathways we have to getting to these targets with the staff opportunity in both the velocity and core businesses with the addition of solutions to the portfolio starting with BPM coupled with the general strength of the existing portfolio. More specifically, for fiscal 22, we expect ARR of one point. This is Jim Eppelman. I think we apparently got dropped from the call, which is a brand-new experience for us, but I understand this happened just as Christian was starting out with our FY22 guidance. So, Christian, can you pick it up again from the beginning of the FY22 guidance discussion? Great. Thanks, Jim. So, back to the financial guidance and go-forward reporting structure. First, let me reiterate how exciting a time this is for PTC. The restructuring we're going through right now is really the single biggest thematic investment PTC has made that I can remember. This reorganization is designed to better align PTC to our SAS future, and as an interesting consequence, it should also de-risk our path to delivering on the mid-term ARR and cash flow growth targets we discussed at our Investor Day last November. So starting with guidance on slide 24, we continue to target getting the mid-teens ARR growth in the mid-term. Jim did a good job outlining many of the pathways we have to getting to these targets with the fast opportunity in both the velocity and core businesses, with the addition of solutions to the portfolio starting with DPM, coupled with the general strength of the existing portfolio. More specifically, for fiscal 22, we expect ARR of $1.615 billion to $1.66 billion. That's a growth rate of 10% to 13% on a constant currency basis following four consecutive years of double-digit ARR growth. It's also worth mentioning Then we expect continued churn improvement in fiscal 22 and are targeting another 100 basis points improvement. From a linearity perspective, we would again expect slashed ARR growth throughout the year on a constant currency basis. So using the midpoint of guidance, that would imply about 11.5% ARR growth each quarter. Obviously, this can fluctuate given bookings performance, start dates, etc., but we believe we provided for that within the range outlined. The one thing worth pointing out is that ARR growth in Q1 of 22 is expected to be approximately 15% since Q1 21 did not include ARR for ARENA. In order to help with the modeling, we've provided historical counts in currency performance in the data tables on the website, and I'll touch more on this in a little bit. Turning to cash flow, we also continue to target approximately 25% to 30% annual free cash flow growth over the midterm. For fiscal 22 specifically, we're guiding for free cash flow of approximately $400 million As a consequence of the restructuring, we're expecting cash outflows of approximately 50 to 55 million, with approximately two-thirds occurring in the first half and the majority of the remaining payments to be made in Q3. Excluding restructuring, our expected free cash flow in fiscal 22 would be approximately 450 million, representing 25% growth compared to the 359 million we generated in fiscal 21 on the same basis. So doing some directional math and using round numbers on the midterm targets, this means we would expect free cash flow in the $550 to $600 million range in fiscal 23 and would expect $700 to $750 million of free cash flow in fiscal 24. Regarding the linearity of free cash flow in fiscal 22, excluding restructuring, we expect to see a similar pattern as in fiscal 21 with more than 60% of free cash flow generation in the first half of the year. Collections are stronger in the first half and we expect expenses to increase as we ramp hiring and our staff investments throughout the year. As Jim discussed, the restructuring not only creates strategic improvements in how we're organized, but also enhances our profitability profile. We believe we'll be able to deliver strong free cash flow growth even if we don't accelerate the ARRs. I'll come back to this point on the next slide. Finally, turning to revenue guidance, for fiscal 22, we're expecting revenue of $1.85 billion to $1.98 billion. which corresponds to a growth rate of 2% to 9% on an as-reported basis, or 4% to 11% on a constant currency basis. ASP 606 makes revenue fairly difficult to predict in the short-term for on-premise subscription companies, hence the wide range. Note that revenue has no impact on ARR or free cash flow, as we continue to primarily bill customers annually up front. And again, over the longer term, we expect recurring revenue growth to align with ARR growth, particularly as we transition the company to staff and evolve towards increasingly radical revenue recognition. So moving on to slide 25, using the same free cap flow model we showed earlier, This slide illustrates a directional view of what fiscal 22 could look like, assuming the approximate midpoint of RAL's guidance rate. ARR here grows at approximately 11.5%. Cash generation is up 170 million. We see continued growth in expenses, but given the new operating model, as Jim pointed out earlier, our cash contribution margin expands almost 400 basis points. said differently, the new operating model is expected to add more than $120 million of cash contribution margin versus the 60-plus we added last year on similar, slightly less ARR growth. On the expense front, as Jim mentioned, we're reducing spending in certain areas to fund investments to accelerate our SaaS transition. Additionally, there are some other items that will impact topics this year, such as the accounting for commissions, which is impacted by ASD 606, increased travel, merit, and so on. As far as the P&L is concerned, the net result is that we're guiding for fiscal 22 non-GAAP operating expense to grow by approximately 3% at the midpoint of guidance, which is certainly lower than the 50% of our targeted ARR growth for the year, even though we're significantly increasing our staff-related spending. On an organic basis, Factoring in the arena acquisition, which closed in Q2 of fiscal 21, we actually expect non-GAAP OpEx growth to be closer to 2% at the midpoint of the ARR range. We also have a modest $5 million uptick in CapEx this year. OIE cash taxes remain approximately flat, and we see some expansion in the other category, which is really the restructuring charge and change in working capital as the business grows. Moving to slide 26, as you know, we currently present our ALR and revenue in three product categories, Core, FSG, and Growth. Going forward, as Jim explained, we'll have two business units, Digital Thread and Velocity. So to align our reporting with how we look at the business, we'll be changing our ALR and revenue reporting buckets accordingly. Digital Thread will consist of Core, FSG, and also IoT and AR from the current growth products. And when we report digital thread going forward, we'll provide the detailed split one level below. On the slide, the categories in bold text on the left represent our current disclosure. The categories on the right in bold green text represent our go-forward disclosure. And velocity will consist of on-shape and arena from the current growth products. Slide 27 shows what the recast ARR data looks like. I won't spend a lot of time on this because we published three years of historical ARR and revenue data in our new format within the financial data tables file on the IRR website. There are a couple of points I would make. First, please note that all of the historical constant currency ARR figures have been calculated using our fiscal 22 plan FX rate. In addition to the digital thread and velocity recast, we did a small recap of a portion of our Euphoria AR business, which removed approximately 6 million of ARR in both fiscal 21 and fiscal 20, and 5 million in fiscal 19. We made this change because we've come to realize there are certain buyers with marketing-oriented use cases who purchase the Euphoria engine for short-term promotions without a true intention to use it on a recurring basis. The bulk of the Euphoria suite is unaffected and will continue to be sold on a recurring basis. We adjusted the historical amounts to enable go-forward comparabilities. And then lastly, just in terms of expectations for fiscal 22, starting with the digital thread core, you know, we are targeting fiscal 22 ARR growth of 10 to 12%. This is consistent with our historical performance for digital thread growth. We're targeting fiscal 22 ARR growth accelerating back into the 20% plus range for digital thread FSG. We target fiscal 2022 ARR growth approximately slattish, again, consistent with historical performance and expectations. So, in total, for digital thread, we're targeting ARR growth of 10% to 12%. For velocity, we're targeting fiscal 2022 ARR growth in the 20-plus percent range, given the strength of both ARENA and Onshape. Moving on to slide 28, and it tends to provide some additional context to highlight some of our guidance assumptions. They're all listed in our press release, and I've covered a few of them already, so I won't cover them all here. One point worth calling out is that we target to return approximately 50% of our cash flow to shareholders who share repurchases. In fiscal 22, we will also focus on de-levering. Therefore, assuming $450 million of free cash flow, excluding restructuring, we would expect our buyback to be about 25% of that amount, with the rest going to de-levering. We had strong financial performance in fiscal 21, delivered on four quarters of meeting our ARR and free cash flow guidance, and this was our fourth consecutive year of double-digit ARR growth while maintaining discipline on the expense structure. Most importantly, of course, we believe we're well-positioned to deliver on the midterm targets we provided on Investor Day last November. We're unlocking a significant multi-year catalyst by accelerating our fast transition, and we're also optimizing how we go to market with our digital thread and velocity business units. I'm encouraged by how PTC continues to rapidly evolve to meet the needs of our customers. Moving on to slide 29, we look forward to discussing today's news. during the Q&A session and follow-up calls. Also, we will host an investor meeting on December 15th to further discuss our strategy and targets. Please save that date on your calendars. With that, I'll turn the call over to the operator to begin Q&A.

Ladies and gentlemen, the floor is now open for your questions. We do ask that you please limit yourself to one question only. Your first question comes from Dalmunda of Barenburg.

Thanks for taking my questions. The first one is just I'd like to understand a little bit around the dynamics around the ARR guides for next year, if you can help us kind of unpack. The guide is a little bit wider than you had this year, so it's like the 13%. What's the thinking behind, and what gets you to the higher end of the range versus kind of the lower end of the range? Yeah.

Donna, if you could please repeat your question. For now, we will move on to the next question. Your next question comes from Sterling Audie of J.P. Morgan.

Hi there. This is Maya for Mark Sterling. I just wanted to ask, though, with these transitions adding sales capacity for Aruna, are you guys seeing any challenges in terms of hiring just with the labor market? Just carry on your thoughts there.

Yeah, I mean, I think it's a tight labor market for everybody. I think we're in a strong position. You know, this is a good company. We pay well. Our technology is interesting. Our culture is great. Our work locations are fantastic. I mean, there's a lot going in our favor, but, yeah, sure. I mean, it's a tight market for everybody, and probably we're doing better than most, but, you know, I'd be – No, less than accurate. I said it wasn't the daily challenge. Got it.

Makes sense. Thank you.

Next question, please.

Your next question comes from Matt Hedberg of RBC Capital Markets.

Yeah, thanks, guys. You do have on that. This is Matt Hedberg. So another quarter of double-digit core growth to end with that streak alive. Could you just talk a little bit more about kind of the differentiation you feel you're providing at Cora right now? I mean, as long as we've covered you, there's always been a space with higher tensionaries, but maybe difficult to create share shift. And I noticed that something was talked about in the past with some of the newer technologies, and, you know, people see you as maybe future proof, their tech stack. Are you starting to see a greater, I guess, emphasis on the share shift, or is it more so kind of increased opportunities driving this?

I think it's both.

I mean, I think there's a lot more spend in the market now than there was one or two years ago, and I think we're getting more than our fair share of that spend. There have been some significant displacements. I mentioned the medical device deal, which is largest single order we ever took for our windshield PLM system. That was a competitive displacement. But if I look across many of the larger deals, a lot of them are expansions, you know, companies who used engineering or used PLM in engineering but now wanted to cross the enterprise. And then there were some Greenfield new deals as well. So I just think that there's a lot more spending going into PLM as a category. And I think PTC is sort of risen to become the cream of the crop provider, and we're taking more than our fair share.

Thank you.

Your next question comes from Jay Bleschauer of Britain's Securities.

Hey, Jay. So referring to your comments about the market's readiness to move more to staff, that's –

so as a platform, as an underlying infrastructure, but let's talk about the underlying evolution of what customers are looking for in PLM and your portfolio.

You've spoken of the equivalence of PLM and IoT, but perhaps you could talk about how PLM itself has otherwise evolved and why you're being selected for some of these new functionality requirements beyond the older historical reasons for buying TLN. It's for things like bond management, variance, configuration management, and so forth. I'm also sensing from your pipeline that there's a growing renewed interest in SLN. And I'm wondering if that's something, too, that you're counting on, that business that perhaps you haven't focused on entirely much lately might be getting ready to become more significant again within the overall core portfolio pipeline.

Yeah.

Well, Jay, you have a lot of points there that are interesting, so let me try to hit a few of them quickly. As it relates to readiness for PLM, several years ago, we tried an experiment and began selling our retail vertical solution, PLM solution, which we call Windshield Flex PLM, as cloud-only. And we went to 100% cloud sales, and frankly, that stuck, and we've been in that model for years now. And all the transactions we've done for years now have been in the cloud. That was an interesting proof point. Then if you look at, it's been creeping into our mainstream sales. In fact, before we did this SaaS acceleration, we had planned that 25% of our PLM bookings in fiscal 22 would come in cloud form. 25% would be software in the cloud and 75% would be software not in the cloud. That's before we put any incentives or muscle into it. That plus the success that Arena is having, you know, so far as I can see, Arena is the fastest growing major PLM system in the world, and it's pure SaaS, and Windchill is second. So I love having that number one and two growth position. And, you know, really cloud is driving both of them. So I just think the market is telling us we're ready. And, in fact, customers are literally telling us to our face that we're ready. But that doesn't mean the other stuff is unimportant. You know, people aren't going to buy a windshield because it's in the cloud. Windchill because it's the best system for things like you talked about, build material management, variation and configuration-driven digital mock-ups and service lifecycle management and software and systems engineering. That functionality is highly differentiated, and then you bring in IoT and AR and, you know, wow. So we have a highly differentiated solution that's also in the cloud, and customers are saying we want Windchill, and increasingly we want it in the cloud. So that's kind of where we're at. You know, we're just leading the signals. Basically saying it's time to react. Thank you.

Your next question comes from Valmunda at Barenburg.

I hope you can hear me now. Awesome. Just had a question around the ARR guide for the year.

Considering the range is a little bit broader than what you had over the last couple of years, what do you think you can find and maybe if you can just help us unpack what plays into the decision, what gets you to the higher end of the range, 13% versus the lower end, where do you think you can land that would be really helpful? Thank you.

I think the range is the same three-point range we started off with last year as well, so I'm not really sure that it's necessarily a wider end of the range. In terms of the variables of getting there, I think we've covered a lot of them. Obviously, the continued strength of the business. We'll call it the uptake or the adoption of in-year starts versus rent yields. That all matters as well and can fluctuate how successful we are in continuing to drive turn improvement. I think those are probably the major variables. I was kind of referring to during COVID and kind of post-COVID world, especially in the churn side, it's important. And maybe just as a follow-up, you've seen another under-business opportunity from churn, which is great to hear. What is the key driver compared to what you've achieved already this year when you've basically more efficiencies to come in terms of is it more of a customer success? The fielding is, or is it just a natural bounce back from still from the COVID level? Yeah, no, it's a great question because I think we still have room to continue to drive it over the medium term, and it's really a combination of multiple factors. You know, one, the The product lines that have the highest term rates for us are IoT and AR, obviously. Those products continue to mature. We expect that as they continue to mature, we'll continue to see the stickiness of those products improve, resulting in low returns. I think the whole organizational model evolution that we spent a fair amount of time talking about here today will also help with our level of customer engagement, and that should, I think, help churn as well. And I think there are some other execution issues on our side that we can continue to drive as well. which should provide opportunity to get there. I think those would probably be the main reasons. Yeah, let me comment further, and then also let me hit a second related point related to your first question, Cal. I mean, frankly, if you look at it, Creole and Winchell, which are over a billion dollars now, have churn rates much better than the company average, and the other businesses that are growing faster generally are, less than, you know, higher term rates than the company average. And, you know, you average those together and you get the company average. But the thing is, all of these growth businesses are themselves improving their term rates, you know, quarter by quarter, year by year. And that's why we keep averaging down toward Creole and Winchell. So there's more where this came from, for sure, as it relates to term improvement. And, you know, we expect to see it continue to come. And then back on the growth assumptions, you know, what I wanted to say, I use this phrase more pathways to mid-teens growth. I think in the past, like let's say at our investor day last year, you know, our recipe for mid-teens growth sort of had FSG flat, using the old category, FSG flat. You know, we needed growth to be kind of at least close to double digits. I'm sorry, we need the core business to be close to double digits. And then we needed really a free handle on the growth business. And now you say, well, wait a minute. If the growth business, even if it had a two-handle, if the core business remains in low double digits or even perhaps a couple points higher than that, you don't really need a free handle on the growth business anymore. So sort of like if everything works, we can do even better, but now we have room for one or two things not to work quite as well as we wanted and still get the respectable growth numbers. And even if we don't get to the mid-teens growth numbers with higher margins, we can still get to the cash flow numbers. So we feel like we've taken a more conservative posture. We still think all this stuff can work, but now it doesn't all have to work simultaneously for us to – You know, deliver something else. Thank you both.

Your next question comes from Andrew Ogun of Bank of America.

Yes, good afternoon. Hello. I'm just trying to understand the nature of the transition to pass a little bit better. So you outlined the organizational transition of Salesforce. That I completely get. But I thought the idea before was to sort of, take a more gradual approach, right, and take this modular approach as we introduce Atlas-based features to underlying software. So how is it that you're going to have, you know, software ready quite a bit earlier to do the SaaS transition, or is it we're just going to transition the product to the cloud and then gradually do the same thing with the software in the cloud? That's where I'm a little bit lost. Hopefully my question makes sense to you.

Yeah, no, it makes perfect sense to me. So there's a couple of things. One is we still will, to some degree, do this in phases. But, yeah, we've made a lot of progress, and we're funding a lot of progress now with $45 million of spend. I mean, that is a lot of spend. So we're implementing and accelerating certain initiatives that by the time we begin to bring these systems online, you know, in the back part of the year and so forth, as the volume comes in, we'll have many of the efficiency strategies in place thanks to greater funding of resources and so forth. So I think that it will still be step-by-step. Yeah. However, it will start sooner and the phases will be dramatically compressed thanks to $45 million in new spending. This is a lot of new spending. Thanks, Tom. Thanks a lot. Thank you.

Your next question comes from Matthew.

Hey, Matt. Hey, guys. Just in terms of, you know, you mentioned the $60 million in savings. Are you expecting to see that by 2021? You did talk about... saving money in your sales organization. But there are other areas where you are trying to spend less and there is revenue generating activities. Just trying to get a better understanding as to where that $60 million is coming from.

And you're back on with Matt McBride.

Matt, great to be on with you. Can you please re-ask your question? Thank you.

And we should go to the next question.

Okay, the next question comes from Ken Wong, a busyman security partner.

Great. Thanks for taking my questions. It makes you feel better. Supposedly HubSpot ran into some issues at the beginning as well, so not to do what I did. Thanks, but no, it doesn't make a difference. I feel like someone in the NFL draft that people forgot to make their pick for the question of how long I made it. This is great. So lots of moving pieces here. I just wanted to touch on, as far as this cloud condition that you guys are sort of changing tires while the car is still in motion, should we think about the near term guidance the outlook as maybe being a little more conservative and then as you look longer term you start to feel more confident because like you said there are more i guess there's more optionality is that the right way to think about how you're approaching kind of the next few years or if i'm wrong there please please uh let me let me know if you guys have a different approach in terms of how we should be thinking about the numbers that you guys lay out Yeah, I mean, I think you're to a degree right, for sure. I mean, setting aside macro and the fact that we don't have a crystal ball there and everything like that, we are launching a major test initiative but don't have in our guide big assumptions that will hit this year. I think it will hit next year. It hit even harder in the years that follow. But we haven't planned a lot into this year. Partly because, again, we need to get the service call out there. We need to launch everything. We need to start the sales cycles. Then we need to close the orders. And, you know, if you put, you know, six to nine-month sales cycles on things, and I'm not exactly sure how long it will take, but six to nine months lands you in Q3 or Q4 already. And so we just, you know, not sure then when the start dates might be and all that type of stuff. So we're fairly conservative about the cloud impact to fiscal 22, but quite bullish about it to fiscal 23, 24, 25, and beyond. The other thing is, as we've said, we're a little bit conservative, more so than in past years as it relates to Rockwell. Could be wrong there, but, you know, we're just saying let's not get ahead of ourselves in case they get distracted with this integration of Flex. I don't think Rockwell thinks they'll get distracted, but again, we're just trying not to get out over our skis. As far as all the sales motions that are going to change, the two in the box, have you guys sufficiently factored in potential disruption to this year as you guys work through that, or is this kind of these motions are just kind of typical PPC and you guys can pivot on the fly here? Yeah, well, what's happening on the sales side of the two in the box is pretty typical stuff that happens every year, and which is to say not that extreme. You know, a few more resources here and shipping a little bit, what's overlays and not overlays, things like that. That's pretty typical, and I don't see any, you know, unusual degree of risk there whatsoever. What's happening on the other side is a little bit more dramatic, but frankly most of that is what happens after the customer buys from us. And I actually think it's all good changes anyway. So I don't see that disrupting sales. I see it actually making customers happy because they stopped getting passed around from one person to another and having to re-explain who they are and all that kind of stuff. So I don't know. I don't think it's a high-risk change. Certainly don't see it that way. And, you know, we're eager to go execute it. All right. Great. Thank you, guys.

Our next question comes from Matthew Brim of Mizzou Health Security.

Okay, Matt, sorry, we didn't get you last time around. Yeah, we're going to try to disconnect the question.

No worries at all. So, yeah, my question was just about the $60 million in relative savings versus FY21. You know, you did mention saving money, you know, fair with organization, but in what other areas are you spending that to free that money up, and is that likely to affect any sort of revenue-generating activities?

Yeah, no, again, I want to be clear. It's not in sales. It's really in customer success where we used to have many organizations that took turns talking to customers. We all had management change. You know, they all had sort of overlapping responsibilities, et cetera. So the place we're taking the most money out of would be in customer success, the stuff that happens after the customer buys. And we're doing that not by just reducing capability, but by simply implementing a much more efficient model with many less silos, much less management involved, and so forth. So that's all goodness. You know, there are other places we'll have efficiencies. Like, let me give you an example. If you belong to a field organization that works in technical support, your mission is to make the customer happy, even if it means solving the same problem dozens or hundreds of times quickly. If you're part of a product organization, your goal is to go back and talk to the product guys and tell them, make this product go away in the SaaS offering quickly so that no other customers are even aware that it exists. So you can see there's, like, real efficiencies in terms of, like, how you solve customer problems. Are you trying to make them happy while they have the problem and repeat that hundreds and thousands of times, or are you trying to make the problem go away so that the rest of the customers never knew it happened, just to summarize? These are great efficiencies that we're going to go pursue.

Okay, now that makes a lot of sense. And if I could also just ask, given the acceleration of that, how do you anticipate this will change your relationship with the channel, and does it change their role in any way?

Yeah, I think if you look at the different classes of partners, you know, it affects them differently. You know, let's start with Microsoft related about this, as you might expect, because it will bring a lot of business their way. If you look at Rockwell, Rockwell, too, is leaning into SaaS, and frankly, all of our SaaS products are easier for Rockwell to digest and to deliver on to their customers than would be the on-premise variant. I think Rockwell quite likes the strategy and maybe some of their own thinking about SaaS was born in our boardroom. I don't know. We've got SaaS like that, but I might speculate. And then I think if you look at our resellers, it'll change the world a little bit. They still need to go sell the software. They won't be as involved in delivering it, but then they're very much involved in the implementation of it at the customer side. So I don't want you to think, as it relates to resellers or SIs, that SaaS companies don't have SI partners. I mean, my God, Salesforce has a massive SI ecosystem. They just don't install software and perform upgrades at the customer site. They do system integration. They do adoption. They do business process transformation. They do all that stuff, which still has to happen. So, that's, you know, kind of long-term. I think SIs have to take this sort of posture they have relative to Salesforce and all those other SaaS companies. This, you know, will help them through and, you know, the bigger ones like Accenture, I already know that by. And then for the smaller resellers, the other thing worth noting is that most of our resellers sell Creo and Kepar, and those products are sort of farther out from the SaaS roadmap anyway, so that would be several years down the road before we even really come to that bridge. Great. Thanks, Jen.

Your next question comes from Jason Salino at KeyBank Capital Markets.

Hey, Jason. How's it going?

Hey, guys. Thanks for sending me in. A little deja vu here at the transition, but maybe so the subscription transition, you know, is going to change. The SaaS transition will be the point of change. When we think about the cloud opportunity for TLM,

When we think about the forces of possible acceleration, will it be more of a share gain type story or a pricing uplift from the listenership? Yeah, I think it'll be both. But let me first kind of redefine pricing uplift so we don't confuse anybody. We will deliver more value to the customer and they will pay us more for that value while saving money on their side above and beyond. So is that a pricing increase? I don't know. It's a value increase. And that could drive a tremendous amount of business. If Creo and Windchill are a million dollars and you could double $750 million of that over a decade, well, that's $750 million of more value delivered to the customer base and monetized. However, what we're seeing with Arena and to a degree with Windchill is we have the cloudiest, sassiest solutions in the market, and that does help take share. You know, every piece of business that Arena is winning, they're taking from somebody else, or it's a startup company that they're winning at somebody else's expense. And Arena is the fastest-growing co-op solution in the market right now. So I do think it's both. And, you know, exactly what the balance will be, I don't know. I do think monetizing the customer base by delivering more value is a high probability, and it will drive a lot of growth by itself. Excellent. Thank you.

Okay.

Your next question comes from Joe. Joe, we're going to have there. Hey, Joe.

Hey, Joe. Hi. Great. Hi, everyone. Just to focus on the new digital threat that you have, it maybe seems like there is rising interest in full-platform deals. You know, if I just think about, you know, The way Rockwell expanded the scope of the partnership to look at more products, or even Volvo, I think, when they were talking about the big CanCLM field, you know, they spoke about this better pairing with existing IoT they have set up in their plants. So I'm just wondering, you know, A, am I characterizing the demand environment correctly? And then B, does the new business unit actually allow you to maybe better execute on Rostos than has been the case?

yeah um well let me hit the second question first the new business unit is fundamentally formed to help us better execute on cross health because we do see that platform deal structure happening more and more you know um the example you gave with mobile i could repeat the dozen more examples of that of customers who started with one product and pretty soon they have two and then three and they're trying out the fourth one and so forth and we think that Our products, real windshield thing works before you, work beautifully together like voices in a choir. You know, they make beautiful music together. And rather than selling these things separately, yeah, we can use them all as entry points, but let's pursue entry points that then can be upsold and cross-sold. And so, you know, I think Troy Richardson was one of the first people to, you know, sort of ask, why don't you guys configure differently? You know, us guys, not only here, but why don't we configure differently and go, like, pursue this harder, this cross-sell motion? So that's exactly what we're doing, and that's a little bit how the name Digital Thread came to be. Great, Josh. Thank you very much.

Your next question comes from Tyler Rack. Thanks, Tyler.

Hey, good evening. I wanted to ask you a little bit more about the TLM staff transition. It sounds like that's kind of starting now to assume that in some ways the product's ready. Obviously, it's probably going to get better over time. But how are you thinking about pricing in the lever to kind of push customers towards that, whether it be price increases on the on-prem side or maybe initial discounts to get customers early customers over to the staff. Yeah. Well, let me comment on the first part of your question and then the second part. So, again, we've been onboarding customers' tasks for a while with PLM. And think of it that they're coming in at one margin, and what our goal is is to make improvements behind the scenes that take them to another margin, even at the same cost to the customer. So whether it's single tenant, multi-tenant, I mean, if you're a customer on the customer end, you don't even know. But we on the PDC end, we see the efficiencies we're gaining or not gaining, we do know. And so a lot of our investments is aimed at making the product more efficient for PPC to deliver as opposed to different from the UCGEN that the customer has. Now, that said, if you look what we did with the subscription program, we pulled every lever we could come up with. Do you remember that program when we used to talk about it? We used to say, I don't know, Christian. Christian actually was the program executive. We had like 28 work streams and 300 people working on it. We changed pricing and packaging to favor subscription over, at the time, potential. We paid more commission on a potential deal. We had certain offerings that were only... I'm sorry, we paid more commission. I said that wrong on a subscription deal. We had certain offerings that were only available, certain attractive, sexy offerings, including the AMSA stuff, by the way, that was only available subscription. So we basically stacked the deck in every customer conversation in a way that everybody wanted it to go sufficient. We got the band back together. We're putting the same program together. We're going to stack the deck again in favor of staff this time.

Our next question comes from Adam Borg of Staples.

Hello, Adam. Hey, guys. Thanks so much for taking the question. Just real quickly on IoT, I think you mentioned in the prepared remarks That is slightly below expectations in the quarter. So maybe just talk a little bit more about what led to that and the confidence you have in that improving in fiscal 22, maybe even in the context of a DPM. Thanks so much.

Yeah. So first, Adam, let's be clear exactly what I said. Bookings in the quarter were very strong. However, much of the bookings in a Q4 does not land in ARR in the Q4. It's back to that start of this discussion. So What I said is that ARR was less than we wanted it to be. It was mid-teens and, you know, frankly, we've said we wanted to have a two-handle. Now, bookings in every quarter of fiscal 21 were higher than the previous year quarter in fiscal 20. So there is some bookings momentum happening. And then another thing is we launched this DPM solution that, frankly, we've been working on for two years. It's a major piece of software that we launched and, you know, already has quite some customer interest. So, We sort of feel like the combination of, you know, the bookings momentum we have, including and especially in 2-4, and then the launch of DPM and the trends we're seeing, they bode well for what should happen this year. Great. Thanks a lot. Okay, operator, I think we have time for maybe one more question.

Certainly. Your final question comes from Blair Agranathy of Resume Lab Security.

Hey, Mark. Hey, Blair.

Hey, guys. Thanks for taking the time. Just two quick things. First, on the BPM, Jim, what's sort of the – is there a shift in the go-to-market with this solution? And are there more solutions coming, you know, this year, next year, in behind this? Yeah, I think what you should think – First of all, the DPM will become a category of solutions. And what we're launching first is DPM for factory, you know, digital performance management of what happens in a factory. There will be solutions that are more focused on digital performance management of a fleet of products out in the field and customer sites. But, you know, fundamentally what we're trying to do is move from selling a toolkit where the customer does the solutioning themselves to selling a turnkey solution with a very strong value proposition, sold to executives, not to developers, sold on the basis of the business value it will generate, and then implemented quickly into production. So, yeah, it's a very different sales motion. I mean, number one, we're selling to executives, not selling to developers. Number two, we're selling business value, not speeds and feeds, you know, technical stuff. And I think it's really, you know, where we wanted to take this business for a while. So I'm very pleased with this solution. It took us a while to develop it, as I said, but it's a powerful piece of software, and it really gives us kind of a new platform to build on going forward with IoT. It makes IoT, if I could, a lot like how we sell PLM. You know, we sell PLM to executives based on business value. We were selling IoT to developers as a toolkit, and now we'll sell PLM and DPM to as business value to executives different executives mind you but um executives okay great thank you uh well operator maybe i'll just uh take it from here so first again my apologies this is like uh the strangest uh earnings call i've had again and it's the 44th one as ceo so it's a bit odd but um nonetheless i think we got a lot of good information out there and you guys had some great questions and i appreciate it um So in closing, I mean, we're in a great place. I really like PPC's setup going forward. You know, the changes we announced are good for growth. They're good for profitability. You know, they're going to put us in a stronger position to hit both the top line and bottom line targets than we have out there. So we're looking forward to continuing the discussion with you on follow-up calls at investor conferences. I'm going to be at the Berenberg Conference virtually next week, or I guess it's two weeks out maybe. No, it is next week. And, you know, we look forward to seeing you at our investor meeting on December 15th. So thanks, everybody, and have a good evening.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's conference.