Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the PTC 2020 Fourth Quarter Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Thank you, Joelle. Good afternoon everyone and thank you for joining PTC's conference call to discuss our fourth quarter and fiscal year 2020 financial results. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Before we get started, we'd like to acknowledge that a table from our press release became public and we're currently looking into how this happened. In the meantime, of course the full set of earnings documents are available on PTC's Investor Relations website. Now, moving on to today's call. Please note that our comments, including forward-looking statements including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in PTC's filings with the SEC including our annual report on Form 10-K and quarterly reports on Form 10-Q. As a reminder, we will be referring to operating and non-GAAP financial measures during today's call. Discussion of our operating metrics and the items excluded from our non-GAAP financial measures and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related Form 8-K. References to growth rates will be in constant currency unless otherwise noted. And lastly, we'll be referencing our prepared remarks document which is in presentation form today which you can find posted on our IR website. With that, let me turn it over to Jim.

Thanks Tim. Good afternoon everyone and thank you for joining us. I hope you and your families are safe and well during this crisis. Before we review our quarter and year-end results, I'd like to share some new updates announced earlier today. We are pleased to announce that PTC and Rockwell Automation have extended our strategic partnership for an additional two years, solidifying our alliance through fiscal 2023. Additionally, we have expanded our partnership beyond IoT and AR to include PLM and Onshape. In May, Rockwell acquired Kalypso, a professional services company that has been an important PLM and IoT partner of PTC for many years. This acquisition enhances Rockwell's capabilities to pursue digital thread initiatives, leading to an expanded agreement that supports these efforts. The updated agreement promotes better sales cooperation, grants PTC access to Rockwell's Emulate3D factory simulation software, and is structured to encourage further growth through fiscal 2023. This alliance has increased our capabilities and reach, while providing Rockwell access to top Industry 4.0 software technology, allowing PTC to tap into significant market opportunities. So far, Rockwell has integrated PTC technology within more than 250 large companies across 45 countries, with 70% being new customers for PTC. Rockwell has rapidly become one of our most crucial partners. Blake Moret, Rockwell's Chairman and CEO, agrees that this extension is a major achievement for both companies. We've also declared that we will hold a virtual Investor Day on December 15th, where we will outline our strategy, growth drivers in our markets, our broad solutions portfolio, and our market approach. Kristian will share insights on our strong financial model during the event. Given this upcoming event, we will focus this call on Q4 and fiscal 2020 results, as well as fiscal 2021 guidance. I invite you to join us for the December event. Now, let's discuss the three key components of our strategy to create long-term shareholder value. It begins with aligning with market demand to build a robust pipeline, followed by optimizing new and renewal sales and customer success to drive top-line ARR growth. Lastly, we aim to create an efficient business model and operations that enable PTC to accelerate bottom-line free cash flow growth. This will serve as PTC's new framework for articulating our business strategy, operations, and results as we approach fiscal 2021. Fiscal 2020 was undoubtedly one of the most unique and challenging periods in PTC's 35-year history. I believe we will look back on the past year as a significant moment for PTC. Our software solutions, which were already providing great value pre-pandemic, have now become essential. We anticipated a growing need for our capabilities, and COVID has indeed expedited that demand. Digital transformation initiatives in the industrial sector are accelerating as companies adapt to this new normal. Solutions that facilitate remote work, global team collaboration, remote asset management, and training for frontline workers are more crucial than ever. For PTC, this means increased demand for PLM, IoT, AR, and SaaS. Our pipeline is at record levels, confirming that PTC is well-positioned. Considering the top line, the necessity of remote work has pushed us to significantly enhance our digital marketing and sales capabilities. I’m pleased to share that we achieved strong Q4 bookings, surpassing our previous record from Q4 of 2019, particularly impressive given the global economic climate and the virtual limitations faced by our sales teams. We have made substantial advances in adopting digital go-to-market strategies over the past six months. After navigating our subscription transition, we have successfully overcome prior challenges and returned to record levels of ARR and revenue. We are now experiencing stability in top line growth with higher rates and margins that justified our difficult five-year transition. Fiscal 2020 marked our third consecutive year of double-digit ARR growth for PTC, despite the volatility in economic indicators and the macro environment during that time. Over 90% of our revenue is now software, with 98% of that being recurring, which is a very positive outcome, especially during the pandemic. On the bottom line, our EPS and free cash flow surpassed our guidance. Kristian will provide further details later, but I can share that our fiscal 2021 free cash flow guidance indicates a new high for PTC, driven by strong ARR growth and the resolution of multiple short-term cash flow obstacles that hindered us in fiscal 2020. We're heading into fiscal 2021 with greater earnings potential. Overall, PTC is fortunate to possess industry-leading technology aligned with growth trends, improved digital marketing capabilities, and a sustainable recurring software business model. Now, let's review some key financial highlights. ARR is $1.27 billion, up 14% or 11% at constant currency, aligning with the midpoint of our guidance. The impact of COVID-19 has been evident, with ARR growth for fiscal 2020 landing about 500 basis points below our pre-COVID internal targets due to booking pressures and slightly increased churn driven by the pandemic. Currently, we anticipate a smaller 200 basis point headwind for fiscal 2021 ARR growth, with no obstacles projected for fiscal 2022 and beyond. Overall, we are pleased with our fiscal 2020 results and optimistic about our fiscal 2021 guidance, believing that PTC is set for even greater achievements in the coming years, leading to significant shareholder value creation. Shifting to slide eight, you'll see that ARR growth slightly declined in our FSG business but remained strong in our larger Core business and accelerated in our fast-growing Growth business. Our Focused Solutions Group, which we view as a lower growth cash cow, is exposed to industries significantly affected by COVID-19, especially retail and airlines. Our FSG products are highly competitive, and we expect it to recover to low single-digit growth in fiscal 2021 as economic conditions improve in those sectors. Meanwhile, we are pleased with the 11% growth in our Core business, which continues to significantly outpace market growth. Q4 marked the twelfth consecutive quarter of double-digit ARR growth for our Core segment. Additionally, our Growth business had a robust quarter and a strong year, with growth approaching desired levels. ThingWorx, Vuforia, and Onshape all showed impressive results in Q4, particularly Vuforia and Onshape, which have excelled throughout the year. Notably, the ARR for our Growth business has now surpassed that of FSG, providing a growth boost for the entire portfolio. Delving deeper into our core and growth segments, on slide nine, our CAD team delivered a solid quarter with ARR growth in the high single digits. Performance varied across regions; APAC showed strong results, while demand improved sequentially in the Americas and stabilized in Europe. Overall, CAD renewals were healthy, with improved churn quarter-over-quarter. We are excited about the upcoming launch of Creo 7.0, which will feature our first Atlas-based offering, the Creo generative design extension or GDX. This new offering will leverage our Frustum generative design technology and utilize the cloud via the Atlas environment, serving both Creo and Onshape. We will also introduce advanced simulation capabilities from ANSYS fully integrated with Creo, enhancing our CAD business's growth prospects. Speaking of ANSYS, we’ve seen positive results from Creo Simulation Live, which utilizes real-time simulation technology from ANSYS to improve user outcomes across various verticals such as automotive, medical devices, industrials, and high-tech. On slide 10, we highlight a notable win with NVIDIA, demonstrating how advanced design and simulation processes can impact time to market. Creo Simulation Live allows NVIDIA's engineers real-time control over design decisions, reducing rework and expediting product launches. We are pleased with CSL’s market traction and are eager to initiate new marketing strategies in the coming quarters. On slide 11, our PLM business continued to perform strongly, recording mid-teens ARR growth for both Q4 and the full year. The PLM team exceeded their pre-COVID sales targets. Regionally, Q4 performance was robust, with double-digit growth across major geographic areas, led by APAC. In the verticals, our PLM team has excelled in the medical device sector and aerospace and defense. Slide 12 illustrates a noteworthy achievement in life sciences with Baxter International, where what started as a point solution opportunity for product requirements management grew into a comprehensive digital thread engagement. Baxter is transitioning from several disparate systems to a unified Windchill PLM solution, resulting in significant competitive advantages. Slide 13 highlights another significant win at TE Connectivity. They had been using a customized incumbent system for technical document distribution. By utilizing ThingWorx Navigate and integrating it with Windchill PLM and other enterprise systems, TE will be able to provide content to 20,000 users across various functions. Moving to slide 14 in our Growth business, while IoT ARR faced some challenges in fiscal 2020 due to the new logo headwinds we mentioned earlier, we were pleased to see IoT bookings double sequentially in Q4, benefiting from pent-up demand following mid-year slowdowns and several significant wins. The medical device industry remained the standout vertical, experiencing minimal disruption during the crisis, and our performance in the Americas saw bookings more than double sequentially. Furthermore, PTC was recognized as a leader in the 2020 Gartner Magic Quadrant for Industrial IoT Platforms, an important validation given Gartner's strict evaluation criteria. On slide 15, we provide an example of ThingWorx's application at Stanley Black & Decker, one of the leading brands in industrial tools and hardware. Stanley has been on a years-long digital transformation journey with PTC, and we're happy to expand this relationship in Q4. They are utilizing ThingWorx applications to connect previously siloed data, significantly improving overall equipment effectiveness across their global operations. Slide 16 features Bridgestone, another SCO customer, successfully using ThingWorx Analytics to gain real-time insights into production, driving operational efficiencies and improving quality at scale. Let’s shift to our AR business on slide 17, where the Vuforia team reported strong Q4 results, with bookings up 50% year-over-year. We secured a significant seven-figure deal in Europe, our largest to date, and witnessed a considerable increase in six-figure deals, doubling previous records. This acceleration signifies the success of our upsell strategy, as clients begin with entry-level solutions like Vuforia Chalk before identifying advanced use cases for Vuforia Studio and Vuforia Expert Capture, which are particularly relevant amid the current remote work challenges. Slide 18 showcases a win at Jabil, a global contract manufacturing company. Jabil operates in a highly competitive market, where improving onboarding and training processes can yield tremendous returns. Leveraging existing CAD and PLM ties, PTC introduced the Vuforia suite to Jabil, resulting in a seven-figure starter deal. On slide 19, we highlight a success story with Nordex, a leading wind turbine manufacturer. With travel restrictions preventing their technical experts from commissioning new facilities in India due to COVID-19, they utilized Vuforia Expert Capture to create training content that local technicians could access on-site, thereby ensuring production capacity was met. On slide 20, I’ll conclude my comments on our Growth business by discussing Onshape, which had an outstanding quarter as it concluded its first year with PTC. Onshape achieved a record quarter with bookings up over 80% year-over-year and 70% growth in acquiring new logos. Over fiscal 2020, Onshape secured over 700 competitive displacements, primarily from SolidWorks. This clearly demonstrates Onshape's potential to disrupt a mature market filled with established players. Our investments in its global market expansion are starting to yield positive results, especially in Europe, an essential design software market. We are progressively gaining traction with our reseller channel for Onshape, which presents additional growth opportunities. Finally, regarding education on slide 21, we have seen a remarkable increase in sign-ups during the back-to-school season. This year, sign-ups have surged due to COVID-19. Traditional CAD systems designed for Windows do not cater to the devices students typically use, such as Macbooks and Chromebooks. Now, schools are increasingly adopting Onshape for its flexibility and compatibility with students' devices, realizing they no longer need costly PC labs on campus. Winning in education is crucial because these students represent the future workforce. Captivating them early sets a new standard that creates long-term sales and marketing advantages in the CAD sector. We believe that the swift adoption of Onshape in education sets a precedent for SaaS growth in the commercial sector. Our manufacturing clients share similar requirements for real-time collaboration and data access from any location and device. The COVID crisis is propelling the SaaS adoption tipping point in engineering software ahead by several years. Looking back a year, Onshape appears to be an excellent acquisition. To summarize our Growth business, it’s evident that the COVID crisis has intensified long-term growth prospects for PTC. Now, I will touch on geographic performance. On slide 22, APAC delivered strong results, with ARR growth of 14%, benefiting from the quicker reopening of these economies and improved churn rates on subscription licenses, especially in China. America's ARR growth of 11% was supported by mid-teens growth in PLM and robust performance in our AR suite, but this was partly offset by challenges in FSG. Europe saw 8% ARR growth, bolstered by solid PLM performance but lagged behind other regions due to a higher proportion of CAD sales and pressures on new logo acquisitions in IoT. Before concluding, let’s turn to slide 23 to discuss our other key alliance partner. As previously mentioned, our cooperation with Rockwell and ANSYS remains strong. Our partnership with Microsoft also had a productive quarter, with bookings rising about 20% since Q3, and we saw increasing momentum in Europe, which accounted for 30% of Q4 bookings. With a solid pipeline as we enter FY 2021 and enhanced global engagement, we are confident in the potential of the Microsoft alliance. In summary, as we look to slide 24, we’re witnessing strong demand driven by digital transformation, work-from-home arrangements, the need for remote asset management solutions, and growing interest in SaaS. We are in an advantageous position. Despite the challenging environment, we have executed effectively, achieving solid ARR growth and record bookings to end the year. Our subscription transition is now complete, leading to a rebound in recording ARR and revenue in FY '20. We anticipate a shift in free cash flow for fiscal 2021, with continued growth expected thereafter. Our approach of aligning with market demands, enhancing execution to convert our strong pipeline into robust ARR growth, and leveraging efficiencies to increase free cash flow growth lays the foundation for ongoing shareholder value creation in the years ahead. I will now turn the call over to Kristian for more detailed financial results and guidance.

Thanks, Jim and good afternoon everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance and all growth rate references will be in constant currency. Let me start off with a brief review of our fourth quarter and full year results and then spend the balance of the call on our outlook for fiscal 2021. Turning to Slide 26. Fiscal '20 ARR of $1.27 billion increased 14% year-over-year or 11% on a constant currency basis, which was at the midpoint of guidance. As Jim noted earlier, we had very strong bookings performance in Q4. And consistent with recent trends we did see an uptick in ramp deals which we believe reflects a level of customer conservatism on the pace of their software deployment plans, given the current environment. The takeaway here is that even though our strong bookings outperformance didn't represent a meaningful change to fiscal 2020 ARR, it contributed to backlog in future periods, primarily fiscal 2022 and beyond. Fiscal 2020 new ACV grew 10% despite a year-over-year bookings decline in the high single digits due to the backlog we had entering the year. Churn of 8.6% was slightly higher than expected. Fiscal 2020 free cash flow of $214 million was slightly ahead of guidance. Note that free cash flow for the year includes approximately $52 million of restructuring and acquisition-related payments, as well as approximately $8 million of incremental interest paid before we retire the $500 million of 6% notes back in May. It's also worth pointing out that interest payments on our bonds are now in our second and fourth quarters, while previously they were in our first and third quarters. Fiscal 2020 revenue of $1.46 billion increased 17% year-over-year and was above guidance, driven by 27% recurring revenue growth. As we've discussed previously, revenue is impacted by ASC 606 and related business policy changes. For example, in Q4 contract durations were slightly longer than forecasted. And we had stronger-than-expected conversions, both of which positively impacted the amount of upfront subscription revenue recognized in the quarter. FX was also a modest revenue tailwind. Fiscal 2020 operating margin of 29% increased approximately 870 basis points over fiscal 2019. And lastly, EPS of $2.57 increased almost 60% year-on-year. Turning to page 27. I'll begin with our balance sheet. We ended fiscal 2020 with cash and marketable securities of $335 million and $1.02 billion of gross debt, including $1 billion of senior notes and $18 million outstanding on our revolving credit facility. Note that that outstanding balance of $18 million was paid down on October 27. We believe that this is an attractive and stable capital structure, especially in light of the current economic backdrop. Also please note that for your financial modeling, at the beginning in fiscal 2021 we have adopted a calendar quarter end financial reporting. Now turning to guidance. On slide 28, we highlight a few of our key guidance assumptions. In essence, based on Q4 performance and current outlook for 2021, we're expecting the macro environment to remain stable in the near term, with conditions improving in the second half of the fiscal year. So with that as context and turning to slide 29, we're expecting fiscal 2021 ARR of $1.39 billion to $1.42 billion. That's a growth rate of 9% to 12% on a constant currency basis. And regarding ARR seasonality, we would expect the growth rates to be fairly consistent each quarter throughout fiscal 2021. Free cash flow is expected to be approximately $340 million for the full year, growth of approximately 60% year-over-year. As we've said previously, fiscal 2021 free cash flow growth benefits from reduced interest, restructuring and acquisition-related payments. And regarding the linearity of free cash flow in fiscal 2021, we expect to generate more than 60% of our annual free cash flow in the first half. As collections are stronger in the first half, it will be offset by expenses increasing as we ramp hiring throughout the year. We expect Q1 free cash flow north of $100 million. With the incremental revolver debt paid off and free cash flow accelerating, we plan to address the stock repurchase program with our Board at our upcoming Board Meeting in November. And as a reminder fiscal 2021 free cash flow includes approximately $15 million of restructuring payments related primarily to the headquarter relocation as well as to the cost actions we took early in fiscal '20. Now turning to P&L guidance. We're expecting fiscal 2021 revenue of $1.55 billion to $1.6 billion. That's a growth rate of 6% to 10%. The decline in the revenue growth rate relative to fiscal '20 is related to the impact of ASC 606 and related business policy changes that benefited revenue growth last fiscal year. It has no impact on ARR or free cash flow as we continue to bill customers annually upfront. On the expense front, we're expecting operating expense growth of approximately 10% in fiscal 2021. We plan to start filling open headcount roles at a more normalized pace after hitting the pause button last year while tightly managing expenses throughout fiscal '20. We also expect other expenses like travel to increase as the global economy reopens. And we also expect some increase in variable compensation expense. Non-GAAP EPS is expected to be $2.65 to $2.85 that's growth of 3% to 11%. So wrapping up, we had solid financial performance in fiscal '20. We delivered our third consecutive year of double-digit ARR growth while maintaining discipline on our expense structure. And we are successfully navigating a very challenging macro environment. We began fiscal 2021 in a strong position to continue driving attractive top line growth and very strong free cash flow growth. With that I'll turn the call over to the operator to begin Q&A.

Our first question comes from Jay Vleeschhouwer with Griffin Securities. Your line is now open.

Yes, thank you. Good evening. Jim, let me start with you and ask about what I think are still the two largest sources of revenue for you, namely your CAD active base and your PLM active base. And this is an industry trend question. Over the last couple of years there's been a very interesting phenomenon with Creo growing as quickly in terms of its active base as your principal peers have been doing after lagging your peers' growth as far as active base is concerned. So you're now with the rest of the group in that respect in the mid-single digits for Creo base growth. And so the question is, how are you thinking about the growth from here in the active base for Creo? And then similar question for the Windchill which has also been growing its base, it seems in about the mid-single digits, would you expect some acceleration in 2021 and beyond in the base? And for Kristian since you referred to hiring, I can't help but ask about that. It's been very clear that your open recs are well up from the trough back in the spring particularly for sales and service and R&D. Maybe walk us through how you're thinking about that reopening of the hiring aperture in terms of functions and geos and what it might mean for OpEx growth?

Sure, I’ll address the first part. Last November during our Investor Day, we presented a model indicating that if our bookings for CAD and PLM remained flat, we could expect our growth rates to decline from low double digits to upper single digits, or even mid-single digits over five years. This is based on the assumption of flat bookings. However, I believe we have opportunities for growth beyond just flat performance. We have competitive products and new offerings to introduce, such as Creo Simulation Live and the entire ANSYS suite. Additionally, we’re incorporating generative design and augmented reality technologies into both Creo and Windchill. While we might see a slight slowdown in the near term, we anticipate that the Atlas project will serve as a significant growth catalyst in the midterm. Therefore, the scenario we presented last fall about slowing to market growth is unlikely, as we expect the SaaS transition of Creo and Windchill to drive growth alongside the Atlas platform shared with Onshape. We’ll provide more details in November. Moreover, when comparing our growth rates to others, one of our European competitors reported results significantly weaker than ours. We have strong products and are positioned in better markets, such as aerospace and defense, as well as medical devices. Our business model is robust and minimizes leaks compared to competitors lacking a recurring revenue model. This combination of advantages has allowed us to grow at rates significantly higher than the broader market for the third consecutive year and is forecasted to continue next year. Would you like to address the headcount question?

Is this part seven of the presentation? Jim Heppelmann: Nine. Kristian Talvitie: Part 9? Hey, you just put out a report was it yesterday or two days ago that laid out all the headcount like I don't even understand what the question is.

Well, no I guess the question is...

Yes. Let me try and articulate it this way. We are continuing to invest in the business. There's a fair amount of call it go to market-related, which includes customer success sales and marketing resources. And additionally, Jim talked a lot about some of the future technology that's being developed. That obviously requires talent as well. So R&D talent is really the – also a large pool of hiring for us for the year. I think at the same time we are cognizant of what's going on in the world around us. And we're – we've got plans to hire throughout the year, but I think we'll maintain flexibility as well depending on how the macro environment continues to evolve and how that impacts us in the short term. But that's generally what we're trying to hire is folks that can build cool products for our customers and folks who can help customers extract value from that.

Yes. I think too let me add. When you look at our OpEx increase in fiscal 2021, it seems higher than you might expect. But frankly a lot of that is just cost that fell out of 2020 because of COVID. We're allowing room for it to come back in. So let me give you an example. We spend $40 million to $50 million a year in travel and that just went to zero. So most of FY 2020 had zero travel. But we're assuming in FY 2021 that, yes, we'd be back calling on customers and stuff like that and that would ramp. So a lot of the cost increase makes more sense, if you take the two years and average them, right? If you take the 2% or 3% OpEx growth in FY 2020 and the 10% in 2021 you add it together you get let's call it 13%. Okay average is 6.5%. Well 6.5% makes sense against the guidance of 9% to 12% ARR growth. That's the way you ought to look at it. It's not so much that we're spending a lot more. But that we're returning some of the spend or actually planning for some of the spend to come back as we go into FY 2021.

Perfect. Thanks very much.

Our next question comes from Saket Kalia with Barclays. Your line is now open.

Okay. Great. Hi, guys. Hey, Kristain. Thanks for taking my question here. I'll just keep it to one. Jim, maybe for you. How did the IoT and AR businesses sort of trend towards the end of Q4? And to the extent you can sort of comment here at the beginning of Q1 I guess exiting last quarter, it sounded like just like everybody else it was kind of difficult to sell into some of your end customers, just because of things like factory closing. So curious how things sort of evolved at the end of Q4, and how they're sort of looking now?

When we began Q4, our initial forecast reflected a cautionary approach due to the ongoing COVID situation, despite some positive signs from the roll-ups in the field. However, the roll-ups actually exceeded our initial expectations. Throughout the quarter, we adjusted our forecast upwards four times internally, indicating a steady build in performance. Although there was a significant influx of business towards the end of the quarter, we had already increased our forecast three times in September alone before the final week. Overall, we experienced a continuous strengthening, driven by both IoT and AR, as well as a particularly strong performance in PLM.

Got it. Makes sense. Thanks guys.

Thanks, Saket.

Thank you. Our next question comes from Jason Celino with KeyBanc Capital Markets. Your line is now open.

Hey, thanks guys for taking the question here.

Hi, Jason.

We discussed the funnel for IoT and AR, which seems to have significantly increased, especially at the start of the pandemic. It appears that in Q4, things are returning to normal. Can you explain how we should view sales cycles now that things are starting to open up? What does the typical sales cycle look like, and will it be any different?

Yes. I think most of our AR sales cycles are less than two quarters. And then most of our IoT sales cycles tend to be more three and four, because it's a kind of bigger more complex enterprise system. It's a system of record, it requires some amount of implementation and weaving into the physical side of the business and so forth. So let me just say though the IoT pipeline is good and the AR pipeline is fantastic. And part of the places that some of those sales and marketing resources are going to is to make sure for example in AR that we can actually keep up in that pipeline, because there's so much interest and our competitive advantage is so strong. I mean, if you go look at the Magic Quadrant-type reports, which we'll show you in December if you haven't seen them recently. I mean, we are miles ahead of everybody in this field of industrial AR, and there's just a huge level of interest. So we just want to make sure we're in place actually to execute on it, because again, that interest won't hang around forever if we don't service it. So that's where some of the investment is going. Thanks.

Thank you. I’ll stick to one.

Thank you. Our next question comes from Adam Borg with Stifel. Your line is now open.

Hey, Adam.

Hey, guys, and thanks for taking the question. Maybe just two quick ones for me. First one Jim, maybe a bigger picture question. So, nice to see the Rockwell partnership being extended another two years. It would be great if you could comment on maybe the one or two focus areas of the partnership for this year and how you're thinking about that playing out. And then maybe just for Kristian churn, obviously, you're talking about 100 basis points of improvement next year off of some worsening trend this year. Maybe talk about what are the low-hanging fruit? And what are the drivers of the trend improvement? Thanks so much.

Yes. On the Rockwell contract just to add a little more color. I mean, we extended that early, because both salespeople and customers want certainty that by the time a campaign completes that the partnership is still in full force, right? I mean, you wouldn't want to start a three-quarter sales cycle in the back half of the year if that contract wasn't extended. So we really did it just to take any fear out and because it's a great partnership and we're both committed to it. There were some other changes we wanted to make, while we had the hood open, for example, throwing some more products in there and so forth. But the real thing was it's a great partnership. Let's not scare anybody by letting it come too close to the sun here where it looks like it might expire. So where are we going to focus? I think it's the same place we've been focusing. Rockwell has some real momentum with our products and they're really selling them into their strong suites. Their food and beverage, their North American automotive, their various different materials and oil and gas probably that's a little more challenged at the moment. But it's really Rockwell taking our technology into their very large customer base and really doing the smart factory kind of thing, where they add software this IoT and AR type of software to all the other products that Rockwell has both software and hardware and really build the whole smart factory strategy. So I think that's where we'll continue to focus. It doesn't represent a change. Adding PLM and Onshape, I think is interesting. I don't think that will become central to the partnership. It really is an IoT and AR partnership. But they see some opportunities around Onshape. We showed some examples of how, you could use Onshape for factory design, during our LiveWorx presentation during my keynote. And then for PLM, they have a PLM capability. Now that's quite impressive in Kalypso. And they see some opportunities they want to be able to go after.

Hey Adam, it's Kristian. Regarding the churn question, I want to start by noting that compared to last year in fiscal 2020, we only experienced about a 100 basis point increase in churn, which reflects the strong retention of the software we offer and the value customers derive from it. A significant portion of this increase came from a few larger customers who were already identified as potential churn risks at the start of this year. So, firstly, we haven't observed any significant changes in churn activity due to the pandemic, at least not yet. Secondly, as I mentioned earlier regarding our hiring plans, we will continue to invest in customer success, which we expect will positively affect our retention over the year. Moreover, late in fiscal 2020, we began offering multiyear renewal terms to customers, a policy change that aligns with ASC 606. We believe this change will also help reduce churn. So when we discuss a 100 basis point improvement in churn, we are really just aiming to return to last year's levels, which we believe is an attainable goal.

Great. Thanks so much.

Thank you.

Thank you. Our next question comes from Matthew Broome with Mizuho. Your line is now open.

Hi. Thanks very much. Hi, Jim, Kristian and Tim and congrats on the results, by the way, so just on the Rockwell partnership, will Rockwell be increasing the number of quota-carrying reps assigned to selling PTC solutions? And then, will there be any changes to PTC's sales organization now that it sounds like you'll be selling more of Rockwell software?

Rockwell's earnings call is scheduled for next week or possibly the week after, and I would prefer to leave that question for them. It's clear that the partnership is expected to drive significant growth, which typically leads to increased investments in go-to-market strategies. However, I'll let them address that to avoid taking focus away from their announcement. Regarding PTC, we have accessed Emulate3D, which isn't central to our objectives. Nonetheless, we aim to find ways to better integrate it with Onshape and view it as an additional resource. That said, we have plenty of opportunities to pursue in CAD, PLM, IoT, AR, and Onshape, so we’ll consider using Emulate3D when the right chance arises. Interestingly, Emulate3D was also on our acquisition radar, so while we are interested in its technology, we have many other priorities to manage as well.

Thank you.

Thank you. Our next question comes from Joe Vruwink with Baird. Your line is now open.

Great. Hi everyone. I just wanted to maybe talk about the recent bookings environment. And if we have maybe gotten the forecast for fiscal 2021, I don't know a month or two ago. What would have been different about it? So in other words, it sounds like, your internal plans have moved up as the quarter went on. You're getting some recovery in pieces of the business that were negatively impacted in FY 2020. That all seems to be good. At the same time we might be about to revisit an environment with certain economies closing that could have an impact on new bookings activity. So I'm just wondering kind of the puts and takes in arriving at ARR growth of 9% to 12%, which is kind of a similar number. Kristian, I think you were even talking about it at the beginning of September. Just a give and take and how you think about FY 2021?

Okay. Joe, let me – this is Jim. Let me take a high level let's call it qualitative pass at this. And Kristian if you want to add any quantitative numbers too you can. In the case of FSG, that's a business where for example one of the big properties is Servigistics. Spare parts management and airlines is the largest industry we sell into or one of the largest. So that's had some pressure as airlines were in deep trouble and whatnot. I think if we see modest low single-digit improvement in ARR for Servigistics or let's say for all of FSG, FSG will still be down versus 2019, right? So we're not really expecting miracles there. We're just saying we see some things happening that will be slightly helpful. Now as you go to the rest of it, the real thing is the pipeline. First of all we've become much better at managing the pipeline. And right now we have a very optimistic looking pipeline and not just for Q1. I mean really for the whole year and really for each of the main segments CAD, PLM IoT and AR and really for each of the main geographies. So we have a lot of pipeline. Now we don't have a crystal ball as to what could happen with COVID. Lockdowns could hurt. Although, honestly, we feel like we're locked down and I think most of our customers feel to me like they're locked down already. I mean their production people are showing up to work in the factories but the people we're selling to really are pretty much working from home. More let's say on the knowledge worker side of the business. So I don't know what lockdowns will mean. I kind of think we're in lockdown mode. Yes restaurants are open but that's fine. We're not selling to restaurants. We're selling to manufacturing companies. So I don't know what that will mean. I think Kristian was clear though that our assumption is that life will be kind of like it is now in the near-term and improving somewhat in the back half of our year. If COVID does something radical and it's radically different than that yes, okay, we're going to have to have a different set of assumptions. But we're only working with kind of what we have.

Yes. I don't – I mean, I don't have anything to add to that Jim. Okay. Unless there's a specific question Joe you're trying to get at.

No. No I'm just looking for more color. If I can squeeze one more in and it goes back Jim to a comment you made at the very beginning. We don't see your backlog but it sounds like there's actually a pretty high amount of visibility in the backlog just given some of the ramp deal structures that give you confidence. And the question you talked about this year being a 500 basis point departure from plan, next year a 200 basis point departure and then FY 2022 having no departure. So is that...

Let me link those comments to backlog. I was really talking about backlog as I look forward to 2021 and beyond. When I said is there's a 200 basis points or two percentage points headwind to our growth in FY 2021, which is contemplated in our guidance by the way, really because the backlog is down, entering the year. But if you look at the backlog for the year after that, it's right where it should be, in part because of the booking strength we saw, particularly in the fourth quarter. So right now, we don't have a FY 2022 deficit in our backlog chart. But we do have one that will cost us about two points in FY 2021. Two points of growth, you can run the math, that's what the backlog differential is.

Okay. Thank you.

Thank you.

Thank you. Our next question from Andrew Obin with Bank of America. Your line is now open.

Hi, guys. Good afternoon.

Hey, Andrew.

Just a bigger picture question. I guess, you started to talk about adding sort of Atlas functionality to Creo and Windchill. So as you, sort of, think over the next couple of years what is the investment cycle? What does the rollout look like? When should it peak? When should it start moving the needle in terms of the numbers? Because we've been getting a lot of questions on that particular area actually.

Yes, we will provide more details in December, but to give you an overview, we believe the industry is transitioning to SaaS, and with Onshape, we are at the forefront of this shift. Our goal is to bring our existing customers on Creo and Windchill with us. We are considering developing versions of Creo and Windchill using the architecture of Onshape that would operate similarly as true multi-tenant, multi-user SaaS applications, while ensuring compatibility for migrating on-premise deployments to the cloud. Frankly, this will take us a couple of years because achieving compatibility requires matching feature capabilities exactly. Our focus is on creating full versions of Creo and Windchill that allow for a seamless transition to SaaS, ensuring no disruption in production deployments. This migration typically doubles the annual recurring revenue since on-premise subscriptions greatly increase in value once converted into SaaS subscriptions, avoiding costs associated with servers, administration, and upgrades. I suggest modeling this in the latter part of a five-year timeframe, and it could continue well beyond that, potentially lasting a decade. However, we expect the initial development to take some time, so we are not anticipating any immediate results in 2021 or likely in 2022. We will keep you informed as we progress, as there is a lot of work ahead.

Got you. And just a follow-up question on site access. So you did highlight that you started seeing better results in industrial IoT in September. How related was it to actually being able to gain site access to your customers? And are you seeing any impact particularly in Europe from sort of the announcements of lockdowns in Europe in terms of actual site access?

Well the lockdowns in Europe of course happened just lately. So I wouldn't have seen that in Q4 in any case. But I think it was helpful. Now we did have a pickup in Europe, but the real pickup was in the U.S. And we were able to reengage customers and customers send people back into their plants to get these projects going and so forth. And it was based a lot on expansions, but also we called out some real interesting new wins competitive wins where companies said, okay, let's get this initiative going and make a selection and get back to work. So we did see some of that in Q4. Again the interest level in our IoT software remains very high. And what happened in the fourth quarter is the close rate went up to a more kind of normalized close rate than we were seeing, let's say, in Q2 and Q3.

Great, answer. Thanks for answering my question. Thanks a lot.

Thank you.

Thank you. Our next question comes from Sterling Auty with JPMorgan. Your line is now open.

Yes. Thanks. Hi, guys. You mentioned improvement in pipeline management. I'm curious what were the changes that you made that drove the improvement? And now that you're in the new fiscal year what are the biggest changes that you've made to the sales and go-to-market mode for this fiscal year?

About a year ago, we appointed a Chief Pipeline Officer whose primary responsibility is to oversee the pipeline and ensure we are making the right decisions to develop it. This officer reviews a rolling six-quarter forecast of the pipeline segmented by region, sales channel, and more. This means I can see forecasts for specific areas, such as how CAD in Europe is expected to perform in three quarters. We have established clear targets for this metric compared to our forecasts. This level of data is unprecedented at PTC, allowing us to be proactive; for instance, if we notice PLM in Japan is underperforming four quarters out, we can take immediate action like running marketing promotions. We also use this insight to allocate resources effectively, like hiring for AR due to a substantial pipeline that we need to manage. As we enter the new year, there are no significant changes in our go-to-market strategy or major personnel shifts. We're continuing with our current approach, which has shown great success, following our best sales quarter to date. We've effectively linked sales and marketing within a digital go-to-market strategy, learning valuable lessons over the past year.

Yes. Just adding on that, I mean I think the go-to-market teams have done a remarkable job of figuring out how to leverage virtual selling environment, right and actually adapt and thrive in it. So, I think that will be a complementary model going forward.

Yes, it's much more efficient. As you might know, if you travel for sales calls, it makes it challenging to make many calls. Video calls significantly enhance productivity. We've also transformed our customer experience center into something resembling a broadcast studio, allowing us to host high-quality online events. It feels almost like watching the news on TV, and although it may seem strange in person because it is a studio, it's a very impressive setup. These changes have created a more powerful, scalable, and efficient go-to-market model. For many years, both Kristian and I have advocated for a more digital approach to sales, and while it was difficult at first, it has become quite easy and widely accepted as traditional options have diminished.

Yes, exactly. Thank you, guys. Appreciate it.

Yes.

Thank you.

Thank you. Our next question comes from Rich Valera with Needham & Company. Your line is open.

Thank you. Hi, hi, guys. So Jim, when we were talking back in the, I guess, sort of mid-fourth quarter, when you talked about the pipeline for your AR products being multiples of historical levels. I think at that point maybe it wasn't clear what your close rates were going to be on this very strong pipeline. And based on how the quarter turned out, it sounds like maybe they started to accelerate or were pretty good. So, just wondering if you can provide any color on sort of the AR pipeline buildup, where it stands versus historical, and then maybe what you've learned and how you've started to close on that pipeline.

Yes, Rich, if you have experience in enterprise software, you know the general guideline is that for every dollar in forecast, there should be around three dollars in the pipeline. Sometimes it's two, sometimes it's four. If your numbers approach ten, that indicates issues such as insufficient capacity, lack of qualification, or product problems. It also suggests low close rates because if your forecast remains unchanged while facing ample coverage, it mathematically points to inefficiencies in closing that pipeline. We have very high levels of coverage in AR, and also in Onshape. We're working to understand how to boost the close rate and have made some progress, though it's not at the ideal three-to-one ratio. We're also adding more resources, which is yielding good results, particularly in the last quarter of last year. We have a solid plan for AR this year, as it is a hyper-growth business with significant potential, and we are eager to ensure we capitalize on every opportunity.

Great. And just for clarification, the reason you're able to close that 200 basis point growth headwind in fiscal 2022 is because of the ramp deal, correct? I wanted to understand why there was a 200 basis point headwind in fiscal 2021 but not in fiscal 2022.

Yes. I think we communicated that. A lot of the overperformance we observed, even in the fourth quarter compared to our initial forecast, actually generated backlog, primarily for fiscal 2022 and beyond. So, yes, it involves ramped deals extending that far as customers...

Yes. Let me explain. If a sales representative closed a deal late in Q4, there is a ramp effect. Initially, it adds a little in the first year, more in the second year, and even more in the third year. If the deal closed in Q4, the start date is usually in Q1, and the ramps generally start on the anniversary of that start date. Therefore, a deal closed in Q4 of 2020 contributed nothing in 2020, a little in 2021, significantly in 2022, and possibly even more in 2023. That’s how these ramps operate. What we're indicating is that we have a two percentage point impact against approximately $1.2 billion to $1.25 billion of ARR, which equates to a $25 million gap in pipeline heading into fiscal 2021. However, if you consider how the pipeline appears for fiscal 2022 compared to what it should look like now, it appears to be in good shape.

Hey, thanks. Thanks gentlemen.

Yes.

Thank you.

Thank you. This concludes the question-and-answer session. I would now like to turn the call back over to Tim Fox for closing remarks.

Thanks, Joelle. And everybody thanks for joining us today on the call. PTC will be participating in a number of virtual events this quarter. We'll be posting those details on our investor website. And we hopefully look forward to seeing you on the conference circuit or at our Investor Day on December 15. And once again thanks for your interest in PTC and have a great evening.

Thank you everybody. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.