It will move to cloud over time. But those two growth vectors are and the wood behind those two arrows are on-premise to be crystal clear. And then as a prior question asked, our Creo on-premise business is solid and rocking and rolling. So those three things combined, lastly, with the ServiceMax cross-sell, which is a SaaS product, as you know, Tyler, those give the confidence around the continuation and the types of guidance that we put out in the mid and long term. That being said, for the mid-teens and the — midterm to long-term ARR guidance, there is an element of SaaS starting to transition into that ARR growth rate in the mid- to long-term. My point around the 10-year is the industry and all our customers will take, in aggregate, that long, but we already are taking Windchill+, some Creo+ customers along in the journey.
And that should accrete in the mid and long term. And maybe we see the dam break earlier and it accretes faster, but our estimate is to be tempered here and to work with customers hand-in-hand to get that upside on the SaaS transition. Kristian, anything to add?
Kristian Talvitie: I think that was spectacular.
Neil Barua: That’s the first time Kristian Talvitie complimented me. Thank you, Kristian.
Tyler Radke: Thank you, guys. And so just to clarify, no changes to the medium- or long-term targets? Sounds like no, but I just wanted to clarify.
Neil Barua: No.
Tyler Radke: Awesome. Thanks so much.
Operator: Yes. Your next question comes from the line of Matt Broome with Mizuho Securities. Matt, your line is open.
Matt Broome: All right, thanks very much. I’ll add my congratulations to both Jim and Neil. So maybe just on partnerships, it’s clearly a lot happening with Ansys right now. I’m just curious if you have a view on how this proposed acquisition by Synopsys might affect your partnership there. And maybe if you could remind us the sort of materiality or the strategic importance of that partnership to you.
Neil Barua: Yes. Look, Ansys has been a good partner of ours for many years and will continue to be a good partner. They are part of how we talk about and have a value prop around Creo and the added simulation capabilities. And we help them similarly, right, around what they’re doing on simulation with ours. So it’s a very good partnership for both sides and critical to both sides to a certain extent. To be clear, too, this is actually if the deal goes through, right? I’m not a regulator so I can’t speculate on that. But if the deal goes through and Synopsys is the eventual owner of Ansys, the great thing for us is there’s zero overlap that we have with Synopsys, which might, over time, I don’t know yet, but might, over time, create an opportunity for us.
Matt Broome: Excellent. And then maybe if I could just also ask just how your business in China resolved during the quarter? And if you’ve seen any incremental impacts from any sort of regulatory restrictions there? Thanks.
Neil Barua: Yes. We haven’t seen China be a drag on us.
Matt Broome: Perfect. Thanks very much.
Operator: And your next question comes from the line of Stephen Tusa with JPMorgan. And Stephen, your line is now open.
Stephen Tusa: Hey, guys. Good evening.
Neil Barua: Hey, Steve.
Stephen Tusa: Kristian didn’t come across to me as the managing uptight, but that was a heck of a comment to the new boss. Smart move.
Kristian Talvitie: I wanted to say it might be the first time I’ve complimented anybody.
Jim Heppelmann: And I might second that.
Stephen Tusa: I think just going back to the question on costs. I think in last quarter’s presentation, you said that non-operating, kind of non-GAAP operating would be up 6% to 7% I think you’re saying now 7% to 8% or something like that. I think that’s what the prior question was referring to. Maybe that’s 4 times or something like that. I think that was probably the source of that question. Just curious as well on that.
Kristian Talvitie: Yes, that would be FX-related.
Stephen Tusa: Yes, okay. That makes sense. And then just on your ARR kind of leverage down to free cash, you beat ARR this quarter by a little. You raised — you beat cash by $3 million. It was like a 20% to 25% drop through on that ARR beat. Is there anything to that math? I know you guys have said with upside ARR, you’ll probably invest some of that away so we should just keep an eye on your cash guidance. But is there anything to math like that, where if you get a little bit of that extra ARR, that like it’s kind of hard to invest in a way that you will get some upside drop-through on that ultimately? Or am I thinking too much?
Kristian Talvitie: Really, no, no. That’s a great question. And so let’s just — I think the right — the thing that you need to remember with ARR and cash flow is, we’ll call it ARR equates to invoicing and then cash flow relates to collections and payments. And so our standard terms are 30 days, and depending on the customer, our average terms are definitely longer than 30 days. But let’s just work with 30 days, which means that any incremental ARR that we get in a quarter, that comes in the last month of the quarter actually, isn’t impacting that quarter’s cash collections and therefore that quarter’s cash flows. That all goes to the subsequent quarter. So you have to just remember that time lag when you’re thinking about it. Does that make sense, Steve?
Stephen Tusa: Yes. Yes, makes a ton of sense. One last one for you on cash. Last quarter, you said 55% of the year will come in the first half. I think this quarter, it’s now 58%, so a little more front-end loaded. Again, anything going on there? I mean, it would, I guess, make us feel — we all feel, I guess, better about the year when it’s a little more front-end loaded. But anything going on there from a timing perspective that stands out?
Kristian Talvitie: Yes, I feel better when it’s more front-end loaded too, Steve. And I think what we said, if we’re going to be super technical about it, is more than 55%. And now we’re just kind of honing in on the map and saying it’s going to be more like 58%. But otherwise, I think we had great collections performance here in Q1 and the outlook for Q2 is solid as well. So I think we feel pretty good about the range for Q2 and obviously our outlook for the year.
Stephen Tusa: Great. Thanks a lot. Appreciate the color.
Kristian Talvitie: Thanks.
Operator: And your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Jay, your line is now open.
