PTC Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2022 first quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I'd now like to turn the call over to Matt Schimau, PTC's head of investor relations. Please go ahead.

Hello. Thank you, Julianne, and welcome to PTC's results call for Q1 of fiscal 22. On the call, Jim Heppelman, Chief Executive Officer, and Christian Talbatia, Chief Financial Officer. During this call, PTC will make forward-looking statements, including guidance on future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's most recent annual report on Form 10-K. quarterly reports on 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 today's call, are valid only as of today's date, January 26, 2022, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will also discuss non-GAAP financial measures. These non-GAAP financial 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 Heppelman.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. Turning to slide three, I'm pleased to share that PTC delivered another strong financial performance in fiscal Q1. We executed very well, building on the momentum we saw in Q4. To simplify things, please note that throughout my prepared commentary, I will only discuss growth rates and constant currency. ARR came in at $1.507 billion, which was better than the $1.5 billion we had guided to at the recent investor day. That represents 16% growth, 11% of which was organic. Adjusted free cash flow was also strong at $145 million, which was up 20% year over year and better than the $140 million expectation we set at the investor day. We're off to a very strong start in fiscal 2022. Turning to slide four, Of particular note was our booking strength. Bookings were up double digits organically and high teens overall against the very strong COVID bounce back quarter we saw in Q1 of fiscal 21 when bookings grew more than 30% over the prior year. To put it in perspective, given the tough comparison against Q1 of last year, we had planned bookings to actually be down slightly, inclusive of arena. So this performance was more than 20% above plan. I know that some analysts and investors had voiced concern that the restructuring work we did in late Q4 and throughout Q1 would distract us, but obviously we didn't see that. The strength was broad-based across direct sales and resellers and was achieved with no mega-deals. Rockwell came in ahead of their part of our plan, too, which was great to see and suggests my concerns of them being distracted may prove overstated. ARENA contributed the inorganic element of bookings growth with another strong bookings quarter coming in above plan as well. With the ARENA acquisition getting round-tripped here in Q2, ARENA becomes part of the organic results going forward, and their low 20s growth rate will then add another tailwind to the organic results. ARENA has been a great acquisition. Booking's growth was particularly strong in PLM and in both Europe and Americas. From a macro perspective, global PMIs remain in expansion territory, while digital transformation and SaaS continue to grow in importance as secular drivers. The interest in digital transformation and SaaS has been driving strong bookings for what is very sticky software, which, when layered into a recurring revenue model that is atypical of industry peers, has allowed PTC to deliver performance in excess of market growth rates. This happened right through the pandemic, especially in the large core business that represents about 70% of our ARR, and we fully expect it to continue going forward. These factors gave us confidence to raise the lower end of our ARR guidance range, which at the new midpoint basically means we've rolled our Q1 beat forward. Now, let's take a look at the ARR performance by geography on slide five before turning to business units. In Q1, we saw a strong ARR performance across all geographies. Our ARR growth in the Americas was 19%. All product segments grew, with key growth drivers being the acquired arena contribution and the velocity business unit overall, layered on top of another strong quarter in the core CAD and PLM business. In Europe, our ARR growth was 13%. We saw strong results across the board in Europe, with the strongest drivers of the growth being our digital thread growth and core businesses. Europe has the largest mix of channel versus direct, and the resellers continue to perform well. Our ARR growth in APAC was 14%, with growth primarily driven by our digital thread core business. Next, let's take a look at the ARR performance of our various business units, starting with the digital thread group on slide six. In our largest product segment, digital thread core, we delivered yet another double-digit performance in Q1 with 11% growth. Within this, CAD and PLM both grew double digits with strong growth across all three geographies. This is the 17th consecutive quarter of double-digit ARR growth in the core business, and as we roll out our more aggressive SaaS strategy, I expect we'll see many more. In the digital thread growth, which is IoT and AR, we saw ARR growth of about 14% consistent across both elements. This was in line with our plan and the mid-teens' near-term growth expectation we set at the recent investor day. While this level of growth remains accretive to company growth, we continue to expect an acceleration of growth into the 20s as we get into the back half of the year. The biggest driver of growth in Q1 was from expansions, especially in Europe and APAC. We believe market conditions in IoT are improving, and we like the way the pipeline for our new DPM offering is developing through both PDC and Rockwell channels. For AR, we continue to see a tremendous level of interest, but the market remains nascent. Perhaps most importantly, the formation of the digital thread business unit at the start of FY22 has driven important initiatives to increase our focus on cross-selling of IoT and AR into the core CAD and PLM customer base. FSG had a great Q1 with 6% AR growth. The expansion deal we recently announced with the U.S. Air Force both increases and extends this key relationship for up to five more years. Contracts like this demonstrate the value that our customers are realizing from Servagistics and other FSG products such as Retail PLM and ALM. You may remember I noted at our investor day that having FSG grow in the mid-single digits rather than flat would be a helpful upside growth driver, so I'm pleased to see FSG post another strong quarter. Let me run through a couple of quick customer anecdotes to give you a sense for our digital thread customers and how they rely on us. On slide 7, MAN Energy Solutions is the world's top provider of large-bore engines and turbo machinery for the maritime and energy industries. The company manufactures complex parts, and nearly every engine they make must meet unique customer requirements. Before implementing Creo, they relied on manual, outdated processes that slowed design and production. With Creo, they've been able to transition from 2D to a full 3D model-based approach. Creo's broad range of toolpath automation capabilities enable them to save time in the programming of the toolpaths used to machine the large complex engine parts, greatly increasing efficiency in transitioning from design to production. Turning to slide eight, you may have noticed we announced that the German company Scheffler has expanded its relationship with PTC, and I'd like to share a bit of the backstory. Scheffler has been a longtime Creo customer and has successfully deployed Windchill within engineering. But back in 2017, one of our PLM competitors announced a large PLM deal with Scheffler that appeared to cap PTC's expansion opportunity. But that system didn't ultimately stick, as Scheffler has now decided to consolidate on PTC systems, with Windchill being the backbone. and is broadly deploying our solutions in their standard out-of-the-box fashion so that Scheffler can participate in the full power of our digital thread portfolio. I'm very excited about this collaboration and the further expansion that Scheffler is exploring with our IoT and AR offerings. On slide nine, you'll see how EMA Group, a global business that delivers packaging machines, services, and solutions to a wide variety of industries, was looking for a way to expand their control room offering to help their customers improve overall equipment effectiveness and reduce downtime. As longtime users of PTC's Creo and Wincho, EMA decided that ThingWorx was the ideal IoT solution for their initiative and that Kepware could provide connectivity not only to their machines, but to the other vendors' machines deployed alongside them. EMA has successfully launched new revenue streams by enabling 24-7 monitoring of customer production lines and improved OEE by up to 16%. Vuforia, integrated with ThingWorx, is the platform of choice for the U.S. Air Force training initiatives. Slide 10 highlights the work that PTC partner Vectrona has done with the U.S. Air Force. With finite training resources and limited capacity, the US Air Force set out to incorporate augmented reality into their maintenance and munitions training. Vectrona, using Vuforia Studio, worked with the US Air Force to create immersive 3D AR experiences for phones, tablets, and the HoloLens 2 that are designed to accelerate learning, improve work performance, and facilitate remote training. The improved training shows better engagement and information retention,