PTC Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2021

Key Takeaways

  • Outstanding Q4 and FY21 performance: PTC delivered 12% organic ARR growth in Q4 and 16% overall in FY21, marking its 4th consecutive year of double-digit organic ARR growth and exceeding free cash flow guidance.
  • Core products outpacing peers: Creo grew low double digits and Windchill mid teens, with major competitive displacements such as Volvo’s global CAD standard and a record multiyear PLM order from a medical device company.
  • SaaS acceleration and organizational realignment: PTC is restructuring into “Digital Thread” and “Velocity” units to adopt a 2-in-the-box customer model, aiming for $60 million in run-rate savings and reinvesting half into SaaS initiatives to accelerate its cloud-based transition.
  • Launch of SaaS “lift and shift” program: Starting in FY22, PTC will offer Windchill SaaS as the default for new sales and begin migrating on-premise deployments to the cloud, targeting 75% customer transition over time and unlocking an estimated 2x ARR opportunity per on-prem dollar.
  • FY22 guidance and midterm targets: PTC forecasts 10–13% ARR growth and ~ $400 million free cash flow for FY22 (ex-restructuring $450 million), while reaffirming midterm goals of mid-teens ARR growth and 25–30% annual free cash flow growth.
AI Generated. May Contain Errors.
Earnings Conference Call
PTC Q4 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2021 4th Quarter Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, conference will be open for questions. I would now like to turn the call over to Matt Schmau, PTC's Head of Investor Relations.

Operator

Please go ahead. Quarter.

Speaker 1

Good afternoon. Thank you, Paula, and welcome to PTC's 2021 Q4 conference call. On the call today are Jim Heppelmann, Chief Executive Officer and Christian Palpatija, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast quarter. A replay of the call will be available later today at www.ptc.com.

Speaker 1

Quarter. 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 the dispatch results to differ terrierly from those in the forward looking statements

Speaker 2

can

Speaker 1

be found in PTC's annual report on Form 10 ks, 10 Q and other filings with the U. S. Securities and Exchange Commission as well as in today's press release. Quarter. The forward looking statements, including guidance provided during the call, are valid only as of today's date, November 3, 2021, quarter and PTC assumes no obligation to publicly update these forward looking statements.

Speaker 1

During the call, PTC will discuss non GAAP financial measures. Quarter. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website. With that, I'd like to turn the call over to PTC's Chief Executive Officer, Jim Heppelmann.

Speaker 2

Thanks, Matt, and welcome again to PTC. Quarter. It's been great to get you on board and thanks for your help in preparing for today's call. We have a lot of exciting news for our investors today, quarter. So we plan to allow a little more time than usual for the call.

Speaker 2

No doubt there will be follow-up interest, so we've also scheduled our annual Investor Day in mid December, quarter. And we expect to be active on the IR circuit in the weeks ahead. Starting then with Slide 4. Given the news, quarter. We're going to follow a somewhat different agenda for today's call.

Speaker 2

I'm going to start with highlights of our Q4 and fiscal 2021 performance. Quarter. Then I'll take you through an abbreviated version of our product line results. Next, Christian will complete our discussion of Q4 and fiscal 2021 with quarter. Then turning to the future, I'll address the changes we announced today, which are designed to accelerate our SaaS transition quarter and margin expansion.

Speaker 2

Following that, Kristin will take you through our go forward guidance and reporting structure. Quarter. We've reserved extra time for your questions at the end. Moving to Slide 5. Q4 was an outstanding quarter for PTC, quarter.

Speaker 2

And it capped off another strong year. We came in at the high end of our guidance for ARR growth, and we exceeded our free cash flow guidance. Quarter. Despite the pandemic, every part of the business performed well in fiscal 2021 with growth in every product line and in every geography. Fiscal 2021 was our 4th consecutive year of double digit organic ARR growth and we're guiding for fiscal 2022 to be the 5th.

Speaker 2

Quarter. Furthermore, by continuing our strong focus on operational discipline, we've been able to translate our top line growth quarter. It is strong bottom line free cash flow performance. Christian will take you through free cash flow in more detail later in the call. Quarter.

Speaker 2

Taking a look at the key factors driving our top line performance and turning to Slide 6, our Q4 bookings results were outstanding. Quarter. Bookings were up mid teens organically and high teens overall from the blockbuster Q4 we had a year ago. Remember that in Q4 of fiscal 'twenty, quarter. Bookings bounced back sharply following a downturn in Q2 and Q3 during the depths of the pandemic.

Speaker 2

Quarter. Surpassing last year's strong Q4 number is a great accomplishment. Bookings were strong across all product lines and geographies quarter. Because Q4 of fiscal 2020 had been such an outlier, our plan targeted Q4 2021 organic bookings to be roughly flat to last year's number. Creo was slightly above plan, while everything else was well above.

Speaker 2

FSG and Onshape led the way with bookings growth of more than 90% and 70%, respectively. IoT and AR bookings were both up mid teens year over year to record levels for each, With IoT bookings growing more than 120 percent sequentially, while AR bookings grew more than 60% sequentially. Quarter. PLM bookings were up high single digits year over year. Keep in mind that a good percentage of our Q4 bookings, especially those done later in the quarter, Don't start until October or later, so they end up in what we used to call backlog, but now call deferred ARR.

Speaker 2

Deferred ARR ended the year $20,000,000 above the original plan we had for fiscal 2021. So in summary, not only did we hit quarter, the high end of our fiscal 2021 ARR guidance range by delivering 12 points of organic ARR growth. Quarter. We also booked about a 0.5 more growth into deferred ARR, which will benefit future periods. Turning to ARR on Slide 7.

Speaker 2

Quarter. On a top line basis, fiscal 2021 was a big success. In Q4, we came in at 12% organic ARR, quarter. Excluding Arena and 16% ARR growth overall. Looking at our core products in Q4, we continued to deliver market leading growth.

Speaker 2

Creo came in at low double digit growth, while Windchill grew mid teens. Quarter. According to data published by Jay Blishower, Creo and Windchill have significantly outperformed Siemens and Dassault's CAD and PLM businesses lately quarter as they are relatively flat with 2019, while we're up more than 20%. We've been seeing this solid growth trend in our core CAD and PLM quarter. For years now, and we expect this to continue.

Speaker 2

I'll come back to this important point during the second part of my prepared remarks. Quarter. Next, looking at our growth products, IoT grew mid teens coming in below our target. However, bookings were strong in Q4, quarter. And we expect stronger ARR growth in fiscal 2022 following bookings momentum and the launch of our new digital performance management solution.

Speaker 2

Quarter. Vuforia AR, Vuforia Augmented Reality grew mid teens, which is better than it sounds when you factor in that this growth came on top of very strong 77% growth in our previous Q4 that we're comparing against. I'm happy with the roughly 40% CAGR over the past 2 years. In fiscal 2022, we're positioned to continue good growth in AR based on our bookings momentum. Quarter.

Speaker 2

Onshape grew over 50%. It's now been 2 years since we acquired Onshape, and we're very pleased with the acquisition and the progress made by the Onshape team. Arena grew over 20%. This represents good acceleration from mid teens pre acquisition growth rates, driven by go to market months we've made coupled with synergies gained by being part of PTC. Turning to FSG, growth was 6%, primarily driven by strong performance of our systems and software engineering offerings, where we benefited from several large deals.

Speaker 2

Turning to Slide 8. Quarter. While Creo and Windchill are powerful independently, these products generate even more value when leveraged together. Quarter. A great example of this integrated story can be found in our recent announcement that the entire Volvo Group will adopt PTC's Creo product as their primary CAD solution, mirroring what they did several years ago with our Windchill PLM solution.

Speaker 2

This is a big competitive displacement for Creo. In addition, our ANSYS powered Creo Simulation Live technology, together with Creo ANSYS Simulation, continues to drive customer interest in simulation. I've been saying for some time that as the product system of record, quarter. PLM is a critical element of any manufacturing company's digital transformation strategy. This is exactly what led to our largest ever PLM order in Q4 of 2021, a multiyear committed ramp deal coming from a large global medical device company.

Speaker 2

Quarter. This too was a competitive displacement for Windchill. In PLM, we saw average deal sizes increasing with numerous expansions in the quarter. Quarter. In IoT, this past week, we launched our digital performance management or DPM solution at our manufacturing live event.

Speaker 2

If you missed the event, by the way, you can find the replay on our investor website. DPM is our new solution designed to be a comprehensive turnkey

Speaker 3

out of

Speaker 2

the box solution that addresses our customers' biggest IoT value creation opportunities. Quarter. It will be the perfect antidote to the so called pilot purgatory problem the IoT industry has been discussing. You may have also noted separately the press release announcing that PTC is the only industrial IoT player recognized as a leader by all 4 major industry analyst firms. Quarter.

Speaker 2

Also in the IoT space, Microsoft yesterday officially launched its cloud for manufacturing, and we're thrilled to be a lead partner. Quarter. Our alliance with Microsoft continues to go well with Q4 being our best quarter to date in terms of co selling with Microsoft. Quarter. VEFORIA delivered a healthy mix of expansions, cross sell and net new logos.

Speaker 2

We landed our largest ever AR order from a large pharmaceutical company, which will use Vuforia to deliver augmented digital work instructions to improve the speed and quality of production line changeovers. Also, with all the buzz you hear about metaverse these days, you might enjoy watching the amazing live industrial metaverse demonstration quarter that our CTO, Steve Duttin and I delivered as part of our manufacturing live keynote using our Vuforia spatial toolbox technology. Quarter. If you look carefully at the graphic on the right side of Slide 8, that is Steve and I standing in front of our anonymized digital representations quarter whose movement and activity is being measured and analyzed in real time. This is a peek into our concept of digital Taylorism, quarter named after the famous work of Frederick Taylor, who was the father of industrial engineering more than 100 years ago.

Speaker 2

Quarter. Turning now to Onshape and Arena on Slide 9. Onshape performance has been driven by strong win rates against competitors, quarter, coupled with solid expansion rates. Onshape captured nearly 1,000 new logos in fiscal 2021. Quarter.

Speaker 2

During the year, churn improved by 10 points, while net retention improved by 15 points. And these metrics now look quite strong compared to similar sized SaaS peers of all types. Naturally, smaller companies have been drawn to Onshape quarter because its lightweight SaaS footprint enables agile hardware development processes. But thanks to 17 more product releases during the past year, quarter. Onshape's maturing functionality also led to several significant orders in Q4 from larger companies in the robotics and medical device fields quarter.

Speaker 2

The amazing adoption that Onshape experienced in the education market in fiscal 2021 quarter is icing on the cake. It contributed little to the financials, but sets the stage for mass adoption quarter by the next generation workforce in future years. Arena saw numerous expansions driving larger deal sizes too. Quarter. Arena is also proving to be a great acquisition.

Speaker 2

Like Onshape, Arena is the cloud native market leader in PLM with particular strength in tech centric markets such as electronics and medical devices. We're on track with the integration plan that we laid out for the acquisition of Arena with new sales capacity coming online in the U. S. And Europe. The combination of Onshape and Arena makes PTC the clear market leader in cloud native, PLM and CAD solutions.

Speaker 2

And these offerings make a great pairing for fast moving, high-tech manufacturers quarter who want to develop hardware using the same agile process methodology as software. Next, Slide 10 shows our geographic ARR performance. Americas was up 19%, led by double digit growth in core products and arena. Quarter. Europe was up 13%, led by high single digit in core products, low 40s growth in growth products and double digit growth in FSG.

Speaker 2

Quarter and APAC was up 17%, led by mid teens growth in core products and low 30s growth in growth products. Quarter. There are thousands of people at PTC that contributed to our outstanding fiscal 2021, and I'd like to say thank you to all of them. With that, I'll hand it over to Christian to complete the portion of today's call focused on Q4 and fiscal 2021. Quarter.

Speaker 4

Thanks, Jim. Good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non GAAP results quarter and guidance later in the discussion and all growth rate references will be in constant currency. Quarter. So turning to Slide 12, we delivered ARR growth at the high end of our guidance range.

Speaker 4

Fiscal 'twenty one ARR of 1.4 7,000,000,000 increased 16% year over year. Excluding Arena, ARR growth was 12%. FX was a small $4,000,000 headwind in fiscal 'twenty one for us. Quarter. As Jim highlighted earlier, our bookings were very strong in Q4.

Speaker 4

With this, we had an uptick in quarter. Within this, we had an uptick in ramp deals and that's why our bookings performance did not result in even stronger ARR growth. Instead, the vast majority of our bookings upside went into deferred ARR that will benefit future periods, primarily fiscal 'twenty three and 'twenty. Quarter. Organic churn improved approximately 130 basis points year over year, slightly ahead of our guidance for approximately 100 basis points of improvement, quarter, primarily driven by strong execution in CAD, PLM, FSG, as well as modest continued improvement in both IoT and AR.

Speaker 4

Fiscal 'twenty one free cash flow of $344,000,000 grew 61% year over year quarter and was slightly above our guidance. Note that our free cash flow for the year included an unforecasted $18,000,000 outflow related to foreign tax dispute, dollars 15,000,000 in acquisition related fees and $15,000,000 in restructuring payments. These one time headwinds were offset quarter. By other one time tailwinds, including some one time tax benefits, arena working capital versus original expectations, quarter. Improvements in AR aging also helped drive a one time uptick in free cash flow in 'twenty one.

Speaker 4

Fiscal 2021 revenue of $1,810,000,000 increased 24% year over year quarter as reported or 20% in constant currency and was above guidance. As we've discussed previously, quarter. Revenues impacted by ASC 606, so in Q4 and throughout fiscal 2021, longer than anticipated contract durations and support to subscription conversions positively impacted the amount of upfront subscription revenue recognized in the quarter and in the year. I'd like to remind you that over the long term, ARR and recurring revenue growth rates should be approximately the same. However, in any period, Revenue is subject to much more volatility due to ASC 606, which is why we feel that ARR, our annual run rate, which Also a very close proxy for subscription billings is the true and better indicator of PTC's growth.

Speaker 4

Quarter. In fiscal 2021, non GAAP operating margins were 35% quarter and increased approximately 610 basis points over fiscal 2020. This was due to the strong revenue performance I just mentioned, quarter as well as maintaining good discipline on our operating expense structure. Non GAAP EPS of $3.97 increased 58% year over year and was above guidance. Quarter.

Speaker 4

I'd like to point out that our GAAP results reflect a gain of $69,000,000 related to our investment in Matterport, quarter. And as you may recall, Matterport went public and began trading on July 23. Quarter. In addition, our GAAP results also included the release of $137,000,000 valuation allowance related to our deferred tax assets and a tax benefit of $42,000,000 related to the Arena acquisition. Quarter.

Speaker 4

Moving to the next slide, another way to think about PTC's performance is using the cash flow model we often share. Quarter. As you can see here on Slide 13, ARR plus perpetual revenue plus professional services revenue quarter. Equals our cash generation, which was $1,455,000,000 which is up quarter about $200,000,000 over fiscal 2020. You can also see the total expenses of 1,173,000,000 quarter.

Speaker 4

This was up about $139,000,000 with an increase of about $62,000,000 Or if you think about cash contribution margin as a proxy for cash EBITDA, quarter. And this was up about 100 basis quarter and full year 2018. We expect the full year 2019 results to be in the range of $1,000,000,000 to $1,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000,000 quarter results in terms of cash tax headwinds quarter, which actually resulted in net positive working capital in fiscal 2020 and a growing business. Quarter. Moving to slide fiscal 2021, with cash $27,000,000 In addition, we had medium term investments.

Speaker 4

Quarter. Our gross debt was $1,450,000,000 with an aggregate interest rate of about 3.2%. Quarter. During Q4, we paid down $40,000,000 on our revolving credit facility, and we also made our $19,000,000 semiannual bond interest payment. With our leverage ratio now less than 3 times, which we told you is our goal, we resumed our share repurchase program.

Speaker 4

The $30,000,000 of cash we used to repurchase shares in Q4 was approximately equal to our free cash flow generation in the quarter. All in all, Q4 wrapped up a solid year for PTC from both an ARR and a free cash flow perspective. Quarter. With that, I'll turn it back to Jim.

Speaker 2

Thanks, Christian. PTC is at an exciting point in our history. Quarter. Despite bumpy macro conditions, we have established a 4 year track record of double digit top line organic growth quarter based on a recurring revenue model and driven by widely recognized technology leadership positions in an industry Increasingly Motivated by Digital Transformation. In parallel, our decade long track record of strong operational discipline has driven our margins up, quarter, enabling us to benefit significantly from leverage as we scale.

Speaker 2

You see that in the 61% free cash flow growth I highlighted at the start of the call. Quarter. Given the strength of our financial performance in fiscal 2021, the restructuring we announced today might come as a surprise to some of you. But sit tight because I think you will like what we're doing. For some time now, I've been telling investors about our plans to leverage the Atlas platform that we acquired with Onshape to pivot the whole company toward a SaaS future.

Speaker 2

As I had previously discussed it, much of the upside benefits of the SaaS pivot would come in fiscal 'twenty four and beyond. Many of you have asked why wouldn't we invest more quarter to get to that SaaS upside more quickly. Frankly, that was a good question and one that we thought long and hard about. We even hired McKinsey to help us think through it and develop a strategy. Today, I will explain how, thanks to the changes we're making, we will invest substantially more in our SaaS initiatives, while actually decreasing our overall run rate spending projections significantly.

Speaker 2

Quarter. Let me hit the financial summary first on Slide 16 and then explain the strategy and operational changes behind it. Quarter. In terms of the financial view of the restructuring, we are reducing our spending run rate by approximately $60,000,000 compared to fiscal 2021 quarter as we improve the efficiency of our organizational structure. We've also eliminated about 30,000,000 quarter previously contemplated new spending run rate from our fiscal 'twenty two plans.

Speaker 2

So compared to the plan for fiscal 'twenty two quarter that existed prior to the restructuring. We now have we now expect to reduce our planned fiscal 'twenty two run rate spending by approximately $9,000,000 and then reinvest about half of that into initiatives that accelerate our transition to SaaS quarter with the other half falling to the bottom line. Key SaaS investments will be used to increase capacity on Atlas, to accelerate work to adopt Atlas into our core products and to operate those products as SaaS and into Onshape and Arena product development and sales capacity. Quarter. Despite what will be a very significant investment, we expect to expand cash margins by approximately 400 basis points in FY 'twenty two.

Speaker 2

So we are accelerating both growth and margin expansion at the same time. Quarter. Restructuring related cash outflows are expected to be approximately $50,000,000 to $55,000,000 with about 2 thirds occurring in the first half of twenty twenty two quarter and the majority of the remaining payments to be made in Q3. In other words, the restructuring will obscure the great cash flow progress quarter for the next 2 or 3 quarters, but the benefits will start shining through after that. Already by Q4 of fiscal 2022, we should be seeing a net free cash flow tailwind as a consequence of the restructuring.

Speaker 2

Then, as Christian will outline, fiscal 'twenty three and beyond will look great. Quarter. Let's go to Slide 17, and I'll start by explaining why a SaaS pivot is so interesting to PTC. Quarter. There are three reasons why we think now is the time for PTC to align with and invest more in the SaaS transition.

Speaker 2

First, the industrial software market wants to go to SaaS. Quarter. COVID has greatly amplified the interest in SaaS. PTC is already the recognized SaaS leader in our industry. Onshape and Arena have proven what's possible quarter.

Speaker 2

And they've dramatically elevated PTC's credibility. We are far ahead of competitors in terms of understanding what SaaS is and what it is not. Quarter. Customers are looking for PTC to lead the whole industry through a transition to SaaS. 2nd, based on growing customer demand, quarter.

Speaker 2

We see the need to accelerate SaaS initiatives, while better aligning with SaaS best practices in order to meet the needs of the market. The investments we're making now will allow us to play offense to capture the market demand. 3rd, we believe our new SaaS strategy will accelerate a major growth driver for PTC, quarter, giving us more pathways to mid teens growth in the midterm and helping to derisk our growth ambitions. Quarter. Meanwhile, cost savings from the restructuring itself are expected to de risk our free cash flow growth targets even if the growth Should prove slower to materialize than I expect.

Speaker 2

Turning to Slide 18, owning the industry's only cloud native CAD and PLM combo has been a big advantage. By comparing how our Onshape and Arena businesses work As compared to the balance of PTC, we can see that certain ways in which PTC has been organized are quite inefficient. At the same time, we see an opportunity to serve customers better tool. And that's why we're choosing to evolve our organization to be more SaaS like. I'd like to review several of the larger changes.

Speaker 2

Previously, in addition to working with sales, our customers would have more than a half dozen touch points across our broad customer success organization, including renewal sales, presales, post sales consulting, customer success management, technical support, our cloud organization, a group called customer experience and others. In comparison, most SaaS companies have a 2 in the box model, where each customer has just 1 sales and 1 customer success contact. Not only is PTC's current model inefficient, perhaps more importantly, customers hate being repeatedly passed from one contact to another quarter as they proceed through their journey with PTC. So we are reconfiguring to deploy the same 2 in a box model that SaaS companies utilize. This reconfiguration has no impact on the sales side of the equation.

Speaker 2

In fact, we're adding direct quota carrying capacity into the current model. Quarter. Aside from where we expand coverage, the vast majority of customers will retain the same sales contacts they know and love today. The bigger change for the customer will be that they now have 1 customer success contact rather than many. There's nothing but goodness here for everybody.

Speaker 2

Customers prefer this model and it will save PTC a lot of money as it is much more scalable. Quarter. The other major changes on the product development, delivery and support side. With Onshape and Arena or any true SaaS company, this is all done by a single organization quarter using modern DevOps practices. But within the core PTC product lines, the development, cloud delivery quarter.

Speaker 2

And technical support organizations have been entirely separate, with the latter 2 belonging to the field organization. You simply can't get to SaaS that way. Quarter. As part of our reorganization, we have merged our cloud delivery and technical support groups into the product organization To mirror the modern SaaS practices deployed by Onshape and Arena and everybody else in the SaaS world. This too will create significant operating efficiencies quarter and a much improved customer experience at the same time.

Speaker 2

Nothing but goodness here too. To better understand the demand drivers, quarter. Let's take a look at an illustrative value proposition on Slide 19, typical of what customers see in the transition from on premise to SaaS. For every dollar a customer pays PTC or any other vendor for on prem PLM, they have an estimated additional $2 to $3 in cost of ownership associated with on premise servers and storage and system administrators, Plus SIs who help with on-site installations and upgrades and all that. Their total cost of ownership can be $3 to $4 quarter.

Speaker 2

When the deployment, maintenance and delivery responsibility for the software is shifted back to PTC, we can leverage significant efficiencies to serve that same functionality back to the customer for roughly an incremental dollar at margins that are attractive to us. Quarter. Therefore, each dollar of on premise software ARR today represents potentially $2 quarter of future SaaS ARR for PTC, plus a savings of $1 or $2 for the customer. The customer also gets to enjoy the many other benefits SaaS. It is device agnostic.

Speaker 2

It's ideal for a hybrid work environment. Data is shared with employees and suppliers in real time, plus no more upgrades to do as everyone is always on the latest version. This value proposition for SaaS is not really new news to any of you is what Marc Benioff at salesforce.com has been espousing for 2 decades now. More than half quarter. The overall commercial software industry has already made this pivot, but that's not yet the case in our world of industrial software, quarter where SaaS has low single digit penetration.

Speaker 2

As Salesforce did in CRM, some company We'll have to lead the way to SaaS in the CAD and PLM industry. We think the time is right for industrial companies to move to SaaS and PTC is Best positioned to lead that transition. Turning to Slide 20, we've been delivering more and more new PLM projects at SaaS in recent years quarter as customer preference has shifted there. But going forward, we'll make SaaS our primary delivery model and deliver on premise only when required by the customer. But we also have a large existing customer base with on premise systems.

Speaker 2

In order for existing customers to get to SaaS, quarter. Each customer has to go through a lift and shift process. This process entails lifting the on premise deployment, quarter. Upgrading and decustomizing it is necessary to eliminate technical debt and then shifting it into the PTC cloud from where we can serve it back to the customer as a service. Quarter.

Speaker 2

We plan to focus the lift and shift program first on Windchill, where the biggest opportunity lies and bring Creo and other products into the fold and subsequent phases over time. So you may be wondering, well, how will this help to accelerate growth? The answer is that our organizational changes and the associated wave of investment enable us to scale up to make SaaS the default for new sales and to start the lift and shift process now here in fiscal 2022. Though the value proposition for transitioning to SaaS is sound, quarter. We still have to go through a sales cycle with each customer.

Speaker 2

We're turning the sales teams loose now with this proposition, and we expect the first projects to begin showing up in the back half of fiscal twenty twenty two. The Windchill SaaS capability will be deployed into Azure and into the manufacturing cloud at that, So Microsoft is eager to help us sell this proposition. I like to think of this project as the last upgrade for quarter. Because when the lift and shift project is done, then PTC will take it forward from there. Therefore, a good time to sell this program is whenever customers start planning their next upgrade.

Speaker 2

Customers tend to upgrade windchill systems once every 2 or 3 years, so we'll get a shot at a good portion of the base each year and expect success to accelerate in fiscal 'twenty three and beyond. There are thousands of windshield deployments out there, so I anticipate this process will take numerous years, perhaps a decade, And we won't get them all. Naturally, we'll focus first on the most ready customers and work on the long tail farther out. Quarter. In the end, I expect we'll ultimately get about 75% of the customers to transition and we'll continue to offer on premise variance of the product quarter.

Speaker 2

Born of the same code stream on an indefinite basis for those who do not want SaaS. PTC is all in on SaaS. The program we're launching is a major cross functional effort on par with the highly successful program we executed to move from perpetual quarter. To where we are today with 98% of our software revenue now being subscription. Like that subscription program, the SaaS transition program Involves numerous changes to our offerings, to our pricing and packaging, to compensation and more.

Speaker 2

We have the same program leader driving it. Quarter. An important difference though is that the SaaS transition program is all about growth acceleration within the recurring software business model we currently have in place, which means we will not have the same so called valley of death effect that our cash flow went through back then. Quarter. Now we'll have all of the gain, but none of that pain.

Speaker 2

Taking you deeper into the elements of this program will be a key agenda topic at our December Investor Day. One last related change we're making is to organize into 2 main business units as shown on Slide 21. With plans to leverage SaaS now in place and underway across the entire company, it no longer $1,000,000 to have a SaaS business unit per se. Therefore, we plan to reunite Vuforia AR With the CAD, PLM and IoT product lines into a business unit designed to promote higher levels of cross selling across this integrated product portfolio. This new business unit, which focuses on the digital transformation driver, will be all about growing the base and leading them to SaaS.

Speaker 2

It will be called the Digital Thread Business Unit to reflect the highly integrated nature of its portfolio of products. Troy Richardson, who's been our Chief Operating Officer for the past year, is being promoted to become President of this business unit. Troy has already been managing the go to market side of these businesses, but now the product development arm will report to him as well to drive title alignment. Quarter. Naturally, I'll stay involved in the technology road map because as you probably know, that's where my passion lies.

Speaker 2

You'll get more time with Troy Richardson at the upcoming Investor Day. Quarter. Onshape and Arena will remain together under their current President, Mike Dottilio. This will be called the Velocity business unit to reflect quarter. That the cloud native pure SaaS value proposition of Onshape and Arena is most attractive to companies who want to deploy agile product development processes and move fast.

Speaker 2

This business unit is all about disrupting the competition and landing new logos, which in many cases are SMB customers. Quarter. But we're seeing larger companies being drawn to Onshape and Arena Solutions too because their existing vendor simply doesn't have anything that compares. Companies like Garrett Motion, for example, the $4,000,000,000 automotive turbocharger company we profiled at our fiscal 2020 Investor Day last year, Who switched to Onshape from a high end CAD competitor to gain increased business velocity. You'll have more time with Mike Dottulio too at the Investor Day.

Speaker 2

Both business units' presidents report to me. I'll help drive their respective strategies while Troy and Mike preside over the operating cadence of each business unit. A related change is that the Atlas platform will move under our very capable CTO, Steve Dertin, quarter, who will develop the shared platform to meet the needs of both units. Steve will continue to report to me. Quarter.

Speaker 2

I know that was a lot of information to take in. Turning to Slide 22, let me summarize and then I'll hand it back to Christian for more specific go forward guidance. Quarter. First from a top line perspective, our SaaS acceleration pivot unlocks another powerful multiyear growth catalyst for quarter. Exiting fiscal 'twenty one, Creole and Windchill together represent more than $1,000,000,000 of ARR, growing double digits organically.

Speaker 2

Quarter. This growth pattern has been in place for 4 years now right through the pandemic with the strong performance driven by the role both products play in the digital transformation strategies of industrial companies. With the SaaS program that we're launching, we're layering an additional growth driver into this core business quarter that we expect could last a decade. Therefore, in our core business, we see double digit ARR growth being sustainable well into the future. Quarter.

Speaker 2

Together with the growth drivers in IoT and AR, plus Onshape and Arena, we're creating more pathways to drive ARR growth to the mid teens. In my view, PTC's growth story is alive and well. 2nd, quarter. From a bottom line perspective, the strategic improvements we're making will drive up our cash contribution margins considerably and help derisk our cash flow targets quarter under a broader range of ARR growth scenarios. Christian will expand on this.

Speaker 2

Given our confidence in growth, quarter. Coupled with the higher margins, we remain committed to the midterm free cash flow targets that we set at our Investor Day last year. Call. Recall that our guidance was for mid term free cash flow growth of approximately 25% to 30%. After we get beyond the restructuring payments, we expect to form in that range, perhaps earlier than you might have expected.

Speaker 2

Our guidance for fiscal 2022 assumes we'll get a small positive impact from the SaaS transition in the back half of the fiscal year, which is counterbalanced by slower assumed growth rates in FSG and somewhat conservative assumptions we have around Rockwell's contribution as they work their way through the Plex integration. Let me be clear that our commitment to partnership with Rockwell remains as strong as ever and that we're energized to work together because of the great potential we see ahead. Quarter. In particular, we see tremendous potential for the DPM

Speaker 4

time this is for PTC. The restructuring that we're going through right quarter. Now is really the single biggest somatic investment PTC has made that I can remember. This reorganization is designed to better align PTC to our SaaS future. And as an interesting consequence, it should also derisk our path towards delivering on the midterm ARR and cash flow growth targets we discussed at our Investor Day last November.

Speaker 4

Quarter. Starting with guidance on Slide 24, we continue to target Mid Teens ARR Growth in the Midterm. Jim did a good job of outlining the many pathways we have to getting to these targets with the SaaS opportunity in both quarter and core businesses with the addition of solutions to the portfolio starting with DPM, quarter coupled with the general strength of the existing portfolio. More specifically for fiscal 'twenty two, we expect ARR of 1 point

Operator

quarter. Thank you for your patience. Your lines will once again be placed on music hold until we present the call.

Speaker 4

Banquet. Okay.

Speaker 2

So this is Jim Heppelmann. I think we apparently got dropped from the call, which is a brand new experience for us. But I understand this happened just as Christian quarter. We're starting out with our FY 'twenty two guidance. So Christian, can you pick it up again from the beginning of the FY 'twenty two guidance discussion?

Speaker 2

Quarter.

Speaker 4

Great. Thanks, Jim. So back to the financial guidance and go forward reporting structure. First, let me reiterate quarter. How exciting a time this is for PTC.

Speaker 4

The restructuring we're going through right now is really the single biggest somatic investment PTC has made that I can remember. This reorganization is designed to better align PTC to our SaaS future. Quarter. And as an interesting consequence, it should also de risk our path to delivering on the midterm ARR and cash flow growth targets we discussed quarter at our Investor Day last November. So starting with guidance on Slide 24, quarter.

Speaker 4

We continue to target getting to mid teens ARR growth in the midterm. Jim did a good job outlining many of the pathways we have to getting to these targets with the SaaS opportunity in both the velocity and core businesses, quarter with the addition of solutions to the portfolio starting with DPM, coupled with the general strength of the existing portfolio. Quarter. More specifically for fiscal 2022, we expect ARR of $1,615,000,000 to 1 point $66,000,000,000 That's a growth rate of 10% to 13% on a constant currency basis. Following 4 consecutive years of double digit ARR growth.

Speaker 4

It's also worth mentioning quarter that we expect continued churn improvement in fiscal 'twenty two and are targeting another 100 basis point improvement. Quarter. From a linearity perspective, we would again expect flattish ARR growth throughout the year on a constant currency basis. Quarter. So using the midpoint of guidance that would imply about 11.5 percent ARR growth each quarter.

Speaker 4

Obviously, this can fluctuate given bookings performance, start dates, etcetera, but we believe we provided for that within the range outlined. The one thing worth pointing out is that ARR growth quarter. In Q1 of 'twenty two is expected to be approximately 15% since Q1 'twenty one did not include ARR for arena. In order to help with the modeling, we've provided historical constant currency performance quarter in the data tables on the website, and I'll touch more on this in a little bit. Turning to cash flow, quarter.

Speaker 4

We also continue to target approximately 25% to 30% annual free cash flow growth over the midterm. Quarter. For fiscal 2022 specifically, we're guiding for free cash flow of approximately 400,000,000 quarter. As a consequence of the restructuring, we're expecting cash outflows of approximately $50,000,000 to $55,000,000 quarter with approximately 2 thirds occurring in the first half and the majority of the remaining payments to be made in Q3. Quarter.

Speaker 4

Excluding restructuring, our expected free cash flow in fiscal 'twenty two would be approximately $450,000,000 quarter, representing 25% growth compared to the $359,000,000 we generated in fiscal 2021 on the same basis. So doing some directional math and using round numbers on the midterm targets, this means we would expect free cash flow quarter in the $550,000,000 to $600,000,000 range in fiscal 'twenty three and would expect $700,000,000 to $750,000,000 of free cash flow in fiscal 'twenty four. Regarding the linearity of free cash flow in fiscal 'twenty two, excluding restructuring, we expect quarter. To see a similar pattern as in fiscal 'twenty one with more than 60% of free cash flow generation in the first half of the year, quarter. Collections are stronger in the first half and we expect expenses to increase as we ramp hiring and our SaaS investments throughout the year.

Speaker 4

Quarter. As Jim discussed, the restructuring not only creates strategic improvements in how we're organized, quarter, but also enhances our profitability profile. So we believe we'll be able to deliver strong free cash flow growth quarter. Even if we don't accelerate the ARR growth. I'll come back to this point on the next slide.

Speaker 4

And finally, quarter. Turning to revenue guidance for fiscal 'twenty two, we're expecting revenue of $1,850,000,000 to 1,980,000,000 quarter, which corresponds to a growth rate of 2% to 9% on an as reported basis or 4% to 11% on a constant currency basis. ASC 606 makes revenue fairly difficult to predict in the short term for on premise subscription companies, hence the wide range. Note that revenue has no impact on ARR or free cash flow quarter as we continue to primarily bill customers annually upfront. And again, over the longer term, we expect recurring revenue growth to align with ARR growth, particularly as we transition the company to SaaS and evolve towards Increasingly Ratable Revenue Recognition.

Speaker 4

So moving on to Slide 25 using the same free cash flow model we showed earlier. This slide illustrates a directional view of what fiscal 'twenty two could look like assuming the approximate midpoint of our ARR guidance range. ARR quarter. Here, it grows at approximately 11.5%. Cash generation is up $170,000,000 We see continued growth in expenses, quarter.

Speaker 4

But given the new operating model, as Jim pointed out earlier, our cash contribution margin expands almost 400 basis points. Quarter. Said differently, the new operating model is expected to add more than $120,000,000 of cash contribution margin versus the 60 plus we added last year on similar slightly less ARR growth. On the expense front, as Jim mentioned, we're reducing spending in certain areas to fund investments to accelerate our SaaS transition. Quarter.

Speaker 4

Additionally, there are some other items that will impact OpEx this year, such as the accounting for commissions, which is impacted by ASC 606, increase travel, merit and so on. So as far as the P and L is concerned, the net result is that we're guiding quarter. For fiscal 'twenty two non GAAP operating expense to grow by approximately 3% at the midpoint of guidance, quarter, which is certainly lower than the 50% of our targeted ARR growth for the year, even though we're significantly increasing our SaaS related spending. Quarter. On an organic basis, factoring in the Arena acquisition, which closed in Q2 of fiscal 'twenty one, quarter.

Speaker 4

We actually expect non GAAP OpEx growth to be closer to 2% at the midpoint of the ARR range. We also have a modest $5,000,000 uptick in CapEx this year. OIE cash taxes remain quarter. We see some expansion in the other category, which is really the restructuring charge and change in working capital quarter as the business grows. Moving to Slide 26.

Speaker 4

As you know, we currently present our ARR quarter and revenue in 3 product categories, core FSG and Growth. Going forward, as Jim explained, quarter. We'll have 2 business units, Digital Thread and Velocity. So to align our reporting with how we look at the business, we'll be changing our ARR and revenue quarter. And when we report digital thread going forward, we'll provide the detailed split one level below.

Speaker 4

On the slide, the categories in bold text on the left represent our current disclosure. The categories on the right in bold green text represents our go forward disclosure. And Velocity will consist of Onshape and Arena from the current growth products. Quarter. Slide 27 shows what the recast ARR data looks like.

Speaker 4

I won't spend a lot of time on this as we published 3 years of historical ARR and revenue data in our new format within the financial data tables filed on the IR website. Quarter. There are a couple of points I would make. First, please note that all of the historical constant currency ARR figures have been quarter. 2nd, in addition to the digital thread and velocity Recast.

Speaker 4

We did a small recast of a portion of our Vuforia AR business, which removes approximately $6,000,000 of ARR in both fiscal 'twenty one and fiscal 'twenty and $5,000,000 in fiscal 'nineteen. We made this change because we've come to realize there are certain buyers with marketing oriented use cases who purchase Vuforia engine for short term promotions quarter without a true intention to use it on a recurring basis. The bulk of the Vuforia suite is unaffected and will continue to be sold quarter on a recurring basis. We adjusted the historical amounts to enable go forward comparability. Quarter.

Speaker 4

And then lastly, just in terms of expectations for fiscal 2022, starting with the digital thread core, quarter. We are targeting fiscal 'twenty two ARR growth of 10% to 12%. This is consistent with our historical performance for digital thread growth. We're targeting fiscal 2022 ARR growth accelerating back into the 20% plus range. Quarter.

Speaker 4

For Digital Thread FSG, we target fiscal 'twenty two ARR growth of approximately flattish, again consistent quarter with historical performance and expectations. So in total for Digital Thread, we are targeting ARR growth of 10% to 12%. For Velocity, we are targeting fiscal 'twenty two ARR growth in the 20 plus percent range given the strength of both arena and Onshape. Moving on to Slide 28. And to provide some additional context, we highlight some of our guidance assumptions.

Speaker 4

They're all listed in our press release and I've covered a few of them already, so I won't quarter. One point worth calling out is that we target to return approximately 50% of our cash flow to shareholders through share repurchases. In fiscal 'twenty two, we will also focus on delevering. Quarter. Therefore, assuming $450,000,000 of free cash flow excluding restructuring, we would expect our buybacks to be about 25% of that amount with the rest going to delevering.

Speaker 4

So wrapping up, we had strong financial performance in fiscal 2021, quarter. Delivered on 4 quarters of meeting our ARR and free cash flow guidance and this was our 4th consecutive year of double digit ARR growth quarter, while maintaining discipline on the expense structure. Most importantly, of course, we believe we're well positioned to deliver on the midterm targets we quarter provided at our Investor Day last November. We're unlocking a significant multiyear catalyst by accelerating our SaaS transition quarter. And we're also optimizing how we go to market with our digital thread and velocity business units.

Speaker 4

I'm encouraged by how PTC continues to rapidly call to meet the needs of our customers. Moving on to Slide 29, we look forward to discussing today's news during the Q and A session and follow-up calls. Also, we will host an investor meeting on December 15 quarter to further discuss our strategy and targets. Please save that date on your calendars. With that, quarter.

Speaker 4

I'll turn the call over to the operator to begin Q and A.

Operator

Ladies and gentlemen, the floor is now open for your questions. Quarter. Your first question comes from Gal Munda of Berenberg.

Speaker 5

Quarter. Yes. Hi. Thanks for taking my questions. The first one is just I'd like to understand a little bit quarter.

Speaker 5

Around the dynamics around the ARR guide for next year, if you can help us kind of unpack the guide is a little bit wider than it has this year as a percent of 13%. What's the thinking behind and what gets you to the higher end of the range versus kind of the lower end of the range?

Speaker 4

Quarter.

Operator

We will return to music hold until the call can resume. Thank you for your patience. Thank you for your patience. Gautam, if you could please repeat your question.

Speaker 2

Operator, we're not hearing Gao.

Operator

I'm not either and there's also some audio coming in the background from your line. Quarter. For now, we will move on to the next question. Your next question comes from Sterling Auty of JPMorgan. Quarter.

Speaker 6

Hi,

Operator

quarter. On the new SaaS transition and adding sales capacity for Arena. Are you guys seeing any challenges in terms of hiring just with the labor market. Just curious on your thoughts there. Yes.

Speaker 2

I mean, I think It's a tight labor market for everybody. I think we're in a strong position. This is a good company. We pay well. Our technology is interesting.

Speaker 2

Our culture is great. Our work locations quarter. Fantastic. So I mean there's a lot going in our favor, but yes, sure. I mean it's a tight market for everybody And probably we're doing better than most, but I'd be less than accurate if I said it wasn't a daily challenge.

Operator

Quarter. Got it. Makes sense. Thank you.

Speaker 2

And by the way, just while I have the floor here, I'm very sorry to our participants here. This is my 44th earnings call and I've never been dropped once, once less twice. So we're doing our best to power through it here. I'm not sure what the problem is, but next question please.

Operator

Your next question comes from Matt Hedberg of RBC Capital Markets.

Speaker 1

Quarter. Thanks guys. You do have on that. This is Matt Swanson on for Edberg. So another quarter of double digit core growth To end with that streak alive, could you just talk a little bit more about kind of the differentiation you feel you're providing in core right quarter.

Speaker 1

I mean, as long as we've covered you, this has always been a space with high retention rates, but maybe difficult to create share shift. Quarter. I know this is something we've talked about in the past with some of the newer technologies and people seeing you as a way to maybe future proof their tech stack. Quarter. Are you starting to see a greater, I guess, emphasis on the share shift?

Speaker 1

Or is it more so kind of the new greenfield opportunities driving this?

Speaker 2

Quarter. I think it's both. I mean, I think there's a lot more spend in the market now than it was 1 or 2 years ago. And I think we're getting more than our fair share of that spend. There have been some significant displacements.

Speaker 2

I mentioned the medical device deal, which was largest single order we ever took for our windshield PLM system. That was a competitive displacement. But if I look across Many of the larger deals, a lot of them are expansions, companies who used engineering or used PLM in engineering, but now wanted across the enterprise. And then there were some greenfield new deals as well. So I just think that there's a lot more spending going into PLM as a category.

Speaker 2

And I think PTC is sort of risen to become the cream of the crop provider and we're taking more than our fair share.

Speaker 6

Thank

Speaker 3

you.

Operator

Your next question comes from Jay Vleeschhouwer of Griffin Securities.

Speaker 2

Hi, Jay.

Speaker 7

So referring to your comments about the market's readiness to move more to SaaS, that's so form as an underlying infrastructure. But let's talk about the underlying evolution of what customers are looking for quarter. In TLM and your broader portfolio, you've spoken of the equivalents of PLM and IoT, But perhaps you could talk about how PLM itself has otherwise evolved and why you're being selected for some of these new functionality requirements beyond the older historical reasons for buying PLMs. So things like Bomb management, variance, configuration management and so forth. I'm also sensing from your pipeline that quarter.

Speaker 7

There's a growing renewed interest in SLM. And I'm wondering if that's something too that you're counting on that Business that perhaps you haven't focused on terribly much lately might be getting ready to become more significant again within the overall core portfolio pipeline.

Speaker 2

Yes. Well, Jay, you got a lot of points there that are interesting. So let me try to hit a few of them quickly. Quarter. As it relates to readiness for PLM, several years ago, we tried an experiment and began selling our retail vertical solution, PLM solution, Which we call Windchill Flex PLM as cloud only.

Speaker 2

And we went to 100% cloud sales and frankly that stuck And we've been in that model for years now. And all the transactions we've done for years now have been in the cloud. That was an interesting proof point. Quarter. Then if you look at, it's been creeping into our mainstream sales.

Speaker 2

And in fact, before we did the SaaS acceleration, we had planned That 25% of our PLM bookings in fiscal 2022 would come in CloudForm. 25% would be software in the cloud and 75% would be software not in the cloud. And quarter. That's before we put like any incentives or muscle into it. So that plus the success that Arena is having, So far as I can see, Arena is the fastest growing major PLM system in the world and it's pure SaaS and Windchill is second.

Speaker 2

Quarter. So I love having that number 1 and 2 growth position. And really cloud is driving both of them. So I just think the market is telling us we're ready. And in fact, customers are literally telling us to our face we're ready.

Speaker 2

But that doesn't mean the other stuff is not important. People aren't going to buy Windchill because it's in the cloud. They're going to buy Windchill because it's the best system for things like you talked about, bill of material management, variation in Configuration Driven Digital Markups and Service Lifecycle Management and Software and Systems Engineering. That functionality Highly differentiated and then you bring in IoT and AR and wow. So we have a highly differentiated solution that's also in the cloud And customers are saying we want Windchill and increasingly we want it in the cloud.

Speaker 2

So that's kind of where we're at. We're just reading the signals and Basically saying it's time to react.

Speaker 7

Thank you.

Operator

Your next question comes from Joel Munda of Berenberg.

Speaker 5

I hope you can hear me now. Quarter. Great. Awesome. Just had a question around the ARR guide for the year, considering the range is a little bit lower than what you had over the couple of years.

Speaker 5

I was thinking behind it, maybe if you can just help us unpack and what plays into the decision, what to the higher end of the range, 13% versus the lower end where you think you can land? That'd be really helpful. Thank you.

Speaker 4

Gal, hey, it's Christian. I mean, I think the range is the same 3 point range we started off with last year as well. So I'm not Really sure that it's necessarily a wider end of the range. And I mean in terms of the quarter. Variables of getting there.

Speaker 4

I mean, I think we've covered a lot of them. Obviously, it's the continued strength of the business. We'll call it the uptake or the adoption of in year starts versus ramp deals, that all matters as well and can fluctuate How successful we are in continuing to drive churn improvements, I think those are probably The major variable.

Speaker 5

Okay. That's helpful. Yes, I was kind of referring to kind of during COVID and kind of post quarter with world, especially on the churn side, it's important. And then maybe just as a follow-up, you've seen another one 100 basis points opportunity from churn, which is great to hear. What is the key driver Compared to what you've achieved already this year when you basically beat the expectations, where do you see more efficiencies become In terms of is it more of a customer success that's yielding it or is it just a natural bounce back from still from the COVID level?

Speaker 4

Yes. No, it's a great question because I think we still have room to continue to drive it over quarter. The medium term and it's really a combination of multiple factors. 1, quarter. The product lines that have the highest churn rates for us are IoT and AR, obviously.

Speaker 4

Those products continue to mature. Quarter. We expect that as they continue to mature, we'll continue to see the stickiness of those products improve, quarter. Resulting in lower churn. I think the whole organizational model evolution that we spent A fair amount of time talking about here today will also help with our level of customer engagement and that should I think help churn as well.

Speaker 4

And I think there are some other Just execution issues on our side that we can continue to drive as well, Which should provide opportunity to get there.

Speaker 2

I think those would probably be the main Yes. Let me comment further and then also I want to hit a second related point Related to your first question, Gal. I mean, frankly, if you look at it, Creole and Windchill, which are over $1,000,000,000 now, year. Have churn rates much better than the company average and the other businesses that are growing faster generally are less than the Higher churn rates in the company average and you average those together and you get the company average. But the thing is all of these growth businesses are themselves improving their churn rates quarter by quarter, year by year.

Speaker 2

And that's why we keep averaging down toward Creo and Windchill. So, there's more where this came from for sure as it relates to churn improvement quarter. And we expect to see it continue to come. And then, back on the growth assumptions, what I wanted to say, I use this phrase more pathways to mid teens growth. I think in the past, like let's say at our Investor Day last year.

Speaker 2

Our recipe for mid teens growth sort of had FSG flat, using the old categories, FSG flat. Quarter. We needed growth to be kind of at least close to double digits. I'm sorry, we need the core business to be close to double digits and then we needed really a free handle on the growth business. Quarter.

Speaker 2

And now you say, well, wait a minute, if the growth business, even if it had a 2 handle, if the core business remains in low double digits quarter or even perhaps a couple of points higher than that. You don't really need a 3 handle on the growth business anymore. So sort of like if everything works, We can do even better, but now we have room for 1 or 2 things not to work quite as well as we wanted and still get to respectable growth numbers. Quarter. And even if we don't get to the mid teens growth numbers with higher margins, we can still get to the cash flow numbers.

Speaker 2

So we feel like We've taken a more conservative posture. We still think all this stuff can work, but now it doesn't all have to work simultaneously for us to deliver some good numbers.

Speaker 5

That's really helpful. Thank you both.

Operator

Your next question comes from Andrew Obin of Bank of America.

Speaker 8

Yes. Good afternoon.

Speaker 2

Hello.

Speaker 8

Just trying to understand the nature of the transition So you've outlined the organizational transition sales force that I completely get. But quarter. I thought the idea before was to sort of take a more gradual approach, right, and take this modular approach as we introduce quarter. So how is it that you're going to have software ready quite a bit earlier quarter to do the SaaS transition or is it we're just going to transition the product to the cloud and then gradually do the same thing with the software on the cloud? That's why I'm a little bit lost.

Speaker 8

Hopefully, my question makes sense to you.

Speaker 2

Yes. No, Andrew, it makes perfect sense to me. Quarter. So there's a couple of things. One is we still will to some degree do this in phases.

Speaker 2

But yes, we've made a lot of progress and we're funding a lot of progress now With $45,000,000 of spend, I mean, that is a lot of spend. So we're implementing and accelerating certain initiatives By the time we begin to bring these systems online in the back part of the year and so forth as the volume comes in, we'll have many of the efficiency strategies in place, thanks to greater funding of resources and so forth. So think that it will still be step by step, yes. Quarter. However, it will start sooner and the phases will be dramatically compressed, thanks to $45,000,000 in new spending, which is a lot of new spending.

Speaker 8

Thanks, Sam. Thanks a lot.

Speaker 2

Thank you.

Operator

Your next question comes from Matthew Brehm of Mizuho Securities.

Speaker 3

Hey, Matt. Hey, guys. Just in terms of you mentioned the $60,000,000 of savings you quarter. You did talk about saving money in your sales organization, but quarter. Are there areas where you are planning to spend less and any of those areas of revenue generating activities?

Speaker 3

Just trying to get A better understanding as to where that $60,000,000 is coming from.

Speaker 4

Quarter.

Operator

Apologies everyone. Please standby. Conference

Speaker 4

call.

Operator

Okay. We are back and you're back on with Matthew Broome.

Speaker 1

Quarter. Matt, great to be on with you. Can you please re ask the question? Thank you.

Speaker 4

Quarter. We should go

Speaker 2

to the next question.

Operator

Yes. Okay. The next question comes from Ken Wong of Guggenheim Securities Partners.

Speaker 9

Great. Thanks for taking my questions. It makes you feel better. Supposedly HubSpot ran into some issues at the beginning as well. So Not to this for Larry.

Speaker 2

Thanks, but no, it doesn't make us sick.

Speaker 9

So I feel like someone in the NFL quarter. So lots of moving pieces here. I just wanted to touch on as far as this cloud transition, as you guys are Sort of changing tires while the car is still in motion. I mean, should we think about the near term guidance, the outlook Maybe being a little more conservative and then as you look longer term, you start to feel more confident because like you said, there are more I guess there's more optionality. Is that the right Way to think about how you're approaching kind of the next few years or if I'm wrong there, please let me know if you guys have a different approach in terms of how we should be thinking about the numbers that you guys laid out.

Speaker 2

Yes. I mean, I think you're to a degree right for sure. I mean, Setting aside macro and the fact that we don't have a crystal ball there and everything like that, we are launching a major SaaS initiative, but don't have year. In our guide, big assumptions that will hit this year. I think it will hit next year and hit even harder in the years that follow, But we haven't planned a lot into this year, partly because again we need to get this earnings call out there, we need to launch everything.

Speaker 2

We need to start the sales cycles, then we need to close the orders. And if you put 6 to 9 month sales cycles on things and we're not exactly sure how long will take, but 6 to 9 months lends you in Q3 or Q4 already. And so we just not sure then when the start dates might be and all that type of stuff. So quarter. We're fairly conservative about the cloud impact to fiscal 2022, but quite bullish about it to fiscal 2023, 2024, 2025 and beyond.

Speaker 2

Quarter. The other thing is, as we've said, we're a little bit conservative more so than in past years as it relates to Rockwell. Could be wrong there, but we're just saying let's not get ahead of ourselves in case they get distracted with this integration of Flex. I don't think Rockwell thinks they'll get distracted, but again, we're just trying not to get out over our skis.

Speaker 9

Quarter. As far as all the sales motions that are going to change, the 2 in the box, I guess, have you guys, I guess sufficiently factored in potential disruption to this year as you guys work through that? Or is this kind of these motions are just kind of PTC and you guys feel you can pivot on the fly here.

Speaker 2

Yes. Well, what's happening on the sales side Of the 2 in the box is pretty typical stuff that happens every year and which is to say not that extreme. A few more resources here and Shifting a little bit, what's overlays and not overlays, things like that. That's pretty typical. And I don't see any unusual degree of risk there whatsoever.

Speaker 2

What's happening on the other side is a little bit more dramatic, but frankly, most of that is what happens after the customer buys from us. And I actually think it's all good changes anyway. So I don't see that disrupting sales. I see it actually making customers happy because they stopped getting passed around from one person to another and having to be explained who they are and all that kind of stuff. So I don't know.

Speaker 2

I don't think it's a high risk change. Certainly, don't see it that way week. And we're eager to go execute it.

Speaker 9

Got it. Great. Thanks, guys.

Operator

Quarter. Your next question comes from Matthew Brim of Mizuho Securities.

Speaker 2

Hey, Matt. Sorry, we didn't get you last time. We're not.

Speaker 4

Yes. We're going to try to disconnect

Speaker 3

quarter. So yes, my question was just about the $60,000,000 in quarter. You did mention saving money in your sales organization, but in what other areas are you spending lab to free that money up and is that likely to affect any sort of revenue generating activities?

Speaker 2

Yes. No, it's again, I want to be clear, it's not in sales. It's really in customer success, where we used to have many organizations that took turns talking to customer. They all had management change. They all had sort of overlapping responsibilities, etcetera.

Speaker 2

So, the place we're taking the most money out of would be quarter in customer success, the stuff that happens after the customer buys. And we're doing that not by just reducing capability, but by simply implementing a much more efficient model with many less silos, much less management involved and so forth. So that's all goodness. There are other places we'll have efficiencies like let me give you an example. If you belong to a field organization, you work in technical support, Your mission is to make the customer happy, even if it means solving the same problem dozens or hundreds of times quickly.

Speaker 2

If you're part of the product organization, Your goal is to go back and talk to the product guys and tell them make this product go away in the SaaS offering quickly, So that no other customers are even aware that it ever did exist. So you can see there's like real efficiencies in terms of like how you solve customer problems. Are you Trying to make them happy while they have the problem and repeat that 100 and thousands of times? Or are you trying to make the problem go away so that The rest of the customers never knew it happened, just to summarize. These are great efficiencies that we're going to go pursue.

Speaker 3

Okay. Now that makes a lot of sense. And if I could also just ask, just given sort of the acceleration to SaaS, how do you anticipate this change of relationship with the channel and does it change their role in any way?

Speaker 2

Yes, I think if you look at the different classes of partners, it affects Differently, let's start with Microsoft and elated about this as you might expect because it will bring a lot of business their way. If you Look at Rockwell, Rockwell II is leaning into SaaS and frankly all of our SaaS products are easier for Rockwell to digest and to deliver on to their customers Then would be the on premise variance. So I think Rockwell quite likes the strategy and maybe some of their own thinking about SaaS was born in our boardroom, I don't know. You'd have to ask Blake that, but I might speculate. And then I think like if you look at our resellers, it will change their world a little bit.

Speaker 2

They still need to go sell the software. They won't be as involved in delivering it, but then they're very much involved in the implementation of it at the customer site. So, I don't want you to think as it relates to resellers or SIs that SaaS companies don't have SI partners. I mean, my God, Salesforce has a massive SI ecosystem. They just don't install software and perform upgrades at the customer side.

Speaker 2

They do system integration. They do adoption. They do business process transformation. They do all that stuff, which still has to happen. So, that's kind of long term.

Speaker 2

I think SIs have to take the sort of posture they have relative to Salesforce and all those other SaaS companies, Which will help them through and the bigger ones like Accenture already know that play. And then for the smaller resellers, the other thing worth noting is that Most of our resellers sell Creo and Kepler and those products are sort of farther out on the SaaS roadmap anyway. So that would be several years down the road before we even really

Operator

Your next question comes from Jason Celino of KeyBanc Capital Markets.

Speaker 2

Hey, Jason. Hey,

Speaker 6

guys. Quarter. Thanks for fitting me in. A little deja vu here with the transition. But maybe so the subscription transition, you don't have to press and change.

Speaker 6

The SaaS transition will be a deployment change. When we think about the cloud opportunity for PLM, when we think about the sources of possible acceleration. Will it be more of a share gain type story or a pricing uplift from the lift and shift?

Speaker 2

Yes, I think it will be both. But let me first kind of redefine pricing uplift, so we don't confuse anybody. We will deliver more value to the customer and they will pay us more for that value while saving money on their side above and beyond. So Is that a pricing increase? I don't know.

Speaker 2

It's a value increase. And that could drive a tremendous amount of business. If Creo and Windchill are $1,000,000,000 and you could double $750,000,000 of that over a decade. Well, that's $750,000,000 of more value Delivered to the customer base and monetized. However, what we're seeing with Arena and to a degree with Windchill is we have the cloudiest, SASSI solutions in the market and that does help take share.

Speaker 2

Every piece of business that Arena is winning, they're taken from somebody else or quarter. It's a startup company that they're winning at somebody else's expense. And Arena is the fastest growing PLM solution in the market right now. So I do think it's both. And You know exactly what the balance will be, I don't know.

Speaker 2

I do think monetizing the customer base by delivering more value is A high probability and it will drive a lot of growth by itself.

Speaker 6

Excellent. Thank you. Welcome.

Operator

Quarter. Your next question comes from Joe Greweink of Baird.

Speaker 6

Quarter. Great. Hi, everyone. Just to focus on the new digital thread business unit, it maybe seems like there is rising interest in full platform deals. If I just think about the way Rockwell expanded the scope of the partnership to loop in more products or even Volvo, I think when Dave, we're talking about the big CADPLM deal.

Speaker 6

They spoke about this better pairing with existing IoT they have set up in their plants. So I'm just wondering, A, am I characterizing the demand environment correctly? And then B, does the new business unit actually allow you to maybe better execute on cross sells than has been the case?

Speaker 2

Yes. Well, let me hit the second question first. The new business unit is fundamentally formed to help us better execute on cross sells, because we do see that platform deal structure happening more and more. The example you gave with Volvo, I could repeat a dozen more examples of that, of customers who started with one product and pretty soon they have 2 and then 3 and they're trying out the 4th one and so forth. And we think that Our products, Creo, Windchill, ThingWorx, Vuforia, work beautifully together like voices in a choir.

Speaker 2

They make beautiful music together. Quarter. And rather than selling these things separately, yes, we can use them all as entry points, but let's pursue entry points The DIN can be up sold and cross sold. And so I think Troy Richardson was one of the first people to sort of ask why don't you guys Configure differently on us guys now that he's here, but why don't we configure differently and go like pursue this harder, this cross sell motion. So that's exactly what we're doing and that's a little bit how the name Digital Thread came to be.

Speaker 6

Great. Thank you very much.

Operator

Quarter. Your next question comes from Tyler Radke of Citi.

Speaker 1

Hey Tyler. Hey, quarter. Good evening.

Speaker 8

I wanted to ask you

Speaker 4

a little bit more about the PLM SaaS transition. It sounds like quarter. That's kind of starting now. So we assume that in some ways the product is ready. Obviously, it's probably going to get better over time.

Speaker 4

But quarter. How are you thinking about pricing as a lever to kind of push customers towards that, whether it be price increases on the on prem side or maybe initial discounts to get early customers over to the SaaS offering?

Speaker 2

Quarter. Yes. Well, let me comment on the first part of your question and then the second part. So Again, we've been onboarding customers' SaaS for a while with PLM. And think of it that they're coming in at one margin and what our goal is, is to make improvements behind the scenes that take them to another margin Even at the same cost to the customer.

Speaker 2

So whether it's single tenant, multi tenant, I mean, if you're the customer on the customer end, you don't even know. But we on the PTC end, we see the efficiencies we're gaining or not gaining, we do know. And so a lot of our investment Is aimed at making the product more efficient for PTC to deliver as opposed to different from the UCGent at the customer side. Now that said, if you look what we did with the subscription program, quarter. We pulled every lever we could come up with.

Speaker 2

If you remember that program when we used to talk about it, we used to say, I don't know, Christian. Christian actually was the program executive. We had like 28 work streams and 300 people working on it. We changed pricing and packaging to favor subscription over at the time perpetual. We paid more commission on a perpetual deal.

Speaker 2

We had certain offerings that were only I'm sorry, we paid more commission, I said that wrong on subscription deal. We paid we had certain offerings that were only available, certain attractive sexy offerings, including the ANSYS stuff, by the way, that was only available subscription. So we basically stack the deck in every customer conversation in a way that everybody wanted it to go subscription. We got the band back together. We're putting the same program together.

Speaker 2

We're going to stack the deck again in favor of SaaS this time.

Speaker 6

Quarter. Thank you.

Operator

Your next question comes from Adam Borg of Stifel.

Speaker 2

Quarter. Hello, Adam.

Speaker 6

Hey, guys. Thanks so much for taking the question. Just real quickly on IoT, I think you mentioned during the prepared remarks quarter. That was slightly below expectations in the quarter. So maybe just talk a little bit more about what led to that and the confidence you have in that improving in fiscal 2022, maybe even in the context of DPM?

Speaker 3

Quarter.

Speaker 2

Yes. So first, Adam, let's be clear exactly what I said. Bookings in the quarter were very strong. Quarter. However, much of the bookings in the Q4 does not land in ARR in the Q4.

Speaker 2

It's back to that start based discussion. Quarter. So, what I said is that ARR was less than we wanted it to be. It was mid teens and frankly, we've said we wanted to have a 2 handle. Quarter.

Speaker 2

Now bookings in every quarter of fiscal 2021 were higher than the previous year quarter in fiscal 2020. So there is some bookings momentum happening. And then another thing is we launched this DPM solution that frankly we've been working on for 2 years. It's a major piece of software quarter that we launched and already has quite some customer interest. So we sort of feel like the combination quarter.

Speaker 2

The bookings momentum we have, including and especially in Q4 and then the launch of DPM and the trends we're seeing, quarter. They bode well for what should happen next year.

Speaker 6

Great. Thanks so much.

Speaker 2

Okay. Operator, I think we have time for Maybe one more question.

Operator

Certainly. Your final question comes from Blair Abernathy of Rosenblatt Securities. Quarter.

Speaker 4

Hey, Blair. Hey, Blair. Hey, guys. Thanks for taking the time. Just two quick things.

Speaker 4

First on the DPM, Jim, what's sort of the is there a shift in the go to market with this solution in our and are there more solutions coming This year, next year and behind us.

Speaker 2

Yes. I think what you should think, first of all, is that DPM will become a category of solutions. And what we're launching first is DPM for factory, digital performance management of what happens in a factory. There will be solutions that are more focused on digital performance management of a fleet of products out in the field at customer sites. But fundamentally, what we're trying to do is move from selling a toolkit where the customer does the solutioning themselves to selling a turnkey solution with a very strong value proposition, sold to executives, not to developers, Sold on the basis of the business value it will generate and then implemented quickly into production.

Speaker 2

So, yes, it's a very different sales motion. I mean, number 1, we're selling to executives, Not selling to developers. Number 2, we're selling business value, not speeds and feeds, technical stuff. And I think it's really Where we wanted to take this business for a while. So, I'm very pleased with the solution.

Speaker 2

It took us a while to develop it, as I said, but it's a powerful piece of software and it really gives us Kind of a new platform to build on going forward with IoT. It makes IoT, if I could, a lot like how we sell PLM. We sell PLM to executives based on business value. We were selling IoT to developers As a toolkit and now we'll sell PLM and DPM as business value to executives, different executives mind you, but executives.

Speaker 4

Okay, great. Thank

Speaker 2

you. Great. Thank you. Well, operator, maybe I'll just take it from here. So first again, my apologies.

Speaker 2

This is like The strangest earnings call I've had again and it's the 44th one as CEO. So it's a bit odd, but nonetheless, I think we got a lot of good information out there and you guys had some questions and I appreciate it. So in closing, I mean, we're in a great place. I really like PTC setup going forward. Quarter.

Speaker 2

The changes we announced are good for growth. They're good for profitability. They're going to put us in a stronger position to hit quarter. Both the top line and bottom line targets that we have out there. So we're looking forward to continuing the discussion with you on follow-up calls at investor conferences.

Speaker 2

I'm going to be at the Berenberg Conference at least virtually next week or I guess it's 2 weeks out maybe. No, it is next week. Quarter. And we look forward to seeing you at our Investor Meeting on December 15. So thanks everybody and have a good evening.

Operator

Quarter. Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call. You may now disconnect.

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