PTC (PTC) Q1 2024 Earnings Call Transcript

adminFebruary 1, 2024

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PTC (PTC -1.85%)
Q1 2024 Earnings Call
Jan 31, 2024, 5:00 p.m. ET

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC’s 2024 1st 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.

Matt Shimao — Head of Investor Relations

Good afternoon. Thank you, Jessica, and welcome to PTC’s 2024 1st quarter conference call on the call. On the call today are Jim Heppelmann, chief executive officer; Kristian Talvitie, chief financial officer; and Neil Barua CEO-elect. 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.

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The forward-looking statements, including guidance provided during this call are valid only as of today’s date, January 31st, 2024, 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, Jim Heppelmann.

Jim Heppelmann — Chief Executive Officer

Thank you, Matt. Good afternoon, everyone and thank you for joining us. There may be an issue displaying the presentation materials. If you don’t see them, I invite you to go to investor.ptc.com, you’ll find the same presentation materials there and you can follow along.

We are right now on Slide 3. I’m pleased to report that PTC’s Q1 results provided a good start to our fiscal ’24. We delivered solid financial results while in parallel making great progress on CEO succession. Over the past six months, Neil and I have run a textbook transition process and we’re nearing the combination.

We spent a lot of time together and traveled the world extensively to accomplish the goal we articulated of a seamless transition that ensures continuity and PTC’s strategy and momentum. Neil is ready to be CEO. He understands our business well. He’s fully committed to our strategy and he has the full support of an outstanding executive team.

I’m confident that PTC will continue to drive growth and profitability well into the future under Neil’s leadership. With that, I’d like to turn it over to Neil to discuss the Q1 results, Neil?

Neil Barua — Chief Executive Officer

Thank you, Jim. We’re on Slide 5. Today, I’ll focus my comments on three topics: first, what I’ve learned about PTC over the past several months; second, the drivers of PTC’s durable and consistent growth; and third, driving further value creation with discipline and consistent execution. After my remarks, I’ll hand over the call to Kristian to take you through our Q1 results and our guidance.

Then we will have a Q&A session. Up front, I’d like to say a big thank you to Jim for sharing his industry insight and wealth of knowledge over the past year. The transition has gone very well and has been helpful to have Jim participate as I’ve engaged with customers, employees and investors. I’m honored to be taking over the CEO role on February 14 with PTC on a solid trajectory.

Credit to Jim and the team, we have a great strategy based on a differentiated portfolio of assets and led by a strong team. As I said, my initial focus is on ensuring that we keep building on our momentum with disciplined and consistent execution. Turning to Slide 6. Our customers design, manufacture and service products.

Most of our large customers produce and service the world’s most critical assets, for example, wind turbines, tractors, automobiles and MRI machines. The biggest learning I’ve had relates to what I am seeing in our customer base and how much we could do for them. Digital transformation has clearly taken hold with our customers, around the world, and finally is here to stay. Industrial companies can’t have manual, antiquated or disconnected workflows if they want to be competitive in today’s complex world.

Our customers need to modernize the portion of their operations that spans from design to manufacturing to service. Importantly, our core products are the essential foundation for that. Turning to Slide 7. Industrial companies are still at early stages of leveraging product data effectively across their organizations, but they have started to move on in a meaningful way.

We see the opportunity the same way our customers do. Digital transformation is a journey. Our broad portfolio provides a lot of opportunity to help our customers be competitive, irrespective of soft PMIs and economic cycles. Next on Slide 8.

My second major learning is that the overall PTC team is strong and capable. As I visited our offices around the world, I spent a lot of time doing skip-level, one-on-one meetings and town halls. I was inspired by the caliber and spirit of our people. I was impressed by their extensive product understanding and deep customer relationships.

Their enthusiasm is palpable. They realize the opportunity ahead of us and that we have a portfolio of capabilities to win big. Turning to Slide 9. I also feel very good about the strength of my highly experienced leadership team and how we will operate, going forward.

My style is to bring what I’m hearing from customers into the conversation and capture the energy and ideas from each team member. This collaborative framework is already working well. And as a team, we are making progress in aligning on PTC’s value-creation opportunities going forward, and our focus energies toward that. Let’s turn to Slide 10.

On our past couple of earnings calls, we have been sharing this framework, which shows the cumulative drivers that support our top line growth. Fiscal ’24 is expected to be our eighth consecutive year of double-digit organic constant currency ARR growth. A key point to understand is that our top line growth is sustainable, supported by the many layers of cumulative drivers that we have built over time. Each layer contributes to our ability and drive value for customers and as our customers continue to invest in digital transformation, our comprehensive product portfolio differentiates PTC.

This is because PTC is the only company that can help industrial manufacturers drive closed loop product lifecycle management across engineering, manufacturing quality and service. Moving to Slide 11. We have also been sharing this framework on recent earnings calls which shows the cumulative drivers that support our bottom line growth. As with the previous slide, every layer in this framework is important.

The key point on this slide is that our strong free cash flow growth in recent years is attributed not only to our solid top line growth, but also to our subscription license business model and strong operational discipline. I am fully aligned with Kristian on the paramount importance over free cash flow guidance, and we have a high-level of confidence in the targets we’ve provided. Turning to Slide 12. My philosophy on resource allocation is that focus and discipline are important.

To that end, it is our view that we have a compelling portfolio in place. The key things to get right are to focus on evolving customer needs and to drive strong and consistent execution toward that. To ensure this consistency, we will put a clear focus on our highest ROI opportunities. We will be disciplined and unemotional when it comes to prioritizing our time and resources on the products and product integrations that will create the most value for our customers.

To use an analogy, we plan to put more wood beyond the most important arrows to ensure we drive the best outcomes for our customers and PTC. Let’s now turn our attention to these priorities. Expanding our PLM or product lifecycle management footprint at customers both within engineering departments and enterprisewide. There are two main reasons for this secular trend.

First, PLM systems have evolved to meet the complexities faced today by industrial manufacturing companies. As just one example, the Volvo Group, whose chief digital officer and chief technology officer I was speaking to yesterday, uses Windchill to manage their platform product strategy, which leverages modular components. The sophisticated configuration management capabilities of Windchill have enabled the Volvo Group to produce more product variants while at the same time lowering their unique part count, which is good for the Volvo Group’s top line as well as their bottom line. Industrial companies have come to understand that their ERP systems are inadequate to handle these types of complexities.

They now view their PLM systems as strategic and spending on PLM is in focus. Secondly, industrial companies are facing competitive pressures and are looking for new ways to drive productivity and efficiency as they digitally transform. They also rearchitect their workflows to streamline inefficiencies and drive collaboration with their manufacturing, quality and service operations. Again, it is the PLM system that takes center-stage as this happens, because the PLM system is becoming the system of record for product data, and that makes the PLM system the epicenter for digital transformation of product companies.

Increasingly, PLM systems are being leveraged as the backbone for sharing product data across departments, as well as with design and supply chain partners. This is good news for PTC. The market is coming to us where we are strong. Another large value creation opportunity is cross selling.

PTC has done this successfully over the years, and we have additions to the portfolio that are meeting evolving customer needs and therefore present significant opportunities for PTC: One is, ALM or Application Lifecycle Management, which is led by Codebeamer and is now augmented by our acquisition of Pure variants. Here we have the most modern and capable ALM solution in the market. Products now contain more embedded software than ever, and for many products there has been an explosion in the number of unique software configurations that need to be developed and updated over time. Codebeamer is the next-gen software development platform that enables industrial companies to manage this increasing level of complexity.

Pure variants augments Codebeamer with industry-leading software variant management capabilities, which is a key differentiator. While demand from the Auto industry and its suppliers are a strong driver of ALM growth, demand for ALM tools is expanding in other verticals as well due to the trend toward software-driven products of all types. Clearly, this is an interesting growth opportunity and we have been increasing our investments and focus in this area. A second cross-sell opportunity is ServiceMax.

We acquired ServiceMax in January 2023 and the strategic fit with PTC is solid. For many of our customers, growing the services business is their top priority. As a system of record for high value, long lifecycle assets in the field, ServiceMax significantly enhances our SLM or Service Lifecycle Management portfolio, enabling PTC to now offer the industry’s first truly comprehensive solution for service process optimization. The opportunity set here is large, and this segment is underpenetrated today, with most of our wins replacing homegrown or stretchy-based systems.

ServiceMax has approximately 300 customers and PTC has approximately 3,000, with the exact same profile. Industrial companies that produce complex, high value assets. This provides us with clear cross-sell opportunities and we have now aligned the PTC sales teams with the ServiceMax sales specialists to go to market together. We are building momentum, but keep in mind that this will take some time to develop because sales cycles for this type of product are long given their new implementations for the most part.

Clearly, continuing to grow CAD and converting our install base over to SaaS across all products are two additional opportunities, which overlap to some extent, because we will see conversion of Creo customers to our Creo Plus SaaS offering over time, much like Windchill plus. For customers, moving to SaaS enables a different collaboration paradigm that brings significant productivity benefits, making real-time, multi-user collaboration possible. Beyond the productivity benefits, customers also want the lower total cost of ownership and improved security posture that SaaS offers. As we have stated previously, we see this as another 10-plus-year journey for our customers.

We have visibility to solid growth in our core on-premise business; and therefore, don’t need to rush things and force customers to move before they are ready. The opportunity will be with us for a long time. Therefore, our focus is making sure our SaaS transition is done with an optimized customer experience. It is a tight community, so credibility and references are important.

Wrapping up on Slide 13. I’m honored to be stepping in at such an exciting time. There are so many good things happening at PTC and so many opportunities to drive further value. In part because of the portfolio of products that Jim and the team built over the years and the distinct needs of the market, PTC is well-positioned to deliver sustainable ARR and free cash flow growth, based on layers of cumulative growth and profit drivers.

We are putting, as I said, more wood behind the most important arrows to drive the best outcomes for our customers, and I am focused on working with the team to enhance PTC’s execution on the opportunities that drive the most customer and shareholder value. We plan to host an investor day this year and share more about our key medium to long-term opportunities. We are working toward becoming more consistent with our messaging, and more focused in how we prioritize our time and resources. It is a great time to be at PTC because we have a clear path to unlocking a lot of value.

With that, I’ll hand the call over to Kristian to take you through our Q1 financial results.

Kristian Talvitie — Chief Financial Officer

Thanks, Neil, and hello, everyone. Starting off with Slide 15, PTC, again, delivered solid financial results in terms of both ARR and free cash flow, which we believe are the most important metrics to assess the performance of our business. Our constant currency ARR growth was 23% in Q1 and on an organic basis excluding ServiceMax our growth was 13%. Note, that we acquired ServiceMax in Q2 of fiscal ’23, so starting next quarter Q2 of fiscal ’24, we will no longer exclude ServiceMax from our organic results.

To help investors understand our business performance, excluding the impact of FX volatility, we’ve been providing ARR guidance and disclosing our ARR results on a constant currency basis. At the end of Q1 our constant currency ARR was $2.016 billion, slightly above the guidance range we provided for the quarter. In Q1, our cash flow results also came in slightly ahead of our guidance, with operating cash flow of $187 million and free cash flow of $183 million. As a reminder, our Q1 cash flows included a $30 million of imputed interest related to the deferred payment for ServiceMax.

Our cash flow performance is driven by our ARR and operating efficiency. And in Q1, we extended our track-record of disciplined operational management, while continuing to invest in key priorities like ALM and SaaS. Turning to Slide 16. Let’s look at our ARR growth by geographic region.

Although FX continues to be volatile and the selling environment remained challenging in Q1, our constant currency organic ARR growth was solid across the Americas, Europe and APAC with growth in the low to mid-double-digits. On APAC our year over year organic constant currency growth increased to 14% in Q1, compared to 12% in Q4. And in the Americas and Europe, our organic year over year constant currency growth in Q1 was comparable to what we saw in Q4. Turning to Slide 17.

Let’s look at our ARR growth by product group. In CAD, we delivered 10% constant currency ARR growth in Q1 with the growth, primarily driven by Creo. In PLM, our constant currency ARR growth was 33%, 19 points of this growth was attributable to ServiceMax; and therefore, our organic constant currency growth in Q1 was 14%. In PLM, our organic growth was primarily driven by Windchill and also supported by strong percentage growth in ALM, thanks to Codebeamer.

Although the manufacturing PMIs have indicated a sluggish overall demand environment for many quarters now, our topline has shown good resilience. Part of this is because of our subscription license model, our low churn rates and the propensity for our customer-base to prioritize R&D investments through challenging times. In addition, as Neil explained earlier, our solid ARR growth is being supported by the digital transformation journeys of our customers, which we believe is a secular trend. Moving to Slide 18.

We ended the first quarter with cash and cash equivalents of $265 million. Given the consistency and predictability of our free cash flow, we aim to maintain a low cash balance and prefer to maximize debt reduction. Our gross debt was $2.267 billion with an aggregate interest rate of 5.7%. During Q1, our gross debt decreased by $55 million.

We used $181 million of cash to paydown debt, which was partially offset by $96 million, primarily related to Pure Systems and the $30 million imputed interest payment related to the final payment for the ServiceMax transaction, which we discussed previously. We were 2.8 times levered at the end of Q1 ’24, and expect that to trend down throughout the remainder of the year as we are prioritizing paying down our debt this fiscal year. We intend to use substantially all of our free cash flow to paydown our debt this year and expect to end the year with gross debt of approximately $1.7 billion. In connection with this, we have temporarily paused our share repurchase program and expect our diluted share count to increase by approximately 1 million shares in fiscal ’24.

Heading into fiscal ’25, we’ll revisit the prioritization of debt paydown and share repurchases. Our long-term goal assuming our debt-to-EBITDA ratio is below three times, remains to return approximately 50% of our free cash flow to shareholders via share repurchases while also taking into consideration the interest rate environment and strategic opportunities. With that, I’ll take you through our guidance on Slide 19. We’re maintaining our fiscal ’24 guidance, and following our solid Q1 results, we believe we’re well positioned to deliver on our guidance for the full-year.

For Q2, our constant currency ARR guidance range of $2.05 billion to $2.065 billion corresponds to year-over-year growth of 11% to 12%, I’ll get into more details on the next slide. On cash flows, we’re guiding to free cash flow of approximately $240 million in the second quarter. To help you with your models, we are continuing to provide revenue and EPS guidance, but as a reminder, ASC 606 makes revenue and EPS difficult to predict for PTC since we sell primarily on-premises subscription license — licenses and the way revenue is recognized from these contracts can vary significantly based on variables that we don’t believe are necessarily relevant to the performance of the business. I actually did a teach-in on this subject on our Q4 ’22 call that you may want to refer to, if you’re new to PTC.

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. Importantly, we’ve maintained consistent billing practices over-time, and we primarily bill our customers annually, upfront, one-year at a time regardless of contract term lengths. So, our free cash flow results overtime are comparable. Moving on to Slide 20.

Here’s an illustrative constant currency ARR model for Q2 ’24. You can see our results over the past nine quarters, and the column on the far right illustrates what is needed to get to the midpoint of our constant currency ARR guidance. This illustrative model indicates that to hit the midpoint of our Q2 guidance range, we need $41 million of sequential net ARR growth. Because our ARR tends to see some seasonality, the most relevant comparison is the sequential growth in Q2 of ’23 and Q2 of ’22.

We believe we’ve set our Q2 ’24 constant currency guidance range prudently, which reflects an ongoing sluggish selling environment. Putting this into the context of the full-year, let’s turn to Slide 21. Here is a repeat of the slide we showed last quarter, which illustrates what’s needed to get to the midpoint of our constant currency ARR guidance for fiscal ’24. Looking at the full-year perspective naturally removes a lot of the quarterly volatility related to large transactions and ramp deal and start date dynamics.

As you can see on the slide, for illustrative purposes, even if the full-year is flattish with the last two years from a net new ARR perspective, given the incremental $20 million of deferred ARR in the back half, which we’ve talked about before, we would be at 12% growth for the year. We think the full-year guidance range of 11% to 14% balances both risk and opportunity. Finally, on free cash flow, we continue to have a high degree of confidence in our quarterly and full-year guidance because of the predictability of our cash collections and the disciplined budgeting process, we have in place. So in conclusion, PTC has strong portfolio and strategy and a great team of people with deep expertise and strong customer relationships.

We’re focused on disciplined and consistent execution to ensure we deliver on the value creation opportunities we have ahead of us. With that, I’d like to turn the call over to the operator to begin the Q&A session.

Questions & Answers:

Operator

(Operator instructions) And your first question comes from the line of Joshua Tilton with Wolfe Research. Joshua, your line is open.

Joshua Tilton — Wolfe Research — Analyst

Hey, guys. Thanks for taking my questions. I’ll try and sneak it, maybe two in here, if I can. Just the first one, I thought it was pretty interesting that you mentioned the selling environment kind of still remains challenging and sluggish this quarter.

I guess my questions is, was it more challenging than you guys were expecting 90 days ago? Is it any better than Q4? And maybe kind of how do you expect that selling environment to be for the rest of the year?

Neil Barua — Chief Executive Officer

Yes. Thanks for the question. This is Neil. We haven’t seen any change.

It’s been a sluggish sales environment for a number of years now, particularly around the approval cycles of our customers. It’s just taking a lot, and it has been for multiple years. Nothing has changed worse or better since I’ve been here during the transition time, and currently how we’re looking at Q2.

Joshua Tilton — Wolfe Research — Analyst

And maybe given that answer and the guidance that’s kind of out there, it is implying that a lot of growth, especially in the net new ARR, is to come through in the second half. And, I guess maybe just remind us, I know you have the deferred ARR balance, but what’s kind of giving you guys the confidence in that second half net new ARR growth, especially in the context of the 2Q guide?

Neil Barua — Chief Executive Officer

Yes. I’ll start, and Kristian could add if I missed anything. First of all, looking at the pipeline of opportunities, I feel confident around the number and the size of the deals, the criticality of the customers, the importance of the customers that we’re working with hand-in-hand to get to a conclusion, to move them down this digital transformation journey. And so, when we look at that that pipeline is interesting to us in a manner that gives us confidence around the guidance that we gave to you that we are now targeting.

And so, that’s an element of it. Again, to be clear, this doesn’t assume that anything changes in the selling environment from now to the end of the year. There’s just an element of pipeline and a seasonality that we’ve always had, quite frankly, in the second-half, where these types of deals we’ve historically been able to close out and our intent is to do the same this year.

Joshua Tilton — Wolfe Research — Analyst

Super helpful. Thank you.

Operator

Thank you. Your next question comes from the line of Clark Jeffries with Piper Sandler. Clark, your line is open.

Clark Jeffries — Piper Sandler — Analyst

Hello. Thank you for taking the question. Great to see the resiliency of the business. Neil, I was hoping you could expand on your comments around the timeline for the cross-sell for ServiceMax.

It seems like you’ve made some early progress in aligning the go-to-market. But could you help us think through what that success in cross-sell looks like in fiscal ’24? What it looks like in fiscal ’25? And what’s a reasonable timeline to reach its stride in terms of reaching the existing customer base as well? Thank you.

Neil Barua — Chief Executive Officer

Yes, Clarke, great question. Thank you for asking it. Look, the first year — since clearly, I’m very familiar with ServiceMax, given my background, the first year has been integration work and really getting to know the ways in which the ServiceMax team could interact in a precise way with the PTC team. We did that.

We accomplished that. We had early success, which creates some momentum. Secondly, after we saw that, we’ve implemented a far more constructive and direct selling process by which the ServiceMax sellers are now very much tied into how the PTC sellers are going forward, in this fiscal year. And what that’s caused is two things.

The customer base is now understanding of the PTC broader value proposition of the digital thread and why ServiceMax is so critical to be part of that, No. 1. So that’s creating a level of interest, engage rate and, quite frankly, momentum that we’ve already been seeing. And two, the sellers now have a familiarity of speaking the language that’s necessary for ServiceMax to begin scale.

I foresee this year to be a time period, given the sales cycles of ServiceMax, these are all new implementations for the most part, even if they are already existing PTC customers. That takes a bit of time. And I see this year as building that momentum by which, as we said when we made the ServiceMax acquisition, this is a mid-teens-plus grower. And my expectation is, this year is the building blocks by which the subsequent years really define that sustainable mid-teens growth over or above with ServiceMax.

Clark Jeffries — Piper Sandler — Analyst

Perfect. I really appreciate the color. Look forward to the analyst day. Thank you.

Operator

Your next question comes from the line of Yun Kim with Loop Capital. And Yun, your line is open.

Yun Kim — Loop Capital Partners — Analyst

Hi. Thank you. Congrats on a solid quarter, Jim, Neil and Kristian. ARR growth, Creo CAD has been incredibly resilient for a long time.

How do you see that playing out this year? Can it keep growing in the double digit consistently this year? And do you need Creo+ to kick-in to provide a tailwind for it to keep growing in the double digits?

Neil Barua — Chief Executive Officer

Great question. And one of the great things with the transition with Jim is I’m far more well-versed in the amazing product that we have in Creo. And like you said, good performance from Creo. We expect that to continue.

This is Creo on-premises, Creo throughout the course of this year, given the differentiation, given the strength of that product. And quite frankly, Creo+ is very limited, if at all, in terms of impacting our Creo results and the strength of it, in the near to maybe even the medium term. Like I said, that SaaS journey will be a 10-plus year journey. We’re already seeing the strength of Creo on-prem, feel like that double-digit growth is sustainable.

Creo+ over time, as the market adopts it, is cherry on the top.

Yun Kim — Loop Capital Partners — Analyst

If I could just sneak one in for Kristian. Kristian, I believe this is a big — much, much bigger year for renewals. Do you expect to continue to focus on increasing contract length? And remind us where we are in terms of overall contract length where that has been trending, and any update on the churn rate?

Kristian Talvitie — Chief Financial Officer

Yes. Hey, Yun, thanks for the question. Churn rate continues to be low and steady, so let’s start with that one. And yes, we will continue to try and move contracts to longer-term contracts, which we believe is beneficial for our customers, as well as actually for PTC.

So we’ll continue to try and move in that direction. And then, lastly, I think, your question was around the average contract length, which as it stands right now, still hovers around a two-year term.

Yun Kim — Loop Capital Partners — Analyst

Thanks so much.

Operator

And your next question comes from the line of Matt Hedberg with RBC Capital Markets. Matt, your line is now open.

Matt Hedberg — RBC Capital Markets — Analyst

Great. Thanks, guys. And Jim, congrats on the run as well and Neil officially taking over on, I think, the 14th, you said. So great run, Jim and Neil, looking forward to this next journey here.

I guess, I had a question, Neil. You mentioned — there’s been a lot of focus on Creo+ and Windchill+. And you had some comments in your prepared remarks on the SaaS transition. I don’t think a lot of people feel like this is really like what we typically see in a SaaS transition because I think you’re not trying to like push customers there, but to move to the SaaS variants.

But just maybe how do you kind of philosophically think about that? And are there things perhaps that you can do to sort of show the functionality, that’s where it’s going in the plus variants? And I don’t know, maybe there’s some pricing or incentives that could drive that behavior. But it feels like it’s an accretive thing for you and beneficial to the customer as well.

Neil Barua — Chief Executive Officer

Great question, Matt. Thanks for asking it. It’s important to us. Let me just make sure I reiterate this.

We have a view, I have a view, that was consistent with Jim’s view that the industry will go do SaaS. That’s an inevitability. As I said, we believe it’s going to be, in my estimation, a 10-plus-year journey. It could be wrong, it could move faster, could take a little bit longer.

But the way in which we’re thinking about it here, with already some momentum built, particularly in Windchill+, Creo+ we launched a couple of quarters ago, we’re building with customers already, the resilience, the scalability, the repeatability of a SaaS offering by which when other customers of similar complexity or size or segments are ready to take it on, we have built the strength and the capabilities to do that. And so, the way in which we’re doing is, we’re not taking any foot off the accelerator in terms of our focus, energy, investment into our plus strategy. But we do want to force customers, different than others out there, but it’s very important philosophically as you ask for us to have a way in which we work with our customers as they need to migrate for their value prop to move from an on-prem system to a SaaS offering, we will be there hand-in-hand to do that. And our ultimate belief is, that will reward us in a meaningful way.

When the dam breaks, we might — we will not only get the conversion of our existing on-prem customers to the SaaS offering, but have a differentiated offer for those in other competitive environments that might want to move to the best-in-class solution at PTC.

Matt Hedberg — RBC Capital Markets — Analyst

Got it. Thanks a lot. Super helpful.

Operator

And your next question comes from the line of Adam Borg with Stifel. And Adam, your line is now open.

Adam Borg — Stifel Financial Corp. — Analyst

Awesome. Thanks so much for taking the questions. Maybe for Neil, it was pretty interesting when you talked in your script about focusing resources toward the highest priority areas. A lot of focus, obviously, on PLM, the upsell opportunities you’ve had.

Maybe talk a little bit about IoT and AR and how you’re thinking about those opportunities? And then, I have a quick follow-up.

Neil Barua — Chief Executive Officer

Yes. Very important question. And to be clear, I’m going to be very consistent around making sure, across the broad portfolio of capabilities we have, to make sure with all of you, we focus in not only internally, but as we report our messaging to you around the largest value creation from an aggregate dollar perspective, those priorities, which I made around PLM, SLM, with ServiceMax, ALM, the CAD piece of it, as well as how we transition our customers to SaaS. That doesn’t mean IoT, AR, Servigistics Arbortext, FlexPLM aren’t important.

I have and we have leaders there, capable leaders working through that, many of which are important to our digital thread, many of which of those products are important to industrial manufacturers going through a digital transformation. And what I meant by prioritization and focus is as a general way in which the company has done for many years now, during the planning process, I’m making sure with the team here that, like I said, we put more wood behind the arrows that create the highest value creation opportunities and make sure those that might not have as strong of an outlook or have a different investment profile, we look at that with the time horizon and make the right concise decision to prioritize where we put the investment dollars, and where we may want to de-prioritize a few of those based on the outlook of that business. Right now, we have a very broad portfolio, I feel good about it. But, we’ve been doing it consistently over the last three years just making sure we’re placing the next incremental dollar in the highest value creation opportunities, going forward.

Adam Borg — Stifel Financial Corp. — Analyst

Incredibly helpful. I really appreciate that. Maybe just a quick follow-up for Kristian just on the model. I think the guidance implies on opex, a 200-basis-point increase in opex spend relative to the guidance you talked about 90 days ago.

Maybe talk a little bit more about what are the areas that you’re looking to drive increased investments? Thanks so much.

Kristian Talvitie — Chief Financial Officer

Yes. Hey, Adam, it’s Kristian. No, I mean, I think that our opex guidance for the year is pretty well in line — it remains unchanged from really what we would have said 90 days ago. In terms of areas where we’re investing incrementally this year, it’s what we’ve been talking about.

There’s ALM in particular, there’s some investments into SaaS, which includes Windchill+, includes Creo+, actually includes some Atlas those are areas where we’ve got incremental investment going this year. But in terms of change to the investment profile from last quarter, I’m not sure I’m tracking with you.

Adam Borg — Stifel Financial Corp. — Analyst

Got it. We can talk more offline. Thanks so much.

Operator

And your next question comes from the line of Joe Vruwink with Baird. Joe, your line is open.

Joe Vruwink — Baird — Analyst

Great. Thanks for taking my question, and also wanted to extend my best wishes to Jim. Another one on just maybe more recent performance. So 1Q was a good quarter for new ARR added.

You finished above guidance. I think, you grew that line 20% year-on-year. Anything to call out just in terms of what drove the upside in the 1Q plan? And then, maybe looking to 2Q, any discrete factors that would explain kind of a year-over-year decline in new ARR added? Or maybe relatedly, is deferred ARR factoring any more or less in the outlook today?

Kristian Talvitie — Chief Financial Officer

Yes. Hey, it’s Kristian. Thanks. Good question.

So again, I think Q1, again, despite a challenging environment, I think we executed well. I think that across geographies, across product segments, hopefully, that showed through in our results. As far as the full-year is concerned, again, we are maintaining our full-year guidance, as we start looking at Q2 here. I think, we’re just trying to be prudent on the immediate-term outlook.

But as a reminder, I guess, for everybody as it gets back to the — there’s ARR and then there’s cash flow. And on the cash flow side of things, whether there could be more volatility on ARR on the cash flow side of things, both from a quarterly and annual guidance perspective, I think, we feel very good about that guidance. But otherwise, I think seasonality is kind of in line with last year from an ARR perspective, taking into account the incremental deferred we’ve talked about ad Nauseam.

Joe Vruwink — Baird — Analyst

OK. Great. Thank you.

Operator

And your next question comes from the line of Tyler Radke with Citi. And Tyler, your line is now open.

Tyler Radke — Citi — Analyst

Thanks so much for the question and congrats to you, Neil, and Jim. Look forward to the next journey here. Neil, you talked about how you made a number of observations across the product portfolio in your time here. One of the things that stood out to me was on your comments on the SaaS transition, kind of talking about it as a 10-year journey.

I think in the past, PTC had talked about it, maybe a little bit more medium-term than that. So I’m just wondering, and maybe the question is for Kristian, is there any impact we should think about on the medium or long-term financial targets, as it relates to that? And then, conversely, what are you seeing on the on-prem side maybe that surprised you to the upside that’s giving you that confidence, that it’s about a little bit of a longer time frame? Thank you.

Neil Barua — Chief Executive Officer

Hey, Tyler. So let me try, and then Kristian could add to this. The two actually are related, your two questions. And as you know, the on-prem business is delivering really solid growth.

And one of the reasons why we talk about PLM, PLM expansion, we are still in the early innings of PLM, as I mentioned in the prepared remarks, in the early innings of being the system of record for product data across our customer base. It is happening in many cases. But there is, as far as the eye can see, in all the travels Jim and I have been doing to meet with customers, it is now happening. And so — and this is based on our on-premise Windchill systems.

So that gives the confidence as we think through structuring, scaling, enabling our sellers, the marketing around it, to make Windchill that system of record for product data that we’re seeing in already some of our customers, that’s why I have the confidence around really putting the wood behind the arrow around that initiative, combined with the ALM initiative that has a very interesting growth factor that we talked about, that is predominantly on-premise. It will move to cloud over time. But those two growth vectors are and the wood behind those two arrows are on-premise to be crystal clear. And then, as a prior question asked, our Creo on-premise business is solid and rocking and rolling.

So those three things combined, lastly, with the ServiceMax cross-sell, which is a SaaS product, as you know, Tyler, those give the confidence around the continuation and the types of guidance that we put out in the mid and long term. That being said, for the mid-teens and the — midterm to long-term ARR guidance, there is an element of SaaS starting to transition into that ARR growth rate in the mid- to long-term. My point around the 10-year is the industry and all our customers will take, in aggregate, that long, but we already are taking Windchill+, some Creo+ customers along in the journey. And that should accrete in the mid and long term.

And maybe we see the dam break earlier and it accretes faster, but our estimate is to be tempered here and to work with customers hand-in-hand to get that upside on the SaaS transition. Kristian, anything to add?

Kristian Talvitie — Chief Financial Officer

I think that was spectacular. Thanks.

Neil Barua — Chief Executive Officer

That’s the first time Kristian complimented me. Thank you, Kristian.

Tyler Radke — Citi — Analyst

Thank you, guys. And so, just to clarify, no changes to the medium- or long-term targets? Sounds like no, but I just wanted to clarify.

Neil Barua — Chief Executive Officer

No.

Tyler Radke — Citi — Analyst

Awesome. Thanks so much.

Operator

Your next question comes from the line of Matt Broome with Mizuho Securities. Matt, your line is open.

Matt Broome — Mizuho Securities — Analyst

All right. Thanks very much. I’ll add my congratulations to both Jim and Neil. So maybe just on partnerships, it’s clearly a lot happening with Ansys right now.

I’m just curious if you have a view on how this proposed acquisition by Synopsys might affect your partnership there. And maybe if you could remind us the sort of materiality or the strategic importance of that partnership to you.

Neil Barua — Chief Executive Officer

Yes. Look, Ansys has been a good partner of ours for many years and will continue to be a good partner. They are part of how we talk about and have a value prop around Creo and the added simulation capabilities. And we help them similarly, right, around what they’re doing on simulation with ours.

So it’s a very good partnership for both sides and critical to both sides to a certain extent. To be clear, too, this is actually if the deal goes through, right? I’m not a regulator so I can’t speculate on that. But if the deal goes through and Synopsys is the eventual owner of Ansys, the great thing for us is there’s zero overlap that we have with Synopsys, which might, over time, I don’t know yet, but might, over time, create an opportunity for us.

Matt Broome — Mizuho Securities — Analyst

Excellent. And then, maybe if I could just also ask just how your business in China resolved during the quarter? And if you’ve seen any incremental impacts from any sort of regulatory restrictions there? Thanks.

Neil Barua — Chief Executive Officer

Yes. We haven’t seen China be a drag on us.

Matt Broome — Mizuho Securities — Analyst

Perfect. Thanks very much.

Operator

And your next question comes from the line of Stephen Tusa with J.P. Morgan. And Stephen, your line is now open.

Stephen Tusa — J.P. Morgan — Analyst

Hey, guys. Good evening.

Neil Barua — Chief Executive Officer

Hey, Steve.

Stephen Tusa — J.P. Morgan — Analyst

Kristian didn’t come across to me as the managing uptight, but that was a heck of a comment to the new boss. Smart move.

Kristian Talvitie — Chief Financial Officer

I wanted to say it might be the first time I’ve complimented anybody.

Jim Heppelmann — Chief Executive Officer

And I might second that.

Stephen Tusa — J.P. Morgan — Analyst

I think just going back to the question on costs. I think in last quarter’s presentation, you said that non-operating, kind of non-GAAP operating would be up 6% to 7% I think you’re saying now 7% to 8% or something like that. I think that’s what the prior question was referring to. Maybe that’s four times or something like that.

I think that was probably the source of that question. Just curious as well on that.

Kristian Talvitie — Chief Financial Officer

Yes, that would be FX-related.

Stephen Tusa — J.P. Morgan — Analyst

Yes, OK. That makes sense. And then, just on your ARR kind of leverage down to free cash, you beat ARR this quarter by a little. You raised — you beat cash by $3 million.

It was like a 20% to 25% drop through on that ARR beat. Is there anything to that math? I know you guys have said with upside ARR, you’ll probably invest some of that away so we should just keep an eye on your cash guidance. But is there anything to math like that, where if you get a little bit of that extra ARR, that like it’s kind of hard to invest in a way that you will get some upside drop-through on that ultimately? Or am I thinking too much?

Kristian Talvitie — Chief Financial Officer

Really, no, no. That’s a great question. And so, let’s just — I think the right — the thing that you need to remember with ARR and cash flow is, we’ll call it ARR equates to invoicing and then cash flow relates to collections and payments. And so, our standard terms are 30 days, and depending on the customer, our average terms are definitely longer than 30 days.

But let’s just work with 30 days, which means that any incremental ARR that we get in a quarter, that comes in the last month of the quarter actually, isn’t impacting that quarter’s cash collections and therefore that quarter’s cash flows. That all goes to the subsequent quarter. So you have to just remember that time lag when you’re thinking about it. Does that make sense, Steve?

Stephen Tusa — J.P. Morgan — Analyst

Yes. Yes, makes a ton of sense. One last one for you on cash. Last quarter, you said 55% of the year will come in the first half.

I think this quarter, it’s now 58%, so a little more front-end loaded. Again, anything going on there? I mean, it would, I guess, make us feel — we all feel, I guess, better about the year when it’s a little more front-end loaded. But anything going on there from a timing perspective that stands out?

Kristian Talvitie — Chief Financial Officer

Yes, I feel better when it’s more front-end loaded too, Steve. And I think what we said, if we’re going to be super technical about it, is more than 55%. And now we’re just kind of honing in on the map and saying it’s going to be more like 58%. But otherwise, I think we had great collections performance here in Q1 and the outlook for Q2 is solid as well.

So I think we feel pretty good about the range for Q2 and obviously our outlook for the year.

Stephen Tusa — J.P. Morgan — Analyst

Great. Thanks a lot. Appreciate the color.

Kristian Talvitie — Chief Financial Officer

Thanks.

Operator

And your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Jay, your line is now open.

Jay Vleeschhouwer — Griffin Securities — Analyst

Thank you. You noted on the call your closed-loop life cycle strategy and your cross-selling structure and process. The question I have is about customers’ receptivity to cross-selling. And what I mean is, do you see any correlation between the likelihood of cross-selling and the size of the customer or the customer’s products and/or perhaps the end market? Is there anything that will make a customer in industry X or where product Y more receptive to your multi-solution cross-selling approach than perhaps another customer might be? Then a follow-up.

Neil Barua — Chief Executive Officer

Yes. Thanks for the question, Jay. In terms of ServiceMax cross-sell, a key factor is having product companies, OEM manufacturers having long life cycle assets in the field. And if you want to double-click, critical assets within life sciences, electronics and high tech, the industrial manufacturing space, the ones that are in the field for a long time, the product companies are now needing service revenue to offset any declines or lack of new product innovation to make sure that they’re getting a consistent durable revenue stream themselves.

So that’s a consistent correlation that we’re seeing from a customer lens. Two is when a customer has Windchill, one thing that’s really interesting is this past quarter, we won a very large industrial manufacturing win at ServiceMax, over a seven-digit-plus deal that, quite frankly, I was trying to win for five straight years at ServiceMax on our own unsuccessfully. And we were able to take this deal down because the customer has Creo and Windchill. And they, over time, as they implemented ServiceMax, want the asset field record, the system of record of the asset to actually flow back to their PLM system.

So the combined solution, Jay, of — and the correlation point of a customer with Windchill with long life cycle assets that they produce is a really nice makeup, which brings that math of 300 ServiceMax customers equated with 3,000 similar like-minded PTC customers. Last thing quickly on ALM, which is actually a big cross-sell for us as well, that’s interesting to us on the other side of it. So as we mentioned I think last earnings call, we’ve been seeing Codebeamer as a tip of the spear where we’re particularly in automotive, automotive suppliers where now we’re getting in the conversation as we’re showing them the Codebeamer value prop, we also have a PLM system that might not be PTC, how can the two work together with hardware configuration management, with software configuration management, Codebeamer. Should we actually look at PTC for the combined offering? That’s interesting to us.

We’re starting to see it. I wouldn’t call it a trend yet but it’s another opportunity that might have a correlation that we’re starting to see some early signs of, Jay.

Jay Vleeschhouwer — Griffin Securities — Analyst

OK. Also, over the last two or more years, it’s been demonstrable that Creo and Windchill have gained share, as you know. And I think there are some describable reasons for that. But over the course of fiscal — of calendar ’23, it did look as though CAD market shares were beginning to stabilize.

And I’m wondering if you are beginning to see any evolutions or new dynamics in either CAD or PLM suggesting that customer requirements or selection criteria or anything of that kind might be changing from what they’ve been over the past number of years as it might affect your Creo or Windchill momentum?

Neil Barua — Chief Executive Officer

Yes. I’m going to — I’ll take the Windchill piece, and maybe I could ask Jim as I’m getting deeper into the Creo piece to comment on that. But one of the interesting things we’re seeing with our prioritization of putting wood behind more of the arrow in the PLM expansion category, which is predominantly Windchill, as you know, Jay, is when customers are going through an ERP migration, particularly SAP to S/4HANA, we’re seeing that as a really interesting point where the customer is looking at what workflows belong in ERP system versus MBS versus a PLM system. And we’re actually feeling advantaged when that introspection is happening to have more functionality being put within a PLM system, which makes Windchill far more important in the transition process.

So that’s a theme we’re starting to see, No. 1. And No. 2, again to reiterate, the idea of having a broad portfolio not only on the SLM side, ALM side, I believe we’re starting to have the customer conversations where having a Windchill PLM system becomes more critical to have a common data flow over time through the thread.

And we’ll see whether that amounts to competitive placements, but we see that as a continuation of some themes that are interesting for us for Windchill expansion. Jim, do you want to talk about Creo?

Jim Heppelmann — Chief Executive Officer

Yes, maybe I could add. Jay, I think your point is that PTC has had good double-digit growth, steady as she goes, for some years now with Creo. And some of the competitors have lost momentum and then seemingly gained some of it back. I think you know we have one European competitor in particular whose customers aren’t that happy, and that dynamic serves us very well.

Now it looks like they have some momentum, but I think you remember, too, they put through some fairly nasty price increases, which I think might cover up a little bit what’s really happening because the price increases might give them some short-term growth but actually exacerbate the problem that the customers are frustrated about. So I don’t know. I feel like our business has been steady. And we think, as Neil said clearly before, will continue to be steady.

Creo+ maybe offering a bit of a tailwind over time. I think that we’re in a position to take share with Creo and to take share on the other end of the customer base with Onshape. And so, I like our CAD prospects.

Jay Vleeschhouwer — Griffin Securities — Analyst

Very good. Thank you.

Operator

And your final question comes from the line of Saket Kalia with Barclays. Saket, your line is now open.

Saket Kalia — Barclays — Analyst

OK. Great. Guys, hey, thanks for squeezing me in here. I’ll keep it to one question.

Just first off, congrats, Neil, on the upcoming appointment, and Jim, tip my cap to you for all the years at PTC and the industry. The question I want to focus on here maybe for Kristian and Neil is just the ALM business overall, right, really spearheaded by Codebeamer. How do we — can you just maybe give some contours on roughly how big that business is from an ARR perspective, how fast it’s growing roughly? And Kristian, you talked about sort of the range of outcomes in sort of this ARR guide. How much can Codebeamer sort of affect that range of outcomes? Because it just sounds like there’s a lot of excitement, a lot of product success there.

I wanted to just put some numbers around it to the extent we could.

Neil Barua — Chief Executive Officer

Yes. I mean, I’ll start, Saket. Good to hear your voice. I’ll let Kristian talk about if we do break out ALM from a size perspective.

But it is, from my perspective, nowhere near the size of Creo and Windchill at this current time. However, the pace of growth is extremely exciting. I mean, as fast as I’ve seen West Coast start-ups start growing, I’m starting to see that same level of percentage growth year over year. We got some work to do so it’s not going to be a straight up into the right line.

But that being said, one of the things we’ve been seeing is Codebeamer is catching fire. I think we mentioned that as a quote from last quarter’s call. And we’re seeing as the adoption occurs or a POC occurs at a large automotive company that, for example, Jim and I were in Japan. Once they start testing out, this thing goes big relatively quick.

As an example, we won a very — what we thought was a very large Codebeamer, not the one that we press released, another one within Q4, right, of last year of a large European auto maker. This last quarter, we got an add-on order already of sizable value from that same customer. So that’s leading to this excitement piece, No. 1.

No. 2 is some of these deals with Codebeamer are very substantial size, right? Not only the add-on orders but like the size of the deal because the users that need software development tools like Codebeamer, are, in some cases, a lot larger of a population than the mechanical engineers. And so, that’s why it has such a what we call a prioritization of the high dollar value creation opportunities. That’s why part of that.

Jim Heppelmann — Chief Executive Officer

Could I just add? It’s also a very strategic high ground. It’s an important piece of business to win.

Saket Kalia — Barclays — Analyst

Absolutely, absolutely. Anything we could talk about in terms of, again, just sort of contours, rough sizing, because it does feel like an important sort of long-term investment area?

Neil Barua — Chief Executive Officer

Yes, here. So let’s just try rough sizing and say it this way. This year, we ought to pass through the $100 million mark on ARR with our ALM segment.

Jim Heppelmann — Chief Executive Officer

To be clear though, that would be the integrity product we previously had plus the Codebeamer product added together, yes.

Saket Kalia — Barclays — Analyst

So like a total ALM portfolio would be $100 million by the end of this year?

Kristian Talvitie — Chief Financial Officer

At some point this year, yes, and it’s growing faster than the —

Neil Barua — Chief Executive Officer

Accretive to growth.

Kristian Talvitie — Chief Financial Officer

The overall company growth. It’s accretive to growth.

Saket Kalia — Barclays — Analyst

Got it, got it. Guys, very helpful. Again, tip my cap to both of you. Well done.

Jim Heppelmann — Chief Executive Officer

Great. Thank you. So I think that’s the end of the questions. So before Neil wraps it up, I’d like to just take a minute to personally close out with PTC’s investor community and to thank all of you for so many years of support.

During my tenure, I always listened carefully and took investor input seriously, and it helped shape our strategies and allowed the PTC team to really move the needle on value creation. I know Neil will do the same. The transition process with Neil has been lengthy, thoughtful, and frankly, it was even a lot of fun. As a result, I can tell you with confidence that Neil and team are ready to go.

Neil has my congratulations and full support. So I want to sign off then by saying thanks, and goodbye one last time, knowing I’m leaving a strong company in good hands. Over to you, Neil.

Neil Barua — Chief Executive Officer

Thanks, Jim, truly, and thank you, everyone, for joining us and for your questions today. In the weeks ahead, Kristian, Mike DiTullio, Matt Shimao and I will be on the road participating in investor conferences, and it would be great to keep the dialogue going. During the last week of February, Kristian will be at the J.P. Morgan Credit Conference in Miami.

Matt will attend the Wolfe Conference in New York. During the first week of March, we’ll be at the Morgan Stanley and KeyBanc conferences in San Francisco, then Mike DiTullio will attend the Virtual Loop conference during the second week of March. And also, we have two bus tours coming to visit us at our Boston headquarters next week. Those visits will be hosted by Kristian and me.

Please reach out to J.P. Morgan or Piper Sandler if you’re interested. And on behalf of the team, thank you, again, and we look forward to engaging with you.(Operator signoff)

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