Q4 2022 PTC Inc Earnings Call
We had the PTC dot 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.
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.
Forward looking statements, including guidance provided during this call are valid only as of today's date November <unk> 2022, 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. 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 the call over to <unk>.
<unk> Chief Executive Officer, Jim <unk>.
Thanks, Matt.
Good afternoon, everyone and thank you for joining us.
I am pleased to report that PTC delivered an outstanding fourth quarter, which capped off a record year in fiscal 'twenty two.
Our topline metric of IRR.
Bottom line metric of free cash flow both came in above the guidance ranges, we issued 90 days ago.
Execution was strong throughout fiscal 'twenty, two as full year results align well to the growth and margin expansion strategies, we outlined at last December's Investor day.
Relative to topline and bottom line metrics across both absolute and relative improvement measures fiscal 'twenty two was ptc's best year in decades.
Before I dive in I'd like to point out that Christian will cover the ongoing effects of the strong dollar later during his section of the call. So the simplified things I'll focus my discussion on constant currency results where applicable.
Turning to slide four.
And free cash flow results for Q4 were very strong in.
And the strength was broad based across all segments and geographies.
<unk>, we saw organic growth continue at the accelerated pace of 15% driven by strong performance across the board in digital thread core digital thread growth SSG and velocity.
Our code Beamer acquisition had another strong quarter and contributed to a point of inorganic growth taking ptc's totally are to 171 billion up 16% year over year.
Our topline growth was helped by the lowest churn the company has seen in many quarters, even better than last quarter organic churn, excluding the impact from Russia improved by 193 basis points, well better than the 100 basis points, we guided to at the start of the year.
Despite churning the entire Russian business churn was lowest in Europe for both Q4 and the full year.
Price increases provide a helpful tailwind to renewals globally, but the underlying gross churn improvement is what has carried the day all year long.
Fiscal 'twenty two was the fifth consecutive year of double digit growth for PTC.
It was also the second consecutive year of 16% <unk> growth, but take note that the organic element of that growth mix has accelerated by 300 basis points from 12% in fiscal 'twenty, 1% to 15% in fiscal 'twenty two.
Per our guidance, we expect to post a sixth consecutive year of double digit <unk> growth in fiscal 'twenty three even after a considerable allowance for a potential macro slowdown.
Free cash flow in Q4 was $29 million ahead of our guidance free cash flow for fiscal 'twenty, two was $416 million above our guidance and up 21% year over year, despite an approximate $30 million or 700 basis points headwind due to the impact of FX.
On our operations.
Including $53 million of payments, primarily related to our restructuring from a year ago and fees related to acquisitions adjusted free cash flow was $468 million.
Next on slide five.
I wanted to reflect on our margin expansion initiatives, we pursued over the past year, including both the restructuring related to our SaaS pivot announced a year ago.
And the portfolio resource optimization, we discussed on the last call.
Both programs have proven very successful because against the backdrop of a rocky economy, we achieved about three percentage points of cash contribution margin expansion in fiscal 'twenty, two while simultaneously accelerating organic growth rate by about three percentage points as well.
Thats six points of expansion against our rule of 40 type measure in a single year.
We expect the ongoing effect of these profitability initiatives to lead the further cash contribution margin expansion in fiscal 'twenty three.
With the restructuring cost behind us and cash contribution margins expanding on double digit growth, we're expecting to drive free cash flow up about 35% to the $560 million level in fiscal 'twenty three.
Moving to slide six despite the scary headlines we continue to read every day, we saw record demand for our offerings in the fourth quarter.
While we again experienced some macro related softness in smaller deals, notably in Europe , and some softness in China.
These factors were offset by the strength in <unk> SaaS and larger deals as.
As we previewed on the last call organic bookings were up low single digits from a blockbuster Q4 last year setting new record highs in Q4 and for fiscal 'twenty two.
Q4 bookings were up 30% sequentially from the strong Q3 level, which reflects typical seasonality.
Bookings growth was strong in both the digital thread and velocity units.
The recent <unk> acquisition continues to perform exceptionally well with Q4 wins at a large German automaker, a large semiconductor company and a large Korean automaker among others.
Turning to slide seven in Q4, we again saw strong growth across all geographies.
Our growth for the Americas was 17% and.
In Europe , <unk> grew 16%, despite the Russia exit in Q2, which still affects the growth rate given the trailing nature of our <unk> metric.
AOR growth in APAC was 13%.
Across all geographies the largest AOR growth in terms of magnitude was driven by continued strong demand for our <unk> CAD and <unk> products within digital thread core.
We saw the strongest <unk> growth in terms of percentage across all geographies for velocity with our cloud native unshaped, CAD and arena PLL products, continuing to grow multiple times faster than the market rate.
Next let's look at our performance of our business unit, starting with the digital thread on slide eight.
In our largest product segment digital thread core we delivered another strong double digit growth performance in Q4 with 14% AOR growth within this CAD again grew low double digits, while <unk> accelerated to 19% growth as windshield continues to be a hot seller.
Q4 represents the 20th consecutive quarter of double digit <unk> growth that we've seen in the core CAD and <unk> business.
And digital thread growth, which is Iot and AR growth sustained the 19% AOR growth rate and we were just a smidgen short of rounding up to that two handle growth rate goal, we were hoping for close enough in my view.
Thing works DPM had a decent quarter, including a nice expansion deal from a customer who first purchased <unk> last quarter.
<unk> posted great results again in Q4, growing 9% organically and 19% inclusive of code Beamer.
Turning to slide nine on the SaaS transformation front, we landed several windshield plus deals, including our first few lift and shift of SaaS conversions with our partner DXP services.
SaaS transition program is right on track.
Our win at Raymond Corporation illustrates the value proposition of windshield, plus Raymond Corp is owned by Toyota industries, and they make a wide variety of forklift trucks pellet Jackson warehousing products.
Raymond conducted a study and found that with our windshield plus SaaS solution. They can drive substantial savings in total cost of ownership, while avoiding the burden of maintaining the software system themselves.
Raymond is now enabling their distributed workforce with windchill plus.
A reminder, that windshield plus is the tip of the iceberg of a bigger plus strategy and you will see us follow with <unk>, plus and other similar premium SaaS offerings in fiscal 'twenty three and beyond.
We're aiming to launch <unk>, plus and this bigger plus strategy at LIBOR in May.
Turning to the velocity business on slide 10 year over year <unk> growth for the velocity unit maintain the accelerated rate of 29%. We saw last quarter with Unshapen arena again, each growing multiple times faster than their respective market.
Arena continues to mirror, the BLM strength, we see with windchill and the mid Twenty's growth rate of arena that we've seen throughout fiscal 'twenty. Two is more than 10 percentage points higher than arenas pre acquisition growth rate had been.
Both on shaping arena have been great acquisitions for PDC.
The strength of these businesses, which are the cloud native pioneers in our industry.
It gives us confidence that the future of our market will be SaaS and the shift to SaaS will create strong growth tailwind for PTC for years to come.
Let's turn to slide 11, and talk about the future.
Given the strength, we've seen in our business throughout fiscal 'twenty Phil.
Juxtaposed against the likelihood of a more difficult macro situation that is said to be headed our way, but has not yet arrived in a meaningful way.
It's a real challenge to tell you with precision how our business will perform in fiscal 'twenty three.
But because of our recurring model. The fact that our software is very sticky and key to the digital transformation efforts and industrial companies around the world are pursuing we.
We think that the range of likely outcomes is fairly narrow at 10% to 14% <unk> growth.
Therefore, it's most likely that we will see a growth in the double digit range again in fiscal 'twenty three.
Even worse outcomes and thus have not included them in our guidance range.
For the sake of illustration, a 30% decline in bookings all year, plus the 100 basis points more churn gets us to 7% are our growth.
And just to demonstrate the amazing resilience of our model.
Note that it would take a massive 75% year over year bookings decline on top of 200 basis points more churn to get a flat year over year growth.
But even then free cash flow, which shows solid growth given cash contribution margin improvements already implemented the.
The restructuring payments that are now behind us and.
And the spending austerity, we'd surely implement in response to a downturn of that magnitude.
Bottom line is that we are very confident that the resilience of our model ensures strong fiscal twenty-three results.
While a potential macro downturn is on everybody's mind. The foreign exchange rates were already experiencing is a bigger factor in our fiscal twenty-three free cash flow projections the.
$560 million target for free cash flow.
Correlates both to our growth slowdown.
And to the very strong dollar that we're currently experiencing.
At today's foreign exchange rates, which are the most unfavourable and two decades the.
The $560 million of free cash flow and fiscal twenty-three includes a roughly 60 million dollar headwind versus what the same free cash flow would be at given our fiscal 2002 plan rates.
The $560 million remains within the $550 million to $600 million free cash flow range. We established back in 2019, when the world look very different.
But I trust you can see if not for significant FX headwinds, we would in fact be guiding to a free cash flow number above that 2019 range due to the underlying strength in our business.
Keep in mind that because our customer contracts are recurring the same dollars flow through the system year after year.
<unk> <unk> is a big headwind now if exchange rates return to a more normal range in the future than the headwind would dissipate and free cash flow with trend back towards the higher level of performance.
On the other hand, if today's FX rates become a permanent new normal then we'll give consideration to other strategies like regional pricing changes to compensate.
Obviously, the company is very well positioned and while we're allowing that the macro situation could slowest down somewhat versus our true potential in fiscal twenty-three. Our strategy is clearly working or execution has been stellar and are resilient business model means we're position to produce attractive and.
Aided performance and our top line and bottom line free cash flow metrics no matter what scenario unfolds.
I shortened my typical customer anecdotes today, because I wanted to save time to discuss the new IR reporting model that we're adopting as we transition into fiscal twenty-three.
Let's move to slide 12.
As most of you know with the code Beamer acquisition lending in MSG last quarter suddenly <unk> become a growth business, which doesn't really match our original conception of F. S. G as a low growth cash cow.
In fact with digital thread core growth and FFG segments, all growing mid teens are better our current reporting model yields little insight into our growth drivers.
And thinking through what to do with FFG, we realized that the current segmentation also doesn't map very well to our strategy and it doesn't map at all to industry market segments, which makes competitor performance comparisons difficult.
Worse, yet by fragmenting parts of our Pls business across digital thread core where wind chill lives.
<unk>, where are retail flex PLL businesses based on wind chill lives and velocity, where we have arena.
Our IR reporting structure have has obfuscated are strong market position and <unk>.
Given how our business has evolved we feel the current reporting model no longer serves any of us very well and it's time to evolve it till.
Turning to slide 13 to address these challenges going forward, we've decided to adopt a simpler reporting model of CAD and PLL and to be completely transparent and how we're recasting our business into this model.
I have already discussed last year's growth rates using the existing four segments of digital thread core growth in MSG plus velocity.
On slide 13, you'll see how the prior segments mapped to the new segmentation model.
Mapping is more simple than it appears if.
If we are referring to using a computer to aid in designing product information than it is computer aided design orchid.
If we are referring to aggregating product data and databases and managing the processes to interact with it across the product lifecycle.
And it's product lifecycle management or BLM.
You can see that if we recast last year into the new model.
Then inside of 1.71 billion AOR company growing 16% last year, we had a $756 million <unk> business growing 11% and a $950 million <unk> business growing 20%.
In case it helps with competitor comparisons total revenues were 113 $7 billion for <unk> and 796 million for CAD in fiscal 2002.
This new reporting model maps, much better now analysts and competitors view of the world.
You can also see how we allocate pdc's, 10% to 14%.
Growth guidance for fiscal twenty-three using the old model and how those same growth allocations within map to the new model.
In the old IR segmentation model, we would have guided digital thread core to grow 10% to 14%.
Digital thread growth to grow 15.
G to grow 5% to 10% and velocity to grow 20% to 25% in fiscal twenty-three.
I Trust you find that all to be quite reasonable and consistent with the high level of the ranges correlating to fiscal 2002, actual and the low end of the range, leaving room for macro slowdown.
And the new model that same 10% to 14% company growth maps to kid growing 8% to 10% and PLL growing 12% to 17%.
Please feel this bridge from the old model to the new model as a one time event because starting with the next earnings call. We will report using only the new cat and PLL IR segmentation model it will make things much easier for all of us.
Turning to slide 14, I want to briefly remind you that while we're adopting a new reporting model. It is certainly not a new strategy I trust it might even feel a little familiar to you.
Indeed, we've always been clear that it was our pls strategy that led us to acquire server just sticks Thingworx Arena code Beamer and others.
We have said that at each step of the journey you might even remember me, saying Iot is BLM.
In introducing the closed loop BLM language back when we acquired thing works.
Perhaps or even remember a few years back we had a reporting category of extended BLM that included <unk> an SLM.
We've been pursuing abroad PL envisioned for years and have made tremendous progress now we want to put it on display.
We probably need a drum roll now because this reporting model unveiled some really great news on slide 15, that's been true for some time, but masked by our reporting structure.
As the new segmentation clearly reveals with $981 million of <unk> software revenue I'm ready to declare that PDC has become the clear category leader in the hot BLM market.
Using apples to apples definition similar to that of competitors.
PVC as easily number one globally in terms of scale ahead of number two Siemens and number three death, so by some distance.
Note that total pls revenue of PDC is more than $1.1 billion. When you include services.
But being a software company, we think is most appropriate to focus on software.
With a growth rate well ahead of these competitors in recent years, we are rapidly widening the leadership gap.
A primary reason why we've been outpacing the market for years is because of the uniquely compelling BLM portfolio rebuild but.
But a second key reason is that we transition to a subscription business model years ago, whereas competitors remain largely perpetual in nature.
While the valley of death, which slowed ptc's growth for years has faded in our rearview mirror. It lies ahead for these competitors should they attempt to transition to our business model that would only open the software revenue gap further.
The takeaway is that just as surely as desk, so leads and cat.
And answers leads and simulation.
PTC leads and PLL.
Five consecutive years of Pdc's accelerating BLM growth demi.
Demonstrates that PLL supports a very attractive growth rate.
I feel confident PVC can and will build on a strong leadership position in this great market segment for years to come.
Turning to slide 16 today, we're guiding the first quarter and full year of fiscal twenty-three.
At our virtual Investor day, just two weeks from now will give you a bit more insight into our business strategy and operations in fiscal twenty-three and then guide how we expect that to play out across a longer period through fiscal 2005.
I don't want a preview that content today, but I think you'll like where the company is headed as we continue performing while transforming as we've consistently done over the past decade.
Then a bit farther down the calendar, we hope you'll join US here in Boston for LIBOR X 2023, and May 15, and 16 of next year, where you have an opportunity to dive deep into all things PDC <unk>.
<unk> will afford investors ample opportunity to interact with management employees customers and partners.
Please block off both events in your calendars.
Wrapping up my part then on slide 17, as I reflect on fiscal 2000 to demand remains strong all year and we've seen only minor signs of a macro slowdown.
Accelerating growth and expanding margins prove our strategy is working well and strong execution as driven our top and bottom line performance to levels that are amongst the best across our industry peer group.
Transitioning into fiscal twenty-three I'm excited about the opportunities to do even better as we push ahead with our sassing margin expansion initiatives.
We're watching diligently for changes in the demand environment and feel well prepared for whatever lies ahead.
Because of our business model and spending discipline, we expect to deliver solid top line growth and robust bottom line growth across any of the more plausible macro scenarios.
Continue to believe the company has never been in a better position to create shareholder value.
And with that I'm going to turn it over to Christian for his more detailed commentary on financial results and guidance.
Thanks, Jim and good afternoon, everyone before I review our results I would like to note that I'll be discussing non-GAAP results and guidance and.
References will be invoked constant currency and as reported.
Turning to slide 19 and.
In fiscal 2002 are are are grew 16% on a constant currency basis and exceeded guidance.
On an organic constant currency basis, excluding code Beamer, RR was $1.61 billion up 15% year over year.
As Jim explained our top line strength in Q4 was broad based we're executing well against our strategy and we're continuing to improve upon our strong market positions.
Our SaaS businesses across our digital thread in velocity groups saw continued solid.
In Q4.
On an as reported basis, we delivered 7% growth 6% organic.
Due to the impact of FX headwinds, which were $134 million substantially higher than the approximately $85 million of FX headwinds that we would have expected assuming Q3, ending exchange rates and at the midpoint of our guidance for Q4.
Moving onto cash flow despite the FX headwinds our cash flow results were strong with Q for the full year results coming in ahead of our guidance across all metrics.
Solid collections performance and slower hiring help to offset the incremental headwinds that materialized in queue for and for the full year or restructuring cost controls and above plan perpetual license revenue primarily from kept were also help to offset the FX headwinds.
When assessing and forecasting are free cash flow. It's also important to remember a few things FX rates were more favorable in the first half of fiscal 2002, and the majority of our collections occur in the first half of our fiscal year Q4 is our lowest cash flow generation quarter and free cash flow is primarily a function of.
Rather than revenue.
In fiscal 2002, FX fluctuations created a headwind of approximately $30 million to our free cash flow.
Results Q.
Q for revenue of $508 million increased 6% year over year in fiscal 2002 revenue was 193 $3 billion up 7%.
As we've discussed previously revenue is impacted by IFC six O. Six so we do not believe that revenue growth rates are the best indicator of our underlying business performance, but would rather guide you to.
The best metric to understand our top line performance and cash generation.
On a constant currency basis, our queue for revenue was up 12% year over year and our fiscal 2002 revenue was up 11%.
Before I move on to the balance sheet I would like to provide some color on our non-GAAP operating margin as I did last quarter. We continued to caution because revenue is impacted by IFC six O six other derivative metrics such as gross margin operating margin operating profit in EPS are all impacted as well still.
It's worth mentioning that we're benefiting from the work that we've done to optimize our cost structure are non-GAAP operating margin expanded by approximately 300 basis points to 38% in fiscal 2002.
Moving to slide 20, we ended the fourth quarter with cash and cash equivalents of $272 million or gross that was one 306 billion with an aggregate interest rate of 3.9%.
During Q4, we repaid $75 million on a revolving credit facility.
Regarding our share repurchase program as we've communicated previously we completed $125 million repurchases at the front end of this fiscal year.
Our long term goal, assuming our debt to EBITDA ratio is below three times as 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.
Next slide 21 shows are byproduct group.
And the constant currency section on the top half of the slides we used <unk>.
Rates as of September 30th 2021 to calculate.
For all periods.
You can see on the slide how FX dynamics have resulted in differences between our constant currency.
And as reported.
Over the past eight quarters.
I provided a reminder, on the previous call that when we set our guidance for fiscal 2003, we would be providing that at the September 32022, FX rates and restating history, assuming those rates, let's turn for that now.
Here on slide 22.
We show the new reporting categories that Jim took you through with historical results Recasted using.
Our FY 2003 plan rate for all periods.
We posted a set of financial data tables to our IR web site that has our financial statements as well as these tables for.
For comparative purposes of the constant currency historicals.
FY 2003 plan rates.
And should be used when forecasting ttc's constant currency.
Our results.
This is important to can sit or in the context of our guidance because we provide guidance on a constant currency basis exchange rate fluctuates significantly between the end of Q4 and the end of Q1 that would be reflected in our as reported AOR.
We believe constant currency is the best way to evaluate the top line performance of our business because it removes X FX fluctuations from the analysis positive or negative.
Given the sharp moves that and FX that we've seen recently I thought it would be useful to provide an updated arif sensitivity.
Here on slide 23.
And as you can see in addition to the U S. Dollar Retrans Act in Euro yen in more than 10, other additional currencies using our queue for FX rates the impact of a 10% change in the euro would.
It would be approximately 38 million positive or negative and the impact of a 10 yen change would be approximately $7 million again positive or negative.
And of course, the estimated dollar impact is dependent on the size of the base.
Turning to slide in 2004.
Since most of the sell side forecasts had been built assuming.
September 30th 2021 rates I thought it would be helpful to provide this slide as a reference point before I take you through our actual guidance on slide 25, slide 24 illustrates what our guidance would have looked like.
If calculated using our fiscal 2002 plan rates.
The year over year growth rate for <unk> is.
Is the same 10% to 14% that you'll see on slide 25, however, the absolute.
Values for our higher given the FX rates.
Versus the FY 2003 plan right.
For revenue the actual as we report and the guidance, we provide are on and as reported basis not on a constant currency basis for illustrative purposes. This slide shows our fiscal twenty-two revenue on a constant currency basis, assuming our fiscal twenty-two plan rates.
On this basis, the illustrative year over year growth rates for fiscal 2003 or about 6% higher than the comparable numbers you will see the next slide.
The range of revenue growth is lower on slide 25, because our reported revenue is based on.
Monthly FX movements rather than.
A point in time set of rates and we faced some tough comps and fiscal twenty-three, particularly in the first half of the year.
With that I'll take you through our guidance on slide 25.
Today, I'll focus on FY twenty-three and Q1 and.
In a couple of weeks when we have our Investor day will focus more on the medium term.
For all our guidance amount, we're using our fiscal 2003 plan rates the rates as of September 30th 2022.
For fiscal twenty-three, we expect constant currency AAR growth of 10% to 14%, which would make this the sixth consecutive year of double digit growth.
This corresponds to fiscal twenty-three constant currency.
1732 179 billion.
Churn is a key component of our our guidance and we significantly outperformed our churn guidance and physical 22 and ended the year with organic churn at five 6% using our fiscal 2002 plan rates.
Our medium term target as stated back in 2019 was to get to the 6% level by fiscal 24, and we achieved this earlier than expected.
Going forward I think there's still room to improve our churn rate, but at the same time I Wanna be cognizant of the macro environment and that's the rationale behind keeping our churn assumption essentially flat for fiscal 2003.
Next on cash flows for fiscal 2003, we expect free cash flow of approximately $560 million.
Up about 35% and adjusted free cash flow of $562 million up about 20%.
This includes an estimated $60 million of headwind caused by FX impacts on our operations.
As compared to FY 2002, FX rates.
R.
Fiscal twenty-two restructuring is substantially behind us so the difference between free cash flow and adjusted free cash flow is small for fiscal 2003.
Our capex assumption for fiscal twenty-three is approximately $20 million and therefore relative to free cash flow guidance of $560 million, we're guiding for cash from operations of $580 million.
In a few minutes I'll take you through an illustrative FY 2003 free cash flow model in more detail.
Moving on to revenue guidance for fiscal twenty-three, we expect revenue of 191.
To 199 billion, which corresponds to a growth rate of negative 1% deposited 3%.
ASC six O six makes revenue fairly difficult to predict in the short term for on premise subscription companies, hence the wide range.
And remember revenue does not reflect cash generation as we typically bill customers annually upfront regardless of contract term legs.
It's worth taking a few minutes to explain this.
So let's go on a short detour from guidance and turn to slide 26.
This slide shows a hypothetical example, with pen contracts and different assumptions for four variables.
Software type, which can be either on premise subscription perpetual support.
Or cloud Slash SAS.
The number two upfront recognition percentage to keep this model simple, we'll just assume that 50% of the on premise subscription total contract value is recognized upfront under ASC six O six to be clear this varies by company and even byproduct within each company, but here.
We're just trying to keep this simple to illustrate the point.
Number three term length.
This example uses term lengths ranging from one to four years and four contracts size. This is really total contract value or T. CV and this example, CBE ranges from 1000 to $4000, but note all of these contracts have the same.
<unk> of $1000.
Moving to slide 27 for certain contract types, namely Sass and cloud.
And on premise support contracts revenue recognition as radical over the term of the contract for these contracts term length and contract value did not have impact on revenue recognition and revenue aligns with <unk> on an annual basis, you can see this year with $250 being.
Recognized ever recorded.
On the next slide Slide 28, Here's the example of a one year on premise subscription that renews annually.
Due to ASC six O six half of the contract value is recognized.
As.
Upfront revenue in the remaining half is recognized ratably over the contract term. Since this is a one year subscription revenue aligns with <unk> on an annual basis. However on a quarterly basis. There is a difference because of the upfront.
Revenue recognition with $625 in the first quarter and $125 in the next three quarters.
Turning to slide 29 here, we're highlighting an example of a four year on premise subscription again.
Under AFC six O six have the contract value is recognized as revenue upfront.
However.
And cash invoicing are both done on an annual basis.
In this example, the amounts would be 1000 per year. In contrast is this example shows.
We would recognize $2000 of revenue upfront and the remaining 2000 will be recognized ratably over the 16 quarters of the term.
Moving to slide 30.
The graph compares.
Revenue for these 10 hypothetical contracts over a 12 year period.
Over the 12 years. This model assumes no growth price increases nor churned, there's no changing of term lengths know migrating from support to on premise subscription or from on premise subscription to sass.
Of course as you know, we actually have program programs in place that actively drive each of these dynamics, but it would be much too complicated to start adding these kinds of dynamics into this super simple example.
The Green line, which is a R. R.
Or at least shows flat business performance 10 contracts at $1000 each for $10000.
Each year zero percent growth.
Whereas the Blue line, which is revenue shows a lot of volatility from year to year revenue growth rates vary from negative 33% positive 69% in any given year.
And again, while this example example is overly simplistic.
Hopefully you can see why we keep saying that you can't really look at revenue to understand the underlying performance.
Of our business nor is it helpful. When trying to understand free cash flow dynamic.
What is important to remember is that over the term of the contract over the term of each contract every dollar becomes a dollar of revenue.
However, how and when revenue is recognized as dependent on the mix of contracts, starting and or renewing in any given year and can vary significantly from period to period.
And you can imagine what happens to margins and EPS.
Under this kind of scenario.
Next on slide 31 is the conclusion.
Due to AFC six O six the revenue trend is noise for companies like PTC that sell on premise subscriptions.
But the point here is don't worry because free cash flow is really a function of <unk> and this is why we focus on <unk> and free cash flow and believe it to be the best way to assess our fundamental business performance.
Now returning from that fund side trip to guidance on slide 32 for Q1, we're guiding for cash from operations of $170 million free cash flow of $165 million and adjusted free cash flow of $166 million.
There's one additional item worth noting related to the cash flow in Q1 and fiscal 2000.
And Q1, we expect to make a 10 million dollar foreign tax payment related to changes to the withholding tax policy of a foreign country.
Since we also expect this to be substantially all of this to be substantially substantially all of us to be refunded before the end of the fiscal twenty-three there's no expected impact to the full year financials.
And we will not adjust for this aside from this item is your model the quarters of fiscal 2003 keep in mind that we expect the quarterly distribution.
To follow a similar pattern as in fiscal 2002 in fiscal 21 for the cash flow metrics with over 60% of our cash flow coming in the first half of the year in queue for being our lowest cash flow generation quarter.
Next on Slide 33, let's take a look at an illustrative model that uses the assumptions that Jim described earlier and illustrates what you would need to believe to achieve the midpoint of our fiscal twenty-three constant currency.
Guidance.
At the midpoint of one 706 billion.
In this illustrative model, which is for 12% constant currency our growth. We've assumed we've assumed that churn worsens by approximately 100 basis points and we kept new ACB flat.
Well, new <unk> is not exactly the same as bookings do the dynamics such as ramp deals and in year starts, which we've discussed before it's close enough proxy for this exercise.
I would point out that well the churn increase looks hi that is in fact, the map of an approximate 100 basis point.
Increase that we outlined earlier in the discussion.
And well the macro environment may increase churn as you can see on the page a 100 basis point increase would push absolute churn levels churned dollars above levels that we have not seen for quite some time.
And we have some tailwinds on the churn front, which include term lengths lengthening in fact are expiring base in fiscal 2003 is only slightly higher than physical twenty-two despite more than $200 million in the beginning.
The price increase we implemented in May should also provide some tailwind throughout the year and importantly, our product portfolio continues to mature and some of the product segments that have higher churn like Iot.
Have seen steady improvement and churn over the past three years and still have.
Lots of room for improvement to get to renewal rates more in line with for example, krio and wind chill.
On the flat new ACB assumption I would also point out that we have slightly more differed starting in fiscal 2003 than we did in fiscal 2002.
We will have a full year of new sales from code beamer versus the two quarters worth that we had in fiscal 2002 and the price increases that went into effect should provide a modest tailwind on the new sales front as well.
You can see that to hit the midpoint of 1.7 hundred 6 billion, we need to add $188 million in fiscal 2003.
Balancing potential macro uncertainties with the momentum we've been seeing in our business our forecast and given some of the considerations I just mentioned, we believe our fiscal twenty-three guidance is prudent.
Turning the slide 34, here's an illustrative constant currency model for Q1 you.
You can see our results over the past eight quarters and the far right column, we've modeled the midpoint of our constant currency Q1 IRR guidance.
Because our tends to see some seasonality. The most relevant comparison is Q1 hundred 21 Q1 hundred 22.
The illustrative model indicates that to hit the midpoint of our Q1 2003 guidance of $1.59 billion, we need that $18 million or they are on a sink sequential basis. This is less than the $40 million. We added in Q1 of 21 and the $37 million. We added in Q1 of fiscal 2002.
Again for the reasons I mentioned in just a minute ago. We believe we've said R Q1, 2003 constant currency.
Guidance range prudently.
Let's move on to slide 35, which shows an illustrative free cash flow model for fiscal 2003, I know that most of you model free cash flow using the indirect method, which uses the P&L and balance sheet as a starting point.
Given the complexities related to AFC six O six that.
We spent some time on earlier on this call they are inherent challenges and using the indirect method to forecast free cash flow for PTC. The model on this slide is based on what we use internally.
No that looking at it in this way may be unfamiliar to some of you. So please feel free to reach out if we can help.
Starting at the top with <unk> note that the FY 2000 <unk> bin.
After September 32022 rates.
And that for fiscal 2003, we've used the mid point of our constant currency guidance moving down the model. The primary reason why FY 2003 professional services revenue is down is because of unfavorable FX developments, we've seen over the past year. In addition, we <unk>.
Expect roughly a third of our professional services revenue to transition to DXP overtime.
Moving to Costa revenue and operating expenses, the FX developments over the past year have the opposite effect here compared to revenue.
Four costs and expenses VFX moves are beneficial.
You can see the powerful leverage on our cash contribution which is a characteristic outcome of a sticky recurring subscription business model combined with operational disciplined.
As you can see expected restructuring payments are materially lower in fiscal 2003, because as Jim explained earlier, we completed the work related to the operational optimization announced a year ago.
And the related cash restructuring payments are now substantially behind US. We have also completed the work to rebalance resources across the company to align with our growth opportunities and we did this without a restructuring charge more.
Moving on you'll see that other expenses higher and fiscal twenty-three compared to fiscal 22. This is primarily due to higher interest rate on a revolver given the higher interest rate environment cash.
Cash taxes are also higher in this model and reflect.
Higher taxable income as well as the impact of section 174.
And finally, the other categories also higher in FY 2003. The main driver here is higher working capital to support continued growth.
2022 also includes the impact of FX movements, all this sums up to expected.
Free cash flow of $560 million <unk>.
Inclusive of the 134.
Headwind that materialized.
And consequent 60 ish million dollar headwind to free cash flow.
Jim explained earlier, we expect to deliver approximately approximately $560 million under the most plausible.
<unk> scenarios and I'd like to reiterate that.
If the macro situation gets worse and our cash generation has impacted you can expect us to moderate our spending on the other hand, if the macro situation improves or the dollar strength reverses this would be favorable for our cash generation and in that scenario, we'd likely invest more aggressively in our business.
As we start the year, we believe $560 million is a good target.
And that's a good segue to slide 36.
First of all we are prepared for a for a storm and expect to be resilient in the face of one from a top line perspective, we serve industrial product companies and R&D at those companies tends to be quite resilient. So we have a supportive topline backdrop we.
We've also transition successfully to a subscription business model and our products are very sticky with our customers.
Just as importantly from a cost and operational perspective, we have done a lot of optimization in 2022 that will serve as well going forward, we've already batten down the hatches <unk>.
Nevertheless, as we've said in the past, we do not have a pollyanna type view when it comes to the macro situation. We have a strong track record of disciplined operational management and in the event of a meaningful downturn, we're prepared to pull the additional spending levers to mitigate the impact on our cash flows.
Variable compensation would automatically adjust and depending on the magnitude of the downturn.
We would also curtailed planned tires.
Look at Backfilling attrition marketing spend travel spend et cetera.
So with that.
I would like to wrap it up here and turn it over to the operator to begin Q&A.
At this time I'd like to remind everyone. Two please limit yourself to one question. If you have additional questions. Please to return yourself to the queue.
Your first question comes from the line add Steve <unk> J P. Morgan.
Hello, Steven it happened.
Hi, Good evening, how are you guys.
Quite a comprehensive run down there thanks for that.
Yeah [laughter].
[laughter], okay. So so the messages that you guys already I guess, that's the message.
They just on this on this on this customer behavior. I mean, you you went to great lengths once again.
Highlight how you're ready for whatever comes your way with the business model and.
In in those in those parts of the business that you did see.
Perhaps.
Not as much growth in bookings and in Europe , and China, I mean, they are obvious reasons for that probably but.
What what what are you seeing in customer behaviour. There is it is it just kind of like deferrals, a budget is it longer cycle times to close.
And how do you expect us to kind of progress here and into the fourth quarter.
Yeah.
So first again I want to remind you we had record sales in queue for so while we saw some minor slowdowns. We also saw strength more than offset it in other places.
But to answer your question in China.
Really COVID-19, its geopolitical and all those kind of things and China's 5% of our business. So we don't have a lot of exposure there.
In Europe , it tends to be smaller companies, who are themselves battening down the hatches in there.
They are trying to kick the can down the road and.
Get a little bit more insight into what's going to happen to the economy, but I mean, I know that as a general question for everybody. So let me elaborate a little bit it's a funny time because.
On one hand, you have the PM is coming down and normally that slows down our bookings, but it hasn't here.
We certainly read the read the papers like the rest of your deal, but we also have customers everywhere, who can't keep up with demand I mean, we have a customer visits center here at PDC on the 17th floor and it was completely packed today, we had six daylong meetings going on in parallel we only have the capacity for sex.
I'm on the board of automotive supplier and <unk>.
Recently, we were reviewing the IHS forecasts, an IHS as forecasting the auto industry to grow 2% to 6% next year.
Big supplier to defense companies in fact, two of the companies that we are here today, where defense companies and they can't keep up with the volume and their customers are asking for more and more and more.
I was in Europe last week and I visited.
Couple of clean energy companies and again because of what's going on in the energy industry.
Whether it's clean energy or not clean energy.
There's a lot of action happening people, who used to ship gas through pipelines and I'll need to ship it through ships and so that creates a whole bunch of new demand for for example, big compressors that sit on ships, we have a customer makes those.
I visited a winter wind company and they think their sales are going to triple over the next 10 years because of the desire for clean energy I went to a truck company and they can't keep up with demand for diesel trucks. Meanwhile, they have enormous demand for electric trucks, because all these ecommerce companies Amazon target whatever.
Really want their packages delivered in an electric vehicles and so all these fleets are trying to move to electric so I understand Steve like there's the headlines and then there's everything else, we see and the everything else really is quite encouraging.
But.
We're trying not to be pollyanna, we're trying to be aware of the headlines.
That could in fact impact us so we tried to model it in.
One last quick one on a look back to two Q and any.
Kind of impact from the price increases that that you saw on kind of a postmortem on that.
Yes Christian have you tried to size at all of the impact of the price increase since Q2.
I think it's.
Probably high single digit.
Million dollars worth of impact in fiscal 2002, so that'd be half a percentage point of growth let's call. It.
Okay, great. Thanks, a lot casually appreciate all the detail very helpful. Thank you. Thank you.
Your next question comes from the line of Candy, along with Oppenheimer and company. Please.
Great.
A quick question.
Mac I was gonna get beat like a horsehair, but you saw a little bit of SNB weakness in Europe , I guess, what has that been baked into potentially spreading elsewhere are you guys fencing it off it in Europe for now in terms of the guidance.
No I think we are if you look at our guidance scenario the best case shows such.
Substantial slowdown in bookings momentum and the worst case shows a substantial decline in bookings and that would have to happen somewhere and I can imagine it would start in SNB globally and work its way into bigger accounts. So.
We're giving you a guidance range that the entire range is well below the.
The level of performance, we've had for a while now and and again, it's really just based on conservatism, there's not a lot of science, though behind it because like I said, there's no science, there's no data actually that supports taken the range down that low is just being prudent because of everything we read and everything we here.
Got it Okay I really appreciate that you have our circle back in the queue. Thank you get.
That is all the time, we have first questions today I will now turn the call back to Jen Heflin.
Okay I apologize yeah. Thanks, Thanks, Angela so listen everybody I'm, sorry, we didn't get more time for questions. Today, we had a lot of content.
We allowed Christian to spend a little bit of time in an accounting less in there because.
We think people are going to ask the question, how do you get 35% free cash flow growth of flat revenue in flat margins and and the simple answer is revenues noise free cash flow.
PDC is based on Iraq, and we have substantial increases in our free cash or cash.
Contribution margins against growing NAR, so the math works, but we wanted to make sure you understood that so it didn't leave lingering questions, but anyway.
Will hopefully see most of you all of you.
In two weeks when we have our Investor day will go a little bit deeper into the business strategy as I said and then we'll get into some midterm guidance, we're going to guide <unk>.
23, 24, and 25 and again I don't want to preview that content now, but I think it's a positive story you probably can sense that we feel good about the business. So thanks, a lot for your time, sorry, we didn't have more time for questions and we look forward to following up with you in two weeks or whatever forums and venues happened before then thanks a lot.
Okay. Thanks.
Okay.
This concludes today's call you may now disconnect.
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