Jim Heppelmann
President and Chief Executive Officer at PTC
Thanks, Matt. Good afternoon, everyone, and thank you for joining us. Turning to Slide 3, I am pleased to share that PTC delivered another strong financial performance in fiscal Q1. We executed very well, building on the momentum we saw in Q4. To simplify things, please note that throughout my prepared commentary, I will only discuss growth rates in constant currency. ARR came in at $1.507 billion, which was better than the $1.5 billion we had guided to at the recent Investor Day. That represents 16% growth, 11% of which was organic. Adjusted free cash flow was also strong at $145 million which was up 20% year-over-year and better than the $140 million expectation we set at the Investor Day. We're off to a very strong start in fiscal 2022.
Turning to Slide 4. Of particular note was our booking strength. Bookings were up double digits organically and high teens overall against the very strong COVID bounce back quarter we saw in Q1 of fiscal '21 when bookings grew more than 30% over the prior year. To put it in perspective, given the tough comparison against Q1 of last year, we had planned bookings to actually be down slightly inclusive of Arena. So this performance was more than 20% above plan. I know that some analysts and investors had voiced concern at the restructuring work we did in late Q4 and throughout Q1 would distract us, but obviously, we didn't see that. The strength was broad-based across direct sales and resellers and was achieved with no mega deals. Rockwell came in ahead of their part of our plan too which was great to see and suggest my concerns of them being distracted may prove overstated.
Arena contributed the inorganic element of bookings growth with another strong bookings quarter coming in above plan as well. With the Arena acquisition getting round trip here in Q2, Arena becomes part of the organic results going forward and their low 20s growth rate will then add another tailwind to the organic results. Arena has been a great acquisition. Bookings growth was particularly strong in PLM and in both Europe and Americas. From a macro perspective, global PMIs remain in expansion territory while digital transformation and SaaS continue to grow in importance as secular drivers. The interest in digital transformation and SaaS has been driving strong bookings for what is very sticky software, which, when layered into a recurring revenue model, that is atypical of industry peers, has allowed PTC to deliver performance in excess of market growth rates. This happened right through the pandemic, especially in the large core business that represents about 70% of our ARR and we fully expect it to continue going forward.
These factors gave us confidence to raise the lower end of our ARR guidance range which at the new midpoint basically means we've rolled our Q1 beat forward. Now, let's take a look at the ARR performance by geography on Slide 5 before turning to business units. In Q1, we saw strong ARR performance across all geographies. Our ARR growth in the Americas was 19%. All product segments grew with key growth drivers being the acquired Arena contribution and the Velocity business unit overall layered on top of another strong quarter in the core CAD and PLM business. In Europe, our ARR growth was 13%. We saw strong results across the board in Europe with the strongest drivers of the growth being our digital thread growth and core businesses. Europe has the largest mix of channel versus direct and the resellers continue to perform well. Our ARR growth in APAC was 14% with growth primarily driven by our digital thread core business.
Next, let's take a look at the ARR performance of our various business units, starting with the digital thread group on Slide 6. In our largest product segment, digital thread core, we delivered yet another double-digit performance in Q1 with 11% growth. Within this, CAD and PLM both grew double-digits, with strong growth across all three geographies. This is the 17th consecutive quarter of double-digit ARR growth in the core business, and as we roll out our more aggressive SaaS strategy, I'll expect -- I expect we'll see many more. In the digital thread growth which is IoT and AR, we saw ARR growth of about 14%, consistent across both elements. This was in line with our plan and the mid-teens near-term growth expectation we set at the recent Investor Day. While this level of growth remains accretive to company growth, we continue to expect an acceleration of growth into the 20s as we get into the back half of the year. The biggest driver of growth in Q1 was from expansions, especially in Europe and APAC.
We believe market conditions in IoT are improving and we like the way the pipeline for a new DPM offering is developing through both PTC and Rockwell channels. For AR, we continue to see a tremendous level of interest, but the market remains nascent. Perhaps most importantly, the formation of the digital thread business unit at the start of FY '22 has driven important initiatives to increase our focus on cross-selling of IoT and AR into the core CAD and PLM customer base. FSG had a great Q1 with 6% ARR growth. The expansion deal we recently announced with the U.S. Air Force both increases and extends this key relationship for up to five more years. Contracts like this demonstrate the value that our customers are realizing from Servigistics and other FSG products such as retail PLM and ALM. You may remember I noted at our Investor Day that having FSG grow in the mid-single digits rather than flat would be a helpful upside growth driver. So, I am pleased to see FSG post another strong quarter.
Let me run through a couple of quick customer anecdotes to give you a sense for our digital thread customers and how they rely on us. On Slide 7, MAN Energy Solutions is the world's top provider of large bore engines and turbomachinery for the maritime and energy industries. The company manufactures complex parts in nearly every engine they make must meet unique customer requirements. Before implementing Creo, they relied on manual outdated processes that slowed design and production. With Creo, they've been able to transition from 2D to a full 3D model-based approach. Creo's broad range of toolpath automation capabilities enable them to save time in the programing of the toolpaths used to machine the large complex engine parts, greatly increasing efficiency in transitioning from design to production.
Turning to Slide 8. You may have noticed we announced a deal with the -- we announced that the German company, Schaeffler, has expanded its relationship with PTC, and I'd like to share a bit of the back story. Schaeffler has been a long time Creo customer and has successfully deployed Windchill within engineering. But back in 2017, one of our PLM competitors announced a large PLM deal with Schaeffler that appeared to cap PTCs expansion opportunity. But that system didn't ultimately stick as Schaeffler has now decided to consolidate on PTC systems with Windchill being the backbone and is broadly deploying our solutions in their standard out-of-the-box fashion so that Schaeffler can participate in the full power of our digital thread portfolio. I'm very excited about this collaboration and the further expansion that Schaeffler is exploring with our IoT and AR offerings.
On Slide 9, you'll see how IMA Group, a global business that delivers packaging machines, services and solutions to a wide variety of industries was looking for a way to expand their control room offering to help their customers improve overall equipment effectiveness and reduce downtime. As long time users of PTC's Creo and Windchill, IMA decided that ThingWorx was the ideal IoT solution for their initiative and that Kepware could provide connectivity not only to their machines, but to the other vendors machines deployed alongside them. IMA has successfully launched new revenue streams by enabling 24-7 monitoring of customer production lines and improved OEE by up to 16%. Vuforia integrated with ThingWorx is the platform of choice for the U.S. Air Force training initiatives. Slide 10 highlights the work that PTC partner, Vectrona, has done with the U.S. Air Force.
With finite training resources and limited capacity, the U.S. Air Force set out to incorporate augmented reality into their maintenance and munitions training. Vectrona using Vuforia Studio work for the U.S. Air Force to create immersive 3D AR experiences for phones, tablets, and the Hololens 2 that are designed to accelerate learning, improve work performance and facilitate remote training. The improved training shows better engagement and information retention with continuous and repeatable tasks training available regardless of the system or aircraft type. Turning to Slide 11, the Velocity be use ARR growth in Q1 was more than 650% due to the inclusion of Arena and 53% organically, which would be Onshape. If you were to add Arena's pre-acquisition results into the prior year to get a better pro forma comparison, then you'd have the Velocity business unit growing at 28% in Q1. That 28% is a mix of Onshape growing at 53% and the larger Arena business growing in the low 20s.
Growth of both Onshape and Arena is multiple times higher than market rates, clearly demonstrating that industrial companies see the benefits of SaaS. We continue to ramp investments to expand technology leadership and to broaden the geographic presence of our Velocity businesses. On Slide 12, Beta Technologies, a leading developer of next-generation electric aircraft for the cargo and logistics market, sought a cloud native product development platform where everyone would be working with one single source of truth [Technical Issues] the workflow restrictions of traditional file-based design systems. Beta turn to Onshape because of how it enables real-time collaboration, allowing the engineering team to work from any location while streamlining their communications during the design process.
Top profile in Arena customer, Potrero Medical, on Slide 13, is a predictive health company developing the next generation of medical devices leveraging smart sensors and artificial intelligence. Potrero needed a scalable quality management system to support its growing product development and compliance needs including satisfying FDA audit requirements. Arena was the right solution offering a cloud native QMS with a quick implementation, leading to ECO cycle time reduction of 30% and non-conformance improvement of 20%. As a final topic, I'd like to give you a quick update on our SaaS acceleration initiative on Slide 14. We've made tremendous progress in the past 90 days since we announced the more aggressive strategy. We've launched our SaaS program management office which was modeled after the very successful approach we used to drive our subscription transition several years back. Our field organizations transitioned to the new two-in-a-box customer success organization modifications with product development to deploy the DevOps type of approach you see in virtually all SaaS companies.
We've made good progress advancing our offerings especially the Windchill multi-tenant version which will go into production shortly this quarter and we made good progress preparing the SaaS conversion offerings that will power the hundreds of lift and shifts that will happen in the coming quarters and years. We have more work to do, but we're certainly up and running. That the time for SaaS has arrived in our industry and PTC is very well positioned. We're already the SaaS leader in our space with continued strong SaaS growth in Windchill and FSG and high levels of growth in our cloud native Velocity business unit. Sharing the Atlas SaaS platform, we have a dual strategy to win with Onshape and Arena, powering a new agile product development approach, while we transition our digital thread portfolio and existing customer base to SaaS to elevate the platform strategies that so many larger companies have.
To wrap up on Slide 15, I'm pleased with PTC's position and the opportunity that lies ahead. Q1 gave us a strong start to what we expect to be our fifth consecutive year of double-digit ARR growth. Our portfolio of products is unique and compelling and obviously aligns well the customer demand. Our results have been consistently strong for many quarters, but we're poised to accelerate growth as the SaaS tailwind blows harder in coming quarters and as we gain more momentum with our IoT and AR initiatives in the back half of the year. We are poised to drive higher levels of profitability too, following the organizational changes we've already implemented, and as our startup businesses continue to mature up their J-curves. The company has never been in a better position to create shareholder value.
With that, I'll turn it over to Kristian for more details on the financial results.
