Q4 2021 PTC Inc Earnings Call
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Yes.
Could cost of this actual results to differ materially from those in the forward looking statements can be found in Ptc's annual report on Form 10-K for the 10-Q other filings with the U S Securities and Exchange Commission as well as in today's press release.
Forward looking statements, including guidance provided during the call are valid only as of today's date November 3rd 2021, and PTC assumes no obligation to publicly 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. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website with that I'd like to turn to.
Call overseas Ptc's, Chief Executive Officer, Jim supplement.
Thanks, Matt and welcome again to PDC has.
It's been great to get you on board and thanks for your help in preparing for today's call.
We have a lot of exciting news for investors today. So we plan to allow a little more time unusual for the call.
No doubt there will be follow up interest. So we've also scheduled our annual Investor day in mid December and we expect to be active on the IR circuit in the weeks ahead.
Starting then with slide four.
Given the knows we're going to follow a somewhat different agenda for today's call.
I am going to start with highlights of our queue for in fiscal 2021 performance.
And then I'll take you through an abbreviated version of our product line results next Christian will complete our discussion of Q4 in fiscal 21 with his financial reviews.
Then turning to the future I'll address the changes we announced today, which are designed to accelerate our SaaS transition and margin expansion.
Following that Christian will take you through our go forward guidance and reporting structure.
We've reserved extra time for your questions at the end.
Moving to slide five Q4 was an outstanding quarter for BBC and it kept off another strong year.
We came in at the high end of our guidance for air or growth and we exceeded our free cash flow guidance.
Despite the pandemic every part of the business performed well and fiscal 21 with growth in every product line and every geography.
Fiscal 21 was our fourth consecutive year of double digit organic AOR growth and.
And we're guiding for fiscal 2002 to be the fifth.
Furthermore, by continuing our strong focus on operational discipline, we've been able to translate our top line growth in a strong bottomline free cash flow performance Christian will take you through free cash flow in more detail later in the call.
Taking a look at the key factors driving our top line performance and turning to slide six our queue for bookings results were outstanding.
Bookings were up mid teens organically and high teens overall from the blockbuster Q4, we have a year ago.
Remember than in queue for a physical 20 bookings bounce back sharply following a downturn in Q2 and Q3 during the depths of the pandemic.
Surpassing last year's strong queue for number is a great accomplishment.
Bookings restaurant across all product lines and geographies because queue for a physical 20 had been such an outlier. Our plan targeted Q4, 21 organic bookings to be roughly flat to last year's number.
<unk> was slightly above plan, while everything else was well above.
FSD and Onshape led the way with bookings growth of more than 90% and 70% respectively.
And ER bookings were both up mid teens year over year to record levels for each with Iot bookings growing more than 120% sequentially, while AAR bookings grew more than 60% sequentially Pls book bookings were up high single digits year over year.
Keep in mind that a good percentage of our queue for bookings, especially those done later in the quarter don't start until October or later, so the end up and what we used to call backlog, but now call differed AOR.
Deferred AOR ended the year $20 million above the original plan, we had for fiscal 21.
So in summary, not only did we hit the high end of our fiscal 21 HR guidance range by delivering 12 points of organic growth. We also booked about a point and to have more growth into deferred a R, which will benefit future periods.
Turning to IRR on slide seven.
On a topline basis fiscal 21 was a big success in queue for we came in at 12% organic are excluding arena and 16% error growth overall.
Looking at our core products in queue for we continued to deliver market leading growth.
<unk> came in at low double digit growth, while windchill grew mid teens.
According to data published by James Lee shower, <unk> and when shall have significantly outperform Siemens into shows Gadahn pill and businesses lately as they are relatively flat with 2019, while we're up more than 20% we've.
We've been seeing the solid growth trend in our core cat and <unk> business for years now and we expect this to continue.
I'll come back to this important point during the second part of my prepared remarks.
Next looking at our growth products Iot grew mid teens coming in below our target.
However, bookings were strong in queue for and we expect stronger HR growth in fiscal 2000 tool following bookings momentum and the launch of our new digital performance management solution.
View for Ya.
Before I augmented reality group mid teens, which is better than it sounds when you factor in that this growth came on top of very strong 77% growth in our previous queue for that we're comparing against.
I'm happy with the roughly 40% CAGR over the past two years.
And fiscal 22 were positioned to continue good growth and they are based on our bookings momentum.
[noise] Onshape grew over 50%. It's now been two years since we acquired on shape and we're very pleased with the acquisition and the progress made by the Onshape team.
Arena grew over 20%. This represents good acceleration from mid teens preacquisition growth rates driven by go to market investments, we've made coupled with synergies gained by being part of PDC.
Turning to Fsba growth was 6%, primarily driven by strong performance of our systems and software engineering offerings, where we benefited from several large deals.
Turning to slide eight while krio and wind chill are powerful independently these products generate even more value when leveraged together a great example of this integrated story can be found in a recent announcement that the entire Volvo group will adopt ptc's Creole product as their primary cat solution.
Mirroring what they did several years ago with our <unk> solution.
This is a big competitive displacement for Korea.
In addition, our answers powered Creole simulation live technology together with Krio answers simulation continues to drive customer interest and simulation.
I've been saying for some time that as the product system of record <unk> is a critical element of any manufacturing companies digital transformation strategy.
This is exactly what led to our largest ever Pls order in Q4 of 21, a multi year committed ramp deal coming from a large global medical device company. This.
This too was a competitive displacement for wind chill.
And <unk>, we saw average deal sizes, increasing with numerous expansions in the quarter.
In Iot this past week, we launched our digital performance management or DPM solution at our manufacturing live event. If you Miss event by the way you can find the replay on our Investor Web site.
[noise] DPM is our new solution designed to be a comprehensive turnkey out of the box solution that addresses our customers biggest iot value creation opportunities.
It will be the perfect antidote to the so-called pilot purgatory problem. The Iot industry has been discussing you.
You May have also noted separately the press release announcing that PDC is the only industrial Iot player recognized as a leader by all four major industry analysts firms.
Also in the Iot's based Microsoft yesterday officially launched its cloud for manufacturing and we're thrilled to be a lead partner.
Our alliance with Microsoft continues to go well with queue for being our best quarter to date in terms of cold selling with Microsoft.
Before he had delivered a healthy mix of expansions cross sell in net new logos, we landed our largest ever E. R. Order from a large pharmaceutical company, which will use before you to deliver augmented digital work instructions to improve the speed and quality of production line changeovers.
Also with all the Buzz you hear about met averse. These days you might enjoy watching the amazing live industrial Merdivorous demonstration that our CTO, Steve routine and I delivered as part of our manufacturing live keynote using our before you spatial toolbox technology.
If you look carefully at the graphic on the right side of slide eight that is Steven I standing in front of our Anonymised digital representations, whose movement and activity is being measured and analyzed in real time.
This is a peek into our concept of digital Taylor Ism named after the famous work of Frederick Taylor, who was the father of industrial engineering more than 100 years ago.
Turning now to Onshape, an arena on slide nine.
Onshape performance has been driven by strong when rates against competitors, coupled with solid expansion rates.
And sheep captured nearly 1000, new logos and fiscal 21.
During the year churn improved by 10 points, while net retention improve by 15 points and these metrics now look quite strong compared to similar sized SAS peers of all types.
Naturally smaller companies have been drawn to onshape, because it's lightweight SaaS footprint enables agile hardware development processes.
But thanks to 17 more product releases during the past year and sheeps maturing functionality also led to several significant orders in queue for from larger companies and the robotics and medical device fields, who loved the product for similar reasons.
The amazing adoption that onshape experienced in the education market in fiscal 21 is icing on the cake. It contributed little to the financials, but sets the stage for mass adoption by the next generation workforce in future years.
Arena saw numerous expansions driving larger deal sizes too.
Marina is also proving to be a great acquisition like.
Like Onshape Arena is the cloud native market leader in PLL with particular strength in tech centric markets, such as electronics and medical devices.
We're on track with the integration plan that we laid out for the acquisition of arena with new sales capacity coming online in the us and Europe.
The combination of Onshape and arena makes PDC that clear market leader in cloud native <unk> and can solutions and these offerings make a great pairing for fast moving high Tech manufacturers, who want to develop hardware using the same agile process methodology as software.
Next slide 10 shows are geographic AOR performance Amir.
America's was up 19% led by double digit growth in core products and arena Europe was up 13% led by high single digit in core products, low forties growth and growth products and double digit growth in MSG and.
And APEC was up 17% led by mid teens growth and core products and low thirties growth and growth products.
There are thousands of people that PDC that contributed to our outstanding physical 21, and I would like to say, thank you to all of them.
With that I'll hand, it over to Christian to complete the portion of today's call focused on Q4 in fiscal 2001.
Thanks, Jim Good afternoon, everyone before I review, our results I would like to note that I'll be discussing non-GAAP results.
Guidance later in the discussion and all growth rate references will be in constant currency.
So turning to slide 12, we delivered AOR growth that the high end of our guidance range physical 21, <unk> of 147 billion increased 16% year over year.
Excluding arena RR growth was 12%.
FX was a small $4 million headwind.
In fiscal 21 for us.
As Jim highlighted earlier, our bookings were very strong in queue for.
With this we had an uptick in within this we had an uptick in ramp deals and that's why our bookings performance did not result in even stronger growth instead, the vast majority of our bookings upside went into differed that will benefit future periods, primarily fiscal 2003.
Organic.
Anneke Church improved approximately 130 basis points year over year slightly ahead of our guidance for approximately 100 basis points of improvement.
Primarily driven by strong execution in CAD PLL M. S G.
As well as modest continued improvement in both Iot and a R.
Physical 21 free cash flow.
344 million grew 61% year over year and was slightly above our guidance.
Note that are free cash flow for the year included in Unforecasted 18 million dollar outflow related to a foreign tax dispute $15 million, an acquisition related fees and $15 million in restructuring payments.
These onetime headwinds were offset by other one time tailwinds, including some one time tax benefits.
Arena working capital versus the original expectations improvements.
Improvements in our aging.
Also helped drive.
One time uptick in free cash flow and 21.
Physical 21 revenue of 1.81 billion increased 24% year over year as reported or 20% in constant currency and was above guidance as we've discussed previously revenues impacted by AFC six O six.
So in queue for and throughout fiscal 21.
Longer than anticipated contract durations and support the subscription conversions positively impacted the amount of upfront subscription revenue recognized in the quarter and in the year.
I would like to remind you that over the long term.
Are are and recurring revenue growth rates should be approximately the same however in any period revenue is subject to much more volatility due to AFC six O six which is why we feel that.
Our annual run rate.
Which is also a very close proxy for subscription billing.
Is that true and better indicator of Ptc's growth.
In.
Fiscal 21, non-GAAP operating margins were 35% and increased approximately 610 basis points over fiscal 20.
This was due to the strong revenue performance I just mentioned.
As well as maintaining good discipline on our operating expense structure.
Non-GAAP EPS of $3.97 increased 58% year over year and was above guidance.
I'd like to point out that our GAAP results.
Reflect the gain of 69 million related to our investment in matter port.
Mark to market.
As you may recall matter, Portland, public and begin trading on July 23rd.
In addition, our GAAP results also included the release of 137 million dollar valuation allowance related to our deferred tax assets.
And a tax benefit of 42 million related to the arena acquisition.
Moving to the next slide another way to think about Pts performance is using the cash flow model, we often share as you can see here on slide 13.
Plus perpetual revenue plus professional services revenue each.
<unk> R cash generation, which was $1.455 billion does up.
About $200 million over fiscal 20.
You can also see that totals the total expenses of 1.173 billion. This was up about 138 million over physical 20.
Which leads to a net cash.
Cash contribution margin of $473 million, an increase of about $62 million.
Or if you think about cash contribution margin as a proxy for cash EBITDA.
We delivered 29%.
Cash contribution margin and this was up about 100 basis points compared to physical 20.
In this format you can see most of the one time headwinds and Tailwinds I discussed earlier are below the line is in terms of cash tax headwinds and Tailwinds M&A related expenses improvements in aging.
Which actually resulted in net positive working capital in fiscal 21.
One would normally expect to be negative in a growing business.
Moving to slide 14, I'll begin with a balance sheet. We ended with physical 21 with cash and cash equivalents of 320 million. In addition, we had medium term investments of $78 million, primarily related to our investment in matter port.
Our gross debt was 1.45 billion with an aggregate interest rate of about 3.2%.
During Q4, we paid down $40 million on a revolving credit facility.
And we also made our $19 million semi annual bond interest payment.
With our leverage ratio now less than three times, which we told you as our goal the resumed our share repurchase program.
$30 million of cash we used to repurchase shares in queue for.
It was approximately equal through our free cash flow generation in the quarter.
All in all Q4.
Wrapped up a solid year for PTC from both in <unk>.
And the free cash flow perspective, with that I'll turn it back to Jim.
Thanks Gretchen.
PDC is at an exciting point in our history.
Despite bumpy macro conditions, we have established a four year track record of double digit topline organic growth based on a recurring revenue model and driven by a widely recognized technology leadership positions in an industry increasingly motivated by digital transformation.
In parallel our decade long track record of strong operational discipline has driven our margins up enabling us to benefit significantly from leverage as we scale.
You see that in the 61% free cash flow growth are highlighted at the start of the call.
Given the strength of our financial performance in fiscal 21, the restructuring we announced today might come as a surprise to some ya, but sit tight because I think you will like what we're doing.
For some time now I've been telling investors about our plans to leverage the Atlas platform that we acquired with Onshape to pivot the whole company towards SaaS future.
As I had previously discussed it much of the upside benefits of the SaaS pivot would come in fiscal 2004 and beyond.
Many of you have asked why wouldn't we invest more to get to that SaaS upside more quickly frankly.
Frankly that was a good question and one that we thought long and hard about we even hired mckinsey to help us think through it and develop a strategy.
Today I will explain how thanks to the changes we are making we will invest substantially more in our SaaS initiatives, while actually decreasing our overall run right spending projections significantly.
Let me hit the financial summary, first on Slide 16, and then explain the strategy and operational changes behind it.
In terms of the financial view of the restructuring we are reducing our spending run right by approximately 60 million compared to fiscal 21.
As we improve the efficiency of our organizational structure.
We've also eliminated about $30 million.
Previously contemplated new spending run right from our fiscal 2002 plans.
So compared to the plan for fiscal 2002 that existed prior to the restructuring we now have and we now expect to reduce our plan fiscal 22 run right spending by approximately 9 million.
And then reinvest about half of that into initiatives that accelerated transitioned SaaS with the other half falling to the bottom line.
Key SAS investments will be used to increase capacity on that list.
To accelerate work to adopt Atlas into our core products and to operate those products SaaS and into Onshape, an arena product development and sales capacity.
Despite what will be a very significant investment we expect to expand cash margins by approximately 400 basis points in FY 2000 till so we are accelerating both growth and margin expansion at the same time.
Restructuring related cash outflows are expected to be approximately $50 million to $55 million with about two thirds occurring in the first half of 22 and the majority of the remaining payments to be made in Q3 and.
In other words, the restructuring will obscure the obscure the great casual progress for the next two or three quarters, but the benefits will start shining through after that.
Already by queue for a fiscal 22, we should be seeing a net free cash flow tailwind as a consequence of the restructuring.
Then as Christian will outline fiscal 2003 and beyond will look great.
Let's go to slide 17, and I'll start by explaining why SaaS pivot is so interesting to PDC.
There are three reasons why we think now is the time for PDC to align with and invest more in the SaaS transition.
First the industrial software market wants to go to SaaS culvert is greatly amplified the interesting SaaS.
PVC is already the recognized SaaS leader in our industry Onshape, an arena have proven what's possible and maybe dramatically elevated pdc's credibility. We are far ahead of competitors in terms of understanding what sassy is and what it is not cuss.
Customers are looking for PDC to lead the whole industry through a transition to SaaS.
Second based on growing customer demand, we see the need to accelerate fashion that SaaS initiatives, while better aligning with SaaS best practices in order to meet the needs of the market. The investments, we're making now will allow us to play offense to capture the market demand.
Third we believe our new SAS strategy will accelerate a major growth driver for PPC.
Giving us more pathways to mid teens growth in the midterm and helping to derisk our growth ambitions.
Meanwhile, cost savings from the restructuring itself are expected to Derisk are free cash flow growth targets, even if the growth should prove slower to materialize than I expect.
Turning to slide 18.
Owning them industry is only cloud native cadden PNM combo has been a big advantage.
By comparing how are Unshapen arena businesses work as compared to the balance of BDC, we can see that certain ways in which PVC has been organized are quite inefficient.
At the same time, we see an opportunity to serve customers better too and that's why we're choosing to evolve our organization to be more SaaS like.
I'd like to review several of the larger changes.
Previously in addition to working with sales our customers would have more than a half dozen touch points across a broad customer success organization, including renewal sales pre sales wholesales consulting customer success management technical support a cloud organization a group called customer experience in other.
In comparison, most SaaS companies have two in the box model, where each customer has just one sales and one customer success contact not only is pdc's current model and efficient, perhaps more importantly customers hate being repeatedly passed from one contact to another as they proceed through their journey with PDC.
So are we are reconfiguring to deploy the same two inbox modeled SaaS companies utilize.
This reconfiguration has no impact on the sales side of the equation in fact, we're adding direct quota carrying capacity into the current model.
Aside from where we expand coverage the vast majority of customers will retain the same sales contacts they know and love today.
The bigger change for the customer will be that they now have one customer success contact rather than many does nothing but goodness here for everybody customers prefer this model and it will save PDC a lot of money as it is much more scalable.
The other major changes on the product development delivery and support side with Unshapen arena or any choose as company. This is all done by a single organization using modern devops practices.
But within the core PDC product lines, the development cloud delivery and technical support organizations have been entirely separate with the ladder to belong to the field organization, you simply can't get possessed that way.
As part of our reorganization, we have merged or cloud delivery and technical support groups into the product organization to mirror the Marvin SaaS practices deployed by Onshape, an arena and everybody else in the world. This too will create significant operating efficiencies and a much improved customer experience at the same time now.
Thing, but goodness here too.
To better understand the demand drivers, let's take a look at an illustrative value proposition on slide 19 typical of what customers see in the transition from on premise to SaaS.
For every dollar a customer pays PVC or any other vendor and <unk>. They have an estimated additional two to $3 and cost of ownership associated with on premise servers and storage and system administrators, plus size, who help with onsite installations and upgrades and all that.
Their total cost of ownership can be three to $4.
When the deployment maintenance and delivery responsibility for the software is shifted back to PDC.
We can leverage significant efficiencies to serve that same functionality back to the customer for roughly an incremental dollar and margins that are attractive to us.
Therefore, each dollar of on premise software AOR today represents potentially $2 on future SaaS AOR for PDC.
That's a savings of one dollar or two for the customer.
The customer also gets to enjoy the many other benefits SaaS is device agnostic, it's ideal for a hybrid work environment data is shared with employees and suppliers in real time, plus no more upgrades to do as everyone is always on the latest version.
This value proposition for SaaS is not really new news to any of you is what Marc Benioff that Salesforce Dot com has been espousing for two decades now.
More than half the overall commercial software industry has already made this pivot.
But that's not yet the case in our world of industrial software, where SaaS has low single digit penetration.
And Salesforce did in CRM, Some company will have to lead the way to SaaS in the <unk> industry.
We think the time is right for industrial companies to move to SaaS in PVC is best positioned to lead that transition.
Turning to slide 20, we've been delivering more and more new PSM projects SaaS in recent years as customer preference has shifted their but going forward will make SaaS, our primary delivery model and deliver on premise only when required by the customer.
But we also have a large existing customer base with on premise systems in order for existing customers to get the SaaS each customer has to go through a lift and shift process.
This process entails lifting the on premise deployment upgrading and D. Customizing it is necessary to eliminate technical debt and then shifting it into the PVC cloud from where we can serve it back to the customer as a service.
We plan to focus the lift and shift program first on when Joe where the biggest opportunity lies and bring <unk> in other products into the fold and subsequent phases overtime.
So you may be wondering well how will this help to accelerate growth. The answer is that our organizational changes and the associated wave of investment enable us to scale up to make SAS the default for new sales and to start to lift and shift process now here in fiscal 2002.
Though the value proposition for transitioning to Saas's sound, we still have to go through a sales cycle of each customer.
Returning the sales teams loose now with this proposition and we expect the first projects to begin showing up in the back half of fiscal 2002.
The windshield SaaS capability will be deployed into azure and into the manufacturing cloud at that so Microsoft is eager to help us sell this proposition.
I'd like to think of this project is the last upgrade for each customer because when the lift and shift projects done then PVC will take it forward from there. Therefore, a good time to sell this program is whenever customers start planning their next upgrade customers tend to upgrade windchill systems. Once every two or three years. So we get a shot at a good portion of the base.
Each year and expect success to accelerate and fiscal twenty-three and beyond.
There are thousands of windchill deployments out there. So I anticipate this process will take numerous years, perhaps a decade and we won't get them. All naturally will focus first on the most ready customers and work on the long tail farther out.
In the end I expect will ultimately get about 75% of the customers to transition and will continue to offer on premise variance of the product born of the same coldstream on an indefinite basis for those who do not once has.
[noise] PDC is all in on SaaS. The program. We're launching is a major crosswalk shall effort on par with the highly successful program.
We executed the move from perpetual to where we are today with 98% of our software revenue now being subscription.
Like that subscription program. The SaaS transition program involves numerous changes to our offerings to our pricing and packaging to compensation and more.
We have the same program leader driving it.
An important difference, though is that the SaaS transition program is all about growth acceleration within the recurring software business model. We currently have in place, which means we will not have the same same so-called valley of depth effect.
That our cash flow went back went through back then now will have all of the gain but none of that pain.
Taking you deeper into the elements of this program will be a key agenda topic at our December Investor Day.
One last related change, we're making is to organize into two main business units as shown on slide 21.
With plans to leverage SaaS now in place in underway across the entire company and no longer makes sense to have a SaaS business unit per se. Therefore, we plan to reunite before AAR with the CAD PLL Iot product lines into a business unit designed to promote.
Higher levels across selling across this integrated product portfolio.
This new business unit, which focuses on the digital transformation driver will be all about growing the base and leading them to SaaS.
It will be called the digital thread business unit to reflect the highly integrated nature.
Its portfolio of products.
Troy Richardson, who has been our chief operating officer for the past year is being promoted to become president of this business unit Troy.
Troy has already been managing them go to market side of these businesses, but now the product development arm will report to him as well to drive tight alignment.
Actually I'll stay involved in the technology roadmap because as you probably know that's where my passion lies.
You'll get more time with Troy Richardson at the upcoming Investor Day.
Onshape an arena will remain together under the current President Mike <unk>. This will be called the velocity business unit to reflect that the cloud native pier SaaS value proposition of Unshapen Arena is most attractive to companies, who want to deploy agile product development processes and move fast.
This business unit is all about disrupting the competition and lending new logos, which in many cases are SMB customers.
But we are seeing larger companies being drawn to Unshapen arena solution still because their existing vendor simply doesn't have anything that compares companies like Garrett motion. For example, the 4 billion dollar automotive turbocharger company, we profiled at our fiscal 20 Investor Day last year, who switched to Onshape from a high end CAD competitor.
To gain increased business velocity.
You'll have more time with Mike <unk> at the Investor Day.
Both business units President's report to me I'll help drive their respective strategies will Troy and Mike preside over the operating cadence of each business unit.
Ah related changes that the Atlas platform will move under our very capable CTO steed their teen who will develop the shared platform to meet the needs of both units stable continue to report to me.
I know that was a lot of information to take in.
Turning to slide 22, let me summarize and then I'll hand, it back to Christian for more specific go forward guidance first from a topline perspective are SaaS acceleration pivot unlocks another powerful multiyear growth catalyst for PDC and our shareholders exiting fiscal 21, <unk> and windshield together represent more than $1 billion.
Growing double digits organically. This growth pattern has been in place for four years now right through the pandemic with a strong performance driven by the role both products play and the digital transformation strategies of industrial companies.
With the SaaS program that we're launching where layering an additional growth driver into this core business.
We expect it could last a decade.
Therefore in our core business, we see double digit growth being sustainable well into the future.
Together with the growth drivers and Iot NAR, plus Unshapen arena, we're creating more pathways to drive <unk> growth to the mid teens.
In my view Pdc's gross stories alive and well.
Second from a bottom line perspective, the strategic improvements, we're making will drive up our cash contribution margins considerably and help derisk, our cash flow targets under a broader range of AOR growth scenarios Christian will expand on this.
Given our confidence and growth coupled with the higher margins, we remain committed to the midterm free cash flow targets that we set at our Investor day last year, we call that our guidance was for midterm free cash flow growth of approximately 25% to 30%.
After we get beyond the restructuring payments, we expect to perform in that range, perhaps earlier than you might have expected.
Our guidance for fiscal 2002 assumes will get a small positive impact on SaaS transition in the back half of the fiscal year.
Which is counterbalanced by slower assume growth rates and F. S G and somewhat conservative assumptions, we have around rockwell's contribution as they work their way through the flex integration.
Let me be clear that our commitment to the partnership with Rockwell remains as strong as ever and that were energized to work together because of the great potential we see ahead.
In particular, we see tremendous potential for the DPM offering sold through Rockwell and their calypso consulting arm.
Christian back over to you.
Thanks, Jim.
Now take you through our financial guidance and go forward reporting structure.
Turning to slide 24, first let me reiterate how exciting a time this is for PTC.
The restructuring that we're going through right now is really the single biggest somatic investment PTC has made that I can remember.
This reorganization is designed to better align PTC to assess future and is an interesting consequence. It should also derisk our path towards delivering on the midterm.
R and cash flow growth targets, we discussed at our Investor Day last November.
Starting with guidance on slide 24, we continue to target.
Mid teens are our growth in the midterm, Jim did a good job of outlining the many pathways we have to get into these targets with the SaaS opportunity in both the velocity and core businesses.
With the addition of solutions to the portfolio, starting with DPM, coupled with the general strength of the existing portfolio.
More specifically for fiscal twenty-two we'd expect.
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Ladies and gentlemen, please stand by today's conference Overpayment yearly.
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Okay. So this is this is Jim Appleman I think we are apparently got dropped from the call, which is a brand new experience for us, but I understand this happened just as Christian was starting out with our FY twenty-two guidance. So Christian can you pick it up again from the beginning of the FY twenty-two guidance discussion.
Great. Thanks, Jim.
Go back to the financial guidance and go forward reporting structure.
First let me reiterate how exciting a time this is for PTC. The restructuring we're going through right. Now is really the single biggest dramatic investment PTC has made that I can remember.
This reorganization is designed to better align PTC to our SaaS future and is an interesting consequence that should also derisk our path to delivering on the midterm R. R and cash flow growth targets, we discussed at our Investor Day last November.
So starting with.
Guidance on slide 24, we continue to target getting to mid teens are our growth in the midterm.
Jim did a good job outlining many of the pathways, we have to getting to these targets.
With the SaaS opportunity in both the velocity and core businesses.
With the addition of solutions to the portfolio, starting with BPM, coupled with the general strength of the existing portfolio.
More specifically for fiscal 2002, we expect AOR of 1.615 billion to 1.66 billion, that's a growth rate of 10% to 13% on a constant currency basis.
Following four consecutive years of double digit growth.
It's also worth mentioning that we expect continued churn improvement in fiscal 2002 and are targeting another 100 basis point improvement.
From a linearity perspective, we would again expect flattish IRR growth throughout the year on a constant currency basis.
So using the midpoint of guidance that would imply about 11, 5% AOR growth each quarter. Obviously this can fluctuate given bookings performance start dates et cetera, but we believe we provided for that within the range outlined.
The one thing worth pointing out is that growth.
In Q1 of 22 is expected to be approximately 15% since Q1 hundred 21 did not include Arif for arena.
In order to help with the modeling we've provided historical constant currency performance.
In the data tables on the website and I'll touch more on this.
A little bit.
Turning to cash flow. We also continue to target approximately 25% to 30% annual free cash flow growth over the mid term.
For fiscal 2002, specifically, we're guiding for free cash flow of approximately 400 million.
As a consequence of the restructuring we're expecting cash outflows of approximately $50 million to $55 million with approximately two thirds occurring in the first half of the majority of the remaining payments to be made in Q3.
Excluding restructuring are expected free cash flow and physical 22 would be approximately $450 million, representing 25% growth compared to the $359 million, we generated in fiscal 21 on the same basis.
So doing some directional math and using round numbers on the midterm targets. This means we would expect free cash flow and the $550 to $600 million range in fiscal 2003, and would expect $700 million to $750 million a free cash flow in fiscal 2004.
Regarding the linearity of free cash flow and physical 22, excluding restructuring we expect to see a similar pattern as in fiscal 21 with more than 60% of free cash flow generation in the first half of the year.
Collections are stronger in the first half and we expect expenses to increase as we ramp hiring and our SaaS investments throughout the year.
As Jim discuss the restructuring not only creates strategic improvements in how we're organized but also enhances our profitability profile.
So we believe we will be able to deliver strong free cash flow growth, even if we don't accelerate.
I'll come back to this point on the next slide.
And finally, turning to revenue guidance for fiscal 2002 were expecting revenue of 1.85 billion to $1.98 billion, which corresponds to a growth rate of 2% to 9% on a as reported basis or 4% to 11% on a constant currency basis.
Six O six makes revenue fairly difficult to predict in the short term for on premise subscription companies. Hence the wide range note that revenue has no impact on a R. R. R free cash flow as we continue to primarily bill customers annually upfront.
And again over the longer term, we expect recurring revenue growth to align with they are our growth, particularly as we transition the company to SaaS and evolve towards.
Increased increasingly rateable revenue recognition.
So moving on to slide 25, using the same free cash flow model, we showed earlier.
This slide illustrates a directional view of what physical 22 could look like assuming the approximate mid point of Ral guidance range.
There are.
Here grows at approximately 11, 5% cash generation is up $170 million.
See continued growth and expenses, but given the new operating model as Jim pointed out earlier cash contribution margin expands almost 400 basis points said.
Said differently the new operating model is expected to add more than 120 million of cash contribution.
Arjun versus the 60, plus we add as last year.
On.
Similar slightly less RR growth.
On the expense front as Jim mentioned, we're reducing spending in certain areas to fund investments to accelerate our SaaS transition. Additionally.
Additionally, there are some other items that will impact opex. This year, such as the accounting for commissions, which is impacted by six O six increased travel merit and so.
So as far as the P&L is concerned. The net result is that we're guiding for fiscal 2002, non-GAAP operating expense to grow by approximately.
3% at the midpoint of guidance, which.
Is certainly lower than the 50% of our targeted they are our growth for the year, even though we're significantly increasing our SaaS related spending.
On an organic basis factoring in the arena acquisition, which closed in queue to a physical 21.
We actually expect non-GAAP Opex grew.
Growth to be closer to 2% at the midpoint of the rage.
We also have a modest 5 million dollar uptick in Capex this year.
Cash taxes remain approximately flat and we see some expansion in the other category, which is really the restructuring charge and change in working capital as the business grows.
Moving to slide 26, as you know, we currently present, our AOR and revenue in three product categories KOR FX G a growth.
Going forward as Jim explained, we will have two business units digital thread and velocity so to align our reporting.
With how we look at the business will be changing our ALR and revenue reporting buckets accordingly.
Digital thread will consist of core F. S G.
And also Iot NAR from the current growth products.
And when we report digital thread going forward will provide the detailed split one level below.
On the slide the categories in bold text on the left represent our current disclosure Ah categories on the right in bold greentext represent our go forward disclosure.
And velocity will consist of Onshape an arena.
From the current growth products.
Slide 27 shows what the recast ALR data it looks like.
I won't spend a lot of time on this it was republished three years of historical AOR and revenue data in our new format within the financial data tables file on our website. There are a couple of points I would make.
First please note that all of the historical constant currency figures have been calculated using our fiscal twenty-two plan FX rates.
Second in addition to the digital thread and velocity recast we did.
A small we did a smaller recast of a portion of our view for your <unk> business, which removes approximately $6 million IRR and both physical 21, and fiscal 2000 and $5 million in fiscal 19, we made this change because we've come to realize there are certain.
Buyers with marketing oriented use cases, who purchased euphoria engine for short term promotions without a true intention to use it on a recurring basis.
The bulk of the view for a sweet is unaffected and we will continue to be sold on a recurring basis.
We adjusted the historical amounts to enable go forward comparability.
And then lastly, just in terms of expectations for physical twenty-two starting with the digital thread core.
We are targeting physical 22.