PTC Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to today's PTC 2024 Fourth Quarter Conference call. During this presentation, all parties will be in a listen-only mode. Following the presentation, a conference will be open for open questions, and I'll come back and reiterate how you can ask questions at that time. I would now like to turn the call over to Matt Schimau, PTC's head of investor relations. Matt, please go ahead. Good

afternoon. Thank you, Aaron, and welcome to PTC's Fourth Quarter and Full Fiscal Year 2024 conference call. On the call today are Neil Barua, Chief Executive Officer, and Christian Talbotia, 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 .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 6, 2024, 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 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, Neil Feruron.

Thanks, Matt. I've been traveling the globe, meeting with customers, listening to their perspectives and supporting the teams to close deals. I'm hearing one consistent theme from the companies that build the products the world relies upon. Neil, we need to shorten our development timelines as quickly as possible, with the highest quality, to remain competitive. This includes our hardware, mechanical, electronic, and embedded software processes that all need to come together for a final product. Please help us do this, as PTC's core offerings are the key to unlock this value. This is PTC's North Star, as we are best positioned across these critical dimensions to address the needs of our customers' half. It is tangible, the momentum. And while it might not show up every quarter in a linear fashion, I'm utterly convinced of our long-term trajectory due to this tectonic shift happening within the key verticals we serve. In fiscal 24, our free cash flow growth was solid, up 25% year over year. Our constant currency ARR growth was up 12% year over year. I am proud of the team, as these results were driven in a selling environment that remained difficult, an environment that is consistent with what we have been articulating over the course of the past two years. We also delivered, despite several organizational moves we made over the past two quarters. There were varying pockets of relative strength, such as areas in APAC, and more broadly with our reseller channel. There were also pockets of relative weakness, such as Western Europe. In summary, however, aggregate transaction values were in line with what we have been seeing over the past couple of years, which speaks to PTC's resilient business model and our diversification across the verticals and geographies we serve. This allowed us to report solid Q4 results, despite the steady persistence of macroeconomic headwinds and geopolitical uncertainty. I am also energized to announce that given the strength of our business and consistency of our free cash flow generation, we announced today a $2 billion share repurchase authorization. This provides us with another lever to further enhance shareholder value. Christian will walk you through the details of how we plan to execute our buyback program. Let's move now to slide four, which highlights our product portfolio and strategy. As a reminder, our five focus areas are, one, PLM, which is driven primarily by our Windshield product, two, ALM, which is driven by our CodeBeamer product, three, SLM, which is primarily driven by our ServiceMax product, four, CAD, which is driven primarily by our Creo product, and five, our continued focus on SaaS. These are the areas where we believe we can create the greatest customer value and are the areas where we have focused resources and attention. As I said earlier, our customers need to introduce new products at a faster pace and with higher quality. It is not unusual to hear from customers that they need to shorten their new product introduction timelines in half. And that's not possible without digital transformation across their workflows, which is exactly what our products enable. It is also worth highlighting that we are bringing our suite of software offerings in the areas that matter most for our customers together to help product companies improve their competitiveness. Given the unique breadth and openness of our portfolio, we can enable -to-end digital threat initiatives, which leverage a connected flow of product data across design, manufacturing, service, and ultimately reuse. A digital threat enables product companies to break down silos, streamline workflows, and achieve interoperability across departments, functions, and systems with a single version of the truth. It also secures the quality, consistency, and traceability of product-related data, ensuring that the data is -to-date, accessible, reliable, and actionable. With a digital threat, the right data is delivered to the right people at the right time and in the right context across the value chain. The demand drivers for our core offerings are strong, and our differentiated capabilities to drive digital threat initiatives are increasingly important to our customers. There is so much we can do to help our customers drive better business outcomes. But as I mentioned last quarter, given this incredible opportunity in front of us, this underscores that we also need to evolve how we operate to deliver more value to our customers with more precision and with more consistency. I'll turn to this now on slide five. Last quarter, I previewed some changes in our -to-market efforts that we were contemplating. I'd like to get into some more detail since the first elements of these changes have been put into place. During my time here at PTC, I visited with many of our customers and, importantly, spent time with the -to-market teams that interact with these customers. I had the chance to assess our capabilities and to examine the ways in which PTC's -to-market teams are organized to bring value to our customers. Along with external advisors, we evaluated these elements on a qualitative basis and took the time to assess the performance of our -to-market teams on a quantitative basis as well. The result of this evaluation is that we are making changes to our -to-market structure that I believe will make us more effective in serving our customers and enable us to sustain the low double-digit ARR growth target for the medium term that we've previously laid out. I'd like to take a few minutes to walk you through these changes in more detail. First, we are hiring a new Chief Revenue Officer who is expected to start in December. This leader is well known within the enterprise software space and I expect that once he settles in, he will drive increased focus, speed, and accountability in a more vertically oriented -to-market model. Speaking of which, the second adjustment we are making is that we are aligning PTC's selling, marketing, and customer success motions around the five key verticals we already serve, particularly in North America and Europe. Those are industrial products, federal aerospace and defense, electronics and high tech, automotive, and lastly, medical technology and life sciences. The rationale for this vertically focused realignment is simple. It's an extension of our mantra of putting more wood behind the arrows that we believe deliver the greatest value to our customers and ultimately to our company and our shareholders. By aligning our -to-market organization along industry lines, we will increase the specialization of our sellers, which will enhance their industry knowledge and allow them to be more effective at understanding the needs of their customers, how to help with their digital transformation journeys, and how to provide relevant industry specific feedback to our product development teams. Similarly, by having customer success teams that specialize in certain verticals, they will be more familiar with the pain points that affect their customers and can act more quickly with more precision to solve these challenges. Frankly, I believe that we have been leaving money on the table with our previous structure and that there are significant opportunities to enhance our ARR growth by selling to and serving our customers in this manner. We have a large pool of customers and their need for digital transformation can be met by the portfolio products we have today.

Yet,

we aren't fully capitalizing on this because of how we currently operate. Consider, for example, a customer in the automotive sector. In some cases, that customer's lead salesperson within PTC might also be addressing customers in the med tech and high tech spaces. And while that automotive customer might have certain brands and divisions using our Windchill product for PLM, they might not be standardized on it. The automotive industry is under immense pressure to transform to software defined vehicles, which of course comes with tremendous unique challenges, some of which can be addressed with our CodeBeamer product working alongside and integrated with Windchill. By adjusting the PTC teams that serve this customer to focus exclusively on the auto industry, for example, we believe that our selling and customer success teams will be able to cross-seller solutions and this will also enable us to address these customers' unique industry specific challenges more swiftly and effectively. Underpinning this transformation are three cultural tenets that I think are worth highlighting because we believe they will ultimately drive value to our customers and to PTC overall. First, focus on what matters the most for our customers. Second, drive increased speed internally and deliver value to our customers more quickly. And third, be more accountable for our decisions from start to finish. As part of this transformation, we have also reduced spans and layers within the -to-market organization while also eliminating certain overlay functions. To be clear, this is not an exercise in cost-cutting. Rather, we believe reorganizing our customer-facing resources will make us more effective in capturing the vast opportunity that is ahead of us. We expect to redeploy the run-rate costs associated with these people back into the re-architected -to-market organization. We will be hiring quota-caring salespeople and also specialized technical resources in our customer success organization that align with our five key verticals. There will be approximately $20 million of cash outflows associated with these changes. Krishan will cover more details in his discussion. Let me wrap up my comments about this -to-market realignment by saying that I believe the opportunities to improve our effectiveness are significant here at PTC. We have started to make the required changes to our organization. We are confident that these changes will lead to repeatable and scalable -to-market motions that will serve us well, and the guidance that Krishan will walk you through takes into consideration the possibility for some near-term disruptions associated with this realignment. Although we are taking significant measures to avoid meaningful stumbling blocks, we must acknowledge that we are evolving our -to-market organization and the potential near-term risks associated with doing that. We believe we have taken a responsible approach here and look forward to updating you on future earnings calls. Finally, I thought it was worth spending most of my time today, as I just did, sharing my thoughts and expectations related to our -to-market alignment. This took precedence over sharing some excellent customer stories. And so, this quarter, we put the customer stories into the appendix slides of our earnings presentations. I'll continue to highlight customer stories on a consistent basis in future quarters. With that, I'll hand the call over to Krishan to take you through our Q4 and full-year financial results and future guidance. Thanks, Neil. And hello, everyone.

Starting off with slide 7, PTC again delivered solid financial results in terms of both ARR and free cash flow in a continued, challenging selling environment. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business. To help investors understand our performance, excluding the impact of foreign exchange volatility, we provide ARR guidance and disclose our ARR results on a constant currency basis. At the end of Q4, our constant currency ARR using our fiscal 24 plan FX rates was $2.207 billion, up 12% -over-year. Deferred ARR came in as expected. Moving on to cash flow, in Q4, our free cash flow results were also solid as we resolved the collection timing issues we saw last quarter. For the full year, our free cash flow was $736 million, up 25%. Over the medium term, we continue to expect our free cash flow to grow faster than our ARR with our non-GAAP operating expenses expected to grow at roughly half the rate of ARR. A basic tenet of our subscription business model and budgeting process is that there's natural operating leverage we benefit from as our ARR grows. In fiscal 24, our operating efficiency expanded by 370 basis points to 42%, compared to 38% in fiscal 23.

Moving to

slide 8, there are a few key takeaways here. First, as I just mentioned, we expect that our OPEX will grow at approximately half the rate of ARR over time. You can see that on this slide. On the right-hand side, you can see our constant currency, ARR CAGR from fiscal 21 through fiscal 25 is approximately 15%. Our expected OPEX CAGR is approximately 6%. This is the leverage I was mentioning on the previous slide. Well, this is a little less than 50%. This is also because we had a couple of acquisitions over this time, and there's additional leverage as those get integrated. Point being that while OPEX growing at 50% of ARR growth may not work out exactly that way in any given year, we've been delivering on this and think that it remains a good rule of thumb as you think about modeling our business over the medium term. Secondly, we also talk about our disciplined approach to budgeting and investment decisions, and I think that shows up pretty clearly on this slide as well. Well, our overall OPEX CAGR is expected to be approximately 6%. It's really more like 4% in SG&A and 11% in R&D. I think this punctuates a point that we've made previously that given the challenging selling environment we've been in for some time, it hasn't really made sense to be investing a lot incrementally into sales and marketing, or G&A for that matter. Additionally, we believe there is incremental room for effectiveness within the spend envelope we have today, as evidenced by the -to-market realignment Neil elaborated on earlier. And this brings me to the final point of the slide that I'm trying to emphasize, which is that we're investing in our future growth while delivering solid, free cash flow. On the slide, the blue line represents our non-GAAP R&D expense trend. You can see that the slope of the blue line inflected four years ago following our transition to a subscription model. As our free cash flows expanded, this has enabled us to reinvest greater amounts into R&D to support our customers and drive future growth, despite the challenging macro. For over a decade, from fiscal 2008 to fiscal 2020, our average non-GAAP R&D expense was approximately $210 million, and our 12-year CAGR was about 2%. In contrast to that, we expect to invest approximately $400 million in non-GAAP R&D this year, and our four-year CAGR from fiscal 2021 through 2025 is expected to be approximately 11%. This evolution of our business is important to understand, and it's great for our customers because it allows us to continue to invest incrementally in our products even during a turbulent macro. Turning to slide nine, let's look at our ARR growth in more detail, starting with our product groups. In Q4, we delivered 10% constant currency ARR growth in CAD and 13% in PLF. Our top-line growth has shown good resilience. Despite the environment we've seen over the past couple of years and is supported by our unique portfolio with a solid footprint in higher growth segments of the market, as well as the digital transformation journey of our customers. These underlying strengths are further supported by our subscription model, our low churn rate, and the propensity for our customer base to prioritize their own R&D investments through challenging times. Moving to our ARR by region, our constant currency organic ARR growth was solid across Americas, Europe, and APAC, with growth in the low to mid double digits. Across all regions, our -over-year organic constant currency growth rates in Q4 were similar to the growth rates we saw in Q3. Turning to slide 10, we took on a lot of debt over the past three years, and we've been diligently paying that down. During Q4, we paid down $63 million and ended Q4 with cash and cash equivalents of $266 million and gross debt of $1.753 billion. During fiscal 24, our gross debt balance decreased by $569 million. We used $694 million, substantially all the free cash flow we generated this year, to pay down our debt as we said we would. This was partially offset by an increase in gross debt of $125 million in Q1 related to pure variance and the imputed interest for ServiceMax, which we discussed in detail on our Q1 call. We were 1.9 times levered at the end of Q4. As you know, our long-term goal, assuming our -to-event ratio is below three times, remains to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic opportunities. I'm pretty sure I don't need to do the math for you, but the $2 billion authorization that we now have in place through fiscal 27 is clearly more than 50% of the free cash flow we expect to generate over that period. This year, as you also all know, we have a $500 million bond that's coming due in February, which we intend to retire at that time with cash on hand and by drawing on our revolving credit. And in line with what we've said previously, we intend to buy back approximately $300 million of our common stock in fiscal 25 commencing this quarter. Also, as you know, we aim to maintain a low cash balance given the consistency and predictability of the business. As such, assuming we have excess cash, we expect to return it to shareholders. And the authorization we now have in place gives us a lot of flexibility in how we do that. Our fully diluted share count in fiscal 24 was $121 million, and we currently expect fully diluted shares to be approximately flat in fiscal 25. Moving to slide 11, before I take you through our guidance, let me walk you through how we guide and report ARR. As I said earlier, we believe constant currency ARR is the best way to evaluate the top line performance of our business because it removes FX fluctuations from the analysis, positive or negative. If you take a look at slide 24 in our appendix, you'll see the extent to which FX volatility impacted as reported ARR over the past eight quarters. For fiscal 24, we provided constant currency ARR guidance and reported constant currency ARR results for all periods using our fiscal 24 plan FX rates, which were as of September 30, 2023. We also recast historical constant currency ARR amounts back to fiscal 19 at those fiscal 24 plan FX rates for comparative purposes. For fiscal 25, we're taking the exact same approach. We set our constant currency ARR guidance and will report constant currency ARR results for all periods using our fiscal 25 plan FX rates, which are as of September 30, 2024. We also recast historical constant currency ARR amounts back to fiscal 19 at our fiscal 25 plan FX rates for comparative purposes. You can find the recast historicals in the financial data tables for Q4-24 that are posted on our IR website. And on this slide, you can see the recast constant currency ARR amounts for the past eight quarters. With that, I'll take you through our guidance on slide 12. All of the ARR amounts on this slide are based on our fiscal 25 plan FX rates. For constant currency ARR, we expect growth of 9 to 10% for fiscal 25 and approximately .5% for Q1. I'll get into more detail on constant currency ARR on the next two slides. On cash flows, we're guiding for free cash flow of 835 to 850 million in fiscal 25, which absorbs the approximately 20 million of outflows for severance and consulting fees related to our -to-market realignment. Given that the amount is relatively small, we're not calling out any restructuring So all of this will flow through the sales and marketing and COGS lines on our P&L. And reiterating what Neil said earlier, we expect to be reinvesting the run rate expense back into the -to-market organization throughout the year. In fiscal 25, we expect similar invoicing seasonality compared to the previous four years. Based on this and our expected cash outflows, we expect approximately 55% or more of our free cash flow to be generated in the first half of the year and for fiscal Q4 to be our lowest cash generation quarter. Note that our cash flow guidance is not on a constant currency basis, so FX fluctuations and interest rate changes can have an impact in either direction. For Q1, we're guiding for free cash flow approximately 230 million, which absorbs approximately 12 million of the 20 million of total outflows related to the -to-market realignment. The remainder of the payments will be spread out throughout the rest of the year. We have a high degree of confidence in our guidance for free cash flow due to the predictability of our cash collections and the disciplined budgeting structure we have in place. Importantly, we've maintained consistent billing practices over time. We primarily bill our customers annually upfront, one year at a time, regardless of the contract term length, so our free cash flow results over time are comparable. Furthermore, over the past five years, we've optimized our internal budgeting process. It starts with having a subscription business model that generates predictable cash inflows. Then we start each fiscal year by funding our business for growth at the low end of our internal ARR expectations. And as we progress through the year, we maintain or increase the level of funding based on the growth dynamics we're seeing. By proceeding in this manner, we're able to match our investments to the market environment and in an agile way, we're also delivering predictable free cash flow. To help you with your models, we're also providing revenue and EPS guidance. However, I'd like to reiterate my favorite reminder, ASC 606 makes revenue and EPS difficult to predict for PTC since we sell primarily on-premises subscriptions, and the way that revenue is recognized from these contracts can vary significantly based on variables that aren't necessarily relevant to the performance of the business. I did a teach-in on this subject on our Q4 fiscal 22 call that you may want to refer to if you're new to PTC. The summary is we believe ARR and free cash flow rather than revenue and operating income are the best metrics to assess the performance of our business. Moving on to slide 13, here's an illustrative constant currency ARR model for fiscal 25. You can see our results over the past three years, and the column on the right illustrates what's needed to get to our constant currency ARR guidance for fiscal 25. Note that all amounts on this slide are using our FY 25 plan FX rates. The illustrative model indicates that to hit .5% ARR growth, we need to add 214 million of net new ARR this year. Our fiscal 25 guidance range assumes that we'll add approximately 20 million less net new ARR in fiscal 25 compared to 24, and approximately 5 million less than in fiscal 23 and 22. It's worth noting that on an annual basis, our opening deferred ARR for the year is expected to be in line with slightly better than what we've seen over the last three years when normalizing for the 10 million incremental we had in fiscal 24. Additionally, our churn remains low, and we expect our churn rate in fiscal 25 to be in line with slightly better than the improving churn rates we've had in the past three years. Our business model is resilient, and while the selling environment remains challenging, we believe that because of these dynamics and allowing for potential near-term disruption due to our -to-market realignment, that 9% to 10% ARR growth is the right target for fiscal 25. Next on slide 14, here's a similar illustrative model for Q1. As you know, based on our results over the past few years, our net new ARR can be somewhat volatile in any given quarter, given dynamics such as new or renewal bookings, seasonality, timing of deferred ARR siting, how much of our new bookings in any given quarter starts in the quarter, how much churn we expect in any given quarter, et cetera. We've clearly seen quarterly volatility in our results over the past few years, and we expect to see some of these dynamics in Q1. This slide shows our sequential net new ARR over the past couple years, and the column on the right illustrates that we need 20 million of sequential net new ARR growth to hit .5% growth in Q1. Obviously, it's impossible to predict any given quarter with that level of precision. However, I'm sure you'll note that this is below the sequential net new ARR for Q1 that we've had over the past couple years. And as such, I think there are two factors worth noting, both timing related. First is the linearity of deferred ARR, and secondly, the mechanics of a couple contracts that will show up as churn in Q1 but are contracted to come back into ARR later this fiscal year. Together, these two factors are expected to adversely impact our Q1 sequential net new ARR by approximately 10 million, but will not have an impact on fiscal 25. Also, we need to be mindful of any potential disruption from the -to-market changes we're making. Importantly, we continue to keep our focus on the full year, as this is how we make incremental investment decisions over the course of the year. With all that said, we think it's worth emphasizing that after normalizing for the approximate 10 million timing impact I just called out, our Q1 sequential ARR will be in the same ballpark as the past couple of years. Turning to slide 15, I know that most of you model free cash flow using the indirect method, which uses the P&L and balance sheet as a starting point. However, given the complexities related to ASC 606, there are inherent challenges in using the indirect method to forecast free cash flow for PTC. The model on this slide is based on what we use internally. I know that looking at it in this way may be unfamiliar to some of you, so please feel free to reach out if we can be of help. Starting at the top, for fiscal 25 we're using .5% ARR growth, the midpoint of our accounts to currency guidance range. Next, our perpetual revenue is primarily related to our Kepler business, which is moving to subscription over time. And the primary reason that our professional services revenue is modeled to decline in is because a portion of it is transitioning to DXP over time. These three line items get us to our expected cash generation for the year, assuming no significant fluctuations in FX rates. Moving down to the cost sections, I'd like to highlight that the approximately 20 million of cash outflows related to our -to-market realignment are embedded in the cost of revenue and operating expenses line. Even as we reinvest in the business and realign the -to-market organization in 25, we continue to see expansion of our operating efficiency metric due to our recurring subscription model combined with our budgeting process. Continuing to move down the model, we provide guidance assumptions for stock comp, amortization, capex, cash interest payments, and cash tax payments. You can find these on slide 19 of the earnings deck and also on pages 3 and 4 of the press release. Note that the cash interest payments are expected to be approximately 90 million in fiscal 25, significantly lower than in fiscal 24, driven primarily by a decrease in debt. Also, cash tax payments are expected to be 110 million in fiscal 25, significantly higher than in fiscal 24, reflecting higher taxable income, the utilization of our deferred tax assets, and the impact of Internal Revenue Code Section 174. And finally, let's take a look at the other category in fiscal 24. The 82 million was primarily related to FX movements and working capital. For fiscal 25, the main drivers of the 99 million being modeled here are FX rates which have already moved significantly since September 30, 2024, as well as working capital to support continued growth. In this simplified illustrative model, the impacts of FX fluctuations are captured on a net basis in the other line. In reality, FX fluctuations that are net positive for free cash flow result in higher cash generation and cash disbursements, and FX fluctuations that are negative for free cash flow result in lower cash generation and cash disbursements. All of this sums up to our expected free cash flow of approximately 843 million, which is the midpoint of our fiscal 25 free cash flow guidance range. So in conclusion, PTC has a strong portfolio and strategy, a track record of operational discipline, and clear value creation opportunities. We're focused on what matters most for our customers, and we're aligning our operations accordingly so that we can scale our business in a consistent manner. With that, I'd like to turn the call over to the operator for today's Q&A session.

Thank you. And ladies and gentlemen, as mentioned, we will begin our Q&A session now. And remember, if you would like to ask a question on today's call, you need to hit star followed by the number one on your telephone keypad. We do ask that you please respect the process and limit yourself to one question only when asking a question. If you have additional questions, you're free to return back to the queue, and we'll get to as many as we have time for. Our first question for today comes from the line of Ken Wong with Oppenheimer & Company. Your line is live.

Fantastic. I wanted to just ask a question in terms of the -to-market disruption. Neil, you mentioned that Christian has baked that into the guidance. I guess, one, when would you assume that you hit sort of peak disruption? And then I couldn't help but notice that in Q1, you're growing .5% and 11% on an adjusted basis. Is that the right way to think about the growth rate, assuming you guys can manage through the disruption with minimal impact?

Let me take the, Ken, answer the question. Let me take the front end, and then Christian can talk about the way in which we're thinking about the year. So, we're not expecting disruption. In fact, we've been really thoughtful and have gone to already great lengths to prevent disruption. We've got a number of mechanisms. We've done it before to make sure that we prevent that disruption across the team as we're going through this transformation. At the same time, though, we are also recognizing that, as in many -to-market transitions that happen across every company, there can be some friction within the sales team, despite all our best efforts. At the end of the day, these are people, not spreadsheets. Emotion is there and a lot of management that goes into them. But again, we're hyper-focused on making sure that we minimize it. But in contrast to your question to setting guidance conservatively, to kind of artificially engineer a beat and race cadence, we set our guidance in a way that gives us some room, in case we end up seeing any short-term disruptions over the course of the next number of quarters. Christian, you want to take the second piece? I think you just did. OK,

good.

All right, perfect.

Thank you, guys. Thank you for your questions.

Our next question is from the line of Daniel Jester with BMO Capital Markets. Your line is live.

Great. Thanks for taking my question. Maybe just on the market, I know there's five pillars on the product side, which you're really focused on. Maybe, Neil, we can have an update as to what you expect to see from a variation in terms of performance of the business and maybe double-click on ServiceMax and Code Beeper. Thank you.

Yeah, good question. So as you can see from the results from our PLM and CAD breakout, we continue to have strong performance across those categories across last year. And what's driving that is the windshield proliferation, which will, you know, the strategy that's going to market transmission is within the verticals that are using windshield, how to continue to penetrate that more in a precise and consistent manner across the enterprise. So windshield is something we continue to see momentum in. We're building more momentum. And with this vertical strategy, we'll have even more precision by the key verticals we already serve with Noam and Kayleigh Cher and examples of other customers in those verticals that are using windshield at scale, like we're seeing in many cases already. But we have plenty of wood to chop to take down all those dollars in ARR that we could have as we expand windshield. So that that's a category that we're really leading into. Code Beamer, as you asked, you know, last year in particular, Q4, two out of the 10 out of the 10 largest automotive OEM companies with revenue, two out of them are expanding Code Beamer even in Q4 at pace. And so that's good. Additional three plus customers that have been using Code Beamer already in deployment have decided to expand that usage. So we're starting to see this element of Code Beamer as it gets deployed in the environment, as software engineers are using it, as they're seeing how software interacts with the hardware engineers, mechanical engineers, customers are saying we want more of Code Beamer. So we're going to press on that. You're going to see continued emphasis on how Code Beamer, windshield work even more comprehensively together, which will continue to accelerate the PLM thrust that we're starting to see in the market. And then lastly, I know I didn't talk about customers, as I mentioned on the call, but there's a great case study that we're seeing continued indications and customer deployments on with ServiceMax, to your question, around one of the largest, you know, manufacturers of cranes in the world has been a large Creo Windshield customer for almost a few decades. And we've been working on this with the ServiceMax team for the last, call it 12 to 18 months with this customer with our new release that I mentioned in the summertime around Windshield and ServiceMax connection on trouble tickets being able to flow back into Windshield from ServiceMax. That customer did a very comprehensive proposal and an RFP that looked at all the competitive offerings and they chose us because of ServiceMax's integration with Windshield and the flow of product data from engineering to service and back, which was the key differentiator for us. So we see continued emphasis there, momentum continues to build and we look forward to a good year on both fronts.

Thank

you

very much. Thank

you for your question. Our next question is from the line of Saket Kalia with Barclays. Your line is live.

Great.

Hey, guys, thanks for taking my question here. Neil, maybe for you, I know you spend a lot of time with customers and you called out Western Europe in your prepared remarks. So I'd love to just zoom into that, into that geography a little bit. What do you hear from customers there about willingness to spend right now? And how do you sort of envision 2025 in Europe from just a demand perspective?

Yeah, great question. I have been spending a lot of time in Europe and rest of the world and also here in North America meeting customers, as you mentioned. I think what we're seeing the dynamic, we saw some of that in Q4. You know, we delivered solid results, as we said, for ARR and really great results on cash flow for Q4. But, you know, in terms of having a blowout quarter for Q4 and ARR, we had a few deals in Western Europe in particular, like we noted, that either pushed out or got smaller in the deal value that were really pushing on, you know, getting done over the course of Q4, which I believe we'll still get in due time over the course of this year. And the dynamic that's happening and at the same time, by the way, we won a number of deals that were at the same value that we thought in Western Europe and closed those in Q4. I think what we're working through is particularly within the automotive vertical in Germany, there is obviously a lot of pressure around just the cost structure, the speed in which they're developing cars, the tier one suppliers that supply those, all those components of how do you really create competitors versus Chinese OEMs. We're seeing a lot of that pressure occur as we've all been reading in the press. I've been sitting in board rooms with all of these customers. That's the bad news and the highlights of the media reports. I believe that this is forcing our customers that we're serving in the specific vertical in Western Europe to rethink how they're actually operating as a business to remain competitive. And that comes down to first codebeamer was continued to blow momentum within Western Europe because software now needs to work at the same speed as mechanical hardware, mechatronic systems within these OEMs that need to have codebeamer implemented to do that, to keep pace with the Chinese development cycle. So I think that's a net positive for us, despite the macro and the issues that the German automakers are dealing with. So that's a positive. On the second piece is on Windchill, they're looking at thinking about PLM, how to move product data faster through their enterprise because they need to stay alive. And so I don't want to get too aggressive on saying it's going to be wide open field for us to go execute and win a lot of deals in Western Europe because there is a backdrop of uncertainty. But within the business, there's a lot of urgency and need to change the way they're actually doing business. And our technology underpins that change. So I'm bullish around the requirement socket. I'm bullish around the urgency for them to do it. I'm cautious around how they're actually going to spend those those dollars over the course of the next couple of years. And and we'll see how that goes over the course of this year. We factor that into how we put this range of guidance as well.

Makes sense. Thanks, guys.

Thanks for your question. Our next question is from the line of Joe Vruick with Baird. Your line is live.

Great. Thanks. On the go to market change, would you say that initiating the timing now means the structure is mature ahead of meeting to be positioned for maybe any benefit from renewed spending that customers might pursue around macro improvement? I guess I ask because there's the potential always after the U.S. election that industrial orders pick up. If you did see an improvement in industrial sentiment, these would be PMI. Do you think there's a lag for your business? So you expect your pipelines to replenish maybe later in twenty twenty five. And that really simply lines up with when this new structure is going to be mature anyways. And so all of that is ultimately compatible with the changes you're now making.

Yeah, great question. I would say that our teams are already underway and getting ready and executing across the plan. And there's several things we're working through around account plans, assignments, all the great stuff that every team needs to do to organize for being able to face the vertical opportunities that exist. And we're working through that. And that's the area that we believe we're not expecting disruption, but we're taking into account that something's in other situations to adjust for that if something does happen. But what we won't have is not being ready for the opportunities that we see in the current pipeline. And if somehow or another business actually changes versus the last two years of this sluggish sales environment, our vertical approach already with experiencing these verticals at scale with big customers, we're primed to take advantage of incremental demand and being able to continue to be well versed to take advantage of that and not have as much of a lag. So I'm looking forward to if we could get manufacturing and PMI to take up. PTC is ready for that. We've been ready for a while and we're going to be even more ready as we verticalize the business, which we're doing. And it's underway. And we're looking forward to how that translates over the course of this year into next.

Thank you. Thank you for your question. Thank you for your question.

Our next line is from the line of Adam Borg with Sticell. Your line is live. Awesome.

Thanks so much for taking the question. Maybe for Neil, you talked a little bit about the go to market focus around five key verticals and I believe the stock question talked a little bit about what you're seeing in the automotive. I was hoping you could talk a little bit. Is there anything else interesting happening in the other four verticals worth commenting, both positive or negative and maybe Christian, if you could just remind us what the current ARR mixes for each of those top five verticals, that'd be really helpful. Thanks so much.

You know, I'll start with the one that's top of everyone's mind across the world. There was in India a couple of weeks ago. It's the same dynamic. Federal aerospace and defense is just continuing to be an area that is facing significant backlog and demand. And they're trying to move that faster through their business to deliver the products that are being asked to be delivered. From their customers. And so, you know, in India, I was in UK here in North America, spending a lot of time that that segment, I think, is continuing to be an area we're leading into. We have a lot of experience. We have a lot of credibility there. We're going to continue to do that. I'm going out to Washington, D.C. to make sure we continue to promote this again in a vertical marketing perspective. Already going into that model, we believe there's a lot of really interesting dynamics happening in the federal aerospace and defense across the world. We're very well positioned there. On med tech and life sciences, we're also seeing an interesting other dynamic where a lot of these companies have gotten very big through a lot of acquisitions. And they're now being forced to really develop products in a faster pace. That requires PLM, at the heart of an epicenter of moving product data as fast as possible to manufacturing. And so we're seeing some really interesting trends occurring in med tech and life sciences. We had a couple of really interesting wins that happened in the last couple quarters of 2024. And we expect that to continue because, again, it's a survival and existence of their business to actually put these frameworks and systems together like Windchill, like CodeBeaver, like Creo, and ServiceMax to be able to deal with the competitive nature of their business.

And then, Adam, get back to your other question. If we talk about the vertical exposure across the major industries, the industrial space is kind of high 20s for us. F, A, and D is around 15 electronics and high tech, also in that same mid teens automotive, in the kind of low teens, med tech in the low teens. And then the other, what we would, I guess, call non-core verticals make up the difference, which is also around kind of 15ish percent of the business.

Awesome.

Thanks again.

Great. Thank you for your question. Our next question is from the line of Jay Flee Shower with Griffin Securities. Your line is live.

Thank you. Good evening. With regard to the digital thread comments, maybe we could tie that into the vertical comments you have this evening. That is, which verticals would you say are furthest along in terms of adopting three or more solutions, three or more of your various three letter acronyms as indicative of implementing closed loop lifecycle management. And then with regard to auto, when you last reported your segments as a percentage of revenue, which was six years ago, it was mid teens percent, but your exposure to auto was very different. Back then it was largely power trains and supply chain, never really body. But would you say now that with the evolution of automotive systems requirements, that your whole exposure and delivery of software to automotive is going to be fundamentally different than your more limited exposure in the past?

Yeah, great question, Jay. I'll start with the second one on automotive. I think there's been a massive shift in our, our determination in our foothold in that market. I think it's very different than whatever that prior stat was given. And the reason for it is it's predominantly the influx of windshield and code beamer in that group. And this, as you know, well, this includes the OEMs and tier one, tier two, tier three suppliers, code beavers taking a hold on that. And we're just pushing all accelerators, windshields also right along for the ride. And you'll see more and more of that come into it versus the design guys, the factory guys, those are, those are there. The great competitors is ours. We're more focused on helping our customers deal with this entire problem statement of how to build software defined vehicles at speed to compete against the Chinese and our tools and our software, as you know, well, is very well placed there. Some cases, by the way, they're looking at Creo, they're looking at other things that we have across the portfolio, but the majority of the, the strength in that group, and you'll see that continue again, it might not happen in a linear fashion, but the ultimate over the medium and long term will be you will see windshield and code beaver really wrap their arms around that space in an aggressive fashion. That's the strategy and the direction that we've got on, on your first part of your question on digital thread across verticals. There's not really one that's taken. I could, I could say, wow, they really take an on hold. And that's the amazing part of this business, Jay, which is we look at those verticals. And this is my point of we've got a lot of money on the table to go tell them around how Creo, windshield, code beaver work together. And then on the aftermarket service side, how the service facts fit into it. That's all the other things that we've got. But in those four core areas, we've got a real opportunity with in certain segments already customers using it, but let's promote it across the entire vertical. And that that's the area that we're going to keep pressing on. We're going to build product integrations around, we're going to get our messaging consistent around. We're going to do customer reference ability on. And that's where we think we've got the ability to have a sustainable, low double digit growth rate in the medium and long term. That's the goal that we're pushing for. And, and from our perspective.

Thank you.

Thank you. Thank you for your question. Our next question is from the line of Andrew with Bank of America. Your line is life. Yes. Good evening.

Andrew.

Hey, how are you? So we're sitting here right right after the election and we ended up going to a bunch of industry shows. And it just seems a lot of uncertainty that we were picking up from election. You know, this multi year D stock really impacting people's budgets that have disrupted operations. You know, post the election, you know, do you feel there's more uncertainty than usual about 25 calendar year budgets or because the comps have gotten so much easier and we are past the election that sort of created this uncertainty that visibility has gotten better. Thank you.

Yeah. To be fair, we're 24 hours post the election results. So, you know, I was with two customers today already. And what I will say is their commentary and their desires are similar to what it was 48 hours ago, which is around how to make sure we are set up to deal with all the complexities of the world, which includes geopolitical uncertainty. But that's only one of it. There is supply chain uncertainty. There is workforce disruption, uncertainty of retirement, aging. There's complexity of products that consumers are demanding now. As we again, I'll note the Chinese OEMs. They have opened up the world to saying, let's give the users all this complex and configuration of products in very different ways. And when you add all that together, what we're hearing from customers again, 24 hours, but previous to that is we need technology that PTC provides to be relevant, to have product data move faster through our organization through highly configured models and variances of their products that include software, that includes hardware, that includes electronics and mechanical so that we could And I think that's going to be in any scenario, a need that will continue to accelerate regardless of an administration and regardless of pushing certain geographies versus the other. So that's why what I said was we're working through a tectonic shift. I'm utterly convinced around the long-term view of it, the linear nature of this on a quarterly basis. You can pick and choose that number, but this business is moving in these verticals because of the urgency of our customers to survive and to remain competitive. And I think those dynamics are perfectly suited for what PTC has to offer.

So realignment is the biggest source of uncertainty into 25 versus macro. Is that fair to say?

I think it's Andrew, if I could say, I think it's everything. I don't think there's going to be at least in the last 24 hours, less uncertainty. I think it's, we're going to see the next couple quarters play out and we'll be ready for it. But right now we're focused, Andrew, on delivering what our customers are needing from us. And depending on the changes in the environment, we'll be ready for it. We have been ready for it through multiple different administrations for 35 plus years. And we've been successful as a company. And we're going to deal the same way going forward for the next 35 years.

Well, that's a great answer. Thanks so much.

Thank you for your question. And ladies and gentlemen, a reminder to please stay on the call at the conclusion of today. Neil is going to be back on to close us out. And we have a final question from today from the line of Jason Salino with KeyBank. Your line is live.

Hey, appreciate you fitting me in. You know, maybe for Christian, you know, if we play back the tape from 90 days ago, I think when you gave us an initial framework for FY25, you technically said, you know, double digits for our growth. Now, if I look at the guide, you know, technically, it's, you know, single digits at the midpoint. So curious, like what had changed in these 90 days, like, I don't know if it was macro or if it's just incremental conservatism around the go to market kind of changes, but just curious on, you know, the the hair that I'm splitting here.

Yeah, I really I think it's the latter case. And I think it's just, you know, conservatism around potential impact of the go to market realignment.

Okay, great. Thank you.

Thank you for your question. And ladies and gentlemen, as promised, that will wrap up our Q&A session for today. And I'd like to turn the line back over to Neil to close this out. Thank you.

Thank you, everyone, for joining us. And for your questions today, Christian and Matt will be both on the road in the weeks ahead, participating in investor conferences. Christian will be in New York in mid-November, hosting a Vizzuho dinner and attending the RBC conference. Christian will also be going to London while I'm in Asia in early December, and we'll be at the NASDAQ conference. Matt will be at the Wells Fargo, UBS, and Barclays conferences on the west coast in early December. And thank you again, and we really look forward to engaging with you. Thanks.