The operator introduces the PTC's 2023 fourth quarter conference call and hands it over to Matt Shimao, the Head of Investor Relations. The call will be discussing forward-looking statements and non-GAAP financial measures. CEO Jim Heppelmann thanks everyone for joining the call.

In the fourth quarter, PTC had solid financial results with double-digit growth in ARR and 41% growth in free cash flow. The CEO transition is actively underway and the current CEO will focus on Q4 and fiscal '23 results, while the new CEO will provide forward-looking commentary. Despite a sluggish global environment, PTC saw broad-based ARR strength and low churn in Q4. Customer demand was solid, and the portion of business signed in Q4 but not starting until later increased, resulting in a $8 million decrease in Q4 ARR and a $20 million increase in deferred ARR.

Kristian explains that the company's deferred ARR strength has led to an increase in their fiscal '24 ARR growth guidance to 11%-14%. They also delivered $44 million in free cash flow in Q4, up 52% year-over-year, driven by strong ARR growth and higher operating efficiency. ARR growth by geography was 25% in the Americas, 24% in Europe, and 18% in APAC. The company's CAD product group saw 10% ARR growth in Q4, driven by Creo and Onshape. PTC is also taking share in different parts of the CAD market and is excited about their new Creo+ SaaS offering and Onshape.

PTC has seen positive customer demand for their new product, Creo+, and believes they have good opportunities to gain market share in the CAD industry with Onshape. Their recent acquisition of Codebeamer has also been successful in meeting the growing demand for ALM tools in various industries, particularly in the automotive industry due to the increase in software-defined vehicles. With the addition of Pure Systems, Codebeamer now offers robust configuration management for both hardware and software components of manufactured products.

The Pure Systems company, although small, has had success with their pure::variants offering in the auto and industrial industries. This, combined with their strong presence in the PLM, ALM, and SLM markets, makes PTC well-positioned for future success. The current CEO, Jim Heppelmann, thanks his team and the investors for their support and announces his transition to a new CEO, Neil Barua, who will be supported by the same team that drove PTC's transformation. Barua will take over the leadership role in February and shares his excitement for the future of the company.

The incoming CEO is excited to take on their new role and has been traveling with the current CEO to meet with customers, employees, and partners. They have been building relationships and have seen the relevance of PTC's software in customers' digital transformation initiatives. The CEO plans to continue engaging with investors and analysts and looks forward to an upcoming Investor Day. They have been immersing themselves in all aspects of PTC's business, including a recent win at Volkswagen Group. PTC is well-positioned to support customers' digital transformation needs and has a strong strategy and product portfolio. The company is expected to continue its double-digit growth in ARR for the eighth consecutive year in fiscal 2024.

PTC has a proven track record of consistent double-digit growth, which is supported by various drivers. The company's strong free cash flow growth is a result of its subscription model and operational discipline. The new CEO's focus will be on executing the strategy with discipline and metrics-driven approach. The company expects its free cash flow to grow faster than ARR in the medium term, with prudent reinvestment and controlled operating expenses. The company has set targets for solid top and bottom line growth, with a focus on executing to its full potential.

The company's ARR in Q4 '23 was $1.941 billion, a 23% increase from the previous year. On an organic constant currency basis, ARR was $1.77 billion, a 13% increase. Cash flow for the quarter and full year exceeded expectations. Revenue for Q4 was $547 million, an 8% increase from the previous year. The company believes that ARR is a better indicator of business performance than revenue or EPS due to the impact of ASC 606. The company is increasing its fiscal '24 guidance range to 11% to 14% due to higher deferred ARR.

The company encourages the use of ARR and free cash flow as the best metrics to understand their business and cash generation potential. They ended the fourth quarter with $288 million in cash and paid down $43 million of debt. They also made a final payment for a previous transaction and drew additional funds for an acquisition. Their debt-to-EBITDA ratio was 3x at the end of the quarter and they plan to prioritize paying down debt in fiscal year 2024. They have paused their share repurchase program and expect their diluted share count to increase. In the long term, they plan to return approximately 50% of their free cash flow to shareholders, taking into consideration their debt-to-EBITDA ratio and strategic opportunities. They then review their performance against their initial guidance for the year.

In fiscal year 2023, despite a challenging market, we had a strong performance with consistent growth in both top and bottom line. We provide ARR (Annual Recurring Revenue) guidance on a constant currency basis to remove FX fluctuations. For fiscal year 2024, we expect constant currency ARR to grow 11% to 14%, with a Q1 growth rate of 22% to 23%. The recent acquisition of ServiceMax will not be included in the organic growth rate for Q1.

The company is guiding for free cash flow of $725 million in fiscal '24, with operating cash flow of $745 million and CapEx of $20 million. The predictability of their cash generation has been consistent since transitioning to a subscription model, allowing for long-term investments even in a volatile economic environment. The majority of their free cash flow is expected to be generated in the first half of the year, with a $30 million imputed interest payment in Q1 related to an acquisition. Revenue and EPS guidance is provided, but ASC 606 makes short-term revenue difficult to predict for on-premise subscription companies.

The company's revenue, margins, and earnings per share are impacted by ASC 606, making them unreliable indicators of performance. The company has been steadily increasing R&D spending and is able to reinvest more due to strong free cash flow. The company's fiscal '24 ARR model shows the need to add $241 million in net ARR, with deferred ARR and the acquisition of Codebeamer and ServiceMax contributing to growth.

The company believes that they have set their fiscal '24 constant currency ARR guidance range and Q1 constant currency guidance range prudently. They also mention that they have an incremental $20 million of deferred ARR starting in fiscal '24, which is skewed towards the second half of the year. The company also provides an illustrative model for forecasting free cash flow, which may be unfamiliar to some investors due to the complexities related to ASC 606. The model takes into account the midpoint of their constant currency ARR guidance, perpetual revenue from their Kepware business, and the decline in professional services revenue due to transitioning to DxP. The company expects to see continued reinvestment in the business, but also plans to expand operating efficiency due to their sticky products and subscription business model.

The paragraph discusses guidance assumptions for various aspects of the company's financial model, including stock compensation, capital expenditures, interest payments, and cash taxes. It also mentions the expected free cash flow for fiscal years 2023 and 2024, and how potential changes in the demand environment may affect investment decisions. The company reiterates previous targets for fiscal year 2025 and provides new targets for fiscal year 2026, but notes that external factors such as macroeconomic conditions, FX rates, and interest rates could impact these targets.

The company is anticipating changes in global tax laws to have an impact on their midterm free cash flow and has factored this into their targets. Over the past 3 years, they have had a 40% 3-year free cash flow CAGR, with solid ARR growth and non-GAAP OpEx growth at 50% of ARR growth. They are targeting a free cash flow of $1 billion in fiscal year 2026, with a 20% 3-year CAGR. They have a strong portfolio and strategy, with a strong position in CAD and plans to disrupt the market with Onshape and Creo+. They have also expanded their leadership in PLM and strengthened their ALM position with acquisitions. They have a unique portfolio of interconnected digital thread capabilities. The company is focused on paying down debt and expects interest payments to decrease in fiscal years 2025 and 2026. They have strong execution and are in the early stages of a major on-premise to SaaS transformation driven by customer needs.

PTC's growth is not solely driven by SaaS, but also by its robust software portfolio, customer expansion, margin expansion, resilience in the face of macro uncertainty, and strong leadership. The company is well-positioned to continue creating value for customers and shareholders.

The speaker announces that they will now take questions and give closing remarks. The first question is from Kyle Aberasturi, who asks about the company's better-than-expected churn and how they are retaining customers. Kristian Talvitie explains that they have been working on driving programmatic change, longer term lengths, commercial discipline, and market/product maturity to improve churn. The speaker believes there is still room for improvement. The next question is from Ken Wong, who asks about the company's fiscal planning and how it relates to the recently announced fiscal 2026 target. Neil Barua confirms that he was involved in the planning and shares that there may be some nuances or refinements to the strategic road map that contributed to the fiscal 2026 target.

PTC's CEO Ken shares his confidence in the company's performance, especially in PLM expansion capabilities, ALM strength, and cross-selling opportunities. He also mentions Pure's role in augmenting their solutions and the inclusion of ServiceMax in the sales team's quotas. Analyst Jason Celino asks about the momentum in Codebeamer and the recent Volvo deal, questioning if it is driven by existing customers upgrading, displacements of other tools, or new customers. Neil Barua responds that it is a combination of all three factors.

The speaker discusses a large strategic relationship with Volkswagen and the deployment of code beamer to their enterprise users. This has led to a displacement of other tools in the marketplace and is creating momentum for the company. The CEO adds that in the fourth quarter, they did transactions with 5 auto OEMs, including 3 big name new logos with whom they had no previous relationship. The next question is about the company's focus on SaaS, given the CEO's background in the field.

The company is seeing continued interest in their SaaS offering, which is an important growth driver. They expect an S-shaped adoption curve and a decade-long journey. While SaaS is a key focus, it currently has little impact on ARR growth. The company is working with customers to optimize their conversion experience. There are other layers of the growth cake that are performing well and the team is focused on accelerating them. The company has good visibility for the next few years, with ramp deals and deferred ARR providing some level of certainty.

The company has many multiyear contracts that are not up for renewal until fiscal '24. Retention rates are high and deferred ARR provides additional visibility. There is potential for monetization beyond existing users for PLM, particularly with Windchill's adoption expanding to other groups and becoming an enterprise-wide system of record. This is driven by the push towards model base and the digital thread.

The company is working on a metrics-driven approach to sustain their strong sustainable growth in Windchill and will provide more details at their Investor Day in the spring. The rule of thumb is that there are 10x to 15x more users in the broader enterprise than in engineering, and there is a real opportunity for growth. The company plans to be in the mid-20s for SaaS ARR by 2023, and their long-term cash targets are strong despite other headwinds.

The speaker addresses a question about incremental changes and explains that there are no significant changes expected aside from operating the business. Another speaker discusses the product roadmap for 2024, mentioning the development of Atlas, new forms of packaging, and other executables. They also mention a release in December that will tie ServiceMax to Servigistics and IoT for preventative maintenance use cases. The speaker also answers a question about sales coverage and customer account segmentation, stating that there are no major changes expected for 2024.

The CEO of PTC discusses the company's plans for growth in the coming year, with a focus on their Windchill+, Creo+, and Kepware+ strategies. They also mention their plans to improve cross-selling and SaaS capabilities, particularly with their Codebeamer product. The company will also be offering incentives to their channel partners and refining their direct sales strategy.

Jim Heppelmann, CEO of PTC, discusses the recent launch of Windchill+ and its potential revenue uplift. He also explains the positioning of Windchill+ versus Arena in the market, with Windchill+ being geared towards larger, vertically integrated companies and Arena towards smaller, fast-moving high-tech companies with complex supply chains. Windchill+ focuses on orchestrating data across the value chain, while Arena excels at facilitating collaboration between engineering teams and contract manufacturers.

The speaker discusses how Arena is more focused on operations rather than product configuration and is well-suited for contract manufacturing in the electronics industry. They compare Arena to Onshape and mention upcoming investor conferences where they will be speaking. They also mention upcoming bus tours at their headquarters and thank listeners for joining the call.

This summary was generated with AI and may contain some inaccuracies.