PTC Inc. (PTC) Earnings Call Transcript & Summary

[Audio Gap] Day 1 of the conference. And joining us from PTC is CFO, Kristian Talvitie; and Tim Fox, Head of IR. In terms of format, I'm going to kick it off with some questions. And if anyone in the audience has a question, you can submit it through the webcast page and we hope to get them as well. So with that, let's jump in. And Kristian and Tim, thank you so much for being here. I really appreciate it.

Yes. Thanks very much for having us.

You bet.

We're super excited to be here. And obviously, before we get started, my legal counsel would want me to remind everybody that we may be making forward-looking statements on this call. And as such, we would refer you to our risk factors that are clearly posted on our website and in our most recent press release and filings with the SEC. So sorry. And with that, it's back to you.

Perfect. So maybe just for those a little bit less familiar with the company, just maybe a brief background on PTC, Kristian, and the big opportunities that you're going after.

Yes. Great, thanks. So PTC is a pretty interesting story from my perspective. It's a 30-plus-year-old software business that has gone through many stages of evolution ranging from markets served to the manner in which it's served. And we continue to try to understand the needs of our customers and the technologies available and adapt them. And so what I mean by that really is PTC started off originally as a CAD company. It was one of the premier CAD companies throughout the '90s and then actually expanded from CAD into PLM. That was through an acquisition around the turn of the century, which brought 2 things, both Windchill, as well as our current CEO, Jim Heppelmann, into the company. From 2000 to the kind of late 2008 time frame, PTC was largely still a perpetual CAD and PLM company. From there, when Jim actually took over as CEO, President first and then CEO around 2010, the company began to continue to expand its product portfolio both organically and through acquisition, expanding into a service life cycle management, SLM; application life cycle management, ALM; and then in the kind of 2015 time frame, into the Internet of Things with the acquisition of a company called ThingWorx; and then into augmented reality a couple of years later with the acquisition of a company named Vuforia. Also, around the 2015, 2016 time frame, the company began transforming its business model from a perpetual license model into a subscription model, at this point still all on-premise subscription but, again, continuing to evolve to meet the needs and demands of our customer base. Getting into IoT and AR expanded market opportunities for us and create some pretty unique value propositions for our customers. And then most recently, in November of last year, we acquired a company called Onshape, and Onshape really brought a few things to us. A, some of the industry's leading talent. It also brought the industry's really only pure native, multi-tenant CAD and collaboration SaaS application and interestingly also brought with it a architecture, a platform that we've now called Atlas, which is a multi-tenant SaaS architecture, which we'll look to leverage into the future as well. So it's really been a pretty interesting story, gone through multiple iterations and evolutions, again, to meet kind of customer requirements, and we're continuing to push forward on those fronts. So we have about 6,000 people worldwide, approaching about $1.5 billion in revenue and it's opening us. That's the company in a nutshell.

Great. And we'll jump into many of those growth drivers in a minute. So maybe just talking about the current macro, maybe you can provide us just an update on what trends you're seeing in terms of the pipeline, retention and even demand by vertical, geography over the last few months.

Yes. Sure. So in terms of the current macro in particular with the COVID-19-related environment, in the early days of this, we saw the impact first in China. We've subsequently seen here in the recent months China began to rebound a little bit. The slowdown, if you will, hit Europe next and then the United States. I think it's -- still a little bit remains to be seen exactly how that's going to play out here this quarter. We certainly saw a slowdown, particularly in Europe and North America, at the tail end of last quarter. The guidance that we put out assumed for a range of scenarios for the rest of the fiscal year ranging from a situation that is bookings -- new bookings, which is an indicator of new business sold, down about 30% in Q2 and starting to rebound in -- or sorry, Q3 and starting to rebound in Q4; a midpoint of guidance, which has us down 30% both in Q3 and Q4 on a year-over-year basis, which is somewhat in line with what we saw back in 2009 with that dislocation; and then a more severe scenario with bookings down 50% in both Q3 and Q4. And as you'll note from the guidance, even in all those scenarios, we still expect to see a high double-digit to -- sorry, high single-digit to low double-digit ARR growth, depending a little bit on the shape of the recovery, which, as I said before, I think, still remains to be seen. Like any good software company, the majority of our sales come in, in the last month of the quarter, which we're in now, and in particular towards the tail end of the last month. So on the new bookings front, I think we're definitely seeing some pressure on deals that have traditionally required folks being on site, both from the customer and from PTC side, in order to stand up a new implementation, deals where we're seeing just expansion deals. That's -- I'm sorry, that's in particular on the IoT and the PLM side. Deals where we're seeing expansions on those are still happening. And then turning quickly to retention rates. In our guidance, we actually called for -- or allowed for a slight degradation of retention rates in the back half. Our original guidance coming out of the year was that we were going to see modest improvement over last year's churn, kind of approaching 7%. And now in our guidance, it is implied something closer to 8%. And so we're allowing for the possibility that we see degradation in renewal rates. However, as we have progressed through the quarter here to date, we actually in this quarter have not seen a significant change in renewal behavior by customers. And so I view that as a positive sign. But still a month to go here and next quarter also to contend with. So I think we're just watching closely the developments on the macro front and trying to make sure that we can adapt accordingly.

That's great. That's great. So let's jump into some of the growth businesses. So one of the things that we've been talking about over the last several months is just how the pandemic has been accelerating many trends. And as it relates to PTC, there are some really interesting opportunities the pandemic offers around industrial digital transformation, around IoT, augmented reality and CAD, as you talked about a little bit earlier. On the IoT front, how exactly does ThingWorx, which is PTC's IoT solution, how does that actually help customers during the pandemic accelerate IoT? And what trends are you seeing there?

Yes. So IoT really comes in 2 flavors for us. It's smart connected products and smart connected operations. And it's really trying to make, we'll call it, factories and products more productive and making sure that folks operating those plants and products have good visibility into operating efficiencies. And so we think that -- back to the original question, I guess, how do we think the pandemic is going to impact this over the longer term, we think that there's a number of things that could possibly come out of this situation where folks are having -- had to work from home for an extended period. And as people think about their own operations and their own design activities, we think that one of the outcomes of this is likely to be that companies are going to start thinking a little bit harder about their own digital transformations over the medium to longer term, and there's a real potential there that we do see some acceleration as a result of companies looking to advance their own digital transformations. The other thing that incidentally we're also seeing is an increase in interest in SaaS as a delivery mechanism for us, particularly on the design side. We see that in a pickup in pipeline activity, particularly for Onshape, which is interesting to note. So I think there's a number of possible outcomes that happen here, but we think we're well positioned to continue to serve the needs of our customers.

Great. Great. And maybe even just on augmented reality given its closeness with IoT, we're in early days in IoT in the industrial setting, but I think we're even in earlier days on AR. So what's the AR opportunity that you're going after? And how complementary is IoT with AR together?

Yes. Great question. So for us in our application of augmented reality, where IoT is about making factories and products, we'll call it, more productive, more efficient, AR for us is really about making people more productive as well. And so the combination of the 2, we think, is a pretty powerful offering for our customers, particularly, again, in these environments where maybe not everybody can be on site and you might have an expert that's working from home, helping out somebody that is actually on the plant floor and maybe has a question on how to resolve an issue and through AR technology can join in live, see exactly what the technician on the floor is seeing and be able to provide both verbal and visual guidance in terms of how to get the situation resolved. So we think that the combination of the 2 is a pretty powerful offering for many of our customers.

Got it. And recently, you made Vuforia Chalk free. And even last week, Rockwell announced the same. What kind of traction are you seeing from this? And what's really the monetization opportunity over the time?

Yes. Well we've seen pretty interesting traction. In fact, thousands of customers have downloaded Chalk. We've seen a pretty significant uptick in usage of Chalk here over the past couple of months. And we've had a couple of good wins, a couple of customers that have actually decided that it is actually beneficial enough that they're ordering it now. For others, once the free trial is over, we'll see how that turns into a monetization opportunity. But certainly, right now, it's really about helping educate the market on how AR can actually be beneficial to them. And we think we're getting a lot of folks who are trying it out who may not have under the old normal. So we'll see what the future brings. But certainly, we've had a lot of interest and a lot of trials and usage of the technology thus far.

Got it. That's really helpful. And just thinking about Onshape, so you mentioned earlier some increasing adoption as a result of the pandemic around SaaS. And one thing that I think I underappreciated was just how sticky CAD and PLM is in general given the 20- to 30-plus-year relationships that you guys have with your customers. But the brittleness of the on-prem software is really coming through, especially as you either work remotely and work collaboratively. So what's the strategy around driving Onshape adoption? And how do we think about competitive displacements or ultimately, over time, even displacing your own portfolio with Onshape in a SaaS format?

Yes. Good question. So I think as we said when we first acquired Onshape, our belief and intent is that, number one, it will allow PTC to participate in certain parts of the market that perhaps we haven't really participated before, i.e., the lower end of the CAD space. And we think that over time, we will see adoption of SaaS moving up the stack. There's an interesting case study for those who were not able to attend our Investor Day -- our most recent Investor Day, where we had a company called Garrett Motion that's actually approaching $3 billion business, so a sizable company that is actually switching lock, stock and barrel off of a competitive CAD and PLM system onto Onshape. Now again, this is a, we'll call it, an outlier, but I think it's a good proof point to show that there are companies of size and scale that are really evaluating their choice of technology and delivery option because, as you said, what SaaS and what Onshape really bring, not only our SaaS platform and architecture but can also meaningfully improve the speed of development cycles. And I think that was really the main message from this company at our Investor Day. So there's a few different approaches here. We've also recently just started allowing a handful of our resellers as well to begin selling Onshape. So we'll see what kind of traction we get with that. But primarily, it's focused at this point on competitive displacements more so than displacing our own customer base. Over time, it seems likely that, that will happen as well. But I think that's also to the benefit of our customers and, frankly, to the benefit of PTC over time as well.

Got it. And just while we -- before we switch topics, just on Onshape and Atlas, you referenced them earlier, maybe talk a little bit more about what's the vision around this platform underpinning it. And tomorrow is your LiveWorx virtual customer conference. So not to steal any thunder from that, but I assume there'll be some announcements around Atlas. So maybe you could just provide some broader context around the strategy and vision around Atlas.

Yes. Sure. So I think there's work being done across the company to see how we can leverage the Atlas platform across a broader swath of our product portfolio. That's likely to be a multiyear effort that if you're a believer like I am that this part of the software space will eventually migrate to SaaS, as we've seen many other application areas migrate to Saas, we think we're well positioned for it. And in terms of LiveWorx, you're right, tomorrow is actually the official kickoff of LiveWorx, which is really -- we like to think of it as the premier digital transformation conference, and PTC is really the presenting sponsor. We've got actually record response rate to this year's virtual event. Registrations are actually up almost double of what last year's attendance was. The themes will largely still revolve around enterprise digital transformation, and we'll be talking about how technology can help all of us adapt to the new normal kind of created by the macro environment that we're operating in now. We'll also be featuring an inspirational keynote from the founder and CEO of Black Girls Code, which should be an interesting presentation for all to see. And then we will talk about technology and the direction of the technology that we're moving in, including how we're leveraging Atlas more broadly across the portfolio over the coming years. So just a little plug for LiveWorx there. If you haven't signed up, I think it'll prove to be a pretty interesting event, and we encourage everybody to sign up and attend.

Right. Got it. Now before we jump to some financials, let me just ask maybe 1 or 2 just on the partnership. So Rockwell is one that I've been tracking really closely just given my view of the importance of accelerating your opportunity in the factory setting. So maybe just the baseline, how is the partnership going from your vantage point? As we think about the evolution of the partnership, I think it's a 3-year deal that runs through next September. So maybe just comment on just how's the partnership going. What needs to happen to accelerate it? And how should we think about the evolution over time?

It's Tim. I'm happy to jump in on that one. So yes, specifically with Rockwell, this is a critical partnership for us. It's one that gives us access to a part of the market that we frankly didn't have access to before on sort of an organic basis. Rockwell has not only a large presence in the discrete manufacturing space and, frankly, in many accounts where we may not have a relationship with our core products, but they also, of course, bring to the table a presence within process manufacturing, which there's no need really to use CAD or PLM to design food and beverage. So it's an enormous sort of greenfield opportunity for us. They've got a very large go-to-market effort. They've been working extremely hard over the past year, 1.5 years training and expanding their own software capabilities, building pipeline. Pipeline continues to build very nicely. They're not only concentrating on the ThingWorx platform but also selling augmented reality. They're finding that the use cases for AR in the factory are very compelling. The ROI is quite easy to measure and, frankly, easy to deploy. It's all SaaS-based. So overall, we are very pleased with the progress there and fully expect coming out of this crisis to see that the partnership continues to flourish. I'd also point out, just to follow on Kristian's comment about LiveWorx, we're going to be announcing a joint solution for the factory with Rockwell as well as Microsoft. So it's going to be a sort of trifecta here with a couple of our major partners announcing a new solution that's basically going to be a turnkey solution for kind of high-value digital transformation, real-time production, performance monitoring, asset monitoring, but basically a turnkey solution that's -- will get time to value -- will quicken the time to value and result in higher ROI and faster deployment. So we're excited about Rockwell, obviously, but also with Microsoft together. We're starting to actually team up and put some solutions in the market together.

Great. And I guess, another reason to tune in tomorrow for those announcements. So maybe switching to some financial questions in the last 10 minutes or so. And again, please feel free to continue sending questions in through the webcast chat link. But on investments, PTC has been going after some large opportunities. We just talked about it with IoT, AR and cloud-based CAD. But to me, that involves some really significant investments to make accounts successful, further build out the product and sales and marketing. This year, as we think about expenses, growth is only going to be at about 2% range versus expectations of about 9% going into the year. So some of these cost savings, I know, are onetime in nature. But how should we think about how sustainable a lower expense profile really is and the trajectory of investments beyond this year?

Yes. It's a great question, Adam. Thanks. PTC actually, it turns out, I guess, somewhat fortuitously did a restructuring in Q1 and Q2 in conjunction with the acquisition of ThingWorx. And through the course of doing that, we actually reduced headcount more than we had originally intended to. So as the crisis evolved, we have been able to control expenses really largely by limiting hiring and the backfill of some of those roles. And we just continue to monitor the overall environment, monitor customer activity, and we'll continue to do so here over the coming months. And as we see the macro environment starting to loosen up and customer behavior changing, we would start loosening the spigot, if you will, and hiring back more. I mean we are doing some hiring now, but we're trying to be pretty judicious in the hiring that we're doing. So that, in addition to, as you said, some onetime items here, reduced travel. Lower bonus expense, as an example, we will also see some benefit this year. But again, the primary driver here is really controlling headcount and other variable expense.

Got it. And just thinking about ARR, you talked earlier about the transition the company has been making internally, and some of that is around the business model. And obviously, today, PTC is not the same company that it was during the Great Recession given 95% of software revenue is ratable. I think it was 30%, 40% at that time back in '08 and '09. ARR has been really resilient, and we've talked in the past about the drivers that make up ARR. But what's the relative importance of churn, price increases and net new bookings to ARR? And maybe just adding to that, you mentioned the assumptions around net new bookings growth for the remainder of the year. How does that impact -- how does the lower net new bookings growth this year, call it, the mid- to the low end of the range of 30% to down 50%, how does that impact ARR growth in coming years?

Yes. It's a good question. And again, we should just be clear on our definition of ARR, which is really more like billings than having anything to do with revenue, first of all. So there are some nuances to how we -- what we call ARR and how we report it. And I would encourage everybody to, again, go back to our Investor Day presentation where I think we tried to do a fairly thorough walk-through of the mechanics of ARR billings. And so in the scenarios that we've outlined for this year, a lot of it -- if you're asking about next year, a lot of that depends on what the shape of the recovery looks like. Is it a V shape? Is it a U shape? Is it an L shape? But in general, I think, under all of those scenarios, we would still expect ARR growth next year as well and that's also, as you mentioned, a function of churn. As we said earlier, we haven't really seen a material change to churn thus far through the year. We'll see, again, what happens here in the last month of the quarter and into next quarter. But those are the 2 primary variables that play into ARR. There is a final nuance, which is backlog of deals that were booked previously. We have some deals that are multiyear-ramp deals that have been booked either this year and previous years that are slated to ramp as well again next year. And again, because of the way that we report ARR, it's only once that part of the contract goes live that we take that portion of the ramp into ARR. So that leaves us with some backlog going into next year, which, again, is additive to new bookings starting next year as well.

Got it. And maybe just taking a question that came in. So obviously, COVID has been a headwind, and we talked about that a little bit earlier in the conversation. But how should we think about the long-term or the sustainable growth profile around your various businesses, IoT, PLM and CAD? And I like throw AR into that. So maybe just comment on the sustainable growth profiles. And does the COVID opportunity potentially accelerate that given the digital transformation that we've been discussing throughout the conversation?

Yes. It's a great question. We think that over the longer term, that we will grow in line with market growth rates for basically all of the product families that we have, which for CAD and PLM are largely in the high single-digit range; and in IoT and AR, our growth businesses, I guess, which also include -- which includes Onshape. We think that, that market growth rate over time is in the 30% to 40% range. And a few years out, as they continue to get larger, obviously those growth rates will come down. But we think that we're well positioned to perform in line with those market growth rates. Obviously, there's some disruption here in the short term, and we'll see how long that disruption lasts. But over the longer term, we think we'll continue to grow in line with market growth rates.

Great. And maybe just one last...

Yes. Sure.

Oh, I'm sorry. Go ahead.

No. I was going to say in terms of the things that could accelerate those growth rates, again, I do think that it is this acceleration of digital transformation to the extent that our customers choose to act on that theme. And then there's other themes that are out there in the water system that are being discussed, such as reshoring, et cetera, which could also provide a potential tailwind for us as customers -- if customers choose to start acting on this kind of reshoring activity. But I think all that remains still to be seen. So right now, we're focused on servicing our customers in these kind of troubling times and providing solutions that can help them get through the here and now, and we'll look and see what that means for the future once we get there.

Great. Well with that, I think we're actually out of time. So, well, Kristian, thank you. Tim, thank you so much for being here. I really appreciate it. And thanks, everyone, for joining, and I hope you enjoy the rest of the conference. Have a great day.