Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2024 First 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 Matt Shimeo, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, Jessica, and welcome to PTC's 2024 First Quarter Conference Call. On the call today are Jim Heffelman, Chief Executive Officer, Christian Talbotia, Chief Financial Officer, and Neil Barura, CEO-elect. Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com. 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 actual results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q, and other filings with the U.S. Securities and Exchange Commission, as well as in today's press release. The forward-looking statements, including guidance provided during this call, are valid only as of today's date, January 31, 2024, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. of 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 Heppelman.

Thank you, Matt. Good afternoon, everyone, and thank you for joining us. There may be an issue displaying the presentation materials, so if you don't see them, I invite you to go to investor.ptc.com. You'll find the same presentation materials there, and you can follow along. We are right now on slide three. I'm pleased to report that PPC's Q1 results provided a good start to our fiscal 24. We delivered solid financial results while in parallel making great progress on CEO succession. Over the past six months, Neil and I have run a textbook transition process, and we're nearing the culmination. We spent a lot of time together and traveled the world extensively to accomplish the goal we articulated of a seamless transition that ensures continuity in PTC strategy and momentum. Neil is ready to be CEO. He understands our business well, he's fully committed to our strategy, and he has the full support of an outstanding executive team. I'm confident that PTC will continue to drive growth and profitability well into the future under Neil's leadership. With that, I'd like to turn it over to Neil to discuss the Q1 results. Thank you, Jim.

We're on slide five. Today, I'll focus my comments on three topics. First, what I've learned about PPC over the past several months. Second, the drivers of PPC's durable and consistent growth. And third, driving further value creation with discipline and consistent execution. After my remarks, I'll hand over the call to Christian to take you through our Q1 results and our guidance. Then we will have a Q&A session. Up front, I'd like to say a big thank you to Jim for sharing his industry insight and wealth of knowledge over the past year. The transition has gone very well and has been helpful to have Jim participate as I've engaged with customers, employees, and investors. I'm honored to be taken over the CEO role on February 14th, with PTC on a solid trajectory. Credit to Jim and the team. We have a great strategy based on a differentiated portfolio of assets and led by a strong team. As I said, my initial focus is on ensuring that we keep building on our momentum with discipline and consistent execution. Turning to slide six, our customers design, manufacture, and service products. Most of our large customers produce and service the world's most critical assets. For example, wind turbines, tractors, automobiles, and MRI machines. The biggest learning I've had relates to what I am seeing in our customer base and how much we could do for them. Digital transformation has clearly taken hold with our customers around the world and finally is here to stay. Industrial companies can't have manual, antiquated, or disconnected workflows if they want to be competitive in today's complex world. Our customers need to modernize the portion of their operations that spans from design to manufacturing to service. Importantly, our core products are the essential foundation for that. Turning to slide seven, industrial companies are still at early stages of leveraging product data effectively across their organizations, but they have started to move on it in a meaningful way. We see the opportunity the same way our customers do. Digital transformation is a journey. Our broad portfolio provides a lot of opportunity to help our customers be competitive, irrespective of soft PMIs and economic cycles. Next, on slide eight, my second major learning is that the overall PTC team is strong and capable. As I visited our offices around the world, I spent a lot of time doing skip-level, one-on-one meetings, and town halls. I was inspired by the caliber and spirit of our people. I was impressed by their extensive product understanding and deep customer relationships. Their enthusiasm is palpable. They realize the opportunity ahead of us and that we have a portfolio of capabilities to win big. Turning to slide nine. I also feel very good about the strength of my highly experienced leadership team and how we will operate going forward. My style is to bring what I am hearing from customers into the conversation and capture the energy and ideas from each team member. This collaborative framework is already working well, and as a team, we are making progress and aligning on PTC's value creation opportunities going forward and our focus energies towards them. Let's turn to slide 10. On our past couple of earnings calls, we have been sharing this framework, which shows the cumulative drivers that support our top-line growth. Fiscal 24 is expected from your eighth consecutive year of double-digit organic constant currency AR growth. A key point to understand is that our top-line growth is sustainable, supported by the many layers of cumulative drivers that we have built over time. Each layer contributes to our ability and drive value for customers, and as our customers continue to invest in digital transformation, our comprehensive product portfolio differentiates PTC. This is because PTC is the only company that can help industrial manufacturers drive closed-loop product lifecycle management across engineering, manufacturing, quality, and service. Moving to slide 11. We've also been sharing this framework on recent earnings calls, which shows the cumulative drivers that support our bottom line growth. As with the previous slide, every layer in this framework is important. The key point on this slide is that our strong free cash flow growth in recent years is attributed not only to our solid top line growth, but also to our subscription license business model and strong operational discipline. I am fully aligned with Christian on the paramount importance of our free cash flow guidance, and we have a high level of confidence in the targets we've provided. Turning to slide 12, my philosophy on resource allocation is that focus and discipline are important. To that end, it is our view that we have a compelling portfolio in place. The key things to get right are to focus on evolving customer needs and to drive strong and consistent execution towards that. To ensure this consistency, we will put a clear focus on our highest ROI. We will be disciplined and unemotional when it comes to prioritizing our time and resources on the products and product integrations that will create the most value for our customers. To use an analogy, we plan to put more wood beyond the most important arrows to ensure we drive the best outcomes for our customers and PTC. see. Let's now turn our attention to these priorities. Expanding our PLM or product lifecycle management footprint at customers, both within engineering departments and enterprise-wide. There are two main reasons for this secular trend. PLM systems have evolved to meet the complexities faced today by industrial manufacturing companies. As just one example, the Volvo Group, whose chief digital officer and chief technology officer I was speaking to yesterday, uses Windchill to manage their platform product strategy, which leverages modular components. The sophisticated configuration management capabilities of Windchill have enabled the Volvo Group to produce more product variants while at the same time lowering their unique part count, which is good for the Volvo Group's top line as well as their bottom line. Industrial companies have come to understand that their ERP systems are inadequate to handle these types of complexities. They now view their PLM systems as strategic and spending on PLM is in focus. Secondly, industrial companies are facing competitive pressures and are looking for new ways to drive productivity and efficiency. As they digitally transform, they also re-architect their workflows to streamline inefficiencies and drive collaboration with their manufacturing, quality, and service operations. Again, it is the PLM system that takes center stage as this happens because the PLM system is becoming the system of record for product data. And that makes the PLM system the epicenter for digital transformation of product companies. Increasingly, PLM systems are being leveraged as the backbone for sharing product data across departments, as well as with design and supply chain partners. This is good news for PTC. The market is coming to us, where we are strong. Another large value creation opportunity is cross-selling. PTC has done this successfully over the years, and we have additions to the portfolio that are meeting evolving customer needs and therefore present significant opportunities for PTC. One is ALM, or Application Lifecycle Management, which is led by CodeBeamer and is now augmented by our acquisition of pure variants. Here, we have the most modern and capable ALM solution in the market. Products now contain more embedded software than ever, And for many products, there's been an explosion in the number of unique software configurations that need to be developed and updated over time. CodeBeamer is a next-gen software development platform that enables industrial companies to manage this increasing level of complexity. Pure Variance augments CodeBeamer with industry-leading software variant management capabilities, which is a key differentiator. While demand from the auto industry and its suppliers are a strong driver of ALM growth, demand for ALM tools is expanding in other verticals as well. Due to the trend towards software-driven products of all, this is an interesting growth opportunity, and we have been increasing our investments and focus in this area. Our second cross-sell opportunity is ServiceMax. We acquired ServiceMax in January 2023. and a strategic fit with PTC is solid. For many of our customers, growing the services business is their top priority. As a system of record for high-value, long-life cycle assets in the field, ServiceMax significantly enhances our SLM, or Service Lifecycle Management Portfolio, enabling PTC to now offer the industry's first truly comprehensive solution for service process. The opportunity set here is large. And this segment is underpenetrated today, with most of our wins replacing homegrown or spreadsheet-based systems. ServiceMax has approximately 300 customers, and PTC has approximately 3,000 with the exact same profiles. Industrial companies that produce complex, high-value assets. This provides us with clear cross-sell opportunities, and we have now aligned the PTC sales teams with the ServiceMax sales specialists to go to market together. We are building momentum, but keep in mind that this will take some time to develop because sales cycles for this type of product are long given their new implementations for them. We need to grow CAD and converting our install base over to SaaS across all products are two additional opportunities, which overlap to some extent because we will see conversion of Creo customers to our Creo Plus SaaS offering over time, much like Windchill Plus. For customers, moving to SaaS enables a different collaboration paradigm that brings significant productivity benefits, making real-time multi-user collaboration possible. Beyond the productivity benefits, customers also want the lower total cost of ownership and improved that SaaS offers. As we have stated previously, we see this as another 10-plus-year journey for our customers. We have visibility to solid growth in our core on-premise business and, therefore, don't need to rush things and force customers to move before they are ready. The opportunity will be with us for a long time. Therefore, our focus is making sure our SaaS transition is done with an optimized customer experience. It is a tight community, so credibility and references are important. Wrapping up on slide 13, I'm honored to be stepping in at such an exciting time. There are so many good things happening at PTC and so many opportunities to drive further value, in part because of the portfolio of products that Jim and the team built over the years and the distinct needs of the market. PTC is well-positioned to deliver sustainable ARR and free cash flow growth based on layers of cumulative growth and profit. We're putting, as I said, more wood behind the most important arrows to drive the best outcomes for our customers, and I'm focused on working with the team to enhance PTC's execution on the opportunities that drive the most customer and shareholder value. We plan to host an investor day this year and share more about our key medium to long-term opportunities. We are working towards becoming more consistent with our messaging and more focused in how we prioritize our time and resources. It is a great time to be at PTC because we have a clear path to unlocking a lot of value. With that, I'll hand the call over to Christian to take you

through our Q1 financial results. Thanks, Neil, and hello, everyone. Starting off with slide 15, PTC again delivered solid financial results in terms of both ARR and free cash flow, which we believe are the most important metrics to assess the performance of our business. Our constant currency ARR growth was 23% in Q1, and on an organic basis, excluding ServiceMax, our growth was 13%. Note that we acquired ServiceMax in Q2 of fiscal 23. So starting next quarter, Q2 of fiscal 24, we will no longer exclude ServiceMax from our organic results. To help investors understand our business performance, excluding the impact of FX volatility, we've been providing ARR guidance and disclosing our ARR results on a constant currency basis. At the end of Q1, our constant currency ARR was $2.016 billion, slightly above the guidance range we provided for the quarter. In Q1, our cash flow results also came in slightly ahead of our guidance, with operating cash flow of $187 million and free cash flow of $183 million. As a reminder, our Q1 cash flows included $30 million of imputed interest related to the deferred payment for ServiceMax. Our cash flow performance is driven by our ARR and operating efficiency, and in Q1, we extended our track record of disciplined operational management while continuing to invest in key priorities like ALM and SAS. Turning to slide 16, let's look at our ARR growth by geographic region. Although FX continues to be volatile and the selling environment remained challenging in Q1, our constant currency organic ARR growth was solid across the Americas, Europe, and APAC, with growth in the low to mid double digits. In APAC, our year-over-year organic constant currency growth increased to 14% in Q1 compared to 12% in Q4. And in the Americas and Europe, our organic year-over-year constant currency growth in Q1 was comparable to what we saw in Q4. Turning to slide 17, let's look at our ARR growth by product group. In CAD, we delivered 10% constant currency ARR growth in Q1, with the growth primarily driven by CREO. In PLM, our constant currency ARR growth was 33%. 19 points of this growth was attributable to ServiceMax, and therefore our organic constant currency growth in Q1 was 14%. In PLM, our organic growth was primarily driven by windchill and also supported by strong percentage growth in ALM thanks to Codebeamer. Although the manufacturing PMIs have indicated a sluggish overall demand environment for many quarters now, our top line has shown good resilience. Part of this is because of our subscription license model, our low churn rates, and the propensity for our customer base to prioritize R&D investments through challenging times. In addition, as Neil explained earlier, our solid ARR growth is being supported by the digital transformation journeys of our customers, which we believe is a secular trend. Moving to slide 18, we ended the first quarter with cash and cash equivalents of $265 million. Given the consistency and predictability of our free cash flow, we aim to maintain a low cash balance and prefer to maximize debt reduction. Our gross debt was $2.267 billion with an aggregate interest rate of 5.7%. during Q1, our gross debt decreased by $55 million. We used $181 million of cash to pay down debt, which was partially offset by $96 million, primarily related to pure systems and the $30 million imputed interest payment related to the final payment for the service max transaction, which we discussed previously. We were 2.8 times levered at the end of Q1-24 and expect that to trend down throughout the remainder of the year as we're prioritizing paying down our debt this fiscal year. We intend to use substantially all of our free cash flow to pay down our debt this year and expect to end the year with gross debt of approximately $1.7 billion. In connection with this, we've temporarily paused our share repurchase program and expect our diluted share count to increase by approximately 1 million shares in fiscal 24. Heading into fiscal 25, we'll revisit the prioritization of debt paydown and share repurchases, our long-term goal, assuming our debt-to-event-dollar ratio is below three times, remains to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic opportunities. I'll take you through our guidance on slide 19. We're maintaining our fiscal 24 guidance, and following our solid Q1 results, we believe we're well positioned to deliver on our guidance for the full year. For Q2, our constant currency ARR guidance range of $2.05 to $2.065 billion corresponds to year-over-year growth of 11% to 12%. I'll get into more details on the next slide. On cash flows, we're guiding the free cash flow of approximately $240 million in the second quarter. To help you with your models, we're continuing to provide revenue and EPS guidance, but as a reminder, ASC 606 makes revenue and EPS difficult to predict for PTC since we sell primarily on-premises subscription licenses, licenses, and the way revenue is recognized from these contracts can vary significantly based on variables that we don't believe are necessarily relevant to the performance of the business. I actually did a teach-in on this subject on our Q422 call that you may want to refer to if you're new to PTC. The summary is, we believe ARR and free cash flow, rather than revenue and operating income, are the best metrics to assess the performance of our business. Importantly, we've maintained consistent billing practices over time, and we primarily bill our customers annually, up front, one year at a time, regardless of contract term lengths. So our free cash flow results over time are. Moving on to slide 20, here's an illustrative constant currency ARR model for Q2-24. You can see our results over the past nine quarters, and the column on the far right illustrates what is needed to get to the midpoint of our constant currency ARR guidance. This illustrative model indicates that to hit the midpoint of our Q2 guidance range, we need 41 million of sequential net ARR growth. Because our ARR tends to see some seasonality, the most relevant comparison is the sequential growth in Q2 of 23 and Q2 of 22. We believe we've set our Q2-24 constant currency guidance range prudently, which reflects an ongoing sluggish selling environment. Putting this into the context of the full year, let's turn to slide 21. Here's a repeat of the slide we showed last quarter, which illustrates what's needed to get to the midpoint of our constant currency ARR guidance for fiscal 24. Looking at the full-year perspective naturally removes a lot of the quarterly volatility related to large transactions and ramp deal and start date dynamics. As you can see on the slide, for illustrative purposes, even if the full year is flattish with the last two years from a net new ARR perspective, given the incremental $20 million of deferred ARR in the back half, which we've talked about before, we would be at 12% growth for the year. We think the full-year guidance range of 11% to 14% balances both risk and opportunity. Finally, on free cash flow, we continue to have a high degree of confidence in our quarterly and full-year guidance because of the predictability of our cash collections and the disciplined budgeting process we have in place. So in conclusion, PTC has a strong portfolio and strategy and a great team of people with deep expertise and strong customer relationships. We're focused on disciplined and consistent execution to ensure we deliver on the value creation opportunities we have ahead of us. With that, I'd like to turn the call over to the operator to begin the Q&A session.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Please limit yourself to one question only. If you have additional questions, please return to the queue. And your first question comes from the line of Joshua Tilson with Wolf Research. Joshua, your line is open.

Hey, guys. Thanks for taking my questions. I'll try and sneak maybe two in here if I can. Just the first one, I thought it was pretty interesting that you mentioned the selling environment kind of still remains challenging and sluggish this quarter. I guess my question is, was it more challenging than you guys were expecting 90 days ago? Is it any better than Q4, and maybe kind of how do you expect that selling environment to be for the rest of the year?

Yeah, thanks for the question. We haven't seen any change. It's been a sluggish sales environment for a number of years now, particularly around the approval cycles of our customers. It's just taking a lot, and it has been for multiple years. Nothing's changed worse or better since, you know, I've been here during the transition time and currently how we're looking at Q2.

And maybe, you know, given that answer and the guidance that's kind of out there, it is implying that a lot of growth, especially in the net new ARRs, to come through in the second half. I guess maybe just remind us, I know you have the deferred ARR balance, but what's kind of giving you guys the confidence in that second half net new ARR growth, especially in the context of the 2Q guys?

Yeah, I'll start, and Christian could add, if I missed anything. First of all, looking at the pipeline opportunities, I feel confident around the number and the size of the deals, the criticality of the customers, the importance of the customers that we're working with hand-in-hand to get to a conclusion to move them down this digital transformation journey. And so when we look at that, that pipeline is interesting to us in a manner that gives us confidence around the guidance that we gave to you. that we are now targeting. And so, you know, that's an element of it. Again, to be clear, this doesn't – anything changes in the selling environment from now to the end of the year. There's just an element of pipeline and a seasonality that we've always had historically been able to close.

Super helpful.

Thank you. Your next question comes from the line of Clark Jeffries with Piper Sandler. Clark, your line is open.

Hello. Thank you for taking the question. Great to see the resiliency of the business. Neil, I was hoping you could expand on your comments around the timeline for the cross-sell for ServiceMax. It seems like you've made some early progress in aligning the go-to-market, but could you help us think through what that success in cross-sell looks like in fiscal 24, what it looks like in fiscal 25, and what's a reasonable timeline to reach its stride in terms of reaching the existing customer base as well?

Yeah, Clark, great question. Thank you for asking that. Look, the first year, since clearly I'm very familiar with ServiceMax, even my background, the first year has been integration work and really getting to know the ways in which the ServiceMax team could interact in a precise way with the PTC team. We did that. We accomplished that. We had early success, which creates a momentum. Secondly, after we saw that, we've implemented a far more constructive and direct selling process by which the ServiceMax sellers are now very much tied into how the PTC sellers are going forward in this fiscal year. And what that's caused is two things. The customer base is now understanding of the PTC broader value proposition of the digital thread and why ServiceMax is so critical to be part of that. Number one, so that's creating a level of interest, engagement, and quite frankly, momentum that we've already been seeing, and two, the sellers now have a familiarity of speaking the language that's necessary for ServiceMax to begin scale. I foresee this year to be a time period, given the sales cycles of ServiceMax, these are all new implementations for the most part, even if they are already existing PTC customers. That takes a bit of time, and I see this year as building that momentum, by which, as we said when we made the ServiceMax acquisition, this is a mid-teens plus grower. And my expectation is this year is the building blocks by which we really define that sustainable mid-teens growth or above with ServiceMax. Perfect. I really appreciate

the color. Look forward to the end of the day. Thank you.

Your next question comes from the line of Yun Kim with Loop Capital. And, Jan, your line is open.

Thank you. Congrats on a valid quarter, Jim, Neil, and Christian. AR Growth Creo has been incredibly resilient for a long time. How do you see that playing out this year? Can it keep growing in the double digit consistently this year? And do you need Creo Plus to kick in to provide that tailwind for it to keep growing in the double digits?

Great question. And one of the great things with the Transistor Gym is I'm far more well-versed in the amazing product that we have in Creo. And like you said, good performance from Creo. We expect that to continue. This is Creo on-premises, Creo throughout the course of this year, given the differentiation, given the strength of that product. And quite frankly, Creo Plus is very limited, if at all, in terms of impacting our Creo results and the strength of it in the near to maybe even the medium term. Like I said, that SaaS journey will be a 10-plus-year journey. We're already seeing the strength of Creo on-prem, feel like that double-digit growth is sustainable. Creo Plus, over time, as the market adopts it, is cherry on the top.

If I could just sneak one in for Christian. Christian, I believe this is a much bigger year for renewals. Do you expect to continue to focus on increasing contract length and remind us where we are in terms of overall contract length, where that has been trending, and any update on the turn rate?

Yeah. Thanks for the question. You know, turn rate continues to be low and steady. So let's just start with that one. And, yes, we will continue to try and move, you know, contracts to longer-term contracts, which we will for PPC. So we'll continue to try and move in that direction. And then lastly, I think your question was around the average contract length, which, as it stands right now, is still a two-year term.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Matt, your line is now open.

And, Jim, congrats on the run as well, and Neil officially taking over on, I think, the 14th, you said. So, great, Ron, Jim, and Neil, looking forward to this next journey here. I guess I had a question, Neil. You know, you mentioned, you know, there's been a lot of focus on Creole Plus and Winter Plus, and you had some comments in your prepared remarks on the SaaS transition. I don't think a lot of people feel like this is really, you know, like what we typically see in a SaaS transition, because I think you're not trying to, like, push customers there, but to move to the SaaS variants. But just maybe how do you kind of philosophically think about that, And are there things perhaps that you can do, you know, to sort of show the functionality, that's where it's going in the plus variance? And, you know, I don't know, maybe there's some pricing or incentives that could drive that behavior. But it feels like it's a creative thing for you and beneficial to the customer as well.

Great question, Matt. Thanks for asking it. It's important to us. Let me just make sure I reiterate this. We have a view, I have a view, that was consistent with Jim's view, that the industry will go to SaaS. That's an inevitability. As I said, we believe it's going to be, in my estimation, a 10-plus-year journey. I could be wrong. It could move faster.

It could take a little bit longer.

But the way in which we're thinking about it here, with already some momentum built, particularly in Windchill Plus, Creo Plus we launched a couple quarters ago, we're building with customers already the resilience, the scalability, the repeatability of a SaaS offering by which when other customers of similar complexity or size or segments are ready to take it on, We have built the strength and the capabilities to do that. And so the way in which we're doing it is we're not taking any foot off the accelerator in terms of our focus, energy, investment into our plus strategy. But we don't want to force customers, different than others out there, but it's very important philosophically, as you asked for us, to have a way in which we work with our customers as they need to migrate for their value prop to move from an on-prem system to a SaaS offering, we will be there hand-in-hand to do that. And our ultimate belief is that in a meaningful way, when the dam breaks, we will not only get the conversion of our existing on-prem customers to the SaaS offering, but have a differentiated offer for those in other competitive environments that might want to move to the best-in-class solution at PPC. Got it.

And your next question comes from the line of Adam Borg with Stipple. And, Adam, your line is now open.

Awesome. Thanks so much for taking the question. Maybe for Neil, you know, it's pretty interesting when you talk in your script about, you know, focusing resources towards the highest priority areas. A lot of focus, obviously, on PLM, the upsell opportunities in CAD. Maybe talk a little bit about IoT and AR and how you're thinking about those opportunities, and then I have a quick follow-up.

Yeah, very important question. And to be clear, I'm going to be very consistent around making sure across the broad portfolio of capabilities we have to make sure with all of you, We focus in not only internally, but as we report our messaging to you around the largest value creation from an aggregate dollar perspective, those priorities, which I named, around PLM, SLM, with ServiceMax, ALM, the CAD piece of it, as well as how we transition our customers as fast. That doesn't mean IoT, AR, Servagistics, ArborText, FlexDLM aren't important. I have, and we have leaders there, capable leaders working through that, many of which are important to our digital thread, many of which of those products are important to industrial manufacturers going through digital transformation. And what I meant by prioritization and focus is as a general way in which the company has done for many years now during the planning process, I'm making sure with the team here that, like I said, we put more wood behind the arrows that create the highest value creation opportunities and make sure those that might not have as strong a outlook or have a different investment profile, We look at that with the time horizon and make the right, concise decision to prioritize where we put the investment dollars and where we may want to deprioritize a few of those based on the outlook of that business. Right now, we have a very broad portfolio. I feel good about it. But we've been doing it consistently over the last few years. It's making sure we're placing the next incremental dollar in the highest value creation opportunities going forward.

Incredibly helpful. I really appreciate that. Maybe just a quick follow-up for Christian, just on the model. I think the guidance implies on OPEX a 200 basis point increase in OPEX spend relative to the guidance we talked about 90 days ago. Maybe talk a little bit more about what are the areas that you're looking to drive increased investment. Thanks so much.

Hey, Adam, it's Christian. No, I mean, I think that our, for the year, is pretty well, remains unchanged from really what we would have said 90 days ago. In terms of, you know, in terms of areas where we're investing incrementally this year, it's what we've, you know, what we've been talking about. provincial plus includes CREO plus, you know, those are areas here. But in terms of change to the investment from last quarter.

We can talk more offline.

And your next question comes from the line of Joe Rulink with Baird. Joe, your line is open.

Great. Thanks for taking my question and also wanted to extend my best wishes to Jim. You know, another one on just maybe more recent performance. So 1Q was a good quarter for new ARR added. You finished above guidance. I think you grew that line 20% year on year. Anything to call out just in terms of what drove the upside in the 1Q plan and then maybe look into 2Q, any discrete factors that would explain kind of a year-over-year decline Kleinan new ARR added, or maybe relatedly, is deferred ARR factoring any more or less in the

outlook today? Yeah, hey, it's Christian. Thanks. Good question. So, you know, again, I think Q1, again, despite a challenging environment, I think we executed well. I think that across geographies, across product segments, you know, hopefully that showed through in our results. As far as the Full year is concerned. Again, we are, you know, maintaining our full year guidance as we start looking at, you know, Q2 here. I think we're just trying to be prudent on the, you know, on the immediate term outlook. But as a reminder, I get back to the, you know, there's ARR and then there's cash flow. And on the cash flow side of things, well, there could be more volatility on ARR on the cash flow side of things, both from a quarterly and annual guidance perspective, I think we feel very good. But otherwise, I think seasonality is in line with last year from an ARR perspective, taking into account the incremental deferred we've talked about ad nauseum.

Okay. Great. Thank you.

And your next question comes from the line of Tyler Radke with Citi. And, Tyler, your line is now open.

Thanks so much for the question, and congrats to you, Neil and Jim. I look forward to the next journey here. Neil, you talked about how, you know, you made a number of observations across the product portfolio in your time here. One of the things that stood out to me was on your comments on the SaaS transition, kind of talking about it as a 10-year journey. I think in the past, PTC had talked about it maybe a little bit more medium term than that. So I'm just wondering, and maybe the question is for Christian, is there any impact we should think about on the medium or long-term financial targets as it relates to that? And then, conversely, what are you seeing on the on-prem side maybe that surprised you to the upside that's giving you that confidence that it's about a little bit of a longer time frame?

Hey, Tyler. So let me try, and then Christian can add to this. You know, the two actually are related, your two questions. And, you know, as you know, the on-prem business is delivering really solid growth. And one of the reasons why we talk about PLM, PLM expansion, we are still in the early innings of PLM, as I mentioned in the prepared remarks, in the early innings of being the system of record for product data across our customer base. It is happening in many cases, but there is, as far as the eye can see, in all the travels Jim and I have been doing, meeting with customers, it is now happening. And this is based on our on-premise windshield systems. So that gives the confidence as we think through structuring, scaling, enabling our sellers, the marketing around it, to make windshield that system of record for product data that we're seeing in already some of our customers. That's why I have the confidence around really putting the wood behind the arrow around that initiative, combined with the ALM initiative that has a very interesting growth vector that we talked about that is predominantly on-premise. It will move to cloud over time. But those two growth vectors and the wood behind those two arrows, and then as a on-premise business, is solid and rocking and rolling. So, those three things combined, lastly, with the service max cross sale, which is a SaaS product, those give the confidence around the continuation and the types of guidance that we put out in the mid and long term. That being said, for the mid-teens and the mid-term to long-term ARR guidance, there is an element of SaaS starting to transition into that ARR growth rate in the mid to long term. My point around the 10-year is the industry and all our customers will take in aggregate that long, but we already are taking Windchill Plus, some Creo Plus customers along in the journey, and that should accrete in the mid and long term. And maybe we see the dam break earlier and it accreeds faster, but our estimate is to be tempered here and to work with customers hand-in-hand to get that upside on the staff. Appreciate anything to add. I think that was a spectacular thing. That's the first time Kristen complimented me. Thank you, Kristen.

Thank you. And so just to clarify, no changes to the medium or long-term target. Sounds like no, but I just wanted to clarify.

No.

Awesome. Thanks so much.

And your next question. Your next question comes in the line of Matt Broome with Masuho Securities. Matt, your line is open.

All right. Thanks very much. I'll add my congratulations to both Jim and Neil. So maybe just some partnership. There's clearly a lot happening with ANSYS right now. I'm just curious if you have a view on how this proposed acquisition by Phenopsis might affect your partnership there. And maybe you could remind us via sort of materiality or the strategic importance of that partnership piece.

Yeah, look, ANSYS has been a good partner of ours for many years and will continue to be a good partner. You know, they are part of how we talk about and have a value prop around Creo and the added simulation capabilities. And we help them similarly, right, around what they're doing on simulation with ours. So it's a very good partnership for both sides and critical to both sides to a certain extent. To be clear, too, this is actually if the deal goes through, right? I'm not a regulator, so I can't speculate on that. But if the deal goes through and Synopsys is the eventual owner of Ansys, the great thing for us is there's zero overlap that we have with Synopsys over time. I don't know yet, but might over time create an opportunity for us.

Excellent. And then maybe if I could just also ask just how your business in China evolved during the quarter and if you've seen any incremental impacts from any sort of regulatory restrictions there.

Yeah, but, you know, we haven't seen China be a drag on us.

Thanks, Ray.

And your next question comes from the line of Stephen Tussow with J.P. Morgan. And, Stephen, your line is now open.

Hey, guys. Hey, Steve. Christian didn't come across to me as the managing uptight smart move.

I was going to say, it might be the first time I've complimented anybody.

I'm checking that.

Just going back to the question on costs, I think in last quarter's presentation, you said non-operating, kind of non-GAAP operating would be up six to seven. I think you're saying now seven to eight or something like that. I think that's what the prior question was referring to. Maybe that's the source of that question. just curious. Yeah, that would be FX-related. Just on your ARR, $3 million, I think it was like a 20% to 25% drop-through on that ARR. To that math, I know you guys have said you would probably invest some of that away, so we should just keep an eye on your cash guidance. Is there anything to math like that where if you get a little bit of that extra ARR that it's kind of hard to invest in a way that you will get some upside drop-through on that? No, no, that's a great question. The

thing that you need to remember with ARR and cash flow, we'll call it ARR equates to invoicing, and then cash flow, our average terms are done in 30 days. But let's just work with 30 days, which means that any incremental ARR that we get in a quarter that comes in the last month of the quarter actually isn't impacting that quarter's cash collections, and therefore that quarter's cash flows. That all goes to the subsequent quarter. So you have to just remember that time lag when you're thinking about it. Does that make sense, Steve?

Yeah. According to you said 55% of the year will come in the first half. Again, anything going on there from a timing perspective that stands out?

Yeah, I feel better when it's more front-end loaded. And I think what we said, if we're going to be super technical about it, is more than 55%. Now we're just kind of honing in on the map and saying it's going to be more like 58%, but, you know, otherwise, you know, I think we had great collections performance, you know, here in Q1, and the outlook for Q2 is solid as well, so I think we feel pretty good about the range for Q2 and obviously the outlook for the year.

And your next question comes from the line of Jay Leeshauer with Griffin Securities. Jay, your line is now open.

Thank you. You noted on the call your close-up lifecycle strategy and your cross-selling structure and process. The question I have is about customers' receptivity to cross-selling. And what I mean is, do you see any correlation between the likelihood of cross-selling and the size of the customer or the customer's products and or perhaps the end market? Is there anything that would make a customer in industry X or with product Y more receptive to your multi-solution cross-selling approach than perhaps another customer might be? Is that a follow-up?

Yeah, thanks for the question, Jay. You know, in terms of service-backed cross-sell, you know, a key factor is having product companies, OEM manufacturers having long lifecycle assets in the field. And, you know, if you want to double-click, you know, critical assets, you know, within life sciences, electronics, high tech, the industrial manufacturing space, ones that are in the field for a long time, the product companies are now needing service revenue to offset any declines or lack of new product innovation to make sure that they're getting, you know, a consistent, durable revenue stream themselves. So that's a consistent correlation that we're seeing, you know, from a customer lens. Two is, you know, when a customer has windchill, one thing that's really interesting is this past quarter, we won a very large industrial manufacturing win at ServiceMax over a seven-digit-plus deal that, quite frankly, I was trying to win for five straight years of service. We'll take this deal down because the customer has Creole and Windchill, and they, over time as they implement ServiceMax, want the asset field record, the system of record of the asset, to actually flow back to their PLM system. So the combined solution chain and the correlation point of a customer with Windchill, The long life cycle lasts a really nice makeup, which brings that math of 300 service moral like-minded. That's interesting to us on the other side of it. So, as we mentioned, I think, last earnings call, we've been seeing CodeBeamer as a tip of the spear, where we're particularly in automotive suppliers, where now we're getting in the conversation as we're showing them the CodeBeamer value prop. Hey, we also have a PLM system that might not be PTC. How can the two work together with hardware configuration management, with software configuration management, CodeBeamer? Should we actually look at PTC for the combined offering? That's interesting to us. We're starting to see it. I wouldn't call it a trend yet, but that's another opportunity that might have a correlation that we're starting to see some early signs of, Jay.

Also, over the last two or more years, it's been demonstrable that Creo and Windchill have gained share, as you know. And I think there are some describable reasons for that. But over the course of calendar 23, it did look as though CAD market shares were beginning to stabilize. And I'm wondering if you are beginning to see any evolutions or new dynamics in either CAD or PLM suggesting that customer requirements or selection criteria or anything of that kind might be changing from what they've been over the past. number of years as it might affect your CREO or windshield momentum.

Yeah, I'm going to, you know, I'll take the windshield piece, and maybe I could ask Jim, as I'm getting deeper into the CREO piece, to comment on that. But one of the interesting things we're seeing with our prioritization of putting wood behind more of the aero in the PLM expansion category, which is predominantly windshield, as you know, Jay, is when customers are going through an ERP migration, particularly SAP to S4 HANA, we're seeing that as a really interesting point where the customer is looking at what workflows belong in an ERP system versus MES versus a PLM system. And we're actually feeling advantaged when that introspection is happening to have more functionality being put within a PLM system, which makes windshield far more important in the transition process. So that's a theme we're starting to see, number one. And number two, again, to reiterate, the idea of having a broad portfolio, not only on the SLM side, I believe we're starting to have the customer conversations where having a windshield PLM system becomes more critical to have a common data flow over time through the thread. And we'll see whether that amounts to competitive displacements, but we see that as a continuation of some themes that are interesting for us for windshield expansion. Jim, did you want to talk about Creole? Yeah, maybe I could add.

Jay, I think your point is that PTC's had good double-digit growth, steady as she goes for some years now with Creole. And some of the competitors have lost momentum and then seemingly gained some of it back. You know, I think you know we have one European competitor in particular whose customers aren't that happy. And that dynamic serves us very well. Now, it looks like they have some momentum, but I think you remember, too, They put through some fairly nasty price increases, which I think might cover up a little bit what's really happening, because the price increases might give them some short-term growth but actually exacerbate the problem that the customers are frustrated about. So, I don't know. I feel like, you know, our business has been steady, and we think, as Neil said clearly before, we'll continue to be steady. Creel Plus may be offering a bit of a tailwind over time. But, you know, I think that we're in a position to take share with Greal and to take share on the other end of the customer base with Dante. And so, you know, I like our Gant prospects.

Very good.

And your final question comes from the line of Sackett Kalia with Barkley. And Sackett, your line is now open.

Okay, great, guys. Hey, thanks for squeezing me in here. I'll keep it to one question. And just first off, congrats, Neal, on the upcoming appointment and to him for all the years at PTC in the industry. The question I want to focus on here, maybe for Christian and Neal, is just the ALM business overall, right, you know, really spearheaded by CodeBeamer. How do we – can you just maybe give some contours on roughly how big that business is from an ARR perspective, how fast it's growing roughly? And, Christian, you talked about sort of the range of outcomes in sort of this ARR guide. How much can Codebeamer sort of affect that range of outcomes? Because it just sounds like there's a lot of excitement, a lot of product success there. I wanted to just put some numbers around it to the extent we could.

Yeah, I mean, I'll start talking. Hey, good to hear your voice. You know, I'll let Christian talk about if we do break out ALM from a size perspective, but it is, from my perspective, nowhere near the size of CREO and Winchell at this current time. However, the pace of growth is extremely exciting. I mean, as fast as I've seen West Coast startups, same level of percentage growth year over year. We've got some more to do. So it's not going to be a straight up into the right line. But that being said, one of the things we've been seeing is Codebeamer is catching fire. I think we mentioned that in the quote from last quarter's call. and we're seeing as the adoption occurs or a POC occurs at a large automotive company that, for example, Jim and I were in Japan, you know, once they start testing out, this thing goes big relatively quickly. As an example, we won a very, what we thought was a very large code beamer, not the one that we pressed, but it's another one within Q4, right, of last year of a large European automaker. This last quarter, we got an add-on order already of sizable value from that same customer. So that's leading to this excitement piece, number one. Number two is some of these deals with Codebeamer are very substantial in size, right? Not only the add-on orders, but like the size of the deals because the users that need software development tools like Codebeamer are in some cases a lot larger of a population than the mechanical engineers. And so that's why it has such a – what we call a prioritization of the high-dollar value creation opportunities. That's why Elon's part of that.

Could I just add – it's also very strategic high ground. It's an important piece of business to win.

Absolutely. Absolutely. Anything we could talk about in terms of, again, just sort of contours, rough sizing? because it does feel like an important sort of long-term investment area.

Yeah, here. So let's just try rough sizing and say it this way. You know, this year we ought to pass through the $100 million mark on ARR with our ALM.

To be clear, though, that would be the integrity product we previously had plus the Codebeamer product added together.

So like a total ALM portfolio would be $100 million by the end of this year.

I feel that at some point this year, yeah, and it's growing faster than the overall company growth. It's a criticism growth.

Got it, got it. Guys, very helpful. Again, tip my cap to both of you.

Yeah, great. So I think that's the end of the question. So before Neil wraps it up, I'd like to just take a minute to personally close out with PTC's investor community and to thank all of you for so many years of support. During my tenure, I always listened carefully and took investor input seriously, and it helped shape our strategies and allowed the PTC team to really move the needle on value creation. I know Neil will do the same. The transition process with Neil has been lengthy, thoughtful, effective, and frankly, it was even a lot of fun. As a result, I can tell you with confidence that Neil and team are ready to go. Neil has my congratulations and full support. So I want to sign off then by saying thanks and goodbye one last time, knowing I'm leaving a strong company in good hands.

Over to you, Neil. Thanks, Jim, truly. And thank you, everyone, for joining us and for your questions today. In the weeks ahead, Christian, Mike DiTullio, Matt Schimau, and I will be on the road participating in investor conferences, and it would be great to keep the dialogue going. During the last week of February, Christian will be at the J.P. Morgan Credit Conference in Miami. Matt will attend the Wolf Conference in New York. During the first week of March, we'll be at the Morgan Stanley and Key Bank Conferences in San Francisco. that Mike DiTulio will attend the virtual Loop Conference during the second week of March. And also, we have two bus tours coming to visit us at our Boston headquarters next week. Those visits will be hosted by Christian and me. Please reach out to J.P. Morgan or Piper Sandler if you're interested. And on behalf of the team, thank you again, and we look forward to engaging with you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.