PTC Inc.

2023 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 Shiemau, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, Danica, and welcome to PTC's 2023 Fourth Quarter Conference Call. On the call today are Jim Heppelman, CEO, Neil Barua, CEO-elect, and Christian Talbatia, CFO. 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 1, 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 CEO, Jim Heppelman.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. As usual, I will focus on constant currency results when discussing top line metrics, and Christian will cover currency effects later in the call. I'm pleased to report that in the fourth quarter, PTC again delivered solid financial results in terms of ARR and free cash flow, which are the most important metrics to assess the performance of our business. Reflecting on the full year, which will be my last year in the CEO seat, Fiscal 23 has been one of PTC's best years ever. Despite a challenging economy, we delivered a seventh consecutive year of double digit top line growth with ARR growing 23%, 13% organically, and revenue crossing the $2 billion threshold. And on the bottom line, we delivered 41% growth in free cash flow. This performance is a great stepping off point for me as I hand the reins of the company to Neil Barua going forward. Given the CEO transition that's actively underway, during this call, I'll focus my comments on Q4 and fiscal 23 and let Neil take the lead on forward-looking commentary. Coming back to the Q4 results and turning to slide four, though the manufacturing PMIs have indicated a sluggish global environment for many quarters now, our top line ARR continues to show good resilience. In Q4, we saw a broad-based ARR strength across our product groups and geographies. Our churn remained low, and for the full year, we did better than the churn targets we had shared previously. Customer demand was solid in Q4, up overall and on an organic basis in line with the exceptional results we delivered in Q4 last year. Within this context, the portion of business that we signed in Q4, but that did not start in Q4 or fiscal 23, was greater than we had modeled. Since ARR only kicks in when the subscription starts, Q4 ARR was $8 million lower than we had modeled, while deferred ARR is consequently $8 million higher. With this influx, our total deferred ARR is now $20 million higher than it was at the beginning of fiscal 23. Christian will explain that because of this added strength in deferred ARR, we are now guiding ARR to grow 11% to 14% in fiscal 24, higher than the 10% to 14% growth range we discussed previously. Moving to slide five and switching to our bottom line view, we delivered $44 million of free cash flow in Q4 ahead of our guidance and up 52% year over year. For the full year, our free cash flow was $587 million. ahead of our guidance and up 41% year-over-year. Remember that ARR is the primary driver of cash flow, so this robust result was driven by a combination of strong ARR growth and higher operating efficiency. In fiscal 23, we delivered 38% operating efficiency, which was 620 basis points higher than fiscal 22, well above our initial target that called for approximately... 450 basis points of improvement in operating efficiency. We expect these operating efficiency improvements to be sustainable, and we think our subscription business model will continue to provide us with operating leverage. Turning to slide six, let's look at ARR growth by geography. ARR growth in the Americas was 25%. In Europe, ARR growth was 24%, and in APAC, ARR growth was 18%. Regionally, compared to a quarter ago, the gap between as reported in constant currency ARR widened in Europe and narrowed in APAC. On a global basis in Q4, our constant currency ARR growth was 3% less than our reported ARR growth. Versus prior quarters, we saw improved demand in China and in our SMB reseller channel. All three regions benefited from intergrantic growth to varying degrees due to the acquisition of ServiceMax. Next, Let's look at ARR performance of our product groups on slide seven. In CAD, we delivered 10% ARR growth in Q4. Within these results, the growth magnitude was primarily driven by Creo, but supplemented by strong percentage growth in Onshape. PTC is taking share in different parts of the CAD market with both products, and we're excited about the potential of our new Creo Plus SaaS offering, as well as Onshape. We launched Creo Plus at LiveWorks event this past May, and the initial customer demand for Creo Plus has been encouraging. Regarding Onshape, with NPS scores that lead the industry by a considerable margin and solid retention rates, we see good opportunities to take share in the part of the CAD market that Onshape focuses on. Garmin's recent decision to replace their incumbent CAD system with Onshape speaks to the product's maturing functionality and competitive differentiation. In PLM, our ARR growth rate in Q4 was 34%, or 15% organic, with the incremental inorganic growth coming from ServiceMax. ARR growth in Q4 was primarily driven by Windchill, but supplemented by strong organic growth in ALM thanks to CodeBeamer. CodeBeamer has proven to be a great addition to our portfolio, with strong demand coming from manufacturing companies that might already be proficient at managing hardware development, but are struggling to deal with a growing wave of software complexity. While demand is most notable in the automotive industry due to the rise of software-defined vehicles, we see customer demand for ALM tools expanding in other verticals as well, driven by the trend towards software-driven products of all types. Not only do manufactured products contain more software than ever, but there has been an explosion of software configurations that need to be developed and maintained across a company's different product lines, including across model years, sales options, and cloud deployments. That's why we supplemented our CodeBeamer ALM solution with the acquisition of Pure Systems. You probably know that on the hardware side of the manufactured product, configuration management has always been the special sauce of Winchell. Now, with the addition of the Pure Variant solution, CodeBeamer will be able to offer equally robust configuration management for the software side of the product. The peer systems company is relatively small, but their breakthrough peer variance offering has already landed early wins at many of the same auto and industrial companies that are adopting CodeBeamer. Introducing this key competitive differentiator and value proposition into CodeBeamer makes our position in the ALM market even more promising. We've been taking significant share in the PLM market and are well positioned going forward with our strengthened core PLM with Windchill and Arena, complemented by strong positions in the faster growing ALM and SLM parts of the market. Wrapping up my comments then, first I'd like to say a heartfelt thank you to all of you who have supported me and my team over the years. Your insights and support have helped us to transform PTC into the awesome company it is today. a $2 billion scale growth and profit leader with a unique product portfolio that helps our manufacturing customers digitally transform their businesses. I'm personally very proud of what the PTC team has accomplished during my 13 years as CEO and much longer tenure as the company's technology and strategy leader. I feel things are in good position to transition the leadership to Neil Barua. Neil will be supported by the same team who drove our transformation. including Christian, Mike DiTullio, Aaron von Staats, Kevin Wren, Steve Durteen, Catherine Kinneker, and thousands of other PDC employees. I wish them all the best as they evolve the business in pursuit of new ways to create value for our customers and shareholders under Neil's leadership, just as they did during mine. I will remain in the background supporting Neil through February, but I plan to let him take the stage in investor discussions going forward. With that, I'll hand the call over to Neil to share his perspectives on the CEO transition and the future of the PDC business.