PTC Inc. (PTC) Earnings Call Transcript & Summary

Excellent. Thank you, everyone, for joining us. My name is Keith Weiss. I head up U.S. software equity research here at Morgan Stanley. And very pleased to have with us today at the NASDAQ investor conference from PTC both CFO, Kristian Talvitie; as well as Tim Fox, SVP of Investor Relations. So Tim and Kristian, thank you very much for joining us this afternoon, both in New York and in London. So maybe a good place to start, for investors not as familiar with the PTC story, Kristian, can you maybe walk us through, sort of in broad strokes, sort of the solution portfolio PTC is brining to the market place? And sort of the competitive positioning that you guys are trying to sort of exploit in that market to lay a foundation for the rest of the conversation?

Yes. Sure, Keith. First of all, thanks for having us at the conference. We're excited to be here. Secondly, before I answer the question, my General Counsel would be disappointed if I didn't remind everybody that we may be making forward-looking statements and that we would refer you to the safe harbor language and risk factors outlined on our press release and in our periodic filings with the SEC, all available obviously on ptc.com as well. So with that as a backdrop, than really getting into your question. At a high level, PTC is today, a little over 6,000 employees worldwide. We are approaching kind of $1.4 billion in ARR and $1.5-plus billion in overall revenue. From a geographic perspective, a little bit over 40% of that is in the United States. Just a little under 40% of that is in Europe, and around 20% of that is in Asia Pacific. So we have a broad geographic reach. And then from a product portfolio perspective, we think about PTC really in kind of 3 core groups of products. One is our core product group, as we call it, which is really CAD, Computer-Aided Design and PLM, Product Lifecycle Management software. This is really the long heritage of PTC. It's about a 30-year-old software company, started as a leading CAD provider, branched out into PLM from there. The next product group that I would talk about is what we call our Focused Solutions Group. These are also a number of technologies that include service, lifecycle management application, lifecycle management, et cetera, technologies provided again to our customer base. We view these as very important solutions for our customers, but perhaps the least growthy part of the overall PTC product portfolio. And then the third piece is what we call our Growth Product segment, which includes our IoT or Internet of Things applications as well as augmented reality applications. And about a year ago, we also added Onshape to that. And Onshape is, of course, really the industry's only true, pure multi-tenant SaaS CAD application that's available on the market today. In addition to having the CAD application, Onshape also brings to PTC that multi-tenant SaaS platform, what we call Atlas and look forward to leveraging in the future more broadly across the product portfolio. Then just lastly, wrapping it up, we tend to serve discrete manufacturing customers. We have thousands of customers around the world that make up the customer base, and many of them have been customers for a long time. So a strong, stable customer base, a robust product offering and significant geographic reach. This is the last thing that I would point out for folks that are new to the PTC story. Again, obviously, have started off 30-plus years ago. The predominant commercial model at the time was a perpetual licensing model. Over the past 5 years, PTC underwent a transition to shift from selling perpetual licenses, really to selling subscriptions. And today, almost all of our product sales are subscription licenses. So that was a pretty big shift for PTC. But as we found out kind of the hard way here with the unfortunate global pandemic, it proved to be a pretty timely shift for PTC as well. So that's really the background of the company and where we are today, focused really on delivering solutions to our customers, discrete manufacturing, customers increasing the process as well, technology solutions that can help them improve their product development as well as product, we'll say, delivery, manufacturing and delivery solutions with the technology that we have.

Got it. Got it. That's -- yes, that's a great foundation and great introduction to PTC. I want to start out at the high level and we'll work our way down into individual product lines and then get more granular. And you mentioned this in sort of the introduction, but the business model of PTC has shifted considerably over the past 5 years. And the results of that were stark in terms of if we look at the impacts on the results that we saw in the 2008, 2009 downturn versus what we saw come through in terms of results during this year and all the macro turns [ you had ] this year was a much more resilient model. Can you talk to us a little bit about how much of that is just the business model and just sort of the durability of the revenue stream and of the growth that you get with this traditional model? And how much of it came from maybe a little bit the Solution portfolio is broader, the Solution -- like there's a higher-value solutions for your customers in terms of what PTC is bringing to the equation today?

Yes. Sure. It's a great question. There's no doubt that the model itself tends to be more resilient. And as we saw, we just wrapped up our fourth quarter, it was the end of September, that was our -- the end of our fiscal year. And much of that year was undoubtedly impacted by the global pandemic, yet even in a year that was wrought with uncertainty and lockdowns and other things that are impacting economic activity, we actually still deliver 11% growth on ARR and saw a relatively minimal impact to churn. And so again, no doubt that the model itself is more resilient. And I think you were mentioning contrasting to the last significant downturn to kind of 2008, 2009. At the time, we saw 30 -- I think it was 36% decrease in perpetual license revenue that year, which obviously has a significant impact in any year on the financial performance. And again, here, ended last year with 11% ARR growth. So again, a lot driven because of the model. That said, and I like the second part of your question, it isn't really just the model. It's also the nature of the solutions that you're providing and the value that customers are getting from those solutions. And what we found is that, frankly, across the product portfolio, whether it's CAD or PLM or SLM or AR, even IoT, what we've seen is pretty resilient retention rates across all those segments. There were some modest upticks in churn. Some of that known due to a couple of large contracts that we knew about going into the year. Some of it, there was some impact in the SMB space, which may be not so surprising given that those companies don't have quite the same robust balance sheets that many larger companies do to weather a storm like this. But all in all, it was, call it, 100 basis point deterioration in churn, which, again, I think just speaks to the resiliency of the products that are being offered and the model that we have.

Got it. Yes, it's pretty remarkable. I mean, the description model definitely showed its strength in spades for PTC and multiple companies during the downturn. But there's also that underlying -- the fact that the retention rates hold in so well just shows how much more fundamentally these companies are utilizing and how much more ingrained in their business processes these technologies really have become, even over the last decade.

Yes, for sure. One of the things that we look at is obviously not just the retention rate, which is the final outcome of any commercial decision that a customer is going to make, but we're also looking at the utilization of the technology. And certainly, in the early couple of months of the pandemic, we did see utilization dip to a certain degree as companies had to rewire how they were working and how they were thinking about leveraging the technologies that were critical to their operations, like the products that PTC provides. And as we got past the first few months, we've actually seen utilization rates creeping right back up to kind of prepandemic levels. So companies are figuring out how to adapt. And to me, looking at the utilization rates is a critical precursor to obviously, any kind of churn event that may be coming in the future. So I think we're pretty pleased and agree with you that I think PTC is well positioned with the portfolio that we have, and is providing vital products to our customer base.

Okay. So when we look at PTC and given the manufacturing focus of the company, we look to external indicators like headline PMI and new orders for an indication of kind of how is the sort of the demand environment doing. How -- and they've bounced back significantly from sort of the lows that we saw earlier this year and reaching kind of new highs we haven't seen since, I think, February 2018 in the October numbers. How well do those match up to kind of what you're seeing from your customers and the demand environment that you guys see on the ground, if you will?

Yes. It's again, another insightful question, Keith. I don't know who's feeding you these, but they should have a raise. The...

It's the beard.

So actually, maybe the best data point is really our kind of Q4 performance that we just talked about a month ago. And we actually saw very strong performance in that quarter. It was actually better than what we had originally anticipated and better than what we guided to from a demand perspective. So I think that the customer base, I think the PMI, even though it's a sentiment index, does carry some weight in terms of the overall demand environment. It will be interesting to see as we get through the first quarter here. The second wave wasn't really a thing as we ended the year. But as we start this new year, second wave kind of have been the thing. So we'll see how much impact that has. But listen, I think that we believe that certainly, over the longer term, we're well positioned with great products, with great customers and great opportunity to continue to go out there and provide value to customers.

Got it. Shifting gears and digging into the Solution portfolio. I wanted to start with some of the growth initiatives. Starting with the IoT platform, there's been a really good big focal point for PTC for quite some time and has been top of mind for a lot of investors in the industry for a while. We've been talking about IoT. Can you talk to us about the -- like sort of the pace of development of the industry, of the marketplace for IoT-type solutions? How has that been developing behind the kind of the hype of IoT? Where are you guys seeing the most traction in people really putting together fundamental good IoT solutions and really getting good returns out of the marketplace? So maybe like a market development type question, if you will.

Yes. Sure. So the -- I think that the market has and continues to evolve. I think a lot of it started out with -- even our ThingWorx platform was originally exactly that. It was a platform, it was a rapid application development platform. And the original intent was that this was going to enable companies to develop their own IoT applications 10x faster than they could trying to do it on their own. And I think folks on both sides of the equation, i.e., customers as well as providers, have realized that companies that are in the business of manufacturing whatever it is that they manufacture, planes, automobiles, they don't necessarily really want to be in the software application development business. And so that notion of selling the platform or providing a platform really started morphing into more what are solutions that could be provided more readily out-of-the-box, deployable solutions. And there, I think what we -- what the industry saw was a lot of, we'll say, point solutions popping up to be able to solve specific kind of point problems for various segments of the market. And PTC has continued to follow suit there as well and have really started to try to move much more in that direction. I think that our focus has really been on twofold smart connected products as well as smart connected operations. And so over the past few years, we've been migrating more into developing solutions for those 2 use cases. And arguably, it is still a -- there's still probably more configuration required than a straight out-of-the-box solution. That said, we've been investing here significantly recently in continuing to move up that stack towards more fully functional, fully capable, out-of-the-box capabilities. And we'll be talking about those more and more here over the coming months as we have a couple that will be coming to market. So generally speaking, that I think has been the transition. It started off as more platform, then moved into kind of point solutions and now is moving into more broader and sustainable out-of-the-box use cases, if you will.

Got it. So the evolution towards more of a solution versus a platform should help to speed the delivery and also sort of the market acceptance, as people have a clearer idea of sort of what PTC can do for them from that IoT platform perspective?

Yes, that's right. And they can then not have to be in the application development and maintenance business that they don't really want to be in.

Right. Got you. Can you talk to us a little bit about the competitive environment when we think about the IoT platform or these IoT solutions? You can see it seems to be like one different than sort of -- a lot of the kind of just traditional software vendors. It seems like the manufacturers themselves in some of the big industrial companies like a Siemens want to do more on this side of the equation. On the other side of the equation, there's new vendors coming up with more of platform story, more of like a data platform story, like a C3 used to be IoT C3 now AI, who was trying to sort of service customers more from a data perspective. Is that kind of like the relevant competitive environment that you guys think about?

Yes. So I think that there are some competitors out in the market that we see periodically. A lot of them are, call it, smaller point solutions. The biggest competitor that we still probably see is the kind of the DIY efforts in companies because they have specific use cases that they're trying to solve for. And so that still probably remains our largest competitor. Some of these other, a, you have, on the one hand, smaller point solutions; on the other hand, C3.ai that I think does more very large custom service-intensive projects for a much smaller handful of customers. And it's a lot of custom development, custom work going into a platform like that. I'm not saying there's anything wrong with that. We just think that the market opportunity is perhaps more significant as we continue to build out relevant solutions that can be deployed more rapidly. Customers can get value more rapidly and have a broader base to deploy into.

Got it. That makes a ton of sense. I want to shift gears and make sure we talk a little bit about Onshape. Actually, before I shift gears, just a programming note for anybody on the webcast, you can submit questions. There's a box on the lower right, I believe, where you could submit a question and it'll pop up in my e-mail, and I could ask that question to Kristian or Tim, if you guys do have questions. And while I'm waiting for those or -- if there are any of those, I'll take them. If not, I have plenty of questions that we could continue on. So on Onshape, really like fascinating kind of new development within the PTC story. One, because it's taken a while for CAD programs to get -- to be SaaS-based. And like you said, this is really the first scale, truly SaaS-based CAD solution out there. A lot of guys have moved to subscription, but they're not SaaS-based. One, what's taken it so long? Like why has this been so hard to move into a multi-tenant architecture? And two, what's the initial customer response that you guys have seen once you brought Onshape onboard? You talked about a major expansion of the pipeline. How are customers looking at this SaaS-based solution?

Yes. I mean, why it's taken so long, there's probably a number of ways to speculate about that. The industry has largely been cornered by kind of 4 main players for quite some time that all have had significant installed bases with on-premise delivery models for quite some time. And so why that migration hasn't happened sooner, up to a lot of different speculation. What we believe and what Jon Hirschtick, the founder of Onshape, now a good team member here at PTC, believes is that the SaaS delivery model brings so many benefits above and beyond just kind of design features, if you will, in a CAD tool that, ultimately, folks are going to have to migrate in this direction. The ability to collaborate, the ability to access your design on any device from anywhere, all the things that you would expect out of a modern SaaS tool, forget what industry segment it's serving, are now available in a market that just hasn't had it before. And so I think we're starting to see more and more interest in the customers that we serve, in the markets that we serve as people are thinking about their product development processes and how they want to create going forward. And one of the real benefits is kind of speed the design and the ability for multiple people to be in a design concurrently at the same time on different devices from different locations and to be able to work on that all at the same time. And so speed to design, speed to market is becoming critical. And the delivery model itself is a huge enabler in driving that. So you -- and by the way, again, the restricted working conditions that we're all in these days with work from home or limited work from the office capacity is only, I think, further adding fuel to the interest in different ways to think about the future capabilities of companies. And so you're right, we've seen the interest, as reflected by pipeline, has increased tremendously. It's up 6x from when we acquired Onshape. We continue to see -- pipeline continues to build. We continue to see great adoption in the education space. That market as well has been severely impacted. Students can't really go to labs anymore to work on mechanical design projects. So the adoption there has been rapid, extremely rapid, and the utilization continues to remain high. So I mean, wrapping it all up, I just think that the benefits of SaaS are only accentuated, given the times that we're in currently. And as Jim likes to say, I don't think that genie is going back in the bottle. And so now, it is just going to [ have ] time for adoption.

Got it. And extending the conversation, you guys are rolling out a new strategy around Atlas, right? And sort of extending that delivery model more fully across solution portfolio. Can you talk to us about the strategy of Atlas? And how should investors be thinking about like the time frame and time lines to that rolling out more fully?

Yes. Sure. So Atlas is really that pure multi-tenant kind of SaaS platform. You can think about that as the platform, Onshape as an application sitting on top of that platform. And then I would think about it in a couple of different ways. There are things that are going to migrate to Atlas, think about Vuforia and some of our augmented reality solutions that were already SaaS, now just really kind of leveraging that platform. And then as we think out over the longer term, we think that, that platform can also be leveraged more broadly across the portfolio. Think CAD, think PLM, that, of course, is going to be a longer-term effort. I think that we'd be thinking years out, 2 to 3 years out before we see something really material on that front. But there's no doubt that the interest even for, call it, core CAD and for PLM to begin deriving some of those benefits from that delivery model, the demand signs exist. So now it's just a matter of investing to get there so the customers can leverage it.

2 Got it. Outstanding. So we did get in 2 questions from investors. I'm going to try to hit these quickly before our time runs out. First question is around kind of ThingWorx and the summary of the question, in industry conversations, this investor here, Azure IoT coming up a lot as a player in IoT platforms. And what he wants to get at is you guys have a partnership with Microsoft around Azure IoT. Can you talk about the dynamic of that partnership? And where is it competitive? Where is it cooperative between ThingWorx and Azure IoT?

Yes. I'm going to let Tim -- he's been sitting here patiently waiting to answer a question. I know he loves this one, so I'm going to let Tim weigh in.

Sure. Happy to take it. Thanks. Yes, it's a great question. In fact, it gets back to really the essence of why that strategic alliance was formed with Microsoft a couple of years ago now. In many ways, they were what we'd call kind of an accidental competitor out there. Very strong Azure IoT platform story and to a certain extent, had some sort of horizontal capabilities around software development that allowed customers to dabble a little bit in building some business applications. But what was often the case is that those customers were trying to do very specific industrial use cases that they couldn't necessarily solve with the Microsoft IoT platform. And so that's where we got together, sort of opened the kimono, looked at the different offerings, figured out where sort of they ended and where we began and decided that really it made a lot more sense to go to market together. And so that's actually been a very fruitful relationship for us. We go to market together, we build pipeline together, we engage customers together. And it's really been, as I said, very fruitful. We've expanded what was predominantly a U.S.-based effort into Europe. We've seen some really nice traction there in recent quarters. To the extent that there's sort of competition, it really is with customers that look at that platform. And as Kristian was talking about earlier, trying to do it themselves, right? So they may still take the Microsoft Azure IoT platform, maybe engage with the systems integrator and try to build a custom solution. And ultimately, as Jim likes to call it, leave a trail of tears, which is a customer that may not have the true business application that they actually wanted to solve the use case they wanted. So I'd say today, it's materially much more in the cooperation as opposed to competition, but we do still see pockets of customers going at it alone and then ultimately, turning to a commercial solution like ThingWorx.

Got it. And one -- the last question from the clients and then unfortunately, I'm going to have to wrap it up. The question is your traditional CAD PLM competitors are just so Siemens and Autodesk. Do these players have a competitive offering like ThingWorx? And if not, why do you think they haven't created one? I think that's to you, again, Tim.

Sure. So generally speaking, there isn't really in the traditional competitive space other than Siemens has a technology that's branded MindSphere. And so that's sort of their, what I'd call kind of version 1.0 of a factory deployment, factory use case. We haven't seen it much in the market to date. But obviously, a lot of respect for the Siemens technology stack that they do have. So we keep a close eye on them. But outside of that particular vendor, really nothing to speak of from the other competitors. This is really something that we've been forging ourselves quite uniquely in this space. And frankly, there's a lot of really interesting connective tissue between the core CAD and PLM solutions and IoT and AR. We're leveraging those technologies. There's a lot of cross-pollinization between them, leveraging CAD data models, digitalization, even configuration management for some of the AR technology. So it's actually a pretty powerful combination, and we've got a, what I consider, 6- or 7-year lead in that front.

Got it. Excellent. Unfortunately, we're now overtime. But Kristian and Tim, thank you guys very much for joining us. This has been a really interesting conversation and always great to catch up on the latest and greatest of what's going on with PTC. If you guys have any follow-up questions, clients on the line, please feel free to reach out to Tim or myself with any follow-ups. And again, thank you very much for joining us.

Great. Thanks, Keith.

Thanks for having us. Thanks, everybody, for the time and the support. Appreciate it.