PTC Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2022 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. If you would like to ask a question, simply press star followed by one on your telephone keypad. I would now like to turn the call over to Matt Chameau, PTC's Head of Investor Relations, please give a hand.

Good afternoon. Thank you, Angela, and welcome to PTC's fourth quarter and fiscal year 2022 conference call. On the call today are Jim Heppelman, Chief Executive Officer, and Christian Calvatia, 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, 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 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 this call are valid only as of today's date, November 2nd, 2022, and PTC assumes no obligation to 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 Heppelman.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. I'm pleased to report that PTC delivered an outstanding fourth quarter, which capped off a record year in fiscal 22. Our top line metric of ARR and bottom line metric of free cash flow both came in above the guidance ranges we issued 90 days ago. Execution was strong throughout fiscal 22 as full year results aligned well to the growth and margin expansion strategies we outlined at last December's investor day. Relative to top line and bottom line metrics across both absolute and relative improvement measures, Fiscal 22 was PTC's best year in decades. Before I dive in, I'd like to point out that Christian will cover the ongoing effects of the strong dollar later during his section of the call. So to simplify things, I'll focus my discussion on constant currency results where applicable. Turning to slide four, ARR and free cash flow results for Q4 were very strong, and the strength was broad-based across all segments and geographies. A particular note, we saw organic ARR growth continue at the accelerated pace of 15%, driven by strong performance across the board in digital thread core, digital thread growth, FSG, and velocity. Our CodeBeamer acquisition had another strong quarter and contributed a point of inorganic ARR growth, taking PTC's total ARR to 1.71 billion, up 16% year over year. Our top-line ARR growth was helped by the lowest churn the company has seen in many quarters, even better than last quarter. Organic churn, excluding the impact from Russia, improved by 193 basis points, well better than the 100 basis points we got into at the start of the year. Despite churning the entire Russian business, churn was lowest in Europe for both Q4 and the full year. Price increases provide a helpful tailwind to renewals globally, but the underlying gross churn improvement is what has carried the day all year long. Fiscal 22 was the fifth consecutive year of double-digit ARR growth for PTC. It was also the second consecutive year of 16% ARR growth. But take note that the organic element of that growth mix has accelerated by 300 basis points from 12% in fiscal 21 to 15% in fiscal 22. Per our guidance, we expect to post a sixth consecutive year of double-digit ARR growth in fiscal 23, even after a considerable allowance for a potential macro slowdown. Free cash flow in Q4 was $29 million ahead of our guidance. Free cash flow for fiscal 22 was $416 million above our guidance and up 21% year over year, despite an approximate 30 million or 700 basis points headwind due to the impact of FX on our operations. Including 53 million of payments primarily related to our restructuring from a year ago and fees related to acquisitions, adjusted free cash flow was 468 million. Next on slide five, I want to reflect on the margin expansion initiatives we pursued over the past year. including both the restructuring related to our SAS pivot announced a year ago and the portfolio resource optimization we discussed on the last call. Both programs have proven very successful because against the backdrop of a rocky economy, we achieved about three percentage points of cash contribution margin expansion in fiscal 22, while simultaneously accelerating organic ARR growth rate by about three percentage points as well. That's six points of expansion against a rule of 40 type measure in a single year. We expect the ongoing effect of these profitability initiatives to lead to further cash contribution margin expansion in fiscal 23. With the restructuring costs behind us and cash contribution margins expanding on double-digit ARR growth, we're expecting to drive free cash flow up about 35% to the $560 million level in fiscal 23. Moving to slide six, despite the scary headlines we continue to read every day, we saw record demand for our offerings in the fourth quarter. While we again experienced some macro-related softness in smaller deals, notably in Europe, and some softness in China, these factors were offset by the strength in PLM, SAS, and larger deals. As we previewed on the last call, organic bookings were up low single digits from a blockbuster Q4 last year, setting new record highs in Q4 and for fiscal 22. Q4 bookings were up 30% sequentially from the strong Q3 level, which reflects typical seasonality. Bookings growth was strong in both the digital thread and velocity units. The recent CodeBeamer acquisition continues to perform exceptionally well, with Q4 wins at a large German automaker, a large semiconductor company, and a large Korean automaker, among others. Turning to slide seven, in Q4, we again saw strong ARR growth across all geographies. ARR growth for the Americas was 17%. In Europe, ARR grew 16% despite the Russia exit in Q2, which still affects the growth rate given the trailing nature of our ARR metric. ARR growth in APAC was 13%. Across all geographies, the largest ARR growth in terms of magnitude was driven by continued strong demand for our Creo CAD and Windchill PLM products within Digital Thread Core. We saw the strongest ARR growth in terms of percentage across all geographies for velocity, with our cloud-native Onshape CAD and Arena PLM products continuing to grow multiple times faster than the market rate. Now, next, let's look at ARR performance of our business unit, starting with the digital thread on slide eight. In our largest product segment, digital thread core, we delivered another strong double-digit growth performance in Q4 with 14% ARR growth. Within this, CAD again grew low double digits, while PLM accelerated to 19% growth as Windchill continues to be a hot seller. Q4 represents the 20th consecutive quarter of double-digit ARR growth that we've seen in the core CAD and PLM business. In digital thread growth, which is IoT and AR, growth sustained the 19% ARR growth rate, and we were just a smidgen short of rounding up to that two-handle growth rate goal we were hoping for. Close enough in my view. ThingWorx DPM had a decent quarter, including a nice expansion deal. from a customer who first purchased EPM last quarter. FSG posted great results again in Q4, growing 9% organically and 19% inclusive of CodeBeamer. Turning to slide 9, on the SaaS transformation front, we landed several Windchill Plus deals, including our first few lift and shift SaaS conversions with our partner, DXP Services. The SaaS transition program is right on track. Our win at Raymond Corporation illustrates the value proposition of Windchill Plus. Raymond Corp is owned by Toyota Industries, and they make a wide variety of forklift trucks, pallet jacks, and warehousing products. Raymond conducted a study and found that with our Windchill Plus SaaS solution, they can drive substantial savings in total cost of ownership while avoiding the burden of maintaining the software system themselves. Raymond is now enabling their distributed workforce with Windchill Plus. A reminder that Windchill Plus is the tip of the iceberg of a bigger plus strategy, and you will see us follow with Creo Plus and other similar premium SaaS offerings in fiscal 23 and beyond. We're aiming to launch Creo Plus and this bigger plus strategy at LiveWorks in May. Turning to the velocity business on slide 10, year-over-year ARR growth for the velocity unit maintained the accelerated rate of 29% we saw last quarter, with Onshape and Arena, again, each growing multiple times faster than their respective market. Arena continues to mirror the PLM strength we see with Winchell, and the mid-20s growth rate of Arena that we've seen throughout fiscal 22 is more than 10 percentage points higher than Arena's pre-acquisition growth rate had been. Both Onshape and Arena have been great acquisitions for PTC. The strength of these businesses, which are the cloud-native pioneers in our industry, gives us confidence that the future of our market will be SaaS, and the shift to SaaS will create strong growth tailwinds for PTC for years to come. Let's turn to slide 11 and talk about the future. Given the strength we've seen in our business throughout fiscal 22, juxtaposed against the likelihood of a more difficult macro situation that is said to be headed our way, but has not yet arrived in a meaningful way, It's a real challenge to tell you with precision how our business will perform in fiscal 23. But because of our recurring model, the fact that our software is very sticky, and key to the digital transformation efforts that industrial companies around the world are pursuing, we think that the range of likely outcomes is fairly narrow at 10 to 14% ARR growth. Therefore, it's most likely that we'll see ARR growth in the double-digit range again in fiscal 23. At the high end of our 10 to 14% ARR organic growth guidance for fiscal 23, we would be looking at only modest bookings growth and no further improvement in churn, both somewhat disappointing outcomes versus the strength we've seen in fiscal 22. At the midpoint of the guidance range, we're looking at no growth at all in bookings, plus 100 basis points more churn. At the low end of the guidance range, we're looking at a 15% decline in bookings all year, plus the 100 basis points more churn. We feel that these are the most plausible outcomes for fiscal 23, but I want to be completely clear that as we sit here today, we have no indication whatsoever that bookings will actually decline or that churn will actually increase. We are simply adding a prudent safety factor to our guidance range so we're all prepared for a downturn should it happen. While we don't foresee even worse outcomes and thus have not included them in our guidance range, for the sake of illustration, a 30% decline in bookings all year plus the 100 basis points more churn gets us to 7% ARR growth. And just to demonstrate the amazing resilience of our model, note that it would take a massive 75% year-over-year bookings decline on top of 200 basis points more churn to get to flat year-over-year ARR growth. But even then, free cash flow would show solid growth given cash contribution margin improvements already implemented, the restructuring payments that are now behind us, and the spending austerity we'd surely implement in response to a downturn of that magnitude. Bottom line is that we're very confident that the resilience of our model ensures strong fiscal 23 results. While a potential macro downturn is on everybody's mind, the foreign exchange rates we're already experiencing is a bigger factor in our fiscal 23 free cash flow projections. The $560 million target for free cash flow correlates both to an ARR growth slowdown and to the very strong dollar that we're currently experiencing. At today's foreign exchange rates, which are the most unfavorable in two decades, the $560 million of free cash flow in fiscal 23 includes a roughly $60 million headwind versus what the same free cash flow would be at given our fiscal 22 plan rates. The $560 million remains within the $550 to $600 million free cash flow range we established back in 2019 when the world looked very different. But I trust you can see if not for significant FX headwinds, we would in fact be guiding to a free cash flow number above that 2019 range due to the underlying strength in our business. Keep in mind that because our customer contracts are recurring, the same dollars flow through the system year after year. While FX is a big headwind now, if exchange rates return to a more normal range in the future, then the headwind would dissipate. and free cash flow would trend back toward the higher level of performance. On the other hand, if today's FX rates become a permanent new normal, then we'll give consideration to other strategies, like regional pricing changes, to compensate. Obviously, the company is very well positioned, and while we're allowing that the macro situation could slow us down somewhat versus our true potential in fiscal 23, our strategy is clearly working, our execution has been stellar, And our resilient business model means we're positioned to produce attractive and differentiated performance in our top line ARR and bottom line free cash flow metrics no matter what scenario unfolds. I shorten my typical customer anecdotes today because I want to save time to discuss the new IR reporting model that we're adopting as we transition into fiscal 23. Let's move to slide 12. As most of you know, With the CodeBeamer acquisition landing in FSG last quarter, suddenly FSG has become a growth business, which doesn't really match our original conception of FSG as a low-growth cash cow. In fact, with digital thread core growth and FSG segments, all growing mid-teens are better, our current reporting model yields little insight into our growth drivers. In thinking through what to do with FSG, We realized that the current segmentation also doesn't map very well to our strategy, and it doesn't map at all to industry market segments, which makes competitor performance comparisons difficult. Worse yet, by fragmenting parts of our PLM business across digital thread core, where Windchill lives, FSG, where our retail flex PLM business is based on Windchill lives, and Velocity, where we have ARENA, our IR reporting structure has obfuscated our strong market position in PLM. Given how our business has evolved, we feel the current reporting model no longer serves any of us very well, and it's time to evolve it too. Turning to slide 13, to address these challenges going forward, we've decided to adopt a simpler reporting model of CAD and PLM. And to be completely transparent, and how we're recasting our business into this model. I've already discussed last year's growth rates using the existing four segments of digital thread core, growth, and FSG, plus velocity. On slide 13, you'll see how the prior segments map to the new segmentation model. The mapping is more simple than it appears. If we are referring to using a computer to aid in designing product information, then it is computer-aided design. or CAD. If we are referring to aggregating product data in databases and managing the processes to interact with it across the product lifecycle, then it's product lifecycle management, or PLM. You can see that if we recast last year into the new model, then inside a 1.71 billion ARR company growing 16% last year, we had a 756 million ARR CAD business growing 11%, and a $950 million ARR PLM business growing 20%. In case it helps with competitor comparisons, total revenues were $1.137 billion for PLM and $796 million for CAD in fiscal 22. This new reporting model maps much better to how analysts and competitors view the world. You can also see how we'd allocate PTC's 10% to 14% ARR growth guidance for fiscal 23 using the old model and how those same growth allocations would then map to the new model. In the old IR segmentation model, we would have guided digital thread core to grow 10% to 14%, digital thread growth to grow 15% to 10%, and velocity to grow 20% to 25% in fiscal 23. I trust you find that all to be quite reasonable and consistent with the high level of the ranges correlating to fiscal 22 actuals and the low end of the range leaving room for macro slowdown. In the new model, that same 10% to 14% company growth maps to CAD growing 8% to 10% and PLM growing 12% to 17%. Please view this bridge from the old model to the new model as a one-time event. Because starting with the next earnings call, we will report using only the new CAD and PLM IR segmentation model. It will make things much easier for all of us. Turning to slide 14, I want to briefly remind you that while we're adopting a new reporting model, it is certainly not a new strategy. I trust it might even feel a little familiar to you. Indeed, we've always been clear that it was our PLM strategy that led us to acquire Servagistics ThingWorx. Arena, CodeBeamer, and others. We have said that at each step of the journey. You might even remember me saying IoT is PLM and introducing the closed-loop PLM language back when we acquired ThingWorx. Perhaps you even remember a few years back, we had a reporting category of extended PLM that included PLM, ALM, and SLM. We've been pursuing a broad PLM vision for years and have made tremendous progress in Now we want to put it on display. We probably need a drum roll now because this reporting model unveils some really great news on slide 15 that's been true for some time but masked by our reporting structure. As the new segmentation clearly reveals, with 981 million of PLM software revenue, I'm ready to declare that PTC has become the clear category leader in the hot PLM market. Using apples to apples definition, similar to that of competitors, PTC is easily number one globally in terms of scale, ahead of number two Siemens and number three Dassault by some distance. Note that total PLM revenue at PTC is more than $1.1 billion when you include services, but being a software company, we think it's most appropriate to focus on software. With a growth rate well ahead of these competitors in recent years, we are rapidly widening the leadership gap. A primary reason why we've been outpacing the market for years is because of the uniquely compelling PLM portfolio we've built. But a second key reason is that we transitioned to a subscription business model years ago, whereas competitors remain largely perpetual in nature. While the valley of death, which slowed PTC's growth for years, has faded in our rearview mirror, It lies ahead for these competitors should they attempt to transition to our business model. That would only open the software revenue gap further. The takeaway is that just as surely as Dassault leads in CAD and Ansys leads in simulation, PTC leads in PLM. Five consecutive years of PTC's accelerating PLM growth demonstrates that PLM supports a very attractive growth rate. I feel confident PTC can and will build on a strong leadership position in this great market segment for years to come. Turning to slide 16, today we're guiding the first quarter and full year of fiscal 23. At our virtual investor day just two weeks from now, we'll give you a bit more insight into our business strategy and operations in fiscal 23, and then guide how we expect that to play out across a longer period through fiscal 25. I don't want to preview that content today, but I think you'll like where the company's headed as we continue performing while transforming, as we've consistently done over the past decade. Then, a bit farther down the calendar, we hope you'll join us here in Boston for LiveWorks 2023 on May 15 and 16 of next year, where you have an opportunity to dive deep into all things PTC. LiveWorks will afford investors ample opportunity to interact with management, employees, customers, and partners. Please block off both events on your calendars. Wrapping up my part then on slide 17, as I reflect on fiscal 22, demand remains strong all year, and we've seen only minor signs of a macro slowdown. Accelerating growth and expanding margins prove our strategies working well, and strong execution has driven our top and bottom line performance to levels that are amongst the best across our industry peer group. Transitioning into fiscal 23, I'm excited about the opportunities to do even better as we push ahead with our SAS and margin expansion initiatives. We're watching diligently for changes in the demand environment and feel well prepared for whatever lies ahead. Because of our business model and spending discipline, we expect to deliver solid top line growth and robust bottom line growth across any of the more plausible macro scenarios. I continue to believe the company has never been in a better position to create shareholder value. And with that, I'm going to turn it over to Christian for his more detailed commentary on financial results and guidance.