PTC Inc. (PTC) Earnings Call Transcript & Summary

Great. Hello, everyone, and welcome to our fireside chat with Onshape as part of the Baird Disruptor series. I'm Joe Vruwink, the Vertical Software analyst at Baird. And joining me today are 2 of the co-founders of Onshape, Jon Hirschtick and John McEleney. And also Tim Fox, the Senior Vice President of Investor Relations at PTC. Before we jump into our fireside chat, I did want to mention to the attendees that you can submit questions through the webcast front, and I'll try to work those into our conversation as we go on. But to kick things off, Jon and John, thanks very much for joining us today. It's good to see both of you. I wanted to start this Baird Disruptor series, we've been highlighting companies, and I think Onshape is maybe one of the best examples of a disruptor because you're starting in an industry that's been well established. And very much a credit to the 2 of you because you've helped kind of move the industry a certain way through some of your background. I wanted to start on that. So can you maybe provide just for investors attendees a little bit about your background, a little bit about the traditional industry setup when we're talking about technical applications or product development, what typically a product designer engineer might be using? And then how all of this ultimately culminated in kind of the creation of Onshape?

Okay.

John, do you want to take a lead in giving your background. I'll give my background, and you can take us through our business...

Sure. Sure. So Joe, thanks for -- it's a pleasure to be here. So I've spent my entire professional life since I was a college intern working on CAD and other software tools for product development, most notably, Johnny and I, as you noted, we were part of the founding team of SolidWorks and grew that business and spent 18 years there. And before -- as we were each -- John and I were CEO for a while and a long time part of that company, and then founded Onshape in 2012.

And just a little bit of my background and then, John, maybe we can take you through some of the history about engineers do. I'm a mechanical engineer by training as well. And early on, did some mechanical design work at a defense equipment manufacturer and then ultimately, got together with John and the team at SolidWorks for many years and had been in the software industry now for 30 years, mostly in the product design space. I had about a brief 3-year sort of a venture into, really, the cloud when it was really first starting in the enterprise cloud space of helping people take on-premise applications and moving to the cloud. And then we started Onshape in 2012. John, you want to kind of take...

Yes. And I should also mention, I'm the head of the Software as a Service, SaaS, business unit here at PTC since we were acquired a year ago. And so what led us to found the company was, I'll start with visiting customers. So our customers are people who design and manufacture products -- manufactured products, things you'd think of made in factories around the world, everything from machinery and industrial goods, things you'd see on the factory floor, to consumer products that you have in your home, chair you're sitting in, your keyboard, computer, whatever; and medical devices, all sorts of things. Anything you'd think of is manufactured. I love visiting customers, love visiting product developers. And for many years, I would visit and I would hear about the problems they have, problems I generally class as around installing and dealing with this heavyweight software stack that are typically involved in CAD, CAD is one of the heaviest applications in the world, and getting that installed on special purpose Windows computers and so forth. And then the other side of the problem being communication among team members. Data in those older systems are stored in files. We're not talking one file. We're typically talking hundreds, thousands of files. Everyone needs their own copies of the files and no matter how you copy them around or try and synchronize them or put them in servers, you have all these problems over who's got the latest version of the data? Am I going to overwrite your version? Are you going to overwrite my version. We've tried to solve these problems. Products get built with these systems, but every customer I go to, I'd hear hours of this kind of stuff is they'd unload on me, hey, when are you going to fix this? This in my old life. And then at the same time, we could see cloud, web and mobile technology evolving. Companies like Salesforce, Workday, Zendesk, NetSuite, basically, Google Docs, everyone was going to this new model of -- then new, model of cloud, web and mobile, and we thought, hey, we could solve the problems of the product development community if we made a completely new architecture and platform. For doing it, we used the principles of cloud, web and mobile. And we felt that it took a complete re-architecting new platform to completely capture all the benefit potential of cloud, web and mobile, and that's what we've done with Onshape.

Okay. That's great. Now you mentioned a few things. Obviously, the acquisition by PTC, which is a doubling down on the idea of cloud and also, Jon, your leadership of now the SaaS initiative within PTC, a doubling down of the SaaS delivery model. Maybe just for the sake of grounding the conversation, and this will generate more questions. But can you speak to the levels of penetration of something like SaaS CAD has had recently in the industry? And then maybe what initial inertia or momentum you're starting to see behind a change from what is traditionally and still largely is kind of an on-prem model to what Onshape is doing?

Johnny, you want to take a shot at that?

Yes, let me have the first crack at it, and then you can talk about it from the whole business unit perspective. I think to think about -- one of the things about this industry that is really important to understand is that it's a very attractive industry from -- certainly from a vendor standpoint in terms of developing, but also, of course, from an investment standpoint because once you'll start using these tools, they become part of the operation for a manufacturer. And when you're an operational system, it's -- people rely on that system to get their products out the door. And so the state-of-the-art, if you will, in terms of what the systems are out there, they were all installed base systems. So while the world outside of design and manufacturing had moved to cloud and mobile, the industry in terms of design and manufacturing really is sort of locked in the installed base sort of world. For a couple of reasons. One, they're operational systems, so they're hard to kind of basically get people to ultimately sort of make some changes. So there's some inertia that's there. But secondly, the depth of the detail. We're making products that end up making the products we use in our daily lives. So all the little curves, the blends, the surface texture, the dimensional accuracy, the level of detail of functionality required to allow a design in manufacturing for the company to build those products is really high in terms of functional barriers. So this is not moving simple texts around and a simple video app. It's really robust, deep functionality. So from Onshape's perspective, let me just sort of pause for a second, and say, we're in the very early stages. We had a shortened baseball season, but to use a baseball analogy, kind of in the very early, early innings of this sort of shift to a SaaS cloud mobile world. That's very exciting because there's so much growth and so much opportunity in front of us. And part of what made that sort of possible in terms of why it's an industry that's sort of following the rest of the broader industry is, again, the level of functionality that's required. And then companies typically make changes as they start new projects or develop new products. And so as a start-up Onshape, we had a lot of functionality to build a credible solution that people actually could switch to. And I would sort of say that largely, we've made huge strides in terms of the depth of that functionality. And now, of course, we're expanding the breadth in terms of different application coverage, which has been a wonderful part of this past year with PTC as we started to expand that. And Jon will talk a little bit more about Atlas and how that fits in the context of our strategy. So it's very early days in the sense of early innings, but we're seeing some of the signs that point to the longer-term growth potential. Jon will talk also, perhaps, a little bit about the future engineers, in terms of what's happening in the education market. It's just absolutely been exploding in terms of usage. So these headwinds of COVID for the rest of the world, they really have caused people to step back and say, what does this mean and how do we work with disparate supply chains and remote working? And all of those things, I think, turn into tailwinds longer term. But Jon, maybe you can give in the context of describing Atlas for everyone.

But we'll get -- I'm sure we'll get to that. But yes, I think John is right. It's not a major -- we're a small part of the market, but we're growing much faster. I -- like, the growth rate we experienced is much higher than the industry. And that -- we like the way those trends play out long term.

Okay. Yes. So let's dive into the technology itself because I think this is what investors are really interested in. There's already questions coming in on in just more detail of how Onshape is different than other cloud-based CAD that is starting to gain momentum at the same time. And so maybe I'll start. It's probably not fair to define Onshape as just a CAD application. It's more than that, and it's kind of built to be more than that. And so maybe you can explain why that exactly is. What is the foundational kind of platform or technology that is ultimately being leveraged, not just for CAD application, but this might bring us speaking about Atlas next.

Sure. So Onshape is a collection -- first of all, we're the only pure cloud approach in the industry now. Of course, all the products, all the companies use cloud to some degree and they all, because they know it's the place to be today, they all want to say, "Hey, we're in the cloud. And they are to a little degree. I mean, in my old life, in my previous life, we were installing software and copying files to and from cloud servers. Not a bad thing to do. It's a good thing to do. But that's not what we're doing. We're doing something beyond that to give a correspondingly higher level of benefit. So by pure cloud, I mean, we have no traditional installed app. We have no old code that's being installed, no file-based workflows, all of that's gone. Just like we align Onshape with things like Google Docs and Workday and Salesforce and Zendesk and NetSuite, all those systems work the way we do. So at our core and our cloud stack, it starts with the database, all our data is in a database in the cloud and around that, we have a collection of core services that underpin all the Onshape applications. Those are things like data management, analytics, security and user administration, collaborative engines and API. And then on top of that, we build our pure cloud-based apps for modeling, traditional 3D modeling of parts and assemblies, drafting. We have translation services. We also have components of our application for analytics, seeing what teams are doing. We have an IDE for writing code and custom features, which is part of our solution called FeatureScript for -- a really powerful capability. We rethought so many aspects of these core tools. It's amazing. And so we build the end user apps on top of that. And what Atlas is, is PTC saying, "Hey, let's use the core of the Onshape platform, the core database and services, as a way to build other PTC applications that will be cloud and SaaS as well.

Joe, just if I can kind of give a picture of people's minds about what's different about Onshape is that most of the traditional applications have this CAD system, and then they have a way for people to manage things between other users. And like most good innovations, we kind of inverted that model and built this collaboration and sharing engine and metaphorically wrapped all of the CAD and the services functionality around that. So it's a very different way, which, as Jon pointed out, some of those companies that we're inspired by and sort of followed that model, GitHub. So different ways of taking the workflow and, again, sort of shifting it and changing it. So not only do you have the definition capabilities of the existing systems in terms of what's needed for design manufacturing, it's just a whole rethink by inverting the model.

And then I'll maybe ask you to weigh in. So Jon, you spoke about how you hear some of the other CAD vendors say they're cloud, but it's not really cloud. There's a browser-based, there is same clients, set clients, you hear all these different things. Can you maybe way in Onshape and specifically versus the others why -- what in your view is better, what are limitations, this whole competition?

Sure. Well, the technology -- of course, people care about the benefit it delivers to the user and not just how the codes are written or so. So the benefit is, first of all, does the user have to worry about installing and updating software in their computer, okay? So that may seem like a small thing to deal with the distributed design team and COVID life work-from-home. And every time you do that, there's all these gotchas, the user experiences, the drivers and different OS versions, different versions of the CAD system and so forth. So again, with Onshape, you never have to worry about that. I mean, literally, Joe, you could be running -- you could start running Onshape right now on whatever computer you're using. I don't care what it is, and I don't even care if it's a computer. You might be running this on iPad or an iPhone or an Android phone or tablet or a Chromebook, we don't care. You can run on all those things. We're the only people in the industry who can say that. If you're using any of the other so-called cloud solutions, you better make sure you have the right version of Windows and then install 4 gigabytes of software and stuff like that. So that is -- the issue there is how easy is it for the user to deploy it? And the teams that are deploying it to are often large, distributed and changing every day. You can say, well, we'll just make sure everyone has the right computer. Well, who's everyone? Because today, we've got a new supplier, we're bringing this one offline. We're bringing this one online, new employees, contractors every day. So that's just the administration of the system. The next thing is what about the data flow. Again, with these older-generation technologies, even though you might be technically loading from a cloud server, you're still copying files around. So if the 3 of us were working on design, we'd have to decide, well, wait a minute, Joe, if you're editing, I can't edit it because you have the files. Even in our alleged cloud system, we're still pushing files all over the place. It's kind of like -- I mean you can do that with SolidWorks and Dropbox. If you can call that cloud, you can install SolidWorks off the cloud. You could do that when we were there. And so you can put the files in Dropbox and maybe call it a cloud solution. What we believe is that an engineering team is going to waste a lot of time with a system like that, and it's going to inhibit their productivity. It's going to inhibit the team members from coming up with great ideas and say, I'm going to change it now. If we're using Onshape, we never -- it's not like using Dropbox and copying files. We all jump in and work at the same time. So if Johnny's got a great idea for 1 part in the assembly, and you have a great idea for another aspect of that same part, Joe, we can all be modifying that at the same time. So what it means is the team with Onshape, a full cloud solution, we get to the finish line faster than using those older semi-cloud tools. It's just given. We're going to work faster because of this. We're not waiting for each other. We're going to be more creative because before the deadline, we'll have that extra idea. We'll get in there, we'll be able to consider more alternatives because we can see them all as branches and not say, oh, who's got the file that is really the latest version of idea 60? Oh, I overwrote it. Well, Johnny's got it his computer. We will sink it to Dropbox, and your head explodes, okay? So there's a huge difference in the difference between older, partial cloud, installed software. It's harder to install and administer and it wastes a lot of time as the team tries to be creative and innovative. We give -- we're pure cloud, no installs to worry about collaboration works much better. Teams get done faster and they build better products, and that's the benefit we offer with full cloud.

Perhaps a quick way to think about it in some respects, it's like if you remember the days of Siebel, for customer relationship management, and you think about when the cloud started getting introduced, they had Siebel On Demand versus kind of Salesforce. And I think that analogy is probably pretty fitting here.

Actually, can I add one more thing, Joe? I think this is the last place on earth that anyone's talking about this stuff. Like, if you go hang out with cool people, if you go to Silicon Valley, it's really clear what a cloud solution is. I mean, honestly, it's kind of embarrassing for our industry that we have to have these kinds of conversations because everyone else in other software industries have moved on. You know what I mean? It's like they get it. So, like, when we were raising venture capital, none of -- 0 venture capital firms said, "Oh, I see that these other companies have a cloud solution." They almost couldn't believe that anyone could get away with that. So I'm just kind of -- it's kind of funny to me. Like look at your kids, I don't know if you have children, but my children, they're all using -- they don't know how to install software. And they would -- so anyway, you look at the next generation, they have it figured out.

Yes, yes. So maybe let's -- I know there's more questions on kind of competitive dynamics, and maybe we can get to those at the end. But I did want to focus in what Onshape and PTC have been working towards together over the last year. And this gets to, you brought up earlier, the Atlas platform. But PTC, one of the, kind of, 4 foundational CAD PLM companies in the industry, is now starting to leverage the foundational Onshape architecture to maybe do some different things with Creo and Windchill, kind of some of these flagship offerings. So can you maybe speak to how this integration, how this joint union has been going and what the ultimate ambition or goal is?

Sure. I mean, first of all, our PTC Atlas platform strategy has been going great so far. I mean we just launched Atlas in the summer. We're working our way on having our first -- of course, Onshape runs on Atlas, but we're going to soon be shipping other products that run on the Atlas platform, other SaaS products as part of some of the other brands at PTC. So that's super exciting for us. That doesn't mean all PTC products will suddenly be on Atlas. It just means we're starting to see that happen, and that was Jim Heppelmann wish and vision from the beginning, it's all about building better products and building them more efficiently. And Atlas is a route to that because we get more features into products faster. We can centralize our cloud services teams to get leverage out of that. And the products should offer better integrations and a more consistent user experience, easier to have a single sign in and so forth for different applications. With respect to Creo and Windchill, yes, we're going to be using Atlas to help bring those into a SaaS-ified version. Now will those be full perfect SaaS, like I was mentioning earlier? We're going to -- it may not be the perfect full cloud dream there. It may be a -- but it will be a step forward that will be of great value to those Creo and Windchill customers, and that's very exciting to see as well.

And what is it -- let me step back, what are some of the things that are capable by leveraging something like Atlas that may be PTC or any traditional CAD vendor would maybe not be in a position to introduce at this point in time. And I'll throw out a few examples, but at LiveWorx, which is PTC's big annual event, there was talk about doing generative design, talk about leveraging Vuforia, augmented reality off of Atlas. And so maybe you can just talk about some of the functionality that is now becoming more viable by leveraging those technologies?

Sure. So the first question is leveraging cloud and then second -- and SaaS, and then the second is, if you are going cloud and SaaS, why Atlas versus not Atlas? So generative and augmented reality, those are 2 perfect examples where cloud isn't just another place to host some code, but rather a real cloud SaaS platform lets you rethink and escalate the value you offer in those areas more than maybe in some other areas because think about it with generative, you put the real -- and I don't think anyone's really tapped into the power of generative fully -- with the power of cloud for generative fully. They're starting to, but we have a long way to go there. So using -- if you start with the idea of this is only going to be a cloud service and think about what that can mean, you can do a better job for the user. And cloud deployments, a pure SaaS deployment like Onshape, we release every 3 weeks. All users are on the latest version. This is important in any application. But with an area like generative or AR where the technology changes so fast, you want those short innovation cycles. Our CTO, Steve Dertien, is so excited about being able to deliver every few weeks upgrades in that technology because these areas are moving so fast. They're not like the old areas Johnny talked about earlier in some ways where we know there's a huge set of well-known functionality, say, in drawings. We don't need to iterate that every 3 weeks quite as much, but in this area, so that fast iteration, super important to get it in the cloud and SaaS. So that's why cloud SaaS. Now why Atlas versus just any cloud SaaS? It's because we can build the products faster and more efficiently and with more functionality per given amount of calendar time or engineer time because we're leveraging a common core engine of services in a common cloud operations team.

And just from a resource standpoint, I think it's also important to point out that when you're running kind of -- one of the things we've built into the core of Onshape from the very beginning that Atlas really is teasing out in making available to everybody, is the ability to scale up and scale down. So you get the dynamic nature of what cloud operations are. And so we're getting a huge amount of leverage in that. By the way, when Jon and I met was then a year-plus ago to talk about this idea of the platform was something that from the very beginning, we were incredibly excited about. And that's coming to fruition.

And then sticking on the topic of Atlas, how much work is ultimately involved in thinking about -- I know it's not a complete pure cloud shift of something like Creo, but how much of Creo needs to be rewritten in a sense in order to be compatible with Atlas?