PTC Inc. (PTC) Earnings Call Transcript & Summary

[Presentation] Good morning, good afternoon and good evening. Welcome to PTC's Fiscal '22 Investor Day. My name is Matt Shimao, I'm Head of Investor Relations at PTC. And on behalf of the entire executive leadership team, thank you for joining us today. We have a great agenda planned for you designed to articulate the ongoing evolution of our business model to meet the evolving requirements of our customers. We will address the key topics that you have been focused on, including our SaaS acceleration and why we believe we are well positioned to deliver on our midterm ARR and free cash flow targets we will hear from Jim Heppelmann, our President and CEO. Jim will cover our strategy, our experienced leadership team and our attractive market opportunities. Jim will also explain how we have driven superior growth in recent years and why we are well positioned to extend our track record. Following Jim will be PTC's Chief Strategy Officer, Catherine Kniker, or CK as she likes to be called, who will share why we are accelerating our move to SaaS as well as key elements of our SaaS acceleration program. In our SaaS acceleration section, we will also have Steve Dertien, our CTO. Steve will take you through the benefits we can provide our customers through SaaS and the importance of Atlas as the single platform that PTC will leverage on our size journey. Now as you heard on our November 3 earnings call, PTC has reorganized into 2 main business units digital thread and Velocity. Today, the presidents of digital thread and Velocity will take you through their strategic focus areas, key operational goals and plans to drive growth. First up will be Troy Richardson, President of Digital Thread. Troy will be joined by EVP of Products, Kevin Wrenn. Troy and Kevin will share how digital thread is driving value for customers and for PTC with our sales operating model, product portfolio and SaaS acceleration. Next, we'll turn to Velocity, which is built around our market-leading cloud native, Onshape and Arena products. This section will be led by Mike DiTullio, President of Velocity, who will explain how we will stay ahead of the competition. Mike will be joined by Jon Hirschtick, Founder and General Manager of Onshape. Rounding out today's presentations will be PTC's Chief Financial Officer, Kristian Talvitie. Kristian will first recap why we believe ARR and free cash flow are the most relevant metrics for PTC, and provide a primer on how we account for bookings, ARR and revenue. Then Kristian will focus on our financial targets and provide an in-depth look into why we believe we will continue to deliver on our ARR and free cash flow targets. To wrap up today's event, we will host a 30-minute session -- Q&A session, starting around 1:00 p.m. Eastern featuring Jim, Troy, Mike and Kristian. Finally, before I turn it over to Jim, let me remind you that today's presentation includes forward-looking statements regarding PTC's future financial performance strategic outlook and expectations, anticipated future operations and effects of strategic investments and initiatives and products and markets and associated growth rates. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Information about 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, Forms 10-Q and other filings with the U.S. Securities and Exchange Commission. We will also be referencing supplemental operating and non-GAAP financial measures, targets and estimates. The non-GAAP financial measures are not prepared in accordance with GAAP. The definitions of these items and reconciliations of non-GAAP financial measures to comparable GAAP measures can be found on PTC's Investor Relations website in the posted version of this presentation. Now we have a lot of great content for you today. So let's get started. I'm pleased to introduce PTC's President and Chief Executive Officer, Jim Heppelmann.

Thanks, Matt, and a big thank you to the analysts and investors who are joining us today. With PTC unveiling our next inflection point for growth and margin expansion at the recent earnings call, I know you have a lot of questions. So it's a perfect time to share more about what PTC is up to. Digital transformation is the big trend happening all around us and companies around the world are making massive investments to become more digital. COVID has accelerated this trend by driving labor shortages and work-from-home trends into every company's business. A huge portion of the overall digital transformation spend, about 30%, is occurring with companies in the manufacturing industry we serve, and we have a strategy to capitalize on that. Within digital transformation, the biggest theme is shifting to the cloud, which is highly relevant to today's agenda. Let's review how PTC is responding to this digital transformation opportunity. At the heart of every industrial company lies their physical products, their ability to innovate in engineering, to manufacture efficiently, and to deliver top-notch customer service is literally the difference between success and failure for these companies. The use of digital technologies across the physical product life cycle is a strategy used by forward-thinking companies to create competitive advantage. And it's a real threat to those who are laggards. With our unique portfolio of technologies, PTC can play a key role in digitizing the activities across any manufacturing company's product life cycle. And we can help them generate a lot of value as we go about it. What you see in text here is a good way to think about PTC's role and value proposition, but we've distilled that strategy statement down to 3 simple words: digital transforms physical, which means that our digital technologies transform the customers' physical product life cycle. The concepts captured in our logo. The green D, which means Digital and refers to our software, provides a foundation for the Black P, which means physical and refers to the customers' product. The letters PTC now capture our purpose, too, which is the power to create. Our employees have an amazing power to create, whether creating software, SaaS delivery models, go-to-market capabilities or shareholder value, you name it. But through our software, we transmit our power to create to our customers, too. So our power becomes their power. When PTC says digital transforms physical, it has real meaning and we can get quite precise with it. We could talk about specific product functionalities that drive various forms of digital transformation and the business value that each functionality creates. Our message is not abstract at all. For example, with CAD, digital literally defines physical. Our digital CAD tools are used to model future physical products and to generate designs with AI. We leverage our ANSYS partnership to digitally simulate the future physical performance. CAD is used to fully specify physical parts with annotated 3D models that eliminate drawings, and then to produce those physical parts with 3D printing as well as machining instructions for subtractive processes and instructions for workers who assemble the product. With PLM, digital manages physical as the product system of record, PLM catalogs the entirety of a company's product IP collection. It understands the various ways to combine and configure this IP to match customer and process needs. It synchronizes development across mechanical, electronic and software domains. It assures quality and compliance, and it creates a high-fidelity digital twin that mirrors the as is or to be physical product. with IoT, digital connects physical. It gathers data from sensors or control systems on physical assets. It can translate and combine data streams from hundreds of different protocols, then monitor, predict and optimize the operation and service needs of a product fleet or a collection of factory assets. Our new DPM software combines all of these capabilities into a turnkey closed-loop optimization solution that identifies and resolves bottlenecks, creating tremendous gains in the efficiency of industrial processes. With AR, digital augments physical to drive frontline worker productivity, using the industry's most advanced computer vision technology, our software recognizes the physical world, which means we can then decorate it with digital content, to guide a worker or to capture and share expertise from one worker to another and to support remote workers in real time. With our spatial computing technology, companies can create a virtualized metaverse of a factory or work site in order to analyze what's happening and determine how to improve it without actually going there. Then thanks to our push into SaaS digital disrupts physical by eliminating the upfront cost and complexity associated with on-site servers, storage and system administrators. The SaaS approach accelerates initial and ongoing value. It economize ownership, mobilizes data across different devices democratizes access across the company and its supply chain and turns product development into a multiuser social activity. You'll learn a lot more about our SaaS strategy today. While we have a digital transforms physical strategy, we use 2 executions of that strategy to address different needs within the marketplace. To do that, we've organized into 2 business units called Digital Thread and Velocity. Troy Richardson presides over Digital Thread and owns Creo, Windchill, ThingWorx, Vuforia and FSG. Troy's focus is on meeting the digital transformation moment through product integration and cross-sell and bringing that large installed base to SaaS. Mike DiTullio presides over Velocity, which includes Onshape and Arena and focuses on companies that want to develop physical products using the same agile development processes they use for software. This is a new logo business that's taking share in a space where PTC has not played much previously. Now despite their mutual admiration for SaaS, there is distinct positioning between the business units. The Digital Thread group addresses the needs of manufacturing companies who rely on platform strategies to drive IP reuse. A good example might be a company like Volvo, who, for example, uses the same engine technology in trucks, buses, boat engines and construction equipment which in turn drives incredible downstream manufacturing and service advantages. Companies like this prioritize reuse of existing technology and new products. That drives key requirements around configuration management, being deeply integrated with CAD data management in what we call configuration-driven digital mockup. The way that Creo and Windchill work together, creates a highly differentiated solution for companies like this, and there are many of them. Platform companies on average are older and larger and tend to build more expensive and longer life cycle products. They have tremendous operation advantages but are under a lot of pressure to continually modernize their digital approaches to fend off new market entrants. Troy Richardson and Kevin Wrenn will tell you more about these type of companies and the solutions we offer to meet their digital transformation needs. Now the average Velocity customer is really quite different. They tend to make products where a majority of the product value lies in the electronics and software built into the product. Because these companies live in the shadow of Moore's Law, their product life cycles are short. Reuse is of lesser value due to rapid component obsolescence. So there are a lot of clean sheet designs. For companies like this, time to market is critical, and they might be measured in weeks rather than months or years. Their strategy is to adopt agile product development processes meaning frequent iterations and daily builds to allow a team to create a physical product quickly as if it were a pure software. There's no good way to address these needs, except with a SaaS approach. Because they frequently use contract manufacturers to produce their product, a broad solution that includes manufacturing or service may have less perceived value here than it would in the other segment. These companies tend to be younger which is not necessarily the same as saying they're small. Mike DiTullio and Jon Hirschtick will tell you more about these customers and the unique solution we offered them. You can think of our addressable market as a triangle. At the top are large companies. And the larger you go, the fewer companies that remain. At the bottom are smaller companies and the smaller you go, the more that exist. Creo and Windchill, for example, are sold to larger OEMs and to the first, second and sometimes third tier suppliers that serve them. Effectively all of the Windchill base and much of the Creo base is in the upper half of that black triangle. So Velocity's success has been almost purely incremental. You can think of the Velocity segment as the green triangle within the larger black triangle. On average, tech-centric companies are smaller than your typical auto, industrial and aerospace OEMs that have platform strategies. But at the same time, because products of all types now contain electronics and software, the topic of how one might adopt agile product development is a growing interest to medium-sized companies and even do a few large ones. So Onshape and Arena are moving upmarket but with a different core value proposition than Creo and Windchill. Our goal is to have 2 families of SaaS solutions built on the same Atlas technology but focused on these different needs. If you're skeptical that a dual product strategy can work, I'll point you to Dassault's 20-year run with CATIA and SolidWorks as evidence that it can. Our strategy is solid, and so is the leadership team that creates and drives it. Let's take a look. I'm blessed with an amazing leadership team filled with some of the industry's best talent and experience, and we all share a combination of passion and work ethic. Even with new talents like Jill Larsen, Troy Richardson, Jon Hirschtick and Craig Melrose, joining the company in the last 2 years, our leadership team has an amazing average tenure of more than 14 years. That's unheard of in the software industry. Throughout the course of the day, you're going to get to hear from many of these leaders, including CK, Troy, Steve, Kevin, Mike, Jon and Kristian. As a 24-year veteran of PTC, now in my 12th year as CEO, I find it incredible that nearly half the executive team I depend on has been here almost as long or even longer than me. On the other hand, the newer team members like Jill, Troy, Jon and Craig have all brought important new ideas and new perspectives that have made our company stronger. Jill Larsen has helped shape our culture, drove our power to create purpose and helped make PTC a great place to work. Troy joined over a year ago, and it was his outside-in perspective and questioning of the status quo that ultimately led us to reorganize our customer success activities. Jon Hirschtick, of course, brought us Onshape and Atlas but he's also been a culture carrier that makes us think hard about what we do and how SaaS companies might do it differently. Craig Melrose, a 20-year veteran operations improvement expert at McKinsey joined PTC to lead our DPM solution efforts. The PTC of today is a very different company than the company I was chosen to lead more than 11 years ago. It's helpful to have the context of the bold changes we've already successfully made to better understand the changes we're making now with our pivot to SaaS. Let's take a look. If you go way back, PTC has a colorful history as a high-flying growth company in the '90s that encountered hard times at the turn of the century. The story about how we got from there to here started when PTC acquired the pre-revenue Windchill company, I had found it. Windchill went on to become a core backbone of PTC strategy to this day. While Windchill helped save a struggling PTC in the early days, it wasn't until the Board elevated me to the CEO role in FY '11 that things got really interesting. With support from the team I introduced earlier, that's when we set out to transform PTC into a company we could be proud of. First, we spent $100 million on an ambitious R&D program to redevelop a struggling Pro/ENGINEER product into a next-generation CAD product called Creo. Creo has been a huge success. Next, we went after margins, which were unacceptably low. As the new CEO, I remember promising investors that we would expand margins 2 points per year for 5 years. But we went on to add 19 points in 11 years with a few more points to come, thanks to our recently announced changes. We knew we couldn't win alone, so we set out to build a partner ecosystem. We gave the VARs more territory, built an SI ecosystem and added strategic partnerships with Microsoft around cloud, with Rockwell around manufacturing, and with ANSYS for simulation. This partner ecosystem has been a game changer for PTC, as it's enabled us to add to the top line while expanding the bottom line. We began our SaaS journey back in 2013 when we acquired NetIDEAS, a cloud services partner who had built a business offering Windchill as a service. The tenfold ARR growth we saw in the following 8 years confirms the strong market demand for SaaS. To raise the ceiling on PTC's growth opportunity, we look for adjacencies with stronger growth. We acquired ThingWorx to enter the IoT market and Vuforia to get a beachhead in augmented reality. The ThingWorx business has grown from more than $2 million to more than $150 million of ARR, while Vuforia has grown from $2 million to more than $30 million of ARR in FY '21. The unsavory prospect of building brand-new businesses like IoT and AR in an outdated perpetual model led us to undertake a major program to transition the entire company to a recurring revenue subscription business model. After successfully transitioning the valley of death, we love that now 98% of our software revenue comes from recurring sources, which drives both higher growth and better resiliency. By 2020, with 7 years of running NetIDEAS under our belt, we had learned a few important lessons. First, that there was strong demand for SaaS, but second, that the single tenant approach lacked the margin profile that we want at PTC. It became clear that the only long-term interesting approach would be multi-tenant SaaS. So we acquired Onshape and Arena to become the cloud native and multi-tenant CAD and PLM leader now with more than $70 million of ARR. We've been working on our Atlas SaaS platform for 2 years now. And we told you a lot about Atlas at last year's Investor day. Atlas is a strategy to borrow the multi-tenant technology from Onshape and bring it to the entire product portfolio including Windchill, Creo, ThingWorx and Vuforia. In FY '21, we refactored Vuforia on to Atlas, a successful proof of concept. So now we are ready to accelerate phase 3, which starts with Windchill on multi-tenant Atlas beginning in fiscal Q2 with Creo and ThingWorx to follow later. Phase 3 is a more aggressive strategy than what we had been discussing. We're leaning in because of the success we had with Vuforia, technical breakthroughs we've achieved making Windchill multi-tenant and all those new investments we're pouring into SaaS. Our CTO, Steve Dertien, will tell you more about the Windchill multi-tenant approach we're launching in Q2, which mirrors the approach that Dynamics 365 and ServiceNow are following. Now SaaS isn't only about the technology. It affects the organizational structure of a company as well. Realizing that SaaS are companies organized differently, we set out to transform that part of our company, too. With Troy's insights and McKinsey's help, we found a low-risk way to increase our operating efficiency while serving customers better at the same time. We will give you much more information about the different dimensions of our SaaS strategy throughout this session today. I'm proud how this team by performing while transforming has reinvented PTC. We have made progress every single year, steadily adding 10 percentage points of growth while expanding margins by 19 percentage points. On a rule of 40 measure, that's 29 points or an average of nearly 1 point of growth and 2 points of margin expansion per year. As a consequence, the market cap has increased more than fivefold. This amazing transformation has taken us from the basement to the penthouse in terms of performance versus industry peers with growth rates closing in an Autodesk and margins moving toward ANSYS, especially as the latest changes take hold. I acknowledge we've taken restructuring charges at various points along the way in this long journey, but these efforts have dramatically reshaped the company structure and created recurring value well in excess of the onetime restructuring costs. I expect the latest restructuring charge may prove to be our last for some time. Because as the latest changes take hold, we will have modernized and advanced our technology and organization and business model to be state-of-the-art. As you can see, the PTC leadership team has a great track record, and I am supremely confident in what we're doing now. Let's take a look then at the company we've created. In our last fiscal year, PTC generated just over $1.8 billion in revenue. The revenue mix was 91% software and just 9% services. We view software as our core business and want to have just enough services to develop new practices and then to enable and support a partner ecosystem who delivers them. Our services mix has been declining for years as the software outgrow it. And I expect that trend to continue because it's been a big margin driver. If you look at the software part of the revenue, you can see that it is 98% recurring and just 2% perpetual. Our transformation to a subscription business model is complete and it has been very successful. Switching from revenue to recurring software ARR in FY '21, we had $1.47 billion, growing 16% or 12% organically. In terms of market mix in FY '21, it was 42% CAD growing at 11%, 32% PLM growing at 30% or 14% organically if you remove the newly acquired Arena. 11% IoT growing at 16%, 2% augmented reality, growing at 22% and 13% FSG, growing at a surprisingly strong 7%. The delivery model for this ARR mix is interesting. And I'm guessing there's probably more SaaS than you might have expected. While 86% of our subscription software remains on-premise, a full 14% of PTC ARR is in different forms of SaaS, and both forms of SaaS outgrew the on-premise software last year by a large margin, more than triple. That's why we're pivoting to SaaS. I'd like to dive a bit deeper into our SaaS business and our SaaS transformation plans. The first thing I want to cover is why the customer would pay more for SaaS and why it's completely wrong to think of it as a price hike. The SaaS approach represents a substantial increase in value, which the customer is happy to pay for. In an on-premise model, after a customer buys application software from a vendor like PTC, they need to buy infrastructure software and hardware and hire system administrators to manage it all. Windchill, like any enterprise software sits on a stack of infrastructure tools like operating systems, web servers, databases, directory servers, Java VMs, BI tools, system administration tools, security tools and more. Windchill requires large servers, sized for peak load, the product data Windchill stores like CAD files, is large. You need substantial storage sized with headroom to expand. A system administrator or a team of them in the larger deployment needs to set up and maintain everything. You have obsolescence issues up and down the stack as new versions of software are being released all the time, and you need to stay current with various infrastructure and application layers or you risk dropping out of support. If there's a security patch to the operating system or any other component, you need to get on that ASAP but be careful not to break anything by introducing some new incompatibility problem. It does take a lot of care and feeding. The point is, this stuff all costs money and it creates headaches. Customers would prefer to pay us more to take it off their hands because we enjoy substantial operating efficiencies, we can charge that extra dollar yet save the customer money overall. The 2:1 ratio of SaaS to on-premise pricing is an industry rule of thumb, but CK will show you later, it's been slightly better than that at PTC over the past 8 years for Windchill, Servigistics and ThingWorx. Let's talk about how we pursue this opportunity. You saw that our SaaS strategy is not really new at all that we're simply launching the third phase of a journey we began 8 years ago. Starting back in 1987, PTC began shipping software to customers, first on a perpetual model, later on a subscription basis. That part of our business is more than $1.25 billion of ARR and it's been growing at a 10% CAGR over the past 3 years. The on-prem model will continue indefinitely for those customers who prefer it. The first phase of SaaS started back in 2013 when we acquired NetIDEAS and launched our single-tenant SaaS offering for PLM and then followed with SLM and IoT. Over time, this model proved the demand for SaaS offerings, but it left us wishing for more in terms of margins because there were no benefits of scale. With margins that looked a lot like professional services we limited SaaS to those new sales where it was deemed necessary to win and we disallowed lift and shifts of the on-premise customer base. Even with little push due to those margin challenges This part of our business now has more than $120 million of ARR and has been growing at a 23% compounded rate over the past 3 years, more than quadruple the market growth rate in that time frame. The demand in the market is real. It became clear to us that we would need a multi-tenant approach to align the SaaS offering customers want with the margins we want on our end. In FY '20, we launched Phase 2 which is our multi-tenant strategy when we acquired Onshape and Arena. Seeing the greater efficiency of this approach, which we now had in-house, we launched the Atlas platform as a strategy to bring multi-tenant benefits to the broader product suite. There's been a lot of investment in Atlas over the past 2 years, ultimately leading to the successful deployment of the Vuforia AR suite on to Atlas in FY '21. That was our proof of concept for Atlas, and it was very successful. The multi-tenant part of our business, inclusive of Vuforia, had more than $85 million of ARR in FY '21 and has been growing at a 32% compounded rate over 3 years if you adjust as if PTC owned Arena and Onshape back in 2018. Now that Atlas is open for business here in FY '22, we're ready to launch Phase 3 of SaaS, which is to offer Windchill on Atlas in Q2, with ThingWorx and Creo on Atlas to follow. The Atlas multi-tenant approach gives us the margin profile we're comfortable with. So we've pivoted our new sales efforts to this configuration at our sales kickoff last week. A second but very important dimension of Phase 3 is what we call that lift and shift program. In this model, we lift on-premise deployments, upgrade and decustomize as necessary to reduce technical debt and then merge them into a running multi-tenant system. This SaaS conversion creates strong benefits for the customer. For PTC, for each dollar of ARR, we convert from on-premise, we end up with $2 of ARR in SaaS. So there's a strong growth opportunity associated with upselling the large on-premise customer base to SaaS. We also plan to lift and shift the existing single-tenant cloud systems, so they become multi-tenant as well. But in this case, the main driver is the margin improvement opportunity this shift creates within PTC. This SaaS strategy is another business model transformation for PTC with another opportunity to drive higher growth by monetizing a conversion of the customer base to a higher-value offering. Putting a SaaS model on top of a subscription model creates a lot of incremental value. Many vendors do SaaS and subscription in 1 combined step, but for PTC, it's worked better to do it 2. PTC could more readily get 98% of our customers to subscription because it's just a license model change, whereas SaaS impacts the actual software deployment. The 2-step approach creates 2 waves of monetization. One is behind us. the bigger one lies ahead. I know there's plenty of confusion here. So to illustrate how important the business model is and the differences between subscription and SaaS, I will walk you qualitatively through the story of a hypothetical on-premise perpetual company who goes through a 2-step process to convert first to subscription and then to SaaS and emerges with a sustained growth rate significantly higher than the market they compete in. The quantitative data for this model is on the next slide for your review later. This company is not PTC. The story has been simplified, but it mirrors what we've been doing and explains why PTC can outgrow the CAD and PLM market for years to come. At the start, see point #1, this company is a typical perpetual enterprise software company in a 7% growth market. They have $500 million of maintenance, $300 million of license sales and $200 million of professional services. License and service are both growing at 7%. Maintenance is priced at 20% of License, has 100% attach, and this being sticky in mature enterprise software, just 5% churn. Like its peers in the market, this company grows at 7%. It's a lot like PTC's CAD and PLM business of 10 years ago and like many other perpetual companies as well. In year 2, this company decides to do a subscription transition, which is shown at point #2. They flip a switch and start selling their software on a recurring basis. They now charge 45% of the initial license fee per year for the subscription, which includes maintenance. This mirrors what PTC and many others have done. The company's first year revenue drops because they no longer have the big upfront purchases happening. And the company enters the so-called valley of death. Revenue and EPS remained depressed in the valley and investors get concerned. It takes a few years to cross the valley because each new contract is now producing $0.45 per year rather than the $1 upfront and then $0.20 per year. But at the end of the fourth year, both models have produced $1.80 and the curves [ cross ]. In the fifth year and beyond, the subscription model continues to produce $0.45 per year whereas the perpetual model would have produced just $0.20 per year with sticky software like ours that's used for many years, the customer lifetime value increases substantially in this model. So while winning the same number of seats this company begins to outgrow its industry peers who remain stuck with the old model. In the hypothetical example here, the subscription model advantage is worth 280 basis points of growth, plus it's very resilient in a downturn. Let's remember that the prospect of higher growth and resiliency is precisely why PTC and Autodesk and Adobe chose to go through the valley of death. At this point in the story, the software ARR is subscription, but it remains on-premise. So customers still have the cost and headaches of on-premise software that I previously discussed. After the dust settles on the subscription transition in year 9, shown as point 3, this same company, already outgrowing its peers, decides to transition to a SaaS model as well. They begin to shift their new sales effort to SaaS with 5% of new sales per year now coming in at SaaS, which adds that second dollar to the ARR run rate. The SaaS mix of new sales continues to increase at 500 basis points a year, but it's unlikely to get to 100%. The company also implements a lift-and-shift SaaS conversion program, and 5% of the on-prem customer base converts to SaaS per year, which adds the second dollar to their ARR run rate as well. The customer base converted to SaaS also increases at 500 basis points per year. But again, it's likely some portion of the base will never convert. It's important to note that there is no valley of death in a SaaS conversion that follows a subscription conversion because the valley is tied to the pricing model, not the delivery model, and this company has already crossed that valley. A SaaS conversion followed -- following a completed subscription transition is pure upside. With the added SaaS ARR from new sales and from conversions, the growth of this company shifts up a gear, adding another 420 basis points of growth on a compounding basis during the 3-year period. During this time frame, the company is growing at double the rate of the market, even though this company still only adds 7% more seats per year. They're growing faster because they're providing substantially more value to the market than the companies they're being compared to, and their customers are paying them for it. Not only does a recurring SaaS model grow faster, it's highly resilient and doesn't collapse if there's a downturn caused by a pandemic or whatever. A recurring SaaS business model simply outperforms a perpetual on-premise market year-in and year-out. Note again that this company is not PTC. Our story is much more complicated, but I trust you can see the parallels. If this were PTC, we'd be somewhere between year 9 and year 10, enjoying some SaaS benefit already, but really just getting started now that we're removing the constraints and are more aggressively pursuing the SaaS model for both new sales and lift and shifts. Business model advantages are a big reason that industry growth leaders like PTC and Autodesk are outgrowing the market. If you wonder why all companies in the market don't do this, well, the first part of the answer is because entering the valley of death is painful and scary. The second part of the answer is they are. In our industry, Autodesk crossed first and PTC followed. Both companies are well beyond the Valley now and enjoy growth well above the markets they serve. After standing on the sidelines for years and then suffering major downturns in the 2020 recession, both Dassault and Siemens, the largest vendors in our market have announced business model transitions. I say welcome to the club and good luck crossing the Valley. The interesting thing is that if all the vendors in the market upgraded their model to subscription SaaS and brought their customer bases along with. The consequence is that the market would grow faster. Because we'd be all gaining substantially more customer lifetime value. It would effectively double the TAM of the market. In other words, PTC and Autodesk are unlikely to slow to market growth rates, but as Dassault and Siemens transitioned their business model, the entire market should accelerate toward PTC and Autodesk growth levels. The quantitative data that supports the model is supplied here for your review. A reminder that this model is not a real company, and it lacks real-world complexities, including but not limited to ASC 606 impacts and is based on the assumptions I've shared. Changing the assumptions, changes the outputs, but not directionally. The SaaS phenomenon will create a tailwind of growth for PTC's core CAD and PLM businesses for years to come, and it's already started. If we roll single-tenant SaaS and multi-tenant SaaS together, PTC had over $200 million of SaaS revenue in FY '21, which is about 14% of our total ARR. Simple math shows that having 14% of ARR, growing 20% faster than the balance, adds nearly 3 points of growth to the company. We're probably deeper into SaaS than you realized. But we've also had to put a governor on the single-tenant SaaS business for profitability reasons. And now with our multi-tenant Atlas technology ready to go, we plan to open the throttle. Going forward, we'll begin to focus our selling efforts on SaaS wherever applicable, including both new deals and the lift and shift process. Naturally, we'll continue to sell on-premise systems when customers prefer and we'll continue to expand and upsell existing on-premise solutions too. Over time, we expect to see the fastest growth in multi-tenant SaaS. We would expect slower growth in single-tenant SaaS as we deemphasize it in pursuit of higher margins and slower growth in on-premise ARR as well due to the mix shift to SaaS. We expect that about 1/3 of our ARR will be SaaS in 5 years at the end of FY '26. But our SaaS business will continue to grow well beyond that time frame and will become a majority of ARR in later years. With SaaS layered on top of subscription, layered on top of strong products that aligned to good market demand, growth of the CAD and PLM businesses should remain in the double digits and potentially accelerate and growth overall for PTC should remain strong. Okay. With the SaaS discussion out of the way, let's take a look at what's happening in our markets. The first thing to note is that our view on the market has evolved in important way since our Investor Day in 2019. For starters, it was influenced by a pandemic and recession, but we've also gained a deeper understanding of key drivers including both subscription and SaaS, some of which I just shared with you. Back in 2019, we expected the core CAD and PLM market to remain strong and PTC to slow the market growth rates in this largest part of our business. What transpired was as the market slowdown during the COVID recession, that didn't affect PTC much due to the resiliency of our subscription model. In our updated view, we no longer expect PTC CAD and PLM to slow into single digits. We also expected the market in our growth products, which was IoT and AR plus Onshape at the time with Arena added in FY '20 to perform with a 3 handle or even a 4 handle. That level of growth did not materialize in this smaller part of our business. Instead, the market slowed with the recession and PTC performed in line with the market. In our updated view, we expect IoT and AR to largely track with the market. Note that our segmentation model is different in FY '22 than it was in FY '19. The overperformance that happened in our large core business, which we do think is sustainable, canceled the underperformance of the smaller growth portion, which we do think will improve and PTC has performed at a steady double-digit organic rate right through the recession. Let's take a look at the CAD, PLM, IoT and AR markets individually to see what's happening in each. We'll start with CAD because it's our largest business representing 42% of the ARR mix, inclusive of Creo and Onshape. In the CAD market, PTC has 11% share and we're outgrowing a market that's been through a recent downturn but is expected to accelerate going forward. CAD's growth has been driven by tremendous products, by the advantage of having a subscription model in a largely perpetual industry and the advantage of having a growing SaaS mix with Onshape now and Creo to follow in a largely on-premise industry. We've been helped by the ANSYS partnership and our resellers and have seen tailwinds from digital transformation, especially a growing influence of Windchill on CAD decisions at places like Volvo. With improving market growth projections and a set of growth drivers that are unlikely to fade on our side, we expect to continue to deliver strong outgrowth in CAD. As our second largest business, PLM represents 32% of our ARR, inclusive of Windchill and Arena. Here, PTC has 20% share, and we're handily outgrowing a market that's been through a downturn and is expected to accelerate going forward. PTC's growth has been driven by tremendous products by the advantage, again, of having a subscription model in a largely perpetual industry and the advantage of having a growing SaaS mix, this time, both Windchill and Arena in a largely on-premise industry. We've been helped by tailwinds from digital transformation and by our partner ecosystem. With improving market growth projections and our own growth drivers unlikely to fade, we expect to continue strong outgrowth in PLM. Now before I go further, let's step back and review everything I've said so far as it applies to our CAD and PLM businesses, which represent more than 70% of our ARR mix and try to answer the question of whether the growth is sustainable. Over the past 3 years, PTC's CAD and PLM businesses in aggregate have been growing at around 12% in a market that was growing 5%. It's difficult to say with precision, but our models suggest you can bridge the 700 basis points growth differential with a roughly equal split of product advantage and business model advantages we already have in place. Note that while our SaaS bookings mix is increasing, we've only been getting a small portion of the full SaaS benefit to date because we've not been selling Creo as SaaS nor converting the CAD and PLM customer base, both of which represent large components of the SaaS growth advantage in the model we discussed earlier. Per our recent pivot to SaaS and today's lift and shift discussions, we plan to start pursuing that now, which should create a nice tailwind going forward. I should point out that the SaaS mix in PLM is currently much higher than in CAD, thanks to both Windchill and Arena contributing which means the business model advantages would be larger in PLM than for CAD, which would help explain the relatively larger outgrowth in PLM, relative to the market than we see in CAD. Given this bridge, we think our CAD and PLM growth rates will prove sustainable in the double-digit range and could potentially accelerate if market conditions remain stable and our SaaS push accelerates SaaS booking mix and conversion rates for PLM and CAD going forward. Remember, too, that SaaS won't happen quickly. It will be a long-term driver for PTC. Moving on to IoT. Here, we have about 11% of our ARR in a $1.2 billion market for IoT application enablement platforms, which is about 14% share. PTC's upper teens growth over the past 3 years is just slightly ahead of the market. While the market has slowed during COVID, our IoT growth has remained accretive to the company. Market conditions are showing signs of improvement, both in terms of analyst projections and our own bookings and pipeline. Here, we enjoy great products, too. And while our recurring model is typical in this industry and therefore, provides no relative advantage, we do see our churn rates improving. We believe the launch of our up-the-stack solution strategy with DPM will prove helpful as well cross-sell from Windchill and our partnerships with Rockwell and Microsoft. Finally, in augmented reality, which is our smallest segment at just 2% of ARR, we have about 6% share in an early-stage market that grew at a more than 60% compounded rate over the past 3 years. Our own growth top that. Analysts are calling for a very strong growth, though with rates slowing somewhat going forward as the law of large numbers kicks into effect. PTC enjoys a strong product advantage with Vuforia. Our recurring and SaaS models are common in this industry too, but we're seeing improving churn rates, which is helpful. AR is a key digital transformation technology and the linkage to PLM and CAD helps cross-sell. The relationships with Rockwell and Microsoft apply here too and the good manufacturing practices we're adopting have helped us penetrate some nice pharma accounts recently. Let's turn our sights then to the future. looking from a strategic vantage point. If we look at the growth of our overall portfolio, you can see that the 3-year trailing data has us at a 12% organic CAGR. Our FY '22 guidance has FSG at 0, core CAD and PLM at 10 to 12, IoT and AR with a 2 handle by year-end and velocity with a 2 handle as well. But we think over the midterm and longer, we could see acceleration to higher levels in each segment. In FSG, our Servigistics software has some momentum that helped FSG deliver 7% growth in FY '21. And if that continues, we'll do better than 0, maybe up to 5% growth. The SaaS trends I've discussed at length today could add a few more points of growth to core CAD and PLM. Improving market conditions plus the launch of DPM might get IoT back to where we want, which is to say, having a 3 handle. And Velocity could see accelerating growth, thanks to strong agile and SaaS differentiation plus investments in go-to-market, you'll hear about later today. If everything works as we plan, as we hope, then we would land in the upper end of the ranges, and we'd have the opportunity to do better than mid-teens growth overall. If we encounter a challenger too, we might still expect to see mid-teens growth. That's precisely what I meant when I said, there are multiple paths to mid-teens growth, on the recent earnings call. Finally, if there are numerous headwinds that cause us to land at the lower end of the ranges, we could still have double-digit growth. Note that it takes quite draconian assumptions to get down to any scenario with single-digit growth. As you can see, we have a lot to work with here on the growth front. Our planning assumption is that we accelerate to mid-teens growth in the near term or in the midterm. The margin opportunity is equally exciting. While PTC's margins have already improved dramatically, there's more where that came from. There are 2 factors that stand in the way of higher margins at PTC, and we're addressing them both. For us, like any company out there, we have operating inefficiencies. As I said earlier, my team has addressed many operating inefficiencies over the years and posted some great results. Thanks to Troy's leadership, we identified a significant inefficiency in the way that our customer success organization worked. I outlined those changes on the recent earnings call, and Troy will talk more about it this morning. We also offshored some of our IoT and AR development work to allow us to increase capacity on related SaaS initiatives while holding costs flat. With an India R&D center that dates back to 1994, offshoring is a play we've run many times with maturing businesses, always with great results. Thanks to the changes we've already announced, while ARR is projected to grow 10% to 13% in FY '22, spending at the midpoint is only projected to grow about 3%. The difference will flow into margin expansion in FY '22 and beyond. The restructuring charge will obfuscate some of the great progress we're making in our free cash flow results in Q1 to Q3, but you'll be able to see it happening in our adjusted free cash flow metric that Kristian will discuss. The bigger margin expansion opportunity is related to IoT, AR and Onshape all having their margins improve as they scale. Virtually all software start-ups follow a classic J curve. And keep in mind that ThingWorx, Vuforia and Onshape were all startups that were acquired at very small scale. Arena is a start-up, too, but it was a little larger and surprisingly profitable when acquired due to its private -- its prior ownership by a private equity firm. ThingWorx, Vuforia and Onshape are still below the line on profitability. The good news is that they're all progressing in textbook fashion. ThingWorx is approaching breakeven. Vuforia is moving up the backside of the J curve and Onshape's at that point on the curve where profitability gets better and not worse going forward from here. Increasing the profitability of a business as it scales is largely achieved by growing the top line faster than your gross spending. We've been spending heavily in pursuit of growth in these businesses. If the growth failed to materialize in any one of them, then we'd simply dial back, spending in commensurate fashion, and we get the margin expansion that way instead. So either way, the margins on these J-curve businesses will climb in the coming years. Taking the IoT, AR and Onshape businesses from where they currently are to company margins, which is where they ultimately should be represents a substantial margin expansion opportunity in the midterm and beyond. I'd be remiss, however, if I didn't point out that SaaS businesses do not have the same gross margins as on-premise software businesses, which is a modest headwind. For each dollar of on-premise software ARR we've been selling, SaaS gives us that opportunity to add a second dollar that represents the value of the service to deliver and support the software. The second dollar clearly does not come at the same margin percentage as the first dollar. But with multi-tenant technology, it comes in at a margin that remains attractive. PTC has, for years, been growing margins while in parallel, been growing the SaaS ARR mix up to that 14% I discussed. So the factors shown on this slide create much stronger margin tailwinds than the modest headwind of an evolving mix shift towards SaaS. As you can see, we have a lot to work with on the margin front, too. At the most recent earnings call, we stated that the targets we've been sharing at the last 2 investor days remain viable here today. In my view, the outlook is actually improving. I say that because at the November 2019 meeting, we had a recession scenario that assumed a recession might happen in FY '20 too. In fact, that recession happened when the pandemic arrived just 3 months later, and that was both sooner and deeper than we had contemplated. In the recurring model sooner and deeper are bad words. The recession slowed our markets considerably. But the recession impact to PTC was more muted and our growth outlook remains strong. As Kristian said on the earnings call, with the recently announced changes our improved profitability outlook raises cash flow generation at any level of growth. Later, Kristian will show you a model of how we get to $700 million of free cash flow in FY '24, even at the low end of the growth range contemplated back in FY '19. And of course, we do better than that if we get the higher growth we're aiming for. So even though the recession already happened, and it sounds funny to say this, I'm optimistic about our opportunity to achieve the pessimist scenario as things continue to unfold. And PTC's margin and growth expansion opportunities will continue well beyond this time frame. I've given you a lot to think about. Let me summarize my big picture comments before we transition to the deeper dive into the business. I trust you can see why we, the board and management team, remain bullish. The PTC outlook is very promising. First, we serve some really great markets, and we've been performing well in those markets. In terms of products, we are considered by industry analysts to be a leader or even the leader in every market we compete in. You'll hear more about this from my colleagues. Over the past 3 years, we have matched or exceeded the growth of every market segment we participate in. We're the current SaaS leader in CAD and PLM space. And we have a dual strategy to win with the leading cloud-native SaaS products like Onshape and Arena, while we transition the digital thread portfolio and existing customer base to SaaS too. PTC has abundant growth tailwinds and they've helped us consistently outgrow our markets right through the cycle. The digital transformation wave accelerated during COVID and it's become a major new driver in certain markets, most notably PLM. In addition to great products, our recurring revenue model, coupled with very sticky software produces a natural tailwind. I've shown you that our SaaS business is growing much faster than the company overall, which is why we're all in on the SaaS opportunity. We're optimistic that the IoT market will accelerate as the pandemic and supply chain problems subside and as our DPM solution ramps up. And finally, as our portfolio naturally evolves, the growth business has become a bigger slice of the pie, which makes the entire pie grow faster. We have strong margin tailwind still as our growth businesses scale, they'll transition through the J curve, which will lift the company's profitability materially. Meanwhile, the restructuring we've already done will give us a step function improvement here in the short term that will sustain going forward. The company has a great track record of executing ambitious programs. During my time at the helm, the company has improved growth rate by 10 points, while simultaneously improving margins by 19 points. There was no magic, just good strategy and good execution step-by-step over a prolonged period. We're set up to further expand growth and margins going forward. We executed right through the pandemic with a very resilient model. we future-proofed the company by acquiring the very assets that are most likely to disrupt our industry to ensure we can continue to execute no matter what happens, which brings us to the team that drives this company. This is a team with deep industry expertise with passion and drive. This created an amazing strategy and has for more than a decade, nearly flawlessly executed it. A team that took the company from the basement to the penthouse in terms of peer performance and we're not finished. I'm very proud of the team of leaders I get to work with every day. I hope that I was able to address many of your questions about PTC's value creation strategy. Now I'd like to hand you off to CK and Steve Dertien, who will share more about SaaS from a customer, market and technology standpoint. Over to you, CK.

Thanks, Jim. Hi, everyone. I'm Catherine Kniker, PTC's Chief Strategy Officer. Today, I'm going to build off of Jim's opening remarks and explain to you in more detail why PTC is moving to SaaS. To do that, I'm going to walk you through 5 of the most important indicators and proof points so that you understand why it is the right time for this acceleration of our SaaS strategy. First, the market research data is clear about enterprise SaaS adoption and the shift away from on-premise software. Second, PTC's customers have been seeking SaaS solutions for some time now. And I'll share a handful of anecdotes so that you understand the customers' viewpoint. Third, the economics of SaaS are good for our customers and for PTC. So we'll look at the financial benefits of embracing this approach. Next, we'll review several meaningful steps that PTC has already taken to position us for success in the years ahead. And finally, I'll welcome in PTC's Chief Technology Officer, Steve Dertien, for a deep dive on our Atlas SaaS platform and its important role in this strategy. Okay, let's begin with number one. What is the market telling us? If you review the market research landscape, you will see how clear it is that enterprise software market has moved towards SaaS. For example, firms like IDC showed 2022 as the tipping point for most enterprise applications being deployed at SaaS. In line with that, you'll see the notable decline in the percentage of on-prem deployments. This data shows that the enterprise software market is growing at an 8% CAGR. But when you look more closely, you'll see that all the growth is coming from the SaaS or cloud segment at 15%. Now if you want to get more granular by the type of company, consider that almost 80% of product and service organizations, the types of companies that we serve are listing cloud and SaaS as an important or very important for their innovation efforts. So where the market is headed is really quite clear. As good as this acceleration is for PTC, it is even more beneficial for our customers that use our software to improve their business. These benefits include lower total cost of ownership compared with on-premise model and improved security posture, I guarantee that you always be using the latest version of the software, and the internal and external collaboration that is consistent with what we now expect and how we work today. Maybe to bring that to life, let's review a few customer examples. First, let's look at cellcentric. Cellcentric began as a joint venture between Daimler Truck AG and the Volvo Group to develop, produce and market fuel cell systems for industrial trucks. The value of SaaS to cellcentric was actually speed of deployment. When cellcentric embarked on a PLM project with us just in September, they needed to be live with the software no later than December 1. Windchill SaaS was the obvious deployment path, a SaaS-first approach also guaranteed a smooth integration between Windchill and the cellcentric's ERP system, which was critical to their overall cloud-first IT strategy. Another customer that embraced PTC strategy from the start is the United States Navy. There are several benefits of SaaS that -- for the Navy, but collaboration was one of the most important. The Navy adopted Windchill SaaS to extend collaboration beyond engineering to logistics, to supply chain and other groups, both internal and external in their network, leading to a network of more than 15,000 users. Another differentiator for PTC is its commitment to certifications that we've brought to our SaaS strategy. PTC is currently the only PLM software provider certified by the Defense Information services agency with an IL5 certified PLM SaaS offering. More broadly, PTC offers secure SaaS infrastructure that meets FedRAMP compliance, one of the most stringent standards for SaaS environments in the market. It's been a great partnership with the Navy so far, and we look forward to continued success. A third example is Bayer and its Radiology division. The primary benefit of SaaS per Bayer was the reduction of total cost of ownership. Bayer was facing the financial disadvantages of hosting and maintaining an alternative PLM solution in its own data center. Moving to Windchill SaaS eliminated the self-hosting, self-administration requirement and relieved them of that financial burden. In addition, Bayer has adopted ThingWorx in the cloud to support aftermarket service for its machines in the field. Okay. Now let's look at the third indicator, what the economics of SaaS tell us. As you heard earlier, SaaS companies get approximately a 2x uplift on on-premise price points. Customers are willing to do that because there are significant additional costs to run, to scale, to secure, to maintain the software. In a SaaS model, PTC receives more upfront for the software based on the value delivered, but the customer can eliminate all those additional costs I just mentioned. The result is the customers realizing the benefits of SaaS that we just reviewed earlier at a lower total cost of ownership. But this isn't just hypothetical. As you see on the screen, PTC is already getting north of a 2x uplift for our existing single-tenant SaaS deployments. This uplift can vary based on deal size, discounts, add-ons and overages. But in the end, the SaaS customers get the benefit, and this overall increase contributes to our topline growth. Even with that benefit, PTC ultimately saves the customer in this model. Now let's spend a few -- next few minutes reviewing what PTC has already done to set ourselves up to be successful with SaaS in the future. The reality is we've known for years that this is the direction that the market and our customers are headed. So we've pushed ourselves, as you heard from Jim, in this direction, to be in the best possible position when the market accelerates, as it's about to. So here are some examples of what we've already accomplished. First our acquisitions of Onshape and Arena are 2 of the best examples of how serious we are about SaaS. They're leaders in their respective categories and through that we gained a wealth of institutional SaaS knowhow and knowledge, that is benefiting the entire company. And we're leveraging the underlying technology to support other initiatives. The best example of this is how we've leveraged the underlying platform of Onshape to built and operationalize the SaaS -- the Atlas SaaS platform. The common platform and set of services that all PTC products will leverage over time. In a few minutes Steve will give you a closer look at all of the progress that we're making with Atlas. In addition to the cloud native businesses that were recently acquired, many of our customers as you saw through the examples, have long realized the benefits of SaaS deployments with PTC. To expand on Jim's earlier point, this capability was borne out of the NetIDEAS acquisition, and is now central to the SaaS hosting experience for our customers. As the percentages and the logos on the slide indicate, we're seeing meaningful SaaS adoption across our businesses from some of our largest and best-known customers. For example, most of our new retail flex PLM deals are sold as SaaS. And to echo what Jim said earlier, 14% of PTC's total business today is SaaS. In addition, our delivery capabilities are reinforced by the certifications that you see on the screen. These certifications are hard to achieve, but immediately make a difference in customer decisions, especially in industries with heavy regulations and compliance standards like medical device and federal aerospace and defense. On multiple occasions, we've won SaaS deals because we've been the only vendor that meets customer requirements for -- of having these certifications. Now next, let's drill down into one of the most significant pieces of the SaaS business today, Windchill. As you saw, just saw in the earlier slide, 11% of our Windchill core business today is SaaS. And we have strong customer momentum in that direction. Our 3-year CAGR for our Windchill SaaS business is nearly 36%. The demand is notable for a few main reasons. First, PLM as a category has been elevated to a true enterprise platform that is the backbone of broader digital transformation efforts. The demand is real, and we're consistently winning new deals and displacing other solutions in existing deployments. This dynamic received an additional tailwind with the onset of remote collaboration and work-from-anywhere models that have now become the norm. SaaS is the expectation, and we're in the strongest position of any PLM provider to deliver on it. Second, as you heard from Jim, we've been very disciplined in how we've made Windchill SaaS available for our customers. Over the last number of years, we've intentionally limited the number of Windchill SaaS deals while we made architecture and platform enhancements that would result both in a better deployment and usage experience for our customers and a better overall economics for PTC. This has created strong demand from our customer base and we're in the right position today to serve those customers and capitalize on the opportunity. In Q2, we are launching an optimized version of Windchill that includes the architectural enhancements we've been making and is designed to leverage more Atlas services as they become available. This version of Windchill will help us more aggressively capture market demand from new customers and from existing on-prem customers at the time of their next upgrade. This strategy is an easy on-ramp to Atlas for our customers. So we like to think of it as their last upgrade because PTC will take things from there. Another example of how we're setting ourselves up to be successful with SaaS is our company-wide acceleration program. This program mirrors the one we executed 5 years ago when we began transitioning to a subscription business model. The program is being led by [ Bruce Reed ], who also led the subscription transition program. It brings people across PTC together to drive more than 30 connected work streams. Let me give you a few brief examples of the work streams. We're continuing to enhance our SaaS product offerings and scalability by leveraging Atlas. Steve and Kevin Wrenn will share examples of that over the course of today's event. We're also bringing more efficiency and simplicity to our customer engagement and go-to-market strategies. We've updated our sales incentive plans to further encourage our teams to lead with SaaS offerings and bring our customers to the future as soon as possible. Troy will tell you more about this later. And we're continuing to invest in our talent, culture, behaviors and values to reflect the SaaS company we're becoming. So if you add all of these ingredients, where the market is heading, what our customers want, how the economics sit and the path we're already on. Our goal is to go from 14% of our ARR from SaaS in fiscal '20 to approximately 1/3 of our ARR from SaaS by fiscal '26. As I conclude my portion of our presentation, I really hope that you come away with a better understanding that our market -- the market for SaaS is real. Our customers are already seeing value from our SaaS offerings the economics of SaaS are good for our customers and for PTC, and we have the right programs in place to transform PTC into the SaaS leader for the industrial space. Next, let's take a closer look at the role of Atlas our platform is playing in this transformation. Steve, over to you.

Thanks, CK. Hi, everyone. I'm Steve Dertien, PTC's Chief Technology Officer. And at last year's Investor Day, we shared with you our initial plans to combine all of our SaaS development initiatives onto a single platform that we call Atlas. Atlas was born from Onshape where Jon Hirschtick and his team had spent 7 years developing an incredible platform to support their future. And as Jim stated at the time of the Onshape acquisition nearly 2 years ago or just over 2 years ago, PTC acquired not only a tremendous CAD product that they had built, but that incredible platform. It was actually part of our diligence thesis as we were well underway planning and engineering our SaaS future for both Creo and Windchill. Atlas is now the technical home of PTC SaaS future. The single common platform that our products will use to support many of the benefits that you've heard so far today and unbelievable customer experience for collaboration, no more scheduled outages for product upgrades and many, many more. We've made significant progress over this last year with the migration of products like Vuforia and the acceleration of both Windchill and Creo. We're investing in the development of more services that all products will benefit from on Atlas. It's very real, and it's a very critical piece to PTC SaaS future. Now as PTC's CTO, I'd love to take you through a technical review of the platform. But for the purposes of today's event, I'll take you on a visual tour of how Atlas supports our products and our customers. This will help you understand how our customers experience Atlas and why it's their best option for the use of PTC software. Atlas, as seen here in Onshape, unlocks a tremendous amount of parallel and collaborative working methods like what you would see in Google Docs. In this example, engineers in Boston and Tokyo are working simultaneously on the same design for this workstation with all changes visible and documented in real time. It's a modern experience and frankly, the predominant experience that new engineers entering our workforce today expect. Next, let's take a look at before you, the first of PTC's products that we brought over to Atlas. Our Vuforia customers can now leverage all of the benefits of version and workflow access controls and content management, all courtesy of Atlas. These capabilities are essential for many of our customers' regulatory and compliance needs as CK just articulated. For Vuforia specifically, these capabilities have been a substantial differentiator in competitive wins, particularly with pharma and life science companies. We've even incorporated our knowledge of 3D data and translation into Atlas. Many of our products leverage configuration-manage 3D data along the digital thread. Think of a configuration as a specific variation of a product. For instance, one engine has 6 pistons and another engine has 8 pistons. With the amount of 3D data that we manage having an efficient set of services allows us to cost effectively scale many shared use cases across our offerings. This has become increasingly important for us. Here, Vuforia's computer vision and object recognition understands the exact configuration of this Volvo engine and a frontline operator can leverage assembly and inspection procedures in context specific to that variation of the engine. It's an absolute differentiator in the market for us. Next, leveraging data for process automation and workflows is becoming essential for productivity. Every customer that I speak with brings up this topic. If you listen to ServiceNow's recent earnings call, their CEO, Bill McDermott, mentioned workflow more than 30 times. And on Salesforce's call, you may have heard it more than 20 times. We've incorporated our new workflow technology into Atlas, and we're providing across all of our SaaS offerings to allow customers to automate more of their digital thread. SaaS is also fantastic for understanding the telemetry data coming from our products. It helps us understand how our customers are leveraging features and capabilities and help drive adoption with insights to increase customer satisfaction. And as customers appreciate the unprecedented access and insights that they get from the data for tracing their IP, understanding where their information is going and to whom or what their own users are even doing, even whether a supplier has started to work on the data that we've sent to them. Our Creo generative design capability based on Atlas puts generative AI capabilities into the hands of our customers' engineers to efficiently scale and test the number of design options and return the best results for new product decisions. This scale includes all the GPU and AI workloads that generate leverages, making it easier and more efficient for engineers to get the value when they need it. It's an incredible way for engineers to increase their design options and go beyond the human potential with AI to bring new products to market. The power of generative design was first available in Creo, but of course, we're going to bring that to Onshape too. Atlas allows us to bring our generative and simulation capabilities to the unique scalability and user experience requirements of Onshape. Customers cannot wait to get their hands on this and the early feedback for it has been absolutely outstanding. It's an incredible way for us to take advantage of our investments across our products with Atlas. Keeping with the 3D theme for a moment. We're also making SaaS versions of Creo View available on Atlas. It will allow customers to view and mark up and collaborate around numerous 2D and 3D CAD data formats, not just those from PTC. And what was exclusively available to Windchill customers is now available to Arena customers, too. This is a great example of how we can bring a SaaS service to customers, still deploying Windchill on-premises today as well. Why keep SaaS away from them when they can benefit right now. This collaboration with the supply chain can now easily go beyond the firewalls of most customers and the exposure to a SaaS service for on-prem customers as yet another reinforcer of our whole direction. You want to be using SaaS-based technologies. The additional benefit of this service is considerable among consolidating our computing costs and overhead that really supports some of our environmental sustainability efforts as well. I'll explain that more to you in a moment. Atlas is in unbelievable place to scale up other types of applications as well, not just those that are built for 3D. In the case of IoT with ThingWorx, our customers are often managing dozens to hundreds of physical sites, and each may have multiple ThingWorx or ThingWorx Kepware installations that they want to remotely configure and manage. For customers accessing every individual system to configure their installations is an arduous and time-consuming process. With ThingWorx Solution Central, we are dramatically simplifying that configuration management as a service for them. It's a big productivity and time saver for the administrators and control engineers that are operating and deploying an ever-expanding footprint of ThingWorx and maintaining them. We're busy at work planning and developing even more SaaS offerings for ThingWorx, so stay tuned. The management of software updates and moving to a more timeless delivery model is another big advantage that everybody benefits from. Adobe Creative Cloud and Microsoft Office 365 are perhaps the 2 largest desktop installed base applications that have moved from a traditional version and manually installed offering to one that's very simple to install, deploy and update. We're applying the same approach to our products as well. For example, later this fiscal year, a new version of Creo will make it substantially faster and easier for customers to obtain and manage the Creo deployments. No license files, licensed servers, large downloads of installers and layers of IT management. It's a result in a substantial planned reduction in a number of technical support calls that we even feel related to installation and management by our customers. It's really the simple beauty of SaaS. The user simply log in, we verify their entitlements, and they receive Creo in under 60 seconds. You literally can have Creo running faster than I can explain it to you. And this is just the first cornerstone of our Creo SaaS strategy, we have this and a lot more in development for Creo. I hope this gives you a sense of all the progress we've been making with Atlas. Think about everything that you just saw, examples from Creo, Windchill, ThingWorx, Vuforia and Onshape. It's all real. We've achieved a tremendous amount, and we have even more in development. I couldn't be more excited about our future with Atlas. Now if I step back for a moment, I want you to understand the macro level impact of SaaS on innovation velocity and how that translates to our customer value. Think of innovation velocity as a speed at which we can develop new versions of our products and get them into the hands of our customers. When other companies went towards SaaS, Microsoft, Adobe, Atlassian, GitHub and many others, they cited innovation velocity as a key motivator. But in a traditional development process for enterprise software like Creo and Windchill, we produce monthly updates, new minor versions every quarter, major versions annually. Customers then take anywhere from 12 to 36 months to complete an update or an upgrade in their own environment. And realistically, many customers are only able to make those updates 1 or 2 years into their deployments, sometimes taking as many as 2 or 3 years. Most of this is a result of those inefficiencies that come with managing on-premises deployments. And it's a hard truth in our industry, and it's what we're endeavoring to change with SaaS. SaaS completely changes this picture. We can deliver critical security updates and fixes in hours. Regular product updates are delivered every 2 weeks, and significant versions of products can be delivered every few months as opposed to once a year. There is net new value to our customers every 2 to 3 weeks with this approach. It's the experience that Arena Onshape and Vuforia customers have today, and it's what we're building towards with the rest of our products. By the way, this exact situation just played out this last Friday, when a critical open-source vulnerability with Log4j impacted a large amount of systems around the world still to this day. We're able to mitigate that high severity issue within just 3 hours for every customer on Atlas, well before it hit the news headlines Friday morning. Now if I drill into Windchill for a moment, I'll harken back to what CK said earlier. The next version of Windchill will be coming out in Q2 and we will be leveraging the same best-in-class delivery model on Atlas with a multi-tenant architecture. Traditional enterprise software deployments are generally complex undertakings. And they're typically sized for the intersection of the greatest user workload combined with the largest use case that those servers may see. And this leads to a tremendous amount of idle compute and numerous software licenses and costs to go with it. add the hourly cost of an Amazon or an Azure as you're hosting provider. And you can imagine a lot of operating costs in the infrastructure go for anyone operating this way. There's nothing unique about this challenge either. It's a reality that is impacting every software offering that customers operate. Now Windchill has always benefited from having an outstanding web-based, highly scalable architecture, but over the last 3 years, we've been incorporating numerous architectural enhancements to bring it to a multi-tenant SaaS future. It includes deploying Windchill on Atlas to get all the scalability and resiliency of that platform. while also increasing our cost effectiveness. And numerous other enhancements within the architecture improve the overall customer experience with updates and upgrades that have 0 downtime for the users, always at the latest release. We're now in line from an architecture perspective. It's quite similar to that of Dynamics 365 when Microsoft made their initial pivot to SaaS with that product. And our strategy is not that different from the path that they'd taken either. We'll also retain all of the IP security that customers expect with their most sensitive data security needs. And this is also similar both to Microsoft Dynamics 365, but maybe even a little closer to ServiceNow's architecture, as Jim mentioned earlier. This is a major value proposition for customers. They can sustain their systems, processes and regulatory needs all through SaaS at PTC. It's a major advancement for users because they're able to take advantage of many more capabilities faster than they ever have before. And collectively, we can reduce both their costs as well as our own. We are already seeing numerous workloads on Atlas, reducing our computing cost demands by over 50%. And as a software company, our computing resources are certainly a contributor to our environmental sustainability. This is a great first step forward as we understand our impact. And if you compound the impact of all the servers, resources shared by our customers on-prem or even within their own consumption on Amazon or Azure, the collective benefit is actually far more substantial. It's a significant efficiency gain for PTC that goes directly to the profit margins and increases our ability to scale to meet a wider part of the customer market. The journey for Windchill is similar to Microsoft with Dynamics 365, like I explained or even Atlassian with their portfolio and many others that have gone through this. We will continue our roadmap to improve our overall user experience, onboarding and product capabilities as well. And the journey for Creo will be more like that of Adobe Creative Cloud or Office 365. We're incorporating even more of the collaboration experiences that you can see in Onshape into Creo and a few more things that we're not quite ready to show off yet. Ultimately, PTC and our customers benefit from the agility that SaaS provides and delivering these products to our customers sooner, both timeless and continuously evolving with new features for collaborating, both simultaneously and across their supply chain. The on-premises and SaaS versions of both Creo and Windchill, by the way, are built from the same respective code basis. We'll continue to make those products available to customers in on-premises or in SaaS configurations for PTC. We may reserve the right on some of the highly differentiated features to keep those into SaaS-only packages. To remind everybody, though, every customer will have a path forward to SaaS when they're ready, no one left behind. Technologically, all of our products are on an absolutely amazing path, and we will continue with strong market-leading track record with product features and capabilities that our customers depend on. I hope this gives you a better understanding of all the progress that we've made with Atlas over this last year. The role that Atlas plays in our ability to power our customers' digital transformations will only grow from here. And SaaS is the future. We're off to a terrific start that you can be confident in. Matt, back to you.

Thanks, Steve. Let's now take a short break, and we'll see you back here in 10 minutes. [Break]

Hello, everyone. Welcome back. Now let's turn our attention to PTC's business units. Leading off this segment of our agenda is the President of Digital Thread, troy Richardson. Troy, over to you.

Thank you, Matt. Good morning, everyone. I'm Troy Richardson, President of PTC's Digital Thread business unit. For the last 12 months, I've served at PTC's Chief Operating Officer. It's been my job to ensure the success of PTC's go-to-market strategy across sales, marketing, partners, customer success organizations. I'm proud of the results that we've delivered to you and the other PTC shareholders in fiscal '21. As Jim mentioned in this session, our performance in this latest fiscal year seeing at the fact that now is the time to move forward with our SaaS acceleration plan. As you continue to get to know me and we build a better relationship, you'll see my commitment that I'll bring to our customers. So that they get the most out of our relationship with the PTC. This commitment manifests through team structure so that customers enjoy doing business with PTC and through our expectations of product excellence and value realization from our software. This mindset is shared through the Digital Thread business unit, and I'm confident you'll see that during this presentation. In a few minutes, I'll be joined by Kevin Wrenn, who leads our Digital Thread product team Together, Kevin and I want you to take the following points away from our presentation. First, the Digital Thread business unit has a strong foundation in the market with forward driving momentum. Second, we're going to continue delivering above market growth rates for our core CAD and PLM products while accelerating our growth plans for IoT and augmented reality offerings. And third, we've optimized the go-to-market approach with a refined segmentation sales strategies and organizational models that will create a better experience for our customers and making us a more efficient organization. And finally, we're investing in our Digital Thread products and accelerating our evolution to SaaS. We formed a Digital Thread business unit so that PTC can power the digital transformation efforts of the world's largest industrial companies with an integrated suite of products, all while accelerating our ARR growth. The Digital Thread business unit has brought our field and product teams together under 1 roof for 2 main reasons. First, to execute customer engagements and go-to-market strategies that put our digital transformation products in the hands of our customers to deliver them business value; and second, to continue evolving those products to meet our customer needs and bring them to a SaaS future. Our SaaS program work streams that CK outlined earlier are directly contributing to the execution of those 2 pillars. You're familiar with our market-leading digital thread products, which together serves as the basis for digital threat use cases across engineering, manufacturing and services. De reviewed some customer profiles where we're working on large-scale digital transformation projects. Let's look at a standout example of one in this real world. ZF is one of the largest companies supplying systems for passenger cars, commercial vehicles and industrial technology. Let's listen to ZF described the value and the benefits they receive from our digital threat portfolio. [Presentation]

So as you can see from ZF, there are practical and tangible examples of how world world large companies embrace our Digital Thread portfolio for their businesses. We built a terrific foundation for our Digital Thread business unit. Our subscription business model has helped us outpace the market and the strengths of our products is a true differentiator. This foundation sets us up for even more success in fiscal '22. Our core CAD and PLM products make up over $1 billion of ARR today and poised to continue to outpace market growth rates. Our industrial IoT and AR growth products worth almost $200 million in ARR to have defined growth plans that we're looking forward to sharing with you today. And our FSG products continue to be very profitable, contributing to our free cash flow targets. So now let's get specific and show you how we've established our product to field team to set us up for success in fiscal '22 and beyond. The refinements we've made first and foremost, is on the customer experience. In addition, they will help us operate and perform more like a SaaS company. First, to align with SaaS best practices, our product delivery organizations and our technical support organizations are now part of the Digital Thread product group reporting to Kevin Wrenn. The product delivery team has run our customers SaaS deployments will continue to adopt SaaS pricing, discounting and delivery principles to increase the profitability of that part of our business. And by moving the technical teams closer to the product team, there's no daylight between the group's delivering the product and supporting them. This creates efficiencies through faster feedback loops and faster turnaround times for product issues. And as we move closer to our SaaS across our portfolio, the technical organizations will be able to diagnose and eliminate problem for all customers compared to the disparate patching and upgrading processes we see today. You've heard Steve talk about the speed of innovation velocity in the SaaS model. These organizational refinements go hand-in-hand with that. Next, let's talk about the overall customer experience. Historically, on-premise perpetual approach relied on -- our onstream perpetual approach relied on sequential transaction relationship model with our customers. Multiple groups across the organization owned a piece of the customer relationship and this did not bring enough synergies to our customer engagements. For example, whatever group is working with the customer, sales, customer success or technical support and needs the same level of knowledge and understanding about that customer. Without that, customers may not have the best experience because they'll need to explain to multiple groups, which products they use, which use cases they're addressing and any problems they may be trying to solve. If you wind the clock back enough on the on-premise world, this sequential and transactional model was the norm for software companies. But it's unappealing for our customers and does not meet the expectations they have today. So part of our evolution to our SaaS, we simplified our structure of the field organization and created the better ties with the product and technical support teams, all in the answers of making it easier to do business with PTC. Our sales and customer success teams will be working closer together, providing the necessary support to our customers. This reoccurring customer relationship model is more common for SaaS companies and will continue to ensure a positive and satisfying experience for our customers. In addition, the presales team will join the existing customer success managers and the basis for the new -- and will form the basis for the new expanded customer success organization. This new team brings technical domain, product expertise and engages our customer in a consistent and continuous way across the portfolio. Again, these steps are all in service of our customer. They'll be from this -- they'll be benefiting from this SaaS future as much as PTC will. Now let's talk about the customer engagement and the sales strategy for fiscal '22. As you can see on the screen, we're executing a refined segmentation model this year. The model helps us better identify pockets of growth, deploy the best coverage models to capture and close opportunities and execute sales plays tailored to the specific segments so that, that our value proposition is resonated better in the customers in each of the segments. Now keep in mind, we're moving firmly in this direction throughout fiscal '21, and we already have a track record of success with this approach. This model prioritizes product line selling to existing customers and prospects with the highest potential to grow. This means that we're putting even more sales representatives on the field and are selling to the full -- selling our full product line as opposed to selling 1 or 2 specific products. These customers think back to ZF see the value of the Digital Thread and are embracing our full portfolio. The middle roll that you see here, commercial, mid-market and SMB will largely be supported by our channel partners. As you know, the channel is an important part of our business today, and we look closely at how to keep these co-op partners even more successful in FY '22. We prioritized our channel partner model to ensure that the partners that contribute the most to the AR growth and have the highest growth potential, have the most support from PTC. In parallel, we stood up additional self-service models for our -- to help our broader channel partners to make sure we don't forget about that base. Lastly, we're covering the new enterprise segment with the land and expand approach through our design hunter sales reps. To summarize, we've clearly identified the right hotspots, and we have tailored the coverage and the approach to each segment to drive optimal growth. This segmentation marries up nicely with our sales operating model that supports it. As you can see, the 3 pillars of this operating model, first, the structure places a greater emphasis on account-based selling of the full Digital Thread product portfolio as opposed to stand-alone product-based selling. Our customers already see the value of our software every day. So how can we put more of it in their hands to help address more of their business needs. To support this, we're adding adding to our capacity of quality quota-carrying 4 product line sales representatives for these accounts. These common account plans will take advantage of the tighter synergies between sales and customer success, all in the interest of providing the right solutions to our customers. And finally, we're taking the steps necessary to ensure that cross-selling and upselling are productized for our teams. We'll make sure that the primary sellers are trained in the right way leveraging their relationships with the right product specialists and working collaboratively with our customer success team. Throughout all of this, the biggest incentive awards for our sellers will be through cross-sell and upsell opportunities for the full portfolio. So we're putting where our mouth is -- we're putting our money where our mouth is, and we are prioritizing those opportunities. This model is one that I recommended to Jim, and executive team during my first year as PTC COO. So I'm looking forward to leading the digital threat business unit to execute this model. Now that we've reviewed our organization and our customer execution priorities, this is a good place to me to pause and welcome up Kevin Wrenn. Kevin will walk you through the mission and priorities of our product organization to support important growth areas and bring our portfolio to SaaS. After Kevin's presentation, I will come back up for a short wrap up. Kevin, over to you.

Thanks, Troy. Hi, everyone. Our product strategy has 3 main pillars to help us drive faster than market growth and best-in-class margins. First, we have recognized leadership for our core and growth products, and they're all winning in their respective markets. Second, PTC is the only company that can bring these unique technologies together from a -- to form a digital thread that's core to our customers' digital transformation. And third, as CK outlined earlier, the case for SaaS is clear, and we're bringing the entire portfolio there. Our product leadership stands in a position of strength today. In every category of analysts report that we participate in, PTC's products are ranked as leaders. Now when we show this kind of slide to customers, we call it, you're in good hand slide as we invest in keeping ourselves at the top of the market in every category. Now even more rewarding than industry awards is our track record of winning in the market and helping our customers to succeed. Now our strategy guided by the customer engagement approach that Troy described is working. We continue to see meaningful adoption across the portfolio, like Raytheon's 20,000-seat upgrade of Windchill, Volvo Group's adoption of Creo and Windchill and Eaton's investment in ThingWorx and GE Healthcare's success with Vuforia. A major focus for us this year is accelerating the growth of our IoT and AR businesses. For IoT, as the business and the market have matured, our most consistent success has come from folks focusing on a few common repeatable use cases that deliver value in the factory and in service. Now a moment ago, I mentioned Eaton. Eaton adopted ThingWorx and Kepware to address factory use cases that it could scale across its manufacturing sites. These use cases included production performance monitoring, asset monitoring and connected work sales. If you tuned into our October manufacturing live event, you heard Eaton describe how successful this use case-driven approach has been. Now the success of Eaton and hundreds of other customers reinforced our focus on these few use cases as well as our strategy of addressing them with an out-of-the-box solution approach. Now Jim mentioned earlier, our strategy to move up the stack, and that's culminated in the development of the recent release of our first out-of-the-box solution Digital Performance Management or DPM. DPM is used in factory settings to help customers uncover and address production bottlenecks by standardizing losses on the commonly understood metric of production time. We co-innovated DPM with a select group of customers, and we see real potential for it in manufacturing settings. Now our go-to-market strategy focuses on enterprise deals with an executive level audience. And we're using a very nontraditional selling process by working with our prospects to adopt and validate the value from DPM. This allows us to validate the financial impact as a precursor to actually finalizing the first purchase. We have early momentum with this approach in our existing customers and prospects, and we expect impact to ramp throughout the year. This is a really important element of our IoT growth plan for FY '22 and beyond. Now let's move on and talk about AR. Similar to ThingWorx, our strategy with Vuforia started out as a platform play and has evolved to focus on purpose-built use case specific offerings like Vuforia Chalk studio, Expert Capture and Instruct. And as you heard from Steve Dertien, Vuforia has already made it on to Atlas and our AR customers can leverage all the available services. Now Vuforia holds an important value proposition for manufacturers because it addresses some of their most pressing challenges. The loss of expert knowledge from a retiring workforce, the training of new employees and of course, frontline worker productivity. It also has a very natural place within the digital thread for visualizing IoT data and displaying CAD and PLM based 3D work instructions for frontline workers. As Troy mentioned, our go-to-market motion this year puts Vuforia in the best possible position to benefit from cross-sell and upsell to our existing customer base, and we're very excited about that potential. Now another growth driver for Vuforia will be our continued expansion into newer markets. As an example, companies in regulated industries like pharma and medical advice. They're understanding the value of capturing their expert domain knowledge and then scaling that knowledge across their entire organization. AR-powered digital work instructions enable accurate up-to-date content that can be managed and audited in compliance with good manufacturing practices, which is required for these regulated industries. Now this leads us to the second part of our strategy. Our focus on the digital transformation happening in our customer base. Now when we talk about digital transformation to our customers, we advise them to take it on in 3 phases. First, we say, get your digital house in order. And what we mean by this is organize your data in your main enterprise system, systems like PLM and ERP and MES. And then we also tell them, let's connect your products in the field and let's connect your factories using IoT. Second, we say, let's begin to orchestrate that data between systems and products to drive value in use cases like enterprise change management or customer self-service or digital work instruction for the frontline workforce that originate from PLM. Third, we tell them to unlock larger opportunities, things like close look quality, data-driven design, connected revenue models, product as a service initiatives and managing consumables. For all of these examples, our CAD, PLM, IoT and AR technology can be deployed in concert, which reinforces our significant cross-sell opportunity, especially for IoT and AR. A great example of Digital Thread for digital transformation is at the Volvo Group. Now they've standardized on Windchill and they recently decided to standardize on Creo for CAD. We're now working very closely with them on their broader digital transformation. Volvo's pursuit of the digital threat is representative of the type of opportunity that we have with many, if not all, of our existing customers. As Troy outlined, this full portfolio approach is a significant focus for fiscal '22. Now this leads us to the third and final pillar of our strategy, accelerating our portfolio to SaaS. As Troy outlined, we brought product, R&D and the product delivery teams altogether. It's bringing a more modern DevOps practices to product development, deployment and customer support functions. This team is now poised to accelerate the refactoring of our entire portfolio to SaaS. We've already refactored Vuforia. Windchill is coming online now and Creo and ThingWorx will follow. This refactoring also helps us prioritize interoperability across the digital threat product suite. And we've always prioritized openness in other software at PTC, and that won't stop now. We're developing built-in interoperability for other elements of the extended digital thread like productized APIs to connect to common ERP systems, for example. And finally, SaaS allows us to utilize more shared services across customers as opposed to a single technology stack per customer. As Steve described earlier, we'll be able to dial services up and down based on actual customer usage compared to today's model of a single stack per customer that's always on. Now our 3 pillars of our product strategy will meaningfully support our growth plans for fiscal '22 and beyond. We're going to continue to win in our markets. We're going to make the digital threat a reality for our customers and we're going to deliver on our promise of the SaaS future. And with that, I'll turn it back over to Troy.

Thanks, Kevin. I hope this presentation has given you a sense of how the Digital Thread business unit will perform in fiscal '22 and beyond. We have a strong foundation and momentum in the market. We see ample opportunity to keep our core products growing faster than the market, and we'll accelerate our growth plans for IoT and AR. Our operating model is more efficient than ever, and our go-to-market motions will ensure a positive experience while doing business with PTC. And we're continuing our investments in the product portfolio, bring it to SaaS on Atlas and delivering the benefits to our customers. I look forward to speaking to you more during today's Q&A session. For now, I'll turn it back over to Matt.

Thanks, Troy. Next up is the President of our Velocity business unit, Mike DiTullio. Mike, take it away.

All right. Thanks, Matt. Well, hey, everyone. I'm Mike DiTullio, President of PTC's Velocity Business Unit. As you just heard from Troy and Kevin, the Digital Thread business unit is continuing to support types of customers that you most often associate with PTC, the world's largest industrial companies that are digitally transforming across engineering, manufacturing and service. And the SaaS strategy and direction that Troy and Kevin outlined makes perfect sense for those types of companies because of how they operate, but also the products they make. Meanwhile, there's another portion of the market that PTC historically is not addressed in a meaningful way. Companies in this part of the market also make physical products, but they're very different from the industrial generator sitting on the roof of your office or the heavy equipment you see operating at a construction site. Instead, these are products that incorporate more technology, electronics and software components, have shorter time frames between new models and reach a wider selection of end customers from industrial manufacturers to everyday consumers like you and me. These products could range from the fitness watch, you wear at the gym or smart speakers at home all the way to the latest power control units found in today's electric vehicles. As Jim outlined earlier, these companies often share similar characteristics. They actively seek the latest technology for their products. outsourced manufacturing is very common, and they embrace a culture of agile software development. Even more importantly, these companies require a specific approach to product development to match the pace of their businesses. But the legacy tools that they've had to use limit their ability to work this way. They still need to consider things like are we all using the same version of the tool? What's our process for file sharing? Are we all looking at the latest iteration of a new product design? There's now a better way, a way that eliminates all that friction, and that way is cloud native SaaS. So we established the Velocity business unit at PTC built around our market-leading cloud native Onshape and Arena products. And our mission is to fundamentally transform this part of the market by ushering in a new era of agile product development. By doing this, we'll aggressively increase PTC's market share with new logos and bring another high-growth vector of the company. PTC is the only company in the market offering CAD and PLM that were born in the cloud, and we've already built an impressive list of customers that embrace this cloud-native approach. These are some of the most widely known and reputable brands in the market, and they are demonstrative of the market pull for cloud native. These customers are using Onshape and Arena to transform their approach to product design data management, supply chain collaboration and much, much more. So let's go a level deeper to show you why Onshape and Arena have been so successful. Let's start with Onshape. I want to welcome in my colleague, Jon Hirschtick. As many of you know, Jon was the Founder and CEO of SolidWorks, the Co-Founder and CEO of Onshape, and he's now our General Manager of the Onshape business at PTC. Jon, take it away.

Thank you, Mike. 2021 was another fantastic year for the Onshape business here at PTC, and we're planning for a highly successful 2022. Now as many of you know, Onshape is the industry's only cloud-native CAD and data management system. Because of that and the growing trend and demand for cloud native that Mike mentioned, the market is responding in a big way. In fact, Onshape was named the #1 fastest-growing CAD system. We are growing approximately 10x the overall rate of the CAD industry. Now we're also the fastest evolving product in the industry with 16 major releases in 2021. That's due in part to our unique cloud native architecture that, as Steve mentioned, lets us deliver new functionality at a record pace. And every Onshape user in the world is always on the same release of Onshape, the latest release. In 2022, we're planning a big year for our Onshape product, including some very exciting new additions to Onshape that are based on leveraging the PTC portfolio, things like simulation and rendering, ECAD, MCAD integration, PLM integration with Arena and more. Ultimately, a great measure of our product and also our services, training and support overall is Net Promoter Score or NPS. Our Onshape NPS is consistently over 40, which in a business like ours is very high, and it means that our customers are recommending Onshape to their colleagues. Finally, Onshape is not only succeeding in the commercial market but also in the education market with students and teachers. Over 1 million students and teachers have adopted Onshape during the pandemic. we're becoming a kind of de facto standard for education, and we're helping educators when they need it most and setting the foundation for future commercial users. The market's strong response to Onshape is not only in our sales but also in our commercial usage. Now we have over 25 million hours of total usage of Onshape, and our usage is growing again in the range of 10x the rate of growth of the overall CAD market. We're proud of all of these things, but the greatest success we have, the greatest thing is seeing our customers design awesome products in Onshape. And a great example is Trek bicycle, a large and very well-known leader in the red-hot bicycle industry who is standardizing on Onshape. The complex shape of a modern bicycle is a real test of the geometry power of any CAD system, but Trek doesn't only think about their physical bicycles Instead, Trek thinks about how we all approach transportation and the important role that bicycles play in that equation. Now let's hear directly from Chad Manuell, Trek's Head of Engineering. [Presentation]

We really enjoy working with Chad and his team at Trek. Their story, it's such a clear example of the impact that the cloud native product development approach has in their business. Mike, let's turn it back over to you.

All right. Well, thank you, Jon, and a special thank you to Chad and the entire Trek team for sharing their experience with Onshape. So now let's talk a little more about Arena. Right off the bat, I want you to understand that Arena is growing at more than 3x the market rate. making it the fastest-growing PLM system in the market. Arena has established a clear market fit and like Onshape, boast very high NPS scores from customers. For 95% of our new customers, Arena is the first PLM system they've ever had. This demonstrates our expanded PLM market opportunity with cloud-native SaaS and really reinforces our strategy of securing new logos to increase overall market share for PTC. We're investing to press that advantage, which we'll talk about more in just a moment. One of the most common areas where we see Arena used is in the supply chain. Arena helps our customers stay connected with external suppliers and manage the latest data as they move toward the manufacturing process. So I'd like for you to hear directly from one of our most notable customers, Sonos. Now you most likely know the brand and their lineup of amazing sound speakers. But now let's go behind the scenes with Julie Toscano, Sonos Director of Product Development, and operation system solutions to see how Arena is incorporated into Sonos supply chain operation. [Presentation]

All right. Thank you, Julie. Sonos' story really reinforces Arena's market fit and the benefits that our customers gain from cloud-native SaaS. Ultimately, we believe that the market pull for cloud-native SaaS coupled with our leading position today will allow for sustainable growth for PTC's Velocity business unit well into the midterm and beyond. Again, I want to stress that our growth story is about addressing a portion of the market previously not served by PTC. This means that nearly every new win is a net new customer to PTC. The Velocity business unit grew 27% in fiscal '21. To keep this growth consistent and predictable, we're continuing to invest in our people, our products and our customer success. But we're not stopping there. We're continuing to add growth levers like the ones you see on your screen. First, more than 90% of Onshape and Arena business today comes just from the United States, yet 50% of PTC's overall business comes from outside the U.S. There's no reason why the Velocity team can't replicate that global spread of the business. Second, we'll move upmarket and expand our footprint in parallel. And then finally, we'll expand into new vertical markets. The biggest emphasis here will be on Arena, which has enjoyed consistent success in high tech and med devices, yet there are more industries that could benefit from cloud-native PLM, including industrial and FA&D, just to name a few. Lastly, I'd like to say just a brief word about what we call our machine or the organization that runs across the Velocity business unit. These are cloud-native SaaS businesses built from the ground up by cloud-native SaaS companies. So we're continuing the operating model and processes that see the various functions of the business all work in harmony all in support of our customers. On the right-hand side of the screen, you can see the quantitative measures that we hold ourselves accountable to and manage the business against. And of course, many of these are common across PTC but several others are specific to the best practices. All right. In closing, PTC's Velocity business unit is adding another growth opportunity and incremental business to PTC. And -- We are committed to leading this portion of the market with cloud native CAD and PLM and being really hard to catch as we do it. Thank you all. Matt, back over to you.

Fantastic. Thank you, Mike. We've covered a great deal of content today. Now let's get into how this translates into delivering on our financial targets with our CFO, Kristian Talvitie. Kristian, over to you.

Thanks, Matt, and thanks, everyone, for joining us. As you've heard throughout the presentations today, we believe that PTC has significant potential to create value for our customers and shareholders over the long term through the transformation we've outlined. I'd like to now walk you through what all this means for our financial results. Our financial strategy is straightforward. First, align responsible capital allocation with market demand, further enhancing PTC's technology leadership position. Second, drive sustainable top line ARR growth through our broad product portfolio and SaaS transformation. And third, grow free cash flow through operational discipline. We believe that ARR is the best indicator of PTC's top line performance and free cash flow is the best indicator of PTC's bottom line performance. Before we get into the financials, I'd like to take a few minutes to discuss why we focus on ARR and free cash flow. Starting with ARR. Many long-term investors understand the dynamics associated with revenue recognition for a largely on-premise subscription company. But we do get this question a lot, so I think it's worth delving into. As a basic premise, let's remember that every dollar of ARR generates $1 of revenue. So over the term of every subscription, cumulative ARR converges with cumulative recurring revenue. But PTC has an evolving mix of products, many of which have different revenue recognition. The chart shown is meant to illustrate that ARR and revenue trend in the same direction over time. But given the impact that ASC 606 has on revenue recognition for on-premise subscription, we may see more or less revenue growth than ARR growth in any given period. As a case in point, our organic constant currency recurring revenue growth in fiscal '21 was 20%, while our organic constant currency ARR growth was 12%. For fiscal '22, we're guiding to ARR growth of 11.5% at the midpoint, but the recurring revenue midpoint is 7%. So essentially, the same organic ARR growth rate but 2 very different revenue growth rates. Digging a little bit further, PTC has different types of contracts with our customers that have differing revenue recognition. Specifically, we have on-prem subscriptions with varying term lengths. We recognize approximately 50% of the total contract value upfront with the remainder recognized ratably over the term. on-prem products that increasingly leverage cloud technology can result in lower than 50% upfront rev rec. We also have SaaS and support products, which both have ratable revenue recognition. We have on-prem subscriptions converting to SaaS, support contracts, converting on-prem subscriptions and ramp deals, which have their own revenue recognition dynamics based on the shape of the ramp. So ultimately, the mix of contract types, changes in term lengths, movement from ratable to upfront revenue recognition and vice versa make revenue a very complicated metric, which impacts the utility of the income statement as a tool to cleanly understand the company's financial performance. This is why we focus on ARR and free cash flow. So with that as a backdrop, I'd like to review our definitions of bookings and ARR. Bookings represents the annualized value based on the final month of the contract of renewable software contracts committed to, in a period. For contracts with terms of less than 1 year that are not associated with an existing contract, the booking value is equal to the total contract value. ARR, or annual run rate represents the annualized value of our portfolio of active subscription software, cloud, SaaS and support contracts at the end of the reporting period. We believe ARR is a valuable operating metric to measure the health of a subscription business because it captures the expected subscription and support cash generation from our customers. As depicted in the chart and for our internal planning purposes, we use ARR plus trailing 12-month perpetual license and professional services revenue as a close proxy for the cash we expect to collect in any given year. To better understand the relationship between bookings, ARR and revenue, let's look at a few examples. Each of these examples is a $1,000 booking. One is an on-premise subscription with a 1-year term and two 1-year renewals. The next is an on-premise subscription with a 3-year term. Then we show a SaaS subscription with a 3-year term. And the last example is a 3-year on-premise ramp deal. In each of the first 3 examples, we will bill $1,000 upfront annually. And we will -- and in this example, we show collections in the second quarter of each year. ARR is $1,000 throughout the term of the agreement and aligned with billings. You'll also note that ARR starts when revenue starts. But the revenue recognition on each of these contracts is very different. In the 1-year term, you see that we'll recognize $500 upfront and $125 per quarter ratably. This pattern continues with each renewal. In this example, we'll recognize as much revenue as we collect in cash on an annual basis. In the 3-year term, we'll recognize $1,500 upfront and $125 per quarter ratably over the entire 3-year term. In this example, we'll recognize more revenue than we collect in cash in year 1 and less revenue than we collect in cash in years 2 and 3. In the SaaS example, we'll recognize $250 per quarter ratably over the term of the agreement. Here, we'll also recognize as much revenue as we'll collect in cash on an annual basis. So for each of these 3 examples, bookings is 1,000 and total billings, ARR and revenue over the 3-year period is $3,000. The last example is a little more complicated, especially from a revenue perspective. This is a 3-year on-premise subscription where the ARR ramps up to the $1,000 run rate over time. We still count it as a $1,000 booking as this is the exit run rate, which we expect to renew. And we count the booking when the contract is signed. ARR aligns with billings in each period. So $200 in the first quarter of year 1, an incremental $100 in the second year, getting to $300 in ARR in year 2. And then an additional $700 in the third year of the ramp, getting to the $1,000 exit run rate. Revenue in year 1 would be $325 in the first quarter and $25 in each of the remaining quarters in year 1. During year 2, we recognized $138 in the first quarter with $38 recognized in each subsequent quarter. and year 3 begins with revenue of $450 in the first quarter and $125 in each of the remaining quarters. Total billings, ARR and revenue for this contract are $1,500 over the term. Hopefully, that was helpful, and I'm sure riveting to dig in a little deeper to the mechanics of the top line metrics we look at, bookings and ARR and why we don't really look at revenue. And because of the ASC 606 impacts on revenue, there's a corresponding impact on P&L profitability measures, such as operating margin and EPS. This is why we focus on free cash flow as our bottom line metric. But in order to better understand the quality and sustainability of our underlying free cash flow performance and to model future financial performance, we also look at adjusted free cash flow which excludes restructuring and M&A-related payments as well as onetime tax-related payments or inflows. In addition to looking at adjusted free cash flow, we think it's important to also consider other items such as currency or improvements in receivables aging, the addition of acquisition-related free cash flow, et cetera, when we're modeling future expected financial performance. Now turning to our financial performance and targets and taking a little stroll down memory lane, the outlook we provided at our November 2019 Investor Day remains intact. We put out a range of scenarios that included a recession scenario, which still had PTC achieving $700 million in free cash flow by 2024. Of course, it's also worth mentioning that the recession we had modeled happened sooner and was arguably deeper than what we had modeled. Sooner and deeper has an impact on our recurring business model given compounding, as you all know. Our current midterm outlook is still in line with the recession and pessimistic cases we presented back in November of 2019. In fiscal '21, we delivered on our targets, meeting guidance on ARR, cash from operations, free cash flow and organic churn, all against the backdrop of an ongoing pandemic and economic uncertainty. As Jim mentioned earlier in his comments, we've maintained a strong track record over the last 4 years of ARR growth and free cash flow generation with expectations to do the same in 2022. You'll note that we also added adjusted free cash flow on the slide. Our ARR guidance for fiscal '22 is 10% to 13% on an organic constant currency basis. And we're targeting approximately $450 million of adjusted free cash flow in fiscal '22. In fiscal '23, we expect adjusted free cash flow of $550 million to $600 million with the midpoint up 28% year-over-year. And for fiscal '24, we expect adjusted free cash flow of $700 million to $750 million, with the midpoint up 26% versus the fiscal '23 midpoint. I want to take a moment to review our guidance assumptions for Q1 and fiscal '22. We expect ARR of approximately $1.5 billion in Q1, which is 15% constant currency growth and includes about 400 basis points from Arena, which we acquired in Q2 of last year. We expect ARR growth rates in Q2 to Q4 to be consistent with our guidance with the midpoint of 11.5%. We expect adjusted free cash flow of about $140 million in Q1. Restructuring payments are expected to have a negative impact on free cash flow, primarily in Q1 through Q3 with the bulk happening in Q2. Free cash flow linearity, excluding restructuring payments, is expected to follow a similar pattern as fiscal '21 with more than 60% of of adjusted free cash flow generation in the first half. These collections are higher due to invoicing seasonality. Costs are expected to be higher in the second half as we ramp hiring and increased SaaS related investments. Jim and the team did a good job of articulating how we intend to drive towards mid-teens ARR growth over the midterm. Within our digital threat organization, our core business will benefit from the digital transformation trend our customers are investing in, bolstered by our move to SaaS as well as with new logo and cross-sell opportunities. We're modeling an ARR CAGR of 10% to 15%. And -- In our digital thread growth businesses, IoT and AR, we expect to see reduced churn, further expansions, increased cross-sell and more new logos as the recovery from the pandemic continues. Additionally, DPM or digital performance management is expected to contribute to the rebounding growth rates of our IoT business. We believe the ARR CAGR for this business is 20% to 30%. As I've said previously, we expect to exit this fiscal year with a 2 handle on our ARR growth rate. This won't happen in Q1, but we should see some acceleration in Q2 and getting to a 2-handle on ARR growth rates by the back half. FSG, which is already delivering high-value SaaS and on-prem solutions is expected to remain stable and highly profitable, delivering a 0% to 5% ARR CAGR. The Velocity business unit, which includes Onshape and Arena, will benefit from investment in product and sales, allowing expansion into new geos, verticals and moving up market. Our expected CAGR for these businesses is also 20% to 30%. Overall, we have an aspirational goal of 11% to 17% ARR CAGR over the midterm with 14% at the midpoint. We're not going to model every permutation of ARR, but I thought it might be instructive to model a scenario that gets us to 11% ARR growth. This slide shows that in order to achieve 11% ARR growth, you'd have to believe that we can grow new ACV in the high single digits, which is below what we've delivered over the past few years. And you have to believe we can continue to drive modest improvements in churn. With these assumptions, we get to a little more than $2 billion in ARR in fiscal '24. To get to free cash flow, as many of you saw in our earnings presentation, we provided this free cash flow framework for fiscal '21 and '22. And today, we'd like to show you the path to $700 million in fiscal '24 in an 11% ARR growth scenario. Starting at the top, we just talked through what you need to believe for PTC to achieve that level of ARR growth. For modeling simplicity, we're holding perpetual license and professional services revenue constant for future periods. And remember, ARR plus trailing 12-month perpetual license and professional services revenue serves as a good proxy for cash generation. COGS is modeled based on the mix of contractual engagements with costs in line with historical gross margins of perpetual, on-prem subscription, support, SaaS and professional services. If the mix changes significantly, it could alter management's capital allocation decisions. Operating expenses are modeled at approximately 50% of ARR growth, slightly lower in the out years, as you would expect, if the business was on an 11% growth trajectory. Turning to the below-the-line items. We're holding CapEx and depreciation constant. We have a restructuring charge in fiscal '22 related to our SaaS transformation. Jim did a good job of articulating many of the changes we've made over the years to keep PTC relevant to our customer base while increasing both our top line growth rate and ongoing profitability. In this case, you can see a step function improvement in our cash contribution margin in fiscal '22, which we expect to be the new baseline as we think about the future trajectory of the business. Other income and expense primarily reflect the interest payments on our outstanding bonds and revolving credit facility. You can see these decrease after fiscal '22 as we delever. Assuming no incremental debt is taken, this would ultimately trend to the low $40 million range, which reflects the interest on our bonds as well as fees related to our revolving credit facility. Cash taxes are estimated based on the level of GAAP profit realized in this model. However, as we saw in fiscal '21 and discussed earlier, they can fluctuate. We believe that for modeling purposes, what we've laid out here is prudent. The other category is primarily working capital and the impact of FX. Clearly, as you can see in the table, working capital was positive in fiscal '21, largely due to some improvements in Agile receivables. One would not expect working -- positive working capital in a growing business. Hence, we're modeling a modest negative working capital going forward. So as you can see on this slide, even an 11% ARR growth scenario, we can achieve the free cash flow targets we outlined on our Q4 earnings call. Obviously, we're targeting growing more than 11%, but thought it would be interesting to show a scenario like this to demonstrate how this free cash flow framework that we've been sharing works and some of the assumptions we use when thinking about the future of PTC. Now I'd like to turn to our capital structure. From a capital allocation priority perspective, we think about 3 primary areas: first, organic growth via investments in targeted go-to-market areas in strategic R&D projects and the move to SaaS; second, enhancing growth through M&A, focused on targeted acquisitions, deepening the product portfolio and enhancing SaaS offerings; and third, returning excess capital to shareholders through share repurchases, and we have a $1 billion authorization through the end of fiscal '23. We ended fiscal '21 with cash and cash equivalents of $327 million and medium-term investments of $78 million, primarily related to our investment in Matterport. We had gross borrowings of $1.45 billion, including $1 billion of senior notes with an aggregate interest rate of 3.8% and $450 million drawn on the revolving credit facility with an interest rate of about 1.7%. We repaid $40 million of debt and bought back $30 million of stock in Q4. Expanding on our capital return strategy, we said on our Q4 call, that in fiscal '22, we intend to return to shareholders, 25% of our adjusted free cash flow or approximately $112 million as we continue to rapidly delever. We've been in the market buying back shares in Q1, and we expect to have bought back $125 million by the end of the quarter, front-loading our share repurchases this year. On a go-forward basis, in fiscal '22, assuming our debt-to-EBITDA ratio is still below 3x, we'll continue to return approximately 50% of our free cash flow to shareholders via repurchases. In addition to our financial performance and expectations for growth, PTC's ESG strategy also contributes to our success. As a software company, PTC's environmental impact is relatively small but that doesn't mean we don't try to improve our footprint. Our Boston headquarters was awarded LEED Platinum certification, the USGBC's highest level of sustainability achievement. It's really the positive impact on our products -- sorry, it's really the positive impact our products generate for our customers that is large. To better understand and share how our technology benefits customers, we're evaluating how to estimate and document that impact. Under the social umbrella, in fiscal '20, we formalized our approach to DEI and appointed our first Chief Diversity Officer. We have talent programs driving diversity at all levels of the organization and offer employees opportunities for giving, volunteering and participating in PTC foundation initiatives. Additionally, we're driving tech for good through our products and services, academic programs, employee resource groups, industry coalitions and PTC customer and partner networks. From a governance perspective, our Board policies reflect sound corporate governance, including a super majority of independent directors with audit, compensation and nominating committees comprised of 100% independent directors and separation of CEO and Board Chair roles. A gender diverse Board comprised of 33% women effective February '22, with the appointment of Michal Katz, who leads investment and Corporate Banking for Mizuho Americas was announced earlier this week. We are also committed to increasing the ethnic diversity of our board. The board also has oversight of PTC's risk management strategy, including cybersecurity, Human Capital Management and other ESG initiatives. At the employee level, we require Annual Ethics and Compliance training and ongoing cybersecurity training throughout the year. Looking forward, we'll continue to align our ESG priorities into PTC's overall long-term strategy, embedding ESG into risk management and aligning with industry best practices. So I know I've covered a lot. So I appreciate the time you spent with us today. And in summary, we believe PTC can create real value through our transformation. We play in attractive markets and have strong product market fit across our portfolio. We have a proven team and an extensive history of driving successful transformations. After successfully unlocking growth and creating value by transforming PTC from a perpetual to a subscription company, our SaaS acceleration remains a significant opportunity to drive value. We're focused on extending our track record of consistently meeting or exceeding our financial guidance. And we have multiyear opportunities to drive attractive ARR and adjusted free cash flow growth. And through aligning our capital allocation strategy with technology leadership and our market positioning, we can support sustainable growth and shareholder returns. So with that, I'd like to turn it back to Matt.

Thank you, Kristian. Next up will be our Q&A session with Jim, Kristian, Troy and Mike. We're running a bit ahead of time. Let's take a 10-minute break now, and we'll see you back shortly. [Break]

Hello again, and welcome back. Let's jump right into our Q&A. Our first question comes from Jay Vleeschhouwer at Griffin.

Question number 1 is technical and then a go-to-market question for all. The technical question is there's ample history in this industry to show that platform changes can be an accelerant to growth, and we'll stipulate that SaaS can be that now, as we've seen in the past, with earlier such changes. But I think a priori, as well, the industry shows you must have technical competitiveness. And so the question is when you look at Creo over the last number of years, you've moved to an annual release or before you had not been. Do you think that in itself along with the functionality within Creo has been a discernible accelerant to the growth and momentum we documented for Creo? Similarly, for Windchill, it's very clear that the PLM market has been evolving in terms of its requirements beyond just the engineering vault concept. So in what ways do you think that PLM or Windchill has evolved in terms of its functionality, meeting customer requirements to allow it to have accelerated and gain share as well? And then I'll ask the go-to-market question.

Yes, Jay, I'll take that question. Thank you. Let's just say innovation velocity is a key advantage of SaaS. And you mentioned that the innovation velocity of Creo and Windchill has been helpful. But imagine taking that to the level of Onshape. Onshape put out their last release just prior to Thanksgiving. And then today, while we were having this Investor Day, they upgraded their entire customer base, again and closed out, I believe, 291 customer requests just from 3 weeks ago. So that's real innovation velocity. And I do think that taking Creo and Windchill, we don't have to get to 3 weeks, but we can really move faster, moving the innovations from the hands of our developers' keyboard into the hands of the customer. And I think it's going to be helpful. But back to your point, it has helped Creo, and it's helped Windchill. And some of the things we've done with Windchill to be frank, a lot of it is around platform capabilities and products to make products more configurable and to be able to create more variations of products and so forth and manage that process very efficiently and then integrate it with ERP systems and so forth. A lot of that work, by the way, pioneered with our work at BMW. So there's been a tremendous competitive advantage developed. And I see that Atlas and SaaS in general, is being just pouring oxygen into the fire more or less. I'm pretty excited about it.

Thank you, Jay. Let's take our next question from Matt Broome with Mizuho.

So you forecasted medium-term re-acceleration for the IoT market. What do you expect the key catalysts will be for that incremental growth? And what can PTC do to outperform that benchmark?

Do you want to take that one? Or should I?

You're on a roll.

All right. I'm on a roll. So Kristian is throwing that one to me. Yes. I mean if we were to say accelerate the IoT business from, let's call it, the mid-teens to, let's call it, the mid-20s. The recipe for that, that I think you should expect would be about 10 points of growth, 4 parts coming from more bookings, 4 parts coming from reduced churn and 2 parts coming from deferred ARR that's already sitting there for us. So that's kind of a mix of how we would add 10 points. And keep in mind, the probability of the churn and the probability of the deferred are actually pretty high. So we're confident we're going to see some acceleration in the next year.

Thank you, Matt. Our next question is from Jason Celino at KeyBanc.

Congrats on being one of the first company -- Analyst Days to have live Q&A from analysts. That's a first. But to my question, companies like Splunk, they've taken 4 years to migrate their code bases to multi-tenant. With the expected launch for Windchill in Q2, how much of that Windchill code base has been migrated to Atlas today? I mean, what are the main differences in migrating the code bases for infrastructure workloads like Splunk versus application workloads like PLM or CAD?

Yes. Let me take that one, too, unless. So it's actually a very interesting question. And I would say in Q2, we'll be about 9 years into it. The first 7 years were done by Jon Hirschtick at Onshape building out the Atlas platform. And then we've worked on it for 2 years since then to take that platform and prepare it for Windchill and to prepare Windchill for it. So we're deep into this. And we know a lot about it. Again, one of the things I showed you today is this idea of SaaS and knowing the difference between single-tenant and double-tenant, we didn't just fall off the turnip truck. We've been doing this stuff. We have 14% of our business already in that model, roughly half of that 14%, I think it's 8% single tenant, 6% is multi-tenant. But this is an investment that's been in the oven for a long, long time, and it's ready to come out and be served. So that's where we're at.

Thank you, Jason. Our next question is from Saket Kalia, Barclays.

Okay. Great. Troy and Mike, maybe one for you folks. I thought in the last transition, the sales incentive changes really drove some positive changes to PTC's model. You're doing the same thing here with this next transition. I was wondering if you folks could just go 1 level deeper into the mechanics of some of those sales comp changes. And how you manage that when salespeople are selling multiple types of subscription? Does that make sense?

Yes. Let me take a shot at it for you. The work that we did coming into fiscal '21 was all driven around how we sell in the subscription model, right? And I was talking about how do we drive our sellers to hopefully reduce the long-term duration of contracts to bring more value forward for that, and to make sure that we reward sellers for real good value deals for PTC and the customer. And that helps our bottom line, right? But as we evolve to SaaS, we want to start rewarding our customers who are having the right conversations with our -- rewarding our sales teams, we're having the right conversations with our customers about their SaaS transition before we had a kind of a ceiling on that because we don't have the right business model to drive that as aggressively we wanted to. But now we feel like we have the right model and strategy. We do have that dialogue with customers and reward to sales teams for helping us in the transition, which is aligned with our strategy.

Yes. If I could add a couple of things to that. When Troy said long term, what he really meant is make these ramps more linear, move more of the ramp forward in time. We certainly want to do long-term contracts, but we don't want hockey stick ramps. Then the second thing, just to really get down to brass tacks. If you do a SaaS deal, it's going to be twice as big. And we're going to pay you the full rate on the second dollar. So if you do an on-prem PLM deal, you're going to get a commission, right? If that same deal comes in at SaaS, you're going to get twice the commission. If you go to a deal that was sold 2 or 3 or 5 years ago, and you convert it to SaaS with the lift and ship process, you're going to get a big order and you're going to get a big commission. So I can tell you, our sales guys are super excited about SaaS. To them, it's a gold mine, and I'm excited about that. I mean, in the longer run, we might ask you to pay the full rate on the second dollar, I don't know. But for right now, let's use it to prime the pump and let's get going with it.

Thank you, Saket. Our next question is from Yun Kim at Loop.

Jim, Kristian, Troy, Matt and everyone, as always, very detailed Investor Day presentation, definitely a lot to digest and really appreciate the transparency. So Jim and Troy qualitatively, this is one of the questions I get a lot from investors. Can we talk about attach rate of IoT and VR within your CAD and PLM installed base? And what is your expectation regarding this cost opportunity as you leverage the Atlas platform and now that it's much easier for Creo and Windchill customers to access the IoT and VR solutions.

Yes. Maybe Troy, we could take that in 2 parts. I'd like to talk about the attached like percentage part and then let Troy talk about how do we go after that. So one way to think about it, Yun, is to compare it to the Windchill attach rate within the Creo base. And I'm going to make some generalizations here that aren't precisely accurate, but directionally so. Our Creo business, our CAD business is about $600 million of ARR. And Windchill is just over $400 million. So you can say we've successfully attached about 67% to Creo. Now keep in mind, Windchill is still growing though. So that 67% will be more next year because Windchill is growing faster than Creo. At the same time, if you think about the qualities of IoT and AR and the types of companies they appeal to. Well, the same things that attract companies to Windchill will also attract them to IoT and AR, complex products, lots of versions and configurations, expensive manufacturing processes, lots of aftermarket service, that's IoT and AR. So if you could imagine that, let's say, at steady state, you'd achieve the same level of penetration with IoT and AR as we are achieving with Windchill and keeping mind Windchill is increasing. Then let's look at it. So if Windchill is at 67%, let's call it, 70% of Creo, IoT is just a little north of $150 million, $150 million on $600 million is about 25%, which means you could kind of like take 2.5x that business to get to the same level of penetration. And Vuforia is at just north of $30 million of ARR, 5%. So you could take that times what 14% -- 14x before you'd get the same level of penetration as we have with Windchill. So there's a huge opportunity to go upsell and cross-sell these other products into the base where we already have Creo and Windchill. So maybe I'll turn it over to Troy. You can talk a little bit about how we go do that.

Yes. I think what you're saying and it's very positive for us is the way we sold the product in the beginning, customers were still seeking out how do I leverage the platform to drive solutions in their environment. You're starting to see now a lot of that solution work is starting to filter out. And our churn rates are down. We're starting to leverage the product more efficiently, and we're solving more business problems with it. So not only are we saying at how the customers are better utilizing it because our pipeline is building up the right way. The churn rate is down and the use cases are coming through where we can have repeatable solutions for our customers, not to mention we're going to launch new solutions this year like DPM that's going to help boost the install rate of our IoT product line and AR down the road. So there's a lot of positive momentum behind what we're doing with those product sets as we take them to market for our clients.

Yes. And maybe one little thing I could add to that is this term digital thread. So a thread winds through and around and touches a lot of other stuff in my [ sport coat ] here. And that's what digital thread means is how do you flow this data down through different processes and systems and so forth? Like, for example, from CAD to PLM from PLM to IoT into AR, that's the digital thread concept that you actually heard ZF talk about. And that's why we named this business unit that Troy runs Digital Thread because it's all about stimulating the flow of data between these products so that customers really see the value in using them together and selling or, let's say, purchasing in their -- from their perspective, purchasing all of them.

Thank you, Yun. Our final question for today is from Adam Borg at Stifel.

Maybe just for Jim or Kristian, as you think about the medium-term guide, and again, I appreciate all the detail there, what used to happen to get to the low end of the range of 11% versus the high end of 17%? Maybe what's the big 1 or 2 potential downside drivers and upside drivers to get you to each of those?

Well, yes, I mean, I think we talked pretty extensively about the various opportunities in each of the segments.

Certainly, the downside and -- but even the upside. Yes, I mean the whole beginning part of the presentation was around upside. And if we take it through and think about the Digital Thread core. Obviously, continuing to capitalize on the digital transformation trend. That is -- has been a good driver and will continue to be a good driver. We have seen some benefit from SaaS here recently or over the past couple of years and actually expect to see that continue, if not accelerate, as we continue the migration to SaaS. So that -- those are 2 of the big drivers in the core. For IoT and AR, we talked about that. I think there, as we continue to get through the recovery of the pandemic, that's going to open up opportunities with customers as well as a lot of the sales motion that Troy has been laying out and focusing on the cross-sell. And we've been seeing a lot of good upsell even throughout the pandemic in that business. And then, of course, DPM, which recently launched. We have high hopes that DPM is going to actually also unlock growth levers in the IoT space. And then as Mike talked about in the Velocity business unit, we've had a good solid track record there. Even those businesses did even before we owned them, and now we're investing in them to try to expand that growth opportunity. So I think that there's a fair amount of opportunities to continue to drive incremental growth.

Yes. And maybe just the point I was making, I sort of missed your point. But the point I was making is Kristian walked us through a scenario that says, most of those growth initiatives don't work, and we end up at 11% growth, which frankly would be disappointing. And 11% growth, he walked you through how that gets to the $700 million. But I don't come to work every day to drive 11% growth and neither does Troy and Mike. We have our sights set on something much bigger than that. And I'm pretty confident we're not going to end up at 11% growth. We're going to end up somewhere better than that. Maybe we'll get to 17%. I don't know. That requires a lot of things to work well. Maybe the mid-teens growth is more reasonable, the 14% that Kristian and I talked about. But if we get to mid-teens, then that 700 number is going to be a lot stronger because a lot of that upside difference between 11% growth and 14% is going to fall through into free cash flow. So we're pretty excited about the opportunity that lies ahead.

Thank you, Adam, and thank you to everyone for your great questions today. Before we end, I'd also like to thank our world-class event production team as well as the talented and dedicated people across the PTC ecosystem to put in long hours to make today's event happen. The cross-functional collaboration was great and is appreciated. Now I'd like to hand it back to Jim to conclude our fiscal '22 Investor Day.

Great. Thanks, Matt. Well, let me first say, I'm not sure we got to all the questions we ended up having to terminate here a little bit earlier than we had anticipated. But I do think we answered many, many, many questions in the course of the day today. And I hope that in answering those questions and in talking about our business and talking about the great things and the great track record -- the great things that lie ahead and a great track record that is behind us, you see the confidence that PTC has in the team, that I have, that the executive team has and that the Board of Directors has. So I want to thank you for spending a lot of time with us today. Again, I hope you got a lot of value out of the day, and I hope you all have a nice holiday as well.