PTC Inc. Aktie

Great. Hello, everyone. Welcome to JPMorgan Boston TMC Conference. My name is Alexei Gogolev, Head of Vertical SaaS team here at JPMorgan. And today, I'm delighted to be hosting PTC management. We've got Neil Barua, company CEO; and Jen DiRico, CFO of PTC. Neil, Jen, welcome.

Thank you.

First, if I may begin the conversation with your intelligent product life cycle and state? Neil, when you describe the intelligent product life cycle, what does the target enterprise architecture look like in practice? And what are the most common customer missteps on that journey?

Sure. Thanks for having us. Maybe taking a step back around what PTC does in relation to the intelligent product life cycle. The companies we serve, our customers, they build the most amazing products in the world. Our solutions, our software solutions are fundamental to the entire product life cycle of those products, whether it be design, engineer, configure, make and service those products. And so we sell and have a set of solutions across CAD, PLM, ALM and SLM solutions to fulfill our customers' desire to really speed up and make their product life cycle effective so they can build and have great products that we all consume out in the world.

The intelligent product life cycle is around making sure our customers actually adopt these technologies so that they could implement a way in which their products can be delivered in a higher quality in a faster manner to their customers. What does that mean? They deploy our CAD solutions, they deploy our PLM solutions, ALM solutions, SLM solution by which all the engineering and product engineering workflows are as seamless as possible by which they could actually put intelligence on top of it.

And so when we talk about intelligence, one of the themes we're seeing is this product data foundation encompassed across all these product categories need to be put into the framework that we have at PTC in order for intelligence and AI to actually work at scale. And that's fundamentally what the intelligent product life cycle vision is intending for our customers to adopt.

You asked a question of where they are in this adoption. Our end markets have not modernized their product data foundation as much as other end markets. And so AI is inspiring them even more so now to actually deploy Windchill across their entire engineering base that needs a PLM system like Windchill as an example, by which then they can apply AI. So they're in that journey where they're fundamentally to help them with the best-in-class solutions to put together that product data foundation by which -- it's the only way by which AI will actually work at scale for our customers.

That makes a lot of sense. And so you talked about data foundation as AI prerequisite. So what are the most useful metrics you use to show a customer that their product data foundation is improving? And also, how do those metrics translate into purchase decisions?

Yes. So our customers are dealing with a lot of complexity, for example, in the electronics and high-tech sector, where our customers who are the component and manufacturers of all the things that are being put into a data center, we actually enable all of that product engineering to be put on to our product data foundation. So our customers are dealing with how do you accelerate a component, a cooling system to be placed into a data center. And their #1 issue is they can't actually get through their backlog. They can't deliver faster. They can't innovate fast enough.

And so what we're seeing from our customers is how do you speed up with this product data foundation from design to actually build to maintain the speed by which they can deliver these products to the world that is urgently meeting this build-out that we're seeing within, in particular, the data center build-out.

The metrics that they look at is speed to market, quality, defects in order to make sure that this happens as fast as possible. And those are the components by which when they measure AI productivity, when they measure PLM adoption, they are the things that they're looking at is how can I speed up my delivery to my customer base because every segment that we serve across geographies is dealing with this strain of delivering faster with higher quality.

One last point is not only electronics and high tech that are fundamental to the data center transition and delivery, but another example is federal aerospace and defense, we're very strong for the last number of decades at PTC of providing modern solutions to that segment. And that's an area that across federal, aerospace and defense, whether we're putting things up in space or we're dealing with geopolitical elements that require countries to protect themselves, they're actually using modern technologies like our product data foundation to speed up their ability to do things for their customers and their citizens across the world.

So those are the themes that we're seeing that's causing customers to come to us to say, "Please build a product data foundation with you." And then we're showing them the AI embedded releases that allow them to elevate that intelligence on top of that data foundation.

Okay. Yes, that makes sense. So Neil, what are a few internal KPIs you view as the most reliable indicators that the transformation that management has been conducting is durable? And where are remaining gaps?

Let me start on the front end and then Jen, our CFO, can give some indication of some of the things we're looking at from a numerical perspective. But taking a step back from the 2 years I became CEO to now, a lot of hard work of the teams, we've undertaken a refocus of the company and a focus on the core priorities that are now the buildup of the product data foundation. So the things that customers really value to build this product data foundation to put intelligence on it, we really focused the company on that 2 years ago.

That was underpinned by making sure the go-to-market engine can adequately do this in a way that actually creates the durable, sustainable reacceleration of growth, which has been our North Star. That also was augmented by product innovation and product transformation where we are now releasing at a much faster cadence than we ever have as a company since the beginning of Windchill as an example.

That is also relating to this year us putting out -- you'll hear the announcement in a few weeks at PTC NEXT, our first product release kind of conference that we have in Chicago, our first organically built product that we've had at PTC in decades, right? And there's another one right behind it the next quarter. And so that product innovation has been there. You've also seen us get focused on our portfolio by divesting of assets that were not affecting the intelligent product life cycle.

So all that work is now showing up in what Jen will talk about the metrics that we look at. So a lot of heavy lift. I'm proud of the team's progress so far, and that's why we're getting confident about what's happening at PTC currently.

So from a metrics perspective, a couple of things we look at is just the leading indicators around close rates, stronger pipeline. We've talked about -- even this past quarter, I shared that the pipeline is made up of more strategic larger deals than ever before. We also take a look at -- we've hired some new reps in the last 12 months and how they're performing versus prior cohorts. And what we're seeing is they're more productive than previous cohorts, which shows that we're doing a good job in terms of hiring the right people and enablement. And then we're seeing strong renewal rates as well.

All that in addition to -- we've talked a lot about deferred ARR and why that matters in terms of providing additional visibility for us as it relates to contracting with customers over the long term and making sure that we're doing the best things for both PTC and the customer as it relates to extending the lifetime value of a customer.

Thank you, Jen. And I do have a question about deferred ARR. But before we go into that, why do you think are ramp deals and longer terms more common now? And what are the implications for ARR linearity?

Can I take the front end, Jen? You can add.

Sure.

One of the things to create sustainable, durable reacceleration of growth is running the business to do that. And that doesn't come from doing deals to just maximize a quarter. It comes from maximizing, as Jen mentioned, the long-term value of the customer. And the discipline that the new team has put in with the focus that we have is around capturing as much of the customer opportunity as possible regardless of the time line when that's coming to hitting our ARR.

It's contracted. So it's not a wishful thinking. It's things that are appropriate for the customer based on their implementation cycle. It also is very relevant when we're displacing competitors, displacing homegrown tools because there is more deployment energy that's needed and time line to put in place this mission-critical system of record and action that we're putting into place.

And so we'd rather and what we're doing in these strategic deals is make sure we capture the entirety of the customer opportunity, work with them on a multiyear journey to build and have their users adopt our solutions versus doing deals just to maximize a quarter because we want to build this durable reacceleration growth for multiple years, not just 1 year. And that's the framework by which culturally and all the metrics that we're putting underneath the go-to-market team is enabling for these deals to actually come to bear.

Yes.

And then in terms of ARR linearity, Jen, any additional thoughts on what are the implications from these deal structures and ramps?

Yes, sure. So in terms of -- first, it gives us a lot more visibility, right? And what we're seeing -- historically, what we saw was we were actually, in some instances, sacrificing price to be able to get the ARR upfront. And what this does is actually give us much more visibility. It allows the customer to ramp into the deal to truly use the licenses and not have any shelfware.

And so that gives us a lot more predictability over the long run, right? It's a better overall economics for PTC and also the customer can -- like Neil said, it's very thoughtful and planned and -- but also at the same time, contractually obligated, right? And so ultimately, that's kind of I think, the benefit of the deferred ARR while also really making sure that we're continuing to accelerate our demand capture and work with customers for the long term.

Okay. And in terms of deferred ARR, Jen, so what are the operational mechanisms that reduce slippage risk on deferred ARR? And where can timing still move even when contractually committed?

So these are all very -- all contractually committed, as you've said. And so at this point, we have no plans to renegotiate these contracts. It's one of the reasons we take a long time with the customer, both on our end and theirs to make sure that they feel like they can absorb these licenses in the right period of time. But there's no plans to renegotiate or anything like that at this point.

And one other piece that's important is when we did the go-to-market transformation, we aligned the customer success team, the implementation team with the sellers in the field. That didn't happen before the go-to-market transformation. So there was a dislocation from the seller to actually what the implementation looked like. They're now combined and they have the same accountabilities. So that was step number one.

Number two was because of our refocus back into our core priorities, the core platforms in CAD, PLM, ALM and SLM, we invested into those platforms versus getting enamored with another acquisition. And what that meant for our customers was there was better feature upgrades, there was more stability in the platforms by which when they went to implementation, they didn't have to wait for, well, you didn't deliver on a release, so now we can't implement. So we've gotten better across the board across all the transformation that we've done to ensure that we don't need to renegotiate these deals.

Okay. And Jen, you also talked about the Q4 step-up expectation. As you guide to the step-up in new -- net new ARR, what are the two most important drivers, maybe things like conversion of deferred ARR versus incremental demand capture?

Sure. So when we think about Q4, right, one of the things I said was based on the deferred ARR we have in Q4 compared to -- and then if you look at our performance in Q4 of '25, if the team performs exactly the same way, there is -- excuse me. We have the ability to -- it's not really as much of a step-up as before, right?

If you look at the H2 of '25 versus H2 of '26, the incremental is about $7 million. And I've already shared in the last quarter around the impact of deferred ARR being 3x more than what we saw before. And so the reason I shared that was to give confidence that while it looks like there's a big step-up in Q4, we have visibility where we didn't have it last quarter -- in Q4 of '25.

Okay. That makes sense. Neil, so you've called out larger cross-product strategic deals. What has to be true in field execution and enablement to make that deal profile much more repeatable going forward?

Yes. So part of the go-to-market transformation was around reorienting our go-to-market teams around verticals. And that has been a huge benefit to our cross-product conversations because our conversations now in any of the verticals that we're in is not about buy a PLM system, buy Codebeamer. It is about how do you transform your business? How do you actually accelerate time to market? How do you improve quality of your products? When we capture that intention, by the way, also how do you leverage AI?

And when our customers ask us, well, how do we do that? We refer to a customer that is doing that within that vertical that has been using PTC and is evolving faster than the competitor. That then relates back into, well, how do I actually enact that someone -- a competitor of mine or someone that I look up to in the industry and that gets into, well, to do that, you need Windchill deployed. By the way, you should add Codebeamer because you want mechanical and software configuration management done together. And it creates an energy around you need to do more with PTC and you can do more with PTC because others in your verticals are doing that, and they're seeing the benefit.

And they're speaking prominently at our executive exchanges, our customer advisory boards, none of which existed, by the way, 18 months ago, to incite people to say, this is how you should move forward your business as well. So that's helping a lot in terms of the enablement and the communication and the visibility of our customer base.

So you talked a lot about the system of record connectivity. So as you deepen connectivity between the great products you talked about, Creo, Windchill, Codebeamer, Onshape, what are the next integrations that matter most to unlock some tangible customer outcomes?

So taking a step back, those integrations are fundamental to what customers want right now and for the next few years. Just for those that don't follow the industry, those connections across those systems in our competitors aren't that good. And so our view is that by doing it better, where a CAD model can move into PLM to a software engineer and configuration management, those are areas that have looked good on PowerPoint slides for 10, 15 years. But when you talk to our customers, hasn't worked as well as what they wanted.

So we put the investment back into that. You saw an announcement that we made about Onshape to Windchill connector. Customers have been asking that for 2 to 3 years. We actually made it happen now with a new team, and we've gotten beta, and we're delivering in GA this summer. Those are fundamental to the customer on having that modern product data foundation.

Our midterm to long-term point of view is the intelligence layer that we're building by which the agents of our AI-enabled workflows actually can interact with each other is actually the next step of how engineering data and workflows get integrated and dispersed across the enterprise. And we're super enthused about how that looks like over the mid- to long term.

Perfect. Neil, I wanted to ask about the other two products, Windchill+ and Creo+. So what are the most common triggers that drive a customer to choose those two versus remaining on-prem? And what's the biggest remaining adoption blocker?

Sure. So one of the things we've said for the last couple of years when we did a bit of a step back around expectation on Windchill+ adoption, which is playing out extremely well that we did that is that customers that are adopting Windchill+ are actually experiencing it better in terms of the implementation process when they get to the endpoint and deploy it and talk to their users, it's a better environment by which they're running their product data through that system. That's happened and is happening. And we're very successful right now in terms of Windchill+ deployments. It's getting better. We put some investment to ensure the experience was what it needs to be. We continue to invest in it. Our pipeline is growing. So we see active acceleration of Windchill+.

What causes the customer to deploy that solution is, number one, who else is doing it? So that referencing is important. So it's a snowball effect from just a credibility standpoint. Two is if a customer has migrated their SAP to S/4HANA and have finished the ERP implementation to the cloud, most likely they come back and talk about PLM in the cloud, which is Windchill+. And so one factor we watch, which several companies have had a long implementation process with SAP, but many of them are getting to the end stages of the S/4HANA upgrade, that creates an impetus also for Windchill+ to be considered and to be deployed to make their full stack modern on a SaaS platform. Those are the two that are happening that we're seeing the excitement around Windchill+ now.

Okay. Maybe this is a question for Jen. So on a typical on-prem to SaaS uplift, how much is true value or usage expansion versus packaging and pricing? And what are you doing to ensure uplift remains durable?

Sure. So if I take a step back, one of the reasons customers are looking to go to a Windchill+ or conversion is to get the benefits of SaaS, right? And we all know what those are. But in the realm of modernizing your product data foundation, being able to take advantage of AI, there the conversation is really starting to shift.

Now I think we're -- like Neil said, we're meeting the customer where they are. We're not forcing the conversions, but it's certainly something that we're hearing more and more in our customer conversations. Very tactically, from an uplift perspective, we see around [ 2% or so, 2% to 2.5% ] of overall pricing uplift. But for us, it's about making sure that the customer can take advantage of the full AI capabilities beyond the same instance overall. Would you add anything?

I'd just say that the philosophy that we have at PTC is clearly, there's ways in which you could force a customer to do anything and feel good about it for a short period of time. We're here because we've been around for 40 years, and we want to be around for another 100 years. And by doing things that are right for the customer and showing them the value relates to why they won't renegotiate, why it's actually going to get adopted, why they expand, why they use more out of us. And that's our approach with SaaS currently.

Okay. And Neil, as you build common AI infrastructure, so agents can operate across product data and workflows, what are the hardest technical problems? And what is the phased road map to make this real?

Yes. This is almost ubiquitous across our end markets, which is the most exciting part of the next number of years ahead, which is we are fundamentally such strong believers of AI being something that really accelerates our customers' workflows. That said, we have to make sure the contextual data is organized well, which in most cases, is not. On this mission-critical engineering data, the context of the data to train an AI agent and the outcomes of those AI agents need to be perfect. They can't be what it is for a salesperson or a finance person where it's like, hey, this is pretty good. It has to be perfect in the engineering world.

And so all that work, the training on 3D models, the understanding of our parametric models, the design intent, the configuration models, the governance, the security, the identity access and all the interactions across that engineering data across the enterprise needs to be understood, first and foremost, by the AI agent trained appropriately with that deep domain expertise before it could actually do something at scale.

So the big thing that we're seeing from our customers, again, the reason for our -- in the last 90 days inflection also of our confidence level, not only because of the internal work we've done to be ready for this moment, but the moment is here where there's a realization after all these science projects of AI, where we need to make it work, and they're coming back to trusted partners that actually fundamentally understand how the software in their core systems actually interoperate by which we could create AI agents that are the most productive and also efficient from a cost structure standpoint.

And so all those frameworks need to be put in place before AI agents ubiquitously transform a company. And the good news is our end markets are very thoughtful customers. They're not fly by the seat of their pants, and they will be methodical about their deployment of this. And that's the reason why they've been around for 100, 200, 300 years. And our goal is to make sure that they're here for another 200, 300, 400 years.

How about -- how are you thinking about packaging AI capabilities inside each system of record? And also what milestones would indicate AI is moving from feature to actually a material revenue driver?

Yes. So taking a step back, I want to make sure we continue to portray that AI is exposing to our customers the necessity to modernize their product data foundation, whether it's to simplify their tech stack by moving to Windchill+, consolidating their instances in ALM to Codebeamer. All those things are fundamental, to be clear, on the impetus of AI.

What's really good is we've been doubling our release rate of AI embedded workflows into our core system of record, which are productivity step changes in Windchill AI users -- Windchill users or Creo users or Onshape users as an example, or ServiceMax. Those are illuminating to our customers the power of what AI could do in a POC level. To get to scale, implementation and outputs that our customers want, they then realize they need to modernize their product data foundation. So it's a flywheel that's caused by our AI releases. They see the value of what can happen when you train a model on our data on their stack, and it causes them to get their house in order to make sure that they could scale it. So that's the theme we're seeing.

You're going to continue to see -- there's a really strong Creo AI release coming out next week. There's another one coming out in October. There's a number of them that are coming off of the other core systems, and we're showing and illuminating to the world all the things you could do with this incredible technology that, quite frankly, we have the unfair advantage of training the AI agents because we understand fundamentally how our products are built and how to train those models.

And then I can add on the pricing side.

Yes.

Yes. On the pricing side of things, we -- from a AI automation -- excuse me, assistance rather. So we have some products that are built into the per seat price. And then there are some products that we're saying it's a seat-based plus usage. A good example of that is Windchill+ -- Windchill Parts Rationalization, right?

And so we are meeting the customer where they are, but there's -- we know that over the course of the time, there's going to be certain features that are just need to be baked into the functionality and some that we can go and charge more on the usage, et cetera. And so I would say customers are receiving that well for us, and we're going to continue to meet them where they are.

Okay. Thank you, Jen. Neil, as partner involvement expands, how do you maintain clean customer accountability, especially on the multi-product life cycle transformations?

Sorry, I didn't...

On the partner involvement, as it expands, how do you maintain clean customer accountability?

Yes. We've -- Rob and I and CK have been fundamentally always focused in on get your -- first your house in order. Before you interact with other partners, we have to make sure our structure, our processes, our diligence, our accountabilities and the metrics we look at are adequately done in a way that we operate our business well because partners are just extension of all the hard work we're doing. And some partners have been moving at the same pace as what our transformation looks like internally. But we have a lot of opportunity to get them in the same framework and the mindset, the messaging, the ability to go win new business like we've started to do in the same manner that we're directing our direct teams to do.

But that only comes from the right set of data and metrics that we look at internally, which Rob, CK and now Jen and her team have been markedly improving so that we know how to run our business better, and now we could align our partners in a much clearer fashion, understand the ROI, understand the economics behind it, understand who's actually productive, just the same way we look at our internal go-to-market functions.

Okay. Makes sense. And Jen, you also talked a lot about operating model post some of those divestitures that the company recently done. So beyond focus, what changes operationally now that you have those 2 assets divested, and what would minimal disruption look like during the transition period? I'm talking about go-to-market emphasis or maybe some investment priorities.

Sure. So I've been very impressed with the entire PTC operating team. This was a very complicated divestiture, and we've really seen very minimal disruption in our results, right? Of course, these are challenging operational complexities, but ultimately, we've been very proud of the results we've been able to maintain. As we think about overall capital allocation in terms of internally, this is a great example of being -- our ability to stay continually focused on delivering the intelligent product life cycle. You've seen the increased amount of releases from an AI perspective.

So for me, it's about making sure that we're allocating our capital towards the highest and best uses. All the innovation that you've seen over the last year and as well what we're going to be now launching at PTC NEXT in a couple of weeks is really a testament to that. And PTC has done a very good job over the course of the last -- a long time, just continuing to be efficient, but also reallocate capital where it makes sense. And the divestiture is just one of those examples of us being even more focused to be able to deliver on our vision.

And one thing just to add to it because I'm very proud of the team around this. And our advisers -- all of our advisers said, this is the most complex divestiture that they've been involved in. And for 9 months, we spent blood, sweat and tears making sure that, that happened, right? And so that's behind us now. So that 9 months of consumption, so much time and effort, now unleashed on delivering on the intelligent product life cycle vision is also another step change of why we have the confidence on building on the momentum that we're already seeing despite that distraction for 9 months.

So divestiture now complete, you've defined TSA period. You have somewhat higher cash taxes coming next year. But how do you think about balancing? Buybacks, some tuck-in M&As, maybe some incremental R&D investments? And what are the key guardrails you apply to those decisions?

Sure. First of all, our capital allocation philosophy hinges on kind of three pillars: organic investment back into the business, inorganic through M&A and share buybacks. And we evaluate all of those with the same type of hurdle rate. Right now, as you've heard me say on the call just a couple of weeks ago, we believe share buybacks, given where the stock is right now and our conviction in our long-term ability to add value is the right place for us to spend our capital.

But it doesn't preclude us from M&A. We're still continuing to invest in the business to ensure that we're not stifling innovation, right? And I think it's a very balanced approach, but I'd go back to we believe in the long-term value of this company and where the stock price is, we believe share buybacks continue to be a very great return for us.

Okay. Perfect. Neil, maybe in the last minute or so, anything you want to leave investors with coming out of this meeting and this day of meetings that you've had? Like anything that you feel investors should think about when they consider PTC?

Yes. First of all, I appreciate all the interest in PTC. This is a seminal time for PTC because the hard work and the patience all of you have had around can the company reaccelerate growth. We put in the blood, sweat and tears to get to this point. And we've got the internal foundation by which we are starting to see that inflection occur. We are also aided by the customer environment by which they're also needing to change and transform in a very different dynamic than even I saw a year ago.

So those two things together, the proof will be in the results, but we feel confident on the hard work resulting in our North Star of reacceleration of growth and durable, sustainable acceleration continuing on by building a great business in partnership with our customers in the most seminal time that our industries have faced. And we're going to rise to the occasion. We have been, and it's a great time to look at PTC, and thank you for everyone's support on it.

Thank you very much, Neil. Thank you, Jen. Appreciate you being here.

Thank you.

Thank you.

Good evening, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2026 Second Quarter Conference Call. [Operator Instructions]. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, operator, and welcome to PTC's Second Quarter 2026 Conference Call. On the call today are Neil Barua, Chief Executive Officer; and Jen DiRico, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com.

During this call, PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K Form 10-Q and other filings with the U.S. Securities and Exchange Commission as well as in today's press release.

The forward-looking statements, including guidance provided during this call are valid only as of today's date, May 6, 2026, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.

With that, I'd like to turn the call over to PTC's Chief Executive Officer, Neil Barua.

Thank you, Matt, and good afternoon, everyone. PTC delivered a strong Q2. We grew constant currency ARR 8.5% at the high end of guidance and free cash flow, 14% year-over-year, exceeding our guidance range. With the divestiture completed in March, we're moving forward as a more focused company, fully concentrated on our intelligent product life cycle vision.

Our go-to-market transformation continues to gain traction. rent productivity and renewal rates continue to improve, and we've built a large, high-quality pipeline for the second half, well balanced across geographies, verticals and products. We also continued structuring deals for PTC's long-term benefit, increasing our deferred ARR for fiscal '27 and beyond.

We're encouraged by the consistency and momentum we've built over the last several quarters and are focused on delivering a strong second half. Now let's talk about AI and how it's driving momentum for PTC. I'll start with a concrete example from Q2. We displaced a competitor with Windchill plus at a leading automotive supplier.

We won because we showed this customer 2 things: First, that Windchill manages the authoritative product data their business runs on; and second, a clear road map for AI agents that will drive productivity gains across their PLM workflows. This customer move forward because they understood that to take advantage of AI, they first need to modernize their product data foundation.

Importantly, we are seeing this theme resonate consistently across our pipeline. This is the first way AI is creating momentum by driving modernization demand. Our customers are recognizing that the strength of their product data foundation determines their AI ceiling. CTC enables product data foundations with our CAD, PLM, ALM and SLM systems of record.

These systems are now evolving to systems of action in an AI world, where AI agents reason across product data and execute real work. The second way AI drives momentum is through the intelligence layer we're building on top of our systems. Consider what happens today when an engineering change is made to an MRI machine. That change spans multiple teams, takes months and cost significant time and money.

Now imagine a world where AI agents are reasoning across the life cycle, reconciling the change across designs, bills of materials, supplier contracts, or constructions and bringing humans into the loop for approval at each stage. But compressed to ours. As confidence in that intelligence layer grows, the scope of transformation expands from a single engineering change to enterprise-wide process optimization.

As we move in this direction, we will continue building and embedding specialized agents across our portfolio that can access product data that no general purpose AI model can reach. For example, our Creo to Onshape agents are the only agents that can access the underlying mathematical and geometric parameters within those systems to support complex 3D product design.

Modifying a parametric part requires an understanding of shape, tolerances, material properties, manufacturing constraints and how we change propagates across assemblies. General-purpose AI models aren't built for this kind of work. And as customers mature their product data in our systems, the advantage compounds. More data, smarter agents and deeper workflows.

We're scaling this aggressively, nearly doubling our AI releases in 2026 versus 2025 including our first AI native products. And as these capabilities mature, they open clear modernization pathways. From expanded platform adoption today to agent-driven value capture over time. We'll detail these as they take shape, but the direction is clear.

As AI scales value flows to the systems that provide the trusted data, context and workflow intelligence that make AI useful in a real-world industrial environment. PTC is increasingly well positioned at the center of how AI gets applied across the life cycle. Our strategy is clear. Our execution is more consistent and we're building real momentum across the business. We remain focused on delivering a strong second half and creating durable long-term value for our customers and shareholders.

With that, I'll turn the call over to Jen.

Thanks, Neil, and good afternoon, everyone. With the divestiture of Kepware and ThingWorx completed on March 13, and Q2 is our first quarter of reporting as a more focused business. And our first quarter reporting against the updated guidance framework we laid out on March 16.

The results reflect the discipline and consistency we're committed to delivering. At the end of Q2, our constant currency ARR excluding Kepper and ThingWorx, was $2.388 billion, up 8.5% year-over-year, at the high end of our guidance range. Our Q2 operating cash flow and free cash flow both grew 14% year-over-year, and free cash flow came in above our guidance range.

Turning to capital return. In Q2, we repurchased $250 million of common stock, as we said we would. We also deployed the entire $375 million of net after-tax proceeds from the divestiture into an accelerated share repurchase program.

In Q3 '26, we intend to repurchase approximately $250 million of additional common stock, and we expect a decrease in our fully diluted share count to approximately 115 million to 116 million shares compared to 120 million in Q3 '25. For the full year, we expect to repurchase approximately $1.225 billion to $1.325 billion of our common stock.

And today, we announced that our Board has authorized a new $2 billion share repurchase program effective October 1, 2026, through the end of fiscal year 2028 replacing the current authorization at fiscal year-end.

With that, I'll take you through our guidance. In fiscal '26 for constant currency ARR excluding Kepware and ThingWorx we continue to expect growth of approximately 7.5% to 9.5%. At the midpoint, our guidance is for $195 million of net new ARR. While there is no shortage of macro uncertainty, we're confident in executing on the factors we control, our execution, our discipline and how we're serving customers to deliver on our guidance.

Looking at the second half of the year, consistent with what we said last quarter, our intent is to grow net new ARR in Q3 on a year-over-year basis and then deliver a more significant step-up in Q4. What gives me confidence in the second half is that our ability to capture demand continues and we have clear visibility into a significant step-up in deferred ARR starting in Q4.

In Q3, our constant currency ARR excluding Kepware and ThingWorx, we expect growth of approximately 8% to 9%. This corresponds to a net new ARR range of $40 million to $55 million. Moving to cash flow, revenue and EPS. It's worth highlighting that the Kepware and ThingWorx divestiture did not meet the criteria for discontinued operations and therefore, historical financial statement amounts have not been recast.

This impacts the year-over-year growth calculations for cash flow, revenue and EPS [ Vega's ] fiscal '26 includes Kepper and ThingWorx up until the divestiture on March 13. RS fiscal '25 includes Kepware and ThingWorx for the full year. We expect to generate $850 million in free cash flow in fiscal '26. Embedded in that number are 4 items that net to a $100 million fiscal '26 impact and won't recur in future years.

If you factor these out, you get to a fiscal '26 baseline of $950 million. which we believe is the right starting point to use when modeling growth for fiscal '27. We've included an appendix slide that walks through the moving pieces. For Q3 '26, we are guiding for free cash flow of $240 million to $245 million. While our focus is on ARR and free cash flow, we're also providing revenue and EPS guidance to help you with your models.

In Q2, our revenue growth benefited from renewals with longer duration. Driving our revenue and EPS results above our guidance range. To reflect the upside we saw in Q2 and also factor in recent currency moves, we are raising our fiscal '26 revenue guidance to $2.580 billion to $2.820 billion, and we are raising our non-GAAP EPS guidance range to $6.65 to $8.90.

In closing, we continue to deliver. With the divestiture complete, we're moving forward, fully focused on our intelligent product life cycle vision. Our AI road map is resonating with customers. Demand signals are strong and our execution is consistent. I want to thank the entire PTC team for their focus and discipline this quarter. What I see in our results gives me strong confidence in where we're headed.

With that, I'd like to turn the call back to the operator for the Q&A session.

[Operator Instructions] Your first question comes from the line of Saket Kalia with Barclays.

Good, good. Neil, maybe for my 1 question for you. There's a lot of great stuff to talk about here vis-a-vis the quarter -- but I want to zoom out through the quarter just a little bit. You've talked about PTC sort of midterm intention of getting back to double-digit ARR growth. And of course, the macro backdrop is always tough to predict. But I'm curious, how do you feel about attaining that goal at some point?

Sure. Great question, again. Let me have Jen start, and then I'll add to the question.

Yes. It's a great question, Saket. So thank you -- so first, let me just start by saying the trends and the dynamics that Neil talked about in his prepared remarks are very real. We're seeing continued customer demand due to AI need for modernization and getting their product data foundation ready.

Also, we're seeing strength in our go-to-market execution, right? We continue to see strength in our renewal rates and demand capture and all of that is pointing in the right direction. The next thing I'll just call out is we've talked a lot about building the deferred ARR balance, especially for '27 and beyond, and we're making very good progress on that.

And so if I take a step back and I look at what needs to be true for next year, the first thing I'll say to you is if we see no more incremental performance from what we saw this year from our go-to-market team, coupling that with the deferred ARR balance that we have visibility to, we'll see growth increase. And ultimately, we still have to finish out the year, right? But ultimately, we like the visibility that we have right now.

Yes. And Saket, I'll add thanks for the question, and we've got still the year to close out here. But like the dynamics of all the hard lifts that we put in around the transformation on go-to-market, the product transformation, you could see around the release cadence increasing at the most substantial velocity year-over-year that PTC has seen in decades almost, plus the go-to-market execution, we're seeing the buildup of the pipeline, and we'll talk a bit about the AI for us that we've been seeing around making it even more relevant to modernize customers' environments using PTC solutions that's why we're feeling the wind in our back right now.

We got to keep executing, but the team is starting to deliver and the customer environment is changing in our favor. So we feel good about the setup here. We got some work ahead of us for the next -- for the second half, but things are starting to work out here at PTC. We're going to keep our heads down and keep executing.

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Neil, I'd like to tie together a comment you made a quarter ago and again tonight, having to do with accelerated product releases, which is given PTC's history, I think a very important thing to say and to do, particularly given your lagging, let's say, in terms of releases prior to Creo 5 and some of the Windchill releases.

And then the other thing you said tonight to tie together to that is customer modernization. So and perhaps you could just talk about the adoption capacity or inclination of customers today to absorb everything that you're doing now at this accelerated pace, which personally I think is much better than it was 10 years ago. And also how this factors into how you're thinking about incoming business from expansion with existing customers versus displacement.

Sure. Thanks for the question. I would say that 1 of the things we're really proud of that we're seeing is -- and you probably know we had a PTC user summit last week in Las Vegas. And the feedback around the relevancy of what our customers need to actually create a product data foundation is at the highest level that users that have been with PTC for decades are saying is evident in our Windchill road map and our Creo road map, Code Bema road map and down the line.

And so the buildup of this modernization as just the question around the product data foundation, I get to the highest Windchill version, move to Windchill plus get to the latest Creo version that we're releasing here in May, the appetite and necessity to do that is at a higher level than we've seen in recent memory, partly because of 2 things. Number 1 is the AI thrust.

I think those systems of records that we've had for so long that now we're advancing is -- used to be operational infrastructure. Now it is AI foundational infrastructure without all of those versions and the uptick that we're seeing around modernizing that product data foundation, AI won't work at scale, and our customers are realizing that.

So -- 2 things are happening. One is we're releasing products that are highly relevant to the customers that use our products, which is great. That's feedback that we're getting that is very exciting for the business and most importantly for our customers. Two is there's now an inevitability that starting to occur around making sure customers are progressing towards consulting their PLM estate onto Windchill.

You're seeing that in the customer examples that we gave on the quarterly release here, to get ahead of and to make sure that they're AI-enabling their foundations to actually change business processes. I will remind you, Jay, you've known this for a long time. Our customers, 1 of the greatest things is they are complex customers and the adoption of new technology since they began to now is still something that takes a lot of effort, a lot of introspection and a lot of detailed analysis before they move mission-critical elements of their business on to new versions, new platforms and AI enabled.

That's awesome for BDC because we're the trusted area where we provide the context for AI to work and our customers are looking at us to guide them through that journey.

Your next question comes from the line of Daniel Jester with BMO Capital Markets.

Great. Maybe another big picture one. So I think if you go back over the years, the PLM segment would typically grow higher than the company average and higher than the CAD. And if I look at the recast ARR for the second quarter, that gap seems to be narrowing.

And so with the new sort of portfolio mix in PLM and sort of all the product innovation coming and the macro perspective, maybe it would be helpful just to get a perspective of the relative growth rates you would expect of the 2 segments in the business going forward?

Yes, great question. And Jen, you could add to this answer as well. But let me start -- so I would characterize the ARR numbers we're looking at as backwards looking. And we've already been very articulate. The reason why we went through all the transformation and heavy lift over the last few years is to accelerate growth and you're starting to see that in the guidance range that we put in for Q3 and the step-up we have for Q4.

You saw an indication of Jen's point of view around how the setup is configured for '27 and beyond. And what the metrics we look at, the reason why you feel the energy and the excitement from the team here is because we look at demand capture, we look at renewal rates, we look at pipeline growth and in those areas, in those segments, particularly in PLM, we see really strong incentive by our customers to move on to this modern product data foundation led by Windchill, code Beamer, Creo, et cetera.

And so we see PLM growth in those forward-looking indicators as very positive. We've got continued pipeline growth. We've got to execute across it, but we feel good about that. On CAD lastly, we are seeing great strength in Onshape, and we're seeing growth in Creo, but those markets grow at a different growth rate than PLM. And so you're going to start seeing those charts over the next number of quarters. shift as ARR actually comes in deferred ARR actually flows into the P&L. Jen, anything to add?

I think you hit it.

Your next question comes from the line of Adam Borg with Stifel.

Awesome. Great to hear the positive total on the call and the go-to-market change is working. I would love to talk a little bit about the macro more broadly. Obviously, there's a lot of swirl out there. You have a big European footprint. Great to see you up 8% constant currency. But maybe talk about what you're seeing kind of the net theater specifically? And just any other commentary by vertical, especially given the big win you announced with B&W from an automotive perspective.

Sure. Thanks for the question. So again, we're looking at in this stage of transformation. We look at demand capture, we look at renewal rates, and we look at pipeline growth more materially than we do a backwards-looking ARR.

Obviously, all of that needs to show up in era, and that's what we're completely focusing on as we inflect into Q3, Q4 and into next year. The verticals that we're seeing strength in is around electronics and high tech. I don't think that should be a surprise given the data center modernization that's occurring. Those customers are coming to us to build their infrastructure. They need product data foundation to leverage everything that they need to do to accelerate product for their customers.

And two, you saw an announcement this morning, which is indicative of many things that we've been seeing over the last number of quarters, which is in federal, aerospace and defense, PTC is leading the charge here. You saw the R&D U.S. Army as an example, put the stamp of approval that Windchill is the standard for PLM systems. And that's the calling guard to go to all the other agencies to ensure PTC is embedded broadly across not only the Army, but the other agencies.

We're seeing that across the game across geographies, too, around FA&D being a lead horse given the advancements that we have with our product solutions in that area. And so those are the 2 verticals we see strengthen. Lastly, we did -- you noted BMW. We continue to play in the automotive sector different than some of our competitors, where the predominance of our automotive thrust is around come beamer and Windchill, and in some cases, Onshape now.

And so we're starting to see that being a differentiated solution within automotive, where they're starting to needing to be competitive with our solutions as software-defined vehicles accelerate. So it's a really good area for us from that perspective.

Your next question comes from the line of Joe Vruwink with Baird.

On the comments pertaining to AI and driving momentum to PTC. It makes a lot of sense why bidding your product and technical data and better order is important before any Forward AI initiative. But I wanted to ask about what customers are maybe telling you or revealing when it comes to that incremental investment beyond the core, what I guess you're calling the new intelligent layer and both how and when this becomes incremental for PTC.

So maybe you can speak to like commercial strategy and pricing? And then how do you make sure that incremental piece is something that ultimately you can capture versus maybe some other solution provider start-up or the labs themselves?

Sure, Joe. Let me start with like what we're hearing from customers, how they're working their way in terms of using our AI capabilities that we're releasing first, and then Jen could add some of the commercial strategies we have broadly around that capture.

I want to go back and make sure I make a pointed reminder, which is the AI road map and conversations we have with every single customer is relating to we want to go POC and test out these new AI releases. In some cases, I'll talk about scaling it up operationally. But in most cases, testing it out in smaller groups POCing it -- but it ultimately always comes back to before we are in parallel as we're doing this, we have to have our data structured so that as context for AI.

And again, I want to repeat the modernization of their product data foundation is, first and foremost, the thrust of what AI is accelerating in terms of our demand capture. I think that's hopefully clear. Two is when they do actually interface with our AI releases, as an example, I'll give the ServiceMax AI example, which was our first AI release with multiple agents now working in the field technician service area.

One of the larger industrial companies in the world implemented that solution in a small POC. And it was driven by business and IT leaders and it actually didn't capture the scaled attention that the great product would necessitate. That conversation moved then to let's go talk to the workforce -- the mission-critical field technicians, service technicians and show them the solution.

Upon showing them a solution and then adopting it, that became very clear that there's a high ROI and that there's an adoption that actually will happen versus the retailer deciding what the actual mission-critical employees need to do. That is now, Joe, moved into a 7-figure just AI SKU on top of the service exec AI expansion just here in North America, and we're already talking about the global piece, which is a lot larger than the North America piece.

The reason I give you that example is -- that is going to be the nature of our industry and our end market where our customers are now playing around with these great releases -- they will test it out. And only if there's a high ROI, there's a real conviction on adoption, will they then scale it. And that's leading for them to come back to us because we are the authoritative govern, product context for AI to work really properly.

And that's our real value, and we're going to have to continue to make sure we execute now across that strategy as we also go into this intelligence layer. Jen, do you want to add the commercial piece?

Sure. So I would say just echoing what Neil said around just how we expect to see this show up, right? It will take some time. Certainly, we'll see some monetization in '27, but not overly material. And as it relates to monetizing this, as you all know, we are largely seat-based right now, right? And that's really how customers are asking to purchase at this point.

However, we have multiple ways of being the customer where they are in terms of if they want to bring their own agent, et cetera, and so we'll be able to meet them there. But largely, it's early days for us in terms of different hybrid models, but we're ready for them.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

I wanted to ask about what drove better rep productivity. It sounds like obviously a lot of AI and data modernization. But Curious if you have any additional color there? And also, what caused the longer duration in Q2? And I guess, Jen, is that sort of your assumption as we get into the back half of the year?

I'll start with the longer duration. This was just based off of -- we had some key renewals that came through that they wanted to extend their contracts with us over the duration, and we see that ultimately as a very good thing for PTC. As you heard me say last quarter, we saw a similar trend, and we flowed that through the overperformance through the guidance for the year.

And on the first part of your question, look, as a reminder, about 16 months ago, we brought in a new CRO and made major surgery on transforming the go-to-market organization to be a vertical focus go-to-market engine, and we changed a number of things, as we indicated on multiple earnings calls.

Rob and I mentioned, who's out, by the way, in Europe, closing customer deals, we mentioned that it's going to take 18 to 24 months from when we started to actually start seeing the turning of the momentum. We'll call it 15, 16 months into it, and that go-to-market machine is starting to work well based on the demand capture we've seen, based on the renewal rates, based on the pipeline generation, based on the feedback we're getting from customers around our messaging, around the vertical expertise that we're bringing to bear, I'll say that we are continuing to improve it.

We're never done. But right now, we're really focused on executing across this intelligent product lifecycle vision layering on top our AI strategy because we've got a go-to-market machine that's starting to hum, and we're going to keep making it better, but that's where we are in terms of the journey of the transformation.

Your next question comes from the line of Joshua Tilton with Wolf Research.

Congrats on the quarter, and I apologize in advance in that's been discussed or anything that is due till I'm jumping back and forth between a few Prince tonight. The 1 question that I just wanted to ask you guys was looking at the guidance for ARR for the rest of the year reiterated, but sort of implies net new ARR to grow in the back half.

Can you just give us 1 level deeper of what you're watching or what you're looking at that is giving you confidence around the growth that you are pointing us to for the second half of the year?

Jen, why don't you do that? But please ask as many questions and repeat them as possible, we love talking about what's happening at PTC right now. But Jen, go ahead.

Sure. So first of all, as we think about the second half of the year guidance, we do feel incrementally better and more confident about things. And I'll leave you with kind of 2 points. The first is -- as we look at the overall range for the rest of the year, we are increasingly more confident that we've derisked that lower end of the range. So that's the first thing I'll say.

The second thing is, if you look at what we have to do for the second half of the year, versus what we did last -- second half of last year, it's about $127 million of net new ARR in the second half of this year, which is about $7 million more than we did last year for the second half, right?

And if you think about the fact that we've already said we've built durable ARR, deferred ARR into really, it's about -- the step-up is much more around the deferred area that we already have banked and the team really having to perform in line with what they did last year. And so I would say we're increasingly more confident of where we sit for the Q4 step-up.

That was super helpful. Can I just clarify 1 thing you said. Am I supposed to read into your response as ex deferred ARR in the back half that the actual net new ARR is flat year-over-year? Is that what you're trying to say?

Approximately.

Your next question comes from the line of Ken Wong with Oppenheimer. .

Somewhat builds on what Josh was just asking. But as you guys exit Q4, you guys will be tracking above the net new ARR run rate that you guys had exiting last year. Should we think of that as the right framing as we go forward that will be kind of at least back to where we were on a net new ARR basis? Or is Q4 kind of abnormally kind of propped up by the deferred backlog that's flowing into that particular quarter.

So I would start by just saying, the focus this year was just to continue to build long-term durable contracts with our customers to increase the deferred ARR. That's not a onetime thing. That's how we're working with our sales teams and our customers, right? So you can continue to expect that trend to continue.

I would go back to the fact that when we think about next year, right? We wouldn't -- even if we saw no better, more performance than we saw this year, you'd start to see that growth year-over-year. And so I think we're not going to guide any specifics around net new ARR trends, but I think that's the best way to think about it right now.

Your next question comes from the line of Nay Soe Naing with Berenberg.

Maybe if I could start with Neil Neil, please. I noticed that you've been calling out a displacing win for a few quarters in a row now. I just wanted to understand, is it a product of what you and Rob has been put in place for the past few quarters? Or is it also the fact that your investments and product releases around AI is helping with the competitive edge.

And second part of that question is also, am I right in saying that many of the displacement wins that you called out are primarily in the Windchill product. Or is it more broad-based across the product portfolio, please?

Yes, great question. Thanks for asking it. I think, what's happening and what we're seeing, and you saw another one, Hamilton Medical that we released about Code beamer yesterday because that's an ALM code beamer, we're seeing that in droves right now. And part of the thrust of why we're starting to see it.

I'll start with pad first and then move my way down here. One is like we got an incredible capability in Onshape. Onshape by the way, from a vertical perspective is kicking [ b*** ] in the robotics and automation space as well as in the physical AI space. Hence, the reason why Jensen himself actually talked about Onshape and PTC in his keynote, as I'm sure you guys all followed, that's actually just a much better solution than anything that's out there in terms of what Onshape does from a cloud native CAD tool.

On Windchill, as you mentioned, displacements are coming because, again, our focus 2 years ago was to solidify the core functionalities of this company that's made PTC grade. And the teams are in hard at work for 2 years doing that. And so the feedback is, if I'm going to go modernize my PLM environment, why not choose the best product out there that actually is investing into it and not talking about 50 other things that they're going to acquire in the next 2 months, like they're focused on the thing that we need.

So we're seeing displacements happen because consolidating PLM systems onto the best one, which is Windchill is paramount. By the way, I'll give a shout out to Arena, our cloud-native PLM solution is also kicking b*** because we invested into it, added AI functionally faster than any other competitor, and we're starting to see traction there. So that's coming from like the AI angle plus also just the work that we put into Windchill.

Codebeamer ever talked about. That's just off to the races. We have matured the product. We're creating scalability. It's second to none in the industry for companies that need to have complexity at scale of the requirements, which is becoming increasingly important, and we're just making Codebeamer better.

And then lastly, on ServiceMax, like we have a best-in-class solution that has forward-looking that beyond anything we've seen before, and so that's also gaining traction in the space. So put it all together with a newly energized go-to-market transformation that we put in a team and a messaging and a coordination across marketing, sales, et cetera. And you got the recipe for why like field Amojo coming back into PTC. And we got continued focus, and we're not going to take our eye off the ball. But it's the result of all the work we put in for the last 2 years is starting to now show up.

That's really helpful. sounds super exciting. And maybe if I could ask a second question for Jen. On the new share buyback authorization $2 billion across 2 years, that's probably the vast majority of the free cash flow that you generate over the next 2 years as well. Is this -- are you guys just being opportunistic with the share buyback programs given the valuation multiples today? Or is it a fundamental change in your capital allocation approach some of the previous CFO. If I remember correctly, I think the plan was to allocate 50% of free cash flow per share buyback, which the $2 billion this year would be significantly higher than that level.

Sure. So let me just start by saying when we think -- when I think about our capital allocation velocity, it really hinges on 3 pillars: organic investment back into the business, inorganic via M&A and share buybacks. And we look at each 1 of those to understand what was the right return on investment in capital.

And this year, especially right now where the stock price is, we believe in the long-term durability of this company, and so share buybacks have been in our eyes, a very good use of capital. Without guiding to the future, the authorization allows us continued flexibility in FY '27 to ensure that if that makes sense, we can continue to pursue it.

Your next question comes from the line of Tyler Radke with Citi.

Neil, you talked about some pretty large wins in sort of the technology space. And obviously, there's an explosion of code being generated, but also the physical equipment that needs to go into data centers to support that.

So can you just help us understand like how are you benefiting -- what are some of the increased levels of complexity that are driving demand for PTC products and -- is that something you're seeing as you're approaching these renewals with some of these large standing customers that are probably growing much faster than they've ever grown before.

Yes. Thanks for the question, Tyler. So it's a great question, and I'm glad you asked it around the customer environments when you get an electronics and high-tech company that's in the middle of all the data center build out, they are being pressured to deliver as quickly as possible products out into that data center with the highest amount of quality, right?

And that thrust is like very aggressive right now. What all those companies are doing, many of which are now our customers be are the ones that we're displacing into, they're looking at where is the bottleneck, right? And when they look at the bottleneck, the engineering bottleneck of when someone's designing something that's to be used in a data center to when it gets manufactured, that like center of what PTC is so great at they look at that environment that they have, and it's very fragmented, Tyler.

There's multiple different PLM systems in many cases. There's manual processes in many cases. They have not standardized on any real tool, there's multiple things because it's been an afterthought for many companies. So when they're thinking about how do I accelerate it, and every single conversation even with these companies are saying, "Well, I want to supercharge my engineering workflows with AI," it's coming back to it's impossible to do that because you don't have a structured data foundation to apply this to let alone actually have speed within your normal processes without AI.

And so that like tailwind and urgency is causing this point that we're making around modernizing the product data foundation -- we're seeing that across the board across Codebeamer. I mentioned this like a couple of quarters ago, and we continue to see it where Excel or an antiquated system that's been around for 15 years, just doesn't do enough to give context to an AI to accelerate requirements or test case management, same thing on PLM, Same thing on why Onshape is growing like weeds right now. Same thing with what we were actually seeing in displacement for Creo because of the best-in-class nature and the embeddedness of AI into it.

So Tyler, that's the theme of those data center infrastructure build -- the data center picks and shovels to these companies that you guys are all valuing high, well, the picks and shovels underneath them is PTC.

Your next question comes from the line of Siti Panigrahi with Mizuho.

Can you hear me?

Yes, Siti.

Okay. This is Samer calling in. So the question I had was around the specific data that only Creo and your products are able to use and not a third-party agent. How do you create that data mode? What -- and then in the end, who owns the data?

And the follow-up to that or a similar thing is, do you work with SIs or third-party IT services providers to enable the IT infrastructure modernization that is needed to enable AIUs at the customers. So it's a little bit of a repeat of what has happened earlier, but just wanted to get a better feel.

Samer, let me start with the second point. For sure, like on a lot of these large-scale transformations to modernize the product foundation 1 of the things Rob and CK talked about is we're incorporating greater SIs into our ecosystem. And in many cases, they are the lead with us to help modernize the change processes, implement these solutions across customers -- in some cases, by the way, PTC does it with our own solutions and our people as well. So it's a mix. But in predominance, we're using partners to do that on the product data modernization piece.

On the first question around Creo, this is highly relevant in terms of the incredible capabilities we have and the unfair advantage we have to deliver AI to a 3D model. And the unfair advantage is actually the folks that actually own the CAD systems, PTC is 1 of them. There's only a few others in the world that do it. we're embedding AI into our CAD systems in Creo, we've already done it with Onshape.

And the advantage we have is we understand the construct and the context of everything happening to design a 3D part, how it fits for a product the manufacturing constraints, the materials, the geometry, the mathematics to actually bring the creativity of an engineer to life that actually becomes a product that happens on a CAD system that we have full proprietary understanding of how that actually comes to be.

And that is the advantage we have of training our AI onto that data set is a huge advantage versus any third-party. By the way, we applaud every third-party that tried to give a user interface to this our point of view is we're providing the user interface with our AI solution that is going to be materially advantaged than any other third-party as we continue to develop AI across our Creo and Onshape solutions.

Your next question comes from the line of Blair Abernethy with Rosenblatt Securities.

Neil, I wonder if we could just go back to Windchill plus for a minute. And can you just talk a little bit about where the demand is coming from here, net new customers to PTC? And sort of what's with on-prem conversions? Are you seeing that continue? Or are they opening add-ons, new instances with Windchill plus? Just kind of try to get a feel for how that's performing.

Sure. Thanks for the question. I was remiss in not mentioning that modernizing a product data foundation also, in many cases, includes how do you go into the SaaS version of our solutions, which is why you're seeing and we're seeing the traction of Windchill plus in the marketplace. We've released several press releases a number of customer anecdotes. The reality is that product is really moving at pace right now.

And so that is part of the modernization where it's just a more simplified cleaner tech stack by which someone could run their PLM off of and consolidate other legacy systems onto. So that's an area we mentioned a couple of years ago. We're investing into. We want to make sure it's right. We want to make sure we get customer references. We're starting to see that momentum starting to build, and we have many more years to do that.

To answer your question, that is predominantly on net new, and it's a very good thing that we have in our artillery to go win displacements because it's such an advanced solution versus anything else in the marketplace, plus it modernize their tech set by which AI could actually create greater scalability. So that's like kicking b***, we're like super jazzed about and we're thinking ways creatively to continue to accelerate that momentum.

On your point around on-prem, I wouldn't go as far as saying like the dam is broken because many of our customers like really first want to modernize their data foundation by expanding their on-prem solutions and taken out the other third-party solutions that might not have the scalable of Windchill or Veoneer processes and put it in what we call enterprise PLM.

So we like that. And by the way, over time, they will convert to SaaS, but we will take that all day long to make sure that we capture all the seats that are available in that environment, #3 point -- third point, the last thing I'll say is there's going to be many customers, particularly in some spaces where you need to have air gap system where they'll never move to SaaS, and we're perfectly fine with that as well. as we think about it.

Lastly, you didn't ask the question, but I have to add to it. Our AI releases are both for on-prem as well as our SaaS solutions.

Your next question comes from the line of Yun Kim with Loop Capital Markets.

Neil, just following up on Blair's question on Windchill. Obviously, you mentioned product several times on the call today. Is that 1 of the key drivers behind the strength of your -- that you're seeing on deeper AR deal than your focus on deferred AR deals in your go-to-market?

And also, I think you kind of hinted on it, but I just want to make sure, you still need to adopt AI and need to modernize the product data to support those AI initiatives. Is that kind of what's driving some of this momentum around Windchill plus as well?

Sure. That deferred AR buildup is actually coming from multiple different product SKUs. It's coming from code beamer ALM, strength displacements, expansion that we're seeing there were, again, I want to reiterate, Onshape is creating huge displacement opportunities off of I won't name the competitor, but we're taking share there in an aggressive fashion at scale right now.

And then Windchill, to your point, is clearly the nerve center of the product data foundation, and that is a huge element of modernization that we're seeing in the buildup of deferred ARR. And so we see that happening across those major categories I'll give another shut out around our Board in the cloud PLM solution is also seeing a renaissance of making sure expansions occur.

So that deferred ARR is starting to click. And when I mentioned the area of SLM, where previously, as I've mentioned on multiple calls, that ServiceMax is weighing the momentum of the rest of the portfolio -- we went through a rough period for the last 18 months, and we're optimistic that the big digestion of the negative churn is behind us.

We're more in a normalized environment with a strong pipeline, and we're getting that back in the gym and back to form like the rest of the portfolio, we're enthused by what we're seeing so far and still the work and our heads are down to execute around that.

Okay. Great. And you can to just squeeze in 1 more -- so you kind of gave us some use cases and some small PLC examples of our AI products. Can you just kind of expand on what type of AI products that you have available today on GA and just talk about what are your plans around AI products going forward?

Yes. We've got 8 AI releases already done last year that we've been working on POCs and refining with our customers -- we've got 14 more that we're releasing here in 2026 with 1 pretty awesome. You'll see it in PTC decks, an amazing AI native first product release that we're putting out there in Chicago in June.

But the areas that we're actually seeing now going from POCs and migrating to operational scale. I mentioned some of the areas in service packs that are going into more scaled conversations. That's first -- 2 is Onshape AI is actually most of the information that Onshape AI is providing to end users are making and simplifying their processes is happening on AI versus all the other ways they were doing it before AI.

So we're seeing really rapid adoption there on that board in the cloud CAD solution. And then on our Board in the cloud PLM solution, we have an amazing supply chain AI intelligence layer then we're seeing that now being in an operational environment, where customers are seeing supply chain disruptions flowed right into PLM and so that there is no need for multiple tools versus just using PTC's products.

So that's what's in right now and the momentum and the title wave is building on incremental and exciting AI releases just in the next 6 months from now to the end of September. So Stay tuned on that. We're getting really strong feedback from customers. We're working hand in hand with them to make it usable adoption rates, and that's why we're pretty pumped over here.

Your next question comes from the line of Andrew Obin with Bank of America.

As you guys sort of talk more about AI, can you just talk about this attention about proprietary data and folks who want to make all sort of agent solutions want data to be interoperable. You want to be able to feed them to data graphs. How do you manage this tension at your customer level?

And second thing, does that mean that maybe down the road, you have to because PLM is at the heart of it, that you actually have to be your own proprietary capabilities, either organically or through an acquisition.

So thanks for the question. So just moving backwards around how we're executing across our AI strategy. One is this intelligent product life cycle, build a modernized product data foundation. I think we've made that clear around customers need to put their data house in order, PTC enables them to do that.

The intelligence layer that we talked about in the early part of the script is around building a layer of intelligence that actually executes what the agents within the products are actually doing. So Phase 2 is building embedded agents that I talked about previously in the core systems of records in Onshape or ServiceMax or Windchill or Creo or Codebeamer, those are creating productivity gains within that solution.

But our vision is a lot more expansive than that. And we feel we have an unfair advantage to create this intelligence layer because we understand how the context of that data actually operates across an enterprise. What I mean by that is there is a view that we strongly have that agents will need to interact across these domains for greater outcomes to our customers. And we will create that intelligence layer.

We are creating an intelligent layer by which that operates. And those agents can communicate with eachother. So we feel and our customers to answer your question, are coming to us and saying, PTC, you're the trusted source. You understand the data best, you could train the agents the best, you provide this to us. So that's how we see it right now.

However, we are very open, and we have a deep belief that there'll be multiple agents across other systems of records outside of engineering that we will interact with including ones that the customers build, including ones from other software providers or others. But within the engineering workflow and that stream of what happens to that data in the enterprise, we will have the most advanced, most efficient agents build bar none that know what to interact with each other. That's our vision of where we're taking the company.

So your goal is to build agents that dominate your own ecosystem rather than have agents that can sort of plug in your ecosystem and interact with other file formats?

Yes. We will add the best agents that understand how to interact with Windchill and be able to have the data and context of that Windchill productivity gains. -- to make sure a manufacturing agent or an ERP agent or a service agent actually knows how that deal with that solution and create a better outcome for the customer.

So that's how we're thinking about build the best agents and the products that we have deep domain expertise in let them interact with each other and create the interface by which they could interact with other agents that are built by others.

Your final question comes from the line of Alexi Gogolev with JPMorgan.

Neil, if I could go back to the pipeline quality in velocity, you repeatedly referenced large and high-quality pipeline for the second half of the year. Can you maybe talk about the changes that you've seen since Q1, maybe in cycle times or approvals, ramp deals. What's different that you're hoping to see in the second half of the year versus second half of last year?

Yes. Thanks for the question. What we're seeing is the higher quality pipeline. Again, a factor of a go-to-market transformation is around making sure Rob and CK, our leaders of go-to-market, align the resources, the messaging, the -- all the things that we're doing for customers in a vertical way so that we build a higher-quality pipeline with larger amounts that are more strategic and that have higher velocity.

And what I'll say is the high-quality pipeline has increased from last year to now as we think about the second half, the conversations are still -- by the way, we still have to go through approval process. We still live in an environment where there is a war going on in energy prices have escalated to levels no one's seen before in a long time. So all those strains we still have to go through and get the approval.

I think the added things that are happening is, one, we're internally better. We're a better organization than we were last year because of all the hard work that we've done. But 2 is, from a macro perspective, we're getting this thrust of AI is so prominent and customers after spending all the cycles think about AI within their infrastructure are realizing without a strong product data foundation that as context to it, AI just does not work well. And that's leading for us to have these engaged conversations leading to us being energized by the demand capture.

And we got our work here to execute across the high-quality, higher pipeline as we think about the second half of the year versus last year at this time.

That concludes our question-and-answer session. Please remain on the line. As I now turn the call back to Neil Barua for closing remarks.

Thank you everyone for joining us and for your questions today. We'll be on the road on the weeks ahead. participating in investor conferences. We look forward to seeing you then.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Good evening, ladies and gentlemen. Thank you for standing by, and welcome to PTC's Investor Update Conference Call.

[Operator Instructions]

I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good evening. Thank you, Kate, and welcome to our update call to answer questions related to the divestiture of Kepware and ThingWorx. On the call today is Jen DiRico, Chief Financial Officer.

Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com. During this call, PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission as well as in today's press release.

The forward-looking statements, including guidance provided during this call, are valid only as of today's date, March 16, 2026, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.

With that, I'd like to turn the call over to PTC's Chief Financial Officer, Jen DiRico.

Thank you, Matt, and good evening, everyone. We are pleased to complete the divestiture of Kepware and ThingWorx and increase our focus on our intelligent product life cycle vision. Before I take you through our guidance, I'd like to mention that in our slide deck, we have 4 appendix slides on the Kepware and ThingWorx transaction. The first 2 slides show the changes to the estimates we provided when we announced the divestiture on November 5, 2025. There were no material changes to the estimates we originally provided. There were just 3 immaterial changes to our estimates related to the divestiture.

First, the transaction proceeds were $523 million, $2 million below our previous estimate of $525 million related to working capital and indebtedness adjustments. Second, divestiture-related costs are now expected to be approximately $40 million, up $5 million from our previous estimate of $35 million. Third, cash taxes related to the transaction are now expected to be approximately $110 million, down $15 million from our previous estimate of $125 million.

Slide 8 shows the transaction proceeds. As a result of the changes I just took you through, the estimated net after-tax transaction proceeds are now $375 million, $10 million higher than our previous estimate of $365 million. Slide 9 shows an illustrative free cash flow model that bridges from our free cash flow guidance without the divestiture to our post-divestiture guidance. Our post-divestiture free cash flow guidance is now $850 million in fiscal '26, $10 million higher than our previous estimate of $840 million. Following the divestiture, we will generate net cash flow inflows from the transition services agreement with TPG. We expect the transition services agreement to continue through fiscal '26 and end sometime in fiscal '27.

In fiscal '26, we estimate that cash inflows generated from the divestiture-related transition services will largely offset the absence of Kepware and ThingWorx free cash flow post divestiture. For fiscal '27, we are now factoring in an earlier end to the transition services. And because of that, we now anticipate a free cash flow headwind of $70 million in fiscal '27, up from our previous estimate of less than $50 million. Let's continue with our overall guidance update on Slide 4. This update is in line with our expectations. We are no longer including Kepware and ThingWorx in our guidance for ARR. For fiscal '26 and Q2 '26, our constant currency ARR guidance, excluding Kepware and ThingWorx is unchanged. We have updated our fiscal '26 and Q2 '26 guidance for free cash flow, revenue and non-GAAP EPS to reflect Kepware and ThingWorx no longer being part of PTC following the close of the transaction on March 13.

We have also updated our fiscal '26 and Q2 '26 guidance for GAAP EPS to reflect a $464 million gain on the sale of Kepware and ThingWorx, partially offset by the absence of earnings related to Kepware and ThingWorx post close. Finally, over the midterm, we continue to expect non-GAAP operating expenses to grow at roughly half the rate of ARR.

While we are not guiding to fiscal '27 free cash flow today, I know that many of you are focused on this. To help with your models, on Slide 11, we've identified the significant items that impact the baseline for modeling fiscal '27 free cash flow. Also, as I've gotten further into the CFO role, I think it would be helpful to provide some broader comments on PTC related to cash taxes beyond fiscal '26. First, as we've previously highlighted, we've consumed our historical net operating losses. That means our cash tax rate will migrate towards our GAAP P&L tax rate over the midterm. Roughly speaking, in fiscal '27, your model should have cash taxes of $180 million to $220 million. And in fiscal '28, your model should have cash taxes in the same ballpark as GAAP P&L taxes.

With that, I'd like to turn the call back to the operator for the Q&A session.

[Operator Instructions]

Your first question comes from the line of Adam Borg with Stifel.

Awesome really, really helpful. Maybe, Jen, on the last point you brought up around cash taxes, at least qualitatively, given the impact of higher cash taxes in coming years, you talked about OpEx growing at half the rate of ARR. Any qualitative commentary on how we should think about free cash flow growth relative to ARR given the rising cash taxes?

Sure. So first, I appreciate the question, and I'm glad the slides were helpful. As we are not guiding to FY '27, I think at this point, I would focus you back on the fact that overall, our cash taxes will be estimated between $180 million and $220 million for fiscal '27. And that's primarily due to the fact that we have used up our mitigation strategies for cash taxes. And we expect that overall, the GAAP tax rate will align closer to the cash tax rate in '28 at this point. And I look forward to giving you more guidance and updates around FY '27 in the coming quarters.

Your next question comes from the line of Siti Panigrahi with Mizuho.

Great. Jen, just wanted to ask you about share count. I know you talked about the share buyback. How should we think about share count for the remaining of the year or maybe on a quarterly basis?

Sure thing. So like we said, we are going to use the majority of our free cash flow to buy back shares. we expect the range of our overall share buybacks to be between $1.125 billion and $1.225 billion in terms of overall share buybacks.

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Jen, could you give us a little bit more granular data about the divested businesses? Just to be a little bit more precise in modeling, for example, the divested OpEx revenue, cost rate rather. It looks like you were spending about $65 million to $70 million a year on the divested businesses for OpEx and maybe talk about headcount. And then lastly, the contract of sale referred to a potential earn-out of, I think, up to $125 million. Could you talk about the circumstances which would allow you to get to some or all of that?

Sure. So let me talk about -- we are not giving details around specific operating expenses. What I can just highlight is in FY '26, we are seeing a benefit of $70 million related to the Kepware and ThingWorx that we don't expect to recur next year. I would say my overall guidance for -- and just my approach on capital allocation is such that we will look at the entire business, right, and we'll identify areas where we either want to reallocate or find additional efficiencies. And we will incorporate the $70 million that I talked about into that. And again, I would also highlight the $70 million that I shared with you is a combination of TSAs and operating expenses.

Your next question comes from the line of Ken Wong with Oppenheimer.

Maybe shifting gears a little bit. So I think all the numbers got a pretty good sense of it. Can you elaborate if there are any potential go-to-market bottlenecks while you guys are awaiting the ThingWorx divestiture process to play out? Basically, like were there certain perhaps benchmarks or certain paths that go-to-market would have moved forward on had this completed earlier? Any thoughts, any color there?

Sure. So with any divestiture, there comes distraction across the org, but we're very pleased with how the overall organization has handled it. And I would point you back to the fact that we reaffirmed guidance for Q2 in the press release.

Your next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Thanks for giving us the heads up on the call this afternoon. It was nice to wake up and not be in a panic to have to join a call. But -- so my question is on the expense growth. So it sounds like the rule of thumb expense growth half of that for ARR growth. That would be roughly implying about 50% incremental margins. Why is this the right framework? And like where do you continue to see sources of leverage?

Certainly. I would say, without going into specifics, I think overall, as we look at the continued efficiencies that we can drive across the business while also reallocating investment, we do feel like the 50% is the right ballpark. And then I would just take a moment to just remind you, we've -- because we've reaffirmed this, we're very committed to continuing to ultimately focus on our operations and believe it's the right path forward.

Your next question comes from the line of Tyler Radke with Citi.

Jen, on the ASR here, obviously, very clear where you're putting the money. Can you just talk about philosophically how you think about the approach to capital allocation, the decision process on doing the ASR versus other forms and just how we should think about that going forward?

Yes. Thanks for the question. I think right now, as we look at where our best uses of capital can go, we do believe that the share buybacks, just based on the potential that we see in our company overall, we do believe this is the right view for us. We're going to continue to evaluate that in FY '27 and beyond. But based on just the ROI associated, we feel like this is the right strategy for now.

Your next question comes from the line of Saket Kalia with Barclays.

Jen, thanks for all the helpful detail on the slides. Maybe just one housekeeping question as we think about the cash taxes for '27. Just for a baseline, what are the rough cash tax dollars that we should be modeling here for fiscal '26, excluding the cash taxes related to the divestiture?

Sure. For fiscal '26, it's between $130 million and $150 million.

I will now turn the call back to Jen DiRico for closing remarks.

Thank you for your questions today, and we look forward to speaking with you on our Q2 fiscal earnings call. Thanks, everyone.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.

We're good. We're on? Okay. I guess it's going well. How about you, Neil?

Good. Long day.

Great to see everybody. Thank you for coming in to see us talk to Neil from PTC. Neil, thank you very much for being here. Many years now at the conference. I always enjoy this conversation. Let's just start out with the very basics for anyone in the room that's newer to the PTC story. What does PTC do for your customers? And what goals you're trying to solve for them?

Sure. Thanks for having us here at the conference. So PTC, global software company. Our software helps companies around the world, product companies, design manufacture, service the products that we rely upon. 5 verticals we're really deep into that we're innovating for and spending our 40 years of history moving forward. First is industrial manufacturers around the world; second, federal aerospace and defense manufacturers, 3 electronics and high-tech companies. our is medical technology companies and last is automotive.

Great. All very understandable physical goods in the world. Let's talk about the intelligent life cycle vision. I know you've been talking more about this. Frame what that is for investors and what you're trying to deliver for customers through this vision.

So this is really capturing a lot of our customers' attention and is the framework by which we've been indicating the momentum that we've been building over the last couple of quarters of demand capture. And what's happening is there's a realization and understanding for our customers and those new that we're acquiring that product data is actually the fundamental most important asset of product companies around the world. And all that product data actually resides and lives and gets breathed into life by software that's provided by a company like BTC.

And so what we've been working with our customers on is let's supercharge your business. Let's make sure you are competitive by building with you an intelligent product life cycle. What does that encompass? First off, you need to build a product data foundation. You need a strong, consistent product data foundation built by our core solutions, our core mission-critical systems of record in CAD, PLM, ALM and SLM software solutions. So customers build a product data foundation with these best-in-class capabilities to give you a clear data structure.

Then on top of it, we have this incredible technology called AI that needs to be put on top of this product data to supercharge the way in which you could actually understand your most critical asset, product data to actually be competitive. And that builds the intelligent product life cycle and it's capturing a lot of attention and excitement from our customer base and those new that we're acquiring.

That's really great. I'm going to skip ahead a little bit because you brought up AI and data here. Everyone at this conference and for several months now has been talking about AI disruption in software. But you have sort of real data advantage on behalf of your customers with this product data you have. So can you give us a sense how you and PTC view the future world with agents, LLMs and your positioning in that world?

Sure. We're like energized by our positioning with enabling AI to be of advantage to our customers. And we feel very advantaged that we have the secret sauce, the decoder ring to actually train AI to actually have real scalable outcomes for our customers. As an example, the beginning of a product actually happens with the design, right, a 3D model that happens on Creo on chip, which is the flagship CAD models in the business.

The AI agents that we're training on that CAD model actually has a lot of complexity because of the 3D geometry and something called a kernel that drives really complex mathematical computations to understand how that 3D model actually persists in a deterministic way to get manufactured. We're highly advantaged. We're the only ones that understand how to and know how to train that CAD data model on that kernel and what happens to make a deterministic outcome of that AI agent.

So our customers are coming to us after 18 months of experimentation of other solutions that they were looking at, whether it be their homegrown solutions and saying, we've realized PTC has the ability, has the capability and has the technology to actually build the AI agents with us to build the intelligence on top of this product -- intelligent product life cycle. So we feel really good about that.

Lastly, you've seen, hopefully, our customers are giving us really good reviews around a continuous flow of innovation coming out of PTC, organic innovation that has not happened in many years with the transformations we've done, we're putting out AI-enabled solutions within the workflows of our mission-critical systems, the records across ALM, PLM, CAD and SLM.

It's interesting. You're not making widgets. You're making mission-critical automotive, airplanes, medical devices, just some of those verticals you mentioned. It seems like your customers are leaning into AI already and want to take advantage of AI capabilities. Where do you think the mindset is around these mission-critical products and they're willing -- your customers' willingness to adopt AI?

The conversation always includes AI, and our customers are enthused by the progress we've made on real use cases of putting AI within an engineering framework that has really deterministic outcomes. So they're impressed by that. But what's happened is our customers are also the ones that have been around for 10, 50, 200, 500 years of existence. And they realize to make something work, you actually have to put the foundations in place.

And that's why the intelligent product life cycle starts with building a product data foundation that's composed of putting modern tools like Windchill, our PLM system, flagship PLM system, into all the seats that actually in a company that develop products. And we're seeing that momentum in addition in parallel to the AI execution, actually caused the momentum that we've been talking about the last couple of quarters.

Very cool. It's a natural good pivot point to actually switch to go-to-market. Last quarter, you talked about turning the corner on your go-to-market transformation. Can you tell us a little bit more what you meant about turning that corner?

Two years ago, when I came in and became the CEO of the company, we prioritized the company back into the core fundamentals of what PTC is based on feedback we got from customers. That then translated into bringing in a whole new team that actually executed very difficult decisions organizationally, messaging, enablement and reconfigured how we interact with our customers in a vertical expertise manner. And in parallel, we also executed and have begun a revitalization of product and innovation at PTC. We brought in a new Chief Product Officer. He redesigned the product and R&D organization. You could see the release cycles now increasing.

And when you put that all together, we're seeing that momentum show up in customers understanding clearly what does PTC do. They're looking at us now more strategically versus feature functionality of PLM. But like if we drive this intelligent product life cycle, we get outcomes in these verticals that other companies in the verticals are getting from PTC. So I want to get on this bus pretty quickly, start moving through that.

That's showing up now on my energy level here because I'm super enthused about the progress we're making and the tough work we put to get here, but it's shown up in demand capture over the last 2 quarters. Customers are showing up with their checkbook saying, this is starting to work. To be clear, we have still continued work to make this durable, consistent and sustainable. But the difficult decisions we made organizationally, messaging, strategically are starting to now resonate in the marketplace. And that's a good place to be at right...

Absolutely. And I know this demand capture you've talked about, it's impacting ARR, but also deferred ARR. Can you talk us through the dynamic between those 2?

Yes. Deferred ARR is the component of the deal that remains as an obligation of the customer that's committed obligations when actually the technology is implemented, right? And so when we're winning these strategic deals, we're getting larger deferred ARR because when you consolidate a PLM estate, you not only get the homegrown systems that we've got to convert into a Windchill instance in this example, but also our competitive displacements across some divisions that we're using a competitor's PLM solution.

That all has rigor towards how that gets implemented. And we have a precise way now with the go-to-market teams far more aligned than they ever were, customer success and the sales team to really implement when the customer needs the solution and do it methodically by which we actually get the activations and the utilization the way we want at our customer sites.

That's great. And you brought up competition. What is the competitive landscape like today? And particularly in your core PLM, CAD areas? What's new with the existing old guard competition that's out there for PTC?

I think putting the flag as the nerve center of the product data foundation being off of a PLM system is advantaging us, meaning this also includes Codebeamer, which is our ALM solution, but the 2 kind of -- they coexist in the product development cycle. that's a best-in-class solution. And it's really good also when it's a best-in-class solution when competitors are trying to force people to migrate onto a platform and you provide them a solution that is so than what they're trying to force the customer into. So like our openness, our approach of being customer first is resonating.

And that's why we're seeing competitive displacements in PLM. We're seeing competitive displacements in ALM, and we're continuing on that front. Interestingly, in CAD, we have something called Onshape, which is the most modern CAD tool bar none. And we are seeing significant traction and acceleration of competitive displacements of other CAD tools out there that allows us not only to secure the CAD capabilities, but we're building an Onshape to Windchill connector that will also drive PLM growth. So strategy is starting to resonate, and we feel good about our place right now in the industry.

Very cool. And I got to ask about, I'll call it the ankle biters for lack of a better word, but anything in the AI native PLM CAD world, I don't even know if it's a thing. And you've talked about how long your customers has been around to really needing to trust a brand like PTC. Do you think about AI native start-ups at all? Do you see any out there? Or is it really PTC and some of the other more traditional competitors?

We think about everything that's happening around AI like every other company is doing right now. What we feel is a strong advantage is this customer feedback to us versus our own bias is within PLM or CAD or ALM, this is, again, going back to product data is the IP, is the competitive differentiation for these companies, bar none. That is their most valuable asset. It's sitting on Windchill, right? Us enabling innovation for AI-enabled workflows driven an agent frameworks that are built by PTC, understanding the data models well and delivering to customers for use cases that they need.

There's no reason with all the security, governance, access controls that we've already built into our mission-critical system records for them to think about a third party doing this. So we feel really good about our positioning, and we see a lot of people actually energized to join PTC saying, wow, like everyone could do agents, but we don't have a data set that actually we could train these agents on PTC, you have that technology. So we're actually attracting really interesting talent coming in the business.

Very cool. You mentioned earlier, Codebeamer and Windchill. Let's unpack that a little bit more. I think the first time we met, you told me that the most automotive companies have more software engineers on staff than mechanical engineers. Can you talk about the integration between Codebeamer and Windchill and what you're really seeing in the combination of digital and physical product?

Sure. One of the things interesting is automotive in some other industries or some other competitors could be seen as Achilles' heel. For us, what's interesting is our exposure to automotive is through Codebeamer, right? And Codebeamer is an ability for automotive companies to actually be relevant with software-defined vehicles and have actually software be part of the mechanical and electronic components of the car. So Codebeamer is a real strong driver of our growth and is being readily adopted by all of a significant portion of the automotive OEMs, and now it's perking down to the Tier 1, Tier 2 suppliers because of traceability.

When we add Windchill to the component, what's occurring, this theme of software-defined everything, software is becoming in every industry becoming a more critical part of the hardware, mechanical part of the product, right? And Codebeamer does an incredible job mapping to the variances that are happening in mechanical and hardware changes to make sure that products are being developed with the same clock speed of software development as it would in the mechanical and hardware side.

We're very advantaged there because Codebeamer works in an agile framework versus competitive solutions. And then when you layer upon the strength of configuration of hardware mechanical components in Windchill, it's a home run. You will see increasingly number of releases coming up on continued integration tightness between the 2, and you will see agent frameworks and agent capabilities that will actually map towards these 2 systems actually working more and more closely together. It's what our customers want.

Very cool. Last year, you announced an interesting portfolio rationalization, I'll call it, but divested ThingWorx and Kepware. Can you talk about the rationale behind that to sell those businesses? And maybe frame for us the kind of your view on the portfolio going forward?

Sure. Look, right now, the way we see it, as we've been mentioning, we're building momentum. We feel good about the hard lift and it now showing up. We just got to continue to make that consistent. We like the environment that we're operating, and we like the transformation our customers are looking at us for. We like our AI road map and the real value it's providing to customers. So we feel good about the current portfolio. We are close. I think we denoted that April 1 or earlier, we'll be closing the transaction of ThingWorx and Kepware, and we're on track for that time line.

What I'll say is the rationale and the really strong thing that's happening as feedback to us is customers are coming to us in all these conversations saying, this is great. You're talking about the product data foundation, the engineering product data and how we can unleash it across the enterprise, you're building innovation towards that. You're getting deeper into the domain. You're building AI use cases on top of those core systems of records. And you're not taking our eye off the ball and talking about the fragmented factory floor, right, which, by the way, the new owners of the business will have a far greater focus on that.

They'll have capabilities on it, and they'll better serve the customers in that area. And we now have freed up our clarity to the customers, clarity internally to go deliver on the promise of the intelligent product life cycle. And that singular focus across that strategy is super helpful to a company that's been around for 40 years that is pushing and accelerating at the pace we are right now.

That's really helpful and really allows you to focus your R&D organization on what really matters for customers and that you can deliver for them. How do you think about future M&A as an enhancement to your own organic development?

We're constantly looking at tuck-in acquisitions. We've done a few since I joined the company and...

Then joined through an acquisition.

I joined through an acquisition that was a little larger of an acquisition, but the ones that we're looking at is more tuck-in related, where Pure Variants was an excellent acquisition where we brought technology that was very unique that actually builds bridges, this Codebeamer to Windchill variant management, an excellent part of the portfolio that accelerated the ability to deliver what we just talked about.

We are looking at others that are -- we did IQL, a very smaller company. There are several others that could potentially accelerate it. We're staying disciplined on a few fronts. Number one is it has to be relevant to the strategy that we've got. It can't take us off and go to another shiny toy because there's enough demand right now and enough energy on the current strategy. So that's point one.

Two is you can't disrupt the organizational dynamics that we're building. I have a refreshed team where the camaraderie starting to build, the alignment is starting to build, the way we're talking about the business is being consistent. I will not sacrifice that culture changing, adding new people that don't fit in within that framework. But we're looking at it. We constantly are thinking about how do we accelerate the intelligent product life cycle for our customers. But they will be tuck-ins at best.

Okay. Very helpful. And maybe I should have asked first beyond digging into M&A. Let's take a step back, capital allocation as a whole, very cash-generative business today. How should investors think about how management and the Board will view the relative of investing in organic growth, return of capital to shareholders, again, and relative to M&A. I think you've already addressed M&A. But how do you think about broader capital allocation for PTC?

First off, like we've got a new CFO, and she's been doing a bang-up job. The team really is acclimated to her and the organizations really like the refreshed way in which she communicates and interacts with the organization. So I'm pleased. It's still early days, but there's -- the proof points are very positive. And the reason why I bring that up is it's a new set of eyes that's looking at like what's the ROI look like? Like how are we operating? Are we efficient? Are we making the business suffer?

And I'll say, in general, Jen and I are at the spot where the framework of 50% of ARR growth will be kind of OpEx related in terms of the increment is a good continued framework as we think about the opportunities as we think about multiyear ARR growth trajectories, et cetera. And one of the reasons why we feel good about that currently is because the new leadership is actually as much as the prior leadership did, we're continuing on this theme of reallocation of like what's the most best use of resource allocation.

And Jon Stevenson, our Chief Product Officer, is doing a bang-up job. As an example, spending time on releases that are maintenance releases on a product just because we've done it for the last 20 years, doesn't work anymore, right? And so Jon is bringing a new view of that. He's bringing in tools to accelerate development processes. Rob and CK are doing the same thing. And Jen DiRico is here, and she's looking at G&A to do the same thing. And so we feel good about the current contract.

I think it's important to stay disciplined right now. Jen and I shared this, by the way, the entire leadership team, stay disciplined because we see us rising right now and delivering what matters. And if we get too ahead of ourselves, that doesn't result in the right ROI and creates a different culture of the company. And I think by being this discipline has been helping us.

Lastly, I'll say on the capital allocation piece, one of the differences that Jen has brought to bear is we're going to get proceeds from this divestiture. And her approach, which she told the Board and first convinced me was like, look, this like the stock price is way too low. Like we're going to be out there and like we're going to use the proceeds, and we're going to do it in a way that's aggressive.

And so that will be themes of which we look at. But from a cost structure perspective, we feel good so far. We continue to think about reallocation, and we'll continue to think about what's the best for our customers. But right now, we're good in the framework.

Great. I'm going to hit one question on top line and then one on kind of profitability. But on the top line angle, we've talked about the positioning and how it's resonating with customers. But maybe at even higher level, like how does the macro landscape look for your customers? How is the pipeline trending implementation times? Are things moving faster today? Are things slowed down because of uncertainties out there in the world? And then is there any difference by geo or vertical? I know I just asked 5 questions.

No, it's great questions, and I've been in the field a lot of recent. I was just in Japan last week, and it's a theme that actually -- we operate in the major theaters around the world for 40 years, and we have a lot of depth of capabilities and experience with these customers. We're seeing a few themes that are of tailwinds here. Local for local, right? Reshoring, whether it be here in the United States, but in Japan, they're building up an immense renaissance of the industrial base for a lot of different reasons.

And that plays to our strong suit, right? It was a very well-attended kind of week that we spent a lot of time thinking about how do we modernize what has been a pretty legacy stack within the Japanese kind of industrial base using the intelligent product life cycle. And so we feel very advantaged by the local for local kind of what's happened as a result of the geopolitics on helping PTC.

Within the European defense space and aerospace, like there's a revitalization of how do we stay competitive and how do we actually fulfill our obligations to NATO, et cetera, that's causing us to have conversation with customers that says, we need to modernize. We need to like get this product data foundation in place and then put AI on top of it. So we're seeing good themes around that. And again, in automotive, we're very singularly focused on software engineering. That's a real good tailwind on continued companies building their inference there.

Across geographies, I'd say that North America is an area where we see an immense amount of demand and backlog, predominantly for those that don't know, we are at the epicenter of the build-out of data centers, meaning our customers are, whether it's the Cummins of the world, the JCIs, like you go down the Schneider Electrics of the world. They are very strong PTC customers, Caterpillars. And they're dealing with immense demand, right, in backlog. And we're helping them modernize their infrastructure so they can be nimble, adding intelligence to it.

But I'd say that the demand, the uncertainty of the tariff situation is not allowing the customers in North America just to go at the pace the demand is requiring them. So I'm optimistic that as we get more clarity, hopefully, around the tariff situation, it will unlock a next leg for the North American manufacturers. And I'm optimistic calmer minds will prevail and people think about already what has been great things added to the manufacturing within North America, including the OBBB, the tax bill has been a huge benefit to manufacturers, the permitting process. It's all moving in the right manner. We just need the tariff uncertainty kind of put behind us.

Yes. A lot of tailwinds clearly and tariff uncertainty will be one thing to get behind us will be very beneficial, it sounds. I was going to go to the bottom line. You talked a bit about this already, but maybe to ask a very specific question on profitability. How are you using AI? I don't know if you want to give some examples, but AI internally to automate, to create more efficiency for you all. You talked a lot about it from a product strategy for your customers. How are you all using AI tools?

Our engineering group is really accelerating on this. Like it's just really good maturing tools that from a code development perspective and quality is like it's becoming a very important part of how we're talking about the innovation speed. Jon Stevenson likes to say, I've come back here to make sure PTC runs at the speed of a startup. The AI capabilities really allow us to actually leapfrog that versus what's been happening over the last number of decades. So that's a benefit. Customer support, huge value of like we've implemented very strong AI capabilities and customer support.

I'd say, generally speaking, across the other functions, sales and marketing, we've implemented, we use it. We're still sorting through the ROI of those capabilities. And then obviously, in G&A, Jen's coming in and just got a bunch of new ideas of how to use AI to make that more of an efficient, effective kind of model. So yes, we're all of the above.

But similar to our customers, we're making sure it scales. We're making sure there's ROI, and we're making sure there's real use cases because right now, we're busy. We got customers coming to us wanting us to deliver. I don't want the company distracted with too many test experimentations. but within R&D and product, for sure, this is a good capability right now that's matured that is scaling.

Amazing. Let me pause here. We got 5 minutes to go or so. Any questions in the audience for Neil? Sure. We have a mic hold on one second coming down.

Yes. Just I guess, on the CAD side, you mentioned Onshape, Creo, the kind of transformation towards a more cloud-based product on the Onshape side. Can you just give us a feel on product completeness on Onshape, where does that stand versus on the Creo side? Any kind of feel of adoption rate on Onshape versus Creo, like installed base sizes would be helpful. And also, I guess, the first leg on getting Onshape in the market. You often have to win with the universities, right? You have to get into the students that have to learn the tools. Anything around that would be very interesting.

Sure. Great question. So I would say we're not going to talk about the user base, but I'll say it's one of the fastest growing, if not the fastest-growing products we've got in the company right now. Codebeamer and Onshape are like really on fire. The reason for it is because it's matured enough by which companies like Garmin, companies like Garrett, the sophisticated multiproduct needing collaborative solutions, Onshape team has done a nice job scaling, right? And they've created the right element by which all of Garmin's products are being designed on Onshape as an example, a big statement of strength.

Different than Creo, Creo does a remarkable job at large assemblies. So very complex, large heavy industry design. Creo is extremely good at. And Onshape over time could be, but that's not where their focus is. In fact, Onshape's focus right now, we're knocking out of the park on robotics as an example, with Onshape. Most of the physical AI world is being designed on Onshape and several new introductions and announcements are forthcoming in the next number of weeks. we're seeing strength there.

So just from a perspective of where the market is, we're seeing that kind of both boats rise from a perspective of different markets, adding AI that's enabled into both of them, which we're spending a lot of time on, and we're seeing good value on it.

I'll come back to the audience, but the Onshape question triggered one for me just on your other Plus offerings, your SaaS initiatives. Can you tell us what you're seeing with Windchill+, Creo+ and the willingness of these more mature, sometimes around 50- or 100-year manufacturing companies willing to adopt the Plus series, your cloud offerings?

So every one of the new deals that we're winning, meaning from a competitive displacement is going on Windchill+. So it's a real strong product capability that's winning against our competitive solutions. Other competitors -- this is Windchill+. We feel very good versus 2 years ago, I think I told the market like, hold on a second, like this will take some time until we get our sea legs. I don't want to put myself ahead in the company saying Windchill+ is where you should spend your time thinking about where the value uplift is.

Two years later, we have matured, and we have far more transformations under our belt. We are deep into multiple very complex implementations right now. And we're continuing to invest into Windchill+. So we see real value in the continuation of Windchill+.

We also, to be clear, for those new to PTC, continue to see on-premise Windchill expand seats, right? So different than other industries, our industries have not given modern tools to product development teams. we're allowing that to happen. And then we're converting them to SaaS. In some cases, we're converting them early on. So we see that value.

In terms of the CAD kind of cloud versus on-prem, for very complex assemblies, Creo on-prem is completely the right approach. And our AI actually strategy has been building plug-in technology that works on-premise as well as SaaS. So we have an advantage of like AI helping both sides of the customer. And then we've got the best cloud, most modern CAD platform in the world that this gentleman asked about in Onshape. So we've got 2 vectors that customers can choose from.

Lastly, Onshape, different than prior regimes is actually create integration points of Windchill, right? It's a big change. It was a religious change within PTC. And the new team said, we're going to do right for the customers. That's going to unlock a lot more value also from Onshape, downstream into PLM, ALM over time. You saw that with the Garrett, the customer win that we talked about. That is fundamental to like how we displace a major competitor there with that strategy. And we'll continue to do that.

Absolutely. Time for one more from the audience. Do we have one more question for Neil? We crushed it all. a general one, you kind of, I don't know, I'm just going to summarize everything we've talked about, a lot to be excited about. What are the 2 to 3 most exciting things for you as CEO? No target this year, next year? What are you really pumped about with PTC?

We've been putting in the hard work. This has not been an easy couple of years since I took over the role. But doing the right things and making the tough calls on people, strategy, the focus on the customer, revitalizing the culture towards these things. I think that -- and as we're developing our AI capabilities on the intelligence of the product life cycle, it just feels good to have put the hard work and starting to see the momentum build. And when you see the organizations across the world speaking the same way and customers repeating back what we've told them, things are starting to click. And we've said that happened in the last few quarters, work cut out for us. We still have a lot of work ahead of us.

But I'm a big student of when shifts happened in momentum from an organization standpoint, and I could see it happening. And that just gives me pure joy and inspiration to push even harder right now because, one, our customer base needs it and the people at PTC and the generations before that gave us this opportunity deserve for this company to be the preeminent enterprise software company in the world. I strongly believe that we have that place to be that company. So those are the 2 things that keeps us going.

Amazing. I want to thank Neil for being here. It's always one of my most fun interviews. I always enjoy having you on stage. Thank you, Neil.

Thanks. Appreciate you having us.

And good stuff for PTC.

Thank you. Thank you, everybody.

Good evening, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2026 First Quarter Conference Call. [Operator Instructions].

I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, operator, and welcome to PTC's First Quarter 2026 Conference Call. On the call today are Neil Barua, Chief Executive Officer; Jen DiRico, Chief Financial Officer; and Robert Dahdah, Chief Revenue Officer.

Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com. During this call, PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission as well as in today's press release. The forward-looking statements, including guidance provided during this call are valid only as of today's date, February 4, 2026, and PTC assumes no obligation to update these forward-looking statements.

During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.

With that, I'd like to turn the call over to PTC's Chief Executive Officer, Neil Barua.

Thank you, Matt, and good afternoon, everyone. I'll begin today by welcoming Jen DiRico to her first PTC earnings call as our new CFO. I'm confident she'll be a great CFO for PTC and a strong partner to our investor community.

Turning to our results, we delivered a solid first quarter of fiscal '26. We grew constant currency ARR 9%, excluding Kepware and ThingWorx and 8.4%, including them. And we grew free cash flow 13% year-over-year. These results reinforce our confidence in the transformation we are driving and the demand we are capturing. Our divestiture of Kepware and ThingWorx is progressing, and we are on track to close on or before April 1.

Before discussing execution in the quarter, I want to take a step back and talk about our transformation and my optimism for the road ahead. Every transformation has an important turning the corner phase where the end goal is still ahead, but you start to see collective forward momentum across the most important elements of the transformation. This is where PTC sits today. We see it clearly in the following ways: number one, accelerating product road map releases; two, record deferred ARR under contract; three, higher seller productivity; four, customer commitments that are strategic and increasingly span the full life cycle; and five, consistent customer feedback that our Intelligent Product Lifecycle vision resonates with what they need.

To that end, how our customers develop products is changing significantly. Products are becoming more complex, more software driven and more regulated. At the same time, development cycles are compressing. Competition is increasing, supply chains are fragmenting, and the workforce is evolving to favor modern digital-first systems and processes. The traditional product life cycle built on disconnected tools, siloed data and manual processes simply can't keep up. That is why the Intelligent Product Lifecycle is essential for staying competitive.

It is based on 3 core elements: connected systems of record across the life cycle, enterprise-wide cloud access to product data and AI embedded directly into enterprise workflows. Together, these elements turn product data from something that's simply stored and audited into something that actually drives better decisions across engineering, manufacturing, service and the rest of the enterprise.

The companies that will win are the ones that successfully leverage product data in this way and use it as a foundation of AI-driven intelligence and transformation. We believe PTC is uniquely positioned to enable this. Our core products, CAD, PLM, ALM and SLM are the systems of record across the life cycle, defining how product data is created, governed and used across the enterprise. And we support an open ecosystem where this data can be exchanged with other trusted enterprise systems. Our product and AI road maps are focused on making the Intelligent Product Lifecycle real for our customers.

Deeper product integrations are a high priority. The connection between Creo and Windchill is the gold standard, and we're making good progress with our Windchill connections to Codebeamer, ServiceMax and Onshape. In December, we released Codebeamer 3.2, which deepens the connection between Codebeamer and Windchill and improves how customers manage complex cross-domain development.

In October, we released a new version of Windchill that includes the new Windchill UI for a more modern user experience and new change management capabilities that make it easier for customers to share relevant product data with suppliers. Our AI road maps are progressing well, and we are encouraged by customer feedback. Entering 2026, it became clear that customers don't want AI as another stand-alone system or workflow. They want AI embedded directly into the systems of record they already trust for their enterprise workflow. That's exactly where PTC is focused and customers are increasingly recognizing this as a point of differentiation.

In Q1, we continued embedding AI across our portfolio to address our customers' high-value use cases and workflows. In December, we introduced Codebeamer AI focused on improving requirements quality, accelerating test case development and supporting compliance before products move into production.

In January, we released Windchill AI parts rationalization, new AI functionality embedded in Windchill to help customers accelerate development and manage costs by identifying duplicate parts, making part data more consistent and reliable and accelerating part searches. Next month, we will launch a video series called AI in Focus, where we will share our AI strategy in more depth, review product-specific road maps and show continued acceleration of releases. We encourage you to tune in.

We are confident in our AI position because our customers tell us universally that structured contextual product data is their top priority. In addition to embedding AI in our products, we are building a common AI infrastructure across our product portfolio. This will enable our users and AI agents to understand and use product data from CAD, PLM, ALM, SLM and third-party systems in the same way, all backed by data governance and security standards.

Our vision keeps our products and AI closely coupled together thereby encouraging broader adoption of PTC solutions over time.

Turning to go-to-market execution. Our transformation is progressing well. In Q1, we increased seller capacity, improved code attainment and saw ramping reps more than double productivity year-over-year. This reflects territory balancing, improved enablement and greater vertical focus. Most importantly, we are expanding the scope of our customer and partner engagements from focusing on one stage of the life cycle to discussing the Intelligent Product Lifecycle holistically, centered on product data and AI. As a result, we are achieving stronger and more strategic demand capture.

As previously discussed, we exited 2025 with record deferred ARR under contract. We continued this momentum with a record-setting Q1 of large deal volumes and strong competitive displacements and deferred ARR. Some of these deals will begin converting to ARR in Q4 of fiscal '26 and most will ramp in fiscal '27 and fiscal '28. Jen will talk more about the positive impact of deferred ARR on our outlook for the remainder of fiscal '26. We are confident our transformation is helping us build a more durable, multiyear growth engine.

An example of our momentum is the expansion deal we struck with Garrett Motion, a leading automotive supplier. We won this on the strength of our Intelligent Product Lifecycle vision and how it resonated with their leadership and across the company. Garrett is modernizing its product development environment on a cloud-first AI-ready architecture. They were already using Onshape and selected Windchill plus for PLM, displacing a PLM competitor and Codebeamer+ for ALM, displacing an ALM competitor. Garrett's goal is to unify product development with our connected systems, broaden access to product data beyond engineering and establish a foundation for AI. This is increasingly representative of how large product companies are engaging with PTC.

Overall, Q1 demonstrated PTC's momentum with the Intelligent Product Lifecycle. I credit team PTC for driving forward with focused execution and purposeful innovation. I'm energized by our progress and optimistic about where we are headed.

With that, I'll turn the call over to Jen.

Thanks, Neil, and hello, everyone. I'm excited and honored to join the PTC team at the significant time in the company's transformation. Before turning to our Q1 results, I thought I'd share my initial observations and key priorities. I'm impressed by the PTC team and how our Intelligent Product Lifecycle vision is taking hold with customers.

As Neil highlighted, product companies want to leverage AI for their high-value use cases and workflows. The companies that succeed will be the ones that connect product data across the entire life cycle and then leverage that foundation to push AI-driven intelligence. It's an exciting time because PTC is well positioned to help our customers address this challenge.

In terms of my key priorities, I look forward to partnering with Neil and the leadership team to help PTC capture its growth opportunity, maintain strong financial discipline and create meaningful value for our stakeholders. I'm committed to helping the investor community understand and value our business, and I'm looking forward to engaging with you. Now let's turn to our fiscal Q1 '26 financial results.

At the end of Q1, our constant currency ARR excluding Kepware and ThingWorx was $2.341 billion, up 9% year-over-year. Including Kepware and ThingWorx, our constant currency ARR was $2.5 billion, up 8.4% year-over-year. Our Q1 operating cash flow and free cash flow both grew 13% year-over-year. Q1 free cash flow of $267 million included $10 million of Kepware and ThingWorx divestiture costs. Finally, on the divestiture, we are still targeting a close on or before April 1, and there are no material changes to the figures we provided last quarter.

Turning to share repurchases. As previously guided, we repurchased $200 million of common stock in Q1 under our $2 billion share repurchase authorization. In Q2 '26, we intend to repurchase approximately $250 million of common stock. Based on this, we expect a decrease in our fully diluted share count to approximately 119 million shares, compared to 121 million shares 1 year ago.

In Q3 and Q4 this year, we intend to repurchase $150 million to $250 million of common stock per quarter. On top of this, given current valuations, we now intend to return additional capital to shareholders following the close of the Kepware and ThingWorx divestiture. We continue to expect net after-tax proceeds from the transaction of approximately $365 million.

Adding this to our original fiscal '26 plan means that we will buy back approximately $1.1 billion to $1.3 billion of our common stock this year. With that, I'll take you through our guidance.

In fiscal '26 for constant currency ARR excluding Kepware and ThingWorx, we continue to expect growth of approximately 7.5% to 9.5%. Including Kepware and ThingWorx, we still expect growth of approximately 7% to 9% in fiscal '26. In the appendix to our earnings deck, we provide an illustrative ARR model for fiscal '26. And you can see that our fiscal '26 ARR guidance midpoint is for $195 million of annual net new ARR in both scenarios.

In Q2, for constant currency ARR excluding Kepware and ThingWorx, we expect growth of approximately 8% to 8.5%, including Kepware and ThingWorx we expect growth of approximately 7.5% to 8%. In the appendix to our earnings deck, we also provide an illustrative ARR model for Q2 '26. And you can see that our Q2 '26 ARR guidance is for $35 million to $50 million of sequential net new ARR in both scenarios.

Looking at the second half of the year, our intent is to grow net new ARR in Q3 '26 on a year-over-year basis and then deliver a step-up in Q4. We are comfortable with that because starting in Q4 '26, the demand capture we've been highlighting will have a positive impact on our ARR growth. We have visibility to a large increase in the amount of deferred ARR that will start in Q4 '26 compared to previous Q4. And for clarity, the higher level of deferred ARR that is contracted to start in Q4 this year is attributable to the solid progress we've made with our go-to-market initiatives, as well as our commercial initiatives. Both drivers are contributing.

Moving to cash flow, revenue and EPS. Our guidance for these do not take into account the Kepware and ThingWorx divestiture. Except for the divestiture costs already recognized in Q1 '26 and expected in Q2 '26. For Q2 '26 we are guiding free cash flow of $310 million to $315 million, including Kepware and ThingWorx for the full quarter, which absorbs approximately $5 million of divestiture costs. Our business as currently constituted remains on track to deliver approximately $1 billion of free cash flow in fiscal '26.

Related to the Kepware and ThingWorx transaction, we still expect approximately $160 million of total cash outflows this year, which are not expected to recur in future years. and we'll continue to provide visibility to these outflows in our reporting and guidance. When the transaction closes, we will update our guidance, and I'll host a call to take you through the changes.

In recent years, we've developed a high degree of confidence in our guidance for free cash flow based on the predictability of our cash collections and the disciplined budgeting structure we've established, continuing to deliver the strong financial discipline you've come to expect from PTC remains a priority. While our focus is on ARR and free cash flow, we're also providing revenue and EPS guidance to help you with your models. We are raising our fiscal '26 guidance range for revenue to $2.675 billion to $2.940 billion and raising our non-GAAP EPS guidance range to $6.69 to $9.15 in alignment with our Q1 '26 results coming in above the high end of our guidance range.

The key driver of our strong Q1 '26 revenue and EPS was similar to last quarter. We did a great job contracting customer commitments. As a result, our revenue growth significantly outpaced our ARR growth for a second consecutive quarter. In Q1 '26, demand capture continued to outpace ARR growth, resulting in additional deferred ARR that will support durable growth in future periods. Importantly, this dynamic reflects the quality, duration and the structure of customer commitments we're contracting, not a change in revenue recognition practices.

All in all, our results and guidance show that our focus on the Intelligent Product Lifecycle is resonating with customers. We are on the right strategic path with a compelling set of product initiatives, go-to-market initiatives and commercial initiatives.

I want to thank the extended PTC team for their continued efforts and energy. Our people are our driving force. And what I've seen thus far gives me confidence that we will deliver on our opportunity.

With that, I'd like to turn the call back to the operator for the Q&A session.

[Operator Instructions]. Your first question comes from the line of Yun Kim with Loop Capital Markets.

Congrats on a solid quarter, Neil, and welcome onboard, Jen. Since it is your first time, I'll ask a question to Jen first. So Q4 is the first quarter when we can see there are contributions from those deferred ARR deals. What level of visibility do you have on that, if you can quantify that, if you can? What are, for instance, what are some of the variables behind those ramp or deferred ARR deals getting recognized in Q4? And is the timing of that ramp related to billings and would it affect cash flow?

Yun, thanks for the question, and Jen will add to my upfront. But since she's 4 weeks in, let me take the upfront on the dynamics of the demand capture and then she could talk about some of the technicalities, if I don't cover it. So again, I think you heard and thank you for the acknowledgment. We feel really good about the progress of our go-to-market transformation, and it's showing up now in 2 quarters of demand capture that is now relating to the amount of deferred revenue -- deferred ARR that you spoke about in Q4 that's about triple what we had last Q4 entering and double the deferred ARR that we're building starting in '27 that we had coming into this year. So Rob and the go-to-market team is really doing a lot of great work on the demand capture.

And the crux of the deferred ARR is due to the fact that we're winning strategic cross-product and in some cases and in many cases, on some product lines, competitive displacements. And so we're taking the commitment, which is committed dollars from the customer. I'm cognizant that it's not showing up right now in the in-quarter ARR in Q1 and as we guide around Q2, but we're very positive about how it's starting to build into how it will impact Q4 in a more meaningful way than it did last year and also into the following year. And it's all to do with the implementation cycles of our customers, and we feel good about it because the commitments there, it's contracted and it's set to come. Jen, anything to add?

I think you hit it, Neil.

Your next question comes from the line of Joe Vruwink with Baird.

Great. Thanks for taking my question. Jen, welcome. At the big event hosted by PTC's user community about this time last year, there was some, I think, foreshadowing by PTC about AI capabilities that would get added to Windchill and the parts management areas. And at the time, customers were really excited about this. I think that idea as a product is what PTC is now starting to come out with, I think, it was released last week. I guess my question related to this, there's obviously been a lot of AI releases from PTC across all the core products over the past year and not diminishing any of those, but are we may be starting to see some that could prove more material in nature, and this is going to start to register in a more noticeable way on demand decisions over the next year.

So thanks for the question, Joe. Thanks for acknowledging the really good progress that we're making around our AI strategy in concert with what customers really need. And as you noted here, our products are mission-critical, enterprise systems of records across the life cycle. And as you heard last year at the PTC user group, the preponderance of our customers are now really wanting us to embed these AI releases.

As you noted, the Windchill AI parts rationalization, we also did a Codebeamer AI release as well and many others that are accelerating over the course of this year, which is really embedding AI capabilities to advise and assist and over time, automate workflows within these systems of records that we are very well attuned to understand and train the models around it.

So we're thrilled about the progress. Our customers are even more thrilled that we have built these, and now there's a rapid iteration of releases to even make these more consumable over time. So we feel good about where we are around our strategy. We feel very excited about the criticality of PTC to deliver AI to our customers given the strength and the complexity of our system of records within our customer environment.

In terms of the impact of when Jen could start talking about the P&L impact in terms of when we'll see a lift, I'd say right now, it's immaterial in terms of how we think about the economic [ TIL ] coming into the company. But as these releases start taking hold and they move from POCs to scale deployments over the course of the next few years, this should be something we'll be talking to you about and others around a real economic driver of the business.

Your next question comes from the line of Adam Borg with Stifel.

Awesome. Maybe just on Creo and Windchill. And as we think about those growth rates, any way to parse out the mix of growth coming from expansion versus competitive displacement and given the new go-to-market promotions that seem to be having some success, what's the opportunity to drive more on the competitive displacement front?

Yes. Let me start this, and Rob can add, given he's really driving the team in a really disciplined manner the way he said he was going to when he started about 12 months ago, and we're very proud of the progress that team has made. What I'll say is around Windchill, which we don't break out the exact growth rate at Windchill. It's an aggregated PLM number, as you might know, Adam. We're very enthused about the Windchill capabilities and the acceptance and the growth rates around Windchill as a stand-alone product in addition to, by the way, Windchill+, where we're seeing really strong traction.

Creo, as you noted, continues to be a strong grower. It's a steady grower, and we feel good about its competitive dynamic in the CAD market in addition to the fact that we have an amazing Onshape capability that is also starting to be a very strong competitive takeaway off of some of the competitors on their estate. So we feel good about CAD.

In terms of PLM, in terms of the mix around expansion versus competitive displacement, I'd still say, Adam, that the significance is still around expansion. And even in expansion, there's competitive displacements that's happening where customers are giving us their entire estate now of take all the disparate PLM systems and put it on Windchill. So you saw some of the appendix slides, you're starting to see and we're starting to see that being more of the types of deals we're seeing. Part of it is because the customers are understanding to get the benefit of AI, you need contextual product data that's put in one place in a system of record like Windchill. And so this advantages customers to expand with Windchill and then build in parallel with some of the AI capabilities. But we are also lastly seeing competitive displacements that I mentioned, and we're continuing to see more of that happen over the course of this year as we look at the pipeline. Rob?

Yes. The split is correct that we get the majority from expansion, but there is actual growth and accelerated growth in competitive displacements. And so we feel really good about that as a kind of a next step grower for us.

Your next question comes from the line of Ken Wong with Oppenheimer.

Operator, let's go to the next. We will come back to Ken.

Your next question comes from Matt Hedberg with RBC Capital Markets.

Great. Congrats, the software environment seems a bit dicey these days, but it's great to see the consistent results out of PTC. I guess, Neil, I wanted to ask, you just talked about Windchill a second ago. I guess I was curious if you could talk a little bit more specifically on Windchill+, Creo+, just kind of the broad SaaS portfolio. Are you starting to see increased customer demand for SaaS. And in those instances, are you seeing customers spend go even higher in those situations?

Yes. So thanks for the question. And we've been very -- we've been very practical and also transparent with all of you around our journey around building our SaaS momentum. And I'll take first the born in the cloud solutions that we've got and in particular, Onshape, Arena, ServiceMax, and we feel good about to -- in some cases, great about the momentum and the adoption of those capabilities. And several competitive placements that are happening across the 3 of those strong portfolios in addition to the AI capabilities we're building on top of it.

In terms of your question on Windchill+ and Creo+, we're having a bang up and we did have a bang up last year in terms of the momentum building for Windchill+. We had another strong demand capture quarter for Windchill+, if not record breaking. We have plenty more to go. And I want to make sure I think Rob and I are measured about that we've been saying for a while that the dam has not broken where the entire market is flipping to our plus platform overnight. But we have been building momentum. We are working towards making sure we meet the customers where they are.

The good news story is the following. And I've been saying this for 2 years consistently. SaaS starts working for Windchill+ and Creo+ when there's scaled implementations with a great experience with a back-end experience that's good and the customers are happy. We're starting to see that. And we're going to leverage that. We're going to continue to build on the momentum. And so we feel really strongly about our position on SaaS. We feel like that will continue to be a growth driver.

And to your last question around lift on pricing, yes, we are seeing the similar sort of lift that we've been saying around the 1.5 to 2.5x kind of lift in terms of on-prem to SaaS lift on ARR.

Your next question comes from the line of Joshua Tilton with Wolfe Research.

I appreciate all the commentary on the improvement in sales productivity. But when we kind of like dig a little bit deeper in the numbers, it looks like the channel drove over 80% of net new ARR in the quarter. So I'm just trying to understand, like, are there any one-offs in the direct business that we need to understand? Is this tied to the deferred ARR dynamic? And maybe when can we start to see the direct business maybe contributed at a similar level to the channel going forward?

Jen, do you want to start and then Rob could add?

Yes, I can take it. So I think what we're seeing right now is good momentum in both the channel and the direct. What you're seeing actually in the numbers, in particular, in this past quarter, one large deal does have an ability to influence this. And oftentimes with a large deal, you have both the channel and the direct. And ultimately, it's about customer preference and how they want that fulfilled. And ultimately, that's all that's happening in those numbers as right now, you can add, Rob.

Yes. I mean as we've mentioned in prior conversations, we're working very hard to more deeply engage with partners on this. So to create an environment where we can allow that flexibility at the customer and not have a battle that it's direct against the channel, but working together to fulfill at the customer's request. So we think you might see that from time to time. We did have a larger deal this quarter. that fit that picture. But you might see it again in the future, but it's not in any way some kind of visibility into weakness in direct. We work very closely together on that.

And lastly, I want to make sure we're very clear about this. The energy and enthusiasm that turning the corner is around the actual indication and the contracted commitments that are building predominantly deferred ARR. So we feel really strongly about the go-to-market transformation, actually doing the thing that we need to do, which is capture customer demand. How it's showing up in Q1 and our guidance for Q2 has only got to do with timing. And the good news is this is committed capture.

By the way, this is going to show up also in another metric that you can look at. It's not completely indicative of it is RPO and CRPO that you'll see in the Q, but all of these metrics are leading us to make sure we all articulate that demand capture is strong. We got to continue that. And as that happens, ARR over time becomes durable and multiyear in terms of the sustainability.

Makes sense. Maybe just to clarify one thing around that. Was there more deferred ARR added to the balance in 1Q than when you exited Q4?

Yes, there was. And just to reiterate what Neil said before, as we think about where we are, where we sit today versus 1 year ago for Q4 '26, there's triple the amount of deferred ARR on the books for Q4 '26. And then in the same view for '27, there is double for '27 versus where there was last year for '26.

Your next question comes from the line of Blair Abernethy with Rosenblatt Securities.

Thanks very much, guys, and welcome, Jen. Just on the go-to-market side again, I just wonder maybe Rob can shed some color on this. But in terms of new customer adds, what are you seeing out there in terms of interest in your portfolio? Is it skewed at all more towards the SaaS side, the SaaS products? And also, maybe you could provide a little more color on the start-up aerospace and defense program. It looks like you've been winning some business there.

Yes. So 2 questions. The -- as it relates to the new business and new logos, we definitely as mentioned earlier, have had a nice run and an increase in our competitive displacement. So we're picking up what we would consider to be new logos in kind of the upmarket. As we bring on new customers, we default to cloud. So they're coming in a cloud environment. And typically, that's been working very well for us and for the customer who want to enter that way. They reduce their customizations and the complexity in their own environment and obviously try to capture some of the benefits of being in cloud, some of which are pretty obvious, others which will start to manifest in how AI is deployed.

So yes, we're seeing good traction with customers coming in new, and that is our default setting as we bring on new logos into the cloud. In defense, we do -- it's great that you noticed that. You picked up on that. We have an opportunity there. We believe, as we serve some of the largest customers in the world at the top of that stack, we have an opportunity now to incubate at the lower end and we've seen great reception there. Certainly, we always learn and get better every month, every quarter, but the initial response has been really positive there. And we have a number of ways to service that market as well. So we feel like we're well positioned at both the top and the bottom. And hopefully, we'll be able to report some great success stories that group through there.

Your next question comes from the line of Ken Wong with Oppenheimer.

Okay. Perfect. I appreciate the context around deferred ARR and when some of that timing could pop up. When thinking through the unchanged fiscal year ARR guide and coupled with that commentary, that it sounds like more is coming in Q4. Help us think through the seasonality if you could. I mean is it basically going to be even more back-end loaded than you guys were thinking perhaps 3 months ago?

So I think right now, the way we think about it, as you heard me say in my prepared remarks, that we'll have a step-up in Q3 and a larger step up in Q4. I would say it's similar to how we've been thinking about the business, Neil, you can correct me if I'm wrong, prior. But overall, the shape of the curve is very similar to what we thought about when we guided for the full year.

Your next question comes from the line of Daniel Jester with BMO Capital Markets.

Maybe in the slide deck, there was a good story about ServiceMax and expansion there. Last year, maybe a little bit of a tougher year for ServiceMax. And so maybe just an update about what we're seeing there and in terms of the cross-sell opportunity for fiscal '26.

Yes. Let me start, and Rob could add if I missed anything. Look, as we mentioned a few times starting last year, we've been working through very specific churn events in ServiceMax for a number of quarters now. As I mentioned, I think, at last call that where we've got some still residual churn that kind of hit us in Q1, and most of it, we're trying to work through the system by the end of this quarter. That being said, a ray of sunshine in terms of some green shoots. We've been talking about like the cross-sell opportunity you saw. You noted the one in the appendix. We've had some good strong demand capture as we're calling it, i.e., contractual commitments of ServiceMax that was very encouraging as we saw the end of Q4 and throughout the entirety of Q1. We need that replicated over the next number of quarters. We obviously want to ensure that churn is mitigated versus what we've seen in prior quarters.

And lastly, the integration of ServiceMax into the Intelligent Product Lifecycle, and in particular, how our AI strategy allows for agents to work across our systems of record, where we have a very differentiated offer in ServiceMax, we believe is a competitive differentiation, in particular with some of these competitive displacements when customers are giving us PLM. Part of it is to do with the fact that we actually do have such a strong system of record at ServiceMax and ultimately in that AI world we're at an advantage. So not out of the woods, but making progress. And we're staying in real focus to make sure we continue on some of the buildup of some of those green shoots that we're seeing.

Yes. And as part of the alignment to go vertical and start to look at how we rebalance just the go-to-market teams, we've made this a very important part of our elevated messaging. And so it's being brought to market more widely. In addition, we, on a tactical level, really instituted as part of the comp plans in a way to make sure that everybody's got some incentive to bring this in front of the customers. So in addition to the benefit of the customer, there's internal benefits also. So we're trying to make sure the whole company is aligned to get the message out.

Your next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Sorry to belabor another ARR question, but this actually relates to the Q2 ARR guide. I know there's an implied decline in net new dollars added for Q2. Did you see any deals from the Q2 pipeline closed earlier in Q1? Or are you expecting more of the deals in Q2 to also have this bigger deferred component?

It's a great question, Jason. This is all to do with our assumption as we sit here today around how these deals will come into the in-quarter start affecting ARR for that. This has nothing to do with demand being lesser than the momentum that we're talking about. It has simply to do with the structuring and our assumption of that being the case. Quite frankly, it is another quarter where we believe we will continue to build on the deferred ARR to make this a durable, multiyear sustainable growth engine going forward.

Your next question comes from the line of Siti Panigrahi with Mizuho.

Congrats, Jen, and look forward to working with you. So it's good to see some of the initiatives on the AI side you are doing and also buyback. But Neil, I want to ask about the macro that you talked about earlier a little bit, you're conservative there. What kind of trend are you seeing in Q1? And what's assumed in your guidance? And specifically, if you could give some color in terms of vertical if you're seeing anywhere strength or weakness there?

Yes. Rob could add about the vertical piece, but just broadly, we've been in a very difficult macro, Siti. We've talked about this for many years now for a long time. And we are still delivering and capturing the types of results that we're talking about, particularly on the demand capture commentary that we gave. That is across regions, across verticals, we're seeing that strength. And the reason for it, despite the macro having so much uncertainty and volatility, despite policies being uncertain is because, as an example, today, we had one of the larger industrial manufacturers in all of Europe, join us at the CXC. And while they are dealing with so much change they need to modernize. And they need to make sure prioritization of modernizing and creating a strong product data foundation, in this case, Windchill and the expansion of Windchill is what they're looking at with the addition of Codebeamer to make sure they take advantage of AI as they think about their multiyear journey and competitiveness.

So we feel good that even in this environment, our end customer, as you know, Siti has not modernized as fast as almost every other end market of companies. They are getting the urgency to move. And now with this Intelligent Product Lifecycle, it's a comprehensive holistic story for them to actually be competitive with technology provided by PTC.

Yes. Just in terms of the actual strength within the verticals and the geographies, there is -- while there may be in a particular vertical, a geography that hasn't performed, some other geography has stepped up to outperform. And so if you look across the verticals, they all -- our big 5 are all performing fairly well. And then if you look at any geography, there's no geography that has just been depressed. If they're down in one industry, they pick up in another. And so across our 3 or 4 biggest geographies and across the 5 verticals we have some pretty good numbers. And we feel like every one of those is a place that has some upside.

Your next question comes from the line of Nay Soe Naing with Berenberg.

Jen, looking forward to working with you. My question is on the deferred ARR. I think, Neil, you attributed to the fact that the booking to ARR conversion will begin from Q4 as a result of implementation of customers. I was wondering if you could share with us how much visibility or control you have over that implementation time line of the customer, is there any potential risk that the implementation process might take longer or on the other -- on the flip side, it could be shorter than Q4 is coming up?

Yes. So sorry, it was a little unclear, but I want to make sure -- your question was clear that audio was a little low. But just in terms of the deferred ARR -- this is Rob. These are -- this is a contractual commitment. So when we engage and sign these contracts, these are contractually committed amounts of ARR. That's what we heard Neil talk about the durability and the predictability of the business. So they have a great incentive to be on time in their implementation. But if they're not, that ARR [ accounts ].

So we believe that in addition to, obviously, the predictability, the benefit to the customer and the way we've contracted is that it's allowing them time to ensure that they're aligned to the cycle of the contract. And so why we're also excited about how we've had these quarters and what we call demand capture is because in addition to timing them appropriately, we've done them on the proper commercial conditions, not in any way, try to strain the deal by pulling it forward just to hit a current quarter and it doesn't match the implementation cycle or market conditions in those out years. And so these are contractually obligated. They'll hit in these quarters. We are hoping and we're planning to be fully aligned with their implementations. And in addition to that, hopefully, as we get to those out cycles, there's actually upside even in those.

Your next question comes from the line of Tyler Radke with Citi.

So I know you've been asked almost every question on deferred ARR. But I guess I was just wondering if you could help us understand, I guess, the magnitude in which that surprised you in the quarter and then how that changes for the year? Because clearly, you're seeing some good things on the rep productivity side, but you came in a little bit below the high end of the guidance. And then is that something you're just contemplating or risk adjusting more in the outlook? It looked like there was [indiscernible] on the net new ARR for Q2? And then sorry, just to clarify, if you think about the stacking of these ramped ARR deals. I think it implies that your overall ARR growth should reaccelerate in Q4? And if that's the case, would you expect that to be durable, just given the visibility you have?

Yes, Tyler, thanks for the question. I just want to take one step back. The work that we've done and undertaken around go-to-market transformation, the hard work that we did up front and the precision and process that we've undertaken over the last 12 months, and we're continuing on going forward this year and into next. In addition to the product innovation that we're talking about AI is around bringing PTC back to a consistent demand capture environment by which we're winning and engaging in strategic cross-product deals across the core priorities that actually build towards this Intelligent Product Lifecycle and so fundamental to our customers.

And so that process that Rob and [ CK ] and the go-to-market team started off 12 months ago, is showing the fruits of all that process in demand capture that happened in Q4 and in Q1. And as we alluded to, we intend to continue that momentum into Q2. That is not showing up yet in net new ARR. And the way we showed you the guidance for Q1 was clearly not a surprise in which we gave you the range because we know that the whole game is build a durable, accelerating growth company.

And the way you do that is by capturing great demand in a quality deal that fills deferred ARR and allows churn to continue to stay low and keep building new ACV into the quarter that we're playing in. And we believe in summary that, that inflection that turning the corner and the turn the corner starts becoming more apparent in Q4 of this year and substantially into 2027 and 2028. And that's what we're playing for, Tyler, and that's the results and the work that we're doing at this current time, just so we're being transparent with all of you.

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Neil, your references this evening to large transactions coming on top of similar comments back in Q4 where you clearly had a large number of large transactions, leads me to ask the following. And there's quite a bit of deja vu here for me, which is, if you think about ANSYS, 6, 7, 8 years ago, they too had gone through a significant go-to-market change, they too had evolved and broadened their portfolio.

So there's some similarities here that lead me to ask, if you are anticipating a fundamental change in your deal profile or propensity that you will start seeing more frequently, the number of 8-figure transactions as you did in Q4 and as they did over a number of years.

And then secondly, I can't help asking about your presence at CES last month, which was quite significant. I think almost the entire C-level team seemed to be there. There was a significant automotive flavor to your presence there, particularly around ALM and Windchill. The question is, do you think that you can broaden your momentum in auto beyond the tip of the spear that ALM has been giving you, plus in Windchill. So that you can, in fact, start seeing a broader, more impactful growth or share contribution in auto, as you've done, for example, Toyota, Ford, VW, et cetera, et cetera.

Yes, Jay, thanks for the question. And let me start with CES. So we were more than proud, but more than proud. We were very enthused by the reception we got at the first ever CES that PTC has been involved in. And not only from automotive, but Jay, if you were there, you saw all around our booth was industrial manufacturers around the world that actually came to our booth as executives asking us, how can we deploy more of Windchill. Most of them being our customers already, Jay, which you're probably familiar with, but really trying to understand, wait a second, now you have something called Codebeamer, now what are you doing with AI? How can we supercharge our Windchill base or our Creo base, ServiceMax in some cases, what can we do? And that was just a really great puff your chest moment for PTC around. We're in the big stage now, we deserve it, and we're at the fundamental level of transforming these really amazing companies around the world, including automotive, but a lot of industrial manufacturers as well.

On automotive, I will say, right now, Codebeamer is the tip of the spear and that tip of the spear is very substantial for us. And there's plenty more to go in terms of Codebeamer, displacements, not only manual processes, but also competitive solutions. As you see that product is really gaining scale. We're adding Codebeamer AI functionality, which the market is really energized by. So we're happy to get all of automotive onto Codebeamer and that's we're marching towards that end for what it's worth.

Same on Windchill with automotive. We are continuing to see an ability for Windchill, while in some accounts in automotive, it is there, as you know, Jay, we're seeing this theme of like, let's consolidate on Windchill. Let's take all the disparate PLM system and put it all into Windchill, and we're going to continue to go down that path.

Lastly, ServiceMax. So Lamborghini was a marquee customer at our booth. They're deploying ServiceMax now that's tied back into their Windchill instance so that they could deploy the right parts and services to their end customers faster. We're going to go down that path as well. Ultimately, one day, we're going to talk about CAD. But right now, we feel really good about in automotive, ALM, PLM and over time as we're seeing Servigistics, our ServiceMax product and SLM suite of products there. Rob, anything to add?

The only thing I'd say is, in addition, of course, we'd be happy to continue -- to take down the rest of the automotive industry when it comes to our ALM, but we are seeing it start to go into other industries. It's not -- we have not made any type of deliberate decision to knock out. We actually have customers now exploring it and actually in places that you wouldn't even imagine. So we're pretty excited about the possibilities there, and there's obviously a huge white space outside.

And your first question, Jay, around, are you seeing this dynamic of cross-product larger-scale deals. And these large-scale deals, they take a lot of effort, timing is always an art, and we have one of the best artists in the world and Rob kind of with his team landing those. But a big part of what has been the up-level messaging that we've been talking about, that going to partners, getting to the GSIs, revealing what you know, Jay, I think, is like the greatness of PTC, the importance of PTC, to be at the same system of record as the big players worldwide in software, that's beginning to happen. And the more we get there, the more we're starting to construct these larger deals.

When they come in, is going to be on Rob. But we're enthused about the fact that they're starting to actually build into the pipeline, and we're looking at very optimistic ways in which how we could close that over the next number of years.

Your next question comes from the line of Joshua Tilton with Wolfe Research.

And I hate to ask one more on deferred ARR. But if I kind of sum up all the takes of the questions that we're getting that on the call. I think some of us have, remembering or PTSD or whatever you want to call it, from prior communication around deferred ARR that kind of didn't pan out as we were all hoping for in the year. And I'm just -- I guess what I'm asking, is there anything that you can tell us or give us to instill confidence that this deferred ARR balance will come through in the fourth quarter? And then on top of that, is there a way to think about how much of that balance is currently baked into the guidance?

Yes. So let me -- just on the confidence level. And again, I can only speak about what we've been doing since we've been transforming the business across all fronts. And I want to make one reference back to 12 months ago when we talked about all the levels of what we're doing in go-to-market transition. One of it was far tighter linkage between sales and customer success. And Rob made plenty of organizational decisions, process decisions to align the two.

And the reason why that's important in answering your question is customer success, i.e., in that team has the implementation expertise when a deal is underway, they're the ones that actually advise the customer around here's what we see as the way in which the technology can actually be implemented in addition to a third party. That linkage is tighter and because it's tighter, we believe that in the contracting process, it's eyes wide open around when the implementations should occur, when the customers should pay for it and what's the right thing to do for the process of the actual project itself. And so we feel confident that we put the right diligence, number one, and there's far tighter linkages now than there was 12 months ago.

Number 2 is, I think, Rob alluded to this, I want to just punctuate it, is we're doing deals to build a durable, multiyear growth, sustainable business, not telling the customer, if you let us maximize ARR for this quarter, you'll get these certain attributes. We're doing the deals the way they should be to do the deals. And so the risk profile of a customer coming back and saying, the implementation schedule is different than what you said is low, lower than I've seen. And at the end of the day, Rob's got a discipline that says, since we were transparent with you, it's in contract you're going to pay for it. So summary of all that long diatribe is that we feel little risk in that deferred ARR for you to have that PTSD of saying that disappeared or moved out.

Thanks for the clarity. Really appreciate it.

That concludes our question-and-answer session. I will now turn the call back over to Neil Barua for closing remarks.

Thank you all for joining. We really appreciate the questions and the attention. We're going to be on the road the next number of weeks, meetings and conferences and investors. And so we look forward to seeing you. And again, thank you for joining the call.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

All right. Thanks, everyone, for joining us. My name is Sterling Auty. I'm Vice Chairman of Software Investment Banking here at Barclays. Really happy to have with us the team from PTC for our next session. We have both Neil Barua, who's Chief Executive Officer; and Rob Dahdah, who's Chief Revenue Officer. Guys, thanks for joining us.

Sure. Great to be here.

Really appreciate it. Maybe for -- the company has been around for a long time, but it's gone through changes. So for those that are a little bit newer to the story, maybe, Neil, can you kick off and just give us an overview of who PTC is and kind of what you're focused on?

Yes. Let me start with the way in which I like to talk about PTC is through the framework of how our -- what our customers do. And really importantly, at PTC, our customers are those that make the products that we all rely upon, whether it be a car, automobile, quantum computer, GPU, medical device, construction equipment. Those are the products they build. And what PTC does for almost all those categories of products, we provide the software that allows these customers to build, maintain, design and service these incredible products that the world relies upon. So that's what we fundamentally do as a business.

Love it. Love it. I'm big on addressing elephants in the room right away. You just announced a CFO transition. Can maybe give a little bit of context around it?

Yes. We announced that Jen DiRico will be joining PTC starting Jan 1 coming up this year. Kristian Talvitie, our CFO, is actually closing out the quarter with all of us and done a great job for the 7 years he's been here. I chose Jen and we're thrilled to bring her on board because as I've now turning into 2 years of being the CEO of PTC, built a really great team. And Rob Dahdah is here on stage with me, but many others on the leadership team that we've kind of put together and started to hit stride. And Jen brings this capability that we felt through a rigorous process in choosing her around how well she can align with the business leaders on all the great stuff that we've been doing with the business over the last couple of years and what we need to do over the next number of years. And that alignment from a great finance person, but in concert with all the amazing things that you'll hear about that Rob's team is doing and others are doing within the business is critical at this juncture of the company.

Number two is just the way in which we communicate as team members is really important. I think Jen will be really positive there as well as from an internal perspective and an external perspective. So we're more than thrilled to have Jen join us and thank, obviously, Kristian, for all the foundation laying with him and his team that he's done for us to now take this company to the next level.

Do you feel that's kind of the last piece of the puzzle you've kind of made the changes that are necessary and can move from here?

Yes. I treat myself as the coach of the team, and I feel really good come this January, Jen joining that I'm feeling the best team as they work together to actually execute across this vision. And I feel good about now turning that into it continued building on the momentum that we saw at the tail end of the last year, to really take, again, this company to the next level.

Switching gears, we've seen a lot of change and evolution in your core end markets over the years. How would you kind of characterize where we are in that journey across CAD, PLM, et cetera?

I'll take CAD first off. CAD, for those of you that know most of all the designs of the world in a 3D model for all those products that I talked about happens in almost just a few solutions, one of which the market-leading solution that we have. And most of CAD has been around feature and functionality augments, whether it be model-based design, simulation-driven design and generative design has been like the core thesis of CAD over the last number of years. What's really exciting in CAD is the cloud-based capabilities that we bring to bear across PTC for our CAD tools. We have the only cloud-native CAD tool in the world at scale now called Onshape, which as I mentioned in the last earnings call, we've had the largest deal in the company's history of Onshape. And we see CAD being really important in the migration to the cloud with Onshape leading the charge. And then as we think about AI capabilities, which we'll talk about, how to put that within CAD.

A little different for PLM. PLM is not only a movement to the cloud that we're seeing building momentum on, and we feel like that will continue over the next number of years. But PLM has become now seen as an enterprise solution that's necessary for these amazing companies to survive, to actually iterate on products faster with higher quality with greater and lower cost. PLM is now becoming that pivotal nerve center of our customers' solutions to be critical to how they actually interoperate in addition to what happens with cloud with that solution for people that collaborate on a real-time basis.

I think you've talked -- or at least in the market, there's a talk of kind of a PLM renaissance, if you will. It seems to me, especially in the age of AI. We take -- you mentioned kind of the data set that resides there for CAD and what you can do with it, but PLM brings a whole another layer of data capabilities into it to be able to leverage, I would imagine. So how do you kind of characterize, I guess, where we are in the PLM evolution? And is this going to be something that kind of reinvigorates the growth opportunity as you look at your customer set?

Yes. I think PLM is hitting clearly the renaissance that it deserves, and we're leading that charge and making sure everyone knows about the capabilities of PLM. And if you're continuously hearing us as a team talk about the intelligent product life cycle, where we enable our customers to build a strong product daily foundation. Fundamentally, we believe customers that have the best ability to work with their product data in a meaningful manner wins. And we're pivotal to that actually occurring. PLM is, as I mentioned, the nerve center of a product company, right? It is where everything comes together from design to configuration to manufacturability to actually servicing actually happens at a PLM system.

And most of the world, which is the amazing opportunity we got ahead of us, doesn't actually have these advanced capabilities yet. We obviously are the market leader in PLM. We have a lot of PLM users that are using across personas. But when we look at a customer, most personas within the product development organization, manufacturing engineering, quality engineering, supply chain engineering have siloed homegrown tools. And that's the opportunity to put something as robust as Windchill, our core PLM system or Arena or other PLM on cloud system to actually put all of that structured data in a contextual way by which customers can supercharge it with technology that we're advancing in with AI.

Are you seeing -- go ahead.

I was just going to say that in addition, so that whole -- everything that Neil just said is now we've gotten together as a company and looked at how we can elevate our message because that PLM value now is expanded beyond just that department. And that is a value to the whole company. And as you heard Neil say earlier, we make -- we -- the best companies in the world are designed and managed on our platform, but they were designed in the engineering department versus the C-suite knowing what value we bring. And now with this advanced capability with the combination of ALM, we have a whole new talk track that we can bring to the C-suite, creates extra value and is a great expansion value for them and for us.

Are you seeing particular industries moving first? So in other words, who are the early movers to really kind of capitalize on that trend?

We had a banner Q4 in terms of demand capture. And we mentioned that on the earnings call. And the flavor of those deals are actually interesting multiproduct adoption within the customer base, but also all different industries. So whether it be med tech, we saw a huge PLM displacement win that we got in Q4 with a large global med tech firm that finally said, we need to have this integrated ServiceMax solution to Windchill to create faster throughput of our product data to engineer things more in a robust manner.

We saw that.

We saw interestingly a Tier 1 automotive supplier, which if you read the headlines, you say, why is a Tier 1 automotive supplier driving this amount of investment to create product data foundation using PTC. The reason is they're also now thinking about how do they remain competitive? And they've understood that the only way you remain competitive is how do you harness the value of your IP, which is product data, and that ultimately comes back to PTC. Industrial manufacturers, same thing, right? They're all progressing and thinking about how do I stay relevant in this world of competitiveness with how the Chinese are manufacturing and developing things with how do we keep up with what if others are using AI to move faster. And that's causing this renaissance that we're talking about and the opportunity that we all are energized by for PTC to serve.

Makes sense. Rob mentioned ALM as well. I mean PTC was an early mover in ALM years ago. Maybe for those that are not as familiar, kind of what is the ALM opportunity? And where are you in the journey?

I'll start. ALM is application life cycle management. So software engineers, which has now become a very prominent part of the companies that build great products because as we all know, software is now becoming a critical component of how we relate to products that are hardware mechanical in nature. And the integration of those 2 are important in terms of speed by which development could actually be manufactured, right? So what our tool Codebeamer is the tool that we have in ALM does is it actually aggregates all the software requirements, test cases, traceability for anything developed in software that needs to be integrated with a mechanical part of a product.

It's a huge differentiator for us because the integration of Windchill and Codebeamer is something the market just doesn't have. We're the only ones that do it at that type of scale with that type of capability. And we believe a world that is continuing to add more software emphasis to hardware products to have faster throughput is a fundamental driver of people, as we mentioned on the Q4 call, the largest Codebeamer deal in the history of the company is because of this tailwind that we're seeing with customers needing to adopt these solutions.

So it has its own growth momentum, but it also has some pull-through because in situations where we're in there and there's a different PLM now, they're looking at because of the Codebeamer play, they're looking at what it means to adopt our PLM. And that's been not easy to do, have those replacements. So it's been meaningful for the customer because there's benefits to having that integrated solution and there's obviously benefits to us.

So an example is we just press released Garrett Automotive, which does all the turbochargers of the world is like pretty much what Garrett does. They chose us. They were an Onshape customer. They chose us for Windchill+, our SaaS solution and Codebeamer. And the reason of an incumbent and off of like a very competitive process. And the core differentiator was the integration of Onshape into Windchill, but a major one was they as a customer need to add software capabilities and Codebeamer integrated with Windchill was the core differentiator against every other PLM system regardless of economics, that capability is a very strong impetus for the movement towards us.

So you mentioned that you're the only one in market at that scale, but companies obviously are producing this capability. So if they're not using you, kind of how are they doing it?

It's almost -- it's a bit disconcerning is the answer, which is we're giving these incredible people doing incredible things for these products our families rely upon with really antiquated tools. And an example is Codebeamer. We mentioned our largest deal. Customers are using Excel spreadsheets to do requirements management for software development. Like it's -- by the way, in PLM, manufacturing engineers, quality engineers are using manual processes, paper and pen in some cases to actually think about how do you actually provide feedback loops so that there's traceability of products. And so that's like such a great energy inspiration for the company around let's give them the best tools. And in order to give them the best tools, you have to choose PTC in our humble opinion, and they are doing so.

So let's maybe round out the -- we've hit all the major pillars, except for SLM. Let's talk about something near and dear to your heart. Kind of what's the strategic fit? And where are we in kind of manifesting that opportunity that was seen through the original acquisition?

The vision that we have and everything that we do is centered around how to like execute across that vision faster and better. And the intelligent product life cycle is a core tenet of how do you actually put as much data into this product data foundation to make as rich as possible, contextual as possible for customers to like build products faster, more reliably at a better cost structure. Service data, interestingly, an input into the design process or into the configuration management process is very critical. It's a very rich source of data around what actually happens to the product after it gets manufactured.

And so strategically, ServiceMax actually makes the product data foundation even stronger. It's a core differentiator versus our competitors. As we apply then AI, as we apply agents to interrogate this data, we believe it's a huge differentiator for the business. And we're continuing to plot forward around that promise. And ultimately, as Rob said, the work he's been doing around raising the visibility of PTC, telling the C-suite that in order to adopt and get these values, you need to think across systems. Having that viewpoint is very important to accelerate the ServiceMax promise when the company bought the company I was at, to accelerate that, that actually messaging needs to resonate and the product development road map needs to coincide which it is.

Users are happy to hear that the number of times that being out in the field and they're going through a maintenance process going, what were the engineers thinking when they position this, I have to remove this, this and this, just to get access to. So it's great to hear.

Maybe along those lines, where are those kind of lighthouse accounts that have kind of deployed across the whole intelligent product life cycle? And is there -- are you at that point? Or is it still a little bit early to be able to point to them to go to your other customers and say, "Hey, here's the real-world benefits that this customer is seeing because of adopting the whole intelligent product life cycle?

Yes. I mean we have multiple accounts in each -- as you know, part of this transformation that occurred in the go-to-market play here was we organized by industry. So we could start to have much stronger use cases and stories around what happens by industry. So in every one, we have a pretty good version of that. But even in the best ones, if you think -- one I want to name, I can't because we just filled in the last gap of it this past quarter, and we're preparing to make an announcement around that, but it's in the med tech space. It's a significant player. Even in the places where they've made that first step and they see the value, they still have some organizational change to go through also. So this is not -- even where the customer, the C-suite sees the value, we've got work to do in terms of the data migration and how we move the teams to even actually begin to interact with the solution. So it's the beginning of the journey for sure, but we have some great initial traction on this. And when you start to layer in more strength in the AI use cases on top of that IPL, I think you're going to start to see bigger and wider announcements from us in some of these real lighthouse accounts.

I want to hit one more topic, and then I want to give the audience an opportunity to ask questions as well. AI, just you sprinkled it in some of your answers already, but maybe put a fine point on articulating where are you deploying AI for not only the internal use case to improve just the way you're running PTC, but also where -- what's the strategy in terms of the deployment and delivery of AI throughout the product set to drive benefits for your customers?

We've been hard at work on this one, and you saw a number of releases earlier this week, we announced that Arena, which is our cloud-based PLM system, very advanced AI capability. ServiceMax has had very advanced AI capabilities. They're really progressed on the agent structure as well within ServiceMax. You're going to see Codebeamer AI, Windchill AI come up here very shortly this year and then a continued release of all the things we're learning around those capabilities. I will say that the cloud -- native cloud products that we have in ServiceMax, Onshape, which is another place where we've released a number of AI embedded capabilities, they're moving at pace, Arena included because you could iterate fast with the release cycles.

We're going to do the same with Windchill+ and Codebeamer+ and Creo+, but we see embedded AI as one capability that our customers are like coming at us at a lot of rigor around give us these use cases generating AI. As an example, Codebeamer, where test cases are created. Codebeamer AI will automate those test cases, the requirements, and it's massive value in terms of time loss on actually having those capabilities. So there will be an assist in an advise capability of AI that we're doing in ServiceMax's capabilities. They're autonomizing. They're making autonomous functions of workflows using agents, that will also be the theme that we think about doing as a framework with a semantic layer and ontology layer across the domain expertise we have across CAD, PLM, ALM and SLM.

And just a quick follow-on to that, and then we'll go to the audience. Investors are trying to really get a good understanding as you deploy that AI capability, how much of that is just competitive differentiation to extend the durability of your current growth profile? How much of that maybe changes some of the business model and creates an incremental monetization opportunity with your customers?

We're testing it all out. Right now, our view is, at least for the near term, is this creates a necessary competitive differentiation, right, for our product set. we're testing out utilizations. We're testing out token-based with ServiceMax and others where consumption-based models to think about like what the upside looks like. We believe over time, there will be a hybrid of those. We're all learning, right, and we're staying abreast of it. But the good news about PTC is we are working hand in hand. Our customers are coming to us saying, we've tried all these other solutions. We POC these others, foundational models, others that are trying to use your data or PLM and CAD data, they have not been able to give us good outcomes. And we realize that you have the domain expertise of what happens with 3D geometry in a CAD tool. We want to build it together with you. Same thing with PLM, same thing with ALM. And so we feel compelled about that going forward.

Let me see any questions from the audience? Well, let's talk a little bit about -- it's always been my thought, if we look at the early days, deploying a design tool in the cloud was tough because of latency. My friends that are design engineers, just that fractional delay would drive them nuts. But we've seen performance get better. But more importantly, with the layering on of AI, it would feel like the shift to the cloud might finally see an acceleration of shift as it's the perfect place given where compute is to be able to sit there and say, "Hey, if I can use an AI design tool setting the parameters, et cetera, where I can just set it focus on something, come back, see the results and iterate that way. It seems like it's the perfect setup for it. So it feels like the technology is finally starting to come together to drive that evolution more to the cloud. Are you seeing that in reality yet? And kind of where are we in that journey?

Yes. I mean I think from the perspective of the functionality coming even in the past 12 months coming a long way, I would say definitely, that's happening. The AI play that you mentioned is, of course, very real. We have AI available to all of our customers, whether they're on-prem or in the cloud. But in the cloud, they get faster releases and they get access to it 4 times a year versus once a year. One of the main challenges -- so there is no latency issue, by the way. The main challenge is the customizations that have been built over the many years at the customer on-prem and that they now have to have their own organizational change to bring that in. And in some cases, we can make the customizations part of the standard product because they're good global enhancements. But in some of these larger ones where they have 80 customizations, and we're only willing to put 30 into the product. And they still, by the way, very much want to remove all the customizations because they believe it slows them down, they still have to go through that process. And that's not just, hey, we decided to do it today. They got to get a lot of other people and they have to make sure they don't impact or disrupt their own engineering output process. So the challenge actually isn't the solution itself. And there is definitely a draw around the AI possibilities. What we're working through in addition to continuing to enhance the product and the UI and all the speed and the features is how do we help them come along faster and sort of wean them off of those with organizational change and just understanding what the impacts are when they get to the other side.

So the good news on this to add to Rob's point is that we've always since we started, right? I've always said it's an inevitably we'll get most of this base to the cloud. That's still our point of view. By the way, we invested into that. What we've also been consistent in saying is that these deployments need to start getting easier and in repeat mode, right, so that the market sees this, and we have the confidence and the infrastructure built to actually do that. So we're working through making it easier over the course of this year, next year as we're getting more at-bats, which we have been getting a lot more at-bats. And then adding AI is actually a very nice tailwind to really accelerating that potentially.

I also want to -- Rob, I want to shift and spend a quick minute. About a year ago, I think you went through a little bit more of a kind of go-to-market transformation. Give us an update. Where are you in that journey? Do you feel comfortable with that the changes that have been made have settled in? Are there further tweaks that are necessary?

Yes. Thanks for an opportunity to talk about that. The team did a phenomenal job, I think, starting in January of creating this total shift to industry verticals. And so we went into 5 industry verticals from basically running as a pure horizontal across the industries we serve. And at the same time, we had a territory rebound. So we have some very significant accounts with multiyear relationships. And in some of those cases, we moved those accounts we tried to have as little of that type of disruption as possible, but we had to create more opportunity because it was just an imbalance where you have 20 accounts under one person. There's no way they could service those.

I would say the team did a phenomenal job of not only accepting those changes, but really leaning into those changes because we did that over probably a 3-month period, January, February, March. Right when we got everyone kind of settled, okay, here's my accounts. I've reached out. We've had conversations. Liberation day hit right after that. And so it was a significant disruption, call it, in the conversation. It was also an opportunity, and they took full advantage of it. And so the quick answer is I think they handled it very well and they handled it with professionalism and now we're -- we never had instability actually because we delivered all the quarters along the way.

And now we're set up very well for this next phase for actual elevated messaging by industry vertical, we can recruit into those verticals, get better talent. The talent that was great can now focus on the things that they're really good at. In addition to that, we put a lot of operational rigor in. We had our first global kickoff in 8 years in October within 2 weeks of ending one of our greatest fiscal bookings quarters that we've had ever. Within 2 weeks, we have had a global kickoff to which we actually invited all of the top partners. We never have done that before. We had 200 partners in the room. And they heard the message clear from us. There was no place that was off limit. They didn't have a separate partner track. They were in the room with us. When by the time all those folks went home, they had their comp plans, they had their territories, they had their incentives lined up for the year within 2 weeks of the best quarter we ever had. So there was -- I feel like they've accepted it well. I feel like we're in a very good position to tackle the new challenges and opportunities of the year versus dealing with the old self-inflicted ones.

That's great. So with that kind of in the rearview mirror, Neil, as CEO, how are you kind of prioritizing your strategic efforts? What are your strategic priorities from here moving forward?

We have a very clear vision. We've clarified the product portfolio. As you know, we've announced a divestiture of capabilities that are much better suited in other folks' hands so that we could 100% align on achieving for our customers an intelligent product life cycle vision. And all the work that we've been doing on go-to-market transformation, product innovation, AI embeddedness, the layer that will have agents interoperate across our core systems, in addition to making sure my team is given all the support as Jen comes into bear to build on the momentum that I could feel and sense with the existing team is going to be critical to our success. So this is a very fundamental year on a lot of tough decisions made over the last 2 years. This is a year of chop and wood. We have our direction. We have our North Star. We have our customers urgently needing us to be the best given the amazing things that are happening in the world right now. And this is the time when PTC is going to rise to the occasion. This is the stage of that journey that we're in.

I love to hear that. How does the macro backdrop play into that?

We have a philosophy as a leadership team is like we can't dictate what's going to happen in the macro. We could just keep doing what we're doing. And I do have a point of view, though, that despite the noise in the macro that this is causing a greater urgency, again, for our end markets who have not digitally transformed to stay relevant to actually think more materially about digitally transforming. And hence, why we feel energized about the opportunity in front of us.

And then how did that kind of build into the guidance that you gave? So wrapping the strategic and the macro, you gave some ranges out there. What was kind of the bottoms-up build there?

Yes. So assuming -- which we are assuming there's going to be a close of this transaction, we've got a 7.5% to 9.5% range on ARR. Let's say at the lower end, I just want to be very respectful of the fact that none of us really predicted anything that happened last year, if that happens again this year, I want to make sure I have an understanding of what that looks like at the lowest end, right, of the guidance.

Two is like having a 10-plus year part of the business being divested, has taken a lot of work last year to even get to this point and from now to close to make sure like there's no disruption at all on accounts that we're working on that are commingled here, want to take that account. On the high end, continued, you could see Rob and his team have been hitting stride in Q4. As they continue to hit stride over the course of this year, that plus the macro not getting worse is actually allows us to feel good about as we think about the range of the year.

Lastly, the structuring of these deals, right, whether it's a hiring quarter start or ramp deals can swing the numbers here from an in-year perspective. But our main thrust, maybe to summarize is this demand capture that we showed, and it was a really confidence inspiring for all of us at the company quarter, as that continues to formulate with the hard work the go-to-market leadership team has put into place, that's what we're focused in on because that's what the opportunity looks like. And at the same time, keeping the financial discipline that we've had for multiple years that we will continue moving forward and continue this great capital allocation strategy we put into place over the course of last year when I started to this year, and it will continue.

All right. With that, Neil, Rob, thank you so much. Really appreciate it.

Thank you.

Thank you.

All right. Making our way through the home stretch here on day 1. Thanks, everybody, again, as always. With us right now, Kristian Talvitie, CFO of PTC; and Matt Shimano. IR in the front row. Thanks, Matt. Kristian, for coming, as always.

Thanks for having us.

Yes. Your support has been unwavering through the year, so I do appreciate the attendance.

As is yours.

Let's -- generally, we start with kind of an overview of sort of what you guys just reported a couple of weeks ago. But top of mind that I just keep getting asked is some of the divestitures that you just announced. And we'll get into some of the overall underlying performance of the business. But maybe just starting with Kepware and ThingWorx. Could you talk about sort of the rationale? Strategically, there was a lot of effort, as you know, put into those deals back in the day. But I think the direction of those businesses has gone a little different than the core. Talk about some of the rationale behind these, and then we'll talk about some of the financial impacts.

Yes, sure. Happy to do so. But before we get started, my General Counsel would be very upset with me if I didn't remind everybody about our safe harbor language and forward-looking statement cautionary language that's all documented in a very detailed fashion in our press releases and on the website, files on file Forms 8-K and 10-K on file with the SEC. So please do take a look at those. But on to your question, the strategic rationale. So I think Neil has been in the CEO seat now for coming up on 2 years here soon.

And I think he's been pretty unwavering from the beginning on what -- in his view, the core priorities of the business are and the strategy of the company is, which really revolves around CAD, PLM, ALM and SLM with underpinning or foundation of SaaS as a delivery model as well as AI embedded in the products. And you'll notice what I didn't really talk about there was IoT was IoT. And so we have been refocusing on the core and on the core priorities and think that it actually just made strategic sense to find a home for those businesses because they are good businesses, probably just better served for our customers in the hands of somebody who is focused on that part of the market.

And so that's what we intended to do, which also provides strategic focus and clarity for the folks at PTC with everybody focusing on the kind of the core strategy, which is good for our customers and again, good for the IoT business as well with that kind of focus coming from the right owner. And so we undertook a process. It was a full process. narrowed it down to a handful of participants and ultimately determined that TPG was the right owner for this business.

That's great. Yes. And I guess I think you just gave fiscal '26 guidance both with and without. When we think even longer term, when we think about sort of how -- specifically on, I guess, both ARR and cash flow, what are sort of the longer-term implications of this? Do you think we -- I mean, ultimately like slightly higher growth, better profitability longer term? Like what's sort of the longer-term ramifications of this?

Yes. I think that there's -- I think it's clear even from our earnings materials that in recent years relative to the rest of the core portfolio, this business has been a drag, if you will, on growth. And so I think that, that is helpful over the longer term. In terms of the profitability of the business, I think that by now at this time with the sale of the business, the profitability of that business is largely in line with the broader company. So I think we tried to outline that as best we could. Again, in the earnings materials, I think in fiscal '25, we estimate that it contributed approximately $70 million of free cash flow.

I think the way to think about that for '26, '27 and beyond is in fiscal '26, again, depending a little bit on the timing of the close, but we had an assumption around April 1 that it would actually be free cash flow neutral in '26 because, a, timing of collections; and b, as part of the transaction, we expect there will also be a period where there's kind of transaction -- transition services attend that transaction as the business migrates. And I think for the balance of '26, that will largely offset the cash flow differential in '26. I think in '27, we also said probably less than a $50 million impact to cash flows in '27.

Okay. So building that bridge, and you did a good job in the deck, but just to reiterate, you're talking about sort of including those businesses, still $1 billion-ish of free cash flow. In '26, obviously, that comes steps down a little bit. But how should we think about sort of like getting back to those levels as we sort of like anniversary this and move forward?

Yes. So I think that -- I mean, this would be my mental model. This year, I think we'll do about $1 billion of free cash flow, less somewhere in the ballpark of about $160 million, which is made up of taxes on the proceeds as well as divestiture-related fees. And so then as we start thinking about '27, in my mental model, I would actually start building off of the $1 billion. We then have the offset of kind of less than $50 million, which is left over from the transaction or the businesses, excuse me.

And then I would probably add back still the $20 million of kind of CapEx -- incremental CapEx that we have this year in fiscal '26 as we move one of our -- actually our largest R&D center from one office into a new office. So like that I do not expect to recur next year. So I would kind of be building off of that, I guess, the rough math is 970 level.

Yes. Okay. Helpful. Now on the ARR side, you've always given a lot of thought to how you think about guidance, sort of the high end, low end of the range. And it feels like that low end is completely derisked. I guess taking the glass half side of it, what gets you to the higher end of that range? Macro is obviously a bit of a wildcard. But what are these things that you look for? You're like, well, this could actually -- let's think positivity here, Matt and I were just talking about the volatility of this market. But like what gets you to that higher end of the range in '26?

Yes. So I mean, I think just bracketing the guidance range in general, right? I think we -- Neil tried to do a pretty articulate job on the call of saying the low end actually accounts for some deterioration in macro, also tries to take into account potential disruption from the divestiture and the higher end of the range, I think, contemplates some continued positive momentum from some of the go-to-market evolution that we started embarking on last year. And then embedded within that range as well is the kind of deal structure volatility that we can see from quarter-to-quarter, which -- it's just part of the business that we operate.

Yes. What -- so the go-to-market changes, it strikes us that, that verticalization approach should start paying dividends. And maybe you're already seeing it manifest itself. How should we think about the benefit of that as we sort of anniversary these changes and start to think about how that sales force can be better aligned to target the opportunity?

Yes, I think that's right. And I think that it isn't just the sales force being aligned, and we always talk about it as go-to-market because it isn't just the salespeople, but it's sales and marketing and customer success, right, technical resources, all aligned around verticals and all focused on those customers in those verticals. And -- so I think I agree that, that is the right direction for us to be moving in. I think we've seen good progress. I think we saw -- it's difficult for me to point to any disruption that we saw last year, well, implementing these changes.

And now it's a matter of really starting to see some of the benefits of executing on those changes. And then I would say, just to remind you that a lot of the sales cycles for PLM, ALM, right, larger enterprise deals, those sales cycles can run 9, 18 months, sometimes even longer. So it is going to take a little bit of time for that momentum to catch up and build there. But that's where we left room for improved velocity in the high end of the range.

And we talked about this when you reported, but are there -- the significant changes really were made last year. As you're sitting in this Q1, there's always tweaks as the sales force is want to do. But is there anything that you'd highlight that you sort of like we should be aware of in terms of anything incremental that could cause either some potential volatility or even opportunity?

No. I mean, apart from normal tweaks, tweaking compensation plans, tweaking territories, et cetera. I mean, of course, the disruption -- potential disruption from the divestiture, I covered that.

Yes. Yes. Okay. I want to drill on a couple of the businesses, but AI has obviously been a huge focus for the industry and for PTC for quite some time. I mean you guys -- like most organizations have been talking about AI before it was really given a name by the market. How are you helping customers think through leveraging this technology across the various businesses?

And how do you think from a CFO seat, what does that mean from a monetization standpoint? Do you see there's an incremental opportunity with value that you were able to think about monetization differently or charge more or seeing higher commits? How do we think about AI layering into the model?

Yes. It's a really interesting question and interesting times that we live in. I think our view is that AI can definitely help our customers with their product development processes overall. And we talk about it as the intelligent product life cycle. And so there's a few different components to it. One, which we think is somewhat foundational is making sure that they actually have their data house in order, as we like to say. And a lot of that revolves around making sure that their data is in a PLM system and is clean and readily usable, if you will, by AI.

And then -- so that's one whole part of the digital transformation that a lot of companies are going through anyways. And then on top of that, you want to start thinking about, well, what is the AI functionality that we can bring to bear for our customers. And I think the way that we like to talk about that is advise, assist and eventually automate. And so how can you -- if you think about those 3 words and how that works in a product development workflow and broadly across an enterprise, how does advise assist and ultimately automate work, which is making sure that engineers are able to find the right parts in a speedy fashion and the right parts or share information across department lines or other silos into regulatory or into quality departments.

And so how can we help companies, again, find the right information, provide context around that information that's useful to them. So I think that's one way to do it with the advice and the assist and then ultimately automate will also come across disciplines, if you will. So if you think about AI and Windchill, there's -- that's just within the Windchill application and AI and ServiceMax and AI and whatever Codebeamer, but none of those systems really operate as silos and they actually all interact with other systems. In some cases, it's ERP systems or MES systems and so on. So can we bring to bear technology that is going to help that data sharing across those platform silos and even outside of kind of PTC's technology stack and into other technology stacks. They are vital to the whole product life cycle.

And then from a monetization standpoint, how do you -- because that's sort of the question is like it's great that we're providing AF features. But like is it table stakes? Is it incremental to the growth opportunity? How do you kind of think about that element?

Yes. So on monetization in general, I mean, just a general observation, I would think, as you know, we went from perpetual to subscription, subscription now to SaaS and ultimately AI. And going from perpetual to subscription allows you certain options with pricing, like you think about token models and so on and so forth, just even if it's on-prem subscription, going to SaaS opens that aperture up even further, and you can start thinking about consumption-type models. And again, with meter spinning and with AI, it obviously brings similar opportunities.

That said, for right now, and it's still very early days for PTC. But right now, we've actually still gone with a kind of seat-based pricing even for the AI parts that we have out in the market. And again, it's so early that I think we're actually kind of just trying to figure out what is the way that customers actually want to consume. And so right now, we're trying to make sure we have the right value prop and a reasonable price point and then we'll continue to fine-tune based on customer requirements, the best way to price it.

So I mean, does that imply as you learn and as you continue to develop, there could be more of a consumption element to some of these.

We'll look at it Sure.

Yes. Yes. And is there much of a network effect? Because I think a lot of times, there's a real concern about customer data and privacy and training models on customers' data. But is there a broader network effect where the sort of the sum of the parts of the platform provides an overall sort of like higher buyer functionality for every customer? Or is it still very siloed in sort of how you think about leveraging data?

I would -- our customers tend to be very protective of their product IP.

Yes. Yes. And then in terms of SaaS, we've been talking about that for a while, and you guys have made quite a bit of advancements, not only just in Onshape and things like that, but also the core Windchill+ and Creo+. Talk about just -- and I think with AI, SaaS gets sort of like left behind in a lot of the conversations, but talk about sort of how -- where we are in that progression. You guys have never talked about like a forced transition and you're very sort of open to customers how they want to consume the product. But is -- do you feel like you still have that lead from a SaaS perspective? Because it really felt like you guys were far in front of most of your primary competitors from a SaaS perspective. Where are we in that sort of arms race from a SaaS perspective?

Yes. I think SaaS is still an underpinning of the intelligent product life cycle as we talk about and you see it on our slides. So in that sense, it's very much still part of the strategy. I think that you're right, I don't think we're going to go to a forced model and force a customer to consume the software in one way or another. But we are seeing consistent momentum with customers who do want to migrate, and we want to make sure that we have best-in-class offerings for them to migrate to.

Okay. Okay. And then ultimately, what I want to -- where I want to go is sort of how to think about a layer cake of growth with your various businesses. But ServiceMax, I think, Matt, we've had a number of conversations on this, too. It just it feels like such -- like if you're not using your guys ServiceMax or SLM, I don't know what your customers are doing. And so maybe that's the question. Like I mean, it feels like the cross-sell opportunity is so ripe and there. And obviously, you guys have a lot of initiatives across the entire business. But what's the unlock for ServiceMax?

Yes. I think that is -- I think that's right. I think we're still very much behind the strategy as initially laid out as part of the intelligent product life cycle and thinking about design through to service and the synergies that you get by sharing information back and forth or up and down that stack or the synergies that a customer would get by doing that. I think that last year, ServiceMax had a couple of headwinds. There were some leadership changes, particularly on the go-to-market side that happened. And then subsequently, we've also had some idiosyncratic churn events really on the ServiceMax side.

From a customer perspective?

Yes, there were just some unique -- no identifiable trend, unique kind of onetime events, somebody acquired somebody and they had a different strategy. And so there you have it. That's what we mean by idiosyncratic. And so it had a difficult year. I think that we'll continue to see some of that headwind into the first half of this fiscal year. But on the flip side, the momentum of kind of pipeline build and new business being booked, that we're starting to see that turn the corner.

That's great.

That is good.

You guys have so many businesses. We don't have time to go through all of them, but you've always been such great at these like mental models of thinking about, okay, here's how I think about cash flow build. And you've been very, very accurate in some of those builds over the years. Do you -- when you think about like that ARR build, is there a mental model that you're like, well, I think about a couple -- 3 points from PLM, a couple of points from Cat. Like is there some way that we should think about like a build or a layer cake to kind of get to, call it, high single-digit ARR growth?

Yes, that's a great question. And I think that we should probably take that and try to articulate that more clearly like an Investor Day, I think, would be an ideal.

Maybe said differently then, if you were to say, when we think about the growth element of the business, what are some of the -- what are you most -- and obviously, you come with a conservative lens as a CMO. But like what are some of these big blocks that can move that can start to drive -- again, it kind of gets back to that question about like the higher end of the growth algorithm this year.

Yes. I mean, again, I think a lot of it -- I mean here, I would say that the vast majority of things that we're doing is to actually try and drive growth in our net new ARR, right? And I would bucket it into maybe 3 broad categories. One is on the product side. And we've been investing pretty heavily in R&D over the past few years. We've almost doubled our annual R&D spend over the last 5 years or so. And that is really all in support of our customers and trying to bring to market capabilities that are going to drive growth.

And that includes things like investing in the SaaS transition, like investing in tighter integration between ALM and PLM because we're hearing that from a lot of customers that, that would be super valuable to them and like investing in AI that we kind of just talked about. So there's a whole set of kind of product initiatives underway. There's a go-to-market evolution that we've been talking about, which is really all about us being better equipped to serve our customers, how we're going to market, how we're helping them.

And that actually spans both across PTC's direct sales force as well as our channel partners, which are a broad extension of our sellers, right? And they represent about 1/4 of our ARR. So it's like it's an important route to market for us. And so again, trying to work across those vectors to make sure we've got the right kind of account coverage, the right kind of messaging that's going to resonate with customers so that we can help them. And then in the last piece, the last bucket, I would put it into commercial optimization.

And that's been an ongoing process for a number of years at PTC. I think if you went back and looked at our churn in 2019, I think it was around 9%, a little over 9%. That has now come down. It's pretty well below 5% for the last couple of years. I expect it to be this year as well. And so I think there's just incremental opportunity for us to continue to improve on that part of the execution as well. So I mean, there's kind of 3 buckets there.

That's great. The other thing that capital allocation is always a subject near and dear to your heart in terms of thinking about deploying this cash. And you made a pretty significant change in how you think about maintaining cash balances. I forget when that was actually put in place, but it felt like you've certainly amped up the commitment to buy -- how do you think about with these cash flow levels, that balance between buyback, M&A, investing back in the business, how should we think about that? And I guess, specifically on the buyback element. It feels like with some of the proceeds here, there's going to be some significant activity on that front.

Yes. I think maybe the way I would try to articulate our philosophy, if we start with a couple of basic tenets. One, we believe that PTC should operate in a net debt position. And that's where we are now. We've done a -- I think we've done a very good job at bringing the debt levels that we've had down. So I think we're pretty good on that front. And as you said, kind of the cash balance just because of the subscription nature of the business and the predictability of the cash inflows and cash outflows, we definitely want to try to maintain as low a cash balance as we can.

And I think that's been helpful over the past few years. We brought that down from, I don't know, call it, $350 million on average to -- I think we ended last quarter at about $185 million round numbers in terms of a cash balance, and we'll try to maintain a low cash balance. So with those 2 caveats in place, then the free cash flow that we generate, I think either. That would go towards any kind of M&A that we might want to do, which tends to be more focused now on kind of smaller technology tuck-ins that support the core. And to the extent that we don't use any of it for that, I would expect that we return the rest to shareholders via share repurchases.

So does that -- with the divestitures, that also -- it sort of implies that there's no big gaps that you're looking for right now. It feels more that you're sort of signaling more of these strategic tuck-ins as opposed to another ServiceMax or something of that nature.

Yes. I'll say it this way. That may be a little above my pay grade, but as best as I understand it.

Yes. So when we -- as we close here, I mean, it feels like, ultimately, the algorithm is the top line growth is it's a fairly tight range depending on the economic circumstances. The margin expansion is there. The buybacks are there. It feels like cash flow growth per share should continue to outpace sort of the ARR growth element. And is that sort of the right way to think about how you are kind of calibrating the business is kind of like thinking about free cash flow per share growth?

I think that's right, yes.

Yes. And ultimately, I think that's -- I mean, we've covered PTC for a long time, and we've always felt that there's a bit of a valuation gap with some of your peers. And it feels like as you continue to grow that cash flow per share at an accelerated rate, it feels like the market should reward that. but that -- it feels like that's the kind of the balance of growth and profitability that we should think about.

Yes.

Excellent. Well, we are out of time. Just hoping to get a question in from the audience, but we was we didn't even talk about a handful of items. But thanks again, Kristian. Thanks, Matt, for being here. It's always best of luck.

Thank you.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2025 Fourth Quarter Conference Call. [Operator Instructions]

I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, operator, and welcome to PTC's Fourth Quarter and Fiscal Year 2025 Conference Call. On the call today are Neil Barua, Chief Executive Officer; Kristian Talvitie, Chief Financial Officer; and Robert Dahdah, Chief Revenue Officer.

Today's conference call is being broadcast live through an audio webcast and a replay of the call will be available later today at www.ptc.com.

During this call, PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission as well as in today's press release.

The forward-looking statements, including guidance provided during this call are valid only as of today's date, November 5, 2025, and PTC assumes no obligation to update these forward-looking statements.

During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.

With that, I'd like to turn the call over to PTC's Chief Executive Officer, Neil Barua.

Thank you, Matt, and good afternoon, everyone. I'll begin by addressing the press release we issued earlier today regarding the definitive agreement we've reached for TPG to acquire our Kepware and ThingWorx businesses. This is exciting news for us. For our Kepware and ThingWorx customers, this move is designed to enhance the value of these products deliver.

By partnering with TPG, Kepware and ThingWorx gained additional investment, expertise and operational focus, all for the businesses to continue growing and delivering more for customers.

For PTC, this move increases our focus on the area central to our intelligent product life cycle vision. CAD PLM, ALM and SLM and the growing emphasis on SaaS and AI.

With our resources and investment concentrated in these areas, we will continue helping our customers address some of their most pressing challenges by enabling them to fully leverage the value of their product data and to transform each stage of life cycle.

When the transaction closes, we will maintain a close relationship with the Kepware and ThingWorx businesses to ensure a smooth transition. Kristian will walk you through more of the transaction details in a few minutes.

Turning to fiscal '25. Q4 was another quarter of solid execution. We delivered 8.5% constant currency ARR growth and 16% free cash flow growth year-over-year. Throughout the quarter, we were encouraged to see some of the early benefits from our go-to-market transformation show up operationally.

Our execution on large strategic agreements improved through better coordination between our sales, technical and customer success teams. We said on our Q3 call that we had a robust pipeline of large Q4 deals, and I'm proud to say we closed most of them.

The dynamics of these deals are encouraging in the context of our intelligent product life cycle vision and focus areas. We won our largest Codebeamer deal ever as a customer in the automotive vertical decided to move up legacy processes and invest in its next-gen product data foundation.

A large windshield competitive displacement win in the med tech vertical was alongside of ServiceMax expansion, reinforcing this customer's commitment to building a product data foundation and extending that data to other parts of the life cycle. We also won the largest Onshape delever. This was a competitive displacement with the customer embracing the workflow and collaboration benefits of a cloud-native SaaS offering. You could read more about our customer wins across verticals in our appendix slides.

ARR came in at the middle of our Q4 guidance range, which reflects the variability of the large deal structures we discussed in our Q3 call. Importantly, we ended the year with record deferred ARR under contract, providing strong visibility into fiscal 2016 and beyond. While not all of that converts immediately, it gives us confidence in our growth trajectory as these multiyear ramps activate.

In addition, our go-to-market teams are operating with great alignment across verticals and geos. We continue to execute on commercial optimization levels and the overall feedback from the field is very positive.

Our marketing messaging. Focus on our intelligent product life cycle vision is helping customers clearly see how our portfolio enables them to leverage their product data to transform with AI.

Finally, we appointed John Stephenson, an industry veteran, as Chief Product Officer. John is establishing a clear product operating rhythm to support our go-to-market motion and tightening product and R&D linkage to increase the pace and predictability of road map execution.

Overall, Q4 capped off a year of steady, disciplined execution during a volatile market environment. The go-to-market momentum we described last quarter didn't take, it accelerated. Our teams leaned into the transformation and strengthened customer relationships at the exact and we saw clear evidence of multiproduct adoption across verticals.

When we started the go-to-market transformation, we said it would take 18 to 24 months to hit full stride. Less than a year in, the factors we control are clearly moving in the right direction, and we are focused on making them more repeatable and sustainable in fiscal '20.

Regarding the outlook for fiscal '26. For ARR growth, we are guiding to a range of 7% to 9% with Kepware, ThingWorx; at 7.5% to 9.5% without Kepware and ThingWorx. We are also well on track to deliver $1 billion of free cash flow in fiscal '26, including Kepware and ThingWorx.

Regarding net new ARR, Q1 will be similar to last year. and we expect momentum to build through the year, supported by the shape of our pipeline and deferred ARR. The high end of our annual ARR range accounts for continued improvements in our go-to-market progression, minimal customer disruption from the Kepware and ThingWorx divestiture and a relatively steady macro environment. The low end of our annual ARR range accounts for some worsening in the macro environment and unexpected disruption from the divestiture. Variability in deal structures can also move us higher or lower in the range.

Our confidence in fiscal '26 is underpinned by our focus on our intelligent product life cycle vision. AI is cementing the importance of structured product data foundations and PTC is uniquely positioned to make these possible. Customers understand that applying AI to siloed or stale data doesn't work and are turning to PTC's portfolio to build their data foundation. This begins in engineering and other departments and functions across the life cycle.

AI is then applied to this contextual data and even more substantial transformations become possible for our customers. We're enhancing our CAD, PLM, ALM and SLM offerings to make it even easier to build a product data foundation, and we're embedding more AI. We've recently released new AI capabilities in ServiceMax, Servigistics, Onshape and Arena, and we have a strong Creo AI road map underway. We are also on track to release new versions of Windchill, Windchill+ and Codebeamer in the weeks ahead.

I would like to now turn to our capital allocation strategy. In fiscal '26 with our leverage below 1x, we expect to return excess cash to shareholders. We expect to buy back between $150 million and $250 million worth of shares per quarter during fiscal 2016, starting with $200 million in Q1.

Our capital allocation strategy remains disciplined and flexible as we will continue to make investments in R&D around our intelligent product life cycle vision and leave the door open for tuck-in acquisitions.

In summary, we feel momentum building. We're pleased to share today's news about Kepware and ThingWorx, and we're happy they're set up for success with TPG. And for PTC, we move with clarity and a purposeful direction with the entire company focused on delivering our intelligent product life cycle vision for customers.

With that, I'll turn the call over to Kristian.

Thanks, Neil, and hello, everyone. Starting off with Slide 6, I'd like to provide some more details on the Kepware and ThingWorx divestiture. The transaction is expected to close in the first half of calendar 2026, and our expected use of net after-tax proceeds will follow our overall capital allocation strategy of returning excess cash to shareholders while leaving room for any potential tuck-in acquisitions.

We could receive up to $725 million in total cash consideration if certain thresholds are achieved. We expect either $565 million or $600 million upfront, depending on performance during the period up to close. The $125 million future potential earn-out is based on certain criteria related to a potential future transaction by the buyer.

Assuming an April 1 close and a $565 million upfront payment, we would expect net upfront proceeds of approximately $365 million after working capital and indebtedness adjustments, divestiture-related fees and taxes related to the transaction.

Turning to Slide 7. In fiscal '25, ARR attributable to Kepware and ThingWorx was approximately $160 million, and constant currency ARR growth was negative 1%. Including perpetual license and professional services revenue, the revenue contribution of Kepware and ThingWorx was approximately $200 million. We estimate that approximately $70 million of free cash flows was attributable to Kepware and ThingWorx in fiscal '25.

For fiscal '26, we're providing constant currency ARR guidance for PTC, including and excluding Kepware and ThingWorx. ARR growth, excluding Kepware and ThingWorx, is expected to be 50 basis points higher. Also, for fiscal '26, we expect the Kepware and ThingWorx transaction will impact our as-reported free cash flow primarily due to onetime transaction-related items.

To illustrate, I'll take you through a model on Slide 8. Starting at the top with our $1 billion of free cash flow guidance for fiscal '26, which assumes Kepware and ThingWorx are a part of PTC for the full fiscal year. Assuming the transaction closes on April 1, 2026, we would expect lower net cash inflows related to Kepware and ThingWorx in the second half of fiscal '26. However, we would expect this to be largely offset by a transaction services agreement, which begins upon close. If the transaction closes sooner than expected, there could be a modest impact to free cash flow.

Related to the transaction, we expect to incur approximately $160 million of onetime cash outflows. Approximately $35 million of this relates to onetime divestiture-related fees and approximately $125 million relates to onetime cash taxes. We'll have more clarity on those items when the transaction closes, and we'll provide an update at that point. Remember, from an accounting perspective, the proceeds will show up in cash flow from investing, while taxes and divestiture-related costs will show up in operating cash flows.

Assuming an April 1, 2026, close, this model shows that our as-reported free cash flow would be approximately $840 million in fiscal '26. You will have clear visibility to the onetime cash outflows in our reporting, and we will officially update our guidance post close. But as we think about fiscal '27, we expect to be building off the approximately $1 billion we are guiding to this year and we'll need to factor in up to $50 million of headwinds from the divestiture, which is the run rate of Kepware and ThingWorx cash flows, partially offset by TSA income, which we expect to continue.

Moving to Slide 9 and a review of the results we just reported. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business. To help investors understand our business performance, excluding the impact of FX volatility, we provide ARR guidance and disclose our ARR results on a constant currency basis. At the end of Q4, our constant currency ARR using our fiscal '25 plan FX rates was $2.446 billion, up 8.5% year-over-year.

And while I know that we consistently tell investors to focus on ARR and free cash flow rather than revenue and operating income. Given some of the dynamics in the quarter, I do think that it's prudent to talk a little bit about the revenue beat versus the midpoint of our guidance range for the quarter and put this in context with our ARR results.

We came in at the midpoint of our guidance range for net new ARR in Q4. And as we discussed on our last call, the biggest variable between the high and low ends of the range was going to be deal structures. It certainly played out that way.

In Q4, our teams did a great job, and we contracted a record amount of customer commitments. Many of these were in the form of ramp deals, many included commercial optimization levers, and several new and renewing contracts came in with longer-than-anticipated term lines. In fact, our average term line in Q4 increased from approximately 2 years in Q4 of '24 to approximately 3 years in Q4 of '25.

The way revenue accounting works for on-prem subscriptions under ASC 606, we record approximately 50% of the total contract value when the deal starts, and we recognize the rest ratably over the term.

As was evident from our revenue guidance for Q4, we were expecting a healthy uptick in revenue, reflecting the mix of large multiyear renewals and large contracts in the pipeline. But what actually happened was that we beat the midpoint of our guidance range by $140 million and the high end by $110 million.

So going back to ARR. You'll recall that ARR is the best approximation of annual billings related to recurring contracts because it's aligned with the amount that we invoice the customer on an annual basis. And as far as future contractual commitments, well, in the ARR way of thinking, that is recorded as deferred ARR.

In the traditional P&L way of thinking, that shows up in RPO. And when we report our RPO in our 10-K, you'll see that it's up more than $550 million, both sequentially and on a year-over-year basis. But remember, not all of that turns into ARR or revenue in fiscal '26. There's additional deferred ARR in fiscal '27 and beyond as well. This should help explain why our revenue growth in the quarter significantly outpaced our ARR growth.

All in all, it was a solid quarter. with a lot of long-term positive impact that you don't see in our current ARR results or near-term outlook. The significant revenue beat is also what drove the significant EPS beat.

On the cash flow side of things, we generated $100 million of free cash flow in Q4. For the full fiscal year, our free cash flow was $857 million, up 16%. Note that the free cash flow we generated in fiscal '25 absorbed approximately $20 million of outflows related to our go-to-market realignment. Our 16% free cash flow growth in fiscal '25 illustrates the operating leverage we benefit from as our ARR grows. Another way to illustrate our operating leverage is through our operating efficiency percentage, which expanded by 310 basis points to 45% in fiscal '25 compared to 42% in fiscal '24. You can see this in our illustrative cash flow model on Slide 23.

Next, turning to Slide 10. Before I take you through our guidance, let me walk you through how we guide and report ARR. For fiscal '25, we provided constant currency ARR guidance and reported constant currency ARR results for all periods using our fiscal '25 planned FX rates, which were as of September 30, 2024. And for comparative purposes, at the same time last year, we also recast historical constant currency ARR amounts at our fiscal '25 planned FX rates.

For fiscal '26, we're taking the exact same approach with historical results, recast using our fiscal '26 planned FX rates, which are as of September 30, 2025. For new investors who may not be familiar with our approach, please reach out to me or Matt and we'd be happy to do a deep dive.

With that, I'll take you through our guidance on Slide 11. Because we don't know exactly when the Kepware and ThingWorx transaction will close, our guidance for fiscal '26 and Q1 '26 includes Kepware and ThingWorx for the full year. The exception is ARR, where we are additionally providing guidance that excludes Kepware and ThingWorx.

All the ARR amounts on this slide are based on our fiscal '26 planned FX rates. For constant currency ARR, excluding Kepware and ThingWorx, we expect growth of approximately 7.5% to approximately 9.5% in fiscal '26. For constant currency ARR, including Kepware and ThingWorx, we expect growth of approximately 7% to 9%.

Our ARR guidance is mindful of the efforts required to separate Kepware and ThingWorx as we push toward a closing expected in the first half of calendar 2026.

From a linearity perspective, we're expecting similar quarterly seasonality as in fiscal '25 for net new ARR. This primarily has to do with the shape of the pipeline, linearity of churn and the linearity of deferred ARR, which is heavily skewed to Q4 in fiscal '26. Note that our cash flow guidance is not on a constant currency basis. And to be clear, our business is currently constituted is on track to deliver approximately $1 billion of free cash flow in fiscal '26.

We have a high degree of confidence in our guidance for free cash flow due to the predictability of our cash collections and the disciplined budgeting structure we have in place. Importantly, we've maintained consistent billing practices over time. We build primarily upfront annually 1 year at a time, regardless of contract term lengths. So our free cash flow results over time are comparable. In fiscal '26, we expect similar invoicing seasonality compared to the previous 5 years based on this and our expected cash outflows we expect approximately 55% to 60% of our free cash flow to be generated in the first half of the year and for fiscal Q4 to be our lowest cash flow generation quarter.

Some of you may have noticed that our guidance assumption for CapEx is stepping up by approximately $20 million in fiscal '26, which is also absorbed in our guidance for free cash flow. We view this as onetime in nature because it's related to moving a major R&D center to a new office.

Although our focus is on ARR and free cash flow, we're providing revenue and EPS guidance to help you with your models. It's worth noting that our revenue guidance for fiscal '26 looks different from fiscal '25. We expect revenue to be up north of 10% in the first half, up in the mid-single digits in Q3 and to decline in Q4. This obviously reflects the dynamics I discussed earlier, with Q4 being down given the significant overperformance in Q4 of '25.

Moving on to Slide 12. Here's an illustrative constant currency ARR model for fiscal '26. Focusing on PTC, including Kepware and ThingWorx, the column on the right illustrates the midpoint of net new ARR growth that corresponds to our fiscal 2016 constant currency ARR guidance range of 7% to 9%. Consistent with my reminder from last quarter, we expect churn to remain low in fiscal '26 because our customers need to maintain subscriptions to our software to continue designing, producing and servicing the products.

Turning to Slide 13. Here's a similar illustrative model for Q1 of '26 focusing on PTC, including Kepware and ThingWorx, the column on the right illustrates the dollar range of Q1 26% sequential net new ARR growth that corresponds to our Q1 '26 constant currency ARR guidance range of 8% to 8.5%. As a reminder, Q1 is typically our lightest net new ARR quarter given normal renewal seasonality and the timing of larger enterprise transactions.

As I mentioned earlier, we expect similar linearity for net new ARR in fiscal '26 compared to fiscal '25. What's important, however, is what Neil mentioned earlier, that our demand capture remains healthy in a challenging macro environment, and we're entering the year with a stronger pipeline than when we started fiscal '25 and a solid deferred ARR balance which is heavily skewed to Q4.

As you know, our net new ARR can be somewhat volatile in any given quarter, given dynamics such as new or renewal bookings seasonality, timing of deferred ARR, starting how much of our new bookings in any given quarter starts in the quarter, how much churn we expect in any quarter, et cetera?

All of that said, we feel good about the state of the business, the focus on the intelligent product life cycle and its relevance to our customers as evidenced by our pipeline. We have many initiatives underway to capture the opportunity to drive net new ARR growth in the future.

With that, I'd like to turn the call back over to the operator for the Q&A session.

[Operator Instructions] Your first question comes from Ken Wong with Oppenheimer & Co.

Fantastic. Neil, congratulations on the divestiture of the IoT business. Perhaps you can give us some context behind the decision to move on from ThingWorx and Kepware. And then what should we, as investors, deemed to still be strategic in the portfolio? Are there any other products or components of the IoT business that still needs to be shut off?

Yes. Good to hear from you, Ken. So first off, on the decision process, as I've been saying for a couple of years now, we've been really focusing on putting the wood behind the arrows around the things that create the greatest customer opportunity and for PTC where we have the highest right to win. And we talked through all the core priorities, which has now formulate itself into this vision around the intelligent product life cycle.

And because of that and because of the needs and the requirements for our customers around execute across that vision, we decided to make sure that every single person in the company all our resources or attention are dedicated to executing across achieving that vision of the intelligent product cycle. And so that's the way we lend towards the strategic decision on saying, look, at the end of the day, tap where thing works, good businesses, great products, but quite frankly, TPG has a thesis of getting deeper onto the factory floor in operations. And those products will do very well under that framework, leaving PTC, the ability to really continue to deliver what hopefully you saw in Q4, Ken, around executing around our core priorities and just ramping up that focus and attention on it.

In terms of your second question around the strategic component of what we have left. I feel good as we sit here around the portfolio and how it relates to the intelligent product life cycle, how it relates to building a product data foundation for our customers how it relates to our ability to apply generative and agentic AI to that product data foundation and how to send that product data to other constituents of our customers like in the service department, et cetera. And so collectively, I feel good now that with the transaction closing, we have an ability now to fully focus all our portfolio and energy across -- executed across the intelligent product lifecycle vision that we laid out.

Your next question comes from Jason Celino with KeyBanc Capital Markets.

Great. I know a lot of moving parts, and it's somewhat a muted point because of the Kepware cash tax implications, but Kristian, the $1 billion free cash flow guidance, is there any way to know how much of a OBB benefit you're expected to see next fiscal year?

So there is some tailwind from the new Section 174 decision that was in OBDA that is included in that number. To be honest, we don't actually have to make the final decision on which of the 3 main doors, i.e., the all 1 year, 2 year or just let the amortization run out. Doors, we go through until later this fiscal year. Remember, though, that that's also offset, also included in that kind of $1 billion number is the incremental CapEx that we're seeing related to the transition of one of our largest R&D facility into a new office. So there's a bunch of puts and takes that go into that number. But certainly, the tailwind from Section 174 is included in that number.

Your next question comes from Clarke Jeffries with Piper Sandler.

I wanted to ask how you would characterize the push versus the pull with the deal structures this quarter. Did you feel like some of these customers were wanting to push out certainty and and maybe they wanted to make the commitment, but they didn't know what the next 12 months might hold for them, so they wanted to commit to a ramping deal or a longer duration agreement? Any color there would be helpful.

Sure, Clarke, good hear from you too. The -- so let me be clear, in Q4, as we mentioned on our Q3 call, we had a number of large transactions in the pipeline. As I mentioned in the upfront, we closed the majority of those and excellent execution by the team. We also mentioned that the variance in the ARR for Q4 would happen based on the variability of how the deals will get structured.

And in the larger deals, in some transactions, as we've noted, there was ramp deals. And those are committed, contracted elements of the deal, not -- maybe we'll spend the money. Those are contracted with PTC, and we chose to do the right thing for the customer and ourselves, which is execute and capture that demand and have a large set of deferred ARR as Kristian talked about in 2016 and even a larger set of net deferred ARR post-2026 with some of these deals that we captured within Q4. So we feel good about it. And it's -- ultimately, as we think about as stewards of the business, capturing the customer demand, having them commit to it, which is exactly what deferred ARR is, is what we're playing towards. The anomalies back and forth of what is in quarter star within a quarter or 2 is something that is important, but not as important as the capturing of the customer demand.

Your next question comes from Blair Abernethy with Rosenblatt Securities.

Congrats on the Kepware sale. I guess 2 things for me, Neil. First off, as you kind of move away from the factory floor a little bit here, how are you thinking about your TAM business, computer manufacturing side of things. Is that -- does this alter your view on that at all?

No, I actually feel better than I did about the addressable market that we're playing into with intended product life cycle than I did 2 years when I took the job. And the reason for it is that throughout the portfolio of building what we're calling the product data foundation with our CAD capabilities, with our ALM capabilities, with our PLM capabilities and then our SLM capabilities anchored by ServiceMax and Servigistics. When we think about that opportunity and where the customers are driving for their digital transformations to make sure product data is clarified across their enterprise and sent to the right constituents.

And then Blair adding on top AI to that product data foundation has so much breadth and capability for us to execute across. And you saw that again in the customer testimonies that we showed in Q4 around customers really acclimating to the strategy, wanting it and really energized about our AI strategy that is a part of the intelligent product life cycle. So Blair, I'm more thrilled than ever before starting today that we have executed across the ThingWorx, Kepware, put it in the right home because we got a lot of business to take care of here on our existing strategy across the intelligent product life cycle.

That's great. And if I could just slide in one for Kristian. Kristian, just kind of looking at your net new ARR growth of 194 last year, and you're saying midpoint, 195 this year. How are you feeling about the overall environment that you're going to book at the same kind of level, just kind of how do you sort of come that -- come to the number for '26?

Blair, I raise my hand. So let me take the front end of this, and then Kristian could add to it. The way we're looking at it is this approach of our guidance for '26, I would characterize as a disciplined approach to making sure you understand the dynamics of how we're thinking about this year. First off, we're benefited by a very strong committed deferred ARR entering this year versus what we had last year. So that is a strong set of ballast that we've got within a committed set of ARR coming into the business, predominantly in the second half of the year and predominantly in Q4, as we mentioned.

We also have been undertaking, as we mentioned, a go-to-market transmission that is about 9 to 10 months in the making, and we feel very strongly that we've moved the ball forward but still the work needs to now become a repetition and durable. And when we think about that, in light of the divestiture and, call it, the 6-month time period from today's announcement to close or 9 months in calendar year, but in that framework, we modeled out April 1.

When we take the context of all the work needed to talk to customers that are jointly looking at pipeline opportunities with ThingWorx, Kepware and other products, we took that into consideration and said, look, if there is disruption at all from this divestiture for the next 6 to 9 months and the macro gets worse than what it is right now, then there's a possibility of the low end being something that we all should consider. But if we're looking at the way the business is going right now and we think about the deferred ARR, the momentum that Rob and team have been building on the go to market and think about the customer pull that we're getting, the midpoint is actually with the macro not getting worse or better is a good way to look at it.

Now we have -- the reason why we're disciplined, we actually have line of sight to get to the high end of the guidance in terms of go-to-market progression continues to repeat, the greatness that we saw in Q4, builds on that and continues that process. The macro doesn't get weaker and tightened -- Kepware and ThingWorx actually doesn't become a distraction. We've got that range from a disciplined manner. So the good news is we're looking at it, we're being disciplined around our approach. We got a lot of hard work going to make sure this go-to-market transformation continues on the path it is. And we're working hard to make sure that results speak for themselves as we get into the course of this year.

Your next question comes from Matt Hedberg with RBC Capital Markets.

Great. Neil, it's been about a year since you put in the verticalized sales force. I'm curious, are there any other significant go-to-market changes that you're planning for this Q1? And how might that sort of vertical focus pay additional dividends as you get another year under your belt?

Yes. So I'll start and Rob sitting right here next to me ready to get called into this match here because he's excited to share with you what the plan is. But I will say that this year is about, as Rob mentioned, the foundation of the go-to-market transformation was set last year. The fundamentals of what he and team wants accomplished foundational set. He had an incredible kickoff the first time in 8 years at PTC, we had one a couple of weeks ago. And you could feel the energy and excitement around now let's execute across the Q4 momentum. Let's repeat it. Let's make sure it's consistent. Let's get the messaging consistent, let's get the C-level messaging and acknowledgment consistent. And I see Rob and the go-to-market team as let's keep repeating and scaling and making this durable. But I'll let Rob talk about exactly what he's thinking about as he enters this year?

Yes. So thanks for the question. As you know, we did do that alignment by vertical and industry, which was a really important move to set us up for growth. And that alone, just coming through that as the team did and being able to deliver in the 3 quarters that had happened was an incredible accomplishment on its own. As Neil just mentioned, we had our first global kickoff at which, by the way, we had our partners in the room for the first time. So side by side, getting the message unfiltered directly at the same time, which was a stated goal of ours to bring the partner community closer and to expand our reach through our SIs. So that was a great start to the year.

And what we have this year that we didn't have last year was that all of that potential disruption is out of the way. So this year, we can make all of our efforts fixed on elevating the message, which we talked about, we have this -- a way to get now to the C level that we didn't before to tell a story there that I think will definitely resonate and has already tested that in Q4. We're starting to fuse that through our customers and also through our go-to-market organization.

We're reaching out to our SIs in ways we hadn't before and not only through, of course, inviting them to our kickoff, but doing it in a more methodical way where there's a great opportunity for them, for our mutual customers and for us to benefit. And now we're going to start to think about how we feather AI into our talk tracks along the vertical, so we can have much more specific messaging that resonates better by industry, and we think will create better traction and better win rates.

Your next question comes from Jay Vleeschhouwer with Griffin Securities.

Neil, you used 2 of my favorite words, road map execution. And it's interesting as you said that, because for the last number of years, PTC has, I think, done well in that regard, particularly with regard to Creo and Windchill, hence the share gain for each. So what is it from here that you mean precisely with regard to additional improvements in that execution? And how does it tie into the multi-solution 3-letter acronym type sales that you're trying to do?

And then a quick one for Kristian. Since you noted the record increase in RPO. Could you comment as well on current RPO? How that looks sequentially or year-over-year?

Let me take the front end. So Jay, thanks for the question. I would say that, yes, the execution for 40 years of this company around building great products has gotten us this far. And what I think John Stevenson, who you'll soon meet, is aligned towards doing in collaboration with his colleagues across the other functions is as an example, with Windchill, and you'll see this, Jay. The execution around a new UI/UX that actually end users will adopt more and be able to think about how to use product data more available across the enterprise, is something that we're executing towards, and John is putting just want to make sure it happens on time, it happens before customers and our sales team to even ask for it in urgency, right? Because we know that, that is a need.

So just the rigor around making sure road map items result in customer value and Rob's team can actually think about the value that they could get from a sales team perspective. That is actually an element of what we've done in alignment that is newer to the company than the last 10 years, I would say. And it's got really good value already. That's point number one.

Number two is on the AI initiatives. So you're seeing a lot of announcements coming out, and part of it is because we've been working with our customers a lot on POCs and beta to make sure we embed AI into our core products. And you're going to see Codebeamer, Windchill, you saw Arena, ServiceMax, Onshape. You're going to see this continuous flow of execution of road map that is aligned to how does AI, with this incredible contextual data that we've got in our core systems, give benefit and outcomes to our customers that no one else can provide to that customer other than PTC. And that's the area where John is like pushing on very aggressively when he was in Israel last week. And really to summarize this, Jay, making sure that teams are aligned to execute that AI road map in conjunction with the intelligent product life cycle for core products that give real value to our end customers across the core capabilities we got. Kristian?

Jay, thanks. In terms of the current portion of the RPO, I think you'll see in the K when it comes out that approximately 55% of the total RPO we'd expect to recognize over the next 12 months.

[Operator Instructions] Your next question comes from Tyler Radke with Citi.

Congrats on all the announcements here. Neil, maybe a big picture for you. I mean, clearly, the divestiture of the IoT business, the buyback in terms of allocating a lot of capital back towards PTC, really seems to indicate you're doubling down on the core CAD and PLM aspects of the business. Like how do you think about where the growth of this business could go over time? What are sort of the key levers you need to see for this business to get back into the double digits?

Yes. So look, the good news here, Tyler, is that we're building momentum towards putting all the foundational layers to come and create a repeatable way to say we're going to consistently and sustainably continue to grow net new ARR, right? And the first part of that decision process and the foundation laying was centering the student body and now the customer messaging around this disciplined and innovative intelligent product life cycle vision. And that's resonating with customers. They're resonating in Q4. And as you heard Rob say, he's going to make it resonate even more over the course of this year.

So setting the strategy and vision was critical setting the student body directing towards that has been critical, setting the foundation of all the practices and businesses has been critical. And now the cleaning up of all the focus of the business being put right into this vision that we've got versus the IoT businesses is setting us up for building on our already momentum that we saw last year. But in this course of this year, Tyler, to make sure we execute across all those things that we are super jazzed about executing towards. And so what I think the good news here is that the ingredients of being able to answer a question and the process and progress that we're making on those ingredients have moved materially forward from 12 months last year, right? This year is important to repeat that and make it durable. And at that point, we'll be able to come back and say, "Look, here's the durable growth rate for the business." But we're focused on making sure the underpinnings are taken care of. And then we know that the results will speak for themselves over time.

There are no further questions at this time. I'll now turn the call back over to Neil for any closing remarks.

Thank you all for joining. We appreciate it. A number of us will be on the road, investor conferences, and we look forward to seeing some of you there. And again, thank you for your support and participation in today's call. Thank you.

This concludes today's conference. Thank you for participating. You may now disconnect.

Good afternoon everyone. Tyler Radke here. I co-head Citi's software research practice here at Citi. Welcome to day 2, the afternoon stretch of a bunch of great software companies leading off. We have our friends at PTC from up north in Boston. Happy to have the CEO, Neil Barua; and CFO, Kristian Talvitie. Gentlemen, thanks for making the trip. I know it's Q4. There's a lot of business you guys are closing this month. But Neil, I thought it would be great to start with you, somewhat new to the CEO role, but one of the top priorities, I think you had coming into that role was just to meet with as many customers as possible. So I thought it would be great just to get your impressions after traveling the globe, talking to customers. What were some of the most surprising takeaways as you met with customers about PTC?

Well, great to be here. Thank you, Tyler, and glad to make the trip down. First of all, PTC, global software company. We help our customers who build amazing products, design, build and maintain those products. And through the 40 years -- we actually celebrate 40 years at PTC this past May, in the 40 years, we've created a great relationship with many of them through our software suite that includes starting with CAD, which is computer-aided design. So all the cool designs of all the products happened on our software, and then PLM, very importantly to us is where all the designs actually are built into a very sophisticated recipe before they get manufactured. And then we've got a great suite of services on the services side that actually sees and feels and maintains all the things that happen to those products in the field. So in these conversations with these customers globally, and we spend a lot of time with customers and continue to do it and will always continue to do that as the CEO of this company. it's a -- 3 themes are coming up in 10 out of 10 conversations, which is, number one, product companies around the world need to speed up their way of doing business. Their business is getting more complex. It's got dynamics to it, whether it be geopolitical, whether it be policy driven, whether it be competitive driven from many companies around the world that are speeding up development. Our customers are coming to us and saying, what can you provide for us to speed up our [ organization ] to produce great products at a high quality, so we could exist for another 50 to 100 to 200 years. And that is uniformly across every customer and it's only accelerated despite the uncertainty that's out there in the world.

Got it. And I mean, you talked about CAD and PLM. Obviously, those are really broad categories, especially all the different products you touch. I mean, imagine some of this was just kind of educating customers on everything you could do for them in some of those situations.

It's interesting. We've been spending a lot of time now, Rob Dahdah, our new CRO, is really in this go-to-market transformation, making sure the messaging and the view of PTC is seen the way we know it to be seen, which is highly strategic at some of the most substantial companies of the world. NVIDIA is one that we announced in our earnings release and a press release around relationship where every single GPU in the world actually gets configured on Windchill, our PLM system. And raising that now to the senior levels, Jensen and his team are making them more PTC has resulted now in a partnership that we're beginning and is only going to accelerate. -- that we're doing across the board. And part of the theme of what we've done in go-to-market so far is really making the messaging around what outcomes are you getting from deploying these amazing software solutions that PTC has? What others in your industry vertical have done? What outcomes are they getting from using PTC? And we're raising that conversation up to the C-suite. And that's a great new motion that the company is doing at scale now and continue to move that forward as we get into next year.

Yes. And touching on that strategic positioning. I know you don't comment on market speculation, but I think on the last earnings call, you did talk about PTC being a strategic leader in the category and maybe not being surprising that others could be interested in that. But how do you just kind of think about that strategic positioning in the context of the broader market? And how are you thinking about the -- driving shareholder value from here?

Well, the first thing we think about from a strategic standpoint of why we feel so great about the position of PTC and the opportunity to continue to improve PTC is because at these great customers for the last 40 years, we're at the epicenter of their business. So all the ways in which products get designed, developed, built, maintain have been touching PTC's products and is only getting more so. And so if you think about strategically how critical we are in a software vertical that not a lot of players are in, and the depth and understanding and the relationships we've built with amazing products, there's no other company that's this strategic in an environment where product companies are just trying to stay alive to produce the amazing products that our kids, that our families use that we all use on a daily basis. So that strategic priority is so fundamental and such an inspiration for PTC to do what we're doing right now.

Right. And I guess translating that into your conversations with customers, you have made some changes to the go-to-market since you took over. I think you talked about verticalization and some other things. Just give a sense for those changes, where we are in those changes and how you're thinking about the tailwinds or the the benefits of those investments you've made as we head into FY '26?

So as you mentioned, I was announced as CEO about 2 years ago with a great transition with my predecessor, Jim. And as I mentioned on the first earnings call, it's my job and duty to turn over all the stones of the company and make sure are we appropriately doing the things we need to, to create great value for our customers and all the stakeholders. And one of the things early on that we saw in bringing in a lens that was very data-driven was around, we had significant, in our view, improvement levers on how we're operating our go-to-market machinery. And what we [indiscernible] with that was we need to do a number of things different. At the highest level, we felt a vertical approach would benefit us gaining more traction and attaining more wallet share of our great customers and those new by having that focus and desire. There's a number of levers underneath it that we're also pulling, but which also resulted in making sure I brought in the right leader, Rob Dahdah, who is actually here with us today here at the Citi Conference. Recruited him to come in, he joined early December, well aware of the playbook of how we're going to transform. And for the last 7, 8 months, he's been with the team hard at work, chipping away on the playbook to make sure that the transformation actually builds momentum, we make the tough decisions to position us for ultimately a North Star from a financial perspective is, let's start growing at new ARR. And that is fundamentally all the work that he's putting into place with the marketing leadership, all of us leaders to actually have a high-performing sales team that really takes advantage of this opportunity in front of us, Tyler. So good progress so far. It's a multiyear journey but I'm very pleased with the progress so far.

Yes. And I guess that's a good segue on the topic of growing net new ARR to bring in Kristian on the financials a little bit. But post the Liberation Day and a lot of the uncertainty, you did bring down your full year growth targets to the high single digits range. You did take the low end up after last quarter of kind of better execution and everything. Could you just walk us through what you're seeing in the demand environment maybe both from a macro perspective, but also some of these go-to-market changes that Neil was talking to and just kind of your confidence level and in hitting those targets?

Yes. Thanks, Tyler. So yes, you're right. We did bring down our full year guidance post Liberation Day. There was obviously a lot of turmoil, a lot of angst at the time. And some of you may recall, we had set a kind of low end that contemplated a macro situation that got potentially significantly worse from where it had been. There were conversations with customers, they were uncertain as to how they were going to proceed, [ not ] if they were going to proceed, but perhaps when and at what scale they were going to proceed, particularly early on in that quarter. And so we put a place what we thought was kind of a low end that contemplated things getting significantly worse. And then obviously, off of the Q3 results, which we felt were solid and the macro environment in general, I'd say, remaining stable, like we've been calling out now for the past 2 or 3 years almost that it's been a difficult macro or a challenging macro. And I wouldn't say that it's turned into a better macro, it just didn't turn into a worse macro. And given that dynamic, given the execution that we saw in Q3, the opportunity, the pipeline for Q4, we felt it was appropriate to take that kind of low-end scenario off the table. Now obviously, you still need to execute in Q4, but we feel the range that we have out there is appropriate, allows for some ongoing macro turmoil and frankly, allows for deal structuring, which for our larger deals can have an impact in any given quarter as to how much ARR actually starts in the quarter, whether the deal is a ramp deal or whatnot. And so those are probably the 2 bigger swing factors, what happens here with the macro and then the deal structuring between the high end and low end of the range and probably the larger of the 2 variables is the deal structuring aspect, which is difficult to always predict.

On the ramp versus kind of -- okay. Got it. And Obviously, it's early to talk about FY '26 at this point. But just as you look across the product portfolio and if we were to get accelerated growth on a net new ARR basis in '26. And again, absent some dramatic improvement in the macro environment, like what products or maybe segments from the go-to-market perspective do you think could drive that? Like what are you most excited about that you think kind of has that acceleration potential?

Yes, maybe back up to make sure we're level setting. The way we're approaching how we're operating is not by assuming the macro gets better. All these changes we're doing internally to make sure we're better suited for any macro environment. And it's been a bad macro environment for quite some time. We hit a another soft spot this year globally with the Liberation Day and that few months of pause. But all this work and heavy lift that we're doing, including the go-to-market transformation, the addition of a new Chief Product Officer to accelerate our product innovation within AI is around making sure we get our foundation much stronger in any kind of environment that we've got. By the way, if a macro improves, we'll just be benefited even more is the way we think about it. In terms of how we think about the excitement of as we enter next year and the years following, we really feel strongly about achieving our vision of what we're calling the intelligent product life cycle. And you'll hear this more from PTC, where ultimately, we have seen from our customers and heard loudly for them that having a product data foundation that engineering workflow occurs off of and that product data actually being utilized by the rest of the enterprise is our secret sauce at PTC. We do that extremely well with a lot of reliability and confidence. And as we stitch together the workflow, and the data workflows across our software solutions for our customers, we strongly believe that not only inspires customers to use Windchill more broadly and deploy Codebeamer ALM tool, which is -- coincides with what we think about PLM, but also allows them actually to take advantage of generative and agentic AI. And without PTC, without this product data foundation, you're pretty much [ SOL ] as a product company to actually achieve these outcomes to remain competitive in this, in this very interesting world that they all compete in. So we're most jazzed about that because we're starting on second base. We're getting the messaging right. We're making sure the product integrations work well. We're adding the agentic AI capabilities, generative AI capabilities so that when our customers are ready, we're giving up a wholly differentiated experience using PTC.

Got it. Got it. Okay. And maybe just thinking about the product segmentations that you'll break out. Starting on the PLM side, a lot of different great products in there. You talked about Windchill being used by NVIDIA and ServiceMax, where you kind of came into the company through. Like give us a sense of just what could be the biggest growth drivers within that bucket because we often get the question from investors, how to think about the growth of that going forward. And again, when you have various parts that are growing at different rates, at different stages of maturity curve, it's sometimes kind of difficult to get a consolidated number.

Sure. let me start with the beginning of how products actually come alive, which is with design and requirements, and that starts with our CAD tools, right? And Creo is our flagship clearly. It's the thing that we point investors to, to look at and we watch carefully how we innovate on that, how that growth rate occurs. We've also got something called Onshape, which is the born in the cloud CAD tool, which just caught fire and it's fantastic. And it's nothing I want you all to get excited for in models, but I believe from a mid- to long-term perspective, Onshape will be a critical growth driver of that data flow from design through the life cycle of this intelligent product life cycle. So that's the beginning of CAD. The more -- most interesting growth lever we see is around Windchill and Codebeamer. So Windchill is, again, the configuration engine of how products actually get put into a very sophisticated recipe before it gets manufactured. Windchill does that incredibly well. It's a flagship product. It's one of the most substantial parts of our financial framework. And it is the area we see the most opportunity for customers seeing the expansion of Windchill across their enterprise. So a level of seats that they have that has been predominantly doing CAD data management, they are now seeing if we expand PLM beyond that, we actually can move the product development process faster. So Windchill is like front and center, where we're putting resource allocation, incremental dollars to accelerate that, not only on-prem but SaaS, and we can talk about that in a little bit. And then Codebeamer is one of the most strategic capabilities we've got because it -- we have a view that software development in hardware and mechanical companies will become one of the same. Every CEO I'm talking to that runs a product company, they're dealing with how do I break the silos between the software engineers and the hardware and mechanical engineers. Codebeamer with Windchill allows a CEO and a C-suite to actually break those silos down and be able to move a product development process much faster using those 2 capabilities. So we see Codebeamer on its own being a growth lever, but in combination with Windchill being a real exciting part of our growth algorithm as we think going forward.

And then lastly, ServiceMax remains strategically important. We'll talk about what happened this year, but it allows for PLM, again, to have a place by which service data can go back into the PLM system. Again, this reinforcing part of our vision that the product data foundation with the centerpiece being PLM is reinforced with everything that we're doing. Everything I didn't mention, by the way, all the other product categories you've heard for 40 years of PTC or 10 years or before my time are getting the resource allocation differently than the ones I talked about.

I see. So the -- everything is like IoT or other...

You name your word [ soup ] of all the other things, they're important to us. We measure them appropriately. We have different metrics and views of how we manage it. We think about resource allocation all the time on those fronts. But where an incremental dollar comes in is on those areas that I talked about.

So it's interesting to hear you really talk a lot about the kind of the incremental resource allocation, particularly on Windchill, right? I think that's been a product that's been around for a very long time for PTC. But like what are those -- what do those new users look like? Like where is this expanding to? And then is there something you're also seeing on the competitive front where maybe there's an opportunity for you to replace other PLM products?

I will say Windchill has been around for quite some time, as you noted, but the mojo of PLM and the consistency of PTC talking and innovating and releasing really amazing functionality in Windchill, including what we're going to release soon this year around Windchill AI, which is a generative AI solution on top of Windchill. We've accelerated that over the last 18 months. I notably came into this company and made that the centerpiece of how we think about the business going forward because of the strategic importance of that software solution. And so when we think about like the growing utilization of Windchill, a significant portion of our customers use Windchill as just a data repository for these 3D designs, right? So it organizes in a file system, so to speak. It's one capability. It's called PDM, which is not full PLM, and that's been Windchill for 20-plus years. A good portion of our customers have moved and said, you know what, Windchill we could use to now move those designs to a manufacturing engineer or to a supply chain engineer or a quality engineer in a real-time basis to see as the design changes, do I have to change all the other aspects of how to get this manufactured and produced appropriately? And when you get that excitement of Windchill and that use case to be seen as I now can have a faster throughput of a design process to the manufacturing floor using the full set of capabilities of Windchill, that's where we get the expansion of seats.

Lastly, the Codebeamer piece is important because a product actually can't get manufactured without the software alignment there, right? And autonomous driving, one of the most prominent autonomous driving companies in the world use Codebeamer for all their release and requirements management, and that needs to get integrated when they actually build the car on a shop floor, right, at the same time. So that's another area of why we get inspired and why we're pushing on the incremental dollar in those 2 product sets.

Yes. No, that's super interesting. And I guess you touched on AI a little bit, but 1 of the things we heard of -- we had -- your friends in Autodesk, here this morning talking about kind of the AI strategy, but one of the big pieces to kind of unlock that is this data readiness, right? And a lot of these systems, you have file-based architectures, which doesn't necessarily mean that, that data is usable in an AI construct. So how are you thinking about that transition for PTC to kind of, whether you want to call it a cloud-based data model or a data model that's usable by AI?

Yes. So I think we have a two-pronged approach. One is we're embedding AI into our solutions. So regardless, like Windchill and Codebeamer, ServiceMax already is [indiscernible] Onshape is [indiscernible] on generative AI solutions where it's embedded into the actual product. Where the automating, right, the agentic layer actually comes in, which we're spending a lot of time on, you really need to simplify that data foundation as we -- as you noted, a competitor calling that. We also believe that be the case. And we believe in our industry, which we have similarities to a certain degree, there have been complex deployment. So when you look at a Windchill deployment or a Creo deployment, it is a very complex deployment that is taking 12 months, 24 months to deploy. And then on top of that, customizations that occur. So PTC has done a really good job understanding how do all those workflows occur? How does all the contextual data work within Windchill but really, our secret sauce is understanding what happens to Windchill data when it leaves Windchill? What are all the business workflows that happen? And we're building our AI solutions knowing that. So we feel very strongly about that. I will also summarize that our customers need to deploy these digital tools first and foremost. So I'll actually take another step even before data cleansing. Our customers, in many cases, sadly the engineer, great engineers in this world, the great service technicians in the world don't have modern tools. I'm in right now a deal with Rob outside the United States on 1 of the more significant companies of the world that is doing software requirements on Excel and using Excel. Now they're looking at Codebeamer. And this is not just 1 company. It's many companies that we're talking to that need to get to a modern stack, which includes just getting on Codebeamer or getting on Windchill. And then we have to make sure and the third part of our strategy is how does that move to the cloud, right? And we are solidifying our SaaS repetition model. We're getting more confident about SaaS as every month goes by, as every deployment goes by. And we do have a belief that AI is advantaged especially if you know how the contextual data works as PTC knows when it moves to the cloud. And as customers are ready for it, that will be another advantage that they might have.

Got it. Makes sense. And I guess on the topic of customer conversations, I know you've been on the road a lot lately, but would you say that you're seeing any change or increased optimism just in terms of your customer conversations over the last couple of months versus prior this year, like whether it's around AI or kind of looking past the initial shock waves of the Liberation day or...

So I could empathize with all of us and around every single customer, there's a lot of stress out there. So people are dealing with a lot of strain and urgency as we all are around how to navigate through a time that's got so much movement. And that's ubiquitous across every customer conversation. What that relates to and we're advantaged at PTC, we're dealing with customers that are start-ups, but also customers that have been around for 500 years or so, right, 200, 300-year businesses. they've understood that in times like this, you would invest into it and get -- like PTC is doing, right? We're figuring out our foundation. And that then relates to what are the things we need to put in organizationally, technologically to actually do that. And we're also advantaged given, as you mentioned, I'm only 2 years as CEO. When I look out for the next 5 to 10 years, the opportunity for PTC is these end markets have not transformed themselves digitally, like they're 1 of the last industries to do it. And so we see that as an opportunity. They also see it as an opportunity to move now quickly. And so I think the stress and strain that's in the current system across every customer that we talk to is actually causing good leaders to say, let's go actually start doing the work to break down silos in our companies to actually think about how software developers work with mechanical developers. What tools do we need for that? And we're sitting there right on front row seat saying, we're ready to serve you a customer X or Y. And we feel good about that opportunity.

Got it. You alluded to ServiceMax earlier. I just wanted to go back to that. Can you just refresh like the some of the headwinds that you might have seen in that business. It sounds like those are in the rearview, maybe you saw some green shoots this past quarter. But how should we just think about the growth rate potential of that business over time?

Yes. I mean this is -- this was a tough year for Service. Again, we got a few weeks left, so we'll see how it ends up. But we dealt with onetime anomalous churn in our view. In the 10-plus year history of ServiceMax, we didn't see this type of churn where there's just things that we don't believe are going to repeat themselves. So we're gutting through a year that is dilutive to the company growth rate, unfortunately. But on the flip side, when we look at the pipeline and we look at movement of pipeline, when we look at size of deals of ServiceMax now connecting into this opportunity when Service -- PTC bought the company, I was at ServiceMax. When you now see the alignment of how many customers of PTC can use ServiceMax, it's starting to build. Now we got our work ahead of us. But we firmly believe it's strategically important to us. It differentiates Windchill from our competitive solutions and it also creates a bridge that we believe, over time, will be critical for customers, knowing what field data looks like is going to be very critical to product development processes. So we're still encouraged, but it's not where we want to be 2 years into the acquisition, but we're working hard to get back on track.

Yes. And was that related to Salesforce at all on the churn? Or was it -- is it different?

No, no, it's not a -- we're built on Salesforce as you're alluding to. So it's not a Salesforce induced churn. It was -- I'll give you an example, just a very large customer of ours got bought by a much larger company. And for the first time in 10 years, the CFO overruled everyone that actually does the real work of that company and said, we're going to merge all this in a horizontal software platform. And I'm predicting that in 2 years, they're going to come back and ask us to redeploy the solution. But we lost that account [indiscernible]

Yes. Yes. Okay. And maybe, Kristian, on the profitability side, I think despite the choppiness in the macro environment, the free cash flow has continued to hold up. You've had a pretty high degree of, I guess, accuracy on the guidance and your ability to kind of maintain that. Just talk to us about the levers you have in that business? And how do you kind of think about long-term margin expansion, the additional efficiency unlocks that are ahead?

Yes. And just briefly, for those who are not 100% familiar with PTC, it's about $2.5 billion in top line. We measure our top line largely in what we call ARR, which is annual run rate. It's not revenue because of ASC 606, revenues of interesting metric for us. So we focus on ARR, which essentially is our software billings. And maybe more to the point, we operate the business on a cash basis, cash in, cash out, virtually all of our cash inflows, our subscriptions. We're pretty religious about how we bill those annually upfront in advance. And frankly, most of our outflows are also subscription like, whether it's salaries, rents or the software vendors that we use. So we actually have a pretty tight visibility into both cash inflows and cash outflows. And then when you layer on top of that some of the kind of disciplined budgeting process and what Neil was alluding to earlier about where we're going to invest incremental dollars and how we think about reprioritizing spend even internally as we're thinking about capital allocation, that gives us a fair amount of room to be nimble to adjust to a current macro environment, whether that's increasing spending or reducing spending and you have a reasonable runway into the future as you think about that. So that's certainly been helpful on the -- we'll call it on the predictability and growth front in terms of free cash flow.

And then in terms of incremental margins, I guess, we would think about it in terms of cash margins, if you will, not operating or P&L-based margins again because of 606, and there, I would say that I think because of the nature of the business model, there is actually largely modest upward pressure, if you will, on the margins. Now again, assuming that all the initiatives that we're working on to start growing, net new ARR again, and hopefully, the macro turns better. The more that, that happens, the more we're likely to continue to reinvest in different parts of the business. So again, I think we have pretty good visibility into our cash inflows and cash outflows. And as long as we continue to be vigilant in our budgeting and capital allocation decisions, I think we have pretty clear visibility there.

Yes. And maybe related to the cost side, but I would be curious to if there's any examples on the revenue or customer side. But what are some of the examples of internal use of AI that PTC has had, whether that's cost savings, among developers or contact center, not that you have a big contact center, but any examples or projects stand out?

The big one, customer support, we do have customer support that's been utilizing AI, now generative AI, and that's, I think, of value in terms of cost avoidance. We've deployed really interesting tools within our R&D organization. So we're seeing some good lift on QA, some lift on development throughput. Again, we brought in Jon Stevenson, a real expert at AI as well. And he's enthused about how we could accelerate that usage. And then just broadly speaking across all the knowledge workers, sales is really kicking that into high gear. I wouldn't say we're at the spot where I could come out and say, well, that's going to relate and let's go take out 30% less cost or 30% cost levers. But we are seeing interesting productivity gains in pockets. We're measuring it closely. But we've got more work to do before we say that this is the lever that's going to create huge cost savings for the company.

Right, right. And how do you think about the M&A environment, obviously, ServiceMax being kind of one 1 of the larger acquisitions, you've made some other interesting kind of higher-growth acquisitions, I guess, before ServiceMax, whether it was Onshape and Arena. What type of assets or technologies are interesting at this point?

We're looking at tuck-ins mainly that really accelerate the vision of this product data foundation, what we call the intelligent product life cycle. And anything that makes the PLM data more critical or creates an ability for that data to be used for a different workflow that's related to that same data set, that's what we look at. So one bar that we look at is making sure that the buyer whoever is buying are our software is actually aligned with where our strong suits are, right? So you saw us do a tuck-in called [ iQuell ], a company out of Budapest, Hungary, they brought in 15 to 20 amazing people that actually know how to bridge Codebeamer to Windchill and actually are now building and accelerating our Codebeamer AI development. Like those types of companies we get really enthused about. We're looking at all of them. We're very disciplined, I believe, under my leadership around, making sure we really make sure that the organic transformation is prioritized versus starting to get too alerted by any shiny toys. It's got to be about the organic transformation because we see so much value creation possibility on just getting that right.

Right, right. Awesome. Well, I think that's a good place to leave it. We're out of time. Neil, Kristian, really appreciate you making the time, and thanks for everyone for joining.

Thanks, Tyler. Appreciate that.

Thanks, everybody.

All right. Good morning, everybody. Welcome to day 3 of the Oppenheimer Virtual Tech Conference. I'm Ken Wong, software analyst here at Oppenheimer. Very happy to have with me Kristian Talvitie, EVP and Chief Financial Officer at PTC. Kristian, good morning. Welcome.

Ken, thanks for having us. We appreciate it.

Always happy to engage. Look, I think maybe to start off, touching on the most recent quarter, like I don't want to call it an inflection, but I think not only me, but a lot of your shareholders felt that, that was probably the most positive you guys have sounded in quite some time. So maybe just compare and contrast for us the start of the year to where we are now and kind of how that kind of positions you guys for the close of the year?

Yes, sure. Good question, Ken. And just before I get started, I know my General Counsel would be very angry at me if I did not point out directed folks to our safe harbor language and our risk factors that are available in our press releases and on file and Forms 10-Q and 10-K on file with the SEC. So I would definitely encourage everybody to review those.

Now back to your original question, the quarter certainly started off in an interesting way with Liberation Day. And we were still in the, we'll call it, maelstrom of uncertainty in the beginning of the quarter and by the time we had the conference call. And well, customers didn't really have, we'll say, definitive outlooks on what was going to happen as a result of Liberation Day, there was incremental caution for sure, in their language, not caution around, hey, is -- do we need the software? Do we need to undergo digital transformation? It was really more around, hey, nobody really knows what's going on. And it may be that once we move towards deal closure that this is going to get delayed or downsized by the powers that be at those respective customers just given the overall uncertainty.

And I think that's what was reflected in the revised guidance that we gave last quarter. And also out of caution, we tried to model in a downside scenario of what if things started to look more like the GFC environment or the COVID environment, what might that look like for PTC, and that's what led to the kind of the downside scenario of that guidance.

Now as we progress through the quarter, things seem to stabilize much more. And I think that, that was obviously borne out in the results. We came in near the high end of the guidance range, certainly for net new ARR, came in for the high end of the guidance range. So I think those kind of worst-case fears that we all might have had seem to have alleviated. I think that's reflected in our current guidance. We took the low end up on the range, essentially taking that kind of scenario, we'll say, off the table for the year now that we're down to 1 quarter left to go. And as a reminder, we're on a September 30 year-end. So that's where we are.

So I guess just the last point on this. We've talked a lot over the past 2 to 3 years now about kind of the challenging macro environment. And I guess I would say that I'm not sure that the macro environment has really changed. It just didn't get materially worse. I'm not sure it actually really got better, but it just did not get materially worse. And I think that was reflected in the results and the guidance.

Understood. So arguably, still hopefully, something better to come down the line. But for now, just kind of stably bad seems to be how you're framing what's baked in?

Yes, stably consistent with the same kind of challenging environment we've seen for the last number of years.

Perfect. And I guess as we think about the close to the year, how should we frame what needs to go right for you guys to be at the high end of that ARR range? And can we maintain in this stable environment and you guys execute to that number? Or does that require some help from macro or go-to-market or whatever it might be?

Yes. I think obviously, we need to execute on the opportunities we have. I think we feel very good about the pipeline that we have going into Q4. I think Neil commented on that on our most recent earnings call. So I think we feel good about the opportunity, and we obviously need to execute on that. And then just on top of that, I think the biggest variables going into where we end up in the range really probably comes down more to deal structure. And do we see more in-quarter starts? Or do we see more ramp deal type deals that get structured here in this environment. And that's obviously what we're working through this quarter with all the deals in play.

Got it. And so maybe shifting gears a little bit. You guys made a big shift on the go-to-market when we entered the year, focused more on your core verticals. Maybe just a quick update, kind of where are we on that process? Are you done with all the changes and it's now just a matter of executing through those changes? Have you seen any data points you can share in terms of the progress that we're seeing there?

Yes. And so just as a quick refresher, remembering that a lot of the planning that went into this happened in our Q4 of last year and our fiscal first quarter of this year, and the actual changes were really implemented in the beginning of our fiscal second quarter. And those -- when I'm -- we're talking about those changes there, I'm really talking about getting the go-to-market organization aligned around the main verticals that we serve. And go-to-market isn't just sales, it means also marketing as well as customer success, folks in the customer success organization, presales, post-sales, folks who are helping implement the software at our customers or with our customers, getting those aligned around those core verticals.

And on the one hand, I would -- and so what that involved was some, we'll call it, some account reshuffling. As you also might recall, there were certain positions that were eliminated, some of those in each of the kind of go-to-market organizations. And then there's been hiring back on the sales side, it's hiring back into the right areas. On the customer success side, it's making sure that we're hiring more technical resources and so on. And so that shuffling was around account coverage, if you will, and territory optimization.

And so on the one hand, I would say that, yes, that part of the change is done. On the other hand, I would say territory optimization is an ongoing thing that needs to continue to happen in the future. I think we're just at a much better baseline than we've been at historically to continue that journey.

The other parts of the transformation, which include making sure that we have the right messaging to go with each of these verticals, which includes some of the cultural changes that Rob is bringing to the organization, those are actually still ongoing. A lot of that messaging has now been developed. It's being released into the field and put in front of our customers. It was tested before that, and we'll continue to get feedback. But so far, the feedback has been positive from both our own internal teams as well as what we're hearing from customers. So that's good. That will also continue to be an evolution as customer requirements continue to evolve as well as our technology continues to evolve. But I think we feel pretty good about where we are with the messaging at this point.

The other part of the cultural change that Rob is bringing is more focus on, we'll call it, pipeline, pipeline management, pipeline hygiene. And it's coming from a very good place. He's looking to make sure that we have good pipeline, not only so that we have good visibility into out quarters, but also getting good visibility into what kind of requirements are tied to this pipeline. Is there -- Are there R&D road map items that -- that are open, but part of a decent-sized chunk of that pipeline so that you can go back and try to influence the R&D organization to make sure, hey, are we working on X, Y and Z because we've got a lot of pipeline tied to this. And so where do we think we are with that.

And then just the general hygiene as well, making sure that we're using consistent stages, consistent definitions for pipeline management even internally.

And then lastly, I think if I channel my inner Rob here for a second, he would also talk about elevating the message as part of the overall cultural change that's going on as well. And if you think about it this way, what PTC sells is -- or provides to our customers is complex software that helps solve complex problems. It's very technical software. And I think what he would say is we've been very good, and it's been a rich part of PTC's heritage to be very good at that technical level and to be able to engage with customers at that kind of technical level. But also a lot of what we're helping customers do is digital transformation. And that's a bigger initiative.

And if you think about it from a perspective of, well, we can arm the, call it, Head of Engineering. But now that -- now it's incumbent at that customer for the Head of Engineering to try and go sell that to the Head of Service and the Head of Manufacturing and the Head of Quality and Regulatory and so on, which is more challenging when you're trying to -- when you're trying to sell internally across to a bunch of peers who have their own priorities and their own metrics. And so what Rob is talking about is elevating the message, making sure that we're getting the C-suite to understand, not necessarily the technical components, but to understand the business value so that the C-suite can get behind it and really help push those initiatives with the point being that with that kind of top-down pressure, it's a lot easier to get broader organizational alignment around kind of digital transformation and this digital transformation initiative that's so important to our customers.

And attending that, he's also spending a good deal of time focusing on expanding our relationships with SIs that we've done as well because a big part of this digital transformation is, of course, OCM or organizational change management, which is really where they excel as well and a big part of the transformation for the customer. So making sure we're having the right messaging at the right level and not forgetting the deep technical expertise that's required, but making sure that we're providing air cover from the highest levels so that when we get to those technical discussions, they're exactly what they are meant to be. What's the best way to implement the software? And what kind of change do we need to do and what kind of benefit should we be expecting?

Perfect. And with all these changes, I think one interesting dynamic you touched on is just aligning that product road map with the go-to-market changes. How should we think about maybe Rob incorporating pricing as a component of all this kind of product package and pricing and bundling. Is that something that we can see as a potential tailwind going forward? Any thoughts there?

Yes. Well, certainly, he brings a perspective around that to the organization, which I'm very much aligned with. And so I think that it's part of the overall transformation, and I think we'll continue to push on it. Of course, remembering that most of our sales are to existing customers. That's going to be an evolution over time because there are custom dealing in a certain way, and we need to migrate off of that. But for sure, he's aligned and use that as an opportunity going forward as well.

Understood. And just a reminder to the audience, to the extent you have any questions, feel free to submit that into the portal. I did just get one here, so I figure I might as well toss it out now. I know you guys aren't addressing long term at the moment, but kind of in this environment, as you look ahead with the go-to-market changes in play, how should we, at a high level, think about kind of the growth profile in the past, you guys have said that this is kind of a low double-digit midterm grower. Has the environment changed that dynamic in a normal state? What would you -- I guess, how would you characterize what you guys think you guys should grow?

Yes. Really, really good question. And so I think a couple of things. One, if we look back over the past few years, we've been delivering in and around flat net new ARR. The couple of years have their own nuances to them, but broadly speaking, in and around flat. And so -- we've also been saying pretty consistently for the past, I don't know, 10, 11 quarters that the macro environment has been challenging. And I guess at a certain point, you need to really ask yourself, well, is this just the new normal? And if so, what should we, could we, would we do differently to try to drive net new ARR growth, just assuming that this is the new normal from a macro perspective.

And that's exactly what led us down the path of these go-to-market changes, some of the product initiatives, the ongoing SaaS initiative, the commercial optimization efforts that a couple of those have been underway, but a couple of those are certainly newer. I think you've heard Neil talk about AI and the opportunity for AI there. So all of those initiatives together, the intended result is to drive net new ARR growth.

Got it. So I guess, to kind of get back to those goals, executing on all of that plus hopefully, macro cooperating is how we should think about it. And maybe shifting back now to kind of the product side of things. On PLM, clearly, your guys is one of your core products, saw a resurgence during COVID, during all the digital transformation. As we think about this next transformation with AI, you've touched on it a little bit. I mean, do you see PLM kind of becoming more important to your customers? Are there opportunities to continue to see that business, I don't want to say reaccelerate just yet, but to see that business kind of step up in terms of priorities for customers?

I mean I think our belief in general is that, that is a strategic imperative for our customers. PLM and you could think about it even more broadly in our broader definition of PLM, which includes ALM, which includes SLM, but particularly on the product development and the product data side, how can we help our customers achieve their goals, which, if I completely oversimplify, boil down to developing new, even more complex, more sophisticated products faster to help them remain competitive in the markets that they -- in their respective markets that they play in. And I don't think that those pressures have alleviated for our customers at all. And in fact, may be getting more acute in certain places.

Got it. Understood. Let's see another follow-up. On the call, you guys -- well, you guys had touched on some elevated churn and that -- well, that would come back at the end of the year. Are those contracts still on track to come back later this year? This is from the Q1, the Q1 earnings call?

Yes. That was a couple of contracts, and those are on track. And I think some of the other elevated churn that we talked about was related to a smaller handful of events, probably more concentrated in SLM and in IoT, and in IoT in particular, related to the end of lifing of a product that we had. And with that, that was not really a surprise to folks. They knew that was coming. And we had an off-ramp for them that we proposed. And in many cases, they selected that off-ramp and in some other cases, they chose to go a different route, which caused some elevated churn there. But again, that product has now been end of life. So I don't think that comes back.

On the SLM side, I think it has more to do with some customer-specific situations, divestitures, as an example, at a couple of customers led to different decisions or M&A and divestiture activity.

So the 3Q stuff sounds like probably not coming back. 1Q stuff still could resurface or still expected to resurface back half of this year or I guess Q4 this year now?

Or has already.

Got it. Understood. You touched on SaaS and cloud earlier. What does the customer appetite look like for SaaS now? You guys are taking a very measured approach. You weren't forcing anyone to go. But it did sound like on the recent call that there's maybe been a little more heightened interest. Would love to get your take there? And does it start making sense to lean into some of these customers now?

Yes. So I think that the delivery model question is certainly one that comes up with customers, and they're -- I mean, I think, by and large, again, oversimplifying, but in many cases, SaaS is simply a superior delivery model. And so it is of interest to customers. But then it also comes down to the change attendant with migrating to SaaS, which it isn't just shifting the back end, but with SaaS comes more standardization. And if you have a 10- or 15-year-old legacy on-prem system that needs to be migrated, that's also going to come with a lot of this OCM work that we talked about earlier. And so I think for customers, it's really a question of when is the right time to embark on that journey. But it's certainly a theme that continues to come up.

Understood. And in a recent customer event, we got the sense that perhaps new capabilities would be streamlined to Creo+, Windchill+ with maybe a bit of a lag to the on-prem customers. Should we view that as maybe the early stages of you guys trying to facilitate that transition to SaaS a little sooner? Any thoughts there?

Yes. I mean I think that's right. We do want to try to create some differentiation there while making sure that we still have a large and important customer base that is on-prem. So we obviously don't want to leave any of those customers stranded, if you will, as well. So it's a balance that we're trying to strike and just trying to, again, help facilitate that discussion.

Got it. A follow-up question sent to me. Just on cloud, again, early days in terms of adoption there, but are you still seeing the type of economic uplift that you guys were initially thinking? I think it was kind of roughly 2x. Any changes in terms of how that has played out?

No. I think that's still ballpark the right number what the actual uplift is for any given customer situation. It depends on a whole bunch of different variables. It could be a little more, it could be a little less, but I think that's still -- is still the right ballpark.

Perfect. And I try to delay asking about AI for as long as I could, but not surprising, this is always top of mind, especially in this current environment that we're in. PTC serves as the sort of the system of record for product data. I guess how do you guys envision kind of your value in the ecosystem? And then two, to the extent you guys are prioritizing AI development in your products, like how do we see that get monetized over time? What's the feedback been from customers for any early use cases?

Yes. So number one, I guess, first point would be, I think that you're spot on about, we'll call it, system of record for product information, and really for customers to be able to extract as much value as they can from AI. It starts with making sure that your own data house is in order, right? And that, again, goes back to this whole digital transformation theme, an outcome of that is making sure that the data house is in order.

And then secondly, it's still early days in terms of the AI products that we have rolled out, right? Just last quarter, we actually started with ServiceMax AI. And when we're talking about AI, just to be clear, what I'm talking about now is Agenetic AI use cases. We've had Generative AI in Creo, for example, for a number of years now and I think Onshape more recently through a previous acquisition that we did back in 2017. But what we're really talking about now is Agentic AI. And so we're definitely in the early days of that, again, just went GA last quarter.

AI is certainly something that comes up in almost every customer conversation. And it's on our road map as well. I think here, kind of around the turn of the calendar year, plus or minus, you should see Codebeamer AI agents and Windchill agents also become GA as well. And then I guess if you were to think about longer term, those are agents for ServiceMax within ServiceMax, Codebeamer within Codebeamer, Windchill within Windchill. And over the longer term, I think you want to start to see agents working across those silos and then eventually also agents interacting with other enterprise systems that our customers use. But now we're -- we're talking about the future.

In terms of monetization, I think it's a really good question. As you know, most of the software that we -- virtually all the software that we sell is on a per seat basis. And even with ServiceMax, the agents that are now available, those are also priced on a per seat basis, but it does raise interesting opportunities for us to think about what the best way to monetize that is? Is it on a per seat basis? Is it on a consumption basis? How is it that customers are going to be willing to pay for that value. And so I think we're in a bit of an evolving landscape there, but that's the path that we're on right now is starting off with on a per seat basis and working through what the other alternatives might look like.

Understood. And then -- let's perhaps switch over to numbers. It would see a shame that we've got you here and not at least touch on some numbers. You've got that -- or you had $1 billion free cash flow target for next year out there. You guys are obviously progressing towards fiscal '25, but there's also been some kind of puts and takes from currency and taxes and whatnot that could be in play. How should we think about kind of where you stand as we approach that '26 target? Help us think through some of the moving pieces?

Yes. So one that has certainly been top of mind is currency, FX rates in general. I think where FX rates sit today, we've seen a little bit of tailwind, if you will, in the back half. But remembering that it was a pretty significant headwind in the first half. So I think for the year, FX is still a headwind for us this year. But if the rates stay where they are, going into next year, that should be a net positive. Additionally, we've taken out some puts on the euro and the yen to help mitigate any potential, not all, but some of the potential headwind from a strengthening dollar should that happen throughout the course of next year. So I think we view that as a comforting factor.

On the tax front, as you know, the OBBB has reversed some of the change that was introduced earlier as it relates to Section 174 in the revenue code, which had to do with the capitalization of R&D -- capitalization and the amortization of R&D expense and the change really affects U.S. R&D, international R&D is still going to be capitalized and amortized, but there's -- there will be some tailwind from that as well, which I think we feel also incrementally more comfortable with. Still some work to do to decide exactly which path we go down. There's different potential outcomes that are nuanced. So we still have some work to do to figure that out. But net-net, should be a tailwind for us.

And then, of course, also interest rates matter to a certain degree, although going into next year to a much lesser degree than we've seen over the past few years because going into next year, I think we'll have probably around $1.2 billion of debt, $500 million of that's a high-yield note at 4%. So you're left with about $700 million on a variable rate. But -- so the impact of interest rate changes is much more muted than it has been historically.

And then, of course, lastly, we need to figure out how we're going to end this year and equally what the plan for next year looks like. How much incremental ARR do we think we're going to add next year? And what does our spending for next year look like as well. And we're in the middle of our planning process. So that's all work to be completed.

Got it. And on that last point, perfectly segues into a question that just hit my inbox. But I realize you guys are not baking in go-to-market improvements just yet, not baking in macro improvements. Is the right way to think about that net new -- net new ARR that it's stable to how fiscal '25 closes out, like just based on the information that we have today?

Yes, I think we'll provide fiscal '26 guidance when we issue our Q4 results. I think that's probably the best way to leave that one.

Got it. You knew someone was going to try to ask something ahead of time, but respect the game there. And then just while we're here at the end, kind of comfortable with the current leverage levels, how should we think about the prioritization of deploying cash? I mean, buyback has been kind of a nice return this year, but you guys have also been a little more quiet on the M&A front. Like what are you looking at? What are you prioritizing?

Yes. Well, so just -- I think, kind of reiterate the general view on, we'll call it, capital allocation is first, a couple of fundamentals. Number one, we believe that PTC should operate in a net debt position. Number two, just given the consistency of the invoicing and the expenses that we have and therefore, the consistency of the free cash flow generation, we also think that we should try to run this business with a lower cash balance as we can. And what that then ultimately means is anything that's left that doesn't get used, for example, for M&A, we think that should be returned to shareholders via share repurchases.

All right. Perfect. And with that, I think we are right up on time. I don't have any other questions in my queue. So Kristian, thank you so much for taking some time out of your day to interact with us and to the audience, really appreciate you guys all dialing in.

Great. Thanks, everybody. Thanks, Ken, for having us at the conference.

Thank you. Bye, Matt. Bye, Kristian.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2025 Third Quarter Conference Call. [Operator Instructions] Following the presentation, the conference will be open for questions.

I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, Eric, and welcome to PTC's 2025 Third Quarter Conference Call. On the call today are Neil Barua, Chief Executive Officer; Kristian Talvitie, Chief Financial Officer; and Robert Dahdah, Chief Revenue Officer.

Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com.

During this call, PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in the PTC's annual report on Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission as well as in today's press release. The forward-looking statements, including guidance provided during this call are valid only as of today's date, July 30, 2025, and PTC assumes no obligation to update these forward-looking statements.

During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.

With that, I'd like to turn the call over to PTC's Chief Executive Officer, Neil Barua.

Thank you, Matt, and good afternoon, everyone. I'm proud of what PTC is accomplishing in fiscal year '25, and I'm more confident than ever in the important position we hold in the market. Our vision for our customers' digital transformations is resonating. They rely on PTC software to build structured product data foundations in their engineering teams and to extend the value of that data across their enterprises. This helps us accelerate time to market, produce higher-quality products and manage complexity across their businesses. And these product data foundations are the fundamental backbone of AI-driven transformation for our customers and become a driver for organizing and structuring data using PTC solutions. .

In Q3, we executed well, 9.3% constant currency ARR growth and 14% free cash flow growth year-over-year. We also continued deleveraging our balance sheet and repurchasing shares. With our continued visibility to solid cash generation, we expect to remain active under our $2 billion share repurchase authorization. These results reflect continued resilience in a dynamic macro environment and also indicate the early progress of our go-to-market transformation and deepening strategic engagement with customers.

In Q3, policy and trade uncertainty led some customers to slow or face deals. By quarter end, we began to see signs of stabilization as customers adapted to the environment. While it is too early to call a trend, our sense is that we are past the point of maximum disruption. Input costs and tariff discussions remain important watch items and dynamics differ across verticals and geographies, but demand has remained resilient. To us, this underscores that our solutions continue to be mission-critical for customers even in periods of macro uncertainty.

Our Q3 results also reflect steady progress with our go-to-market transformation. The team is continuing to build a more consistent operating rhythm, and we're seeing encouraging signs. Pipeline creation remained healthy. Win rates with tenured reps improved modestly and new reps are making progress in their ramp. We're also seeing stronger collaboration across sales, marketing and customer success and deeper, more strategic engagement with senior decision-makers. While we're still early in this transformation compared to a year ago, we're structurally stronger and better positioned to support our customers. This remains a long-term effort and will continue to refine and adapt, but the early progress we've seen gives us confidence in the direction we're headed.

We advanced our product data foundation strategy in Q3 with portfolio enhancements and customer wins across our 5 focus areas of CAD, PLM, ALM, SLM and SaaS. And we continued our progress with AI. In CAD, we released the most sophisticated version of Creo yet with Creo 12. This release included enhancements in several important areas, including AI-driven generative design. In PLM, we released Arena Supply Chain Intelligence, which brings AI-driven supply chain risk monitoring directly into the PLM environment.

Our customer wins included a new Windchill+ deal with a well-known med tech brand in a competitive process, a new Codebeamer deal with a major automotive supplier. The adoption of Windchill+ with a long-time aerospace and defense customer and finally, a ServiceMax expansion with a med tech customer that is also standardized on Windchill as its enterprise PLM system. You can read more about our customer wins in the appendix lines.

Our product data foundation strategy is also core to what we're doing with AI. Product data foundations are the backbone of AI-driven transformation. We have the solutions to deliver these product data foundations in PLM, CAD, ALM and SLM, and we have a deep understanding of how our customers apply this data across their enterprises. This combination is central to our vision and will keep PTC in the driver's seat to transform our customers' businesses with product data and AI.

Fiscal year '25 has been a milestone year for our AI strategy with releases and meaningful progress from ServiceMax, Windchill, Codebeamer, Onshape, Arena and many of our other products. Feedback from customers has been very positive and validates the direction we're moving in. We'll release more AI capabilities in several products in Q4, followed by a strong AI road map for fiscal year '26.

More broadly, our relation with NVIDIA highlighted in this morning's press release, reflects what's possible when product data intelligence meets cutting-edge innovation. NVIDIA has long used Creo and Windchill. But what's even more exciting is the growing convergence between PTC solutions and the expanding category of physical AI. As AI begins to shape the physical world, not just the digital, product data becomes a connective tissue. That's the role we're playing, and it's the one we expect to deepen with NVIDIA and others. While still early, it will be an area to watch and if it's directly with our vision of product data foundations and AI-driven transformation.

Overall, Q3 was another solid quarter. As we execute in Q4, my confidence is driven by a few things. We have a strong Q4 pipeline with several meaningful opportunities across our verticals and core products, supported by the progress of our go-to-market transformation. Our vision of product data foundations, enabling AI-driven transformation is resonating well with customers and is aligned with durable secular trends rooted in their needs. These include the shift to software-defined products, regulatory-driven traceability and the move to SaaS.

With that, I'll turn things over to Kristian.

Thanks, Neil, and hello, everyone. Starting off with Slide 6. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business. To help investors understand our business performance, excluding the impact of FX volatility, we provide ARR guidance and disclose our ARR results on a constant currency basis.

At the end of Q3, our constant currency ARR using our fiscal '25 plan FX rates was $2.372 billion, up 9.3% year-over-year. In Q3, our free cash flow was $242 million, up 14% year-over-year, while we continued to invest in our key focus areas. Note that the free cash flow we generated in Q3 absorbed approximately $3 million of outflows related to our go-to-market realignment.

Turning to Slide 7. Let's look at our constant currency ARR growth in more detail. Looking at our product groups, our constant currency year-over-year ARR growth was 8% in CAD, driven primarily by Creo and 10% in PLM, driven primarily by Windchill, Codebeamer and IoT. On a year-over-year basis, constant currency ARR grew by 8% in the Americas, 11% in Europe and 11% in Asia Pacific.

Moving to Slide 8. We ended Q3 with cash and cash equivalents of $199 million. At the end of Q3, total debt was $1.236 billion, and we were 1.2x levered. In Q3, we continued the disciplined and consistent execution of our $2 billion share repurchase program and used $75 million of cash to repurchase 444,000 shares of our common stock. We also continue to diligently pay down our debt in Q3 with our total debt balance decreasing by $156 million. In line with what we've said coming into the year, we intend to buy back approximately $300 million of our common stock in fiscal '25 with approximately $75 million of repurchases expected in Q4.

Our fully diluted share count in fiscal '24 was 121 million, and we currently expect fully diluted shares to be approximately flat in fiscal '25.

Looking forward, our capital allocation strategy is governed by a couple of key principles. First, we believe PTC should operate in a net debt position. And second, given the consistency and predictability of our free cash flow generation, we aim to maintain a low cash balance. As such, we expect to return excess cash to shareholders via share repurchases.

With that, I'll take you through our guidance on Slide 9. All of the ARR amounts on this slide are based on our fiscal '25 planned FX rates as of September 30, 2024. We've updated our guidance ranges for ARR, cash flow, revenue and EPS to reflect our year-to-date results and our outlook for Q4. I'll get into more detail on our constant currency ARR guidance on the next 2 slides.

On free cash flow, we've raised the low end of our previous guidance range, and we're now guiding to approximately $850 million for fiscal '25. This guidance absorbs roughly $20 million of cash outflows for severance and consulting fees related to our go-to-market realignment and these are cash outflows that we don't expect to incur next year. For Q4, we're guiding to free cash flow of $90 million to $95 million. At this point, we have good visibility to the free cash flow guidance we've provided for fiscal '25. First of all, during the first 3 quarters of the year, we've generated almost 90% of our full year guidance; second, focusing on cash inflows and as of the end of July, we've already built most of what we expect to collect for the remainder of 25. And third, on the cash outflow side of the equation, which is also important, we know what cash outflows we have planned for the last 2 months of the year.

It's worth pointing out that our free cash flow guidance is not on a constant currency basis. So it's important to be mindful of FX volatility. Approximately 45% of our ARR is transacted in foreign currencies and approximately 35% of our non-GAAP cost of revenue and operating expenses are transacted in foreign currencies. So we have somewhat of a natural hedge. That said, significant FX moves can have an impact.

Given where rates are today, it's worth pointing out that FX is still expected to be a headwind for the full year, but should be a modest tailwind for the second half. All of this has been contemplated in our execution and guidance throughout the year. Importantly, we've maintained consistent billing practices over time. We primarily bill our customers annually upfront 1 year at a time, regardless of contract term lengths. Over the medium term, we continue to expect our free cash flow to grow faster than our ARR with our non-GAAP operating expenses expected to grow at roughly half the rate of ARR. A basic tenet of our subscription business model and budgeting process is that there is natural operating leverage that we benefit from as our ARR grows.

To help you with your models, we also provide revenue and EPS guidance. However, I'd like to reiterate my favorite reminder, ASC 606 makes revenue and EPS difficult to predict for PTC, since we primarily sell on-premise subscriptions and the way revenue is recognized from these contracts can vary significantly based on variables that aren't necessarily relevant to the performance of the business. I did a teach-in on this subject on our Q4 fiscal '22 earnings call that you may want to refer to if you're new to PTC. You can find the presentation on the Investors section of our website.

The summary is we believe ARR and free cash flow rather than revenue and operating income are the best metrics to assess the performance of our business.

Turning to Slide 10. Here's an illustrative constant currency ARR model that shows our guidance for Q4 in context. You can see our sequential net new ARR over the past 11 quarters. The column to the right illustrates the dollar range of Q4 sequential net ARR growth that corresponds to our updated Q4 constant currency ARR guidance range of 8% to 9%. As we've discussed on previous calls, fiscal '25 is back-end loaded due to the size and shape of our pipeline, which is influenced by the size and shape of our expiring base. The majority of our net new ARR comes from upsells, expansions and cross-sells, so our expiring base dynamics can be important.

Raising the low end of the full year guidance to 8% from the 7% growth we talked about last quarter, essentially takes the COVID or GFC-like scenario off the table. The 8% to 9% range for Q4 allows for some ongoing variability given the macro environment, which Neil commented on earlier. For example, deals could be downsized [indiscernible] as well. But we feel good about the size of the pipeline build in Q4.

Moving to add similar illustrative model for fiscal '25 as over the past year. And then the column on the right at rate hole range of full year net ARR growth that is matched to our updated fiscal '25 constant currency ARR guidance range of 8% to 9%. Note that compared to other years shown on this slide, fiscal '24 benefited by approximately $10 million due to incremental deferred ARR in that year.

Finally, and consistent with my reminder from last quarter, we expect churn to remain low in fiscal '25. Since transitioning to a subscription business model, our business has proved to be resilient because our customers need to maintain licenses to our software to continue designing and producing their products. And while we sell to engineering, manufacturing and services departments, most of our business is focused on engineering, where spending by our customers tends to be more protected.

With that, I'd like to turn the call back over to the operator for the Q&A session.

[Operator Instructions] Your first question comes from the line of Tyler Radke with Citi.

I'd be curious just to get an update on kind of the go-to-market initiatives. I know you're heading into year-end planning and thinking about next year. How are you sort of thinking about the evolution of verticalization as well as the product in packaging at this point?

Sure. Thanks for the question, Tyler. And like I was saying, the progression of the go-to-market transformation is giving us confidence -- incremental confidence during the last time we spoke around what Rob, who is here with me that could comment as well as we're working through the dynamics to build a durable go-to-market engine, for the foreseeable future. And so we progressed and we'll talk a bit about what we've seen so far. And I will say, as we're thinking about planning, those inputs around how we're thinking about and seeing the evolution win rates starting to creep up, how we're seeing rep productivity and the way in which Rob is making sure that new reps are ramped up effectively, tenured reps, how do we enable them, how do we arm with the vertical messaging, the product portfolio to get their productivity up. Those are all progressing as we thought they would be with some good momentum that's building behind it as we enter into Q4.

So as we think about 2026 planning, we're actually at a good spot to consider all the progress, plus also the incremental progress that needs to be made in 2026 to really build through what we believe is the acceleration back to ARR growth rate that we would feel very good about based on the opportunity that we're seeing.

But Rob, do you want to add color?

Yes. I mean, obviously, everything that Neil said, just additionally, we feel like we came through last quarter with a lot of foundational work in place. Building on that. We're putting in some vertical messaging to help complement all that work was done, the foundational work and that's been getting tested internally and externally in terms of what it means for our customers that outcomes-based messaging, where we can really start to look at how we help solve problems by industry versus the features and benefits we sell. And that's very much on track. So that will be part of how we think about planning for next year and how we align for next year. So the work that needs to be done to affect the outcomes is in place, and we feel good about it.

Your next question comes from the line of Nay Soe with Berenberg.

Similar to the question before as well, Neil, maybe if you could -- anything else outside of the improvement of progress you've seen in the new go-to-market model. Anything else that's giving the confidence going into Q4 because your comment around the macro outlook incrementally positive probably for the first time in a very long time. So it would be great to hear what else is giving the confidence for the last quarter of the year.

Yes, great question. One of the things Rob and I look at carefully is around how the pipeline evolves. And one of the things I find very refreshing about Rob's discipline with the go-to-market organization is around the alignment across all functions interfacing with the customer to ensure that we are maximizing the potential of that potential pipeline opportunity, but also make sure that we're putting all the resources to ensure that, that pipeline and what's in there, that opportunity is actually executed appropriately to the best way possible based on the customer demand as well as what we can affect from a go-to-market standpoint.

And so Rob and us have put together a process where we look at the pipeline in a far more detailed manner based on opportunity. And then we all, actually, coalesce around how do we move that opportunity to be bigger and how do we move it to actually close rates that it's faster than what we historically saw. So when we think about Q4 and the work is ahead of us in terms of executing closing these deals, a couple of points that give me that level of confidence around the range that we're giving. Number one is we have the highest amount of $5 million-plus deals in the pipeline than we ever have had at PTC. All of those clearly won't close, but we are very well entrenched as an executive team in those accounts, and so we have visibility around how those can evolve to closure.

I will say one of the things that we work through and the difference in how maybe ARR shows up in these deals is the structuring of the deal. So we're centered in secure the customer acquisition and customers might choose to ramp the deal or decide to do more within the quarter. And that affects, obviously, in quarter ARR doesn't change the great value that, that customer provides over the long term for. So one is just the breadth of those deals that we see going in Q4. Two is the distinct and different introspection that Rob has instituted within the go-to-market organization to give us a high level of visibility around the probability of success of those deals coming to closure and by which they might come in terms of the structure.

And then secondly, this is still an evolution that we'll continue on to continue to refine into 2026. But one of the things that we've talked about is, let's raise the messaging, let's raise the conversation of this wonderful mission-critical application that PTC gives to our customers to the C-level of our customers. And across Q3, I can't even tell how many times we are now talking to the C-levels of our customers versus the kind of levels that we've been talking to our customers for the last number of years. So we're elevating the conversation. In fact, I'll give you the anecdote of the announcement that we made with NVIDIA, who also is a great customer of ours of Creo and Windchill, that conversation is elevated to the Jensen level, which would have never happened at PTC for the last number of years, and that's where Rob is pushing all of us to get alignment at the top levels because it shows the great capabilities that PTC has and gives us a framework by which we could show them the great things that we could provide for them to transform their business and apply great technologies like AI to it.

Thanks you very much for all the detail. It's really helpful. Great to hear that with you're already seeing a lot of benefits coming through from the new model. Congrats on that.

Your next question comes from the line of Andrew Obin with Bank of America.

Kristian, just a question. You mentioned something that the tariff uncertainty is dissipating. And it's a very interesting dialogue that we have with the CEOs in the industrial space. Are you seeing an actual change in behavior and maybe some budgets sort of being led out as a result of the deals that have been signed. I know it's only been a couple of weeks, but I've been, I guess, pleasantly surprised by your comments, you think it is starting to make a difference. Any color would be greatly appreciated. .

Sure. I'm not on this call telling anyone that there's an all-clear out there in the marketplace where everyone's back to really doing all the transformation that's highly critical for them all to do. What I could say is that the level of uncertainty from the last call to this call has clearly been mitigated by several things that happened, quite frankly, throughout the course of July, as you noted, Andrew. And so what I'll say is there's more clarity in the conversations, our customers have more clarity around the guardrails they might be able to operate in. I'm pleased by that, by the way, around some of the agreements that have been made in principle, the tax policy, by the way, that got approved in the United States as an example, gives now a defined way in which manufacturers here in the U.S. can actually see the benefit of that tax policy and how that relates to their investment cycle.

So there's been some positive elements of what has been done to give clarity to the situation. But our customers are still dealing, as you noted, Andrew, with how do they deal with higher input costs, even if a tariff policy is set. Now the input costs are, in some cases, higher. How do they deal with that? How do they deal with other, by the way, geographies that have not kicked on the clarity yet? So we're still facing that. We factored that into how we think about Q4. We're keeping a close tab on it. But I would summarize one really interesting thing that has come across through the course of Q3, which is despite the uncertainty that we felt early in the quarter, despite some of the movements that occurred that we predicted in Q3, what I think has been highlighted is that mission-critical digital transformation to remain relevant as a company in a highly complex world with everything that's happening has actually elevated now for our customers to really think through how do they stay relevant in this dynamic world.

And they look at PTC now as a strategic partner to do that. How that formulates over the next few years, we're working hard to execute across that. But I'm pleased by how we're thinking about our customers are thinking about changing their businesses as well using PTC.

Next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Great. This one is actually for Kristian. We love your accounting tutorials. I was a little surprised you didn't mention any old BBA benefit. It may just be timing related and might be more of a next year tailwind. But curious I'd ask if how we should think about it. And is it probably going to be more of a next year benefit?

Yes. Jason, thanks. Great question. Yes, for PTC, that benefit will be a fiscal benefit, and we're still working through some of the details on exactly how much that's going to benefit us. But suffice it to say, it will be a tailwind. So our cash taxes will not be going up as much as we had contemplated previously. But again, details to be forthcoming when we issue our fiscal 2016 guidance.

Your next question comes from the line of Ken Wong with Oppenheimer. .

That's fantastic. Neil, I was hoping maybe you could address the elephant in the room. I know it's not typical for you guys to comment on M&A headlines. But obviously, there was something about competitor acquiring you guys above how you guys are thinking about it and how you would suggest investors think about PTC going forward?

Sure, Ken. Thanks for the question. And by the way, thank you mostly for coming to our event the other day in California. And we invite anyone to come to those events to just see the progress of what product data foundation looks like for PTC and what we could do with customers. But like in terms of your question, as I'm sure you could truly appreciate, we do not comment on market speculation. But I'll say this, PTC is a strategic leader in our space, like you know. So it is not surprising that we'd be of interest in industry conversations about consolidation whatsoever. That said, our focus is on execution and creating strategic value for our customers and shareholders.

Your next question comes from the line of Siti Panigrahi with Mizuho. .

Great. And congrats on a good quarter. And Neil, it's good to hear some of the positive commentary about AI. Could you walk us through some of the early adopters using, and I know it's pretty early to expect any kind of benefit. But what kind of ARR uplift we should expect as customers start upticking AI.

So Siti, good to hear your voice again. Thanks for the question. As you've noted, and I think as we've been mentioning now for a bit of time, but it continues to accelerate, AI is at the forefront of almost every customer conversation. Some, as you're asking, are piloting, some are thinking about scaling. One of the biggest things that is critical here around our approach is we're really differentiating our AI solution that we talked about. We talked about [ ServiceMax ] AI previously, Anji adviser. There's a number of releases that are coming out in Codebeamer, Windchill, Creo 12 is a great indication of what we did with Generative Design and increment on using AI. But our differentiation in combining AI is with combining AI to contextualize product data in PLM, ALM and SLM. This is the whole vision around product data foundation applying AI for actual insights. And there's no one else in the world given the ways in which we know the product data actually works within our customers' enterprise to apply relevant AI.

So Siti, we're seeing really great feedback from POCs that we're undertaking within Codebeamer, Windchill as well as ServiceMax in addition to Onshape, and that is moving now into actually people securing an AI module on top of what they're paying in this example by ServiceMax. I will caution, though, it is still early, and we're not giving out any ways in which this will formulate itself to ARR. We're working through that, but we're learning a lot from our customers. And it ultimately is highlighting that, that product data foundation having us be your CAD capability, your PLM provider, your ALM provider and your SLM provider is absolutely critical for AI to actually work. So we're working through that, and we see a lot of value in it, and we'll continue to post you around how we evolve our AI releases as the year comes to fruition.

Rob, anything to add?

No, listen, it's an amazing opportunity for us for sure. any place that we can help because of our unique data set create predictive insights. As Neil said, you automate repeat task, one of them out there that we can help with, with the data we have and the tools and the just enhance the user experience. So we have tons of opportunity there, and we'll explore those go forward.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

Congrats from me on the results. It's really good to see. Kristian, given the success you had in this quarter and the free cash flow commentary and even some of the commentary on taxes and FX movements. I wanted to ask about the prior $1 billion free cash flow target next year. Last quarter, you didn't really want to reiterate that number. But just sort of curious if you have any increased confidence in that with what you've seen this past quarter.

Yes. Matt, thanks. So first of all, I think that question is probably on everybody's mind. And just to remind everybody that as we talked about last quarter and even before that, there is, we'll call it, 5 key inputs to think about as we think about fiscal '26. One is, obviously, how we finish out this year. really from an ARR perspective. Number two is, of course, the planning and budgeting both the top line and spending plans for fiscal '26. Obviously, FX rates can have an impact, tax -- cash taxes are something to keep an eye on and then, of course, interest rates.

And without really -- we've provided guidance, the guidance range for how we think about how we're going to end this year. We haven't yet talked about the top line or spending plans for next year. So we'll leave those 2 aside. But obviously, FX rates where they stand today are better than they were better than they were certainly throughout most of this year. So that gives incremental comfort and the tax policy also should be a tailwind, which also gives us incremental comfort. So I mean, I guess, net-net, where we are here today, I think we feel incrementally better. Still a lot of work to do to get to a precise number, but we expect we'll have that for you next quarter.

Your next question comes from the line of Blair Abernethy with Rosenblatt Securities.

Great quarter in a tough macro guys. I apologize if you already spoke to this, I had to drop off for a couple of minutes. But Neil, I wanted to ask you about the ServiceMax business, which is now 2.5 years in. Can you just talk a little bit about how it has progressed in terms of cross-selling into the PTC base and the importance ServiceMax is in terms of your go-to-market motion? I just want to understand how much closer this business is going to market with your core CAD business.

Sure. Thanks for the question, Blair. So it's important maybe to start the question off with relating that relating to that please...

[Technical Difficulty]

Sorry to everyone on the call. There's just an emergency reading going on and building right now. Bear with us for a couple of minutes. We'd appreciate it. So we continue to. I think we just got the all clear.

So sorry, Blair, I apologize I gave the whole answer. You didn't hear about it because the emergency in all fairness, I think one thing to note on service back, you'll see it in the customer appendix that there were -- and these are 7-figure deals are on ServiceMax to give context that connection to Windchill in some of these accounts is actually starting to formulate itself customers to think about ServiceMax more broadly. And by the way, vice versa, there was a PLM win that was configured at a Medtech customer because of the ServiceMax connection back to PLM. So it is, number one, differentiating windchill from the other PLM competitors that we have because ServiceMax is unique versus what Siemens has and Dassault, as you all know. That's point number one.

From this year perspective, we have been hit by churn events that have not been pretty in terms of weighing down the overall growth rate of what we were expecting out of ServiceMax. And while we still have a quarter left the several deals that the team is still working on we've had to overcome some churn events that were mainly onetime idiosyncratic in nature. So we don't really see this continuing on in that velocity as we think about 2026. As an example, ServiceMax customer for the last 10 years got bought by a much bigger company that already had an executable field service management solution. And it turned out from us because they were using a different platform. Usually, ServiceMax customers are the ones that actually buy companies versus the other way around. So this was an anomalous event in that example.

But to summarize, we still feel strongly at ServiceMax, its connection back to the core, meaning Windchill and Creo is really critical, particularly in the world of product data foundation as it enters the field and as you apply AI to it, our great ServiceMax is building is actually the most advanced in some of our AI capabilities. So that's something to stay tuned as you think about next year. to really bridge the time between Windshield and ServiceMax and the rest of our digital threat here. So a bit of a negative on the churn, a lot of work ahead of us. And I will say that we've got our work kind of on ServiceMax, but we still feel strongly about the strategic intent of that business and how it fits in within our product data foundation vision.

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Neil, in terms of your current pipeline, are you seeing some improvement in the percentage or magnitude of multi-solution -- multi-letter acronym sales, a quarter ago, you suggested there might be some disaggregation of deals here and there in that respect? Are you perhaps seeing some reaggregation in terms of those kinds of multi-brand deals that are fundamental to your closed-loop life cycle management strategy?

And sorry about asking the second question, but since you highlighted a corporate relationship with NVIDIA, I'd like to ask you about another one that has a direct revenue impact, namely the OEM relationship you've had with [ Ansys ]. I assume that survives the Synopsys acquisition. And given that Synopsys is now much more exposed to your world than just do you see perhaps that there might be some further opportunity to expand on what has already been an expanded relationship with Ansys over the last number of years.

Jay, thanks for the question. tour your voice again. I'll take the second question first on Ansys synopsis. I'm thrilled with the scene being able to execute what was a difficult transaction I give kudos to his boldness as a CEO of seeing that acquisition through. And I think it's going to be great for both companies. As you know, I know Ajay well, and he's done a great job handing that off to [indiscernible]. Rob and I actually have been spending time here, and we'll be spending more time with the product teams, too. I think it's a real good opportunity. We've already been discussing with [indiscernible] to do much more with the new Synopsis Ansys organization, and we'll make sure we lean into that because there is a lot of opportunity there. Nothing for us to disclose at this current time.

But to answer your question, we're predisposed to making this a stronger partnership versus going the other way. So good news there on Senapati together for our customers and for. On the first question around are we seeing more joint product offerings in our pipeline. That also has been an interesting thing that we saw kind of formulate itself in conversations in Q3. We've had a [indiscernible] CXC, by the way, here in Q3, where despite the uncertainty, we actually had the most number of executives and companies come to our CXC to discuss digital transformation. And the reason why I bring that up, Jay, is when they do come up, it's exactly what you said, they think about multi-products to transform. So while they came to the CXC thinking about a coder deployment, which is still critical, might be the first phase of what they do. It brings up the why does Windchill also benefit the product data foundation by doing it together.

That doesn't mean the deal is won all collectively, but it does mean and it shows particularly as we tough thought through the AI strategy, why an engineering-focused workflow company like us to aggregate CAD, PLM, ALM and ultimately what's happening in the service organization has huge value for outcomes that are generated when you put AI on top of it.

So we're looking forward to it. Jay. We're seeing more of it. I'm not here to pop the champagne yet. Hard work is still ahead. And -- but I'm starting to see some good trends on that front to your point.

Your next question comes from the line of Joshua Tilton with Wolfe Research.

Thanks for sneaking me in. I echo my congrats on a good quarter. This one, I think, is for Neil or Rob, maybe, but I think earlier on the call, it was Rob who actually used the words that I believe it was -- the work has put -- has been put into effect the outcomes when he was describing the go-to-market transition. So I guess if the work has put in, like when will we see those outcomes in full effect? Is it a next year event? Is it beyond? Is it sooner? Like when do we start to see the work that you put in bear fruit for the top line growth? .

Thanks for the question. It's Rob. And I'm glad someone was listening, so that's good. The work never stops. So the initial work was really just setting the foundation, and not just, I should say, it was actually an incredible amount of work to be able to do that in a quarter and still deliver the quarter, typically, you could find a number of outcomes, and that was the first kind of step.

The next step is looking at how we talk about how we go approach the customers now, which is looking at the messaging and approaching the customer from an outside in perspective and the problems we solve and how we help them solve the problems, where specifically we play. That obviously is important along with how we staff the team, how we manage the performances of the team we have, upskill and deploy this stuff. And so to get to a specific point, you'd expect when you consider our deal life cycles, something out into next year where you could start to see like more of a lift. But that doesn't mean we can't get a benefit from a message that we deliver well. And in fact, we are. In fact, Neil and I happen to be it an account early on where we delivered the messaging kind of unpolished and really pull the deal back out of the fire that we might not have won. And now we're in the late stages of that deal. And typically, that deal might have gone by. We wouldn't even have seen it. And some of the bigger deals, something like that might take 6 to 9 months to close.

So what I mean by, we're starting to see the results is we just try to -- the results are the checkpoints along the way. First organizing the team, then developing the messaging, starting to deliver the messaging, having that resonate with the customers and then have that be part of their budgeting cycle. So you could expect to see that. And that's what we're pointing at. I mean we're aiming at that for mid next year, mid to late next year.

Your next question comes from the line of Saket Kalia with Barclays.

Okay. Great. Listen, there's been some super helpful commentary on the near-term numbers, even more medium term. I'd love to ask a little bit of a longer-term question maybe for all of you, right, for Neil, Kristian and Rob, I was wondering if you folks can just talk about how you think about commercial optimization. There's a lot of value that you folks provide through your PLM and CAD systems. And historically, I don't think pricing has been as much of a lever of growth in the past. Maybe philosophically speaking, how do you kind of think about that as a lever going forward?

So let me start. Rob could add and Kristian could play cleanup if needed. But philosophically, Rob, myself, Kristian and the leadership team have been working through commercial levers, far more rigor than I think I've ever seen in the 2 years of at least been at PTC. So from a perspective of planning, thinking about options how it impacts customers, how might it flow through ARR, what are the impacts good and bad around certain ways in which we could think about commercial levers has been extreme detailed discussions over the last, call it, 90 days, as Rob has been getting the sea legs underneath them. .

So philosophically, Saket, we believe there is opportunity, and we believe there are distinct ways in which we could capture that opportunity. That being said, I think Kristian said this in prior calls, and I think I'd like to give Rob a chance also to articulate that to show the alignment here, we also have to be very mindful that the customer needs to see value also. And so all of this commercial discussion needs to be interlocked the innovation that I'm pressing really hard on the product team to deliver, whether it be the AI releases, whether it be the continuation of what we're seeing some really good momentum on our SaaS product. So that when we actually execute some of these commercial levers, there is something that we give to our customers and say, "Okay, we're going to take it and there's something new that we actually can appreciate, why you're asking for this." And some cases, well, for the most part, we'll start doing that. In other cases, there are opportunities to continue to optimize the commercial arrangement that we have with customers.

So let me pause there and see, Rob, if you want to add.

Before I actually...

[Technical Difficulty]

All right, 3 times. So Kristian, actually, did some really good analysis to help us at least size the opportunity. And even when I came in, it was one of the first things we had a chance to look at together. And then, as Neil very well said, delivering this in the form of the value to the customer is super important. And also making sure that the teams, the commercial teams know how to have that conversation, which historically, we just weren't really that good at.

So there are a number of things that we're going to bring together. But personally, I think it's a great win, obviously, even for our customers. If you think about how they structure their contracts and how they plan with other major tech providers. This is not like a new motion for that. So it's really more of a new motion for us. We have an opportunity to bring it to them in a new way now in terms of the value we deliver. And it's something that is an important part as we go forward to the strategy for the go-to-market teams.

Your next question comes from the line of Joe Vruwink with Baird.

I was hoping to discuss the new packaging for Windchill that was introduced earlier in the month that strikes me as a pretty big simplification. But maybe what's more intriguing if we can focus on the enterprise user designation and then also the world-based packages. Windchill has always had this great opportunity to expand in the ecosystem around your customers and achieve deeper adoption with some of the personas at the customer. Is this maybe a better way of getting at each of those things? And maybe are you are better equipped to execute? So why is this coming through now? .

Yes. Joe, let me start and Kristian [indiscernible]. Rob. You nailed it. This is -- the pricing packaging that you're referencing is all about making PLM expansion adoption just easier from a customer perspective. It also allows for migration of SaaS to be much more simplified number two. And number three is from how we're like how we're releasing embedded AI into Windchill. This will also make it an easier way in which the customers can consume that type of capability. So that's number one.

Secondly, your question was like, why is this happening now? Well, I'll remind you, last year, when I became CEO, a big thrust of this was PLM is the epicenter of the vision of this company. And as we are continuing to make some success in that regard, we're making sure everything is set up for our customers to really get the value of enterprise PLM broadly and as it moves to SaaS. So that's part of the strategy of executing across the vision that is so critical to the product data foundation.

Rob, anything to add?

No, you nailed it.

Your last question comes from the line of Adam Borg with Stifel.

Awesome. Maybe for Neil, just going back to the macro for a minute. I'd love maybe to go a step deeper just on the federal aerospace and defense vertical, what you're seeing overall? And maybe just comment on the U.S. public sector as we head into the September quarter.

What was the second part of your question, Adam, you cut out a bit?

Sorry about that. Just about the U.S. public sector as you head into the September quarter. .

So we're very bullish currently about the F&D sector broadly globally. Some of you might have been with us in the Paris Air Show and you could have seen our chalet was packed to the gills with the who of federal aerospace and defense companies. And as we all know, in this world that we live in, this has become a critical factor of an acceleration in many geographies the most notable being in Europe, the step-up that's happened with NATO in terms of what their commitments would be to spending there, not only defense, but also space as well. And we obviously had the tax bill passed here in the United States around what defense looks like for United States.

So we are in a lot of different discussions there. Obviously, many of you know, we're very strong in this vertical, and we're leaning into making sure we capture a number of ways in which we got to help our customers deal with backlog and grow their businesses. You also saw that we're going full steam ahead on making sure the start-up community in space in aerospace is taking advantage of great capabilities and the broad set of capabilities we got with Arena, Codebeamer+ and Onshape and what we could do across the entire portfolio. So we're all chips in. We believe we can help our customers dramatically in that area, number one.

Number two is on your question on the U.S. public Look, I think some of the early on conversations, particularly in Q3 around impacts to introspection by different agencies, new agencies is still there. But I think because of the tax bill being passed and because of the criticality of things like NASA and the space program, et cetera, what the DOE is doing, we feel very well situated with how we serve those customers as well, but we're watching it carefully.

I'll summarize that of all the geographies in the world, the U.S. is actually what we're looking at over the course of Q4 and Q1 to get more clarity than the rest of the world, which is actually, quite frankly, getting more clarity on several geopolitical fronts, policy fronts in the United States. So we're looking forward to the administration to continue to provide clarity to U.S. manufacturers across our customer base as well as the public side.

Your last question comes from the line of Clarke Jefferies with Piper Sandler.

So Neil, what stood out to me were some of your comments around maybe some green shoots around inching up of win rates, not tell a clear signal, but maybe some reprieve in what has been a difficult selling environment. I just wanted to ask, what are your expectations for rep growth now that we're getting to the past the period of maximum disruption kind of looking ahead to the year, not guidance, but philosophically, do you think the wallet share benefits from the verticalization will be more impactful? Or is there an opportunity here to increase the hiring on the rep side?

Rob, do you want to start? .

Yes. It's Rob. Thanks for the question. It's a formula we consider all the time because you always want to balance the incremental cost with productivity and ensure that we have optimized productivity before we start to go and incur the cost of incremental heads. But there's definitely an opportunity relative to what we've done here with the verticalization and the industry approach.

Now we also had some opportunity internally to reposition existing investments. So while it wouldn't show in the kind of aggregate total, you might find internally that we had the opportunity to put more direct sellers versus overlay sellers into particular roles. So we're continuing to look at that, but there's no doubt that there's opportunity for us as we go into the next year. And if we see it, I've gotten great air cover from Neil and Kristian to add we're responsible and appropriate.

And one last thing to summarize this. The -- one of the things we said as part of the go-to-market transformation is we would make sure from a layering perspective, we thought through that so that we could fund on the ground in front of customer sellers and those that are technical specialists to actually really think about increasing care and get the messaging out that we're all, as you could tell, super jazzed about taking it in front of our customers.

All right. Thank you for everyone for joining us and dealing with the fire alarms. We apologize for that, and thanks for your patience and for your questions also today. We'll be on the road the weeks ahead. participating in investor conferences in August. Kristian will attend the virtual Oppenheimer Conference. In September, Kristian and I will be in the big Apple at the Citi conference. Looking forward to seeing you all, and Matt will attend the Piper Sandler conference in Nashville. We really appreciate the engagement today. Thanks a lot.

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.

All right. Well, good morning, everybody. Thanks again for joining us today. Dan Jester, BMO Software Research here. And we're really pleased to have with us engineering and design software company, PTC. We have Kristian Talvitie, CFO, with us today. Kristian, thank you for joining.

Dan, thanks for having us.

So in terms of logistics today for all the folks on the line if you have any questions that you'd like me to ask Kristian, just shoot me an e-mail, and I'll do my best to get those answered for you.

So I think to get started, Kristian, it'd be helpful maybe to start the conversation at a high level. Over the past year or so, you've been suggesting to investors that there's 5 kind of focus areas for growth in the company. And so what I want to do is just spend a moment on each one of those 5 drivers, get a sense of what you're seeing today and get your perspective on the business. So maybe we can start with PLM first. So when I first started looking at PTC a few years ago, a big part of the story at the time was the fact that your PLM business was growing faster than the overall industry. And so I know it's been a tough end market for a lot of your products over the past year or 2. But stepping back, kind of what are you seeing in PLM? Are you still growing faster than the market? What should we expect from that business?

Yes. Great question, Dan, and thanks. And just before we get -- before I start answering, my General Counsel would be very angry with me if I didn't remind everybody about our safe harbor language and language regarding forward-looking statements, which is available on our press releases and on our SEC filings on file with the SEC periodically, Forms 10-Q, Forms 10-K, there's risk factors and the safe harbor language. So I would encourage everybody to look at those.

On to your question specifically about PLM, I think that our belief is that PTC is really well positioned with the suite of technologies that we currently have and are kind of in the sweet spot for many of our customers to help them drive digital transformation in the part of the enterprise that we serve. And for them, you need to step back and think about what are the dynamics that they're facing in their respective industries. And a lot of it boils down to getting new, more complicated products to market and complicated both with mechanical precision and/or incrementally more software in those products, getting those products to market faster and with high degrees of quality in as cost-effective a manner as possible. And so we believe that PTC is positioned right at the epicenter of that with really PLM being at the core.

And just PLM quickly or product life cycle management, this is technology that PTC has had now for going on 25-plus years, invested in considerably over that time. And in the beginning, PLM was often referred to as PDM or product data management. And it was used primarily in engineering departments really as a vault for CAD files. It was check-in, checkout for CAD files. And again, over the last 25 years, that's evolved considerably. And now for some of our more forward-thinking customers, PLM is really becoming their system of record for product information. And they're leveraging their PLM system to not only collaborate within engineering departments but also outside engineering departments into, for example, quality or regulatory or manufacturing or even into service departments and cross disciplines within engineering, mechanical and software engineering.

And so with PLM sitting as the system of record where all that data resides, it really creates an opportunity to help them not only speed up the throughput of their own product development cycles, but it also allows for them to do things like configuration management in their product portfolio. So trying to manage a complex product portfolio that has thousands -- tens of thousands of parts to be able to trim down to the extent possible, the amount of parts that they're having to carry, but also maximize the amount of customizable outcomes for their customers. And so that's really the -- I think, the long-term growth driver behind PLM, certainly for PTC and how we think about it.

So it sounds like it's been very durable in terms of the macro trends affecting it. Anything you'd call out in terms of changing in terms of competitive dynamics or how your product is being perceived by your customers or anything else you'd call out from that perspective?

There's a couple of primary competitors in the market, particularly for PLM, solid companies. I think that we get feedback that our software from a capability perspective is certainly up there in terms of comparisons to other alternatives that they have. The other thing that maybe just on a macro and bigger picture perspective, if we think about some of these disruptions that we've seen here over the past few years, and let's take, for example, COVID as one example. Well, certainly, there was some short-term business disruption. But at the same time, I think that also helped solidify in customers' minds really the need to invest in digital transformation, which is a journey, not really an outcome.

And frankly, I think that we'll see how it plays out in the end, but some of the turmoil that we're experiencing now could have that same kind of impact in terms of just, again, solidifying in customers' minds why being as agile as possible, particularly in an environment like we're in today is a necessity for them. And so that's certainly one dynamic that we're watching.

Okay. That's great. So let's move on to the next category, which is ALM and Codebeamer certainly feels like in the last kind of 18, 24 months that, that business has really taken off. And so just help us understand sort of what the drivers have been around the success of Codebeamer and kind of why now? And is this business still going to be an additive contributor to growth? Or help us sort of understand the dynamic that this could have financially in the PLM segment or however else you want to frame it because it's been a great opportunity over the last year or 2.

Yes. We -- thank you. We would agree. It has been a great opportunity and is on the forefront of many of our customers' minds for a couple of reasons. One, what Codebeamer does particularly well is requirements management, test management for their products. And what we're hearing more and more frequently from customers is that they actually really view kind of ALM and PLM together. Again, ALM is not necessarily a new concept, and there are certainly other ALM providers out there in the market. But historically, it had been more thought of as relating to software requirements and test.

And now our customers are saying, well, but our products really aren't just hardware on one side and software on the other. It's really the whole package. And so we're taking a view -- and when I say we, I mean customers that ALM and PLM is really a combined platform because we want to be able to manage the requirements for the entire product in a system. And Codebeamer is positioned pretty well against some of the other competition. It's a more modern platform. It tends to operate with a more agile or in more agile frameworks as opposed to waterfall frameworks. And again, going back to the customers' needs of speed to market, agility, it's proven to be a pretty interesting opportunity for us. Codebeamer 3.0 was an important release and helped address some scalability concerns. But I think now with that out in the market, I think that helps continue to fuel the demand.

Okay. So if you could contextualize it in any way, is this sort of one of the fastest-growing products in the portfolio today? Or how should we think about the potential contribution here relative to others in any way?

It is a faster-growing component of the portfolio. And I think that there's significant opportunity to see continued expansion of ALM and cross-sell into the base. And interestingly, in certain cases, we've been able to get into customers that we haven't been able to get into before with a CAD or PLM first view, but now we're actually getting into these companies with an ALM first motion because, again, Codebeamer is a little bit of a standout in the ALM space. So that's helpful. Who knows if that leads to anything longer term, but it's certainly easier once you have a foothold in a business to be able to get them to look at your broader product portfolio as well.

Okay. That's great. So maybe just moving along to field service management, ServiceMax and what you're seeing there. I think you bought the business a few years ago. I think things have maybe slowed down a little bit for you there. I think maybe some of that is macro, maybe a lot of it is macro, but sort of maybe bring us up to speed in terms of what we're seeing in that part of the portfolio today.

Yes. Again, another great question. I think that we're still of the mindset that the strategic fit of ALM, PLM, SLM is the right answer for many of our customers being able to, again, share product data out with their field service technicians for complex assets that live out in the field, but also to be able to share information from the field organization back into the product development organization, where if there's a more systematic or more common failure that, that company happens to be seeing out in the field with XYZ product that it can be addressed where it needs to be addressed, which is in ultimately the design, right?

And so that logic, I think, still holds true. And yes, you are correct that a lot of the ServiceMax implementations or enterprise implementations, they're larger implementations, not immune to a softer or more volatile macro environment. But again, for many of our customers, their service organizations are, in fact, profit centers for them, and they're obviously an important aspect for customer service and brand reputation and so on. And so for them to be able to improve the quality of the service that they're providing in a cost-effective manner is an interesting value proposition for them. But again, kind of larger scale enterprise deals in the macro we've seen here has been challenged.

Okay. Is there any other sort of limiting factors we should consider? I mean, have you done all of the sort of back-end integration that you need to do in order for sort of the forward-thinking customers who want to put this digital thread together that they can actually execute upon it? Or are there other things that you feel like you need to do in the organization to sort of really help them get to that full optimization of what they would be able to do if they were able to sign this deal and deploy it?

Yes. So I think there has been a considerable amount of work done into the connection between, for example, PLM and SLM, PLM and ALM and we'll continue to strengthen that connectivity as well over time. I think another interesting point that comes up in a lot of customer conversations, certainly more recently over the past 6, 12 months is, hey, tell us about AI. Tell us about your AI strategy. How can that actually help us? And as I think you know, we actually released here recently our kind of first AI agents into actually ServiceMax. That was the first part.

And so those are now GA. Again, it's relatively recent. So we've got a lot of customers that are kicking the tires. But in terms of immediate demand this quarter, I don't know that we'll necessarily see that, but we're certainly getting interest on that front as well. And then I would say that we also have efforts underway for Codebeamer, which I think the market is aware of and for Windchill to get agents in those parts of the of the portfolio as well. And I think we'll see that probably closer to the kind of the turn of the calendar year is when we would see the kind of ALM, PLM agents being released and then more broadly beyond that, I think that's kind of within those various technology platforms. And then from there, I think the next step would be kind of cross technology platforms, agents that can work across SLM, PLM, ALM and then ultimately also connect with other systems that customers are using, whether it's an ERP system or an MES system and so on.

No, that's really helpful. And I was going to ask a little bit about AI later, but maybe this feels like the time to bring it up in terms of your customers' sort of pull in terms of how they want you to provide some of these services. I guess how have the conversations changed over the past few quarters? Have we really seen a broadening of the aperture and sort of many more customers are now really sort of interested embracing forward thinking? Or is this going to be the type of opportunity in which PTC needs to push and say, "Hey, we have all these cool new technologies, you should really try them out." Like how is that dynamic evolving?

Yes. It is becoming -- I think if Rob, our new CRO, were here with me, I think he would say he can barely get through a single customer meeting without having the customer actually asking, "Hey, what's your AI strategy? What does that look like for us?" And so that's certainly a positive dynamic that we're not trying to push some newfangled technology on them that they're not necessarily interested in. But it's certainly being talked about within our customers, probably across multiple of their software landscapes, whether it's engineering or other parts of the organization as well. So yes, a fair amount of interest there.

That's great. So let's maybe move on to CAD. So last quarter, if I remember correctly, I think your CAD business on an ARR basis grew about 8%, which it's the slowest in a long time. And obviously, it's not immune from the macro perspectives, which everyone on this call has heard you and others talk about. But I guess maybe just stepping back, like what's the growth algorithm in CAD from your perspective to where we sit today? I think for the other parts of the business, I think people understand the market, the opportunity to grow maybe in excess of that potentially because of the product area. Is that the same dynamic in CAD? Or how should we be considering the algorithm there?

Yes, really interesting question. I think that on the one hand, the CAD market is one of the more mature markets that we operate in, right? There's kind of 4 of us that really make up the vast majority of the CAD market today. We don't, by and large, see a ton of competitive displacements. It happens every once in a while, but it is -- and there's reason to celebrate it when it does. But I wouldn't say that we necessarily see an increasing trend of that in the broader market. I think where that's slightly different for PTC is with Onshape, which is really the industry's only native SaaS CAD application and the growth that we're seeing there, and again, albeit it's a smaller part of the portfolio relative to other parts of the portfolio, but the growth that we're seeing there really is largely coming from competitive displacements, which is an interesting dynamic. And we'll see how that continues to play out here over the coming years. But that's kind of where I think the state of the CAD market is.

Okay. And then just, I guess, on this last point, SaaS, right, you just brought up Onshape, clearly interesting and it's come up in conversation as well. You've had Windchill+ out for a few years now, Creo+ out for a little bit. Maybe what's the lay of the land in terms of SaaS adoption from your customers? And how should we be expecting that to progress?

Yes. So if we just step back for a second and remember that PTC's business has a blend of some kind of native SaaS properties like Onshape, which we just mentioned, like Arena, like ServiceMax -- and then there are other parts of the portfolio where we can sell either on-prem or in a SaaS environment, such as you mentioned Windchill+, such as Creo+, Codebeamer plus as well. I think ultimately, we are of the belief that this part of the software universe, the technical software cohort of service providers is ultimately going to move to SaaS as well. Like many other parts of the software space, I think it ultimately comes down to it's -- frankly, it's just a better delivery model for software.

And we continue to see interest, in particular, out of those 3 kind of plus categories that I mentioned, it's really Windchill+ is probably the first and foremost. It's still early days in terms of that SaaS transition for us or SaaS migration for us. But we lead new sales engagements with a SaaS-first mentality and then we'll work with our customers on what their plans are in terms of migrating to SaaS over time.

And there's a few different variables that come into play, how customized their environment might be because it's not just necessarily the technology, but there's process change that they need to go through and OCM, organizational change management that they need to go through as well as the technology migration and moving from a highly customized on-prem environment to a SaaS environment requires decustomizing to a certain degree, which is what ultimately creates the that need for the OCM to happen.

And so again, we don't -- we're not in the business of kind of forcing the decisions on our customers, but we certainly want to work with them. And when they're ready to move, we want to be there to help support them and educate along the way as to why it ultimately is -- should be a lower TCO and again, better experience for their users and better outcomes once they've made that decision.

Okay. That's great. Well, that's sort of the high-level lay of the land. So let's maybe take a little bit more of a sharper focus on what's going on today. So last quarter, you updated your full year ARR growth outlook to 7% to 9% this year. And I think a lot of people understand, I think you did a really good job outlining on your call at that time kind of what drove that decision. So the questions that we've been getting have been about, well, what can get PTC back to that low double-digit growth algorithm, which they had aspired to. So if you think about where we sit today and how we can get to that sort of better outcome, what are the key variables that you're sort of considering or that you would have us consider to get an improvement on the growth side over time?

Yes. Again, thanks for that question. I think it's a good one. And really some of the things that we've been talking about even on this call, but I think what we would say is we've got 3 kind of broad pillars of areas of focus. One is the go-to-market changes that we're making, and we can come back and talk about those. The other is some of the product-specific changes that we're making, and we touched on some of those, whether it's SaaS or AI or other releases. And then the last is this, we'll call it, commercial optimization pillar as well that we've been actually working on for a number of years and think that there's continued runway there.

And really, each of those and all of them in concert, the intention of those is to actually get us back to driving net new ARR growth. As you'll remember, our net new ARR has been pretty well flattish for the last 3 years. This year, at the midpoint of our guidance, it's down, but for reasons that I think we're all aware of. But again, the intent of each of those individually and collectively is to get us back to net new ARR growth even in a choppier macro. And we've been in a difficult -- we've used different words over the past 10 quarters or so, whether it's choppy or challenging sales environment or difficult macro, it all comes together really to mean the same thing, which is difficult macro, and it's been for different reasons over the past couple of years as well.

And so even in an ongoing challenging macro environment, our hope is that these things will still get us back to net new ARR growth. Obviously, an improved macro environment would be helpful as well. But even absent that, we're trying to control what we can control in order to drive that outcome.

And can you just remind everyone on the sales front, what are the sort of the key endeavors that you're and sort of the new sales leader, what are they pushing for? And over what pace of time do you expect some of those changes to sort of bear fruit?

Yes, sure. First of all, I would say we talk about go-to-market changes because it isn't really just sales changes. It's really go-to-market, which incorporates both the marketing effort as well as the customer success and technical teams that are all helping with the sales effort and helping customers get the implementation right and get value out of their implementation on an ongoing basis. So that's what we mean by go-to-market changes that we've been making.

And first, I guess, I would probably delineate between the direct side of the business and the channel side of the business. As you know, our channel accounts for about 1/4 of the business today. And we believe there's opportunity for continued growth there. And frankly, on a net new ARR basis, the channel has been flat for a number of years as well. So Rob has also recently hired a new channel leader for us who's really hit the ground running and I think is working with the partner ecosystem to try and figure out what we need to do together in order to drive growth in that part of the business. And then a lot of the other changes that we've talked about, i.e., verticalization and kind of coverage management, that has been really more on the direct side of the business.

And the intent with the verticalization is really to, again, harmonize marketing, the sales effort and the customer success and technical resources around our customers so that we show up with the right folks who understand the industry that they serve, understand how other companies that look like them are thinking about their challenges, understand some of the variables that go into how you might think about implementing some of these changes and in what order and what kind of configuration and what kind of roadblocks you might come up against and how to best come up with a solution for that individual customer. But really speaking, their language more specifically.

Okay. So another sort of topic that comes up a bit is about the efficiency of the business. And you've been sort of very transparent with all of us that you want to grow your expense base at a significant discount to what you're growing the top line. And when you're growing ARR double digits, it gave you maybe some more wiggle room to hit that aspiration. In an environment in which we're more constrained on the growth side, can you still tune your operating expense growth to the same level of precision? Or do you -- are there things that you need to invest in kind of independent of the cycle that maybe break apart that relationship between your top line growth rate and how much you want to grow your operating expenses?

Yes. Really, really good question. And I think just for starters, what I would say is I would think about that algorithm over a multiyear period. It doesn't necessarily apply to any one specific fiscal year. But if you were to go back and look at the last, whatever, 3, 4 years for PTC, I think that you would find that on average, that's held true whether or not in any 1 year it was a little higher or a little lower, which is really based more on the budgeting process and what we think is acute for the year that we're in.

And then I think back to this question about if we're in a high single-digit environment, for example, do we think that we could continue to drive that kind of expense growth? And I think my short answer would be, I think we do because it depends on where you're going to invest. And if I just think about the P&L and think about the different major investment areas, you've got COGS, which growth in COGS is primarily driven by SaaS delivery. So it has more to do with how much SaaS we're selling than any kind of specific investments that we're making into that particular line item. Now obviously, a big component of it is also our professional services organization, but that has been flat and we haven't had an ambition to really try to grow that, but instead rather leverage the broader partner ecosystem. So if I think about the COGS line item, that would be the major driver there. It's an outcome, not necessarily a proactive investment.

And then if you move down to sales and marketing, R&D, G&A, there, I think it actually also becomes a matter of prioritization, meaning I think we have room to continue to stretch the G&A efficiencies even as we scale the business, and we talked about AI earlier, we're looking at that not only for customer use cases, but how we leverage that internally. And so I think what you would see is relatively minimal investment in G&A. And I think if you went back and looked over the last, whatever, 2, 3, 4 years, you would see that, that actually has held true.

There is some increase because of -- it's primarily merit increases, for example, and there have been a couple of smaller acquisitions that bring some temporary G&A that then get worked out over time as we absorb those businesses. But largely, it's been pretty consistent. And then on the sales and marketing line, I think I would think about it is if it's still a difficult macro and we're not really seeing that kind of net new ARR growth on the horizon, the first question for me would be, well, is now the right time to be investing incrementally in sales and marketing because if in this environment, we've added 100 more salespeople, is that really going to drive a different outcome.

We'd have to have that discussion, and we'd think about it. But I think if you went again back and looked at the last 2, 3, 4 years, you would see that sales and marketing, the investment there has also been relatively consistent through the -- certainly for the last 2 or 3 years, which then leaves kind of R&D which is where a lot of our investment has actually gone over the past few years. And I think over the past 5 years, we've actually doubled our R&D expense in terms of a run rate basis from 4 or 5 years ago to where it is today. And I generally don't think that investing in R&D in a difficult macro is going to drive incremental sales this quarter, this year, but it certainly sets us up better for the future and also provides solid support for our customers, which, again, translates into the high renewal rates that we've seen. And so those are good areas for us to be investing in as well.

And now again, it isn't a blanket investment in any of those areas. We want to look at where the need is. We want to look at spend that we have today in the current run rate and can we continue to optimize that? Can we move people around into parts of the organization where we are seeing more growth and more opportunity.

Okay. Well, we are at time. So we're going to have to stop the conversation there. But Kristian, really appreciate the dialogue and your time today. So thank you very much.

Thanks, Dan. Thanks, everybody, for listening and appreciate the support. And if there's any follow-up questions, I think you all know how to reach either me or Matt Shimao, please feel free to reach out. Thanks, Dan.

Thanks, everyone.