PTC Inc. (PTC) Earnings Call Transcript & Summary

The last part maybe is the trickiest to answer, and this is really from a long-term perspective where we feel like we're trending. And it's really a great question. And as we've said numerous times before, we're going to have to continue answering with please stay tuned. There's some big swing factors out there: how long the weak macros persist, when do we return to some level of normalcy on the customer engagement front. To the extent that spending environment remains pressured and travel restrictions, on-site engagement remains challenging, it's going to impact the trajectory. On the flip side, we believe that the pandemic has, in many ways, created a greater appreciation for some of the digital transformation technologies and solutions that we have like PLM, like IoT, like AR, like some of the SaaS-based solutions that we have. And we continue to see increased interest from customers on that front. So over the longer term, that interest, along with continued solid performance in the core with continued performance with some of the strategic alliances that we talk about, ANSYS, Microsoft, Rockwell, really position us to I think continue to achieve double-digit ARR growth over the medium term. That, coupled with the OpEx discipline that I think PTC exercises pretty well, we plan to deliver attractive free cash flow growth over the coming years.

Yes. Yes. And I guess given that we've seen your results come in ahead of expectations kind of the last 2 quarters, is it fair to say that in terms of the recession scenario that you outlined, like we're not tracking as bad as kind of the assumptions that were built into that?

Yes. So again, difficult question. Remember that recession scenario contemplated something happening in fiscal '22, right? Out in the middle, just -- so as to not imply that we knew anything that would demonstrate how the model would work. And for that scenario, we also leveraged that kind of 2009 recession to model how PTC, with its subscription business model, would react under those circumstances. So again, difficult to say, difficult to say how long the pandemic continues, what kind of impact that has. Obviously, it happened earlier than what was in that scenario. So again, I think it's a great question. It's just -- really, too many exogenous variables that make it really difficult to provide a finer point than that on. We think we're positioned well with the product set that we have with a market opportunity to deliver ARR growth over the medium term. And I think we'll leave it there.

Yes. Yes. And just a reminder for investors online, if you do have questions, you can e-mail them to me or submit them directly in the chat, and we'll try to get as many as we can. One question that we got was in respect to your different geographies. And it does sound like you're a little bit more optimistic on Asia and Europe relative to the U.S. I think for obvious reasons. But I guess specifically within IoT, which seems like that's kind of the business that because it is more physical of things is impacted by this pandemic. Have you seen any leading signs that as things reopen in Europe and in Asia that, that business kind of starts to recover in line with those reopenings? Just anything that you could share on that.

Yes. Great question there. Here, at this point, I think it's probably still a little bit difficult to draw any meaningful conclusions on that front. I mean I would say we're continuing to grow pipeline and see interest in, in particular, the IoT solutions. We are continuing to see solid expansion opportunities happening within that business. So I mean if that's an indicator that businesses as they are getting back online want to continue to expand the use of these technologies, maybe that's a way to think about it, expansion opportunities, pipeline creation, both of which we're seeing.

Okay. Makes sense. And you touched a little bit on the partnerships as part of the key drivers towards long-term and double-digit ARR growth. I guess, specifically, on the 3 key partnerships with ANSYS, Microsoft and Rockwell, maybe just for the investors online, could you just kind of recap what you saw last quarter? And are certain partnerships more or less impacted by the pandemic?

Yes. I think it's fair to say that almost no company has been immune from the tough environment that we're all in right now. And I think, to a large part, that includes our alliance partners as well. That said, we did have solid results last quarter for Creo Simulation Live, signed our first 7-figure deal with the release of Creo 7 in April. Creo Simulation Live now has computational fluid dynamics built in, which is a widely used aspect of simulation, and should help drive additional demand for Creo Simulation Live. Rockwell's business improved in Q3 relative to Q2, which was obviously one of the tougher quarters for everybody given the global shutdown. And we certainly remain very positive on the long-term factory opportunity supported by this important relationship. Microsoft, that partnership continues to mature. We saw further evidence of traction in Europe, in particular, last quarter. But that one continues to progress nicely as well.

Got it. And is it fair to say that the partnerships or the contribution from this partnership should drive a higher percent of bookings this year than they did last year?

Well, again, we don't really quantify bookings. And our partners, and rightly so, really didn't like us quantifying their financial metrics. So maybe we'll leave that one alone. While partnerships are progressing, I think there's certainly opportunity to continue to expand each of them, right?

Okay. And then I wanted to talk a little bit about competition. I think the 10% core ARR growth that you've been seeing has been much stronger than many would expect and probably stronger than the underlying industry growth. And so I'm curious, just if you've -- you think you've benefited from any type of vendor consolidation or you've seen maybe competitor struggle that's kind of giving you an opportunity to take share.

Yes. So here, no doubt, I think we remain pleased with the performance of the core businesses, CAD and PLM, frankly. The renewal rates in those businesses have remained steady despite the pandemic. And on the other hand, as I mentioned earlier, I think this kind of remote working environment is really highlighting the value of PLM, which, of course, at its core is really a global collaboration platform for our customers. And so I think we're feeling incrementally positive on the role that PLM will continue to play in customers' digital transformation initiatives as we continue to work through the pandemic. So...

Yes. Okay. And then we had a question come in just around some of the -- I think, obviously, the -- you have pretty good targets and visibility on ARR and free cash flow. The P&L, on the other hand, that's a little tougher to predict with some of the 606 accounting nuances with respect to contract duration and cancellation clauses. But maybe just an update on how contract duration trends have been. I think you had previously talked about those extending. Obviously, in a pandemic, you think many customers maybe are reluctant to sign longer-term deals. But just kind of how you're seeing those trends evolve?

Yes. Yes. It's a great question. In fact, one of the things that we had really hope to start doing this year was to start driving more longer-term contracts, particularly on the renewal front, with customers. We think there's a pretty attractive economic model for them to want to do that. That said, that was kind of just getting rolling right into the face of COVID. And as I just pointed out, in reality now, what we've seen over the past 5 to 6 months is that customers are actually still preferring to go with a shorter renewal at this point in time. So I think as people get more comfortable with the macro environment and get a sense of stability under them, I'm hopeful that we'll continue to drive longer-term contract lengths, but we haven't seen it yet really here this year, yes. And of course, that does have an impact on revenue recognition because of 606 and the on-prem subscription nature of our business.

Right. Right. And the second element that I think has been impacting you on the rev-rec is the cancellation clauses in there. I guess how far through we -- how far through kind of the installed base are you in terms of getting the contract terms in a place where you want to be, where you kind of recognize them at a more consistent manner across the whole base?

Yes. So again, just to remind everybody, we stopped doing that really going into Q4 of last year. So as we're writing new contracts, they do not contain said clause. So really, it's just a matter of getting through the, we'll call it, 3 quarters' worth of contracts that did have that clause. And we're still probably -- many of those are 2- or 3-year deals. So we're probably still a couple of years away from getting through that cycle, which, again, if you want to tie it back to the accounting here for a second, that actually has an impact on RPO as well that, as I've said, we've tried to articulate because of some of that nuance is not really a reliable metric right now. So that's a couple of years away.

Yes. Okay. Okay. Got it. And then maybe just turning a little bit to a product or a strategy question. And I know we don't have Jim here who I think articulated pretty well on the last call. But just this -- I think the Onshape acquisition has really accelerated the pace of looking at moving most of PTC's products eventually to a SaaS-based platform. And I think you guys, you kind of talked about this vision around Atlas and spoke to it a little bit at your recent customer conference, LiveWorx. But could you just talk about how you're thinking about an eventual transition towards SaaS? Obviously, a SaaS-based PLM is very different than SaaS-based Creo or an IoT. But maybe just help us understand how you guys are thinking through that.

Yes. So you're 100% correct. The acquisition of Onshape did bring a native multi-tenant SaaS platform that actually had obviously then multi-tenant CAD and collaboration offering or application called Onshape on top of it. And we've come to appreciate the -- that customer -- the pandemic is influencing how customers think about software in the industrial setting. Today, the way that they access and consume engineering software is largely on-prem. And I think customers are starting to think about that differently. And number one, that's where kind of Onshape comes in. It's really the industry's only pure multi-tenant SaaS solution of its kind. And then on the other hand, as we've talked about and you mentioned, we have Atlas, this underlying SaaS platform, which is going to significantly help accelerate migration, if you will, of, for example, Creo and Windchill onto Atlas. It's still going to be a multiyear effort to get there, for sure. But at the same time, we think it will provide customers with a good kind of seamless migration path to SaaS, which increasingly is the way that they want to consume software. So we think that there's a significant value to our on-prem customers, and that will create over time an interesting upsell opportunity for PTC as well. Again, it's definitely a longer-term initiative, but one that we're pretty excited about.

Got it. Got it. And one thing that we've been observing with most software companies out there is just I think we've seen a lot of -- profitability upside is -- your T&E budgets are lower and folks have kind of consolidated real estate. And while in some cases, these are temporary, some companies have kind of thought about maybe do they make long-term adjustments, do we need to travel as much as we used to. Kind of curious how you're thinking about that at PTC. Obviously, I know you have a nice building in a great area of Boston and a good kind of company culture there. But how are you thinking about ways of maybe finding kind of more permanent cost savings in terms of the things you've learned through the pandemic?

Yes. Another great question. Obviously, we've also seen travel down pretty substantially this year. We can get into more details about our thinking about that for next year when we get to October and start on guidance. But in terms of the longer-term decisions around, call it, consolidation, for example, of real estate, that's something that we're actually still working through. We haven't come to any conclusions. As you point out, they're long-term decisions. We want to make sure that we're being thoughtful about it. And frankly, we're, whatever, 5 months in, 6 months into the pandemic and really remains to be seen how long this persists and how permanent the behavior changes are. Obviously, there's a lot of companies out there that are starting to make decisions around this. I read the same -- many of the same notes that you do, probably not all of them, but many of them. And I mean it's something that we're talking about, but we haven't come to any conclusion we're sharing here at this point.

Yes. Okay. Okay. Well, Kristian, I think we have about a few minutes left here, but I did want to kind of turn it back over to you just in case there were other things that you wanted to highlight or cover here and maybe just kind of leave with us as you're thinking about the next month here in FY '20 and as we head into FY '21.

Yes. Thanks. Well, I mean, again, I think we're feeling pretty reasonable about the outlook for the rest of the year given the current situation, of course. So that's good. I think that -- again, we're finalizing the kind of planning process here for next year, more to come on that in October. But I think even the commentary we provided earlier should continue to demonstrate the benefits of the subscription model that PTC is migrating to over the past few years. And frankly, the technology that we have, and I think we've highlighted this in a number of presentations, but if you look at the Magic Quadrant or other industry analyst reports on CAD or PLM or IoT, AR, Servigistics, SLM, PTC consistently ranks in the upper-right quadrant. So we think, from a technology perspective, we're very well positioned. From a market demand perspective, we think we're performing well within the current constraints. And as these -- as the macros evolve, we think we're well positioned to drive solid growth over the medium term. Great products, great customer base, great market opportunity, couple that with ongoing discipline around spending, and I feel pretty good about the opportunity for PTC right now.

Great. Well, I appreciate the super open and candid conversation and all the disclosure you guys have been providing through the pandemic. So thanks again, Kristian and Tim, for joining our conference. And yes, we'll look forward to hearing from you in the coming months and see where kind of the trajectory heading into FY '21 is.

Yes. Great, Tyler. Thanks so much for having us. We enjoyed the conference here today and appreciate the support. And thanks to everybody else for listening in as well. Talk to you soon.

Okay. Thanks, everyone, for joining.

Thanks, Tyler.

Take care.