Good afternoon, everybody. Thank you for joining us here in the Seaport District at our headquarters and those on the live broadcast for our 2 hour presentation today. Excited to have everybody here. I'm going to run through the agenda here. So Jim is going to kick us off, talk about our growth strategy.
Christian is then going to follow-up and walk through a financial update. From there, John Herstek is going to lead a pretty interesting discussion on Onshape, give you a deep dive into the company and we've got a special guest that he's going to introduce us to. Then we'll do some Q and A and then kind of a last minute addition was our tour that we're going to have from 3 to 5 for those that can stick around of our CXC. So you can see some more demos if your schedule permits. I'll remind you for the Safe Harbor statement here that we'll be discussing non GAAP financial measures and forward looking statements and please refer to all of our SEC filings.
With that, I'm going to turn it over to Jim Heppelmann, CEO and President of PTC.
All right. Good afternoon to everybody here in the room with us, and welcome as well to people that might be listening in on the webcast. So I really want to talk about the growth strategy of PTC because I'm going to make the case here, we really have become an interesting growth company. Now on earnings calls for years already, I've been talking about sort of 3 strategies: growth, subscription and margins. And today really is all about growth, but just let me tick off real quickly kind of the latest on what's been happening with subscriptions and margins before I dive into the growth story.
So on the subscription front, I think you're aware we really have become a subscription company now at this point. This year, we plan to do 95% of our software sales in the subscription business model. And while that's coming off 85% last year, last year was influenced by the last time buy in Q1. And in fact, in FY 'nineteen, Q2, Q3 and Q4 were all in the 90s. So I'd say we're already now in our 4th quarter of nearly pure subscription sales.
We expect it to peak around 95%. So basically from the standpoint of converting our business model to subscription, I think we can check the box and say we're done with that. Now if you were part of the management team or in the boardroom, you'd know there's a lot of things we want to do to optimize the subscription business model, a lot of things we could get better at. But the fact of the matter is we're optimizing our new subscription business model because that's really the only business model we have. Okay.
On the point about margins, the simplest thing is just to show you our track record. And by the way, it goes back much farther than this. When I became CEO 10 years ago, really, we had 13% margins. And we've made steady year after year after year progress of 1 point, 2 points, 3 points. Of course, that was influenced a little bit by the subscription transition, but we've had good steady progress on improving margins for literally a decade.
If you look over this time period of FY 'fifteen through our guidance FY 'twenty, we have a 3% CAGR on OpEx spending, which is very, very low. And it suggests that if we keep that going, there's actually room for much more going forward to still live within our profitability and free cash flow targets. Now it's a little bigger than 3% this year in fiscal 'twenty. And that's really because we acquired Onshape right at the beginning of the year. And while we are planning to take out costs through a modest restructuring effort, that takes some time.
So for a period of a quarter or 2, we'll have some duplicative cost until we're able to go harvest the synergies and take out some cost and get our cost structure back to the point where it'll make a lot more sense going forward. But nonetheless, I think on the OpEx discipline front, I think you'd have to acknowledge that the company has done a very, very good job being disciplined around spending, which then takes me back to the main discussion, which is growth. And that's really what I want to talk about. So I think that PTC at this point has become a bona fide growth company. And by that I mean a company who's looking at a 5 year going forward CAGR on ARR of mid teens and that will approximately double the size of the company's ARR over that period of time.
So this is a mid teens growth company that when you couple that mid teens growth in ARR with that long history of spending discipline, you're going to get free cash flow growth in the upper 20s CAGR throughout that time period. Now a couple of points I want to make. First of all, let me point out our Chairman is here, Bob Schechter. Can you raise your hand? So Bob Schechter is back in the corner if you want to catch him afterward.
But Bob Schechter said to me, I don't know, probably 6 years ago, Jim, you made so much progress on profitability. What you need to think about next is a growth strategy. And so we embarked on 2 big ideas over the past 6 years. 1 is transition our business model to a subscription model that's much easier to grow. And then the second is pursue adjacent high growth technology markets like IoT, like augmented reality and now like SaaS.
So in that time frame, while lifting the growth of our core business, we've added 3 fast growing growth engines with our ThingWorx IoT story, our Vuforia augmented and virtual reality story, and now with our Onshape story. So I think I've gone from the point where we were low profit, low growth to high profit, low growth to now high profit, high growth. And it's actually fun to go into the board meeting and review the annual plan and the long range plan because we now have a completely credible mid teens growth plan over 5 years on our top line metric. Now I do want to point out before I go any farther that actually ARR is the number one metric here at PDC, not free cash flow. Free cash flow is very, very important, but it is our growth in ARR that's enabled our growth in free cash flow.
And one of the things the company in the boardroom has done is really clarified to ourselves that we're a growth company and growth companies go after the top line. Now again, we have great spending discipline. And when you couple that top line progress with that spending discipline, you're going to get huge increases in free cash flow. But you should know we might from time to time do something that temporarily affects free cash flow, like for example, acquire Onshape and it takes us a while to get the cost out and it might take us a while to pay the debt off. But if we acquire Onshape and our free cash flow temporarily goes down, but our ARR growth goes up in perpetuity, we're going to get all that free cash flow back and more in due time down the road.
So I do want you to understand, we see ourselves as a ARR growth machine and that's really the number one mandate of the board and the management team is to turn this into a high growth company. Now if you look at our near term plan, really our guidance, you're starting to see that. After 2 years of 12% actual growth in ARR, we guided this current fiscal 'twenty to 12% to 15% ARR growth. You can see that that's a combination of about 5% growth in our focused solution group or FSG, actually on declining bookings growth. So still growing ARR even though we're planning bookings to be down a bit.
There's about 10% growth planned in our core CAD and PLM business and then 40% growth planned in our growth business, which is again IoT, AR and Onshape. Now much of that 40% growth is already baked in because in our new description of ARR, we have closed business in past quarters that starts or else ramps throughout fiscal 'twenty, which will come in. Now of course, we need to go win new business, but we feel pretty confident about that guidance range. Now if you look beyond the current annual plan and say, can PTC really sustain this growth over 5 years? I think the picture is very, very interesting.
We really compete in 4 main businesses, CAD, PLM, IoT and AR. And in CAD, we have traditional CAD and now we have SaaS CAD. So let's take a look at these markets. CAD is a $5,100,000,000 market whose growth rate has lifted. Now the cat analysts who track the market have lifted the growth projections, in large part because of the subscription effect from PTC and Autodesk.
PTC and Autodesk growth rates are lifting the growth rate of the overall industry. We go over to IoT, that's a $2,000,000,000 market growing at 26% according to this particular analyst. And that would take it out to $6,500,000,000 market by FY 'twenty four. Augmented reality is a smaller market, about half a 1000000000 and growing at a 60% CAGR. By the way, PTC's numbers all look good against these growth rates.
And then if we go to PLM, that's a $1,900,000,000 business growing 7%. If you mix all that together, you get an 18% combined CAGR, which would take these markets to $22,000,000,000 of addressable market in the timeframe of our long range plan by 2024. So I think it's entirely possible to believe if we have strong competitive positions that PTC should be a mid teens or better grower while participating in markets like this. So the question is, do we have strong positions in these markets? And so I'm turning again to some outside industry analysts and what they've published over the last year.
Let's start in the upper left, CAD. Not too much has been published on CAD in recent years, but ABI Research did a top ranking of 3 d CAD systems in the past year. And you'll see that on the y axis, which is innovation, PTC is number 1. On the x axis, which is implementation, maybe a proxy for market share, we're not number 1, but we're still in a strong place. But nonetheless, we have good strong CAD technology.
And I remind you, this is based on Creo. Wait till you see Onshape and you will see Onshape here in the course of this event. Now if you move on to IoT, you can see that PTC in that upper right according to IDC is that yellow or gold colored bubble, the biggest bubble in the leaders quadrant. The only company who is perhaps better positioned than us, at least on the y axis is Microsoft. And I'm going to show you, and we've been talking about this, Microsoft is not our competitor.
They're our friend. It's really Microsoft and PTC competing against most of the rest of these people. Now, maybe it's a good time to just point out my friend and collaborator, Michael Porter, in the front row over here. Michael, as you know, has done a lot of work with me to try to develop the concepts behind why IoT and AR are very important to businesses. And Michael, by the way, is a substantial shareholder of PTC, because he really believes in what we're doing.
If we come down to augmented reality in the lower right, ABI Research just published this report last week. And you can see that PTC is head and shoulders above everybody we're compared to in this 60 plus percent growth market. So we're in a very strong position there. And then if you come to PLM, there were a couple of reports published recently. They all show PTC as number 1.
This particular report from Quadrant, you can see PTC is the farthest to the right and 2nd highest on the y axis as well. So in these combination of markets that together have an 18% CAGR over the next 5 years, PTC is really in a very strong position in every one of them with the strongest competitive position where the growth rates are the highest. So I think we're in very good position to participate in the growth that the market gives us. Now a second thing that a lot of people have asked about is what about the economy? And I thought it would be interesting to talk a little bit about what's driving the growth, maybe even in a bad economy.
So IDC publishes a biannual report around digital transformation or DX, digital transformation spending in the world out there. And they said that in their most recent report that came out in April, they said that in 2019, there was 18% growth in digital transformation spending, which took the total digital transformation spending to 1.18 trillion dollars globally. So that's all forms of digital transformation everywhere in the world. But if you look at the quote on the right of it, they go on to say that the hotspots for digital transformation spending, about 30% of the global total, is in discrete manufacturing and process manufacturing with the top priority being smart manufacturing, which is where PDC lives. So I think it's interesting to understand how much money is being spent on the key technologies for digital transformation, which I would argue strongly include CAD, PLM, IoT and AR really as superstars in that mix.
And again, a 15% CAGR projected out through 2022. So another data point that says we really have an interesting growth opportunity here in front of us. Now let me tell you a little bit about how PTC helps an industrial company with digital transformation. So this sort of picture, if you will, represents all the activities and kind of a flow that happen within a digital I'm sorry, an industrial company. And PTC gets involved 1st upstream in engineering, where we have technologies like Creo and Windchill and now Onshape and breakthrough new ideas like generative design and additive manufacturing and, augmented reality and virtual reality and Internet of things and real time simulation technologies coming to market inside our engineering offerings.
And that helps our customers to dramatically accelerate the time to market and to produce designs which themselves are breakthroughs, for example, from generative design. And then we take that information and we flow it downstream and we reuse it. We flow it through this digital thread into sales more proactive and use the product as a sensor on the customer instead of the way they used to do it, which was use the customer as a sensor on the product. So now they can get feedback, the voice of the product. And of course, these are big consumers of our AR technology as well because they can bring product catalogs to life with 3 d holograms, life size, generated on demand to match a specific product configuration.
So it used to be you have to go to a showroom to see some product you want to buy. Maybe they have the configuration you want. Maybe they don't. Now we can complement all of that with configured order, 3 d holograms and so forth delivered through AR technology. When you go downstream after you got that order and it's time to make it, we and partners like, of course, Rockwell Automation are helping us to optimize what happens in the plant, to optimize the asset productivity, the worker productivity, and really produce a plant that has higher quality, better safety and frankly better throughput and better efficiency.
In some cases, companies are able to avoid building a new plant because they've unlocked so much production capacity in the existing plant. Or in some cases, they're even able to shut plants down because they no longer need them given the production capacity they've been able to bring online with our technology. Now when you go out to the customer site, we can, 1st of all, make the customer look different by wrapping a make the product look different by wrapping a digital experience around it. We can bring new services and capabilities and functionality to the customer through a smart connected product. And we can get data back from them to understand how they're using the product, if they're using the product, how we can have the product deliver more value to them and so forth.
And then we continue on down to the customer service domain, and we're helping companies using smart connected product technologies and augmented reality. We're helping companies do remote service, log into the product and fix it, Sometimes customer self-service. Let me send you an AR experience that will explain to you, Mr. Customer, how to solve this little problem, I won't have to dispatch a truck. Doing product upgrades, predictive analytics, preventative service, all of those things that generate so much value.
And then for the corporation, we're creating new business models like product as a service. We're allowing them to rethink training so that training can move from in advance just in case to just in time in full context, very powerful idea enabled by AR, and helping them recruit new digital natives that want to work for a company that's doing amazing things on the digital technology front. So I think that this set of things PTC is doing checks all the key boxes for an industrial company in the discrete or process industry that wants to transform themselves with digital technology. This is what they're thinking about and it's what we're talking about. Now if you pull back the cover and look at what's underneath that surface layer, what you see is that PTC's focus really is on digital transformation solutions.
And we have a new executive who joined the company. Craig, are you in the room? Yeah, Craig back here. Craig Melrose is our new EVP of Digital Transformation Solutions. So there's always a lot of questions.
Are you guys competing against Microsoft? And I say, no, no, no. We're way up the stack solving problems using infrastructure from Microsoft. So Craig's group produces solutions like the ones I described that use technology from PTC's platforms like Creo, Windchill, ThingWorx, Vuforia, Onshape, and then a little help from our friends, ANSYS and Rockwell Automation. And all of that is deployed onto a private or public cloud infrastructure.
And there we've partnered with Microsoft, particularly when somebody wants a private sorry, a public cloud architecture. So if you look at those awards at the bottom, and I'm not sure you can read the text from your seats here, but basically it says that PTC is Microsoft's current manufacturing and resource partner of the year. The second one says we're Microsoft's mixed reality, augmented virtual reality partner of the year. The third one says we're runner-up for Microsoft's Internet of Things Partner of the Year. And the 4th one says that we're HPE's IoT and Edge Partner of the Year.
Because when customers don't want to deploy this in the cloud, they typically want to deploy it on an Edge server, frequently a ruggedized edge server. And HPE, of course, is in that business. And they quite like us because they move a lot of hardware for edge private cloud infrastructures. So this is a powerful thing, and I hope it helps to clarify a little bit how we're really adding value to Microsoft. The reason we're winning awards is because the customer needs solutions.
And if you start with just infrastructure, it's too much work and too much ongoing cost to custom develop an entire solution. And why should an industrial company custom develop a solution when they can buy one from PTC that's already got massive investment going into it. So this is really us and the top half of this sort of layer cake, if you will, using infrastructure for Microsoft in the bottom half, and it's a great partnership that's working very well. So on that point, all three of our partnerships are working very well, our most strategic partnerships. With Rockwell Automation, we've done 100 deals in the 1st year and a very nice sort of parabolic ramp to that curve.
I ran into at least 5 people here today already that told me they were at Rockwell's event last year or last week called Automation Fair in Chicago. And they were shocked at the presence that PTC had through Rockwell, meaning that within Rockwell's customer event that had 20,000 people, PTC was front and center everywhere they turned. And it really speaks to the strength of that partnership. Some people said it felt like a PTC event actually, but I was there. I can tell you there was lots and lots of Rockwell stuff as well.
Moving on to Microsoft. We've been building traction with Microsoft. Again, a very good trend, more than 150 wins last year and really the 1st year of the partnership and a huge pipeline of opportunities out there to go get the next tranche and the tranche after and of course, all these Partner of the Year awards. And then with ANSYS, that partnership is also ramping. We've successfully built the ANSYS live simulation technology into Creo.
We launched that earlier this year. We back ported it to a few different versions, and we're getting more and more orders on a go forward basis. We're doing more with ANSYS. So phase 1 was the live simulation built into Creo. Phase 2 is to take the whole suite, what ANSYS calls AIM, and build the ANSYS AIM suite into Creo.
And then we're having a conversation. I had dinner with Ajay Gopal a couple of weeks ago, and we were talking about Onshape. Should we do something with Onshape? And I don't think we're on either side ready to commit anything, but I will tell you that's an interesting conversation and we're both engaged in it because the ANSYS technology could play a role there too as well. Okay.
So I think what's interesting, particularly on the right half of those earlier 4 quadrants, is the growth opportunity we've created in IoT and AR, and we can put Onshape in there as well. We've characterized this as a 30% to 40% grower, but it's really made of IoT business that's generally, this is 26%. Most estimates have been more like 30 to 40. But then an AR business, which by all accounts and here at PTC is growing much faster than that. So we think that this combination should be a good reliable 30% to 40% grower for PTC.
Now if you look at the pie charts for a minute, this is trying to show you in FY 2020 how big of a part of the pie this growth business is. So if you look at new sales, you can see that more than a third of our new sales will come from that growth business in fiscal 'twenty. Now just think about that, if a third of your business is growing, let's call it 35%, that itself means the whole business has 12 points of growth, all else being flat or equal. This brings 12 point more new ACV growth into the mix. And if you go down to ARR, of course ARR follows ACV, but about 15% of our ARR this year will be for the growth business.
And again, if 15% of your ARR is growing 35%, that's another 5 points or so of elevation in the overall company growth rate. So if you look at our ARR plans, we have a core business that's been growing right around that low double digit mark, 11 last year, 10 this year. We have an FSG business that grew 10 last year, but we've said, no, it won't be that high this year, but it's still growing. And now you have a growth business growing at those rates. It's not hard at all to get to mid teens or better growth rates on ARR given that mix.
So this mix shift every year is moving more and more in our favor, and we're not losing the growth as we go after that bigger and bigger slice of the pie. So on the point of growth and sales and so forth, many of you know that Matt Cohen, our EVP of Field Operations, left the company last week. He left to join another public company called CyberArk, where he's their chief revenue officer. It was a shame to lose Matt. But I also want to reassure you that Matt was the manager of the person who managed sales and marketing, which is Mike Detulio, and the person who managed customer success, we call it, or really now customer operations, which is Eduardo Camacho.
So I want to invite Mike and Eduardo up here, let you get to meet each of them a little bit and know who they are. Because my point really is it's a shame to lose Matt. We didn't say where he was going because it's a public company and they hadn't announced it yet, and they preferred we wouldn't announce it for them. But what I really want to show you is that Mike and Eduardo joined the company about the same time I did. I'm in my 22nd year at PTC, and it's 21 for Mike and 22 for Eduardo.
These are people who have been executives in the company for a long time, came up through the ranks very successful, and they're going to continue on in their job. Mike has effectively half of Matt's job, which he's had for years now and Eduardo has the other half, which is a slight expansion of the role she had, although she had most of that other half already. So maybe just to kind of open it up a little bit, Mike, can you talk a little bit about your background, your bio here at PTC?
Sure. Thanks, Jim. Hey, everyone. As Jim said, Mike DiTullio, been with the company coming up on my 21st year in the sales and marketing realm the entire time. I started in 1999 as a Sales Account Manager and have been through many transformations of the company, rose up through different levels of management during those years, different levels of responsibility.
For the last decade, I've had the opportunity to run 2 of our biggest geographies. I spent 3 years over in Europe running the EMEA operation, came back to run the Americas operation. And then in 2015, Jim asked me to lead the global sales operation, which I started in 2015. So starting the 5th year of that. And 2 years ago, Jim asked me to join his executive team and look after both sales and marketing to create a modern, I think everyone understands that today marketing and sales are less separated silos.
So to really take that operation, build it into 1, and we've been doing that for the last 2 years.
Great. Can you talk a little bit about a year ago, we've made a lot of changes and some of those changes bit us a little bit. How does preparation for and how do you feel going into fiscal 2020 about where things stand?
Yes. There's been many transformations over the last 4 years. I think you're right. Last year was a year about and this is a good transformation, building capacity to really hit our high growth parts of the market. And I think as we start the year, to answer your question, State of the Union is great.
We have our capacity in place and trained, so we're ready to go. So I feel very good about that. I also feel really good about our senior leadership team, the way we've got the organization set up really solid. And then lastly, the reaction we're getting from the marketplace. Jim just talked about this, but you want to have the machine in place ready to go, but against a market who's interested in what we're talking about.
So state of the union is good.
So our shift from PEB bookings to ARR, anything notable there? Yes. Well, I
think, 1st and foremost, I was thinking about your ARR discussion up here. Jim counts on the sales and marketing engine to be the market share, the creation, the new ACV engine 1st and foremost, that doesn't change. I think that's the same. But I think what we have also done is put some interesting metrics and KPIs in place to make sure that we're equally thoughtful about the long time lifetime value of the customers. And so maybe that's the only added twist besides the growth engine.
Okay. Thanks, Mike. Eduardo, how about you? Can you tell us a little bit about your background?
Sure. Eduardo Canaccio, I joined PTC 22 years ago actually in Portugal working with our customers as an expert on molding tooling. And really after that had 15, 16 years of very different management positions always based out of Europe running from business development services, our partner, our service partner programs, our channel, had roles internationally, worldwide, especially leading our emerging geos, working with our customers, our partners in emerging geos. Then I had the opportunity to move to Asia and actually I ran our services business from Asia based out of Tokyo for a little over a couple of years, then moved back to Europe leading international out of Germany and had the great pleasure to come to the headquarters, moved to Boston 2 years ago, leading at the time customer success and now since very recently part of the executive team running customer success plus our services and our cloud business here for PTC.
So let me tell you real quick a fun story about Eduardo. When we sent her to Japan, I said, Wow, we're sending a Portuguese woman to Tokyo. I wonder how that's going to turn out. And a year later, I tell you they absolutely loved her. They adored her.
And by they, I mean the sales reps, the customers, the partners, everybody. So at that point, I said she's really got something special going because that's a very difficult environment for a woman to go into, but particularly someone who's not even an American at that. Maybe that doesn't help anyway. I don't know. But so can you tell us a little bit about the customer success group you started, maybe work renewal sales into that, what you've been doing there as well?
Yes. So 2 years ago we formed this group of customer success that really has been focusing on a few things, create programmatic adoption and expansion programs, especially for our growth businesses. And that has been proven to be successful. We have improved retention and expansion rates there and we actually have an award winning program with our customer success plans recognized by our industry peers. We have been working really around improving our renewal practices for the subscription world, which has paid its dividends and we still have a long way to go now that we are really living on this subscription world.
What we are really focusing on doing now is now take that to the next level. That means how do we extend that to the core business knowing that also the core business has a lot of new technology coming up with generative design, with Creo Simulation Live, with Navigate and many other things. And also taking it to the next level in terms of enabling our partner community, especially the channel, to build our own customer success practices that's going to help them take the retention to the next level. So that's what we've been focusing on.
Great. All right. Thank you, Eduardo. Thanks, Mike. Thank you very much.
Thanks for joining me. So again, the key point here is, all things being equal, I really didn't want to lose Matt. He got poached away. But at the same time, Mike is not going to forget how to sell and Eduardo is not going to forget how to renew. Matt was managing great leaders like that and they're both going to step up and keep doing what they've been doing and everything I think is going to be fine.
Okay. So let me now talk about when you bring this all together, what does it mean? And so we're going to show you, Christian is going to go in much deeper into what does it take for us to drive $850,000,000 of free cash flow in 2024. Now we're also going to show you some variability on either side. We're going to start with an optimist point of view.
I'm not sure there are any optimists in the room other than perhaps some of us who work for PTC. But for example, if the Onshape business goes well, we might do better than $850,000,000 Now I know there's a lot of skepticism, so we're also going to show you what I'm going to call a pessimist point of view that says the growth engine doesn't work. It kind of runs out of gas and we don't get that kind of growth. That would get us to 750,000,000. And then just for fun, and I don't want to take this super seriously, but just for fun, we decided what would happen if 2,009 happened all over again.
In 2,009, all of our sales fell 30%, new sales fell 30%. So what would happen if in 2022, all of our new sales in the growth engine, the core business, the FSG business, everything fell 30%. Then this is what would happen. We'd get to $700,000,000 in free cash flow. So there's a couple of points I want to make here.
First of all, you should think of free cash flow as a range because there's a lot of factors involved. When we gave this point, we didn't want everybody to take it as guidance on a point number 5 years away. We don't even give point numbers for the next quarter. So we thought of this as like a target, a goal, but people have taken it very seriously. I get it.
850 is our target. But it's within a range of very likely possibilities from 700 to 900. You have to believe really great things to get above 900. And you have to believe really terrible things to get to less than 700. Now at the midpoint of that range, let's say 800, you got a tripling of free cash flow in the next 5 years, which is not something that PTC should be apologizing about or apologizing for.
It's a tremendous upside that would drive tremendous upside in our business. The second thing I want to remind you though is that our key metric is ARR. We should really be talking to you more and more about ARR and how it will drive free cash flow than just talking to you about free cash flow. Because there are certain decisions we make like should we buy Onshape or not that are very positive decisions viewed through the lens of ARR growth and maybe at least in the near term less positive when viewed through the lens of free cash flow. But you all know that if we generate more and more ARR growth and we maintain 10 years of OpEx spending discipline, we're going to generate in due time all kinds of free cash flow.
So Christian's going to take you through these scenarios. And as he does, he's going to show you all the key assumptions. He's going to talk about the ARR growth it would drive, and then he's going to go back through the free cash flow that we'd get out of the business as a consequence. I'm very proud of this growth story. I think it's absolutely amazing, and I really can't wait for Christian to tell you about it.
But before I do that, I got to say a couple of words about Onshape, just to tell you again why we made that acquisition. So I've made for many people this analogy to automobiles. And it's a clear analogy I think that helps open your mind to what we might be thinking. In the world of automobiles, there are gasoline and diesel engines, let's call them internal combustion engines. And the vast majority of the market today is internal combustion engines.
And probably almost everybody in this room who owns a car owns 1 with an internal combustion engine. Meanwhile, on the other side of the market, there's a new idea of pure electric battery powered vehicles, the Teslas and the like. And what people have really realized is, you know what, the market is going to go to electric vehicles, not immediately, but it's an unstoppable force pulling the world in that direction for many, many reasons. And we think that's a similar analogy to the CAD world. The vast majority of the CAD market is on premise software today.
Every brand you know of is on premise software other than Onshape. Onshape is really the Tesla of this industry, the startup company who had the guts to try to take on that industry where barriers to entry are so high. It took people who could raise a lot of capital, who had a big, big, big reputation, and they went out to create the product of the future in the CAD world, a pure cloud SaaS business. Now the guys who did that are very well known and they're both in the room here. You'll get to meet them.
John Herstich and John McElhinney. John Herstich is over here. John McElhinney is over on my right, your left. So they together founded Onshape. They both were previous CEOs at SolidWorks.
John was CEO and handed the reins to John. And then at Onshape, John was CEO and after a while handed the reins to this John. So these are 2 guys who have been incredibly successful in the CAD industry for multiple generations of technology. They created SOLIDWORKS, which is arguably the most successful CAD product in the industry, And they went back and created Onshape because they saw what would happen when somebody really did cloud and SaaS technology for real. So, what you're gonna see is that the benefits of cloud and SaaS aren't dramatic.
You'll hear examples later. But for customers, it's very easy to get started. I can walk over and pick up any of your laptops and open up the design I was working on yesterday on your laptop. There's nothing to install, nothing to set up, no files to download, super easy. It's a much better collaboration paradigm.
It is fundamentally a multi user database application. So you're not sharing content back and forth through marked up files. You're always working on the same data together and you can see what each other are doing. We're going to give you a demo a little bit later. There's a very low total cost of ownership.
There's no system administrators. There's no file servers. There's none of that stuff that every single big customer has out there. And then one of the most profound benefits is you're always on the latest version. And by the way, they upgraded every 3 weeks.
So I was talking to Jay Vleeschhouwer about how Dassault is going to probably extend the viability of CATIA 5 out for many more years past 2025. I mean, CATIA 6 was released in like 2010 ish, I'm thinking, right? So they're allowing more than 15 years for the customer base to upgrade. Meanwhile, John updates the entire customer upgrades the entire customer base every 3 weeks. Now for PTC, this allows us to participate in the part of the market that has the most growth, the lower half of the market where we don't effectively participate.
It gives us dramatic increase in innovation velocity. So when we have a new technology like generative design or live simulation, we can very quickly move it into the market and into the production version that the customers are using. I think there will be a disruption, and we're going to make the case for that a little bit more. But I think there will be at some point a disruption. And as people switch, we stand to benefit dramatically.
And therefore, you should know that faster the switching happens, the better off for PTC. That's really in our interest and that's why we're going to go like crazy. And then finally, for us, customer loyalty, Because if one of our customers wants to switch from the old world to the no, great, stay in the family. We're going to make it very, very easy technically and price wise and so forth for you to come over and just keep sending us the same check every week or every month, let me say, every year. I should be careful.
Keep sending us the check every year, and everything will be fine. So it's really a great business. Now because of these benefits, we think the first thing we get to do is participate in the lower half of the market where most of the seats are sold. And then secondarily, participate in what's likely to be a disruptive wave coming from the bottom up. So the first point means participate in incremental sales and new logos.
The second point means unleash a replacement market where $5,800,000,000 worth of software is thrown in the air playing 52 Pickup and we're going to go get a whole lot of it as that happens. So I'm very excited about this strategy. Some key takeaways though is we're going to continue to invest heavily in Creo and Windchill, just like Toyota or Ford or Volkswagen are still making internal combustion engines and will for a long time. We're going to continue with that technology. It's very, very important.
It's not going anywhere. The second thing is we're going to go after this market share opportunity in the low end of the market. And then third, we're going to position ourselves to be the winner when the SaaS disruption wave rolls through. Okay. With that, closing out our growth story, I'm going to turn it over to Christian Delvedy, who is wearing his Movember mustache, and he's going to take you through the financial update.
Christian? Thanks, Jim. I'm
not actually sure what Movember is, but anyways, thanks, everybody, for coming. Just before we get into some of the details, recapping, I think, A, what Jim communicated and what I'm going to try to communicate over the next 20 minutes or so is we think that PTC is well positioned to deliver ARR of approximately $2,200,000,000 by 2024, and that will generate free cash flow in the range of $700,000,000 to $900,000,000 So if you don't remember anything else from the meaty details I'm about to go through, this is the kind of the key takeaway. So the agenda. Before we actually get into the details of the scenarios that Jim briefly outlined, there's a couple of things that I'd like to do, and I know this will be the highlight for some of you, which is to get into the details, the nitty gritty on how ASC 606 impacts an on prem subscription company from a revenue perspective. I think it's important as well as from a cash tax perspective.
Then I also want to spend a couple of minutes talking about ARR and our definition of ARR because I think it's important for everybody to understand how we're defining it and how to then interpret our results. And then we'll actually get into the scenarios in the meat of the presentation. So starting off, ASC 606 actually has a pretty meaningful impact on rev rec for on prem subscription companies. As it turns out, there's about 15, maybe a couple more or so companies like PTC that have a significant portion of their revenue that is on prem subscription. You can think of companies like Aspen, ANSYS, AVEVA, not all the As, Splunk, right, as well are out there.
And these are all good examples of companies that have similar dynamics that we do. It's just that the variables are somewhat different. So I'm going to attempt to explain these. The 3 most important variables, contract duration, that goes for both new deals as well as renewals. Obviously, the start date matters, and we have a couple of examples to highlight this.
And then what kind of revenue recognition revenue recognition treatment you have on each of the various products that you offer and how those might change and evolve over time matters as well. So as an example here, you could have a maintenance stream, which is recognized ratably. Should that convert to a subscription stream, it will actually then get upfront revenue treatment. We will continue to invest in our products, in core CAD, core Windchill. And there is a possibility that over time, if you add enough cloud functionality, you'll actually be required to take this so called hybrid revenue recognition treatment that any of you who follow another A Stock Autodesk also really has this kind of revenue recognition treatment, and you would actually have to take then the revenue ratably.
So these are all the these are the primary variables that impact it. Cash taxes, on the other hand, are actually based on your reported your P and L pretax income. So higher revenue, higher EPS is actually going to result in higher cash taxes. And again, I'll have a slide on this in a second to try to articulate it better. All that said, we will continue to bill upfront annually for our subscriptions, whether it's subscription, maintenance, etcetera.
So the billing cycle won't actually impact free cash flow,
all right?
So trying to put this into a little table to illustrate it. Under ASC 605, if you had $120 ACV 1 year duration contract, the TCV is $120, you wouldn't recognize anything upfront, and you'd recognize $10 a month ratably, you would bill $120 And then assuming, in this case, to keep the math simple, a 10% cash tax rate, you'd pay $12 in taxes, again, assuming you booked it on the 1st day of the year. Under ASC 606, for PTC, we recognize approximately 50% of an on prem subscription upfront, approximately. So we're going to take $60 upfront, dollars 5 a month. Again, we're still going to build the $120 We're still going to owe the same cash tax annually.
Now you could look at a couple of other scenarios. 2 year term, in this particular case, we would actually recognize about 120 upfront with $5 a month ratably for 24 months. And you can see actually our cash taxes would go up even though we'd bill 120. And obviously, to the extent that you go to a longer term contract, like a 4 year contract, the impact can be quite significant. And really, again, the impact is significant both on revenue because you're going to collect a huge amount of revenue upfront.
So you would see that in the P and L. You'd see it in revenue. You'd see it in earnings. And also just to point out that you would see it it would impact free cash flow from a cash tax perspective, okay? The other thing I would just note here, I mentioned a few other companies that are impacted by this by 606, the on prem subscription companies.
The other piece is I just said that PTC recognizes about 50% upfront. That isn't necessarily true for the rest of that cohort of companies, right? They actually all recognize it a little bit differently, which I think makes it a little challenging for folks like yourself to really understand the business and the variables. So given that we intend to try and actually extend contract lengths, right? Right now, our average renewal contract is about a year.
And on new business, it's probably pushing 2 years on average. I think that we would like to see those lengthen over time, which means that we would expect to start seeing on some of these subscription contracts more revenue being recognized upfront. Depending on how rapidly that happens, it will impact a little bit the lumpiness, if you will, of the revenue. But we do think that from a P and L perspective, revenue will grow in the mid teens, CAGR, and EPS is going to grow in the, call it, 30% range CAGR over this time period, particularly for the market scenario that Jim talked about. So it will have an attractive P and L outcome, just remembering it will impact cash taxes.
Okay. 2nd piece to cover is ARR and our definition of ARR. Normally, if I think about ARR, what I would think is I'm going to take the most recent period, revenue, I'm going to annualize it, normalizing for days. And what I'm really trying to get to is really what's the book of business, what's the ACV of the company's book of business at this particular point in time, right? Now because of some of the revenue recognition issues that I just outlined, you actually can't do that math on PTC.
You can't use the P and L and annualize any quarter because 1 quarter contract could be $240,000,000 the next could be $5,000,000 So instead, we're actually just going to give you the number. When we say ARR, what we're talking about is here is the ACV of our entire book of business in the quarter or in the period, right? And so that's our intention. That also comes with a little bit of lumpiness, which I'm going to outline on the next slide. And of course, you'll also have to remember that this is it's going to be very difficult to correlate what we call ARR to actual revenue on the P and L.
There's a whole bunch of other variables that you need to understand in order to do that. But that's what the definition is. This ARR definition is the same ARR definition that we used when we provided the 8 ks back in September. Okay. So just to use a graphic here to try to illustrate this.
If we take a $100,000 deal and we booked it in Q1 with a Q1 start date, we would show in Q1 ACV or ARR of 100. And in Q2, you would see ARR of 100. If we were if this was the differences between last day of the quarter and first day of the next quarter, if we were a ratable company and it came in on the last day of the quarter or the first day of the next quarter, it actually wouldn't matter. It's one day's worth of revenue. Nobody would ever know.
You wouldn't be able to tell. According to our definition, however, we're going to take the ARR on the start date. So if it books on the last day of the quarter with a start date on the 1st day of the next quarter, what you'll see is 0 ARR in Q1 with 100 in Q2, right? And the difference there is just a day. So there's some inherent lumpiness in what we're providing.
But again, on the other hand, I think what we're providing is really what everybody is trying to back into with math and annualizing quarterly revenue, okay? The other thing that we talked about on our most recent conference call, we referenced things like backlog and ramp deals, and I just want to make sure that everybody understands how these work. So again, if we did a deal that started off with 100 ks of ACV in year 1, added another $200,000 in year 2 and then $300,000 again, an additional $300,000 in year 3. In year 1, we would just take the 100 in ARR. In year 2, we would layer on, whenever it started, the additional 200.
And in year 3, we would layer on the additional 300, even though this is a contractually committed ramp, right? So we would know at the beginning of the deal that this is what the customer is committed to. And so the dynamic of both these start dates and ramp deals creates backlog for PTC. And frankly, this backlog is included in our ARR guidance for fiscal 'twenty, and it's also another factor that gives us a good deal of comfort with the ARR guidance range that we've put out for the year. Lastly, Jim talked about the subscription business model versus the perpetual business model and really the superiority, if you will, of the subscription business model in terms of ARR or revenue and growth.
And so just to illustrate this point, we put 2 slides together. 1 is a hypothetical $500,000,000 ARR business, growing $80,000,000 in new ACV, growing that 5% per year. So 5% new ACV growth year over year with 5% churn, which improves 100 basis points over the term. So again, here with 5% ACV growth, this company would deliver 10% ARR CAGR over that time frame. Looking at the same business and now saying no new ACV growth, flat ACV growth and holding the rest of the variables constant, this same business actually still delivers a 9% ARR CAGR over this time frame, right?
I think everybody gets it. I'm sure it's pretty straightforward math, but it is important when thinking about the scenarios that we're going to show here in just a second and understanding the variables that we just laid out. Okay. Hopefully, that was as exciting for everybody as it was for me. On to ASC, no, we won't do it.
We'll save $842 for another day. Scenarios. So as Jim said, we start off with the 1st scenario, the market scenario. And what we tried to outline here on the right hand side of the slide is really what you need to believe in order to get comfortable with a scenario that's going to generate approximately $2,300,000,000 in ARR. And we broke it out between our growth business, IoT, AR and also Onshape included in this bucket, core business, CADPLM, FSG.
And really, what you would need to believe is that the growth businesses grow in line with what we've stated before as market growth rates. So new ACV growth decelerates to the high 20s, probably from about the high 40s in the early years and decelerates as the law of large numbers kicks in. And that delivers a mid-40s ARR CAGR. Then for the core businesses, what we've assumed is no ACV growth, right? Flat ACV from 20 to 24, and that actually delivers a high single digit ARR CAGR for the core businesses.
And then for FSG, we've assumed a 5% decline in new ACV growth over this period. And that actually also still delivers a low single digit ARR CAGR over the period. Finally, embedded in this assumption is that PTC's total churn improves by about 150 basis points by fiscal 'twenty four, okay? So if you believed those assumptions, and again, this is really just kind of market growth rate assumptions, then you would end up with about $2,300,000,000 in ARR by fiscal 'twenty four. We've had some discussions around market growth rates and frankly, even some dialogue around is it bookings or ARR.
Market growth to me is revenue. To me, ARR is the right compare when you're thinking about market growth rates. So when we think about that and look at the last couple of years, our core businesses, CAD, PLM, have, in fact, been outpacing the market. There are some distinct reasons for this, and I'll walk through those in a second. Also interesting to note that fairly recently, SIM Data came out and actually increased their market growth rates, CAD from 5% to 8% and PLM from 6% to 7%.
Those are their growth data estimates. So we've tried to reflect that in the blue line. You can see the growth rates picking up, and then you can see kind of PTC's growth in the core markets over this same time period. And the point here being, there have been numerous tailwinds that have been very positive reflections for PTC, subscription mix. As we've continued to migrate more and more to a subscription business, you get tailwind from that, super helpful.
You actually get the superiority of the business model and the higher revenue per customer over time, support to subscription conversions and ramp deals, depending on the market or the product segment. So all of these things have actually contributed to greater than market growth rate for the core. And the point here being that assuming flat new ACV over this time period, we would expect that really what would happen is PTC's core businesses would converge with market growth rate, call it, by the kind of 2024 period, okay, assuming flat ACV. On the other side, on the growth businesses, we've said that the market growth rates are in the high-30s. And as you no doubt noticed for FY 'nineteen, we delivered about 28%, 29% growth in the growth businesses.
And what I would actually the point of this slide is to say because of the definitions that we talked about, because of things like ramp deals and start dates for ARR, What we would expect to happen is, in fact, in fiscal 'twenty, our ARR should outpace market growth rates, and I wouldn't read too much into not hitting market growth rates in 'nineteen or exceeding market growth rates in 'twenty. I would look at it over the continuum and say, in fact, our growth businesses have been performing in line with market growth rates over this time period. And now the expectation is that we will actually continue to perform modestly better than market growth rates converging close back closer in 'twenty four. And the reason for that, again, ACV growth contribution for some of the strategic alliances and Onshape, which we've included in this bucket as well. As well as obviously improving churn really in the core IoT and AR markets as well.
So we think that's going to drive slightly better than market growth performance. Okay. So all of that generates free cash flow of approximately $850,000,000 There's a little bit of a caveat here, which is we actually estimate that cash taxes and FX, depending on the adoption of all the things I just pointed out, term lengths, ratable revenue recognition, etcetera, etcetera, could impact free cash flow by up to about $50,000,000 in any given year. At this point, as you all know, in our fiscal 'twenty guidance, we've already accounted for about $15,000,000 of FX impact, about $25,000,000 of incremental cash tax impact that we're seeing in fiscal 'twenty as well as the incremental $25,000,000 in interest that is a result of the Onshape acquisition. And as a reminder, we do plan on paying that debt down and we expect that the Onshape related debt, if you will, will be paid off in the first half of fiscal 'twenty two.
So you can see also the acceleration, a little bit of the cash flow, 'twenty three and 'twenty four, and that's partially because the interest is working its way through, okay? So again, market growth rate, dollars 800,000,000 to $850,000,000 depending a little bit on cash taxes and FX. Also, the assumption that gross margins scale in line with revenue mix and OpEx grows at 50% of ARR growth. And I don't need to go into the OpEx discipline that I think Jim did a great job covering just a few minutes ago. The optimistic scenario, actually, for the rest of the scenarios, we've held the assumptions around core business, new ACV growth, which was flat and FSG new ACV growth, which was declining 5% per year and churn, which was improving about 150 basis points over the period.
We've held those variables flat. And really, what we're toggling on here now is the growth businesses and the new ACV in the growth businesses. And again, if we believe that the new ACV growth decelerates into the low 30s as opposed to decelerating into the 20s, as in the market scenario, it actually delivers a pretty attractive result. Here you get to about 2,400,000,000 dollars One of the more likely things that could drive this really is Onshape and how well Onshape takes off in the market. I think you'll see a demo coming up that I think will help you understand why we're so excited really about inviting John and John to join the team and the rest of the Onshape crew, which is great.
So again, assuming that Onshape really takes off, the optimistic scenario, that's probably one of the big drivers there. That could result in free cash flow in the $850,000,000 to $900,000,000 range and I think helps illustrate how modest improvements or modest changes really in ARR growth can have a significant impact on free cash flow. Then I'm sure that there's a pessimist or 2 in the room. So for that crowd, what we tried to do here was toggle the new ACV growth on the growth businesses and now say let's say that they did half, half the growth rate of what is assumed in the market case or the market scenario that we showed. And what this would mean is new ACV growth would decelerate into the mid teens.
And we would still, again, holding core FSG churn, etcetera, flat, we would still generate about 2,100,000,000 dollars of ARR in this scenario. And that would translate to $700,000,000 to 7.50 $1,000,000 in free cash flow with the same caveats as from before. And then lastly, this recession, the 2,009 redux scenario. And here, what we did was pick a year that's far enough out in the future, fiscal 'twenty two, that doesn't imply that we know anything about what's actually going to happen in the future, but is still near enough in that you can see the impact for 2 or 3 years on the model. And again, what we did is have new ACV decline 30% in fiscal 'twenty two.
This is exactly what happened to PTC back in 2,009. New bookings were down 30%, rebounded in the following year. And even in this scenario, what you see is we end up with ARR of about $2,000,000,000 by fiscal 'twenty four. And from a free cash flow perspective, we believe that even in this scenario, we would end up with free cash flow somewhere around 700,000,000 dollars So wrapping all this up, I think the message that we're trying to communicate is our primary goal is to invest to drive ARR and long term value for our stakeholders. And so again, looking to achieve $2,200,000,000 better or better in fiscal 'twenty four.
We remain committed to spending discipline. We're targeting OpEx growth at half of ARR growth rate, although we also reserve the right to really spend more in certain areas if growth is really taking off. If Onshape or AR or IoT or all of them are really taking off. I think that it would behoove us and all of our stakeholders to make sure that we're putting appropriate resources out in the market to capture that market share. Reminder to everybody that the P and L will be lumpy due to ASC 606.
We talked about reported revenue and the impact on cash taxes. We remain committed to a balanced capital strategy. Back in June, we announced that we were going to increase the share buyback to 50% of free cash flow. We remain committed to that despite the fact that we have suspended it for fiscal 'twenty in order to accelerate the debt repayment related to Onshape. So we've suspended it for 1 year, but we remain committed to the philosophy.
And again, all of these scenarios that we just laid out and the market opportunity for PTC, we believe is going to drive a lot of ARR and ultimately, under any of those scenarios, is going to generate free cash flow in the $700,000,000 to $900,000,000 range, which is a pretty significant uptick from where we are today. And I think it's a great opportunity to create value for PTC and for our shareholders. With that, the moment that everybody has been waiting for,
John Herstich. Thank you, Christian. So I've spent my whole career over 30 years building CAD and other software tools for product development. And in that time, I've been fortunate and sometimes unfortunate to see several big generational shifts come to the industry. Some I've been on the side doing the shift and some I've been on the side of watching it happen as others did it.
But all of them have been big. The shifts from 2 d to 3 d modeling, shifts in computing platform, from mainframes, remember those, to mini computers, remember those, to Unix workstations, anyone remember those, to Windows PCs, the current generation. And now I believe, we believe, Jim believes, I believe, we're in the midst of the latest generational shift in our industry to Software as a Service, SaaS platforms in the cloud. And that's the opportunity that I'm working on, that I've been working on for the last several years. And we believe that this generational shift to SaaS and the cloud, we believe this could be the biggest shift of them all.
I really feel that. And I'm going to talk to you about this in more detail in a moment. It's the biggest shift not only in the technology shift, which is so different than the other ones I talked about, but also in what it can mean to our customers, the benefits that we can bring and ultimately to the business value that can happen. And that's what I'm going to talk to you about here. I'm going to spend the next few minutes telling you why did we build Onshape?
Why build a new generation? What is Onshape? You may not know exactly what we are, and we'll tell you more about that. Why it's important and why it's a benefit to our customers, which is really why we build all this stuff, to be a benefit to our customers. And then after I speak, we're going to have a demonstration of Onshape.
And then the highlight for me, and I hope for you, we'll be hearing from Chris Meade, one of our actual customers, who's here to tell you his story. So let's start with why did we build it. And to think about why we built Onshape, I want you to not think about cloud or SaaS for a moment. I want you to think about a customer, okay? Think about the people who use these systems to build new products, okay?
I want you to imagine a day in the life of a team of people that are building a new product. It could be a new television. It could be a new medical device, a new children's toy, a new piece of a vehicle, a new powertrain system for a vehicle. Imagine that team, and I want you to think about the problems that they have with today's generation, the installed tools. Whether they know it or not, the first problem they all have to deal with is installing software.
Every person on the team has to install a big stack of software. It's not just one tool, it's many tools, CAD, PDM, maybe simulation rendering, VPN tools, license key access, and so forth. There's this big stack of software. It's complicated. It's expensive to install and maintain these things.
There's often staffs of people running around whose only job is to do it. And in today's world where teams are distributed and they're changing every day, who's on the team anyway? Because people come on and off this team every day. That's just the software problems, installing all this software. Now think about the data.
The data is stored in files. When we built this generation, I was part of building this current generation, essentially, the database of record is c:, a file system. You put c:assemblypartwhatever. There's just all these files, not one file like in Word or Excel. I mean hundreds of files, thousands of files to make up the description of a product.
Team members must communicate with each other by copying these files around, okay? The products communicate with each other by copying files around, whether they copy the files through email or FTP or servers or PDM or PLM servers, the problem is the same. As soon as there's copies, there's problems. Who's got the latest version? I don't know.
There's copies everywhere. Am I going to overwrite your changes? Are you going to overwrite my changes? We tried in we've tried over many years to implement things like locking and checkout schemes, but these schemes don't help people work faster really. They're just necessary tools to manage the process.
Now, products get built, but there had to be a better way, okay? One way that people think about doing this is to use the cloud to store files and install software off of. This is what some of my colleagues at other companies in the industry will call a SaaS platform or a cloud platform. We choose to disagree. Johnny and I, David Ketzmann, we don't think of this as a cloud SaaS platform.
We just think if you copy software and files to and from cloud servers, you haven't really fixed these problems. You just kind of move them somewhere else. This is not the way that other companies in the world have won. Companies like Salesforce, Workday, Zendesk, NetSuite, these are those are real cloud products. They all knew that these kinds of strategies don't work in the end, not just because the problems.
We saw what was happening with those other companies. We saw what was happening with cloud, web and mobile technology. And most of all, we saw these problems. I saw it when I would visit customers, and they'd tell me about these problems for hours on end. We saw an opportunity to solve these problems, and that's why we built a pure software as a service, a pure cloud platform for Onshape and for this generational shift.
And that's what we've built with Onshape. It's a completely different approach. It's a real cloud SaaS platform. We store data in a database, not in files. There are no copies.
Data is never copied around. There's no software to install. As Jim said, anyone could run it on your browser right now. In fact, we're happy to demo on any of your computers. We won't leave any data behind because we don't put data on the computer.
That would be a very insecure way to work, if you think about it. The tools all live in the cloud. So because there's nothing to install, it's very easy to get multiple people on the platform, very easy to take them off when they're done working. There's no question about getting everyone on the same version of software because everyone uses the same master instance of the system, no matter where they are on earth. We run on any device, not only Windows and Mac, laptops, Linux machines, Chromebooks, very popular in education, by the way, Chromebooks, iPads, iPhone, you're going to see in the demonstration, iPhone, Android phones, Android tablets, whatever device you have, that's the way modern software can work and has to work, in our opinion.
We believe that if we built this platform, we could put more and more tools on it, not just CAD, but a whole bunch of other tools I'll take you through in a moment and open it up to 3rd parties as well. And we believe that this would let teams that use this platform work faster, produce products with more innovation, save money and basically have better business results, which is what it's all about. And so I'm going to take you on a quick tour of our platform. Again, you'll see more of the demo. Sure, it starts with CAD, and many of you know that we do CAD.
We have part modeling, assembly modeling, drawing. We're proud of some of the things that we've put into our product. It should be better because we have a we're 20 years newer, 25, 30 years newer than the old generation. So we've learned a few things. But beyond the CAD, we've put in things you associate with PDM and PLM systems.
And Jim Heppelmann is the authority on PLM and he says we're doing PLM. So I'd say I can't argue with Jim. Formal release control. Release management is important. We don't do it by locking files and checking things out in those old fashioned ways.
We do it in a cloud platform. Anyone can work in parallel, and we can do this release management, customize workflow and so forth. Communication tools, this is a complete breakthrough in the cloud. If you've used things like Google Docs, how many of you have used that? You know about collaboration queues.
You know about the power
of multiple people in the same document. You're only using it for a
spreadsheet or a Word doc. Global team that can collaborate in real time in an assembly. Once to have a global team that can collaborate in real time in assembly. Once you start thinking about these ideas, the question really is how would people work without them? They seem revolutionary, but once you get used to it, how would you go back to not having these tools?
Task management, another PLM type thing we've put in is assigning work and task management. Again, the cloud is a very natural way to do that. People can log in in the morning, see workflows. Managers can see things getting done. Admin, it's almost unfair how easy we've made system administration.
Remember, I said there's Remember, I said there's people running around installing things. As Jim said, there's no more of that anymore. Those people those jobs can be put to, guess what, building a better product maybe, not running around installing servers, okay? So we give the admin in control. If I wanted to administer a group this large, I go to a web page and I enter people's emails and say what tools they get, and instantly they get them.
It doesn't matter what computer you have. Even easier, we support single sign on. So many of your companies use single sign on. We become just another resource that can be centrally provisioned
through a
single sign on system. Security and controls. We started this journey with people saying, woah, how can the cloud be secure? But I say exactly the opposite. I'd say, woah, without the cloud, how could it be secure?
Because only with the cloud can you set up these role based access controls that not only restrict data to server but restrict data through its whole life cycle from end to end. It never leaves the security control. It never walks out on a disk or on someone's laptop. We can set up groups and permission sets by project, very sophisticated controls. And in addition to being encrypted end to end, our Onshape team now has full SOC 2 certification, if you know what that means, very high level of security and controls.
And then analytics and reporting. This is something you would never find in the old world. We give people incredible data. We collect data on on what's been happening with their data, with their team, by geography, by on what's been happening with their data, with their team, by geography, by time, by release status. We can give people the information they need to run a modern team that's moving at high speed and wants to be agile.
Beyond the tools that we build into Onshape, we also have integrated with many other applications that have used our API. These are applications from other companies in our industry and in some cases, applications that platform. I'm really excited to see what we can do with frustum in generative design and put it in this platform. It's a natural cloud technology. It's a natural in the pace of innovation that it has changing every few weeks.
It's a natural fit with us, and we're excited to see us build our own new tools from generative and maybe other technologies here at PTC. So that tool set we launched in the world and we already have over 9,000,000 hours of usage on our platform, thousands of customer companies. You're going to hear from 1 in a moment. We are honored to be named to the Forbes Cloud 100. We're the only design tools company.
But the greatest success we've had and the greatest thrill for us is not any of these numbers or even the technology itself. The greatest success for us has been what I started with is seeing the customers solve problems, hearing from customers story after story of how using Onshape, they were able to deliver a new product to the market faster. They were able to run their business better. Were able to save money. They were able to be more innovative.
They were able to use their staff better, all these great benefits. It's ultimately the products that our customers build that are most gratifying part. And so with that, I am now going to turn it over to my colleagues, Steve Dertin, CEO of PTC and Philip Thomas, one of our technical services engineer, and they're going to show you Onshape better than I could even show it myself. So thank you.
Just give us one moment here. All right. Thanks, John. So as John said, I'm Steve Routine. I'm a CTO here at PTC.
And joining me is my new colleague, Philip Thomas from Onshape. So in about the next 10 minutes or so, we want to give you just a sense as to what customers go through in using Onshape, just the productivity gain that they get. If you want to wrap your mind around a couple of things, I think Google Docs was referenced, think about a system like that where many people can collaborate on their complex designs. And if you're following like how software development is done with the likes of Git and all the what the software industry is doing there, applying that to CAD. We're going to attempt to kind of show you how that works here in a moment.
Really, for those that are online, you're really only going to see Philip's screen. For those in the room, the smaller monitor here by me, I'm going to play the role of a collaborator here with Philip, and you're going to kind of see us real time do some stuff that is really just not possible in CAD and PLM tools that are in market today, not with Creo and Windchill, not with SolidWorks and their data management. And so hopefully, I'll be a little bit enlightened for you to see what this opportunity looks like. Steve?
Thank you very much. Can you all hear me? Good. Thank you very much, about here, that onshape is very different. We're going to try and, in a few moments, show you some of the differentiators of onshape.
In fact, Steve has already mentioned another. Some of the significant differentiators, specifically starting with the fact that Onshape is a pure SaaS platform. Onshape is the world's 1st refresh refreshable grade Pure SaaS platform. We're going to choose running all the variety of hardware today, Steve's Windows laptop,
to
Imagine that I have met the requirements of the table stakes of parts assemblies and I did ask if you could hear me. Let's take this a little further and I'm going to bring Steve into the fold as I switch the lens over to that of individual contributor. What is it that an individual will do during any given day? And for the benefit of people at home, I'm bringing up my to do list. I'm an individual contributor arriving at work.
I have releases and tasks. In fact, Steve also has a number of releases and tasks that he is responsible for, and I'm going to let him talk through his efforts.
Yes. So this is a little bit where the PLM functionality kind of collides with the GAT functionality, if you will. And so Philip has been so kind as to give me some work here where he wants us to reduce some mass and do some FDA validation of a component in this car that I just had up a second ago. And Philip, why don't you follow along kind of in a Google Docs sort of way? Well, thank you, Steve.
I'm actually
going to take advantage of that. Here I am in the same document. We call it jumping in. And what you're seeing on my screen is a joint session where I have jumped into the same document that Steve is working on. What you see on my screen is what he is seeing on his screen.
It doesn't matter whether he's in the back of a taxi in Shanghai or here at PTC headquarters. And in fact, I'm going to do exactly the same thing on my phone. Here I'm introducing the concept of mobile devices as being a valid engineering tool. And as Steve rotates the geometry on his machine, you'll see it updating on my phone as well.
So those of you in the room, you could see Philip wrote this note that, hey, I should do an ECO for this part or engineering change orders, we would call it, and really on the face of this spare gear holder. So essentially, we want to take this component and isolate that, so you'll be able to see that better in the room and make this a little bit lighter weight. Now we're going to kind of do this together. And so why don't we switch to that. Philip, maybe what we can do is for audience members here, there's a series of windows here that I think we could pull some weight out of this part.
And if everybody would kind of draw your attention down here at the bottom, we have a little feature in here that we added that just calculates the weight of this. And more and more vehicle design today like BMW, every option that goes into a car, they need to tell you what that total weight is these days. And so it's hugely critical for engineering organizations to do that. So Philip, I'm going to edit this sketch and why don't you Steve, let's do
it together. We're both engineers here. On my phone, I'm going to go ahead and edit that same sketch. We are now both simultaneously in that same sketch and we are both working on this collaboratively. And the reason we do this demonstration is to remind you that the paradigm has shifted.
It's much more Google Docs than e mailing a file to someone else for them to make a change, perhaps even make multiple copies of that file that then all receive individual changes. And as Steve makes updates on his screen, we will see them in real time on my screen as well, in this case my phone. And you can see that we're working towards that design goal of 1.75 grams. In fact, I'm here to help him. We're actually both in the same sketch simultaneously, and I'm going to go ahead and make some engineering design change.
We're getting very close, 1.737 grams. So collaboratively, we have worked on this together to achieve the engineering goals. Steve, I absolutely love it. That's fantastic. And of course, that change reflects a change to a single source of truth that is being referenced everywhere in the world simultaneously.
So everyone using that component, if they choose to watch the live reference to live workspace, will see those changes in real time. Steve, what's the next step for you?
Well, I'm actually going to release this, but I'm going to make a quick comment. In a traditional tool, engineers would normally be prevented from doing anything together in the same file. It would be locked out waiting for other people's work. So just to think about that for a change. In your world, you might have a couple of different PowerPoints that you made some changes to.
And now in the end, you got to go collect those and reconcile that all back. That is actually what a process for most customers would look like today on any other tool that they're using. So why don't I actually release this? And what I'm going to do, Filip, is I'm just going to make you an approver on this as well. And so again, this is another functionality that many customers would use.
You can imagine releasing these designs to go to a supplier. So this design would ultimately get published into an ERP system like SAP, at which point you could get it quoted and ordered. But what we need to do is just get this fired off.
And in fact, while he was doing that, I brought up some finite element analysis results courtesy of one of our solution partners validating the design changes that we had made. We can see here that a release candidate has been created by Steve. And the PLM aspect of Onshape is one that our customers have driven us towards. We knew that we had to do the table stakes, the parts, assemblies and drawings. But what really separates Onshape, what really increases the power and productivity is that ability to create to manage the business through an integrated product data management or even product life cycle management capability.
And what Steve, did you release it or should
I sent it to you for approval.
Fantastic. Here we go. So let's do that. So from my version manager, I can see that I think you created a version, but as opposed to submitting it for release maybe. So what I could do is, since you're both looking at my screen here, what I will do is I will go ahead and release that individual part.
Here is the torque plate. I'm actually going to jump to it directly here from the assembly. And I'm going to submit it for review. Just double checking I didn't cross anything on the way. Oh, it is this.
My apologies, Steve. It just took a second to get from your side of the stage to the other. So this is here waiting for me to release it. I am the approver, and I could do this on my phone. I could view a comment history.
I could send it back for rework. But in this case, Steve has done an excellent job. So I'm going to go ahead and release this. So let's go ahead and enter some notes and go ahead and release this. And this is rigorous revision control.
This is something that traditionally is very hard to do for companies because it requires everyone sign into specific systems through VPN. In this particular case, we're doing everything through the web page. So let's ratchet this up a bit. This has now been released. Let's look at an environment that's actually very difficult for companies to work in today.
If I actually go to my action item list, you can see that I have action items associated with a particular component, and Steve has an exactly the same corresponding set of improvement requests on his part in the form of ECOs or engineering change orders. These are work orders that propagate through the company. And in fact, each of us are going to work on these simultaneously taking advantage of a capability inspired by the software management industry. We're going to use Gitflow, whereby each of us, when we work on these ECOs, is actually going to do so on our own separate branch. So in this particular case, both Steve and I are both going to branch.
So I have ECO-nine thousand seven hundred and thirty four. ECO-nine thousand seven hundred and thirty four. I would have capitalized it, but I'm using one hand for something else. And Steve is going to be doing exactly the same thing. So I had, as you saw there, an ECO to align the 2 ports.
I'm going to do that. And in doing so, take advantage of another capability with the non shape, and that is the ability to perform direct modeling operations. This would be an example of a customer that was migrating from another system and they wanted to move their engineering process to Onshape moving forward. In order to do that, we have to be able to give them the ability to modify existing parts without access to the underlying features. In this particular case, I'm aligning this port and its associated hole with another component or another feature on the design, I need to rotate these 10 degrees in order to be aligned.
So I can just drag this around or type in values. So let's say we want to go 10 degrees this way. And they are now aligned. And whilst I've been doing this, Steve has been working on his own direct modeling change, and you can see he's doing ECO-four thousand four hundred and fifty four. But wait, there's more.
Both of us have enacted ECOs. There is actually yet another ECO. If we take a look at the ECO work, we'll see that there is a requirement to replace the underlying casting. In this particular case, our supplier I can't remember the ECO, so I'm just going to type in the word casting. The underlying model from our supplier has changed, and they have e mailed us a new file.
So I'm going to update the design that we've been working on and replace it with Version 2 of the casting. Now if you think about this, we now have 3 completely separate states within Onshape. We have the state that is the revised casting, and we can see as we look at this that there is additional detail on the underside that wasn't present before. In fact, it's probably best if I just show you those changes. So in the development branch, we have a state that includes none of these ECOs.
And if any of you have ever worked in an engineering environment, reconciling these is actually quite difficult. If I do a compare between the current state and the work that Steve has done, for instance, we can see that visually, we can see that there has been a change in terms of the location of this port. We can see that semantically there is an additional feature. And I could go ahead and compare the current state to multiple ECOs that have been enacted simultaneously, something that's very hard, if not impossible, to do for in any other system. And the magical moment here is when you realize that in any order, it really doesn't matter that I can actually merge the changes from the disparate branches into the working branch.
Here I'm updating the casting from version 1 to version 2. We can see the geometry is updated here. And in no particular order, maybe I will take my changes, those related to the alignment of these two ports, And I will merge ECO-nine thousand seven hundred and thirty four into the current workspace. And in no particular order, I will finish by taking Steve's ECO-four thousand four hundred and fifty four. And in aggregate, that represents a productivity increase that is exceptionally desirable and simply unavailable from anywhere else in the industry.
But wait, there's more. Thank you, Steve, for your help. That was very good. Because Onshape is a database, because there are no files to lose track of, The PLM lens, if we shift it over to the eye of a business manager, they now have visibility into the state of the business in a way that was not possible before when you had to wait for reconciliation between files that might be in various unknown states or in various unknown hands. And in this particular case, I'm looking at a rolling 60 day window of my business that has been quite active, 2,700 features created, 277 imports, you can all read.
But more interestingly, the breakdown of the business efforts within my company divided amongst the specific projects in aggregate or perhaps on a day to day basis where the work has been focused, my workforce has been focused. Or importantly, from a PLM perspective of when is this product going to be ready for market, I have in a simple graphic and this is just one of a number of out of box reports that are available. I can see at a glance that I have had 45 releases with 3 pending. And you can begin to see the level of business intelligence that's available, including the fact that I am working with a very disparate design team. And this reflects true engineering today, in this particular case, ranging from the West Coast to the United States through in fact, it was fun to watch Steve on a train journey through Europe recently.
I know he's on a train because it was in Germany and all the dots were in a straight line. But it's nice to know where your data is being accessed, who is accessing it and what they are doing, allowing me to maintain governance, maintain security of my IP and generally give me forward looking visibility into problems before they arise. In a sample that an example that I usually state, if I have a deliverable from a supplier that has a 4 week lead time and I'm 2 weeks out without any action being observable, I might have a problem that might cause me to pick up the phone. Steve, thank you very much for your help. I'm pretty sure our time is up here.
Hopefully, we've been able to, in a very short number of minutes, show you some of the differentiators of Onshape, and we're more than happy to take questions after this event. John, thank you very much.
Okay. So now thank you very much, Steve and Philip. I hope you see now firsthand some of the power we have. And now I want to introduce our customer speaker. It's a great honor.
I know we're all going to really enjoy hearing from Chris Meade. He's the Director of Design Engineering at Garrett Advancing Motion. Chris? Thank you, Jan.
So I'm here to talk a little bit about Onshape from the customer view and how we've looked at this tool and what we see in the future as well. So Garrett Advancing Motion is a $3,400,000,000 revenue company in 2018. We are a technology provider to the transportation industry. While we are 1 year as an independent company, we have a 65 year legacy of innovative turbocharger development, and we're expanding our core capabilities into electric boosting systems as well as software for connected vehicles. Today, we have 1200 engineers around the world, and it's truly a global business.
We have 5 engineering hubs. We serve our customers in every region where engines are being designed and built. We have 12 additional close to customer engineering centers, whether it's Detroit, whether it's Torino, whether it's Japan, whether it's Korea, to make sure that we're serving our customers on the ground. Data management around an ecosystem like this is very, very challenging for us. And when we look at our overall engineering strategy and our product design process, our work with Onshape over the last 3 years has helped us to rethink how can we do our product development processes.
Today, I'll talk about our engineering digital strategy, our journey with Onshape, the key points that we've learned about Onshape will reflect many of the points that the team has already said. They're real. And we'll also take a look forward for what this means for Garrett. When we think about our engineering tool strategy, as we were spinning off 18 months ago, we looked through 2 lenses. The first lens was if we were a start up company with the 65 years of intellectual property that we have in our pocket, how would we do things differently?
Would we do them the same way we always have? Or should we be reconsidering the tools, the processes, the practices that we have in order to move faster and be more innovative? The second lens that we looked at was, if computing power was infinite and if it was free, how would we rethink how we're managing our data, how we're driving our simulations, how we're optimizing our products. And as we started to look at what companies are doing today, we quickly found that there is emerging technology built around new architectures that we believe is going to be changing the world, and we need to be on the forefront of that as well. It's based on these emerging cloud based tools such as Onshape.
I think the team has talked about some of these things today specific to Onshape. But for us, it goes well beyond into the simulation realm, into the test data management realm, into the simulation data management realm, putting machine learning technologies on that data and really trying to leverage all of that data in a very strong way. These cloud based tools have nearly 0 marginal cost for these vendors to scale them. It allows a highly increased utilization of those resources, whether it's licenses, whether it's computing power, which drives the costs down. They're easy to access through a browser anywhere, anytime and a much more modern user experience.
Simulation tools and legacy CAD tools have very complex interfaces, and it's not what our younger, more modern users expect to have. For us, it does start with the geometry, with the CAD on the left hand side, but it goes to pay per use high performance computing, pay per second engineering simulation tools, doing automations and workflows around our post processing, be able to run very large design studies of 100 or 1000 of different data points in order to optimize our products very rapidly. Being able to store that legacy data and build on that as an asset is really critical for us in our product development process. But again, it all starts for us as a hardware company with the geometry that defines the part and how do I optimize that. Our journey with Onshape goes from the end of 2016 when we were first introduced to Onshape.
There's some bullet points in the upper left hand corner about our kind of our engineering structure, our number of users, the number of work that we do here, our PLM system footprint. We are not a very big PTC customer today, quite frankly. So it may be especially interesting that I'm here talking to all of you. But what we have seen through running 6 user pilots, 30 user pilots validated the points that John Hirschtick and Jim had talked about earlier. For us, the first moment was Onshape Enterprise.
This was a transformation to allow large and global engineering organizations like ourselves to manage our data in a much more robust way. We also had a key point as we started to create our spin off company around what do we need to do for our PLM and CAD architecture in the future. And we did a deep dive over a 2 week period to really understand from our global engineering leaders what could Onshape do for us and what the gaps were. And we found roughly 80% of our capabilities that we really needed for minimum viable product were already built into Onshape or were coming in the next months on their part of their product road map. Feature script was the next moment for us.
Feature script is an automation tool that allows us to easily create geometries repeatedly in a parametric sort of a way, but not just geometries, other capabilities within the tool. We are a highly repetitive engineering organization. We do the same types of things in different sizes and different physics over and over again. We have a lot of automations in our legacy CAD tools. But our automation experts told us we can do in 100 lines of code and feature script what would have taken us over 1,000 lines of code in our legacy tools.
And we've continued to prove that and find it to be a very key leverage point for us. When we look at some of the I have the highlights here, which for us reflects many of the points that have already been said. The installation effort compared to legacy CAD systems is 0. It's upgraded every 3 weeks. It gets better and better and better.
And quite frankly, we've upgraded our legacy PLM our legacy CAD system once in the last 4 years, and it took us a 4 it took us a 12 month effort with a lot of internal cost to do that, and it wasn't for new functionality. That was just to be Windows 10 compatible. That's the only thing we got after 12 months of effort and hundreds of installations. The seamless collaboration is another critical feature that we've seen to be very powerful for us. We work with a lot of suppliers around the world to be able to do design for manufacturing optimizations in China, in Eastern Europe, anywhere in the world to exchange on tolerances, machining capabilities, how do we set up our features.
It's been a very powerful tool and helped us to rethink how do we do these practices and processes, how can we rethink the way we design processes to reduce our administrative efforts to go faster in the collaboration with our engineering teams and our vendors and even our customers in order to produce great products even faster. Key points for us on Onshape fall into these 3 pillars that you see here on the screen: collaborative CAD, where we've run production pilots and even started developing production products in many different areas across our entire NPI process, whether it's doing engine package studies, having components of the engine, the vehicle body where the turbocharger needs to fit inside, importing that customer data from many different CAD systems into Onshape to be able to develop and quickly adjust things, whether it's doing the preparation work for FEA simulation to see are there gaps, how do we heal it, how do we bring the components together in very complex system analytics system analysis tools, Doing our entire test lab cell designs as well as adapters and being able to share those adapters across the world from China to France has been very powerful for us.
Supplier design for manufacturing iterations, as we talked about earlier, getting that very fast feedback with external companies. They don't need to have anything special. They just need an Onshape account. They can set it up instantly. We can share with them.
We can iterate. And if we decide we don't want to go forward with that supplier, we stop sharing that specific document with them, and it's gone. No need to export files. No need to send them around. It's very powerful with good with excellent security.
Productivity is the other one for us that's very important. When we look at changing to other traditional CAD systems, we've seen mid single digit productivity improvements. When you look at something like, I think we talked about it earlier, CATIA V5 to CATIA V6. Is it faster? Does it have a different interface?
Yes. But for us, it was mid single digit productivity, and new features and new functionalities didn't seem to be very compelling. But when we look at the increased stability of Onshape, the simplified processes compared to our legacy processes and most importantly, the automation opportunities at the feature level, at the component level, at the assembly level, it's very compelling. The administration, we've already talked about, so I'll leave that one alone. As we look forward, Garrett has taken the decision to move to Onshape as our primary CAD system.
This is going to be a huge effort for us in the next 12 months, and we're using our core CAD design engineers to spark a wider change across our global engineering teams. We've started to rethink our entire design processes to be more collaborative, quicker to iterate and to really challenge our thinking around how can we blur the lines between our traditional functional silos. How can we get all of our engineers, our NPI buyers, our manufacturing teams, our suppliers into a tool that's flexible, always on the same version, available everywhere is a real paradigm shift for us and one that we're very excited about. While we have the evidence from the work that we've done so far, the proof of this transformation will still be coming in the measurable productivity that we need to see from our efforts here. We believe this work that we have in front of us is not truly about changing to a different CAD tool or a different data management system, but it's truly about the human change management that brings our people with us over the next 12 to 18 months to change the way that we think about designing our products.
And Onshape is a very new way of thinking. It's the start of all of our product as we optimize things, but we do believe that the SaaS model is transformative, as John Hirschtick said, and goes well beyond just the CAD tool.
Thanks. Thanks, Chris. So we have a couple of minutes here. Chris has been kind enough to agree to take a couple of questions, if anybody has one for him before we go to the general Q and A. Jay and then Steve.
Chris, hi. Jay Fleece Hauer. Could you talk about the deployment in terms of whether you're going to be using it initially at least if not indefinitely, on new design programs or do you fully intend to switch existing programs on Unshaping? And if you are doing the latter talk about any data migration issues that you foresee?
We have already started doing new non turbocharger product developments in Onshape. So this is already up and running. We are also moving to mixed parts between legacy CAD and Onshape as we move forward with more traditional products. So we're doing both in a 4 phased event. Our import of these legacy CAD files is actually pretty successful, pretty flawless.
It works very well for us. In fact, we earlier today, we were looking with the Onshape team in terms of our import, and we were importing over 40,000 parts into our production environment over the last couple of days, and we had over a 99% import yield rate. So very impressive.
So if you could sorry, if you could just say your name and affiliation, I didn't mention that first, that'd be helpful for the folks online. Thanks.
Sure. Hi, Steve Binner, Marshall Waste. The benefits seem obvious and compelling. Can you talk about if you're giving up any functionality or benefits from moving to Onshape as your primary CAD tool? And then secondly, I think you talked about mid single digit productivity benefits from the old kind of migration to the next kind of iteration?
What type of productivity? I mean, you gave a few of the breakdowns, but either cost or productivity kind of benefits over say 3 to 5 years do you expect from going to Onshape?
The first question was, I'm sorry.
The first question is, are you giving up anything?
Are we giving up anything? So the lens that we've looked at Onshape is minimum viable product. So we are able to create all of the different types of components that we need to make in Onshape. We do find weaknesses in 2 d drawings. So some of the 2 d drawing functionality is still maturing.
We have automations in our legacy CAD systems to create certain very complex components. We are recreating those using the Onshape feature script. But in team to team to develop. Again, every 3 weeks, it gets better and better. There are so there's more complaints on the 2 d side because of the maturity than the 3 d side.
And I'll be clear, we are betting on the future because the tool does get better and better, but we've met our minimum viable product for what we need to be efficient enough given a few of the shortfalls. The productivity and cost benefits, we look at
there's a
few different measurements. So we look at key activities that we do, whether it's creating an engineering change order, like Philip and Steve talked about earlier, or it's executing a specific piece of geometry, or it's planning our design activities. We look at the time on task, and we can measure using a stopwatch or similar measurements, how many times per week per year do we do this, what is the time on task in the old process, What's the time on task in the new process? And then as we launch and we adopt that, we continue to validate that and make it better and better. This is our framework that we use for productivity in Garrett, including our CAD and data management systems.
Thanks, Chris. Wonderful. Appreciate it. Thanks.
Thank you, man. That was great.
All right. We're going to open it
up now for questions with Jim and Christian and John Hirschtick. Again, if you wouldn't mind just stating your name and affiliation before the questions, and then we'll get a mic to you. And then we will. We're going to push the Q and A, obviously, past the 3 time frame here, go a little bit longer, and then still have tours for those interested.
Go ahead, Jay. Thanks. J. Felice Howard, Griffin. For Jim, I guess, two things.
1, could you put the Onshape acquisition in the context of what you spoke about 5 months ago at LiveWorx, specifically your focus at the time on your closed loop lifecycle management vision and the specific quote you had at the time that PLM is now more important than ever? And then secondly, perhaps you could talk about any historical precedents in this industry in terms of how you're thinking about the timeline of integration and adding all the features on top of Onshape that you're talking about. You're well aware, of course, of what Siemens went through with its team center metaphase integration. We talked earlier about DS and V6 timeline and the difficulties encountered in replatforming and so forth. So to what extent are any of the latter applicable here or how you think about those as analogies to what you're trying to do?
Yes. I mean, Jay, those are good questions. So first, we've been talking for some time, for example, about how there's been a renaissance in CAD, that there's a lot of new technologies, AR, real time simulation enabled by high performance computing, additive manufacturing, IoT, that all these technologies were causing us to rethink CAD. And frankly, you see they're causing the market to increase its growth rate. And I think in the process of thinking about CAD and then thinking about PLM and how important it was as a digital transformation backbone, of course, at some point, we stumbled across SaaS and realized that's a transformation driver too.
It will be part of that renaissance. Now SaaS is not something you can add to an existing product. And I think the Onshape guys were the only ones who really started with that premise. And John and I became very good friends when I told him I agree with you. You can't add SaaS to an on premise product.
And he said, Oh my God, you completely understand me. And trust me, I've thought a lot about it, and I've studied who's done it. I mean, name 1, name 1. Name an on premise piece of software that became a SaaS leader. Name 1, you can't.
They all got run over by somebody who did what John did, which was started from scratch. So I think what happened is we think that we can continue creating this renaissance in the world of Creo and Windjell, while in a parallel universe, creating a new version of it in the world of SaaS that runs on your phone and tablet and all that type of stuff. So moving on to the second question, to me, it's not a huge priority to merge them together. In fact, I don't think we'll do that. I think what we'll say is it's much like if Volkswagen bought Tesla, they wouldn't try to jam them together, I don't think, or Toyota bought Tesla.
I think what we're saying is we want to win in the world as most people know it today with Creole and Windchill and other stuff. And then we want to position ourselves to win in the world of tomorrow as people as the light bulb goes on and people want to switch. I think hopefully it's not lost on you. That example from Garrett, that's a CATIA customer. That's the highest end of the highest end tools, switching to Onshape and declaring it to meet the use cases, minimum viable product, getting better quickly.
So to me, I think when a company like Garrett switches for the reasons outlined, which have to do with business benefits on one hand and cost savings on the other, I think that's going to get the attention of people. And we want to say as everybody comes over, let's be on the right side of disruption that we're the ones benefiting from disruption as opposed to suffering, which frankly would have been an exposure had we not made the acquisition. So I think that Onshape future proofs the whole PTC story, which is we got a great story today. And as the world we're in one of the last worlds who's not gone through this SaaS transition. But as the world of technical software and the industrial world goes through this transition, we're now in great shape to be the biggest beneficiary on the other side.
So I think it's a great question, and I'm pretty excited about what this means for us.
Hey folks, Saket Kalia at Barclays. Thanks for hosting the day. Thanks for taking the questions here. One question for you, Christian, and then one philosophical one for you, Jim and John. So first maybe for you, Christian.
Is there a way to think about Onshape's contribution to that new free cash flow range in fiscal 'twenty four, that $700,000,000 to $900,000,000 I know we've got how much Onshape is expected to contribute in ARR, but as you think about that long range plan, how much do you sort of see Onshape kind of contributing to it?
Yes. Well, I think the answer to that is it depends a little bit exactly on how successful it is in the market. And frankly, if it's driving more and more, we are going to continue to invest. I expect it's a high growth SaaS business. I expect it to be a slight drag on free cash flow.
Let me say though, I think that's the base answer. Slight drag on free cash flow, but not huge. But there is an alternative upside case we didn't go through, and that is the market shifts quickly to SaaS and most of the battlefront wages in the SaaS world. Right now, the creo and wind chill R and D budget is much, much bigger than Onshape and growing. It's growing like, let's say, 5% a year.
If it were shrinking 5% a year, you also get to a $900,000,000 free cash flow number or very close. So there's another case that says Onshape really goes fast, doesn't make any more money, but we don't have to have quite as large of an army fighting a battle that doesn't matter as much because the attention has shifted to SaaS versus SaaS and SaaS versus on premise. So that's another interesting scenario.
Got it. Maybe that's a segue into the second into the follow-up question. A little bit of a philosophical one for you, gents, right? So how does the adoption of SaaS impact PLM at all, right? I mean, I think in the customer example before, which was great was the idea of Onshape actually maybe doing about 80% of what product data management did.
Jim, how do you sort of think about, I mean, a large and very successful PLM business here with a SaaS tool that's doing a lot of what PLM is already doing? Does that make sense?
Yes, for sure. Now what you should think is in the on premise world, PTC has CAD, PLM, IoT and AR technologies. And we're constructing on the Onshape platform CAD, PLM, AR and down the road to IoT at some point, not an urgent priority. But we want to recreate a pure SaaS based portfolio that matches the current one. Now the way PLM is done inside of Onshape today is incredibly user friendly.
But of course it works best when everybody is working in the same application, right? The PLM that Windchill does is usually up a level or 2, working across many applications. Some people are in SAP, some are in CATIA, some are in Creo, some are in Microsoft Word or Excel, and how do we run a more complex process. So I actually think there's a case to be made that if a company adopts Onshape, it creates a ever larger pocket of productivity, but Windchill will be called on to integrate that growing pocket of productivity with the rest of the enterprise that is using other tools for various reasons. So I think that Onshape will probably be a net positive for Windchill by creating another flavor of mixed tool enterprise PLM.
Great.
Hi, this is Yi Chen. I work with Tyler Rakhi from Citi. Christian, you talked about the ramp deals benefiting the reacceleration for ARR growth in fiscal year 'twenty four, can you help us quantify the impact of these ramp deals?
No, we're not going to get into quantifying the backlog. And it's the mix of both backlog from ramp deals as well as the start date phenomenon. So let me point out that like any other good red blooded enterprise software company at the end of any given quarter, in particular, at the end of Q4 is when we do a vast majority of our bookings. But per the way that we're treating ARR, we're going to count ARR when the with the start date of the contract, not the sign date of the contract. So we sign a lot of deals, excuse me, at the end of Q4 with future start dates.
So that coupled with ramps, and by the way, those ramps are from deals signed in 2019, 2018 and frankly, even some signed in 2017 that are all going to start layering in to 2020.
Let me add an important point to that, which is that Mike D'Tullio, Mr. New ACV, has to generate as much go forward backlog in the year as we consume. So if you look at net backlog, it will stay relatively flattish because we'll pull some 'nineteen business into 'twenty, while pushing some 'twenty business into 'twenty one and beyond. So Mike's got a number, which is not just this year, but what he has to land this year to create new backlog for future periods as well. So backlog is just another thing we have to manage.
But it's bookings backlog layering in over time to ARR.
And just so for Mike's benefit, more backlog than we're consuming is, of course, better.
Yes. Andrew DeGasper, Berenberg. First, I guess, in terms of the focus of Onshape on the sales force, how do you I guess you're going to keep those separate in terms of what customers are trying to attack. How do you going to keep that sales process focused?
Yes. You want me to take that? Yes.
Go ahead.
Yes. So yes, they are separate right now, and they'll remain separate until we find avenues to carefully allow some cross selling. So for example, some of our resellers might become quite effective at selling Onshape. None of them as of this moment are enabled to do or therefore they're not. So I think we have a new Head of Sales under John starting on Monday, I guess, a week from today, and somebody that's coming back into the family, we're excited to have.
And he's going to have to figure out the Onshape go to market. But within the Onshape go to market, what roles over time might PDC play, PDC and PDC resellers. But in the near term, not a significant role.
Yun Kim from Rosenblatt Securities. Hey, Christian. I have a funny or fun scenario for you. So let's can we get in a scenario where obviously targeting that free cash flow growth of $850,000,000 fiscal year 2024, can you get can you actually miss that target but still grow ARR growth in the high teens and then vice versa where you can actually miss your ARR growth target, but still actually achieve higher than the FC free cash flow target because of the different margins in different business segments?
Yes. So I would say not only the different margins in the different business segments, but it's the amount of investment that we're throwing at the markets, right. So again, more scenarios that we didn't go through, but if we were growing ARR even faster, it's likely that it's because we're also performing well in the market and therefore putting more resources to work. So yes, you could beat the target and still come in slightly lower on the free cash flow or conversely, there's a scenario where it's you're not performing as well on the ARR front and therefore don't actually need to invest as much and therefore could obviously drive free cash flow up. So yes, there's a lot of different ways to think about it.
Yes. Just real quick, I just want to make sure. So you can actually by looking at your ARR growth rate, you can actually adjust your investment levels accordingly to get to that free cash flow target. Is that kind of what you're implying from that conversation we just had? Because clearly, Canon PLM businesses are have a much higher business, so can generate higher cash flow versus your IoT and AR part of the business?
Yes. Let me try, Stephen, this too. The way we have planned this, the plan of record, has us investing aggressively in Onshape. And the real risk to free cash flow is number 1, taxes. And then we gave you some performance scenarios.
And really bad things have to happen for us to miss that $850,000,000 by much. I mean, by really a lot, really bad things have to happen, meaning I don't think they will. Now the taxes thing is a wild card because Christian talked about a $50,000,000 combination of taxes and FX. Now if it were all taxes, that would mean we had $250,000,000 more profit roughly, just taking 20% of $250,000,000 would be 50. Now I hope if we have $250,000,000 more operating profit, you guys won't fret because we paid more taxes.
I think that's a very good situation. We will have extremely high levels of profit on much higher than expected levels of revenue in order to pay that $50,000,000 extra in taxes. So that tax thing is just to us, it's going to come down to accounting judgments made down the road, and it's hard for us to predict exactly where those judgments will land. It's hard to predict the term lengths, okay? These four scenarios though try to set that aside and say, here's what you'd have to believe for us to do 850.
You'd have to believe new CAD sales and PLM sales will be flat. It's a pretty conservative assumption. You'd have to believe the FSG stuff will continue to decline, pretty conservative. And then you have to believe our growth business works, right? But you can switch to the pessimist scenario and say, I believe those first two things, I don't believe your growth business is going to work.
I'd say, okay, we do, but that gets you to $750,000,000 not taking into account the tax thing that would only happen if we had much higher than projected levels of revenue and profit.
Okay. Got it. Thank you.
Any other questions? Otherwise, we will wrap here. Those sticking around, do you have a follow-up? Yes. 2nd.
Okay. Please.
Hey, thanks. Saket Kalia, Barclays again. Christian, maybe a lot of the really helpful scenarios, but the mix shift Jim that you're talking about I think is a really important one, right? So if we just think about mix out in fiscal 2024 because growth here is not just IoT plus AR, right, which is why the growth is IoT plus AR plus Onshape, right? So what is and I think that's an important distinction.
What is growth as a percentage of the ARR pie in fiscal 'twenty four? And what does that percentage say? Just to get a sense of that mix shift.
I didn't run that model. I don't know if you did. I mean, obviously, it's in the model. I didn't break it out like the pie chart did. But you probably have the data to run it.
Just take that pie chart as a starting point and
run it forward. It's about a third in 2024. Of ARR.
Up from 15% of ARR. In 2020. Yes.
Okay, good. I guess that's a wrap. Thanks for joining us live. Those on the live stream and those sticking around, we'll gather over here and do our CXC demo. And again, thanks, everybody.
And maybe just real quick. This is our customer visit center. So the other side of this floor is filled with lots of physical demos that show you generative design and real time simulation and many different IoT use cases and tons of augmented reality. And then an amazing reality lab that has technologies that will make your head spin. So if you have time and you want to go check them out, please do.
And if you don't, that's okay. We understand. Thank you for coming.