PTC, Inc. (PTC) CEO Jim Heppelmann on Q3 2022 Results - Earnings Call Transcript

PTC, Inc. (NASDAQ:PTC) Q3 2022 Earnings Conference Call July 27, 2022 5:00 PM ET

Company Participants

Matt Shimao - Head, Investor Relations

Jim Heppelmann - Chief Executive Officer

Kristian Talvitie - Chief Financial Officer

Conference Call Participants

Matthew Broome - Mizuho Securities

Saket Kalia - Barclays

Andrew Obin - Bank of America

Blair Abernethy - Rosenblatt Securities

Adam Borg - Stifel

Jay Vleeschhouwer - Griffin Securities

Joe Vruwink - Baird

Matt Swanson - RBC Capital Markets

Yun Kim - Loop Capital Markets

Tyler Radke - Citi

Ken Wong - Oppenheimer

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2022 Third Quarter Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

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

Matt Shimao

Good afternoon. Thank you, Savannah and welcome to PTC’s fiscal 2022 third quarter conference call. On the call today are; Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Today’s conference call is being broadcast live through an audio webcast, and the replay of the call will be available later today at www.ptc.com.

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

The forward-looking statements including guidance provided during this call are valid only as of today’s date, July 27, 2022. And PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s press release made available on our website.

With that, I’d like to turn the call over to PTC’s Chief Executive Officer, Jim Heppelmann.

Jim Heppelmann

Great. Thanks, Matt. Good afternoon, everyone and thank you for joining us. I’m pleased to report that PTC delivered an outstanding third quarter, with top line ARR results and bottom line free cash flow results above our guidance, and we’re raising our guidance for the third time this year. Before I dive in, I’d like to point out that Kristian will cover the effects of the strengthening dollar later during his section of the call. So to simplify things, I will focus my discussion of top line growth metrics on constant currency results.

Turning to Slide 4, ARR and free cash flow results were very strong and the strength was broad-based across all segments and geographies. Of particular note, we saw organic ARR growth further accelerate to 15%, driven by the acceleration we saw across the board in Digital Thread Core, Digital Thread Growth, FSG and Velocity units. ARR growth was helped by the lowest churn the company has seen in many quarters. I’m pleased to see PTC’s organic growth rate move into that mid-teens range we’ve been targeting.

We closed the Intland acquisition during Q3. I’ll refer to this business as Codebeamer going forward, because that is the product name we will retain. Codebeamer had an outstanding first quarter at PTC and added a point of inorganic ARR growth, taking PTC’s ARR to $1.63 billion, up 16% year-over-year. In Q3, we complemented our top line growth with even stronger bottom line growth.

Despite strong FX headwinds and nearly $20 million of restructuring and M&A transaction payments, our free cash flow performance was strong at $112 million, which was ahead of our guidance and up 33% year-over-year. Remember that the restructuring we implemented at the end of last fiscal year was designed to drive a more aggressive and efficient SaaS strategy. At the time it was announced, we viewed the charges as short-term pain for long-term gain.

Now, we’re at the inflection point where most of the pain is behind us, leaving us with a cost structure that’s in great shape, while the operational changes continue to generate the positive results we expected. I’m going to circle back on the margin topic in a few minutes when I reflect on macro scenarios.

Moving to Slide 5, despite the scary headlines we read every day, we’ve continued to see solid global demand for our offerings. We did see some minor indications of macro-related softness in smaller European reseller accounts and in China due to COVID-related lockdowns, but this proved immaterial as organic bookings were up 29% year-over-year, roughly double the organic ARR growth rate. Europe bookings grew 20%.

As I mentioned, renewals were also strong and we’re raising our FY ‘22 organic churn guidance as we’re trending slightly better than expected. Growth was strong in both Digital Thread and Velocity units and across all three geographies. Q3 was the seventh consecutive quarter that bookings have grown faster than ARR, which together with improving renewal rates is driving the accelerating ARR growth we’ve been delivering all year.

To help you appreciate the resilience of PTC, as you think about any potential macro volatility that may lie ahead. On Slide 6, I’d like to briefly again review our business model dynamics to help investors understand why, despite the uncertainty, we have confidence in our financial targets for the remainder of the year.

On the left-hand of the slide, you can see that the 16% ARR growth we delivered in Q3 was based not just on our Q3 performance, but performance over the prior three quarters as well. Given our definition of ARR is the annualized value of the book of active recurring software contracts, ARR growth is effectively a trailing four-quarter metric.

When we say ARR grew 16% in the third quarter, we mean that on average ARR has now grown 16% over each of the past four quarters, because the entire book of active recurring businesses now 16% larger than it was at this time last year. While this trailing dynamic serves to dampen the impact of bookings in any single quarter, such as the strong results in Q3 where bookings grew roughly twice the speed of ARR.

It also provides a tremendous foundation of stability for the company. We are raising our ARR guidance for the full year, because three of the four quarterly results that will comprise FY ‘22 ARR growth are already known. And we feel sufficiently confident about Q4. Kristian will elaborate during his guidance reveal.

As you think about macro scenarios and their effect on PTC, remember the basic rule of thumb that’s a longest bookings exceed churn over the trailing four quarters, ARR will grow and so too should free cash flow. Bookings currently exceed churn by a wide margin, roughly 3:1. To demonstrate the resilience of our model, I’ll quickly review the same big round directionally accurate numbers I supplied last quarter for you to run scenarios against. Think of PTC having around $1.5 billion in ARR and on a run-rate basis we’re adding $300 million in annual bookings, while seeing $100 million in annual churn. That’s the 3:1 ratio I spoke of.

Over the next year, the $1.5 billion of ARR would step up by $300 million in bookings, and step down by $100 million in churn to grow to $1.7 billion, which is 13% growth. That’s roughly consistent with our current run rate performance though our actual 15% ARR growth level reflects that we’re running slightly favorable on both bookings and churn. I’ll skip the details this time around, but on the right-side of the slide, let me remind you of the hypothetical scenarios I shared last quarter.

The first scenario has booking slow 30% for four quarters, like we experienced in 2009. And the second scenario has booking slow 30% for two quarters, like we experienced in 2020. In both cases, churn has held flat, consistent with experience in both periods. Across those scenarios, ARR grows upper single-digits to low-teens.

Now, to understand profitability in a downturn, let’s take a fresh look at Slide 7, which I burrowed and updated from our December Investor Day presentation. Whether top line growth remains strong as it has been or slows a bit due to macro developments, we expect to see significant margin expansion going forward. Margin expansion starts with the scale advantages we get by growing the top line faster than spending. Fiscal year-to-date, ARR is up 16%, while non-GAAP OpEx is basically flat, but we have several margin expansion programs that go further.

The first margin expansion program is reflected in the actions we successfully implemented at the end of FY ‘21, which is shown on the left half of the page. Those changes that worth several hundred basis points of margin expansion, once the restructuring is complete, and it now largely is. By the time we enter FY ‘23, we have the bulk of the operating costs and the restructuring costs removed from our results. In addition to that, we’ve also initiated a second margin expansion program, which is shifting resources within our portfolio in a way that addresses key staffing needs, while driving up the profitability of our J-Curve businesses as shown on the right half of the slide.

By reassigning some sales in R&D resources, and I’m talking about the actual people from IoT and AR, where growth has been lower than expected into other parts of the portfolio like CAD and PLM, where growth has been exceeding expectations, we’re able to accommodate much of the company’s resourcing needs, while canceling more than half of the 800 open positions we had a quarter ago. This program will not involve layoffs or restructuring charges, just new assignments for existing employees. The avoidance of new hires and their previously budgeted costs is expected to yield a couple hundred basis points of margin expansion over time.

Note that a nice side effect of these resourcing shifts is that the Digital Thread growth unit comprised of IoT and AR is now crossing into profitability. We expect to see further margin expansion that comes naturally, as these businesses continue scaling beyond the current $214 million in ARR.

In addition to the margin expansion programs that are well underway, there’s a third margin expansion opportunity. If we were to encounter signs of a significant macro slowdown, like the scenarios I mentioned, we would quickly implement new hiring restrictions against the balance of the open positions we have, as well as other spending restrictions. This too would further help margins.

The summary is that our cost structure is in great shape as we contemplate scenarios of what might lie ahead. Given the cost lever we’ve already pulled with the restructuring at the end of last year, the lever we’re pulling now by rebalancing resources within the portfolio and the additional lever that remains incrementally available to us if we see signs of a downturn, we’re looking at substantial margin expansion drivers that make us confident, we can deliver free cash flow growth in the mid-20s or better at Q3 FX levels and across most plausible ARR growth scenarios.

A mid-20s free cash flow growth rates supports the longer-term free cash flow guidance we currently have out there. So we continue to feel good about that even in this shaky environment. Because we have products that are compelling and sticky, sold into good markets using a recurring revenue model, coupled with a longstanding reputation for spending discipline, PTC is in a good position to drive differentiated free cash flow growth no matter what macro scenario plays out.

Getting back to Q3, let’s take a quick look at our ARR performance by geography on Slide 8, before turning to our business units. In Q3, we again saw a strong ARR growth across all geographies. ARR growth in the Americas was 14%. In Europe, our ARR growth was 17% despite the Russia exit in Q2, which still affects the growth rate, given the trailing nature of our ARR metric. Our ARR growth in APAC was 16%.

Knowing that investors are concerned about the macro environment, I’d like to reiterate that we are continuing to see strong bookings and renewal performance globally and in Europe, and giving our recurring business model, ARR is likely to grow in all, but the most extreme downturn scenarios one can imagine.

Next, let’s take a look at the ARR performance of our business units starting with Digital Thread on Slide 9. In our largest product segment, Digital Thread Core, we delivered another strong double-digit growth performance in Q3 with 14% ARR growth. Within this, once again, CAD grew low double-digits, while PLM grew 17%. Bookings grew faster in both cases. Q3 was the best performance yet across the known 19 consecutive quarters of double-digit ARR growth we’ve seen in the Core CAD and PLM business.

On the SaaS transformation front, Windchill+ is in its early days, but we had a solid SaaS quarter for Windchill based primarily on a good mix of SaaS in new projects. We continue to expect to see a growing SaaS impact from lift and shift conversions as that phenomenon ramps in FY ‘23 and beyond. A reminder too that Windchill+ is the tip of the iceberg of a bigger plus strategy and you’ll see us follow with Creo+ and similar premium SaaS offerings in FY ‘23 and beyond.

In Digital Thread Growth, which is IoT and AR, we were pleased to see ARR growth accelerate to 19%. In the neighborhood of that two-handle growth rate we’re targeting. ThingWorx DPM had a solid quarter, including a multimillion dollar ramp deal with a leading global contract manufacturer for a 30 factory DPM rollout following a successful proof of concept.

With ThingWorx DPM, we believe we have a turnkey IoT solution with strong product market fit and this deal represents an excellent proof point. FSG posted great results again in Q3, accelerating to 9% ARR growth organically and growing 17% inclusive of Codebeamer. Within FSG, retail PLM, Arbortext and Servigistics all performed notably well, driven by solid results in terms of both bookings and renewals.

Let’s turn to Slide 10 and double-click on Codebeamer. As the driver of the inorganic growth of FSG, Codebeamer had an outstanding quarter, beating its plan even before landing a mid seven-figures ramp deal with a European automotive supplier that’s standardizing on Codebeamer across its thousands of software engineers. This transaction was actually the largest order PTC booked in the third quarter, which is quite an accomplishment for a business that currently represents 1% of our ARR.

The Codebeamer product has best-in-class ALM capabilities, and is seeing high demand because these capabilities are critical to manufacturers whose products contain embedded software. That’s especially true in industries like automotive and medical devices that are regulated, because an errant software chain – change somewhere in the supply chain could lead to an unexpected product behavior that might kill people. Codebeamer is often an amazing start and early returns are very encouraging.

We have combined Codebeamer with our previous ALM offering called Integrity and elevated this consolidated ALM business to be a key product line alongside CAD, PLM, IoT and AR in the Digital Thread portfolio. Codebeamer will continue to be sold standalone and will sell it with PLM as well. In addition to the strong standalone ALM sales that Codebeamer has been experiencing, adding it to PTC’s portfolio, is expected to drive incremental revenue and cost synergies.

To keep our reporting simple in the near-term, we will continue to report the ALM business in the FSG line item, placing the high-growth Codebeamer business in the FSG reporting line item should take FSG from being a low single-digit grower to a sustainable mid single-digit grower going forward, which of course helps to elevate PTC’s overall growth rate as well.

Before I turn to our Velocity business unit, let me run through a customer story on Slide 11 that illustrates how customers are leveraging our digital transformation capabilities. With more than 29,000 employees, Vestas is a key global provider of sustainable energy solutions to the energy industry.

Vestas is a great PTC customer, and they use our software across their Digital Thread, as they design, manufacture, install and service onshore and offshore wind turbines around the globe. To meet the unique needs of each customer and each deployment, Vestas has embraced digital transformation. Vestas has literally taken an electrical mechanical wind turbine and turned it into a highly tailorable software controlled, connected powerhouse of clean and affordable energy.

For Vestas, the first step was to establish a strong PLM foundation in engineering. Now Vestas is leveraging the end-to-end configuration management capabilities of Creo, Windchill and ThingWorx to drive process improvements across engineering and manufacturing. By eliminating manual handoffs and redundant work, Vestas is unlocking a step function improvement in product and process quality, while shortening lead times.

Vestas is driving closed-loop innovation using data from a large number of connected wind turbines in the field to generate engineering insights. PTC’s unique portfolio was well aligned to support Vestas along their digital transformation journey, and their future plans include increasing use of ThingWorx and Vuforia as they continue to develop their best-in-class wind power solutions.

Turning to the Velocity business unit on Slide 12, year-over-year ARR growth for our Velocity unit accelerated slightly to 29% in Q3, with Onshape and Arena again, growing multiple times faster than their market. These cloud-native businesses each a pioneering leader in its respective category continue to give us proof points that suggest the future of the product lifecycle software market will be SaaS.

With Velocity, PTC has the best pure-play SaaS strategy in our market. It really is the industry benchmark for how SaaS should be done. And with the Atlas platform, born of Onshape and now powering Windchill+ in the broader plus strategy, we are implementing SaaS across the entire portfolio. We expect the SaaS strategy to create strong growth tailwinds in the Core business for years to come.

Let’s move to Slide 13, where I’d like to take you through a Velocity customer story. Wavemaker Labs is a product development accelerator known for product development excellence in automation applications. They have a portfolio of companies and they help these companies build disruptive technologies. Photo you see on the slide is the Flippy 2 Automated Frying Robot from Miso Robotics, which is one of Wavemaker’s portfolio companies. Miso Robotics is leveraging automation to revolutionize commercial food service, and their customers include Jack in the Box, Chipotle and White Castle, all favorites of Kristian Talvitie I’m sure.

To help Miso Robotics and their portfolio companies drive high velocity product development, Wavemaker Labs has chosen Onshape and Arena. Speed, agility and flexible scalability are top priorities for Wavemaker Labs, making Onshape and Arena a natural fit. The unique analytics and management reporting capabilities of Onshape helps Wavemaker Labs to better understand the efficiency and the engagement of their engineers. Also with their high velocity mindset, Wavemaker Labs is focused on driving frictionless collaboration from start to finish.

They’re looking forward to being one of the first customers to deploy the new Onshape-Arena connection feature, which is in customer test now and will be released shortly. This connector will launch the industry’s first integrated pure-SaaS, CAD and PLM suite, which enables improved collaboration and a seamless flow of product data across engineering, supply chain and manufacturing or contract manufacturing activities.

For a final topic, turning to Slide 14, there are two upcoming investor events I want to raise to your attention. First, we plan to hold a Virtual FY ‘23 Investor Day event on November 17th, where we’ll give you a deeper view into PTC’s financial plans for FY ‘23 and beyond.

Second, we plan to host a large LiveWorx Ecosystem event on May 15th and 16th of 2023, that assuming COVID cooperates, we expect will bring together thousands of customers, partners, investors and employees in a live event at the Boston Convention and Expo Center near our Seaport headquarters. We’re hoping that many of you will attend the LiveWorx event where we’ll have a dedicated investor track that allows you to participate in keynotes and investor sessions, plus gives you ample opportunity to interact directly with management, customers and partners across the PTC ecosystem.

To make it easier for you, we plan to make the November event both shorter and virtual, with the intention to give you what you need for your models to tide you over to the bigger LiveWorx event in May, where you can get a full dose of strategy and customer exposure. Please watch for our Hold the Date invitation from our Investor Relations Team regarding both events.

To wrap up on Slide 15, demand remains strong in Q3 and we’ve seen only minor signs of a macro slowdown. But we’re watching diligently and we’re well prepared for whatever lies ahead. Because of our resilient business model and spending discipline, we expect to deliver solid top and bottom line growth across any of the more plausible macro scenarios.

Overall, I’m very pleased with PTC’s position, our strategy is working well. We’ve driven both our growth and profitability to levels that are near the top of our peer group and I’m excited about the opportunities to do even better as we push ahead in parallel with a growth and margin expansion initiatives.

Throughout the first three quarters of FY ‘22, bookings and renewals have been very strong. Growth has been accelerating all year, which is why we’re raising our guidance for the third time. And we’re entering the fourth quarter of what will be our fifth consecutive year of double-digit organic ARR growth. I think the company’s never been in better position to create shareholder value.

And with that, I’ll turn it over to the Kristian for more details on the financial results.

Kristian Talvitie

Thanks, Jim. Good afternoon, everyone. Before I review our results, I’d like to note that I’ll be discussing non-GAAP results and guidance and ARR references will be in both constant currency and as reported. Turning to Slide 17. As a reminder, when we provided guidance last quarter, we specifically excluded the Codebeamer and DxP transactions, which had not closed at that point.

Codebeamer contributed $16 million of ARR in Q3. On an organic constant currency basis, our ARR was $1.61 billion, up 15% year-over-year, and ahead of the comparable guidance range we provided which was $1.58 billion to $1.595 billion. Including Codebeamer, our constant currency ARR was $1.625 billion, up 16% year-over-year.

Aside from a non-operating cash inflow, the DxP transaction did not impact our results as most of the in-flight services contracts are still on our paper. We expect the transition of these services contracts to happen gradually over time, and will be reflected in future guidance as we provide it. However, we expect the impact to ARR and free cash flow to be de minimis.

As Jim explained, our top line strength in Q3 was broad-based. We’re executing well against our strategy and we’re continuing to improve upon strong market position. Our SaaS businesses across our Digital Thread and Velocity groups saw continued solid ARR growth in Q3. On an as reported basis, we delivered 9% ARR growth, 8% organic due to the impact of FX headwinds, which were approximately $81 million, substantially higher than the $32 million of FX headwinds we estimated a quarter ago using Q2 ending exchange rates.

Despite the FX headwinds, our cash flow results were strong coming in ahead of our guidance, increased ARR, solid collections performance, slower hiring and above planned perpetual license revenue from Kepware helped to offset the incremental headwinds that materialized in Q3. When assessing and forecasting our quarterly cash flow, it’s also important to remember a few things. The majority of our collections occur in the first half of our fiscal year. Q4 is our lowest cash flow generation quarter. And free cash flow is primarily a function of ARR rather than revenue.

Q3 revenue of $462 million increased 6% year-over-year, as we’ve discussed previously, revenue has impacted by ASC 606. So we do not believe that revenue growth rates are the best indicator of our underlying business performance, but would rather guide you to ARR as the best metric to understand our top line performance and cash generation. FX impacted revenue by $18 million in Q3. So our revenue on a constant currency basis was $480 million, up 12% year-over-year.

Before I move on to the balance sheet, I’d like to provide some color on our non-GAAP operating margin as I did last quarter. We continue to caution that because revenue is impacted by 606, other derivative metrics such as gross margin and operating margin, operating profit, EPS are all impacted as well. Still it’s worth mentioning that we’re benefiting from the work we’ve done to optimize our cost structure, following our restructuring announcement last November.

In Q3 ‘22, our non-GAAP operating expenses were slightly less than in Q3 ‘21. Yet we delivered significantly higher ARR, free cash flow and revenue, and our margin percentage also expanded compared to a full year ago. As I indicated last quarter, we believe the improvements we’ve driven are sustainable, and we remain on track to deliver operating margin expansion for the full year and expect to end the year with operating margins in the high 30% range.

Moving to Slide 18, we ended the third quarter with cash and cash equivalents of $322 million. Our gross debt was $1.43 billion with an aggregate interest rate of 3.5%. During Q3, the amount drawn on our revolving credit facility increased by $159 million on a net basis to $434 million. This was due to the financing of the Codebeamer acquisition, partially offset by paying down $105 million on our revolver.

Regarding our share repurchase program, as we’ve communicated on the previous two calls, we’ve completed $125 million of repurchases in Fiscal ‘22. Our long-term goal assuming our debt-to-EBITDA ratio is below 3 turns, is to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic opportunities.

Next, Slide 19 shows our ARR by product group. We post the set of financial data tables to our IR website that has our financial statements as well as ARR details. In that file, we share both constant currency and as reported ARR. As a reminder, when we calculate constant currency figures, we use our current year plan FX rates, which are as of September 30, 2021 for all periods.

You can see on the slide how FX dynamics have resulted in differences between our constant currency ARR and as reported ARR over the past seven quarters. Based on exchange rates at the end of Q3, reported ARR for fiscal ‘22 would be approximately $85 million less than our constant currency ARR guidance. This is important to consider in the context of our guidance, because we provide ARR guidance on a constant currency basis.

If exchange rates fluctuate significantly between the end of Q3 and the end of Q4, the impact to our as reported ARR would also change. We believe constant currency is the best way to evaluate top line performance of our business, because it removes FX fluctuations from the analysis positive or negative. As a reminder, as we said our ARR guidance for fiscal ‘23 on our next call, we’ll be providing that at the September 30, 2022, our foreign exchange rates and restating history assuming those rates.

Moving on to the next slide. Given the sharp moves in FX that we’ve seen recently, I thought it would be useful to provide an updated ARR sensitivity rule of thumb so to speak here on Slide 20. In addition to the US dollar, we transact in euro, yen and more than 10 other additional currencies. Using our Q3 FX rates, the impact of a $0.10 change in the euro to USD rate would be $38 million positive or negative. And the impact to a JPY0.10 change in the US dollar to yen rate would be about $8 million. Of course, the estimated dollar impact to ARR is depended on the size of the ARR base.

Turning to Slide 21. We’re pleased to have closed both the Codebeamer and DxP transactions in the third quarter. Let me explain the financial impacts starting with ARR. At the end of Q3, Codebeamer’s ARR was $16 million reported as part of FSG. We expect solid ARR growth from Codebeamer and this should help FSG grow consistently in the mid single-digit range going forward.

The DxP transaction will not impact ARR, but it is instead expected to result in lower professional services revenue. This will happen over time as the services contracts move to DxP from PTC. In Q3, the impact was de minimis. And since our services business is not high margin, we do not expect a material impact to our profitability as the business gets smaller over time.

Next, from a free cash flow perspective, we expect Codebeamer and DxP to have an immaterial impact in fiscal ‘22 and to be accretive in fiscal ‘23. In fiscal ‘22, the incremental operational cash flows essentially offset incremental transaction-related fees and incremental interest expense.

With that, I’ll move on to guidance on Slide 22. I’ll start by pointing out that our previous guidance did not include the financial impact of Codebeamer or DxP, and our updated guidance now does. As I just explained, this positively impacts ARR. But is immaterial for our other guidance items. We’re raising our fiscal ‘22 constant currency ARR guidance based on our strong year-to-date new and renewal bookings performance, the addition of Codebeamer, and despite our exit from Russia in Q2 of this year.

The new range is now $1.66 billion to $1.69 billion, which translates to constant currency ARR growth of 13% to 15% for fiscal ‘22. At the midpoint, we’re raising ARR guidance by $23 million, approximately $16 million of the raise is attributable to the addition of Codebeamer ARR, with the rest being driven by our strong business performance.

Given the macro uncertainties, we’re providing a wider range for ARR than we usually would at this point in our fiscal year. The low end contemplates a 2020 recession kind of scenario where bookings will be down 30% and we’d see a modest increase in churn. This is primarily to illustrate the resiliency of our model.

As Jim mentioned, we did not really see any material impact for the macro environment in Q3. So if that trend continues, we would beat the low end handily. It’s also worth noting that we’re increasing our expectation for organic churn improvement in fiscal ‘22 from approximately 100 basis points of improvement to approximately 150 basis points of improvement, excluding the impact of our exit from Russia. Even including the inorganic Arena churn and additional Russia-related churn, we’re expecting approximately 100 basis points of churn improvement.

And while we don’t guide to bookings, I know that we sometimes reference bookings performance. And Jim mentioned earlier that our bookings growth has outpaced our ARR growth for seven quarters in a row. This will not continue in the fourth quarter, given the exceptionally strong bookings performance we add in Q4 of fiscal ‘21. As Jim also mentioned in our Digital Thread Growth segment, our IoT and AR product lines, ARR accelerated again in the third quarter, as we achieve 19% year-over-year growth. We expect fiscal ‘22 ARR growth for this segment to be 20% plus or minus.

Next, on cash flows, we’re raising our free cash flow and adjusted free cash flow guidance for fiscal ‘22. Our strong year-to-date execution includes growing ARR at the high end of our guidance range, especially in the first half of the year, which helped us to generate the majority of our FY ‘22 collections when FX rates were more favorable. Additionally, Kepware continues to perform very well and our perpetual license bookings are also above plan. Given our operational discipline, and the macro environment, our hiring has also been somewhat slower than anticipated.

And as we think about Q4, the internal resource reallocation Jim discussed earlier will also further slow hiring. These tailwinds are helping us to offset various headwinds including FX or Russia exit, modestly higher compensation and incremental acquisition and interest-related costs due to the Codebeamer and DxP transactions. Finally, regarding Q4, we continue to expect our normal seasonal pattern of cash flow generation, primarily driven by invoicing seasonality.

Moving to revenue, because of the sharp moves in FX over the past three months, we’re reducing the midpoint of our full year revenue guidance by $15 million. So for fiscal ‘22, our new revenue guidance is $1.9 billion to $1.95 billion and the year-over-year growth we are guiding to is now 5% to 8%. ASC 606 makes revenue very difficult to predict for on-premise subscription companies, hence the wide range. Note, that revenue does not influence ARR or cash generation, as we typically bill customers annually upfront, regardless of contract term lengths.

I’ll close out my prepared remarks today by taking you through an illustrative constant currency ARR model on Slide 23. Here, we’re showing our ARR progression over the past seven quarters, and an illustration of what is needed to get to the midpoint of our constant currency ARR guidance for fiscal ‘22.

Focusing on the last line in the chart, organic sequential ARR growth. The trend that is developed in fiscal ‘22 shows better organic ARR growth year-to-date compared to fiscal ‘21. Next, calling your attention to the green box. This model shows targeted ending ARR at $1.67 billion for Q4 to the midpoint of our guidance range. As you can see, to hit the midpoint of guidance, we need to add $50 million of organic ARR in Q4. This is less than the $63 million we added in Q4 of fiscal ‘21.

We believe we’re well positioned to do that, given our pipeline and forecast, and also in part, because we have more deferred ARR starting in Q4 of ‘22, than we did last year. And with the context of macro concerns, we’ve set a low end that contemplates a severe downturn in the global economy. Putting all this together, we believe we’ve set our guidance prudently.

With that, I’ll turn the call over to the operator to begin Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We do ask that you can limit yourself to one question only and then you rejoin the queue for additional questions. Our first question will come from Matthew Broome with Mizuho Securities. Please go ahead.

Matthew Broome

Thanks very much. Hi, Jim and Kristian. So congratulations on the large DPM ramp deal. Just how would you characterize the pipeline for that particular solution?

Jim Heppelmann

The pipeline is quite good. I mean, there’s a lot of interest in this solution. And in fact, we’ve already had a couple of follow-on orders from some of the earliest orders we received. So, I think it’s a good solution. You know there’s a lot going on in the world of manufacturing these days. So there’s a lot of competition for mindshare, but I think we have a very good solution and there’s a lot of interest in it.

Matthew Broome

Thanks.

Operator

Our next question will come from Saket Kalia with Barclays. Please go ahead.

Saket Kalia

Okay, great. Hey, Jim. Hey, Kristian, Thanks for – thanks for taking my questions here or question. Kristian, maybe – maybe I’ll direct this one to you. Can you just talk a little bit about any pricing changes you know that PTC has done you know in the last year or so? How you’ve sort of you know approached pricing you know as – as part of this year’s guide? And just any anything on pricing that you would say with respect to this year’s ARR guide?

Kristian Talvitie

Yeah, sure. Hey, a second. Thanks for the question. So you know like most of our peers, we evaluate pricing typically on an annual – annual basis and you know generally contemplate price increases around the October, kind of November timeframe. That’s been our pattern here for the past – past few years, depending on the overall macro environment and you know competitive environment, we try to take those things into consideration, as we – as we think about price increases.

So for example you know, during COVID, we actually did a much smaller price increase than we normally would. And – and this year, we actually given the macro environment, we actually pulled the price increase forward a little bit. So you know effective in May, we did a price increase that was also slightly larger than normal, reflecting the macroeconomic situation that we’re all in right now.

In terms of its impact to this year’s guidance and performance, I would say it’s been a modest, if you will, at best tailwind for fiscal ‘22. But we think that it’s one that will persist in the fiscal ‘23. And I think the way to think about that is if the price increase was effective in – you know effective in May, any quotes that were already in play would have had old pricing and so on. So you’re – you’re really talking about quotes that are going out after the price increase. So primarily impacting you know Q4 and beyond.

Jim Heppelmann

And maybe to add on renewals. As we’ve discussed, our average term lengths around two years, which would mean each quarter on average, an eighth of renewals are up. And – and then actually a majority of those have contractual price increases uninfluenced by inflation or by price increases we did to the product. So, it was not a major factor. In fact, it was a pretty de minimis factor in Q3, but it will be helpful as we – as we get into next year.

Saket Kalia

Okay, got it. Very helpful, guys. Thank you.

Jim Heppelmann

Thanks.

Kristian Talvitie

Thanks, Saket.

Operator

And our next question will come from Andrew Obin with Bank of America.

Andrew Obin

Yes, good afternoon. Good afternoon.

Jim Heppelmann

Hi, Andrew. Hi.

Andrew Obin

Hi. Jim, Kristian. Just the question on Windchill-SaaS transition. Sounds like Windchill+ is more attractive to new logos versus lift and shift existing clients. How is the pipeline for lift and shift building relative to your expectations?

Jim Heppelmann

I’m quite pleased with it. There’s a lot of interest. But you know it’s a project that has to be sold and planned and so forth. Sometimes I call it the last upgrade. Because you know, there’s a process to de-customize this system and upgrade it and then merge it into the running SaaS system. So there’s a lot of interest. But I think we never really didn’t feel like that’d be fast out of the blocks.

What’s easier to do is if a new customers buying Windchill, we say, well would you like it SaaS and they say, sure, why not. So it’s a lot easier for us to get out of the blocks faster with new projects than with these lift and shifts. But the interest level, I assure you is quite high. And in fact, the growth rate in Windchill is strong overall, but it’s stronger you know as you would expect on a SaaS side than on the on-premise side.

Andrew Obin

Thanks a lot.

Jim Heppelmann

Thank you.

Operator

And our next question will come from Blair Abernethy with Rosenblatt Securities. Please go ahead.

Blair Abernethy

Thanks very much. Good afternoon, gentlemen. Jim, I just wanted to maybe dig in a little more on the Digital Thread Growth that you sort of mentioned the IoT business and AR business, you know maybe not – not quite where you want them to be at. Can you just talk a little bit about what’s kind of happening in those end markets? And sort of what – you know what the competitive landscape is looking like for you guys these days?

Jim Heppelmann

Yeah, sure. Blair. So yeah, I mean, I think all year you know we’ve over-performed in a long list of things. And there’s – and there’s one part of the business has a little bit underperformed, even though it’s growing at a rate that’s accretive to company growth. But that’s IoT and AR. And I think it’s really a – mostly a market issue, not a competitive issue. In fact, I’d say it’s not at all a competitive issue.

There’s this factor that I call the hair-on-fire factor, which is a lot of this stuff is sold into environments that are in chaos right now. You know, if you run a factory, and we’re trying to tell you how we can make it more productive, you say, well, it’s shut down, because I don’t have any inventory. Or I’m in a lockdown mode or – or I have too much inventory or you know there’s just a lot of noise right now that, again, is competing for mindshare, and it’s not just competing for PTC’s mindshare, it’s competing for competitors’ mindshare too.

So I’m unaware of anybody we compete with who has higher performance than we do in this environment. I think this environment will pass and we’ll get more momentum down the road. But meanwhile, what we said is, we have you know, we – we put our resourcing plans in place according to our growth plans. And the places that are surpassing that growth plan need more resources and the places that are behind I mean, honestly, we have too many resources stacked in there.

So we’re just moving them around, it doesn’t mean we’re given up on anything we – we hope to get to and achieve this 20% growth rate, but I think as we look to next year, I think we feel like 20% would be a pretty good growth rate for next year. I’m not guiding to that here, but I’m just saying I don’t think the market supports more than 20% growth rate at this point in time, because of those hair-on-fire issues I’m talking about.

Blair Abernethy

Great, thanks for the color, Jim.

Operator

And our next question will come from Adam Borg with Stifel. Please go ahead.

Adam Borg

Great. Thanks so much for taking the question. Maybe just to follow-up along just the Thread from the last question. So as you allocate these resources from IoT and AR and presumably to CAD and PLM, how do we think about the ramp from the sales and marketing perspective to get these guys productive? I’m assuming it’s a hell of a lot easier to be more productive given they already familiar with the technology and the company versus a brand new reps. I’d love to hear more about the productivity of those reps as – as you make that transition.

Jim Heppelmann

Yeah, for sure. I mean, I think it’s the absolute most effective and efficient way to bring more resources to bear, because these are people who are already in the PTC sales organization, they already know the management team, they already know the customers, we’re just saying, hey, sell this product instead of that one to the same people in many cases. Not in every case, but certainly to the same types of people in every case.

So I think it’s quite – it’s quite an effective way to ramp new capacity. And meanwhile, I don’t see much risk on the IoT and AR side, because we have ample capacity left to keep up with the demand we see. We simply or have too much capacity to be frank in IoT and AR selling. And so we’re shifting that over putting a couple of different products in their big and send them back onto the playing field. So I think it’s – it’s smart. I think it’s going to work well. And I think there’s very little risk.

Adam Borg

Great, thanks so much.

Jim Heppelmann

Thank you.

Operator

Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Jay Vleeschhouwer

Yeah, okay. Thank you. Hello, Jim. Hello, Kristian. Jim, you alluded in your comments to share gain in your Core CAD and PLM businesses. And I think that’s a reasonable observation. In addition to which you noted the strength in ALM, at least with the acquisition.

And if perhaps raises a larger question of how the technical software market is evolving yet again, perhaps moving beyond what has historically been very [technical difficulty] centric industry to increasingly now with a – I think it’s simulation-centric industry in terms of revenue and process.

So you know if that evolution continues you know where the world becomes simulation-driven, plus CAD and PLM. You know how do you – how do you think that positions or leaves PTC in terms of you know your growth, your – your competitiveness, your resource allocation et cetera?

Jim Heppelmann

Yeah. Well, I sort of agree with you, but I’m not sure I agree with every piece of it. But let me – let me just talk about a few of them. So first of all, on taking share. Clearly PTC you know, Dassault had their earnings report yesterday, and you can go line item by line item in the CAD and PLM world. And our results are better than theirs. I think the SolidWorks’ business grew 8% and our Velocity business grew 29%. If I remember correctly, the Enovia and Catia business grew 11% and ours grew 14%. So, certainly on a dollars basis, we’re taking share.

Now, I’ve always attributed some of that to a better business model. So I think we’re monetizing customer relationships better. And we may be taking more wallet share than sheet share, but we’re certainly not given up any share. There’s just no math that would get you there. So I think we’re doing well. Now, is simulation important? Absolutely. But you know so too is PLM. I mean, I don’t know, do you know what simulation company that’s growing like our Windchill PLM business at 17%? I’m not really aware of one. So I think that PLM is a much more strategic product and then people have given a credit for it. It’s sort of the age of PLM right now.

Now, it may also be the age of simulation. And you know we have a great simulation partner in ANSYS, fantastic partner. And you know when a customer says simulation is important, we say great, let me tell you about our best-in-class simulation capabilities built right into Creo that come from ANSYS. So you know I’m happy if the customer thinks simulation is important, but I but I think at least is frequently, they think PLM is important and ALM too. And that’s really our strong suit. We’re absolutely best-in-class at PLM, Vernon.

Jay Vleeschhouwer

Thank you, Jim.

Jim Heppelmann

Thank you, Jay.

Operator

[Operator Instructions] And again, we do ask that you limit yourself to one question and rejoin queue for follow-up. Our next question will come from Joe Vruwink with Baird. Please go ahead.

Joe Vruwink

Great. Hi, everyone. You know, Jim, you brought up Dassault, but I think this topic has extended beyond just the strength a lot of your peers are seeing with the enterprise-type buyer and actually that type of account wanting to forge ahead if making new commitments and actually maybe pursuing things that are newer or more strategic you know cloud adoption has been coming up at the enterprise level. I’m just wondering is that true at PTC as well? And if this divergence was maybe happening, enterprise versus SMB? Does it cause PTC to maybe deviate some of the strategies that the company has been you know talking about and pursuing recently?

Jim Heppelmann

Well, first of all, I think, Joe, that your thesis is at least directionally correct, that there certainly is a lot of interest amongst the larger enterprises, in digital transformation and in cloud. And those are places where PTC is well positioned. And you know kind of historically, we’ve had more exposure to the enterprise market than to the SMB market. You know, Creo and Windchill kind of don’t have near the representation in the SMB market that other products have from say, you know, Dassault or – or Autodesk or whomever.

Now, with – with our Velocity unit, that’s really an SMB business. And that’s doing pretty well. And I think that’s all cloud-driven. You know what I mean? That’s – that’s a subset of the market who says, I really want to go to cloud, and PTC’s Onshape and Arena Solutions are virtually unmatched for those types of customers. But I think in general, yeah, the enterprise market really is leaning into digital transformation. I think COVID was very helpful for this.

And I think it’s most helpful to PLM, because you just really can’t have a hybrid workforce. If people working at home can’t find the data, they need to do their work today, and they can’t walk down the hall to talk to somebody, because they’re not in the building. And even if they were in the building, the person they want to talk to is not in the building.

So you really need a system, a system of record, and a system of engagement to allow you to you know do your job from anywhere in the office today, from home tomorrow, whatever. And – and PLM is that system. So you know, Dassault’s PLM results are pretty good. And ours were even better. And I think that’s indicative of you know a market that’s pretty healthy, which I think was the basic thesis, you know of your question.

Joe Vruwink

Great, thank you.

Operator

Our next question will come from Matt Hedberg with RBC Capital Markets. Please go ahead.

Matt Swanson

Yeah, thanks. This is Matt Swanson on for Matt. Congratulations on the results for starters. And then another really strong guide, and in particular, the constant currency ARR. And that obviously accounts for FX. But you know as you mentioned, Jim, a lot of investor focus going into this earnings season was on the macro.

And I think a lot of people are going to be surprised that there weren’t you know some greater demand headwinds from that macro. So can you just comment a little bit more on that environment? You know, it sounds like the hair-on-fire comments in IoT and AR, maybe that’s a little bit of macro, but you’re obviously overcoming it in a lot of other areas. So if you guys give us a little bit more color on that?

Jim Heppelmann

We are definitely overcoming it. And even with IoT and AR, we did see a nice acceleration in the quarter. So I think if you look at our bookings, they were up strong sequentially. They were up strong year-over-year. You know if I think ahead to our Q4 forecast that is very strong sequentially.

It’s not up year-over-year, because as Kristian said, we have a monster comparison in the – in the prior year, but it’s up quite strong sequentially from quite a strong quarter this quarter. So, right now our forecast looks good. Now, Kristian, and I say okay, I mean, I hope it comes in like that. But you know, if it doesn’t, we’re prepared for that, too.

And that’s a little bit why I took you through the business model and the margin programs and so forth, because we want to win no matter what happens. But so far, honestly, the news is all pretty good. It’s just we don’t want to be a Pollyanna here. And you know, say this downturns never going to touch us. I mean, maybe it will, and if it does, I tried to show you we’re ready for it.

Matt Swanson

Thank you.

Operator

Our next question will come from Jason Celino with KeyBanc Capital Markets. Please go ahead.

Unidentified Participant

Hi, Jim. Hi, Kristian. This is actually [Devine] [ph] on for Jason tonight. Thanks for taking our question. I want to ask about APAC, despite a lockdown there in certain area of the region, PTC still posted a pretty strong growth there, 16%. Just want to ask if there’s anything you can call out around sales cycle, any changes there or any sort of particular strength that you saw from a specific customers or product groups? Thank you.

Jim Heppelmann

Yeah. The strength, first of all was in our Core CAD and PLM business you know the so called Digital Thread Core, which is doing well everywhere. And we did see some, I mentioned this in the commentary, we did see some China lockdown issues, where you know companies just for whatever reason didn’t want to talk to us. But nonetheless, results were still good. You know we kind of had other good news to offset that.

I think the key thing in China to know, if you don’t know this now is it’s now 5% of our business, 5% of our ARR. So we have very little exposure. It had previously been as high as I don’t know, 7% or 8%. But you know when President Trump was in the office, he went to war, as you know with our, let’s say, battle with our largest customer, which was Huawei. And by the time the dust settled on that, Huawei was Dassault’s customer.

And you know because they pretty much got the message not to do business with American companies. And that hurt us in China, generally, all the – you know a large amount of the Chinese manufacturing market is state-owned. And having watched what Trump was doing with Huawei, an American suppliers like us that was not helpful. But you know good news is, we’re down to 5% exposure. And China’s not that material to PTC, which I actually feel kind of good about right now given you know, the – the scariness and the outlook of what might happen there in the coming years.

Operator

Our next question will come from Yun Kim with Loop Capital Markets. Please go ahead.

Jim Heppelmann

Hey, Yun.

Yun Kim

Hey. Hey, Jim and Kristian. Congrats on a strong quarter. Obviously from the results and the guide, your business is accelerating. Looks like the macro is not really impacting you guys as much. Given your strong product positioning and a large core customer – customer base that continues to increase their investments in your solutions. Can you just talk about how aggressively are you cross-selling your products, especially if you look down next couple of years with your Windchill+ migration plan you know, how aggressive do you plan to cross-sell your IoT, AR into your Core CAD and PLM install base? Thanks.

Jim Heppelmann

Yeah, well, Yun, those are good questions. So first on the specific question about cross-sell. I mean, that’s actually a pretty well developed muscle inside of PTC. You know, we built our PLM business largely by cross-selling from CAD and – and then other things we’ve sold have kind of been cross-sold from PLM.

So definitely, we’re trying to make IoT and AR more focused on what we call the Digital Thread story, which is, it’s not only about solving problems with IoT, but it’s about solving problems with IoT using PLM data, which would include of course, CAD, digital markups and visualization and so forth.

And then our Augmented Reality, of course, is a huge consumer of 3D data, because it trains its computer vision models against 3D, digital markup configurations, not to get too technical on you guys. But anyway, there’s a great cross-sell opportunity. It’s a – it’s a big, big focus. But you know, one thing I did want to say, your – your comment at the beginning said that our guide suggests we’re not that affected by the macro.

I actually just want to say to all of our investors, you need to reconfigure your opinion of PTC a little bit, because we’re not a cyclical name anymore. And in fact, our guide, the low end of our guide contemplates a 30% decline in new sales in Q4. It’s just that our model is so resilient, that even a 30% decline in new sales still lands with 13% ARR growth. So like sometimes I read in a report that PTC is a cyclical name, and I say, show me a piece of data that supports that, because for five years, we’ve been steady as she goes, in good times and bad.

And I just feel like we have a business model that’s underappreciated. And you know the worst that downturn is going to get, the bigger performance differential you’re going to see between us and people you compare us to you know particularly in our own industry here, because we’re – you know, our software’s 98% recurring, that’s substantially greater than ANSYS, than Dassault, than Siemens then basically any of the companies you might directly compare us against you know in the same market, let’s say.

Yun Kim

Okay, great. Thank you so much, Jim.

Operator

Our next question will come from Tyler Radke with Citi. Please go ahead.

Tyler Radke

Yeah, Hey, Jim. Hey, Kristian. Just wanted to follow-up on a couple of points. So first just on the price increase, just wanted to clarify that there was no tailwind to that in Q3. And then, you know, secondly, wanted to just hear how you know, customers so far are kind of taking that price increase if there’s you know, any – any pushback just given inflation concerns.

And then finally for Kristian, as we think about free cash flow obviously you’ve been able to maintain and if not raised the guide for several quarters here despite currency headwinds, but – but obviously currency does impact ARR which – which drives free cash flow. So how are you just thinking about the cumulative currency impacts on – on your free cash flow targets and your ability to offset those either through slower hiring or you know other manners? Thank you.

Jim Heppelmann

Let – let me hit the first question and you can take the second one. So the first question was about, was there any pricing tailwind? Yeah, sure, but it just was not significant. So there was a little bit of pricing tailwind.

But again to go back through the kind of calculations here, only a small amount of our book of business came up in Q3 for renewal and most of these contracts have pre-negotiated price increases that we would get, despite whatever level of inflation is out there. There is a minority that you can argue, we have rights to raise the prices higher, and then some are actually tied to CPI, but most of our contracts are actually pre-negotiated fixed – fixed price increases. So we’d get them no matter what the economy and the inflation was.

And then again, on the new sales, it’s just that our sales cycles are longer than two months. And so when you put a quote in front of a customer and you raise the price, you can’t take that quote back and stick a more expensive quote in front of them, because they get kind of angry. If they don’t take that deal. Well, now you can raise it or when you go meet the next customer, you can go in with a higher quote. But it’s just that we didn’t have enough time to work that price increase through our sales cycle, to have it be meaningful to what happened you know in terms of new sales.

So you know like for example, Pepsi raised the growth rate by two points, because they raised the price of potato chips, and you walk in the store and they’re more than they used to be and you pay it, but we’re not selling potato chips, we’re selling complex software that has multi-quarter sales cycles.

Kristian Talvitie

Okay, thanks. Hey, Tyler on the free cash flow. So, it – it – yes is a function of – of ARR as well as some other things, and also a function of timing. So as we think about free cash flow for the year you know, again, well over half of our – of our collections actually happened in the first half of the year when FX rates were much more favorable than they are right now.

And as we think about you know the second half of the year, there are a number of dynamics that – that have contributed. One, we actually had ARR over-performance in the first half. Some of which shows up in you know, we’ll call it second half collection. So that also helps. That helps. We’ve had slower than anticipated hiring which is you know we’ll call it a cost offset which also helps on the – on the free cash flow generation.

And then you know we’ve had modestly better perpetual license performance, Kepware is performing quite well, that’s really the only thing that – that’s left that we sell it even partially perpetual basis. So that – that’s been you know another – another tailwind. So, you net all those out and we’ve actually been able to outperform the free cash flow targets here now, three quarters in a row. And I think we have – you know we raised the – raised the outlook for Q4 and I think we have a good – good setup for that as well.

Tyler Radke

Okay, thank you.

Operator

And our last question will come from Ken Wong with Oppenheimer. Please go ahead.

Kristian Talvitie

Hello, Ken.

Ken Wong

Thanks for taking me in and [technical difficulty]. Just wanted to touch on FSG, I guess you know when you guys had a good performance previously, it seemed like a one-off and now this low single-digit business is going 9% organic, just wondering kind of what is the cause of that? Is it just ALM in there? Any color on FSG would be – would be fantastic.

Jim Heppelmann

Yeah. It’s a good question, Ken. Because we did set an expectation, low single-digit growth and now it’s kind of put along in pretty high single-digit growth. I think you know we’ve just seen better demand than we had anticipated. So for example, if you look at some of the building blocks, Servigistics is a service parts management software and they’re having a great year.

And then there’s what we call, FlexPLM, which is a special version of Windchill that we sell to retail companies, big box stores and clothing and you know apparel and footwear companies. And win rates been good and the demand has been good. There’s Arbortext you know our technical documentation type of technology that does structured documents and automated publishing and so forth, and that’s performed well.

So I think there’s actually some good demand and frankly, pretty good execution. The renewal rates in all cases have improved too. So that’s also helpful. So, I don’t know maybe – maybe we shouldn’t say that FSG will be able to perform in mid single-digits, you know post-Codebeamer when it’s already doing better than that pre-Codebeamer. But you know we’ll try not to get ahead of ourselves. We’re pleased with what’s going on and with Codebeamer in there, you know we’re pretty sure it’s going to be kind of mid single-digits at least going forward.

Ken Wong

Got it. Great, fantastic. Yeah, keep chugging along guys.

Jim Heppelmann

Okay, is that the last question? All right, so Matt’s given me the – give me the signal here. I just want to thank everybody for spending time with us today. Appreciate you know you hanging in there and we look forward to seeing you in 90 days, if not before. Hopefully the economy will kind of – the macro situation will stay as it has been and we’ll have some really great news for you and if not, you know, I think will be – will be okay anyway. So I look forward to seeing you and have a good evening.

Kristian Talvitie

Thanks, everybody.

Operator

And that will conclude today’s conference. Thank you for your participation and you may now disconnect.