The paragraph is an introduction to PTC's 2024 Fourth Quarter Conference Call. The operator welcomes participants, noting that it will be in a listen-only mode initially, followed by an open Q&A session. Matt Shimao, PTC's Head of Investor Relations, introduces the call and mentions that it features Neil Barua, CEO, and Kristian Talvitie, CFO. The call is being broadcast live, with a replay available later. It will include forward-looking statements, and PTC notes that actual results may vary, with more details available in their SEC filings and press release. Non-GAAP financial measures will also be discussed, with reconciliations available. Neil Barua, the CEO, is then introduced to speak.

In the paragraph, the author discusses their global interactions with customers, emphasizing a consistent demand for shorter development timelines with high quality to remain competitive. PTC is seen as a key partner in achieving this due to its core offerings. The company experienced solid growth in fiscal 2024, despite a challenging selling environment and recent organizational changes. There were strong performances in APAC and through resellers, but some weaknesses in Western Europe. Overall, PTC's diversified business model and resilience led to strong Q4 results, despite ongoing macroeconomic and geopolitical challenges.

The paragraph announces a $2 billion share repurchase authorization to enhance shareholder value, with execution details to be provided by Kristian. It outlines the company's focus on five key product areas—PLM, ALM, SLM, CAD, and SaaS—aiming to create customer value by enabling faster and higher-quality new product introductions through digital transformation. The company emphasizes its ability to offer a comprehensive suite of software solutions that facilitate end-to-end digital thread initiatives, promoting interoperability and data consistency across design, manufacturing, and service processes.

The paragraph discusses PTC's efforts to enhance its go-to-market strategy by leveraging digital threads to deliver precise and consistent value to customers. The company evaluated its current capabilities and organization structure and decided to implement changes to better serve customers and sustain growth. One significant change is the hiring of a new Chief Revenue Officer, expected to join in December, who will bring focus, speed, and accountability to a vertically oriented go-to-market model.

The paragraph describes PTC's strategic shift to realign its selling, marketing, and customer success efforts around five key verticals: industrial products, federal, aerospace and defense, electronics and high tech, automotive, and medical technology and life sciences. This realignment aims to enhance the specialization and industry knowledge of their teams, thereby improving their effectiveness in understanding customer needs and aiding digital transformation. It suggests that the previous structure left untapped opportunities for ARR growth. By specializing in specific industries, PTC aims to better meet customer needs and capitalize on its existing product portfolio, as exemplified by potential inefficiencies in handling customers across diverse sectors like automotive and med tech.

The automotive industry faces pressure to transition to software-defined vehicles, presenting unique challenges that PTC aims to address with its Codebeamer and Windchill products. By focusing teams specifically on the auto industry, PTC seeks to improve cross-selling and address customer needs more effectively. The company is undergoing a transformation based on three cultural tenets: prioritizing customer needs, increasing internal speed to deliver value faster, and being accountable for decisions. This involves restructuring the go-to-market organization, not as a cost-cutting measure, but to better seize opportunities by hiring salespeople and technical resources aligned with key verticals. Approximately $20 million in cash outflows is expected due to these changes, with further details to be provided by Kristian.

In the paragraph, the speaker discusses a go-to-market realignment at PTC, highlighting the opportunities for improved effectiveness through organizational changes. They acknowledge potential near-term risks associated with these changes but express confidence in achieving repeatable and scalable strategies. While some disruptions are anticipated, the speaker assures that they have taken precautions to mitigate issues and aim to provide updates in future earnings calls. Due to the focus on go-to-market alignment, customer stories were moved to the appendix of the earnings presentation but will be highlighted regularly in the future. Kristian Talvitie is then introduced to discuss PTC's fourth-quarter and full-year financial results, with an emphasis on ARR and free cash flow as key performance metrics, and guidance provided in constant currency to account for foreign exchange volatility.

The paragraph discusses the company's financial performance and strategic outlook. At the end of Q4, the company's constant currency Annual Recurring Revenue (ARR) was $2.207 billion, a 12% increase year-over-year, while free cash flow for the full year increased by 25% to $736 million. The company anticipates that free cash flow will continue to grow faster than ARR in the medium term, with non-GAAP operating expenses expected to grow at about half the rate of ARR. Operating efficiency improved to 42% in fiscal 2024, up 370 basis points from the previous year. The constant currency ARR compound annual growth rate (CAGR) from fiscal 2021 to 2025 is projected at 15%, while expected operating expenses CAGR is around 6%, demonstrating the company's operating leverage and disciplined investment strategy. Operating expenses are expected to grow at different rates across departments, with SG&A at approximately 4% and R&D at 11%.

The paragraph discusses the company's strategic approach in a challenging sales environment, highlighting a shift towards efficient use of existing resources for sales, marketing, and general and administrative expenses. It emphasizes continued investment in research and development (R&D) to drive future growth while maintaining solid free cash flow. The company transitioned to a subscription model four years ago, which allowed significant reinvestment in R&D despite macroeconomic challenges. While the average R&D expense from fiscal 2008 to 2020 was approximately $210 million with a 2% CAGR, this has increased to an expected $400 million in fiscal 2021-2025 with an 11% CAGR. The paragraph concludes with a review of ARR growth, particularly 10% growth in CAD and 13% growth in PLM, supported by a robust product portfolio and customer digital transformation efforts.

The paragraph discusses the company's financial performance and debt management strategies. It highlights strong ARR growth across different regions and details efforts to reduce debt, including paying down $63 million in Q4 and decreasing their gross debt by $569 million in fiscal 2024. The company plans to use nearly all its free cash flow for debt reduction and mentions an increase due to interest-related factors. Their goal is to keep the debt-to-EBITDA ratio below 3x and return about 50% of free cash flow to shareholders through share repurchases. A $2 billion authorization for fiscal 2027 exceeds these projected returns. They also plan to retire a $500 million bond due in February using available cash and a credit facility.

The paragraph outlines the company's plans for stock buybacks and financial reporting. They intend to repurchase approximately $300 million of their common stock in fiscal 2025, starting this quarter, and aim to maintain a low cash balance, using excess cash to benefit shareholders. They expect the share count for fiscal 2025 to remain stable. The company believes evaluating topline performance in constant currency ARR is best, as it eliminates foreign exchange fluctuations. They provide ARR guidance and results using fiscal 2024 and 2025 plan FX rates set on September 30 of the previous year. Historical ARR data has been recast back to fiscal 2019 with these rates for comparison, available on their website.

The paragraph provides financial guidance for fiscal 2025, forecasting a 9% to 10% growth in constant currency Annual Recurring Revenue (ARR) and approximately 10.5% for Q1. It outlines an expected free cash flow of $835 million to $850 million, factoring in $20 million in outflows for severance and consulting related to a go-to-market realignment. The company anticipates that 55% or more of its free cash flow will be generated in the first half of the year, with fiscal Q4 being the lowest in cash generation. The Q1 free cash flow guidance is set at $230 million, absorbing $12 million of the expected outflows. The guidance does not account for currency fluctuations, and the company highlights its confidence based on consistent billing practices and disciplined budgeting.

The paragraph discusses PTC's financial strategy, emphasizing the optimization of its internal budgeting process over the past five years, starting with a subscription-based model that ensures predictable cash inflows. The company begins each fiscal year with growth funding at the low end of their ARR expectations and adjusts investments based on observed growth dynamics. This approach aims to deliver predictable free cash flow, despite the challenges posed by ASC 606 on revenue and EPS predictability due to on-premises subscriptions. PTC suggests focusing on ARR and free cash flow as performance metrics. The paragraph also presents an illustrative constant currency ARR model for fiscal 2025, indicating a target of 9.5% ARR growth, which requires adding $214 million of net new ARR. The fiscal 2025 guidance anticipates slightly less net new ARR compared to previous years.

The paragraph discusses the company's expectations for annual and quarterly ARR (Annual Recurring Revenue) growth. For fiscal 2025, the company anticipates 9% to 10% ARR growth, with opening deferred ARR projected to be comparable or slightly better than the past three years, when adjusted for a $10 million increment in fiscal 2024. Despite a challenging selling environment and potential short-term disruptions from a go-to-market realignment, the business model remains resilient with low churn rates. Quarterly volatility is expected due to various factors, such as bookings and churn. Specifically for Q1, a net new ARR growth of $20 million is needed to achieve a 10.5% growth target, a goal considered achievable given historical performance. Two timing-related factors—linearity of deferred ARR and contract mechanics impacting churn—are noted as influences on Q1 results.

The paragraph discusses the impact of two factors on the company's Q1 net new ARR, which is expected to decline by about $10 million but won't affect fiscal 2025. The company remains focused on full-year performance for investment decisions. After adjusting for the $10 million impact, the Q1 sequential ARR is comparable to previous years. The paragraph also addresses challenges in modeling free cash flow using the indirect method due to ASC 606. Internally, the company uses a model that assumes 9.5% ARR growth for fiscal 2025, with perpetual revenue transitioning to subscription and professional services revenue shifting to DxP. These changes, along with no significant FX fluctuations, inform cash generation expectations. Additionally, $20 million in cash outflows for go-to-market realignment are included in the cost of revenue and operating expenses.

The paragraph discusses PTC's financial outlook and guidance for fiscal year 2025. The company anticipates enhanced operating efficiency due to its subscription model and budgeting process. It outlines expectations for various financial metrics, including stock compensation, amortization, CapEx, cash interest, and tax payments, with specific figures for interest and tax payments. The expected free cash flow for 2025 is approximately $843 million, and key factors like foreign exchange rates and working capital are addressed. Overall, the paragraph highlights PTC's strong portfolio, strategy, and value creation opportunities.

The paragraph discusses the company's efforts to align its operations to better serve customers and scale its business. During a Q&A session, Ken Wong from Oppenheimer & Co. asks about potential disruptions in the go-to-market strategy. Neil Barua responds, noting that they have taken significant steps to prevent disruption during their transformation, acknowledging that some friction is possible within the sales team as emotions and management dynamics play a role. However, they are highly focused on minimizing any disruption.

In the paragraph, Neil Barua discusses the strategic approach to business performance and growth, focusing on Product Lifecycle Management (PLM) and Computer-Aided Design (CAD) technologies. He highlights the continuing strong performance in these areas, driven by the increased adoption and strategic market penetration of Windchill, a key product. The strategy involves targeting specific verticals for more precise and consistent market penetration, leveraging examples and success stories from existing customers. This targeted approach aims to capture growth opportunities and expand annual recurring revenue (ARR) from Windchill. The overall goal is to build further momentum and capitalize on market potential within those key verticals.

The paragraph discusses Codebeamer's growing adoption, particularly in the automotive sector, with two major OEMs expanding its use. Additionally, several existing customers are increasing their deployment of Codebeamer, highlighting its integration benefits for software and hardware engineers. The text also mentions the collaboration between Codebeamer and Windchill, aiming to enhance Product Lifecycle Management (PLM) solutions. A case study involving ServiceMax is highlighted, showcasing its integration with Windchill and its successful deployment with a large crane manufacturer. This integration allows for improved data flow between engineering and service, distinguishing it from competitors. The paragraph concludes with expectations of continued momentum and success in the market.

In the paragraph, Saket Kalia asks Neil Barua about customer spending trends in Western Europe and the outlook for 2025. Neil explains that while they achieved solid financial results, some deals in Western Europe were delayed or reduced in value, particularly in the automotive sector in Germany. This is due to cost pressures and competition with Chinese manufacturers. However, some deals closed as expected in Q4, and there is optimism about securing the delayed deals later in the year. The current challenges are prompting European automotive companies to reconsider their operational strategies to maintain competitiveness.

The paragraph discusses the momentum of Codebeamer in Western Europe due to the need for software to operate alongside mechanical hardware at OEMs, especially to keep up with the Chinese development cycle. While there are challenges with German automakers and overall uncertainty, there is a strong market need for change, which their technology supports. Despite confidence in the urgency for businesses to adapt, there is caution regarding the spending of funds over the next few years. This cautious optimism is factored into their guidance range. Saket Kalia acknowledges this perspective, and the operator introduces a question from Joe Vruwink, who asks about whether the timing of their go-to-market strategy allows them to benefit from potential increased customer spending following macroeconomic improvement, such as after a U.S. election, and whether this could lead to a lag in the business following improved industrial sentiment.

In the paragraph, Neil Barua discusses their company's ongoing efforts to prepare and execute plans for potential vertical opportunities, without expecting significant disruptions. The teams are organizing account plans and assignments to be ready for these opportunities. If the business environment improves, especially in manufacturing and PMIs, they are prepared to capitalize on increased demand due to their experience with large customers in specific verticals. The company is focused on verticalizing their business to be even more prepared moving forward. This transitions into Adam Borg's question about the company's go-to-market strategy focused on five key verticals, including what's happening in the automotive sector.

In the paragraph, Neil Barua discusses significant developments in various verticals, notably federal, aerospace, and defense, which are experiencing high demand and backlog, with efforts being made to accelerate product delivery globally, including in India, the UK, and North America. The focus is on leveraging experience and promoting this sector, particularly in Washington, D.C. Additionally, in the med tech and life sciences sectors, companies are dealing with rapid growth due to acquisitions and are now pressured to develop products quickly. This need highlights the importance of Product Lifecycle Management (PLM) to expedite product data transfer to manufacturing, indicating interesting trends in these industries.

The paragraph discusses recent successes and future expectations for business systems like Windchill, Codebeamer, Creo, and ServiceMax, highlighting their importance for competitive survival. Adam provides a breakdown of industry exposure percentages, noting high percentages in the industrial space and mid to low teen percentages in FA&D, electronics/high tech, automotive, and med tech, with non-core verticals making up the rest. Jay Vleeschhouwer from Griffin Securities asks about the adoption of digital thread solutions across verticals, specifically the automotive sector, and how the company's exposure to automotive has evolved with newer system requirements. Neil Barua begins to respond to the question.

The paragraph discusses a significant shift in the automotive industry attributed to the integration of Windchill and Codebeamer, which are gaining traction among OEMs and suppliers at various tiers. The focus is on enabling the development of software-defined vehicles to better compete, especially against Chinese manufacturers. While there are competitors, the company's tools, including Creo, are well-positioned to support this transformation. Although the adoption of digital thread across different verticals is not yet widespread, there is a substantial opportunity to promote a combined use of their software products, including ServiceMax, across various sectors. The company is focused on leveraging these tools to address industry challenges and expand their market presence.

The paragraph features a conversation between Andrew Obin and Neil Barua following an election, where they discuss the uncertainty impacting 2025 budget planning. Obin highlights concerns from industry shows and a multiyear de-stock affecting budgets and operations due to election-related uncertainty. Barua responds by noting that even 24 hours after the election results, customers' concerns remain focused on managing various complexities like geopolitical and supply chain uncertainties, workforce disruptions, and evolving consumer demands. He emphasizes that these challenges persist irrespective of the election results.

The paragraph discusses the urgent need for PTC's technology to facilitate faster movement of product data through organizations, encompassing software, hardware, electronics, and mechanical elements. This necessity is driven by customers' demands to remain competitive and survive, a trend expected to accelerate regardless of external factors like administration changes. Neil Barua expresses confidence in PTC's long-term relevance and adaptability, despite uncertainties, and underscores the company's readiness to meet customer needs amid evolving environments. Andrew Obin acknowledges the comprehensive nature of current uncertainties, and the operator reminds participants to stay on the call for closing remarks.

The paragraph outlines a Q&A session during a conference call. Jason Celino from KeyBanc questions Kristian Talvitie about a shift in projected annual recurring revenue (ARR) growth for FY2025, which has changed from double digits to single digits at the midpoint. Talvitie attributes this change to conservatism regarding the impact of go-to-market realignment. The session concludes with Neil Barua announcing upcoming investor conferences and events where Kristian and Matt will be participating in different locations, including New York, London, Asia, and on the West Coast.

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