Jim Heppelmann
President and Chief Executive Officer at PTC
Thanks, Emily. Good afternoon, everyone, and thank you for joining us. I hope you and your families are well during these continued uncertain times. I'm pleased to share that PTC has welcomed many of our vaccinated employees back to our offices where requirements allow, and we look forward to the day when we can do this on a global scale. Meanwhile, we're monitoring the growing concern with the delta variant of the virus and hoping this new development doesn't lead to another round of business lockdowns. Before I dive into the quarter, I want to share some important news on the Investor Relations front. Emily has been doing a great job holding down the fort since Tim Fox left. But keeping up with IR demands is a big job, and Emily was happy to hear that reinforcements are on the way.
I'm pleased to announce the hiring of Matt Shimao as our new Senior VP of Investor Relations. Matt came to us as a recommendation from one of our largest investors, and he came out on top following a thorough search process. Matt comes to us with a finance background and several successful stents on both the corporate side and the sell side of Investor Relations. He is a strategic thinker and we're excited to bring him on board. Turning to slide four. With three quarters behind us, our guidance for FY '21 has us right on track to deliver mid-teens ARR growth and $340 million of free cash flow this year. That will be a fourth consecutive year of double-digit top line ARR growth, and I anticipate we'll be discussing a fifth consecutive year of double-digit ARR growth when we guide fiscal '22 in 90 days or so. While the stronger PMI numbers that we're seeing can only be helpful, I'm pleased to see that PTC is earning a reputation as a company that can consistently perform at high levels in good times and in bad.
In preparing for this call, I thought back to where we were a year ago with shutdown orders in place, empty offices and factories and schools contemplating how to educate from home. Against that chaotic backdrop, I'm very pleased with the results that PTC has been able to deliver right through the pandemic. Some years back in the days when our portfolio was narrower and sold in a perpetual model, our business was much more cyclical, but consistent, reliable performance is always what we strive for, and we did the difficult work to earn that. The type of steady organic top line growth performance you see from PTC hasn't been the rule in our peer group, especially among our most direct CAD and PLM competitors. I attribute our superior performance to a better business model, to tremendous strength across our entire portfolio and to growth drivers that are now more secular than cyclical. In terms of growth drivers, PTC is well positioned for the future.
The new logo success of our Onshape and Arena businesses demonstrates the growing demand for SaaS technologies. We see PLM joining IoT and augmented reality as key digital transformation technologies for industrial companies and years of market outgrowth in the CAD business speaks to the innovation we've reignited there. Turning now to slide five, so we can get into the Q3 details. PTC delivered another strong performance in top line ARR and bottom line free cash flow in the third quarter. Bookings grew in the mid-30s, a strong rebound in comparison to a year ago when bookings declined. In the top line category, we had a very solid quarter with ARR growth of 18% or 15% in constant currency to $1.42 billion. Growth was driven by solid performance in our growth businesses, continued momentum in our core business where we again outpaced market growth and by a solid contribution from Arena solutions. On an organic basis, ARR grew 14% or 11% in constant currency in Q3, in line with our guidance.
To close out the top line category, revenue growth of 24% as reported was driven by strong execution, aided by the impact of ASC 606 revenue recognition policies plus, of course, the Arena contribution. Switching to the bottom line category. We delivered strong free cash flow of $85 million and non-GAAP EPS growth of 34%, reflecting a combination of strong top line results, combined with continued operating expense discipline even while we also invest for growth. We continue to feel confident about our FY '21 target, up $340 million in free cash flow. Moving to slide six. Digital transformation remains our main secular driver of growth. You may remember last quarter, I shared our new tagline, digital transforms physical.
These three words are captured in our logo and embody how PTC thinks about our long-term strategy. PTC is a digital company, but our customers do business in the physical world, making physical products in physical factories and servicing those products at physical customer sites. In my LiveWorx keynote in June and again at our Global Partner Summit in July, I outlined the power of PTC's unique digital transformation story that has one foot in the digital world and one foot in the physical world. We tell our customers that our digital transforms your physical. And by that, we mean we help customers use digital to define, manage, connect and augment physical products. Our portfolio is already transformative. But now with SaaS, PTC is at the very forefront of thinking about how customers will use digital to disrupt physical in terms of taking an entirely different approach across the hardware, software and system administration of their IT systems. SaaS is surely coming to our market as it has so many other B2B software markets, and PTC has carved out an enviable leadership position.
We now have the most to gain from this disruptive force. With that as context, let's take a look at the respective contributions of the FSG, Core and Growth segments of our portfolio. Moving to slide seven. You'll see that ARR in our Focused Solutions Group showed growth of 4% or 1% constant currency, which aligns with our growth expectations for this segment. ARR growth for our core business was 14% or 11% in constant currency. Our growth segment saw 60% ARR growth with 23% organic constant currency growth, reflecting on one hand, some lingering hangover from COVID, but counterbalanced by solid performances from our Onshape AR and Arena SaaS solutions.
Let's go a click deeper into the main elements of our large core and growth segments. Turning to slide eight. Our CAD team delivered another impressive quarter with ARR growth in the low double digits, reflecting growth across all geos and an improving demand environment. The additional features and functionalities that Creo seven delivers, including Creo Simulation Live and Creo ANSYS simulation, continue to demonstrate the power and differentiation of Creo. In addition, last quarter, we announced Creo 8, which includes the generative design extension module called GDX, which is based on our Atlas SaaS platform. While it's still early days for Creo leveraging Atlas, this module is a great example of how PTC plans to deliver innovative SaaS-based capabilities as we systematically transition our core products to SaaS. On slide nine, a great example of how CAD generative design and real-time simulation make an enormous impact can be found at HPE COXA, a provider of products, engineering solutions and technology projects for the performance automotive and motor sports sectors.
The company designs and manufactures car components and complete systems for some of the highest profile, super premium sports car brands around the globe. Inefficiencies in a multistep, multi-software approach to design were causing miscommunication between design and analyst teams, which delayed production times and caused customer satisfaction risks. By adopting fully integrated and streamlined generative simulation and additive technology workflows in Creo, HPE COXA has simplified the design sequencing, reduced overall design and production time and improved design agility and time to market.
Moving on to slide 10 in our PLM business. You'll see that PLM continued to deliver very strong performance with another mid-teens ARR growth quarter. From a geographic perspective, in Q3, we saw broad-based strength across all our geos and in our customer base with a solid quarter in the reseller channel. And we saw increased demand for PLM through the Microsoft alliance, another proof point suggesting more customers are understanding the critical role that PLM plays in their digital transformation initiatives. Incidentally, during the quarter, we won three more Partner of the Year awards from Microsoft. On slide 11, we profile a win with cell centric, a Daimler Truck and Volvo joint venture, which helps hydrogen fuel cells -- or which develops hydrogen fuel cell systems and believes that PTC's PLM solution is best in class. As the deadline of becoming an independent entity loomed on the horizon, cell-centric knew they needed a PLM backbone in place quickly. PTC delivered our cloud-based Windchill offering establishing a best-in-class application landscape for PLM in a great competitive displacement.
Moving on to our growth businesses. I'll begin with IoT on slide 12. IoT delivered high teens year-over-year ARR growth, delivered -- driven by strength in Europe and APAC. Rockwell was the largest reseller of IoT in the quarter. On slide 13, we discussed how Eaton, a multinational power management company saw the need to deploy a digital transformation strategy across their enterprise. Our factory insights as a service IoT application helped to deliver quick wins, forming a digital foundation upon which they can easily add more use cases. Eaton was able to realize multiple improvements, including improved OEE, reduction in unscheduled maintenance, reduction in manual efforts and 100% worker compliance with SOPs.
Let me shift to our augmented reality business on slide 14. The Vuforia augmented reality team again delivered strong results in Q3 with ARR growing across all geos. We saw improving retention and expansion rates and the opportunity to cross-sell into the larger PTC portfolio is gaining momentum. This quarter, we also announced a new AR product, Vuforia Instruct, a unique Atlas-based SaaS solution designed to enable enterprises to leverage 3D CAD data to deliver -- create, deliver and scale interactive AR work instructions to optimize inspection procedures. When you consider that 2/3 of manufacturers are still using paper-based inspection processes, you can appreciate how Instruct delivers considerable value to our customers. Vuforia resonates with the customers we engage through our alliance with Microsoft and one of the awards we won this quarter was Partner of the Year in mixed reality.
On slide 15, you'll see an innovative example of the use of augmented reality that comes from Stana, a UK company dedicated to the design, production and service of residential and commercial stairlifts. Stairlifts are customized systems configured for and installed in the consumer's home to help those with difficulty navigating stairs. For example, the move from the first floor living room to the second floor bedroom. Stana leveraged Vuforia to create an AR application that allows customers to see how a customized 3D hologram chairlift could fit and work in their homes. With COVID limiting the amount of face-to-face interaction by sales and service teams, Vuforia enabled a customer-centric tool that could be used by sellers during the sales cycle to help potential buyers visualize a residential stairlift in their home. Stana saw increased purchase confidence, improved differentiation against competitors and shorter sales cycles through improved customer communication.
Turning now to slide 16. Onshape delivered a very strong quarter with ARR growth of 40% year-over-year. We had a very strong bookings quarter in the Onshape core commercial business with larger deal sizes and stronger renewals, thanks to a maturing product. Onshape continues to gain share in the education market, too, as schools and students turn to SaaS-based solutions for mobility and ease of everything. Looking ahead to Q4, we see a strong pipeline for both the commercial and larger account enterprise business.
Turning to slide 17. It Is fun highlighting customer stories, especially when that customer is solving a problem through innovation. Delta development and R&D companies specializing in military applications for cooling and heating systems in extreme environments was contracted to design and manufacture an autonomous portable refrigeration unit for deployment by Medix on the battlefield. The company was seeking to reduce its IT overhead, which had been taking up 20% of the engineering team's product design time.
By moving from an on-premise CAD system that took a lot of care and feeding to Onshape, the time loss associated with software installations, licensing and regular system upgrades was eliminated. They both reclaimed the 20% of their design capacity and at the same time, enabled real time collaboration on 3D designs across a distributed team environment. Moving to Arena on slide 18. Arena continues its growth trajectory, delivering ARR growth of over 20%. Arena is seeing strong traction with upselling as they increase penetration into current customer environments and keep retention rates high. By all measures, Arena looks to be a great acquisition. I'm also pleased to note that we opened our first European Arena sales operation during the quarter.
Turning to slide 19. NEXTracker, a flex company is one of the fastest-growing clean tech companies in solar, offering next-generation solar power plants with smart solar trackers and energy storage solutions. The company lacked a single source to track and manage its engineering design and development processes. They needed a better way to manage product information across distributed teams, to enable automated approvals and to improve tracking and accountability.
With Arena, NEXTracker was able to reduce review and approval times by nearly 60%, eliminate time zone delays with global partners and accelerate product introductions by 25%. Arena has helped NEXTracker significantly improve the way they design and get products to market. Naturally, I'm pleased that PTC has been able to complement the strong performance of Creo and Windchill in the traditional market with breakout performance from Onshape and Arena in the burgeoning SaaS market of tomorrow.
The success we're having with Onshape and Arena in the small and mid-market is 100% complementary to Creo and Windchill success in larger companies. Geographic performance was strong on a global basis, and as shown on slide 20, reflecting the performance trends we've seen year-to-date. Americas ARR growth of 21% was driven by solid core performance and Arena. Europe ARR grew 9%, consistent with prior several -- several prior quarters, with strength in CAD, PLM and improving growth in IoT as we work toward full recovery from COVID there. APAC delivered the fourth quarter in a row of mid-teens ARR growth with strong performance in core and growth businesses. Summarizing the state of the business on slide 21, we're pleased with the general good health of PTC across all of its different dimensions and moving parts, and we look forward to wrapping up a great year of ARR and free cash flow growth here in FY '21.
With that, I'll turn it over to Kristian to take you through more details on the financial results and guidance.
