PTC Inc. (PTC) Earnings Call Transcript & Summary

All right. Thank you all for joining us here this morning at the 2020 virtual TMT conference here at RBC. My name is Matt Hedberg. We are delighted for our next session to have PTC with us today. With this via phone, we're having some technical issue, is Kristian Talvitie, CFO; and then Tim Fox, IR and many, many more hats that Tim has -- he's with us both on video and audio here. So thank you, gentlemen, for joining us here this morning. Maybe this is -- there are several themes of this conference. Obviously, we -- this is probably one of the first conferences post the vaccine. So I think it's both a vaccine conference, perhaps a post-election conference, although I'm not too certain about that yet. But then also really this whole view of fundamentally -- fundamental acceleration in a lot of markets post-COVID. It's something we're calling, Faster to the Future.

So I guess to start -- and maybe Kristian we'll start with you. With the backdrop of a potential vaccine and some accelerants and maybe some pent-up demand in your end markets, I think we've all been positively surprised, despite a lot of these headwinds with the resiliency of your ARR through this very challenging period. Could you set the stage for us in terms of what you've seen both in terms of headwinds and tailwinds, but then how that translates to a significantly more durable business than any of us remember 5, 6, 7 years ago?

Yes, sure. Great question, Matt. I'm sorry, just before I answer, my General Counsel would want me to remind everybody that we may be making forward-looking statements, and you should please visit our website to see our safe harbor language or our periodic filings with the SEC. And so with that, thanks, Matt. It's a great question. So first of all, I think that the transition -- PTC transitioned from a perpetual to the subscription model. Frankly, it couldn't have happened at a more fortuitous time, right? And as you know, '20 was really kind of the last year where we saw any kind of impact from mix, and even that was nominal. And now we sell predominantly -- on the software side predominantly, almost exclusively subscription licenses. And that has, in fact, created a very durable business model for PTC. Renewals continue to be strong. We have a very large base of contracts out in the market with almost [ $1.2 billion ] as we started the year and churn was modestly worse than what we had thought, really when we started the year. But again, it speaks to the value that customers are getting from PTC's solutions that even in this macro environment that we're in, that they are still renewing at a very good clip. On the new sales activity, we certainly did see some pressure on that front and that subsided a little bit in Q4, where we actually had strong bookings performance, in fact stronger than we had originally anticipated, which also speaks to some of the dynamics that we're seeing in the marketplace. People want to get back to work. People are figuring out how to leverage technology to do virtual sales calls or work from home as the case may be. And so you wrap all that together, and I think we did post a solid year here in fiscal '20. And this sets us up nicely really for fiscal '21. As you know, the guidance that we provided, the ARR growth of 9% to 12% contemplates a little bit of a range of what may happen on the new sales activity that could weigh in on that a little bit depending on how the pandemic and the vaccines play out. But I think that sets us up well for '21. In terms of headwinds, as we called out on our Q4 call, we are entering fiscal '21 with a little bit less backlog than we had originally planned for, and that's obviously reflected in the guidance, but that would be a headwind that we're facing going into this year. The good news is that we've already actually started building backlog for fiscal '22 and beyond, which creates a solid base as we work our way through fiscal '21.

That's great. And I forgot to mention this at the top of the call -- and we are getting some questions in from investors, so thank you for those. But for those that would like to submit questions, please do so and we will insert those as we go here. So thank you for the questions already. Maybe before we kind of get to some of the questions from investors though, I think sort of dovetailing on that first question. I think recognizing that your core business is really -- I think you noted it's -- you've had 12 now consecutive quarters of double-digit constant currency ARR growth, which is really in the midst of everything that's going on, a remarkable -- really testament to the durability of those platforms. Can you talk about what is -- where is that growth coming from? Is it net new? Is it inside your base in terms of expansion? Because I think those growth rates would have been surprising for a lot of folks 3, 4, 5 years ago even.

Yes, good -- another good question there. So particularly on the CAD and the PLM front, I would tell you that a lot of the incremental ARR that we're generating is with upsell and cross-sell opportunities within our existing base. On the PLM front, despite COVID, we had a very strong year on PLM front. I think that the pandemic and whole working from home and the lockdown situation has actually got companies -- not that they weren't thinking about digital transformation before, but maybe has helped them think about the rate at which they want to invest in that. So again, solid performance on PLM. And I think we would expect to continue to see solid PLM performance here in fiscal '21 and beyond as well. On the CAD side, a slightly different dynamic, a little bit more contribution from new customer acquisition, particularly through our reseller channel. Still predominantly expansion opportunities within our existing base, but there is a little more of a flavor of new customer acquisition there. Encouraging to see that we're still seeing activity on that front. So it's certainly an interesting environment to navigate through.

That's super helpful. And then I want to make sure we devote time to the growth side of the portfolio, but -- I mean I want to make sure we touch on one of the -- what I think is one of the most profound benefits from Onshape is Atlas. And this can be for either of you. But you're in the middle of replatforming, both CAD and PLM on Atlas, which, to me, could be one of the most profound architectural changes we've seen in a long time from PTC. Refresh us in terms of where we're at in that development process? And ultimately, what does it mean for a customer? And I want to make sure because -- how do customers think about the new platform relative to purchases today? Do they think about it? And how do you eventually move a customer for more of an on-prem CAD or PLM to more of a SaaS-based Atlas CAD, for instance? And leave Onshape out of the mix here because I think that's a whole another growth driver in and of itself. Either of you can answer that question.

Yes. Well, I'll take a stab at it, and then Tim can correct me if he thinks I've mischaracterized anything. So for starters, I would say, I know in the question and it is kind of you to say that we're in the middle of this effort. And I would probably recharacterize that to say we're in the early stages of this effort. Now completely agree that the Atlas platform is a very valuable asset for PTC and should prove to be so for years to come, but the actual effort is still in its early stages. What we're really trying to do and what I think PTC has done over the years, many times in many ways, is stay relevant for the customer base and continue to evolve with the needs of the customer base and how they want to -- a, how they want to purchase software moving from the perpetual model to the subscription model that offers a lot more flexibility, if you will, to now future stages in terms of how they want to deploy that software, which is another evolution that's taken hold in different parts of the software industry at different rates. The technical software space has not been, we'll call it, an early adopter of SaaS as a delivery approach. But certainly, as more and more companies are seeing the benefits of SaaS and other parts of their software -- the software portfolios that they have, it creates a desire and a demand for those benefits even in other parts of their portfolio, i.e., technical software. So we would completely agree with you that longer term, we think this part of the software space is going to move to SaaS as well. And with the refactoring, if you will, of Creo and Windchill, what we're really trying to do is make sure the customers have the optionality that they want and that they -- if they want to move to a SaaS delivery mechanism that we can offer that when they're ready to do so. So again, I think this is also, as you stated, a long-term structural driver for PTC. That said, I still think it's a couple of years out before we start to really see anything. It's not a trivial effort to refactor these platforms. So let me pause there and see if that: a, kind of answered the question; and b, if Tim has any further comments he want to add.

Yes. I mean -- yes, I -- so maybe I was a little bullish on in the middle phase. Is it right to think kind of 18, 24 months, is that kind of the horizon for the -- I mean I'm sure there's -- you're probably trying to be a little opaque in terms of the exact timing, but is that kind of the right time frame maybe 1.5 years, 2 years until kind of that platform is ready?

Yes. I think that you're correct in trying to be opaque because we're still in the, we'll call it, early phases. So definitely not wanting to commit to an exact time frame here, but certainly 24 months is is not an unreasonable expectation.

So I guess -- maybe just one other question on this. We've got a lot to talk about this morning here. But if I'm a customer, right, because I have to imagine they're hearing some of this as well and there's also Onshape and things like that. I guess what's still encouraging is that one of the potential risks would maybe be stalled deals in front of a big launch, but you're not seeing that, which then really speaks to me that customers still find a lot of value. And when we get closer to that phase, I'm sure there's going to be some sort of like a migration path to kind of help customers get there. Is that kind of the right way to think about this that you're going to continue to charge forward with Creo and Windchill as is, and then you're going to make a logical progression to that when the time is right?

Yes, Matt, that's exactly right. And again, what we want to make sure that we are offering to customers is exactly that a clear migration path. So a lot of our customers have complex products with long life cycles. They have designs that stick with them for many years. And so they have a lot of CAD data that needs to -- that they still need to be able to access. And so we want to make sure that we're architecting the solution in a way that allows them to bring their data along with them. So it is and I have to leave this platform, leave all my valuable data behind, but rather, how do I switch to a more robust software delivery method, while still being able to leverage the data that I have that's so important to me. So that's really the crux of the effort here.

Got it. That makes a lot of sense. Flipping to the growth side of the portfolio, Q4 seem -- obviously, in the face of a lot of uncertainty, still felt like a bit of inflection, whether it was the bounce back in IoT deals. I think you mentioned Onshape. The pipeline is up 6x since the acquisition there. I know the IoT stuff had a bit of a headwind just in terms of getting on-site customers. Walk through some of the dynamics of the growth portfolio when you think about -- specifically, I think you mentioned like we're building pipe for 2022 already. What is it that's driving some of that momentum in some of these various aspects of the growth in your side of the business?

Yes. Good question, again. And just to clarify, we're actually building backlog...

Backlog.