PTC Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2023 second quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I would now like to turn the conference over to Mr. Matt Schimel, PTC's head of investor relations. Please go ahead, sir.

Good afternoon. Thank you, Lisa, and welcome to PTC's fiscal 2023 second quarter conference call. On the call today are Jim Heppelman, Chief Executive Officer, and Christian Talbatia, 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 10K, Form 10Q, 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, April 26, 2023, 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 Heffelman.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. I'm pleased to report PTC delivered strong results in our second fiscal quarter of 2023. As you know, we feel that ARR and free cash flow are the best metrics to assess the performance of our business. We exceeded our guidance on both metrics in Q2 and are at the midpoint raising the full year guidance for both metrics. A reminder that as usual, I'll focus my discussion on constant currency results when discussing top line metrics. and Christian will expound on currency effects later in the call. Starting with the top line metric of ARR on slide four, in Q2, we came in at 1.814 billion, which was above the high end of our guidance range and up 26% year over year. Top line strength was broad based across all segments and geographies. Bookings were solid in Q2 and our churn results were outstanding. Organic ARR growth was 13%, with ServiceMax and CodeBeamer contributing the extra 13 points of inorganic growth to bridge us to that 26% growth rate. Given our strong first half results, together with a solid outlook for the second half, we are narrowing our full year ARR guidance range while slightly raising the midpoint. Christian will provide guidance details later. Global PMIs continue to hover in the mid 40s to 50 range, suggesting the business environment remains challenging for industrial companies, but it does not appear to be getting much worse. Despite the sluggish macro, the solid organic bookings result we saw in Q2 was up nicely on a sequential and year-over-year basis, suggesting at this point that the softer booking result in Q1 was probably an anomaly within the normal range of bookings volatility rather than the beginning of a more sinister trend. While we did see continued booking softness in small and medium business and in China, this was offset by notable booking strength in Europe and in the US, and in particular with Windchill and CodeBeamer, as well as with IoT and AR. Running counter to the SMB trend, Onshape had a record bookings quarter, helped in part by a large household name electronics company making the decision to move away from SOLIDWORKS, and standardized instead on Onshape to gain the advantages of SaaS and agile product development. This key win represents a notable milestone for Onshape. In our core business, we saw a higher mix of ramp deals from companies choosing to proceed with large strategic programs, but wanting to ramp their deployments over multiple years. This buying behavior pushes more of the bookings into deferred ARR, which benefits fiscal 24 and fiscal 25 ARR growth more than it does fiscal 23. Deferred ARR is up sharply year over year. Naturally, we took the outlook for bookings, churn, start dates, and deferred ARR into account when we adjusted our FY23 ARR guidance. We landed a large and interesting PLM and ALM order from a European automotive OEM that included extension options for Windchill and CodeBeamer that contemplate a relationship spanning 20 years. The fact that an automotive OEM wants to understand commercial terms over the next two decades speaks to how sticky our software is. Clearly, they expect to have it for a while. A final top line observation is that organic growth arguably has a bit more momentum than the numbers on this slide suggest. That's because following the CodeBeamer acquisition, our strategy has been to shift our organic ALM selling effort to the new CodeBeamer technology platform. That strategy is working, and CodeBeamer is doing exceptionally well. CodeBeamer is now the ALM standard at several of the largest European and Asian auto OEMs and at numerous suppliers. But the consequence of this shift in sales strategy is that some of the ALM business we would have likely transacted organically is now scored as inorganic CodeBeamer instead. We estimate that excluding the impact of this mixed shift factor in Q2 would cause this slide to show organic growth at 14% with inorganic growth at 12. CodeBeamer will become organic in Q3 when we pass the acquisition anniversary. Moving to slide five and switching to our bottom line, we delivered 207 million of free cash flow in Q2, a record quarterly result that was ahead of our guidance and up 48% year over year. Note that in fiscal 22, we had 41 million of restructuring-related cash outflows for the full year and 18 million in Q2. Excluding the impact of restructuring payments in last year's compare, we still delivered 31% year-over-year free cash flow growth in Q2, driven by a combination of strong ARR growth and higher operating efficiency due to disciplined cost management. We raised our free cash flow guide for the year. Christian will elaborate on that, too. To help you understand what's driving the big year-over-year increase in free cash flow, let me recap the margin expansion program that PTC management's been driving. First, I'll remind you that operating efficiency is our metric that measures the percentage of our billings that we're able to convert to cash flow each year. Margins have been expanding for many years now, but the organizational realignment we did at the end of fiscal 21, coupled with the resource rebalancing work we did during fiscal 22, have together created an organizational model for PTC that's efficient and sustainable. We delivered 300 basis points of expansion in fiscal 22. At the midpoint of our fiscal 23 ARR guidance range, based on actions that are well behind us now, we expect our operating efficiency to expand by at least another 450 basis points this year. Looking back, while other companies were hiring like crazy, The proactive work we did to optimize our cost structure proved prescient and is generating exactly the results we promised. Given the trends at PTC, we do not anticipate any need for the type of layoffs or restructuring that we've seen in the tech world around us. Indeed, we're still hiring and investing in the business, albeit conservatively, which Christian will discuss later. Turning to slide six, a large driver of this margin expansion is the natural result of putting the business model transition behind us. Traversing the valley of death in fiscal 2014 through 19 caused PTC to defer revenue recognition while retaining the same spending levels, which made our reported margins look much worse than they fundamentally were. The short-term pain we endured during that transition is long gone, and now we're enjoying the fruits of the long-term gain we were aiming for, which is a resilient business that's tracking toward peer-leading performance. That's a good segue to slide seven, where I'd like to share a view of PTC's combined top and bottom line performance in comparison to peers. Starting at the upper left, Autodesk recently showed this FY23 Rule of 40 comparison at their investor day in March. Note that Autodesk's definition of the Rule of 40 uses free cash flow margin rather than operating margin, which is probably a good way to look at it given ASC 606 accounting noise. I'd prefer to use ARR rather than revenue growth for the same reasons, but I realized that makes comparisons of actuals hard to do. So for today's purposes, we will embrace Autodesk definition. That said, this chart showed PTC with an anemic 28% figure for fiscal 23, which didn't sound right to me given the margin expansion I just described. So moving to the upper right, Our team looked up all the actuals to reverse engineer the Autodesk chart, and two things became clear. First, Autodesk has a strange fiscal calendar where 11 of the 12 months of their fiscal 23 actually happened in calendar 22. Most of the companies in this analysis, including PTC, would say this is really a 22 comparison. Second, there are some significant one-time factors involved here too, because PTC's fiscal 22 cash flow was negatively impacted by the restructuring I mentioned. whereas Autodesk cash flow during this period was helped by their practice of billing multi-year subscriptions up front, which they've since committed to move away from. Putting those points aside, obviously the future matters more than the past, so it's interesting to consider the trajectory of companies in this peer group going forward. The two charts on the lower half of the slide have been created using consensus data pulled directly from FactSet. In the current year, based on strong growth and significant free cash flow margin expansion that PTC has been delivering, we're expected to move to the middle of the pack while Autodesk recedes. Next year in 2024, based on continued growth and margin expansion, PTC is expected to lead this peer group in the rule of 40 as Autodesk defines it. Of course, these are just consensus models and not actuals, but we're comfortable with the expectations shown here for PTC because they align to the mid-term guidance ranges we provided at our November investor day. We'll plan to revisit this useful chart periodically to track how PTC is doing as compared to peers. Turning to slide eight, let's look at ARR growth by geography. ARR growth in Americas was 29%. In Europe, ARR growth was 25%. And in Asia Pacific, ARR growth was 19%. All three regions, benefited from the acquisitions of ServiceMax and CodeBeamer, albeit to differing degrees. Next, let's look at ARR performance of our product groups on slide 9. In CAD, which is those products that enable authoring of product data, we delivered 10% ARR growth in Q2, and the market has been growing an estimated 7%. Within these results, the growth was primarily driven by Creo, but supplemented by strong percentage growth in Onshape. Jay Bleishauer recently noted in his research that Creo has been the fastest growing major CAD system for 12 of the past 16 quarters. Onshape is growing at a considerably faster rate than Creo, so PTC is clearly taking shares in different parts of the market with both products. I feel we have a great hand to play in the CAD market. In PLM, which includes those products that enable data and process management, Our ARR growth rate in Q1 was 39%, or 16% organic, with the inorganic growth coming from both ServiceMax and CodeBeamer, CodeBeamer having enjoyed a tailwind from the ALM mix shift factor I previously mentioned. In PLM, we continue to significantly outperform the market, which has been growing approximately 8% in core PLM, but more like 11% when you roll in the extended PLM categories of ALM and SLM. ARR growth for PLM in Q2 was primarily driven by windchill, supplemented by strong percentage growth in ARENA, IoT, and SLM. PTC has a strong hand to play here too, as clearly we are taking significant market share in the PLM market as well. Turning to slide 10, now that 2022 is behind us, we thought it'd be helpful to publish PTC's calendar year performance for those analysts who wish to make growth and market share comparisons on that basis. As you can see, calendar 2022 was a strong year for PTC, and it was our fifth consecutive year of double-digit ARR growth in both our CAD and PLM segments. In PLM, the addition of ServiceMax into our portfolio brings management of the customer's installed base of products into our product lifecycle management offering, and this significantly expands our category leadership. On a calendar 2022 basis, inclusive of the 153 million ServiceMax contributed on a pro forma basis, PLM revenue was 1.15 billion. ARR growth was strong at 20%, with organic at 18%, which suggests we're widening the leadership gap. In CAD, our results were all organic in calendar 22, and growth here too remains well ahead of the market. CAD revenue was $788 million in calendar 22, and the ARR growth rate was 10%. PTC's growth rate in CAD is best in class, so while we're not the category leader, given the differential growth rates, we are in the passing lane. Turning to slide 11, in just a few weeks, we're hosting our big LiveWorks event on May 15 and 16 here in Boston. This is our flagship event dedicated to our customer and partner ecosystem. and we're also welcoming investors to join. It's a great way to network and learn firsthand all things PTC. This year, we're excited to try a new approach to maximize the investor experience. In addition to having an exclusive investor lunch session on sustainability, as well as an executive Q&A session, we have organized an immersive investor track, which will enable you to attend our main keynote and our spotlight sessions on ServiceMax, Windchill Plus, and Creo Plus, sitting alongside our customers and partners. We will host a special demo tour for investors, and you'll be free to explore and learn more on your own too. There will also be opportunities to network with our executive team, and our board will be present as well. We would love to see you at LiveWorx. If you need registration details, please reach out to our IR team. On slide 12, One of the demos you can check out in the Windchill section will come from Fresenius Medical Care. Fresenius is the world's leading provider of products and services for individuals that need dialysis treatment. Fresenius produces dialysis machines in over 40 manufacturing facilities around the globe and also runs a network of over 4,000 dialysis clinics. There's a lot of inherent complexity in their product lifecycle. Fresenius saw the opportunity to bring down treatment costs and improve their products by building a digital thread workflow across their engineering, manufacturing, and service domains. Windchill was selected as the backbone to bring product data together and enable better collaboration across internal groups and with external partners. Fresenius subsequently standardized on Creo and has since adopted ThingWorx for smart connected products and for smart connected factories. Currently, they're exploring how they might leverage ServiceMax in that digital thread. Fresenius is a great case study that shows the breadth of what PTC technology can enable. For another teaser on slide 13, one of the demos you literally can't miss seeing is the Komatsu wheel loader. It's big and yellow and weighs 30 tons. Using Creo and Wincho, Komatsu engineers and manufactures equipment that customers use for decades in the field. Because Komatsu's aftermarket service business contributes significantly to their overall financial results, They've been investing in software to make their services business more efficient and productive. Komatsu has been using PTC service lifecycle management software, including Servagistics since 2006 to optimize spare parts inventory, and Arbortech since 2015 to streamline the availability of service instructions. Last year, Komatsu expanded their investment in service technology by selecting ServiceMax. Komatsu purchased software independently from PTC and ServiceMax when we were still separate companies, but represents a good example of the type of customer where we think we can be successful cross-selling because they really appreciate that 3D model-based digital thread. Komatsu is also a poster child for my point that for every customer that ServiceMax currently has, PTC has 10 more that look like them, companies that use Creo and Winchell to produce products that have long service lives. Summarizing then on slide 14, in fiscal 23, we're continuing to make good progress toward our midterm guidance targets. With solid first half results, we're well positioned to achieve our full year ARR and free cash flow guidance, which ticked upward this quarter. PTC has expanded our clear category leadership role in PLM, which has become a must-have technology backbone for digital transformation at industrial companies. The addition of ServiceMax further extends what was already a unique portfolio of interconnected digital thread capabilities across the full product lifecycle. Second, with organic growth at double-digit levels already, we're in the early days but executing well against a major on-premise to SaaS transformation that should provide a multi-year growth tailwind. You'll learn a lot more about our SaaS strategy at LiveWorx. Third, We have a well-earned reputation for driving margin expansion that goes back more than a decade, and the proactive changes we made are driving high levels of free cash flow growth through the midterm guidance period. Fourth, with organic ARR in the low teens juxtaposed on PMIs in the upper 40s, I trust you would agree we are actively demonstrating that our business model is very resilient. Q2 bookings were solid and churn outstanding. Top-line growth and bottom-line profitability are approaching peer leadership levels, even in this challenging macro environment. And finally, we're led by a team that has deep expertise and a proven ability to drive growth and margin expansion. I want to congratulate Mike DiTullio, who was promoted to president and COO in the quarter. Mike and I have decades of experience working together, and I'm very much enjoying this new division of labor. Congratulations also to Neil Barua, who was previously the CEO of ServiceMax and joined PTC as the president of our SLM business that combines ServiceMax with PTC's broader suite of service-related technologies and use cases. We're pleased to have Neil join the team and love what he brings to the business. With so many positive trends going our way, I continue to believe PTC has a tremendous opportunity to create shareholder value. With that, I'll turn it over to Christian for his more detailed commentary on financial results and guidance.