PTC Inc. (PTC) Earnings Call Transcript & Summary

This presentation includes forward-looking statements regarding PTC's future financial performance and targets, strategic outlook and expectations, anticipated future operations anticipated effects of completed and potential strategic acquisitions, 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 the appendix to this presentation and in PTC's annual report on Form 10-K, Forms 10-Q and other filings with the U.S. Securities and Exchange Commission. This presentation includes supplemental operating and non-GAAP financial measures, targets and estimates. The non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. The definitions of these items and reconciliations of non-GAAP financial measures to comparable GAAP measures are included in the appendix to this presentation.

Good morning, good afternoon and good evening. Welcome to PTC's Fiscal '23 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 today. And as a reminder we will hold an even more extensive Investor Day session at our big LiveWorx events. LiveWorx will be in person in Boston in May, and we hope you'll join us. Today, we will address key strategic topics, including how the transaction to acquire ServiceMax announced this morning fits into our closed-loop PLM vision and strategy. We will also take you through our medium-term financial guidance and why we believe we are well positioned to continue delivering on our targets. First up, we'll hear from Jim Heppelmann, our President and CEO. Jim will highlight how PTC has been performing while transforming and the drivers of our continued market outperformance. Jim will also explain why we believe the ServiceMax acquisition is strategically and financially attractive. Following Jim will be PTC's President of our Digital Thread Group, Mike DiTullio, who will focus on our SaaS strategy and show how we are leading our industry to SaaS. Rounding out today's presentations will be PTC's Chief Financial Officer, Kristian Talvitie. Kristian will first recap the importance of ARR and free cash flow as the key metrics to assess PTC's business performance. Then Kristian will take you through our financial targets and provide an initial look at how the ServiceMax acquisition is expected to impact our financials over time. To wrap up today's event, we will host a 30-minute Q&A session featuring Jim, Mike and Kristian. 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. Hello, everyone, and thank you for joining us. Hopefully, you all saw today's announcement about the ServiceMax acquisition. We are very excited about this acquisition and the incremental value it can generate for customers and shareholders. I plan to cover the headline information quickly upfront. And then in a few minutes, I'll circle back to why we decided to acquire ServiceMax and how it fits into our strategy. I think you will be as excited about this acquisition as we are. First and foremost, it's a great strategic fit with our closed-loop product life cycle management strategy. Customers will love it. ServiceMax is expected to add about 11% more ARR to PTC's book of business. That incremental ARR is pure SaaS and with synergy should grow even faster than we are. The transaction is expected to be accretive to free cash flow to the tune of $5 million in fiscal '23 and much more accretive in the midterm. You'll see that in the strength of our guidance when Kristian shared the updated view. We agreed to pay Silver Lake Partners $1.46 billion for ServiceMax, a very attractive price that represents a slight discount to PTC's own revenue and free cash flow multiples. Naturally, a transaction of this size is subject to regulatory approval, and therefore, is expected to close in early January. The ServiceMax acquisition will fit nicely into our ongoing program of performing while transforming. You can see that as a sizable pure SaaS business, ServiceMax is completely aligned with our SaaS initiative. And as a key service system of record, it will add depth to the already successful service dimension of our PLM strategy. With ServiceMax on board, we'll be in a position to lean in harder on what we call service life cycle management or SLM. Though PTC's senior management team has very long tenure, more than 15 years on average. We are certainly not entrenched in our thinking. We have, for years, been looking hard at each and every opportunity to increase growth rates and to expand margins. We have made many changes and achieved a tremendous amount of success along the way. Note that with fiscal '22 behind us, we've now added 35 points on a rule of 40 measure during my tenure as CEO. That's nearly 3 points per year on average over a 12-year period. This level of change and improvement drives shareholder value if successfully executed and PTC has absolutely delivered on that point with a compound annual growth rate in our share price of more than 17% over that 12-year time frame. If we look at the growth performance over the last 5 years since we completed our subscription transition, you can see that we have delivered steady double-digit growth with the organic element of that growth increasing substantially last year, compared to competitors, we saw only a minor slowdown in the COVID pandemic of 2020. Keep in mind that our subscription transition effectively ended in 2019. So since that time, there has been very little mix shift growth with our organic growth since then, largely being the kind that comes from selling more software than the competitors. Our aspiration on the growth front has been to get to and then maintain mid-teens ARR growth. We accomplished that goal in fiscal '22 and believe we can do it on a regular basis going forward assuming the macro economy is healthy. We've made tremendous progress on the margin expansion front over the past 5 years as well. We have seen cash contribution margins steadily expanding over that time frame. In total, by more than a dozen points, we feel that cash contribution margin is the appropriate margin metric to track due to the noise we get from ASC 606 on revenue and all derivative metrics like operating margin and EPS. Most of our investors tell us they value PTC on a free cash flow multiple so cash contribution margin is a critical metric for us. Our aspiration here is to get cash contribution margin into the low 40s on a sustainable basis. We see a path there in the midterm, starting with a big 450 basis point step-up here in fiscal '23. That step-up is largely accomplished by giving actions we've already taken time to play out. We believe there are a few more points of cash contribution margin expansion to come in the midterm time frame as spending grows less than the top line rate. With increasing margins, overlaid on increasing growth rates, it should be no surprise that our performance over the past few years has been stellar as compared to our closest peers, all of whom are strong performers in their own right. I expect PTC will maintain peer-leading performance in the midterm, no matter what the economy does. If we look deeper into the most recent year, fiscal '22 stands out as the company's best year in decades. Despite a more challenging economy compared to fiscal '21, we achieved about 300 basis points of organic growth acceleration and about 300 basis points of cash contribution margin expansion. That led to record ARR on the top line and record free cash flow on the bottom line. Bookings grew mid-teens, commensurate with ARR, while churn improved significantly. In fiscal '22, we saw strength in every product segment and in every geography. It was a great year for us. Because it's so impactful, let's take a closer look at what is happening with cash contribution margins. In fiscal '22, we launched 2 separate margin expansion programs. At the beginning of the year, we announced a restructuring designed to better align the company to SaaS principles. This enabled us to reorganize the field organization and the product delivery organization to work more like best-in-class SaaS companies. That program unlocked many efficiencies. So we funded substantially more resources in our SaaS initiative while reducing overall headcount by about 330. The changes drove a significant boost to cash contribution margins in the year, but that progress was offset by the restructuring charge that came with it. That restructuring charge is behind us. So now we enjoy the full benefit of this program going forward in fiscal '23 and beyond. Then at the Q3 earnings call, we told you about a program we were pursuing to rebalance resources within our portfolio to better align with the growth opportunities as we see them at current. Simply put, if IoT and ARR are going to grow around 20% then let's fund them that way. So we shifted resources primarily into Core CAD and PLM to keep up with the strong growth being experienced there and to incrementally fund SaaS work as well. Consequently, we were able to cancel 550 planned hires. This program did not entail any restructuring charges. But because it happened late in the fiscal '22 year, the benefits largely accrue to fiscal '23 and beyond. As you can see through our performance and our guidance, these programs have been very successful and will contribute greatly to our cash contribution margins going forward. The business has been doing well, but most of us believe a more difficult macro environment probably lies ahead. Fortunately, PTC's business model is very resilient. While it's difficult to predict with any accuracy what will transpire in fiscal '23, we believe that the most plausible outcome for PTC will be double-digit growth in ARR, accompanied by a substantial expansion in free cash flow. At the high end of our 10% to 14%, ARR organic growth guidance range for fiscal '23, we would be looking at a bookings growth slowdown and no further improvement in churn, both disappointing outcomes versus the strength we've seen throughout fiscal '22. At the midpoint of the guidance range, we're looking at no growth at all in bookings plus 100 basis points more churn. At the low end of the guidance range, we're looking at a 15% decline in bookings all year, plus the 100 basis points more churn. We feel that these are the most plausible outcomes, but for the sake of illustration, and as a means to demonstrate the tremendous resiliency of our model, we have provided scenarios that would lead to 7% ARR growth and flat ARR growth. Even at the disastrous situation that would drive hypothetically flat ARR growth in fiscal '23, we would have substantial free cash flow growth due to the expanding cash contribution margins, as I've previously outlined. Note that we expect that the ServiceMax acquisition will add about 11 points of inorganic ARR growth in fiscal '23 after closing. So with ServiceMax, it's likely that we'll have overall ARR growth in the low to mid-20s in fiscal '23, more from Kristian on that later. PTC's core business has been exceptionally strong for 5 consecutive years, and the PLM segment has been carrying much of the load. As I explained on the recent earnings call, PTC has passed first Dassault and then Siemens to become the category leader in PLM on an apples-to-apples basis, and we are significantly outgrowing these companies. This slide suggests that the PLM market is growing double digits, which might be higher than you expect. This is because certain subsegments of the PLM big picture, like ALM, SLM and IoT are growing substantially faster than mainstream PLM. PTC has strong positions in each of these subsegments. ServiceMax is expected to add about $148 million on a trailing 12-month basis to our PLM software revenue. Therefore, the addition of ServiceMax will increase our PLM category leadership while helping us maintain our high growth rate. For investors that like to bet on category leaders in strong markets, PTC deserves a close look. The CAD market is an interesting story, too. Here, PTC is technically in fourth place, but effectively tied for second place with Siemens and Autodesk because the difference between us is minimal. Dassault holds a commanding share lead across their combination of CATIA and SolidWorks. But both of these businesses have been underperforming the market in recent years and appear to be giving up share. SolidWorks revenue, for example, has been growing less than their price increases alone should drive and seat count has been flat. It would appear that some SolidWorks share is shifting to Creo at the high end where SolidWorks runs out of gas and some share is shifting to Onshape at the low end where the SaaS benefits of Onshape really stand out. In any case, CAD is an incredibly important and profitable business for PTC, and it has been growing double digits for half a decade now. Our Creo and Onshape products are both very strong and both are performing well versus the market. Our composite growth rate in CAD is best-in-class. I like our position in CAD. And while we're not out in front, we are in the passing lane. Shifting to forward-looking strategy, the CAD and PLM markets we serve are large and have healthy growth rates. The addition of ServiceMax will materially increase PTC's TAM, and we expect it will add a tailwind to our growth rate. Digital transformation has been the key driver of the market's accelerating growth rate. The investment in digital transformation is massive and about 1/3 of it, more than $500 billion per year is being deployed by manufacturing companies. Manufacturers are investing a lot because they're under pressure. The hybrid workforce doesn't work with paper processes and digital product data has to be both accessible and managed. Public companies of all types are being pressured to address climate change, and industrial companies are generally significant offenders. They have a lot of room for improvement, but they can't move the needle much without analyzing their products, and the manufacturing and service processes those products imply. Meanwhile, software is eating the world and whether it's embedded controls, digital user experience or IoT-enabled connectivity, and more and more product engineering is done in software every year. On top of all that, due to COVID and the semiconductor shortages, we've seen the pressures that supply chain issues are putting on product development and manufacturing. Realistically, addressing any of these issues requires digital investment, and CAD and PLM are seen as the key digital systems to optimize product engineering, manufacturing and service activities that lie at the very core of what an industrial company does. PLM, in particular, has changed from a nice to have to a must-have for manufacturing companies of all types. PTC strategy is perfectly aligned to the digital transformation needs of industrial companies. Our logo tells the story. The black part is a P, representing the physical world. The green part is a D representing the digital world. The shape is a yin-yang symbol, which means that physical and digital counterbalance and complement each other in a special way. At PTC, we've reduced this complex interrelationship to 3 simple words: digital transform physical. This tagline works well because all of our customers share the trade that they produce physical products. So of course, these physical products frequently have digital components still. PTC on the other hand, is purely a digital company. So I tell our customers that our digital transforms your physical. In the eyes of our customers, the digital transformation capabilities of PTC products are critical, which helps explain both the demand we've seen for years now and the incredible stickiness of our software. To enable the customers' digital transformation strategies, we offer a comprehensive portfolio of products that addresses each part of the product life cycle. CAD is where digital defines physical. ALM addresses the digital brains of physical products. So this is where digital controls physical. PLM keeps track of all the configurations of data and the processes for changing them. So for PLM, we say digital manages physical. When we speak of the Internet of Things, the things are physical. So our IoT software is where digital connects physical. One of the key uses of IoT and product data is improved service of products. So with SLM, we say digital sustains physical. Obviously, ServiceMax will contribute to what we already have here. And with augmented reality, we can take digital data off the computer screen and decorate the physical world with it to guide manufacturing or service processes. So AR is where digital augments physical. When our products are connected together in a data flow, we create a digital thread of product data. A digital thread means relevant product data is flowing between applications in different departments with traceability and under configuration control, which promotes both efficiency and quality. There is a digital thread in engineering that connects to and feeds downstream threads in manufacturing and in service. Customers never buy this whole footprint at once. Instead, they view PTC as a trusted partner to guide them on a long-term journey of transformation. John Deere, for example, purchased 2 seats of CAD to become our first customer in 1987, and today, they are a top customer with a large PTC footprint of this capability in place. The thread shouldn't only flow downstream ideally, we should have a means to sense what is actually happening in the factory or out at the customer site and provide that feedback to upstream product and process planning activities. PTC acquired our IoT solution ThingWorx to provide these feedback loops and to enable our unique and powerful concept of closed-loop product life cycle management. At a baseline level, all manufacturing companies want this digital thread to create 3 dimensions of advantage for their business, getting their products to market faster, reducing the cost of producing their products, and improving product quality. That is table stakes. Many customers want more than table stakes, and have deployed more sophisticated strategies to pursue their ambitions. PTC solutions enable these strategies, and this is what most of our conversations revolve around. Our medical device, automotive and defense customers need their processes to comply with federal regulations. They use PLM to institutionalize compliant processes. Companies everywhere, but especially those that are public, need to reduce greenhouse gases to please their stakeholders. They use our entire suite to understand and analyze product designs and their process implications. Most companies these days are looking to leverage more digital innovation in terms of software and connectivity in their products. That leads to ALM and IoT conversations. Our retail customers nearly all embrace fast fashion, which means very short product development cycles to let them start as late as possible but end just in time to improve the odds of hitting the latest fashion trends. This is what our FlexPLM software for retailers is all about. Our largest OEM customers want to adopt platform strategies, where their products are configured from a set of reusable modules to gain better leverage of their substantial capital investments in manufacturing and service. Creo and Windchill excel at this. Smaller startups and tech companies are the opposite. They have little capital or appetite for it. So they want to leverage asset-light strategies like SaaS and contract manufacturing. Their goal is to develop hardware like they develop software using the same type of agile product development processes. This is becoming the primary Onshape and Arena conversation. Nearly every company is contemplating their path to the cloud and looking to get out of the data center business, that leads to the Atlas and Plus conversation. Many companies have an Industry 4.0 smart factory strategy, which leads to IoT and AR conversations with a recent focus on DPM. Following COVID, many want to virtualize not only their knowledge workers, but frontline work in manufacturing and service as well. IoT and AR play a key role here, especially through our industrial metaverse capabilities. And last but not least, more and more companies have a strategy to offer a high-margin service to accompany their products. This is viewed as a particularly good strategy during bad economic times when new product sales might slow down, but service needs accelerate as existing products in the field where and age. It is the conversation about SLM, the service part of our PLM strategy that brings us back to the ServiceMax acquisition. We have pursued the idea of acquiring ServiceMax since 2015, shortly after we launched our IoT business in 2014. Our interest in ServiceMax stems from the fact that connected service is one of the killer vertical solutions for industrial IoT. We launched our original partnership with ServiceMax in 2015, even buying an equity stake in the company. You probably won't remember, but we talked about this important new partnership at our 2016 Investor Day. Unfortunately, an interloper stepped in and derailed our plans. General Electric surprised everybody by purchasing ServiceMax in 2017 for a very high price. At first, we thought our partnership would survive, but GE soon made it clear that ServiceMax would serve their predex strategy and not PTC, and they canceled the partnership unilaterally. The only good that came of it was a nice return on our equity investment. Being part of GE Digital was very unhealthy for ServiceMax. 2 years later after GE Digital had imploded, a damaged ServiceMax was carved back out of GE by Silver Lake Partners. It took Silver Lake several years to rebuild the business, including bringing on a new leadership team. But by 2021, ServiceMax was very healthy again. And with just days from launching an IPO where PTC was again planning to invest as a strategic partner. After the IPO market collapsed, Silver Lake agreed to sell PTC of the business at terms that we all like. The reason we've been pursuing ServiceMax for so long is that it fits perfectly into the service or SLM part of our PLM strategy. ServiceMax will be the anchor system of record for products in the field, which niche together our whole SLM story across the many different service-related assets PTC has acquired over time. Many of you credit PTC with a great track record for selecting and integrating acquisitions in a way that creates real value by enhancing the company's growth, margin and strategic differentiation. I'll point out that the most recent examples of Onshape in fiscal '20, arena in fiscal '21 and Codebeamer in fiscal '22 as being good proof points. ServiceMax is doing well because they offer a wide range of capabilities all running on the Salesforce platform that work together to address the entire range of service needs a customer has from contract management to installed base management, to the scheduling and utilizations of parts, crews and contractors in the service process. The ServiceMax team should feel very proud of what it has accomplished. The product capabilities are excellent. And our diligence shows that ServiceMax customers are very happy. We look forward to the ServiceMax team becoming part of PTC. ServiceMax fits neatly into PTC's closed-loop PLM strategy by fully address service execution needs, which is part of our strategy where the current capabilities are insufficient. ServiceMax is the missing ingredient in our SLM story. ServiceMax is designed for companies who need to deliver asset-centric service. That means companies who can't service a given product without knowing a lot about that specific product serial number. Contrast that to the Verizon truck that can come to your home and fix your cable problem, without knowing anything about you or your home or the hardware you have because it's all disposable commodity stuff anyway. They only need to know your address and have somebody to let them in. Asset-centric means product-centric. So ServiceMax fits amazingly well into PTC's portfolio. ServiceMax will draw product information and service builds of material from Creo and Windchill. Arbortext delivers configured technical documentation into the service process. ThingWorx pulls in and analyzes IoT data for the product to enable service to be more predictive and preventative. Vuforia enables the service technician or even the customer to see the service instructions augmented right onto the product and with more insight into actual service events, Servigistics can better optimize spare part inventories. PTC knows that top line synergies come from cross-sell and adding ServiceMax to the PTC portfolio sets us up to drive a lot of cross-sell in all directions. We really like the Salesforce angle and believe we can drive cross-sell in both directions here, too. Obviously, Salesforce has a proven SaaS platform with a massive installed base. Salesforce CRM manages the 360-degree view of the customer. PTC PLM manages the 360-degree view of the product or asset. ServiceMax bridges these world because it knows which products or at which customers, what their service needs are, how to perform that service and what parts the technician will need to bring along. I think that choosing PTC for PLM will make incrementally more sense for Salesforce customers and choosing Salesforce CRM will make incrementally more sense for PTC customers. I expect PTC will be able to help take the ServiceMax partnership with Salesforce to an elevated level. The customer and vertical alignment between PTC and ServiceMax is very tight. Both can excel with manufacturers whose products are complex, long-lived and whose availability is critical to the customer that owns them. Think of an MRI or radiotherapy machine at a health care clinic. The machinery in an automated factory or the equipment used in energy exploration or production. Servicing these products properly is necessary to maintain their uptime, yet they're not simple. So you need to know a lot about the product in order to service it well. Because ServiceMax is pure SaaS, it will immediately drive our SaaS mix into the mid-20s. And because ServiceMax should be accretive to PTC's growth rate, it will help our SaaS mix accelerate over time, moving the mix towards parity in the 5-year window of our long-range plan. To go a little deeper into our broader SaaS strategy and the progress we're making there, I'd like to turn it over to Mike DiTullio, a 24-year veteran of PTC and President of our Digital Thread business unit. Mike?

All right. Thanks, Jim. Hi, everyone. It's great to be with you again. The transformation of SaaS is the most important thing happening at PTC. And the reason why is simple. SaaS will be a long-term growth driver for PTC's ARR and free cash flow. We're embracing new ways of making, selling and supporting our products. We're modernizing the motions that we use to engage and support our customers and we're updating our operations to run the business more like a best-in-class SaaS company. In short, SaaS is transforming every part of PTC for the better. So let's start by reinforcing why SaaS is so important? SaaS is the future of B2B software. It's already the preferred way of delivering and using software for many industries, including mobile banking, health care and entertainment. As we explained last year, B2B markets have now passed the SaaS tipping point. With each passing day, SaaS is more and more becoming the expectation of our customers, and we're ready to deliver for them. Like in other industries, our customers want the benefits that SaaS offers. There is tremendous incremental SaaS value in the form of more innovation, better supply chain collaboration, improved security and generally speaking, fewer headaches for the customer. SaaS saves our customers money, too. Even though they spend more with PTC, they offload to PTC, significant costs they would otherwise carry for the hardware stack, the complex software stack and all the system administration and upgrade work that's no longer necessary. All PTC customers see value from using our software. But the value of performing the care and feeding of the software system in-house is a very tenuous proposition. Because CAD and PLM software is complex for customers to care for, another benefit of SaaS is removing the friction that otherwise impedes expansions and cross-selling, which is a win for all parties. During last year's Investor Day, we explained how every $1 of on-prem ARR equates to $2 of SaaS ARR. The 2:1 ratio is an industry standard, and it works because of the associated benefits and cost savings. We're now a year into this transformation and the early data we have from Windchill plus deals is promising. The uplift so far has ranged from 2.4x to higher than 3x. A pleasant surprise we've encountered is that customers understand that SaaS software never carries the same big discounts that perpetual software did. So in addition to the uplift, we're pursuing discount reductions to be consistent with SaaS standards. That means a higher price point to reflect the greater value at an appropriately lower discount. The bottom line here is that we continue to think 2x is an appropriately conservative number to plan against for your models. It's important to note that PTC's transition path is different than most software companies who move from on-prem to SaaS because we're doing it in 2 steps instead of one. For PTC, the first step is converting from perpetual license contracts to subscription licensing contracts, which we did circa FY '14 through FY '19. The licensing conversion is painful for everybody who undertakes it because it drags you through the valley of death and you stop recognizing the full value of contracts upfront and take them ratable instead. We're happy that PTC has put that transition behind us because 98% of our software contracts are now subscription. PTC's step 1 licensing transition allowed customers to restack the licenses they owned and they generally did so and purchase more at the same time. Thus, on average, we were able to generate a 45% uplift in the annual recurring value. Now we'll apply the SaaS transition as a separate and independent step 2 and can generate the incremental uplift to 2x. Again, a reminder that there is no valley for PTC or just upside. Let's walk through how SaaS will drive more ARR growth in practice. In terms of new bookings, SaaS gives us several levers to grow our total ARR faster. We can take new waters as SaaS, which effectively doubles their size, but we can also remonetize existing customer run rates by converting on-prem systems to SaaS, which doubles the go-forward ARR run rate. Conversions represent a very compelling growth opportunity given that we currently have more than $1 billion of on-prem ARR. The new alliance with DxP Services was specifically designed to support the conversion program by allowing us to outsource the professional services work that's required, yet have it performed to our specifications. Because I come from a sales background, I can tell you how excited our sellers are by the potential of this 2x uplift. They quickly realized that SaaS makes deals bigger, which makes commission checks bigger. Plus, it gives sellers an opportunity to go back and incrementally monetize existing relationships. Naturally, we've structured our compensation plans to incentivize SaaS across the board. There are several important factors to keep in mind as we think about the growth tailwind associated with SaaS conversions. First, we will never convert 100% of the on-prem ARR. We're targeting 70%. Second, it won't happen quickly. We expect it to happen over a decade. And then third, situations like this tend to naturally play out in an S-curve shape because it takes time to get the pump primed, then it accelerates and later, the growth tails off as we work through the long tail that remains. Now I know you're all good at math, but just to make the point, 70% of $1 billion is $700 million. If we spread that equally across 10 years, it would be $70 million per year, which would add multiple points of incremental ARR growth each year. But given the S-curve, it's reasonable to expect a lesser tailwind in the first few years, accelerated growth for another 5 or 6 years, and then the tailwind recedes and ultimately fades in later years. As you can see, there are compelling reasons for both the customer and for PTC to move to SaaS. So now let's look at how we're making that happen. First, I'd like to highlight our SaaS transition program. As we described at last Investor Day, this is a multiyear program that is transforming all aspects of PTC so that we operate and perform as a best-in-class SaaS company. This program is modeled after and overseen by the same leaders who ran our very successful subscription business model transition back 2015. It's a similar premise here. We're running dozens of work streams across the entire company to transform the major functional areas of our business. Some examples of these work streams would include our pricing team defining and rolling out SaaS pricing to help us capitalize on the 2:1 ARR ratio. Our partner teams defining new go-to-market and support models with our SI and channel partners and our customer engagement teams building onboarding and transition plans for customers adopting our SaaS products. Ultimately, it's the output from all these work streams of the SaaS transition program that will help us achieve our customer adoption and SaaS ARR goals for years to come. One of the most important work streams of the program is the product road map. We have detailed plans for how migrating our digital threat portfolio to SaaS. You've probably seen a version of this slide before. The underlying foundation for taking our portfolio to SaaS is the Atlas platform. Atlas was born of OnShape where it has been matured and proven over the past decade but now serves the broader needs of PTC's entire portfolio. Atlas provides the multi-tenant architecture that allows for economies of scale and shared services across our products. From a portfolio perspective, we start with our native SaaS products Onshape and Arena. For our core products, we are denoting the Atlas-based SaaS versions with a plus marker. A simple way to think about that is customers get all the existing benefits of products like Creo and Windchill+ all the SaaS benefits that take those products to another level. We're off to a great start with the Plus strategy. We delivered Windchill+ in Q2 of last year as planned. Yesterday, we announced Kepware Plus bringing industrial connectivity and factories to the cloud. And in May, we plan to launch Creo Plus at LiveWorx. In parallel, we're working hard on plus versions of ThingWorx, Codebeamer and the rest of the digital thread portfolio. As excited as we are about SaaS, we acknowledge that not everybody is ready for it yet. So we plan to maintain and advance the on-prem versions of our key products for years to come by simply building 2 versions of each product from the same code stream. So in summary today, we're past the tipping point and full speed ahead on SaaS. The SaaS transition program aligns us with where the market is headed and ensures we're doing everything necessary to capture the significant multiyear ARR growth tailwind that SaaS represents. We're confident in our direction, and we feel we're miles ahead of our competitors. We're not cutting any corners as we lay the solid foundation that will put PTC in the best possible position to create lasting shareholder value. I look forward to seeing many of you at LiveWorx in May, and I thank you for your time today. Next, let's turn to Kristian for a closer look at our financials. Kristian, over to you.

Thanks, Mike, and thanks, everyone, for joining us. As you heard from Jim and Mike, PTC is executing well against our long-term vision and strategy. We have solid momentum in the markets we focus on. And we're building on that momentum with our SaaS strategy and acquisitions also provide a tailwind. Our momentum with customers is becoming apparent in our financial results, and I'd like to take you through that today starting with our financial strategy. First, we focus on aligning capital deployment with market demand to further enhance PTC's technology strategy leadership position. Second, we focus on driving sustainable top line ARR growth. Our organic growth has accelerated in recent years based on our strong PLM and CAD portfolio, and we expect our SaaS strategy and the Onshape Arena, Codebeamer and ServiceMax acquisitions to continue to provide tailwinds. And third, we focus on growing free cash flow through strong execution and 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. I know that many of you will be disappointed but I won't be doing a detailed accounting tutorial today. However, it is important that investors understand why we focus on ARR and free cash flow. So we have included a fulsome review of this in the appendix slides and you can also refer to the materials provided during our Q4 earnings call a couple of weeks ago. The takeaway is due to ASC 606, the revenue trend is noise for companies like PTC which primarily sell on-prem subscriptions. Because revenue is impacted by ASC 606, all other P&L metrics and operational efficiency metrics that rely on revenue were also impacted. Essentially, the utility of the P&L to understand and assess PTC's financial performance is limited. We shared this graph on our Q4 earnings call to illustrate the volatility of revenue versus ARR in a small set of 10 hypothetical contracts, which all have the same ARR but revenue -- but different revenue recognition characteristics. This graph shows the volatility of revenue versus ARR. Essentially, the point is over the term of a contract, every dollar of ARR becomes $1 of revenue, regardless of when that revenue is recognized on the P&L. We view ARR as a valuable operating metric to measure the top line health of a subscription business because it's a close proxy for subscription invoicing. In addition, Free cash flow is primarily a function of ARR due to the relatively small amounts of perpetual license and professional services revenue that PTC has. In assessing bottom line performance, we believe free cash flow is the best metric for PTC because it's not impacted by revenue recognition dynamics. To conclude this section, using ARR and free cash flow together is a good way to understand and assess our business fundamentals, and that's why we focus on these metrics internally. So now that we've level set, let's take a quick look at our final performance. Delivering on financial targets with consistency is obviously important. So first, let's review how we did in fiscal '22. Despite significant FX headwinds and macro uncertainty, we executed well in all 4 quarters and delivered strong results relative to our guidance across all metrics. We started off the year with constant currency ARR growth guidance of 10% to 13%. We came in at 16%, 15% organic and also came in ahead on our cash flow targets despite significant FX headwinds. Next, let's look at our constant currency ARR results over a longer time series starting in FY '16. We've delivered double-digit constant currency growth for 6 consecutive years. As you can see in the chart, from fiscal '16 through fiscal '20, our ARR growth was helped by a mix shift from perpetual revenue during our transition to a subscription business model. Since fiscal '20, we've continued to deliver double-digit constant currency ARR growth even without the tailwind of perpetual to subscription conversions. In fiscal '21 and '22, we delivered 2 consecutive years of 16% constant currency ARR growth, and it's worth noting that organic growth accelerated in fiscal '22 to 15% compared to 12% in fiscal '21. As both Jim and Mike highlighted, our solid ARR momentum is based on our technology leadership, strong product market fit and subscription business model. Going forward, we expect to build on our momentum with our SaaS strategy and the ServiceMax Codebeamer, Arena and Onshape acquisitions, which should provide tailwinds for many years to come. That's a good segue to the next slide. Combining market-leading products, a subscription business model and cost discipline has led to sustainable operating leverage and more stability in our performance. On this slide, you can see our non-GAAP operating expenses in gray and free cash flow results in blue over the past 7 years. Looking first at the operating expense trend, I think it's fair to say that our reputation for being disciplined on costs is actually deserved. At the start of fiscal '16, we had about 6,000 full-time employees. At the end of fiscal '22, we had about 6,500 full-time employees, most of that headcount growth coming from acquisitions. Meanwhile, our constant currency ARR grew more than double from $805 million in fiscal '16 to $1.7 billion in fiscal '22. In recent years, we grew our R&D at the fastest pace as we invested to drive product leadership. The operating expense line that's grown the slowest in recent years is sales and marketing. This again illustrates the power of our subscription business model. By the way, if you're wondering why operating expenses stepped up in fiscal '21, a primary driver of that was the acquisition of Arena, which has done really well as part of PTC. Next, looking at the free cash flow trend in blue. From fiscal '16 to fiscal '20, our free cash flow CAGR was slightly below our constant currency ARR CAGR and the trend lack stability due to both the volatility of the perpetual model as well as what Mike referred to earlier as the valley of death, which was the business model transition. You can see that after we completed our transition, our free cash flow growth accelerated materially and the results have shown greater stability. Going forward, we believe that we can sustainably grow our free cash flow at a faster rate than our ARR growth, and this is possible because of our competitive strength, subscription business model and disciplined operational management. Note that in fiscal '23, our non-GAAP operating expense growth is expected to be essentially flat because of the substantial cost optimization, we did in fiscal '22 and the impact of FX fluctuations. Our rule of thumb going forward is for our non-GAAP operating expense to grow at approximately half the rate of our ARR growth. Let's continue to look forward with a focus on how ServiceMax is expected to impact our financial results. For now, we ask that our sell-side analysts continue to model PTC without ServiceMax. To keep things orderly, we request that you update your models for ServiceMax after the transaction closes, based on the information we're providing today. Starting with some key facts and figures. Our expectation is that ServiceMax will contribute approximately $175 million of ARR to PTC's fiscal '23, and it's currently growing in the mid-teens. We expect that over time, there will be ARR synergies and that ServiceMax could become a high-teens grower. In Q2 of fiscal '23, following the close of the acquisition, we expect ServiceMax ARR to be approximately $160 million. ServiceMax's geographic revenue mix is approximately 58% in the Americas, 34% in Europe and 8% in Asia Pacific. However, ServiceMax typically builds foreign transactions in U.S. dollars. So approximately 95% of its ARR is collected in dollars, which also translates to a much lower impact from FX fluctuations on their free cash flow. This may evolve over time as we integrate the business, but in the current environment, we view this as a positive. ServiceMax is free cash flow positive, and we expect the net impact of the acquisition to be approximately $5 million accretive to PTC's free cash flow in fiscal '23. This takes into account ServiceMax free cash flow, less transaction-related payments and incremental interest payments. Assuming the transaction closes in January, we expect ServiceMax to contribute approximately $140 million of revenue in fiscal '23, of which, approximately 11% or $15 million is professional services. We expect ServiceMax's gross margin to be approximately 70% in fiscal '23. This is really about 80% gross margin on the software, similar to Arena and a gross margin on the small professional services base that's much lower than PTC's professional services margins. We expect there's some opportunity for improvement on this front over time. Finally, we expect that ServiceMax will add approximately $70 million of non-GAAP operating expense to PTC in fiscal '23. From a capital structure perspective, we ended fiscal '22 with a strong balance sheet, and we have commitments in place to fund the acquisition in 2 stages. $808 million at closing and $650 million to be paid in October of 2023. At closing, we expect to fund the initial payment with a new $500 million committed term loan and borrowings under our revolving credit facility. We expect to fund the second payment in October of '23 with cash on hand and borrowings under our revolving credit facility. Note that the increased interest payments shown here have been factored into the financial guidance we're providing today. Given the interest rate environment, we expect to prioritize paying down our debt in fiscal '23 and fiscal '24. During this time, we will pause our share repurchase program. We expect to have substantially reduced our debt by the end of fiscal '24 and will then revisit the prioritization of debt paydown and share repurchases. Despite this short-term interruption, our long-term goal, assuming our debt-to-EBITDA ratio is below 3x and remains to return approximately 50% of our free cash flow to shareholders via share repurchases while also taking into consideration the interest rate environment and strategic opportunities. Turning to financial guidance for fiscal '23. On the left-hand side of this slide, you can see our actual fiscal '22 results, and the guidance we provided for fiscal '23 during our Q4 results call 2 weeks ago. On the right-hand side, we've now layered in the ARR free cash flow and revenue uplift we expect from ServiceMax in fiscal '23. With the macro environment and FX rates could have a positive or negative impact we continue to believe our guidance for fiscal '23 is prudent. Hopefully, this helps you to get started on modeling ServiceMax as part of PTC. We intend to provide more color on the financial impacts when we get to the Q1 earnings call, assuming the deal is closed. For fiscal '24, despite various puts and takes, we continue to believe our previously stated free cash flow range of $700 million to $750 million is still an appropriate range. Next, turning to fiscal '25 targets including ServiceMax, which we're rolling out today, we're targeting mid-teens constant currency ARR growth. Furthermore, we expect to expand our non-GAAP cash contribution margin to approximately 40%. We expect to get there by continuing to grow ARR at a faster pace than non-GAAP operating expenses. Also, as our mix of business continues to evolve between fiscal '22 and fiscal '25, we expect a relatively stable gross margin. I'll provide more detail on this in a minute. For free cash flow, we're targeting $825 million to $875 million. At the midpoint, the 3-year free cash flow CAGR from fiscal '22 to fiscal '25 would be in the mid-20% range. The macro environment and FX rates could have a positive or negative impact on our fiscal '25 targets. In addition, our fiscal '23 through fiscal '25 free cash flow target includes the impact of internal revenue code Section 174, which requires the capitalization of R&D expense for tax purposes. We expect the impact of Section 174 in fiscal '23 and fiscal '24 to be minimal, approximately a $10 million headwind, but it will accelerate the depletion of our deferred tax assets to the end of fiscal '24. So for PTC, the biggest increase in cash taxes will be in fiscal '25 when the impact is approximately $75 million to $80 million. It is possible that Section 174 will be repealed or altered, which means that there could be upside to our fiscal '25 cash tax assumption. Currently, our fiscal '25 free cash flow targets include that step-up in cash taxes. Beyond that, cash tax growth should moderate and be more in line with our operating income growth. Finally, before I wrap up, we've received a lot of questions about how our gross margin is expected to develop as the mix of our business changes over time, and I'd like to help provide some clarity. For fiscal '22, we're showing PTC actuals. For fiscal '23 and beyond, our illustrative model includes ServiceMax. As you know, our lines of business have different gross margin profiles. First, let's start at the top of the slide and focus on the non-GAAP gross margin column on the right-hand side. I'll start by taking you through the gross margin by line of business. Our gross margins for on-prem subscriptions are in the low to mid-90% range, and we expect this to continue through fiscal '27. For SaaS, our gross margin is approximately 70%, which is a blended average of mature properties such as Arena and ServiceMax offset by less mature SaaS properties like Onshape and Windchill+. We believe there is opportunity for margin expansion going forward as we continue to scale, improve operational efficiencies and as our SaaS properties continue to mature. However, for the purposes of this model, we'll use 70% for all years. Perpetual licenses are just a small part of our mix, but carry high gross margins, and professional services is a lower-margin part of our business. Due to the ServiceMax acquisition, we expect our professional services gross margins to decline in fiscal '23. For this model, we'll use 13% for fiscal '22 and 6% for all other years. However, like with SaaS gross margins, we see opportunities to expand professional services margins over time. Now before I go further, I'd like to be clear that this is a model, not guidance. And so the next step is to stress test this model. We hear some concerns from investors and analysts about gross margin pressure as a side effect of SaaS transitions. We understand those concerns and think this is why it's worth spending some time on this topic. In this illustrative model, we make some key assumptions. First of all, we model fiscal '23 ARR to be consistent with the midpoint of our guidance. And we told you earlier that we expect SaaS to be in the mid-20% range of our total ARR. So we just plugged in a round number here that gets us to 24%. From there, we modeled ARR growth of 12% annually, which is a prudent assumption. Furthermore, in order to stress test the model, we allocate the growth between fiscal '23 and fiscal '27 entirely to the lower-margin SaaS ARR, while holding the higher-margin on-prem ARR flat. To be clear, this is not what we expect. We actually expect our on-prem ARR to continue growing, albeit more slowly than SaaS. Nevertheless, making a corner case assumption enables us to test what could potentially happen to gross margins. For this model, we left perpetual license revenue flat throughout the period, but it's also such a small number that it doesn't really impact total gross margin that much even if it fluctuates. And lastly, we have professional services declining over time, which is what we expect particularly due to the DxP transaction. The model tells us that in this scenario where SaaS ARR already exceeds on-prem ARR in fiscal '27, our gross margin would go to approximately 78%. Hence, our belief that our gross margins will be relatively stable over the midterm. And at the same time, compared to fiscal '22, gross profits would increase over 70%, which is good for cash flow. We continue to believe there are opportunities to improve both our SaaS and professional services margins over time. You should be able to run other scenarios yourself with the numbers we provide here. I'd like to close my prepared remarks today by emphasizing that we're running PTC to create value for our customers and shareholders alike. First and foremost, we've demonstrated an ability to proactively adapt to changing macro environments and market opportunities. Years ahead of our peers, we did the hard work to transition from a perpetual to a subscription business model. We've significantly increased operating margins over the past 10 years. And now as we lead our industry to SaaS, we're focused on driving another leg of growth and margin expansion. We continuously optimize our spending to be in line with market opportunities. In addition, we've executed on strategic acquisitions that enhance our ability to serve our customers. Underpinning all of this is our commitment to disciplined operational management. We will control costs in turbulent times while investing in long-term opportunities. As it relates to fiscal '23 and as we articulated on the Q4 earnings call, we've already battened down the hatches, and we are prepared for an uncertain macro, ready to pull more levers if necessary. We believe there continues to be growth in margin in our model going forward. So I'll leave you with this. Our fiscal '25 financial targets reflect our ongoing pursuit of best-in-class top and bottom line performance. With that, I'll turn it back to Jim.

Thanks, Kristian. I hope today's presentation helps to reinforce that PTC truly is in a great position. We have a unique portfolio that creates a digital thread of interconnected solutions across each stage of the product life cycle. The ServiceMax acquisition brings tremendous new depth to the service part of our offering and will be a tailwind to ARR and free cash flow growth right from the start. PTC has consistently delivered against our financial targets, and we've demonstrated tremendous progress accelerating our growth and expanding our margins. We're the clear category leader in PLM, which has become a must-have backbone of digital transformation at industrial companies. When we combine our track record of value creation, our product portfolio, a multiyear SaaS tailwind, a business model that's growthy and resilient and a team with deep expertise and proven ability to execute, we have all the ingredients for sustained shareholder value creation. With that, let me turn it back over to Matt to kick off our Q&A.

Thanks, Jim. We are now going to move to the Q&A session. [Operator Instructions] Our first question comes from the line of Jay Vleeschhouwer of Griffin.

Jim, your history of the relationship with ServiceMax was a useful reminder. But still, I think it's also important to keep in mind that over the last decade or more, PTC's enthusiasm for SLM has ebbed and flowed. You did have to all put it into what you used to call FSG. So what has changed in terms of the customer requirements or selection criteria that has now enhanced your enthusiasm for SLM, we're leading you to this acquisition, and of course, we've made previous acquisitions in SLM? And then relatedly, you refer to the cross-sell opportunity with this acquisition. Could you speak about that as well in terms of fitting this into your overall cross-sell opportunity?

Yes. Sure, Jay. Those are all fair questions. I think we originally got into this partnership with ServiceMax 4, 5, 6, 7 years ago to drive cross-sell. And we had integrated our product together, and we were starting to make joint sales calls and we were building a nice pipeline, and really pretty excited about it. And then that was interrupted as I described. And kind of we lost a lot of momentum there. We went back to the drawing board. At that point, we still had the IoT business and the AR business. And so it was just a question of priorities because we had a strategy for SLM that was supposed to have ServiceMax in the middle of it, and suddenly, that strategy didn't exist. And so we spent our energy trying to drive good growth in IoT and AR and frankly had some pretty good success. Now a couple of interesting things have happened in the past year. And I know you've noted these. One is that our FSG group had a bang-up year against an expectation of low single-digit ARR growth, we posted 10% organic constant currency ARR growth in fiscal '22. So there's actually some magic already happening. And then, let's be honest, the plans has fell back in place where we could get the band back together, bring ServiceMax in-house and go back to that strategy that we had been so excited about. So I'd just say it's an opportunity to do what we've always wanted to do in a time frame where we're ready to do it and actually already showing some good momentum with Servigistics, with Arbortext, IoT and AR or use cases that fit in there. So I can tell you, and maybe Mike wants to comment on this, our sellers are very, very excited. Of course, not too many of them know about it other than the feel we led in to -- under the -- during the diligence process, but people at PTC will be very happy today because this will really fill a hole that makes our SLM story so much more compelling to the end customer. So I think it will open up a wave of cross-selling going forward. Do you want to add there, Mike, about the sales perspective?

Only that my phone is blowing up. They're ready to go sell it.

For our next question, we'll go to the line of Saket Kalia of Barclays.

Okay. Maybe a question for Jim or Mike on the SaaS transition in the core business. Great to see the early multiplier of 2.4 to 3x, understanding it's probably a small sample size. But maybe what are some of the reasons why that multiplier is trending a little bit higher than what we're planning on. And then maybe relatedly, just zooming out on SaaS, what are some of the reasons that some customers might not opt for SaaS early? And how are we getting them comfortable with some of those risks?

You want to take a stab at that, and I'll pick up the [indiscernible] what's left.

Yes. Well, when you get right down to what I think the value prop is there, and I just think the market is just that much further along in SaaS, where the ROI stands for itself. Jim mentioned in the discussion that our enterprise systems, CAD and PLM, in particular, they're heavy. The value you can get from them is amazing, but they're heavy to maintain. And so I think the ROI just sort of falls out. And it is early. It's early data points, but we're confident in what we'll be able to get.

And let me say, Saket, just on this discount point, if I go back to that for a second. If you look at our SaaS standard pricing, pretend you are not a customer, and you look at our SaaS standard pricing and the discount table that would go with that, it's a SaaS discount table, not a perpetual discount table. So then you look at a perpetual run rate customer, and you say, well, if I were to try to get you that pricing, it's not 2x. It's 3x, sometimes 4x sometimes times 5x. And the reaction is, why is our pricing so high? And you quickly realize that discount is crazy. SaaS companies don't give 60%, 70% discounts for big deals, they don't. It's a different world because you have real delivery cost. In the perpetual world, whether you bought one copy or 1,000 copies or 100,000 copies, our delivery cost was the same, which is to sit back and watch you download it. But in the SaaS world, we actually have an annual cost on Azure, for example, and our own resources running and upgrading these systems doing the DevOps motion, we have a real cost. So we can't discount like that. And I think to me, that's the lesson we are starting to learn and it's a good thing. It's a good thing to go back to the customer and say, it's a higher multiple, but it's actually a very good discount we're giving you. It's just you're moving out of a world that doesn't make sense anymore into a world that plays by different rules and different discounting table is part of the rules. Now the part of your question, like, why wouldn't somebody do it? They're just not ready. I mean a natural time to do it is when you're about to do a big upgrade, it helps. If your company has already decided we're going to SaaS, usually companies don't pick PTC's PLM system, be the first thing to go to SaaS. Usually, these customers have a strategy to bring everything to SaaS, and they're going around talking to all the vendors about how would I get your system to SaaS, how would I get your systems to SaaS. Maybe they're talking to system integrators about in-house stuff, how could you run it for me on AWS or Azure, something like that. So I think it's just -- you've got to catch people at the right time. They have to be mentally ready for SaaS. They probably need to be approaching an upgrade point and then it's then also perhaps it's a sales cycle. You know what I mean, we're talking about a project that's going to cost some money, surface value looks really expensive until you go through the before and after financial and they realize, actually, it's not more expensive, it's less expensive, but then I need to offload this cost that I currently have in-house in order to get that benefit.

We'll take our next question from Ken Wong at Oppenheimer.

I had one for Kristian here. When we look at the longer-term targets, I think most of us were obviously coming into this event, thinking about what the organic free cash flow number could look like. Any way to help us flesh out what the ServiceMax impact might be? And then on the broader macro assumptions, are you guys generally thinking it will be similar to '23, where it's kind of static new ARR and some churn headwinds?

Yes. So first of all, I think by the time we get to '25, it's going to be very difficult to start breaking out which dollars of cash flow come from where. So no, we're not really going to break that out. Secondly, there's a ton of moving parts between now and then and different variables, including the interest -- incremental interest, the Section 174 impacts and so on. So I mean, I think the targets are good and reasonable, and that's where we stand.

Maybe I could say qualitatively, in that 2025 free cash flow number, there's 3 large headwinds and 1 tailwind. The 3 large headwinds are FX, which is large and real and it's here already. It is the 174 taxes, which you rolled in, and that's become a huge -- could reverse itself and pal, that would be great. And then macro, we're assuming a slowdown. And I don't actually have a lot of evidence to that, but nonetheless, for all the reasons we've been talking about, it seems prudent to assume that the macro is going to go against us. So there's 3 large tailwinds, and there's 1 meaningful -- I'm sorry, 3 large headwinds and 1 meaningful tailwind, which is ServiceMax and it's meaningful. That's a company that's going to help us a lot. But like Kristian said, like let's say we generate synergies and we restructure it, like if you got $1 of free cash flow, you're trying to determine if it came from an acquisition you made now 3 years ago, it's very subjective like, hey, Mike, how much sales cost did we allocate to them? And how much R&D costs get allocated here and there? That's why it's difficult to answer that question with precision. But I think if you just say, 3 large headwinds, 1 tailwind, nets out to a pretty good number, good chance that some of those headwinds could go away, currency could swing in our favor. It has a little bit already since we last talked to you. But if we got back to some normal currency, that'd be a huge reversal of a headwind and potentially a real meaningful tailwind against those numbers.

And there's still some incremental interest in fiscal '24 as well or '25, excuse me as well.

Our next question is from Jason Celino of KeyBanc.

I think Mike gave us the framework that $700 million conversion potential with the SaaS transition over 10 years. assuming at least a 2x uplift. If I do the math right, that means like a 400 basis point annual growth contribution, but obviously, the first few years will be less than that. Does that framework sound correct?

Yes, that's the $70 million that Mike said $70 million per year if it were a straight line, but it's probably an S-curve. So yes, I mean, I think 70% on our current run rate is probably the 4 percentage points you're talking about. So I think that's right. This S-curve is a little hard to project that with accuracy, but we just we've been around the block enough to know that these things take time to get going. And then they run well. And then they start to peter out once you've harvested the biggest low-hanging fruit working harder for each new deal and you're coming ever closer to that 70% that's not going to move the remainder is after the 70% that's not going to move.

For our next question, we'll go to Steve Tusa at JPMorgan.

Congrats on the deal. Just a question on why the staggered payment structure on this. October, I guess, is the second payment to close this out. And then just as a secondary question, what's the end market breakout now for this business? I think I looked back at the filing, and it showed a pretty heavy oil and gas and energy mix to this business? What's the current end market breakout for ServiceMax? Has that changed much?

Yes. You work on the first question. Let me hit the second one on the energy -- or the market breakout. Their big industries are medical device, industrial and oil and gas. Now at PTC, we have a huge position in medical devices. Our #1 industry is industrial, and we put oil and gas in industrial. We don't break out oil and gas. So like if I think of a Schlumberger or a Weatherford, I call them industrial companies in our pie chart. They call them oil and gas. So I think the industry breakout is really pretty darn good because what Weatherford and Schlumberger type companies have in place as they make complex industrial equipment, again, that's used in the exploration and the production processes, and those are typically PTC customers.

Yes. And on the first part, I think it helps us match a little bit better expenses and free cash flow as we go through the business, we'll have a partial year of ServiceMax contribution this year and obviously, a full year next year. It's not exact. But this was the deal structure that we came up with. We think it's a good one.

Yes. I mean, think of it this way. Why have a full year of interest costs in transaction costs and everything upfront and then a partial year of free cash flow, why don't we sort of spread some of the deal costs and interest costs over the period of time when the cash flow is kicking in. It's an interesting structure. I mean, Silver Lake said, wow, I'm not sure I ever thought of that before, but yes, sounds good. We like it.

We'll take our next question from Adam Borg of Stifel.

Just maybe for you, Kristian or Jim. So in the past, PTC has had several restructuring programs. And I was just curious, should we expect a restructuring program coming out of the ServiceMax integration? And maybe just as a follow-up, your SaaS platform and strategy is really around Atlas, and that's clear with the presentation today. How should we think about ServiceMax fitting into this? Obviously, it's on sales force today, but is there an opportunity to migrate on to Atlas over time?

You hit the first one, and I'll get the second one.

First one is, no. We aren't expecting a restructuring as a result of this. So that was kind of a softball.

Yes, that's exactly right because the company was being a little bit restructured by Silver Lake and in recognition that they weren't going to have the IPO and they had kind of loaded up some costs that would be kind of aligned with the company in that era that was going to be high growth, low-margin IPO, and they were already changing the structure of that company a little bit, which was convenient because it then fits much better into PTC. And then the second part of the question was sorry, I'm not taking notes like I normally do. Can you reask the second part?

The Salesforce.

Oh, Salesforce platform. We have 0 interest in replatforming this thing off sales force. And it's a little bit why I said, we actually think the Salesforce platform is just fine. I mean the cost structure of using that platform is pretty fair. And we think it's, frankly, a nice bridge to that massive customer base. So One of the things that got GE in trouble is they started to talk about replatforming ServiceMax on the Predix if you remember, I don't know. And that didn't go over well. First of all, sales force didn't like it. And then second of all, the customers of ServiceMax are typically customers of Salesforce. They didn't want it to be replatformed. So we have 0 interest in doing that, not even going to have that conversation internally.

Our next question is from Yun Kim at Loop Capital.

First, congrats on the acquisition. It sounds like it's not only a highly strategic one but a really good financial one. So Kudos to Kristian for that. Can you update us on any change you're expecting to your go-to-market to better leverage the ServiceMax business? Clearly, this is a big boost for your SLM as you talked about. But should we -- but an SLM is heavily concentrated around the industrial vertical, but should we expect more industry-focused go-to-market? For instance, is the service suite that's being planned? Will that incorporate ServiceMax? And also, I am assuming there will be an immediate cost opportunities both ways. Will PTC salespeople have access to ServiceMax right away? Or would there be more of a specialized sales force focusing on those cross-sell opportunities in the near term?

Great. Why don't I take a shot at a lot of questions in there. I mean, I think, first and foremost, we'll get to January. But thinking about the overlap that Jim talked about in our customer base is of asset-intensive companies that would have helped for years, of course, we'll have synergies with the 2 sales force. It's also important to note, as you may know, that we have a separate service group today who works with our existing generalists across our customer base. So we see a very similar model that we've had with all of our acquisitions that have been relevant to our customer base, where we end up with a 1 plus 1 equals 3. Of course, we have the ServiceMax sales team, our existing service sellers. And post-January, we'll decide how we want that to look. But you can bet that there'll be synergy between that team focused and specializing on service selling leveraging our 20- and 25-year relationships with our existing customer base.

Yes. And let me just add one thing to that, and then you can. If you look at our integration playbook, rule #1 says, first, do no harm. So I mean, we'll ease into the pursuit of synergies after we've stabilized the company inside of PTC and everybody understands where the bathrooms are. And how their comp program works and all that sort of stuff. So we'll definitely go after the synergies. I mean it is synergies at the end of the day that get us so excited about this. It's just got to do that in due time so as to not break anything. I think when ServiceMax as part of GE, they just rushed and made all kinds of changes and said we're going to replatform, and oh my God, it was a mess. So we don't want to -- we don't do that kind of stuff.

No, you actually took the words out of my mouth I was going to say, listen, it's a great business. We're super excited about the acquisition, and that was going to be my point. Rule #1, do no harm. And then we'll -- once we get to know each other, all the more better, then we'll figure out how to make it work and how to get after those synergies.

But maybe just one last comment on that. We certainly do know how to bring an acquisition in, do no harm and over time, create cross-selling motions.

For sure.

We do that all the time. We did it just with Codebeamer very recently. But again, always starting with do no harm.

We'll take our next question from Joe Vruwink at Baird.

Part of the success for PLM has been its relevancy for more personas in an organization as part of enterprise strategies. And now you're adding better exposure to service professionals. Jim, you going back to the sales force comments, but the sales force connection could even pay dividends with customer organizations. I guess my question is, when you think about your current customers that you consider best-in-class and their PLM adoption, do you have any sense for how much addressable seats or penetration of addressable seats ends up being relative to when PLM is just isolated in product engineering? And then do you think most of your end market exposure kind of has to go through this evolution where PLM increases and its use across an enterprise?

Yes. I can throw out some anecdotal data from customers I know to give you some sense for that. I don't have a hard analysis right here in front of me. But for example, I know an elevator company, elevators and buildings, that has several hundred engineers and 3,000 service technicians. We're in the middle of a conversation with an automotive company about using augmented reality in their service procedures. They have 4,000 in-house dealerships and 10,000 more dealerships that are run like franchises by outside parties, but branded and using the right recipe. So I'm just saying like these companies have -- the ones that do service as a real business generally have a lot more people out there doing service than they have back in engineering. So it's a big multiplier for sure. And we're pretty excited. The average customer size for ServiceMax is actually quite large in our view. So it shows there's quite a good opportunity there.

Our next question is from Gal Munda at Wolfe Research.

And congrats on the acquisitions as well over the acquisition as well. In terms of -- Jim, you mentioned that GE made a little bit of a mess of a business when they had it. Can you be just a little bit more specific. I know you mentioned the potential replatforming? How about the whole investment in R&D or maybe go to market? What -- and most importantly, what has changed since when Silver Lake came in, what did they fix and how fixed you think that is today? In other words, do you think it's operating at its full potential? And if not, what are some of the easy wins that you can do to make it sure that it operates at potential?

Yes. I think that -- the first thing that happened within GE is the leadership team left. Dave Yarnold had been the CEO. That's the guy had built the relationship with. He left a number of other key people left. And so first thing is you acquire a company, you lose all the leadership. And then let's remember GE Digital itself was in a bit chaos during this period of time. I think they lost a lot of the go-to-market people, a lot of the leadership. The guy running the product was there before GE through GE and remains in place. So I think the product was not so badly damaged. I think it was really more the business that you wrap around the product. And again, I think we're quite good at selling this kind of software. And we're going to be able to wrap a very large portfolio of complementary stuff around it and bring it to market into a much larger customer base. Our customer base is at least 10x larger than theirs, which isn't surprising because our ARR is 10x larger. But I think really where we're going to develop synergies by integrating the products and then cross-selling their products into our customer base and our products into their customer base. And like I said, perhaps doing a little bit better, a little bit more of that with sales force PTC has never had a meaningful relationship with Salesforce. We happen to use it a lot and pay them a lot of money for it, but we never had a go-to-market because there was no great connection, minus something like ServiceMax. So I'm hopeful that there will be something there, too. But that's just icing on the cake at this point. We can get a lot of synergies whether that also comes to be or not.

For our next question, we'll go to Tyler Radke at Citi.

I appreciate the opportunity to ask a question. So you've raised price over the last 12 months on a lot of your core products, and obviously, seeing some tailwinds just from some of the CPI-based contracts on renewal. How are you thinking about price increase on the on-prem side as a lever to maybe accelerate the move to SaaS over the long term? And then if you could also just kind of walk through your assumptions on how fast you think the on-prem base migrates to SaaS? I believe in one of the slides you're kind of expecting the on-prem base to be relatively stable or flat. But just kind of walk us through the puts and takes of the forecast and how much future price increases will be a factor?

So on the pricing front, I think we're early enough here in the transition that we're not really trying to use differential pricing as a meaningful lever at this point. There's still pull from the market and there's still folks evaluating their options. So I do think that's an opportunity further down the road, but not one that we're really driving right now. In terms of the mix, again, I just want to remind everybody that slide we showed on gross margin, not guidance. That's really the corner case to help pressure test what could happen under a very drastic scenario, meaning all the growth was SaaS and none of it was still on-prem. We don't think that's going to happen. I think as we said during the presentation, in fiscal '23, somewhere in the mid-20s percent range of our ARR will be SaaS. I think as we get out to 2027, it's going to be approaching the low to mid-40s percent range and it will grow from there. And this is that kind of S-curve that Mike was talking about as well. So we still expect the on-prem business to continue to grow here in the -- actually over the next decade. It will just be slower growth than the SaaS part of the business.

Yes. Let me just say, you sense in us, I hope, some real enthusiasm about the SaaS program because it's a bit of a gold mine. And it's a gold mine for us while creating better value and better outcomes for the customer. So it's a win-win. And I agree with Kristian, there's a time to use price increases. But that's like in the fourth quarter when you're doing cleanup, not in the first quarter when you're really just trying to sell on the value proposition.

We'll take our next question from Matt Broome at Mizuho.

Not to belabor the point, but just in terms of when that S-curve really starts to inflect. So we're looking at the sort of 2025, '26 sort of time frame, is that -- I appreciate it's just a sort of a best guess at this point?

Yes. My view would be if we said on average, it's 4% over 10 years, just let's go with that 4% each year for 10 years. I think it will be less than 4% this year and next year. We might be in the 3% to 4% range, getting into '25 and might be more than 4%, I don't know, 4, 5 years after that and crossing back through 4% and down to 2%, 1%, 0% as we get further out. I mean that's what a S-curve looks like. And just let's be honest. There's not a lot of precision around such S-curves. It's just every time we run initiatives like this, you can stand back and look at it and say, wow, it was another S-curve. The term S-curve was not invented here at PTC. It's it's a phenomenon that happens out there in the world. It's kind of like a bell curve in a growing business. If you take a bell curve and you tip it on a growth rate, you get an S-curve. That's basically what we think is going to happen.

Our final question for today is from Blair Abernethy at Rosenblatt Securities.

Just 2 quick things. Is there any -- just looking through ServiceMax product set, and they do have some warranty offerings and so forth. And maybe you could just speak to what you see as a potential product overlap for the early days there? And the second thing is as you get down the road and more of your existing SLM products are moved to Atlas, what's the sort of plan for tying those into ServiceMax, which is going to be obviously based on Force.com?

Yes. So first on the overlap. Their products are almost all exclusively adjacent to our products with no meaningful overlap, which, frankly, in a way is a little bit disappointing because there won't be any cost synergies there. But it does mean that we can have more cross-selling type synergies. So I don't see that. And then the second part of the question, sorry? Matt? Usually, I take notes while we're doing this because I get lost in the first part. I can't remember the second part. I think it had to do with the platform. how Do you integrate the 2 platforms? Yes. So when software runs in the cloud, whether it runs on 1 cloud, 2 cloud, 3 clouds, you don't really know. So it's very easy for us to deliver an experience to a customer that appears 100% integrated even if part of it is running on Salesforce and part of it is running on Atlas. And so that's how we'll proceed. By the way, the user interface of ServiceMax looks like the user interface of Salesforce because normally, you're running an inside Salesforce. So we won't try to even change that. There's a look and feel there that makes sense and we'll integrate these products together in the best way possible. We need to do a lot of design work and for all these gun jumping rules and so forth, we're not actually allowed to do all that work prior to closing the deal. Now the good news is we did it all 5 years ago. So we actually built all these integrations 5 years ago. We just need to dust them off, update them and talk about what else could we do going forward. Okay. Matt, I think that was the last question. So first of all, I'm happy to see we got done early. We'll give you a little bit of time back. But thank you all for spending time with us here today. We really appreciate it. I hope this information was helpful. I hope you're as excited about our business and this acquisition as we are. There's a couple of opportunities to spend time with us yet in this quarter. For example, we're going to be hosting an Oppenheimer roadshow here at our PTC headquarters on November 28. Then Kristian is going to be at the NASDAQ Investor Conference in London on December 6. Matt and myself are going to be at the Barclays Conference in San Francisco on December 7. So maybe we'll run into some of you at those venues. But if not, we look forward to talking to you at the earnings call in early February. So thanks again for your time today. Really appreciate it.

Thanks, everyone.

Thank you.