Neil Barua
Chief Executive Officer-elect at PTC
Thank you, Jim. We're on Slide 5. Today, I'll focus my comments on three topics: first, what I've learned about PTC over the past several months; second, the drivers of PTC's durable and consistent growth; and third, driving further value creation with discipline and consistent execution. After my remarks, I'll hand over the call to Kristian to take you through our Q1 results and our guidance. Then we will have a Q&A session.
Up front, I'd like to say a big thank you to Jim for sharing his industry insight and wealth of knowledge over the past year. The transition has gone very well and has been helpful to have Jim participate as I've engaged with customers, employees and investors. I'm honored to be taking over the CEO role on February 14 with PTC on a solid trajectory. Credit to Jim and the team, we have a great strategy based on a differentiated portfolio of assets and led by a strong team. As I said, my initial focus is on ensuring that we keep building on our momentum with disciplined and consistent execution.
Turning to Slide 6. Our customers design, manufacture and service products. Most of our large customers produce and service the world's most critical assets, for example, wind turbines, tractors, automobiles and MRI machines. The biggest learning I've had relates to what I am seeing in our customer base and how much we could do for them. Digital transformation has clearly taken hold with our customers, around the world, and finally is here to stay. Industrial companies can't have manual, antiquated or disconnected workflows if they want to be competitive in today's complex world. Our customers need to modernize the portion of their operations that spans from design to manufacturing to service. Importantly, our core products are the essential foundation for that.
Turning to Slide 7. Industrial companies are still at early stages of leveraging product data effectively across their organizations, but they have started to move on in a meaningful way. We see the opportunity the same way our customers do. Digital transformation is a journey. Our broad portfolio provides a lot of opportunity to help our customers be competitive, irrespective of soft PMIs and economic cycles.
Next on Slide 8. My second major learning is that the overall PTC team is strong and capable. As I visited our offices around the world, I spent a lot of time doing skip-level, one-on-one meetings and town halls. I was inspired by the caliber and spirit of our people. I was impressed by their extensive product understanding and deep customer relationships. Their enthusiasm is palpable. They realize the opportunity ahead of us and that we have a portfolio of capabilities to win big.
Turning to Slide 9. I also feel very good about the strength of my highly experienced leadership team and how we will operate, going forward. My style is to bring what I'm hearing from customers into the conversation and capture the energy and ideas from each team member. This collaborative framework is already working well. And as a team, we are making progress in aligning on PTC's value-creation opportunities going forward, and our focus energies towards that.
Let's turn to Slide 10. On our past couple of earnings calls, we have been sharing this framework which shows the cumulative drivers that support our top line growth. Fiscal '24 is expected to be our eighth consecutive year of double-digit organic constant currency ARR growth. A key point to understand is that our top line growth is sustainable, supported by the many layers of cumulative drivers that we have built over time. Each layer contributes to our ability and drive value for customers and as our customers continue to invest in digital transformation, our comprehensive product portfolio differentiates PTC. This is because PTC is the only company that can help industrial manufacturers drive closed loop product lifecycle management across engineering, manufacturing quality and service.
Moving to Slide 11. We have also been sharing this framework on recent earnings calls which shows the cumulative drivers that support our bottom line growth. As with the previous slide, every layer in this framework is important. The key point on this slide is that our strong free cash flow growth in recent years is attributed not only to our solid top line growth, but also to our subscription license business model and strong operational discipline. I am fully aligned with Kristian on the paramount importance over free cash flow guidance, and we have a high-level of confidence in the targets we've provided.
Turning to Slide 12. My philosophy on resource allocation is that focus and discipline are important. To that end, it is our view that we have a compelling portfolio in place. The key things to get right are to focus on evolving customer needs and to drive strong and consistent execution towards that. To ensure this consistency, we will put a clear focus on our highest ROI opportunities. We will be disciplined and unemotional when it comes to prioritizing our time and resources on the products and product integrations that will create the most value for our customers. To use an analogy, we plan to put more wood beyond the most important arrows to ensure we drive the best outcomes for our customers and PTC.
Let's now turn our attention to these priorities. Expanding our PLM or product lifecycle management footprint at customers both within engineering departments and enterprise-wide. There are two main reasons for this secular trend. First, PLM systems have evolved to meet the complexities faced today by industrial manufacturing companies. As just one example, the Volvo Group, whose Chief Digital Officer and Chief Technology Officer I was speaking to yesterday, uses Windchill to manage their platform product strategy, which leverages modular components. The sophisticated configuration management capabilities of Windchill have enabled the Volvo Group to produce more product variants while at the same time lowering their unique part count, which is good for the Volvo Group's top line as well as their bottom line.
Industrial companies have come to understand that their ERP systems are inadequate to handle these types of complexities. They now view their PLM systems as strategic and spending on PLM is in focus. Secondly, industrial companies are facing competitive pressures and are looking for new ways to drive productivity and efficiency as they digitally transform. They also rearchitect their workflows to streamline inefficiencies and drive collaboration with their manufacturing, quality and service operations.
Again, it is the PLM system that takes center-stage as this happens, because the PLM system is becoming the system of record for product data, and that makes the PLM system the epicenter for digital transformation of product companies. Increasingly, PLM systems are being leveraged as the backbone for sharing product data across departments, as well as with design and supply chain partners. This is good news for PTC. The market is coming to us where we are strong.
Another large value creation opportunity is cross selling. PTC has done this successfully over the years, and we have additions to the portfolio that are meeting evolving customer needs and therefore present significant opportunities for PTC:
One is, ALM or Application Lifecycle Management, which is led by Codebeamer and is now augmented by our acquisition of Pure variants. Here we have the most modern and capable ALM solution in the market. Products now contain more embedded software than ever, and for many products there has been an explosion in the number of unique software configurations that need to be developed and updated over time.
Codebeamer is the next-gen software development platform that enables industrial companies to manage this increasing level of complexity. Pure variants augments Codebeamer with industry-leading software variant management capabilities, which is a key differentiator. While demand from the Auto industry and its suppliers are a strong driver of ALM growth, demand for ALM tools is expanding in other verticals as well due to the trend towards software-driven products of all types. Clearly, this is an interesting growth opportunity and we have been increasing our investments and focus in this area.
A second cross-sell opportunity is ServiceMax. We acquired ServiceMax in January 2023 and the strategic fit with PTC is solid. For many of our customers, growing the services business is their top priority. As a system of record for high value, long lifecycle assets in the field, ServiceMax significantly enhances our SLM or Service Lifecycle Management portfolio, enabling PTC to now offer the industry's first truly comprehensive solution for service process optimization.
The opportunity set here is large, and this segment is underpenetrated today, with most of our wins replacing homegrown or stretchy-based systems. ServiceMax has approximately 300 customers and PTC has approximately 3000, with the exact same profile. Industrial companies that produce complex, high value assets. This provides us with clear cross-sell opportunities and we have now aligned the PTC sales teams with the ServiceMax sales specialists to go to market together.
We are building momentum, but keep in mind that this will take some time to develop because sales cycles for this type of product are long given their new implementations for the most part. Clearly, continuing to grow CAD and converting our install base over to SaaS across all products are two additional opportunities, which overlap to some extent, because we will see conversion of Creo customers to our Creo+ SaaS offering over time, much like Windchill+. For customers, moving to SaaS enables a different collaboration paradigm that brings significant productivity benefits, making real-time, multi-user collaboration possible.
Beyond the productivity benefits, customers also want the lower total cost of ownership and improved security posture that SaaS offers. As we have stated previously, we see this as another 10-plus-year journey for our customers. We have visibility to solid growth in our core on-premise business; and therefore, don't need to rush things and force customers to move before they are ready. The opportunity will be with us for a long time. Therefore, our focus is making sure our SaaS transition is done with an optimized customer experience. It is a tight community, so credibility and references are important.
Wrapping up on Slide 13. I'm honored to be stepping in at such an exciting time. There are so many good things happening at PTC and so many opportunities to drive further value. In part because of the portfolio of products that Jim and the team built over the years and the distinct needs of the market, PTC is well-positioned to deliver sustainable ARR and free cash flow growth, based on layers of cumulative growth and profit drivers.
We are putting, as I said, more wood behind the most important arrows to drive the best outcomes for our customers, and I am focused on working with the team to enhance PTC's execution on the opportunities that drive the most customer and shareholder value. We plan to host an Investor Day this year and share more about our key medium to long-term opportunities. We are working towards becoming more consistent with our messaging, and more focused in how we prioritize our time and resources. It is a great time to be at PTC, because we have a clear path to unlocking a lot of value.
With that, I'll hand the call over to Kristian to take you through our Q1 financial results.
